The limits to Modern Monetary Theory

As we all know Modern Monetary Theory insists that a government which prints its own money can simply never run out of money. Thus it is always possible to finance ever more government spending.

The rest of us have the occasional problem with that idea but we are stilled by the thought that, well, the people who make money never can run out of it, can they?

There was that time in Zimbabwe of course, where the last print run of $100 trillion dollar bills weren’t worth enough to pay for the ink to print the next one. But surely that’s an exception, right?

There is also an £18million black hole in the accounts after the company revealed in May that the Venezuelan central bank has been struggling to pay its bills.

De La Rue was hired by Venezuela to print bank notes. And the people who received the printed bank notes don’t have enough money to pay the bill for them. It would appear that we have a second testing to failure of this central contention of Modern Monetary Theory.

Perhaps we should revert to the more sensible Marxist - tendence groucho - economics and point out that even if we’ve an idiot proof system like MMT we need to find a moron to properly test it. For a central political point is that inevitably one or more of them will get elected somewhere.

When Conservatism found its voice

On November 1st, 1790, Edmund Burke published his “Reflections on the Revolution in France,” and articulated, what many regard as for the first time, the essence of Conservative philosophy. Despite general optimism in Britain and the US that the French Revolution would usher in an age of liberty and sweep away the privileges and petty powers of an oppressive aristocracy and an autocratic church, Burke predicted that the revolution would end in blood and chaos because it was founded on abstract ideas that ignored the subtleties and complexities of human nature and human societies.

Burke stressed the importance of practicalities, of things that had survived the test of time and had been proved to work. The abstract and metaphysical reasoning was inadequate because it was not grounded in reality. He wrote:

"What is the use of discussing a man's abstract right to food or to medicine? The question is upon the method of procuring and administering them. In this deliberation, I shall always advise to call in the aid of the farmer and the physician, rather than the professor."

Burke took on headlong the assertion by Thomas Hobbes that Human society might be explicable on a deductive system like that of Euclid’s geometry. No, said Burke. Society is impenetrably complex and detailed, and defies reduction into simple principles. It is more akin to an organism, developing like a living entity, adapting and changing not according to some rational analysis, but more by reliance on the values transmitted by tradition

He argued that constitutional reform should be gradual, drawing on what had been inherited from the past and had proven its worth by the survival of societies that embraced practical values such as property rights and traditional practices. His case was that the imposition of theoretical abstractions such as the rights of man was too easily subverted and used to justify tyranny. The French might talk of asserting values that were rationally calculated, but it was the inherited rights, embodied and restated in England in Magna Carta and the Declaration of Right, that provided a secure base of continuity and acceptance that conveyed value in practice.

Burke’s reputation was greatly enhanced when the French Revolution degenerated into the repression and bloody savagery that he had predicted. He thus became hailed as the founding father of modern Conservatism. This is not the conservative character trait that Lord Cecil described as “a disposition averse from change,” but the political tradition (spelled with a capital ‘C’) that does not seek to conserve an outcome, but a process. It does not oppose change, but wants it to be organic and spontaneous, rather than imposed according to some plan. It is a tradition that has endured for more than the two centuries since Edmund Burke first gave it its voice.

The extinction of poverty in London

There is no poverty in London today. At least, there’s no poverty in London using one of the two definitions being used here:

Poverty is no longer quite so prevalent as in Booth’s day: Booth concluded that 35% of Londoners lived in poverty at the end of the 19th century, and the Trust for London’s latest figures indicate that 27% do so today. But compare that with a national average of 21% and it’s clear there is a problem.

Booth’s definition of poverty was 10 to 20 shillings a week for a family of four or five. Take the top end of that and upgrade for inflation (of goods and services, not the price of labour) and we get perhaps £100 a week. For four people. £25 each, or £3.50 per person per day.

There is no one, not one single person, living in London today on that sum. Therefore there is no poverty in London. Not unless we change the definition of course.

Booth’s was the value of everything. Rent, clothing, health care, food, saving for the pension no one would survive to collect. Today’s definition is living in a household earning less than 60% of median income, suitably adjusted for household size. Which is how we can have killed poverty stone dead and yet still be measuring its existence.

Of course, we did have to change that definition. After all, how can careers - and political parties - be built upon the idea of fighting poverty if the thing being fought no longer exists?

When Martin Luther changed the world

On October 31st, 1517, Martin Luther issued his ninety-five theses. The story is that he defiantly nailed them to the door of Wittenberg Castle church. He was objecting to many of the practices of the Roman Catholic Church of his day, and especially the selling of indulgences. The Church made a great deal of money from selling forgiveness to sinners, and objected strongly to Luther’s assault on a major source of its income.

He was not the first to criticize the Church’s practices, including the selling of benefices. Erasmus had earlier voiced criticism, and while he personally remained loyal to the Church, it was said that “Erasmus laid the egg that Luther hatched,” leading to the Reformation.

Luther refused to recant when ordered to by Pope Leo X in 1520 and by the Holy Roman Emperor Charles V at the Diet of Worms in 1521. He was excommunicated by the pope and condemned as an outlaw by the Holy Roman Emperor. This was hardly surprising, given that he taught that the Bible, not the Church, is the only source of knowledge of God. This undermined the authority of the priesthood because it allowed every person to communicate directly with God, rather than through the intercession of the priesthood. Luther went further by translating the Bible into German to make it accessible to lay people. He made use of Gutenberg’s printing press to have it circulated widely.

To read the Bible, people had to be literate, so in the countries and counties that embraced Protestantism literacy spread. German counties tended to follow the religion of their prince, and there is evidence that the protestant ones enjoyed wider literacy.

Intriguingly, it has been suggested that literacy aids industrialization by enabling workers to follow written instructions. It was in the protestant countries and German counties that the early industrial Revolution took hold. If one overlays two maps, one of which shows where Protestantism took hold, and the other where industrialization developed, there is considerable overlap. Indeed, Max Weber and R H Tawney published books that tried to trace the connection that linked Protestantism to industrial development. The literacy needed by protestants to access the Bible directly might have played a significant role, in addition to the sociological and psychological factors they explored.

Following on the heels of the Reformation came the Enlightenment, liberating the minds of men and women from magic and superstition. On All Hallows’ Eve 502 years ago, Luther lit a fire whose flames still flicker today. He changed the world.

Wealth inequality is grossly overstated

We are continually told that wealth inequality is of horrendous scale and something we must do something about. This claim fails on two counts.

The first is a point we make much of around here, that we use the wrong measure of the wealth distribution. We measure market inequality, rather than the only important type, that which exists after all the things we do about inequality in general. We must, if we are to gain any useful information, measure after the effects of taxes, benefits, state provided services and so on, not before. For, obviously enough, such redistribution greatly changes the wealth distribution.

But it’s also wrong for another measurement reason. We don’t even count, at all, the major form of wealth today, human capital. From the ONS:

The value of the UK’s real full human capital stock, or the human capital of the employed and the unemployed, was £21.4 trillion in 2018.

This human capital was much more equally distributed than the financial capital - or household wealth - that so much fuss is made over. And that household wealth is some £12 trillion too.

Two thirds of the country’s capital isn’t even being counted, that two thirds being much more equally distributed than the one third that people whine about so bitterly.

Shouldn’t we start at the beginning again and actually measure wealth correctly before we try to decide what, if anything, we’re going to do about who has it?

Stalin and remembrance

On October 30th, 1961, the Soviet Party Congress voted unanimously that Joseph Stalin’s embalmed body should be removed from inside Lenin’s tomb in the Kremlin, and buried nearby with a plain marker. It was a continuation of the de-Stalinization process begun in 1956 when Nikita Khrushchev gave his secret speech to a closed session of the 20th Congress of the Soviet Communist Party. In that speech, Khrushchev had denounced the late Soviet leader for his wide-scale repression and personality cult.

Revered as a godlike figure in his day, Stalin was in fact a thug and mass murderer. Historian still dispute how many millions he killed, but all agree that it was many millions. The historian Timothy Snyder has used Soviet archives, opened after the collapse of the Soviet Union, to conclude that the figure was 9 million, including 6 million he personally ordered killed. His estimate is lower than that of other historians who have used demographic and census figures to suggest that the archive records are incomplete and underestimate the true death toll by a considerable amount.

Of those executed or deliberately starved to death in the socialist republics over whose union Stalin presided, some put the figure as high as 20 million. This figure includes the known atrocities committed outside of Russia itself, such as the murder of 22,000 Polish officers in the woods at Katyn in Poland.

It is a coincidence that the same day of the year, October 30th, is also the official Day of Remembrance of the Victims of Political Repression under communist rule in the USSR. It was officially declared as such in 1991, and is marked by solemn memorials every year. The date is an official public holiday in the Russian Federation, when people can contemplate the crimes that the socialist regimes perpetrated.

People gather at the Solovetsky Stone, a monument commemorating the victims. It features a stone from the Solovki concentration camp, now installed in front of the old KGB headquarters and prison at the Lubyanka Square in Moscow. Although he was himself a KGB officer in his younger days, President Putin has appeared alongside the Patriarch and Primate of the Russian Orthodox Church to pay respect and homage to the victims. Sometimes people recite the names of some of those who died.

The scale and brutality of the socialist empire of Eastern and Central Europe staggers the memory and the imagination. But it happened, and it ruthlessly destroyed the lives of millions in support of its poisonous ideology.

So that today’s generation, many of whom are oblivious to its sheer wickedness, might be made aware of what it did, work is in progress for museums to be established in Washington DC and in London, to record and to present some of its horrors. Gulag victims who survived, and relatives of those who did not, have recorded memories that bring home the stark reality of its evil. The museums will provide a timely reminder of the crimes that the Soviet system perpetrated. It is to be hoped that school parties will tour them, as some visit the Nazi death camps, to remind today’s young people of the horrors that a perverted ideology can and did unleash.

The Reverend Malthus Prize for being absolutely 100% correct

An informal and occasional prize to be sure but one we think worthwhile.

We generally think of the Reverend Malthus as being entirely wrong. After all, the last two centuries have been proof perfect that technological advance can indeed raise the living standards of all, substantially and sustainably, rather than just turning up as more people living in the same old subsistence style. The thing is though, Rev. Malthus was entirely correct for all of history up to the moment he sat down to write. Other than this past couple of hundred years it was true that economic growth turned up as just more people. In parts of the world it continued to be - India’s GDP was very much larger when the British left than when they arrived. But that it was spread across some four times as many people meant that GDP per capita hardly budged. That is, it’s not that Malthusian growth stopped happening, it’s that non-Malthusian growth started, in some places, happening.

Which gives us the outline of the prize. Someone who was entirely correct given history and knowledge to that time. But who managed to write down, insist upon, that truth at just the moment is stopped being true.

At which point we give you Jean Gimpel, from his lovely little book “The Medieval Machine”. The recording of how the early middle ages, rather than the later renaissance, incorporated the sort of technological advance that led to the later Industrial Revolution we find most interesting. But it’s this from the preface that qualifies for the prize:

We are witnessing a sharp arrest in technological impetus, save in the military field: it was in the declining Middle Ages that the cannon was developed, Innovations - that is, inventions that have been financed, tested and made commercially available - are few and far between, a fact particularly remarkable in the pharmaceutical industry. Even computers have not spread into every home in the country, as was forecast. Like every previous civilisation, we have reached a plateau.

…

While I hope that the reader of The Medieval Machine will want to pursue his own comparisons, I must point out one alarming contrast. The economic depression that struck Europe in the fourteenth century was followed ultimately by economic and technological recovery. But the depression we have moved into will have no end, We can anticipate centuries of decline and exhaustion. There will be no further industrial revolution in the cycles of our Western civilisation.

It’s that this was published in 1976 which qualifies it. It’s entirely true that the computer was not in every home at this point. Yet Intel was founded in 1968, they created the first commercial microprocessor in 1971, Apple was founded in 1976, the Apple I released that year, the Apple II - actually useful - in 1977. The TRS -80 and Commodore PET in 1977, the IBM PC in 1981. The mobile phone, which is by far the most widespread computer today, was demonstrated in 1973, Arpanet was up and running by 1971.

That statement about computers and technological advance was made at the exact moment that it became untrue.

We welcome further entries for this very occasional prize…..

The AI Economy by Roger Bootle

The AI Economy by Roger Bootle is a very good read. Roger is Chairman of Capital Economics, Europe's largest macroeconomic consultancy and he also writes a column for The Daily Telegraph. 

Throughout the book, Bootle gives a clear introduction to the relevant topics surrounding AI, from the different types of universal basic income to the supporting arguments and critiques of Piketty's work on inequality. His style involves clearly laying out theories and their critiques, sometimes even in bullet point lists, before giving his own judgement.  

The book ranges from discussions over the possibility of deficient demand impacting on bond yields to what school subjects will be desired in the future. This makes it an informative book for everyone from traders to students. 

He remains optimistic throughout the book whilst still recognizing the challenges that the new AI economy introduces, steering a middle course between the predictions of Utopia and Dystopia often associated with the subject to offer a realistic and grounded vision of the future.  For example, while confident that advances in technology will deliver higher living standards, as they have done throughout history, the immediate impact will likely make people worse off due to structural unemployment. Nonetheless, he is adamant that “AI will not spell Armageddon for employment.” 

He is helped by his decision to leave discussion of 'The Singularity' (when AI becomes fully conscious) until the end. If we do reach this point, which Bootle suggests that we never will, then it would be almost impossible to predict what would happen next as human Labour quickly becomes extinct and humanity is either destroyed by technology or assimilated into it. 

On the role of the state in the development of AI, Bootle gives a fairly free market approach. Although he believes the government should neither tax nor subsidise progress in this field, he gives a strong case for drawing up an appropriate legal framework as well as restrictions on development of AI in areas that could be used by criminals or for weapons. 

When it comes to education, he identifies an increasing importance in the humanities and how they develop critical thinking skills. He believes that technology will dramatically improve the education sector from freeing up teachers from more mundane tasks to how online classes can bring education to a wider audience.

He moves on to cover UBI which is probably the most discussed policy area when thinking about the AI economy. Bootle argues that any implementation of UBI would be unacceptably low or unacceptably expensive and thus unfeasible. However, although he covers negative income taxes earlier in the specific chapter it might have been good if he could then have come back to them to either offer them as an alternative to the unfeasible UBI or to give an argument on why it would also be unfeasible. His only criticism of negative income taxes, which he credits to Friedman himself, was simply that they incentivise people to lie about how much they earn in order to get more money. This incentive however already exists in any system that has direct taxation and it also fairly hard to do with the PAYE system. He may have been more comfortable in not covering this area because he predicts that technological change will not necessarily either decrease inequality nor remove work - at least until the singularity. We all hope that this to be true but as he himself says, this may be an area that could do with some more academic research. 

He makes the amusing observation of what we view as AI shifts all the time and much of what we consider normal computer processes now would have been considered 'AI' a few years ago. Although it is difficult to predict the future, Bootle does give a very grounded and undoubtedly realistic view of the future. This, however, is overlooking the real value of the book, which is to enable the reader to enter the debate themselves by introducing the key concepts and issues. As an introduction to the debate as a whole, this book is invaluable.

Black Tuesday crashed the world's economy

The fourth day of the Great Stock Market Crash was October 29th, 1929, known to history as "Black Tuesday." The Dow Jones Industrial Average dropped 25% over the four days, and investors lost $30 billion. This was 10 times more than the 1929 federal budget, and more than the United States spent on World War I.

The market collapse brought an end to the decade of exuberance and excess known as the Roaring Twenties. The optimism that followed World War I had seen a huge expansion of American Industry, coupled with an agricultural decline caused by massive overproduction. People had flocked to the cities to share in the new prosperity, and invested their savings in the ever-rising stock market, rather than in more secure long-term assets. Money was easy, and brokers let people buy on credit. People thought the market would rise forever, but it didn't.

Following the Great Crash, the Dow saw another slide, a longer one, from April 1930 to July 1932, when it hit its lowest point of the 20th Century, representing a loss of 89% for all stocks. It heralded the beginning of the 12-year Great Depression that affected all Western industrialized countries. Bankruptcies followed in the wake of the stock price declines, and credit contraction induced business closures, bank failures, mass lay-offs, and a collapse of consumer confidence.

It was a time of great misery as businesses and farms closed and people's savings disappeared overnight. There were suicides, and New York hotel clerks were reportedly asking guests, "Do you want a room for sleeping or jumping?" As people deserted stocks and went for commodities such as gold, the Fed tried to boost the value of the dollar by raising interest rates. This move was also motivated by a belief that easy credit had led to the over-indulgence of stock buying that had ultimately precipitated the collapse.

There is still dispute about what caused the crash, but the analysis by Milton Friedman and Anna Schwartz in "A Monetary History of the United States," is now widely accepted as the reason that it led to the Great Depression. That analysis points to the collapse of the banking system during three waves of panics from 1930 to 1933 as the source of the credit famine that brought about bank failures and business and farm closures.

As the Financial Crisis of 2008 unfolded, those in authority decided to learn from the mistakes of history, rather than to repeat them. They unloosed the purse strings with quantitative easing and ultra-low interest rates, and no second Great Depression manifested itself. While it is too soon to be completely confident, it looks as though the crisis might have been contained. It has, however, left a great deal of extra money in the economy, distorting people’s view of real demand, and encouraging unjustified investment and misallocation of resources. It will take some delicate handling to remove it at a pace that does not trigger another collapse.

A bit early for panto season but "Oh No It Doesn't!"

We’re told that the gender pay gap blows out to an incredible 28% for women in their 50s.

No, really, it doesn’t:

The analysis by Rest Less, a jobs, volunteering and advice site for the over-50s, reveals that both sexes reach their peak full-time salaries in their 40s: for women this is £34,665 and for men it is £46,213, a difference of £11,548 or 25%.

But the data shows that the gap grows again over the next decade, with the mean average salary for a woman in her 50s, working full-time, being £32,052 compared with £44,561 for a man in his 50s, a difference of £12,509 or 28%.

As we, the ONS, even the Statistics Ombudsman, have been pointing out over the years we should not - because it is entirely misleading - be using mean wages. Instead, median tells us what it is that we want to know. What also rather worries is this:

The gap between men and women working part-time is 8% for workers aged between 18 and 21. This rises slightly to almost 10% for those in their 20s and again to 12% for those in their 30s.

They’ve got the sign wrong. As ONS points out the part time gender pay gap is in favour of women.

As we like to remind people from time to time we’ll never be able to solve a problem unless we start by identifying reality. Which we should probably start doing.