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November 24, 2015

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nick ford

Hmmm, I'm not sure reducing the deficit can be dismissed as non-economist quite so easily. I acknowledge the importance of reducing the deficit with regards to ensuring economic stability is heavily overemphasised, particularly in a country that has a freely floating exchange rate and its own currency. However, a good argument can be made that squeezing public expenditure can result in the more efficient use of real resources and better productivity in the public sector. For example, the productivity of the police seems to be improving, perhaps as 'Bobbys on the beat' and traffic patrol are replaced by CCTV cameras. When the reverse happens ie when public services are handed large extra amounts of cash, productivity seems to go backwards. For example the large sums diverted to health by Brown and Blair have partly been diverted to insiders.
George makes plenty of mistakes, but I repeat, I don't think deficit reduction can be dismissed so easily.
I eagerly await Bob's opinion...

gastro george

"... the large sums diverted to health by Brown and Blair have partly been diverted to insiders ..."

Can you elaborate on all parts of that sentence?

Deviation From The Mean

For me the main strength of Corbyn is his attitude to 'foreign affairs'.

The policies that Mr Cohen has consistently advocated have been a total and utter disaster in every single way.

Some humility please Mr Cohen, a hiatus of say 10 years to reflect where you have gone so spectacularly wrong would be a start.

Churm Rincewind

Gastro George - Nick Ford can no doubt reply for himself, but I would imagine he's referring primarily to the GP Performance Related Contract 2004, which famously provided the opportunity for GPs to "top-up" their earnings while at the same time reducing patient care.

As one of the BMA negotiating team subsequently put it, "It was just stunning. Nobody in my position had ever believed we could pull it off but to get it...was a bit of a laugh."

gastro george

OK, it was an honest question. That contract was not the finest hour of the NHS.

gastro george

Regarding Cohen, I wonder how long the Observer will continue to pay him to write the same article every week.

Igor Belanov

@ gastro george

Probably for as long as Jeremy Corbyn is leader of the Labour Party.

Blissex

«socialists and social democrats»

The two big wings in the debate are the Corbynite centrist/social-democrats and the "Wet Tory" blairistas (some of which were pretty much High Tories).

Corbyn's policy stance overall is to the right of the german socialdemocrats, and of most christian-democract parties of continental countries.

«rightists claim that a strategy of "no compromise with the voters" is electoral suicide.»

Indeed it is, currently. However if house prices crash in the South, Corbyn's right-wing social-democratic approach looks a winner.

«the role of personal loyalties. The division between Blairites and Brownites (which seems so quaint now!) was more about allegiances to individuals than about policy differences.»

G Brown's policies were roughly the same as those of J Corbyn, while T Blair's and P Mandelson's policies were in the end essentially indistinguishable from those of G Osborne. My usual quote from from Lance Price, 1999-10-19 that shows that and that little has changed from 15 years ago:

«Philip Gould analysed our problem very clearly. We don’t know what we are. Gordon wants us to be a radical progressive, movement, but wants us to keep our heads down on Europe. Peter [Mandelson] thinks that we are a quasi-Conservative Party but that we should stick our necks out on Europe. Philip didn’t say this, but I think TB either can’t make up his mind or wants to be both at the same time.»

That was in 1999, and T Blair eventually switched entirely to the positions of P Mandelson and P Gould.

To the point that D McBride's excellent book reports the episode of where G Brown fought off T Blair's attempts to raise VAT, as G Osborne did, to shift the pressure of taxation from the Southern middle class to the Northern lower classes.

The genius of T Blair and G Brown is that they both pandered shamelessly to the "aspirational" voters of the South who want bigger property prices and lower remortgage interest rates, because of G Brown's beliefs, they also pursued (covertly) relatively social-democratic policies like tax credits for the low paid, which transformed the lives of many poor workers, especially in the North, even if that is an electorally irrelevant demographic.

Andrew Curry

@Gastro george: health spending diverted to insiders? That seems like a good description of PFI to me: extracting money from taxes and paying it to finance.

But it may not be what @Nick Ford had in mind.

Bob

Nick, reducing spending leads to lower tax down the line. So you won't necessarily "reduce the deficit." The deficit is a red herring and a meaningless accounting residual. It should never be mentioned.
"However, a good argument can be made that squeezing public expenditure can result in the more efficient use of real resources and better productivity in the public sector."
Possibly. But if you can do that, just cut taxes.

Bob

"That seems like a good description of PFI to me: extracting money from taxes and paying it to finance."
The state's cost of money is zero. PFI or "borrowing" money by issuing Gilts are voluntary.

Bob

"Political reality says immigration is a big problem; economic reality says it isn't."

Do you have the resources to handle it?

So let's do the thought experiment. Implement a Job Guarantee now at the living wage in the UK. With the open borders to the EU and the unemployment level across the EU at about 23 million you will get a mass migration to the UK to get a job and a living wage.

Use the projections of EU travel to the UK from a decade ago and then the reality. You'll find that it was out by two orders of magnitude. The so-called understanding you appeal to is wrong *today*.

And that was for the chance of a job. The Job Guarantee is, in its correct form, *guaranteed*. Once word gets around - particularly across a devastated EU - there will be mass migration. How many of the 23 million you cannot predict, because you tried to predict ten years ago and got it completely wrong.

Word will get around quickly because of the mass communications architecture, which is much better today even than it was ten years ago.

It may even start slowly and the mass-movement delayed until the critical understanding gets around and gets back from the vanguard. But once you get a critical mass you'll get an influx along the lines of a refugee crisis.

How are you going to house those people next week? How are you going to feed those people next week? What will be the environmental impact on the UK's sewerage and water networks of an instant population increase of up to a third in a matter of a few weeks?

So you have a choice:

Don't introduce a Job Guarantee or increase welfare at all in the UK, which condemns the largely white poor from the lower working class to permanent poverty, destitution and early death.

Or you restrict access to the Job Guarantee to residents, which then affects poor immigrants that have been invited here on a visa or EU waiver - condemning them to being an underclass unable to access social security. Restricting access to social security for immigrants is a genuinely racist action imv. If people have been invited here, then you treat them the same as if they were born here.

Or you deny that very many of the 23 million unemployed will come here - which is deluded nonsense given how completely wrong the estimates of migration were when Labour opened the borders to the new EU states a decade ago. They will come and they will come quickly in vast numbers.

Or you implement a visa scheme that restricts access to the UK to those low skilled EU immigrants who wouldn't otherwise get a visa. (And you make visa access more expensive to business so that they choose to train or automate first and use the people that are HERE).

So it's not a subject of debate as to whether open immigration affects the job opportunities of the poor here in the UK. It does as a matter of basic logic as I've outlined. The question the open borders people have to answer is why are they are prepared to restrict the job opportunities and social security access of those that already live here - Who are people who can vote for them. Why are people outside this country that they can't directly help from the position of a national government so much more important than the six million or so here who they can?

And of course it is because they don't believe in nations. They believe in the Glorious One World Order. They are Gowons, not citizens. Even though they are pitching to be elected to the government of an actual nation.

The way to help other nations is not to drain them of their working people and shatter their communities, but to go out there and solve the political and cultural problem that stops those nations emulating the development progress of the Japanese, Koreans and Chinese. It is to see nationhood as a force for good in the world that can ensure nobody lives in poverty.

This idea that the process is somehow self-limiting is again an appeal to market forces that simply does not occur in practice. Exactly how are the required schools, hospitals, roads, and most importantly water, sewerage, food and shelter going to get built in such a short period of time. They take years to get in place. The existing migration has already stressed the school system to its limit, and the housing system was broken well before then. It is an appeal to infinite fungibility that you can get sufficient skilled staff in place to operate the expanded services. You can't make a silk purse out of a sows ear.

And that's before you get onto the political debate - where the 'mass-migration' concept caused by open borders will be used against the idea of a JG, and the environmental argument - what is the carrying capacity of the country?

Clinging to open borders is a religious position. Why risk excess flows when a simple visa system ensures you get the right level of flow and the right type of migrant to build *your* society? That defeats all the arguments against the Job Guarantee and has considerable political support from the natives who actually vote for you.

A

Well said Bob.

nick ford

Bob,
ref the deficit.
We are straying a bit from Chris's topic, but I am sure he won't mind too much and this stuff about the deficit is interesting.
I suggest your views about the deficit have some validity, but only in the special circumstances of their being spare capacity in the economy, and the economy approximating to a closed economy.
I accept that if there is spare capacity in the economy, and the interest rate is at zero (we can put off negative interest rates for another day) then cutting spending may indeed reduce output and tax receipts down the line. However, when the economy is operating at full capacity, cutting spending will allow resources to be used elsewhere in the economy. I suggest at present there is just about sufficient demand ( and only just) to keep the economy at full capacity, based on wage inflation and that the BOE keeps debating whether to raise rates. Once there is plenty of demand, then the deficit must be crowding out investment spending. (In such circumstances if the government raised taxes and taxpayers reduced consumption, more resources are left over for investment).
The situation is further complicated by the economy being open. One might argue that the deficit is just an ‘accounting residual’ if the deficit amounts to the government simply borrowing of its own citizens. However, the UK trade deficit means we are borrowing from abroad, and using more real resources than we are producing. While this is no disaster, it means we are accumulating debt to foreigners, and servicing this debt will reduce future living standards in the UK (unlike the circumstances when the government debt is owed to its own citizens in a closed economy).
Finally I would take issue with the idea that the cost of government debt is zero. I accept that the government could, if it wished, either issue short term debt or instruct the BOE to buy up all its debt. At the current interest rate of 0.5% that would be the cost of the debt. But as the economy picked up it would have to pay a higher rate of interest on its debt, as the BOE raised rates. Again that is OK, but it involves a real cost if the debt is partly to foreigners. (Where central banks do not pay interest on deposits they would find themselves having to ‘mop up’ surplus cash when an economy picked up).
In summary, I think the view that the deficit should not be addressed in recessionary circumstances have some validity. However, in normal circumstances, the man on the street’s simple view, that you can’t spend what you don’t earn, (or some such version thereof) is also valid. If the more sophisticated view on the deficit is not qualified, it will , rightly, be rejected by the voters.

nick ford

Churm/Gastro/Andrew,
Thanks for helping me out on this one. Yes, I mean that when it had plenty of extra money, the BMA used the opportunity to obtain significant pay rises for its members, as did other recipients of NHS cash.
Straying slightly off topic, I think the GP's contract was a mistake, but I also think the standard contracts most consultants are on leaves them in the bizarre position where the less efficient the NHS is, and the longer the waiting lists are, and the poorer the care is, the more the consultants personally benefit through greater private practise opportunities. I know of no other employment situation where employees gain, the worse their employer performs, and do not see how we expect an organisation to improve its productivity when so many of its senior staff have a vested interest in this not happening.

Bob

Please read:
http://www.3spoken.co.uk/2013/05/making-banks-work.html
Nick, it is better to regulate banks via asset side discipline (loans become a gift of shareholder's funds and are unenforceable if they do not meet certain criteria), than via interest rates.
"However, the UK trade deficit means we are borrowing from abroad, and using more real resources than we are producing. While this is no disaster, it means we are accumulating debt to foreigners, and servicing this debt will reduce future living standards in the UK (unlike the circumstances when the government debt is owed to its own citizens in a closed economy)."
Please read:
http://www.3spoken.co.uk/2014/02/its-exporters-stupid.html
The causality is wrong. Foreign governments save in £s to reduce their exchange rate and this forced saving creates "trade deficits." We could try to start a currency war, but there is little we can do about it. I have explained in a prev comment from someone the difference between exchange and 'conversion' as the 'capital flight' myth is often used:

"There is a big difference between a fixed exchange rate system like the Eurozone and the UK that I think the mainstream STILL ignore. It is the difference between ‘conversion’ and exchange. In 'conversion' the supply of the liability shrinks. So the Bristol pound is deleted when the UK pound is issued. The UK pound is deleted when the pound of sterling silver is issued in a metallic system. The Barclays bank deposit is deleted when the £20 note is drawn from the ATM. That is what conversion is.

Exchange is different. There is no deletion. When you exchange USD for GBP at the desk, the USD stays in circulation. It becomes the assets of the desk.

That’s why the price floats, because the quantity is fixed. If the price stays the same the quantity has to adjust.

If a currency moves down so that imports become 'more expensive', then the 'inflation' that goes off is a distributional response that tries to eliminate some of those imports so that the exchange demands equalise. That also eliminates somebody else's exports.

The important thing to remember is that when a currency goes down, all the others in the world go up in relation to it and nations that rely upon exports (export led nations) start to lose trade - which depresses their own economy.

Any one of those other economies can intervene in the foreign exchange markets, purchase the 'spare' currency and that will halt the slide for everybody. And all exporters to an import nation have a central bank with infinite capacity to do that.

Export-led nations have to constantly provide liquidity into the rest of the world to allow others to buy their goods. Otherwise the rest of the world runs out of the particular money that is needed for the export transaction to complete and the export never happens (UK buyers buy Chinese goods with GBP, but Chinese workers and taxes are paid in Yuan. The relative shortage of Yuan due to the export differential has to be provided by the Chinese or Chinese goods become, in absurdum, infinitely expensive).

So the important insight, IMV, is that exporters need to export and the central banks that support that policy with 'liquidity operations' will ultimately halt any slide for any important export destination - either explicitly or implicitly through their own banking system.

Every analysis I've seen analyses the situation from the point of view of the currency that is being depressed. Almost none look at it from the exporter's point of view. So where are the goods they no longer can sell to the importer going to go in a world where overall export growth is fundamentally limited by the increase in world income? In a world where 'export led growth' is the insane mantra, that is a mistake and leads to a mistaken view and mistaken policy recommendations."

Bob

"Again that is OK, but it involves a real cost if the debt is partly to foreigners. (Where central banks do not pay interest on deposits they would find themselves having to ‘mop up’ surplus cash when an economy picked up)."
About half of Gilts are owned by foreigners (excluding the Bank of England's holdings.) National Saving is a better idea for a variety of reasons. If you want to read the article explaining why here it is:
http://www.3spoken.co.uk/2015/09/gilt-issues-considered-harmful.html
Pics showing amounts here (notice very few owned by households):
http://4.bp.blogspot.com/-AOBZNV7Kovg/VegDYmiBJPI/AAAAAAAAAZs/UAQPQfm7C5A/s1600/Screen%2BShot%2B2015-09-03%2Bat%2B09.22.26.png
"National Savings Income Bonds can only be bought by individuals, there is a fixed holding limit and they are non-negotiable (i.e. they can't be transferred - only sold back to National Savings or held until maturity), whereas Gilts can be held be any entity national or international, in any quantity and traded in a marketplace.

Once you understand that Gilts, like Savings Bonds, attract regular income and are a government annuity paid by the state to the holder of the Gilt, then you have to start assessing it like any other recipient of a government benefits - tax credits, state pension, disability benefit, housing benefit."

An Alien Visitor

"they also pursued (covertly) relatively social-democratic policies like tax credits for the low paid, which transformed the lives of many poor workers"

This is overstating things somewhat. The very poor went from being very poor to be slightly very poor. Not really my idea of a transformation!

Bob

"Once there is plenty of demand, then the deficit must be crowding out investment spending."
There is no financial 'crowding out.' Deficits add to savings. However there can be real crowding out. Important to differentiate the two.
"However, in normal circumstances, the man on the street’s simple view, that you can’t spend what you don’t earn, (or some such version thereof) is also valid. "
People need to realise that this requires someone else to spend above their means.
There is a fundamental asymmetry in that government issues the currency and has an infinity amount of money at all times.
That's true for a currency user. The government issues various tokens (money, bonds, etc.) In fact if the government does not run deficits, and there is no big reduction in the current account deficits and corporate surplus.
Data you may find interesting:
http://www.3spoken.co.uk/2015/10/uk-sectoral-balances-q2-2015.html
http://www.3spoken.co.uk/2015/10/uk-private-debt-levels-q2-2015.html
If there needs to be 10% permanent surpluses so be it. If there needs to be continuous deficits so be it. The UK tends to continuously run deficits.

Blissex

"Bob", your passion is admirable but it is a bit tedious (perhaps even more than my repeats of relevant quotes :->) that you turn every discussion into an exposition of the miraculous properties of MMT.

We all know that stuff by now. Governments whose currency is accepted as payment of debts borrow for political reasons, some of them pretty stupid, not because of economic reasons. If there is an economic reason it is to keep their currency accepted as payment of debts by limiting its issuance, but that depends on how much... Anyhow, always think about the distributional impact on voters :-).

Bob

The DMO already has cross facilities in place with the banks in the interbank market to ensure that everything clears to where it should be at the close of the day if they have a particularly heavy day in the spending department.

The Treasury plays the same game as the banks. They run massive overdrafts intraday and then clear in the interbank market at the end of the day.

It's a very important point that there is never any serialisation restriction on government finances. Serialisation is the loanable funds myth.

The monetary system expands as is required and then everybody saves with everybody else to clear at the end of the day and maintain the pretense.

Most people don't get how the system works. All complicated systems based on flows require buffers. In a financial system it is float.

Many people think in terms of individual transactions executed serially in currency. These transactions are *batched* instead.

Banking settlement happens at the close of the day. All books are in balance overnight and then the process begins again the next day. Right from the beginning of the day asset & liability management people are looking at developments and taking steps to bring everything together at the end of the accounting period.

It's a balancing act.

IIRC, Scott fullwiler mentioned that Red operations types admit that the books aren't balance all the time during the day and the Treasury has some overdrafts, which is supposedly disallowed. But who's to know as long as the reports at the end of a period show everything in balance with no Treasury overdrafts.

Better to just run an overdraft at the central bank and "free up" the red books types for some other purpose :)

Bob

Blissex you may be interested in this diagram that shows government spending is DISCONNECTED from Gilt issuance. It is a very good picture showing government spending flows. It is at the bottom of here:
http://www.parliament.the-stationery-office.co.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm

Also see:
HM Treasury's remit to the Debt Management Office:
https://www.gov.uk/government/publications/debt-management-offices-exchequer-cash-management-remit-2012-13
and
this current operations document at the BoE
http://www.bankofengland.co.uk/markets/Documents/sterlingoperations/summaryops130502.pdf

"Governments whose currency is accepted as payment of debts borrow for political reasons"
The government is in no need of borrowing. However the private sector is in great need of saving and so the government issues Gilts so they can.

Bob

"Anyhow, always think about the distributional impact on voters :-)."
Yup. Look at who owns Gilts Blissex:
http://4.bp.blogspot.com/-AOBZNV7Kovg/VegDYmiBJPI/AAAAAAAAAZs/UAQPQfm7C5A/s1600/Screen%2BShot%2B2015-09-03%2Bat%2B09.22.26.png

Bob

BTW Blissex, when are you going to make blog posts on your own blog?

nick ford

Blissex. I think its a serious case of evangelical fanaticism. Probably can be cured by a couple of weeks on a beach in a warm country with hyperinflation.

Bob

"Probably can be cured by a couple of weeks on a beach in a warm country with hyperinflation."
Already been to two.
Zimbabwe:
http://bilbo.economicoutlook.net/blog/?p=3773
Wiemar Republic:
http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html

nick ford

Hi Bob,
Be careful in Zimbabwe. The only beaches have crocodiles, which have a high propensity to consume.

Calgacus

Bob, that on immigration was a response to me from Neil, at his blog. I would enjoy your thoughts. No time to say much, but I hope people look more carefully at what Neil says & what I say. I don't give a damn about UK immigration, it's your country to close or open, but I do give a damn about careful thought. MMT is careful thought and Neil (& Bob) discard MMT & careful thought above, which might afford some amusement to other readers here. But that is the reason I am writing about something I don't give a damn about.

For instance- Will there will be on the order of 1 million immigrants per DAY to the UK after an open JG? That's what the whole EU gets in a YEAR. Is this at all plausible or reasonable, or even possible without a major Dunkerque squared effort by the UK & other governments to do this? An absurd effort that would have nothing to do with a JG. Who is making silly, illogical claims?

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