macroeconomics

Is Brexit worse than expected?

I was talking to a friend, who asked if anyone had predicted the current chaos caused by Brexit, which led me to look for and find my personal manifesto for remain [ or on medium ], both published in May 2016

I got the economy, rights, and the loss of freedom of movement right. I was also right on sovereignty and remain so on peace and hope!

I didn’t predict the collapse of offshore fishing industry, food rationing, or an energy cost crisis or that we would have a trade agreement that didn’t allow people to come here to work, although on fish & food, others did. I, and I think most people, have a better understanding of what we’ve lost. I think we’ll be back. …

Trade Friction and free movement.

I co-authored this, published at Brexit Spotlight by Another Europe.

Measuring the Brexit impact on the economy: the evidence that points to a self-inflicted calamity

It is little wonder then that the Conservatives are under acute pressure to revise their trading arrangements with the EU in order to re-open access the European single market. But it seems likely that – at least for the time being – Brexit ideology will not allow any serious recognition of the economic reality. …

Trebles all round!

This week, the Labour front bench, in a trinity of acts, supported the autumn statement and thus austerity in principle, criticised Tory immigration policy on the grounds of competence and repeated their promise to not join the EU, its single market, or adopt the EU’s freedom of movement in the next parliament (if they win).

The inconvenient truth is that the UK economy needs unskilled EU workers to do the work, It’s not the net fiscal impact that’s the issue. We have a massive labour shortage, we need migrants to do the work, it’s about the output. It’s not all highly skilled work as we define it either, it’s hospitality, agriculture, and health care. And today we define highly skilled as highly paid; even if only the highly skilled were desirable, they are not synonymous.

I have thought long and hard to find a way of compromising with those who want to pander to racists on free movement, and I can’t find a way of doing it while solving both the macro-economic problems and remaining true to our internationalist principles. All this “control immigration” or a fair “points based” immigration policy which involves stopping people is just pandering to racism.

Differentiating from the Tories on competence is morally vacant.

Accepting the debt fetishism at the heart of the Tories “New Economic Policy” is also morally vacant, and self defeating, you can’t cut your way to growth and austerity causes poverty, homelessness and is killing the NHS. Labour’s next manifesto and government must offer hope. They will lose votes from Corbyn’s voting coalition, and as far as I can see it’s deliberate.

You’d think they’d learn that voters always have somewhere else to go! Some demographics, historically Labour voters, are choosing to vote Tory. …

Inflation

The Bank of England was made ‘independent’ of the Treasury in 1997, although not really, so that it could take the blame for any decisions to increase interest rates, such as those taken earlier this week (£) when the Bank increased bank rate to fight inflation.

How does that work? Inflation is believed to have one of two causes, one is that there is too much demand, chasing too few goods and consumers bid up prices. The other is that import prices are rising and thus have an impact on the domestic price level. These are known as demand-pull, or cost push. The current inflation would seem to be caused by the increase in the cost of imports especially primary energy products, exacerbated by a fall in the exchange rate.

The monetarist theory is that there is a real world and money view of the economy.

i.e.

Prices x Product = Money Supply x Velocity of Money

PQ = Mv

This equation is derived via definitions and algebra and thus there is no proof of causality. Monetarists say that reducing the money supply will reduce prices. This assumes that in the short term both the velocity of money and the amount of product are static. Recent econometric studies suggest that the velocity is not constant, and there has always been a problem of defining what money supply is as it must include some credit and so is very difficult to constrain. We should note that consumer credit can be increased very rapidly so can no longer be consider static.

There can be no doubt from studying economic history, that increasing interest rates to reduce the money supply causes a recession, unemployment and poverty. It’s also highly likely that unionised workers will demand higher wages to defend their living standards. In a world where business is internationally mobile, business will defend its profits by increasing prices and/or off shoring the work; this is the wage-price spiral where an economy has high inflation, both cost push and demand pull and low growth.

The drivers of growth and/or the floor to a recession are investment, exports or government expenditure, especially benefits. Increasing interest rates makes investment and the national debt more expensive. It makes exports cheaper in their foreign markets but of course the big factor in the export price uplift is Brexit. Higher interest rates increases the income on savings and the expense on business and domestic borrowing. A squeeze on profits will cause capital to go overseas, especially if the exchange rate is high although this may be ameliorate by the increasing yield in bonds. The other cause of the economic malaise is the poor investment rates by both the private and public sector in the UK.

There can be no doubt that increasing interest rates will cause unemployment. This is how it reduces demand.

The other option to monetary policy is product supply, direct investment such as the EU’s Horizon Europe programme or price regulation to cause a profit squeeze, tax the energy companies and banks, build more houses, control profits, transfer income from the wealthy to the poor because the poor spend more of their income and of course rejoining the EU’s single market to reduce both import and export frictional costs.

High interest rates are a choice, a choice of theory and a choice of policy. The inconvenient truth is no-one knows if it works.

ooOOOoo

I conclude with some links to key commentators, professional economists. David Blanchflower, writes in the New Statesman, “The Bank of England is recklessly driving the UK into a deep recession”, he warns of the threat of unemployment, elsewhere on his twitter feed he is highly critical of the Bank and its Governor, Andrew Bailey, He is also quoted in a video clip by C4 on twitter, stating that unemployment hurts people more than inflation, which can be seen to be a declining threat. Anne Petifor exposes the role of the global capital markets in ‘managing’ food and energy costs, Richard Murphy provides a modern monetary critique of the theories. I particularly like his calling out of the role of import prices and speculators,

There is a third reason why the BoE policy will not work. It’s not just the assumption that people have too much to spend that the BoE get wrong. They have actually totally failed to identify the proper cause of this inflation.
The inflation we’re suffering is the result of shortages of oil, gas, fertiliser and food, in the main. Some of these are real (food, in particular). Others are being stoked by speculators who are profiting from them, which is why oil companies are declaring such big profits now
Richard Murphy – On Twitter

The featured image has been taken from Blanchflower’s New Statesman article where he asserts its a BoE MPC authored chart. This I assume can e used under the OGL license. …

Labour’s macro-economics, “Back to the Future”

Starmer made another speech on economics on Monday 25^th July. It is reported in the Guardian.

Starmer has been trying to pitch Labour as the party of fiscal prudence and will say: “With me and with Rachel Reeves [the shadow chancellor], you will always get sound finances; careful spending; strong, secure and fair growth. There will be no magic-money-tree economics with us.”
From the Guardian,

This article looks at growth and debt, Starmer and Reeves flirtation with Osbornomics and Reeves' rejection of nationalisation on the grounds of cost, I note countervailing views from Murray and Long Bailey and note that Reeves places herself in the sad queue of shadow chancellors undermining Labour's election chances by 'telling the truth'. There's more overleaf ...

Reeves on Macro-economics

It came as a shock that she spoke for an hour, given that delegates who might want to oppose her, only got 1 minute. I summarise the speech here, as much of it was just political ballast, although sometimes you need to build a justification for what we do.

She started with a litany of Tory failures, and repeated the lessons that we can, post-pandemic, clearly see who are the essential workers in our economy and see how poorly they’re paid. She noted Angela Rayner’s announcement of a series of welcome protections and improvements to the social wage and employment protection law and segued to the need for an effective economy that works for all of us.

I say more overleaf, where I mildly praise the good bits, and critique the missing bits.

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

While writing, Responsible Opposition, about Sir Kier Starmer’s 1^st 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

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

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. …

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