John McDonnell has got quite a collection of talent to give talks on economics around the country, and the latest is Paul Mason. His talk is wide ranging and certainly not academic in tone, as befits the occasion, and I agree with the broad thrust of it, although not all the details. Here are a few thoughts.
The impending second crisis.
There seems to be a general presumption in certain circles that we are heading for another crash. (Perhaps I could call it ‘the end of capitalism is nigh syndrome’.) This is always a possibility (of course), but I do not think it is a probability. In the UK, do not be fooled by the referendum blip (or pause). I think it is quite likely that Prime Minister Osborne will by 2020 be presiding over strong growth, as everything that was put on hold before the referendum comes on stream. I also think we may see rapid Eurozone growth before then.
On a related theme, there is also a widely held view that after the referendum the Conservative party will fall apart - it is the Corn Laws all over again. I would put that probability much smaller than the chance we might vote to Leave, or that Boris gets to be our next PM.
I’m glad he likes Labour's new fiscal rule. He writes: “There’s a school of thought among Labour supporters, and some academics, that the deficit is irrelevant, that “taxing the rich” solves all your problems. It does not.”
‘I did not know you could do that’
His reference to the Macdonald government coming off the gold standard is certainly apposite. Too often the centre left gets trapped by what it sees as unbreakable economic or political convention, only to see the other side break it (think minimum wage).
What is said in this central section sounds radical, but I think it is meant to be read in the context of the impending next recession that I talked about earlier. What I think he is worried about is that, in that context, any fiscal action would need monetary support, and with the current regime it might not get it. In other words the economy tanks, the next Labour government wants to stimulate but inflation stays close to 2%, and the Bank of England does not cut rates to allow the fiscal rule's knock out to apply. For this reason he supports the proposal, which has a number of notable advocates, that the inflation target be raised to 4%.
I would agree this could be an issue: what economists called the ‘divine coincidence’ (that inflation would always provide the appropriate signals) just does not seem to work very well any more. Whether raising the inflation target to 4% is the best way of dealing with the problem, as opposed to for example an intermediate NGDP target, I’m less sure about but I’m open to persuasion. I agree with Paul that this is a problem involving the central bank's mandate, rather than its independence.
He also supports Corbyn’s original Peoples QE proposal. He cites me as opposing it, but in fact I did not oppose the idea as an alternative to the QE that the Bank would want to do otherwise. What I thought was wrong with Corbyn’s QE was that it appeared either to negate central bank independence, or make a National Investment Bank conditional on the Bank wanting to do QE. In the past I have talked (here, or via Tim Harford here) about how governments and the central bank could cooperate to do money financed fiscal stimulus. In other words Corbyn's QE is fine as an alternative to conventional QE in the context of recession fighting, but not as a general way to finance an investment bank.
I suspect he is also just a little bit worried that the bond vigilantes might finally arrive. I think there is no way that will happen, but we have some history of a central bank governor who worried that it might and gave the wrong advice as a result. If that happened again, we would want monetary policy makers to offer monetary finance of any fiscal stimulus (in exchange for a government commitment to always recapitalise the central bank on request), rather than urge fiscal constraint. Perhaps one way to do that would be to make the central bank’s ability to do unconventional monetary policy conditional on that money finance offer being made.