NGDP targeting: wither monetarism?

Monetarism is like a Zombie: it can be found theoretically wanting, empirically false and technically infeasible but in one form or another it just soldiers on.  In some ways the hype surrounding the conversation about the possibility of moving from an inflation based paradigm to targeting NGDP could be read as the end of monetarism.  But viewed from another angle it (NGDP targeting) can also be read as the latest reincarnation of monetarism.

Purists will of course bulk: monetarism died along time ago as central banks realized they did not control the money supply as private banks also create money all the time in the form of credit.  But if in narrow technical terms monetarism died soon after its birth, in broader political terms it came of age in the ensuing years.  As I see it there were three initial pillars to monetarism only one of which technical.  First, the CB can control the money supply (false) and thereby inflation; second, the CB should be independent (from democratic influence) to pursue price stability (not amenable to boolean operators); third, monetary policy is the preferred technocratic as opposed to democratic policy (fiscal) lever.  Even though the first be dead the second and third live on.

My problem with NGDP targeting is threefold.

First, proponents of of inflation targeting like the quasi monetarists are want to argue that the last twenty years of  inflation targeting has been a dizzying success.  As per Nick Rowe:

 We have 20 years of empirical evidence showing how inflation targeting works to stabilise expected and actual inflation.

Not so fast.  We have twenty years in which many things were happening: a move across the advanced capitalist zone to flexibilise labour markets and the incorporation of broad swaths of eastern European and Asian, and south Asian labour reserves into the global market; and increasing trade liberalisation and capital mobility. So I am not sure the CB’s should get all or even most of the credit for price stability over the last twenty years.  Although they may warrant some of the blame for higher average unemployment than the pre-monetarist CB regime.

Second, I remain to be convinced that the CB’s can actually target NGDP.  They, the CB,s, have a limited range of arrows in their tactical quiver.  If anything the present crisis has taught us (like the crisis of Keynesianism) at such periods in the micro-economic motivations swamp the thinking of businesses.  I suspect the BOC could announce tomorrow that it had raised its inflation target to 6% and not much would happen in real or nominal terms.  Defeating inflation was a rather simple exercise even if politically difficult.  All the CBs had to do was to put interest rates through the roof and kill off every marginal producer of goods and services.  Similarly keeping inflation in check (on target) was and is a relatively easy affair when one simply has to throw sand in the financial gears.  It becomes a problem of second order magnitude to target NGDP growth when everyone who counts knows you do not really have the ability to independently bring it about.

Nominal growth targeting means nominal investment targeting and in the context of already hyper low interests rates it is hard to see where the CB has a viable policy lever.  They can play around with quantitative easing (as they have already done) but all that appears to have done is set a soft floor on some classes of asset values.  And it is an open question as to whether or not this is a good thing.  On what rational basis was it decided that some asset values were worth preserving and others not?  More importantly putting a soft floor under some classes of asset values has done next to nothing for investment rates which is after all how you target underlying economic growth even when not discounted by inflation.

Third NGDP targeting is opaque in a way that inflation targeting is not.  There is a relatively decent link between the credible threat of high real interest rates and the threat of low real interest rates.  The former pushes noun against a verb the latter not so much.  Without the direct ability to determine aggregate investment rates the CBs are forced into much more cloistered channels with little to no capacity to sanction the relevant actors should it not get what it wants.

My critique probably boils down to the following.  It is only under a supremely unique set of circumstances that CBs found their targeting regime and interest rates to have such a profound positive influence on the level of economic activity.  In capitalist economies it is businesses that invest and hire (something both liberal and Marxist economists agree on) interest rates and asset valuations play only a small part of the calculus to invest.  The government on the other hand can use fiscal policy to indirectly stimulate investment through tax policy and directly control aggregate investment and thus employment via direct spending.

Ironically if the government was to monetize the debt by putting Peter in bed with Paul (the CB and the treasury) it would inadvertently give some real teeth to the CB’s ability to prove to the relevant economic actors that it was serious about targeting NGDP growth.  But I suspect Tory New-Keynesians like Rowe and Sumner would not abide.  For once you show that fiscal policy is in fact a powerful force for economic regulation the last two pillars of monetarism come a tumbling down.  Some version of industrial democracy would be back on the table.

Hardly what a Tory goes shooting for when they wake up early in the morning.

Stimulative austerity bearing fruit in Britain? Not. Nor globally

George Osborne was quick out of the gates with the austerity as stimulus gambit.  Which as everybody from myself to Paul Krugman predicted was going to be a flop.  Osborne has been trying to save face by arguing that his government’s austerity package saved Britain from becoming Greece  (the most disingenuous piece of clap trap coming from the other side of the Atlantic since Tony last spoke of the need to go to war in Iraq).  The bond vigilantes are not swarming in on fully sovereign countries (i.e., those with the power to go around the bond market if they so choose; see almost any post by Bill Mitchell).  Indeed, Japan has a debt to GDP of over 200% and is issuing ten year bonds with great fan fare at below 2%.

Meanwhile Cameron has been trying to save face with an alternative: namely, that it is the crisis in the Eurozone that is to blame.  As Bill Mitchell points out the Eurozone was in crisis before Cameron pushed through austerity.  That is to say, if the British economic recovery hinged on a buoyant Europe it was a silly plan.

Now some fair-minded reader might insist that neither Osborne or Cameron could have known that the crisis in Europe would go from bad to worse and they are therefore the victims of optimism but not stupidity.  Not so.  Like the Canadian Finance Minister, Osborne has been preaching austerity and public sector restructuring to all and sundry.  The problem is that the austerity gambit requires that exports do the heavy lifting in terms of dragging the domestic economy up, up and away.  But if all the countries that buy your imports are also trying to do the same then in the aggregate we all loose: a in an anchor cut loose.

Canada and Britain could have perhaps used austere means to jump start their domestic economies by free riding on a massive stimulus in the US and Continental Europe.  Again it has been clear for some time that was not going to happen.  So even if austerity could have worked its funky magic it would have been because Europe was doing stimulating fiscal stimulus.

Gangster Capitalism: Same as it ever was?

If you are going to read one thing and just one thing on the financial crisis and how it is working itself out you need to read this blog post at naked capitalism:  the one stop shop for understanding contemporary finance.

After the September 2008 crash, Iceland’s government took over the old, collapsed, banks and created new ones in their place. Original bondholders of the old banks off-loaded the Icelandic bank bonds in the market for pennies on the dollar. The buyers were vulture funds. These bondholders became the owners of the old banks, as all shareholders were wiped out. In October, the government’s monetary authority appointed new boards to control the banks. Three new banks were set up, and all the deposits, mortgages and other bank loans were transferred to these new, healthier banks – at a steep discount. These new banks received 80 percent of the assets, the old banks 20 percent.

Then, owners of the old banks were given control over two of the new banks (87% and 95% respectively). The owners of these new banks were called vultures not only because of the steep discount at which the financial assets and claims of the old banks were transferred, but mainly because they already had bought control of the old banks at pennies on the dollar.

The result is that instead of the government keeping the banks and simply wiping them out in bankruptcy, the government kept aside and let vulture investors reap a giant windfall – that now threatens to plunge Iceland’s economy into chronic financial austerity. In retrospect, none of this was necessary. The question is, what can the government do to clean up the mess that it has created by so gullibly taking bad IMF advice?

In the United States, banks receiving TARP bailout money were supposed to negotiate with mortgage debtors to write down the debts to market prices and/or the ability to pay. This was not done. Likewise in Iceland, the vulture funds that bought the bad “old bank” loans were supposed to pass on the debt write-downs to the debtors. This was not done either. In fact, the loan principals continued to be revalued upward in keeping with Iceland’s unique indexing designed to save banks from taking a loss – that is, to make sure that the economy as a whole suffers, even suffering a fatal austerity attack, so that bankers will be “made whole.” This means making a windfall fortune for the vultures who buy bad loans on the cheap.

Go read the whole article.

Returns to education: from a sure thing to a trip to vegas

Paul Krugman has pointed out, here and here that the meme that most of the inequality we have been experiencing of late has much to do with differences in educational attainment is bogus.  Mankiw responds in typical fashion by changing the standards by which that claim is judged.  Krugman presented solid evidence that the returns to education have been declining.  To which one should add that if we did a real ROI calculation the returns have gone negative.  Mankiw counters by saying that may be true but if you do not have an education you are less likely to get a chance to become the top 1%.

The difference between the two as near as I can tell is that Krugman demonstrates that buying a lottery ticket has worse odds of paying out than ever before and Mankiw’s master stroke is apparently that if you don’t buy a lottery ticket you have no chance at winning.

Sad, really.

Republican attack on collective bargaining halted

There is a certain paradox in what just happened in Ohio.  Thanks to the provision in some states for direct democracy as opposed to a singular reliance on representative democracy a Republican law that would have in all but name abolished collective bargaining for public sector workers was trashed in a popular referendum officially abrogating the law.

As per the FT

Ohio rejects move to limit workers’ rights

Voters in Ohio have overwhelmingly rejected a Republican-backed measure to limit collective bargaining and curtail strikes by public sector workers, in a referendum widely seen as a dress rehearsal for next year’s presidential election in the critical battleground state.

Although opinion polls had shown a clear lead for the “No” campaign, early results suggested that the outcome of Tuesday’s ballot was even more emphatic, with almost two-thirds of the votes being cast against the measure. With more than 2m votes counted, 62 per cent had voted against the proposal.

How to read economic language for bias: “wage inflation” in Newfoundland and Labrador

Sometimes we read things and we get that gut feeling that we are being subtly manipulated.  Economics is of course full of this subtle manipulation.  Words like “choice”, and “efficiency” and even phrases like “free trade,” “efficient markets” and my favourite “the natural rate of X” have a very specific meaning in neoclassical economics which do not not have much connection to what the layperson might think they mean.  What is curious about the above terms is that they all lead the layperson in the right ideological direction even if they (the layperson) have no idea what the terms really mean in economic practice.

To my mind one of the most egregious ‘tells’ is the phrase “wage inflation.”  Here even the pedigree of the phrase is suspect.  In economics the word inflation is generally reserved to refer to an increase in the price level.  If just one good rises in price what we have is a relative shift in prices.  Sometimes when, for example, we disaggregate inflation data we talk about the relative contribution of specific  items like food, and energy to the overall measure of inflation.  But to talk of wage inflation is just bizarre.  Economists do not talk about profit inflation; so why would we talk about wage inflation?  The only reason I can come up with is that when an economist does talk about wage inflation they are either too ignorant to bother listening to, or too biased to bother taking seriously.  There is the third possibility that they think inflation is anywhere and everywhere a function of wage increases which normally goes by the name of a wage cost push theory of inflation.  So the third is really an expression of the soft bigotry that comes from being too biased.

Lest anyone think I am making up false examples or hitting at straw men just click on this document.  Here an economist talks specifically about “wage inflation” in Newfoundland and Labrador.  Now I am sure he is a fine economist but why would Mr. Locke talk about wage inflation?  If he were simply unbiased but confused about what the word inflation meant why would he choose to not also talk about profit inflation?  Indeed, in 2008 profits as a percent of wages were running at 125%.  The decadal average was over 70% whereas the national average was around 25%.  If anything it sounds more like a case of profit push inflation but then again Newfoundland and Labrador do not have an inflation problem: prices rose on average 2.45.  So why talk about inflation at all?  Even more embarrassingly Mr. Locke’s own graph plots wages in Newfoundland and Labrador as a percent of the Canadian average.  His stellar proof (p.10) that wages are the cause of an almost non-existent general rise in the price level in Newfoundland and Labrador is that wages in the province have risen to less than 95% of the national average.

The only answer I can come up with is that in such a context the use of the word “inflation” after the word “wages” is designed to tell the reader that increasing wages are BAD.  Why is it bad?  Because inflation is BAD.  And not as in Michael Jackson’s Bad, but you know BAD.

In any case when you read the phrase “wage inflation” stop reading and do something more intellectually rewarding like cleaning your toilet.  And as you watch the water rise in your bowl ask your partner to come in and watch the “inflation” in the water level.  At least with specific reference to the general level of water in your toilet bowl you will be on safer linguistic and scientific ground than talking about wage inflation.

The irony of greed: The end game for Neoliberalism?

The global economy is in the toilet and the Boomers’ representatives are chanting: “flush, flush, flush.”  Me? I am eating cigarettes and wine while admiring the remarkable consistency in the myopia of all of it.

In the name of fiscal prudence the whole of the advanced capitalist zone is in engaged in austerity budgeting and calls for more of the same.  Even Martin Wolf, in his otherwise insightful column in the FT online today, felt the need to tap his hat and nod in the direction of the genteelism of supply.  Exhibit A, the conclusion to his incisive intervention:

Reconsidering fiscal policy is not all that is needed. Monetary policy still has an important role. So, too, do supply-side reforms, particularly changes in taxation that promote investment. So, not least, does global rebalancing. Yet now, in a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings.

As is widely acknowledged, monetary policy has little outside of conciliatory role to play at this time.  In so far as the CBs should not make the mistake of tightening policy as the ECB and the BoC did.  But apart from the role of spoiler there really is not much left for the CBs to do.  The problem is squarely fiscal.  As Wolf himself went to pains to argue.  Why then the conclusion given that further tax reductions are not only going to make the fiscal positions of governments worse they will also likely have the same effect as lowering interest rates at this time:  Nadda, ziltch, rien, nothing?  The problem is that Wolf has to tip his hat to conventional wisdom.  If not; he has no hope of bending the ears of policy makers.  Oh well, that is his plight not mine.

Here, given none are listening we may speak frankly.  The world economy is in the toilet because free trade, tax cuts, deregulation and above all the liberalization of finance over the last thirty years let loose a Tsunami of forces both economic and political.  The liberalization of finance and production allowed for the national gutting and then global whipsawing of labour.  As the profiteers profited and retired workers slept while the assets they had built were being systematically stripped and the fortunes being amassed were then turned to the seedy business (although a time honoured practice if one cares to actually read Smith) of buying off the government–and it must be stressed the intelligentsia too–broadly understood.

We now have the perfect storm.  A generation of public and private sector functionaries has been trained to believe that the market can do no wrong and the government no good.  As a corollary is of course the proposition that monetary and regressive tax policy is everything.

The irony, of course, is that any credible account of the present crisis would have to admit that we are here because free trade, tax cuts, deregulation, the flexibilization of labour markets  and above all the liberalization of finance brought us here.  How odd it is then that we should be treated to more of  the same as the cure for what ails us.

The Circus of Greed: the Political Economy of Ratings Agencies

Would be hard not to know by today that the S&P downgraded the US .  What is less well known is why it is further evidence of the circus of greed that is the American financial and political system.  First, read this post by Bill Mitchell, S&P decision is irrelevant.  If you are pressed for time just scroll down to where he talks about Japan’s experience with the ratings agencies.  Next go read this excellent post over at Naked Capitalism, Matt Stoller: S&P’s Predatory Policy Agenda.

Now remind yourself how poorly the ratings agencies did at rating the TBTF financial institutions in the walk up to the crisis.  Now ask yourself why ratings are not being done by competent, independent, and a not for profit third party.

Towards an adult conversation about Canadian labour markets

Have you ever heard the urban legend about how such and such generation of Canadians are lazier than the past generation?  Or the One about how this generation just does not want to work and why we need to make sure EI under-insures job loss to guard against loafers taking advantage of the system?  I have.  In fact I heard that story for all of my adolescent and adult life despite the fact that I took any job that was on offer since the age of 13.  I thought myself to be a rather industrious exception to the layabout tendencies of my generation.  But like most self perceptions and ruling policy narratives it turns out it is, scientifically speaking, unadulterated bullshit.  By which I mean that that the facts neither fit my self stylized superiority  complex nor the policy meme about the need to restructure labour market institutions to deal with the pragmatics of a generation beset by a pampered recalcitrance towards work.  Again, scientifically speaking, by which I mean the facts do not fit the narrative, it is total bullshit.
Here is what the data says .  In the graph below I have plotted two metrics of the propensity to work.  The first is simply the total amount of employment divided by the total population aged 15-64.  The second is total employment divided by total population.  Notice the two series more or less track each other.  Also notice they both trend upwards.  Significance? Let us take the first metric, in 1960 around 58 percent of all Canadians between 15 and 64 were employed in paid labour markets by 2008 around 74 percent were employed.  What does that mean? It means that generationally speaking more of us work than ever before in the history of Canada in paid labour markets.  And this holds true for the second metric (line below the first plot).

Having been disabused of the usual suspects what then accounts for the increasing levels of employment insecurity since the sixties.  In short the answer is the supply of labour and the demand for labour.  Simply put supply has been increasingly outstripping demand.  Don’t believe me then look at the data.  In the graph below I have simply subtracted the growth in employment from the growth in the population between 15 and 64 years of age.  A negative reading means population growth is higher than employment growth.  Take a look at the trend line.

Canadians are supplying far more labour for hire than they ever have.  What has changed is that the economy is simply not absorbing the labour supply available.  So two questions arise.  Why are Canadians supplying so much paid labour and why can’t aggregate demand match aggregate supply?  Answers to those question will have to wait for another post but those are the serious questions.

Note: All data are from the OECD.  Click on graphs for enlarged and clear images