I have criticised the Institute for Fiscal Studies quite a number of times over the years, most recently here. Let me add to the number of those occasions by quoting from an article by its director, Paul Johnson reproduced from The Times and placed on their web site yesterday. In it he said:
If a period of apparent success breeds one form of magical thinking – a belief by policymakers in their own infinite wisdom and ability to bend the economy to their will – then a period of economic difficulties breeds different forms of magical thinking. And I'm not talking here about debates over the speed of deficit reduction or the speed at which interest rates should now rise. Reasonable people can and do disagree over those. I'm talking about a more fundamental unwillingness to confront reality. There's a lot of this about, too.
Note that it is assumed that the need for deficit reduction and to rase interest rates - even though there is no evidence that either is necessarily needed - is not magical thinking. Instead Johnson said:
One strand is evident among those who believe that leaving the single market and customs union can make us better off economically. It will not. Making trade with by far our biggest, richest and closest trading partner more expensive will not have net economic benefits.
So far, so good you might say, but not evidence of a balanced approach. And nor is this:
Then there are those who seem to believe that all our public spending needs can be solved by printing money, that in the long term extra tax revenues are not needed. Or those who think that there are many tens of billions of tax revenues that can be painlessly magicked from the vastly rich and from multinational companies. Or those who believe that letting the free market rip and building a new tax haven off the coast of Europe will solve our problems, and we can have both low taxes and world-class public services. Or those who believe widespread nationalisation is a panacea.
Why not just have a swipe at everyone who does not believe in the failed consensus of mainstream austerity Paul?
And in case there is any doubt as to his intention he followed that with:
In the face of years of poor economic performance these sorts of delusions are perhaps understandable. But delusions they are.
Now I happen to agree on tax havens, but at least I offer reasoning, which is that to promote these undermines the level playing field that is essential for the operation of fair markets whilst increasing inequality, which reduces effective demand, and restricts government spending, that achieves the same goals. I have the decency, then, to present an argument. Johnson does not.
Let me turn to his other suggested ‘delusions'. Like money printing.
First, I have heard no one say all our problems can be solved by money printing. Misrepresenting your opponents argument is a sign of desperation Paul. Using the power of the state to create demand to deliver higher pay, better productivity and enhanced productivity whilst keeping a decidedly wary eye on inflation is something very different from money printing without limit.
Second, Johnson ignores the fact that money printing paid for £435 billion of state spending over the last decade which will never be recovered from tax now, but which has instead been covered by debt cancellation, which is money printing by any other name. It worked, at least in some ways. And inflation was not created. It's not delusional to say so. It is fact. Sorry Paul, but making up arguments does not work.
And third, MMT proponents do argue more tax will be paid in many cases. That's the inevitable consequence of rising real incomes. It's what happens when the multiplier works. Wrong again, on basic economics this time Paul.
As for the tax gap? You mean you think we should tolerate tax abuse Paul? Is that your argument? Let them take the money? It's an interesting suggestion. But not too hot when it comes to the rule of law. And not too good when it comes to justice at any level. As social comment it is deeply revealing.
And as for nationalisation: did you not notice the rent seeking behaviour of natural monopolies Paul? If not, why not? Shouldn't it be addressed? And if not, why not? Could it be because the vested interests might not like it?
To give him his due Johnson says these are the reasons:
The truth is less exciting and more mundane and harder work. Successful economies are built not on unlimited spending or unfettered free markets or fetishes with nationalisation or privatisation. They are built on the careful design of regulations – of the financial sector and of utilities, however they are owned; on effective and inclusive education and training policies; on efficient and progressive and broad-based tax policies; on judicious decisions over where to invest public money; on good governance and effective institutions. Boring I know. But then reality was always less exciting than fairytales.
No one denies managerialism has a role in any well functioning state. But to make it the mantra of policy is not just boring, it's wrong unless (and I stress that unless) the starting point for discussion is a state where everything is working just fine. But that is not what we have. Instead we have an economy that is very clearly malfunctioning. Applying the very bast management to a bad system still delivers bad outcomes. Maybe that is a lesson Johnson needs to learn. In the meantime he should also note that when a system does not work it needs reform, and process can never deliver that.
Nor do I think Johnson believes it can. I instead think what he wants is a roll back from the status quo to some vision of economic nirvana that he thinks existed pre 2008, probably when he was an undergraduate. It's not going to happen, thankfully. But in the meantime the head of the Institute for Fiscal Studies offers dismal arguments based on dismal reasoning in support of dismal economics founded on dismal politics. It's dismally disappointing and some indication of how far economics has fallen that he is the head of the supposedly best think tank we have on the issues in question.
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It’s not just dismal , it’s plain wrong. When you criticised Johnson last week Richard, I thought I would email him the piece I put on here about money creation, but lethargy got the better of me . But reading his latest outpouring of nonsense I am going to send it to him when I get half an hour this afternoon.
Please do
I sent it yesterday. Let’s see if he replies.
Also posted as comment on earlier blog – for ‘balance’. Thanks, again, Richard.
Thank you, you answered a question about the ND before and thank you for that. In this article you say that the QE held by the BOE is essentially written off, this is 25%. Can we write off more?
Technically yes
There is no obvious reason to do so at present
It would be much more useful to use the power to create money to fund new investment and not to boost the City
Quick question:
Has any of the gilt bought by the BofE actually matured? If so this process receives little coverage amongst conventional economists or the press – do you recall this being covered by FT?
Many have
So far the BoE has always gone back into the market to replace them
The process is called rolling over
Why does the BofE replace matured bonds?
To keep the amount of QE funding constant
Otherwise they woul;d be withdrawing QE and so reducing money supply
Have a peek here… I’ve not picked out any specific example as we all perceive things differently so the best explanation for me might not be the best for you https://www.google.co.uk/search?client=opera&q=asset+purchase+facility+explained&sourceid=opera&ie=UTF-8&oe=UTF-8
Indeed, none may quite work but you’ll know more after I’d think. Interesting again most people simply have no idea of how the BofE works internally.
Whilst clearing out recently I came across my son’s old university macro economics text book. When I say old I mean less than 7 years and probably still being used.
It concludes
Loanable funds only come from households who wish to save and that deficits reduce the economy’s growth rate at all times (because if government borrows it must be taking funds from the private and therefore more productive sector)
If this is the type of unquestioning economics our university’s teach undergraduates no wonder everything is dismal.
That really is dismal economics
Which book?
Economics – N Gregory Mankiw and Mark P Taylor – 2010
That is a dire book….
Dire indeed ! Just a bit of back story on Mankiw . In 2011 his students walked out on him essentially because the crash of 2008 made no impact on his limited view of what economics is. He’s what Bill Maher calls a clever stupid person and as with so many other clever stupid people his ideas are widely accepted because they fit the mainstream myth of what economics is and how it works . Oh and of course he has been widely praised and honoured to boot.
Agreed
Ah yes, I purchased this about 10 years ago having been told it was the current basic text for UK economics. It was actually just to check what it said about land – practically zilch, in fact even less than my old Lipsey.
Hence, Carlyle’s “The dismal science.”
How do we get people to change their minds? I suspect some on here, like myself, originally took it as axiomatic that it was “tax and spend”, that Govt books had to be balanced etc, but somehow as I began reading more by writers who challenged the consensus I began to think that their explanations were more convincing – and could lead to greater equality – and that the standard model with it’s preposterous assumptions was simply untenable.
However, I don’t have any “skin in the game”. But there are many who have invested a life’s work in neoliberalism (as have many in other disciplines only to find out at some later date in the light of new evidence that nearly everything they believed to be true was false) and they probably can’t afford to dump it now. So do we have to wait for the Grim Reaper to do the work or are neoliberals self-replicating?
And why doesn’t Paul Johnson come on here and refute Richard’s assertions?
G Hewitt
“How do we get people to change their minds?“
https://www.prospectmagazine.co.uk/magazine/why-jeremy-corbyn-needs-a-think-tank
I found this interesting. Arguably Richard is a one man think tank and Corbynomics was precisely this process. So maybe the program just needs expanding. How does one start and promote a left wing think tank?
It needs some money…..
Even left wingers need to eat
When was economics at its height, I wonder? Was there ever a time in this culture when money printing was taught to be the essential it is, or has it always been associated with hyperinflation as, thanks to our mis-education on the subject, itself surely not an accident, it is now? One wonders what was taught in schools to discourage money-printing before the days of Weimar…
My 12 year old lad recently was told in geography class, that Third world countries can’t afford to employ people for basic public services, as they have no money to do so.
The indoctrination starts early.
Is anybody familiar with the work of the Australian economic historian ( for want of a better description) Graeme Donald Snooks? He has very interesting things to say about the problems and dangers of economic orthodoxy and neoliberalism. He is published by Palgrave, and I am surprised that his book from 2000, titled ” The Global Crisis Makers: An end to Progress and Liberty? ” Is not as widely read as it should be. He is under no illusions as to how neoliberalism has achieved it’s position through serving special interests, and his grasp of, and explanations for long-term historical economic trends and interactions are fascinating. Interesting reading if you enjoy or need a wider perspective.
Not known to me
Nor me. Seems like somebody well worth reading: https://link.springer.com/chapter/10.1057/9780333977989_8. Thank you Karl Greenall.
(https://en.wikipedia.org/wiki/Graeme_Snooks).
Paul Johnson is just another useless Neo-Liberal/Neo-Classical economist (well only a partial one, he’s a PPE by degree) who at the end of the day after a lot of name calling and inventing strawmen can’t produce a workable alternative model to MMT to justify his views.
What I find most objectionable is the tone of this piece.
Everyone who believes in something that he does not believe in is “delusional” and exhibiting a belief in “fairytales”.
If he would explain why this is so it would be possible to take him seriously.
I would have thought that, in the main, the “Times “readership, like him, is committed to austerity and it’s underpinning logic; his revenue projections are based upon the principle that the economy is like a household, cash based and silent on capital accumulation and depreciation. No statement on contingent liabilities and risk management.
Imagine running a FTSE 100 company on an Income and Expenditure basis and you have some idea of how he must view the world.
I like to believe that I have an open mind, I don’t mind being proved wrong but someone has to show me why I am wrong and not simply state it.
He should start by explaining how it is possible for the government (via it’s subsidiary entity)
to purchase £435 billion of gilts in order to benefit the health of the financial sector but not to purchase NHS assets in order to benefit the actual health of the nation.
Perhaps it should be borne in mind gilts, too, are created from nothing. So value, purchasing power, is created from nowhere, by our elected representatives, and gifted not to the population at large, but one small sector of it. How can they justify this?
Thanks KeithP; March 20 2018 at 4:32 pm
“He should start by explaining how it is possible for the government (via it’s subsidiary entity)
to purchase £435 billion of gilts in order to benefit the health of the financial sector but not to purchase NHS assets in order to benefit the actual health of the nation.”
One to carry in my wallet. It has worked well with several friends already …
It is good…
What £435bn of assets is currently on sale that would help the NHS?
If they spend it on buildings who staffs the buildings? If on staff then what happens in year two? If on P&M what happens when it wears out?
I expect, Phil, that your friends don’t answer for the same reason I don’t answer a babbling brook. A noise that doesn’t change, doesn’t listen and makes no sense.
Oh don’t worry about posting this, even less about replying. I know that if you try to point out that MMT collapses into an incoherent jelly of logic the moment you explain that printing infinite money fails because resources are finite and so is people’s trust in a currency, that you get accused of wanting old people to starve.
I think if we all believed in the Flying Spaghetti Monster then all illness on the planet would end. So if you don’t believe in his noodley goodness then you want babies to die.
Busy day for Richard (happy birthday!) so I’m going to jump in here; MMT is description, not instruction. Even so, nowhere is the suggestion made that infinite money creation would be credible. One necessarily needs resources to back it with. Resources should never be lying idle for lack of money. I think myself money can only safely be created for productive investment purposes without there being inflationary complications. IMV, the real argument ought to be about what does and does not constitute productivity which can safely be funded without affecting the integrity of the currency.
This has to be what willful ignorance looks like.
Regarding the £435bn of assets – surely the better question to ask yourself is “where did the government get the £435bn to buy those assets?”. Answer that one honestly and you’re making a start towards enlightnement.
Regarding infinite money printing (ignoring the “money printing” misnomer for a minute) – Your error here is in the use of “infinite”. You won’t find anywhere on this blog where infinite provision of government credit is suggested. The limit for money creation is the capacity of the economy. When the amount of money in circulation begins to exceed the productive capacity of the economy, that’s when you start to get problems. Up until that point, all you’re doing is mobilising available resources.
Honestly, are you TRYING not to understand this? It isn’t rocket science.
Your strawman has been erected from a very shallow misunderstanding of how MMT works and therefore is easily knocked down. The Fruitloop Emporium only exists in your head.
Wow! Another one for the wallet.
I am sure Mr Johnson welcomes you support; your arguments about infant mortality are particularly sound.
The IPPR very recently published a paper on Income Tax Band proposals by Alfie Stirling, one of their senior economic analysts, in which he stated
“the UK’s system of taxing incomes is not progressive enough, too inefficient and poorly equipped to raise the revenue that will almost certainly be needed to meet the public spending challenges of the 21st century”. I wrote to Mr Stirling pointing out this error and advising him that we abandoned the gold standard some time ago , and consequently taxation and government borrowing do not finance public spending.
I advised him that I might publish his reply. In his reply he agrees with this statement, and although he seems to agree with the other basics of MMT which I outlined , he writes..
“But that does not necessarily mean there are no constraints on government borrowing/debt (which is just the residual/accumulated residual between expenditure and receipts). Most mainstream economic policy makers believe that these constraints will be non-trivial for the foreseeable future. Under this assumption, and all else being equal, raising tax revenue is desirable in order to contain this residual, if expenditure is expected/desired to increase. I happen to have sympathy with some of the arguments that constraints on borrowing/debt can be trivial when some of the other points you make in this email are satisfied. But I also acknowledge there is legitimate debate on this issue. However, the paper you refer to wasn’t about this debate so it adopted the assumptions of mainstream macroeconomics (rather than say, for example, modern monetary theory) given that its audience in terms of policy makers would also hold those assumptions.”
In other words, he agrees that the earth is round, but his peers all think it is flat, so he too must talk as if it is flat.
And this is from a supposedly “Progressive” institution!
This is an intensely problematic situation and one I face
I am writing a paper on tax gaps. We know tax does not fund government spending. But the world believes it does., And it believes money cannot be sued to fund government spending. And that borrowing must be limited. So closing tax gaps does matter for reasons that we know are not real
So tell me, do we close tax gaps if it gets things done that would be or do we wait for a perfect world of understanding?
It’s a serious question
Someone mentioned QE earlier, can I sneak in a question about it? It did not cause consumer price inflation, but it did cause asset price inflation, didnt it? Some commentators say this is because the money went to the 1 percent, not the 99 percent, and if the latter had got hold if it , they would have spent it and it would have caused consumer price inflation, so its a good job they didnt.
So it does seem to have increased inequality. Would it have been OK if it had been distributed to the 99 percent?
But PQE would have been needed for that
In a very different amount
The situations cannot be compared
I don’t agree it caused asset inflation. Decades of market abuse caused the asset inflation (or, to call it what it was, a huge property bubble).
What QE did in that case was to stop the bubble bursting at such a rate that it would have ruined hundreds of thousands of lives and broken the international banking system, possibly beyond repair.
The inflation was already there. QE just managed it to a softer landing.
What’s amazing is that MP’s have access to a 2014 QE briefing note that tells them that the UK government is able through its nationalised central bank, the Bank of England, to create money from nothing electronically. It’s surely possible for only an average intelligence MP to put-two-and-two together to realise that the Treasury can arrange for the government to create money for its spending whenever it wants (conditional of course with its other role of avoiding abnormal inflation in the UK economy). Coupled with this would go the realisation that Margaret Thatcher, David Cameron and Theresa May were all talking out of their proverbial when they declared the UK government has no money making powers of its own.
Here is the briefing note link. Access is convoluted because Parliamentary Briefing Notes are meant only for MP’s not the public.
researchbriefings.files.parliament.uk/documents/SN04997/SN04997.pdf
Open a new tab and copy and paste link into browser search box at top of web browser, hit enter to download file.
Thanks
I will be blogging this….
You might want to also download Alastair Darling’s 29th January 2009 letter setting out the QE constraints referenced in the above QE Briefing Note:-
https://www.bankofengland.co.uk/-/media/boe/files/letter/2009/chancellor-letter-290109
‘Central Bank Money’
What is not, you might ask?
Note the conflict in Darling’s letter in freeing up market liquidity by issuing Treasury bills.
Re the tax gap issue, surely there are still , are there not, essential reasons to close it , eg to reduce inequality and to provide incentives/discouragement for certain types of individual or corporate behaviour, without the need to invoke the “revenue” argument.
A pity its called the Inland “Revenue” .
You are right re the tax gap
It is no longer called the Inland Revenue
Alistair Darling reverts back to saying the BoE will create the money for QE in his 3rd March 2009 letter to Mervyn King:-
https://www.bankofengland.co.uk/-/media/boe/files/letter/2009/chancellor-letter-050309
Bizarre!
I like and respect Paul Johnson – he was my first line manager in my first job, at the IFS in the mid-1990s – and always a fun guy to have a pint with. But I think he’s painted himself into a corner here, whether by accident or design. I know that Paul was pissed off about the EU Referendum result, and particularly the assertion by Michael Gove that “the British public has had enough of experts”. The Leave campaign won on a mixture of lies, BS and stoking resentments, whereas pretty much all the economic modelling of the impact of Brexit – both orthodox, and heterodox – showed that “hard Brexit”, in particular, will impose substantial hardships on the UK. It was totally understandable that Paul was annoyed about the referendum – the campaign, and the result, was a farce. *However*, since then Paul seems to have taken up the position as the defender of the ‘centrist’ (really centre-right) mainstream political and economic establishment against any and all criticisms, from right or left. This has had two particularly adverse consequences. First, Paul doesn’t differentiate between “anti-establishment”voices from the right and the left; he sees them as both as bad as each other. This leads to the conclusion that Jacob Rees-Mogg is morally equivalent to Jeremy Corbyn or John McDonnell – a view that is so ludicrous as to require no further comment. (Additionally, what the hell is “anti-establishment” about Rees-Mogg? The guy is a privileged and moneyed Tory toff). Second, in response to the (valid) observation that the performance of the British economy has been extremely poor on most metrics over the last 10 years, Paul has nothing to offer except more of the same failed (Coalition/Tory) policy solutions. This isn’t the way to persuade anyone that a centre-right approach is the best political strategy and I fear that IFS is going to become more and more irrelevant as time goes by, whether Britain swings to the left under Corbyn or further right under Rees-Mogg (or similar) in the years ahead. So as I say Paul has backed himself into a corner, and it’s not clear how he – or the IFS – can escape from it. Simply labelling all your critics idiots or fantasists is rarely a productive strategy for winning a debate.
Wholeheartedly agree Howard
“the position as the defender of the ‘centrist’ (really centre-right) mainstream political and economic establishment against any and all criticisms, from right or left.” He tries, then, to defend the manifestly indefensible and unsurprisingly fails to convince. Got to wonder why, though… what’s going on with him? Does he feel he has to go down with this particular ship, is that why he plays on? Weird.