Vince Cable is still the best member of this Government

Lars and Britmouse got there first, but let me point you towards Vince Cable‘s recent speech. The mainstream media focused on Vince’s reference to homebuilding in the 1930s. That is understandable in a country as obsessed with housing as the UK is, but the really interesting part was on monetary policy.

As in the 1930s, homebuilding now would be a sideshow, the real impetus to growth in the 1930s was leaving the gold standard, devaluation and reflation. This is exactly the policies  I and others have been calling for. Homebuilding was a consequence, not a cause of the UK’s recovery.

Without the Bank of England supporting the government no policy effort will be successful and this is what Vince says. Furthermore, without communicating that clearly the policy will fail. This is exactly what people like Scott Sumner and David Beckworth have been saying…and know it finds itself in the mouth of Vince Cable:

The right way to understand loose monetary policy is in terms of expectations: of whether future money demand will be growing fast enough to make borrowing to invest or spend worthwhile.  It is not enough just to look at the base rate.  Look at Japan: because of its persistent deflation, its zero-interest rates still do not reflect easy money conditions.  Anyone investing is facing the persistent pressure of falling prices and falling profits.

In the 1930s, the abrupt departure from Gold – so much condemned by the City – had the strongest possible effect on expectations of rising money GDP.

…What tools does the Government have? The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP. The Mansion House speeches signalled a clear intention to continue aggressive monetary policy.

Ladies and Gentlemen, that is Vince Cable advocating a NGDP target as a commitment device, exactly what this blog and many others have been arguing is essential if the UK is ever going to recover. There is some hope.


For the nth time, already!

I just want to inform all my international readers that there are no institutional problems with the UK adopting NGDP  level targeting. Failure is a choice.

First of all, for those keeping score, we’re still doomed. Secondly, the coalition can still, at any time, prevent doom, by changing the Bank of England’s mandate to target nominal gdp and to ease policy until it returns to trend.

If NGDP level targeting can be adopted quickly somewhere it is here. If somewhere needs to lead by example, I would recommend the UK too. NGDP is below trend, our banking system is weak, we are closely tied to the Eurozone, inflation expectation are falling and all anyone needs to do is to convince David Cameron’s cabal that this policy would get them elected. Conservatives *love* getting elected.

Britain has a parliamentary system with a lot of power vested in the executive. This is normally very good for getting things done. Sadly it also means you get bad legislation passed “when something needs to be done.” Something needs to be done and for a change it would be nice were the Government to do the right thing.

The Markets Don’t Predict a Bright Future

Loathe as I am to piddle on Scott’s victory parade, I think some perspective is needed. NGDP targeting is catching on, it certainly has supporters within the UK Government like Vince Cable and his staff and in the commenteriat. Likewise, it is gaining ground with Jeffrey Frankel, A professor at Harvard and in Japan and with Paul Krugman and yada yada yada…things are looking up for this obscure policy, which is a good thing.

Yet this optimism doesn’t appear to be buoying markets. If NGDP targeting has been gaining popularity you’d like to see some sign of it in the stock markets, yet the last three months have been awful.

There’s an awful lot of red pixels. Of course inferring anything from market data is very difficult, that is after all the point of markets, to process information. Events in the real world of central banking are likely to dominate discussions of NGDP targeting. But, were monetary policy regime change to be likely you would expect to see some optimism in the numbers, and these are very pessimistic numbers indeed.

Scott should be happy with his progress so far, he has undoubtedly helped put NGDP targeting and monetary easing back onto the policy agenda, when it might have been ignored. However, he is premature in saying the future is bright when all signs suggest it is very likely quite dim.

Why we should support QE in language an undergrad student can understand

Here’s a piece on QE I wrote for the LSE student rag (with some help from Luis Enrique).

Printing £75bn does not sound like a plan to make us all richer. It sounds like a plan to turn us into Zimbabwe. But last week Mervyn King, Governor of the Bank of England, announced that is exactly what he will be doing. When complete, the Bank’s Quantitative Easing, or QE, programme will have seen £275bn leave the printing presses, nearly £5000 for every person living in the UK. Informing the Bank’s decision is the news that more than two and half million people are now unemployed, including nearly a million young people. In fact, many students reading this will have chosen to come to LSE because finding employment has been difficult. Urgent action is obviously needed to tackle this, but printing money appears a method of dubious merit. Of course, there is a logic to the Bank of England’s action that may mean students graduating this time next year will find it easier to get a job than they expect.

The Bank’s actions appear odd, even dangerous, only because of the rarity and extremity of our situation. In normal times the Bank doesn’t announce how much money it will be printing, it just changes the interest rate at which it will lend. To keep growth steady, when the economy is decelerating they cut interest rates to encourage spending and when the economy is accelerating they raise interest rates to discourage spending. You can raise interest rates as high as you like, but can only cut them to zero, and that is where they’ve been since March 2009. This means they have to try to encourage spending through other methods.

Over the last nine months the economy has seen no growth when normally it would be almost two per cent larger. If an economy stops growing it may be because bad policies prevent new companies from setting up shop and creating and employing new technologies. Alternatively, an economy may falter because there is too little demand for those new industries and technologies. Whether the Bank’s actions are wise will depend very much on which describes our current situation.

The idea that firms and people may be lying idle because nobody wants their produce is a strange idea at first. If people are willing to work that must mean they want to consume. If they didn’t people would be happy to stay at home and relax. But there is one good people want to buy which won’t put others to work. You buy a car to get from A to B and you employ a mechanic. You buy a sheep because you want mutton or wool and you employ a shepherd. You “buy” money to swap it for something else by working or saving, but you don’t employ anyone because money can be created for free.

In nervous times, we all would like to improve our balance sheets, we all want to build up buffers of savings, and that often involves wanting to hold more money in our current accounts. When one person does this it causes no problems, but when we all become more nervous we all end up wanting to build up a safety buffer. Now with only so much money in circulation this can only happen if we each spend less than we earn. But this is impossible because everyone’s spending is someone else’s earnings. Unless extra money is put into circulation we get slowly poorer until people decide they have the right amount of money relative to their earning and spending. We have a recession. We have our current stagnation. QE is designed to put more money into circulation and to create more safe places to invest that money. That should lead to healthier balance sheets and more demand to employ people and will bring the economy back to life.

In an economy held back by bad policy, printing money does exactly what you would expect it to and makes everything more expensive. At a time of stagnant wages and austerity budgeting this would be a terrible result. Some people have pointed to high inflation as proof the bank has already printed too much money. In one story growth falters because people start demanding relatively more money than goods and services. In that world, printing money -whether through changing interest rates, QE or targeting total cash spending – will make us richer. In the other it makes us poorer.

Looking at the UK and global economy, three things imply the Bank’s actions will help more than hinder. One major source of inflation has been successive increases in VAT. In the last two years it has increased from 15% to 20%, adding at least a percentage point to inflation. A lot of inflation is also still working through import prices since sterling devalued. Lastly, crisis in Europe and continued depression in the US means the UK’s economy can expect little external support. The Bank of England has little influence over any of these and has ignored them to focus on what it can influence in the domestic economy.

In the last three years a lot has changed. Whether more QE is a good idea or not depends on whether the economy has been damaged to the point where we can employ a million fewer people than we used to. If the financial crisis or government policy has wrought such damage upon us then QE will merely produce ever higher prices. If there is still some slack in the economy then we will see more people employed and better living conditions for everyone. Simplistic comparisons with Zimbabwe may be attention grabbing, but in reality QE may be the best hope we have to get the UK back on track.

Scott Sumner’s victory is total…


“Market monetarists” like Scott Sumner and David Beckworth are crowing about the new respectability of nominal GDP targeting. And they have a right to be happy…. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.

I for one welcome our new NGDP targeting, level targeting overlords, but in the UK it sounds like we may have had something similar for a while.

Scott’s having a good week, and good for him, it sounds like he’s sacrificed a fair amount of time with his daughter (during the years when a child actually wants to spend time with its parents) to push for market monetarism. I’d certainly buy him a beer were he to ever visit LSE.

Economics is not the study of choice

Turns out I actually do have something to write about. A propos of Yglesias and Rodrik, I think people really need to stop thinking about Economics as some sort of study of choice, which is how it is traditionally conceived. Yglesias quotes Rodrik…

The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.

…and notes that non-interventionist environments don’t really exist. The market doesn’t appear ex nihilo and it isn’t really helpfully conceived of as a way of aggregating individual choices.

For a long time individual choice involved fighting and then using brute force and intimidation to get what you want. The key innovation of modern states wat to turn brute force and intimidation towards the realm of enforcement of contracts.

I think economics is much better thought of a study of contracts, expectations and choices last. The contractual elements of live take up most of your expenditure, housing, healthcare and saving for retirement and all of those things depend far more on your (and our collective) expectation of the future.

Choice comes into the picture only later on. Rational Choice theory is useful for estimating how people make certain choices, but it is the imposition of brute force strengthening contract enforcement and making the future more predictable that may be better routes for thinking about economics.

For example, Scott Sumner‘s proposal for central banks to adopt NGDP targeting, level targeting. This isn’t economics about choice, this is economics which is intended to make contracts easier to create ex ante and enforce ex post because it is about aligning expectations with what the future will actually be like in a stable way. Contracts and expectations form the core of economics, they are just very complicated in real world and difficult to model in the theoretical.