"A new economics"

"I've read everything ever written in economics, and I've decided it's all rubbish." John McDonnell probably didn't mean to say something this cranky, but it's one interpretation of his call for a "a new economics."

The thing is, Labour doesn't need new economics at all. For one thing, given that George Osborne is the anti-economics Chancellor, any economics at all would be an improvement.

And for another, pretty much everything substantive Mr McDonnell wants to say is consistent with old conventional economics. Anti-austerity is basic undergraduate economics. The case for a national investment bank is founded on the view that finance is dis-serving the economy - which is held by mainstream figures such as John Kay or Adair Turner. "People's QE" - the idea that the central bank should, if necessary, buy bonds issued by the state investment bank - is no more radical than the Federal Reserve's purchases of agency bonds. Concerns about under-investment can be rooted in the notion of secular stagnation proposed by Alvin Hansen in 1938* and revived by Larry Summers and Paul Krugman. And McDonnell's call for worker participation in management can be justified by Hayek's claim that centralized knowledge of complex systems is impossible and so there must be institutions for gathering dispersed information.

Mr McDonnell, therefore, has no need for "new economics". Some of the old economics is good enough to justify his policies. Which poses the question: why call for a "new economics"?

One possibility is that he's engaging in fake radical posturing of a sort that's too common on the left and is attacking a straw man - failing to see that there's a difference between economics and right-wing prejudices. Another explanation is that he is approaching the issue not from the perspective of an economist but from that of the Bubble which has perpetuated the illusion that there's some economic justification for what Osborne is doing.

Whatever the reason, Mr McDonnell is missing a big trick here. It is vitally important for any potential party of government to create the impression of economic competence. Labour should be kicking at an open door here: Osborne's policies have no basis in conventional economics and are failing even by their own dim standards. If, however, Mr McDonnell poses as a radical when he is not, he'll miss the chance to tell the truth - that it is Labour that is in many ways the party of mainstream economics and Osborne who is the crank.

* In fact, it's very similar to an even older idea - that of the stationary state, a theory held by most classical economists such as John Stuart Mill and his predecessors.

Comments

[Bob]

Mainstream economics - as in that which is actually taught, is based on lies for example the money multiplier.

I have looked at the alternative Labour are offering and it requires the same amount of the population unemployed as the Tories, is based on the same lies, will run into a massive supply side issue (just like they already have in Japan) and therefore won't do what they think it will do.

It's massively unimpressive because it plays away from home in Tory land.

Time to change the frame and explain to people how money works.

[SpinningHugo]

For good or I'll, given McDonnell's personal history, he has no prospect of persuading the voters Labour needs that he could be a competent economic manager. You can't see or hear him for all the baggage in the way.

New or orthodox. With an iPad or a free microwave. It doesn't matter whatsoever.

[Bob]

"competent economic manager."
An extremely vague term.

[Bob]

"Concerns about under-investment can be rooted in the notion of secular stagnation proposed by Alvin Hansen in 1938* and revived by Larry Summers and Paul Krugman."
It was proven to be BS in the decades that followed. The obsession with 'investment' by economists is silly. We need to increase capital investment but it is not the only thing we need to do:
http://www.3spoken.co.uk/2015/09/corbynomics-and-current-budget-balance.html
"The Keynes idea appears to come from a time before the Beveridge style welfare state was implemented and certainly before that evolved into a spending side auto-stabiliser system, but that 'fact change' doesn't appear to have dulled enthusiasm for the concept."

"The numbers come from the Public Sector Finance report from the UK's Office of National Statistics.

For the financial year 2014/15 the current budget deficit stood at £48,876mn. So that is the amount you have to generate from somewhere to get it to zero.

However before we do that it is useful to understand how you get that figure. What actually is the current budget deficit?

It is defined as:
Net Current Expenditure + Interest Paid + Depreciation - Current Receipts
so using the figures from 2014/15 (In £ mns) you get:
634,317 + 47,222 + 37,306 - 669,969
To get the current budget deficit to zero you have to conduct extra investment spending - which then gets taxed away at the tax take percentage (which is 1 - the saving percentage) creating the extra tax receipts to cover the current budget deficit. Effectively you move the deficit from the current budget to the capital budget.

There are a couple of things to note from this calculation.

The first is that the depreciation figure is a transfer from the capital budget and adds to the current deficit. The more investment you do, the bigger the depreciation figure gets which then means you have to do ever more investment spending every year to cover the growing current deficit.

The second is the interest paid figure which similarly adds to the current deficit. The more investment spending you do at interest the bigger this figure gets. The higher interest rate you pay the bigger this figure gets. And the bigger the figure gets, the more investment spending you have to do in subsequent years to clear the current deficit.

You can already see that there are two unfortunate positive feedback loops inherent within the calculations.

Net investment spending (Gross spending less depreciation) for 2014/15 was £30,328mn. If you express receipts as a percentage of total expenditure you find the tax take is 89.4%. So for every £100 spent, £89.40 came back as tax and £10.60 was held as financial savings.

The tax take percentage varies as the tax side auto stabilisers allow people to save. In the post crash era where people are generally saving it has been as low as 82%.

So to clear the current budget deficit at a conservative tax take of 80% you'd need to make £61,095mn of extra investment spending (i.e. the capital net spend needs to be three times what it currently is). That will vary up and down depending upon the actions of the automatic stabilisers. In 2009/2010 you would have needed £107,684mn of investment spending.

There is of course lots of talk within Corbynomics of closing tax gaps, changing rates and the like. All of that is largely distributional. If you take tax off one person, they can't then spend it with somebody else and you potentially deprive somebody of an income. Only where you defer or offset saving behaviour, somehow, is there an impact on the total tax take percentage. Really you're relying on the old balanced budget multiplier to work its magic - which likely isn't that effective in an open net importing economy like the UK.

There is, of course, no need to balance any budget, and doing so violates 'Lerner's Law'. "
Besides the complexity issues, balancing the current budget has clear issues:

* you are limited to fixed capital formation and capital transfers. So you can build universities and hospitals, but you can't staff them.
eventually you run out of stuff to build. This leads to the old Labour problem of building roads to nowhere just to keep 'investment' going.
* you neglect items because of the current budget restriction. The only effective investment a government can make is in its people. But that is all current spend and is therefore difficult to do.
* you have to raise taxes to make the books balance. Nobody likes tax rises. Raising taxes is far more unpopular than explaining that budget balances are not really significant. It seems strange to take a political hit on taxation when you don't need to.
* Fixed capital investment targets a small section of the country's supply chain. Only a small section of the population is engaged in building things. The UK is 80% service based and people are trained for services. So you are quickly going to run into supply side capacity constraints, and potentially start to limit other capital development in the private economy.
* the action of the auto-stabilisers pulls the current budget out of balance as a matter of design. If the economy contracts social security payments go up and tax take declines. You then have to do more investment spending to counter that. Yes there is more slack at that point, but is it the right sort of slack. Is the supply fungible enough?
* the more investment, the more depreciation and interest paid. That leads to a positive feedback spiral between the current budget deficit and the level of required investment (and is another reason why Gilt Issues are harmful)

Overall it seems a strange political choice, when you can easily get away from adjusting taxes and allow yourself more freedom to improve direct services (the National Education Service for example) with a functional finance approach. Simply explain that government is creating money so banks don't have to lend it. Government is stepping in so that ordinary people can save more and borrow less while at the same time ensuring everybody the private sector doesn't wish to hire has a job and an income. "

[Xavier Trapnel]

The actual political task is how to make the advice of Martin Wolf and Adair Turner seem comforting, competent and reassuring to people who have never heard of them and are rationally ignorant of economics. This is a problem about rhetoric not about policy. The Labour Party has currently sworn off rhetoric and is incapable of addressing the real task.

[Bob]

https://en.wikipedia.org/wiki/Adair_Turner,_Baron_Turner_of_Ecchinswell
"Jonathan Adair Turner, Baron Turner of Ecchinswell (born 5 October 1955) is a British businessman, academic, a member of the UK's Financial Policy Committee, and was Chairman of the Financial Services Authority until its abolition in March 2013. He is the former Chairman of the Pensions Commission and the Committee on Climate Change. He has described himself in a BBC HARDtalk interview with Stephen Sackur as a 'technocrat'."
Banker.

[Mustsign topost]

"centralized knowledge of complex systems is impossible and so there must be institutions for gathering dispersed information" and institutions for dispersing gathered knowledge?

[Theophrastus]

Bob

When anyone on the internet accuses someone else of being a liar or telling "lies", I switch off because I find such folk to be cranks and obsessives. Proving intention to deceive is difficult and usually irrelevant. It is sufficient to say that that x is untrue or false, rather than to cast aspersions on the moral integrity of whoever states x as true. Unless of course, you want to feel morally superior for some bizarre reason, such as virtue signalling.

[gastro george]

"One possibility is that he's engaging in fake radical posturing of a sort that's too common on the left and is attacking a straw man"

I wouldn't say that radical posturing is unique to the left. Isn't Gideon's deficit obsession also radical posturing and attacking a straw man?

[econbutt]

great post

how often does "I've read everything ever written in economics, and I've decided it's all rubbish" really signify "I am too lazy to read economics, but fully trust my impression that it's all rubbish"?

i've noticed a lot of heterodox/throw it all out and start again economists will claim "we heterodox need to know our mainstream economics even better than the orthodox in order to critique it" but will then go on to demonstrate a complete lack of understanding of mainstream economics. particularly, as you note, ignoring areas where mainstream economics would reinforce their positions!

[Bob]

"When anyone on the internet accuses someone else of being a liar or telling "lies", I switch off because I find such folk to be cranks and obsessives."
The money multiplier is lies. Banks don't lend reserves, loans create deposits. As shown by the BoE here:
http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx
Or are the BoE lying? Pretty crazy conspiracy you got there.

[Bob]

Can "mainstream economics" explain what has happened in Japan in the past few decades:
http://bilbo.economicoutlook.net/blog/?p=28918
"We also have a living laboratory to show that governments that issue their own currency do not have to issue debt to the private markets.
And,we are also being shown in real life, that inflation does not accelerate out of control if they do not issue debt to the private markets but rather the central bank buys the majority of the new issues up.
You cannot beat reality!
There was an article in the Economist Magazine (August 30, 2014) – Quantitative freezing – which considered recent developments in the Japanese bond market.
It noted that:
AS PART of its quest to end Japan’s 15-year-old deflationary torpor, the Bank of Japan is buying around 70% of all newly issued Japanese government bonds (JGBs).
The following graph shows the annual purchases of Japanese Government Bonds (JGBs) since the January 2005 to July 2014 by the Bank of Japan (blue line) and the Non-Government sector (red line). I didn’t plot the purchases made by Japanese government agencies.
There has been a dramatic increase since the beginning of 2013 in Bank of Japan purchases. In fact, the Bank of Japan purchases have exceeded the primary issue and run down the stock held by non-government sector wealth holders."
Why has there been no hyperinflation?

[Paul Walker]

"In fact, it's very similar to an even older idea - that of the stationary state, a theory held by most classical economists such as John Stuart Mill and his predecessors."

I would say no to this. Yes, the stationary state is in Mill's "The Principles of Political Economy" but it wasn't a concern for most of the classical school. The main concern for the classical economists, from Smith on wards, was growth, the very opposite of the stationary state.

[Bob]

"ignoring areas where mainstream economics would reinforce their positions!"
What the hell kind of argument is that?The search is for truth. Mostly right is mostly misleading.
"It is sufficient to say that that x is untrue or false, rather than to cast aspersions on the moral integrity of whoever states x as true. "
I'm sorry. Perhaps I can send you some flowers honey. Would that make you feel better?

[Bob]

"i've noticed a lot of heterodox/throw it all out and start again economists will claim "we heterodox need to know our mainstream economics even better than the orthodox in order to critique it" but will then go on to demonstrate a complete lack of understanding of mainstream economics. "
Yeah, well you are just a grad student with 6 followers who likes dumbing things down, so nobody cares what you think ;)
https://www.blogger.com/profile/10901506008348100808
https://mobile.twitter.com/econdumb
Piccy:
https://econdumb.files.wordpress.com/2015/07/okun-econdumb.png

[Bob]

The twitter account of "econbutt" is being followed by Prof. Steve Hanke.
http://www.cato.org/people/steve-hanke
Also:
https://mobile.twitter.com/irdmbrokers

[Bob]

Ah so you are a Cato propagandist.
https://en.m.wikipedia.org/wiki/Steve_Hanke
"Steve H. Hanke (/ˈhæŋki/) is an American applied economist at the Johns Hopkins University in Baltimore, MD. He is also a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute in Washington, DC,[1] and Co-Director of the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise in Baltimore, MD.[2]

Hanke is known for his work as currency reformer in emerging-market countries such as Argentina,[3] Estonia,[4] Lithuania,[5] Bulgaria,[6] Bosnia and Herzegovina,[7] Montenegro,[8] and Ecuador.[9] He was a Senior Economist with President Ronald Reagan’s Council of Economic Advisers from 1981–82,[10] and has served as an adviser to heads of state in countries throughout Asia, South America, Europe, and the Middle East.[11] He is also known for his pioneering work on currency boards, dollarization, hyperinflation, water pricing and demand, benefit-cost analysis, privatization, and other topics in applied economics."

[Bob]

"EconDumb is an economics blog by a grad student in Economics. I work in the field of labor economics and its intersections with macroeconomics, economic history and income distribution. The blog is an open annotated bibliography, including summaries of papers I have read for work. I called it EconDumb because I learn best by making complicated things as simple or “dumb” as possible."
Gee, how condescending.

[Bob]

Your blog says:
"The efficiency wage is above the market clearing wage, so the market no longer clears AKA there is unemployment. Workers who shirk no longer get to go work for another firm at the same wage, if they shirk don’t get work at all. In this new equilibrium firms don’t have to spend any money on monitoring, but all workers exert full effort. The unlucky few get to stay home and suck their thumbs. Boom.

Is this a plausible explanation for equilibrium unemployment (assuming such a thing even exists)? I don’t think so, at least not at the aggregate level. Effort monitoring just doesn’t seem that costly for most jobs. I was a master slacker at all the jobs I worked in high school and college, yet I always felt like there was a manager breathing down my neck. But if anything I was payed below my marginal product. But it is a clever model, and probably applies for some specific markets. I’m sure there are tonnes of empirical papers about efficiency wages, which seemed to have been quite the hot topic in the 80’s."
So you want there to be unemployment. Very nasty. And this is all based on BS. I laughed at "master slacker."
https://econdumb.wordpress.com/2015/10/03/stiglitz-discipline/

[Bob]

https://mobile.twitter.com/econdumb
The evidence strongly suggests "Econbutt" and "Econdumb" are the same person. The twitter account says EconButt (@EconDumb.)

[Bob]

Prof Hanke's Cato page has an email :)
[email protected]
"Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. He is a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute in Washington, D.C.; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; and a contributing editor at Globe Asia Magazine. Prof. Hanke is also a member of the Charter Council of the Society of Economic Measurement and the Financial Advisory Council of the United Arab Emirates.

In the past, Prof. Hanke taught economics at the Colorado School of Mines and the University of California, Berkeley. He served as a Member of the Governor’s Council of Economic Advisers in Maryland in 1976-77; as a Senior Economist on President Reagan’s Council of Economic Advisers in 1981-82; and as a Senior Advisor to the Joint Economic Committee of the U.S. Congress in 1984-88. Prof. Hanke also served as a State Counselor to both the Republic of Lithuania in 1994-96 and the Republic of Montenegro in 1999-2003. He was also an Advisor to the Presidents of Bulgaria in 1997-2002, Venezuela in 1995-96, and Indonesia in 1998. He played an important role in establishing new currency regimes in Argentina, Estonia, Bulgaria, Bosnia-Herzegovina, Ecuador, Lithuania, and Montenegro. Prof. Hanke has also advised the governments of many other countries, including Albania, Kazakhstan, and Yugoslavia.

Prof. Hanke is a Distinguished Associate of the International Atlantic Economic Society; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Profesor Asociado (the highest honor awarded to international experts of acknowledged competence) at the Universidad del Azuay in Cuenca, Ecuador; and a Profesor Visitante at the Universidad Peruana de Ciencias Aplicadas (the UPC’s highest academic honor) in Lima, Peru. He has been awarded honorary doctorate degrees by the Bulgarian Academy of Sciences, the Universidad San Francisco de Quito, the Free University of Tbilisi, Istanbul Kültür University, and Varna Free University in recognition of his scholarship on exchange-rate regimes and currency boards. In 1998, he was named one of the twenty-five most influential people in the world by World Trade Magazine.

Prof. Hanke is a well-known currency and commodity trader. Currently, he serves as Chairman of Hanke-Guttridge Capital Management, LLC — an investment manager located in Maryland that employs a long-short equity strategy. He is also a member of the Supervisory Board of Advanced Metallurgical Group N.V., in Amsterdam, and Chairman Emeritus of the Friedberg Mercantile Group, Inc. in Toronto. During the 1990s, he served as President of Toronto Trust Argentina in Buenos Aires, the world’s best-performing emerging market mutual fund in 1995.

Prof. Hanke’s most recent books are Zimbabwe: Hyperinflation to Growth (2008), A Blueprint for a Safe, Sound Georgian Lari (2010), and Juntas Monetarias para países en desarrollo: Dinero, inflación y estabilidad económica (2015).

Prof. Hanke and his wife, Liliane, reside in Baltimore and Paris.

Sign up to receive Prof. Hanke’s articles and distributions."

[chris]

@ Bob - you say: "Mainstream economics - as in that which is actually taught, is based on lies for example the money multiplier."
I agree - of course - that the money multiplier is nonsense. But it is no longer taught, and in fact is rejected by the better textbooks. See eg Carlin & Soskice, Macroeconomics (2006 ed) p270.

[aragon]

John McDonnell wanted to vote for the Fiscal Charter, as he thinks economics is accountancy, (but he has had his first meeting with economists) but we all know that economics is just like a household (or council) budget (accountancy)! As George Osbourne tells us. Simples!

There is no commitment to the policies you outline, they just appropriated them. e.g. Energy policy was repudiated for politically correct nonsense, localism.

Some think MMT is radical. But Labour do have an ipad, I have seen the pictures online (or did they borrow it?)

[Nanikore]

The mainstream you talk about is not the mainstream now, or has been for the last 40 years. It has emphasised the market as an inefficient allocator of resources, expectations and incentives adjusted for 'price stickiness'. Basically ultra-pro Globalisation. This was behind, financial deregulation, for example. There is plenty of 'mainstream' economics behind Osborne - such as Ricardian Equivalence and the policy ineffectiveness proposition. Have you heard of Sargent, Lucas and Prescott? There is far more Sargent, Lucas and Prescott in New-Keynesian economics, the dominant paradigm, than Keynes. Sticky prices are not an intellectual riposte to this. Events such as the 1951 Accord which separated the Federal Reserve from the democratic process are also basic to the philosophy underlying neo-classical macro-economics and it effectively rules out the central bank supporting government deficits.

Make no mistake, Keynes (eg. uncertainty and irrational behaviour in financial markets) has been forgotten.

[Luis Enrique]

Chris is wrong. The money multiplier is an accounting identity. It is only wrong if you use it to tell a story in which banks must find extra deposits if they wish to expand lending. You do not need to do that.

[Luis Enrique]

Or perhaps I should have said, if you teach it as a model with constant parameters so that varying H causes proportionate change in M. But again there is no need to teach it like that.

[Blissex]

The impression I get from the overall tone of the above discussion and so many others is that the debate is framed in a pure neoliberal way: how to boost lending, and to whom. The underlying logic is that debt is a "factor of production", one with a declining "marginal productivity" to GDP, so policy needs to boost lending ever faster to maintain nominal GDP and asset growth.

This can last for a long time (it has already last a few decadeds) but it won't end well...

[Bob]

"and in fact is rejected by the better textbooks."
Some textbooks do not include the money multiplier?

[Bob]

Luis,
No. Banks always lend by 'splitting the zero' - aka balance sheet expansion.

There is never a time when a bank has to ring down to deposits to see if there is enough money left. In fact any institution that operates like that is eliminated by an institution that can operate asynchronously via a price bridge - since the latter is more efficient.

There is a reason Halifax Building Society became the biggest. It used computers and realised early what it could do and what size meant.

[Luis Enrique]

Bob try reading before responding

[Econbutt]

hi i have no idea who steve hanke is the twitter account i set up for my blog follows any economics related account I can find (likely the same strategy used by Steve hanke if he follows my shithole account!) I am indeed a random nobody former grad student who should be ignored at all costs. I am glad I introduced one of you to the concept of an efficiency wage though :-) and yes some small amount of people spending some time unemployed (ie, not working and searching for work) is almost certainly optimal.

it is crazy to me that my innocent pot shot/caricature of heterodoxists prompted more than one of you to search for ad hominem fodder! it saddens me that this brilliant economics blog has the most batshit readers/commenters. Chris deserves better than you lot ;-)

[Bob]

"I am glad I introduced one of you to the concept of an efficiency wage though :-) and yes some small amount of people spending some time unemployed (ie, not working and searching for work) is almost certainly optimal."
Employment buffer stocks > unemployed buffer stocks.
Please read:
http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

[Bob]

"some time unemployed (ie, not working and searching for work) is almost certainly optimal."
Absolutely fine. So why are they not prepared to fully compensate the millions of individuals such a policy deliberately leaves on the scrap heap. Surely those people, who they now admit are systemically unable to get a job due to their policy actions, deserve a full living wage, decent housing and a degree of comfort.

Or does the policy also require starving people, blaming them for something that is out of their control and ensuring that they endure the diseases of poverty. In which case why not set up the gas chambers now?

We're not talking a small number of people here (in the UK.) The number of people unemployed is the population of the cities of Glasgow, Liverpool and Bristol combined. The number of people wanting work if they could get it is the same as the population of the cities of Glasgow, Liverpool, Bristol, Sheffield, Manchester, Leeds, Edinburgh and Leicester combined.

Don't these people think that 8 cities worth of people deserve a better deal?

[Bob]

"and yes some small amount of people spending some time unemployed (ie, not working and searching for work) is almost certainly optimal."
Optimal from whose point of view? Surely it is better that they are employed, and that businesses have to compete to attract them away from what they are currently doing. Then firms are more likely to replace the job with machines, or look at training somebody - both of which drive productivity forward faster.

The problem with the obsession with 'efficiency' is that it reduced resilience in the system. And we saw what happens when you neglect resilience. We're still suffering because of it.

All complex flow networks are trade offs between efficiency and resilience. Obviously if those pushing for efficiency don't suffer from failures in resilience then they will just push for more efficiency. Which is why all the banks should have been bankrupted and the loses forced onto shareholders and CEOs.

[Mark]

Given the misunderstandings, mediacmacro and flat-out nonsense touted as good economics nowadays, isn't it just easier to play up a 'this is crap, let's do something new' angle?

It stops the media painting Corbyn's lot as from the 80s (one of their big attack lines), it allows the reintroduction of old ideas without the taint painted on it by the last few decades of tory cheerleaders and, let's face it, how much of our media is going to notice that their ideas are just going back to an old common sense (as opposed to a commonly accepted distortion of old ideas)?

Cynical, I know, but I'm not actually sure there's such a thing as 'too cynical' any more.