The trouble with capitalism — Chris Dillow

Are the faults of capitalism curable, or are they instead symptoms of a chronic disease? This is the question posed by Martin Wolf:

What we increasingly seem to have…is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.

There is much to admire in this piece. But I fear it understates the problem with capitalism....

Falling rate of profit?

Stumbling and Mumbling
The trouble with capitalism
Chris Dillow | Investors Chronicle

Richard Murphy — Fisking Martin Wolf on modern monetary theory

I suspect Wolf chose to get this wrong, deliberately. His narrative does not work if he noted correctly what MMT said.

But his real disagreement is that whilst MMT is correct (subject to his own misconceptions) he thinks the policy implications are wrong.

Nice smackdown, if a smackdown can be considered nice.

Richard Murphy concludes:

Wolf has conceded MMT is right. Now he needs to accept the consequences. Including that democracy by and for the people should prevail.

To this I would add that representative democracy can only work if the electorate and the those they elect to represent them are properly informed. In a society in which wealth, influence, power and knowledge are unevenly distributed, with the top enjoying a disproportionate share of these, political outcomes will be biased in that direction.

Those at the top will therefore do what is in their considerable power to maintain the status quo by controlling the narrative. The narrative is now shifting with understanding of MMT proliferating to the extent that VSPs can no longer retain their credibility by denying the evident. Therefore, the narrative is beginning to shift away from attacking MMT. after having failed with ignoring it, toward blunting it. This can be read as the social and political subtext of Martin Wolf's piece, which is ostensibly chiefly economic and financial.

Tax Research UK

Fisking Martin Wolf on modern monetary theory

Richard Murphy | Professor of Practice in International Political Economy at City University, London; Director of Tax Research UK; non-executive director of Cambridge Econometrics, and a member of the Progressive Economy Forum

Richard Murphy — The battle for money has begun

We live in a dangerous time when the FT promotes a form of hardline, and deeply undemocratic monetarism.

It's dangerous that some on the left have bought into Positive Money's ideas.

The battle for money has begun. It is essential that it is won. 

Tax Research UK
The battle for money has begun

Richard Murphy

Yves Smith — Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs

The underlying pathology is not hard to describe: employers (enabled by the Fed which has since the 1980s been only too wiling to provide for higher levels of unemployment so as to curb labor bargaining power to keep inflation tame) have succeeded in eliminating labor bargaining power. That program has been aided and abetted by the popularization of libertarian ideologies, which encourage many to see themselves as more in charge of their destiny than they are and thus see success and failure as the result of talent and work, as opposed to circumstance.…

More on precarity and the Anne Case and Angus Deaton study, too.

Naked Capitalism
Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs
Yves Smith

George Monbiot — A maverick currency scheme from the 1930s could save the Greek economy

George Monbiot looks at Martin Wolf, Ann Pettifor, the Bristol pound, and Bernard Lietaer, and Silvio Gesell for solutions that would help Greece.

The Guardian
A maverick currency scheme from the 1930s could save the Greek economy
George Monbiot

Merijn Knibbe — Rogoff on Wolf. Some comments or: empowering households made all the difference

In a very readable and insightful review of the new Martin Wolf book (which I haven’t read yet) Kenneth Rogoff plays the revolutionary card:’Let’s get rid of these debts, we’ve got nothing to lose than a deflationary chain of events’. This puts him, in a Eurozone perspective, in the radical left corner of politics (and it’s kind of ironic that he accuses text-book economists like Krugman of being ´hard-left´…).

Real-World Economics Review Blog
Rogoff on Wolf. Some comments or: empowering households made all the difference
Merijn Knibbe

What we didn't learn from the economic crisis — Danielle Kurtzieben interviews Martin Wolf

In the years since the financial crisis, countries have struggled to remove the causes of the most recent financial crisis. Thus far, they have failed. That's the view of Martin Wolf, associate editor and chief economics commentator at the Financial Times. In his new book, The Shifts and the Shocks, Wolf examines what we've learned from the crisis, and just as importantly, what we haven't learned.

VOX
What we didn't learn from the economic crisis

Danielle Kurtzieben interviews Martin Wolf

The Economist — A Prominent Financial Columnist Is Calling For Radical Reforms To The Global Economy

Review of "The Shifts and the Shocks: What We've Learned--and Have Still to Learn--from the Financial Crisis" By Martin Wolf. Penguin Press; 466 pages. Allen Lane.

To make finance safer, Mr Wolf suggests replacing a fractional reserve banking system, which takes in deposits and lends most of them out in longer-term loans, with a system of "narrow banking", where deposits must be backed by government bonds. To sustain demand without relying on dangerous asset bubbles, he proposes permanent "helicopter money", where governments run deficits that are financed by the central bank. For a man of the mainstream, this is brave stuff.…

Pushing his analysis to its logical conclusion, he argues that the only way to deal with today's underlying problems--a fragile financial system and a secular weakness in demand--may be to move away from bank-based credit altogether and rely on permanent budget deficits financed by central banks. 

Forcing banks to match their deposits with safe government bonds would reduce the risks of bank crashes and encourage a healthier reliance on equity finance. Permanent money-financed deficits would, in turn, provide a safer way to sustain spending than private-asset booms and busts. If done responsibly, they need not cause inflation.

Business Insider
A Prominent Financial Columnist Is Calling For Radical Reforms To The Global EconomyThe Economist

Randy Wray — Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke

On money cranks.

Economonitor — Great Leap Forward
Something is Rotten in the State of Denmark: The Rise of Monetary Cranks and Fixing What Ain’t Broke

L. Randall Wray | Professor of Economics, University of Missouri at Kansas City

Crossposted at New Economic Perspectives and Naked Capitalism. Interesting comments at all venues.

Brad DeLong — Afternoon Must-Read: Martin Wolf: Review of ‘Capital in the Twenty-First Century’, by Thomas Piketty

Martin Wolf goes there. Unequal wealth equals unequal power and greatly unequal power spells the end of democracy.

Like I've been saying, neoliberal capitalism is antithetical to democracy in that it results in oligarchic plutocracy through the power and influence that great wealth involves in a political system based on politicians financed by donors and a revolving door between the corporate sector and government.

WCEG — The Equitablog
Afternoon Must-Read: Martin Wolf: Review of ‘Capital in the Twenty-First Century’, by Thomas Piketty
Brad DeLong

Ralph Musgrave — Martin Wolf criticises Lawrence Kotlikoff.

Martin Wolf in today’s Financial Times puts seven suggestions for improving the banking system. The fourth involves criticising Lawrence Kotlikoff’s 100% reserve banking ideas. In reference to banks, Wolf says “I accept that leverage of 33 to one, as now officially proposed is frighteningly high. But I cannot see why the right answer should be no leverage at all. An intermediary that can never fail is surely also far too safe.”

There are several mistakes in those two sentences, as follows.

Read it at Ralphonomics
Martin Wolf criticises Lawrence Kotlikoff
by Ralph Musgrave

For Bill Mitchell's take on full reserve, see 100-percent reserve banking and state banks, where Bill addresses both proposals now currently under discussion.

Randy Wray — Martin Wolf’s Liquidity Traps And Free Lunches Through Fiscal Expansion

Read it at Economonitor | Great Leap Forward
Martin Wolf’s Liquidity Traps And Free Lunches Through Fiscal Expansion
by L. Randall Wray

Warren Mosler on Martin Wolf — Part II

Repost: Warren's remarks in bold. Wolf's are indented.

People who reject free lunches are fools: Liquidity trap – part II
Posted by WARREN MOSLER on April 20th, 2012

Fiscal and monetary policy in a liquidity trap – part II
By Martin Wolf

Output is produced by work.

Work is a cost, not a benefit. 

It is in that sense that there is no free lunch.

Might fiscal expansion be a free lunch? This is the question addressed in a thought-provoking paper “Fiscal Policy in a Depressed Economy”, March 2012, by Brad DeLong and Larry Summers, the most important conclusion of which is obvious, but largely ignored: the impact of fiscal expansion depends on the context. *

In normal times, with resources close to being fully utilised, the multiplier will end up very close to zero; in unusual times, such as the present, it could be large enough and the economic benefits of such expansion significant enough to pay for itself.

‘Paying for itself’ implies there is some real benefit to a lower deficit outcome vs a higher deficit outcome. With the govt deficit equal to the net financial assets of the non govt sectors, ‘Paying for itself’ implies there is a real benefit to the non govt sectors have fewer net financial assets.

In a liquidity trap fiscal retrenchment is penny wise, pound foolish.

I would say it’s penny foolish as well, as it directly reduces net financial assets of the non govt sectors with no economic or financial benefit to either the govt sector or the non govt sectors.

Indeed, relying on monetary policy alone is the foolish policy: if it worked, which it probably will not, it does so largely by expanding stretched private balance sheets even further.

Agreed.

As the authors note: “This paper examines the impact of fiscal policy in the context of a protracted period of high unemployment and output short of potential like that suffered by the United States and many other countries in recent years. We argue that, while the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times, discretionary fiscal policy where there is room to pursue it has a major role.”

There are three reasons for this.

1. First, the absence of supply constraints means that the multiplier is likely to be large.

Why is a large multiplier beneficial?


A smaller multiplier means the fiscal adjustment can be that much larger.
That is, the tax cuts and/or spending increases (depending on political preference) can be that much larger with smaller multipliers.

It is likely to be made even bigger by the fact that fiscal expansion may well raise expected inflation and so lower the real rate of interest, when the nominal rate is close to zero.

However the ‘real rate of interest’ is defined. Most would think CPI, which means the likes of tobacco taxes move the needle quite a bit.
And with the MMT understanding that the currency itself is in fact a simple public monopoly, and that any monopolist is necessarily ‘price setter’, the ‘real rate of interest’ concept doesn’t have a lot of relevance.

2. Second, even moderate hysteresis effects of such fiscal expansion, via increases in the likely level of future output, have big effects on the future debt burden.

Back to the errant notion of a public sector debt in its currency of issue being a ‘burden’.

3. Finally, today’s ultra-low real interest rates at both the short and long end of the curve, suggest that monetary policy is relatively ineffective, on its own.

Most central bank studies show monetary policy is always relatively ineffective.

The argument is set out in a simple example. “Imagine a demand-constrained economy where the fiscal multiplier is 1.5, and the real interest rate on long-term government debt is 1 per cent. Finally, assume that a $1 increase in GDP increased tax revenues and reduces spending by $0.33. Assume that the government is able to undertake a transitory increase in government spending, and then service the resulting debt in perpetuity, without any impact on risk-premia.

“Then the impact effect of an incremental $1.00 of spending is to raise the debt stock by $0.50. The annual debt service needed on this $0.50 to keep the real debt constant is $0.005. If reducing the size of the current downturn in production by $1.50 avoids a 1 per cent as large fall in future potential output – avoids a fall in future potential output of $0.0015 – then the incremental $1.00 of spending now augments future tax-period revenues by $0.005. And the fiscal expansion is self-financing.”

This is a very powerful result.

Yes, it tells you that the ‘automatic fiscal stabilizers’ must be minded lest the expansion reduce the govt deficit and, by identity, reduce the net financial assets of the non govt sectors to the point of aborting the economic recovery. Which, in fact, is how most expansion cycles end.
For the non govt sectors, net financial assets are the equity that supports the credit structure.
So when a recovery driven by a private sector credit expansion (which is how most are driven), causes tax liabilities to increase and transfer payments to decrease (aka automatic fiscal stabilizers)- reducing the govt deficit and by identity reducing the growth of private sector net financial assets- private sector/non govt leverage increases to the point where it’s unsustainable and it all goes bad again.

It rests on the three features of the present situation: high multipliers; low real interest rates; and the plausibility of hysteresis effects.

A table in the paper (Table 2.2) shows that at anything close to current real interest rates fiscal expansion is certain to pay for itself even with zero multiplier and hysteresis effects: it is a “no-brainer”.

And, if allowed to play out as I just described, the falling govt deficit will also abort the expansion.

Why is this? It is because the long-term real interest rate paid by the government is below even the most pessimistic view of the future growth rate of the economy. As I have argued on previous occasions, the US (and UK) bond markets are screaming: borrow.

The bond markets are screaming ‘the govt. Will never get its act together and cause the conditions for the central bank to raise rates.’

Of course, that is not an argument for infinite borrowing, since that would certainly raise the real interest rate substantially!

Infinite borrowing implies infinite govt spending.

Govt spending is a political decision involving the political choice of the ‘right amount’ of real goods and services to be moved from private to public domain.

Yet, more surprisingly, the expansion would continue to pay for itself even if the real interest rate were to rise far above the prospective growth rate, provided there were significantly positive multiplier and hysteresis effects.

I’d say it this way:

Providing increasing private sector leverage and credit expansion continues to offset declines in govt deficit spending.

Let us take an example: suppose the multiplier were one and the hysteresis effect were 0.1 – that is to say, the permanent loss of output were to be one tenth of the loss of output today. Then the real interest rate at which the government could obtain positive effects on its finances from additional stimulus would be as high as 7.4 per cent.

Thus, state the authors, “in a depressed economy with a moderate multiplier, small hysteresis effects, and interest rates in the historical range, temporary fiscal expansion does not materially affect the overall long-run budget picture.” Investors should not worry about it. Indeed, they should worry far more about the fiscal impact of prolonged recessions.

They shouldn’t worry about the fiscal impact in any case. The public sector deficit/debt is nothing more than the net financial assets of the non govt sectors. And these net financial assets necessarily sit as balances in the central bank, as either clearing balances (reserves) or as balances in securities accounts (treasury securities). And ‘debt management’ is nothing more than the shifting of balances between these accounts.

(and there are no grandchildren involved!)
(and all assuming floating exchange rate policy)

Are such numbers implausible? The answer is: not at all.

Multipliers above one are quite plausible in a depressed economy, though not in normal circumstances. This is particularly true when real interest rates are more likely to fall, than rise, as a result of expansion.

The ‘multipliers’ are nothing more than the flip side of the aggregate ‘savings desires’ of the non govt sectors. And the largest determinant of these savings desires is the degree of credit expansion/leverage.

Similarly, we know that recessions cause long-term economic costs. They lower investment dramatically: in the US, the investment rate fell by about 4 per cent of gross domestic product in the wake of the crisis. Businesses are unwilling to invest, not because of some mystical loss of confidence, but because there is no demand.

Again, we know that high unemployment has a permanent impact on workers, both young and old. The US, in particular, seems to have slipped into European levels of separation from the labour force: that is to say, the unemployment rate is quite low, given the sharp fall in the rate of employment. Workers have given up. This is a social catastrophe in a country in which work is effectively the only form of welfare for people of working age.

Not to mention the lost real output which over the last decade has to be far higher than the total combined real losses from all the wars in history.

Indeed, we can see hysteresis effects at work in the way in which forecasters, including official forecasters, mark down potential output in line with actual output: a self-fulfilling prophecy if ever there was one. This procedure has been particularly marked in the UK, where the Office for Budget Responsibility has more or less eliminated the notion that the UK is in a recession. Yet such effects are not God-given; they are man-chosen. They are the product of fundamentally misguided policies.

This is an important paper. It challenges complacent “do-nothingism” of policymakers, let alone the “austerians” who dominate policy almost everywhere. Policy-makers have allowed a huge financial crisis to impose a permanent blight on economies, with devastating social effects. It makes one wonder why the Obama administration, in which prof Summers was an influential adviser, did not do more, or at least argue for more, as many outsiders argued.

The private sector needs to deleverage.

It’s no coincidence that with a relatively constant trade deficit, private sector net savings, as measured by net financial $ assets, has increased by about the amount of the US budget deficit.

In other words, the $trillion+ federal deficits have added that much to domestic income and savings, thereby reducing private sector leverage.
However, as evidenced by the gaping output gap, for today’s credit conditions, it’s been not nearly enough.

The government can help by holding up the economy. It should do so. People who reject free lunches are fools.

Minsky in the news

Read it at Multiplier Effect

Minsky in the News
by Thorvald Grung Moe

Most readers here probably know that Hyman Minsky was Randy Wray's PhD advisor. Certainly, greater awareness of Minsky is a boost in credibility and exposure for both Post Keynesianism and MMT.

Martin Wolf on public goods

Public goods are the building blocks of civilisation. Economic stability is itself a public good. So are security, science, a clean environment, trust, honest administration and free speech. The list could be far longer. This matters, because it is hard to secure adequate supply. The more global the public goods the more difficult it is. Ironically, the better we have become at supplying private goods and so the richer we are, the more complex the public goods we need. Humanity’s efforts to meet that challenge could prove to be the defining story of the century.

Read it at The Financial Times
The world’s hunger for public goods
by Martin Wolf

Cuts to the core. Must-read for anyone who thinks public purpose is significant socially, politically, and economically.

Martin Wolf does sectoral balances

Read it at The Financial Times | Martin Wolf's Exchange
Understanding sectoral balances for the UK

by Marin Wolf

(h/t Stephanie Kelton via Twitter)

What would have happened if governments had, instead, attempted to slash their deficits by raising taxes or cutting spending at a time when interest rates were already as low as they could be? If governments want to cut their deficits, other sectors must, in aggregate slash their surpluses.

Broadly speaking, there are two ways such an adjustment can happen: higher spending, at given incomes, or a collapse in incomes. When interest rates are low and the financial sector frozen, the latter is far more likely than the former. In other words, the adjustment to fiscal austerity occurs via a slump.

This is straight up Godley macro.

Finally, some people note that the sectoral balances are identities: they must add up to zero. This is correct. But there are many different ways they can add, both in terms of the relative sizes of the surpluses and deficits and levels of economic activity. This sectoral way of thinking can be easily converted into standard macroeconomic models, in which interest rates and income jointly determine the equilibrium outcome. The important contribution of this way of thinking is that it forces one to ask how one expects the economy to add up.

Wolf gets it. And, yes, he does address corporate rent-seeking behavior as a problem to be addressed.

Martin Wolf proposes MMT-like policy course for UK

...The pity is that the Bank’s new money is going to buy long-dated government debt. That will not achieve much, given how low yields already are. As the prime minister might say, policymakers need a bigger “bazooka”. It would be more effective if newly created money paid directly for government spending. The government could send £1,250 to each citizen resident in the UK. It could also use new money to purchase private debt, including loans to small businesses. This is off-balance sheet public spending. If the chancellor decides to call it “credit easing”, that is absolutely fine....

Read the full post at The Financial Times, Time has come for some intelligent policymaking.

(emphasis added)

(h/t Ralph Musgrave)

Wolf begins his post with Wynne Godley's sectoral balance approach to macro and moves from there to Abba Lerner's functional finance policy — just like MMT. What he needs to add is the job guarantee or employer of last resort (employment assurance) to round it out.

Martin Wolf gets it; why not Paul Krugman?

Martin Wolf is the chief economics commentator at the Financial Times and is one of the most influential economics writers in the world. He’s no radical for sure but today’s article entitled “Time to think the unthinkable and start printing again” could have been written by Abba Lerner himself. It completely debunks the accepted wisdom that we need austerity, that we’re tied to the whims of the financial markets, and that government deficits are some dire problem....

Read the whole post at Comments on Global Economic Policy, Martin Wolf gets it; why not Paul Krugman?

Martin Wolf — It's the demand, stupid

The depth of the contraction and the weakness of the recovery are both result and cause of the ongoing economic fragility. They are a result, because excessive private sector debt interacts with weak asset prices, particularly of housing, to depress demand. They are a cause, because the weaker is the expected growth in demand, the smaller is the desire of companies to invest and the more subdued is the impulse to lend. This, then, is an economy that fails to achieve “escape velocity” and so is in danger of falling back to earth.

Martin Wolf, Struggling with a great contraction at The Financial Times.

Nothing most readers here don't already know, since Wolf's analysis is quite similar that of MMT economists. But it is nice seeing something like this at FT. Martin Wolf seems to be one of the very few sane economists in an insane world.

Martin Wolf schools BIS on sectoral balances

Martin Wolf has an interesting post from the MMT perspective today in his column at The Financial Times.

Now turn to the yet more debated question of fiscal policy. The question I have is this: does the BIS know that every sector cannot run financial surpluses at the same time?

Few doubt there is excessive private sector debt in a number of high-income countries. But how is it to be reduced? The BIS notes four answers: repayment; default; higher real incomes; and inflation. Let us rule out the last and focus on the first. Repayment means spending less than one’s income. That is what is happening in the US private sector (see chart). Households ran a financial deficit (an excess of spending over income) of 3.5 per cent of gross domestic product in the third quarter of 2005. This had shifted to a surplus of 3.3 per cent in the first quarter of 2011. The business sector is also running a modest surplus. Since the US has a current account deficit, the rest of the world is also, by definition, spending less than its income. Who is taking the opposite side? The answer is: the government. This is what a controlled depression means: every sector, other than the government, is seeking to strengthen its balance sheet at the same time.

The BIS insists this is not good enough: highly leveraged countries are running structural fiscal deficits, which must be eliminated as soon as possible. Fair enough, but where are the offsetting adjustments to occur?

Read the whole post at Why austerity alone risks a disaster.

I posted a comment there commending him. Consider lending your support, too.