A Balancing Act/Slash and Grow/Credit Where It’s Due (link to follow on Monday) are about three things: fiscal policy, where growth might come from (in demand terms), and monetary policy.  Wolf ties them up beautifully in a few hundred words.

Balancing Act said that fiscal deficits have to rise in a recession – well duh – amongst other things, and that they are quite effective.

Slash and Grow was sceptical about how far exports could save us.  It called for the government to be slightly easier on the government deficit.  Investment rising would be nice … though I was not optimistic.

Now M Wolf has neatly tied these ideas together with monetary policy notions:

An obvious way to combine credibility with a pro-growth stimulus is to close the structural current deficit relatively rapidly, while introducing credibly temporary offsets, particularly via spending on investment and tax holidays. The central bank should also finance such temporary deficits. That would eliminate the crowding out of private investment that would occur if governments borrowed in the market, instead. The government would need to co-ordinate closely its structural fiscal consolidation and temporary spending and tax cuts with the Bank of England.

Loose money, relatively tight fiscal – but an explicit coordination of monetary and fiscal policy – which is very much what I call for when describing QE as a combination of the two.  My method is more roundabout: identifying a number of credit weaknesses in the economy and directing reserves in those directions.  As I said earlier, coming out with tax cuts and spending cuts at the same time is an interesting idea, and now endorsed, it seems, by Mr Wolf:

Delivering a tightening even of 5.2 per cent of GDP over one parliament, without any offset, is likely to push the economy back into a recession. So combine the necessary structural changes to pay, pensions and other long-term spending commitments with credibly temporary offsetting measures, such as lower taxes, incentives for investment and large one-off infrastructure projects.

There is a genesis of a complete plan here.  A national infrastructure bank (policy exchange have called for one).  Long term revision of benefits.  Monetary policy working with fiscal policy rather than the two acting independently ….

I wish I had Wolf’s brevity of expression.  But, that said, “The central bank should also finance such temporary deficits. That would eliminate the crowding out of private investment that would occur if governments borrowed in the market”  hides a maze of details – about central bank independence, not least.  But to my mind there are no massive differences between:

  • the central bank financing the government taking expansionary fiscal steps and;
  • the government directing the central bank to offer liquidity where there is a fiscal/credit risk.

Or am I missing something?  It is late in the week.

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2 thoughts on “Martin Wolf makes me envious here

  1. Wolf is being oblique but to me the clear message is that he sees investment funded by a Bank of England overdraft – ie QE as undated public credit – as the way to go.

    I think that the difference between

    (a) “the central bank financing the government taking expansionary fiscal steps”

    and

    (b) “the government directing the central bank to offer liquidity where there is a fiscal/credit risk.”

    is that the former case relates to the credit necessary for the circulation of goods and services and the creation of new productive assets – public or private – while the latter need involve only credit related to, and tied up in, existing productive assets.

    Not only is this difference ‘massive’ but it is the failure of virtually the entire economics profession to understand this difference between:

    (a) Dynamic credit – involved in the clearing of credit obligations; and

    (b) Static credit – tied up in productive assets by the conflicting claims of finance capital;

    which means that most of their work is a complete waste of time, because it does not adequately reflect the real world of the productive economy.

    But who needs a central bank anyway? Hong Kong has never had one and it’s done them no harm: indeed when it’s combined with the fact that a third of HK government income comes from land rental, it means that the earned income of HK citizens is much more lightly taxed than almost anywhere else – at the expense of rentier landlords, but to the benefit of everyone else.

    I prefer that sort of radical liberal approach to taxation of privilege rather than people, but I recognise that such a taxation approach is politically impossible. Stlll, there’s more than one way to skin that cat.

  2. I should say

    “a) Dynamic credit – involved in the CREATION AND clearing of credit obligations”

    As economists like Steve Keen, Richard Werner, Dirk Bezemer, Michael Hudson – I have yet to read Minsky or Veblen – among others actually understand is that the creation of credit/money precedes deposits, and does not follow them. This reality disposes of ‘savings gluts’ among other canards, and accounts for the mechanics of debt deflation.

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