Bill Mitchell wants the big change

Bill Mitchell:

I argue that we have to abandon our notion that the role of government in meeting the climate challenge is to make capitalism work better via price incentives. Rather, we have to accept and promote the imperative that governments take a central role in infrastructure provision, rules-based regulation (telling carbon producers to cease operation) and introducing new technologies.

Mitchell wants big changes. That's how I know his thinking is wrong.

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Time Magazine, December 31, 1965:

Far from being a socialist left-winger, Keynes (pronounced canes) was a high-caste Establishment leader who disdained what he called "the boorish proletariat" and said: "For better or worse, I am a bourgeois economist." Keynes was suspicious of the power of unions, inveighed against the perils of inflation, praised the virtue of profits. "The engine which drives Enterprise," he wrote, "is not Thrift but Profit." He condemned the Marxists as being "illogical and so dull" and saw himself as a doctor of capitalism, which he was convinced could lead mankind to universal plenty within a century. Communists, Marxists and the British Labor Party's radical fringe damned Keynes because he sought to strengthen a system that they wanted to overthrow.

Keynes -- pronounced canes -- wanted to keep the economy he knew, and fix it. He didn't want to abandon capitalism. He didn't want the big change.

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When you go for big change, the story often goes something like this, as told by William E. Leuchtenburg in Franklin D. Roosevelt and the New Deal:

It was frequently remarked in later years that Roosevelt saved the country from revolution. Yet the mood of the country during the winter of 1932-33 was not revolutionary. There was less an active demand for change than a disillusionment with parliamentary politics, so often the prelude to totalitarianism in Europe...

Many argued that the country could get out of the morass of indecision only by finding a leader and vesting in him dictatorial powers. Some favored an economic supercouncil which would ignore Congress and issue edicts; Henry Hazlitt proposed abandoning Congress for a directorate of twelve men. Others wished to confer on the new president the same arbitrary war powers Woodrow Wilson had been granted. Even businessmen favored granting Roosevelt dictatorial powers when he took office. Distressed by the chaotic competition in industries such as oil and textiles, alarmed by the outbursts of violence, convinced of the need for drastic budget slashing, they despaired of any leadership from Congress. "Of course we all realize that dictatorships and even semi-dictatorships in peace time are quite contrary to the spirit of American institutions and all that," remarked Barron's. "And yet -- well, a genial and lighthearted dictator might be a relief from the pompous futility of such a Congress as we have recently had... So we return repeatedly to the thought that a mild species of dictatorship will help us over the roughest spots in the road ahead."

Big change is dangerous.

What, Blanchard and Ubide again?

The next paragraph, after that opening:

Our contention has been that lower interest rates decrease the fiscal and the economic costs of public debt. In addition, lower interest rates and the effective lower bound on nominal interest rates limit policymakers’ ability to use monetary policy, requiring them to rely more on fiscal policy to sustain demand and activity. We have made a careful case for the use of primary deficits to sustain demand where needed, and for the use of these deficits to finance growth-friendly measures, such as the fight against global warming, or the financing of transition costs of reforms, or other types of public investment. We have argued that, by increasing investment, a well-designed fiscal policy can contribute to increased neutral rates, in turn making monetary policy more effective.

So the main thrust of their argument is that low interest rates make public debt a good deal. A secondary issue, offered "in addition" to the main thrust, is that low rates make monetary policy ineffective. Third, they have made "a careful case" that deficit spending would be a great way to expand "the fight against global warming".

To pick up where I left off yesterday, it's all bullshit.

It's certainly not economics. Economics wouldn't focus on getting you a bargain price on the fight against global warming. I think Blanchard and Ubide only bring up global warming because it has a pre-existing fan base which they hope to use to expand their readership. What else could it be? That they don't know the difference between macro-economics and bargain-hunting? Give me a break.

Where is the part where Blanchard and Ubide ponder the need "to sustain demand" and how that need arose and whether their recommended solution even works?

And how the hell did the failure of monetary policy get to be just an afterthought? What's wrong with these people?

The one sentence that impresses me:

We have argued that, by increasing investment, a well-designed fiscal policy can contribute to increased neutral rates, in turn making monetary policy more effective.

That's economics. That's where they should be all the time. But you can't just give it one sentence and think you're done. If you want to increase investment, you need to know why investment is insufficient and you might want to know the cause of the cause, and the cause of the cause of the cause.

If you work backwards like that, eventually you'll find that the ultimate cause of most any economic problem is policy. Policy that's just wrong, or policy that was right but then the economy changed. Add a little irony to that and make it that the economy changed because of policy (as it should), and you've got the Lucas critique.

Now that's funny.

What, demographics again?

From Why Critics of a More Relaxed Attitude on Public Debt Are Wrong by Olivier Blanchard and Ángel Ubide, July 15, 2019:

The decrease in real interest rates is not something that started with the financial crisis and that will go away when its effects fully dissipate. The decrease started much earlier, in the mid-1980s, and has taken place steadily since then, driven in large part by structural factors, such as demographics.

Okay, but not long ago, "structural factors, such as demographics" were used to make a different argument. This argument:

The decrease of Labor Force Participation was not something that started with the financial crisis and that would go away when the effects of the financial crisis fully dissipate. The decline began much earlier, in the year 2000, and had taken place steadily since then, driven in large part by structural factors such as demographics. 

But the decline in Labor Force Participation stopped dead in its tracks in October of 2013. And it wasn't because demographics returned to what it had been before the year 2000. Far as I'm concerned, this means the demographics argument was total nonsense. It was nonsense then. It is nonsense now.

Economists should do economics, and leave fertility issues to druids.

No disrespect intended, to druids.


Blanchard and Ubide, the next two sentences:

For a while, there was a belief that, after the financial crisis, interest rates would return to their historical levels. They have not.

Some people thought that, after the financial crisis, interest rates would return to their pre-crisis levels. But interest rates have not returned to those levels. The statement implies that the effects of the financial crisis have fully dissipated.

That is certainly wrong.


Many economists seem to think their task is to explain the economy to the rest of us. That's not it. The task is to understand the economy. If you don't understand it, all your explanations are bullshit.

My recent comment at JW Mason's

My response to Mason's A Baker’s Dozen of Reasons Not to Worry about Government Debt:

The last part, all underlined, is a link to mine of 19 June.

"the ability of a central bank to stabilise inflation using its short-term nominal interest rate tool" makes the world go round, you think?

This has been stuck in my craw for a while now, from JW Mason:

I don’t think a “quantity of money” has been an important part of orthodox macoreconomics or any major heterodox school for many, many years.

Enter Cecchetti, Mohanty and Zampolli (2011), page 2:

As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. With few exceptions, the focus was on a real economic system in which nominal variables – prices or wages, and sometimes both – were costly to adjust. The result, brought together brilliantly by Michael Woodford in his 2003 book, is a logical framework where economic welfare depends on the ability of a central bank to stabilise inflation using its short-term nominal interest rate tool. Money, both in the form of the monetary base controlled by the central bank and as the liabilities of the banking system, is a passive by-product.

Money is a passive by-product, they say. Passive in 2003, perhaps. But money was no longer passive just a few years later, when interest rates hit the zero bound and the demand for safe assets skyrocketed.

"Land, labor, and capital" -- and also finance

From Grundrisse 17:

Monied capitalists and industrial capitalists can form two particular classes only because profit is capable of separating off into two branches of revenue. The two kinds of capitalists only express this fact; but the split has to be there, the separation of profit into two particular forms of revenue, for two particular classes of capitalists to be able to grow up on it.

Again: Monied capitalists and industrial capitalists exist as two separate classes because profit includes two types of revenue. Therefore, the existence of the two classes of capitalists is evidence that profit includes the two types of revenue.

I can live with that.


From Chapter 23:

I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together, namely, the rate of interest and the marginal efficiency of capital. For it now seems clear that the disquisitions of the schoolmen were directed towards the elucidation of a formula which should allow the schedule of the marginal efficiency of capital to be high, whilst using rule and custom and the moral law to keep down the rate of interest.

Finance is not a factor of production. Finance is a factor of facilitation: it facilitates production. But finance has a cost, just as land and labor and capital do, and must be included on any list of cost categories.

In our world also

"The destruction of the inducement to invest by an excessive liquidity-preference was the outstanding evil, the prime impediment to the growth of wealth, in the ancient and medieval worlds."