David ‘Whoops!’ Blanchflower strikes again

Back to the wall again

You…hang on, what’s that noise?

Never mind.

You may have seen that your humble narrator has had one or two exchanges in the past with arch-Keynesian, wannabe Krugman, and Columbo dress-a-like David Blanchflower. They centered on his now infamous 2009 prediction that

“If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn, unemployment could easily reach four million… If large numbers of public sector workers, perhaps as many as a million, are made redundant and there are substantial cuts in public spending in 2010, as proposed by some in the Conservative Party, five million unemployed or more is not inconceivable.”

Blanchflower, being rather a fragile sort, blocked me after our latest discussion of this (I’m in good company there) but others have continued to hold him to account and Blanchflower has continued to defend it.

In the course of defence just 11 days ago Blanchflower tweeted the following

BlanchBut hold on, what’s this? It’s the Office of National Statistics saying that, you guessed it, that double dip never was. Blanchflower’s thumb will be working overtime trying to explain away this one.

Oh, that sound, I’ve figured out what it is; it’s Blanchflower’s credibility disappearing down the toilet.

EDIT

Also embarrassing for such a Labour partisan as Blanchflower is the fact that it now appears that the economy did much worse under Labour, slumping much further in 2009 and recovering less strongly before the election in May 2010.

Dip: The British economy avoided a recession - two quarters of negative growth - at the start of last, the Office for National Statistics said

Source: Daily Mail

Bubble. Burst. Liquidity. Repeat

Increasing both

In March 2000 the dot com bubble burst. From a peak of 5,048.62 on March 10th, 24 percent up on late 1999, the NASDAQ Composite index had fallen to half that by late 2000. GDP growth slumped and unemployment steadily climbed from under 4 percent in late 2000 to a peak of 6.25 percent in mid-2003.

On January 3rd, 2001, Alan Greenspan acted and cut the Fed funds rate to 6 percent. By June 2003 it was down to 1 percent where it stayed until June 2004. The effects are well known. This wave of liquidity was directed by government action like the Community Reinvestment Act, government bodies like Fannie Mae and Freddie Mac, and a minefield of moral hazard in a financial sector which knew it would be bailed out of any trouble, into a housing bubble.

That bubble burst too. With inflation on its way up from 2 percent in mid-2003 to 4.7 percent in October 2005, Greenspan gradually raised the Fed funds rate, reaching 5.25 percent in June 2006. But this crippled many people who had borrowed at lower rates to buy property. The number of new foreclosure starts in the US increased by more than 50 percent to 1.1 million between 2006 and 2007.

Assets backed with these non-performing loans crashed in value. Banks holding them saw their balance sheets ravaged. Seeing counterparty risk everywhere, banks stopped lending to each other and the LIBOR, usually about 0.15 percent above where the market thinks the bank rate will be in three months’ time, shot up to over 6.5 percent in August 2007. The credit crunch had arrived.

And Greenspan, his academic successor Ben Bernanke, and central bankers around the world reacted as they had to the bursting of the dot com bubble. The Fed funds rate went back down from 5.25 percent in September 2007 to 0.25 percent in December 2008. Likewise, between July 2007 and March 2009 the Bank of England slashed its Base Rate from 5.75 percent to 0.5 percent. Even the supposedly cautious European Central Bank reduced its key rate from 4.25 percent in summer 2008 to 1 percent by the spring of 2009.

When this failed to have the desired stimulative effect central bankers began trying to pull down the long end of the yield curve. Under Quantitative Easing the Bank of England spent £375 billion of newly printed money on British government debt. The Federal Reserve is spending $85 billion dollars a month on bonds.

There is a pattern here. A bubble in assets (dot com stocks) bursts and central banks react by hosing liquidity into the system. But this liquidity inflates another bubble (property) and when that bursts central banks react by hosing liquidity into the system…

In the high Keynesian noon of the post-war period it was widely thought that monetary policy was ineffective for macroeconomic management (it is debatable how much this is actually owed to Keynes). All that could be hoped for from monetary authorities was support for the fiscal policies which really had the clout to equilibrate the economy.

But this Keynesian paradigm fell apart with the stagflation of the 1970s. Money mattered was the lesson and it became the primary tool of macroeconomic management, replacing fiscal action, at least until the ‘Return of the Master’ following the credit crunch.

But what has this meant in practice? As interest rates are lowered in response to an adverse shock investment, calculations change, especially when, like Alan Greenspan, those behind the policy publicly promise its continuance. To the extent that this fosters a wealth effect, consumption, as well as investment, may be stimulated. And this, in fact, is exactly the way the policy is supposed to work.

But the rates cannot stay that low indefinitely, nor, despite the jawboning by monetary policymakers, are they intended to. At some point they will rise. Again, this actually is the way the policy is supposed to work.

And when those rates do rise what happens to those marginal investors who made their decision when rates were at their lowest? What happened to the NINJAs who bought condos in Michigan when interest rates were 1 percent when the rates went up in 2006? They were scuppered. And what will happen to all the enterprises which are currently dependent on interest rates remaining at their historic lows when those rates start to rise? It is because more people are now asking that question that markets have turned skittish recently, since Ben Bernanke even began to discuss a possible future ‘tapering’ of Quantitative Easing.

Those rates will have to rise at some point. But, when they do, whichever bubble we have now will burst. Our monetary authorities have printed themselves into a corner.

This is what passes for macroeconomic management. As one of the high priests of this bubble-onomics, Paul Krugman, advised in 2002 in the wake of the dot com bust “To fight this recession the Fed needs…soaring household spending to offset moribund business investment…Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble”. And no, that’s not taken out of context.

One of the great myths in economics is that of some sort of stable equilibrium. It is apparent that active monetary policy is little better at producing that than fiscal policy proved. Instead the economy is characterised by crises of increasing frequency and amplitude and the only solutions policymakers appear to have to deal with them will buy ever shorter-lived respite at the cost of increasing both the frequency and amplitude of crises.

We are in an equilibrium of sorts, but it is an equilibrium of crises.

This article originally appeared at The Commentator

Ed Miliband on banking

Ed-Miliband-006

Speaks for itself

It’s a funny thing is politics. Someone demonstrates that they have the skill set required to win an election and, in doing so, they assume responsibilities for which they have demonstrated no discernibly appropriate skill set at all. It might be fascinating to hear Alex Ferguson give a lecture on football tactics, but I’d skip his thoughts on string theory and quantum mechanics.

Take Ed Miliband. The son of a politician, the brother of another politician, he has spent his entire life in politics. What is there is this background which gives him any basis upon which to comment on banking, let alone very much else?

Yet that is what he did last July when he gave a speech at the Co-op bank saying 

“It is a pleasure to be here at the Co-op. You have always understood that ethics of responsibility, co-operation and stewardship must be at the heart of what you do.

That’s one of the reasons why the Co-Op bank has in the last week seen a 25 percent rise in applications for accounts.

It was your values that I was talking about last September when I said to the Labour Party conference that Britain needed a different kind of economy.

An economy based not on the short-term, fast buck, take what you can. But on long-termism, patient investment, and responsibility shared by all.

Not an economy based on predatory behaviour. But productive behaviour.

Not an economy that works just for a powerful, privileged few But an economy that works for all working people”

And now, a little less than a year later, the Co-op bank is bust.

We, perhaps, shouldn’t be too harsh on young Miliband. After all, like much of our political class, he has very little idea of how things work beyond politics so it shouldn’t come as much of a surprise when he talks such obvious rubbish about non-political topics.

But we ought to ask ourselves a question; why do we give politicians so much power over things they don’t understand in the slightest?

Living in the Age of Keynes

http://getvideoartwork.com/gallery/main.php?g2_view=core.DownloadItem&g2_itemId=93050&g2_serialNumber=1

The path to prosperity

In 1935 John Maynard Keynes wrote to his friend George Bernard Shaw: “I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems.”

That book, The General Theory of Employment, Interest and Money, published the following year, would go on to fully realise Keynes’s expectations. After World War Two, following Keynes’s analysis, policy makers and economists around the world used fiscal and monetary tools to pursue the goal of ‘full employment’. Keynes gave his name to both the economics and the age itself.

It is conventionally said that this Keynesian Age was brought to an end by the Stagflation of the 1970s. To the extent that responsibility for ‘economic management’ was simply transferred from politicians with primarily fiscal tools to central bankers with monetary tools this can be argued. But there is another sense in which we never left the Age of Keynes.

The first substantive chapter of The General Theory is chapter two, ‘The Postulates of the Classical Economics’. Here Keynes ridicules a set of beliefs which he ascribes to an ill-defined group of ‘Classical economists’. For these Classicals income was either spent on consumption or saved. These savings, as capital, were invested with the two quantities, savings and investment, being equilibrated by the interest rate. As Keynes’s Classical mentor Alfred Marshall put it:

“[I]t is a familiar economic axiom that a man purchases labour and commodities with that portion of his income which he saves just as much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”

Keynes, by contrast, saw no such essential unity between savings and investment. In The General Theory he wrote that the “decisions which determine Saving and Investment respectively are taken by two different sets of people influenced by different sets of motives, each not paying very much attention to the other”.

It was possible, Keynes argued, that investors driven by mercurial “animal spirits” could become so pessimistic that the Marginal Efficiency of Capital (the expected return on their investment) could plunge below the interest rate (the cost of funding that investment) so that no investment would take place. The Marginal Efficiency of Capital could, indeed, sink so low that nominal interest rates couldn’t offset it, giving rise to the ‘liquidity trap’ and monetary impotence. Marshall’s link would be broken and aggregate demand would fall.

For Keynes, the way to guarantee the continued investment which not only guaranteed aggregate demand in the present but also increased prosperity in the future, was for the government to underwrite the profitability of investment by acting as spender of last resort, via fiscal stimulus, to prop up the Marginal Efficiency of Capital.

This was the polar opposite of the Classical view. Whereas Keynes believed that spending made you rich enough to save, the Classicals believed that saving made you rich enough to spend. Though Keynes would have agreed with the father of the Classicals, Adam Smith, that “Consumption is the sole end and purpose of all production”, they took totally different routes to get there.

This stems from a striking difference in attitudes to saving. Adam Smith, anticipating Marshall, wrote, “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people…by labourers, manufacturers, and artificers”. Keynes, by contrast, said that “whenever you save five shillings, you put a man out of work for a day”.

Is it Smith or Keynes’s attitude towards consumption and saving which animates western policymakers today? Since 2008 we are supposed to have seen ‘The Return of the Master’. In truth he never went away. We’ve been living in the Age of Keynes for decades.

This article originally appeared at The Commentator

Hayek on the euro

Tru dat

I’ve just finished a book titled Hayek, Currency Competition and European Monetary Union, the text of the 1999 Hayek Memorial Lecture given at the Institute of Economic Affairs by European Central Bank bod Otmar Issing.

Issing quotes Hayek’s Denationalisation of Money from 1978 saying

“though I strongly sympathise with the desire to complete the economic unification of Western Europe by completely freeing the flow of money between them, I have grave doubts about doing so by creating a new European currency managed by any sort of supranational authority. Quite apart from the extreme unlikelihood that the member countries would agree on the policy to be pursued in practice by a common monetary authority (and the practical inevitability of some countries getting a worse currency than they have now), it seems highly unlikely that it would be better administered than the present national currencies.”

Issing spends his lecture arguing that Hayek was wrong.

Otmar 0 – 1 Hayek

I hate to say it but…

This last week has seen articles from Roger Bootle and Allister Heath warning of the consequences of a bursting in the “bond bubble”. Now we have the Bank of England’s Andrew Haldane saying

If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally.

We’ve seen shades of that over the last two to three weeks.

We have intentionally blown the biggest government bond bubble in history. We’ve been vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That’s a risk we as FPC need to be very vigilant to.”

As I asked on The Commentator last August, Is the bond bubble the biggest yet?

IDS is the heir to Beveridge

A jolly nice chap

“Iain Duncan Smith is scum” announced a former friend of mine on her Facebook wall recently. Actually, as anyone who has met him will attest, IDS is a perfectly affable chap. But he is sceptical of the present size and nature of Britain’s welfare state. This, apparently, makes him “scum”.

Between 2001 and 2007 British government spending increased by 54 percent in real terms. In nominal terms the coalition is actually raising spending even further, from £661 billion in 2010 to a projected £729 billion in 2015. What cutting is being done is coming from above target inflation so that, in real terms, spending will fall by 2.7 percent. And remember, that’s a real terms cut of 2.7 percent after a real terms increase of 54 percent.

But the reaction from sections of the left to this bare snipping has, as with my former friend, been nothing short of demented.

Nick Cohen frequently says very sensible things but at the end of the day he writes for the Observer and he has to sing for his supper – hence a steady flow of silly articles about barely existent ‘austerity’ and mythical ‘Tory cuts’. In a recent article he wrote that “Iain Duncan Smith’s universal credit poses a serious threat to women’s independence.” You actually have to ask how independent someone who is dependent on state welfare actually is in the first place, but to have done so would have been to intrude on the usual orgy of hysteria which accompanied the article.

One of Cohen’s Facebook friends commented, “Yes, yes, yes. Duncan Smith has a nasty agenda, fired by his own sense of Christian mission. A very creepy man.” Another warned that “The Tories especially are making attacks on the poorest, that are remarkably similar to the sort of thing the eugenicists of the nineteenth century used to say.” Sections of the left are currently consumed with lunatic levels of fear and loathing.

It never seems to occur to these people that someone could question the present size and nature of Britain’s welfare state from any motivation other than pure evil. It never enters their minds that someone might be critical of the welfare state as it stands for the simple reason that it is a massively expensive failure.

“Flat rate of subsistence benefit; flat rate of contribution”;

“Unemployment benefit will…normally be subject to a condition of attendance at a work or training centre after a certain period”;

“National assistance (a means tested benefit) is an essential subsidiary method in the whole plan…The scope of assistance will be narrowed from the beginning and will diminish”;

“Assistance…must be felt to be something less desirable then insurance benefit; otherwise the insured persons get nothing for their contributions. Assistance therefore will be given always subject to proof of needs and examination of means; it will be subject also to any conditions as to behaviour which may seem likely to hasten restoration of earning capacity”;

“The proposal to adjust benefit according to the rent actually paid by individuals should, provisionally, be rejected”.

These quotes, recommending conditions on eligibility for welfare, proposing a reduction of benefits over time, supporting the notion that benefits must not match employment income, and rejecting housing benefit, do not come from someone like Iain Duncan Smith who the contemporary left would brand as evil. They come, in fact, from the Report of the Inter-Departmental Committee on Social Insurance and Allied Services of 1942, written by William Beveridge, which laid the foundations for the welfare state.

Beveridge’s plan was, as James Bartholomew writes,

“very simple. Everyone would make flat-rate contributions to a national insurance scheme. Those who fell ill, became unemployed or reached retirement age would, in return, receive flat rate payments. That is it. The rest was detail”.

John Maynard Keynes reportedly told his friend Beveridge: “The Chancellor of the Exchequer should thank his lucky stars that he has got off so cheap”.

Keynes was wrong. Over the years Beveridge’s safety net became a vast hammock. Since the welfare state got under way in earnest in 1948, social security spending as a percentage of GDP has increased from 4 percent to nearly 14 percent; a 250 percent increase.

Source: IFS

Those on the right and this coalition government are often accused of launching an attack on the welfare state bequeathed us by Beveridge and the Attlee government. That ship has long since sailed. Beveridge’s welfare state died decades ago when it became the bloated, expensive, counterproductive monster it is today. And it wasn’t the right that killed it, the left did.

There is a new film out by dreary, overrated Marxist Ken Loach titled The Spirit of ’45. In it, among other things, Loach calls for the Brits of 2013 to resist coalition welfare reforms and redouble their commitment to state welfare spending. But that is not the spirit of 1945. The spirit of 1945 was of work, contribution, and insurance.

And that appears to be the spirit of 2013 too. As a recent report by the National Conversation found: “Wherever they stood on the political spectrum, we were told that the welfare system was broken, and that no one party held the answer to fixing it… A key concern, shared by respondents from different backgrounds, was the degree to which the modern welfare system had moved away from Beveridge’s original plans for social insurance. With the gradual erosion of Beveridge’s contributory principle, governments found themselves paying out ever larger welfare disbursements to people who had never paid into the system”.

Sensing this even Ed Miliband has begun making noises about “recognising contribution”.

Iain Duncan Smith is not “scum”. Rather, unlike Loach and Cohen and his loony friends, he is the heir to Beveridge. If the spirit of ’45 lives on anywhere, it is in the coalition’s welfare reforms.

This article originally appeared at The Commentator

An exchange with Glenn Close, sorry, some bloke

“You never replied to my post, or my tweets…”

One of the things they always say about economics is that it’s about allocating scarce resources. One of those resources is time. I’m currently in the middle of exams for my Masters and three months off my wedding so when it comes to time I’ve got a fair bit of economising to do.

Not everyone is in that situation. Some, quite the opposite to me, have an abundance of time with a relative lack of things to fill it with. One of those people is Joe Sucksmith.

On May 28th The Commentator published an article of mine titled Deficit and debt: Does anyone know the difference? Two days later I had a reply to the posting of the article on this blog (which you can find below the article) from Mr Sucksmith. He wrote “Monetary sovereigns retain control over interest rates, so there is no risk of suffering penal rates due to an increase in the debt. Japan is instructive in this regard” I pointed out that, at that time, Japan was experiencing rather a nasty (an unexpected by the Bank of Japan) spike in bond yields. Mr Sucksmith’s example, in other words, was proving him wrong as he typed.

The exchange continued, as you’ll see, with Mr Sucksmith saying sillier and sillier things, a favourite being that, despite Japan having increased it’s debt to GDP ratio from 50% to 230% its stimulus spending hadn’t been big enough. In the end Mr Sucksmith left a post so full of errors and confusion (the main one being that he assumes money demand to be infinite) that the time it would take to refute it was too much time for me to be prepared to divert from either my revision or wedding preparations. So I left the comment to sit before approval.

Since then, while I have been busy with other things, Mr Sucksmith meanwhile has tweeted me demanding a reply and now devoted a whole blog post (and a further tweet about that blog post) to the exchange. A quick look at Mr Sucksmith’s blog reveals it to be be full of such exchanges (Lord Carlile, Student Rights, and Dominic Casciani of the BBC also being on the receiving end), indeed, we have here nothing less than Disgusted of Gloucestershire.

Me? I have one more exam next week and then a wedding in a different continent to get on sorting so I’m afraid I will continue to economise my time with Mr Sucksmith. Maybe I’ll return to it when I have more time. In the meantime I hope Joe gets out more.

Is it because I isn’t black? Yes, actually

To the utter ambivalence of most University of London students there are some election going on for their usless union at the moment. But hold on, what’s this?

Black - CopyApparently only black students (or those who ‘self define’ as black) are allowed to vote for one of the positions. Isn’t that a bit, well, racist?

Oh well, as you’ll see, I voted. Not that anyone will care, ULU is about to be put out of our apathy.

Good riddance.

John Maynard Keynes, in the long run

John Maynard Keynes, 1883 – 1946

“In the long run we are all dead”. So said John Maynard Keynes, born 120 years ago on Wednesday, in one of the most misquoted phrases in economics.

It comes from Keynes’s Tract on Monetary Reform, from 1923, in a discussion about the economic long and short run. If a factory closes you can say that in the long run its workers will find jobs somewhere else but in the short run there may be considerable unemployment and it was this that Keynes was concerned to tackle. Thus, the full quote is: “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”

Indeed, Keynes thought much about the long run. One of his most celebrated pieces of writing was an essay titled The Economic Possibilities for Our Grandchildren (1930) and he was one of the architects of the post-World War II Bretton Woods monetary system.

But this isn’t to say that Keynes had any coherent idea about the long run. He didn’t. In The Economic Possibilities for Our Grandchildren he observed that, since the Industrial Revolution, “the average standard of life in Europe and the United States has been raised, I think, about fourfold” and predicted that “the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is today”. In large part he attributed this, correctly, to “the accumulation of capital which began in the sixteenth century”.

But this capital accumulation was simply assumed by Keynes, not analysed. In The General Theory of Employment, Interest and Money (1936) he speculates on the future possibility of “a society which finds itself so well equipped with capital that its marginal efficiency is zero and would be negative with any additional investment”, blithely asserting that it would be “comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero”. The Solow growth model theorists are derided for their characterisation of technological change appearing exogenously as “manna from heaven” but that is exactly how Keynes conceptualised the accumulation of capital and capital goods.

In fact financial capital is that part of income not spent on current consumption; saving, in other words. Capital goods have to be produced and maintained. If they had no value, as Keynes posits in his Utopia, they would not be produced. Include the cost of maintaining them and they would be even less likely to be produced.

This lack of understanding of the process of capital accumulation, which he himself put front and centre of his theory of increasing wealth, was a constant in Keynes’s writings. In The Economic Consequences of the Peace (1919) Keynes wrote that, during the 19th century, which he later characterised as an “epoch of enormous economic progress”,

“There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory,—the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.”

This is drivel. The cake was consumed, not least by Keynes himself who wrote of the pre-1914 era that “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he may see fit, and reasonably expect their early delivery upon his doorstep”. And while Keynes was a-bed, per capita consumption of milk, meat, butter, sugar, and tea all rose between 1860 and 1913. The grandchildren and great grandchildren of those who had flocked to Milton’s “dark, satanic mills” in the early days of the Industrial Revolution were beginning to consume such soon-to-be-household names as Oxo, Lipton, Rowntree, and Pears.

The end, even if Keynes couldn’t see it, was to extend to the inhabitant of Stepney the opportunities enjoyed by the inhabitant of Bloomsbury. This was made possible, as Keynes recognised, by “the accumulation of capital” which came, as Keynes failed to recognise, from saving. Keynes, aping his friend Lytton Strachey, derided the Victorians for not consuming the cake in its entirety but they understood better than Keynes that it was out of those leftovers, those savings, that they would bake a bigger cake tomorrow.

Keynes was concerned about the long run but he had no conception of how we would get there. He simply extrapolated past trends into the future without stopping to consider what factors were at work behind those trends. To paraphrase, economists set themselves too easy, too useless a task if they simply tell us the ocean will be flat tomorrow without checking the forecasts.

By consuming the whole cake today without regard to the provision of tomorrow’s dinner, in Keynes’s long run we’d all be hungry.

This article originally appeared at The Commentator