FT letter denouncing Corbynomics

Here’s the letter, organized by Paul Levine and myself, to appear in the FT tomorrow, and here’s Chris Giles’ story about the letter.

Thanks to those who signed, and the many who were supportive but whose positions don’t allow them to make potentially political interventions like this.   Needless to say, our motivation wasn’t political.   It was ire that the mantle of ‘mainstream’ was being offered by the ‘letter of 41’ and claimed by Jeremy Corbyn.  Who Labour elects as its leader is the business of its broadly defined ‘members’.   But we and our signatories don’t wish to have the median economist position misrepresented.

Small point.  The ‘targets’ sentence in the letter is losing people a bit.  This is to be read as ‘renationalising will probably make companies worse not better’.  [The ‘target’ is the target of the renationalisation, ie a company.  Sorry.  Terrible drafting by me in this case].

Post script:  Ethan Ilzetzki at the London School of Economics also wished to sign, but we got this message too late for the FT deadline.  Anyone else who is supportive or not is free to comment below.

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ICYMI Paul Levine and I are organising an anti-pro-Corbynomics letter

In case you missed it, I’m organising, with Paul Levine at Surrey, a letter to express the anti-Corbyn view, to counter the misleading impression given by the ‘letter of 41’ published in the Guardian.  If you are a practising economist and think you might want to sign, contact Paul or I and we will show you a draft.  We have 43 so far.   Notice that Paul already wrote a letter on the topic, pointing out how misleading the letter of 41 was on the matter of Corbyn’s anti-austerity being ‘mainstream’.  The letter was ignored by the Guardian, but I reproduced it in an earlier post.

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No need to show the wrong sort of spine over raising rates

I was alerted by Matt O Brien on Twitter that some [see, for example this NY Times op-ed] are arguing that the Fed and other central banks, who had prefigured an imminent first hike in rates in their speeches, should follow through regardless and raise rates, ‘to show some spine’, else run the risk of losing inflation-fighting credibility.

This argument ought to have no foundation.  But unfortunately it has.

In an ideal world, the central bank would be sufficiently transparent about its objectives, and its interest rate plans, and how the latter are contingent on the evolution of data, that there would be no need, if bad economic news interferes, to follow through on an interest rate rise that was consistent with the old data, for the sake of ‘showing spine’.  Indeed, in that world, raising rates would constitute an unwelcome policy surprise, a departure from the agreed contingent plan.  Those who had grasped the old plan would set about working out what the new plan was, and for a while, the economy would suffer as a result of the increased monetary policy uncertainty.

The element of truth in the argument is that there is not this sufficient degree of transparency.  We don’t know precisely how the FOMC or the MPC, for example, trade-off their goals of stabilising inflation and real activity.  And we don’t know how those objectives translate into operational policy rules, nor how those rules, given a view about how the economy plays out over the future, translate into a properly state-contingent plan for interest rates.  This opacity allows the view to take hold that the Fed needed to and was going to raise rates come what may.  And that any sign that they don’t, following a stock-market correction, is a sign that they have been taken over by the low interest rate lobby.

Despite this kernel of truth, I’m confident that policymakers won’t put much weight on this concern, behaving instead as they do in a properly contingent fashion, and will put back rate rises if necessary.  But they would be advised to try harder to communicate what they do, their plans for achieving it, and how that translates into interest rate trajectories from quarter to quarter.  This won’t and shouldn’t insulate the Fed and other central banks entirely from criticism.  But it would raise the level of debate from ‘you should be raising rates, cowards!’ to:  ‘oh, those are your objectives, are they, well I don’t like that!’ or ‘if that’s what you are trying to achieve, you have a funny way of going about it!’.

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Lower terminal central bank rates doesn’t mean it will be time for PQE.

That’s the conclusion of Richard Murphy’s latest blog.  He has latched onto the latest of dozens of speeches by central bankers pointing out that for one reason or another, they don’t expect the resting point of central bank rates to be as high as in the pre-crisis period.  And concluded that this means we should be adopting People’s QE – the periodic funding of public investment through the creation of new central bank money.

Actually, aside from the problems with that policy that I have explained in previous posts, there’s no reason to conclude that.

For one thing, we can contemplate raising the inflation target.  I’ve proposed 4%, falling into line with a suggestion by Blanchard in 2010, to be reviewed every 5-10 years as evidence about long run equilibrium real rates shifts.  Raising the inflation target will raise the terminal point for central bank rates one for one, and make more room for nominal rate cuts.

Second, we can contemplate more active use of conventionally financed fiscal stimulus policy.  Simon Wren Lewis, Jonathan Portes and others have proposed just that, under the auspices of an independent fiscal council.

Third, we should remember the battery of new unconventional tools that the BoE has already availed itself of;  vanilla quantitative easing;  funding for lending;  macro-prudential tools;  and purchases of private sector assets [‘credit easing’].

Fourth, recall the solution proposed by Miles Kimball, Willem Buiter and others – to reform the institutions of money so that negative nominal rates are possible.

Fifth, we have the possibility of more concerted and coherent forward guidance, articulated as both lower interest rates for longer (than historical policy rules would suggest), and as a corresponding, conscious overshoot of the inflation target.

Sixth, there is the possibility of adopting, temporarily, in a crisis, levels-based targets, either a price level target, or a nominal GDP target, as a device to make the lower interest rates for longer, and inflation overshoot in the above solution more credible.

Seventh, in extremis, we have the possibility of helicopter drops of money direct to consumers, an old idea urged on us recently by Wren Lewis, Eric Lonergan, Mark Blyth, and others.

So there are plenty of other – to my mind far more attractive – options to consider.  So far Mr Murphy has said nothing about these other options, which is curious.

If the motive is to solve a monetary policy problem, we need to know why these other seven options are less appealing to the Corbyn team.

More likely, the omission stems from the fact that they are reasoning from a financing problem [‘how can we get more stuff without borrowing to make us look crazy?’].  That there are better ways to solve a monetary policy problem is not relevant if those options don’t solve a financing problem.

[Needless to say, I don’t think there really is a serious financing problem].

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Paul Levine on the 41 claiming Corbynomics is ‘mainstream’

I’ve been organising an anti-the-41 letter, which has been going slowly, the score currently 41-29.  In the course of that I corresponded with Paul Levine, a Professor specialising in macro at the University of Surrey.

Paul is a founder member of the European community of economists that started to do macro properly, following the lead of the US.  And with Pearlman, wrote foundational papers in time-consistency and control theory that I remember Nobel laureate Tom Sargent marveling at in his macro lectures.

Anyway, cutting to the chase, Paul wrote his own letter, which the Observer seem to have decided to ignore, responding to the 41.  I hope their neglect was accidental, because it does not look like it, spoiling as it does a Guardian letter that became a one-sided Guardian story about how Corby is proposing respectable macroeconomics.  Here’s the text:

“The 41 signatories (Observer, Sunday 23rd  August) writing on  Corbyn’s economic policy fail to distinguish between the quite different forms of “anti-austerity” policies proposed by opponents of the Government. These vary from deficit denial (high debt doesn’t matter); to proposing much slower consolidation involving some combination of spending cuts and tax rate increases dependent on the growth of tax revenues;  to a simple painless solution based solely on  taxing the rich, raising corporation tax and incredible estimates of  preventable tax avoidance/evasion levels.  Corbynomics is firmly rooted in the latter, whilst being vague about debt targets. IMF, current Labour Party policy and, in effect, that of the SNP (as shown by the Institute of Fiscal Studies) belong to the middle category, often denounced as “austerity-lyte”.  The mainstream position is this one, not Corbynomics.”

 

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Tsipras being decisive, not irresponsible?

Put as a question as I can’t claim to know enough to be sure.  But some are castigating Tsipras for being irresponsible and subjecting Greece to unwanted and unnecessary uncertainty so soon after concluding the 3rd bail-out agreement, and receiving the first tranche of money [paid straight to the ECB].

An alternative narrative is that once the agreement was signed, it was a foregone conclusion that the Left Platform group and supporters would ultimately withdraw all support.  That would force him to rely on the cooperation of too many opposition MPs, who would extract a political price that might undermine him, and perhaps the agreement itself.  [Really, what else is he now, except the agreement?]  Indeed, they would be looking for the first chance to sink him and his Syriza rump.

Given that foregone conclusion, better to call the election soon, to give LP as short a time as possible to organise their own Party.  Obviously he calculates that he will swap LP MPs for almost as many names that he has hand-picked for his new party list, and who will owe their new career to him, and thus be bound into his personal project of implementing the agreement successfully.  If an election has to happen to secure Tsipras’ hand, and thus ultimately the fate of the agreement [which lies in demonstrating cooperation over implementation] what benefit is there to waiting?

It might look odd, since ultimately Tsipras decide that the Referendum’s ‘No’ meant ‘Yes’.  But he has presumably been looking at the same polls as everyone else, and sees that no-one else can capitalise on that abrupt change in strategy, or facing up to reality, however one sees it.

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The next research economist advising traders to get onto the MPC should serve gardening leave beforehand

This suggestion was put to me by an old friend, and it seemed right.  To explain:

Jan Vlieghe – who I think is a great hire for the MPC – is shortly to start voting on the MPC, following his appointment to the slot vacated by David Miles.  I’d like to propose that the next similar appointment enforces a protracted period of gardening leave, a period between departing the former private sector employer, and casting the first vote, lasting a few months at least.

Why?  We are used to the idea that those moving from the public to the private sector should serve time like this, so that their knowledge of the Bank of England’s policy deliberations has time to become sufficiently outdated that the future private sector employer is not getting any unfair advantage.

But why the need for a leave period to mark moves in the other direction?

A classic job type – including Jan’s – is for a private company to employ economists to scrutinise central banks, and the data they are watching, to figure out as accurately as possible what they are going to do next.  And then to figure out based on that what a fair price would be for assets whose value is closely related to current and future central bank interest rates.  Like that country’s government bonds.

Over time, such an economist will build up a world view, sharing it with those actually taking risk in the company, getting feedback, probing it, modifying it when it is shown to be in error, and so on.  Those actually taking risk might not share that view [one such Tweeeted at me today something like ‘if I listened to our economists I would be bankrupted’].  But they certainly know it, from hours of grilling.

Part of the process of worldview building is likely to be of the following form ‘if I was in their shoes, this is what I would be doing and thinking’.  In figuring out what the MPC will do, it may help to figure out what the MPC should do.

As Jan, or any future similar MPC hire, casts their early votes, they will be doing so tackling the same challenges that were explained to their former employers, including helping unravel what they thought were misperceptions by the Bank, or emphasising good insights that the other, ongoing, incumbent members had.   This puts the former employer, (in this particular case Brevan Howard), at an advantage, for the period while this information is useful.

If procedures inducting members like the Treasury Committee hearings, or other procedures like the Inflation Report and the Minutes, were immediate and entirely transparent in communicating the new hire’s worldview, then the advantage got by one of your economists being hired as an MPC member will be very short-lived and immaterial.  But such procedures fall sufficiently far short of this to leave room for money to be made.

It goes without saying that Jan is just an example here and the problem is not specific to his hire at all.  It would have applied with the same force to Ben Broadbent, the late David Walton, and probably others.  It was pointed out to me that even those economists who work for large industrial corporates fall foul of this, since those companies have large Treasury operations who would make money by knowing a little better what would happen to interest rates.  So a hypothetical return of Spencer Dale, who went to be Chief Economist at BP, would present the same problem.

So the solution is to enforce a few months of gardening leave, enough time for the new MPC hire’s world view as it was when they left their private sector employer to be sufficiently outdated that their first few votes become no easier for them to predict than for other market participants.

 

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