Je ne Bregret rien

Am I missing something, or are there very few or no prominent Brexiteers changing their minds about the benefits of Brexit?

I find it extraordinary that there are not more.

Opinion polls have shifted somewhat against.  But politicians and commentators have doubled down.  This in the face of very marked changes in the likely costs and benefits of leaving.  The chance of no deal at all in March 2019 has risen greatly;  also I’d conjecture that the chance of Brexit In Name Only, either in the form of a very close tie to the EU, or prolonged ‘transition’ has risen.  The inability of the warring factions in the Tory Party to confront the trade-offs that face the UK, and the crystallisation of the Irish border as a stumbling block, have both reduced the chances of a free trade agreement that would separate us materially from the UK.

A rational calculus of the cost and benefits of Brexit has surely shifted in favour of Remain.  Brexit in Name Only grants only symbolic political freedom, and considerably reduces the say we have over the market we stay hitched to.  No deal might be a catastrophe and is surely to be avoided at all costs.  An increase in the probability of these two things surely lowers the benefits of Brexit.  Unless you place an extremely high weight on Brexit as an abstract end in itself, therefore, you must surely change your mind.

To repurpose a much used analogy.  Imagine that Remain had won, but 2 years down the road it became clear that the EU was going to force us to join the Euro, or leave the EU.  This would surely cause former Remainers, for whom the ultimatum would be a surprise, to rethink.  The probability of Euro membership and all its disadvantages has risen;  the benefits of leaving the EU therefore increase.  The analogous cacophony to the Brexiteers, who formally dismissed the chance of a no deal exit as Project Fear, but now try to normalise it, would be a line up of Remainers explaining the political benefits of the Federal project that Euro membership would include us in, waving away concerns about the lack of monetary independence with assurances that it would all be fine.  And unresponsive to calls for another referendum given that Euro membership was at the time dismissed as a highly unlikely prospect.

Perhaps this Bregret is happening, only privately.  Public Bregret would constitute too much of a loss of face.  Or perhaps Bregret is judged too unproductive in the tribal warfare for political influence in the future.  Bregretters would be bottom of the pile for political influence amongst always-true-Remainers, and traitors in the eyes of the continuity-Brexit tribe.

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Was poor post crisis macro performance all central banks’ fault?

Martin Sandbu’s column excoriates central banks for post financial crisis macroeconomic performance.  He is right about a lot of things, so I am sure – and hope – his broadside is taken seriously.

But I don’t think he is right about this.

Martin’s piece fills a vacuum left by central banks and their finance ministry sponsors. [What?  I hear you thinking.]  Central banks themselves ought to be routinely, even institutionally reviewed.  Stephen Williamson commented on Twitter [something to the effect] that he had never seen a central banker own up to a mistake.  This is bizarre.  We and they know that they make mistakes all the time, and recognition of that informs the next policy decision or policy reform.  A well designed policy this period requires diagnosing the status quo, and understanding the extent to which we are where we are because of where we went wrong before.  Treasury Committee conducted a brief review of post crisis monetary policy in the UK towards the end of Andrew Tyrie’s chairmanship, but the exercise fizzled out.

Seen through the economic spectacles that central banks use to observe the economy – their apprehension of the state of the art of macro – performance isn’t all that bad.  Inflation undershot the target, but not spectacularly.  This is indicative of the output gap – the amount of spare capacity in the economy – not being too great.  Actual weakness in post financial crisis in output is therefore something new and ‘structural’.  When necessary, the UK central bank tolerated a substantial overshoot up to 5.5%, weighing as it was asked the adverse consequences for the real economy if it had set policy tighter.  It’s only a hypothesis that the large gap between a line extended out of the pre-crisis output trajectory and actual output has anything to say about the efficacy and competence of monetary and fiscal policy and their frameworks.  The medium frequency moving average growth rate has moved around before, and it may have simply fallen again recently.  Again, seen through the lens of central bank model spectacles, the absence of accelerating price falls is evidence that this is indeed what happened.

Added to this, conditional on the financial crisis happening [ie let’s leave aside the controversial question of what role central bank policies and frameworks had in that event], there is a danger of expecting too much from macroconomic stability efforts.  Critics invite us to assess what happened against a perfect benchmark, but what actually would have been feasible given the speed with which politics and instruments work?

At this point, you might plausibly interject and say – well, so much the worse for those spectacles through which central bankers view the workings of the economy.  But, I – and I guess they – have yet to come to a radically new world view that would explain why what they did was so badly wrong.

To the specific criticisms….

Martin wishes that central banks had not accepted the effective floors to their policy rates provided by current monetary institutions;  he wishes that we had had more asset purchases.  He thinks that consideration should have been given earlier to helicopter money.  He also thinks that central banks are overly keen to normalise interest rates.

Responding properly to this wide-ranging critique is difficult to do compactly.  So I’ll make just a few brief points.

First, some of the things Martin wants are not the fault of the central bank, or at least could not have plausibly been done unilaterally.

Implementing very negative interest rates and helicopter money falls into this bracket.  I imagine that there might be a legalistic reading of the Bank of England Act that concludes that the BoE could do these things, but I don’t think this would have washed politically.  [circumstantial evidence being the perceived necessity of government involvement at the instigation of QE;  and political reaction lately to QE and low interest rates.]

It’s debatable whether the limits on the quantity or type of assets fall into this category [of being things that the central bank could change unilaterally].  The Treasury reserved for itself the right to set these limits.  But the Bank of England Act reserves the right to set ‘monetary policy’, which could have been construed more broadly than setting Bank Rate.  And anyway, the situation was probably one in which within reason those limits would have been modified as the central bank wished.

Second, aside from the smaller question of who ought to have acted so that the thing that needed to be done was done, there is the issue of whether these monetary policy reforms would have been appropriate at all.  [And remember, that is taking as a given the premise that there was inadequate stimulus.  Which is not above question].

I think that to the extent that there was inadequate stimulus this would have been better coming from conventional fiscal policy – which we now know had and has space to act more vigorously – rather than wholly new central bank policies like very negative rates or helicopter money.  I would, however, go as far as to say a few things in the direction of Martin’s critique.  One is that these policy reforms should not have been dismissed out of hand by those that did [Carney included].

A better response would have been to produce a serious evaluation of the costs and benefits, and put a contingent plan in place for their use, explaining what preparatory work was needed and was being done, and what kind of eventualities would trigger their use.  If I recall correctly, Carney’s objection to helicopter money involved observing that the BoE paid interest on reserves.  That was unsatisfactory as I wrote earlier on this blog.  He was equally – and inappropriately – dismissive of thinking through negative interest rates [recall his put down of Andy Haldane’s think piece at Treasury Committee].

[To recap briefly why objecting to helicopter money on the grounds that the BoE is paying interest on reserves is not good enough:  the BoE paid interest on reserves so that it could simultaneously hold interest rates above the natural floor [thought to be 0 at the time] AND do large amounts of QE.  The consequence of paying them means that creating new reserves creates an every expanding amount of them without limit, as the interest on reserves is paid as reserves, which then bear interest, and so on.  There is not a strong argument IMO against stopping doing this and allowing interest rates to fall, as a preparatory step before doing helicopter money.  The effects of that can be monitored as the policy unfolds, and if it becomes over-stimulatory, it can be reversed without limit.]

As to whether central banks ought to have done more (and more exotic) QE purchases.  More purchases would have come with fiscal, market-distorting and political risks – viz the reaction and analysis of what was done already.  I doubt very much whether the amount of stimulus could have been made very much larger without these costs beginning to look large enough to offset the benefits.

To state in summary terms where asset purchase policies went wrong, I’d say the following:  I think one can make a plausible case that the BoE should not have concentrated purchases on government securities at the outset;  that the ECB’s eligibility policies meant that QE was directed most where it was least needed;  and that the communication of these policies by many central banks was highly suspect at best: emphasizing channels of transmission that were probably not their [‘printing money’]; failing to disclose the exit path; and claiming too much for the policies in the absence of good evidence, initially.

Martin’s final complaint was that central banks have been in too much of a hurry to normalise interest rates.  Here I am in sympathy with him.  But I don’t think that the difference between what central banks should be doing and what they are doing [say, specifically, in the UK and the US] is large enough to be worth a broadside critique or make any great difference to the trajectory of output.

As an aside, I recall that Ryan Avent also takes this view [of the Fed in particular] and was sufficiently agitated about it to conclude that central bank independence over monetary policy was a bad idea.  The fragility of politics in the UK/US/Eurozone and the capriciousness with which some finance ministries are being run, combined with not believing that interest rate policy has gone too far wrong, leads me to conclude exactly the opposite.  That what central bank independence there remains [and with instruments arguably at their full extent already] is serving us very well indeed.

This brings me to what I think I would have set down as the real failure of macroeconomic policy recently.  This is not the failure to pull the policy levers managing the last crisis, but the failure to draw up an institutional and battle plan for the next one.


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How big a deal is No Deal? We have no idea.

Exiting the EU without a deal having previously been inconceivable, some among the Brexit ultras are trying to present it as an alternative preferable to the negotiating position agreed at the Prime Minister’s Chequers meeting, or whatever the EU might actually offer as a response.

The Government has been alternatively chastised for not attempting to figure out and take mitigating action, and for trying to conceal what they know or what actions they might have planned.

But just how bad would exiting under ‘no deal’  be?

A part of the question was answered by the bodies looking into different Brexit scenarios before the referendum.  The ‘no deal’ scenario envisaged transiting in an orderly fashion towards trading with Europe on WTO terms.  The Centre for Economic Performance, for example, came up wtih a central estimate of a reduciton in GDP per head of 9% relative to the counterfactual of remaining in the EU.

But this is not a complete answer, because there is no time now before March 2019 to achieve that orderly transition.  Our WTO schedules for independent membership have not yet been agreed.  And we lack the physical, IT and administrative infrastructure to carry out the much greater volume of interventions in trade required.

It is this lack of orderly transition that opens up the possibility of shortages and panic and the necessity for mitigating planning with stockpiles and support from the armed forces.

It also makes the cost of no deal to some extent unknowable, and therefore not credibly quantifiable, or even credibly mitigated.

The reason for that is how bad a disorderly no deal turns out to be would depend in part on how bad people think it’s going to be.  If the belief took hold that no deal was going to be catastrophic, panic buying might ensue, shortages would emerge, and there could be a break down in law and order as those who were too late to the shelves or petrol pumps took whatever drastic action seemed appropriate to survive.

What might cause such a belief – that a no deal would be catastrophic – take hold is anyone’s guess, but that would depend in part on whether it was believed that others believed a no deal was catastrophic.  And so on, ad infinitum.

Of course, these higher order expectational dynamics might kick in whether or not we actually exit the EU without a deal in March 2019.  They might begin as people start to take precautions against a possible No Deal catastrophic exit, or take precautions against others taking precautionary action, and so on.

Plans for mitigating action like stockpiling, or armed forces deployment might help reduce the chance of a self-fulfilling catastrophe like this.  Or it might increase it, causing people to surmise, perhaps, that the government have wargamed the thing themselves and concluded that for reasons they have not revealed it all looks much worse than people had thought thus far.  The fact that there are no stockpiles or armed forces plans that could mitigate the event that everyone coordinated on PANIC! – the government’s monopoly on violence would be nothing in the face of 60 million hungry anarchists – is, since it means there is no way of making panic impossible, a factor in making panic possible.

To recap, the consequences of a disorderly exit under no deal are to some extent unknowable, and that unknowability is partly what generates the capacity for a catastrophe.  Attempts to quantify the range of possibilities and their likelihoods are likely to be completely unconvincing.  And no one should be fooled by the water-tightness of any plans for mitigating action, should they come to light.  Equally, although not publishing these plans and deliberations seems like the action of an undemocratic government hoping to evade accountability, it is also consistent with one hoping to avoid the worst kind of self-fulfilling crisis.

It is the impossibility of stamping out self-fulfilling panics that in part makes offering no deal as a bargaining strategy incredible for a rational government seeking to look after its citizens.  Though of course that does not rule out it being used by other kinds of government, such as those actually governing.

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Philip Lane should not be making comments on Irish tax policy

Simon Wren Lewis and Frances Coppola have written two thoughtful pieces about Irish central bank Governor Philip Lane’s public comments about Irish tax policy.

My own view is that he should not be making these remarks.

The reason has to do with the effect that making them will have on the presumed nature of the office and the incumbent holder in the future.

If it becomes normal for central bank governors to comment on matters other than monetary and financial policy, there is a risk that governments will seek to vet future candidates for their other policy views, and not appoint primarily on the basis of monetary and financial policy expertise.  And that future candidates will invest time and energy competing on the basis of political acceptability, rather than their skills operating the central bank policy levers.

The expectation that this will happen will feed back into monetary policy, undermining the original purpose of central bank independence, that there were benefits to be had by creating the impression, and following through on it, that monetary and financial policy would not be continually readjusted to suit political imperatives.

In the Eurozone, the scope for national central banks to bend to national governments’ views is limited by the fact of their vote being diluted on the ECB Governing Council.  But that effect is not zero.   And other central bank governors may be emboldened by Lane’s remarks.

Obviously, in the real world, one must presume that a certain amount of politicking goes on in selecting Governors and courting Governor jobs.  But this is limited by the precedent of generally not speaking out, and the priority such considerations are accorded would increase if the precedent was routinely broken.

These worries are not mere niceties.

Right wing comment in the UK press has often featured the presumption that Mark Carney was selected in part because of his shared political world view with George Osborne and David Cameron, a presumption that was unfortunately fed by Carney himself repeatedly speaking on topics off his patch in a way that they would have approved [on diversity, climate change, the benefits of EU membership, and so on].

Going a little further back, one can speculate that the need to find a governor of the right sort was underlined by Mervyn King’s comments in 2010 on what prudent fiscal policy required at the height of the UK’s financial crisis.


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New Statesman post on Labour’s 3% target for the BoE

A link here to a post explaining a boilerplate view of why Labour’s ideas for reform of the BoE’s mandate [and location] are misguided.

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Times article on capitalism

Here a link to an article with David Miles on capitalism.

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2% wasn’t an ‘arbitrary number’ Neel

FOMC member Neel Kashkari has been doing battle with the crypto gold bugs on Twitter.  In the cut and thrust of this debate, he let fly that the 2% target the Fed had set itself was an ‘arbitrary number’.

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I mostly disagree with this.

2% was a round number that weighed up various factors bearing on the optimal inflation rate for a central bank.

First, the Friedman Rule:  inflation erodes the value of money, forcing people to economise on it, and suffering inconvenience as a result.  [The FR actually implies on its own setting the target at minus the riskless real rate of interest].

Second, the costs of re-posting prices [known as ‘menu costs’ imagining restaurants reprinting their menus].

Third, the fact that inflation measures tend to overstate true inflation [because of inadequately taking account of quality improvements, changes in the goods mix, and changes in the mix of outlets that sell them].

Fourth, how positive inflation helps bring about falls in real wages in some sectors where there might be downward nominal rigidity.  [If you are in a poor performing sector, or managing poor performing workers, you may be able to lower real wages simply by not increasing the wage in £s].

Fifth, the benefit of keeping nominal interest rates [which will tend to rise one for one with the inflation target] above the zero bound, to provide for decent size cuts at the onset of a recession.

This latter benefit we have learned more about.  We know that the risk of hitting the bound is greater than we presumed then in the late 80s and early 90s.  And we now have more experience operating unconventional monetary policy tools which can be used as a substitute for interest rate policy.

I say ‘mostly disagree’ because I doubt that there was any particularly scientific quantification of these things in the determination of the actual number.  A lot of that went on after the event.  But these arguments were common currency among academic and central bank economists, and those at the top of the Fed and other central banks would have known them.

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