For most of us, it’s a great boon to live in a world in which travel between even distant parts is relatively cheap and takes hours rather than days, weeks or months. We can visit, explore and learn about places and people we never could have done only 40 years ago. More than that, if things are difficult for us at home this gives us the option to try our fortune elsewhere where resources, attitudes and the style of governance may suit us better.
Is there are approaches which are systematically superior to others then it is entirely to be expected that people finding themselves where these are sub-optimal will, if they are courageous and determined enough, seek to move to those where things are better. In Western Europe and North America we regard ourselves as fortunate in having considerable freedom to say, do and trade what we wish. We think of these as rights to which most global citizens aspire. If we are right about this we must expect the arrival of people from abroad at our ports and airports who would like to live and work in our countries. Continue reading Bad Targets for Policy 2: Immigration→
This is the first blog in a two-part series on ‘Bad Targets for Policy’. The second in the series will be on immigration.
We’ve seen a lot of focus on the ‘costing’ of policies in the parties’ manifestos for the forthcoming UK election. But we must remember that money is only a means of keeping account. Accounts are important but they are not reality. An account of debt is important, but it is not a physical reality. When a government has a debt in its own currency which only it (or its institutions) can issue, its obligations are important but not physically binding. They are not even legally binding, since the debt can be devalued virtually to zero by inflation. It follows that the real implications of government debt are not simply consequences of current government spending and taxation and the gap between them. Indeed these may be among the least important causes.
The real consequences of government debt result from the physical burden implied by the future obligation to transfer some control over a portion of real goods and services from the state to holders of the issued debt, either as interest or in repayment of capital. That debt in the nominal quantity of the national currency (the total amount in pounds or dollars say) is only a starting point. Inflation changes the relationship between that number and the obligation in real goods and services; the changing size of the national economy alters the ability to fulfill a fixed obligation. Continue reading Bad Targets for Policy 1: Government Debt→
Having recently had the opportunity to visit China and combine that with some reading about the country, I’ve come away with some inevitably fairly superficial thoughts about how the Chinese and the West do things differently. While the Chinese government sets limits on voiced or organised challenges to the Communist Party’s control of the country, it seems that most Chinese are able to pretty much get on with their lives as they wish. Having visited the great open spaces at the centre of London, Paris, New York, Berlin and Madrid, it felt disturbing to be shooed off Tiananmen Square at dusk, but otherwise despite the presence of police and soldiers at nearly every turn in central Beijing, I felt able to move around and take photographs pretty much as elsewhere.
I suspect the vast politically apathetic majority of Westerners would feel no restriction of their freedom under the Chinese regime. If the rise of Donald Trump and apparently popular strongmen such as Russia’s Vladimir Putin and Turkey’s Recep Tayyip Erdo?an, along with Brexit, show that the ability to vote is not enough to sustain government by reason then Mao Zedong’s Great Leap Forward and Cultural Revolution show that the lack of a democratic buffer leads to the deaths of millions.
Just how much cash does the NHS and social care need to prevent the distressing stories of patients languishing on trolleys for hours in A&E departments? Can we possibly afford what it needs, or is it really a ‘bottomless pit’ as often claimed? Do we need to lower our expectations of what can be provided for us? Or does the whole funding system of the NHS need to be overhauled, with charges and/or insurance-style payments? Sadly, we are frequently being directed by politicians’ state-shrinking agendas and commentators’ ignorance towards the wrong numbers and the wrong reading of those numbers, with the result that the wrong answers are given to these questions. The truth is that if we look at things correctly, there is no reason why we cannot have an excellent healthcare system in Britain without any great sacrifice in our enjoyment of the other goods and services that the modern economy has to offer. Continue reading Explaining the NHS Crisis: Lies, Damn Lies and Health Spending→
Since the financial crisis of 2007-8, one suggested target reform has been the monetary system itself. This reform is based on the recognition that money in the modern economy is a rather peculiar phenomenon.
There are two popular conceptions of the nature of money, both of them incorrect. (Note that when we talk about money, it is entirely artificial to separate cash, in the form of bank notes and coin, from what we hold in bank accounts. To all effects and purposes, for the vast majority of us, they are the same and completely interchangeable.)
The first conception is that money is a fixed quantity determined by the government, which is either accepted by convention or because you can go to your bank and get a certain quantity of gold for it. (Presumably not many people have actually tried this!) The second is that banks can issue new money to lenders as a multiple of pre-existing deposits, depending on how often depositors demand cash. This is frequently referred to as ‘fractional reserve banking’. Continue reading A Banking Debate→
The authors of this report claim that ‘there has been a failure of government policy to decide the role banks should play, and therefore what sort of institutions they should be.’ and that ‘we have ended up with a banking system dominated by a small number of giant banks…’ These institutions are only able to survive because they are ‘too big to fail’, yet they offer poor customer choice and service, have acted illegally in rigging markets and indulge in ‘socially useless’ activities.
A Review of ‘Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down…and Why They’ll Take Us to the Brink Again’ by Suzanne McGee (2010, Crown Business)
This book is an excellent complement to the academic stuff I’ve read on the causes of the financial crisis. These latter accounts are very detailed in terms of ‘what’ happened but tend to be light on the ‘why’. ‘Chasing Goldman Sachs’ goes a long way to filling that gap.
The academic consensus view seems to be that driven by an increase in demand for safe places to save there was a huge increase in deposits held by financial institutions and collateralised by Asset-Backed Commercial Paper (ABCP). A significant proportion of this paper was comprised of securitised mortgages – many packaged in such a way that their quality was opaque. The toxicity of these was enhanced by dodgy ratings and shuffling to off-balance-sheet vehicles. When problems with some of these mortgages arose it took a while for holders of these ‘shadow-banking’ deposits to sort out whether or not their deposits were collateralised by bad assets or good ones. There was a panic and large-scale dumping of these deposits which led to loss of liquidity in the market for short-term interbank loans. Without these loans banks find it very difficult to balance their books at the end of each day as they are obliged to. (A good guide to all this from the academic point of view and to further more technical reading is at http://www.nber.org/papers/w17778.) Continue reading ‘Chasing Goldman Sachs’ by Suzanne McGee – A Review→
Understanding Money – a non-technical account of the essential role money and its creation plays in a modern economy. This article was previously available as a pdf, but I have now posted it as a blog in its own right. Since it was originally written in 2010, I have made a few revisions and additions.
Most of us have little idea of what money is and where it comes from. When we think of money, we think of bank-notes and coins. We know that most money is held in bank accounts, but even then we have an image (although most of us are probably aware that it isn’t quite an accurate image) of these notes and coins being held for us by the bank or lent out by the bank to make money for them (and hopefully us, if the money is held in an interest-bearing account). In fact the reality is about as far away from this as it is possible to imagine.
Of the total amount of money (adding together bank-notes and coin held by the general public and the value of all bank accounts in the UK), the bank-notes and coin make up only around 3% ! The reality is that the vast majority of all money exists only as a record held in someone’s name by some bank or other. How can this be? Where does this money come from? Where does it go? In this article I will attempt to answer these questions, and in doing so explain the benefits and the potential downside to our monetary system. Continue reading Understanding Money→
‘Aggregate Demand, Idle Time, and Unemployment’ – A Critique of Michaillat and Saez
Like all neoclassical models, that of Michaillat and Saez (2014) referred to in Simon Wren-Lewis’s Mainly Macro blog on 16th August fails to model money realistically. This renders their model incoherent and in any case incapable of encompassing one of the most important causes of unemployment: inadequate aggregate demand due to monetary factors.
The chief feature of their model is a product market in which matching is the mode of exchange. This produces costly frictions that lead output to apparently run ahead of consumption. To make sense of demand that does not automatically follow from income Michaillat and Saez introduce a ‘non-produced good’ which is endowed to every household. When households meet to exchange goods there is mutual trade of this non-produced good and households’ individually produced goods so as to optimise each household’s joint holding in utility terms. Michaillat and Saez ascribe a relative price p to the production good, which apparently becomes the absolute price when they determine the price of the non-produced good as 1. Since it is determined in equilibrium it is important that p is an absolute price, otherwise quantities of exchanges, production and labour demanded would be indeterminate in the model as they would also depend on the rate of exchange between the produced and non-produced goods. In fact it turns out that claiming p to be an absolute price is untenable. Continue reading Money and the Neo-classics… Again→
Independence is Nominal – long-gestated thoughts given birth to in response to Brian Barder’s blog post on the lack of post Scottish referendum preparedness and the need for the UK coalition government to resign if there is a ‘Yes’ vote.
Here I am, up in Scotland and strangely detached from the debate. (For comparison I was very active for the Yes side in the devolution campaign.) This detachment is partly due to personal events over the last 18 months, but also to a difficulty in getting a handle on what it all means. Continue reading Independence is Nominal→