Rethinking public debt

13 Jul, 2020 at 13:43 | Posted in Economics | 1 Comment


Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

The Deficit Myth: a review

12 Jul, 2020 at 12:21 | Posted in Economics | 5 Comments

One common objection to neoclassical economics is that it underweights the importance of history and class. It is therefore paradoxical that Stephanie Kelton’s The Deficit Myth, which claims to challenge orthodox economics, should be guilty of just these vices.

Modern-Monetary-Theory-Let’s start by saying that I wholly agree with the main claims she makes — that a government which enjoys monetary sovereignty can always finance its borrowing. Asking how we will pay for public spending is therefore daft. Instead, the question, as Dr Kelton says, is: can the extra spending be resourced? The constraint on raising health spending for example — if there is one — is a lack of doctors and nurses, not a lack of finance. Where there are resources lying idle, governments should raise spending to employ them. Dr Kelton explain these ideas wonderfully clearly, so I recommend this book to all non-economists interested in government finances.

For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality. And rightly so. I was simply channelling Kalecki, Beveridge, Lerner and Keynes, who famously said back in 1933:

“Look after the unemployment, and the Budget will look after itself.”

For me, Kelton is – albeit very lucidly – reinventing the wheel …

At one stage she claims that MMT “didn’t exist” before the late 90s. But whilst the phrase did not exist, the ideas certainly did. Randall Wray is right to say that “the main principles of functional finance were relatively widely held in the immediate postwar period.”

Chris Dillow

Yours truly thinks that Dillow gets it right here on the question of the originality of MMT.

As has become abundantly clear during the last couple of years, it is obvious that most mainstream economists seem to think that Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with. That is actually very telling about the total lack of knowledge of their own discipline’s history these modern mainstream guys like Summers, Mankiw, and Krugman has.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system

We intend therefore​, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Keynes on microfoundations

11 Jul, 2020 at 20:16 | Posted in Economics | 2 Comments

keynes essays in biographyThe atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity – the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of.


Where ‘New Keynesian’ and New Classical economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social and economic systems. The interaction between animal spirits, trust, confidence, institutions, etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.

Paul Krugman — a case of dangerous neglect of methodological reflection

10 Jul, 2020 at 11:36 | Posted in Economics | 20 Comments

rosenbergAlex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminishing Returns? — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine a couple of years ago. Writes Rosenberg:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics:

‘Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.’

The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, and there seems no immediate prospect for improving the assumptions of perfect rationality and perfect markets from behavioral economics, neuroeconomics, experimental economics, evolutionary economics, game theory, etc.

But these concessions are all the New Classical economists need to defend themselves against Krugman. After all, he seems to admit there is no alternative to maximization and equilibrium.

I think Rosenberg is on to something important here regarding Krugman’s neglect of methodological reflection.

When Krugman responded to my critique of IS-LM this hardly came as a surprise.  As Rosenberg notes, Krugman works with a very simple modeling dichotomy — either models are complex or they are simple. For years now, self-proclaimed “proud neoclassicist” Paul Krugman has in endless harping on the same old IS-LM string told us about the splendor of the Hicksian invention — so, of course, to Krugman simpler models are always preferred.

In an earlier post on his blog, Krugman argues that ‘Keynesian’ macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

Sure, ‘New Keynesian’ economists like Krugman — and their forerunners, ‘Keynesian’ economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”

wrong-tool-by-jerome-awBut if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macro models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

Science should help us disclose the causal forces at work behind the apparent facts. But models — mathematical, econometric, or what have you — can never be more than a starting point in that endeavor. There is always the possibility that there are other (non-quantifiable) variables – of vital importance, and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the formalized mathematical model.

The kinds of laws and relations that ‘modern’ economics has established, are laws and relations about mathematically formalized entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real-world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made mathematical-statistical “nomological machines” they are rare, or even non-existent. Unfortunately, that also makes most of contemporary mainstream neoclassical endeavors of mathematical economic modeling rather useless. And that also goes for Krugman and the rest of the ‘New Keynesian’ family.

When it comes to modeling philosophy, Paul Krugman has in an earlier piece defended his position in the following words (my italics):

I don’t mean that setting up and working out microfounded models is a waste of time. On the contrary, trying to embed your ideas in a microfounded model can be a very useful exercise — not because the microfounded model is right, or even better than an ad hoc model, but because it forces you to think harder about your assumptions, and sometimes leads to clearer thinking. In fact, I’ve had that experience several times.

The argument is hardly convincing. If people put that enormous amount of time and energy that they do into constructing macroeconomic models, then they really have to be substantially contributing to our understanding and ability to explain and grasp real macroeconomic processes. If not, they should – after somehow perhaps being able to sharpen our thoughts – be thrown into the waste-paper-basket (something the father of macroeconomics, Keynes, used to do), and not as today, being allowed to overrun our economics journals and giving their authors celestial academic prestige.

Krugman’s explications on this issue are really interesting also because they shed light on a kind of inconsistency in his art of argumentation. During a couple of years, Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavors. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. In his End This Depression Now — just to take one example — Paul Krugman maintains that although he doesn’t buy “the assumptions about rationality and markets that are embodied in many modern theoretical models, my own included,” he still find them useful “as a way of thinking through some issues carefully.”

When it comes to methodology and assumptions, Krugman obviously has a lot in common with the kind of model-building he otherwise criticizes.

The same critique – that when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models that he otherwise criticizes – can be directed against his new post. Krugman has said these things before, but I am still waiting for him to really explain HOW the silly assumptions behind IS-LM help him work with the fundamental issues. If one can only use those assumptions with — as Krugman says, “tongue in cheek” – well, why then use them at all? Wouldn’t it be better to use more adequately realistic assumptions and be able to talk clear without any tongue in cheek?

The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic model building is little more than “hand waving” that give us rather a little warrant for making inductive inferences from models to real-world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around. As Keynes has it:

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the natural science, the material to which it is applied is, in too many respects, not homogeneous through time.

If macroeconomic models – no matter what ilk – make assumptions, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists – regardless of being New Monetarist, New Classical or ‘New Keynesian’ – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error.

So let me — respectfully — summarize: A gadget is just a gadget — and brilliantly silly simple models — IS-LM included — do not help us working with the fundamental issues of modern economies any more than brilliantly silly complicated models — calibrated DSGE and RBC models included. And as Rosenberg rightly notices:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics.


People who have their heads fuddled with nonsense

10 Jul, 2020 at 11:19 | Posted in Economics | 2 Comments

unemployment-line-great-depression_large_image1The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years… Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy.

J. M. Keynes (1929)

RCTs and the limits of evidence-based policies

6 Jul, 2020 at 12:45 | Posted in Economics | Leave a comment

There is something paradoxical about Michael Gove’s recent speech calling for government to be “rigorous and fearless in its evaluation of policy and projects.” It’s that his praise for evidence-based policy has come in a year when we’ve seen that policy should sometimes not be based on rigorous evidence …

top5It’s sometimes hard to extrapolate the results of the RCTs lauded by Gove. They “prove”, for example, that parachutes don’t save lives. As Cartwright and Deaton say:

“Demonstrating that a treatment works in one situation is exceedingly weak evidence that it will work in the same way elsewhere; this is the ‘transportation’ problem.”

And where they do yield results, these can be hard to interpret. The average treatment effect hides important heterogeneity of effects on individuals, for example.

There’s also the problem that past evidence is no guide to the future … There are two very important categories of cases where past evidence doesn’t help us predict the future.

One is the problem of radical uncertainty: we can never be 100% confident that past statistical relationships will continue to hold. The other is that of reflexivity. Beliefs can change the world. For example, McLean and Pontiff and Cotter & McGeever have shown that when strong evidence emerges of stock market anomalies, these get competed away. In economic policy, the counterpart to this is Goodhart’s law: “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”

Chris Dillow

As Chris notes in his post, evidence-based theories and policies are highly valued nowadays. Randomization is supposed to control for bias from unknown confounders. The received opinion is that evidence based on randomized experiments, therefore, is the best.

More and more economists have also lately come to advocate randomization as the principal method for ensuring being able to make valid causal inferences.

Yours truly would however rather argue that randomization, just as econometrics, promises more than it can deliver, basically because it requires assumptions that in practice are not possible to maintain. Just as econometrics, randomization is basically a deductive method. Given the assumptions (such as manipulability, transitivity, separability, additivity, linearity, etc.) these methods deliver deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. And although randomization may contribute to controlling for confounding, it does not guarantee it, since genuine randomness presupposes infinite experimentation and we know all real experimentation is finite. And even if randomization may help to establish average causal effects, it says nothing of individual effects unless homogeneity is added to the list of assumptions. Real target systems are seldom epistemically isomorphic to our axiomatic-deductive models/systems, and even if they were, we still have to argue for the external validity of the conclusions reached from within these epistemically convenient models/systems. Causal evidence generated by randomization procedures may be valid in ‘closed’ models, but what we usually are interested in, is causal evidence in the real target system we happen to live in.

The point of making a randomized experiment is often said to be that it ‘ensures’ that any correlation between a supposed cause and effect indicates a causal relation. This is believed to hold since randomization (allegedly) ensures that a supposed causal variable does not correlate with other variables that may influence the effect.

The problem with that simplistic view on randomization is that the claims made are both exaggerated and false:

• Even if you manage to do the assignment to treatment and control groups ideally random, the sample selection certainly is — except in extremely rare cases — not random. Even if we make a proper randomized assignment, if we apply the results to a biased sample, there is always the risk that the experimental findings will not apply. What works ‘there,’ does not work ‘here.’ Randomization hence does not ‘guarantee ‘ or ‘ensure’ making the right causal claim. Although randomization may help us rule out certain possible causal claims, randomization per se does not guarantee anything!

• Even if both sampling and assignment are made in an ideal random way, performing standard randomized experiments only give you averages. The problem here is that although we may get an estimate of the ‘true’ average causal effect, this may ‘mask’ important heterogeneous effects of a causal nature. Although we get the right answer of the average causal effect being 0, those who are ‘treated’ may have causal effects equal to -100, and those ‘not treated’ may have causal effects equal to 100. Contemplating being treated or not, most people would probably be interested in knowing about this underlying heterogeneity and would not consider the average effect particularly enlightening.

• There is almost always a trade-off between bias and precision. In real-world settings, a little bias often does not overtrump greater precision. And — most importantly — in case we have a population with sizeable heterogeneity, the average treatment effect of the sample may differ substantially from the average treatment effect in the population. If so, the value of any extrapolating inferences made from trial samples to other populations is highly questionable.

• Since most real-world experiments and trials build on performing one single randomization, what would happen if you kept on randomizing forever, does not help you to ‘ensure’ or ‘guarantee’ that you do not make false causal conclusions in the one particular randomized experiment you actually do perform. It is indeed difficult to see why thinking about what you know you will never do, would make you happy about what you actually do.

Randomization is not a panacea. It is not the best method for all questions and circumstances. Proponents of randomization make claims about its ability to deliver causal knowledge that is simply wrong. There are good reasons to be skeptical of the now popular — and ill-informed — view that randomization is the only valid and best method on the market. It is not.

Dags för socialdemokratin att göra upp med sin nyliberala åtstramningpolitik

4 Jul, 2020 at 16:00 | Posted in Economics, Politics & Society | 5 Comments

I stället för att använda den möjlighet som Coronakrisen inneburit att göra rent hus med nyliberalismens falska berättelser, har den socialdemokratiska partiledningen valt att försvara den ekonomiska politik som förts sedan 1990-talet …

bigOriginalTrots att nästan alla länder vi brukar jämföra oss med har kunnat göra lika stora eller betydligt större finanspolitiska satsningar i krisen, talas här i landet om att det skulle vara tack vare “ansvarsfull” sparpolitik förut som vi nu kan satsa och rädda jobb …

Trots att ojämlikheten förklarats vara tillväxthämmande och direkt farlig för demokratin. Och trots att Riksbankschefen förklarat att han kan skapa hur många svenska kronor som helst genom en enkel knapptryckning kommer redan varningarna från den socialdemokratiska ledningen och den moderata oppositionen om att vi snart måste börja “spara i ladorna” igen.

Åtstramning alltså, som svar på krisen.

Sofie Eriksson & Markus Kallifatides & Daniel Suhonen

Yours truly och några få andra nationalekonomer — som fortfarande har lite kontakt med verkligheten — har under ett par års tid nu frågat sig varför vi i det här landet har en regering som inte vågar satsa på en offensiv finanspolitik och låna mer. Inte minst mot bakgrund av de historiskt låga räntorna är det ett gyllene tillfälle att satsa på investeringar inom infrastruktur, vård, skola och välfärd.

Vad många politiker och mediala så kallade experter inte verkar (vilja) förstå är att det finns en avgörande skillnad mellan privata och offentliga skulder. Om en individ försöker spara och dra ner på sina skulder, så kan det mycket väl vara rationellt. Men om alla försöker göra det, blir följden att den aggregerade efterfrågan sjunker och arbetslösheten riskerar ökar.

En enskild individ måste alltid betala sina skulder. Men en stat kan alltid betala tillbaka sina gamla skulder med nya skulder. Staten är inte en individ. Statliga skulder är inte som privata skulder. En stats skulder är väsentligen en skuld till den själv, till dess medborgare.

En statsskuld är varken bra eller dålig. Den ska vara ett medel att uppnå två övergripande makroekonomiska mål — full sysselsättning och prisstabilitet. Vad som är ‘heligt’ är inte att ha en balanserad budget eller att hålla nere statsskulden. Om idén om ‘sunda’ statsfinanser leder till ökad arbetslöshet och instabila priser borde det vara självklart att den överges. ‘Sunda’ statsfinanser är osunt.

Tyvärr verkar det som om Magdalena Andersson — i likhet med många andra gamla studenter från Handelshögskolan i Stockholm — har rejäla kunskapsluckor. Kanske borde man sluta lära ut monetaristiskt Chicago-nonsens från 70-talet och istället följa med i teoriutvecklingen. Lite ‘functional finance’ och MMT kanske inte skulle skada även på maktelitens lekskola …

Ett lands statsskuld är sällan en orsak till ekonomisk kris, utan snarare ett symtom på en kris som sannolikt blir värre om inte underskotten i de offentliga finan­serna får öka.

Den ­svenska utlandsskulden är historiskt låg. Den konsoliderade statsskulden ligger idag på lite över 20 procent av BNP och enligt regeringens prognoser från tidigare i år kommer den att vara kring 16 procent om två år. Med tanke på de stora utmaningar som Sverige står inför i coronavirusets kölvatten är fortsatt tal om “ansvar” för statsbudgeten minst sagt oansvarigt. I stället för att ”värna om statsfinanserna” bör en ansvarsfull rege­ringen se till att värna om samhällets framtid. När numera t.o.m. IMF insett att det är kontraproduktivt att föra en ekonomisk politik med syfte att minska statsskulden, är det minst sagt bedrövligt när en regering inte insett att problemet med en statsskuld i en situation med nästintill negativa räntor inte är att den är för stor, utan för liten.

The concept of dynamics

4 Jul, 2020 at 08:59 | Posted in Economics, Politics & Society | 7 Comments

adornThe concept of dynamics, which complements bourgeois “ahistoricity,” is raised to something absolute, while it nevertheless, as the anthropological reflex of the laws of production, must be critically confronted in the emancipated society with need. The idea of unfettered doing, of uninterrupted creating, of chubby-cheeked insatiability, of freedom as intense activity, feeds on the bourgeois concept of nature, which from time immemorial has served to proclaim social violence as irrevocable, as a piece of healthy eternity. It was due to this and not any presumed equalization that the positive designs of socialism, against which Marx bristled, remained in barbarism. What is to be feared is not the slackening of humanity in a life of luxury, but rather the dessicated expansion of what, in the guise of the all-natural, is social – the collectivity as the blind rage of making. The naively mandated unambiguity of the tendency of development towards the raising of production is itself a piece of that bourgeois nature [Bürgerlichkeit], which permits development only in one direction, because, integrated into the totality, ruled by quantification, it is hostile to the qualitative difference. If one thinks of the emancipated society as one emancipated precisely from such a totality, then alignments become visible, which have little in common with the raising of production and its human mirror-images.

T. W. Adorno

Central banks and fiscal policies

3 Jul, 2020 at 12:50 | Posted in Economics | 18 Comments

Suppose a UK government became extremely irresponsible, and enacted large tax cuts during an economic boom. The Bank would, following its remit, attempt to put the lid on inflationary pressure by raising interest rates. Suppose further that the markets panicked, and refused to buy UK government debt except at ridiculously high interest rates. In that situation I think it is extremely unlikely that the Bank would intervene and buy government debt, because it would believe that economic stability was best served by the government cutting its deficit.

fsAcademics have sometimes speculated about such a standoff. In this game of chicken would the government give in and raise taxes or cut spending, or would the Bank give in and “monetise” the deficit by buying government debt? I think this debate is a little academic, because a government so intent on creating an inflationary boom would also think nothing about telling the Bank what to do. The governor would be ordered to monetise the deficit and if he refused he would be replaced by someone who would.

No governor of a central bank wants to be put in that situation. It is for this reason that Mervyn King said: “Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.” Obsession can breed irrationality. Which brings us back to 2010, which is much more like recent events than our hypothetical economic boom. Perhaps this irrational fear of deficits may help explain why during the largest recession since the war King ignored standard macroeconomic theory and practice and encouraged the austerity that proved so disastrous. A lesson may be that while you can trust central bankers to deal with a short-term panic in the government debt market during a recession, you should never trust them to be objective when talking about fiscal policy.

Simon Wren-Lewis / The Guardian

Mainstream macroeconomics — rigorously irrelevant

2 Jul, 2020 at 16:57 | Posted in Economics | 6 Comments

be-relevantThere is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

One might have hoped that humbled by the manifest failure of its theoretical pretenses during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. But — empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists and other DSGE modelers — there are still some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy … Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it … Dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise.

If macroeconomic models – no matter of what ilk –  build on microfoundational assumptions of representative actors, rational expectations, market clearing, and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behavior and the behavior in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality.

A gadget is just a gadget – and no matter how brilliantly silly DSGE models you come up with, they do not help us working with the fundamental issues of modern economies.

An interview with Stephanie Kelton

1 Jul, 2020 at 13:25 | Posted in Economics | 2 Comments

Cody Fenwick: What drives the biggest misunderstandings about government debt in our national conversation?

mythEverything is wrong. The way we talk about federal government debt is, from my perspective, we say things like we’re borrowing from China and foreigners. Hillary Clinton said when she was secretary of State that it’s a national security threat. People talk about it representing a liability to all of us, so we hear people talk about “your share [of the national debt],”  a burden on future generations, that it ultimately has to be paid back, that it’s going to require higher taxes in the future. I could keep going.

So what connects all these misunderstandings? Are we thinking of the government too much like a household or a business?

Yes, of course. We think that the government has borrowed, and we think that this is real debt. And neither of those things is correct. I say in the book that if I walk into a bank and borrow money, I’m borrowing money because I don’t have it. Right? That’s why I got to the bank to take out a loan. The federal government is not borrowing money because it needs money. It’s not borrowing because it doesn’t have the capacity to finance whatever it wants to spend money on. It has the fiscal capacity; it can just spend. And not only that, the government sells the bonds. And by the time the government sells the bonds, the spending has already taken place. So the bonds cannot possibly be the tool with which the government raises money in order to spend. It’s selling the bonds after the spending had already taken place. Why does it do that? It doesn’t need to borrow, it has already financed the spending.

So we don’t really understand — the public and most economists get this wrong — we don’t even understand what the purpose of selling bonds is. We treat it as a borrowing operation. It’s not. The purpose of selling the bonds is to drain off the reserves, the dollars, to remove some of the dollars the government has spent into the economy and replace them with treasuries. It’s a subsidy to the rich, is what it is.


To Keynes — as to Abba Lerner and MMT today — it was evident that the state had the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that meant that it had to take on ​debt and underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieving two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance’, austerity and​ balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

J. M. Keynes

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

Throughout history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down.

The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long time-horizon perspective.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey

NAIRU — a non-existent unicorn

30 Jun, 2020 at 17:27 | Posted in Economics | 8 Comments

powemp3In our extended NAIRU model, labor productivity growth is included in the wage bargaining process … The logical consequence of this broadening of the theoretical canvas has been that the NAIRU becomes endogenous itself and ceases to be an attractor — Milton Friedman’s natural, stable and timeless equilibrium point from which the system cannot permanently deviate. In our model, a deviation from the initial equilibrium affects not only wages and prices (keeping the rest of the system unchanged) but also demand, technology, workers’ motivation, and work intensity; as a result, productivity growth and ultimately equilibrium unemployment will change. There is in other words, nothing natural or inescapable about equilibrium unemployment, as is Friedman’s presumption, following Wicksell; rather, the NAIRU is a social construct, fluctuating in response to fiscal and monetary policies and labor market interventions. Its ephemeral (rather than structural) nature may explain why the best economists working on the NAIRU have persistently failed to agree on how high the NAIRU actually is and how to estimate it.

Servaas Storm & C. W. M. Naastepad

Many politicians and economists subscribe to the NAIRU story and its policy implication that attempts to promote full employment is doomed to fail since governments and central banks can’t push unemployment below the critical NAIRU threshold without causing harmful runaway inflation.

Although this may sound convincing, it’s totally wrong!

One of the main problems with NAIRU is that it essentially is a timeless long-run equilibrium attractor to which actual unemployment (allegedly) has to adjust. But if that equilibrium is itself changing — and in ways that depend on the process of getting to the equilibrium — well, then we can’t really be sure what that equilibrium will be without contextualizing unemployment in real historical time. And when we do, we will — as highlighted by Storm and Naastepad — see how seriously wrong we go if we omit demand from the analysis. Demand policy has long-run effects and matters also for structural unemployment — and governments and central banks can’t just look the other way and legitimize their passivity re unemployment by referring to NAIRU.

The existence of long-run equilibrium is a very handy modeling assumption to use. But that does not make it easily applicable to real-world economies. Why? Because it is basically a timeless concept utterly incompatible with real historical events. In the real world, it is the second law of thermodynamics and historical — not logical — time that rules.

This importantly means that long-run equilibrium is an awfully bad guide for macroeconomic policies. In a world full of genuine uncertainty, multiple equilibria, asymmetric information, and market failures, the long-run equilibrium is simply a non-existent unicorn.

NAIRU does not hold water simply because it does not exist — and to base economic policies on such a weak theoretical and empirical construct is nothing short of writing out a prescription for self-inflicted economic havoc.

NAIRU is a useless concept, and the sooner we bury it, the better.

Hicks’ chef-d’oeuvre

28 Jun, 2020 at 16:15 | Posted in Economics | 2 Comments

When we cannot accept that the observations, along the time-series available to us, are independent, or cannot by some device be divided into groups that can be treated as independent, we get into much deeper water. For we have then, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply. We are left to use our judgement, making sense of what has happened as best we can, in the manner of the historian. Applied economics does then come back to history, after all.

hicksI am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed. We have no business to turn to them automatically; we should always ask ourselves, before we apply them, whether they are appropriate to the problem at hand. Very often they are not. Thus it is not at all sensible to take a small number of observations (sometimes no more than a dozen observations) and to use the rules of probability to deduce from them a ‘significant’ general law. For we are assuming, if we do so, that the variations from one to another of the observations are random, so that if we had a larger sample (as we do not) they would by some averaging tend to disappear. But what nonsense this is when the observations are derived, as not infrequently happens, from different countries, or localities, or industries — entities about which we may well have relevant information, but which we have deliberately decided, by our procedure, to ignore. By all means let us plot the points on a chart, and try to explain them; but it does not help in explaining them to suppress their names. The probability calculus is no excuse for forgetfulness.

John Hicks’ Causality in economics is an absolute masterpiece. It ought to be on the reading list of every course in economic methodology.

Top 15 Economics Blog of The World

25 Jun, 2020 at 08:34 | Posted in Economics | 3 Comments

Top-15Random Observations for Students of Economics
This blog is run by Gregory Mankiw …

Macro Musings Blog
Run by David Beckworth, a senior research fellow at George Mason University …

Confessions of a Supply-Side Liberal
Run by Miles Kimball, the Emeritus Professor Economics at Michigan University …

Marginal Revolution 
Alex Tabarrok and Tyler Cowen, both professors of economics at George Mason University, run this blog …

Naked Capitalism 
This blog was started in 2006 as a joint initiative of various economic scholars to address the issue of underreporting of the extent and severity of the underpricing of risk of all credit instruments in the US …

New Economic Perspectives
This blog is written by multiple authors and provides articles and analyses from several renowned economists, finance gurus, legal scholars, and academicians …

The Enlightened Economist
This blog is run by Dr. Diane Coyle at Cambridge University …

Real-Time Economics
This blog is run by a wing of the Wall Street Journal …

The Intelligent Economist
This blog is run by a group of economic students and graduates who wanted to share their love for their subject with the rest of the world …

The Undercover Economist
This blog is written by Tim Hardford …

Thoughts on Economics
This blog mostly features articles on Post Keynesian economic theories …

Ed Dolan’s Econ Blog
Dr Dolan has had the experience of teaching in some of the world’s finest universities in colleges …

Worthwhile Canadian Initiative
This is an economics blog with a focus on Canadian economic issues …

Lars P. Syll
Dr. Syll, a professor of economics at the Malmo University in Sweden, runs this blog to educate and enlighten his followers on subjects like realist social science, theories of distributive justice, and the methodology and philosophy of economics …

Mainly Macro
Written by Dr. Wren-Lewis, the Emeritus Professor of Economics and Fellow of Merton College at Oxford University …

The Brand Boy

The Deficit Myth

24 Jun, 2020 at 10:41 | Posted in Economics, Politics & Society | 15 Comments

keltonSoon after joining the Budget Committee, Kelton the deficit owl played a game with the staffers. She would first ask if they would wave a magic wand that had the power to eliminate the national debt. They all said yes. Then Kelton would ask, “Suppose that wand had the power to rid the world of US Treasuries. Would you wave it?” This question—even though it was equivalent to asking to wipe out the national debt—“drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand.”

Such is the spirit of Kelton’s book, The Deficit Myth. She takes the reader down trains of thought that turn conventional wisdom about federal budget deficits on its head. Kelton makes absurd claims that the reader will think surely can’t be true…but then she seems to justify them by appealing to accounting tautologies. And because she uses apt analogies and relevant anecdotes, Kelton is able to keep the book moving despite its dry subject matter. She promises the reader that MMT opens up grand new possibilities for the federal government to help the unemployed, the uninsured, and even the planet itself…if we would only open our minds to a paradigm shift …

Precisely because Kelton’s book is so unexpectedly impressive, I would urge longstanding critics of MMT to resist the urge to dismiss it with ridicule. Although it’s fun to lambaste “magical monetary theory” on social media and to ask, “Why don’t you move to Zimbabwe?” such moves will only serve to enhance the credibility of MMT in the eyes of those who are receptive to it.

Robert P. Murphy / Mises Institute

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84As the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt …

The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …

If for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment.

Abba Lerner

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