Month: September 2019

MMT and the impossible trinity

John Quiggin28 Comments

There’s generally not a lot of common ground between fans of Robert Mundell (the intellectually respectable face of supply side economics) and those of Modern Monetary Theory. Yet in one very important respect, their ideas are two sides of the same coin.

Mundell got his Nobel Memorial Prize, in large measure, for what’s been called the ‘impossible trinity’, namely that a country can’t have all three of a fixed exchange rate, an independent monetary policy and free capital movement.

Turn that round and it says that, if you are willing to give up one of the three, you can have the other two. If we ignore the idea of controlling capital movements completely (limited controls don’t do the job) the trinity becomes a simple two-way choice: fixed exchange rate or independent monetary policy.

If you are on the gold standard, or part of a monetary union, then you are stuck with a fixed exchange rate, and Mundell’s point is that you can’t have an independent monetary policy. Conversely, if you are a sovereign nation, issuing your own fiat money, and you choose not to defend a fixed exchange rate, you can choose your own monetary policy.

That observation is what gives Modern Monetary Theory its name. Under modern (post-gold standard) conditions, any country with its own currency can choose its own monetary policy.

Old men behaving badly (2nd repost)

John Quiggin4 Comments

I first posted this in 2011, and reposted it in 2014. Sadly, nothing changes, except that the old men keep getting stupider and behaving worse.

John Howard’s endorsement of Ian Plimer’s children’s version of his absurd anti-science tract Heaven and Earth has at least one good feature. I can now cut the number of prominent Australian conservatives for whom I have any intellectual respect down from two to one.[1] Howard’s acceptance of anti-science nonsense shows that, for all his ability as a politician, he is, in the end, just another tribalist incapable of thinking for himself. [2]

Although not all the tribal leaders are old men, an old, high-status man like Howard is certainly emblematic of Australian delusionism . Like a lot of old, high status men, he stopped thinking decades ago, but is even more confident of being right now than when he had to confront his prejudices with reality from time time. Like other delusionists, Howard has no scientific training, shows no sign of understanding statistics and almost certainly hasn’t read any real scientific literature, but nonetheless believes he can rank clowns like Plimer and Monckton ahead of the real scientists.

The situation in the US is similar but even more grimly amusing, with the sole truthteller in the entire Republican party, Jon Huntsman, recently reduced to waffling (in both US and UK/Oz senses of this term) because he briefly looked like having a chance to be the next non-Romney. This tribal mindlessness is reflected in the inability of the Republican Party, at a time when they ought to be unbackable favorites in 2012, to come up with a candidate who can convince the base s/he is one of them, but who doesn’t rapidly reveal themselves as a fool, a knave or both.

And, as evidence of the utter intellectual shamelessness of delusionism, you can’t beat the campaign against wind power, driven by the kinds of absurd claims of risk that would be mocked, mercilessly and deservedly, if they came from the mainstream environmental movement.

The global left is in pretty bad shape in lots of ways. Still, I would really hate to be a conservative right now.

fn1. Now (2014) down to zero. Turnbull has proved he lacks any real substance.

fn2. I’m not saying that all Australian conservatives are mindless tribalists. There’s a large group, epitomized by Greg Hunt and now Malcolm Turnbull, who understand the issues quite well, but are unwilling to speak up. Then there is a group of postmodern conservatives of whom Andrew Bolt is probably the best example, who have passed the point where concepts of truth or falsehood have any meaning – truth is whatever suits the cause on any given day.

Cum/ex

John Quiggin15 Comments

Looking for a different story in the business pages of The Guardian, I happened across a headline stating The men who plundered Europe’: bankers on trial for defrauding €447m. That attracted my attention, but the standfirst, in smaller print, was even more startling

Martin Shields and Nick Diable are accused of tax fraud in ‘cum-ex’ scandal worth €60bn that exposes City’s pursuit of profit

For those without a calculator handy, that’s about $A100 billion.

I think of myself as someone who pays attention to the news, but I had missed this entirely. Google reveals essentially no coverage in the main English language media. There’s a short but helpful Wikipedia article and that’s about it. The scandal has been described as the ‘crime of the century’, but it’s just one of many multi-billion dollar heists, with the GFC towering abover them all.

It remains to be seen how the trial will turn out, but it’s already clear that, as usual, the banks have got away with it. The bank most closely involved in the scam, HypoVereinsBank in German has set aside €200 million euros to cover its potential liability. That’s less than 1 per cent of the tax avoided or evaded (the lawyers will be fighting out which, for some time, but the effect on ordinary citizens is the same).

The crucial point here isn’t the failure of the law to punish wrongdoing.

What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. The point of the financial sector is not to allocate capital more efficiently, but to undermine the regulatory and tax systems that are supposed to make the economy work properly. Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality.

The only way to fix the problem is to shrink the financial sector to a tiny fraction of its current size, and tightly regulate what remains. The rational route to achieve this would start with the kinds of reforms being proposed by Elizabeth Warren. But we may be stuck with a messier path, in which courts tire of giving slaps on the wrist to recidivist banks and start shutting them down.

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