If only Murphy knew some economics

He’s off on the MMT tear today and, as ever, his lack of a grounding in the basics of the subject lets him down:

So money has value because the government endows it with that quality. And then, and only then, is the supposed left-wing quality added to this whole issue, because modern monetary theory then notes that when markets do not create full employment (and they usually do not, as Keynes first pointed out 80 years ago) then the government can create its own money to just to indirectly boost economic activity (which is exactly what QE was supposed to do, but was not very good at, to put it kindly), but to do it directly by investing itself.

And modern monetary theory says that this can be done until we reach full employment. Then, and only then, will we have inflation because of money creation (although we could have it for other reasons, such as a Brexit devaluation, but that’s something quite different). Because we have not had effective full employment for a long time (bogus stats on self-employment levels do not indicate full employment really exists) we have also not had this type of inflation for a long time.

The bit he’s missing here is the definition of full employment. The way he’s put it – we only get inflation if we go above full employment – is just another way of stating the NAIRU, non-accelerating inflation rate of unemployment. Which is something that changes. According to the microeconomic structure of the economy.

We have, for example, in the UK economy in the past had inflation when unemployment was higher than it is today. It’s also true that other countries have inflation when unemployment is higher than our own. And places where they still have less inflation when unemployment is less than our own. That is, there’s something about the structure of the economy that changes that definition of full employment. A useful definition of full employment being when we get inflation – the same statement a Murphy’s own we’ll only get inflation at full employment.

What really provides the joy here is that if you went along to him and said, so Friedman’s NAIRU then, or maybe even, so, this Phillips Curve then, he’d not know what you were talking about. As you explained it he’d insist that it was, or they were, entirely wrong. Because. Despite their both being (NAIRU really only says that we can shift the Phillips Curve, not just move along it) exactly what he is saying. Without his having read the libraries of work on the implications of either or both.

33 comments on “If only Murphy knew some economics

  1. Couldn’t get past the first sentence

    “So money has value because the government endows it with that quality.”
    Yerwhat!?!?
    Experience would tend to indicate that governments are quite capable of endowing money with no value whatsoever.
    It’s all down to confidence. Nowt else.

  2. BiS

    It’s part of his badly misremembered economics classes about fiat money – which is not backed by a physical commodity, but instead has been declared to be money by the state. (It could also have something to do with his bizarre claim that money has value because you can pay tax with it.)

    Money need not have the backing of a state – to be money, it must perform the functions of money – be a unit of account, a means of payment and a store of value. The cryptos have problems in the first category – a unit of account. (it’s rare to find stuff denominated in bitcoin – but it does (did) happen).

  3. Borrowing / lendng appears to be possible with things like Bitbond, but all far too low level to be doing any serious heavy lifting (in a modern economy)?

    I’m speculating here, but wouldn’t setting up the ability to borrow (from the start, as part of the ledger) potentially give a crypto more price stability (wrt volumes etc)?

  4. Anyone watch BBC QT – Reading on Thur

    HoF store closures:

    Woman (twenties?) in biker jacket ~39m: Unemployment rates are lower than ever so people don’t have enough money to buy stuff.

    One of Ritchie’s students?

  5. Unemployment is about 4%, a forty year low? By any modern definition “full employment”, even beyond as Murphy et all demand mass immigration to fill job vacancies.

  6. I am not an economist, but I know what NAIRU and the Phillips curve are. Murphy is old enough to have lived through the stagflation of the 70s, so he has actual experience of what happens when the Phillips curve runs into the natural employment rate. Yet again, we are left wondering how this utter charlatan is not laughed out of public life.

  7. Bloke in Costa Rica

    ‘I am not an economist’

    Despite his claims, neither is Murphy by any reasonable definition. A Neolithic man trying to comprehend nuclear physics. So far out of his depth he could star in an adaptation of the famous Jules Verne novel….

  8. Amusing stuff over on TRUK….

    Like much else, Ritchie claims to have invented the Fair Tax Mark:

    “I should make clear that I thought up the Fair Tax Mark and am a non-execs and unpaid director of it.“
    http://www.t*xresearch.org.uk/Blog/2018/06/08/fair-tax-is-here-to-stay/

    Of course, what he means is, he stole the idea from one of his own commentators:
    http://www.t*xresearch.org.uk/Blog/2011/01/10/fair-tax-status/

    Pay for a Fair Tax Mark, and Ritchie suddenly says your legal tax avoidance is legal and ok:
    http://www.t*xresearch.org.uk/Blog/2018/06/09/timpson-group-joins-the-list-of-companies-saying-they-want-to-pay-the-right-amount-of-tax-at-the-right-rate-and-at-the-right-time/#comment-807861

    Point out to FTM that their “6600 shops” claim is dodgy as they only approved 37 companies so far out of a 350 target, and they don’t like it:
    https://twitter.com/NoelScoper/status/1005690490442866692

    Meanwhile, Alex Cobham and the FTM meet Murphy Richards:
    https://twitter.com/alexcobham/status/1005852658610077697

  9. Ken says ” to be money, it must perform the functions of money – be a unit of account, a means of payment and a store of value.”
    Of course. Fiat money has no practical existence except in the minds of economists. Fiat or not, people in the economy – which is what economics is about, will use it as real money as a medium of exchange & a store of value. If they ever start noticing it’s fiat money they stop using it as a store of value & may, in due course, abandon using it as a method of exchange.
    It’s something the Clown of Ely constantly overlooks. Economics reflects people. People don’t reflect economics

  10. bloke in spain – “Of course. Fiat money has no practical existence except in the minds of economists.”

    Well yes and no. Fiat money works because it is a promise to pay. And like any other promise, its value depends on the chances of it being honoured.

    As long as the plebs trust the government to pay, they will accept the note. Although I think most people trust the government to allow a moderate amount of inflation and so have priced that in. As soon as people think the government can’t or won’t pay, they will seek an alternative.

  11. “As long as the plebs trust the government to pay”

    Actually, most “money” nets off, and is both borrowed and lent by people (nothing to do with government). Hence, it is Joe Bloggs (borrowed, via a bank) who is promising to pay – which collectively all ensures that “money” current accounts are good.

    Apologies, as from prior discourse we’re all on the same side on this one.

  12. “Actually, most “money” nets off, and is both borrowed and lent by people (nothing to do with government). Hence, it is Joe Bloggs (borrowed, via a bank) who is promising to pay – which collectively all ensures that “money” current accounts are good.”

    How much of the money in the economy is private debt backed?

  13. Most all of it, Jim. Think of wages. The employer runs up a debt with the employee throughout the month for work done. Discharges it on pay day. Many services are paid for after the delivery of the services. Or the other way round & goods & services net to be supplied to discharge the debt of a payment.
    All economies are a network of short term debts all relying on confidence in the money they’re denominated in.

  14. FTM update……..

    Timpsons, the key cutters and shoe menders, have been awarded a FTM.

    As they have thousands of Tiny outlets, it enables FTM to expand their misleading claim using ‘shops, offices and outlets’ as its measure of participation, rather than actual companies, which would be far more honest.

    So let’s have a closer look at Timpsons.

    John Timpson has routed support for his son’s political career through company donations. According to reports in Reuters, some £480,000 over 6 years has been donated to Edward Timpson.

    Now, IF Timpson senior had paid for the donations out of his own pocket the tax and NIC position would have been (This is simplified as if all £480k were paid this year):

    Gross salary £885,000
    Income Tax £383,850
    NIC £21,324
    Net salary £479,825

    And employers’ NIC – £105,232

    And so it would cost a total of £990,232 for Timpsons to pay Timpson senior enough to allow him to donate £480,000 to his son. They would get a CT deduction of course so a net cost of £802,087

    By routing the donation through the company, the net cost is £480,000 (as they shouldn’t get a tax deduction for it – but see below)

    That’s a saving of over £320,000. And it’s all tax and NIC that is saved.

    Totally legal of course but is it playing ‘fair’? Is it paying by the ‘spirit’ of the tax rules as FTM is supposed to be about? The donation would seem to be personal and if Timpson was an ordinary employee, he just wouldn’t be able to do this.

    What does Spud say about this?

    “That is not what the Fair Tax Mark appraises”

    “We can say the law is wrong but we can’t call it avoidance if the law obviously permits it”

    In other words if a company is not breaking the law, it doesn’t seem to matter to FTM at all what a company does. So long as the company is prepared to stump up the fee to FTM, it seems they will get a FTM.

    So much for the ‘spirit’ of FTM. While Murphy publicly decries companies who use the rules to their advantage, he seems quite happy to turn a blind eye in practice, just so long as FTM gets their fee.

    So what, exactly, is the point of the FTM?

    Incidentally, while political donations are not allowed for tax purposes, Timpson senior has actually said that isn’t what the payments were. They were;

    “…paid for administrative (not campaigning) costs that enable Edward to fulfil his public function as an MP more effectively,”

    So it’s possible, just possible, that the company has claimed the cost for tax purposes – using an argument that the payments helped the company’s trade in some way through Timpson junior’s support for the trade that the company is in.

    Possible but unlikely. But surely Spud would have looked into whether Timpsons were claiming a tax deduction for this before FTM awarded the mark?

    “.. I have not double-checked, just for the record”

    (Tim, feel free to republish this)

  15. Thanks for that AndrewC. But not for the reason you wrote it.
    It’s for this: ““…paid for administrative (not campaigning) costs that enable Edward to fulfil his public function as an MP more effectively,”
    £480,000
    I repeat, £480,000
    I’ve run a small company & created a great deal of tangible value & not generated £480,000 in “administrative costs”. Not even £48,000 over 10 or more years. “Administrative costs” were a very small portion of what we did & were kept that way.
    “costs that enable Edward to fulfil his public function as an MP more effectively,”
    Edward gets a healthy salary & more than generous expenses, provided by the taxpayer, to “fulfil his public function as an MP” The “effectiveness” of Edward doing so is a qualitative assessment that we’d better not visit, on this occasion.
    But. Simply. Jeezus!

  16. @AndrewC

    “Possible but unlikely. But surely Spud would have looked into whether Timpsons were claiming a tax deduction for this before FTM awarded the mark?”

    This is in my post that’s waiting for Tim to moderate:

    Pay for a Fair Tax Mark, and Ritchie suddenly says your legal tax avoidance is legal and ok:
    http://www.t*xresearch.org.uk/Blog/2018/06/09/timpson-group-joins-the-list-of-companies-saying-they-want-to-pay-the-right-amount-of-tax-at-the-right-rate-and-at-the-right-time/#comment-807861

  17. So a question for AndrewC. Does the illustrious Edward pay tax on this £480,000? Or does it just disappear, untouched, into his already well lined pockets?

  18. Jim,

    How much of the money in the economy is private debt backed?

    Table C in this provides a good picture for UK £ plc – from row 35 onwards.

    https://www.ons.gov.uk/file?uri=/economy/nationalaccounts/uksectoraccounts/datasets/thenationalbalancesheetestimates/current/previous/v2/nationalbalancesheet2015tables1_tcm77-425494.xls

    In answer to the question – and outside of the “yet to be recorded” amounts BiS refers to – very little “directly”. When looking at household debt, there are mortgages secured on houses. Otherwise it’s “all around the houses”, with banks at the centre of it all (~£21 trillion of both assets and liabilities of the total aggregated of ~£30 trillion).

    Money in current / deposit accounts – ie people and businesses lending to banks (rows 40 and 52), with lots of intra bank as well.

    Banks provide loans to households (mortgages) and businesses (rows 42 and 54), and to themselves.

    Etc, etc.

    I’ve posted that year (it doesn’t change too much year to year) because later years switch the columns and rows around, which I find less intuitive to instantly see.

  19. “In answer to the question – and outside of the “yet to be recorded” amounts BiS refers to – very little “directly”.

    But that “yet to be recorded” debt is very important, isn’t it? Pretty well all transactions in an economy, at some point, involve a time gap between payment & value received. In one direction or the other. Just because there’s no interest being accrued (excepting invoice settlement penalties) doesn’t mean it’s not debt. It’s the confidence that the value of the denominating currency doesn’t vary substantially over the period of the debt lets the whole system operate. The macro-economics stuff in government figures is, in relative terms, trivial bollox.
    Shown by what happens if government fucks up & you get hyperinflation

  20. AndrewC

    “We can say the law is wrong but we can’t call it avoidance if the law obviously permits it”

    This is astonishing – a company doing anything short of out and out criminal behaviour can get the FTM!

    Ritchie must be desperate for the money!

  21. @Noel Scoper.

    Fuck me, that’s awful. Part boasting, part desperately seeking adulation, meandering.

    And I bet he tells everyone what a brilliant lecturer he is.

  22. Jesus shit.

    Andrew, you are being very kind…

    I could only manage a few minutes. He doesn’t exactly help himself with his introduction, pretty much: “Hey everyone, look at me, I’m a complete and utter prick”.

  23. “It’s part of his badly misremembered economics classes about fiat money – which is not backed by a physical commodity, but instead has been declared to be money by the state. (It could also have something to do with his bizarre claim that money has value because you can pay tax with it.)”

    *Some* of it has value because you can pay taxes with it. Most is backed by the promised future labour of borrowers.

    Suppose in a remote town there is no government, but there is a big town baker who issues ‘bread vouchers’ – tokens that can be redeemed for a loaf. Everyone buys bread, so everyone can use/spend them, so they’re universally valued. They can be used by all other businesses as a medium of exchange.

    Now suppose the farmer wants to buy a new tractor to grow wheat, but doesn’t have the cash. He goes to the bank and makes a promise to repay five thousand bread vouchers, a thousand a year for the next five years. That promise – a legal contract – is new ‘money’ that the farmer has created, and given to the bank. The bank in return credits the farmer with 4500 bread vouchers, and takes 100 vouchers a year to pay its own expenses. That 4500 is far more vouchers than the baker has issued, but that doesn’t matter, because we’ll never need them all at once.

    Note, the bank is approximately net-neutral in this deal – it has taken in just about as much money as it has given out. It makes no promises to redeem them with its own labour. Because it’s making no promises, it’s creating no money. The farmer is.

    The farmer buys a tractor and transfers the 4500 credits to the tractor-maker’s account. He grows wheat, sells it to the baker for 100 bread credits a month, and repays the loan with them. The tractor farmer withdraws 20 credits a month from the bank to buy bread. The bank exchanges vouchers from the farmer for vouchers given to the tractor maker. And the baker hands out a few hundred vouchers a month and receives the same number back – so there are only ever a few hundred baker-backed vouchers in existence at any given time.

    Now, in one sense, bread vouchers only have value because the baker is ultimately backing them with promised bread. This applies to the 5000 the farmer has promised the bank too. Nobody would want them if there was no bread. But in another sense, the value of the vast majority of vouchers is actually backed by the farmer’s promise to repay (the paper contract sat in the bank’s vault), by his promised five years labour, by the production made possible by the farmer’s new tractor, by the capital value of the tractor itself.

    And in this scenario, no government is required, and the currency is not backed by government fiat, (although given that the actual bread does not exist until the morning of the day itself they’re redeemed, it’s not quite a tangible asset, either). Simple, right?

    Murphy’s wrong, but there’s some sense in which fiat currencies do have value *because* they can be redeemed as payment of tax. However, the value of most of it doesn’t *come from* that source. It’s a subtle point, but an important one.

  24. Can you pay a Fair Tax Mark director as a “consultant” and still be paying the right amount big tax?
    £9792 to one of them.

  25. Sam Jones – when Murphy first announced it, I tried gaming the system and found that you could actually do whatever you like to avoid or evade taxes, but so long as you fully disclosed that you were doing so you would get enough points to get the FTM.

    I put this to Murphy who said that you wouldn’t. When I asked why not, he said that there was an over-ride so that they could deny the FTM to someone if they didn’t think they really merited it. I asked where it said that, and eventually the rules got edited so that they do now say it (I think).

    So the clear and objective principles are subject to the issuer’s discretion 🙂

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