Good grief, Ritchie really, really, doesn’t understand economics, does he?

Robert Skidelsky also endorses a key argument of mine:

Corbyn’s proposal, unlike orthodox monetary financing, would not add to the national debt – a major advantage. Orthodox QE – let’s call it “monetisation one” – is intended to be reversed, with taxation used to raise the money to redeem the government bonds held by the central bank. The expectation of future tax hikes could drive people to save part of the new money, rather than spend it.

OK, let’s say that is true. That’s Ricardian Equivalence.

And it’s Ricardian Equivalence that says that government stimulus doesn’t work. So, Ritchie (and Skidelsky) are using the argument that stimulus doesn’t work to argue for stimulus….

29 thoughts on “Good grief, Ritchie really, really, doesn’t understand economics, does he?”

  1. also this: “Corbyn’s proposal, unlike orthodox monetary financing, would not add to the national debt ” is a shocker – it means permanent monetary expansion and it validates all the concerns about inflation etc.

    Elsewhere Richie has been trying to say that People’s QE would be a counter cyclical tool under the control of the BoE, and tried to make it looks like a sensible version of the idea (a version which is strictly speaking not necessary, not that different from regular QE, but which might help sustain public investment during downturns) but this admission here reveals he still has the loony free lunch idea at heart

  2. sorry, that was by Skidelsky not Richard, but Richard did not react by saying – hang on, that’s wrong

  3. Er, no. The whole point of Corbyn’s / People’s / Green QE is that you never ever reverse it. It’s a way of getting around Ricardian Equivalence. He’s using the argument that reversible stimulus doesn’t work to argue for irreversible stimulus.

  4. (Obviously it would then be horribly inflationary, but as previously noted Ritchie has no concept of second-order effects.)

  5. So on he one hand Ritchie says that all economists are wrong, the textbooks are wrong, it’s all wrong.

    Then someone cites an economic theory to support him and all of a sudden he’s clinging on to the support of economists.

    abacab’s description of the Ritchie sitting in the Flash Gordon tree stump is the most accurate I’ve read. I’m tempted to steal it, as there are people I work with who it describes perfectly.

  6. Amazimgly Ritchie has previously.and repeatedly argued quite explicitly that QE itself, regardless of its formal recognition DOES NOT actually really add to the national debt because it will really never be repaid. Any counter – view was met with “Get real”. And yet here he is now arguing that his QE IS different because y’know, it won’t need to be repaid.
    But then previously he was all for governments borrowing more and railed against “debt fetishists”. Now he isn’t interested in Government debt because he finally, finally has his audience and he’s drunk with excitement about it all.

  7. I fear this is mistaken:
    “Orthodox QE – let’s call it “monetisation one” – is intended to be reversed, with taxation used to raise the money to redeem the government bonds held by the central bank”
    But the reversal of QE doesn’t require higher taxes. All that would happen is that the BoE sells the gilts it owns on the open market; this would tend to raise gilts yields and depress the money stock – a form of monetary tightening.
    Yes, the govt could if it chooses raise tax to redeem those bonds. But it could instead choose simply to rollover the debt. That’s a fiscal decision. Whether to reverse QE is a monetary one. They are different things.
    (It doesn’t look as if QE will be reversed any time soon – but that’s another story).

  8. @AndrewM: its more that he’s now using Ricardian Equivalence to demand irreversible QE over reversible QE, but when he was demanding the State borrow shed loads more to provide stimulus because borrowing costs were so low, any mention of Ricardian Equivalence would have resulted in the normal ‘neoliberal troll’ response.

  9. chris – well that’s true, but if the government was contemplating a large splurge financed by more borrowing, let’s say a policy that would significantly increase the deficit, people would probably be entitled to think “that’s going to need repaying from taxation sooner or later” or at least that it would take us closer to the limit of the amount of debt the government would be willing to roll over, so that any further increases in spending would need to be tax financed. So whilst you are right that there is a distinct fiscal decision to be taken that isn’t dictated by the BoE deciding to sell bonds into private sector hands, if we are operating close to constraints then we are adding to fiscal pressures. Whereas, these guys things, if we can finance spending by permanent monetary expansion, we will escape those pressures.

  10. “abacab’s description of the Ritchie sitting in the Flash Gordon tree stump is the most accurate I’ve read. I’m tempted to steal it, as there are people I work with who it describes perfectly.”

    Oi thank’ee koind zir.

    Feel free to steal 🙂

  11. “Orthodox QE – let’s call it “monetisation one” – is intended to be reversed, with taxation used to raise the money to redeem the government bonds held by the central bank.”

    Hmmm… surely Orthodox QE is the purchase by the central bank of government bonds already issued. The reversal of QE would not be financed by taxation, but by selling the bonds back into the market. There would surely be no difference in the taxation required to redeem them.

    But, as Tim is saying, if the prospect of future taxation, because of the issuance and future redemption of bonds, is not an effective method of stimulation, then that rather drives a coach and horses through the argument that we should be stimulating the economy by an increased budget deficit.

  12. Look. The answer is “increased public spending and an increased deficit”.

    This is where we start.

    Everything else is finding justification for what we already know a priori to be the answer.

    Wise people agree with this*. Yet you ignore that.

    *well, it’s how it worked in the Communist world for decades.

  13. @Justin, it was in a thread from last week. I don’t think the comments are searchable from google.

    Have a look at the “Ragging on Ritchie” threads going back a week or two

  14. its here

    “How else can we explain the fact that he believes, simultaneously, (a) that printing money will boost the economy, and (b) that printing money has no economic effects?”

    It’s different holes in his Flash Gordon stump. There is no other plausible explanation.

    And also self referenced again here

    I guess he’s been looking out of a different hole in his stump than when he was getting all damp over Picketty then….

    Took a while because I was enjoying all the haiku in that 2nd link.

    [Opened all Ragging tagged posts in a single window and searched for abacab]

  15. There’s an earlier one, the first time I came up with it (and I went on a bit). If it helps searching, I used the name “James Bond” in the explanation – that should eliminate noise.

  16. It might not be in a Ragging on Ritchie – work back from the Piketty one looking for “James Bond”.

  17. No need, found it:

    https://www.timworstall.com/2015/08/06/ritchies-magic-money-tree/#comment-585143

    “And it’s not possible to believe both things, is it? ”

    Yes it is.

    Ritchie is like the nasty scorpion thingy in the treestump in Flash Gordon. He lives in a cavity a the centre of the stump, and there are a whole bunch of passageways leading off in many directions, into which James Bond has to put his hand to be stung or not.

    What does the world look like to the scorpion? He can look out of any one of the tunnels at a time, and see a small part of the outside world. He builds his view of the world from what he sees out of these tunnels. But, he has ADD, so can’t concentrate long enough to form an overall view of the world by putting together what he sees through each individual tunnel.

    Furthermore, and just to destroy the analytical facilites, every now and again, some twerp twats him on the head with a big stick.

    So, when Ritchie looks through the tunnel that shows him the magic money tree, his ADD makes him see just the magic money tree, cos that’s all that exists outside the stump. And when he looks through the tunnel that shows him the Joy of Tax, then tax is indeed joyous and necessary for funding things, and he forgets the magic money tree. Oh, look, a squirrel!

    Finally, the scorpion knows he’s important cos every so often big people like James Bond put their hands into his stump for his adjudication.

  18. “And it’s not possible to believe both things, is it? ”

    Doublethink is a fundamental tenet of IngSoc…

  19. This is the most wondrous spectator sport. Let us hope Corbyn wins and Murphy is projected into the spotlights so that his wondrous proposals are given due examination. It will be rough and rather fun.

  20. I can’t wait for Brillo to hit him with his contradictory blog post in a trainwreck interview.

    Cos he will 🙂

  21. I thought the gilts bought with QE created money were eventually to be sold and that money deleted. I realise that there are reasons to be sceptical. Does anyone acknowledge that’s what should happen e.g Carney/Osbourn ?

  22. Here’s the method. They bought gilts of different maturities. So, some of them mature. To maintain the stock the BoE buys more therefore. At some point, they just stop buying to replace those that mature. To repay them Treasury must issued more bonds to hte market to roll them over. BoE never actually sells back out into the market.

  23. @ Tim

    BoE *could* sell into the market – though hasn’t done at present. If he QE stock was reduced by the BoE (in effect, tightening or raising rates) they could elect to sell bonds into the market. It’s less efficient then simply letting bonds simply mature, but it could be done (and indeed, has been done through the repo) when supply of particular bonds/maturities gets too low.

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