Chronicles by Thomas Piketty: reflections on three reviews

As I have already reviewed this book for the New Statesman, I thought it might be interesting to compare my review with two others: Ben Chu in The Independent and Paul Mason in the Guardian. Paul uses some pretty positive language (“lucid”, “brilliantly concise”), Ben is much more critical, and my review is mainly descriptive (although I do use the word 'delicious'). To be fair, Ben’s main criticism is that putting together occasional newspaper columns (nicely translated from the French by Seth Ackerman) does not work as a book, so it is more a criticism of the publisher than the author.

I suspect there is less disagreement among reviewers than there first appears to be, for one simple reason: the Eurozone crisis. Inevitably quite a few of Piketty’s columns are about that crisis. It was obvious that Piketty should write about this at the time, but the columns work less well when they are collected together. I understand the Eurozone crisis much better now than I did as it was unfolding, and people will be rightly interested in the end result rather than the process by which I got there.

But it is not just that. Piketty, like many mainstream economists within and outside France, view a monetary union as fundamentally unstable. I find that frustrating for two reasons. First, a fiscal/political union seems to be a non-starter right now, so it is not a very helpful perspective, and it tends to prevent those that hold that view from exploring in more depth how the existing monetary union could be made to work better. In that respect I side with the position of Yanis Varoufakis, which I quote at the end of my joint review. (Both Paul and I review Piketty alongside the new book by Yanis Varoufakis, and I will talk more about this book in a later post.)

If we just consider the columns that were not about the Eurozone crisis, I positively enjoyed reading these. They are well written (and well translated), with little that a non-economist would find difficult. The word that keeps springing into my mind is refreshing, but I did not use it in my New Statesman review because I was not sure where that feeling came from. On further thought I think it is the combination of two things. First, the pleasure of seeing an excellent economist apply his knowledge in a very accessible way across a range of issues. Second, that his perspective is deeply and unapologetically egalitarian. He writes without needing to constantly defend his views against a more neoliberal perspective, something I suspect an Anglo-Saxon version of Piketty would feel the need to do.

Port Talbot and Neoliberalism

Brief synopsis for non-UK readers. Port Talbot is the latest UK steel plant to face closure at least partly as a result of dumping by Chinese steel producers. While the US government seems quite prepared to place high compensating tariffs on Chinese steel, the UK government had blocked EU attempts to do the same.

I used to think I knew what neoliberalism was. True it is a term that is employed far too liberally (no pun intended), but I thought neoliberals had a clear idea of what they were about. This was to keep markets free from government interference, and also to prefer almost without question market processes based on private property over state action. As a result, it was neoliberal to want to shrink the state as much as possible, as long as its role in defending markets and private property was preserved.

It was for this reason that I could say that the UK government’s actions in blocking tariffs on Chinese steel were nothing to do with neoliberalism. If China was a capitalist country where independent (from the state) producers received no state subsidies, then that would be different. But it appears that what we have instead is an all powerful state rigging a market. That couldn’t be neoliberal, surely?

I am aware that neoliberalism has a blind spot when it comes to what economists would call market imperfections. That seemed to me one difference between neoliberalism and ordoliberalism, with the latter seeing a clear role for the state in restricting monopolies. The way you could characterise this is that neoliberals started Econ 101 but skipped before the lessons on market failure, while ordoliberals held out a little longer to hear about monopoly.

That, at least, is how I saw it. I had also seen the Institute of Economic Affairs, a London think tank, as being a bastion of neoliberalism. Although often a supporter of Conservative government actions, they were not in favour of caps on immigration or Osborne’s hike in minimum wages. I was therefore rather surprised to hear its director say that the EU government would have been wrong to impose tariffs on Chinese steel. True, the idea that a producer in an oligopolistic market with high entry barriers could use its deep pockets to drive out other producers by temporarily cutting prices, and subsequently use its new monopoly position to raise prices by much more, might have been one of the economic lessons that were skipped. But when one of the most powerful states in the world does it? I would have thought that would have raised alarm bells for any neoliberal.

Either I am missing something, or I am being a typical academic (economist) in expecting an ideology and those who uphold it to be internally consistent. After all, another major example of large states interfering with markets is the implicit subsidy provided to ‘too big to fail’ banks, but I do not remember neoliberals attacking that much either. Neoliberalism is whatever neoliberals do?!

Or maybe not. I think critics of this UK government miss a trick when they call its failure to defend its steel industry as the actions of a “failed, laissez-faire Thatcherite ideology”. That gives it a kind of respectability it does not deserve. Instead it is a government that seems to have decided that defending the interests of China are more important than its own steel industry. When China announced on 1st April that it was imposing high tariffs on a type of steel produced in the UK, the only thing that looked like an April fool were the actions of the UK government.         

The big story behind Port Talbot

In today’s print edition of the New Statesman I have a brief review of Yanis Varoufakis’s new book. (The review also looks at Piketty’s newly published collection and translation of newspaper articles. I’ll talk more about each when the review appears online, but for now you can read a similar (in parts) double review by Paul Mason.) The organising macroeconomic theme in his book is the need to find systems capable of successfully dealing with current account surpluses. In my review I say I’m not sure whether this framework is really capable of holding up everything that the author wants it to support, but there is no doubt of the importance of the issue. For example, it seems to me this is the framework, albeit at a more industry specific level, with which to see the current crisis over the threatened closure of the UK’s steel plant at Port Talbot.

The surplus in question here is the surplus Chinese capacity to produce steel. Ambrose Evans-Pritchard in the Telegraph, who has a similar perspective, reports an OECD estimate that China's excess capacity is over twice the size of total European Steel production. Because China is able to subsidise production in various ways, this means this steel can beat UK production on price. The US department of commerce is reported as thinking that the subsidy on some types of steel justifies a tariff of 236%!

If this is correct, then this story is not about neoliberalism or the free market, but a story of a rigged market. To put it another way, it is a market where one set of producers have the ability to eliminate their competitors by flooding the market at a loss because they have the ‘deep pockets’ of a state behind them.

The EU have been trying to raise tariffs against Chinese steel producers for three years, but have been blocked by a coalition of countries led by the UK. The UK Business minister Sajid Javid has been quite explicit about this: he prefers cheap steel because it helps other parts of UK industry. It may also have something to do with wanting to curry favour with China because of other matters (which was the point of John McDonnell’s Little Red Book stunt, if only he hadn’t started reading from it!). This is not Javid upholding the principles of a free market, but instead allowing a large state to rig a market. The irony in this case is that the state in question is not the one he works for. 

Postscript (11/4/16) For more detail, see this from Ben Chu        

Helicopters are easy to fly

The debate over helicopter money seems to have got past the ‘shock, horror, people’s faith in the monetary system would collapse’ phase, and past the ‘it wouldn’t work because people wouldn’t spend the money’ phase, to the ‘what happens next’ phase. And to be fair to the critics, many proponents of helicopter money have not been clear on this issue.

The point was put very clearly yesterday in an FT Alphaville piece by Gerard MacDonell. Once the recession is over, there is likely to be too much money in the economy from the central bank’s point of view (which means, money has to be withdrawn to maintain the inflation target). We cannot say how much, but equally it would be wrong to ignore the problem. So what happens next?

I think I have been clear (at least recently) on this point. First, helicopter money as I see it is not a way to get inflation overshooting by the back door. The idea that the increase in money is ‘permanent’ is meaningless, as Eric Lonergan says. Overshooting may be a good idea, but there is no need to be devious about it. Second, the obvious way to ensure the central bank still achieves its inflation and other objectives is to recapitalise the bank if necessary. The central bank could enforce very high reserve ratios on commercial banks, but is that a desirable thing to do?

In my view helicopter money would be accompanied by a commitment by the government to recapitalise the central bank if that was needed. Yes, commitments can be broken, but only by the kind of government that would happily revoke central bank independence anyway.

The answer to what happens next is therefore easy. When it becomes clear after the recession that there is now too much money in the economy, the central bank takes it out. In other words, monetary policy acts as normal. If the central bank runs out of assets to do this, it gets recapitalised. Recapitalisation means more government debt. So we can end up in a position which is exactly equivalent to one where the distribution of money had been financed by an increase in debt in the first place: a conventional fiscal expansion.

In this world, helicopter money is (a particular type of) fiscal expansion by the back door. As Narayana Kocherlakota points out, this back door method has no purely macroeconomic advantages over the real thing. But the reason why we need a back door is obvious right now. Economists need to get real about these political constraints. Obsession with debt is not just based on ignorance, but it serves an ideological purpose which is not going to go away.

Yet even if governments were not obsessed with current levels of debt (and that is all they are obsessed by), go back to the textbooks on why monetary policy is prefered to fiscal policy as a stabilisation tool. One of the reasons you will find is that monetary policy is quick to invoke, with no institutional (aka democratic) hurdles to pass. Those who argue that helicopter money is just like fiscal policy seem to ignore this. There is also the (obvious) point that helicopter money allows what I call the consensus assignment to work (by expanding the meaning of monetary policy a little beyond interest rate changes), rather than leaving it with the rather large Achilles Heel of the zero lower bound.

Helicopter money is just another way of doing textbook demand management. What it does is move around current institutional boundaries a bit, to reflect real institutional and political constraints. There is nothing magical about the current institutional boundaries. Perhaps if you think (as Brad DeLong does) about the profits the central bank makes as a social credit that gets automatically distributed to people rather than given to an intermediary (the government), you might feel easier about it.