Saturday thought: the macroeconomics we need

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Three conversations I had yesterday suggested I need to clarify my approach to macro-economics. One was withColin Hines, the co-ordinator of the Green New Deal group. The second was with Andrew Baker of Queen’s University Belfast, who is always worth talking to. The last was with Danny Blanchflower, once of the Monetary Policy Committee.

Colin, rightly felt that I was not sufficiently emphasising a point I made in my comment on Larry Elliott’s review of People’s Quantitative Easing, where I said:

Larry assumes that the job of the state is to fill in the gaps left by the private sector. I don’t do that. I don’t think Jeremy Corbyn does. I think that the state can and should sometimes say that private sector growth may not be all it’s cracked up to be. It’s good, but it’s not omnipotent. So, because a few might drive CPI higher the fact that most cannot access housing is not, for example, a reason not to build housing. It can, and should be a reason why the state should be building the housing that is needed and at the same time taxing, if need be, those activities that need to have the wind taken out of them to make sure that the economy remains in balance. If the same logic is not applied we would not, ever, for example, get the green energy reforms we need.

I suspect that to many people, and more macro-economists, this is a surprising view. As Danny has pointed out in an excellent paper he wrote in 2012 (which had me laughing on several occasions, but that might say something about me), most macro-economics starts from a fundamentally market based approach where the starting point for much analysis is that we are either in a state of general equilibrium or can achieve one. This assumption (which is absurd, in itself) is dependent upon a whole host of other assumptions, all of which basically suggest that markets work. It’s from this wholly unjustified viewpoint that it is claimed that the best thing a government can do is steer clear of doing anything.

And Andrew Baker and I had a brief discussion of Veblen and evolutionary economics, with me throwing a bit of Schumpeter into the mix, as a I recall.

What’s the point of all this? Simply to say that what I am suggesting in response to Larry Elliott, and in my suggestion that People’s Quantitative Easing does quite deliberately mix monetary terms and fiscal policy, as well as in the broader approach I take, is that what is frequently taught as if it is macro-economics at universities is actually a mildly curious abstraction from reality which has no bearing upon any decision that can be taken in the real world. Instead I am putting in its place a holistic approach to thinking that stands back and asks who is the right agent to achieve a particular goal at a point in time. In fact, I am asking, quite deliberately, how the agents that are available can contribute to the necessary outcome and then I look to fill the gaps.

This necessarily implies that the role of the politician is to decide what outcome they desire. The idea that they are the passive respondent to, or supplier of support to, the market that is the supposed arbiter of all that is needed is an idea I specifically reject. That is one of the ideas implicit in my book The Courageous State.

It is, in my view, the job of the politician to provide the space where the market can operate, the tools so it can work to best effect, and the regulation to enforce them, but the politician has to also appreciate that the conditions for optimal decision making in markets do not exist, and that even if they did markets cannot manage externalities well, and nor do they always (by any means) deliver full employment or optimal income distributions. In that case intervention by a politician is not an option, but is a necessity. Pretending otherwise is, in my view, a dereliction of the politicians duty.

Saying that, the form of necessary intervention should not be generic, and nor should any approach be static. Take an example: it may have been appropriate to a need that existed in 1997 to suggest that the Bank of England be given independence to set interest rates (even if that was always an illusion, as section 19 always made clear). I do not think that illusion is useful now: indeed, I think it has been harmful. The Bank of England failed to spot the 2008 crash coming, amongst its many failings. It has fragmented economic direction of the economy. It has artificially divided monetary and fiscal policy when they need to be linked. And it gave too much emphasis to monetary policy and certainly far too little to fiscal stability when the need was for the latter when the former ceased to have any real impact from 2009 onwards. The model has not worked. It is in need of review. There is no Platonic form of economic structure: the Aristotelean approach that I prefer suggests that reform around a mean is the only sensible approach to take.

That’s where the idea of evolutionary economics comes in: new structures are always needed to create the process of change in an economy that is never going to reach a point of equilibrium and should never want to do so because that is wholly contrary to the human condition.

The National Investment Bank that is a part of Corbynomics is a part of that process of necessary institutional change, as is People’s Quantitative Easing. Each is a suggested form institutional and practical reform to meet a need. More than that though, in that they also provide a mechanism to manage a downside in an economy, they wholly reject the idea, implicit in almost all mainstream commentary that rejects them as inappropriate, that George Osborne has set us on an inevitable path to economic nirvana which even Larry Elliott seems to believe, and which view I do not only not share, but think is recklessly irresponsible to be used as a basis for forecasting when we know such things do not happen in reality. The logic of those commentators is that of macro-economists believing that there is but one path and it is to a stable equilibrium, a position as naive (if I might say so) as the person who believes that Marx was right to suggest that a collapse of capitalism inevitably led to socialism.

Instead what I am saying is that it is the political responsibility of a government to make clear its economic goals. That is leadership. It sets the direction of travel. The goals have to be clear, but have to also allow for the possibility of unforeseen circumstances: economic progress is never straight line.

I stress, before anyone comes up with absurd comments like ‘5 year plans’ and the like that this is nothing more than the manifesto process, with a twist, which is that it accepts that the state has the power and responsibility to intervene in this process, and must do so.

Then then structures have to be put in place to achieve those goals. So, it is entirely appropriate to delegate responsibility to bodies like the Bank of England: that is an act of management. But management is about doing the right thing to fulfil a plan just as leadership is deciding what the plan is: they are not the same thing. And what that then means is that to ensure that there is co-ordination within this framework there has to be explicit cooperation, and not the pretence of independence. So, a core team of cabinet politicians would be tasked with cooperating on economic strategy but then also be tasked with coordinating implementation with the governor of the Bank of England, the National Investment Bank, the minsters of devolved governments and so on.

This process requires three things. First, high quality economic data on what is really happening in the economy, and far too few economists have any experience with that.

Second, it requires the ability to understand that the tools available to manage the economy are often alternatives and substitutes for each other. So, People’s Quantitative Easing can (in part) be seen as an alternative to borrowing, and choosing the right one is the task for the time. But policy in central bank reserves is little more than a related issue, whilst all of them have direct relationship with tax when the quantity of money and the impact that is likely to have on growth and inflation are all impacted by all of them, often (I stress again) as substitutes one for another, even if that is little understood. The role of the government’s deficit (which I address at some length in the forthcoming Joy of Tax) is just another variable in this equation, and not a goal in any form.

And there does, of course, need to be feedback loops in this process and a willingness for it to change. But that process of change has, I stress, to be politically led.

And it is in this leadership role that I differ from conventional macro. Let it be said loud and clear: there is no guiding hand. That is a myth. The politician who thinks otherwise is not just misguided, but also proves themselves unfit to hold office when it is the absence of that guiding hand that makes their office necessary. The result is a very different view of the macro economy, and one where it is recognised that it is necessary for politicians to decide on the balances they are trying to achieve, the goals they want to establish, the role of economic participants in the process, and the risk controls they will build into the system. But, I stress, none of these things happen by chance and having politicians, advised by economists, who think they are just victim of circumstances that are beyond their control at the helm is the last thing we need, but is what we have had for far too long.

PS The ideas here are mine: don’t blame those I mention for what I say: they just helped trigger some thinking.