Andy Haldane's contribution to public debate since leaving the Bank of England has not been as significant as I think many hoped it might be given that he enjoyed a reputation as one of its more enlightened monetary policy setters whilst working at the Bank as its chief economist.
That said, this final paragraph from an article on inflation and economic forecasting in the FT this morning is good:
John Kenneth Galbraith famously said economics was extremely useful — as a method of employment for economists. The same could be said of inflation forecasts and central bankers. For all Bernanke's sound analysis, forecasting is likely to remain interpretive dance — always mysterious, occasionally enlightening, a show without much tell.
Of course, Haldane is referring to Ben Bernanke's review of the Bank of England's forecasting techniques, which I have already reviewed somewhat negatively here.
Haldane is also negative, which leads to the obvious question as to why he spent so much of his life dedicated to the task he now treats with such contempt.
Saying that, it's hard to disagree with Galbraith, as usual. But in that case, and given the massive flaws in most central bank estimates, meaning that in general the quality of their forecasting is abysmally poor for reasons I noted in my previous piece, why do we give them so much power?
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One would hope that, like weather forecasting, economic forecasting would improve in accuracy over time as experience improves the models. It would never be perfect, because predicting the future never is, but it could get better.
Does it?
To put it another way, is economics done in a scientific manner – the formulation, testing, and rejection of hypotheses based on evidence? Enquiring, empirical, rational, and sceptical.
Or is economics a matter of unchallengeable received wisdom, ideology and belief? Closed to new ideas and impervious to evidence.
The latter, as it stands at present
“To put it another way, is economics done in a scientific manner – the formulation, testing, and rejection of hypotheses based on evidence? Enquiring, empirical, rational, and sceptical. ”
I don’t see how it can ever be that unless there is first a clear definition both of the hypotheses being tested and the ‘facts used in the test.
For example, rate of inflation sounds like a nice simple thing to test. But inflation of what? The past couple of years the rate of food price inflation has been very much higher than any of the official inflation rates. Currently the inflation rate of olive oil is over 100%. House price inflation has been through the roof (!) for many years. And don’t get me started on the definition of GDP.
While the ‘facts’ being tested are defined by those whose hypotheses are at risk there will never be any kind of scientific method in economics.
Perhaps economics, not being a science, cannot use the scientific method and will just continue to be a religion – faith without proof.
It is all about belief
There is only political economy, at best
Starting with the Romans debasing their coinage, then on to the horror stories of inflation in the Weimar republic, then add in the frequency of its modern use in general new stories and it is easy to assume that inflation is a well understood straightforward concept, but like the Cheshire cat, the longer you look at it the more its solidity tends to dissolve.
As far as I can see it is a measure of something that suits the needs of the people that get to decide what is measured.
Why it includes somethings but not others and exactly how it is separated out from market operations like supply and demand appears to be about who has power and who does not.
At least Steve Keen’s system dynamics (non-equilibrium) economic model, Minsky, can forecast the great moderation and the GFC 2008 (Great Financial Crisis). It includes banks and finance !!! and how banks create money and can use macro-economic definitions as the base. It uses double entry accounting to produce the equations.
Basic intro
https://www.youtube.com/watch?v=jIP7ES1lCGk
The Minsky Models of Modern Monetary Theory 1 to 12
https://www.youtube.com/watch?v=EcXCNgM52HI
Impossible to predict the future but a darn site more relevant than most DGSE models.
Open source, free to download with quite a bit of tutorials/ handbook.
https://www.profstevekeen.com/minsky/
why do we give them so much power?
You could extend the question to many other areas: in which priesthoods control narratives and politicos (with more or less knowledge) go along with what the priests say – because they (politicos) see little to be gained by rocking the boat. In the case of the priests – to publicly go against the narrative/flow would lead to careeer consequences & in any case, the politicos would probably think “its just one priest gone bonkers”.
Over the weekend I initiated an e-mail exchange on elec’ markets (& their reform) between myself and one of the most senior officials in the EU. From the response, it was clear he did not understand the points being made – it was not even disagreement – more kicking the can down the road/steady as she goes. Likewise some of the more minor priests in this area privately agree with the realities raised by my collective (we work as a collective in terms of elec market reform) – but publicly it is all “our market which art in heaven”.
We are dealing with cults – & they got power because of events in the 1970s which were leveraged to give this power to people that have little or no interest in reality (Mrs Queen: “so why didn’t you see the crash coming”) but every interest in fitting reality to their religious positions, & as usual Galbraith nails it.
Why do we give them all this power? Well, the power has to reside somewhere…
It all comes back to getting greater diversity of opinion and democratic accountability into the organisation
Safe to say the vast majority of economists and politicians have no idea what a simplified consolidated balance sheet of a sovereign government should show at a macroeconomic level. As such they are completely unable to understand a “sovereign government neither has nor does not have money” as Randall Wray said in 2011. See page 11 in the following paper:-
https://www.levyinstitute.org/pubs/wp_778.pdf
This lack of understanding means nations are still ruled by the hocus-pocus of tribal witch doctors yet these “priests” strut around pretending they are God’s gift to mankind!
You made a point yesterday about including sectoral balances.
I think using this set of concepts is a very useful tool indeed
These are simple equations at their most basic, and ought to be more easily explainable to both public and the political elite.
Richard makes the point elswehere about shortcomings in the education of young people in how the economy and money work at a basic level.
Again I think sectoral balances are essential as part of remedying this shortfall in numeracy.
I’d go further and suggest that teaching sectoral balances to junior age weans could be fun.
(having some experience in teaching primary numeracy)
The key thing that balance sheets ought to be telling people is that money as a tool is “shiftable” but it fails to penetrate. This is the true meaning in regard to Wray’s statement in regard to government created money “sovereign government neither has nor does not have money.” The twin tools of creation and retirement allow this “shiftability”. Many people, however, still think of money as a thing like gold coins you can lock away in a safe deposit box almost forever and provides a mental refuge from future anxiety. It clearly, however, is a very good thing that governments have sovereignty over “shiftable” money because when it comes to crises not least a major war, pandemic or global warming, it can quickly respond. All the money token loaded safe deposits in the world aren’t suddenly going to come to the rescue in the event of such crises!
On a slightly related note, it seems Liz Truss is channelling Richard regarding the BoE’s role in her downfall, in an interview with the BBC:
“Ms Truss said her and Kwasi Kwarteng’s tax-cutting plan to promote growth, was ‘undermined by organisations’ like the Bank of England and the Office of Budget Responsibility (OBR).
“Civil servants had also failed to warn her ‘the UK economy was uniquely exposed’ to so-called Liability Driven Investments (LDIs) – which invest in government bonds because they are usually so stable.
“The Bank of England was forced to start buying back government bonds after these LDIs came close to collapse – which in turn could have forced them to rush to sell other assets.
“She said: ‘I have spent many months getting the blame, people saying it’s all my fault, people criticising me, trashing me. Yet the Bank of England had a very, very significant role in what happened. The Office of Budget Responsibility had a very significant role in what happened. I haven’t seen them get anything like the level of scrutiny or questions that I’ve got.'”
https://www.bbc.co.uk/news/uk-politics-68821646
On this alone I think she is right
I think the BoE had no idea what they were doing by announcing QT and that is what really crashed the interest rate
She was still a truly appealing Prime Minister though
Everyone makes typos, but seem a little strange!
She was still a truly appealing Prime Minister though
For “appealing” read “appalling”, I assume!
Only in the minds of dogmatic, neoliberal, market fetishists was QE or QT a good idea. Don’t get me wrong – buying gilts during the pandemic was a good idea to push rates lower; indeed, if conditions warranted, selling gilts from the APF portfolio might be a good idea at some point…. but the “Q” is the problem – Q for quantity where the BoE pre-announces how many they will buy (QE) or sell (QT) and push ahead at whatever price prevails.
Anyone with sense would say “we plan to buy £xxbn but it does depend on the price”… and it is also how open market operations are conducted. I have yet to understand why they did this “buy at any price” intervention… I am told that they thought the market would deliver a fairer price. Shocking that grown adults in the financial business should think this.
All good points
“But in that case, and given the massive flaws in most central bank estimates, meaning that in general the quality of their forecasting is abysmally poor for reasons I noted in my previous piece, why do we give them so much power?”
Because politicians are even worse? With much worse incentives? … Don’t you agree?
I disagree
They are not woirse
They just make more accountable guesses
From a government’s point of view, it is giving away responsibility, not power, that matters. The government always retains the power, even if they will not admit it. It’s the same trick as is played with “fiscal rules”. If a government can portray itself as steering a path through a stormy sea buffeted by rules and “independent” powerful organizations, it can plausibly portray itself as having “no choice” and doing the best in the circumstances.