Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 31 August 2016

Fiscal rules should target the deficit, not spending

This jointly authored VoxEU piece on making the EU more resilient after Brexit that came out nearly two months ago has already had some unfavourable comment: Paul Krugman calls it timid, and Brad Delong does not like it much either. I want to pick out one particular idea, which I think is simply wrong and dangerous, and which I find it extraordinary that so many economists signed up to. Here is the relevant passage, in a section about the public finances.
“In most countries, the level of [government] expenditure – rather than the deficit – is the main problem. High expenditure makes it difficult to raise taxes and balance the budget, leading to dangerous debt dynamics. Thus, a focus on expenditure rules, linking expenditure reduction to debt levels, appears to be one of the most promising routes.”

Now this sounds to me like saying two things. The first is that the size of the state is too large in most countries. [1] The second is that we can use the need to bring government debt down as a way to correct that. It sounds to me exactly the policy that I accuse US and UK governments of following, although in their case the linkage is generally concealed. In this article it is suggested it should be explicit.

Whatever your views about the size of the state (including having no a priori view), it seems obvious that this is an intensely political issue. In contrast questions about the appropriate long run size of government debt are not so political, but more importantly they involve a completely different set of issues to those involved with the size of the state.

That is why policies or fiscal rules that aim to stabilise or bring down government debt focus on the budget deficit. It keeps the issue separate from the appropriate size of the state, and hopefully takes a good deal of the politics out of that issue. Linking the two issues makes it very easy to fall into what I call deficit deceit: saying we must cut government spending because government debt is too high, rather than because the state is too large. Even if that is avoided, associating the two sets back the cause of sensible debt management by needlessly politicising it.

That is why sensible fiscal rules target the deficit in some form, and allow how that deficit is achieved to be a political choice. I know this may seem obvious to me because I have written a lot about fiscal rules, but I would have thought the point might have also occurred to one of the economist authors of that article. When heterodox economists argue that the mainstream is hopelessly embroiled in the neoliberal project, they will be able to cite this article as evidence.

[1] You might say that, perhaps with certain European countries in mind, this is just a recognition that there is too much inefficiency and needless bureaucracy within government, rather than being a deeper statement of what governments should and should not do. If that is the case the authors should say so, but even then the coupling with debt control is problematic.

Tuesday, 30 August 2016

Project Fear = We have had it with experts

Normally reading the Financial Times you are safe from ‘I cannot believe he said that’ moments. But occasionally you come across something like this, in this case from the normally reliable Wolfgang Münchau:
“Those who campaigned for the UK to stay in the EU are shaping up to be two-time losers. They lost the referendum vote on June 23; now they are losing the battle to keep the UK inside the single market. Both defeats are based on repeated misjudgments.
Their original mistake was to exaggerate the economic effects of Brexit. The long-run consequences are hard to gauge. What we do know, so far, is that the result did not cause an immediate crisis — and this is what matters politically. This is why the consensus within the Conservative party has been shifting towards a harder version of Brexit.”

Forget all the conflicting and unreliable monthly data and surveys, and focus on the two clear impacts that the Brexit vote has already had. The first is a large depreciation in sterling, which makes almost everyone poorer. [1] The second is a cut in interest rates plus a reactivation of unconventional monetary expansion. To imply that these events strengthen the Leave case is just completely and utterly bizarre. It is just another version of the ‘they predicted Armageddon’ trick which I complained about here. Any objective referee would judge the score so far to be

Economists 2 Leavers 0

As for ‘the long-run consequences are hard to gauge’, this homily implies that making trade harder with our immediate neighbours might make us better or worse off. This is wrong. Common sense, along with all the economic models, suggest the uncertainty is all one-sided. Estimates are for a reduction in UK living standards of between 3% and 8%.

Michael Gove was widely derided for saying the UK has had enough of experts. But using the label ‘Project Fear’ is exactly the same. It has been used in the Scottish referendum and Brexit as a way of discounting expert advice. Yet in the political world calling warnings about the impact of either Scottish independence or Brexit ‘Project Fear’ is seen as a successful tactic. If you believe this report, it is why the Labour leadership chose not to endorse (and in fact rubbished) the government’s warnings about the economic dangers of Brexit (although as I note here the suggested involvement of the Economic Advisory Council in that is incorrect). It is true that Project Fear is applied to government warnings about the economic impact of independence/Brexit, but when those warnings are backed by nearly all experts it amounts to an attack on expert advice.

So in the Orwellian world that we are now living in, the tactic of calling something Project Fear is newspeak for saying we have had enough of experts.

[1] If you own a large amount of assets denominated in overseas currency then you could be better off, at least for a time. However even here a permanent terms of trade loss will eat away at any wealth gain when real interest rates are negative. On average the UK is a net debtor, not a net creditor.  

Monday, 29 August 2016

Heterodox economics, mainstream macro and the financial crisis

When heterodox economists want to argue against the mainstream, they typically start by talking about the failure to predict the financial crisis. This can be done in two different ways. One is to invoke Minsky, and talk about risk perception, leverage and the failure of the banking sector. I think this argument is accepted by mainstream macroeconomists, which is why there has been an explosion of DSGE and other microfounded analysis putting a financial sector into macromodels.

I just want to make two points on this. First, it is a sin of omission rather than signifying some fundamental flaw in existing macroeconomic theory. That is why financial sectors can be added to existing DSGE models: nothing has to be torn up and thrown away. Second, the fact that leverage was allowed to increase substantially before the crisis was not something that most macroeconomists were even aware of let alone approved of. As I have said before, if I had seen a chart showing bank leverage (like the one shown here) before the crisis I would have been extremely worried. It is true that Rajan’s warning in 2005 was famously knocked down by Summers, but it is a mistake to assume that most academic macroeconomists either agreed or disagreed with Summers: it just wasn’t their field. As Andy Haldane says, before the crisis
“prudential regulation was a niche academic issue. In my view, this absence of academic debate and challenge contributed, in no small measure, to international prudential standards being set at levels which were, with the benefit of 20/20 hindsight, not just too low but ridiculously too low.” (my italics)

There is a second strand to the heterodox attack on mainstream economists concerning the financial crisis, and that invokes not Minsky but Wynne Godley. Here I think heterodox economists also have a point, but they tend not to put it very well and, perhaps as a result, it has not yet impacted on the mainstream. Godley had, since the start of the millennium, raised alarm bells about rising US debt. The US savings ratio had been falling since the 1980s, but the personal sector had only gone into deficit at the end of the 1990s. (Michalis Nikiforos has a discussion.) Godley said this was not sustainable, and eventually he was proved right.

It is at this point that most heterodox accounts go wrong. They focus on the model he used to do his analysis, a model that tracks sector balances and their implications for sector wealth, but which otherwise has minimal behavioural content. This has become the “Stock-Flow Consistent methodology”, and it is inferred that mainstream models fail to impose stock flow consistency. But this is accounting, not economics, and was not unique to Godley. When I was a young economist at the Treasury in the 1970s, their UK model was ‘stock-flow consistent’, and forecasts routinely looked at sector balances. The model I built in the 1990s, which unlike the Treasury’s model included many of the theoretical features we now associate with New Keynesian models, also tracked sector balances. In terms of theory these were mainstream macromodels, but not microfounded macromodels.

It is trivial to add this accounting to any macromodel. The reason why it is typically ignored when it comes to the personal sector is because in most mainstream models these balances are of no consequence. Steve Keen points this out, but does not take the next step of asking why this is. The answer is because of the simplicity of the dominant mainstream model of intertemporal consumption, where there is no desired level of wealth or debt which consumers try to attain.

To understand the behaviour of both consumption and financial balances over the last few decades you need to understand the changing nature of credit availability from the financial sector. The best analysis I have seen of that comes from mainstream macroeconomists, and in particular Chris Carroll and John Muellbauer. (I first wrote about this here, but subsequently here.) Simply having a fixed proportion of credit constrained consumers does not get you there, because it cannot model what happens when credit constraints change.

Why did most mainstream macro ignore this work, and as far as I can see continues to ignore this work? It is not because their analysis sweeps aside the basic intertemporal consumption analysis of mainstream theory. Carroll’s analysis builds on that model and adds some basic real world elements like finite lives and income uncertainty. I think this work was/is ignored because incorporating this analysis into microfounded models raises serious problems associated with heterogeneity across age and income. As Carroll shows it is possible to do, but not easy to do. Playing around with habits or some ‘rule of thumb consumers’ is much easier. Blanchard has recently made a similar point in his critique of DSGE models.

In fact I would go further than this. I argue here that it was this microfoundations methodology that allowed mainstream macro to ignore the fall in personal savings in the US that preceded the crisis, because it is a methodology that allows you to be very selective about what empirical features you do or do not explain. As the best explanation for this decline in the savings ratio is easier credit, then any general equilibrium analysis would require modelling the financial sector. For this reason I speculate that had the microfoundations revolution been more tolerant of other methodologies (as it was in the UK until the end of the 1990s), macroeconomics may well have done more to integrate the financial sector into their models before the crisis. That is a rather different critique than the one typically offered by heterodox economists, but it is no less fundamental.

Mainstream macroeconomics addiction to microfoundations methodology has given heterodox economists an opportunity. If mainstream macro continues to shun what it calls policy models (models that use aggregate relationships justified by an eclectic mix of theory and data), then this space can be occupied by others. But to do that heterodox economists have to stop being heterodox, by which I mean defining themselves by being against almost all mainstream theory. As Jo Michell writes “The problem with heterdox economics is that it is self-definition in terms of the other”. As the scope and diversity of mainstream theory gets larger and wider, the space that can be occupied by those who reject the mainstream shrinks.

Friday, 26 August 2016

Why we must have a second referendum

I think many people who argue against a second referendum have not taken on board the scale of the difference between the various Brexit options. We could retain access to the single market and free movement of labour (the Norway option). Or we could just cut a trade deal with the EU, do nothing on services, and end free movement (the Canada option). Or other things in between. In economic terms the Norway option is much closer to EU membership than it is to some of the alternative forms of Brexit.

Perhaps an analogy is that you decide one day that it is time to move house, as you are really bored with your current property and aggravated by its various imperfections [1]. That decision is akin to the Brexit vote. But you have no idea where you are going to move to. It could just be a local move to a similar style property, or it could be to somewhere in another part of the country where property is cheaper but where you would have to find new friends and a new job.

The Brexit vote in practice is the green light to explore what possible alternatives are available. Having looked at the various alternatives, you may decide that you do indeed want to move. Or alternatively you may realise that your current house is not so bad after all, and is superior in many ways to the best available alternative, and so you decide to stay. To deny a second referendum is a bit like saying that once you have decided to move you cannot go back on that decision, no matter what the alternatives turn out to be. A slightly closer analogy is that you decide to move house, but then you get someone else to choose the best new house for you, and you have to accept the choice they come up with even if you think it is inferior to your current house..

So the key arguments for a second referendum are that the alternative to EU membership was not specified in the first referendum (they were also unknown at the time, and depend on what can be negotiated from the EU), and that these alternatives are very different from each other. I cannot see the logic in saying people should have a direct say on whether to leave the EU, but no direct say on what to leave it for. [2]

[1] I choose an analogy involving an individual rather than a group or society as a whole to avoid the (well known to economists) problems associated with non-transitive preferences for groups of individuals: see Jonathan Portes here.

[2] Note that I make no reference to voters being lied to in the first referendum. My argument still holds even if Leave had been completely honest.  

Wednesday, 24 August 2016

Why Corbyn’s Brexit campaign matters

I sometimes think discussions with Corbyn supporters is a bit like talking to one half of a couple going through a bad patch in their relationship. Let’s call them PLP and LPM. There is no doubt that for many years PLP had taken LPM for granted. And as a friend to both you can wholeheartedly agree that PLP’s flirtation with austerity in recent years was a serious breach of trust, and more generally a very foolish thing to do. You agree that in those circumstances LPM getting into bed with Corbyn was quite understandable.

But you can see that Corbyn is no good for LPM. Their relationship is going nowhere. What is more PLP is, perhaps as a result, full of remorse. Austerity has long gone, and PLP is promising almost everything LPM wants. You know that when LPM and PLP work together they are a great couple, perhaps even a winning couple. Yet when you try to say this to LPM you either get the hurt of an aggrieved party (how can I ever trust them again), or worse still the poisoned words of despair (that even at their best as a couple they were no better than anyone else).

So when I ask how can you expect Corbyn with only the confidence of 20% of his MPs to get many votes, I’m told that the PLP should not be able to dictate who the leader is, as if that somehow negates my point. [1] Life with Corbyn may be going nowhere, but it is all PLP’s fault. When I point out Corbyn’s major mistake during the Brexit campaign, I’m told it probably had no effect so why should it matter.

But it does matter. What Corbyn and his team decided to do as part of their Brexit campaign was to rubbish Osborne’s claims about the economic harm Brexit could do. They were rubbishing the key part of the Remain campaign. That decision was certainly an embarrassment for that campaign, and for his own PLP colleagues. It was a slap in the face for academic economists, 90% of whom did think that Brexit would be harmful.

Not only was it the wrong thing to do for those reasons, but it also puts Corbyn in a far weaker position after the Brexit vote. Let me quote a comment from that earlier post from Mike Berry, who knows a thing or two about the media. He says it was
“a gargantuan, colossal and highly stupid strategic error. If Corbyn, McDonnell and the rest of the shadow cabinet had repeated endlessly the warnings of economists about what would happen and continued this after the results, day after day after day on all the main media outlets they would now be in a very strong position because they would be able to conclusively pin the responsibility for the negative economic consequences of Brexit on the Tories. They could have forced the Tories to own the slump and shredded their deserved reputation for economic competence for a generation. Deeply disappointing.”

So why did they make such a big error? According to this report, “the Shadow Treasury team vetoed a story developed by Labour’s policy team for Shadow Chief Secretary Seema Malhotra, which warned of the effect of Brexit on the value of sterling.” It goes on: “Those close to the Shadow Chancellor felt that the independence referendum in Scotland had shown how Project Fear went down badly with Labour voters. McDonnell’s Economic Advisory Council (EAC) would have felt the sterling crisis idea was counter-productive too, one source said.”

It was blindingly obvious, from either macro theory or from market reaction to polls, that sterling would depreciate sharply if the UK voted Brexit. Mike Berry’s point continues to apply. But the reason given for not going with this is bizarre. Leaving the EU, as with Scottish independence, will have serious economic consequences for the UK and Scotland respectively. To not mention this, or worse still trash others that do, because it might not be believed is extraordinary logic. (It is like saying a lot of people do not believe in man made climate change, so let’s start supporting climate change denial.)

It is fine to talk about some of the issues the Remain campaign was ignoring, like workers rights, but you can do that without rubbishing what other people on the same side are saying.

What added insult to injury when I read this account was the reference to the EAC. The EAC certainly did not say that Corbyn should discount economists claims about economic costs, or that the likely exchange rate depreciation should not be mentioned. Some of us may have said that talk of some kind of financial crisis similar to 2008 was going over the top, but that is completely different. (A substantial depreciation is not a financial crisis.) It’s not good to misrepresent the EAC as a cover for bad decisions. You do not need to take my word for this. To quote from the statement five of us made after Brexit and Danny Blanchflower’s resignation: “we have felt unhappy that the Labour leadership has not campaigned more strongly to avoid this outcome”.

The reaction of Corbyn’s supporters to all this is to respond to a very different accusation, which is that Corbyn helped lose the Brexit vote. But that is something that is virtually impossible to decide. The issue for me is not whether Corbyn in undermining the Remain campaign influenced the final vote, but that he did it in the first place.

One possibility of course was that he was quite happy to undermine that campaign because of his own ambivalence towards the EU. After all, he did take a holiday during the campaign (imagine if Cameron had done that), and he didn’t actually campaign that hard. But let us instead take him at his word. What we have then is a major strategic failure by him and his team, a failure that will have consequences for the future.

A large part of politics over the next few years will be about Brexit. The Prime Minister is extremely vulnerable on this issue given the splits in her party. There is a huge difference between the various forms of Brexit, and a united Labour party with a passionate advocate of European engagement leading it could help influence events. If there is an economic downturn as a result of the uncertainty over Brexit the government must be made to own that downturn in voters eyes. You cannot do that if the leader of the opposition said the downturn wouldn’t happen.

Let me end with a quote from a recent article by Martin Jacques. While I disagreed with his unqualified description of New Labour as neoliberal, I think he gets Corbyn exactly right in this quote.
“He is uncontaminated by the New Labour legacy because he has never accepted it. But nor, it would seem, does he understand the nature of the new era. The danger is that he is possessed of feet of clay in what is a highly fluid and unpredictable political environment”

I know it has only been a year. I know recent betrayals still hurt. But the road Labour is currently on leads nowhere, and the longer it takes for the membership to realise that the more damage is done. Once you stop seeing the alternative through jaundiced eyes it is so much better.

[1] Logical consistency often goes out of the window in such discussions. I’m asked how can I know that this no confidence vote will damage Labour in a General Election by the same people who tell me Corbyn’s current unpopularity in the polls is because Labour is split.

Postscript [07/09/2016] It now looks like the reason why the explanation given for not supporting (or indeed trashing) economists analysis of the benefits of the single market reported and discussed above were bizarre is because they were a diversion. This report and this from George Eaton show clearly that Corbyn and McDonnell do not support membership of the single market. 

Tuesday, 23 August 2016

Minority rule: Migration, Brexit and Mandates

It is generally (not universally) agreed that the issue of migration played a large role in leading 52% of UK voters to want to leave the EU. However that does not mean there is a mandate to end Freedom of Movement (FoM) at the cost of losing access to the single market. I’m rather surprised by the number of people who think it does. There are lots of reasons why it does not, like voters being told they could end FoM and still stay in the single market, like that many people voted to end FoM because they wanted a better NHS, whereas the opposite will be true in practice. (Tony Yates discusses this general point here).

However the clearest reason why Brexit does not mean there is a mandate for ending FoM was made by Ian Dunt yesterday. Put simply, it is that a majority of a majority can be a minority. The fact that many people voted Brexit because they wanted more control over immigration does not imply that a majority of all voters did.

Suppose that everyone understood that there was an unbreakable link between freedom of movement (FoM) and membership of the single market. Suppose all the 48% who voted to Remain prefered to keep membership at the ‘cost’ of retaining FoM. Suppose 48% of those voting Leave felt the opposite. But 4% of those voting Leave wanted a Norway style arrangement, and wanted to leave for some other reason than FoM . In this case a majority want to keep FoM, and do not want further migration controls if that means being out of the single market.

Of course these numbers are made up, although polling evidence does suggest a majority of people prefer being in the single market to ending free movement. But the key point is that we do not know what the true numbers are. Yet the presumption seems to be being made in lots of quarters, from researchers to politicians, that the referendum result means that we cannot go for any arrangement involving FoM. This just does not follow.

Nor does the fact that the Leave campaign focused on immigration make any difference. Again imagine that the 4% who wanted to leave for reasons other than immigration were rock solid about voting Leave. For the undecideds, however, immigration was critical. In which case any decent campaign would focus on the undecideds. We could change the figures to make it even clearer: 30% of Leavers were rock solid because of sovereignty or financial issues, but 22% were undecided and also worried about immigration. Again a good campaign would focus on immigration, even though it was a minority concern. Election results, like prices, are determined at the margin.

There is therefore no mandate from the referendum result to sacrifice membership of the single market in order to end free movements. Which is one excellent reason why we need a second referendum on the final terms for Brexit before we leave.

Postscript (17/10/16) Here is some polling evidence supporting these arguments.  

Monday, 22 August 2016

New Labour and neoliberalism

Anyone who talks about New Labour as being a “disciple of neoliberalism” really should define what they mean by neoliberal. One of the defining characteristics of neoliberalism as far as I am concerned is a dislike of ‘big government’. Neoliberals are not libertarians: they are happy to use the state and make it powerful in particular ways (e.g. defence). However neoliberals are in favour of the privatisation of many government activities, and cutting its welfare and redistributive roles. That is the only reason why austerity was a neoliberal policy.

There are lots of ways of measuring the size of the UK government, but here is one: government consumption as a share of GDP, using world bank data.

The share of UK government spending on this measure, as with others, rose steadily and significantly under the 1997-2010 Labour government. The contrast with the previous Conservative government could not be clearer. The positive benefit that brought to public services like the NHS was real and substantial.

There are other ways in which New Labour attempted to undo the impact of the market. One concerned child poverty. While they did not manage to reverse the increase in child poverty that occurred under Thatcher, it was not for want of trying. Relaxed about the inequality that came with neoliberalism for sure, but not relaxed about poverty. New Labour introduced the minimum wage.

New Labour could be described as neoliberal in some of the other things it did, or did not do. But true disciples do not usually pick and choose which of their leader’s teachings they follow. When it comes to the rather important issue of the size of the state, New Labour was not neoliberal.

Saturday, 20 August 2016

Brexit, economists and journalists

What does a macroeconomist say when confronted with evidence that output has stopped growing since Brexit, but that retail sales growth is strong and employment is holding up? The first thing they would probably say is that monthly figures are erratic, and we really should wait and see (although the Bank was right to cut rates as a precautionary measure given the negative evidence we already have). Second, they might also say that a short term burst in the consumption of consumer goods made overseas is quite a sensible response to the collapse in sterling, as there is often a lag before an exchange rate fall is passed through into higher prices in the shops. Buy your washing machine now before the price goes up. Third, they might note the collapse in sterling has (for good economic reasons) preceded the negative impact of Brexit on trade, and trading firms might benefit from that in the short term. The real worry about the short term impact of Brexit is a collapse in investment, as firms put projects on hold until the nature of the Brexit deal becomes clear, but it is very difficult to guess how large that effect will be. But finally they would also note that if the depreciation in sterling we saw as the vote was announced is permanent, that means every person in the UK is poorer as a result. That has to be reflected in lower consumption eventually.

What does a journalist say confronted with the same evidence? If they voted for Brexit they say economists forecast Armageddon, and it has not happened. They say “ it is obvious that the sky has not fallen in as a result of the referendum, and those who said it would look a bit silly.”

This is an old trick. Completely exaggerate what the other side says, and then cry victory when that exaggerated fiction does not come to pass. I remember 2013, and how the first sign of UK growth (growth in income per head that was at best on trend, rather than above trend as you would expect in a recovery) was proclaimed as vindication of 2010 austerity. When I pointed out that this argument made zero economic sense, I was referred to statements by someone or other that said growth would never happen under austerity. Of course they did: when governments are doing stuff that is causing serious harm and appear not to be listening it is human nature to overstate your case.

Exactly the same no doubt happened over Brexit. But most economists, most of the time, have been absolutely consistent. The real damage that Brexit will do is medium/long term, and results from the straightforward fact that making it more difficult to trade with our immediate neighbours will harm growth. How much harm varies depending on the type of Brexit (which is still to be determined) and which study you look at, but in most cases the impact is large and permanent, and we will not know exactly how large for years. Economists also said there would be noticeable short term disruption caused by uncertainty about the exact nature of Brexit, but how large that short term impact would be is very difficult to estimate, and it was of secondary importance compared to the longer term costs. They did not talk about Armageddon, and they did not talk about the sky falling in.    

The lesson of all this is that the reporting of economics in a good deal of the UK press is hopelessly biased by politics. Of course academic economists are not immune from this failing (and it is a failing), but most try not to succumb. Any group that is so consistently misrepresented in the press, and whose advice is so consistently ignored, would organise some form of resistance and defence. Just how much harm has to be done to the UK economy before academic economists do the same?

Helicopter Money: missing the point

I am tired of reading discussions of helicopter money (HM) that have the following structure:

  1. HM is like a money financed fiscal stimulus
  2. HM would threaten central bank independence
  3. So HM is a bad idea

(Admittedly here (3) is only implicit.) What these discussions never seem to ask, even when discussing (2), is why we have independent central banks (ICB) in the first place. And what they never seem to note, even in establishing (1), is that ICBs deny the possibility of a money financed fiscal stimulus (MFFS).

ICBs exist to avoid problems when politicians do macro stabilisation. But creating an ICB means that a MFFS is no longer possible. It could only happen through ICB/government cooperation, which would negate independence. But proponents of ICBs say this is no problem, because macro stabilisation can be done entirely by using changes in interest rates, so a MFFS is never going to be needed.

Then we hit the Zero Lower Bound. Unconventional monetary policy (e.g. QE) is a far more uncertain and unreliable stabilisation tool than fiscal policy. Which means ICBs cannot do the job there are required to do, and their existence prevents a MMFS.

To then say no problem, governments can do a bond financed fiscal expansion is to completely forget why ICBs were favoured in the first place. Politicians are not good at macroeconomic stabilisation. If you had any doubt about that, global austerity should be all the proof you need.

So demonstrating (1) does not, I repeat not, imply that ICBs do not need to do HM. Implying that it does is a bit like saying governments could set interest rates, so why do we need ICBs. Most macroeconomists would never dream of doing that, so why are they happy to use this argument with HM?

Which brings us to (2). Now (2) is never in my experience examined with the same rigour as (1): it seems almost that just mentioning ‘fiscal dominance’ is enough to frighten the horses. The only circumstances I can see where (2) would be true is if, following HM and a subsequent upswing, the central bank finds that it runs out of assets to sell in order to keep rates high and prevent inflation exceeding its target. One obvious solution is for the government to recapitalise the central bank.

Does that compromise central bank independence? The Bank of England does not think so. It got the government to agree to make good any losses from QE. Have people worried that this compromises the independence of the Bank of England Of course not: no one can seriously imagine a UK government ever reneging on this commitment. So why would HM be any different?

Let me put it another way. Imagine the set of all governments that would refuse a request from an ICB for recapitalisation during a boom when inflation was rising: - governments of central bank nightmares. Now imagine the set of all governments that, in a boom with inflation rising, would happily take away the independence of the central bank to prevent it raising rates. I would suggest the two sets are identical. In other words, HM does not seem to compromise independence at all.

So please, no more elaborate demonstrations that HM is equivalent to a MFFS, as if that is an argument against HM, without even noting that ICBs prevent a MFFS. No more vague references to HM threatening independence, without being precise about why that is. And please some recognition that the whole point of ICBs is not to have to rely on governments to do macro stabilisation.

Friday, 19 August 2016

Hard truths for the IMF

It is to the IMF’s credit that they have an Independent Evaluation Office, and their recent report on the Eurozone crisis is highly critical of the IMF’s actions. The IMF’s own staff told them in 2010 that Greek debt could well not be sustainable, but the IMF gave in to European pressure not to restructure Greek debt. Instead the Troika went down the disastrous route of excessive austerity, and the IMF underestimated (unwittingly or because they had to) the impact that austerity would have. In the last few years we keep hearing about an ultimatum the IMF has given European leaders to agree to restructure this debt, and on each occasion the IMF appears to fold under pressure.

These repeated errors suggest a structural problem. Back in 2015, Poul Thomsen, who runs the IMF’s European department, said “we need to ensure that we treat our member states equally, that we apply our rules uniformly.” But that is exactly what the IMF has failed to do with the Eurozone and Greece. As Barry Eichengreen writes
“When negotiating with a country, the IMF ordinarily demands conditions of its government and central bank. In its programs with Greece, Ireland, and Portugal, however, the IMF and the central bank demanded conditions of the government. This struck more than a few people as bizarre.
It would have been better if, in 2010, the IMF had demanded of the ECB a pledge “to do whatever it takes” and a program of “outright monetary transactions,” like those ECB President Mario Draghi eventually offered two years later. This would have addressed the contagion problem that was one basis for European officials’ resistance to a Greek debt restructuring.”

We could add that, since the Asian crisis of the late 1990s, the fund have understood the dangers of taking actions which just favour creditors, but as part of the Troika it sits down on the same side of the table as the creditors.

As Eichengreen also notes, it is not as if the IMF have had problems demanding commitments from regional bodies such as African or Caribbean monetary unions and central banks in the past. The problem is much more straightforward. He notes that European governments are large shareholders in the Fund, and that “the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture.”

In other words we have something akin to regulatory capture. The IMF’s job is to be an impartial arbitrator between creditor and debtor, ensuring that the creditor takes appropriate losses for imprudent lending but also that the debtor adjusts its policies so they become sustainable. In the case of the Eurozone it has in effect sided with the creditors, and ruinous austerity has been the result of that.  

Wednesday, 17 August 2016

Hope, experience and the left

Paul Mason has an article in the Guardian which I think exemplifies where many on the left are right now. He looks back at the electoral failure of Michael Foot in 1983 and the formation of the SDP, which together began the gradual marginalisation of the left in the UK. He goes through the obvious differences between that history and now, but then notes a key similarity:
“As with the SDP, there is a prospect that a few entitled Labour MPs will split, and that the media will get behind the narrative that they are the “true” Labour party. Disunity has already damaged Labour in the polls, just as it did with Michael Foot.”

Why will that not matter this time? His answer seems to be that neoliberalism is on its last legs and the Labour party has 300,000 new members, which he describes as the main event of 2016. These are times of hope for the left, he says.

Of course a revitalised membership is great, as long as that membership understands that it is just one small part of what has to happen to actually change things. It has to combine with a united parliamentary party if it is to have any hope of victory. Just try putting yourself in voters’ shoes: voters who know little of politics, but want to elect a prime minister and a party that will govern well and govern in their interests. In Labour they see a party that has voted no confidence in their leader. It really does not matter if that happened yesterday or 4 years ago because the media will remind all concerned as if it was yesterday. They will say to themselves if their own MPs have no confidence in Labour’s leader, how can I?

I have made this point so many times over the last few weeks. Responses fall into two kinds. The first says that if Corbyn is reelected, MPs must unite behind him, and it will be disgraceful if they do not. If it all breaks down, it will be their fault. But MPs are not soldiers who must carry out orders (although even soldiers ordered into battle by a commander they think is hopeless do not fight very well), but people who have experienced Corbyn’s leadership at first hand. To disregard their experience as just the smears of Blairite plotters is escapism. There are some smears of course, but there is also real frustration and anger among MPs at failures of leadership. If this experience of MPs is ignored, it will be Labour party members, and they alone, who are responsible for the consequences of the votes they cast.

The second response is that the party will have to replace its troublesome MPs. Here history does suggest that this is a excellent way of achieving the split on the left that Paul Mason agrees may happen. To cross fingers and hope it does not happen, or to imagine it will not matter this time, is a triumph of hope over experience, to put it kindly.

But what about the imminent demise of neoliberalism? Here I have to disagree with Paul Mason. The main event of 2016 was the Brexit vote, not 300,000 new Labour members. To think otherwise is delusion. The Brexit vote, in its way, was a blow against neoliberalism, but of an entirely reactionary kind. Economic crises embolden both the radical left (those 300,000 new members) and the reactionary right, and how that turns out depends in part on how united, organised and smart each side is. Under Corbyn, even with 300,000 new members, the left was not able to stop Brexit. Thinking the next time will be different is again putting hope over experience.

What is more, this hope seems rather selective to me. What about putting hope a leader who is standing on a radical economic programme with no question marks over their commitment to closer ties with Europe. He cannot be trusted, I am told, even though he was once ‘core group plus’. Little hope extended there. What about a leader who will be able to unite the party, with a chance of taking power back from this Conservative government that is doing so much harm. He will be overthrown by the Blairites, I am told, even though according to the Corbyn camp the original number of hostile MPs numbered less than 40. This is close to paranoia. 

This is not a hopeful left, but a left that wants to rerun past victories rather than adapt to reality. A left that will not allow itself to believe that by electing Corbyn in 2015 the membership has stopped the drift of the party to the right. A left that does not want to see how Brexit has changed the political landscape. And above all else a left that will not let go of a leader who started out with less than 40 hostile MPs and ended up with 172. A man who is not a victim of some Blairite plot but of his own inability to lead.