I came across this video earlier today and thought it was worth sharing. It’s an audio extract from a longer talk given in Italy by Warren Mosler, who is one of the founders of Modern Monetary Theory (in the same way some bands are big in Japan, Mosler is big in Italy!). Mosler describes in one minute what a good economy should look like, and in light of George Osborne’s announcement today of his ‘commitment’ to full employment, it seemed apt. Does his description sound remotely like what we have today? I think not! The full video and transcript are here.
George Osborne gave a speech today in which he gave a commitment to achieving ‘full employment’. The trouble is, full employment means different things to different people. Osborne seems to think it means having the highest employment rate in the G7. We’re already 4th on that measure (which is I guess why he chose it), but is this a good measure? It looks at the proportion who are employed, but to know if we have ‘full employment’, don’t we need to know how many are ‘unemployed’?
Chris Giles already has a blog up today with the same name as this one, and he gives two other definitions to the one George Osborne is using. Post-war, full employment just meant everyone had a job who wanted one. For most of the 50s and 60s, this was indeed the case. As Robert Skidelsky says here:
“Between 1950 and 1973 unemployment averaged 2% and was always well under one million.”
2%! We’re supposed to be happy with 7% today. Of course at that time there were much fewer women in the workplace, but they weren’t classed as unemployed because more households could get by on one income back then.
The second definition Giles gives I suppose you could say is the economist’s definition. That is called the NAIRU or the “non-accelerating inflation rate of unemployment” to give it its full name. Many (most even) economists believe that there is a trade-off between inflation and unemployment and that once unemployment falls below a certain level, inflation will start to accelerate. Ex Tory Chancellor Norman Lamont once said that unemployment was a price well worth paying to ensure inflation stayed low. The NAIRU in the UK is estimated at anywhere between 5 and 7%. This Guardian story gives a bit more detail:
“The Bank of England and the Office for Budget Responsibility (OBR) suggest that once the “equilibrium rate” for unemployment is reached, then full employment is achieved. The OBR said in its fiscal and outlook forecast, published at the same time of the budget, that unemployment would fall to its equilibrium rate in 2018.
The equilibrium rate is not fixed. In its February 2014 inflation report, the Bank of England said that the medium-term equilibrium unemployment rate was 6 to 6.5%, which means that unemployment remains 0.75 to 1.25% above this. The OBR said it judged that the long-term unemployment rate was 5.25% – with unemployment 1.75% above that. The bank says that the medium-term equilibrium unemployment rate will fall as demand recovers.”
So where does that leave use then? Full employment is either “the highest employment rate in the G7”, some technical, estimated rate believed to be the low-point at which inflation remains stable, or some loose (but much higher in some respects) definition of “everyone who wants a job has one”. I prefer the latter, but we could even extend this further and define it as “everyone who wants a job has one at a wage high enough to have a decent standard of living”. Wouldn’t that be something worthy of the name “full employment”?
I suspect George Osborne thinks he can get to his version of full employment by doing basically what he’s been doing, a bit of hand-waving while relying on the private sector to pick up with the help of rising levels of household debt. Which will be fine. Until it isn’t. Genuine full employment requires a much more active government than any of the main parties are currently willing to entertain. Here’s some further reading on how we could really get there.
Quite a lot of links this week, and first up, Scottish Independence. Much of the debate so far has been over what currency an independent Scotland should use. In this post Neil Wilson argues that it’s the real resources of Scotland we should be talking about and that a new Scottish currency would be the best option:
A nice blog from Tim Harford next how governments could start to address inequality, using Finland as an example:
And here Jules Birch discusses the welfare cap which passed through Parliament this week with help from Labour:
Speaking of Labour, here’s two blogs expressing despair at Labour’s general uselessness:
A wonkish this one, but I’ve included it, because it’s well argued. If you’ve know any economics, you’ll probably be OK:
And finally, I found this blog on self-employment by Flipchart Rick interesting. Lots of nice charts as well:
The BBC aired another documentary from the ‘poverty porn’ genre this week, where Boris Johnson’s sister, someone off Eastenders, a posh bloke and Theo Paphitis dropped in on people struggling in today’s ‘cost of living crisis’. Here’s two blog posts on issues raised by this show (and others like it):
Joe Halewood has been blogging tirelessly on the bedroom tax for months now, and in this post he demonstrates how easy it could be to appeal the bedroom tax:
For a long time now, it’s been very clear that Jobcentre Plus is no longer worthy of the name. It’s whole operation is now about sanctioning as many people as possible. This blog describes how they may be going beyond what the law allows in their zeal to get people of benefits:
This is a good lay man’s guide to the Ukraine situation:
And here, Neil Wilson blogs on what should happen with the national debt should Scotland vote for independence:
In this post, Peter Martin, explains why talk of the need for austerity for years to come is based on ‘muddled thinking’:
Here’s a nice video of a talk by the great Bill Black, explaining “How to rob a bank”.
Finally, yesterday we got the sad news that Tony Benn had passed away at the age of 88. I was excited to go and see him speak a couple of years ago. He was getting frail then, but still in fine form. This 10 minute video is a great reminder that on most things, he was right:
I blogged yesterday about this recent paper on money published by the Bank of England. The paper outlines the process by which banks create money and states a number of times that the reality differs from how most economics textbooks treat the subject. From time to time, when mainstream economics is challenged in this way, its defenders respond by saying one of the following things:
1. We already know that;
2. It’s not true that the textbooks teach in that (inaccurate) way;
3. The textbook version is just a simplification for new students, and more advanced courses teach the right way.
I thought I’d very quickly tackle points 2 and 3 by digging out my old undergrad textbook. The text we used was ‘Macroeconomics (5th Edition)’ by N. Gregory Mankiw. This was purchased in 2002 for the princely sum of £34.99, but I believe this (updated) text remains the best selling macro textbook.
Very briefly then. The BoE paper writes:
“The reality of how money is created today differs from the description found in some economics textbooks”
Like what? The paper asserts:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
While the Mankiw textbook (p485) says:
“…financial markets have the important function of transferring the economy’s resources from those households that wish to save some of their income for the future to those households and firms that wish to borrow to buy in investment goods to be used in future production. The process of transferring funds from savers to borrowers is called financial intermediation.”
Back to the BoE:
“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.”
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
“Each dollar of the monetary base produces m dollars of money. Because the monetary base has a multiplied effect on the money supply, the monetary base is sometimes called high-powered money.”
So it’s clear there are things in mainstream texts that would seem to be wrong or misleading, contrary to point 2 above, but is point 3 correct? Is it all just a necessary simplification as a starting point for learning complex ideas? While Mankiw does talk of ‘models’ it doesn’t say that the model does not really reflect reality and is just a simplification, and I studied economics to Masters level without being disabused of these ideas. It was only relatively recently I discovered these textbook example was not necessarily the truth. That could be a personal failing on my part, but I suspect I am not alone.
The Bank of England published quite a nice briefing today entitled “Money creation in the modern economy“. It won’t surprise you if I tell you that a lot of central bank publications are quite heavy going for the lay person, but this one is actually quite an easy read. It sets out to bash a couple of common myths in how bank lending words, some of which is quite quotable, which is what I’m going to do now.
It’s a very common belief that banks take money from savers and lend it out to borrowers, and in doing so play an intermediary role. I think this belief is sometimes used to bolster the view that savers are virtuous and more saving would be a very good thing. While saving is a very good thing for an individual or household, if everyone saved as much as the could, we get into a paradox of thrift type situation – not good. So do banks take savers money and lend it to borrowers? Here’s what the Bank of England say:
“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.
In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”
So rather than lending out savers deposits, what banks actually do when they make a loan is to create new money, which then becomes a deposit. The Bank of England paper explains it like this:
“Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”
These things are not well understood by the general public, and it’s quite rare to find an honest attempt to explain them from an official source, so this paper is very welcome. Helpfully, the BoE produced this short video to accompany the paper. Have a watch!
I’ve done a few of posts on conservative framing recently and I was subsequently reminded of a draft paper by Bill Mitchell and Louisa Connors called “Framing Modern Monetary Theory“. It discusses how the economy is generally discussed by mainstream commentators, before considering how an alternative narrative might be constructed using similar tactics as those in the mainstream. They argue that:
“The dominance of mainstream macroeconomics narrative in the public domain is achieved through a series of linked myths that are reinforced with strong metaphors.”
Below is a table from the paper by way of some examples. Many of these metaphors pop up on an almost daily basis. If, like me you frequent the comment sections of newspaper websites, you’ll see them all the time. They have all been absorbed by people and repeated back ad nauseum:
All of the metaphors in the table are either wrong or willfully misleading, but they been very successfully implanted into most people’s minds through constant reinforcement. The challenge is how to construct alternative metaphors to start to change the nature of the debate. UK Labour’s strategy (assuming they actually disagree with the Government) has been a poor one. As the authors say in the paper:
“…progressives should avoid debating within the frames that conservatives use. For example, attacking the British government’s pursuit of fiscal policy as being ‘too fast’ implies that the desirable alternative is more gradual (managed) reduction in the government deficit. The frame is that the budget deficit is bad and has to be reduced. The more productive progressive frame would be to explicate the functional role of government deficits…”
Labour re-announced their proposals for a ‘compulsory job guarantee’ today, along with their plans for funding it. I’ll ignore the funding proposals because they are just playing the nonsense ‘how will you pay for it’ game, but there were some extra details on how the programme will work in practice. It had previously been said that it would only be a one year programme, but now Labour say 5 years. Not all the details are in, but there are enough now to do a compare and contrast with Labour’s plans and what the real thing would look like. By real thing I of course mean the job guarantee as envisaged by MMTers. Apologies for the formatting of this table, but I’m crap at html!
|Labour’s Compulsory Job Guarantee||MMT Job Guarantee|
|Eligibility||18-24 year olds claiming JSA for over 1 year; Aged 25+ on JSA for over 2 years||Anyone willing and able to work|
|Compulsory?||Yes, possibility of having benefits sanctioned if refuse job||No|
|Choice of which type of work?||Unclear. Some element of choice likely||Yes. People would be offered work suitable to their skills and interests|
|Jobs where?||Private and non-profit sectors||Non-profit only|
|Pay||Current minimum wage||Living wage|
|Hours||25 hours per week||Flexible depending on circumstances. Full time and part time options|
|Duration||6 months||Indefinite – until the individual finds a regular job|
|Training included||Yes, but £500 cost cap||Yes|
|What type of work?||Unclear. If like Future Jobs Fund, could be a wide range||Very broad range|
To summarise then, I like the fact that Labour are acknowledging a need to create jobs, but dislike pretty much everything else about their plans. The pay’s too low, the hours too short, the private sector are involved (to what extent is still unclear), 6 months isn’t long enough, there are unnecessarily threatening undertones (sanctions!, compulsory!) and so on. It’s a start though I suppose.
A lot of links to get through this week. First up, here’s a post outlining how we might overhaul the tax system to make it more progressive:
And here’s two posts on inflation. Inflation is low and falling at the moment. Policy makers are so scared of inflation, they avoid policies that might improve the economy:
Next, George Monbiot reminds us that while the Government is obsessed with cutting welfare from those at the bottom, corporate welfare is still alive and well:
And here, JD Alt points out the obvious – if the private sector can’t or won’t invest in areas that are vital for future development, then the government should:
There was a Panorama this week about food poverty. Patrick Butler gives us the details:
‘Making work pay’ is a cliche we hear a lot, but according to this blog post, work already does pay in the vast majority of cases:
With unemployment still high (athough falling) and the Work Programme failing, Labour say they will introduce a ‘compulsory jobs guarantee’. Details on what this will look like have been vague, but they are now hinting it might look something like this:
Finally, news of another massive sense of humour failure from UKIP. Tom Pride explains: