Economics
Announcing a New Paradigm for Economics and Beyond
One thousand critiques of neoclassical economics are not going to be effective unless the critiques hang together.
The post Announcing a New Paradigm for Economics and Beyond appeared first on Evonomics.
Poor, petrified, non-doms are terrified that they might have to pay some tax
The Guardian is reporting this morning that:
“People are jumping on planes right now and leaving,” said Nimesh Shah, the chief executive of Blick Rothenberg, an accountancy firm that specialises in advising very rich “non-doms” on their tax affairs. “I am not being dramatic, they are leaving right now.”
Shah said his clients – some of the richest people in the country – were “petrified” of plans to abolish the “non-domicile” regime, through which for the past 225 years wealthy people have been able to live in the UK and not pay tax on their overseas income.
You can sense the hyper-ventilation from which Shah must be suffering oozing through every pore of this comment, largely because he senses his business model is disappearing in front of his eyes.
And what is it that his terrified clients are so frightened of? It is the risk that they might have to pay a fair contribution in tax to the country in which they wish to live and which they want to host their activities whether they are socially desirable, or otherwise.
There are three things to note. The first is that advisers like Shah are always inclined to overstatement, usually to protect their own self-interest.
Second, that said, I am sure he is right. Some of the thoroughly anti-social people he represents will leave the UK. Shah has every reason to worry about the future profitability of his firm if he is dependent upon them.
Third, he is drastically overstating his case. Some people will leave. A very few will do so straight away. But the vast majority will have good reason for staying. Methinks the man doth protest far too much.
And as for those poor, petrified clients? Maybe they should try living with the fear that you have no idea where the next meal might come from whilst being harassed for repayment of innocently overpaid carer’s allowance that you have no chance of ever refunding. Then you might find out what fear really feels like. As it is, I don’t give a damn about their fear that they might just have to pay some tax, because is exactly what they should be doing.
Ben Bernanke’s review of the Bank of England was doomed from the outset because he didn’t ask the right questions
There has been lots of comment in the media on the criticisms that former chair of the US Federal Reserve and economics Nobel prize winner, Ben Bernanke, has made of the Bank of England’s forecasting techniques. He undertook a review of these methods at the invitation of the Bank because so much concern has been raised about how poor their forecasting has been, particularly since the Covid crisis.
In general, observers have suggested that Bernanke must have been thorough because he has made twelve recommendations for what people think to be significant reforms within the Bank. Bank of England boss, Andrew Bailey, has already said that he will act upon them. That, however, to me is the surest sign that Bernanke has missed his target. If he had suggested anything that would have created real change Bailey might have resisted his recommendations a lot more obviously.
A long time ago a wise person taught me that I should, when reading reports of this nature, not consider what is said within them, but what is left unsaid, meaning that an issue has been ignored. It is in this light that I have read the report.
Before noting those exceptions let me make it clear that I am unsurprised that he has said that (and I am summarising his twelve, heavily overlapping, recommendations when noting these issues):
- The Bank’s methodologies are out of date.
- The Bank’s technology is outmoded.
- The Bank is over-reliant on data analysis.
- The Bank has structures that do not encourage the promotion of expertise.
- There has been resistance to change within the Bank.
- Critical thinking that challenges the Bank’s forecasting has been discouraged, even in the Monetary Policy Committee.
- The Bank’s systems are orientated to processing normality, and not exceptions to the norm.
- There is a bias against narrative explanation of the Bank’s opinions and forecasts.
- Its reporting methods might be familiar due to their habitual use but they are not necessarily useful.
I stress, this is not how Bernanke puts things; I offer these as reasonable interpretations of what he says. To me they say that the Bank:
- Is outmoded in its thinking.
- Has failed to invest despite the enormous resources available to it.
- Requires compliant obsequiousness from its staff.
- Does not encourage critical thinking.
- Hides behind opacity.
- Lacks creativity.
- Most of all, is seeking to reinforce what it thinks it knows rather than what might actually be happening.
Again, I stress he did not say that: it is what I think he means.
That said, there are, in my opinion, major failings in what Bernanke has done. For example, has not questioned the basis of the economic approach adopted by the bank, which is based on what is described as dynamic stochastic general equilibrium modelling (DGSE). This is unsurprising. Bernanke is deeply invested in this economic method methodology, as all central bankers are. However, the model is profoundly unsound. There are a number of reasons.
Firstly, the model is based upon microeconomic foundations. It assumes that the model of decision-making that is appropriate for individuals, households and companies is also appropriate for the state. To put this another way, the household analogy is built into it from the outset. The result is an inherent logic that the government is just another player within the economy when it is nothing of the sort. It role is not only normally the inverse of all other actors within the economy, it also sets the rule for everyone else.
There is another problem arising from the use of microeconomic foundations. Many of the crass assumptions within microeconomics, including that markets can produce optimal outcomes and that they can clear supply and demand, are implicit in DGSE modelling, quite inappropriately. You cannot build sound economic forecast on the basis of nonsense. Bernanke does not say this.
Secondly, although it is claimed that these mathematical models can handle uncertainty, I do not think that is true. They can only handle risk, which is probabilistic. I am not convinced that they can handle uncertainty, to which probability cannot be attached, although it happens, nonetheless. This is why they were quite unable to handle the global financial crisis of 2008 and the Covid crisis. Those events simply did not exist within the range of forecast probabilities. Bernanke does not point this out.
Third, these models assume that there is such a thing as equilibrium, i.e. an optimal economic outcome to which we can aspire. There is no evidence that such a state as ever been achieved. In that case, why it is appropriate to assume that this is the basis for forecasting is very hard to explain. Bernanke offers no such explanation.
Fourth, as Steve Keen has explained, relentlessly, models of this sort are based upon the assumption of a barter economy where there is no role for money. Any adaptations within the model to include the role of money are necessarily a fudge. Why the Bank is using such a model to control monetary policy is hard to explain.
Fifth, if, instead of an equilibrium state being modelled there is instead a model that presumes that the status quo prevails (which Bernanke implies to be the case), then the model has built within it an assumption of reversion to the norm. That would be great if that norm was what everyone desired, but very clearly the norm within the economy in which we all live at present is not working. That means that the model is inherently in conflict with society - and what is happening in the real world.
Sixth, the most massive macroeconomic externality, in the form of climate change, is effectively ignored within this model, because that is what its microeconomic foundation necessitates. This fact pretty much undermines just about everything the Bank does.
I could go on, but I think that my reservations are now clear. I am, of course, aware of that I am generalising, but I also know that in almost every model of this sort where adaptation is introduced to try to accommodate the criticisms made, the assumption is that the exception from the model’s requirements is contrary to economic well-being i.e. the model always tries to make prediction that resort to its implicit over-riding assumption that pure market economies must exist, fundamentally free of government interference. The reality that a central bank exists to implement government policy is in fact contrary to the implicit assumptions in the models that presume that no such thing should happen.
Bernanke mentions none of this. As a result what he says will fail us.
But that was also guaranteed for another reason. It would appear from the commentary that he has provided that he spoke to no one, at least of consequence, outside the Bank when undertaking his work. In other words, he has made recommendations for reform of the way in which the Bank works without ever once considering the opinion, or needs, of the Bank’s stakeholders, whether they be the government, other politicians, society at large, or business of all sizes. His comments do, therefore, represent the ultimate statement of central banker arrogance. In the opinion of central bankers, nothing but their view matters. Bernanke did not say this, but whether he recognises it or not, it is clear that he thinks it.
Bernanke was always the wrong person for this job. He was a central banker marking another central banker’s homework, without ever questioning the assumptions on which the central bank worked. This investigation was doomed from the outset as a consequence.
And these are the people that Rachael Reeves is placing her faith in to run the economy when a Labour government is in office.
We face a Labour meltdown after the election
I seriously wonder how long Labour has got before it has no choice but to wake up and smell the coffee.
It would be incredibly easy for Starmer, Reeves and Streeting to be sitting very smugly at present thinking that the election is sewn up and that their future in government is assured. On the basis of that they could and should be planning a whole string of King’s Speeches in which they might deliver their grand vision for the UK.
My problem with this suggestion should be obvious. Whilst the first observation is clearly true in the sense that the probability that they will win the election is very high, the second assumes that they have a plan for when they are in office, and nothing does at present suggest to me that anything of that sort exists.
It is, of course, possible that the Labour leadership team has created a ship so tight that nothing has leaked from it and they are playing a deliberate game of not disclosing their plans. It would be foolish to ignore this possibility. They do, rightly, know that much of the media is still not on their side.
However, I do not think that the team is anything like that watertight, let alone clever. Instead, like dazed rabbits that can hardly believe their luck on realising that they might suffer their fourth loss in a row, they are still so obsessed with winning the election that almost no one, I suspect, within the party has given much (if any) thought to what might happen next.
If there is a plan for government (and by now they should have one), I would be surprised. After all, we know that they might have only agreed on a manifesto very recently.
Likewise, if almost anyone within the shadow team beyond those very close to Starmer, has any real clue as to what might be expected of them on the day that they walk into their new department, I will be astonished. Nor do I expect anything much to change between now and then.
I do, in fact, have good reason for thinking that. The only minister who appears very close to Starmer who might have responsibility for a major spending department is Wes Streeting, and what he has to say about the NHS is deeply depressing. His instruction is that we must accept the status quo, increase the scale of private sector involvement in the supply of health services, anticipate real-term cuts in funding, and face down the inevitable employment disputes that will arise as a consequence. Given that he is in a better position than anyone else to negotiate a sensible settlement with Starmer and Reeves, then heaven help everybody else. It looks like that for all new ministers their primary focus will be on who it is that they can sack from day one onwards.
Accepting that I could be entirely wrong, the question to then ask is what will the public’s reaction to this be?
It is, of course, possible that in the short term they really will not care. Given how utterly disastrous the Tories have now proved themselves to be, anything might seem like a relief in comparison.
But, this is very unlikely to last for very long. The UK public are extremely fickle when it comes to their support for politicians, and I already suspect that Labour’s internal polling will be showing them that much of their support is decidedly soft.
As many commentators here suggest, it is likely that many of those who would traditionally support Labour feel decidedly uncomfortable about doing so now. Instead, much of their support probably now comes from those who would normally have voted Conservative, but who appreciate just how extreme and incompetent those who lead that party now are. That does not suggest that those people have really changed their political persuasion or that they think that Labour really is taking the place of the Tory party that they once supported. They are simply voting in despair, just as those who traditionally supported Labour despair about who to vote for.
This combination could prove quite disastrous for Labour. If it becomes apparent within months of being in office that they really do not have a plan for government, let alone a plan for how to fund the improvement in government services that people in this country are desperate for, the number of people who will have a sense of regret about voting for them will be significant.
Labour could, of course, be planning for this and expect to play a long game, hoping that over the following years, events will turn in their favour, giving them the opportunity for re-election. I do, however, think that to do so would be naive. There are two reasons for doing so.
The first is that as anyone with any sense knows, the Tories and other far-right political parties will be working in close strategic alliance, supported by the well-funded Tufton Street think tanks, from the moment that the election is lost. They will be promoting an agenda of hate from then on, knowing that there will always be a certain part of the population that will support this, which part will be boosted in size if Labour appears incompetent once in office.
The other reason for doubting that Labour will necessarily survive the appearance of incompetence that they might create within months of being in office is the deeply embedded belief that appears implicit in Rachael Reeves' thinking at present. Everything that she does and says implies that she is of the opinion that the structure of the society in which we live is stable and without need to change. In fact, most of the few proposals that she has made are about reinforcing those structures. This is naive in the extreme. The reality is that our society is unprepared for the problems that it is now facing, and someone with Reeves' attitude is wholly unsuited to partake in the process of adaptation that is now necessary.
Every one of our major public services is failing. It is apparent that a little tinkering at the edges will not solve the problems inherent within them.
As is also now very obviously true that climate change is going to have a dramatic impact much sooner than most people ever expected. After the wettest, but warmest, history in the UK in 200 years we will face a food crisis this summer. A new dependency upon imports will put pressure on exchange rates, and prices, but there is no hint within her thinking of how we will address that issue.
Worse, she has already abandoned her commitment to a Green New Deal.
On top of that, her very obvious lack of willingness to believe in the power of government to effect change, because she is already outsourcing decision-making to as many establishment-populated quangos as she possibly can, makes clear that she does not even think the government should be seeking to tackle the changes that are so obviously required. Presumably, she believes that the market will address them.
My guess is that Starmer shares her views. He shows no apparent capacity for independent thinking.
It is only a question of when all this will become apparent after Labour gets into office. My suspicion is that it will only take months for this to happen. At that point, when possessed of a big majority, Labour will have three choices.
They could try to weather out the storm, which would be disastrous for us all. Action is required.
Alternatively, they could realise that they have no choice but change, and look for what other plans are on the table that they might adopt. This is when I hope that the thinking in the Taxing Wealth Report might be of benefit.
Otherwise, they might resort to the ruse that they are already using with regard to social care, and say that nothing can be changed on issues of this scale without cross-party support, on the basis of which they will try to blame everyone else for their failings even though it would be naive on their part to believe that anyone will think that claim to be credible.
In summary, Labour is likely to offer us turmoil whatever the outcome of the general election precisely because they appear to have no plans in place for what they might do if, as is overwhelmingly likely, they win it. That’s not encouraging. Worse than that, rarely might there have ever been a greater opportunity lost, because that looks to be the prospect right now.
The national debt is not as big as the government claims
I just posted this short video on the national debt on TikTok. I think we’ve upped our production values in this one. Comments would be welcome.
This morning’s post on TikTok has had more than 20,000 view so far. That is not bad for about a week on the platform.
The national debt's not as big as claimed The UK government says that the national debt is £2,659 billion. That's not true. £733 billion of that is owed to the UK government - and you can't owe yourself. So the real figures is much smaller than they claim. #money #uk #nationaldebt
MMT — coming to an economy near you!
Överskottsmålet är ett hål i huvudet. Riksbanken kommer inte att nå sitt inflationsmål. Euron är dysfunktionell och eurokrisen kommer tillbaka vid nästa recession. Se där tre bra utgångspunkter för den som vill förstå hur ekonomin kommer att utvecklas det närmaste året. Låter det både stolligt, alarmistiskt och populistiskt? Möjligt, men det finns en röd tråd […]
Chicago economics — out of touch with the real world
Tom Sargent is a bit out of touch with the real world up there in his office … Certain people have a capacity for ignoring facts which are patenty obvious, but are counter to their view of the world; so they just ignore them … Sargent is a sort of tinkerer, playing an intellectual game. […]
Video: The Bank of England is failing us all
I posted this on TikTok this morning:
The Bank of England has failed us Across the developed world inflation is now falling back to levels last seen before the Covid crisis. The UK will soon be there. However, interest rates are not falling back to the levels of that period. The Bank of England increased them, saying that doing so would beat inflation, which was untrue, and now they’re keeping them high to benefit the wealthy. It's time they were cut significantly. #bankofengland #money #uk
Two sides of the same hymn sheet
George Monbiot posted this on Twitter this morning:
In November, I wrote a column estimating how much it would cost to restore public services. Answer: v roughly £100bn a year: https://t.co/B0Nreqv6gg Where would it come from? @RichardJMurphy has the answers in this essential article. https://t.co/Pno9pspbPB. Read them together.
— George Monbiot (@GeorgeMonbiot) April 11, 2024
It looks as though George and I are two sides of the same hymn sheet.
Labour’s going to have very big problems with the Bank of England
Megan Greene, who is an external member of the Bank of England Monetary Policy Committee and, as such, one of the people responsible for setting UK interest rates, has written in the FT this morning, saying:
The most obvious way the UK economy differs is much more constraint on the supply side. The Monetary Policy Committee (MPC) recently estimated potential growth of 1 per cent this year, rising moderately to 1.3 per cent by 2026. The Congressional Budget Office (CBO) estimates US potential growth of 2.2 per cent over the same period. This means the US can withstand more demand in the economy before it turns inflationary. While the UK has long lagged behind the US in potential growth, the difference became much starker during the pandemic.
The claim that Greene is making here is that there remains a significant risk of inflation in the UK because we do not have the productive capacity to increase the supply of goods and services in the UK to meet any additional demand, if it were to arise. As such, her argument is that the Bank of England must continue to impose austerity upon the economy through the imposition of high interest rates to prevent that chance of additional demand occurring.
This is an extraordinary, and deeply perverse, argument, with an enormous sting in the tail in it.
The perverse argument is that the Bank must not permit growth because there is some inflation risk if it happens. It cannot be sure that this is the case, but it believes it must act anyway.
On the other hand, it is knowingly and perversely imposing a policy that can only impact upon those who happen to suffer the misfortune of having their fixed rate mortgages come to term, meaning that they must be renegotiated.
In addition, and extraordinarily, the Bank is knowingly imposing a policy that has no impact whatsoever on most of the top 20% or so of income earners in society, almost all of whom have seen fair pay rises and have benefited from the additional investment income that they have enjoyed as a consequence of the Bank’s interest rate policy, which has boosted their capacity for consumption expenditure whilst everyone else is suffering.
Put together, in that case, and as the IMF is recently pointed out, the prospect of this policy working is exceedingly limited, even if it were appropriate. The nature of our fix rate mortgage system means that the transmission rate for monetary and interest rate policies into the economy is incredibly slow, meaning that the chance of there being any significant economic impact on consumption as a result of high rates is marginal, but at the same time that policy does actually increase the likelihood that those who are always inclined to spend the most will continue to do so, directly fuelling inflation as a consequence.
It is, however, the sting in the tail that is most important here. Megan Greene is typical of the current batch of external appointees to the Bank of England MPC in being particularly hawkish with regard to interest rates, meaning that she is very inclined to keep them high. Not only does this not work, it also inappropriately increases government costs, denying it the opportunity (presuming that you believe in Rachael Reeves’ fiscal rule) to stimulate the economy.
In addition, it imposes additional cost on any business intending to invest, which is the hope on which Rachael Reeves has pinned her whole economic policy when she demands that the private sector must grow before she can take any action to relieve austerity. As a result, as things stand, the Bank of England is promoting policy that is bound to undermine any chance of Labour’s hoped for growth, shattering all that it has to offer the country at a stroke.
Far be it from me to say that Labour is misguided in placing its hopes in City grandees. Instead, let me simply point out that at present many of them appear deeply opposed to what Labour is seeking to do. In that case, something is going to have to give. I cannot see the City grandees changing their minds. So, the question is, will Labour? If they don’t, they have almost no chance of success with the policies that they have currently set out.