Is there a storm coming?

Is there a storm coming?

In an article on CNBC, with an article entitled, Bank of England's Haldane warns on inflation; bond yields move higher (cnbc.com), they summarise the article, "In a recorded lecture, Haldane noted that there were both upside and downside risks to the inflation outlook, but cautioned that an inflationary “tiger” had awoken. ... Global markets have been jittery over the past week due to a spike in the U.S. 10-year Treasury yield, driven in part by rising expectations for inflation and economic growth. I review the comments and look at the basics, present some charts on employment, inflation, growth and investment and ask if this is just fear mongering by monetarists ....

Thinking about macroeconomics with Anneliese Dodds

Thinking about macroeconomics with Anneliese Dodds

While writing, Responsible Opposition, about Sir Kier Starmer’s 1st speech of the year, I pointed out that Anneliese Dodds would be giving the Mais Lecture, which had been previewed in the Financial Times (paywall). They said that she will,

 …  call for a ‘responsible fiscal framework’ based on ‘pragmatism, not dogmatism’  … [and] … signal … that the Labour party is backing away from the hard-left economic policies of former leader Jeremy Corbyn, seeking instead to fight the Conservatives on economic competence and protecting the UK’s recovery from the damage caused by the Covid-19 pandemic.

Chris Giles – Financial Times

The speech has now been delivered and I heard/watched it live. The first thing to say is that I do not consider this to be a repudiation of late stage Corbynomics.

I needed help to work out what was said, it was a very low key speech, certainly not in the style of a UCATT shop steward, more in the style of one of the academics from the cast of Inspector Morse. There was no emphasis and so we need to work out what’s important and what is just said in passing. Stephen Bush points out the unusual nexus of welcome from James Meadway & Chris Giles, he writes,

… [ the speech] attracted a glowing write-up from the FT’s influential economics editor Chris Giles and an approving tweet from James Meadway, the adviser who more than anyone bar John McDonnell himself shaped the Labour Party’s economic strategy under Corbyn

Stephen bush – New Statesman

Meadway’s tweet was trolled by Richard Murphy, who was one of the authors of Corbyn’s original Corbynomics manifesto and is a supporter of modern monetary theory (MMT), but Labour stepped away from these monetary & fiscal policy  ideas after 2016.

I found the speech underwhelming, almost academic in its tone, which given the host may have been appropriate. I am certainly of the view that it is not a step away from or a rejection of McDonnel’s policies. If anything, the call for a ‘responsible fiscal framework’ based on ‘pragmatism, not dogmatism’ is an attack on Osborne and the politics of austerity and his remaining fans in the Tory party. She praised the independence of the Bank of England, but this has had its problems; it failed in 2008 and it was politicians that rescued the economy and the argument for its independence is based on the argument that politicians and their electors can’t be trusted to make the right decisions. If those decisions are painful, why should they? Independence is a way of baking in neo-liberalism. She was clear however that monetary policy is not enough to build a successful macroeconomy.

Over-relying on monetary policy levers for economic growth – as the UK has arguably done for the past decade – can lead to undesirable outcomes. Without accompanying fiscal action, low interest rates and gargantuan quantitative easing programmes can exacerbate inequality and concentrate economic gains in the hands of those who were already asset-rich, at the expense of those who rely on income from their labour. Risky indebtedness, especially combined with a highly unequal distribution of assets, can exacerbate inequality.

Anneliese Dodds

She spoke on fiscal policy; did she repeat McDonnel’s Golden rule? If she did, she qualified it by saying that borrowing to invest is only available because of the low interest rates. I have two things to say, firstly, I thought interest rates are a policy instrument, so if a government which is a currency sovereign wants them low, then low they are! Secondly, defining what is current account expenditure is not simple. Why is the education budget not considered an investment in human capital?

Is this as good as it gets? We are to be grateful that a Labour Shadow Chancellor still intends to borrow to invest and that monetarism is no longer part of Labour’s macro-economic tool kit.

On the upside she mentioned wealth inequality and aggregate low wages as constraints to growth but no mention of remediation which would be an effective wealth tax, a better minimum wage, reformed procurement policies and labour law reform. She also mentioned critically the growth in value of unproductive assets, such as art and wine; but surely this is the result of quantitative easing and a side effect of the increasing marginal propensity to save by the rich, again addressable by a wealth tax.

She announced a series of technical changes to the budget management process, all of which are good, but not particularly left wing and so likely to be nicked by the Tories. These consist of ensuring equality & carbon impact analyses on the budget and spending plans and placing a longer term time frame on the budget together with using more very long term bonds.

I also noted that while it seems that Labour is committed to a high wage, high skill economy, our reticence to talk about the means by which we select the short and medium term winners is not talked about; under Corbyn’s leadership, the new National Investment Bank was to be the instrument for seeding innovation and new jobs, but the means of funding it, and the way in which loans and grant were to be allocated remains unclear.

I submitted a question on this i.e. selecting industrial and innovation winners, which the moderator, Prof. Barbara Casu put as her first question; if Anneliese Dodds had wanted to talk in detail, this would have been in the speech, it wasn’t and her answer to Professor Casu’s question added no clarity.

It was a very technocratic speech, delivered in a technocratic style, presumably designed not to frighten the horses. It was a rejection of both modern monetary theory (MMT) and fiscal consolidation but not a manifesto for socialism.

ooOOOoo

The speech was introduced by the Dean of Faculty at CASS, Paulo Volpin, and the questions moderated by the Professor of Banking, Barbara Casu. Both would seem have been initially educated in Italy, I hope that the new immigration rules post Brexit will allow others to follow their route and come to the UK to teach.

I have written previously about Corbynomics on this blog and also on MMT on my bliog, and on my wiki, and on QMT in my obituary on David Graeber, on the blog. …

On macroeconomics, in memory of David Graeber

On macroeconomics, in memory of David Graeber

David Graeber died a couple of months ago on 2nd Sept. I never met him but was introduced to his work by my son who pointed me at "On Flying Cars and declining rate of profit", and he was introduced to me as one of the world’s leading anarchist thinkers; he was teaching at Goldsmiths which is close to where I live. I didn't feel it appropriate to write anything at the time, however I was clearing up my desktop and came across "Against Economics", which is a review of Robert Skidelsky's book, "Money & Government: the past and future of economics". It is through these two articles, and his tweet stream, that I came to know him; there is much wisdom in these articles. In this blog post, I comment on three things which I think especially important. Firstly, the nature of capitalism has changed. Capitalism is no longer progressive, and its defenders are moving towards arguing there is no alternative. The problems that the economic system needs to solve are no longer growth and the resource allocation required to deliver it, but, in his words, "how to deal with increasing technological productivity, decreasing real demand for labor, and the effective management of care work, without also destroying the Earth". This would also require an equitable distribution of wealth and income, the lack which is one of the chief criticisms of capitalism. Secondly that amongst the fatal flaws in economics as a science is the truth that systems that promise a benevolent equilibrium cannot rely on expectations of exogenous rewards to act as stabilisers. Thirdly, I look at his critique of the quantitative theory of money, and his positioning of credit and debt as an exclusively social construct. For more, see below/overleaf ...

QE 2020

QE 2020

Goodness, here’s the Bank’s page on Quantitative Easing. The last tranche is £645bn. It’s a shit load of money and I find this an important quote,

Suppose we buy £1 million of government bonds from a pension fund. In place of the bonds, the pension fund now has £1 million in money. Rather than hold on to this money, it might invest it in financial assets, such as shares, that give it a higher return. And when demand for financial assets is high, with more people wanting to buy them, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity.

The italics and underlining are mine. This is not a plan, it’s a dream. More likely!

If this is designed to boost aggregate demand, then it does so through the lending market and is mitigated by peoples expectations and animal spirits. Poor people spend more of what comes in and are also more debt adverse or will be excluded from borrowing [more] and there’s more of them. If it’s defending aggregate demand that’s needed then we should be pumping this money out through the benefit system nc. the in-work benefit payments; SSP and Redundancy should be state paid/underwritten benefits, not paid by employers nor underwritten by loans. If it’s about protecting the poor inc. the in work poor and vulnerable, then doubly so.

See below/overleaf for a chart showing its size compared with both the fiscal deficit and balance of trade deficit. …

More from Meadway

More from Meadway

I went to one of the local labour political education workshops at which James Meadway was speaking. Odd, since I had been reading of his views, in particular with respect to his contention with MMT; I wrote them up on this blog. but it was good to hear him in person.

I have written about MMT and its contention with the Labour front bench a couple of times and summarised my understanding of the MMT position on International Trade. A couple of years ago I wrote on their views on Monetary vs. Fiscal policy, this latter article also summarises and links to articles critical of MMT.

Meadway emphasised two things, “Not all Currencies are equal”, the dollar is still the international trade denominator. The second point is that making debt default the policy tool to deal with private sector foreign exchange debt is not wise as the biggest FX debt holders are probably HSBC and Barclays. While the UK public sector FX debt is tiny, this private sector debt is not and it’s questionable if we could bail the banks out a second time which since the ring fencing of retail and investment banks is mired in the swamp would jeopardise the people’s savings.

He also emphasised the importance of ownership, investment and universal services as socialist agenda items and thus the creation of an irreversible shift in power; not so sure my memories of Thatcher selling off the Mutuals is evidence that this will work but it will be a powerful manifesto. …

Fiscal credibility, ptui!

Yesterday, I went to a meeting on Brexit, Free-movement and immigration; conversation in the bar afterwards segued from, “why did a Corbyn led PLP argue to abstain on the Tories Immigration Act?” via a  post match analysis of Lewisham Deptford’s Brexit/Anti-Brexit meeting to consider the radicalism of Labour’s 2017 Manifesto and the development of macro economic policy since then; it doesn’t do so well when compared with the Corbynomics of 2015. One of the key developments since then has been the development of Labour’s Fiscal Credibility Rule, which promises to only borrow to invest.

To those who think this is smart, I ask why so-called current account spending on education is not seen as “investing” in Human Capital, but this is not it’s main problem.

However, I awoke this morning to see one of Richard Murphy’s tweets where he is contending with Jonathan Portes & Simon Wren Lewis, the rule’s author’s it would seem. It got a little testy. Anyway, here’s Richard, detoxifying, or not the twitter spat, and making the point that the Fiscal Credibility Rule is not based on Modern Monetary Theory. because it acknowledges the monetary constraint, and not the real world one. Murphy refers to his earlier piece, A challenge to Simon Wren-Lewis on modern monetary theory and Labour’s fiscal credibility rule in which he critiques the Fiscal Credibility Rule. My precis of his position is that the rule is based on a neo-classical approach, fundamentally legitimises austerity and fetishises debt reduction. I had a look for the Portes/Wren Lewis original position and assume that “Issues in the design of fiscal policy rules” is it.

My research took me to this, which Bill Mitchell claims to be his last words on the Fiscal Credibility Rule, the article contains the following powerful line,

The problem is that this reinforces the narrative that deficits and public debt are in some way ‘bad’ and as I note below this will not turn out well.

One of the problem’s exposed by Bill Mitchell’s article is that it suggests that the Fiscal Credibility Rule is a bit like Lord Buckethead’s nuclear deterrent policy, it only works if the secret is kept, in this case that Labour does not believe that the Fiscal Credibility Rule is a necessary macro-economic constraint even if the economists that wrote it do so.

ooOOOoo

To some extent, this article is just a reading list, there’s not so much of me in it., but I have promised myself a precis of Chapter 7/8 of Fazi and Mitchell’s Reclaiming the State, which is a relatively simple and short exposition of MMT. …

Brexit and Labour’s 2017 Manifesto II

In my article “Brexit and Labour’s 2017 manifesto“, and on my wiki article, “Stability & Growth Pact”, I talk about the reasons supporters of Labour’s 2017 manifesto might believe that they need to leave the EU to run fiscal deficits, nationalise critical businesses and offer state aid. I had come to the conclusion that our current terms of membership allowed the UK to pursue whatever macro-economic policies it chose and to be able to pursue its nationalisations. There would seem to be some questions on state aid and some people have raised the issue of the Railway Directive and its possible impact on the single market and nationalisation. A campaigning comrade of mine, from Southampton Itchen CLP has researched these issues and produced the following report, overleaf,  which he also published on Facebook wall.

He concludes, the notion that all EU activity is driven solely by Neo-Liberal ideology is in my opinion a mistaken assumption. In many instances there are additional rationales underpinning the EU rules that go beyond mere market obsession. The EU has pressed for more open networks in telecoms and energy but open access across national energy networks is critical for renewable energy production being made viable on a grand scale. Whereas in the water sector, where it is not feasible to create overlaying pan-European services, the EU has never shown any interest in legislating for open networks.

I would not go so far as to suggest the EU does not have an over optimistic view of the market system or tend to assumptions about private sector performance vs public sector that are not sustained by the economic models relied upon and it is possible to have a good discussion about Ricardo’s theory of comparative advantage.

On the other hand, free market supremacy is a pretty widespread assumption in the modern western world. The victory of the Neo-Liberal ideology has been to shift public perceptions to accept the ‘private good, pubic bad’ mantra as a gospel truth. That human beings in the EU broadly accept the same mantra is not really a surprise. The challenge to us as socialists is not just to reshape the UK economy to provide for greater equality and justice but to begin to reshape the underlying assumptions about human and market behaviour that underpin much of the capitalist economic system. …

Dallio on Economics

I am tidying the flat of items I have kept for too long, and came across an unread copy of Ray Dallio’s “How the Economic Machine Works”. I had been pointed at it by a then work colleague who had asked me to comment.

I didn’t feel in the mood to read it, and know I don’t want to keep it and so I googled it to create a bookmark but came across this 30 minute video, which can of course be consumed at double speed.

Dallio constructs a macro-economic model based on productivity growth, and credit cycles.

I have problems with his ignoring of the impact of monopoly on prices which given his rigid adherence to demand pull inflation theories could be a problem because he requires that over pricing leads to a dropin demand which doesn’t necessarily occur in monopolistic markets. He treats savings as a purchase of assets i.e. as spending; I am not sure that’s right.

He makes no mention of the marginal propensity to spend/save i.e. ignores the fact that the poor spend more of any incremental income than the rich. There is a limited discussion of fiscal policy.

He argies that the real economy i.e. the economy in terms of goods and services ignoring prices, grows at the rate of macro productivity growth.

There is no mention of international trade in his model.

I am unclear what causes the turn round in his long term debt cycle i.e. why does it change from benign to catastrophe. (Is it just animal spirits reacting to inflation and/or the micro debt burden? Or maybe its banks getting cold feet about the creditworthiness of thier borrowers.)

He argues that when the long term credit cycle moves to bust there are only four things that policy makers can do in order to reduce the total debt burden, restore creditworthiness and start spending again,

  • Cut spending (Austerity)
  • Reduce debt (Defaults & Restructuring)
  • Redistribute wealth (from the wealthy)
  • and print money

He argues that the first three are deflationary i.e. will reinforce the recession but the final one does not. (I can’t see how taking money from the rich and giving it to the poor is deflationary because of the short term higher propensity to spend of those with lower incomes.) He argues that these policies need to be balanced and that changes in income/product must be greater than the change in the debt burden. This reminds me that he does not seem to discriminate between domestic and government debt.

He finishes with three personal lessons, the last of which I heartily agree,  don’t borrow too much, don’t charge too much, and keep yourself up to date i.e. improve your productivity. …

Brexit and Labour’s 2017 manifesto

Some Lexiters claim that the EU treaties will inhibit a Labour Government if it tried to implement its 2017 manifesto. It is argued that the single market would inhibit industrial policy and the stability and growth pact would inhibit macro-economic policy. I don’t think this is so and have written up my notes on my wiki.

The single market does not inhibit an industrial policy, and the stability and growth pact has no enforcement mechanism for the UK. (Another opt-out which we will lose if we leave and seek to rejoin). 🤔 …

The day after the night before

The day after the night before

That was a shock, a soul deadening shock. In the words of the meme, I felt a grief for the loss of the future I thought I and my children had. How did this happen? How could we have voted to follow the corrupt and the vain, Johnson and Farage. The answer may have been most rapidly and accurately identified by John Harris of the Guardian in an article, entitled “If you’ve got money, you vote in … if you haven’t got money, you vote out” in which he identifies those whom we’ve known about for years, who can be described in a number of ways. In my micro blog post, “Pebbles”, I describe them as ‘globalisation’s losers’, the working class whose towns, communities and institutions have been smashed during the neo-liberal ascendency, communities that Labour stopped listening to and representing in 1997 leading to a loss of 5 million votes between 1997 and 2010. Making this even more problematic for Labour is that nearly ⅔ of Labour’s voters, voted remain, and just as globalisation’s losers cannot be ignored, nor can Labour’s majority of remainers. What is to be done? …