I would be surprised if there was no role. How immigrants are attacked despite they bringing benefits to the local economies.
Profs. Ufuk Akcigit, John Grigsby and Tom Nicholas have a piece:
I would be surprised if there was no role. How immigrants are attacked despite they bringing benefits to the local economies.
Profs. Ufuk Akcigit, John Grigsby and Tom Nicholas have a piece:
Civilization existed before money, but probably wouldn’t have gotten very far without it. Ancient humans’ invention of money was a revolutionary milestone. It helped to drive the development of civilization, by making it easier not just to buy and sell goods, but to pay workers in an increasing number of specialized trades—craftsmen, artists, merchants, and soldiers, to name a few. It also helped connect the world, by enabling traders to roam across continents and oceans to buy and sell goods, and investors to amass wealth…
Over the centuries, money continued to evolve in form and function. The ancient world’s stones and shells gave way to coins, and eventually to paper currency and checks drawn upon bank accounts. Those physical tokens, in turn, gradually are being superseded by electronic ones, ranging from credit card transactions to new forms of digital currency designed for transferring and amassing wealth on the Internet.
Nice pictures in the story as well…
Beatrice Cherrier’s blog is quickly becoming one of the blogs to read.
In her recent post, she points how Walter Heller as a Chief Economic Adviser managed to advise the Kennedy Government. This is important as there is lot of criticism on role of economic expertise:
Trump’s decision to demote whoever might be nominated chairman of the Council of Economic Advisers (CEA) from his cabinet has been interpreted as a final blow to a though year – in which economists’ advice has been systematically ignored by voters- within a though post-financial crisis decade. Economists are under the impression that since 2008, their expertise has been increasingly challenged, and they have offered several analyses and remedies: more micro, more data, more attention to distribution and less to efficiency, more humility, more awareness to the moral and political element in economic expertise, more diversity and more interdisciplinarity –economic education included- Few of these however rely on the whopping literature on the history and sociology of scientific expertise.
Histories of how economists painfully gained reputation and trust during the XXth century abound. Most of them are focused on public policy – data on private businesses are more difficult to obtain, and tracking economists’ influence on the public is elusive–. And none of them fail to mention the canonical proof that economists’ expertise is/have been influential: it was Walter Heller, 4th CEA chairman, who convinced J.F. Kennedy and L.B. Johnson to propose a massive income and business tax cut, passed by the Congress in 1964.
The facts are well-known: Eisenhower’s legacy was a sluggish decade, with growth stuck at 2,5% per year and unemployment at 8%. Recurring budget deficit, which topped 12 billions in 1959, prevented much needed defense, education and welfare expenditures. Kennedy’s campaign was consequently focused on the promise of restoring growth, of “get[ting] this country moving again.” The candidate had nevertheless straightforwardly rejected the fiscal stimuli proposed by those economists, including Paul Samuelson, who had participated in his Democratic Advisory Committee. Kennedy came to the oval office with the notion, inherited from his father, that the budget should be balanced and the money supply tightly controlled. Under the influence of his CEA chairman, Walter Heller, Kennedy became more favorable to sustaining a budget deficit, and by early 1963, he had submitted to Congress the largest peacetime voluntary budget deficit: $12 billion. He proposed to reduce income tax rate from 20-91% to 14-65% and corporate income tax rate from 52 to 47% and to abolish loopholes and preferential deductions to enlarge the tax base. He promised that, should the Congress pass his tax cuts, the 1965 budget would be equilibrated. The proposal was finally enacted in 1964, under Johnson. 1965 saw the smallest Federal deficit of the decade (1 billion), strong growth and unemployment down to 4%. The trend persisted throughout the decade, with inflation pressures slowly building in response to Johnson’s spending frenzy.
Thought the contribution of the tax cut to this period of prosperity, and to subsequent imbalances, is still fiercely debated, its positive spillovers on the whole profession commands wide agreement. Heller’s CEA has contributed to shift economists’ image from ivory tower technicians to useful experts and to strengthen public trust. It has been heralded as the canonical example for economists’ ability to increase society’s welfare, a symbol of a (some would say lost) golden age. The scope of Heller’s influence has, in fact, extended ways beyond the tax cut. He was instrumental in putting poverty on the presidential agenda, and, as recently unearthed by Laura Holden and Jeff Biddle, he was the one who turned human capital theory into an argument in favor of federal funding for education. His peculiar status as the “economic experts’ expert” was immediately recognized. He made Time’s cover twice in two years. No other CEA chair made the cover of the magazine before the late 1976, and none ever made it twice as CEA chair. But if the fallouts of his expertise are well known, its determinants are less so. The nagging question remains: how did he do it?
Read the post for more details.
What is interesting is how in US you can actually remain relevant as an economist knowing about policy and people. These ideas are so important for history of thought. Whereas in India there is no chance despite such a rich history..
New Zealand’s election is scheduled to be held on 23 Sep 2017.
However, the central bank’s term is getting over on 26 Sep 2017 as well. This is of immediate interest to those studying political economy of central banking. After all, central banks are always blamed to be favoring either incumbent or opposition government. And to have the tenure of head of central bank clash with election dates is a pot boiler.
The best way to do handle the situation is to either give the current incumbent another term or extend the term of the chief by a few months till the political cycle is over.
What becomes interesting in NZ case is that the current chief Graeme Wheeler is not interested in any extension whatsoever. Thus, the government has announced the current Deputy Grant Spencer as the Acting Governor for 6 months.
Finance Minister Steven Joyce will appoint current Deputy Reserve Bank Governor Grant Spencer as the Acting Governor of the Bank for six months, following the expiry of current Governor Graeme Wheeler’s term on September 26 this year.
“Mr Wheeler’s term as Governor expires on September 26, three days after the general election, and he has decided not to seek reappointment,” Mr Joyce says. “Following advice from the Cabinet Office and consultation with Cabinet, I have decided that the most appropriate course of action would be to appoint an acting Governor for a six month period to cover the post-election caretaker period. This will give the next Government time to make a decision on the appointment of a permanent Governor for the next five year term.
“I have decided to appoint Mr Spencer as acting Governor from 27 September 2017 to 26 March 2018, on the advice of the Reserve Bank Board of Directors. The Government is pleased to have someone of his calibre to move into the role. He is a highly experienced member of the Bank’s Leadership team who will provide stability and continuity through this caretaker period prior to the appointment of the new Governor.”
Mr Joyce and Mr Spencer have agreed that there will be no change to the Policy Targets Agreement for the period Mr Spencer will be acting Governor.
Mr Spencer has advised the Government that he won’t be applying for the permanent role, and intends to retire following his period as acting Governor.
The Bank has had one previous acting Governor. Former Deputy Governor Rod Carr was appointed in an acting capacity for the pre-election and caretaker period around the 2002 General election, following the resignation of Governor Brash.
Mr Joyce thanked Governor Wheeler for his service to the Bank.
“The Governor has performed his role calmly and expertly during a highly unusual period for the world economy. I thank him for his service up until now and for the remainder of his term as Governor,” Mr Joyce says.
Croaking Cassandra, a blog on NZ economy wonders about the proposal:
But there are other unanswered questions. For example, is this a solution envisaged by the Act? The only previous appointment of an Acting Governor was when Don Brash resigned to go into politics, and Rod Carr was appointed as acting Governor while the selection process for a permanent successor took place. There is a clear need for acting Governor provisions in such cases – Governor can resign, die, or otherwise become incapacitated (and can even be removed for cause by the Minster).
But here is the relevant statutory provision (section 48)
If the office of Governor becomes vacant, the Minister shall, on the recommendation of the Board, appoint—
(a) a director of the Bank; or
(b) an officer of the Bank; or
(c) any other person—
to act as Governor for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less.
As I have read that section, it envisages an acting Governor to complete a Governor’s term. not to provide a temporary Governor when it is inconvenient to appoint a permanent one.
That interpretation seems consistent with two other aspects of the Act. First, Governors must be appointed for an initial term of five years (although subsequent extensions can be for shorter terms). Parliament made that choice deliberately, presumably to help emphasise that the Governor was to operate at arms-length from the government. If, by contrast, an acting Governor could keep on being appointed for terms of six months at a time, it would allow the intent of the Act, operational autonomy, to be eroded if the government determined on such an approach, without coming back to Parliament to amend the law.
And second, the PTA provisions of the Act clearly tie in to the fixed term appointment of a Governor – and in that context an acting Governor filling in for an unexpected vacancy (as Rod Carr was in 2002) simply carries on with the PTA the substantive Governor had had in place. There is no provision in the Act for a PTA with an acting Governor – and the existing PTA is personal to Wheeler, and expires with his term in September this year.
The key lesson is need to rethink through the central bank act:
More generally, it highlights again the desirability of a more throughgoing review of the governance provisions of the Reserve Bank Act. That should not be a particularly partisan issue – more like an opportunity for some sensible reflections and revisions in light of 27 years experience with the current framework, changes in the role of the Bank, changes in the governance of other core government agencies, and changes in the understanding of how mechanically (or not) monetary policy can be run (and monitored).
We in India are also waking up to the need to thoroughly understand the central bank act. There are just so many ways Governments can interpret the loopholes in the Act to serve their interests…
I came across this website:https://www.exploring-economics.com which is going to be used a lot by this blog in future.
It has this wonderful resource page on history of economic thought with this superb picture summing the core of most schools:
This is amazing!
As they say: A picture is worth thousand words and here it is worth much more than just thousand words.
These schools of thought are compared across different questions and issues. THese together should help develop comparative perspectives on these schools.
There are videos and lectures on the site as well. Do take a look..
Noah Smith isn’t just pointing to evidence that debunks old ideas but also to new ideas which could help macro gain some credibility.
In his recent post, he points to new papers which could shape macro in future:
Xavier Gabaix, a New York University economist who gets far less attention than he should, has written what might prove to be the most interesting macroeconomic theory paper in years. The title, “A Behavioral New Keynesian Model,” isn’t exactly exciting and the paper is still incomplete, but it might help resolve the most important and difficult macroeconomic debate in academia today — whether low interest rates cause inflation, deflation or neither. And it might signal a sea change in the way macroeconomic theory gets done.
Traditionally, macroeconomists have believed that low interest rates encourage inflation. But first Japan, and now the U.S. and Europe have kept rates low for years now, and inflation has stayed stubbornly low. A radical group of macroeconomists, including Stephen Williamson of the Federal Reserve Bank of St. Louis and John Cochrane of the Hoover Institution, have introduced a new theory called Neo-Fisherism, which says that a long period of low interest rates actually holds prices down instead of pushing them up. Williamson and Cochrane have both repeatedly stressed that New Keynesian models — the most mainstream type of macroeconomic theory — can easily yield the Neo-Fisherian result instead of the traditional view. One problem is that the standard models are often ambiguous — they offer a number of possible, radically different outcomes for the economy, with no way to tell which will happen.
Gabaix tackles these problems with a simple, intuitive, yet bold step. Instead of assuming that people are perfectly rational, he theorizes that they have limited attention — what psychologist Herbert Simon called “bounded rationality.” When interest rates or gross domestic product change, people in Gabaix’s model don’t quite realize that things are different. Even more importantly, they’re short-sighted — they don’t think as much about the probability of a recession happening 10 years from now as they do about one occurring in the next six months.
Those ideas probably seem obvious to most people. When events are further in the future, you worry about them less, right? I know I do. But to macroeconomists, this is a pretty radical step. Most macroeconomic researchers are strict adherents to the cult of perfect rationality. If the economy looks like it’s being driven by behavior that isn’t quite rational, macroeconomists usually bend over backward to explain it as a failure of economic institutions, rather than a result of human psychology.
Wonder what took it so long. It was just waiting to happen.
His paper shows following outcomes:
Will be interesting to see what direction does all this take. Though, a glance at the paper shows no behavior, it is just equations..
Superb post at OUP Blog.
On supermarket shelves, we are given a mind-numbing array of choices to select from. Shall we have some peppercorns on our macaroni, some cinnamon for baking, or a sprig of rosemary with roast pork? Five hundred years ago, however, cooking with herbs and spices was a much simpler choice. Many of the spices we use nowadays still flourished only in their native habitats, and were not as widely enjoyed as they are today. In fact, Christopher Columbus made it his quest to collect spices from around the world, deeming it as worthy as gold. “In truth,” he said, “should I meet with gold or spices in great quantity, I shall remain till I collect as much as possible, and for this purpose I am proceeding solely in quest of them.”
Thanks to these early explorers, cultures around the world have created delectable dishes based on spices and herbs both homegrown and imported, and it is fascinating how often these additions can change the essence of an entire meal. Indeed, many spices have been so commonly used they have come to represent entire cuisines. We cannot imagine Indian food without curry, for instance, nor conceive of any sashimi platter without that indispensable wad of wasabi.
In addition to spicing up dishes, studies have also shown that adding seasoning to your diet leads to copious health and other physical benefits. This is not a recent discovery. In ancient Roman times, the philosopher Pliny advised his students to wear a “crown of mint” upon their heads while studying, as it “exhilarates the mind.” Modern studies reveal that his advice was spot-on. Other than headaches, mint also alleviates asthma, nausea, and digestion problems. Other herbs and spices, such as the nutmeg, similarly helps prevent infection and ageing due to their antibacterial properties.
If you possess a green thumb, cultivating your own herbs is also a peaceful activity that calms the nerves. Thomas More, who kept his garden alongside the Thames, said of rosemary “I let it run alle over my garden walls, not onlie because my bees love it, but because it is the herb sacred to remembrance and to friendship.” Likewise, many other herbs also convey their own “flower language,” or floriography. Basil channels good wishes, sage pronounces wisdom, while tarragon, curiously enough, expresses “lasting interest.”
They have a map as well to figure where certain spices and herbs came into being. I think Indian contribution is not fully represented..
The usual bit on monetary is raise rates if inflation is rising and lower them when inflation is falling. This is called as Fisherism based on Irving Fisher.
How about turning the idea on its head? How about raising rates to push higher inflation? This is called Neo-Fisherism (trust economists to come with bad names).
Steven Williamson takes us through this radical idea:
This blog pointed to this post linking Harry Porter to economics. It said Ministry of Magic was just antithetical to economic world where market exchange should allocate resources not some bureaucracy .
In a rebuttal on Mises Blog it says Potter world was not all that bad. It has some useful lessons for central bankers:
Liberal arts macroeconomists? What the hell is that?
David Colander one of the few economists who is really worried about the decline of quality in economics teaching, has a piece here.
He says there are not enough people who can teach macro at undergrad level. At undergrad level, one needs people who can connect the various dots and generate interest in aggregate econ issues. The macro at grad level is the specialist DSGE type which remains the focus for most macro people:
Liberal arts macro professors have not always been endangered. Thirty or forty years ago, standard macro theory blended pedagogical, methodological, and historical issues into macro theory, making macroeconomics more undergraduate professor research friendly. Then standard macroeconomic theoretical research was based on IS/LM analysis, as was pedagogy. Standard macro econometric research still included activities such as estimating consumption functions and money demand functions — activities that one could have an honors students do. Undergraduate macro professors could be active participants in the standard macroeconomic theoretical and policy debates.
That has changed. Standard macro is now dynamic stochastic general equilibrium (DSGE) analysis. Theoretical and applied macro econometric research has become so technical and specialized that it is beyond what can reasonably teach in an undergraduate liberal arts school. For macroeconomic theory, this is a gain; macro theory is beginning to come to grips with the complexity of the macro economy. But it is not a gain for undergraduate teaching of macro.
The problem is exacerbated by the fact that graduate training in macro is not designed to prepare graduate students to become undergraduate professors of economics who combine both research and undergraduate teaching. Graduate economics training in macro is designed to prepare students for full-time research positions at a graduate university or a Central Bank. The result is a very small pool of highly qualified macro-research-focused candidates from standard programs whose goal is to teach macro at a liberal arts school. While the pool is small, it is not zero. There are always a few graduate students who want to teach at a liberal arts program where they can integrate undergraduate liberal arts teaching with their research. So they accept jobs at liberal arts schools. Unfortunately few of them survive to tenure.
Given how much messed up so called modern macro is, one should atleast appreciate and encourage liberal arts macro. Even that is not happening.
Simon Johnson, the long standing warrior against big banks and fancy finance suggests to reinstate Glass Steagall Act.
The best argument for a modern Glass-Steagall act is the simplest. We should want a lot more loss-absorbing shareholder equity. And, to reinforce this, we should want to make the largest banks simpler and more transparent, with “strong structural firewalls” as Dennis Kelleher, of Better Markets, puts it. Of course, in that context, we should ensure that various activities by “shadow banks” (structures that operate with bank-like features, as Lehman Brothers did) are properly regulated.
Building support for legislation to simplify the biggest banks would greatly strengthen the hand of those regulators who want to require more shareholder equity and better regulation for the shadows. These policies are complements, not substitutes.
Just 20 years back, there was so much noise about removing Glass Steagall Act. And it was of course removed and banks allowed to get into all other activities. Discussions have moved back to square one now..
There was a time when this blog used to get caught in the Prize fever. This time it did not even realise that this year’s award has been announced. Not sure whether this explains maturity of the blog or it has become too old to remember. It is though ironical to be distributing all these Prizes in economics given the state of economics around the world. Though this year’s prize is different.
This year’s Prize is an interesting one . Given to Prof Deaton for his work on “analysis of consumption, poverty, and welfare”. I mean till all this crisis, these terms had disappeared from economics lingo. No one cared much about these old historic economic issues of consumption, poverty, and welfare barring the development economists of course. Now because of inequality and Piketty people have again started to talk about these issues.
The Prize website poll says only about 30-35% knew about Prof Deaton’s work on the subject. His work is on three questions:
To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.
The work for which Deaton is now being honored revolves around three central questions:
How do consumers distribute their spending among different goods?Answering this question is not only necessary for explaining and forecasting actual consumption patterns, but also crucial in evaluating how policy reforms, like changes in consumption taxes, affect the welfare of different groups. In his early work around 1980, Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. His approach and its later modifications are now standard tools, both in academia and in practical policy evaluation.
How much of society’s income is spent and how much is saved? To explain capital formation and the magnitudes of business cycles, it is necessary to understand the interplay between income and consumption over time. In a few papers around 1990, Deaton showed that the prevailing consumption theory could not explain the actual relationships if the starting point was aggregate income and consumption. Instead, one should sum up how individuals adapt their own consumption to their individual income, which fluctuates in a very different way to aggregate income. This research clearly demonstrated why the analysis of individual data is key to untangling the patterns we see in aggregate data, an approach that has since become widely adopted in modern macroeconomics.
How do we best measure and analyze welfare and poverty? In his more recent research, Deaton highlights how reliable measures of individual household consumption levels can be used to discern mechanisms behind economic development. His research has uncovered important pitfalls when comparing the extent of poverty across time and place. It has also exemplified how the clever use of household data may shed light on such issues as the relationships between income and calorie intake, and the extent of gender discrimination within the family. Deaton’s focus on household surveys has helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data.
Just scroll the page for more resources..
Jan Frederick P. Cruz and Ronald U Mendoza look at this phenomenon of rising political dynasties. Not just in emerging world but in US as well where Clintons and Bushes dynasties have been at the helm since 1990s:
The possibility of a showdown between Hillary Clinton and Jeb Bush in the US Presidential polls may have some political pundits salivating, but perhaps many more Americans wondering. Is political power becoming too concentrated in the US? A Bush or a Clinton was President or Vice President in the US for almost 30 years between 1981 and 2009, a dynastic run that may yet be extended by the 2016 elections.
Elected politicians related by blood or by marriage are considered part of political dynasties, and their relevance to democratisation and economic development applies to both developed and developing democracies. Recent efforts to estimate the share of dynasties in various democratic parliaments indicate that they may range from as low as 6% in the US, to as high as 75% Philippines (Figure 1).
Research shows places where dynasties rule, there is underdevelopment:
Recent research on dynasties in the parliaments of India and the Philippines turn to extensive data on political clans at the local government level, enabling an empirical analysis of the links across dynastic patterns on the one hand, and development indicators on the other.
First, the share of dynasties in the Indian Lok Sahba is around 24%, compared to 75% in the Philippine Congress. When one examines how dynastic incidence at the state level (for India) or provincial level (for the Philippines) is linked to socio-economic indicators, the results seem to confirm a negative correlation between political dynasties and economic development.
The dynastic share at the state level in India is negatively correlated with annualised state-level economic growth. Moreover, in India, the dynastic concentration is smaller in states where citizens are relatively better off and where the socio-economic standing of the average person is rising.
A similar analysis focused on political dynasties in the Philippines’ local government confirms similar patterns. There is also a negative correlation between Philippine provincial real per capita income and dynastic incidence among local government officials.
Hence, in both India and the Philippines the dynastic share indicator is positively correlated with a rising poor population. In other words, dynastic legislators persist in states where there is low human development and a large poor and vulnerable population.
There are various possible explanations here. Rising living standards could weaken patron-client relations that tend to sustain political dynasties. The more economically independent the typical voter is, the less reliant he or she might be to a local patron. Furthermore, rising incomes may also result in a growing middle class, more competitive options for candidates, and more resources that can be tapped for political campaigns by different groups.
In the end, political dynasties in today’s modern and developing democracies are a reminder of how personalities still dominate the political landscape, be it in Washington, DC or in Bombay and Manila. Democracies do not necessarily reflect a level playing field, when certain political clans wield disproportionately large influence and control over public resources. And in the worst cases, all that political power is not wielded to advance development or reduce poverty. They appear, instead, to be linked to underdevelopment and rising inequality, particularly in countries and regions with relatively weaker democratic institutions.
Whoever said that during elections is the only time the vote of the richest citizen is equivalent to that of the poorest needs to start rethinking whether this still holds true in many democracies.
Hmm. Something which has been known for a while. But power of politics is such that if dynasty politics is possible, they will not just be created but all efforts to sustain it shall remain too..
He reflects on the ongoing Greece crisis (for how long will it continue). He says how earlier tanks took over countries and now it is banks:
TCA Srinivasa Raghavan ponders over this question.
He starts with this interesting Churchill quote which actually applies to quite a few things in economics:
Never in the field of human conflict was so much owed by so many to so few,” said Winston Churchill in 1940 when a few hundred British fighter aircraft were fending off a few thousand German bombers.
In a like manner, where economists are concerned, never in the field of human endeavour has such a small group of intellectual charlatans inflicted so much damage on so many. Many examples of the harm they have done can be given. But here, let’s only examine the notion that the ideal level for a country’s fiscal deficit is three per cent of its gross domestic product (GDP).
I have tried, for the last 25 years, with the futility of a fool, to find out why it is three per cent and not 3.5 or 2 or 4.1 or 5 per cent. Where did this three per cent come from? Who thought it up? What’s so special about it? Above all, who made it the prevailing orthodoxy? If someone knows, please let me know through the comments column on this paper’s website. I will be eternally grateful.
Personally, I think it was the International Monetary Fund(IMF), in the aftermath of the Latin American debt crisis in the 1980s, which invented this level. Before that it was generally agreed that government debt must not be “excessive”. But no number was put on the ratio. If it was, tell me and I will stand corrected.
IMF shares a blame for many a things wrong in world economy. Using their bully pulpit, they have forced all economic policy thinking on simplistic and homogeneous targets. (Despite this, IMF officials are much sought after and continue to drive policies worldwide). Same thing applies for inflation targeting as well. Where did the number come from? What started as an experiment in New Zealand Central Bank is seen as a gold standard for all monetary policy. Here also we have put all kinds of targets without really looking at the nature of the economy. But thankfully, unlike fiscal deficits where 3% is the standard across countries here inflation targets are divided into country-wise – developed country, emerging economy, developing country and so on.
The pressure probably came from American banks, which had been doing a lot of short-term lending to developing countries. They had burnt their fingers, hands and feet in Latin America. They realised then that they needed a benchmark figure that their loan officers could use. (The invention of that figure, by the way, was why the East Asian countries hid their short-term borrowing levels in the late 90s. As long as no one knew, the US and other banks would continue to lend.)
Simultaneously, the people who were manning the incredible financial globalisation that started in 1985 via the institutional investors also needed a number to look at. Thus, by the mid-90s a new notion of good and bad had been born. If a country was at or around three per cent fiscal deficit, it was good; if not, it was bad. This number became what body temperature is to a doctor. Borrowing countries had no choice in the matter. They either adhered to this norm or went with less and more expensive credit.
India, having taken a severe knock in 1991, accepted this number, not least because so many of its economists owed so much to the IMF and its sister, the World Bank.
Don’t get me wrong. I am not arguing that the fiscal deficit does not matter. I used to do that when financial globalisation had not assumed the scale it has now. But since it is a reality now, the deficit does matter. But why put such a low number on it when it constrains governments so badly?
It is useful to remind the regression-obsessed economists that it was Keynes who legitimised the idea of a budget deficit. Before that the orthodoxy demanded a balanced budget, that is, a zero deficit.
Moreover, Keynes never laid down a number. Nor did his academic followers, like Alvin Hansen, do that. All they said was that when demand is depressed, governments must spur it along even if it means running a deficit, even a very large one.
The whole idea always has been to constrain the government badly. First constraint the govt and then ask govt to do much more for the economy. This is classically happening in India currently.
He says the govt should read LK Jha instead. This is surprising as we hardly read any of these guys anymore. Indian history of economic thought is a banished thought. The whole obsession is to just follow what the western experts have said over the years (despite being wrong):
In 1981, fed up with what Raj Krishna had jokingly described as India’s “Hindu rate of growth”, the highly influential L K Jha wrote a book (Economic strategy for the 80s) in which he said India needed to give up its obsession with more-or-less balancing the Budget. That recommendation could not be adopted during 1980-84 because of the huge IMF loan, of around $5 billion, India had taken in 1981. But 1984 was an election year and Indira Gandhi needed to spend more. So, India told the IMF that it would not use up the entire loan.
But while Gandhi wanted to spend more on giveaways, Rajiv who became prime minister after her assassination decided to expand the budget deficit – as it was called then – to spur growth. The results were dramatic. India finally broke out of the low-growth syndrome in 1986. But then a terrible drought in 1987 and a contrived political crisis intervened. The deficit continued to expand, but not for financing investments.
In 1991, thanks to poor management by Bimal Jalan, who was finance secretary during an unstable government in 1990, India went bust. Since then India has adopted three per cent as key to fiscal nirvana.But the time has come to give up this obsession. Jaitley should adopt five per cent as the floor level. Otherwise, there is little hope.
Where does 5% come from?
There is a need to rethink and rewrite this standardization of economics around macro targets. The whole pink media goes berserk if the targets are missed by a % or so. Whereas things like water, air, education etc targets are barely mentioned.
(And Bimal Jalan? Did I read that right? He seemed to have only grown despite poor management. And was recently the chair of expenditure commission as well..)
Axel Weber, former head of Bundebank (who could have become ECB chief if he had not resigned) has this nice piece.
He says why CPI based inflation targeting is too narrow an objective. Above all, it does not even guarantee price stability:
Over the last two decades, inflation targeting has become the predominant monetary-policy framework. It has been essentially (though not explicitly) adopted by major central banks, including the US Federal Reserve, the European Central Bank, and the Swiss National Bank. But the 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach.
The Bank for International Settlements has long argued that pure inflation targeting is not compatible with financial stability. It does not take into account the financial cycle, and thus produces excessively expansionary and asymmetric monetary policy. Moreover, a major argument in favor of inflation targeting – that it has contributed to a decline in inflation since the early 1990s – is questionable, at best. Disinflation actually began in the early 1980s – well before inflation targeting was invented – thanks to the concerted efforts of then-US Federal Reserve Board Chair Paul Volcker. And, from the 1990s on, globalization – in particular, China’s integration into the world economy – has probably been the main reason for the decline in global inflationary pressure.
A more recent indication that inflation targeting has not caused the disinflation seen since the 1990s is the unsuccessful effort by a growing number of central banks to reflate their economies. If central banks are unable to increase inflation, it stands to reason that they may not have been instrumental in reducing it.
The fact is that the original objective of central banks was not consumer-price stability; consumer-price indices did not even exist when most of them were founded. Central banks were established to provide war financing to governments. Later, their mission was expanded to include the role of lender of last resort. It was not until the excessive inflation of the 1970s that central banks discovered – or, in a sense, rediscovered – the desirability of keeping the value of money stable.
But how to measure the value of money? One approach centers on prices, with the consumer price index appearing to be the most obvious indicator. The problem is that the relationship between the money supply (which ultimately determines the value of money) and prices is an unstable one. For starters, the lag time between changes in the money supply and price movements is long, variable, and unpredictable. Given this, targeting consumer prices in the next 2-3 years will not guarantee that the value of money remains stable in the long term.
Moreover, different methods of collecting consumer prices yield different results, depending on how housing costs are treated and the hedonic adjustment applied. In short, monetary policy has been shaped by an imprecise, small, and shrinking subset of prices that exhibits long and variable lags vis-à-vis changes in the money supply. Unfortunately, monetary policymakers’ effort to operationalize the objective of ensuring that the value of money remains stable has taken on a life of its own. Today’s economics textbooks assume that a primary objective of central banks is to stabilize consumer prices, rather than the value of money.
Furthermore, economists now understand inflation as a rise in consumer prices, not as a decline in the value of money resulting from an excessive increase in the money supply. Making matters worse, central banks routinely deny responsibility for any prices other than consumer prices, ignoring that the value of money is reflected in all prices, including commodities, real estate, stocks, bonds, and, perhaps most important, exchange rates.
In short, while price stabilization through inflation targeting is a commendable objective, central banks’ narrow focus on consumer prices – within a relatively short time frame, no less – is inadequate to achieve it. This was highlighted by the surge in many countries’ housing prices in the run-up to the 2008 financial crisis, the steep decline in asset and commodity prices immediately after Lehman Brothers collapsed, the return to asset-price inflation since then, and recent large currency fluctuations. All are inconsistent with a stable value of money.
I mean all this has been so obvious but the obsession with IT continues.
Infact Weber says central banks need to look at multiple things:
Central banks’ exclusive focus on consumer prices may even be counterproductive. By undermining the efficient allocation of capital and fostering mal-investment, CPI-focused monetary policy is distorting economic structures, blocking growth-enhancing creative destruction, creating moral hazard, and sowing the seeds for future instability in the value of money.
Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard.
History hints at what a stability-oriented framework could look like. In the last quarter of the twentieth century, many central banks used intermediate targets, including monetary aggregates. Such targets could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices.
Short-term consumer-price stability does not guarantee economic, financial, or monetary stability. It is time for central banks to accept this fact and adopt a comprehensive, long-term monetary-policy approach – even if it means that, in the short term, consumer-price inflation deviates from what is currently understood as “price stability.” Temporary fluctuations in a narrow and imprecisely measured CPI are a small price to pay to secure the long-term stability of money.
Indian central bank had exactly this kind of framework only to be rejected by the fashionable IT framework. Some IT central banks like say BoE, ECB, etc have atleast understood the limitations of IT game. They have missed the forest for the woods and continue to pay for their mistakes. But they still call them as IT central banks and have added the euphemism flexible to it.
Most fashionable economic ideas of today are only proved as duds in future. This is because we believe too much in scientification of economics. Some idea works in some time and we make a big deal of it and think it will work all the time. Soon the idea is projected as a big theory. The theory becomes even bugger if it comes from the hallowed schools of economics in US. And here is an idea whose limitations have been exposed in the crisi.s But it continues to remain.