Sunday, February 26, 2012

Oxford Prof thinks along Modern Monetary Theory lines.

Simon Wren-Lewis is an economics prof at Oxford. He says:

“We seem to be in a strange prisoners dilemma where it is absolutely clear that the world wants more safe assets (the rate of interest on indexed debt is zero if not negative), but every individual government thinks that if it provides them lenders will suddenly panic, and think they are no longer safe. I think this fear is irrational, but unfortunately events in the Eurozone feed this fear on a daily basis. (It should not, because governments without their own central banks are in a different position from those that have . . . )”

Can’t quarrel with that (much as I like quarrelling). In particular, what he calls “safe assets” are much the same as what MMTers call “private sector net financial assets”.

He then goes astray by ACCEPTING the demand by economic conservatives for a balanced budget, and looks for ways to boost demand WITHIN that balanced budget. The ploy he advocates is to raise taxes and public spending by the same amount.

The reasons why that raises demand are a bit technical, and I won’t go into those technicalities. But the more important point is that the whole balanced budget idea is complete and total B.S.

That means that any proposal based on the balanced budget assumption has to have flaws somewhere. And the flaws in the “raise taxes and public spending” idea are thus.

First, the idea WOULD raise aggregate employment. But the problem is that the idea only works by raising PUBLIC SECTOR employment. Now that is a severe weakness because any half decent system or idea for raising employment ought to work given RISING OR FALLING public sector employment. Plus it ought to work assuming the aim is keep public sector employment CONSTANT as a proportion of total numbers employed.

Second, going for the “raise taxes and public spending” idea involves government in a self-contradiction as follows. Where government decides that the optimum split of GDP as between private and public sectors is some given ratio, that ratio will be disturbed if government goes for the “raise taxes and public spending”. Or to put it in less general terms, the current Tory led regime in the U.K. is aiming to REDUCE public spending relative to GDP, so it is unlikely to accept the “raise taxes and public spending” idea.

The Social Market Foundation.

On the subject of balanced budget ways of raising employment, Wren-Lewis then supports the ideas recently put by the Social Market Foundation. See W-L’s last paragraph here. These ideas are complete hogwash, as I explained here.


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