Last night I attended a lecture by Lord Skidelsky at the Progressive Economic Forum. On a personal note it was amusing not only to be so near to my alma mater the LSE but also to have a chat with one of my past tutors from there Willem Buiter. Returning to the economics the lecture was based on the faith that Lord Skidelsky has in fiscal policy and his argument that we should have expanded it in the face of the credit crunch. Putting it another way he is an out and out Keynesian although the claim in the introduction that he was the greatest expert on the subject seemed a little harsh to me on John Maynard Keynes himself.
If we start with a strength of his approach it was the point that we have seen an extraordinary monetary response to the credit crunch. He also mentioned his discussions with central bankers and how they debated what the response had been in terms of growth and inflation. It was clear that he was unconvinced that it had done much good, but whilst he did not seem to address the point of who should be held responsible for this, he did have a proposed solution which was for the government to take back control of monetary policy. In some ways I support that as it would return at least some democracy to an important process but it also creates another type of what I call the British Rail problem. This is a situation where we do not like the current scenario and sometimes forget that the proposed alternative is something that we did not like much either when we had it. In other words there is a clear danger of jumping from the frying pan into the fire. Indeed I found it troubling that when asked a question about QE and its consequences our noble Lord simply resorted to waffle.
The case here is that we would have been on a better path if in the dog days of 2008/09 and following we had expanded fiscal policy. The detail sounded like an argument for something of a control and command economy when the case was made for public investment “of course there will be mistakes but the private-sector makes mistakes too”. The latter point is true but glosses over the point that it is with their own money or with money given to them by shareholders. We know that it is far from perfect in a world where managers act as owners and even owners can appear on TV smoking weed and acting oddly. But then again of course if we look at Tilray we see that taking advantage of people smoking weed is apparently the great new profit opportunity or something like that! The Steve Miller Band were of course on point many years ago.
I’m a joker
I’m a smoker
I’m a mid-night toker
The problem is that whilst Lord Skidelsky can assert his claims as so often in economics we lack evidence. The nearest example to a country I could think of to his preferred scenario is Japan. It’s fiscal deficit stayed quite high for a while in response to the credit crunch as in relation to GDP it went 9.5%, 8.3% twice, 8.1% and then 7.8%. Yet in terms of economic growth or wage growth it has seen its own struggles. Also one of the ways this has been financed has been by the QE bond purchases of the Bank of Japan which has bought 42% of the market now and its total balance sheet is just passing annual GDP. So via the depressive effect of QE effect on bond yields, we see that a further stimulus was applied by QE, as otherwise a higher deficit would have been required for the same outcome. This brings me to another issue which I will expand upon more later but these thoughts seem unworldly with regard to financial markets, and a harsher critic might say from another world.
Another issue is a common one with advocates of expansionary monetary policy which is the “More, more,more” one. At whatever point we find ourselves we are told that the next step will lead us to the economic version of the land of milk and honey. It is of course not the fault of advocates of fiscal policy that the monetary policy advocates have pretty comprehensively queered this patch. But we are where we are and as Kelis points out.
Might trick me once
I won’t let you trick me twice
No I won’t let you trick me twice
Here we got the strongest example of an unworldly line of thought which was the suggestion that UK banks should be restricted to domestic activities only. I could see two clear flaws in that. The first is that RBS and Barclays may well immediately collapse and HSBC would either shift to the places in its name and/or collapse. Next if we move to the international arena there is the case of Turkey where UK banks have lent around US $15 billion which presumably they would need to get rid of under the planned scenario. In its current state Turkish firms could hardly repay it and other banks would only take over the loans for quite a discount.
Regular readers will know that I am very critical of banking behaviour and am certainly no fanboy. But the problems with banking run deep as for example are we really expected to believe that Danske Bank somehow took on some US $234 billion of dodgy money in Estonia without anybody being aware of it? We cannot wish away this reality and retreat behind our own borders as we are likely to find the problem simply pops up somewhere else.
Next comes the issue highlighted by the mention of a requirement for capital controls to accompany the new policy. These were not specified and were rather vague leading to the fear that they might spread to more areas than intended. We also know that they have a patchy success record because if we look at China where some of the implementation has been ruthless we also see that a lot of money escaped via Bitcoin if nowhere else.
This was accompanied by the implication that financial markets are bad people and speaking from personal experience some of them certainly are. But in general they mostly represent investors and pensioners and if you are implementing policies they are worried about they have a right to ask for a higher rate of interest. This can be a dangerous downwards spiral which has become anaethetised to some extent in the credit crunch era because central banks have replaced investors as buyers of government debt. But as that option would not exist in Lord Skidelsky’s scenario as the government will be in charge of monetary policy we could see what would be regarded as outright monetisation of government debt. We have seen few examples of this but the one in Ghana we looked at a couple of years or so back was like an express lift going down.
An unspoken theme here was the issue if how much control any government actually has these days? In the scenario suggested in the lecture we saw a firm grip being taken in some areas but in my opinion a lack of understanding of not only second order effects but also some first order ones. That could go wrong very quickly. On an initially more minor point the idea that Labour should have devalued the Pound £ in 1964 rather than 1967 provoked two lines of thought. Firstly my understanding of the 67 devaluation was that due to later revisions of the balance of payments it was not necessary so why do it earlier? Next comes a much less minor point that an outspoken sub-plot might be that a much lower £ is also part of the plan. That might be arrived at on day one if the reference to doing things without telling voters was carried out – interestingly the source of this line of thought was a political opponent Nigel Lawson- as it would be somewhat like financial dynamite I think.
Moving to strengths of the proposal there are indeed some. Firstly we do have some control over events and some freedom of manoever and there are times fiscal policy can help.There are certainly areas which could do with more public money. I agree that monetary policy has spiraled out of control with the list of its advocates shrinking. Also the point that what we have has at best a patchy record and at worst has not worked is a fair one. But to my mind that is quite some distance from assuring us that it is a type of Holy Grail for our economic problems.