So raising demand exacerbates inflation? Well then try this…

I don’t expect anyone to understand this. Pearls before swine and all that. You don't mind being called a swine do you? Anyway, here goes.

Instead of raising demand, why not use the money that would have been used to raised demand to cut costs: e.g. use the money to subsidise all labour. Labour is THE ULTIMATE COST, so the subsidy would have an anti-inflationary effect, while at the same time extra money is pumped into the economy, so output and employment rises.

Spotted the flaw? . . .  No?

The flaw is that the labour subsidy is a once and for all effect, a secular effect, while the basic cause if inflation is still operative and it’s a permanent effect: that’s the fact that there is some level of employment at which the quality of dole queue labour is so low that employers rather than take dole queue labour, tend to pinch labour from other employers, consciously or unconsciously. I say “consciously or unconsciously” because many employers seek extra staff by advertising in papers etc, and inevitably employees of other firms see those adverts and sometimes apply for the relevant jobs. (Looking at those adverts was actually a common pastime during lunch breaks at the first job I ever did.)

So those adverts result in the price of labour being bid upwards, and that effect is PERMANENT, as long as the above “low quality of dole queue labour” phenomenon persists. So the above subsidy wouldn’t work.

OK, then. Can we circumvent the latter problem? The answer is “yes”, and as follows.

Subsidise JUST those relatively low quality dole queue individuals. That way the subsidy compensates for their low quality RELATIVE TO already employed labour. Which means employers would take on that dole queue labour rather than bid up the price of labour. Hey presto: unemployment falls. Or more accurately, NAIRU / the “natural level of unemployment” falls to below its previous level.

Next problem:

People on the dole who are unsuitable for any job in their area on 1^st Jan are not necessarily STILL UNSUITABLE a month later: they might have found a job to which they are ideally suited. So how do we know when to stop the subsidy in respect of any given employee?

Well it’s easy: easy in theory at any rate. All one needs to do is call employers’ bluff.

That is, if an employer claims the subsidy in respect of individual X, then have state employment agencies threaten to remove X at any time after X has been in the subsidised job for more than say a month, (and maybe allocate X to another subsidised job, or return X to the dole queue). If X REALLY IS a fully viable employee, the employer will cease claiming the subsidy and keep the employee. Alternatively, if X is genuinely non-viable, then the employer won’t mind losing X.

And there’s nothing wrong with that relatively fast labour turnover: there’s no harm in the unemployed sampling a variety of different jobs because the mere fact that they’re unemployed means their existing set of skills may be obsolete or in excess supply, so they may very well have to find a type of work very different to their previous job.

Problem solved. NAIRU is reduced, the natural level of unemployment declines, the Phillips curve shifts or whatever way you want to put it.

Don’t understand? Well sleep on it, and read it again tomorrow. Seek and ye shall find. Knock and it shall be opened unto you.

Why politicians pushed central banks into doing QE.

Charles Goodhart says in this video that politicians pushed central banks into cutting interest rates and doing QE. Well you can see why, can’t you?

Reason is that politicians are deficit-phobes. So they prefer central banks to bring stimulus because that doesn’t involve deficit. And here’s an illustration of the logic involved.

If government borrows and buys some office blocks, that counts as deficit. In contrast, if the central bank prints money and buys the shares of the firm that owns the office blocks, that doesn’t count as deficit. (Cue, finance minister wets his pants, and dances around his office in delight.)

But in both cases the government / central bank machine becomes the owner of the office blocks, so there is no effective difference between the two scenarios.

Raving bonkers, innit?

Hat tip to Mike Norman re the video.

India’s next central bank governor spouts nonsense on Keynsianism.

Raghuram Rajan, India’s next central bank governor, questions Keynsianism in this FT article.

He makes the obvious point that in a recession some geographical areas and industries will be harder hit than others, thus, so he claims, we might be better off concentrating on the hard hit areas / industries than spending money on general Keynsian stimulus.

The flaw in that idea is that there will ALWAYS BE areas and industries doing better than others. That doesn’t disprove the idea that given a GENERAL lack of demand, the solution is a GENERAL i.e. non-targeted rise in demand.

As to the “hard hit” areas and industries, that’s an entirely different point and a total can of worms. E.g. government CAN INTERVENE and help the “hard hit”, but does government have more wisdom than the market? Should we subsidise rust belt industries? The British government poured millions into declining industries like British Leyland and shipbuilding over the last four decades or so. That didn’t stop their ultimate demise.

Or perhaps we could ignore the declining industries and do more to bring employment to the AREAS where those industries exist. But too much of that sort of thing stops labour moving to other geographical areas where labour is in demand.

Like I said: a can of worms. And it’s a can of worms which in no way detracts (to repeat) from Keynes’s point, namely that given a GENERAL deficiency in demand, the solution is a GENERAL or “non-targeted” rise in demand.

H/t to Mike Norman and Ramanan.

Simon Johnson mocks British bank regulators.

See here.

I particularly like this passage:

“In plain English, a supposedly well-capitalized bank in the UK can have 97 cents of debt per one dollar of assets (and just three cents of equity). Such a low loss-absorption capacity would get you run out of town in the US, where regulators are weighing a 5-6% leverage ratio (twice as much equity on a non-risk-weighted basis), and some responsible officials are still pushing for 10% or higher.
So much for the laughs. The tragedy in the Prudential Regulation Authority’s exercise is British officials’ apparent belief that they are carrying out real reform, rather than setting the stage for serious trouble.”

MMTers need to think about exactly how to merge monetary and fiscal policy.

Advocates of Modern Monetary Theory (MMT) don’t view interest rate adjustments too favourably. They tend to advocate stimulus in the form of having the government / central bank machine simply create new money and spend it into the economy (and/or cut taxes).

Positive Money and other advocates of full reserve advocate the same, but PM & Co have thought through the best way to actually effect the latter policy. MMTers should take note.

More on this topic in an article by yours truly here.