Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 4 September 2014

Class interests

This is a small contribution to answering Paul Krugman’s question about why the wealthy want to raise interest rates, even when the economy remains depressed. (See also Steve Randy Waldman, Peter Dorman and Brad DeLong.) The preliminary point to make is that this is not just a US phenomenon. In the UK the right wing Institute for Economic Affairs set up what they call the ‘shadow MPC’, and they were voting for higher interest rates before the recovery began! The highly influential FT journalist Chris Giles, who has become a bellwether for right wing interests, has been championing the cause of an early rise in rates for many months.

I want to start with inequality, and the rising share of the 1% in the US and UK. This began in the 1980s, and is associated with deregulation of the financial sector and large cuts in top tax rates. The dominance of a neoliberal ideology, associated with Reagan and Thatcher, occurred at the same time, and there is no doubt that those who started becoming much wealthier at that time understand the connection.

Both politicians began their administrations during periods of high unemployment - higher than anything seen since the war. Both were the result of tight money: in Thatcher’s case this was a clear political choice, whereas in the US it was the result of the Volcker Fed. Whether intentional or not, this high level of unemployment greatly helped both administrations achieve their neoliberal goals, in part because it fatally weakened the power of organised labour. The period also helped the neoliberal cause because it appeared to discredit the idea that governments could intervene in the economy to achieve full employment.

Is it any wonder, therefore, that the ‘1%’ who started to become much richer in the 1980s should see tight money as an essential condition of their new found wealth? But what about the ‘interests of capital’: surely the owners of business should see that firms will be less prosperous if demand is kept too low through tight money? Here I can only quote Michal Kalecki:
“But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders.  Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.”
This was written in 1943, and the post war consensus appeared to suggest Kalecki was being too pessimistic. But that was before neoliberalism and the rise of the 1%.

Nowadays we see achieving the ‘natural unemployment rate’ as predominantly the task of monetary policy. Most economists see independent central banks as a better means of achieving this than direct political control for familiar reasons. However if you think that lasting full employment can be unsound for your class interests, then giving monetary control to conservative central bankers would also seem like a good idea.

This sets up two areas of political tension between the interests of the wealthy and, of all people, academic macroeconomists. First academic macroeconomists, and their occasional number who become central bank governors, see monetary policy as a means of achieving the natural unemployment rate and steady inflation. The wealthy see monetary policy as a means of maintaining a degree of unemployment that reduces the political threat to their wealth. Second, when monetary policy stops working in a liquidity trap, most academic macroeconomists want to use fiscal policy to take its place. To the wealthy this not only seems unnecessary, but it also calls into question their ideology about the failure of pre-neoliberal times.

As macroeconomists we know (or think we know) that it is impossible to keep unemployment above the natural rate forever, because inflation will continue to decrease, although there is now a lot of evidence which suggests it may not decrease by much. So if you wanted to critique my (and Kalecki’s) characterisation of the views of the wealthy, you might say that keeping unemployment above its natural rate is not a sustainable strategy (and therefore not rational). To which I would respond maybe, but there could be a reason why now, like the 1980s, is a particularly important time to keep unemployment high for a while.

The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%. I remember saying shortly after the crisis that the neoliberal position that government regulation was always bad and unregulated markets always good had been blown out of the water by the crisis. This was politically naive, in part because a crisis caused by unregulated markets was morphed by the right into a crisis caused by too much government debt, or too many immigrants. But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. For the 1%, these are very dangerous times, and they want to be on favourable territory for the battles ahead.  


50 comments:

  1. A bit odd this one, as the non-economics ones tend to be.

    "But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. "

    If, as here, our focus is on the UK and US, it seems a bit implausible to suggest that unemployment has much further to fall. This just is not the 1980s. UK unemployment is at 6.4%, and by this time next year looks like it will be as low as it ever has been in 40 years. It is a similar picture in the US, with unemployment at 6.3%.

    As for government debt, that won;t be being reduced for many years to come. The deficits are just too huge, and the rate of reduction too slow, for debt levels to be falling for many years, whatever politicians may say (at least 5 would be my guess). the picture here is rather different in the US from the UK, but not by much.

    S W-L knows these things as well as me.

    Indeed, if there is, as he seems to think, an elite 1% who have a collective memory of the early 80s, and want to raise unemployment, why are they doing such a bad job of it in the UK? After all, this blog told us yesterday that the current government was much more rightwing than that in the 80s.

    I suspect the explanation as to why there are those who support the raising of interest rates is rather more straightforward. Instead of it being a conspiracy by the 1% to create unemployment, there are a number who think that there is no slack left in the economy and the time has come to start withdrawing the monetary stimulus by returning to 'normal' interest rates. The actual reasons given by, say, Chris Giles or Allister Heath are what they actually think.

    As it happens, I think they are wrong and S W-L right about the downside risks of a rate rise. But I don't think that the reasons they give are in fact lies.

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    1. .
      I am sceptical of the unemployment rate. Its calculation seem derivative and not absolute.

      The rate that would be more informative is the labour participation rate - which is the percentage of the workforce that is working.

      In the US, I think the labor participation rate took a big dive with the great recession and has not significantly improved. Not sure of the UK.


      .

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    2. The UK employment rate is at 73.1%, the highest since records began in 1971. Unlike in the US, it has risen sharply in recent years. No doubt an oversight by our 1% overlords in carrying out their masterplan..

      This is another way in which the UK is not like the US.

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    3. What about unemployment? Is the unemployment rate the lowest since records began? Check it out. Jobs have increased. But so has the population of workers (mainly supplied from abroad) Also zero-hours contracts is probably now the new manifestation of weak labour markets (from the worker's point of view).

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    4. The employment record is in terms of the % employed, not just the absolute number.

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  2. So in the UK the same story as from Paul Krugman: 'The wealthy want to raise interest rates, even when the economy remains depressed.'

    Fine!

    But let's add -(at least in the UK) . everybody who is sick and tired of speculators who use the low rates to turn London into the world Capitol of the 1%.

    And please - let's also add all the retirees who ask hopelessly for higher returns on their Bank deposits!

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    1. the rise in the stock market has more than made up for that.

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  3. I find it very hard to believe that this level of cynicism would be widespread among the wealthy. Is there any actual proof of this?

    It looks like the typical economist fallacy of thinking about people as being "perfectly rational" wealth maximizers (with no morals or feelings except maybe greed). This may work in some specific circumstances but as a way of explaining society it leaves something to be desired.



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  4. .
    Good insightful column. Thank you.

    This sentence raised a query: "As macroeconomists we know (or think we know) that it is impossible to keep unemployment below the natural rate forever, because inflation will continue to decrease, although there is now a lot of evidence which suggests it may not decrease by much." Did you mean "above the natural rate" or "inflation will continue to increase"?


    .

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  5. .
    ( A shame I cannot edit my comments)

    Additionally:

    I think it is a bit unappreciated how salutatory an extremely low unemployment rate can be. The general well being and happiness of society should vastly improve. This improvement would not show up in economic statistics but it should be measurable somehow.
    .

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  6. After Lehman Brothers, only a few days later David Buik was the first banker I saw come onto the BBC News 24, quite happy to say that the bankers were not to blame (typing 'David Buik' into the BBC news website gives a history of some of his numerous BBC performances - they like him).

    This was at a time when even shameless ex-Tory MP Angela Knight hid, until moving on from banking to energy!

    Burke 1795, "but in the case of the farmer and the labourer, their interests are always the same, and it is absolutely impossible that their free contracts can be onerous to either party", gets somewhere near the beginning of conservative economics, change with no change.

    I can only think this is why the BBC accused me of trying to dictate their economic coverage when I pointed out to them that they stopped using the term 'liquidity trap' on their website when the 2008 crisis happened - it was okay for the Japanese crisis pre-2008, but not for the UK after 2008. To which I say, parp!

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  7. Isn't it simpler than this? This isn't mutually exclusive, but if inflation is sticky, then higher interest rates mean higher returns for (wealthy) lenders/asset holders.

    Sure in the long run the real interest rate is exogenous, (akin to the natural ratel of unemployment) but it isn't difficult to think of reasons for short-termism.

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    1. To follow up, I don't think trade union power is cyclical. I agree with your reading of events in the 1980s, but TUs got hammered then and stayed hammered. They didn't renew themselves at all in the good times in the early noughties. So higher interest rates = weaker organised labour is pretty tenuous.

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    2. The threat isn't from organized labor specifically but from politics as a whole moving to the left.

      From the U.S. perspective I agree with Wren-Lewis's post. With loose monetary policy and tight labor markets things could improve and labor may revive:

      http://www.bostonglobe.com/opinion/2014/08/28/vennochi/yGEFtx9d60vZgHUlCDmGIN/story.html

      "... So, in honor of Labor Day, let’s celebrate the power of worker solidarity, when like-minded employees rally around a cause and fight together until they achieve it.

      One note, however: These particular workers are nonunion.

      Over the past six weeks, thousands of Market Basket workers organized a labor movement that has been hailed as unprecedented and game-changing. Victory required extreme discipline and tenacity as well as broad-based buy-in to their mission by Market Basket customers. These laborers made it happen without paying a cent in union dues.

      As the Market Basket standoff dragged on, business gurus cited the workers’ relentless effort on behalf of Arthur T. as a larger lesson for corporate America about what it takes to build a team. But there are also lessons for organized labor about what it takes to sell their cause.

      Most notable is the power of narrative. Market Basket workers used social media as an organizing tool, but, at the same time, they skillfully used old and new media to tell their story before the other side knew what was happening.

      And, unless you were Arthur S., it was a story that had something for everyone:

      Workers standing up for, not against, management.

      The desire to believe in one corporate leader putting the well-being of his workers over shareholders, in an old-fashioned “It’s A Wonderful Life” way.

      Employees of modest means willing to put paychecks for rent and mortgages on the line for principle.

      “It speaks to a broader search and yearning for respect and fairness,” said Lew Finfer, a veteran community organizer who has worked for decades with unions to do just that by promoting better worker pay, conditions, and benefits. ..."

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    3. Good luck in your game this evening, guys! Nice to see you took some time out of your prep to comment on macroeconomic issues.

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  8. Simon: you write some very very good posts. But this one is bad.

    My response: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/09/how-to-destroy-the-neoliberal-consensus.html

    My punchline: < sarc > Right. So the aftermath of the financial crisis is an especially dangerous time for the "neoliberal consensus". OK. So to save the neoliberal consensus, let's make unemployment temporarily even higher to make it even more dangerous for the neoliberal consensus??? < /sarc >

    This makes no sense whatsoever. If you are trying to avoid having an accident, while keeping your average speed the same, you don't increase your speed on the dangerous bits of the road, and slow down on the safer bits.

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    1. Nick - you seem to be arguing about something completely different. The empirical observation, which Krugman originally raised and which accords with my own experience, is that monetary policy hawks currently tend to be to the political right. The question is why is that. In fact it has nothing to do with actual policy, which luckily (at least in the US and UK) is in the hands of relatively apolitical macroeconomists, who worry about output gaps and stuff.

      And we are not talking about wanting to bring back unemployment at the level of the 1930s either. My hypothesis, or rather Kalecki's hypothesis, is that a degree of unemployment is good for a particular class. It may not be a very good theory, but it is not a conspiracy theory, its about class interest. Do you think there is no such thing as class interest?

      And why the aversion to the concept of neoliberalism? What would you rather call what happened in the UK, US and elsewhere in the 1980s?

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    2. Nick - from time to time I read your blog, and you write some good stuff, but the one you link to above is, really, bad bad. I've myself occasionally had reason to quarrel with Simon, but on the issues raiSed here I can't but concur with him.

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    3. Curses! I just wrote a long reply and the computer glitched! Trying again:

      Simon: your reply there does not make sense either. If those right wing economists who are monetary hawks believed in Kalecki's model, it might make sense that they would want (temporarily) higher unemployment to preserve the "neoliberal consensus". But I am 99% confident that they aren't Kaleckians, or anything close.

      Of course there are "class" interests. But there are 1,001 different ways of dividing up people into two or more classes. Men/women, urban/rural, young/old, etc. forever.
      And which of those 1,001 ways of dividing up people into classes makes most sense depends on the question at hand. If the question is tight or loose money, the prime facie sensible way to define "class" is creditor/debtor. Or maybe unemployed/everyone else. (And the fact that some of those class distinctions will be correlated with each other is not relevant. The rich tend to be tall. "Why do tall people like tight money?" is not a sensible question to ask.)

      It reminds me of Borges' Celestial Emporium of Benevolent Knowledge:

      http://en.wikipedia.org/wiki/Celestial_Emporium_of_Benevolent_Knowledge

      Somewhere, no doubt, some monetary hawks are asking exactly the same question about people like you and me: "The empirical observation, ...., is that monetary policy doves currently tend to be to the political left. The question is why is that."

      What do you think would be a good answer to that question? And wouldn't you be annoyed if they dismissed your arguments for looser money by saying "Simon doesn't really believe all that new Keynesian stuff; he's just promoting his own class interest, as an XYZ"? I know I would be.

      You are far too good (and honest) an economist to have your arguments dismissed like that. And you shouldn't do it to others. You don't need to. Your arguments can stand on their own two feet.

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    4. Nick: I think I'm just continuing to be a social scientist. We - originally Paul - starts from an empirical observation about the hard-money preferences of the wealthy. No one has yet disputed that observation. This is a puzzle - views on monetary policy at the moment should be about things like output gaps, and not correlated with your wealth. Surely this is an interesting puzzle to explain. The natural way to explain it is self interest, or maybe a shared ideology, but Paul was not satisfied with the obvious arguments here. So there was something interesting to speculate about.

      Now there would be a problem if I did something like the following. Two members of the UK MPC voted for higher interest rates recently, and I disagree with that, and I have written about why I disagreed. However if I had not engaged with their macroeconomic arguments, and instead just said you are doing that just because you are representing the interests of the wealthy, that would be a bad argument. But I did not. So yes I do get cross when people dismiss my macroeconomic arguments by implying I have some political motive, but that is not what I and others are doing here.

      On class, I think this involves issues that go well beyond blog comments.


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  9. "And why the aversion to the concept of neoliberalism? What would you rather call what happened in the UK, US and elsewhere in the 1980s?"

    We could have different names for different political ideologies rather than lump them all into one very vaguely defined set, as if 1980s Australian "socialists" and Thatcherites and Reaganauts and Francois Mitterand were all homogenous.

    As for class interests, there is self-interest and insofar as you categorise people in a group with similar self-interests, you can say that there is a group interest. So there are class-interests, racial interests, fishermen's interests etc. If the incentives are right, people in these groups may form organisations to pursue their interest collectively e.g. trade unions get formed, apparently to have inter-union disputes between the self-interests of different groups of workers (and sometimes with management). However, concepts like 'class interests' usually seem to make for sloppy social science. If someone acts in the way predicted, then that's class interests at work. If they don't, it's ideology or false consciousness etc. As always, tell me what the model predicts won't happen and then I can know what it predicts will happen.

    Anyway,

    (1) The evidence that people advocating tight money don't want full employment hasn't been presented, so it's very tempting to simply say "No case to answer".

    (2) There is a tremendous danger of sweeping generalisations on an issue like this. For example, you describe the SMPC as if they're a straightforwardly homogenous unit, yet some of their dry-as-bones members have been very dovish throughout the crisis. (I'm thinking in particular of Tim Congdon, who happens to be economics spokesman for UKIP.) It's not clear to me that Tim Congdon and Patrick Minford have different class interests- if anything, I suspect Congdon is richer because he's stayed clear of academia- but they do seem to have different views on a number of technical issues in macroeconomics*, and so Minford has been a hawk and Congdon a dove.

    Having said all that in criticism, I don't have any big global explanation to offer as an alternative, or any local explanations that are much good, so I'm reluctant to be dismissive of your basic idea. My suspicion is that the focus should be more on the different prevalence of creditors and debtors across different classes (and generations) and in particular the different prevalence of bond-holders, rather than full employment vs. unemployment. Surely, if we're to take the prima facie evidence into account, the inflationistas care a lot about inflation, and don't see any connection between their monetary policy proposals and unemployment. It takes someone who takes Keynesian/Monetarist economics seriously to know better.

    So maybe your explanation is basically right, but just needs tweaking to that it's in terms of a class interest in low-inflation & interest rates and credit-debt relations rather than unemployment. That's not as exciting a story as "The 1% WANT high unemployment", but it's perhaps a more accurate one.

    * Mainly ratex: Minford of course is very keen whereas Congdon has been terse and dismissive when I've seen him even discuss the idea.

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    1. I think you should see what I wrote in the context of the discussion started by Paul Krugman. He and others take the empirical association between hard money views and the 1% in the US as pretty clear, and I was noting that - to the extent I have any information - I had observed the same in the UK.

      Paul originally had the debtor/creditor view, but thought it was not convincing, partly because high wealth allows a portfolio that is high in stocks as well as bonds, and low rates are good for stocks. I do not really disagree with what Paul and others have said on this, but I just thought Kalecki's view was worth throwing in.

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    2. I'm not sure I follow the portfolio point. Even if you can manage the illiquidity of a stock-heavy portfolio, it's still more optimal to have a more liquid portfolio with the same rate-of-return.

      Was there a big clamour for hard money among the 1% (or anyone else) in the late 1990s, when unemployment dropped considerably in the US but inflation remained low? If not, then that suggests that the worry is more about inflation. And if you think that money is short-run neutral or even inversely non-neutral i.e. inflation depresses growth in the short-run (as is depressingly commonplace in the US) then you don't even associate that hard monetary policy with higher unemployment.

      However, my suspicion is even if the folks we're talking about are thinking about macroeconomics with a solid New Keynesian model, it's still the fear of inflation rather than the hope of unemployment that's motivating the pursuit of tight monetary policies.

      (I also have no idea why the hard money folks seem to be so much more influential among the right-wing the US than the UK.)

      Of course, one of the great things about an NGDP target is the way it handles the creditor-debtor relation.

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    3. SW-L: "high wealth allows a portfolio that is high in stocks as well as bonds"
      You'd think so, but in my experience wealthy investors favour low risk as much as the next man; it depends on the individual's own anxieties and innate sense of adventure, not their degree of wealth. And for some, the fact they have accumulated it means they want to keep it, not speculate with it.

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    4. Its about how the economic surplus are distributed in the economy between labour (wages), shareholders (dividends) or debt owners (interest). These different economic agents (workers, owners of capital and owners of debt) will pursue different economic policies, and with different static & dynamic outcomes of different policies, the relative time preferences of the economic agents must be brought into account. The time horizon (or future discount rate) for these agents are different: workers have a high future discount rate given focus on the short term (weekly, monthly and annual wages); shareholders are more focussed on the medium term (quarterly results, semi- & annual dividends, share price gains - profitability vs. company sustainability); and owners of debt (i.e. bondholders) have a long term focus (security of income & stability - annual interest payments, future par-value capital principal repayment).

      To complicate it further, labour are debt owners through pension funds & other savings, but also creditors to debt owners through consumer credit. Similarly, shareholders are debt owners through their accumulated wealth, but creditors to debt owners that require credit to make invest.

      The high-low unemployment, high-low interest rates, fast-slow economic growth are all factors at play in this dynamic.

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  10. The wealthy own assets. Low interest rates pushed up the value of assets, therefore I find it hard to believe the wealthy are complaining.
    The people I hear complaining about low interest rates are ordinary savers.

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  11. Except you can't save except by owning assets, and you can't own assets without being a saver. Low interest rates on deposits literally tells you that one category of asset prices is low.

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  12. It is great that Paul Krugman and a few others have raised a few issues about power and wealth. But I think the discussion needs to go a bit deeper into the political science arguments.

    For a start, whatever they do for the rich, booms are not necessarily good for the poor either. In extreme cases for example, they result in higher food and land prices, often forcing them off the land and into debt. Owners of capital, including house-owners see their relative wealth rise. They therefore like booms.


    I think here is where comparative schools of thought approaches to these questions are important. Intrinsic in neo-liberalism (which makes the same rational choice assumptions as neo-classical economics) is the assumption of absolute gains. As long as you personally are better off, that is what is important. For neo-realists, however, it is whether you are doing better than everyone else, even if the sum of the utility is less. This applies to states as well.

    It seems for the 1 per cent the neo-realists have a stronger argument, partly because this wealth is connected to power.

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    1. When it comes to things that are necessary to live, public policy should encourage the production but not the inflation of those items.

      Homeowners in the USA have large tax breaks both in buying and selling real estate. If people see prices rising, there is a snowball effect as others rush in. With stocks, the only effect is that it becomes a poor investment, with housing it ruins the ability of nonhomeowners to live.

      It would be better if those producing new structures faced no tax at all to encourage more housing but those who merely buy and sell faced very high taxes on short term ownership to discourage unnecessary housing competition and thus keep prices lower.

      A lower cost of living makes for a more competitive economy.

      Farmers as well should be free of income taxes.
      .

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  13. The assertion that wealthy interests may be behind tight monetary policies in order to protect existing relative wealth and power relations may be true in the US, however, I do not think it holds true for Germany and the Euro. In this case it is a about protecting the value of the currency for trade reasons. The US as the underwriter of world trade has to be much less concerned about things. For other countries where that is not the case and that are heavily dependent on imports of raw materials, for example, sudden rises in commodity prices would lead to external payments issues and possible speculative attacks that would wreak havoc for such trade dependent countries. For a currency to acquire currency is something that has to be earned.

    Another oversight of Krugman is his view that Greece and Italy would be better off with their own currencies where they have the option to devalue. Actually if they had to raise funds in their own currency to pay back debts in say DM they would be in even more serious problems. This was a big problem for Asian countries after their crisis (when for example the Indonesian Rupiah collapsed against the dollar).

    It is no wonder many countries take issues of hard currency very seriously.

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    1. IIRC the Asian countries had an answer to that. After being savaged by the IMF, they resolved never again, and built up substantial foreign currency reserves.

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  14. "In fact it has nothing to do with actual policy, which luckily (at least in the US and UK) is in the hands of relatively apolitical macroeconomists, who worry about output gaps and stuff."

    This is a myth. Many macro-economists believe they are apolitical when of course they are not. This is because there is a single paradigm in the subject. Macro-economists believe for example in neo-liberal arguments that assert that free markets are the efficient form of allocation. Take free international trade for example, they think because of comparative advantage, international trade is unambiguously good. What we need is a neo-Marxian analysis which says it leads to concentrations of wealth and capital and not the win-win outcomes that neo-liberal (classical economic) theory asserts. The idea that monetary policy is separate to fiscal policy, should work towards a stable inflation rate which should be achieved with open market operations in short term government debt and credit allocation should be determined by the interest rate which should be market determined are taken as givens. But really all these things are absolutely political in their consequences. One approach might be preferable for all sorts of reasons, but it is not apolitical by any means.

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  15. Simon,

    Thank you for a very good blog. I appreciate it much and read it every week. I also follow you at Twitter.

    I don't think that there is a grand master plan from the 1% or 0.1% to keep unemployment elevated for a prolonged period of time just to prevent discrediting of the neoliberal ideology. But you're right that it's upsetting that the right-wing pundits managed to morph the crises into a "government debt crisis" instead of an "aggregate demand crisis" or a "elevated risk aversion crisis".

    I work as an investment manager and I've seen the portfolios of the mega-rich. They typically hold a high portion of interest bearing assets and a smaller portion of equities. The real estate they hold is not meant to be sold and a higher valuation is nice but will lead to higher real estate taxes. What's important to them is that the interest bearing assets don't depreciate in value and that the real return is positive. The equities they hold are blue chips or mega caps and they accept some volatility in that asset class, but not too much.

    To them high real rates of interest are almost always good because of the composition of their portfolios. Then there's the loss aversion aspect. They will not be equally happy with a big gain as they are sad with a big loss. Even if the gain is twice in one year as the loss in another (in absolute terms), they will still just remember the loss and might perhaps fire you for that.

    The mega rich have very little knowledge of macro generally speaking. If you tell them that a country is not like a household when it comes to running deficits, they will think that you're mad and fire you. And who can blame them. Just remember what Obama said 2010 about the need for austerity; since the households has to tighten their belts, so does the state (or something like that). One might think that if even the President of the United States doesn't understand about the household fallacy (and well into the crisis where he had had a crash-course in macro), how can one expect other people to understand this.

    It is simply just The Power of Ignorance that we are witnessing combined with the perceived self interest of the mega rich and the affluent

    Michael in Switzerland

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    1. That is very useful - thanks. I'd be interested in what you thought about the following. One of the arguments in this debate is that, to the extent that the wealthy hold equities and the stock market rises when interest rates are low, then capital gains on equities might compensate for low rates on interest bearing assets. I take the point you make about holding a low proportion of equities. But I also wonder whether the focus might be more on the income that assets of all kinds yield, and capital gains on equities would not increase the value of dividends received.

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    2. "But you're right that it's upsetting that the right-wing pundits managed to morph the crises into a "government debt crisis"

      Rogoff-Reinhart did an enormous service to this link. No wonder they were fawned over by finance and financial journalists.

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    3. SWL, IMHO Michael's point is that the near-rich, rich and mega-rich actually pursue different policies. Also, its is whether they are new to their wealth (they accept greater risk for greater reward), or have inherited / long time wealth (less risk to ensure less losses). Lastly, it also matters in which social circles they move, i.e. whether they pursue further wealth accumulation, or accept the income from their existing wealth.

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    4. As per my previous comment, I would probably classify the bottom 90% as workers (nearly all income from wages), the next 9% the near-rich (high wage income and greater savings likely skewered towards equities), the top 1% the rich (may receive high wage income, but likely mostly from accumulated wealth, with balance between equities and bonds); the top 0.1% and 0.01% the very-and ultra/mega-rich (mostly wealth income coming from investments in property & bonds).

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  16. Allow me to offer a somewhat different explanation. First, the 1% hates inflation because they also tend to be politically conservative, and it's the hallmark of conservatism to always believe in eternal and immutable standards. The worst thing you can call a conservative is a "relativist." That's why they hate situational ethics. It's why they tend to be goldbugs. It's why they are more likely to believe in a God...and not just a God, but an active God that imposes order on the universe. They hate the year 1979 because that represents the zenith of Club 51 and cocaine snorting, free love, abortion rights, indeterminate jail sentences, the fading of the death penalty (that most absolute and eternal of all penalties), yada, yada, yada. Inflation undercuts their belief...nay, their craving for an immutable store of value. Inflation forces you to realize that values are all relative. That kind of thinking is just impossible for conservative minds. So it's not that rentiers hate inflation out of perceived class interests; they hate inflation because they also tend to be conservative. In order to understand why the 1% fears inflation you have to first get inside the head of conservative thinking. And conservatives hate anything that even smells like relativism, and accepting inflation means having to accept the reality that money is not an immutable and absolute measure of value. They can't live without a north star to guide them.

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  17. Old money does not like new money

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  18. in the us, it may be that those who are against obama realize that low interest rates help the economy which rebounds in his favor.

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  19. Great post<

    I'm not disagreeing with the unemployment point but I think that Inflation is the most efficient form of confiscation (or wealth erosion) for the wealthy. Deflation is the means by which they increase their wealth.

    The decline in organised labour is critical but so is the capture of mainstream leftist parties by the neo liberal agenda. Cross party consensus is owned by the 1%. The votes of the rest have been triangulated out of the policy process.....

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  20. "In fact it has nothing to do with actual policy, which luckily (at least in the US and UK) is in the hands of relatively apolitical macroeconomists, who worry about output gaps and stuff."

    Sargent, the father of a lot of what you macro-economists now do said there is no efficiency-equity tradeoff and cites this as one of the most important 12 insights of economic theory.

    Firstly, to an historian and political scientist who has studied why some countries are rich and others poor it is actually most likely not correct. But more than that, isn't the remark itself almost the most political one you can actually make?

    Macro-economists need to study political economy? Whatever happened to that? They need to understand that you cannot separate the two. There seems to be a prevailing orthodoxy among mainstream economists which believes you can.

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    1. Typo above:

      Sargent says there IS an efficiency - equity tradeoff.

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  21. Simon, You say “Nowadays we see achieving the ‘natural unemployment rate’ as predominantly the task of monetary policy. Most economists see independent central banks as a better means of achieving this than direct political control for familiar reasons.” A confusion of issues there, I suggest.

    That is, it’s perfectly feasible to use fiscal policy to regulate demand while excluding “direct political control”. That can be done (as advocated by Richard Werner, Positive Money and others) by having a committee like the BoE MPC decide on the TOTAL AMOUNT of fiscal stimulus, while leaving it politicians to decide THE NATURE of that stimulus (e.g. whether it takes the form of more public spending or tax cuts). For more details, see p.9&10 of PM and Werner’s submission to Vickers:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

    As it happens, Werner & PM advocate a mix of fiscal and monetary, but the underlying point I'm making remains: it's possible to use fiscal to adjust demand without politicians having direct control over the AMOUNT of fiscal stimulus.

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  22. Have you ever considered they just believe in that higher rates mean higher inflation, like Cochrane and Williamson

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    1. That still leaves open the question of why that belief correlates with being rich.

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  23. Lower or higher interest rates is an interesting debate, and it serves the special concerns of the 1 percent quite well.

    It distracts the conversation from the real issue, which is financial reform.

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  24. I think the comment above about the preference of the investment preferences of the ultra-rich rings very true. What a rentier really wants is a large income stream which is stable (or growing slowly) in real terms. He or she worries less about capital certainty, since in the absence of disaster they do not anticipate realising assets (and indeed may be accumulating more if the income stream is big enough). So an environment in which asset prices are low (which also helps with inheritance taxes) relative to the income stream is ideal for them.

    In the 19th century British rentiers achieved this ideal by holding Consols (with an infinite duration, and no income uncertainty). But since now they hold shorter-dated fixed-interest assets they are forced to give up some income if their existing bonds mature and must be replaced by bonds with a lower coupon. This is a gradual process, but it becomes more damaging the longer the period of low interest rates persists.

    One other possibility worth mentioning. It's my impression that the rich strongly favour austerity and high interest rates in their home country. They're less obsessive about the rest of the world - here they can see that the gains to their holdings of global equities may outweigh the potential damage to their fixed-interest income. And, of course, it's more important to maintain control over the domestic workers (who might storm their luxury apartments, or at any rate impose meaningful taxes on them). Short of a violent revolution political control overseas is less important. But since it's domestic oligarchs who influence domestic politics, there is a natural bias towards higher interest rates.

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  25. "In fact it has nothing to do with actual policy, which luckily (at least in the US and UK) is in the hands of relatively apolitical macroeconomists, who worry about output gaps and stuff."

    Few things have served neo-liberalism and the 0.01 per cent so well.

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