Economics

In dreams (personal)

Published by Anonymous (not verified) on Thu, 17/05/2018 - 6:53am in

Tags 

Economics

  In memory of Kristina, beloved wife and mother of David and Tora. Today, twenty-five years ago, the unthinkable happened. People say that time heals all wounds. I wish that was true.

The Young Turks Condemn Comments Celebrating Persecution of Palestinians

This is a video from the American left-wing news show, The Young Turks, in which main man Cenk Uygur comments on the appalling views of American Conservatives on the Israeli state’s persecution of the Palestinians. One of them remarked on American television about how wonderful and transparent Israeli democracy was. He thought it was the most democratic country in the world. He also praised Israeli walls. These were great too, unless you believed that Palestinians were people.

He was referring to the wall built by the Israelis, to keep the Palestinians the Israelis expelled from their ancestral homes out. The Israelis have been trying to expel all of the Palestinians from Israel and the occupied territories ever since the Nakba at the birth of Israel. They have also refused to readmit Palestinians, who fled the massacres committed by the Israel forces at the time, for purely racist reasons. They have said quite openly that they weren’t going to allow them to return as this would upset the ethnic composition of Israel as a Jewish state.

Uygur then comes to the comment of Ben Shapiro, a very young Republican political commentator, who for some reason they revere as some kind of great intellectual. Shapiro tweeted that Israelis like to build, while Palestinians prefer to bomb and live in sewage. Uygur makes the point that the reason the Palestinians live in squalor is because they don’t control their economy and the Israeli state is forcing these conditions upon them. He also point out that with this, the Republicans are demonising the Palestinians, just as the Nazis demonised the Jews. And it’s done for the same reason: to make their genocide easier.

He also acknowledges that Arabs and Palestinians also demonise Jews and Israelis, and he’s very firmly against that as well. They’re all human beings, and the only proper solution to this is a two-state solution. He also praises the ‘If Not Now’ movement, which demonstrated against the murder of the protesters yesterday. This is made up of young Jews and rabbinical college students.

But there was one person, who was pleased with the murder of the protesters: Anne Coulter. She tweeted that Israeli soldiers had killed 28 protesters (the total number is 59), before asking ‘Can we do that?’

She was referring to Trump’s plans to build a wall to keep the Mexicans out. Uygur argues passionately that if the Israelis get away with shooting the Palestinian protesters caged in Gaza, then it’ll encourage Trump to believe he can shoot Mexicans trying to enter the US. Because just as the Israeli state demonises the Palestinians as terrorists, so the Trump and the Republicans claim that Mexicans are rapists, drug abusers and members of criminal gangs like MS-13.

And if that happens, you can also bet it’ll have a knock-on effect over this said of the pond. We’ll have the islamopobes and anti-immigration lobby over here claiming that we need to have the right to shoot illegal immigrants for the same reason.

Calls for more pension saving are a recipe for a pensions disaster

Published by Anonymous (not verified) on Wed, 16/05/2018 - 6:32pm in

The Guardian reports this morning that:

The average person will have to save £260,000 over their lifetime to enjoy a basic income in retirement, climbing to £445,000 if they are unable to get on the property ladder, according to a report by a former government pensions minister.

In a gloomy assessment of the outlook for today’s millennial generation, Steve Webb said most savers in the government’s scheme were likely to accumulate only half the target amounts.

The report comes from insurer Royal London, who clearly have a vested interest in more people saving. The report is also totally wrong.

The more people save the less economic activity there is in the UK. That is for two reasons. The first is that savings take money out of the economy: they are not spent, so that has to be true. And second, because savings do not fund investment (they go into second-hand shares and property in the main, instead) they do not add value to the UK economy. They do instead simply inflate the value of financial assets.

Now let's roll forward thirty years and assume that everyone has saved as required. We will have five things. The first will be a massive pile of financial assets. The second will be an economy that has underperformed. The third will be an economy with too little actual investment because there will have been no demand for its creation. Fourth, we will then in all likelihood be much worse off than those countries that have not saved in this way. But, fifth, and most important there will then be fewer young people (demographic change is happening) and they simply will not have the means to buy that great pile of over-valued financial assets that their older generation will by then own. And sixth, they will be over-valued. The reasons for this I have already explained: markets are institutionally set up in the short term (which is all they care about) to ensure that this is the case.

So how will the younger generation in thirty years react to this request that they buy this pile of second-hand dud financial assets? They'll realise they are being sold a pup and refuse to part with their cash for assets that will deliver little real value to them. And all those savings will disappear in a puff of financial meltdown.

There is good reason for this. Of course it makes sense for an individual to save. I do not dispute it. But as I say time and again on this blog: just because something makes sense for an individual does not mean it makes sense for an economy as a whole: in fact the opposite is often the case. And that is true here. So long as everyone does not save then saving for retirement can work because the assets into which money is saved are not overvalued enough, and the economic effect of saving in the current period is not big enough, for massive economic distortion to result. But is everyone does it then the opposite is true: total economic distortion results: asset bubbles are created whilst current incomes are suppressed and the result is an inevitable economic meltdown when it is appreciated that there will never be a market able to buy the assets that must (in the case of pensions) be sold to provide an income for a person in retirement. And I stress, pension calculations do assume that the capital is consumed and so assets must be sold.

Royal London are, then, talking complete nonsense.

And so too are governments by compelling mass pension saving.

Pensions are always provided by a younger generation being willing to forego part of their income to look after the elderly. That's the only way it works. And that can only happen en masse through a state pension system. The private pension system we have is already tottering because of asset over-valuation. It will collapse if required to do what Steve Webb suggests.

One day we will realise macroeconomic problems cannot be solved with microeconomic solutions. Pensions are a case in point. But right now learning the lesson may prove to be very costly indeed. And insurers will profit on the way. Of that we can be sure.

How did the Qld government accumulate so much debt?

Published by Anonymous (not verified) on Wed, 16/05/2018 - 8:12am in

Tags 

Economics

Trad needs to show how she can reduce state debt from its current level of $71 billion, or at least prevent it from blowing out to nearly $81 billion, as currently projected for 2020-21.

Wohlstand für alle?

Published by Anonymous (not verified) on Wed, 16/05/2018 - 7:06am in

Tags 

Economics

 

Predictions and Economic Debate.

Published by Anonymous (not verified) on Wed, 16/05/2018 - 4:15am in

Tags 

Economics

Before going into matters, I want to register my protest against the massacre perpetrated by the Israeli racist government of Benjamin Netanyahu against Palestinian demonstrators.

I also want to protest against the jaw-dropping hypocrisy of Australian Prime Minister Malcolm Turnbull and Foreign Minister Julie Bishop, who as always are ready to spin excuses for the inexcusable.

You don't speak for me. I don't condone crimes against humanity.

----------
The Job Guarantee MMTers promote seems to be getting some public attention in the US. Not only that, recently Prof. William “Bill” Mitchell and co-author Thomas Fazi had an article in the popular Jacobin Magazine.

Personally, I can see the attraction of a JG, and I myself am not immune to it, although as a Marxist I have doubts about its political feasibility and its longer-term implications. But I am no expert.

Neither is The Sandwichman (aka Tom Walker), which doesn’t mean he can’t, without dismissing the conception, ask some quite relevant questions (“Job Guarantee versus Work Time Regulation”; “Job Guarantees, Collective Bargaining and the Right to Strike”). Commentator Calgacus offered answers, but a more academic approach, by the leading MMTers would not be out of place, particularly for those less than imbued in the details.

From the other side of the pond, Chris Dillow has his own observations about the JG. I think they are reasonable. That’s how he concludes:

“What we have there, then, are two different conceptions of a JG. On the one hand, it might be a policy which helps capitalism function better. But on the other, it might be a form of transitional demand – a policy which whilst fulfilling human needs is one that cannot actually be sustainably adopted by capitalism and is instead a stepping stone towards socialism.

“I’m honestly not sure which it is.”

----------
Another debate going on in the backdrop is the endlessly inconclusive one about the merits or lack thereof of neoclassical economics. You know the drill: someone writes something against neoclassical economics (the list may vary somehow, but inevitably includes its failure to predict the GFC/housing bubble crash), a bunch of people gang up against him/her. Typically, neither side covers itself in glory.

Same old, same old.

Well, not quite. This time, Jason Smith did something creative. He turned the table on the critics: he read Dirk Bezemer’s well-known papers claiming that some heterodox economists predicted the housing collapse and the ensuing recession. (Full disclosure: I myself have quoted those papers and I used to be a bit of a Steve Keen fanboy). Smith could not find the quotes attributed to Wynne Godley, Michael Hudson, Steve Keen, Jakob Brøchner Madsen, and Jens Kjaer Sorensen.

Bezemer replied to Smith: the quotes, he explained, were not verbatim statements copied and pasted, as it were, from the works of the mentioned authors; instead, they were Bezemer's summation of their views. The quotation marks, in other words, were unwarranted. But the summation itself, Bezemer says, was accurate.

In the particular case of Godley, Bezemer added:

“There is no problem in the fact that Godley et al note the collapse is already underway. That does not detract from their correct projection of consequences of the crisis that was underway, which at that time many still saw as a bad but local housing market crisis. It is the perception of the macro consequences that makes their analysis remarkable, don’t you think?”

So, Godley et al did not predict the housing bubble collapse, but the consequences of it: once the fire had started Godley et al, unlike others, understood things would get burnt. Fair enough.

In the case of Steve Keen, Bezemer writes in his response to Smith:

“Steve Keen’s projection (like Godley’s) was made on the assumption of unchanged policy. Australia however implemented a housing credit expansion program and suffered a major growth slowdown which fell only just short of a technical recession (one quarter negative growth, not two). So Keen’s assessment of recession was overtaken by later policy facts, as can always happen; but his reasoning at the time was correct and consistent with the near-recession.”

Again, fair enough. But let’s call a spade a spade: prediction, not projection. All predictions, as Bezemer surely agrees, are contingent upon nothing happening to negate them. That’s little more than a tautology: it goes without saying. Or, to put things plainly, Keen's prediction failed ten years ago because the government made him fail.

The question Bezemer doesn't seem to consider is what’s the point of making predictions every other week if they come with a built-in get out of jail free card? I mean, other than getting some free publicity?

Like this: Steve Keen in August, 2016, as I noted then.

(source)

We're in mid 2018. It's been almost two years since that interview and one since this review. What explains that now?

----------
Given the way that second debate goes on and on, shedding little light but generating plenty of heat, Smith deserves recognition for his contribution. I don't expect it should put an end to it, but at least it should reduce some of the hype. Unfortunately, it took too long for someone to come up with that idea.

Had Smith thought of that earlier, it would have spared us a good deal of “buyer’s remorse”.

----------
Speaking of predictions. Ross Wolfe, who has kept himself well clear of that debate, has some very frank and thought-provoking reflections on prediction, history, and Marxism.

Hobbes on Consumption Tax & What we Owe the Community/Polity

Published by Anonymous (not verified) on Wed, 16/05/2018 - 2:01am in

But if we consider, where Monies are raised according to wealth, there they who have made equall gain, have not equall possessions, because that one preserves what he hath got by frugality, another wastes it by luxury, and therefore equally rejoycing in the benefit of Peace, they doe not equally sustaine the Burthens of the Commonweal [civitatis]: and on the other side, where the goods themselves are taxt, there every man, while he spends his private goods, in the very act of consuming them he undiscernably payes [imperceptibiliter persolvit] part due to the Commonweal, according to, not what he hath, but what by the benefit of the Realm he hath had. It is no more to be doubted, but that the former way of commanding monies is against equity, and therefore against the duty of Rulers, the latter is agreeable to reason, and the exercise of their authority.--Hobbes De Cive, XI.XIII

This post is prompted by reading a draft of very fine unpublished paper by Ioannis D. Evrigenis on Hobbes's political economy which reminded me of Hobbes's defense of the consumption tax. This tax is promoted (over one alternative, the income tax) in name of equity. Below I want to return to the question of equity. But before I get to that I want to not two features (in reverse order of importance) about what Hobbes says about the consumption tax as such (which I believe has escaped notice hitherto--I am happy to be corrected).

First, it is a form of payment that can go almost unnoticed when it is folded into the quoted price. Obviously, this is not so in places (i.e., Stateside) where the sales tax is not included in prices quoted. Including the tax in the quoted price, is so a way to exercise authority in a quiet way without constantly calling attention to one's power. It follows that by constantly calling attention to the sales tax, US government(s) is/are actually constantly calling attention to their power. Hobbes rightly notices this is undesirable because it promotes undesirable passions (fear, anger, etc.).

As an aside I have heard two reasons for the US (and I believe Canadian) practice to keep the tax distinct from the quoted price: (i) it's in the interest of shops/sellers to make apparent price low (in order to stimulate desire/demand for the good); (ii) US anti-tax legislators want the public to know how much taxes add to costs of goods. These are both compatible with the further claim that this practice reinforces the visibility of state power.

Second, Hobbes likes the consumption tax because it is proportional payment for benefits received from the polity. These benefits are, of course, heterogeneous. Some of these benefits are clearly economic through the provision of public goods. Hobbes's point is also compatible with the idea that citizens benefit from the state in many non-economic ways (and that the costs of providing those non-economic benefits should be paid by the citizenry). Because the point of consumption (as distinct from, say, investment) is want-satisfaction (in Hobbes that's a quite natural thought because it connects nicely to his account of liberty), and this takes place within, and in certain respects are made possible by, the framework of law and order, taxing consumption is a straightforward way of making people pay for the benefits they receive from living in political society. The more we consume the more we benefit from the state. 

So far so good. But now let me turn to the equity claim. one may also say,  the more we can consume the more we benefit from the state. Putting it like this points to the fact that when the state protects, say, property it benefits not just present consumption, but also wealth. Now, this raises moral (and political) problems for the equity claim. 

Now one can understand wealth (for present purposes, income and inherited income) as future consumption. So, recent defenses of the consumption tax, accept his point. Textbooks teach that taxing life-cycle income is equivalent to taxing consumption.* The problem here is that this equivalence (between taxing income and taxing consumption) does not hold for capital/investments. 

So, what the state protects (in say defending property rights) is not just the right to present consumption, and the ability to consume in the future, but also the ability to accumulate capital. Hobbes's claim that the (proportionate) consumption tax is equitable seems correct for the first of these (present consumption, that is want satisfaction). It is not entirely obvious that we benefit equally from the the protection for deferred consumption; citizens who live and work at subsistence level (in Hobbes's day that would have been the vast majority), do not benefit much directly from the state's protection of saving. [This last point already tells you that even leaving aside the question of capital, contemporary models that work with life-cycle income are not entirely apt for or neutral in societies with people that live at subsistence level.] It hard to see how even in such a society the equity claim can really survive scrutiny. Adam Smith famously did not and for that reason thought it equitable to find ways to tax the luxury consumption of the rich (see my book for discussion), although Smith suggests this can be best done through a sales tax, but "toll upon carriages of luxury."

If we understand savings and capital as consumption deferred, Hobbes's point seems tenuous, but still defensible. But the moment we treat capital as a source of accumulation then Hobbes's defense of a consumption tax as equitable strikes me as unconvincing. While one can argue that everybody benefits from the escape from the state of nature, the rich really benefit disproportionately from the state's protection when they are allowed to accumulate.

As noted above, Hobbes's argument in defense of the consumption tax  does not reduce to equity. Quiet, non-invasive forms of taxation promote political stability (as opposed to many other forms of taxation). So, from a Hobbesian perspective that may eave ample even decisive room to defend the consumption tax. 

*Evrigenis calls attention to this in his paper. (I use a different text book than he does.)

Oh dear, oh dear, Krugman gets it so wrong, so wrong

Published by Anonymous (not verified) on Tue, 15/05/2018 - 11:29pm in

Tags 

Economics

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of […]

The death of interest, inflation and the independent central bank

Published by Anonymous (not verified) on Tue, 15/05/2018 - 6:11pm in

Tags 

Economics

I have used this chart before, and I do so again without apology. It comes from an IPPR report, but that's  irrelevant to the use that I'm making of it:

What, I suggest, is that this chart shows something quite staggering. I call it the death of interest. The trend is long-term and inexorable,  in my opinion.  The simple fact is that the so-called 'risk-free'  interest rate is disappearing.

I stress, this does not mean that interest will not be charged in the future,  but to understand this it has to be appreciated that the interest rate charged on most loans is made up of two components.  One is the cost of money,  and since for most banks the cost of money is little different to the 'risk-free'  interest rate this charge is tending towards zero over time. That's precisely because, as modern monetary theory explains, there is no cost to creating money and as a consequence there is no cost to lending it, meaning that its price should, in fact, be nothing.  That is a  fundamental reason why, overall, interest rates remain low now, on average, when compared to long-term norms when different money creation arrangements prevailed.

The second component is not really an interest charge at all: it is a risk premium to cover the chance that the borrower will default upon their loan obligation, and leave the lender with a bad debt.  This is, of course, why many loans still carry quite exceptional interest rates when official rates are almost non-existent.

I am not,  then, suggesting that we will see the disappearance of interest in the economy:  as long as default risk exists there will be interest charges,  but that is not the point at issue here. All that disguises is the fact that the real, risk-free,  interest rate is tending towards nothing and that means that, in effect, the entire mechanism of monetary policy is now redundant.

There is another reason for this redundancy: if interest rates decline so does inflationary risk. This is a chart of long-term inflation in the UK, from the House of Commons library:

The risk-free interest rate is declining in the UK  and wholly unsurprisingly so too are oscillations in inflation rates,  especially if war and the world crashing out of the gold standard and the UK leaving other exchange rate mechanisms (such as the ERM) are taken out of the trend,  they being the only real explanation for significant inflation hikes since the 1860s.

I have already suggested today that monetary policy now seems to be a wholly irrelevant mechanism for economic policy control, but so too, I suggest is  inflation targeting. The reason is common between two:  if interest rates are tending toward zero, and I think they are,  then inflation is inevitably going to tend in the same direction,  external shocks apart, which can never be corrected by monetary policy.

The time to bury monetarism really has arrived. And in that case  the day of the independent central bank is also over.

On the irrelevance of a supposedly independent central bank

Published by Anonymous (not verified) on Tue, 15/05/2018 - 3:49pm in

Tags 

Economics

Whilst on a train home last night, after an evening discussing macroeconomic policy, it occurred to me that the Bank of England now has as much chance of controlling the economy by changing interest rates as a birth control clinic has of controlling a country’s population when everyone in it is aged over 50.

Despite that many still think that we must have an independent Bank of England controlling the economy using interest rates with the sole aim of limiting inflation, which has not been an issue of any economic significance for a considerable period.

Why, oh why, you might well ask?

Pages