Showing posts from January, 2014

Why the Fed should not taper alone

My latest post at Forbes endorses Raghuram Rajan's call for there to be permanent co-operation between the central banks of the G20. Business is global: financial markets operate across borders. Countries no longer have genuinely independent monetary policy. Monetary policy needs to be co-ordinated internationally, with the Fed as "first among equals". Whether intentionally or not, the Fed has become the de facto central bank of the world. It is time it behaved like it.

Read the whole post here.

Related reading:

Why the Fed cannot taper - Coppola
Don't blame the Fed for the turmoil in emerging markets - Aziz, The Week
Fed to emerging markets: "Our currency, your problem" - for now - Verma, Euromoney
Emerging markets' victimhood narrative - Rodrik & Subramanian, Bloomberg
Dilemma not Trilemma: the global financial cycle and monetary policy independence - Rey, VoxEU
Trilemma looks ok to me (Mundell-Fleming model still works) - Guy Debelle, Reserve Bank of Au…

Laffer and the Yeti

My post "Oh no, not again" about Ed Balls' 50p tax rate policy sparked something of a debate. This post at Pieria disagrees with my view that the 50p rate is pointless and argues that it is justified as a response to growing inequality. I have now posted a response, also at Pieria, which focuses on the morality of taxation - and debunks both the Laffer curve and "trickle down economics". Here's a taster:
"In this recent post, I argued that Ed Balls’ policy of reversing the Conservatives’ 5p cut in the top rate of tax was pointless. My argument was principally an economic one.  Balls had stated that the tax increase would be used to reduce the deficit, but research from both HMRC and the IFS suggests that such a small increase would make little or no difference to tax revenues. Deficit reduction cannot possibly come from minor adjustments to tax codes. What is needed is growth.  "But this is not to say that higher taxes on the rich are necessarily …

Oh no, not again

At the Fabian conference yesterday, Ed Balls announced the Labour Party's intention, if elected in 2015, of restoring the 50p tax rate that was abolished by the present Coalition government. It is the central plank of his deficit reduction plan. But it is by no means clear that it is capable of bearing the weight he would like to place upon it.

The 50p rate had a short and inglorious life. It was announced by the previous Labour government in the 2009 Budget and took effect in April 2010, only a month before Labour's defeat in the May 2010 election. The Conservatives announced the reduction of the rate to 45p in the 2012 Budget, to take effect in April 2013.

Both the OBR and HMRC have shown that there was a substantial behavioural response ("forestalling") to the announcement of the 50p rate, with HMRC estimating that £16-£18bn of income was brought forward into the 2009/10 tax year to avoid the 50p rate. The announcement of the 45p rate elicited a similar behavioura…

Banks do not lend reserves

Me, at Forbes. No, banks don't lend out reserves. They don't lend out deposits, either. And excess reserves due to QE don't "crowd out lending". We are not "paying banks not to lend".

With sincere thanks to Sober Look, whose work I love. Sadly he did get this one wrong. But he's certainly not the only one.

Facts we should remember

At Pieria, Euronomist and I remind everyone - and especially Eurozone policy makers - of a few economic truths: "people consume out of income, not wealth" (duh), "supply depends on demand in a financial crisis" (here's looking at you, Hollande), and of course ""relying on exports doesn't make for a vibrant economy" (guess who that's aimed at?).

Read the whole article here.

Time to say goodbye, Co-Op Bank edition

On 14th January, the Board of the Co-Op Group approved the Terms of Reference for an independent review of the governance of the Co-Op Group. The review is to be led by Lord Myners, who was appointed to the Board as an independent director in December with the remit to conduct such a review. This is now the fourth review of the Co-Op's problems, the others being the Kelly review of the circumstances of the Britannia takeover, the Treasury Select Committee's inquiry into the circumstances of the Verde deal collapse, and the Bank of England's forthcoming enforcement investigation into the conduct of the Co-Op Bank. And the Chancellor of the Exchequer has announced that there is to be yet another independent inquiry. I do wonder if this is overkill. There is only so much navel-gazing a company can stand. In the end, they have to get on with being a business and providing a service to their customers and, in this case, their members.

Also on 14th January, the Co-Operatives Mov…

Banks are not fund managers

New post at Forbes
BANKS DO NOT LEND OUT DEPOSITS. They really don't. And they don't "invest" customers' money, or "keep it safe". They lend, and they use customers' money to fund that lending. And that's what we want them to do. 
Oh, and there's a little bit about that Libor rigging matter, too.

Three posts on basic income

I don't think I've ever before posted three articles on three different sites in the same day. But I have now. And what's more they are all related to each other. So for those who are interested in all things related to basic income, here are the links to the three posts with a brief explanation of each.

At Pieria, my study of the Speenhamland system of poor relief, which was actually an experiment in basic income. It was vilified for depressing wages, creating labour shortages, encouraging unsustainable population growth and requiring ever-higher taxes to support it. But as I show in the post, none of these is true. It actually worked well, and the things it was blamed for were largely caused by other factors. But when it was abolished, it was replaced with the cruellest form of welfare ever devised - and it looks ominously as though we may be heading down that same path again.

At Forbes, my discussion of why we need a minimum wage. If we are going to have in-work and out…

Risk pricing in labour markets

This is a long overdue response to Nick Rowe's question about whether some kind of "taboo" makes employers less willing to exercise their right to dismiss than workers to exercise their right to leave, thus making it more difficult for them force down wages in response to adverse economic circumstances.

The argument that unemployment happens when wages fail to adjust sufficiently to changed market dynamics is a well-aired one. But explanations of "sticky wages" tend to focus on structural rigidities such as employment protection legislation. Nick wonders whether the explanation is more psychological.

Just because something is a psychological effect doesn't mean it can't be quantified. Pricing intangibles is something of a black art, but as we move into a post-industrial society it will become increasingly important; you may not even be able to explain what your asset is, let alone kick it, but you go to considerable lengths to obtain it and keep it - or…

Stravinsky and the problem of mathematics

It has been a horrible week. A post on Pieria was the cause of a series of really rather nasty personal attacks both in the comments on the post and on Twitter. It seems that some people didn't like me criticising one piece of sloppy work by an academic econometrician whose other work they admire.

I find this bizarre. One piece of poor work does not invalidate someone's entire output. When I was at the Royal College of Music, I attended a Stravinsky Festival at the South Bank. It went on for weeks and covered Stravinsky's entire instrumental output. By the end of it I never wanted to hear another piece of Stravinsky ever again. But one of the things I learned in the course of this was that great composers are fallible. Igor Stravinsky is a great composer. The Rite of Spring is one of the greatest orchestral pieces ever written. But that doesn't mean that every piece he wrote is great. Far from it. Some of his output is frankly rubbish and should be consigned to the dus…

The Twelfth Commandment

In recent years there has been an enormous interest in "happiness". Scientists think they have worked out what "makes us happy" - the chemical interactions in the brain that create the subjective feeling of "happiness". Though they seem to confuse it with "pleasure", which is not the same thing. Confusing "pleasure" with "happiness" is like confusing an energy drink with a balanced meal. The energy drink gives you a short-term sugar rush which soon wears off and may be followed by a hypoglycaemic crash which makes you feel even worse, whereas the balanced meal doesn't cause a "high" but gives you energy for a whole day. Similarly, we may get pleasure in the short-term from activities that in the longer term make us unhappy - recreational drug use leading to addiction, for example. Or we may use pleasure-giving activities to numb the the pain of broken relationships, unemployment, financial distress and general m…