The Economist has published an article under the title:
Too good to be true
That's their description of Corbynomics (although, only after they praise its motives). To reach their conclusions they say:
The £120 billion in missing tax revenues–which is about four times the government's own estimate–comes from a report by Tax Research, a pressure group. Even if the figure is to be believed–which requires a leap of faith, since the report does not explain its calculations fully–Mr Corbyn's proposed remedies are wanting. Britain already has one of the smallest shadow economies in the rich world; stopping cash-in-hand payments entirely is impossible (and even if it were not, the extra tax burden would crush some of the economic activity that generates this untaxed income). The Corbyn manifesto vaguely pledges “a proper anti-avoidance rule”.
I think they should read my report on this issue, which explains where every figure comes from, and a wide range of solutions. To be blunt, The Economist made its claims up. And that's the kindest thing I can say about their claims.
Next they say:
If the plan to boost investment through reform of the tax system is half-baked, another of Mr Corbyn's ideas is dangerous. He promises “people's quantitative easing”, a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Mr Corbyn seems to want the Bank of England to use that cash for more productive purposes, by buying bonds from the national investment bank.
That's really dangerous isn't it? Building homes is, after all, much more dangerous than bailing out bankers, isn't it?
But they say:
In the short term people's QE might gee up economic activity without increasing the stock of government debt–currently 80% of GDP–since the Bank of England could write off the bonds it had bought.
True, except they add:
But it is a risky proposal. At present the bank looks unlikely to embark on a fresh round of QE (instead it is mulling monetary tightening). If Prime Minister Corbyn were to rely on QE to fund public investment, he might be tempted to cajole the bank into prescribing more of it. At the mercy of politicians, the bank would lose its credibility, and confidence would drain from the economy, forcing interest rates up and crimping investment–again, just the opposite of what was intended.
So, we're back to three myths.
The first is that the economy is now set to grow forever. Maybe they did not notice economic turmoil this week.
Second is belief if what Paul Krugman calls the confidence fairy who drives the bond vigilantes. Which belief has always proved to be utter nonsense.
And the third is the belief that the Bank of England is independent and never has a politician had a word to say to it. That frankly leads one to think tThe Economist lacks any capacity for basic observation, let alone economic reasoning. It's also just wrong, as I have shown.
So what we actually have is The Economist reporting misinformation and fairy tales.
Is that the best they can do?
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In the Economist’s world, the economy is always set to grow forever. Except when we’re in recession, when it’s set to return to growth next year, and then grow forever.
The more I read the Economist The more I think they dont understand economics.
I’m afraid the The Economist merits the corporate version of the description thrown at one of Thatcher’s more bone-headed Ministers -Roger Freeman, think – by Dennie Skinner “a man/magazine educated beyond his/its intelligence”. I’ve always dislike The Economist’s misguided self-satisfaction, smugness and its mistaken belief that it is Moses coming down from Mt Sinai, when it is actually a tabloid wrapped up in magazine format.
Amused
Read the comments, if you have access to the internet webby version. I’ve had a go at tackling their lies.
I just linked my blog in those comments
I gave up with most of them: the usual drivel I am afraid from such sites
I’ve seen your comment in the thread following The Economist’s piece. If you select “oldest first” you’ll find I’ve kicked off a mini-debate tackling The Economist’s prejudices.
Yes agreed. The Economist is by very stupid people for very stupid people – a bunch of teenage scribblers churning out formulaic essays for that breed of people who think they are demonstrating taste & intelligence by taking The Economist
When they say that PQE could benefit the economy but “If Prime Minister Corbyn were to rely on QE to fund public investment, he might be tempted to cajole the bank into prescribing more of it” I think what they mean (aside from the independence thing) is that maybe some PQE would be appropriate for a certain level of investment but then the danger would be that once PQE was no longer appropriate we would still need investment, so Corbyn would carry on using PQE even when it would no longer be appropriate.
Simon Wren-Lewis said something similar in his blog a couple of weeks ago where he suggested there was an inherent incompatibility between QE and an investment bank because the former is a specific measure used for a relatively short period under specific circumstances while investment is long-term and continuous. I think the implication is that under circumstances where PQE is appropriate (which you yourself have outlined — low inflation, shortage of money in the economy, economy well under capacity, nowhere near full employment, etc) you start off with PQE investment, but then some time later PQE is no longer appropriate and you have a load of half finished investment projects, so you have to either abandon them half finished or use PQE when it is no longer appropriate. (Wren-Lewis did seem happy for an investment bank funded by borrowing and helicopter money to be established separately, and then the two could be combined for a kind of PQE, though unlike you he believes the Bank is and should remain independent).
You may have addressed this point before, but are you proposing an investment bank based on PQE and only PQE or are you proposing an investment bank that is separate from PQE and is funded ordinarily by conventional means (tax / borrowing) but under appropriate circumstances is funded partially or fully by PQE? Obviously if the latter then we wouldn’t have to worry about inappropriately using PQE to finish off projects as if the economic circumstances no longer favoured PQE we could just switch from PQE to conventional funding.
So Jeremy Corbyn will need some people who can think big picture economics
I’ll tell you this: I have never had so many heterodox economists – the sort who do this sort of real thinking – contact me as I have in the last couple of weeks
It’s a shame Wren Lewis is apparently not among them: I think his belief in helicopter money and not PQE very odd in the sense of ‘hard to explain’
But of skills there will be no shortage, I am sure
And to come to your point: do you really think a bank can’t use different financial instruments at different times for different purposes and that to use a different instrument a whole new structure has to be built? I find that very odd too
If this is Simon Wren Lewis from Oxford Univeristy that you are talking about, I doubt he will contact you. He isnt as heterodox as one would think.
I think Ysaac may be right. Some of Wren-Lewis’ stuff is quite conventional particularly so when he writes about the Eurozone(he doesn’t even recognise basic Optimal Currency Area principles).
I’m no fan of the Economist. However, I can’t see where the first claim – that the economy will grow forever – is being made, or even presupposed, in any of the quotations above.
If you say that we don’t need PQE because we are about to tighten monetary policy it is because you think the crisis is over and growth requiring monetary control will now be the game in town
Why is it that anything to do with ‘public purpose’ is viewed as dangerous by these people-could it be that it threatens the rentier and his/her wealth-syphon?
Bond Vigilantes are real. They pointed out that Greece would never be able to service its debts in full, well before European politicians accepted the fact (they’re still grappling with it now…) – those politicians at the time of the first warnings did however manage to shoot the messenger (http://www.bbc.co.uk/news/10124807) before sending another tranche of bailout funding to the same Greek elite that had spent its way into insolvency in the first place.
The collateral damage of the Greek crisis in the summer of 2012 pushed Italian and Spanish government bond prices to yields that teetered on the point of unsustainability: the vigilantes at work.
It’s easy to forget Soros “Breaking the Pound” in 1992, but the reality is that the UK faces a stark choice: either have capital controls and become a closed economy with levels of economic activity far below what they are today [ie: total economic sovereignty at the expense of a huge recession with large negative effects on employment and incomes], or remain as an open capital market, but with the constraint that global markets need to have confidence in the economic policy framework. The notion that we can ‘have our cake and eat it’ by not caring what others think of our policy while still relying on their funding is simply wrong. Foreigners today own £400bn of UK government debt (http://www.dmo.gov.uk/ceLogon.aspx?page=Gilts/Overseas_Holdings&rptCode=D5N): if they lose confidence in us, no realistic amount of closing the tax gap will help replace that funding.
I will close on a quote from Jams Carville from when he was an economic aide to Bill Clinton: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
That debt has 14 year term on average
And we do not need to print bonds. That’s just a myth. The government can just run a current account deficit at the BoE
Sure it’s illegal right now
You’re saying we break the country rather than break Maastricht?
Shall we get real?
There’s two key points in your post, one micro and one macro:
1) “The government can just run a current account deficit at the BoE”. What this means is that when the government wants to spend Real resources beyond those it raises from taxation, it would raise the difference by printing money. Unless you believe that the act of printing money creates of itself sufficient Real economic resources to meet the governmental need, then this printing money (“PQE” as you term it) acts as an Inflation tax on the economy. An Inflation tax is a terrible public policy outcome as it only hits those unable to save in other currencies. The “in extremis” example of this is Venezuela where the government runs a 20+% of Real GDP fiscal deficit financed largely by the printing of money, and inflation there is now around 600% a year [although as the government no longer reports what inflation is, I’m having to impute this number from a combination of the rate of devaluation of the currency on the open market and estimates of the rate of money supply growth]. So: making the BoE the locus of government finance can only work (without creating uncontrolled regressive redistribution effects) the extent that it’s only used when it’s creating wealth – a necessarily limited scope (I think we can all agree the effect of increasing money supply on real economic growth has substantial diminishing returns: printing some more money could well increase GDP, printing a vast amount of more money is highly unlikely to create a vast amount more of economic activity and there going to be inflationary with all the negative redistributive issues that creates). In short, this is an economic underpinning of Simon’s point; “Corbyn would carry on using PQE even when it would no longer be appropriate.” – so while we might not need to print bonds, we need to be damn careful if we don’t as it risks become a slippery slope with highly undesirable policy outcomes.
2) “That debt has 14 year term on average”. Right, but Italy’s is almost 9 years and in summer 2012 the secondary bond market took their bond yields to ~7%, the cusp of unsustainability. The problem arises when a lack of secondary market buyers pushes yields to levels at which the government could clearly not afford to repay if all its debt were to be refinanced over time at these levels. If the debt has a 14yr average life, we need to convince buyers to purchase 7% of the debt stock per year as it matures: that’s £110 billion, per year – every year (just to maintain the current stock of debt) – if those buyers can buy secondary market debt at unsustainable yields for the government, the government would need to offer the same unsustainable yields to convince primary market buyers to refinance the maturing debt. There’s only two paths from there: (1) the government quickly convinces the markets that it is taking action and secondary market yields fall back to sustainable levels or (2) the government looses market access and requires a bailout. This is why confidence of the bond markets is key: a longer tenor certainly helps reduce “rollover risk” (the risk that no buyers can be found for maturing debt), it with the sheer amount of existing UK government debt (£1.56 trillion), that risk is never truly eliminated.
a) Read some MMT. You clearly have little idea how money works
b) Italy did not have its own currency
c) We need convince no one to buy debt: debt sales are an option: if we cannot run the economy any other way we break Maatsricht 123 and borrow from the BoE. Are you really saying we shouldn’t?
On your advice I’ve read up on MMT. It still doesn’t adequately explain why Venezuela as a country has nationalised a large number of critical private sectors and is using the central bank to fund its government deficit, yet is experiencing serious hyperinflation. To be brutally honest: that economy seems much more to bear out monetarist dogma that inflation is a monetary phenomenon. But I’d love to hear the counter-argument.
I’m not saying one should or shouldn’t use the BoE to fund government deficits or rollovers. I’m saying there’s clearly diminishing real economy returns to printing more and more money (essentially this is Adair Turner’s argument): printing some money may well have positive real economy effects, but printing vast quantities of money is likely to have very sub-optimal real economy outcomes. History has lots of examples of this (all of which came with tragic human costs) and no counter-examples of this, so I think we can all agree this is fact.
And you are indeed right: Italy doesn’t have its own currency. When it did have the Lira in the 70s & 80s it had persistently high inflation and a persistently weak currency. Which brings me to another question: if the BoE is the centre of deficit finance and funding Gilt rollovers, then money growth in the UK will far outstrip that of Germany & the US. In that scenario, wouldn’t a rational British saver sell sterling and buy a hard currency (e.g dollars) since over the long run exchange rates tend to track relative monetary base sizes? i.e. To ensure people have demand for sterling balances in this kind of PQE economy, wouldn’t you need capital controls to stop all these newly printed sterlings being sold for harder currency (thus crashing the value of sterling and driving up the cost of imports)?
Sorry to ask lots of questions, I’m just trying to make sure I fully understand your perspective…
I am sorry: this is is inflation / monetarist paranoia gone mad
It’s not worth my while responding when I have al;ready done so many times over
My suggestion to you though is a simple one: try looking at what happens in the real world Where none of the thinks you think might happen occurred as a result of QE (although they were widely predicted). Why on earth do you think they might as a result of PQE?
I think with Greece it mattered because they dont have their own currency. If my understanding of MMT is correct ,they can either get it from the ECB or taxing private activity or borrowing from private actors(including the bond holders).
With regards to the George Soros, the incident and Soros’ so called victory would be worth explaining via MMT. If I am correct, wasn’t it that he simply made a bet that the pound would fall and it did and he thus made a huge amount of money?
Re both: right
Bond vigilantes can be dispelled with a few chosen words, assuming a real economy with genuine physical resources underpinning it.
In the US – #mintthecoin – suddenly debt ceiling talk just melts away.
In the EU – We will do whatever it takes
In the UK – We’ve got Gideon in a hard hat, looking after our tax havens.
“I have never had so many heterodox economists — the sort who do this sort of real thinking — contact me as I have in the last couple of weeks.”
Great news! Over the past few weeks your blogs and Corbyn’s growing popularity have made me more hopeful than ever that there is an opportunity to challenge mainstream neoliberal fairytales. It’s a shame that challenges tend to be so fragmented when collective action is required.
@Richard Murphy – I think the best way for you to respond to this article would be to write one in another prominent publication like the Guardian,etc explaining in simple and straightforward language why the economist is mistaken and thus spreading misinformation. I doubt you would get the same traction from this blog.
The Guardian is lined up against anything Corbyn
I thought Polly Toynbee was sympathetic. She has run with your opinions before now. Could she facilitate something?
She has not bought Corbyn’s ideas
Really?! I just read a Zoe Williams article that doesn’t sound like it.
http://www.theguardian.com/commentisfree/2015/aug/16/jeremy-corbyn-corbynomics-cosy-consensus-debt-radical-fear
Maybe you know something that we dont know.
Zoe’s stood out from the crowd
She still gets what the Guardian should be about
Ysaac is right (once again) about you seeking right of reply Richard – big reply. There have been plenty of pro-Corbyn articles in the Guardian and the timing for a major reply is spot-on. Now.
In fact The Economist themselves should give you the space – and not despite the fact that it sounds counter-intuitive but because it does.
What about Seumas Milne:
last few paras of : http://www.theguardian.com/commentisfree/2015/aug/26/china-crisis-market-mayhem-aftershocks-2008-another-crash?CMP=share_btn_fb
‘That’s one reason why the anti-austerity movement and the demand for economic alternatives is growing across Britain, Europe and the US. The elites so evidently don’t know what they’re doing, even as they rake in the spoils. In such a context, calls for large-scale public investment, ownership and quantitative easing for the real economy made by Labour’s leadership frontrunner, Jeremy Corbyn, look far more realistic than the business-as-usual offered by his rivals.
If the current market chaos turns into another crash, the demand for much stronger measures will become unstoppable.’
OK
Not all!
I accept
..and Bridget Christie, though admittedly not so focused on economic policy!
http://www.theguardian.com/politics/2015/aug/29/jeremy-corbyn-moment-bridget-christie..
More on beige jumpers!
The Guardian’s continual attacks on Corbyn are a disgrace. There is now little difference between the Guardian and the Daily Mail. Fortunately they seem unlikely to have much impact on the result and Labour will at last have a leader who believes in the power of the State.
Sorry to be a stick in the mud folks, but these are just a few examples:
“Corbyn has already changed the rules of the game” Seumas Milne
http://www.theguardian.com/commentisfree/2015/aug/05/jeremy-corbyn-political-stitch-up-anti-austerity-labour?CMP=ema_632
Jeremy Corbyn for prime minister? Why not? Brian Eno
http://www.theguardian.com/commentisfree/2015/aug/06/jeremy-corbyn-prime-minister-labour-leadership
Jeremy Corbyn wins economists’ backing for anti-austerity policies http://www.theguardian.com/politics/2015/aug/22/jeremy-corbyn-economists-backing-anti-austerity-policies-corbynomics#comment-58128608
“Jeremy Corbyn’s opposition to austerity is actually mainstream economics”: http://www.theguardian.com/politics/2015/aug/23/jeremy-corbyns-opposition-to-austerity-is-actually-mainstream-economics
I humbly recommend less pride and more forthright pragmatism on the publicity side of things – and I do so with the best of intentions.