Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 16 December 2014

Robert Peston, Mr Market and me

Paul Krugman picked up on my post commenting on the views of Robert Peston’s pals in the bond market, and Robert Peston has now responded. To characterise this as a debate would I think be wrong. Being the excellent journalist that he is, Peston is reporting the views put to him, rather than taking a particular side. In his response, he does a reasonable job of presenting Paul and my views, and does not argue too hard against them. I have two significant clarifications, and one key point.

The first clarification is that Peston still downplays the importance of having your own central bank and borrowing in your own currency. He says that is ‘partly’ why the UK has avoided the fate of the Eurozone PIIGS. I would argue that is entirely why the UK (and the US, and Japan) have done so. Both Paul and I would argue that fiscal policy should have been expansionary and not contractionary in 2010 [1], and in my view this would have had no detectable influence on any risk premium. The recent IMF self-evaluation that I discussed here also argues at a global level that the switch to fiscal contraction ('austerity') in 2010 was a mistake caused by a misreading of the Eurozone crisis.

Second, I think what he writes at the end could be misleading. He says: “Now to be clear, there are economists who attack the idea that the deficit and debt can be cut by growing the economy with all the vehemence of Krugman's and Wren-Lewis's lampooning of me and Mr Market.” The minor point is that I did not lampoon either him or the market, but simply what his pals thought about how the market worked. But more seriously, the argument that debt could eventually be lower as a result of growing the economy through fiscal expansion - advanced for example by DeLong and Summers - is different from the point that Paul and I make about the irrelevance of default risk for the UK or US and the consequent foolishness of trying to cut the deficit when interest rates are at their zero lower bound.

Those clarifications apart, the main thing I wanted to say was this. Of course he was just quoting what was said to him by his pals in the bond market, and I would not want him to suppress those views, although I did get some feedback from others in the markets that their own view would have been rather different to his pals. My complaint was that he did not talk to some academic macroeconomists as well, and I explain here why their opinion on issues like this may be at least as useful as some players in the market. If he ever wants my opinion, he just needs to email!
 
[1] See for example Paul’s recent book, and Jonathan Portes and my recent paper.


39 comments:

  1. What I have found and others have noticed about the presentation of liquidity trap analysis at the BBC since 2008 is that the Corporation has deliberately pushed it to the side-lines, not enough to call it suppression but certainly enough to render it generally irrelevant to public political debate.

    In my view there has been a consistency in this over the last six years which must be editorially deliberate, and has shamed a state institution which should in theory work better than a marketplace-only set of news providers, but which in practice has proven itself over the last generation to have been nearer in culture to the Daily Mail than it has to the universities.

    And this at a time when 40% of the younger generation (at least) is or have attended those universities.

    In short, the BBC is looking increasingly gerontocratic - rather like those readers of the Daily Mail it seems so inexplicably beholden to.

    ReplyDelete
    Replies
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  2. I have come to the conclusion that none of the above mentioned has any idea how a sovereign floating fiat currency economy works. For instance, the difference between the currency issuer (Treasury) and the currency users (the whole of the private sector and the rest of the world). The fact that only the government's Treasury can create (spend into existence) new financial assets and remove financial assets by taxation. (Taxes don't pay for anything, they go back into thin air as soon as they get back to the Treasury.)

    The fact that the central bank can't create net new financial assets, it can only swap existing Treasury interest paying bonds, for the money the Treasury created (spent) in the first instance, to allow someone in the private sector, to pay for those bonds. The government always spends before it collects taxes, else there wouldn't be any money to pay the taxes. It’s the taxes that drive the requirement to get some government money; it won’t let you pay taxes in any other currency.

    The government doesn't have "borrow" money. Why would it borrow back its own money which cost it nothing to issue, and pay interest on it, other than to give free money to pension funds and the like All government spending could remain as "reserves" at its central bank for ever. Paying interest on those reserves, as it now does, to keep a positive policy base rate to control commercial bank lending, sledgehammer style. Bye bye Mr Market; go and play in the Eurozone, they are all currency USERS, a foreign currency, the Euro.

    Remember that the government gets all its spending back eventually by taxation. The deficit and the national debt, is all its spending that it hasn't got back yet because all we currency USERS out here keep saving it and not spending it so it can't tax it.

    The government's erroneously called "national debt", is the private sectors national savings, pound for pound.

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    1. Private sector + foreign sector savings. All of the national debt (gilts) are assets.

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  3. You believe the UK was like the PIIGS (PIIGS, I tell you!)?? This smacks of 2010 shrillness married to UK paranoid dog-eat-doggedness.
    France must be the real comparison (we are constantly told how badly they are doing) and what are their borrowing costs? Percy Pavilion
    Otherwise a good reply.

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    Replies
    1. If you compare France to the UK then you don't understand the currency system.

      You can compare the Eurozone as a whole to the UK, or you can compare France to Scotland.

      Very important not to compare apples and pears.

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    2. Only one bond yield in the Eurozone? Who doesn't understand exactly?

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    3. Better analogy is US states.

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  4. As has been pointed out elsewhere (https://alittleecon.wordpress.com/2014/12/15/bbcs-economics-editor-struggles-with-economics-of-public-debt/), Peston spends too much time talking to his bond trader friends who, to be honest, are not the most unbiased of observers, and like to think of themselves as some kind of Masters of the Universe. Which they're not.

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  5. Peston is naive to think there is no self-interest in the answers he gets from actively trading bond traders; just look at the LIBOR scandal as an example.

    But when it comes to talking of the deficit and what to do with it, Peston is not as bad as his colleague, BBC Political Editor Nick Robinson. But wasn't he President of the Young Conservatives whilst doing his PPE at Oxford?

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  6. This is a remarkably generous response from Simon, considering that Peston appears not to have understood much of the criticisms made by Simon and Paul Krugman and continues to argue against them, despite his admission that he's only a journalist with not much knowledge of economics, in particular:
    a) he still thinks insolvency can be an issue for the uk, whereas S & P explained why it is not, for a country with its own currency and CB
    b) he cites the fact that better growth prospects for the uk have not led to rate increases as a counter-argument, whereas as S&P explain, it is the expected path of short term rates that is significant, not growth forecasts, and of course, with inflation still falling and little pick up in wages, there seems little prospect of a B&E rate rise any time soon.

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  7. This is a hilarious blogsite. When not at work and accidentally listening to the BBC at home I get furious with the big government bias of the BBC. It is staffed almost entirely by people with a single mindset of always complaining about market failure, and seeing any government failures a result of not enough government. The cultural side is even worse than the political side. To see the folks on this website complain because one or two people at the BBC aren't uniformly socialist tells us more about this site than the BBC.

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    1. This is not about wider left-right bias in the BBC though, it is quite specifically about the BBC's cover of macroeconomic issues and here it seems to be pretty clear. You will repeatedly hear presenters lead with lines like "Whoever is in power in 2015 will need to make serious cuts to public spending.." but this gigantic assumption is never questioned. I remember one Newsnight where Allegra Stratton interviewing Paul Krugman treated his ideas with complete incredulity ("You REALLY believe we shouldn't be making cuts").

      Macroeconomic issues are presented in the confrontational political format and never consider concepts like aggregate demand, the liquidity trap and so on.

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    2. Fair point.

      If you were to argue that we are now in a decent economic recovery then it's reasonable question about 2015 nominal spending growth being reduced. And I suppose you've read about the problems with growing government revenues.

      And as I said below, there is a sub-text "housekeeping" aspect to the debate about the quality of government spending.

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  8. FWIW I agree about the irrelevance of the size of the deficit. However, I think the debate is a sub-text for a debate about wasteful government expenditure rather than about macroeconomics. It's a feeling amongst the voters, especially taxpayers. that the government is poor at spending their taxes.

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    1. I would agree. The government should be making spending cuts, but they should balance this with tax cuts equal to or greater than the spending cuts. The government should target spending that is wasteful (like ending the war on drugs) and increase spending on things like flood defenses. As the economy improves, the deficit will come down. Then people will see literal benefits (cuts in their tax bill) to the spending cuts.

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  9. Mr Market is of course not worried about actual default, since it is impossible. He is worried about the value of his investment, which will fall if interest rates increase and/or inflation erodes the value of Sterling (the two being linked of course). That is why Mr Market likes austerity policies, and dislikes expansionary fiscal policy.

    More importantly though if Mr Market is a bond trader in London talking to a BBC journalist he likes policies that result in Mr Market paying lower taxes.

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  10. Hardly anyone likes paying higher taxes, and quite a small number of people pay most of the income tax. Lots of people like receiving government spending. It's an old issue.

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    1. This seems to be a consistent Tory trope leading into the next election. Of course a small number of people pay most of the income tax - because they get all of the money. Most people would be happy to pay more tax as a by-product of a significant increase in their income.

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    2. Agree with both - but particularly important is Gastro George's clarification which is often omitted by certain daily 'news' papers as to why so few people contribute so much of the income tax receipts - because their incomes have soared whilst the vast majority have grown more slosly, stagnated or even declined.
      Yes, "Lots of people like receiving government spending." Not least the corporate sector, which at a conservative estimate "direct corporate welfare costs British taxpayers just shy of £85bn a year."
      http://www.theguardian.com/commentisfree/2014/oct/06/benefits-corporate-welfare-research-public-money-businesses
      (I did want to cite this issue via the Telegraph or Mail, but a Google search of "UK corporate welfare/subsidies Daily telegraph/Mail" revealed nothing, Hence the Guardian link)

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    3. so few people contribute so much of the income tax receipts - because their incomes have soared

      This isn't really true. People in the top income brackets are paying more in income tax than they were five years ago, because of the introduction of the higher rate and removal of the personal allowance, while everyone else is paying less. Government policies have concentrated the income tax burden on a smaller number of people.

      This is a red herring though. Concentrating on income tax ignores the rest of the tax system, which is much less progressive (particularly VAT and property taxes). It also ignores benefits (the other half of the redistributive coin) where cuts have of course hit the poorest hardest. When you take all that into account people earning over £150k a year don't have much to moan about, even if they're paying a bit more tax.

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    4. ...because their incomes have soared
      "This isn't really true"

      Perhaps you need to check the extensive data on this - which reveals that the share of the 'income pie' of the top decile (the top 90-100% of the population) has become much bigger over the last 20+ years, and tellingly, of total UK income growth between 1994/95 - 2011/12, the share of this going to the top decile is approximately 38%. Compared to the next *four* deciles below this, who received 45% combined, whilst the bottom 5 deciles (aka the bottom 50%) received just 16% of income growth in the period.
      (It is worth noting that the soaring incomes of the top decile did take a hit during the last financial crisis and income inequalities narrowed - thanks to the automatic stabilisers which cushioned much of the blow for the lower income deciles compared to the higher ones).
      Given those few in the top decile who have seen their incomes soar, surely they are then contributing more to income tax receipts - unless the majority can/have shielded their increased incomes from the tax man!
      Is there any evidence that "the introduction of the higher rate and removal of the personal allowance", rather than the soaring incomes, is why those in the top income brackets are contributing so much more to income tax receipts?

      Agree with paragraph 2, regarding regressive taxes, the cuts and those on >£150k!

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    5. Forgot the link regarding income growth shares...
      http://ftalphaville.ft.com/2014/02/11/1768992/the-uks-squeezed-bottom-charted/

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    6. I don't dispute the data about the increased share of the pie taken by top earners in the last ten or twenty years. My point is about the last five, where as you say the income of the top bracket has actually suffered, and changes to income tax have penalised such people further. At the same time efforts to reduce the income tax burden on lower earners (through raising the personal allowance and reducing the basic rate) have reduced their contribution to the overall pot. So the concentration of income tax on higher earners has certainly increased in the last five years, for reasons other than just their 'soaring' income. Again, I don't see anything wrong with this, even though I happen to be one of the sufferers.

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    7. I think if you're in the top tax rate, then "suffering" might be overstating the fact.

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    8. Indeed. I was attempting to deploy what we call 'irony'.

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    9. End taxes on income and start taxing land value.

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  11. "Being the excellent journalist that he is, Peston is reporting the views put to him, rather than taking a particular side."

    I find it extraordinary that this can be written without a trace of irony.
    And if it was ironic here, then let my amazement be directed at the many other occasions, not on this blog, where this is not.

    Paul Krugman has often lamented that, should a politician claim that the Earth is flat (many Republicans are not far from that, certainly they make similarly ridiculous claims), the media would report that opinions differed on the shape of the Earth.

    Surely that is not being an excellent journalist. If journalists are merely restating what has been told to them, then they really are voice-recognition software. Surely a journalist should be expected to challenge the sayings, providing data to help form an opinion, to point out that a particular framework has been making ludicrously false predictions ever since we reached the zero lower bound...

    But even the "he said she said" school of easily filling media space is a step ahead of what Robert Peston did there: he only repeated what was said by those who made no sense...

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  12. Is it necessary to continue to say "when interest rates are at their zero lower bound?" For this audience, would not "interest rates at zero" suffice?

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    1. Without the "bound" there would be no justification for fiscal policy. You guys need to keep banging on about the bound, or people might begin to think monetary policy was not just about interest rates. Heavens! You might become market monetarists and join the real world where QE and Future Guidance work (sort of) at the ZLB, instead of S W-L's theoretical world.

      And, yes, I have read S W-Ls inadequate explanations for the current US and UK recoveries. Something to do with savings rates. Yeah, right.

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    2. There is a debate over whether QE is inflationary or deflationary. Helicopter drops are a better idea.

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    3. The phrase "zero lower bound" is superfluous. In a sovereign floating fiat currency economy, the natural rate of interest is Zero, as in 0 %. Whenever the government spends, it always spends twice. The government always spends new money, it doesn't recycle tax money. Tax money goes into the galactic dustbin when it is collected from the currency USERS and gets back to the currency ISSUER, the Treasury.

      The Treasury does not have a balance sheet as mere mortals would understand one. It can create money any time it wants by spending it into existence. It can destroy that money by taxation, any time it wants. Government money is like the numbers on a cricket scoreboard, the team may run out of batsmen, but the scoreboard does not run out of numbers to display the runs those batsmen scored.

      The currency USERS all have to run with balance sheets, even the Bank of England. If the government creates new money and keyboards it into your current account each week (pension), your bank has a problem. It has a liability to you that came from the government and no asset to match it. Its balance sheet doesn't balance. Hence, the government creates an equivalent amount to the deposit it gave you, and puts it in your banks current account at the BoE; they call it a "reserve". Your bank's balance sheet balances again.

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    4. Sorry I missed a bit about "reserves". Banks don't lend "reserves" to the private sector, only to other banks that have a current and securities account at the Bank of England. Reserves are the "anti-matter" to the deposit "matter" in your current account.

      You can create matter out of anti-matter at an ATM, if you take the pension deposit out of your current account as "cash" notes. As you walk away from the machine, the anti-matter (reserves), will follow you. If you pay a bill with that cash, and the company you pay, pays it into their bank. The reserve will jump back into that companies bank reserve account. Spooky, what !!!???

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  13. The comments on this post are some of the most interesting I have read for a while - and certainly more entertaining than the BBC currently is. I agree with so much of what has been said, but the funniest comment must be the one from Cyrille saying that "journalists really are voice-recognition software". That had me in stitches, it's just so true! Thank you so much for that, Cyrille! :-)

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  14. "My complaint was that he did not talk to some academic macroeconomists"

    Perhaps because he does not see much value in those economists. Personally I would iike to some good predictions about the future. A good analogy would be to a doctor. If a doctor provides bad information regularly, people will stop listening to him.

    However, it seems to me that economists can be wrong about the value of stimulus and yet retain their positions

    ReplyDelete
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