Ship of Fools: Is there a money-tree? Have we looked hard enough?

Thread: Is there a money-tree? Have we looked hard enough? Board: Purgatory / Ship of Fools.

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Posted by anteater (# 11435) on :

I am becoming increasingly unsure of the idea that UK indebtedness requires austerity, but I find economics difficult to grasp and would like to debate some of the issues involved. I am re-reading a book by Richard Murphy (The Joy of Tax) plus anything else that tackles the issue of whether it is good sense or madness to set about an ambitious program of UKG spending to overcome our present dismal condition. I admit I have done ok by the neo-liberal consensus but I know a lot haven't and I'm increasingly doubtful that it has any validity.

At root for me, is the idea that looking at the UK economy as if it were a domestic household economy is wrong and dangerous. And I think there is widespread agreement with this. But it seems intuitively easy to believe and so if it is totally wrong, a lot of persuasion needs to be done to get people away from it.

Basically, Murphy believes there is a money tree. In his initial defence it seems that we were able to find a money tree for banks without triggering the inevitable (?) inflation. And he strongly continues to advocate Corbyn's idea of a people's QE which Labout seems to have backed off from, either because they no longer believe it, or they feel it would be impossible to convince the country of.

One of his central ideas is that the UKG does not have to borrow externally since it can print the money it needs to finance a program of growth, and when the situation has improved can then reign back the supply of money to prevent inflation, which of course is what a lot of people do not believe. He criticises the OBR for continuing to classify as UKG debt, amounts which have been bought back via QE and so are debts owed to the State, where even the interest on them goes to the state. What is a debt you owe yourself? Fair question.

Enough of the outlines. Hopefully there will be people on the Ship who have familiarity with these ideas. Otherwise it will sink.

Here are some points I would like to debate:

1. It is said that QE in the UK has not caused inflation. But I have read that QE in the developed world has actually fuelled inflation in the developing world and caused huge rises in commodity prices and national unrest. Has anyone any insight on this, because if true it makes QE ethically poor.
2. It there a solid reason why it is more dangerous to devote QE to Keynesian-type programs and not just banks?
3. My main doubt is that when the UKG spends money it does not have the expertise to spend it widely. This was seen in the (£9 bn) NPfIT programme set off by Tony B which I worked on. Nobody working on it thought it would be anything other than a train wreck. It was pathetic in multiple ways, so the fear is that if we did QE to kickstart, say a Green Enginerring Industry, it would end up as the same sort of waste of money. Murphy speaks of the courageous state, and writes an inspiring book about it. But you need expertise as well. Do we have it? (I remember when the best brains in IT were public servants - a long time ago).
4. It the whole idea a pipe-dream? Because if not the current policy is just not on.

[ 14. June 2017, 15:49: Message edited by: anteater ]

Posted by Alan Cresswell (# 31) on :

I'm no expert either. But, I think there is a money tree (and, there's nothing magical about it).

But, first a comment on the analogy to household finances and not overspending, so beloved of those who want to cut spending to reduce national debt. The problem with the analogy is that households borrow, in fact they borrow quite a lot. Indeed, the government almost encourages it. And, in many cases that borrowing is entirely reasonable and logical. We borrow to buy a house, and then often pay less in mortgage repayments than rent (and, even if renting was cheaper we retain the asset in a house we've bought). We borrow to buy a new car, enabling us to get to a wider range of jobs and other such freedoms. We borrow to send our children to university (especially those not in Scotland who have to pay extortionate tuition fees). We borrow for replacement windows, new boilers, to refit the kitchen and bathroom. The household finances analogy would say that there's nothing wrong with borrowing, especially when there's a likely payback on that. Yet those using the analogy want us to believe the nation shouldn't borrow. Anyone confused by that?

IMO (and, I'm no expert as noted) the money tree is called investment. Spend money to boost the economy, then that will be recouped through increased tax revenue. The question isn't about looking for the money tree, it's that we need to plant the money tree - or, preferably an entire orchard of them. Invest in education, so that we have a workforce able to do the jobs required. Invest in healthcare, so our workers aren't off sick. Invest in public transport so workers can get to work efficiently with minimal fuss. Invest in developing new technologies to meet the future demands of society. Of course it takes skill and expertise to identify where to invest, but without it there will be no money tree.

The problem with the agenda of the Conservative Party, and to an extent the Tory-Lite Labour of Blair/Brown, is that there was a systematic programme of cutting down money trees. Councils sold off their housing stock at bargain prices. National industries (utilities, transport, even the Post Office) were flogged off for peanuts. Schools and hospitals have experienced (at best) budget increases below the increases in costs. We no longer invest in university education, expecting students to invest in their own future.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by anteater:
I am becoming increasingly unsure of the idea that UK indebtedness requires austerity, but I find economics difficult to grasp and would like to debate some of the issues involved. I am re-reading a book by Richard Murphy (The Joy of Tax)

I think good further reading is Mark Blyth's 'Austerity - History of a dangerous idea'. You can get a flavour of it from the various talks he has done to promote it (much of which are on youtube).

In regards to your first question - I'm not entirely sure what you are referring to, but one difficulty that developing countries face lies in sterilizing QE after the event, because they don't have many viable mechanisms for doing so.

Posted by Crœsos (# 238) on :

Also not an expert, just an enthusiastic amateur.

Like a lot of economic questions, the answer seems to be "it depends". When the economy is booming (i.e. is fairly near to full employment*) there does not seem to be a "money tree". Increased government spending "crowds out" private spending, which is competing for the same already fully employed labor pool, requiring higher wages to attract workers. Hence inflationary pressure. In other words the fiscal multiplier is less than one. (£1 of government spending increases GDP by less than £1.)

On the other hand in a depressed economy (i.e. one with a lot of slack in the labor force) those inflationary pressures do not exist. There is enough underutilized labor that the government can employ a lot of people without causing wage-driven inflation. In situations like this the fiscal multiplier is greater than one. (£1 of government spending increases GDP by more than £1.) This analysis was pretty well vindicated in the wake of the recent financial crisis.

One crude way to figure out which situation you're in is to ask 'are wages increasing or stagnant'? If it's the former then there is no "money tree", at least not in the form of increased government spending. If it's the latter then there is.

--------------------
*Like a lot in economics "full employment" is a term of art used differently than when normal people use it. To an economist "full employment" means not "everyone who wants a job has one" but rather "employing more people than this will significantly increase inflation".

Posted by Dafyd (# 5549) on :

A government can simply create money in the same way that banks can: by printing more money than it's got assets to cover. You're not going to get a situation where everyone shows up at the Bank of England at once to claim the £5 promised to the bearer.

If the government creates too much money that's a problem - it creates inflation. Some schools of economics think it's a big problem. Keynesians would say that it all depends on what the rest of the economy is doing. Putting money in when the economy is in a boom is bad; putting it in when the economy is in a slump is good.

Posted by anteater (# 11435) on :

Chris Styles: Thanks for the suggestion. I'll follow it up. You say:

quote:
I'm not entirely sure what you are referring to

Basically Murphy seems to view QE as practiced to date as benign. Now he is a principled man and would not want to see QE causing problems in the rest of the world, so I suppose I should ask him what he thinks on this. But the idea is that QE pumps money into the West whereas investment opportunities give higher returns in the developing world which can lead to a boom. The following is from the African Development Bank group as an example view:

quote:
Inflationary pressures: Higher liquidity flows to developing countries could raise inflation mainly through commodity prices and the lending capacity of the banking system in developing countries. As most commodity prices are denominated in the U.S. dollar, devaluation of the greenback arising from QE3 could cause a rise in commodities prices. In anticipation of the introduction of the QE3, commodity prices especially oil and agricultural commodities have surged. Although inflation has dipped so far in 2012, it remains a significant threat to emerging and developing countries. This is particularly true in Africa for food items which represent a significant share of consumption basket.

Posted by anteater (# 11435) on :

Croesus:

quote:
There is enough underutilized labor that the government can employ a lot of people without causing wage-driven inflation.

True but is it labour that can drive the economy in areas like Green Engineering? Maybe as Alan implies we need to start with re-skilling but it's a long process.

What I don't know is the economics of employing relatively unskilled labour. I would like to believe it can be done but a major challenge we have is how to usefully employ relatively unskilled labour. Maybe it's not so difficult. How long to train somebody in building skills for instance. I don't know.

Posted by Sipech (# 16870) on :

*Dons professional hat*

There are some failings when we both talk of and measure inflation, which are not being addressed. At present, we have the retail price index (RPI) and the consumer price index (CPI). In short, the RPI includes mortgage inflation while the CPI excludes it. There's a bit more to it than that.

Both, however, exclude house price inflation. This is desirable if you're a homeowner, as often the value of your house increases by more than you can earn (after expenses), but it's a blight for would-be first time buyers who see the real value of their savings (i.e. deposit) eaten away by inflation. For reference, house price inflation is currently running at 5.6%.

Note that basket of goods that goes into both RPI and CPI includes a mish-mash of things that people just happen to spend money on, and do not readily distinguish between those that are cost-of-living expenses (such at food, utilities, household cleaning items) and those that are more discretionary (such as holidays or video games).

In an ideal world, wage inflation would be outstripping the cost-of-living inflation, though there's little political will to change the methodology in case it gives a result that either the government of the day might find difficult to defend or which the opposition might not be confident of remedying in the future.

The problem that many have with QE is that is very indirect; a problem that was part of the idea behind PQE which would be more visceral. QE doesn't stimulate wage inflation but the jury is still out on whether it indirectly inflates the cost of the living.

Posted by PaulTH* (# 320) on :

quote:
Originally posted by Alan Cresswell:
Spend money to boost the economy, then that will be recouped through increased tax revenue.

I am certainly not an expert, but I'd be interested for examples of economies where this idea has worked well in practice. Or where very high taxation increases national prosperity rather than stifling enterprise.

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by PaulTH*:

quote:
Originally posted by Alan Cresswell:
Spend money to boost the economy, then that will be recouped through increased tax revenue.
I am certainly not an expert, but I'd be interested for examples of economies where this idea has worked well in practice. Or where very high taxation increases national prosperity rather than stifling enterprise.

Well, you can start with the New Deal in the US.

And, I never mentioned very high tax increases. Or, tax increases at all - the increased tax revenue comes from more people in employment, and more of them in better paid jobs, rather than necessarily increasing the rates of tax. Though, we currently have very low tax rates, so there is room for small, or even modest, tax rises.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by PaulTH*:
I am certainly not an expert, but I'd be interested for examples of economies where this idea has worked well in practice. Or where very high taxation increases national prosperity rather than stifling enterprise.

One always turns to the Scandinavian countries, which have high taxation and high prosperity.
Most of the world in the fifties and sixties increased national prosperity faster than it is increasing now and had higher taxes.

As for the opposite course of action: here in the UK it is not doing any good. Wages are still rising more slowly than inflation. (And before you blame Labour for something that wasn't actually their fault - seven years of austerity have just made the supposed problem worse.)

[ 14. June 2017, 19:32: Message edited by: Dafyd ]

Posted by PaulTH* (# 320) on :

quote:
Originally posted by Dafyd:
seven years of austerity have just made the supposed problem worse.

I don't disagree with you when we look around us. But I have an instinctive distrust of tax, borrow and spend, leading to the flight of capital and entrepreneurial vision, ending in stagnation and bankruptcy. I don't pretend to know all the answers.

Posted by anteater (# 11435) on :

Alan:

quote:
The problem with the analogy is that households borrow, in fact they borrow quite a lot. Indeed, the government almost encourages it. And, in many cases that borrowing is entirely reasonable and logical

Well, yes, all that is fine and makes sense, but is far removed from the reason that Murphy (who John McDonnell thinks is a bit too radical!) gives.

For him the key difference is that a Government, so long as it has a sovereign currency, can create money out of thin air. Literally. So there is no need to go to external financial markets to finance a recovery package. And this is what some people think is voodoo economics.

The Government borrows from itself and provides the funds by fiat. Now Murphy believes neither in Santa Claus nor the Tooth Fairy, so there's more to it than that. For him there is one snag that he considers highly unlikely to take place and one which is certain to take place but can be managed.

The first is that it will not be able to find people to buy its debt, and I don't claim to understand this. Since it is the UKG that buys it what's the problem? He says it's very unlikely to happen but it niggle me 'cause I don't understand it.

The certainly is inflation and a debauched currency if no corrective action is done. And this is a worry. You can imagine, that the plan has done most of what you want and you can see the economy overheating, and then mistime corrective measures.

Interestingly he does deal with one of my objections which I only found on second reading. The obvious way to stop overheating would be fiscally by raising taxes, but he admits that it is very difficult for anyone to write a manifesto promising to raise taxes for no obvious benefit, (maybe Nick Timothy could do it!).

So he believes that when the Gov needs to inject money it does it fiscally, and when it wants to reign back it does it by monetary policy (raising interest rates), not popular either but easier. But the danger is that you'll do neither.

A bit like the person who resolves that this time I'll really stop at three pints, but . . . . we know the story.

I think that right or wrong this is a difficult idea to sell, but I think it may well be right. And if the Government are muppets then nothing will work.

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Sipech:
*Dons professional hat*.... QE doesn't stimulate wage inflation but the jury is still out on whether it indirectly inflates the cost of the living.

Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?

Posted by Crœsos (# 238) on :

quote:
Originally posted by Alan Cresswell:
Well, you can start with the New Deal in the US.

A fairly good example. Nearly four years of Hoovernomics and Mellon's liquidationism (essentially what we now call austerity) failed to improve the economy. FDR's New Deal (jobs programs funded through government deficit spending) fuels recovery. In 1938 the U.S. decides to cut back government spending despite economic indicators showing this was premature and the economy goes into a small recession again. The U.S. economy starts growing again with re-armament and the Second World War which, from a purely economic perspective, is pretty much the same thing as the New Deal: a jobs program (the draft) funded through government deficit spending (war bonds).

quote:
Originally posted by anteater:
So he believes that when the Gov needs to inject money it does it fiscally, and when it wants to reign back it does it by monetary policy (raising interest rates), not popular either but easier. But the danger is that you'll do neither.

A bit like the person who resolves that this time I'll really stop at three pints, but . . . . we know the story.

If anything, historical experience is that modern (meaning 20th and 21st century) governments are more likely end spending too early than keep it up too long. The cautionary tales seem to be Weimar Germany, modern Zimbabwe, and . . . well, that's it actually. You'd think we'd have more examples if this was a commonplace thing for governments to do.

Posted by Leorning Cniht (# 17564) on :

quote:
Originally posted by Sarah G:
Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?

Well, for starters, ignore anything that Richard Murphy says. He's not an economist, has no particular expertise in economics, and if he said something right, it was probably an accident.

If you want a respectable vaguely lefty economist's take on it, you could do a lot worse than Simon Wren-Lewis. He signed a letter, also signed by a collection of other respectable academic economists, in broad support of Labour's economic approach over the Tories' austerity.

Posted by anteater (# 11435) on :

Learning Cnight: What's your beef with Murphy? I like his writing and would rather hear why his ideas are wrong then just that his career was Accountancy. I believe he is now Professor of Economic Practice at City University.

I can well believe that he has some things wrong and John McDonnell has, I believe, said that as a Macro Economist he leaves a lot to be desired. I can see some potential flaws but most of what he says has plausibility. IMO of course.

Posted by Jane R (# 331) on :

PaulTH:

quote:
But I have an instinctive distrust of tax, borrow and spend, leading to the flight of capital and entrepreneurial vision, ending in stagnation and bankruptcy.

Do you. Do you really, or is it a result of reading the propaganda of the right-wing press? Because they're just telling you what their proprietors (who have hugely benefited from neo-liberalism) want you to hear.

There are two money trees, as a matter of fact. The first is your everyday High Street Bank, which "creates" new money every time it grants one of its customers a loan - to buy a car or a house, for example. The second (in this country) is called the Bank of England and not only has the authority to print new money, as in QE, but creates all the money we use.

As for the "flight of capital and entrepreneurial vision" - either it's already happened or it's not going to. Dyson's factories are in the Far East. The Daily Heil's headquarters are in Bermuda. Most of the big Internet companies (Amazon, Google) pay their tax on UK transactions elsewhere. Because they can. The economy still seems to be rumbling on, although most of the wealth generated is going to multinationals and/or billionaires who are not UK residents.

There is a global elite that controls most of the money in the system; you're right about that. They've got us right where they want us, squabbling over the crumbs from their table. Perhaps it's time to stop worrying about what they will do and try to make things better for ordinary people instead. Never mind about David Cameron's (quickly abandoned) quest for greater happiness for the moment: there are people in this country who don't even have their basic needs for food and shelter taken care of, in one of the richest countries of the world. We should be ashamed.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by PaulTH*:
I don't disagree with you when we look around us. But I have an instinctive distrust of tax, borrow and spend, leading to the flight of capital and entrepreneurial vision, ending in stagnation and bankruptcy. I don't pretend to know all the answers.

Okay, but to turn this around, what evidence do you have that austerity ever works? In reality the oft quoted examples where it appears to have worked were relatively small economies trading with larger neighbours who were embarking upon massive expansionary spending.

The only other reason for austerity is the Reinhart/Rogoff paper on debt/gdp ratios - but it turned out that after factoring the arithmetic mistakes they had made, that this was a less than compelling argument.

Posted by anteater (# 11435) on :

PaulTh:

quote:
But I have an instinctive distrust of tax, borrow and spend

So do I and most people. But beware of instinct - it can be aclimatization to the standard neo-liberal consensus which is pretty widespread just now.

So reading someone like Murphy is a bit like reading a climate change denier - your feeling is "surely everybody can't be wrong" and also a bit of helplessness because if you do have to form your own opinion it's bloody difficult. Interesting though.

The idea that it's just a question of tax and spend is highly misleading. Murphy is rather controversial, although when he sticks to his main speciality which is tax, he is much less so. But there is a growing body of opinion that austerity is simply wrong-headed.

And it certainly has little appeal ethically. I've up till now bought into the neo-liberal agenda because it's done me well. But the prospect of a Labour administration has spurred me to investigate whether they are loonies or not, and I'm less and less sure that they are.

Posted by Sipech (# 16870) on :

quote:
Originally posted by Sarah G:

quote:
Originally posted by Sipech:
*Dons professional hat*.... QE doesn't stimulate wage inflation but the jury is still out on whether it indirectly inflates the cost of the living.
Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?

Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.

The reason being one of education. Universities predominantly teach the neoliberal economics of Friedmann and Hayek. In the US, in particular, I understand that Keynes is barely mentioned in some of the more prestigious institutions. The idea is that economics is treated as medicine - there is an orthodox view and then there are quacks. Competing ideas are treated in economics departments like homeopathy is in a training hospital or like creationism is in a biology department.

The idea of 'teaching debate' is an alien concept. You may find a few outspoken economists on the left like Thomas Picketty or Ha-Joon Chang, but they are the exception rather than the rule.

Posted by Sipech (# 16870) on :

quote:
Originally posted by anteater:
Learning Cnight: What's your beef with Murphy? I like his writing and would rather hear why his ideas are wrong then just that his career was Accountancy. I believe he is now Professor of Economic Practice at City University.

I can well believe that he has some things wrong and John McDonnell has, I believe, said that as a Macro Economist he leaves a lot to be desired. I can see some potential flaws but most of what he says has plausibility. IMO of course.

I would largely agree with Learning Cnight's verdict on Murphy. I've clashed swords with him in the past and found that while he projects an air of authority, his understanding of the real world of business is severely wanting.

I recall a particular incident when he was advocating some tax reform when he built up a straw man and I pointed out to him that his base assumptions were simplistic and misleading, with his subsequent solution being inadequate and impractical. He didn't take kindly to my critique. Rather than engage, he left a curt comment and then shut down the discussion (which was in the comments on his blog).

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Sipech:

quote:
Originally posted by Sarah G:
Trying to put the question as neutrally as possible, so that I can actually learn something, what would the majority of economists say would be the effects of the proposed Labour economic model?
Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.

I understand that universities are heavily dominated by right-wing neoliberal economists. Nevertheless my understanding - admittedly from within a bubble - is that even so more economists are critical of austerity policies than are in favour. That's based on surveys printed in the Guardian so there may be sampling errors.

[ 15. June 2017, 10:11: Message edited by: Dafyd ]

Posted by Jane R (# 331) on :

Sipech:

quote:
The idea of 'teaching debate' is an alien concept. You may find a few outspoken economists on the left like Thomas Picketty or Ha-Joon Chang, but they are the exception rather than the rule.

This is a problem in many disciplines, not just economics. There is a dominant framework (let's call it a paradigm) within which you are allowed to tinker, but suggest that the whole framework needs to be changed and you're either a pariah or Albert Einstein.

Posted by anteater (# 11435) on :

As a comment on Chris Styles recommendation of Mark Blyth's book. Mark needs a commercial advisor or he'll never make many book royalities. Why?

His talks are great. I'm listening on YouTube to his talk-of-the-book, but it's such good fun, why read the book? Presumably his tendency as a speaker to characterise economic theories as bull (or) horse shit, or world leaders as Laurel and Hardy and his general light hearted attitude towards the disaster which is the modern economy, don't make it into print, so why would I read his book?

Unless he re-issues it as a comic book.

I've also just listened to Simon W-L. Also good, but with zero potential as a stand-up.

Maybe Mark stays sane on the basis you've got to laugh otherwise you'd cry.

[ 15. June 2017, 11:34: Message edited by: anteater ]

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Sipech:
[QUOTE]Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.
<snip>
The idea of 'teaching debate' is an alien concept. You may find a few outspoken economists on the left like Thomas Picketty or Ha-Joon Chang, but they are the exception rather than the rule.

That's fascinating- one of the most controversy packed disciplines doesn't teach debate!

Please stick around; I suspect there's much to be learned.

One of the expressed concerns about the Magic Money Tree (MMT) is that seriously increasing investment in wages and investment in public services fuels inflation. Is that generally agreed? If so, how do the JC camp aim to neutralise that effect?

Posted by Doc Tor (# 9748) on :

quote:
Originally posted by Sarah G:
One of the expressed concerns about the Magic Money Tree (MMT) is that seriously increasing investment in wages and investment in public services fuels inflation. Is that generally agreed? If so, how do the JC camp aim to neutralise that effect?

I don't see how that can be agreed. The differentials between public and private sector are very small (and possibly negative), raw values explained by the higher education and qualifications required to work in the public sector, and the ongoing pay freeze (which means Mrs Tor has had pretty much no pay rises at all since the Recession during which time prices have risen by 25%.)

Bunging the public sector a few quid - hell, hiring a few more people so those left don't have to work stupid hours - isn't going to add to inflationary pressures.

Inflationary pressures which are, according to figures today, about to breach the 3% mark.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Sipech:
Without having conducted a comprehensive survey, my answer is inherently biased towards the anecdotal. With that enormous caveat, the impression I get is that most economists would be highly critical of any Labour economic model.

The reason being one of education. Universities predominantly teach the neoliberal economics of Friedmann and Hayek.

But that's fairly meaningless - all you are describing is a popularity contest masquerading as a serious field of inquiry (and no prizes for guessing why Hayek gets such attention in the US).

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by anteater:
As a comment on Chris Styles recommendation of Mark Blyth's book. Mark needs a commercial advisor or he'll never make many book royalities. Why?

His talks are great. I'm listening on YouTube to his talk-of-the-book, but it's such good fun, why read the book? Presumably his tendency as a speaker to characterise economic theories as bull (or) horse shit, or world leaders as Laurel and Hardy and his general light hearted attitude towards the disaster which is the modern economy, don't make it into print, so why would I read his book?

Unless he re-issues it as a comic book.

I've also just listened to Simon W-L. Also good, but with zero potential as a stand-up.

Maybe Mark stays sane on the basis you've got to laugh otherwise you'd cry.

I would highly recommend Mark Blyth's book.

I don't think it's really true the Keynes isn't taught, from what I've read there is an on-going discussion between neo-Keynsians and Freidmanesque veiws.

Good alternative books are Krugman's End This Depression Now and Joseph Stiglitz's The Price of Inequality. All of these books are easily acceptable.

Blyth explains why both the theory and the practice of austerity is completely flawed and just does not work.

AFZ

Posted by Enoch (# 14322) on :

I don't think there is a money tree. I regret that it also is my considered opinion that economists choose which theories to believe in and advocate according to which theory would, if it turned out to be true, deliver what they'd like to see be able to happen. It's all driven by wishful thinking and whether you believe they know what they're talking about. I've emboldened that if because it's fundamental.

As much as on economic theory, it also depends on whether you're a glass half full or a glass half empty person. If you're a glass half full person, you find it quite easy to believe that a government escapes the rules that govern domestic economics and can spend its way out of its problems. If you're a glass half empty person, you don't.

Apart from that:-

1. Having lived through the period 1960-90, I can't avoid the conclusion that a government living on tick causes inflation.

2. If your currency inflates, it makes borrowing much more expensive and ultimately impossible. It's also a dishonest way for a government to treat its citizens.

3. The more extractive taxation becomes, the less people will feel any moral inhibitions about evading paying it, particularly if the rules appears random, partial, unfair or irrational.

4. When interest rates are low, it makes sense to borrow money to fund infrastructure projects - i.e. capital expenditure. And

5. It never makes sense to fund the revenue functions of government out of capital borrowing.

Posted by Leorning Cniht (# 17564) on :

quote:
Originally posted by anteater:
Learning Cnight: What's your beef with Murphy?
[..]
I can well believe that he has some things wrong and John McDonnell has, I believe, said that as a Macro Economist he leaves a lot to be desired. I can see some potential flaws but most of what he says has plausibility.

That's basically my problem with the man. Murphy doesn't understand economics, he doesn't understand tax incidence, and he frequently purports to believe contradictory statements at the same time* and yet he sounds vaguely plausible and several of the things he says sound superficially attractive.

That makes him the most dangerous kind of snake-oil salesman - he's the one telling you things you want to hear, and so you're less likely to question his accuracy.

He claims expertise he doesn't have. In my book, there's almost no greater sin.

*(one example - he rails against people who live abroad avoiding UK tax by living abroad (for example, Philip Green's wife Tina), whilst simultaneously claiming that wealthy people don't change their domicile in order to avoid tax.)

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Doc Tor:
I don't see how that can be agreed. The differentials between public and private sector are very small (and possibly negative), raw values explained by the higher education and qualifications required to work in the public sector, and the ongoing pay freeze (which means Mrs Tor has had pretty much no pay rises at all since the Recession during which time prices have risen by 25%.)

Bunging the public sector a few quid - hell, hiring a few more people so those left don't have to work stupid hours - isn't going to add to inflationary pressures.

Inflationary pressures which are, according to figures today, about to breach the 3% mark.

Although much of this sounds plausible, I think there is a lot of value in asking where mainstream expert opinion is on this, and I hope Sipech can enlighten us.

Assuming JC intends to keep his promises, increased money is going to be spent.... spending a lot more than the Tories is surely his thing? It's certainly the expectation of his supporters.

My question is, does this in conventional economic theory add to the inflation rate, which as you say has already reached 3%?

With a follow up question, how is JC planning to keep inflation low?

Posted by Doc Tor (# 9748) on :

quote:
Originally posted by Sarah G:
My question is, does this in conventional economic theory add to the inflation rate, which as you say has already reached 3%?

Given that total public sector employment is around 1/5th private sector employment, you've a better case in arguing for private sector wage controls to put a break on inflation.

How does that sound?

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Sarah G:
Assuming JC intends to keep his promises, increased money is going to be spent.... spending a lot more than the Tories is surely his thing? It's certainly the expectation of his supporters.

My question is, does this in conventional economic theory add to the inflation rate, which as you say has already reached 3%?

I suppose that what is driving inflation just now is a weak pound which is making imports more expensive and driving up prices overall to match. If that's so then I think increasing wages to compensate may not have any further inflationary effect.

One of the underlying differences between Keynesian economics and modern mainstream economics is that mainstream economics thinks that markets quickly find an efficient equilibrium, and Keynesian economics thinks that they can find inefficient equilibria fairly easily and then get stuck there. Rising prices without wages rising to match is a sign of inefficient behaviour.

I don't know that an inflation rate of 3% is near the danger zone. It's become something of an economic dogma that it must be kept low. Obviously it's in the interests of those of us with lots of savings to have low inflation rates. The value of low inflation rates to the wider economy is less clear. In the present economy where there are low wages and sluggish growth and rock bottom interest rates inflation might help get the economy moving by making investment in cash less attractive.

Posted by anteater (# 11435) on :

Leorning Cniht:

quote:
Murphy doesn't understand economics, he doesn't understand tax incidence

This illustrates the problem in getting to the bottom of these debates. It involves one in lots of learning, and of course, as a beginner, it is that much harder to tell the bullseyes from the bullshit.

Murphy certainly thinks he understands tax incidence, and is in disagreement with other economists, and presumably with yourself. It would take us quite a lot time to debate the rights and wrongs of all this, and I doubt it's worth trying.

Which is why it is so hard to base any election campaign on economics. It doesn't sound like you're against all left leaning economists, so maybe I'll agree that Murphy need not be the main source.

Posted by PaulTH* (# 320) on :

"It's called Socialism" John McDonnell said proudly at last year's Labour Party Conference. But I don't understand any way in which Mr McDonnell's brand of socialism differs from communism. This is evident from the ringing endorsement the Communist Party of Great Britain gave to Mr Corbyn's manifesto. McDonnell is on record as singing the praises of Marx, Lenin and Trotsky. History shows us, in many parts of the world that it's a small jump from excessive state intervention to state control and totalitarianism. He also believes in extra parliamentary activity to destroy capitalism, and has called this weekend, for a million people on the streets of London to force Mrs May out. Along with trade union mobilisation.

While people may think my imagination is running riot, I can remember seeing Arthur Scargill on TV in the 1980's saying how much he admired how the Eastern Bloc countries were run. I have visited Poland several times since 2010, and I know people of my age group who can remember life under the communists. Everybody had a job and took as much sick leave as possible. They all had a doctor and they mostly retired early at 50. But nothing got done. They were a nation of zombies with no entrepreneurial spirit nor any sense of hope. The only way to get any favours was by loyalty to the Party. While religion wasn't suppressed, it was certainly oppressed. I know a lady whose father was a police officer. When her family wanted her to have her First Communion, she had to be sent to an aunt in a remote country village because her father couldn't be seen to be supporting it. Poland has come on a long way, but ask anyone there if they would like socialism back?

Capitalism generates wealth, but unfortunately it gets concentrated in the hands of the few. Socialism with its punitive taxes and overblown state destroys wealth and enterprise, and leads to a bog standard levelling down. What we need to find is a middle way, a sort of capitalism with conscience which allows the benefits of being a rich country to trickle down to everyone. My opinion is that the best way to achieve this is by centrist consensus politics. Corbyn's and McDonnell's plan to raise £50 billion by only taxing the idle rich and greedy tax dodging corporations is a fantasy, because they will simply restructure their finances to avoid paying it. So they will either over tax most of us or borrow and bust the economy. Their plan to repeal so called anti union legislation will see a return to the appalling Labour relations of the 1960's and 70's which I recall with dread.

I am mentally gearing myself up to a Corbyn government which I suspect will happen this year, but I think the magic money tree will have poisonous roots which will have baneful consequences long after I'm dead.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Dafyd:

I don't know that an inflation rate of 3% is near the danger zone. It's become something of an economic dogma that it must be kept low.

On this note; a number of people are arguing for the central bank targets to be raised from 2% to 4% on the basis that we know that the current target can lead to interest rates hitting the zero lower bound during a bust.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by PaulTH*:

Corbyn's and McDonnell's plan to raise £50 billion by only taxing the idle rich and greedy tax dodging corporations is a fantasy, because they will simply restructure their finances to avoid paying it.

Actually, I'd argue that unless someone takes the bull by the horns and fixes this central problem capitalism in anything like its present form is doomed - and we are confined to some form of neo-feudalism.

Forget benefits and any form of social democracy, unless tax avoidance ends, states in the long term will not be able to fund basic things like the rule of law and the institutions which make markets possible.

Also, there's a strain of 'young people who want everything for free' to the discussion here and on other threads, to which I'll just leave this graph:

https://www.publications.parliament.uk/pa/cm201617/cmselect/cmworpen/59/IDExport-web-resources/image/Figure-9-Projected-lifet ime-receipts-health-education.png

Posted by Dafyd (# 5549) on :

quote:
Originally posted by PaulTH*:
History shows us, in many parts of the world that it's a small jump from excessive state intervention to state control and totalitarianism.

Most communist states in the world have come from revolutions against regimes whose only excessive state intervention was in the police and military.

quote:
What we need to find is a middle way, a sort of capitalism with conscience which allows the benefits of being a rich country to trickle down to everyone. My opinion is that the best way to achieve this is by centrist consensus politics.

The problem comes when people shift the centre about. Thatcher shifted it to the right. You could argue that Corbyn and MacDonnell's policies are simply where the centre was when Thatcher took power. To be honest, I don't think their manifesto is significantly to the left of Blair and Brown. The Liberal Democrat manifesto in this election included a 1p rise on income tax for middle and high earners which is arguably to the left of Corbyn.

Posted by Doc Tor (# 9748) on :

quote:
Originally posted by PaulTH*:
trickle down

I'm sorry, but anyone who uses this phrase seriously in a post about economics simply hasn't been awake for the last 50 years.

"Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by PaulTH*:
What we need to find is a middle way, a sort of capitalism with conscience which allows the benefits of being a rich country to trickle down to everyone. My opinion is that the best way to achieve this is by centrist consensus politics.

That's a very interesting statement. First you define your "middle way" as the unbridled capitalism which the Tories seem intent on taking the UK towards - with the demonstrably un-workable "trickle down" conjecture that Doc Tor has already addressed. Then you say you opinion is for centrist consensus politics, so presumably if you voted according to your opinion your cross was next to the name of your Labour, LibDem or Green candidate - all of whom cluster around that centrist position.

Posted by Baptist Trainfan (# 15128) on :

quote:
Originally posted by Doc Tor:

quote:
Originally posted by PaulTH*:
trickle down
I'm sorry, but anyone who uses this phrase seriously in a post about economics simply hasn't been awake for the last 50 years.

"Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.

Quite apart from issues of social justice, money will only flow from the rich to the poor if tax levels for them are high, and if there are significant tax advantages for divesting themselves of their dosh.

Posted by Jane R (# 331) on :

Rich people don't like parting with their money. That is how they become, and remain, rich. That is why "trickle-down" economics does not work.

Or, as the late Terry Pratchett put it "There are more poor people than rich people, and it's easier to get money out of them."

Putting more money into the pockets of poor people not only enhances their quality of life; it boosts the economy, because they are more likely to spend it on goods or services. Rich people may do this as well, of course, but there are fewer of them so it will not have such a big effect - and they might just sock it away in their Swiss bank account instead.

Posted by Boogie (# 13538) on :

quote:
Originally posted by Jane R:
Rich people don't like parting with their money. That is how they become, and remain, rich. That is why "trickle-down" economics does not work.

Or, as the late Terry Pratchett put it "There are more poor people than rich people, and it's easier to get money out of them."

Putting more money into the pockets of poor people not only enhances their quality of life; it boosts the economy, because they are more likely to spend it on goods or services. Rich people may do this as well, of course, but there are fewer of them so it will not have such a big effect - and they might just sock it away in their Swiss bank account instead.

I 100% agree with this.

What use empty properties and piles of gold or art treasures hidden in vaults?

Rich people get rich because they care more about money than people. There must be a few that this doesn't apply to - but they are rare as hens teeth 🐔

Posted by alienfromzog (# 5327) on :

I am not an economist. However I think the following is a reasonable analogy of how our economy works. It is certainly closer to reality than any household analogy you may hear. I am hoping that some actual economist comes along to tell me what I’ve got wrong or congratulate me on my clarity of thought… YMMV.

quote:
This is an alienfromzog analogy:
Suppose, I own two fields. For the sake of simplicity I will stipulate that the soil is fertile and doesn’t require much in the way of attention and there will be no natural disasters... Essentially if I plant seed, it will grow and yield a crop I can sell. (I have tried various permutations but I want to make this simple).

To plant a field will cost me £3000. A full crop, when sold will net me £12,000 per field. So, do I plant one or two fields this year? Well, the problem is that I only have £5000 in the bank, so I can only afford 1 field’s worth of seed.

At the end of the year, I sell my crop and have a nice £12,000 return and the remaining £2000 means I have £14,000 in my account. Now, I have some very good arrangements with my local businesses so I only have to pay my bills at the end of the year but I have to pay for food for me and my family, transportation etc. etc. For the year this comes to £11,500. So once I’ve paid my bills I have £2500 left. So next year I cannot even afford to plant the whole field…

An alternative is that I borrow £1000 from my mate next door. I will even be generous and give him a big return on his loan, so it will cost me £1500 at the end of the year. I thus plant both my fields and at the end of the year I have a return of £24,000. I pay all my bills which will probably come to a bit more because I’ve shifted twice as much crop to market but still only comes to £15,000, so I have a return of £9000 minus the £1500 I own my neighbour. So my net at the end of the year is £7500 and I can afford to plant both fields without borrowing at all.
Example one:
Cash on hand: £5,000
Cost of seed / fertiliser etc: £3,000
Cash remaining: £2,000

Income from selling crop: £12,000
Subtotal @ end of year: £14,000

Costs for the year: £11,500
Net at the end of the year: 2,500.
============================
Example two:
Cash on hand: £5,000
Loan: £1,000
Cost of seed / fertiliser etc: £6,000
Cash remaining £0

Income from selling crop: £24,000
Subtotal @ end of year: £24,000

Costs for the year £15,000
Loan repayment: £1,500
Net at the end of the year: 7,500.

In terms of a modern, developed economy like ours, the empty, unused field corresponds to spare capacity in the economy – that is unemployment, underemployment (people who want to work fulltime but can only find part time work) and poor productivity (UK lagging behind developed world in this regard at the moment).

Of course the numbers are silly but the concept is vital that spare capacity is wasteful and ultimately austerity makes the economy smaller (in the first example I can’t even afford to plough and seed both fields next year).

That's revenue expenditure where the use of borrowing and government spending in the slump supports the economy. Capital spending would be, borrowing to buy another field (educating our population or investing in a new industry).

If you want to look at this properly in a real economy, it requires some serious maths which is beyond me to be honest. However it's easy to see which variables matter. Economists I trust will tell you that there is (still) significant spare capacity in our economy and real interest rates are effectively zero. Hence there is no doubt that borrowing to support the economy at this stage makes absolute sense and cutting back (austerity) is absolutely the wrong policy - it is totally counter-productive.

If I have two fields and £7000 cash and I borrowed to get 3 fields' worth of seed and fertilizer that would clearly be foolish as the best I could do is cram more seed into the fields I have (I don't know if this works but here I am reaching for some surrogate for inflationary pressures.... it's ok, I'll stop now).

AFZ

Posted by PaulTH* (# 320) on :

quote:
Originally posted by Alan Cresswell:
so presumably if you voted according to your opinion your cross was next to the name of your Labour, LibDem or Green candidate - all of whom cluster around that centrist position.

I don't think that the manifesto Labour presented to us is in any way centrist. I don't agree with unilateral nuclear disarmament, though I long to live in a nuclear free world, and I don't agree with the Lib Dems on rerunning last year's referendum, so I wasn't able to vote for any of those parties.

Posted by Enoch (# 14322) on :

quote:
Originally posted by Doc Tor:
... "Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.

But that's just as much a statement of political or economic faith as the opposite view.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Enoch:
But that's just as much a statement of political or economic faith as the opposite view.

Except for the actual studies of 'trickle down' done by economists at - variously - Harvard, Oxford and the IMF. Where the benefits of trickledown have proved to be - at best - tiny in the most ideal of cases, and in the general negative.

[ 17. June 2017, 13:04: Message edited by: chris stiles ]

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by PaulTH*:

quote:
Originally posted by Alan Cresswell:
so presumably if you voted according to your opinion your cross was next to the name of your Labour, LibDem or Green candidate - all of whom cluster around that centrist position.
I don't think that the manifesto Labour presented to us is in any way centrist. I don't agree with unilateral nuclear disarmament, though I long to live in a nuclear free world, and I don't agree with the Lib Dems on rerunning last year's referendum, so I wasn't able to vote for any of those parties.

Given that a body economists supported it as in-line with mainstream economics and it contained no mention of unilateral disarmament and indeed committed to renewing trident, what on earth are you talking about?

AFZ

Posted by PaulTH* (# 320) on :

quote:
Originally posted by alienfronzog:
Given that a body economists supported it as in-line with mainstream economics and it contained no mention of unilateral disarmament and indeed committed to renewing trident, what on earth are you talking about?

I mentioned unilateral nuclear disarmament because Alan suggested the Green Party as a possibility. When taking advice from economists, we must remember that there are as many different opinions as there are economists. I don't think hiking taxes to levels not seen since the 1940's is mainstream economics. As canfirmed by the IFS.

Posted by Doc Tor (# 9748) on :

quote:
Originally posted by Enoch:

quote:
Originally posted by Doc Tor:
... "Trickle down" hasn't, doesn't, and never will, work. It doesn't feed the hungry or clothe the poor or heal the sick. Everything good about this country, we've wrested, sometimes violently, from the hands of the rich and powerful. The mere idea that they'd let some it simply slip through their fingers is nonsense on a stick.
But that's just as much a statement of political or economic faith as the opposite view.

Except I have evidence on my side, and all you have is lots of rich dudes getting richer telling you not to believe me.

Seriously, this is case closed. It doesn't work.

Posted by lilBuddha (# 14333) on :

Since the 1970's, the birth period of "trickle down", the disparity between rich and poor has greatly increased. The gap has narrowed a bit recently, but this is mainly to benefit of pensioners. And the very rich, often not included in the charts, continue to get even richer.
Oh, things trickle down alright, but they aren't money.

Posted by Doc Tor (# 9748) on :

1890s, according to wiki.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by PaulTH*:

quote:
Originally posted by alienfronzog:
Given that a body economists supported it as in-line with mainstream economics and it contained no mention of unilateral disarmament and indeed committed to renewing trident, what on earth are you talking about?
I mentioned unilateral nuclear disarmament because Alan suggested the Green Party as a possibility. When taking advice from economists, we must remember that there are as many different opinions as there are economists. I don't think hiking taxes to levels not seen since the 1940's is mainstream economics. As canfirmed by the IFS.

It's amazing how when the IFS was laying out the effects of the Budgets in each year from 2010 to 2017 they were basically ignored or derided but as soon as they say something about Labour, they are quoted and requoted and indeed misunderstood and misquoted.

I find fault with the IFS analysis here and I'll come to that but first let's deal with the specific issue of the tax burden.

The tax burden is simply a measure of the proportion of the national GDP that is taken in taxes. It does not reflect in any way where the taxes are falling - on corporations, on individuals in direct taxes, on households in indirect taxation. Hence out-of-context it does not necessarily mean what people think it means. What I am getting at here, is that increasing the tax-take as a proportion of GDP does not necessarily mean that your taxes are going up. It might mean only the highest earners and corporations taxes are going up.

The UK tax burden as a percentage of GDP is low by international standards and hence 'highest since 1940s' sounds radical but it really isn't. We'll still talking about less than many comparable countries (look it up!). Furthermore given that we pay for out healthcare by direct taxation whilst other countries fund healthcare in other ways, logically UK taxation should be higher than comparable countries, all other things being equal in macroeconomic terms. (Healthcare costs are potentially a drag on economic growth regardless of whether you pay a tax for it or a preminum for it).

So even if the IFS is right, it's still not out of the box. But I think they're wrong because they have deliberately excluded any macroeconomic effects of Labour's policy. They do this for a reason - they focus on fiscal effects only. However when you're talking about the effects of policy, ignoring any effects in the wider economy means your sums will be wrong. Labour's plan would inevitably have some effect on output. More government spending will result in more economic activity both directly and indirectly resulting in an overall increase in GDP. This is partly offset by a potential reduction from the taxation. In an economy with significant spare capacity this effect will result in economic growth. (This is the mainstream economics bit).

Even modest estimates of this effect would make the IFS's assessment very wrong. Which I find disappointing because in terms of fiscal effects, the IFS has done an amazing and much ignored job the past 8 years.

Here's a real economist explaining
this better than me. Also here, a using some basic macro economics (I'm told) is an estimate that overall the economy would be 1% bigger under Labour.

AFZ

Posted by lilBuddha (# 14333) on :

quote:
Originally posted by Doc Tor:
1890s, according to wiki.

My bad. I was referring to the supply-side economics of Thatcher and Reagan. Demonstrable failures for any class but the rich.

Posted by Sarah G (# 11669) on :

I have to say, there's a lot to be learned from this thread!

quote:
Originally posted by Doc Tor:
Given that total public sector employment is around 1/5th private sector employment, you've a better case in arguing for private sector wage controls to put a break on inflation.

How does that sound?

Thanks for the reply (and Dafyd). My question goes further than public sector pay.

JC is planning to spend a lot of money on a lot of different things, of which public sector pay is but one. Is it generally accepted in economics that this will have a significant effect on the inflation rate?

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Sarah G:
I have to say, there's a lot to be learned from this thread!

quote:
Originally posted by Doc Tor:
Given that total public sector employment is around 1/5th private sector employment, you've a better case in arguing for private sector wage controls to put a break on inflation.

How does that sound?
Thanks for the reply (and Dafyd). My question goes further than public sector pay.

JC is planning to spend a lot of money on a lot of different things, of which public sector pay is but one. Is it generally accepted in economics that this will have a significant effect on the inflation rate?

The short answer is that it depends.
And then you have to talk about how moderate inflation has both good and bad consequences for most people.

I haven't seen any specific analysis on this point, I'll have a look, but the short answer I suspect is that if there was an inflationary effect it could easily be offset by slow increases in interest rates which would be a good thing because then interest rates can be cut when the next slowdown occurs to stimulate activity. One of the great fears is that when the next shock occurs (i.e. Brexit) there are no good levers for the government to pull to stop a recession sliding into something worse.

AFZ

Posted by anteater (# 11435) on :

SarahG:

quote:
JC is planning to spend a lot of money on a lot of different things, of which public sector pay is but one. Is it generally accepted in economics that this will have a significant effect on the inflation rate?

Yes it depends, but Labour's problem is that it is widely accepted by Joe Public.

My own view is that a stimulus package would do good if it is handled wisely but here is a bit caveat. And I have noted by experience on NPfIT to show that having money sloshing around can result is huge waste. And that's before you get to EU funded airports with runway too short to take planes.

However, UK Athletics has shown that strong direction and allocation of funds can produce stunningly good results. And it is entirely possible that this could be the result of a Labour Administration.

But is it probable?

I think in the end, decision will be made on more subjective grounds. We've had three farcical budgets in the last 4 years, cutbacks on flood defences (and we know what happened there) etc etc as nauseam and that's before brexit.

Could it get worse? Actually yes, but it could get a lot better. John McDonnell in an interview rather disarmingly admitted there was a risk. And that's as certain as you get.

But as has been said many times, if I was poor or young I'd vote Corbyn without hesitation, 'cause I've less to lose and would take the risk.

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by PaulTH*:

quote:
Originally posted by alienfronzog:
Given that a body economists supported it as in-line with mainstream economics and it contained no mention of unilateral disarmament and indeed committed to renewing trident, what on earth are you talking about?
I mentioned unilateral nuclear disarmament because Alan suggested the Green Party as a possibility.

Though, it's not particularly relevant to whether or not there is a money tree - renewal of Trident (or not) is about how we spend the fruit of the money tree, not how we get more fruit from the money tree.

It could be argued that spending on Trident will create work in various sectors of the UK economy, and hence be an investment that will pay off in retaining engineering skills etc. But, if you want to make that argument then you need to ask whether the same benefit could be gained at lower cost by investing in developing low carbon energy technology (lots of engineering expertise retained through developing off-shore wind or wave power technology, for example).

Posted by chris stiles (# 12641) on :

quote:
Originally posted by anteater:

I think in the end, decision will be made on more subjective grounds. We've had three farcical budgets in the last 4 years, cutbacks on flood defences (and we know what happened there) etc etc as nauseam and that's before brexit.

and in fact, cuts of this nature (see also lack of road maintenance, putting off planned build outs of national infrastructure to cope with population movements) are very much a case of 'borrowing from the future' to make short term political capital.

Posted by Russ (# 120) on :

quote:
Originally posted by Alan Cresswell:
households borrow, in fact they borrow quite a lot. Indeed, the government almost encourages it. And, in many cases that borrowing is entirely reasonable and logical. We borrow to buy a house, and then often pay less in mortgage repayments than rent (and, even if renting was cheaper we retain the asset in a house we've bought). We borrow to buy a new car, enabling us to get to a wider range of jobs and other such freedoms. We borrow to send our children to university (especially those not in Scotland who have to pay extortionate tuition fees). We borrow for replacement windows, new boilers, to refit the kitchen and bathroom. The household finances analogy would say that there's nothing wrong with borrowing, especially when there's a likely payback on that. Yet those using the analogy want us to believe the nation shouldn't borrow.

Micro-economics is easier than macro-.

At the household level, we can distinguish three types of borrowing:

- investment (borrowing to secure a future stream of income or cost savings, such as buying a car that costs less to run). That's a good thing to do.

- having-it-now (borrowing for capital spend on consumption, such as a new TV, and paying back over a fixed period, instead of saving up). That's neutral - it's a valid choice that costs more in the long term but gives the benefit sooner.

- living beyond your means (borrowing ever-greater amounts to plug the gap between income and revenue outgoings). That's unsustainable.

Seems to me that the onus is on those who think this doesn't apply at the macro level to explain why.

Posted by MarsmanTJ (# 8689) on :

quote:
Originally posted by Russ:
Micro-economics is easier than macro-.

At the household level, we can distinguish three types of borrowing:

- investment (borrowing to secure a future stream of income or cost savings, such as buying a car that costs less to run). That's a good thing to do.

- having-it-now (borrowing for capital spend on consumption, such as a new TV, and paying back over a fixed period, instead of saving up). That's neutral - it's a valid choice that costs more in the long term but gives the benefit sooner.

- living beyond your means (borrowing ever-greater amounts to plug the gap between income and revenue outgoings). That's unsustainable.

Seems to me that the onus is on those who think this doesn't apply at the macro level to explain why.

Let's take a look back at the 2007 budget, before the 2008 crisis, shall we? Let's assume that in a crisis situation caused by global financial trends, the government has different priorities.

2007 Budget: tax take £553 bil. Budget: £587. Total borrowing: £34 bil, or 6.3%. Total Capital Spending (that comes under columns A and B of your 'micro-economic plan') was £44 bil.

Explain to me again how that Labour government was bad with money and grossly overspent?

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Russ:
Seems to me that the onus is on those who think this doesn't apply at the macro level to explain why.

The short answer is because it doesn't. I'm not being facetious here, what I mean is that it is simply true that government spending doesn't work like this. Even if we can't explain the reasons, it doesn't change the fact.

There are literally thousands of examples of this is other fields: it was known before Einstein that the Newtonian model broke down but it was only when Einstein worked out relativity that we knew why. Medicine is full of examples of diseases being described long before the pathophysiology is understood.

Anyway, government spending is not at all like a household budget because the government itself is a big part of the economy and thus reductions in spending create reductions in income in a way that would never be true of a household. The key concept here is Fiscal multipliers

Some types of government spending tend to have positive multipliers (greater than 1) - investment or even everyday expenditure if it increases employment and decreases the welfare bill. In a situation where interest rates are at the zero-lower bound (interest rates can't normally go negative) the evidence (from the IMF among others) is that the multipliers are far bigger than normal.

This was my attempt at an analogy that explains this.

AFZ

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Russ:

Seems to me that the onus is on those who think this doesn't apply at the macro level to explain why.

I think the onus on anyone who wants to support austerity is to point to a simple case where it has actually worked.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Russ:
Seems to me that the onus is on those who think this doesn't apply at the macro level to explain why.

Do you think it applies to banks? A household cannot lend out more money than it takes in. A bank usually can unless it abuses the ability. Every time it does that it creates money out of nothing.

The government is like banks in that it can actually create money. It shouldn't create too much money; how much is too much is a macro-economic question.

Another thing to note about the government is that very little of its spending falls into the category of day-to-day consumption (your category c). (Heating bills for government buildings maybe.) Most of it has some kind of investment benefit. The police maintain economic activity. The health service keeps people economically active. Education is investment. Roads and maintenance are investment. The government doesn't make a profit.

Posted by MarsmanTJ (# 8689) on :

quote:
Originally posted by Dafyd:
The government doesn't make a profit.

Or if they do, there are serious questions raised about whether they are doing their job adequately. See the RBKC Council which has a fairly significant budget surplus and serious questions are being raised about 'why' right now.

Posted by Russ (# 120) on :

quote:
Originally posted by Alan Cresswell:
Spend money to boost the economy, then that will be recouped through increased tax revenue...
...Invest in education, so that we have a workforce able to do the jobs required. Invest in healthcare, so our workers aren't off sick. Invest in public transport so workers can get to work efficiently with minimal fuss. Invest in developing new technologies to meet the future demands of society. Of course it takes skill and expertise to identify where to invest, but without it there will be no money tree.

Whether these are good investments in strictly financial terms - whether the revenue stream would actually be sufficient to pay off the debt incurred to make the investment - is an empirical question.

Economics being what it is, we can guess that the answer is "it depends". That some people, if you'll forgive me putting it bluntly, are good investments and some aren't.

If what the skill and expertise tells us is that this sort of investment will grow the economy enough to cover its costs in theseparts of the country but not those, would you go along with that advice ?

Or is this talk of "investment" and "economic growth" just spin for a programme of spending that you'd do anyway for ideological reasons ?

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by MarsmanTJ:

quote:
Originally posted by Dafyd:
The government doesn't make a profit.
Or if they do, there are serious questions raised about whether they are doing their job adequately. See the RBKC Council which has a fairly significant budget surplus and serious questions are being raised about 'why' right now.

It depends on how you define "profit". If the government spend £1b on a new bridge taking a motorway across a river, and the improved access results in new and expanding businesses boosting the economy and generating £100m extra tax revenue per year then after a decade the government is in profit.

[ 18. June 2017, 14:19: Message edited by: Alan Cresswell ]

Posted by ThunderBunk (# 15579) on :

quote:
Originally posted by Alan Cresswell:

quote:
Originally posted by MarsmanTJ:

quote:
Originally posted by Dafyd:
The government doesn't make a profit.
Or if they do, there are serious questions raised about whether they are doing their job adequately. See the RBKC Council which has a fairly significant budget surplus and serious questions are being raised about 'why' right now.
It depends on how you define "profit". If the government spend £1b on a new bridge taking a motorway across a river, and the improved access results in new and expanding businesses boosting the economy and generating £100m extra tax revenue per year then after a decade the government is in profit.

The other way of looking at that is that the surplus starts from the first year, in that if the tax take is 10% of the total economic impact, bearing in mind that taxes are (hopefully) paid by all economically active parties. The government does not itself need to make a profit, or even break even, because it is not entirely distinct from the society on whose behalf it functions.

Posted by anteater (# 11435) on :

MarsmanTJ:

quote:
Explain to me again how that Labour government was bad with money and grossly overspent

Well I'm having to face up to the fact that the "Labour left the country bankrupt" meme may well be bullshit.

If this is the case, how did they make such a lousy job of countering it? The Lib Dems kept on repeating it and most of Labour seemed on the austerity bandwagon. Was is just the case that Brown's campaign rivalled May's for crapiness? After all Dave got to a hung parliament following a 60 majority, not 18.

Is that why Lefties hate the Old Guard? Or does it show the difficulty of putting the arguments across? I. e. That Labour knew they would lose the argument so felt they had to go along with the story that everyone believed?

Whatever happened to the guy that wrote the "Sorry, there's no money left?

Posted by Dafyd (# 5549) on :

quote:
Originally posted by anteater:
Well I'm having to face up to the fact that the "Labour left the country bankrupt" meme may well be bullshit.

If this is the case, how did they make such a lousy job of countering it?

Brown was a famously poor public performer. Also it did happen on his watch; saying it wasn't his fault would have looked irresponsible. Finally, they were trying to put forward the message that the deficit would need paying off after the economy had recovered, which was easily spun as agreeing that the deficit needed paying off.

Miliband decided to distance himself from Brown and Blair and not to campaign on Labour's record, which allowed the Tories to continue to define it.

Posted by lilBuddha (# 14333) on :

quote:
Originally posted by MarsmanTJ:

quote:
Originally posted by Dafyd:
The government doesn't make a profit.
Or if they do, there are serious questions raised about whether they are doing their job adequately. See the RBKC Council which has a fairly significant budget surplus and serious questions are being raised about 'why' right now.

Not defending RBCK, but here is the dilemma for any institution tasked with serving its constituents: Balancing conserving resources v. serving said people. A surplus in itself is not wrong. The hows and whys can be, but merely having one even if all current needs are not met is not inherently wrong or bad.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Dafyd:
Brown was a famously poor public performer. Also it did happen on his watch; saying it wasn't his fault would have looked irresponsible. Finally, they were trying to put forward the message that the deficit would need paying off after the economy had recovered, which was easily spun as agreeing that the deficit needed paying off.

The other factor was that they - rather unwisely - had talked about the end to boom and bust and had also bought into the model of low regulation, and it would have been hard for the Blairites/Brownites to admit that these particular factors were at fault.

At the time, the example of Greece served as the easy narrative for the media to adopt and map onto any financial crisis - after feebly trying to resist, they tended to go along with the descriptions of the commentariat.

In retrospect there was a slight overspend (under 1%) in 2006/2007 but this was excusable because of how the economy looked like at the time. The real issues started when the GFC kicked in in earnest, automatic stabilisers came into effect and then the financial sector needed a bailout.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Dafyd:

quote:
Originally posted by anteater:
Well I'm having to face up to the fact that the "Labour left the country bankrupt" meme may well be bullshit.

If this is the case, how did they make such a lousy job of countering it?
Brown was a famously poor public performer. Also it did happen on his watch; saying it wasn't his fault would have looked irresponsible. Finally, they were trying to put forward the message that the deficit would need paying off after the economy had recovered, which was easily spun as agreeing that the deficit needed paying off.

Miliband decided to distance himself from Brown and Blair and not to campaign on Labour's record, which allowed the Tories to continue to define it.

This is the key. For me there are 3 factors:
1) the political opportunism of Cameron and Osborne. Of course the austerity narrative also fits their pre-existing prejudices (government bad, private sector good and Conservatives always have to mop up Labour's mess)
2) Our incredibly ignorant and agenda-driven print media coupled with the BBC's false - the earth may be flat or round, opinions vary - form of balance made it very hard for anyone who opposed the narrative to actually be heard. (Miliband being shouted down by a BBC audience member who was totally wrong in 2015 debate, for instance)
3) The Lib Dems. The reason I can't stand Clegg and Cable is that they did a complete 180 and supported austerity post the 2010 election. The past two years have shown that the Lib Dems did restrain Cameron from the worst excesses of the foolishness that is today's Tory party but for all that they are still Tory enablers. A Tory minority government could not have done so much damage or so controlled the media narrative in my view.

I guess the missing 4th aspect is Labour's failure to counter any of this but I think it important to appreciate how big a challenge it was. Miliband's Labour tried to be anti-austerity on the quiet (2015 manifesto was a good start to countering the damage done but they didn't want to shout about it).

I wrote 2 years ago that the reason the Tories should fear Corbyn was because he would call them out on the austerity myth and the reason they didn't was because they believed they could discredit and demonise him effectively enough (with the help of their sympathetic media) that no one would listen. At this point, I'll call that one a high-scoring draw...

I apologise that I've said this before but I do think it bears repeating: history will be very kind to Gordon Brown. He managed the crisis exceptionally well, along with Darling. It's always difficult to be sure, but Brown's action on the world stage almost certainly prevented a worldwide banking crisis. Experience in the 30s shows how horrific that I could be and I would postulate that in a modern, essentially cash free economy if the banks literally stopped, even for a day or two, it would be catastrophic. Try to imagine, no one being paid, no one able to pay for anything...

It is true that Brown could have extracted more from the banks in return but actually the UK turned a profit on insurancing the banks and would have done well out if RBS and Lloyds if Osborne hadn't sold them cheap.

What is so frustrating to me is that the Conservative economic policy is not just not great, it is the very opposite of what we should be doing and they have managed to win one and a two half elections on a platform of economic competence. Which I suspect is why Martin Wolf of the FT described it as insane economics.

The magic money tree is a great soundbite but is just another example of effective propaganda. Anyone who uses it either doesn't know what they're talking about or is lying to you.

AFZ

Posted by Sarah G (# 11669) on :

quote:
Originally posted by alienfromzog:

quote:
Originally posted by Sarah G:
JC is planning to spend a lot of money on a lot of different things, of which public sector pay is but one. Is it generally accepted in economics that this will have a significant effect on the inflation rate?
The short answer is that it depends.

I would be interested in a longer answer, if possible.

quote:

And then you have to talk about how moderate inflation has both good and bad consequences for most people.

I did a little bit of rooting around to learn more on this point, and I arrived top article here, which seems to be free of politics AFAICS, but is behind a paywall if you've already used your freebies.

To summarise, these are the effects they mention:

1) Financial instruments change their attractiveness up or down
2) Drivers lose out
3) Pensioners lose out
4) Workers lose out if Brexit hits
5) The housing market slows

I'm struggling to see the positives, and the last three are a bit worrying.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Sarah G:

quote:
Originally posted by alienfromzog:

quote:
Originally posted by Sarah G:
JC is planning to spend a lot of money on a lot of different things, of which public sector pay is but one. Is it generally accepted in economics that this will have a significant effect on the inflation rate?
The short answer is that it depends.

I would be interested in a longer answer, if possible.
quote:

And then you have to talk about how moderate inflation has both good and bad consequences for most people.
I did a little bit of rooting around to learn more on this point, and I arrived top article here, which seems to be free of politics AFAICS, but is behind a paywall if you've already used your freebies.

To summarise, these are the effects they mention:

1) Financial instruments change their attractiveness up or down
2) Drivers lose out
3) Pensioners lose out
4) Workers lose out if Brexit hits
5) The housing market slows

I'm struggling to see the positives, and the last three are a bit worrying.

Positives for you:
1) Deflation (which was a real risk back in 2011-12) is really bad for an economy. Although to be fair, I don't think it a big risk at the moment.
2) Inflation is good for reducing debt in real terms. Moderate inflation (c.f. v.low inflation) means that debts are significantly smaller.
3) Moderate inflation makes non-productive assets (i.e. gold) less attractive and hence encourages more investment in productive parts of the economy - such as business lending.

I'll have a look and see if anyone's done the empirical work on this specific point.

AFZ

Posted by alienfromzog (# 5327) on :

I haven't found any empirical data but the principal is that increases in public sector spending would not cause inflation whilst there's spare capacity in the economy. Furthermore current inflation drivers are the cost of oil and imports because of the weak pound.

It's important to separate out wage inflation and price inflation. If wage increases keep pace with prices then most of us are not worse off at all. It's only people on a fixed income that suffer. Inflationary cycles whereby high inflation expectation drives spiralling wages and prices are very damaging but that's not what we're looking at.

I think that the Labour plans wouldn't drive inflation and if they did then this would be of the 'normal' level and could be effectively managed with conventional means (interest rates). But you need a real expert to check that out. Either way is a much smaller risk than the risk of further austerity which we know is making things worse.

AFZ

Posted by anteater (# 11435) on :

I have just got to the bit in Mark Blyth's book where he explains why the Eurozone is actually condemned to perpetual austerity, and outcome he views as unredeemably shitty. And it's scary, and makes you wonder about those who supported the Euro.

I had already had Euro-skepticism (a sadly amibuous term - we need that plus EU-skepticism - I was a remainer) confirmed by Joseph Stiglitz' book but Blyth's description of it as a monetary domesday weapon is truly worrying. Read the book but here's the summary, a lot of which I didn't know.

So a key difference between US and Eurozone is that the US banks were too big to fail but not too big to bail, painful though that was and still is. So now, roughly, the top six banks have assets equal to about 60% of US GDP, so any one failing would have a really serious effect, of up to ten percent of GDP.

By contrast, the top THREE French banks have assets up around 350% of French GDP, and so are not only too big to fail but too big to bail. There is no way the French government can clean out the stables as the Fed did in the US. Other Eurozone countries are similarly placed, France being just the worse one.

If you compared the assets in the banks to the Eurozone GDP a different answer may emerge, but the ECB is not equipped to do the bail out. This means the only way to get back into order is to progressively deflate until all the countries become like Germany, who is the only beneficiary of the Euro (to be fair Blyth is not sure that even Germany is a beneficiary, but he is certain that it is the only candidate for this privilege).

So what about UK? Our exposure is about as bad as France, but we do have our own currency. I really don't know what that means.

Now all this was written about 2 years ago but it's still worrying.

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by anteater:
a key difference between US and Eurozone is that the US banks were too big to fail but not too big to bail, painful though that was and still is. So now, roughly, the top six banks have assets equal to about 60% of US GDP, so any one failing would have a really serious effect, of up to ten percent of GDP.

By contrast, the top THREE French banks have assets up around 350% of French GDP, and so are not only too big to fail but too big to bail.

Can you explain how this relates to the Euro? Surely if France still used the Franc then that wouldn't affect the comparison between the assets of the banks and the French GDP? Also, are those assets limited to within each nation, or is it a reflection of French banks holding significant assets outside France and US banks being largely limited to the US?

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Alan Cresswell:

Can you explain how this relates to the Euro? Surely if France still used the Franc then that wouldn't affect the comparison between the assets of the banks and the French GDP?

Because the ECB doesn't act as a lender of last resort for the Euro. As the Greeks found out, in the final analysis the Germans don't want to bail out anyone else.

quote:

Also, are those assets limited to within each nation, or is it a reflection of French banks holding significant assets outside France and US banks being largely limited to the US?

It reflects both sets of banks holding significant amounts of bad assets (and yes most of the assets held by French banks are foreign in the sense of being foreign to France).

Posted by Enoch (# 14322) on :

quote:
Originally posted by anteater:
I have just got to the bit in Mark Blyth's book where he explains why the Eurozone is actually condemned to perpetual austerity, and outcome he views as unredeemably shitty. And it's scary, and makes you wonder about those who supported the Euro. ...

I shouldn't worry too much about it Anteater. I'm sure you can find someone else of equal or greater credibility who will say something completely different. And alarmism both sells and gets you interviews on chat shows.

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by chris stiles:

quote:
Originally posted by Alan Cresswell:

Can you explain how this relates to the Euro? Surely if France still used the Franc then that wouldn't affect the comparison between the assets of the banks and the French GDP?
Because the ECB doesn't act as a lender of last resort for the Euro. As the Greeks found out, in the final analysis the Germans don't want to bail out anyone else.

Which doesn't change the maths - assuming there is a lender of last resort for banks with assets significantly in excess of GDP then that lender will have severe difficulties bailing out a failing bank, regardless of whether they're using Euros, Francs or doubloons.

Besides, isn't the ECB lender of last resort for the banking sector, but not for government bonds? I may have that wrong though.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Enoch:

quote:
Originally posted by anteater:
I have just got to the bit in Mark Blyth's book where he explains why the Eurozone is actually condemned to perpetual austerity, and outcome he views as unredeemably shitty. And it's scary, and makes you wonder about those who supported the Euro. ...
I shouldn't worry too much about it Anteater. I'm sure you can find someone else of equal or greater credibility who will say something completely different. And alarmism both sells and gets you interviews on chat shows.

Go on then! Lazy anti-intellectualism adds nothing to the debate.

I can find lots of people who will tell you that vaccines are dangerous. They're still wrong. I know this because this is my field and I know the data.

AFZ

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Enoch:
I shouldn't worry too much about it Anteater. I'm sure you can find someone else of equal or greater credibility who will say something completely different.

No. I think this silly and ultimately a counsel of defeat - basically it amounts to throwing up our hands and saying 'no one can know anything and what do those experts know anyway'.

I think you can give salience to different views by their explanatory power - and this explanation has a fairly good track record in explaining the behaviors of the various actors before and (crucially) after the crisis.

Some things are just facts, the amount on the balance sheets of banks are facts, as are their leverage ratios.

Posted by Sarah G (# 11669) on :

quote:
Originally posted by alienfromzog:
I haven't found any empirical data but the principal is that increases in public sector spending would not cause inflation whilst there's spare capacity in the economy. Furthermore current inflation drivers are the cost of oil and imports because of the weak pound...

I think that the Labour plans wouldn't drive inflation and if they did then this would be of the 'normal' level and could be effectively managed with conventional means (interest rates). But you need a real expert to check that out.

Thanks for the info! Very helpful.

Am I right in thinking that by 'capacity in the economy' you mean unemployment? If so, surely JCs aim would be to remove that sharpish, presumably meaning that public spending will have an inflationary effect?

I don't see the pound strengthening much anytime soon, meaning the underlying oil/import inflation you mention will remain. Can high inflation be brought down by interest rates effectively? What effect would that have on investment?

A little bit of Googling suggests that the EU and US inflation rates are about 2%. If we're at 3% and rising, it feels like a problem to me.

quote:

Either way is a much smaller risk than the risk of further austerity which we know is making things worse.

But surely the choice isn't only between Osborne austerity and Corbyn magic money tree levels of spending. He's put a lot of expensive commitments out there. I suspect that a controlled turning on of the tap would be a better plan.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Sarah G:

quote:
Originally posted by alienfromzog:
I haven't found any empirical data but the principal is that increases in public sector spending would not cause inflation whilst there's spare capacity in the economy. Furthermore current inflation drivers are the cost of oil and imports because of the weak pound...

I think that the Labour plans wouldn't drive inflation and if they did then this would be of the 'normal' level and could be effectively managed with conventional means (interest rates). But you need a real expert to check that out.
Thanks for the info! Very helpful.

Am I right in thinking that by 'capacity in the economy' you mean unemployment? If so, surely JCs aim would be to remove that sharpish, presumably meaning that public spending will have an inflationary effect?

I don't see the pound strengthening much anytime soon, meaning the underlying oil/import inflation you mention will remain. Can high inflation be brought down by interest rates effectively? What effect would that have on investment?

A little bit of Googling suggests that the EU and US inflation rates are about 2%. If we're at 3% and rising, it feels like a problem to me.

quote:

Either way is a much smaller risk than the risk of further austerity which we know is making things worse.
But surely the choice isn't only between Osborne austerity and Corbyn magic money tree levels of spending. He's put a lot of expensive commitments out there. I suspect that a controlled turning on of the tap would be a better plan.

Inflation is specifically a comparison of prices (&/or wages) to a year ago. The effect of the weak pound has meant a rise in prices. If the pound doesn't fall further, then in 12 months time this effect will disappear. Conversely because of Brexit, I think it will but the appropriate response to that is to strengthen the fundamentals of the economy by investment.

Spare capacity does indeed refer to unemployment but also underemployment (people wanting full time work but only being able to find part time employment). Danny Blanchflower, former member of the Bank of England monetary committee tried to calculate an estimate of this. It's not easy.

But the big one with the UK is the productivity gap:
Guardian article. The point is that when wages rise faster than prices, standards of living improve.

We can be fairly certain that there is significant spare capacity because the trend growth since 1945 is very consistent. After each recession bar one, the economy grew faster than the trend rate and made up the lost ground (this is the definition of a recovery). Care to guess which one?

This is the really worrying aspect though, that austerity might be harming the UK'S longterm growth potential. This would cost us all more than any short term costs. And it is a real concern. If people are unemployed for a prolonged period it harms their lifetime earning potential and their children's educational attainment is affected as well. Cutting the education support allowance was another example of a stupid idea. It cost peanuts. It only has to have a tiny effect on the educational outcomes of the poorest to easily pay for itself several times over. We don't (AFAIK) have the data yet but I'm betting it has quite a large effect on those who benefitting from it.

There is no magic money tree, it's just basic macroeconomics. The limitations are when governments can't borrow anymore and then their room for manoeuvre is limited. But the UK is currently paying effectively negative interest rates (that is in real terms, investors are paying the UK to look after their money!) So that's not an issue. The scary scenario is that austerity weakens the economy and piles on the debt (as we have seen in the past 7 years) and makes us all poorer and debt with reach 100% GDP or more with no gains. Borrow now, spend countercyclically and the economy will grow faster and the debt will take care of itself.

Austerity remains good politics and terrible economics.

This is now two years old but gives you some numbers to explain what we're talking about.

AFZ

Posted by anteater (# 11435) on :

Alan:

quote:
Which doesn't change the maths - assuming there is a lender of last resort for banks with assets significantly in excess of GDP then that lender will have severe difficulties bailing out a failing bank, regardless of whether they're using Euros, Francs or doubloons.

I would reply thus. In the US case, huge though the amount of X-rated shit on the bank balance sheets was, it was still capable of being bought and switched by the Fed, due to the large US GDP. If all the banks had been headquartered in Iowa and any bail-out had to be done by Iowa, your point would probably apply.

Plus they can print money - and how!

I'm still trying to grasp all this, and unfortunately it is highly technical. But the videos on YouTube are really good and I think you'd like him. Moderate left wing, thinks austerity is demonstrably on a par with leeching, and even come from the right side of the border! [Smile]

Posted by Russ (# 120) on :

quote:
Originally posted by alienfromzog:
Borrow now, spend countercyclically and the economy will grow faster and the debt will take care of itself.

Keynesian countercyclical policy makes perfect sense. AIUI it means borrowing to spend on capital works during the (roughly one-third of the) time that the economy is in a (relative) trough and paying the money back during the (roughly one-third of the) time that the economy is doing relatively well.

Politicians seem to find the second half of the prescription really difficult to follow.

I commend to you Alan Cresswell's qualifier that skill & expertise are needed to identify those projects which will make a real substantial difference to economic growth.

It's not true that any old borrow-and-spend will do.

Posted by Crœsos (# 238) on :

quote:
Originally posted by Russ:
Keynesian countercyclical policy makes perfect sense. AIUI it means borrowing to spend on capital works during the (roughly one-third of the) time that the economy is in a (relative) trough and paying the money back during the (roughly one-third of the) time that the economy is doing relatively well.

Politicians seem to find the second half of the prescription really difficult to follow.

Actual experience with austerity seems to indicate that it's really the first half of the prescription that politicians find difficult to follow. I've pointed out that, contrary to conventional wisdom, politicians seem to find it very easy to "take away the punch bowl".

quote:
Originally posted by Russ:
I commend to you Alan Cresswell's qualifier that skill & expertise are needed to identify those projects which will make a real substantial difference to economic growth.

It's not true that any old borrow-and-spend will do.

Actually it is. The main point is not to get a return on investment but to get enough money circulating in the general economy again to overcome the paradox of thrift. If you can do that while also funding projects that have later value so much the better, but that's not a necessary component of Keynesian counter-cyclical spending. Keynes himself once came up with a thought exercise about money being injected into the economy by burying bank notes in bottles.

quote:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

This was in part a response to those who were in theory in favor of government deficit spending during recessions but always found some reason why the projects were impractical. Keynes noted that even impractical projects can boost the economy under the right conditions. (This was also an oblique attack on the gold standard, the idea that money can only come from digging up gold and then re-burying it in bank vaults.)

[ 20. June 2017, 20:31: Message edited by: Crœsos ]

Posted by Sarah G (# 11669) on :

If JCs policies would be so good for the economy, why do the financial markets not like them?

Posted by Alan Cresswell (# 31) on :

Financial markets are just part of the economy, that part which is concerned with finance and in particular turning as big a profit as possible. What's good for the economy as a whole may not result in the biggest profits for the financial markets.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Alan Cresswell:
Financial markets are just part of the economy, that part which is concerned with finance and in particular turning as big a profit as possible. What's good for the economy as a whole may not result in the biggest profits for the financial markets.

Also of course the people who work in financial markets are as likely to adhere to popular economic fallacies as anybody else.

Posted by Sioni Sais (# 5713) on :

quote:
Originally posted by Sarah G:
If JCs policies would be so good for the economy, why do the financial markets not like them?

Jeremy Corbyn isn't opposed to the markets, even the financial markets, but he does think the markets should serve man, not the other way round.

Posted by alienfromzog (# 5327) on :

Simon Wren-Lewis addressing some of the points we talked about earlier.

He also refers in this post to the work by Blanchflower on underemployment.

There is a danger that I (and others?) will just link to Wren-Lewis's blog continually but I have found he makes complex macroeconomics very accessible.

AFZ

Posted by Leorning Cniht (# 17564) on :

quote:
Originally posted by alienfromzog:

There is a danger that I (and others?) will just link to Wren-Lewis's blog continually but I have found he makes complex macroeconomics very accessible.

I don't agree with him very often when he strays into politics as opposed to economics (when he does, he comes over as far more collectivist than I am comfortable with), but I find his economic presentation both clear and, as far as I can judge, generally correct.

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Dafyd:

quote:
Originally posted by Alan Cresswell:
Financial markets are just part of the economy, that part which is concerned with finance and in particular turning as big a profit as possible. What's good for the economy as a whole may not result in the biggest profits for the financial markets.
Also of course the people who work in financial markets are as likely to adhere to popular economic fallacies as anybody else.

I thought they all had many very expensive economists employed specifically to avoid that sort of thing happening. If everyone is heading in one direction, but you head in the other and get it right, you make a killing. But if you follow everyone else and it's wrong, you're dead.

They may be trying to turn a big profit, but they're doing it by betting on what would be most effective route for the British economy.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Sarah G:
I thought they all had many very expensive economists employed specifically to avoid that sort of thing happening. If everyone is heading in one direction, but you head in the other and get it right, you make a killing. But if you follow everyone else and it's wrong, you're dead.

If you really believe this then I give you all the alleged ten sigma events that have happened in the last 50 years.

Besides, the markets can stay insane for longer than you can remain solvent, and generally it's hard not to follow the herd.

[ 21. June 2017, 20:53: Message edited by: chris stiles ]

Posted by Sarah G (# 11669) on :

By 'ten sigma event', I assume you're referring to probability/statistical distribution mathematics to denote an event extremely unlikely to occur. If so, I'm not sure what your point would be here. Some unpacking would be helpful.

My musing is that investment firms have very well paid economists on board who are being asked inter alia to predict the likely outcomes of Labour versus Tory governments to the health of the economy. These firms make money by getting it right. If they invest in sectors tied to the health of the UK economy, and it goes wrong, they lose money. Or make money if it goes right.

These people seem to be saying that a Labour government would be significantly worse than a Tory one. When Tony Blair was elected in 1997, the stock market soared. The opposite view seems to be taken to a JC government.

There's got to be much more to it than 'JC would be bad for the economy because that's what the Telegraph says'. I wonder what...

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Sarah G:

There's got to be much more to it than 'JC would be bad for the economy because that's what the Telegraph says'. I wonder what...

If 'everyone knows' that such and such would make the pound fall, then it becomes a self fulfilling prophecy - at least in the short term. Note that in all cases the impact was to short term instruments, gilt rates hardly budged.

Posted by lilBuddha (# 14333) on :

Good for the economy. What that means depends on how one looks at it. Short-term v. long term. Good for rich v. good for poor. The economy can do well whilst the average person is not.
I think you will find that investment firms were not employing amateur economists on the run up to the great recession.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Sarah G:
By 'ten sigma event', I assume you're referring to probability/statistical distribution mathematics to denote an event extremely unlikely to occur. If so, I'm not sure what your point would be here. Some unpacking would be helpful.

I presume the point is that in the last fifty years there have been ten crashes or other recessions that have been rated ten sigma events.

The point is that the equations used to assess the probability of crashes, recessions, etc, clearly underestimate the likeliness of such things and are therefore based on faulty assumptions. Fundamentally they model the movements of financial variables as being the outcome of lots of independent decisions whereas in fact they are responsive to each other.

quote:
My musing is that investment firms have very well paid economists on board who are being asked inter alia to predict the likely outcomes of Labour versus Tory governments to the health of the economy. These firms make money by getting it right. If they invest in sectors tied to the health of the UK economy, and it goes wrong, they lose money. Or make money if it goes right.

People in the past have paid astrologers a great deal of money to get it right.
The profit motive is not I think sufficient to rule out bias in other respects. I don't believe the salaries of managing directors are really in line with their contributions to the success of the companies they manage. In this case, investment firms might be biased towards hiring economists that favour economic models that flatter investment firms.

The test is not to ask whether the well paid economists are well paid, but to ask to what extent the pay of the economists correlates with their future success in prediction.

The other thing to note is that the financial markets are not reacting solely to the probable future of the economy but also to perceptions of the probable future of the economy.

The stock markets rose in response to Trump's inauguration. I'm not convinced that's a sign that Trump will be good for the economy.

Posted by Crœsos (# 238) on :

quote:
Originally posted by Dafyd:
The stock markets rose in response to Trump's inauguration. I'm not convinced that's a sign that Trump will be good for the economy.

Virtually all of that rise (at least in the American markets) was in stocks in financial services companies. I'd guess they were optimistic that a lot of Obama-era regulations were about to be reversed. This may be good for the bottom line of financial services companies, will almost certainly be good for the bonuses of high-level finance executives, but is unlikely to be beneficial to "the economy" in the long run.

Posted by Leorning Cniht (# 17564) on :

quote:
Originally posted by Sarah G:
By 'ten sigma event', I assume you're referring to probability/statistical distribution mathematics to denote an event extremely unlikely to occur. If so, I'm not sure what your point would be here. Some unpacking would be helpful.

Everybody starts by assuming that things are distributed with a Normal (Gaussian) distribution. So you expect to fall within one sigma of the mean 68% of the time, within two sigma 95% of the time, and so on.

"Ten Sigma" events happen one time in 10^23 (one time in one hundred sextillion) - or at least, they do if you assume a Normal distribution.

In reality, it's very hard indeed to estimate the shape of the tail of the distribution, but almost any reasonable assumption tells you that tails are significantly larger than the Normal distribution, and so incredibly rare "ten sigma" events aren't actually quite as rare as that. But it's still very very hard indeed to predict exactly how rare they are.

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Dafyd:
I presume the point is that in the last fifty years there have been ten crashes or other recessions that have been rated ten sigma events.
The point is that the equations used to assess the probability of crashes, recessions, etc, clearly underestimate the likeliness of such things and are therefore based on faulty assumptions.

That strange things happen doesn't alter the fundamental point that these highly paid ecomists are saying that JC will very probably be bad for the economy.

quote:
The test is not to ask whether the well paid economists are well paid, but to ask to what extent the pay of the economists correlates with their future success in prediction.

Rather well, I would think. If you keep getting it wrong, you're going to be out of a job; if you regularly get it right, you get a better paid one.

quote:
The other thing to note is that the financial markets are not reacting solely to the probable future of the economy but also to perceptions of the probable future of the economy.

But surely that would work in reverse. If you're an investment firm whose economists are saying that actually JC would be good for the economy, you start buying UK stock regardless of what everyone else is doing; in fact as it gets cheaper, because everyone else is selling it cheap in error.

I would still be interested to know what the economic grounds are, on which the advice about JC being bad for the economy is being given by some very clever economists.

Posted by Jane R (# 331) on :

Economists are human too, and have political views, and are therefore subject to confirmation bias just like everyone else.

Posted by Sioni Sais (# 5713) on :

quote:
Originally posted by Sarah G:

I would still be interested to know what the economic grounds are, on which the advice about JC being bad for the economy is being given by some very clever economists.

In that case you had better ask economists rather than politicians, economics commentators in the media and Shippies too, unless they are bona fide economists, and even then, you had better check the their standpoint, because IIRC economics is no more than a branch of statistics developed to justify policies. Everyone has an axe to grind in this game.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Sarah G:

quote:
Originally posted by Dafyd:
I presume the point is that in the last fifty years there have been ten crashes or other recessions that have been rated ten sigma events.
The point is that the equations used to assess the probability of crashes, recessions, etc, clearly underestimate the likeliness of such things and are therefore based on faulty assumptions.
That strange things happen doesn't alter the fundamental point that these highly paid ecomists are saying that JC will very probably be bad for the economy.

They are strange things that these highly paid economists who are highly paid to predict such things didn't predict. And they're not out of a job despite not having predicted them.

quote:

quote:
The test is not to ask whether the well paid economists are well paid, but to ask to what extent the pay of the economists correlates with their future success in prediction.
Rather well, I would think. If you keep getting it wrong, you're going to be out of a job; if you regularly get it right, you get a better paid one.

That may be how it works in theory. Is it how it works in practice?
If you are the only person in your profession who gets things disastrously wrong then you'd be out of a job. If everyone in your profession regularly gets it wrong then they're not going to sack everybody.
It wouldn't be the only profession in which people regularly employ people who've a history of getting things wrong. Astrologers. Pollsters. We keep hearing that nobody believes pre-election polls any more, shortly before new polls get published.

quote:

quote:
The other thing to note is that the financial markets are not reacting solely to the probable future of the economy but also to perceptions of the probable future of the economy.
But surely that would work in reverse. If you're an investment firm whose economists are saying that actually JC would be good for the economy, you start buying UK stock regardless of what everyone else is doing; in fact as it gets cheaper, because everyone else is selling it cheap in error.

If you're working in the short term then what you do is try to do what you think everyone else will do before they do it.
If everyone else is offloading stocks then in the short term you try to offload yours first.

quote:
I would still be interested to know what the economic grounds are, on which the advice about JC being bad for the economy is being given by some very clever economists.

As I understand it, there's a general economic dogma that the existence of the public sector is bad for the economy, that it constitutes interference in the market and that interference is bad as such.
There's I suppose a general perception that the economy isn't Corbyn's focus of interest. It's probably true that even if the economy as a whole gets larger the relative slice of the economy held by the people employing these economists might get smaller and this looks like the economy getting smaller from that perspective. Corbyn's not a known quantity and unknown quantities make economists nervous.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Sarah G:
That strange things happen doesn't alter the fundamental point that these highly paid ecomists are saying that JC will very probably be bad for the economy.

What those 'strange things' happening points to is that in general city economists are very bad at long term predictions, spotting bubbles and correctly gauging risk. This is partly because of group-think, and partly because the inevitable position they are placed in of 'speaking truth' to their own paymasters mean that they self select for certain viewpoints.

quote:

Rather well, I would think. If you keep getting it wrong, you're going to be out of a job; if you regularly get it right, you get a better paid one.

The point is - going back to the tail risk example - there are certain investment strategies that can make steady returns for long periods of time, until the inaccurately gauged risk wipes them out. Writing credit default swaps was seen to be an easy way of making steady money - until it suddenly wasn't (because a 'ten sigma' event happened), buying credit default swaps was seen as the kind of thing cranks and fools did, until they were suddenly proved to be wise after the event.

quote:

But surely that would work in reverse. If you're an investment firm whose economists are saying that actually JC would be good for the economy, you start buying UK stock regardless of what everyone else is doing; in fact as it gets cheaper, because everyone else is selling it cheap in error.

Not really. If you are at a big bank it's far better to go with the herd than face the inevitable questions about why your unit isn't performing like that of your peers, and why you aren't getting on board the new hot strategy.

Banks for the most part don't make money on just straight forward bets on 'economic growth' [*], but out of leverage and volatility. Additionally, the banking sector in general is full of people who buy into the ideology of 'government bad, market good', so it's not hard to see that they'd only happily support a very narrow range of economic options that may or may not be good for the country as a whole.

Posted by alienfromzog (# 5327) on :

It's really important here to separate out City Economists from Academic Economists ; they are really not the same thing.

The job of a City Economist is simply to make money for the investment fund/bank/etc... What is good for the city is not the same as what is good for the economy at large. Sometimes the interests coincide, sometimes they don't. An academic economist will be someone who researches and publishes in peer-reviewed journals. A city economist usually doesn't have any research experience in economics and advises companies on investment opportunities.

As far as I can see, there are no Academic Economists saying Corbyn would be bad for the economy. Quite the opposite in fact.

On my Facebook memory feed today was this video, I posted 2 years ago.
Oxford Said Business School Lecture 8th June 2015

If you have the time, it's well worth it. Professor Sir David Hendry's talk on economic choices in response to climate change is really interesting. It's from this lecture that I quote Martin Wolf (hardly a lefty): "My basic view is that the British economy is in an appalling shape...[here is] what a government might do if it was run by sane people but it isn't..."

AFZ

Posted by anteater (# 11435) on :

I have now got to, but not finished, Blyth's analysis of modern views of austerity, particularly those championed by Italians of the Boccone school in Milan, which I had never heard of previously but is apparently very influential.

It was started by former President Luigi Einaudi (he with the famous musical grandson) and it's current standard bearer is Alberto Alesina, currently at Harvard. Mario Monte was from this School. And I don't understand it fully but since it chimes in with one prejudice I have, it naturally interests me. You always like it when your prejudices get a bit of intellectual support.

So, under the name of Public Choice Theory, the idea is that the problem with state intervention a la Keynes, is that when the economy is governed by politicians who like to get re-elected, they don't always take the actions that are needed if that means they will become unpopular. How could Italians think this, you may ask?

Well it can't be always true, because I remember the days of Schroeder who steered the German economy through a difficult time and got booted out for his trouble. But it makes sense.

Even Murphy knows that after government action to get the economy going, you must at some time have government action to damp it down. Or big inflation. And even Murphy sees the problem which is why he advocates monetary policy as a dampener, not higher taxes, which don't look could in election manifestos. But you have to do something.

But anything is going to be unpopular. And so, guess what? It tends not to get done. This is why, the founding of the EU was very much on the basis that the economy had to be steered by technocrats who are not subject to elections and so are more likely to do the right thing.

So this may be the problem with the money tree. If your Government was really good, then Keynesian economics can work. But we are at a time of low confidence in government, and that is why Government programs to boost the economy are viewed with distrust.

I'm not say, btw, that Blyth agrees with all of this, but he presents it well. I've not got to the rebuttal yet.

Posted by Russ (# 120) on :

quote:
Originally posted by anteater:
Even Murphy knows that after government action to get the economy going, you must at some time have government action to damp it down. Or big inflation...

...So this may be the problem with the money tree. If your Government was really good, then Keynesian economics can work. But we are at a time of low confidence in government, and that is why Government programs to boost the economy are viewed with distrust.

I'm struggling with the similarities and differences between Keynesian economics and "magic money tree" or "voodoo" economics.

Seems to me that Keynes advocated Govt running a deficit in the low part of the economic cycle and a surplus in the high part, and that both halves are beneficial. The deficit to be financed by borrowing (from within the economy ? - government bonds), repaid from extra taxes or spending cuts that generate the surplus. The deficit/surplus doesn't need to be as big as you might think because of multiplier effects.

That all sounds plausible.

Where it gets "voodoo" is the claim that "the debt will take care of itself" - that the multipliers are big enough that borrowing (from outside the country ?) automatically generate the surplus to pay back the debt so government never needs to cut spending or raise taxes. Regardless of what government spends the money on...

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Russ:
Where it gets "voodoo" is the claim that "the debt will take care of itself" - that the multipliers are big enough that borrowing (from outside the country ?) automatically generate the surplus to pay back the debt so government never needs to cut spending or raise taxes. Regardless of what government spends the money on...

The theory goes like this: The government spends the money on digging pits and filling them in again. The excavators, who wouldn't otherwise be working, knock off after a hard day's pointless work and go and spend the money on beer. So they don't have the money any more. Now, the government gets some of the money back as duty and VAT. The rest of the money goes to the pub owner. After she's paid her staff and suppliers she uses the additional profit to buy a cake for her children's birthday party. That money goes to the baker. The baker uses the money etc etc. Meanwhile, the beermaker passes the money back down the chain to the farmer and the farmer uses it to sow that extra field.
At several points the money passes through transactions which the government taxes. Eventually it all comes back to the government one way or another. But in the meantime, the digger has got some beer, the pub owner has got a birthday cake, the farmer has sown an extra field, and the baker and the pub staff and so on and so on have all got extra things that they want. In addition, because all of those extra things are being made there is now an extra job available in the economy to make those things. The farmer hires the original digger to work the field.

Two points to note.
Firstly, this is all economic activity that wouldn't have happened if the government weren't spending the money. That's why Keynes thinks governments should only deficit spend in recessions because Keynes thinks that what happens in recessions is that the economy has spare capacity that isn't being used. People who would like to work are out of work. If everyone is already doing economically productive work then there's no point in the government spending anything.

Secondly, if the government taxes too many transactions the effect is limited. The government wants to keep things like duty and VAT low. On the other hand, if the money gets into the hand of someone who is saving money and that person saves it - puts in under their mattress or invests in some other high liquidity activity - then the money gets lost. The government wants to tax the money when it gets into the hands of people with money to save.

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Dafyd:

They are strange things that these highly paid economists who are highly paid to predict such things didn't predict. And they're not out of a job despite not having predicted them.

No, these 10 σ events are by definition the sorts of events that no-one could have reasonably predicted, and if regular advice had been given to assume them, would have proved wrong very very nearly all the time. Therefore silly advice, and you lose your job.

quote:
That may be how it works in theory. Is it how it works in practice?
If you are the only person in your profession who gets things disastrously wrong then you'd be out of a job. If everyone in your profession regularly gets it wrong then they're not going to sack everybody.

Even if this were correct, if it were obvious to all these clever people that Corbyn's economic policies were going to benefit the UK economy, they would all go with that. They're not. They're going the other way.

quote:
If you're working in the short term then what you do is try to do what you think everyone else will do before they do it.
If everyone else is offloading stocks then in the short term you try to offload yours first.

No, you play the long term game (The Dukes strategy in Trading Places!). You watch everyone else sell while you buy, and then make a killing when the price goes up.

quote:
As I understand it, there's a general economic dogma that the existence of the public sector is bad for the economy, that it constitutes interference in the market and that interference is bad as such.

Everyone sees the need for a public sector.

JC has been very clear that he intends to do the sorts of things that require money, hence the existence of this thread. The economists don't seem to think it's a good economic plan.

Posted by Sarah G (# 11669) on :

quote:
Originally posted by Sioni Sais:
In that case you had better ask economists rather than politicians, economics commentators in the media and Shippies too, unless they are bona fide economists, and even then, you had better check the their standpoint, because IIRC economics is no more than a branch of statistics developed to justify policies. Everyone has an axe to grind in this game.

I think you're right about where to ask. This is very much an argument with two sides. No-one has popped up to argue the other side. No-one seems to know what the other side is. Indeed, people seem to be denying that another side exists.

So we have all these highly intelligent, highly trained economists with firsts from Oxbridge. They're working in a ruthless environment where getting it right is everything. And they are all simply ignoring an obviously correct economic strategy on the grounds it's not what some other people think?

Sorry I don't buy that for one minute. They have their reasons, and I would think very good ones.

I do hope that the Labour economic team has a better idea of the potential problems with their strategy, but I worry they do not. Which sends me to what Enoch and PaulTH said on the first page; the UK may have yet to rerun the awful economy of the Sixties and Seventies.

From what they say, that's not going to be fun. The most vulnerable, as always, will hurt the most.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Sarah G:
No, these 10 σ events are by definition the sorts of events that no-one could have reasonably predicted

No. Plenty of people who - if they were in finance at all - were at hedge funds predicted these things in each case, and had repeatedly pointed out that the risk models being used were incorrect.

Nevertheless your phrasing reveals why 'mainstream city economists' continued to buy into that group think in the use of the word 'reasonably', after all if everyone blows up at the same time you can justifiably point out to your managers that no one could have reasonably predicted the crisis.

quote:
Even if this were correct, if it were obvious to all these clever people that Corbyn's economic policies were going to benefit the UK economy, they would all go with that. They're not. They're going the other way.

Or it would require a paradigm shift to make work - or the people who think they could make money off such a change are keeping quiet (in the manner of Goldman Sachs late in 2006).

Your arguments - ad naseaum - seem to amount to little more than the repeated claim that as those in the city are earning large amounts because of their 'cleverness' and ability to competently predict the macro-economy, do you have any rational basis for such a claim? Specifically, in order to do so you have to ignore the counter-claims of academic economists.

I just want to point out that in the main the people you laud work for an industry that just blew up on a massive scale and had to be bailed out by the tax payer. I personally would be disinclined to take advice from a bunch of failed gamblers.

Or in other words you are trying to argue the George Parr view here:

https://www.youtube.com/watch?v=mzJmTCYmo9g

Posted by chris stiles (# 12641) on :

quote:
Originally posted by Sarah G:

Sorry I don't buy that for one minute. They have their reasons, and I would think very good ones.

Their reasons are that their 'models tell them so' - they have a habit of coming up with models that miscalculate risk though.

At one point borrowing on the overnight market to lend out for 25 year mortgages was seen to be a sound, risk-less way to make lots of money.

I imagine that there quite a few people who retired midway to eventual blow up whose natural over-confidence has now been boosted by the thought that they had an inkling that the crisis was coming.

Bankers exist - strictly - to make money for their institution - I don't know why you would assume they would have competences beyond that.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Sarah G:
JC has been very clear that he intends to do the sorts of things that require money, hence the existence of this thread. The economists don't seem to think it's a good economic plan.

This is simply not true.

Please find and link to an economist who says this.

I want to be clear, I am not asking for a city economist but an academic economist who argues your point.

The point is, there isn't really two sides to this, not in mainstream macroeconomics.

I will offer you:
Paul Krugman (Nobel Prize winner)
Joseph Stiglitz (Nobel Prize winner)
Simon Wren-Lewis (Oxford Professor)
Mark Blyth (Professor of International Political Economy)
Martin Wolf (OK, so technically he's not an academic economist as he hasn't got a body of his own research to point to but I like the way he presents his analysis...)

AFZ

Posted by Doc Tor (# 9748) on :

quote:
Originally posted by Sarah G:
They have their reasons, and I would think very good ones.

Roughly £1trn of public money. That's an awful lot of good reasons.

Posted by alienfromzog (# 5327) on :

I'd forgotten this quote but it's so appropriate here: Sinclair Upton,
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

AFZ

Posted by anteater (# 11435) on :

Sarah G:

quote:
No, these 10 σ events are by definition the sorts of events that no-one could have reasonably predicted, and if regular advice had been given to assume them, would have proved wrong very very nearly all the time.

I can't let that one pass as an excuse, even if I haven't got a PhD in statistics (maybe you have - but I bet I could pass 11+).

The point is, we haven't had a lot of 10-sigma events happening. What we had is events wrongly classified as 10-sigma when they were nothing of the sort.

As previously stated somewhere, the whole 6-sigma (and 10 sigma) mantra is based on the Normal (Gaussian) distribution, but has become a lazy way of estimating probabilities when there was no reason at all to suppose they followed a Normal curve. We used to do this all the time in Software and Telecommunication. What is the 95%-ile packet delay across a network. Well the distribution is certainly nothing like Gaussian and we all knew that. For a start it was Bi-polar and nobody could analyse it. So to give a figure to management we just say what it would have been if it had been Gaussian which we knew full well it wasn't, because Management demanded a Janet'n'John level analysis.

Which is what happened in Finance. And I have no doubt that any Economist who was not dumb knew full well that there was no evidence to justify using the Gaussian curve, which assumes independence of events - like Mortgage defaults and Bank balance sheets are independent. Yeah - right.

Posted by anteater (# 11435) on :

AlianFromZog:

quote:
The point is, there isn't really two sides to this, not in mainstream macroeconomics.

I will offer you:
Paul Krugman (Nobel Prize winner)
Joseph Stiglitz (Nobel Prize winner)
Simon Wren-Lewis (Oxford Professor)
Mark Blyth (Professor of International Political Economy)
Martin Wolf

Well as Krugman said in a recent interview, there's everybody else and then there's Alberto Alesina.

Summarizing the next bit of Blyth's book, he sadly does not engage a lot with the public choice theorists, but does devote a lot of time to the Expansionary Austerity ideas coming mainly from Alesina who has had huge influence within the corridors of Ecofin and the EU in general.

His idea, backed by several other (always Italian - it seems) economists is that there is such a thing as Expansionary Austerity (or Contraction) which is basically that a Country can get out of a recession by Austerity, and this should be by spending reductions, not by tax rises, and works because Rational People (that semi-mythical beast) see that the government is "getting out of the way" of private initiative (i.e. not getting the best to work for them) and is balancing the books and so the future is rosy and people invest and get the economy off the floor. Georgie O. was obviously a huge fan.

So imagine, you politically like the idea of a small state because you believe public employees are muppets and private businessmen are brilliant, and along comes a group of economists (Alesina at Harward and others) who say the best way for recovery is to shrink the state. Add to that, all the Best Minds in the EU are convinced and you have it.

Makes you wonder why lefties like Corbyn support the EU. Oh, I forgot. He doesn't, really.

Now, Alesina and his colleague did put together an impressive list of countries and events that they would say prove their point. Denmark and Ireland in the 1980's, Australia and Canada, and more recently the REBLLs (the mirror image of the PIIGS - Romania Bulgaria and the three baltic states).

Unfortunately, analysing the original documents is time consuming and beyond most people's capability, and this part of Blyth's book is the least easy read. The usual suspects think Alesina is basically off his head (Paul Krugman calls his idea the Confidence Fairy).

The main negative for Alesina is that the IMF after initially being enthusiastic have distanced themselves. But I think the EU still gives it a lot of cred, although Draghi is not a Bocconi alumnus so may not.

To me the whole idea of this Confidence Fairy is so counter intuitive that I would need overwhelming proof, which isn't there.

But it is not true that no academic economists favour austerity. They have little clout in the US but a lot in the EU.

[ 26. June 2017, 08:20: Message edited by: anteater ]

Posted by alienfromzog (# 5327) on :

That's a reasonable summary Anteater.

My point remains, that whilst there is this minority position in economics (in all academic disciplines, minority positions should not be silenced), the idea that economics is against Corbyn et al. is simply not true. Quite the opposite in fact.

There are some important cultural factors in the EU, I think. I can't remember if it's Blyth or Krugman or Stiglitz, or even Wren-Lewis where I've read about how separate German economic academics are from the rest of the world and how this thinking dominates the EU because Germany dominates the Euro.

If you have the time, do watch the video I linked to, it's really well presented.

It comes back to what I said before; magic money tree is an excellent soundbite and terrible economics. The pubic sector is not a parasite on the back of the economy but a major and vital part of it.

Clearly this is true in terms of public goods that the private sector and market would never support. Moreover, the evidence from Keynes to Stiglitz to Krugman etc. etc. is that this is true in pure economic terms as well.

Unfortunately, in the 'defeat of communism' of the 1980s/90s, the myth that there is only unfettered capitalism or communism and nothing in between has been born. And the key point here is that the evidence shows that the government is a key agent in the economy and there are choices about how we build our economy and how we frame our markets. Stiglitz is really big on this point - markets are not natural phenomena but shaped by the rules we place on them.

AFZ

Posted by Alan Cresswell (# 31) on :

quote:
Originally posted by anteater:
Sarah G:
quote:
No, these 10 σ events are by definition the sorts of events that no-one could have reasonably predicted, and if regular advice had been given to assume them, would have proved wrong very very nearly all the time.
I can't let that one pass as an excuse, even if I haven't got a PhD in statistics (maybe you have - but I bet I could pass 11+).

The point is, we haven't had a lot of 10-sigma events happening. What we had is events wrongly classified as 10-sigma when they were nothing of the sort.

As previously stated somewhere, the whole 6-sigma (and 10 sigma) mantra is based on the Normal (Gaussian) distribution, but has become a lazy way of estimating probabilities when there was no reason at all to suppose they followed a Normal curve.

What is more, if those so-called "10 sigma events" were all economic downturns then it clearly isn't a normal distribution - if it was there would be a corresponding number of extremely unlikely economic booms.

Posted by Doc Tor (# 9748) on :

Looks like the DUP have found the magic money tree. Someone should give them a call and ask them where it is.

Posted by Sioni Sais (# 5713) on :

quote:
Originally posted by Doc Tor:
Looks like the DUP have found the magic money tree. Someone should give them a call and ask them where it is.

With their solid Biblical background they may realise it is equivalent to the "Thirty pieces of silver".

Posted by quetzalcoatl (# 16740) on :

Well, the Tories cleverly didn't cost their manifesto. So a billion pounds is neither here nor there. It's not a money tree, just a rounding error.

Posted by anteater (# 11435) on :

So the final related issue I'd like to raise here is Public Interest Theory, and it is disappointing that Blyth makes no real analysis of this, because it appeals to common sense, and let's be honest - to cynicism about politicians.

Basically what it says is that a lot of economic theory, particularly Keynesianism, seems to assume that whilst the investors and consumers are motivated by personal maximisation of resources, somehow the public servants who control economic policy are corruption-free and do "what is right".

This is behind the design of the EU with it's supranational bodies of technocrats who are not subject to the corrupting effects of needing to be elected, and therefore are "above all that", the whole resignation of the Commission in the wake of corruption at the time of Santer, and the fact that its accounts are not audited and everybody known corruption is endemic, notwithstanding.

So Public Choice theory is saying that Government Officials and Politicians are no better than anyone else. Some will be relatively straight (mainly it seems where the weather is cold) and others will be where the weather is hot (i.e. the garlic belt).

Which may be why one of the earliest proponents was (yet) another Italian (Puviani) who coined the term "Fiscal Illusion" to describe how Governments will attempt to persuade people that there taxes are not as onerous as they look when compared to be benefits they receive. Basically by sleight of hand.

And of relevance to the current debate, deficit financing is seen as a subtype of fiscal illusion because what it does it give benefits which will be paid by future generations, and this is precisely one of the charges most often levelled against deficit spenders.

So Corbyn's manifesto is very re-assuring, because he wants to get into power. So nobody earning less than £80k will be taxed more, and you'll get all these benefits. How? By increasing public debt which will be paid for by future generations.

Of course, we could also include devaluation of the currency, and to be fair this does move resources from the rich to the poor to a reasonable extent. But it's still a con.

And of course, if the US had been constrained to finance its wars by current taxation, they never would have happened.

Which is why Corbyn's greatest USP is his apparent saintliness, and one has to credit him in this respect. It's not nothing to have been consistently the least expensive MP. He may indeed be uncorruptible.

But are there many others?

Posted by Doc Tor (# 9748) on :

Kicking debt into the long grass is a perfectly reasonable way of dealing with it.

1850: Here, my good man, a crisp £1 note the size of a pocket handkerchief for you. Go seek your fortune!

2017: A pint costs how much?

Posted by Sioni Sais (# 5713) on :

Someone else has shaken the Magic Money Tree.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Doc Tor:
Kicking debt into the long grass is a perfectly reasonable way of dealing with it.

1850: Here, my good man, a crisp £1 note the size of a pocket handkerchief for you. Go seek your fortune!

2017: A pint costs how much?

Yep.

The point is that all other things being equal, of course you should reduce the debt. (Like Brown did in 2001 with the revenue from 3G licences). However if the cost of reducing the debt is greater than the savings (and at this point in time, it's several orders of magnitude greater) then it's a really stupid thing to do. Especially when real interest rates are negative. (In real terms, people who buy government bonds are paying us to look after their money). In the video I linked to, Martin Wolf says that the UK doesn't really have any debt (in historic terms). He's using hyperbole but he says that with a chart of UK national debt to GDP going back to 1690, so it's certainly got perspective - the debt levels are not record or extraordinary or any other flowery adjective you may wish to use...

AFZ

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Doc Tor:
Kicking debt into the long grass is a perfectly reasonable way of dealing with it.

If the government wants people to lend them money it wants to do so in such a way that they get their money back with interest. For each individual lender it needs to repay the loan before it becomes valueless. That doesn't mean it needs to clear its entire debts: the government can take out new loans.

For many governments, including the UK, the reason for lending to them is that you're sure to get your money back and because they have a large volume of money loaned out they're reasonably relaxed about giving you your money back when you want it. So the UK doesn't need to offer any kind of onerous interest rate.
(It was even less onerous before Osborne got into power. Remember how Osborne originally made it a priority to keep the UK's AAA lending rate?)

Posted by anteater (# 11435) on :

If the Tories had half a brain . . .

They would row back on austerity, hire more police, put more money into the NHS and all these good things, pushing up borrowing in the hope of stealing Labour's clothes.

They could also make it harder for Labour to maintain the middle-class incentive on university fees, by ensuring that there would be "no money left".

And it would all be for the good of the country.

Who knows? Apparently they are "considering the public sector pay cap". Why wouldn't they? Surely they can see that if they are going to continue with Austerity which anyway was a policy of George [Devil]

Osborne, they'll lose.

Why not?

[ 28. June 2017, 16:15: Message edited by: anteater ]

Posted by quetzalcoatl (# 16740) on :

I suppose they have to adapt to Corbyn, without seeming to, and meanwhile, slagging him off as likely to bankrupt the country, and anyway, he's still a Trot.

Posted by chris stiles (# 12641) on :

quote:
Originally posted by anteater:
If the Tories had half a brain . . .

They would row back on austerity, hire more police, put more money into the NHS and all these good things, pushing up borrowing in the hope of stealing Labour's clothes.

...

Why not?

Possibly. OTOH it's also that the particular electoral coalition that they have assembled doesn't give them the room to manoeuvre in this way.

The core of their base are older people who have been hit over the head with the austerity message (and the narrative that they worked really hard to get where they did, whereas the feckless young did not). They need to continue to get them out to vote, because even when they do they have only got fairly narrow majorities.

Posted by Russ (# 120) on :

quote:
Originally posted by Dafyd:
The theory goes like this...

At several points the money passes through transactions which the government taxes. Eventually it all comes back to the government one way or another. But in the meantime...

...because all of those extra things are being made there is now an extra job available in the economy to make those things...

That's why Keynes thinks governments should only deficit spend in recessions because Keynes thinks that what happens in recessions is that the economy has spare capacity that isn't being used. People who would like to work are out of work. If everyone is already doing economically productive work then there's no point in the government spending anything...

... if the money gets into the hand of someone who is saving money and that person saves it - puts in under their mattress or invests in some other high liquidity activity - then the money gets lost. The government wants to tax the money when it gets into the hands of people with money to save.

The argument about the borrowed money coming back to the government doesn't seem to depend on there being a recession.

You're right that this doesn't happen if people put it under the mattress.

They may also buy imported goods. Or buy any goods/services that are subsidised by the government

Posted by Jay-Emm (# 11411) on :

quote:
Originally posted by Russ:

They may also buy imported goods. Or buy any goods/services that are subsidised by the government [/QB]

That ones not such as problem (the import and mattress cases are, although both are less likely for the poorer).
It only adds an extra link on the chain, with money going in and out. Which side of the chain you need to focus depends on the item.

___(case 1 fixed cost subsidy)
If it's something that the government is subsidising at near fixed costs (e.g. a half empty bus line) then the money they're giving to the people (who then pay) can be taken off the subsidy.

Of course if the government ignore the change, and that they've added that link, then there's trouble. And you'd probably need to allow some room for error. [So in our bus example there be expected to be some 'loss' to the more, now successful, lines. Which would have complicated effects, because otherwise there'd be no incentive.]

____(case 2, unit costs)

If it's something the government is subsidising at unit costs, Then it's a bit more complicated.
You basically have to chose whether to cut the subsidy letting the price rise till demand is back at the same (which is then a bit unfair on the people who were using it before).

Or you have to pay extra staff and costs, in which case you have to look at what of these comes back (I.E if it means hiring someone who would otherwise be on the dole, you can instantly discount Income Tax, NIC Tax, and the dole amount). But of course some will be 'lost'

Even there the subsidy exists for a reason, so the lost money may come back in the long run (e.g. if they buy subsidised oranges and hence save on scurvy drugs*)

*of course then they need to do something with the chemists they were indirectly supporting.

[ 29. June 2017, 07:11: Message edited by: Jay-Emm ]

Posted by Rocinante (# 18541) on :

ISTM that government debt is in a completely different category to household debt, for the simple reason that governments never retire. In the average nuclear-family type household, the main wage-earners will wish to retire at some point, for which they need to have paid off their major debts (notably mortgage) in order to be able to make ends meet on a reduced income (pension).

Governments do not face the same need to pay off their debts, as they will continue in the same form, barring changes of political slant, effectively forever, and will always have income from taxation with which to service debt. Indeed I gather that for a nation which, like the UK, runs a substantial trade deficit, it would be a very bad idea to pay off all our debts as government borrowing is one way of recycling money back into the economy. (The other main way is personal debt, now regarded as A Bad Thing)

At the moment the effective interest rate on government debt is less than zero, and debt is not at a particularly high level by historical standards, therefore there is no particular urgency to pay it down.

I'm sure Phillip Hammond is well aware of this, and given Theresa May's well-known contempt for George Osborne she will have no qualms about throwing his policies into reverse. I would not be surprised if Austerity is comprehensively dumped in the next couple of years. However this is a Tory government, so any largesse will probably be directed at pensioners and the middle classes, with a few baubles for the Police and other "respectable" public servants. The poor will always be with us.

Posted by Martin60 (# 368) on :

quote:
Originally posted by Sioni Sais:
Someone else has shaken the Magic Money Tree.

You think HM has for decades if ever do you? And she benefits how exactly?

Posted by Sioni Sais (# 5713) on :

quote:
Originally posted by Martin60:

quote:
Originally posted by Sioni Sais:
Someone else has shaken the Magic Money Tree.
You think HM has for decades if ever do you? And she benefits how exactly?

Put it this way: The Crown Estates pass a stack of cash to HM Treasury and when HMTQ wants a larger than usual slice, the Treasury pays up. OTOH I work for a fairly profitable part of the Civil Service and we also pass a sum to the Treasury. Do we get extra when we happen to need extra, such as when the economy takes a nosedive? No, we do not. 80 redundancies, pay restraint, all the usual. At least our CEO fell on his sword.

Posted by Martin60 (# 368) on :

I'm surprised. Government spending during a nosedive is the most profitable thing you can do.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Russ:
The argument about the borrowed money coming back to the government doesn't seem to depend on there being a recession.

The money comes back to the government. But it would have come to the government anyway even if the government hadn't spent anything.
The distinction is between an economy in which the only people looking for work are the the usual people between jobs or entering the job market - who all have some prospect of finding a job, and an economy in which there are people looking for work with no prospect of getting any. In the first case, any money the government spends is taking up economic capacity that would be used anyway. It may be worth doing that anyway if the government is using that capacity for something more socially constructive than it would be used for otherwise. But there's no benefit to the economy as such. In the second case, where there are people who are not getting work, there is an economic benefit to government spending even if the government spends the money on something with no constructive purpose.

Posted by Baptist Trainfan (# 15128) on :

A topical take on this theme: here.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by Baptist Trainfan:
A topical take on this theme: here.

I sometimes feel Matt doesn't belong in the Torygraph. But only sometimes.

AFZ

Posted by anteater (# 11435) on :

I'd like to include in this thread, the issue of blatant lies that get accepted and then influence public opinion because they become accepted facts, although they are total BS. For instance: Ungorgeous George claimed that cutting top-rate tax from 50% to 45% caused a tax revenue increase of £7-8bn in the next tax year "proving" that cutting tax can raise revenue.

And it is true that the tax was cut and the revenue did rise. Point proven? Err . . no.

Well I got all this (because I suspected a porky here) from fullfact.org who refer to the blog from tax barrister Jolyon Maugham whose blog entry is here (in case you thought I worked it all out). The essence is:

quote:
As Osborne well knows, if you tell people in March 2012 that you’re going to cut their tax bill by a tenth (from 50% to 45%) in a year’s time, people will choose to delay payment until April 2013 when their bills will be lower. And they did. . .
In other words, tax receipts were artificially low in 2012-13 (because people delayed receiving income until rates fell) and were artificially high in 2013-14 (when those delayed receipts were received). Combine those two numbers and you may well explain your £7bn jump . . .
Osborne could have taken measures to prevent these delaying tactics – which remember only benefited those earning over £150,000 per annum – but he didn’t.

And this cost the country £2.4bn in 2012-13

Personally I find this quite discouraging. Because I've repeated this BS and believed it. So people running the country and knowing the facts still lie without shame, and more depressingly, it isn't routinely exposed and held up to ridicule, as it should be.

No doubt there are more. Sigh. [brick wall]

[ 06. July 2017, 10:14: Message edited by: anteater ]

Posted by Sioni Sais (# 5713) on :

What you have described is just another example of economics, which is little more than the political branch of statistics.

Objective economists are about as common as objective football supporters.

Posted by alienfromzog (# 5327) on :

quote:
Originally posted by anteater:
I'd like to include in this thread, the issue of blatant lies that get accepted and then influence public opinion because they become accepted facts, although they are total BS. For instance: Ungorgeous George claimed that cutting top-rate tax from 50% to 45% caused a tax revenue increase of £7-8bn in the next tax year "proving" that cutting tax can raise revenue.

And it is true that the tax was cut and the revenue did rise. Point proven? Err . . no.

Well I got all this (because I suspected a porky here) from fullfact.org who refer to the blog from tax barrister Jolyon Maugham whose blog entry is here (in case you thought I worked it all out). The essence is:

quote:
As Osborne well knows, if you tell people in March 2012 that you’re going to cut their tax bill by a tenth (from 50% to 45%) in a year’s time, people will choose to delay payment until April 2013 when their bills will be lower. And they did. . .
In other words, tax receipts were artificially low in 2012-13 (because people delayed receiving income until rates fell) and were artificially high in 2013-14 (when those delayed receipts were received). Combine those two numbers and you may well explain your £7bn jump . . .
Osborne could have taken measures to prevent these delaying tactics – which remember only benefited those earning over £150,000 per annum – but he didn’t.

And this cost the country £2.4bn in 2012-13
Personally I find this quite discouraging. Because I've repeated this BS and believed it. So people running the country and knowing the facts still lie without shame, and more depressingly, it isn't routinely exposed and held up to ridicule, as it should be.

No doubt there are more. Sigh.

I think the problem here is not that politicians are mendacious as such. Even the ones with whom I strongly disagree, rarely would I accuse of this. However having watching people like Hunt and Gove and Osborne particularly, I think there are two specific problems:
1) they believe the end (in this case; small state=good) justifies the means and
2) never underestimate the ability of humans to lie to themselves.

Yes, the income tax revenue figures were fiddled. Either Osborne knows this and he's a liar or he doesn't and he's incompetent.

You pays your money and...

... the rich often don't

[Biased]

AFZ

P.s. politicians of all stripes are vulnerable to this weakness. Even when I agree with the ends, I don't always accept the means. Obviously if I disagree with the ends as well...

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