Oh dearie me Sir Simon, oh dearie me

Umm, anyone got a spare economics textbook to send to Sir Simon Jenkins?

The worst evil economics can inflict on humans is unemployment. Not lower pay, poor working conditions, costly housing or enforced migration; just the lack of a job. To be able-bodied and out of work is debilitating to an individual and a waste to society.

Figures todayfrom the Office for National Statistics and earlier ones from the OECD and the International Labour Organisation all point in the same direction. The British and other European economies are running on empty. Only public sector borrowing seems to prevent renewed downturn. Today\’s unemployment rate of 8%, or 21% of under-24s, is a scandal. An unprecedented one million young Britons are jobless. This squandering of labour and loss of wealth is stupefying.

Yup, so, if no job is worse than low wages, lower wages so that there are more jobs. Abolish the NMW for example. But that\’s just snark from me. This is gibberish from Sir Simon.

What matters is to learn lessons. The 1930s depression was in large part the result of a similar policy failure, of strangling money supply at the bottom of an economic cycle.

Indeed, absolutely so, the Friedman/Schwartz finding. So, what does Sir Simon go on to complain about?

The cabinet has so far a one-club policy: quantitative easing. It has printed £200bn for banks.

What? He\’s complaining about this?

Last time around the money supply shrank and that was a very bad thing. So, this time around everyone\’s trying to make sure that the money suppply doesn\’t shrink. And this is still a bad thing?

British economic policy remains spellbound by supply-side glamour. Big projects, like bank bailouts, are sexy.

Erm, those big projects are not supply side. They are demand side. They are aimed (howver badly) at increasing demand in hte economy.

Supply side projects would be things that aimed to reform the supply side of the economy. Like, say, deregulating labour, abolishing the NMW, fucking over the lawyers and accountants (and god nows those middle class rent seekers deserve it) and so on.

Actually, forget sending Sir Simon an economics textbook. Could we start with just a dictionary?

11 comments on “Oh dearie me Sir Simon, oh dearie me

  1. Talking about Quantitative Easing, maybe you can help me understand something about its converse, shall we call it Quantitative Strictening, perhaps?

    OK, so in its first phase, QE means the BoE makes up lots of money and uses it to buy gilts of the commercial banks. This has the effect that the price of gilts rises (because of the increased demand for them), which means the yield falls, which more or less means long-term interest rates fall, which is good. Also, because there is not much demand in the economy, this can be done without inflation increasing (allegedly). This much I can follow.

    Now let’s assume that demand in the economy increases again – the economy gets better. Then the Bank will want to take all that cash back – i.e., do some QS. It is supposed to do that by selling all those gilts back to the banks, so it gets its cash back and can quietly get rid of it.

    But I don’t understand how this will work. This assumes (a) that the banks still have the cash with which to buy the gilts, and (b) will want to do so. It also assumes, it would seem to me, that the State isn’t trying to borrow lots more money at the same time, because if it does, there will be a double dose of gilts being supplied, so the prices will fall stone-like and the yield will rise bird-like, yes?

    Isn’t this going to put the State’s finances in an even more terrible state (as it were)? Don’t tell me the Bank is supposed to hold on to the gilts until the State has got its finances in order and has paid down its debts – that will take forever and in the meantime, all that cash will be leaking into the real economy and causing the inflation you said it wouldn’t cause.

    But I am no economist – how is this QS phase really supposed to work?

  2. A trifle unfair to Simon Jenkins, I think.

    1. The thrust of his article is that spending money on eye-catching projects rather than simply putting money into consumers’ pockets is daft. I agree.
    2. You could be taken to be suggesting he favours abolishing the minimum wage. He didn’t say that.
    3. You suggest he is being inconsistent in criticising the money supply cuts in the 1930s while attacking QE. His REASON for attacking QE is that the newly created money goes into the pockets of banks, the rich and so on, rather than into the pockets of ordinary consumers. Good point. I agree with him.
    4. He does not actually say that normal public spending items (“big bridges” etc) are supply side items (though he could be taken to have suggested this). The one instance of a supply side item he does cite is bail outs for banks. That is right: subsidising a producer is “supply side”.

  3. What do you mean by calling lawyers and accountants ‘middle class rent seekers’? Genuine question – not challenging your statement.

    Do you mean they benefit from all of the regulatory requirements which require their involvement in large companies? Or employment laws which provide them with litigation work?

    Tim adds: The barriers to entry mean they can charge higher prices than they could without such barriers: economic rents in short.

  4. Tim, funnily enough, this debate over whether central banks should be boosting the money supply also divides some on the free market camp: the Austrians, who are basically liquidationists, and the monetarists, who support QE for the reasons you state, and the Keynesians, ditto.

    It is important to bear in mind the argument that one reason we are in this mess is because the Austrian point of view about previous booms and busts has gone unheeded. Every time there was a bust, the cry from the monetarists/Keynesians was for more monetary stimulus (as happened after the dotcom boom when Krguman said America needed a housing bubble). As a result, each boom has gotten steadily bigger, with each bust becoming more violent.

  5. “The cabinet has so far a one-club policy”: the last chap I can remeber complaning about a one-club policy was Healey, whingeing at Thatcher. Healey never did tell us what other clubs he proposed though. Does “Sir” Simon?

  6. Diarieme,

    I thought the “one club” metaphor was Ted Heath’s, and was more aimed at Lawson than at Thatcher, though I may be wrong.

  7. That really is abysmal. Jenkins suggests that government spending is supply-side and leaving money to fructify in the pockets of the public is demand-side. When the former is of course Keynesian demand-side state substitutionary spending, and the latter is Gladstonian supply-side fiscal rectitude.

    So you can ignore whether Jenkins’ economics is right or wrong and just focus on the fact that he’s not even operating with the correct categorisation.

  8. agn: when the Bank want to tighten monetary policy, they *want* interest rates to go up – selling gilts in sufficient quantity should indeed have that effect. It is the same as raising Bank Rate, but affects a different point in the yield curve.

    It should only necessary to raise rates during a boom, at which point tax revenues are going up anyway, so, the “normalization” of gilt prices should not hurt too much.

  9. On QE you’re forgetting that the market is aware the Bank will reverse it and so will have already adjusted. Well if they believe them…

    On the mechanics, the cash remains in the economy, and gilts yield more than cash, so it should be straightforward enough with enough yield inducement.

  10. You may be right, Alan. My memory isn’t always superb. But Den or Ted, was another club ever suggested?

  11. agn

    QE assets aren’t purchased only from banks, but also from institutional investors such as pension funds. Yes, much of the cash ends up in the banks anyway, but that’s because investors deposit cash in banks, especially if they are feeling a bit risk-off.

    “Unwinding” QE depends on there being a deep and liquid market for gilts. If this is the case then selling the gilts is not a problem and will act as expected – i.e. depressing gilt prices and raising yields. If the gilt market were considerably smaller and less liquid than at present then yes, there might be a problem finding buyers. But I think that’s unlikely.

    Oh, and the Bank of England could hold the gilts to maturity, of course. Unwinding them would then be a simple matter of not participating in the next auction.

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