Saturday, 27 May 2017

Random charts 24.

Text in pink on these charts has been added by me.

Friday, 26 May 2017

“Invest in infrastructure while interest rates are low” is a flawed argument.

The above is a popular idea, backed by any number of professional economists. In fact I don’t know of a professional economist who questions the idea.

Unfortunately there is a glaring flaw in the idea, namely that interest rate changes are to a significant extent artificial: certainly central banks THINK they have a big influence on interest rates, and that idea is widely accepted.

Interest rates have of course fallen all of their own accord over the last twenty five years or so, but that fall has been accentuated by central banks since the 2008 crisis.

Thus when it comes to the question as to how much to spend on infrastructure and other investments, what might be called the GENUINE fall in interest rates is a valid reason for spending more. But that reason for more infrastructure investment was valid just before the crisis hit. So did we hear repeated calls for more infrastructure investment at that time? Nope. We had almost complete silence.

Then come the crisis, and so called “professional” economists all started demand more infrastructure spending. In fact there was no more reason for such spending just after the crisis hit than just before.

Put another way, the artificial fall in interest rates is NOT a valid to spend more.

Indeed the latter point gains support from a brief look at how central banks actually cut interest rates: they do it by printing money and buying up government debt. What was that – “printing money”?

Hang on: if the state can just print money (which it can in a country that issues its own currency) why have government borrow at all??? I.e. what’s the point of borrowing money if you can print the stuff (and spend it on infrastructure or whatever)? There’s no point.!!

Put yet another way, why not just print money and spend on any selection of the usual public spending items (education, health, defence, etc). Alternatively, those with right of centre views might want to print money and “spend” that on tax cuts: i.e. have the additional spending come in the form of additional HOUSEHOLD spending.

Indeed, the latter is essentially a form of “helicopter drop” and the latter is widely regarded as a reasonable or viable form of stimulus.

But if one goes for printing / helicoptering, there is no obvious reason to give infrastructure investments any sort of priority. That is, for the purposes of unemployment reduction and getting the economy up to capacity, spending on CURRENT rather than CAPITAL items will do perfectly well. Indeed, “current spending” is probably better than capital spending in that it takes time (sometimes several years) to get infrastructure projects going.


P.S. The above argument could be criticised on the grounds that the WHOLE POINT of artificial interest rate cuts is to encourage borrowing and investment. However that is a weak criticism. Reason is that infrastructure lasts 50 or 100 years and there is no reason to suppose that interest rates over that period will be much reduced just because there was a recession which started around 2008. In contrast, loans for consumer durables last a much shorter time. So for the latter products, artificially reducing interest rates with a view to expanding demand makes more sense.

Thursday, 25 May 2017

Academics should back free speech 100%.

I hope you are not so na├»ve as to think the comments after articles written by academics and similar types of people are always a realistic representation of reader’s reaction to such articles. Some academics can be very selective in which comments they publish.

Universities used to be havens of free speech and open debate. Those days are long gone.

One reason for the latter censorship may be that negative reaction to an article may not do wonders for the author’s career. So if an academic is keen to keep the cash rolling in, a bit of censorship probably pays off.

Censoring comments which are blatantly offensive or totally moronic is perhaps justified. Though frankly I get a maximum of about one such comment per year on my blog. Moreover, there is a good argument for publishing blatantly offensive comments: when A insults B, it is normally A who is made to look stupid. So why not let people make fools of themselves?

The following is a list of sites where I have left dozens if not hundreds of comments over the years, starting with the most liberal or “pro-free speech” blogs. That is followed by a list of blogs where censorship is too common for my liking. Strangely enough, the tendency to censor does not seem to have much to do with whether I agree with relevant authors. For example, advocates of Modern Monetary Theory (which I support) seem to be towards the “censorious” end of the scale. Though to be honest, the number of blogs listed below is not a statistically significant, thus I shouldn't really make the latter generalisation.

Liberal / free speech blogs.

Frances Coppola. The only person I’ve known her to censor is someone I didn’t blame her for censoring. He was a total time waster and idiot. Strangely though, Frances is fairly “censorious” on twitter: regularly blocks people.

Worthwhile Canadian Initiative. 100% free speech on this blog, far as I know.

Mike Norman - an MMT blog.  Pretty much 100% free speech. One commentator was asked not to comment again. As with the idiot commenting on Coppola’s article, this is a genuine idiot and time waster. BTW, Mike plans to stand for president in the US in 2020. What you might call a "long shot"...:-)

Simon Wren-Lewis.  Very liberal. He even publishes comments that insult the great SW-L. But not absolutely 100% liberal, though. SW-L often does not publish comments because he does not have time to moderate them. I don’t blame him for that: he has a full time job to do as well as looking after his blog.

Ann Pettifor.
Lars Syll.
Project Syndicate.
Mark Wadsworth.
Wall Street Journal.  

Stumbling and Mumbling.
Lars Syll.

Blogs where unwelcome comments are sometimes not published.

London School of Economics blog.

Financial Times.

John Redwood. (Tory MP). He certainly doesn’t like publishing comments which criticise the Tories. Maybe the same goes for all or most politicians.

Social Democracy.  Very choosy. Odd, given that the author, who goes by the name of “Lord Keynes” is clearly very bright and well read. He should be well able to defend himself against critical comments.

New Economic Perspectives.  Very choosy about which comments get published.

Bill Mitchell.  Very touchy when it comes to comments that disagree with him. He often edits out links to people/organisations he does not agree with.

Wednesday, 24 May 2017

Top UK Treasury official does not understand deficits.

Nick Macpherson was the top bureaucrat at the UK Treasury 2005-2016. Simon Wren-Lewis (Oxford economics prof) draws attention to the fact that Macpherson claimed in a Tweet that the “Tory pledge to balance budget by 2025 is a disappointment to anybody who wants to break the cycle of deficits, debt and devaluation.” Macpherson then claims in subsequent tweet that, “running a structural current deficit when economy is at full employment is poor economics and poor public finances stewardship.”

I don’t have any big disagreements with Wren-Lewis’s criticisms of Macpherson’s thinking. I’ll set out my own criticisms below which I think are slightly better than Wren-Lewis’s. This is a bit technical: only suitable for people with a serious interest in economics. Here goes.

I’ve actually pointed out the flaw in Macpherson type thinking several times on this blog over the years. But I’ll run thru it yet again.

Assume inflation averages 2% pa over the years. I.e. let’s assume that while inflation may be a bit above 2% in some years, it is below 2% in other years: more or less what has happened in the real world in recent years. Also assume that growth averages about 1% pa in real terms: again, an entirely reasonable assumption – 1% is approximately the actual rate of growth for the UK economy over the last 20 years or so.

The “Macpherson theory” is that in that scenario there should be no deficit over the medium / long term. In fact a deficit is inevitable on the above assumptions and for the following reasons.

The 2% inflation and 1% growth mean that the national debt and monetary base will shrink in REAL TERMS relative to GDP. So on the entirely reasonable assumption that those two will need to remain CONSTANT relative to GDP, then they’ll have to be topped up regularly. And that can only be done via a deficit!

The assumption that the debt and base will remain constant relative to GDP in the long term, or perhaps I should say “very long term” is what has actually happened in the UK over the last 200 years.  That is, while the debt has risen to dramatic levels on some occasions, e.g. after WWII, it has on average hovered around the 50% to 70% of GDP level.

Notice that the sum of the debt and base are what MMTers sometimes refer to as “private sector net financial assets”. PSNFA is an important quantity. It equals or amounts to private sector net financial savings. And it seems (to repeat) that desired PSNFA over the very long term has remained roughly constant.

So, given that a constant deficit is needed, how big will it need to be? Well that’s easy. On the above assumptions, it will need to be (2+1)x50%=1.5% of GDP.!! Macpherson eat your heart out.



The argument put by Wren-Lewis in the above mentioned article is that zero is too low a rate of interest because it means the rate cannot be cut come a recession. Ergo at the zero bound, fiscal stimulus and an increased debt is needed to get the rate of interest up.

Well the slight flaw in that argument is that having got the debt and rate of interest up, the debt will shrink again because of the above mentioned 2% inflation and 1% growth. So Wren-Lewis would need to repeat his “fiscal stimulus so as to get the rate of interest up” process all over again after a few years.

In contrast, I’m advocating a PERMANENT deficit so that the latter “repetition” is not needed. I claim my “model” (for want of a better term) is a bit better.


Artificial interest rates.

Another weakness in the Wren-Lewis model is that under that model, interest rates seem to be simply a device for adjusting aggregate demand. In fact the rate of interest (e.g. for a zero risk loan) is the price of borrowed money, and it is reasonable to assume that GDP is maximised when interest rates are at free market prices, in the same way as it is normally assumed in economics that GDP is maximised when the price of anything else is at free market prices (except where it can be shown that there are good social arguments for the price being artificially low (as is the case with kid’s education) or artificially high (taxes on alcoholic drinks).

I.e. there is merit in the idea that interest rates should be left to find their own level, an idea promoted by Positive Money among others. The only possible flaw in the latter “Positive Money” strategy is that interest rate adjustments might work more quickly than fiscal adjustments. However, it’s far from clear that that is the case.

There is a Bank of England article which claims interest rate adjustments take a year to have their full effect. Plus there is no need to wait for politicians to have lengthy debates on the matter before adjusting fiscal stimulus: an element of variability can easily be built into tax and public spending which DOES NOT require lengthy debates. For example the UK adjusted VAT downwards and then up again during the recent crisis without the say so of politicians (apart from the UK’s finance minister, of course, who implemented those VAT changes.)

Monday, 22 May 2017

Most studies of the economics of immigration are useless.

There’s a very simple reason. Most of them do not consider a HUGE cost that net immigrants impose on host countries, which is the fact that each person requires several tens of thousands of pounds worth of infrastructure and other forms of capital, like housing. (The phrase “net immigrant” refers to the excess of immigration over emigration.)

Thus for each net immigrant, taxes have to be imposed on existing residents of the country to pay for the infrastructure that each net immigrant requires.

Of course the latter point assumes that the host country ACTUALLY DOES create suitable amounts of infrastructure when net immigrants arrive or shortly thereafter. An alternative assumption (one that actually occurs in the real world to some extent no doubt) is that the host country FAILS to create suitable amounts of infrastructure. But the result is still a burden placed on the host country: in the form of overcrowded or inadequate infrastructure.

The above infrastructure point is not to deny that OVER THE LIFE-TIME of each net immigrant, those immigrants will pay, roughly speaking, enough tax to cover their contribution to the country’s infrastructure. But certainly during net immigrants’ first decade or two in the host country, they are “free riders”, thus on balance over their lifetimes, net immigrants do not pay their fair share of infrastructure costs.

As for what the total value of infrastructure and other forms of capital per head is, this study puts the figure at £141,000. The title of the study is “Warning: Immigration Can Seriously Damage Your Wealth” and is published by the Social Affairs Unit. £141,000 is a HUGE AMOUNT.

That is not to suggest that all net immigrants on arrival owe the host country £141k. The issue is more complicated than that. For example the amount of capital that immigrants bring with the must be taken into account. But the size of that figure does mean that to TOTALLY IGNORE the above infrastructure point in any study which purports to measure the costs and benefits of immigration is a huge blunder. And most such studies do in fact ignore the above infrastructure point.

Thus, to quote the title of this article, most such studies are “useless”.

Saturday, 20 May 2017

Pavlina Tcherneva suggests that sales don’t create jobs!*?*!??

If you want to know why the Job Guarantee or “government as employer of last resort” idea is getting nowhere, reason is that the more vociferous advocates of the idea are incompetent  – which is not to say I oppose the JG idea. It’s an idea with definite possibilities, as long as the current leading advocates of the idea are sent to Siberia.

Tcherneva is one of those “leading advocates”. In this article (entitled “Full employment through social entrepreneurship: the non-profit model for implementing a job guarantee” published by the Levy Economics Institute) she starts by questioning whether “expansionary fiscal policy” as she calls it, creates jobs. (I actually referred briefly to this article a few weeks ago, but a closer look at it will do no harm.)

Her first para says (I’ve put her words in green italics), “When it comes to fiscal stimulus, the conventional approach always centers on tax cuts, investment subsidies, accelerated depreciation, contracts to firms with guaranteed profits, and extensions to unemployment insurance and food stamp programs. Though the specific preferences for certain policies may differ from one political party to the next, the objective remains the same: boost private investment and growth by all means possible and jobs will hopefully follow.”

Why “hopefully”? If households are given more money, whether via the above mentioned tax cuts or unemployment insurance, the empirical evidence is that they spend a significant proportion of their newly acquired wealth (gasps of amazement). And that spending creates jobs – how else are relevant goods and services produced other than by people working, at – er – “jobs”?  A large majority of the economics profession believe that fiscal stimulus increases demand and jobs. They are right.

As to the “guaranteed profits” point, that’s irrelevant. Certainly some corporations sign guaranteed profits contracts with government, while other contracts involve a fixed quote for a specific task. In the latter case, relevant firms may then make a profit or loss depending in how well they estimated the cost of the task. But the important point is that when government places orders with firms for goods and services, jobs are created. Or at least a large majority of economists think jobs are created. Tscherneva evidently thinks otherwise.

Modern Monetary Theory.

Another strange aspect of Tcherneva’s above point is that she claims to back Modern Monetary Theory (MMT). But stimulus as proposed by MMT is not much different to stimulus under conventional policies. That is, one of the main forms of stimulus under conventional arrangements is government deficits, while MMTers tend to go for the simpler “just create money and spend it (and/or cut taxes)”. But given that central banks have created money and bought up most of the extra government debt created over the last few years, stimulus over the last few years has in effect taken the above mentioned form that MMT advocates!!!

A total re-think.

Anyway, since sales don’t create, or may not create jobs, Tcherneva claims we need a total re-think here. Her second paragraph reads:

“This way of thinking about the problem, however, is precisely upside down. Growth declines when investment and consumption fall. Investment falls when sales fail. Sales and consumption fall when employment falls. To reverse this vicious cycle, policy must begin by fixing the unemployment situation, which will then lead to a recovery in sales and consumption, which in turn will improve business conditions and profit expectations - all of which will finally boost investment and growth. Growth, in other words, is a by-product of strong employment, not the other way around.”

So apparently if we create lots of JG type jobs – planting trees, picking up litter, charity work, etc – then by some unexplained magic, millions of hi-tech manufacturing jobs, etc will appear from nowhere. This bizarre!

To re-phrase Tcherneva’s argument, she is saying that given a grossly excessive amount of unemployment, instead of giving households money and having government spend money on normal public sector jobs (as per conventional stimulus) we should pay the unemployed to do relatively unproductive and low paid JG type work. There is of course a problem there, and as follows.

If pay for JG work is for the sake of argument half the average wage (and certainly most proponents of JG rightly advocate relatively low pay for such work – e.g. the minimum wage) then there won’t be a huge addition to aggregate demand. Thus relatively few PRODUCTIVE jobs will be created as a result.

In contrast, if demand is boosted in the normal manner, the average job created will be an average sort of public or private sector job paying around the national average wage. More output per job! So why go for the “Tcherneva / JG” option?

In other words, as long as we are talking about a GROSS DEFICIENCY in demand, then normal demand increasing measures (increased deficits, interest rate cuts, etc) are best.

In contrast to GROSS deficiencies in demand, there is the question as to what to do about the 5% or so of the workforce who remain unemployed even at so called “full employment”. Well certainly there is a case there for JG type jobs. To take a crude example, it is theoretically possible to dispose entirely of that “5% unemployment”: just tell the unemployed their unemployment benefit is henceforth conditional on walking up and down their street keeping it free of litter, with pay being equal to unemployment benefit. Anyone refusing the work would no longer be counted as unemployed on the grounds that they had refused work. Hey Presto: unemployment vanishes!

Of course that is a very crude JG system and doubtless we can do better. But it illustrates that the basic role for low paid JG type work is (contrary to Tcherneva’s suggestions) dealing with the above 5%, not dealing with the grossly excessive amounts of unemployment, which we saw for example in the recent recession (which is not to say there isn't a case for expanding JG a bit during recessions).

Tcherneva’s third para.

This reads, “How do we launch a virtuous circIe? One of the most effective ways is through direct job creation in the public sector. John Maynard Keynes spoke of "on-the-spot" employment (Keynes [1982], 171; Tchemeva 20]2b), while Hyman P. Minsky proposed the employer of last resort (ELR) (Minsky 1986). In both cases, the objective is to bring the job contract to the worker in distressed areas and regions with high unemployment, and to attain true full employment over the long run. One modern proposal inspired by Keynes and Minsky is the job guarantee (]G), in which the public sector provides a voluntary job opportunity, in a community project that serves a public purpose, to anyone who is willing and able to work but unable to find private sector employment.”

As regards “distressed areas”, developed countries have had policies in place since the 1930s, if not earlier, to create work in distressed areas!!!! In fact there’s a very large industrial estate covering several square miles just North of where I live in the UK which was started in the 1930s with precisely the latter objective in mind. That’s the “Team Valley” estate, which is now a hive of economic activity. And those efforts to create jobs in high unemployment areas continued after WWII in the UK and elsewhere.

Moreover, if one of the objectives of JG is to deal with distressed areas and ignore the rest of the country, that’s news to me, plus it will be news to most advocates of JG.

If Tcherneva put her “JG / distressed area” idea to the unemployed in distressed areas their response would probably not be couched in entirely diplomatic language. What people in high unemployment areas want primarily is normal, regular private and public sector jobs. No doubt they wouldn’t object to a few “non-profit / charity / JG” type jobs. And no doubt there’s a case for more JG jobs in distressed areas than other areas. But people in distressed areas do not want EVERY JOB or even every other job to be of the “charity / non-profit” type.

Plus the idea that the charity / non-profit sector can absorb a significant proportion of the unemployed in high unemployment areas is plain delusional.


Well that’s the first three paragraphs of Tcherneva’s paper dealt with. Or rather I’ve dealt with SOME OF the flaws in those paragraphs. Any reader with half a brain will have spotted other flaws.

I won’t be wasting time reading any more of this article. Hopefully I’ve gone some way to establishing the point made at the outset above, namely that some of the leading advocates of JG are not too clued up.

However Tcherneva, like many economists, is good at churning out pages of technical sounding text complete  with references to suitably impressive economists like Keynes and Minsky (mentioned above). That sort of stuff fools 99% of the population and about two thirds of fellow academic economists. So doubtless her job and career are safe.

Wednesday, 17 May 2017

The FERI Cognitive Finance Institute have a sense of humour.

I’m reading this work of theirs. I may do a post on it, but meanwhile I’m impressed by their sense of humour. The following two passages illustrate that.


When Lehman Brothers collapsed and subsequently several other banks in several countries in the US and Europe veered on the brink of bankruptcy, it was apparent that events in the   banking system exert a major impact on the rest of the eco-  nomy, including the future path of economic growth. However,   it is less well known that when journalists interviewed leading   experts in ‘economics’ and ‘finance’, namely professors of  economics and finance at major universities, such as Harvard,   Oxford or MIT, their honest response to the questions from the   journalist should have been: ‘I am sorry, but I cannot comment   on the banking crisis.’ An astonished journalist would have   inquired why this was not possible. And an honest academic would have responded: ‘The economic models and theories I use in my work do not include any banks. None of the leading   macroeconomic models and theories include any banks. We   simply do not analyse banks at all.’  


The futility of such a narrow inflation targeting can be illustrated by the European  Central Bank’s official claim that its monetary policy during  its first decade of operation was not interested in and did not monitor bank credit, economic growth nor even inflation in individual Eurozone countries, but was solely focused on  the aggregate Eurozone inflation target of 2%. When asked at a public meeting whether the ECB would thus consider its  monetary policy successful if half of the Eurozone countries  experienced 52% inflation (a disaster), while the other half experienced 50% deflation (an even bigger disaster), resulting in an aggregate inflation rate of 2%, the ECB’s spokesperson responded with a clear ‘Yes’.