Open letter to Neel Kashkari

Dear Neel

I read that you are setting up a new research institute at the Minneapolis Fed to study inequality.

I think this is a good use of resources.

But I don’t think it’s appropriate for you to lead this or for your regional Fed to be seen to be majoring on this topic.

Fed independence is a valuable commodity, and this initiative puts it in peril.

To some it will look like you are using your discretion over regional Fed funds to push a political objective.

Your new President has Janet Yellen in his sights for simply keeping interest rates low in pursuit of the mandate.

The more conventionally conservative Congress have those amongst them that want to ‘Audit’ you, an initiative that stems partly from a concern [totally misplaced in my opinion] that you collectively lost your way by keeping interest rates low and undertaking unconventional policies like QE.

The risk that Fed appointees become politicised is aggravated by the politicians feeling that Fed employees use public money for political purposes.  Inequality is an unavoidably political topic.

Recent research and concerns about monetary policy have focused on how monetary policy works by redistributing;  and how inequality may have been a contributor to currently low real interest rates, which the Fed is accommodating.  But this would not warrant an institute for ‘Inequality’.  This would warrant a research agenda on the causes of low real interest rates;  or on whether there are alternative ways to implement monetary policy in pursuit of your mandate that have different consequences for inequality.

There is also an unfortunate personal angle to this.  Your prior pursuit of political office is bound to be used by some as evidence that this new initiative is part of an agenda to propel you once again into that career.  I don’t doubt your motives, but others might.

The best way to pursue this would be to leave the Fed and try to fund it conventionally, from NSF research grants, corporates, or wealthy philanthropists.  Inequality is rightly THE topic for those worrying about how to preserve the fruits of the enlightenment, and what we here in the UK call the mixed economy welfare state version of capitalism.  So I think you’d find there would be no shortage of willing participants.


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What did Tory Remainers get for giving into the hard Brexiters?

As I wrote here for Iain Martin’s site Reaction Life, the delay in being transparent about what the UK government wants was, I conjecture, mostly about conducting a negotiation between former Tory Remainers and the victorious Brexiteers.

The UK had to approach the EU with a schedule that explained how much it was prepared to pay in terms of obstructing trade for control over migration.  But the price differed between competing Tory factions.  The Remainers won’t pay anything, and perhaps even include those of us who view migration as a social benefit.  Hard Brexiteers see migration as costly, so will pay something.  And there are even those Brexiteers that have convinced themselves into thinking that separating from the single market will increase trade and prosperity overall, not reduce it.  So for those, migration is on the benefit side of the calculation, as is single market dismantling.

The hard Brexiteers have clearly won out.  But at what cost to them?  Did the Remainers and the liberal leavers extract a price?  Could they command one?  If they could, did the hard Brexiteers have anything to offer?

The hard-Brexit/rest divide tends to correlate with other views in the populace at large, so one could imagine in principle that Remainer/liberal leaver MPs could buy something with their capitulation.

But, thinking further about it, I can’t come up with anything concrete.

The post referendum mood seems to involve the Theresa May and the Tory Remainers tilting left.  Embracing less regressive taxes, industrial policy, regional policy.  That they would share with the hard Brexiteers, perhaps, who carry the UKIP manifesto in their pockets.  So that isn’t something the two factions could trade for Brexit capitulation.

Striking a deal seals the prospect of a long uninterrupted period in government, of course.  But both sides need each other for that.  So that also is not something that can compensate Remainers for giving up.

Any ideas?




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Submitting to demonetization, or not

The Indian government decided recently to withdraw 85% of paper currency.  Despite the hair-brained nature of this scheme, ostensibly aimed at reducing corruption and tax evasion, the Reserve Bank of India agreed almost overnight.  More intriguingly, it seems to be working.  Not in the sense of being a beneficial policy.  But in encouraging people to deposit the old notes for something that will be worth something after the deadline.

Why is this intriguing?

Well, a contrasting story, told to me first by former Governor of the BoE Mervyn King, is of the late Sadaam Hussein’s attempt to demonetize the then autonomous area governed by the Kurds, and protected by a Western-backed no fly zone.

Sadaam, who was having a spot of difficulty financing his activities through conventional means, needed to print lots of notes, but sanctions prevented him from buying Swiss-printed dinars.  So, partly for this reason, and partly to try to destabilise, Lenin-style, his adversary, the legal tender status of old notes was revoked.

Kurds were invited to make their way to the central bank of Iraq in Baghdad and swap the old notes for new ones.  But for reasons we can guess at, they did not think it beneficial to cross the de facto border into the rump of Iraq, or find someone to do it for them.  Instead Kurds held onto their old ‘Swiss dinars’, (so-called because they were printed by the Swiss firm De La Rue).  They refused to be demonetized, in other words.

These stories remind us that more generally the decision about what is or is not money is a social and collective choice, not one maintained solely by fiat.

The Kurds ignored Sadaam’s edict.  Not just, or I would surmise, even mainly out of nationalist fervour [the old notes were not ‘theirs’ after all], but because individually, and collectively, it was judged economically advantageous.  Perhaps the expectation arose that at some point a local central bank would be established and the notes would be redeemed [for other bits of paper of course] or Sadaam deposed.  In India, note holders might have pondered whether the demonetization would stand or be revoked at some point.  Instead it seems that they think they have to give into it.

Governments submitting to dollarisation after debasing their own currencies make the same point.  A government gives local currency legal tender status and prints loads of it. Individuals decide to use dollars instead.

These stores provide a caveat to several varieties of what is essentially the same question [what should money be?] that pop up.  For example:

Ken Rogoff debates whether central banks should stop issuing large notes.  And the caveat in the back of our minds should be:  is de-issuing feasible, and will it be accepted?

And Ben Broadbent mulled over whether the central bank should offer its own digital currency.  The caveat here being:  ultimately, this may be decided by society at large, and by markets:  by forces outside central bank control, in other words.

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QE: leads to looser or tighter fiscal policy?

A recent Goldman Sachs piece on the UK holds the view that the BoE’s recent resumption of asset purchases will permit and prompt UK fiscal policy to be looser, postponing consolidation of the deficit.  The mechanism at work is that, comforted by the knowledge that there is a large buyer with a deep pocket for the debt, yields are lower, and this in turn makes the government more comfortable about borrowing, the yield reduction providing more fiscal space.

I don’t hold this view.    But it is interesting to think it through, because it gets at what QE is, and what outsiders seem to think it is.

The way I see it – and the way I think both the government and the BoE see it – is the following.  The reduction in yields acts as a substitute for lowering the short-term interest rate, and, supposing this to be adequate to bring about a desirable path for inflation and the output gap, would allow tighter fiscal policy than otherwise.    One of the arguments made by the government’s critics uses the same logic in reverse.  That line of thought – repeated recently in Paul Krugman’s blog – wishes for rates to be higher as a precaution to provide more room for a future cut to respond to future recessionary shock.

The ‘fiscal space’ argument used to suggest that QE permitted looser fiscal policy isn’t relevant, in my opinion, now, because the UK, at a debt to GDP ratio of about 85%, is a long way from the point at which markets might worry about default, and require corresponding premia to compensate [a point which is not, as Robert Peston recently mentioned in his blog ‘conventionally taken to be 90%’].

I can think of two arguments that might lead you to think that QE made no difference to fiscal policy.  One is that hypothetically, a recession is so deep that fiscal policy is led to loosen on a trajectory that is as generous as could be risked, given available fiscal space, the duration of the shock, and the likelihood of another.  Whatever QE is tried is on too small a scale to change the need for maximally stimulative fiscal policy.  You could just about run this argument as a description of UK fiscal policy 2010-12.  But some would disagree.

A second ‘irrelevance’ argument is that QE is ineffective.  Bernanke joked that QE didn’t work in theory, something taught us many times over, by Wallace, Krugman, Aurbach and Obstfeld, Eggertson and Woodford and others.  Empirical studies of QE find variable, but reliably positive effects on impact.  But this is not proof that its effect endures.  A monetary stimulus that is not a stimulus and is recognised as such would not have any effect on the fiscal authority’s behaviour.

Two ‘QE is financing’ arguments that have more legs, but which the authorities will deny until they are blue in the face, are these.

First, QE is helicopter money in stages, and by disguise.  Both government and central bank recognise that conventional fiscal space might be running out, and so the central bank buys debt that otherwise the market might not bear.  There is lip service paid to selling it back, but that never happens.  We will have to wait quite a while to get a chance for the authorities to rebut this conspiracy theory conclusively.

A second financing argument is that QE tilts the yield curve in such a way that the Treasury, for its own purposes, takes advantage, and skews issuance.  The intention at the outset was that the UK’s Debt Management Office would not do this.  But as I blogged some time ago, you can see evidence that its customary practice of consulting with market clients over what they want issued would have given them cover to do just that.  Summers also worried that the US Treasury was ‘undoing’ the Fed’s QE by tilting issuance towards long end debt.

[Sorry for not providing links:  voice recognition software can’t do this!]



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Carney calls for goverment to redistribute more

He may as well have done.

This speech came soon after several occasions locking horns with Jacob Rees Mogg over the Bank of England’s analysis of the pernicious economics effects of Brexit.  Rees Mogg wrongly accused the Governor of politicising his role, of involving himself in government policy.  The Bank had to form conclusions about the impact of Brexit, and to make those transparent so that its policy changes would be most effective.

Those of us who backed him during these scuffles, and were appalled at the seemingly partisan nature of JRM’s attacks, [and those of others of a similar persuasion], surely feel like raising a non-Governor’s eyebrow at a speech that could not be more political.

If you are of a certain persuasion, the analysis, and the political judgement coursing through this speech, is the right one.  Globalisation created winners and losers;  governments did not do enough to compensate the losers.  Do more to compensate the losers, or globalisation, perhaps even capitalism itself, is doomed.

In Carney’s speech you’ll find things like:  ‘such high income inequalities’;  ‘staggering wealth inequalities…’;   ‘the cry for inclusive growth….’;  ‘inequality of opportunity remains disturbingly low’.

And we learn that ‘subjective well being is significantly affected by perceptions of inequality and the sense of community’.  We are told the ‘challenge is how to manage and moderate the forces of innovation and integration’

And the speech comes to a crunch in advice on ‘The Way Forward’.

Three pieces of advice are offered.  I find them compelling.  But hard to reconcile with the task of turning the handles the BoE was given to turn under the terms of operational independence:

“First, economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology.”  [OK that one might be harmless in a different speech].

“Second, we must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.”  [Translate:  more fiscal stimulus please, and more [or is it less?] structural reform – neither the province of the central bank].

“Third, we need to move towards more inclusive growth where everyone has a stake in globalisation.”  [Many of us agree, but is this the central bank governor’s business?]

The country needed the BoE, and continuity in its leadership most, this year, through the turbulence of the referendum vote.  And it needs these things over the coming years.  What that provides is a sober, apolitical response of the BoE policy levers to events as they unfold.

Speeches like the one Mr Carney gave offer ammunition to the coalition of those that would sweep aside our institutions to get the hardest Brexit possible as soon as possible, and all kinds of other social and political change with it.

His words come after other interventions [eg urging that we need more action on climate change].   And at a time when the BoE is in the awkward position of having been rewarded for its custody of the economy during the disaster of 2008/9 with many more powers than it started with.

There is an argument that if the leaders of our major institutions did not start speaking out and recognising these social dysfunctions and calling for solutions to them, all of the bodies they lead would lose legitimacy, and be swept away in an electoral tide of discontent.  But reflecting on how to respond to this risk is just not a job the Bank has been mandated to carry out.  At least not in public.

Those who cheer Mr Carney’s political economy lectures might reflect on how they would feel if the technocrat delegated interest rate and capital adequacy policy started lecturing them about Ayn Rand or social Darwinism.

In one of the heated exchanges between Carney and Rees Mogg at Treasury Committee, the latter asks why Carney did not critique the economic proposals of Jeremy Corbyn.  Carney, clearly exasperated, chose not to respond.

The genuine answer to that jibe was that there was no prospect of Corbyn’s policies being enacted in the forecast horizon, so they were not relevant to the Bank’s interest rate decisions.  But the mischievous answer Rees Mogg wanted to plant, and which gains currency with speeches like the one the Governor has just made, is that being a good inclusive capitalist, he had sympathy with some of the things Corbyn was proposing and did not want to criticise.

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Rethinking Science

Dear Scientists.  I am not one of you.  Or rather, [and this is part of the problem], you will, mistakenly, not think of me as such.  But I have some advice about how you need to go about rethinking what you do.  That you should is self-evident.  Take a look out any window and you will see that your failures are piling up.  No flying cars.  Teleporting.  Free power.  Or perpetual motion.  And many things deteriorate and break down.  Sometimes, I see mud.   Not surprisingly, there is discontent everywhere.  People are dying, even in this year of 2016.  A few weeks ago, my kids were in bed with a cold.  No-one predicted this, and there was no solution in sight.  All this, yet your disciplines carry on.  I say ‘disciplines’ advisedly, since from my perch I can see you scurrying about in your sub-specialisms, without my sense of the big picture.  Sometimes I browse the internet for Science things and I see pages full of equations.  I conclude from this that you are out of touch with reality, and your failings to improve it.  I have my own theory of the universe, gleaned from introspection, and many years living in it.  Soon you can purchase the book length version, or attend one of my lectures.  If any of you are open-minded enough to invite me to talk to you, I will happily appear in your seminar programs.  Of course my suggestions will not look like a conventional academic paper, because, my friends, that you would hope for this is exactly the problem!  If you are not so open-minded, and I strongly suspect you are not, that will again prove that you have a problem.  Perhaps if you spent less time deriving equations and more time studying the history of scientific thought and the sociology of science, we would not be in this predicament, and this earth would now be a land of milk and honey, so to speak.  The other day, I took my large motorbike to be fixed, and I met a man who wielded spanners and chains and oil and, lo, problem solved, and I thought ‘If only we could make a scientist see this!’  There is a painting called ‘The Scream’ [obviously an art history reference will be lost on you, but persevere, it will be good for you] and this is a good metaphor for what you will be faced with if you do not heed this advice to start holding some conferences soon to Rethink Science.

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Guest post at FT Alphaville on India’s demonetization

Link here.  H/t David Keohane for getting me going on this, and putting me right on facts about how many have bank accounts in India.

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