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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Me in Times Online on Autumn Statement

Here.  Sorry, behind paywall.


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Kill two economic policy birds with one stone: more generous, funded transfer payments

Many are fretting, in the face of Brexit and Trump and Le Pen and AFD and Five-Star that economies are doing too little to combat inequality.

At the same time, with global real rates set to be low for the foreseeable future, economies are going to live closer to the zero bound in future, and in the shadow of business and financial cycles that we now realise can be larger than we thought before 2008.

So how about raising effective tax rates and spending them on more generous transfer payments through the social security/insurance system?

This helps inequality, [redistributing from those earning enough to pay taxes to those who are not] and it amplifies the automatic stabilisers, helping out monetary policy at the zero bound in the event of a recession.  The amplification of the stabilisers means that when a recession hits, tax revenues fall by more, the greater the effective tax rate to start with;  and transfer payments rise by more, the greater the replacement ratio used to start with.

Steady-state inequality is eased in two ways.

First, even at its resting point, capitalist economies will separate people from jobs and from the labour force, sometimes permanently. Higher taxes and transfers benefit those thus dumped on the scrapheap.

Second, recessions tend to hit those at the bottom disproportionately.  The automatic stabiliser amplification gives those who lose their incomes more when they do, but the recession itself will tend to be smoothed somewhat, so the income loss for those at the bottom will be less to begin with.  Averaging over many decades, this tendency to provide more income to the jobless, and reduce joblessness in recessions, will help inequality.


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Helicopter money and QE. Avoiding the fuzzy reversibility problem.

One view of QE – encoded in, for example, Eggertson and Woodford’s 2003 paper, and similar – is as follows.

It comprises two steps, one effective, one redundant.  Step one is the creation of money to buy on the open market a short-dated government bond.  Step two is the trade of that short dated government bond for a long one.  If interest rates are at zero, but expected to be positive later on, step one may have an effect, but only if it induces, via some appropriate communication, lower interest rates out into the future.  If rates are zero and expected to be so forever, step 1 is redundant.

Step 2 is debt management, and exploits what central banks sometimes refer to as the ‘portfolio balance channel’.  Mark Carney called it that today at Treasury Committee.  And he also alluded to the fact that the ‘monetary channel’ as he termed it was not why QE worked.  We might presume he was thinking along the lines I’m sketching here.

The fuzzy distinction between helicopter money [HM] and QE comes about due to using Step 1.  But central banks can, and did sometimes, skip step 1 and simply swap short for long dated gilts.  The Fed did this explicitly in one round of QE, calling it ‘Operation Twist’ after a similarly named episode in the 1960s.

If central banks had always skipped the redundant Step 1 [you can always lower future rates using forward guidance], there would never have been any doubt that this was QE rather than helicopter money.  Indeed, it would have been better not to use the term QE at all, but stick to ‘debt management’.  I don’t recall anyone ever screaming at debt managers that they were doing helicopter money.

Doing it this way would also get round what one person who commented privately on my blog pointed out is a bit inconvenient for central banks.  Central banks are already talking [see Jackson Hole, for example, or also words by Mark Carney and Ben Broadbent] about the fact that the balance sheet size might not shrink back to what it was before the crisis.  This might not look good next to the promise that QE would be reversed, and the religious fervour with which they have said HM should be avoided.

If the portfolio balance channel had simply been exploited with debt management, there would have been no such fuzziness to worry about in contemplating a larger central bank balance sheet after the crisis.

However, you ought to be saying ‘not so fast!’  Suppose we consolidated debt management inside the central bank [it was in the UK until 1997].  And then allowed the central bank to do the issuing of the short debt which was used to get the funds to buy the long debt.  In the standard monetary version of the New Keynesian model, this is satisfyingly distinct from helicopter money.  Short term debt is not money.  But in the real world, things might not be so clear-cut.

But if there was a chance that the real world was like the model world, you might ask – why if the Bank of England, for example, thought that Step 1 [create reserves to buy short debt] was redundant, [what Mark Carney today implied] did they do it at all?  In his defence, he was inheriting a precedent set by the MPC under Mervyn King.  In early communications about QE, he and his MPC took a different view of the monetary channel.  Although subsequently the emphasis was slowly dropped.  And implementing ‘debt management’ in an orderly way, and on a sufficient scale, might have been impossible without this being done by the Debt Management Office.

[PS voice recognition software gets better the more you use it.  RSI sufferers take heart:  Even if you can’t do real work, you can still play.]

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Helicopter money: are they doing it anyway, and, if so, so what?

One way to implement helicopter money is to have the government finance a tax cut or a government spending increase, with a conventional bond issue, and have the central bank buy the bonds with newly created electronic money.

During the post-2008 recession, tax revenues fell, government spending [in the UK, at least on transfer payments] and bond issuance rose, and central banks bought government bonds with electronic money.  A lot of them.

This policy was called ‘quantitative easing’, not ‘helicopter money’ because it was the first leg of a two-leg policy, where the second leg would involve reversing the bond purchase down the road after the economy had recovered.  But half way through, the two policies are indistinct.  ‘They’ might be doing helicopter money anyway, even though it’s called ‘quantitative easing’.

Are they doing helicopter money anyway?  And if they were, what would we infer from whether we should?

There seem to be several varieties of the argument.

One is they are doing helicopter money anyway, so they should jolly well come clean about it and stop hoodwinking the people.   And if they did, the policy would be more successful in boosting the economy.  QE involved a smaller stimulatory bang for the buck, the buck being a risky intermingling of monetary and fiscal institutions.

Another variation on the argument, that I heard recently, was that they might be doing it anyway, and that shows that if they did do it explicitly, we would not expect any magical extra stimulus to follow.  So best leave central bank policies as they are.

Yet another is:  since when we do QE, we will look like we are doing helicopter money anyway,  we shouldn’t do QE at all’.  This argument was circulating inside central banks at high velocity as it became clear that central banks were going to run out of interest rate cuts and something else would have to be done.   Evidently, it was set aside as central banks went ahead with QE regardless.

Central banks’ retort is:  a helicopter money plan is clearly delineated from a QE plan by the fact that it involves only one leg, not two, of the QE policy, ie a transaction that is never reversed.

But this delineation is only as good as the ability central banks have to tie their hands in the future to reverse the bond purchases, thus finally revealing with certainty that the policy was QE and not HM.  Since that might involve tying the hands of different people who succeed the current decision makers as Governors and voting members, such certainty is not possible.  Knowing this, QE is unavoidably somewhat HM-like.

But by the same token, a bond purchase that was determinedly announced as HM would be unavoidably QE-like: subject to a possible reversal down the road when a more conservative central banker takes over.

Where do I come out on all this?

I think that there is some possibility of influencing the guess that people have about whether QE is reversed at down the road.

Committees don’t turn over completely each period, so quicker reversals can be executed more reliably than slower ones.

New members are likely to find the reputation for promise keeping of some value to themselves – perhaps to distinguish a new round of QE from HM, or vice versa! – so they won’t feel entirely unbound.

And the separation between the policy could be encouraged – if not entirely guaranteed – by the finance ministry, or a third party body that scrutinises the central bank [in the UK, the Treasury Committee, say].  And I say ‘not entirely guaranteed’ for the obvious reason that we can’t expect the fiscal authority to discipline itself to limit monetary financing, precisely the reason why there is often legislation that attempts to rule it out.

Since there’s hope that the two can be delineated, QE should be the first resort at the zero bound, [well, after plain bond financed fiscal policy, that is] and HM the last.

[Inspired by slide-show I saw recently that I can’t attribute as it was given under Chatham House rules].

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