In the wake of Donald Trump’s call for lower US interest rates in the midst of solid economic growth and low unemployment, The Economist magazine ran a couple of articles on the threat of populist leaders to central bank independence (CBI) and low inflation.
It is more than 40 years since the publication of the intellectual justification for CBI of Finn Kydland and Edward Prescott, propounding the idea of time inconsistency. Based on the concept of the natural rate of unemployment (NRU), political control of interest rates will give rise to the temptation for politicians to boost aggregate demand and lower unemployment in the short run, below the NRU. This will prove unsustainable over the longer run, merely producing higher inflation, with inevitable costs to economic efficiency and growth.
This was apparently what caused the stagflation of the 1970s, when unemployment and inflation rose together, undermining the putatively Keynesian Phillips curve. The upshot is that politicians and voters are better off with CBI, with the central bank given a fixed mandate of low inflation and autonomy in how it achieves this.
But what is the reality of CBI and monetary policy? Here are some quotes from heterodox economists critiquing the mainstream consensus. Continue reading →
Godley is recognised as having predicted a severe recession in the US some years before it began in 2008, due to the unsustainable build-up in private sector debt, particularly among households.
Minsky is also well known for his ‘financial instability hypothesis’ and its implication that ‘stability is destabilising’ in the financial sector of capitalist economies: periods of stable economic growth can create fragile balance sheets in the private sector, which often lead to stagnation or crisis. Continue reading →
Another extract, in this occasional series, from Michael Hudson‘s excellent J is for Junk Economics (p.86), this time on the definition of economics itself:
“Economics: The linguistic roots of the word “economics” stem from Aristotle’s Greek terms oikos (house or household) and nomos (rule). This often is trivialized as self-sufficient “household management”, in contrast to chrematistics, making money by market exchange and money lending. But economic organization and markets have always been wrapped in a political context as mixed economies. The paradigmatic “household” was the Mesopotamian “large house” (Sumerian and Babylonian é.gal), the temples and later the palaces in which accounting, weights and measures (including the origin of money), standardized interest and wage rates are first documented. Most merchants in Mesopotamia’s takeoff occupied official status in the royal bureaucracy, adopting management techniques from the large institutions. Prices were denominated for accounting purposes and for payment of debts to these large institutions, but were free to fluctuate outside of the city gates and outside of the temple and palace sector.
It thus is a travesty to narrow the study of economics to “markets”, defined simplistically as private sector households earning and spending their income on goods and assets. All markets operate in the context of public regulation, taxation and government spending to provide basic services, including those of the military and religious infrastructure.
Economic theory in modern Europe started as Political Arithmetic for royal management. The key concerns were money, taxes, and the trade policy needed to obtain silver and gold. James Steuart (1713-1780) called the latter “money of the world” and related it to population growth and immigration, colonialism and export production. Classical political economy shifted the focus of economics to domestic value, price and rent theory with a view toward political reform to check the power of landlords and other rent extractors.”
I have been doing some reading on economic development in Africa recently. The continent, if it is even possible to lump its many diverse nations together when discussing development, which is probably unwise, gets some bad press. But as development economist Ha-Joon Chang has said in his bestselling book, ‘Africa is not destined for underdevelopment‘.
That is refreshingly optimistic, and I humbly concur. Having said that, Chang thinks it is all about policies, but for me this is only part of the story. Why do bad policies persist? This is what we need to study. Poor nations whose people want things to improve via economic and social development need pragmatic and effective governments who can implement policies appropriate to their particular national contexts. These will vary from country to country, and over time.
Below I will share some of the ideas I have gathered which mainly draw on the work of political economists who have studied development processes across the African continent. Continue reading →
Continuing the occasional series of excerpts from Professor Michael Hudson’sJ is for Junk Economics (2017, p.178). See also my post quoting Ha-Joon Chang here on the same issue:
“Planned Economy: Every economy since the Neolithic has been planned in one way or another. That is why calendar keeping and seasonal rhythms based on the weather and the harvest became the foundation of economic accounting in the Neolithic and Bronze Age for fiscal and trade policy and for land tenure.
At issue in any epoch is who will do the planning and what its aims will be. The ostensible aim of democratic planning is to design tax and regulatory systems to promote economic growth and sustainability, preferably with a fair distribution of income and wealth. For the classical economists this involved taxing or discouraging rentier income, and subsidizing socially desirable investment and basic needs.
Today’s epoch is seeing financial managers replace rulers and elected government representatives as planners of economies. Financial planning is at least as centralized as government planning, but its aims are different: namely, to concentrate income growth and asset-price gains in the hands of the One Percent.
The financial time frame is short-term and extractive. And fiscally, financial planning seeks to shift taxes off unearned income and financial returns onto wages and profits. Most fatally, it favors debt leveraging, leading ultimately to debt deflation and austerity. The main issue in today’s planning debate is thus whether democratic politics can recover the classical public steering and regulatory mechanisms that have been relinquished to the financial sector.”
Richard Koo is best known for his concept of a Balance Sheet Recession (BSR), which was defined briefly in yesterday’s post. Two of his books are highly recommended: The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession and The Escape from Balance Sheet Recession and the QE Trap.
They are not difficult reading. The basic idea of a BSR is outlined many times throughout, and his arguments are clear. He also employs plenty of empirical evidence mainly in the form of charts.
This post summarizes some of Koo’s main ideas from the two books, although it is by no means exhaustive. Continue reading →