Along with other members of the Progressive Economy Forum I had a letter in the FT yesterday in which we criticised the microeconomic way in which the Office for Budget Responsibility views the role of the government within the macroeconomy.
This video elaborates on that theme, exploring why this approach is fundamentally flawed. We need macroeconomists to talk about the macroeconomy, and we are not getting them in the places where they are needed.
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Richard
I think you need to make a small correction to the title of this blog. Presumably you meant to say “microeconomists” as the penultimate word?
In which case I entirely agree with the proposition!
Bloody spell checker
I know I typed that correctly…
Ah, I have the ‘T-shirt’, the Gold Medal and the last word, but I can’t guarantee the spelling …..
Nor me…. 🙂
Thanks Richard for that clear and concise video. Another little step forward in my understanding of macroeconomics.
Can we have a video questioning why we’re paying interest on bank ‘loans’ when those supposed ‘loans’ are really money creation? Interest is usually compensation for the risk of loss if money loaned isn’t returned and for opportunity cost. If loans aren’t repaid the banks would only appear to lose money due to the way they choose to do their accounting (their choice then) and opportunity cost isn’t applicable, yet we continue to pay interest to the banks granting therm vast profits and something of a death-grip on our finances in the form of mortgages.
On my list ….
Is there any other business in which your cost of raw materials is effective timely zero?
I am not defending the banking system. However there is a risk premium for default on unsecured loans and the banks do have to borrow from each other and the BoE / interbank lending rate at overnight etc. rates. I think it was Ford who said there would be a revolution if people knew how the banking system actually worked. There is a good observation in “The Big Short” when the head of General Electric said that people can’t get 500 bucks to buy a freezer. By any measure the banks need to be subject to reform but in the context of MMT they are an almost indispensable. By central government forcing banks and big insurance houses to hold higher reserve deposits and gilts they can be a powerful tool in regulating the flow of money in circulation – which is existential to MMT theories. I do think there is an argument for VAT on loans at a modest rate – not quite a Tobin Tax but money is a public good and the days of the banks saying that they operate for some public good died in 2008.
Too much to delve into this pm when I have other things in, I am afraid
Hey Richard, just to let you know that the audio on this is just coming through the left channel. Probably not so noticeable on speakers but very noticeable on headphones.
Oh….sorry….
Another great video, drawing together a number of threads in a helpful way, and clear as day on the difference between the micro and the macro. Four things, I think, need repeating endlessly to get out of the “government is a household” mentality:
1. Only the government can create money, and at will (households can’t)
2. The government can keep spending created money as long as there are things to buy, e.g. up to full employment, and not create inflation (households can’t, so would run out of money)
3. Tax doesn’t fund spending, it cancels money out, e.g. to control inflation (good for households)
4. Government debt is actually people savings, of money not taxed back yet (good for households)
Agreed
In one sense the coronavirus is giving a lesson not only is it inducing anxiety because of fear of death but it’s creating economic anxiety. The latter is of course not new but mainstream Classical economists who cling to the belief that economies are self-equilibrating have manifestly failed to prove that this belief provides rapid relief to economic anxiety within human societies. As such they are in a massive state of denial and this means they are not of much use to man nor beast to quote the old adage!
The problem we have is that you and the likes of the OBR are taking different languages. I also recently read a letter from Andrew Bailey claiming that he is NOT monetising gov debt. We have to get these institutions to face up to what they can do and in some cases already are in effect doing by the back door.
We are stuck in an idealogical trap whereby the establishment dare not admit this is even a possiblity, for a percieved fear of becoming a global financial pariah,which then somehow inflicts disaster on Sterling. This is the economics of the past, when financial prudence and the pound had to be solid at all costs. But those costs are no longer acceptable.
Andrew Bailey is one of those for whom the phrase ‘he’d sell his grandmother if told to do so by those in power’ was invented
He does not come across as a great intellect. I believe in the Peter Principle applies in this case, in that he has risen to a position above his ability. Which of course ties in with this government’s ethos,i.e appointing individuals who are loyal to the leaderhip rather than on any inherent merit. It also further puts pay to the myth of an “independent central bank”.
The nation is now reliant on the Chancellor to do the right thing.Right now he is all that stands between Tory inflicted disaster and some sort of recovery. Is he up to it? I fear not.
I have that on good authority, from the man who bought his grandmother.
Keynes argued there was a need to “socialise investment.” By this he meant that uncertainty could at times play merry hell with private investment whereas the central and local state was always in a better position to take a long investment view and this fact induced a stabilising factor into an economy which could also be ramped up when things got bad investment wise in the private sector. Of course such public sector investment works best if the central state is also creating the money for it. Classical economics supporters are completely in denial over these arguments despite it now being very obvious in the 21st century that economies don’t self-equilibrate. They really are monetary illiterate dinosaurs!
That the very idea of equilibrium has somehow survived is astonishing
It is utter nonsense
I am not sure I agree with you Helen. I do not think that central and local state powers can always make better decisions is simply untrue – they are more than capable of making terrible decisions – procurement of large capital projects for one. For sure I want the state to run schools and hospitals but I don’t want them to build them using a public company. By all means do public spending to act against the business cycle in order to bring factors into production – but that is just another way of the state trying to get the economy back into equilibrium. If – as I think we do – believe in MMT then the equilibrium point is a stable inflation. This is something govns find difficult to bring down when high and patently they cannot get it up when they need to. ( No actress – bishop jokes please). Full employment is another equilibrium point etc. Equilibrium points in state planning are necessary in order to allocate funds. The neo-liberals don’t own equilibrium. It is arguably a direction of travel where marginal costs and marginal benefits begin to coalesce. They never quite do because open and free societies change. As one economist put it – all you need for bust is long term stability – and that includes conceptual stability.
I find any discussion of equilibrium perplexing
We’ve never had it
We never will
Why discuss it?
As the following thesis makes clear in Chapter Three for long term public investment he envisaged a National Investment Bank and thought it could be run in a semi-public capacity and the delivery arms from this bank could also operate as semi-public entities. Keynes clearly ahead of his time.
https://ses.library.usyd.edu.au/bitstream/handle/2123/8007/Jack%20Dwyer%20thesis.pdf;jsessionid=D8875861ED19E4A644E68F15750F089D?sequence=1
Robert Skidelsky strongly suggests it’s perennial. It turned up after the Great Depression and Great Recession and now we see it again even in the midst of the Coronavitus Recession. It of course also crops up after major wars. The reasons for it are multiple and serve as a good source for a cottage industry!
https://robertskidelsky.com/2011/01/17/the-relevance-of-keynes/
Thanks Helen – a good read this!
The economist Mark Blyth has just been interviewed on GMS, BBC Radio Scotland this morning. It is worth attention. It is 30 minutes.
He has just produced a book ‘Angrynomics’, (unusually with Eric Lonergan, who comes from a very different perspective; but I like that), which I have acquired but not yet read. He also appers on this youtube video, NSSR Evonomic series, on init-austerity, in a panel with Stephanie Kelton, which may be worth looking at (when I find the time), here: https://www.youtube.com/watch?v=sg_p687rnb8&t=190s
The book is vehemently anti-MMT
They’ve since withdrawn that view
They admit they got it wrong
Yes, I was slightly perplexed about Blyth’s position all along (I didn’t think anti-MMT fitted with the general approach of his economics), because he is often interesting. I have to confess that I have not had time to read the new Blyth (and I do not like to communicate something when I have not considered it properly), but having listened to him on radio this morning, I thought on balance it worth sharing; he is a very good communicator. Exactly what is needed. Furthermore, I wish to give full credit when an established economist undertakes a Damascene conversion (if it is so); very commendable, as rare as ‘hen’s teeth’ and worth celebrating. If the rest could just follow his lead……
This was my review
https://www.taxresearch.org.uk/Blog/2020/06/25/angrynomics-read-it-if-you-want-to-get-angry/
He has changed his mind
I am not saying whether I had a role in that
As normal I throughly enjoyed the video today, keep the standard up, you country needs you.
Re Mark Blyth, I’ve not read Angrynomics yet but I’ve read that a lot of people are not happy with it.
After watching the video today and reading the comments, I listened to this from the Watson Institute podcast. It not only shows the change in Mark’s thinking but offers great insights from Stephanie Kelton on a variety of MMT subjects. I recommend listening to this as a good adjunct to Richard’s blog and videos.
https://youtu.be/NfKiW0Gfn04
Published 21st June.
I am aware of that interview
It has history attached ……
“Economic ideas gain political prominence if they promote, or at least don’t retard, the interests of powerful groups” https://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2020/07/the-economics-politics-divide.html
Thanks Richard. Brilliantly clear and informative as always