24 Comments

• Noorderling 4th Jul '18 - 12:31pm

  Did not know that Kees Verhoeven could speak for anybody other that his party’s members and supporters. He certainly does not speak for me. However one feels about this shower of a British government, i’m Pretty sure they don’t need some Dutchman’s advise.

• Laurence Cox 4th Jul '18 - 1:34pm

  ‘Like the bookseller said to Saint Augustine: “Tolle, Lege” ‘

  Noooo. It was a childlike voice that Augustine heard in a garden in Milan speaking these words and which caused his conversion to Christianity. Opening his Bible, he read Romans Chapter 13, verses 13 and 14 and took the childlike voice as a message from God.

  As you are a Dutchman, I am sure you will appreciate this straight-talking correction to an otherwise-good article.

• Peter Martin 4th Jul '18 - 2:15pm

  Bernard Aris,

  There’s basically only two options for Brexit:

  We can have a Free Trade Agreement with the EU, or we can leave and trade under WTO terms.

  The question is: Does the EU want a FTA with the UK? Or is the plan to try to keep us de-facto member of the EU whilst pretending we’ve left?

  If the UK can at least in the principle of FTA we can try to work out the details of how it will work. But if they don’t they should say so.

  I’m really not sure what the EU does want. It is a genuine question.

• Bernard Aris 4th Jul '18 - 2:40pm

  @Laurence Cox

  No offense taken whatsoever. As you say, I’m Dutch, and in these Trumpian times some bluntness can come in handy (see: https://www.theguardian.com/us-news/video/2018/jul/03/no-dutch-prime-minister-awkwardly-interrupts-president-trump-video), to give as you (or: we EU conspirators out to do the USA, that “City upon a hill”, down) get. To misquote the motto on BBC Broadcasting House: “Nation shall speak peace unto Nation”.

  Beside the movie “Love, Actually”, the real source of the peel-off messaging performance of course is Bob Dylan in 1965: https://www.youtube.com/watch?v=MGxjIBEZvx0
  Those were the years, the 1960’s, that Trump, having completed a Military Academy for his (all but) Comprehensive middle schooling, started working, manipulating the system for both selfish and political reasons; see Michael d’Antonio, “The truth about Trump”; St. Martins paperbacks, New York, 2016, p. 90-92. In this he is no better than the husband of his nemesis, Bill Clinton; but where Clinton is low key about it, Trump boasts both of his Academy exam results (no source to be found) and this dodging his obligation.

• Peter Martin 4th Jul '18 - 2:41pm

  @ Bernard,

  I’ve always found Dutch people to be friendly and hospitable. But, at the risk of being politically incorrect, they generally don’t make good economists! They, like the Germans, do have an odd view about debt which translates into the word ‘Schuld’. The trouble is so does the word guilt! It’s the same in both languages and so very much of a cultural issue.

  This creates psychological problems when our economic system is based on a fiat currency which, in itself, is just debt. There’s no gold and silver involved any longer. The pound is an IOU of the UK government. The euro is a collective IOU of all EZ govts. All assets and liabilities have, in an accountancy sense to sum to zero. It’s all simple enough. If we want to hold those assets someone else has to assume the liabilities. Governments have to be in debt. All they are really ‘guilty’ of is allowing everyone else to have some financial net worth.

  It’s all basic Keynesianism. But, and as Wolfgang Munchau puts it:

  “German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes.”

  I’d add Dutch economists too. There’s really no difference. This attitude is leading to the undoing of the EU, which is bad news for us, even if we are completely out.

  https://www.ft.com/con…/e257ed96-6b2c-11e4-be68-00144feabdc0

• Bernard Aris 4th Jul '18 - 5:31pm

  The Dutch bad economists? History tells you otherwise. Just two examples from Wikipedia:
  *) the pioneering 17th century regent and pamphlettist Pieter de la Court who “pioneered modern thinking about the economic importance of free competition” (see https://en.wikipedia.org/wiki/Pieter_de_la_Court ); see the index in professor Israëls handbook “The Dutch Republic”; and
  *) the leading political economist (co-founder of our IFS, the “Central Planning Agency” , CPB, advisory government think tank since 1946) Jan Tinbergen, “widely considered to be one of the most influential economists of the 20th century and one of the founding fathers of econometrics” and macro-economic model-making (see https://en.wikipedia.org/wiki/Jan_Tinbergen ). He was as many contemporaries a leading (neo)Keynesian, winning the 1969 Nobel Price for Economics. No budget can be introduced in Dutch parliament without the analysis of this CPB.

• Martin 4th Jul '18 - 5:41pm

  Peter Martin:

  Of the “two groups: those that have not read Keynes, and those that have not understood Keynes” I have a strong impression of which one you fit into.

• Little Jackie Paper 4th Jul '18 - 6:52pm

  Peter Martin – ‘The euro is a collective IOU of all EZ govts.’ But to me that really is the question here. It shows up the fundamental problem that the EZ and EU really need to be an optimum political zone as well as an optimum currency zone.

  The euro is a collective IOU of the EZ governments, but only the ECB can issue (and cancel) euros. What we’ve ended up with is an asymmetric currency zone but importantly one lacking political union.

  https://voxeu.org/article/target2-scapegoat-german-errors

  The TARGET2 balances might not matter to the extent that the ECB can just write it off. However I suspect that EZ populists would be rather less sanguine. At best the TARGET2 (im)balances are showing that there is serious divergence in the EZ and at worst it is the ECB buying up southern debt that will likely never be repaid. Again, I can guess what German and Dutch populists would have to say about that.

  What will ever happen if (say) Germany decides to ‘call in’ its TARGET2 balances is anyone’s guess. Monetary union needs political union and until the EZ confronts that it will get nowhere.

• Joseph Bourke 4th Jul '18 - 6:56pm

  Peter Martin,

  “It’s all basic Keynesianism”. I am not so sure it is.. It more closely resembles Abba Lerner’s theory of ‘functional finance than the views of Keynes.
  Keynes’s long-term policy for promoting full employment and reducing economic fluctuations was the socialization of investment. Keynes did not call for recurring budget deficits to finance current expenditure, nor did he advocate counter-cyclical policy to smooth fluctuations in income and consumption. His focus was on preventing recessions by advocating a much larger role for the state in capital creation.
  Keynes’s long-term policy proposals were designed to ensure that budget deficits of current expenditure and revenue were prevented from occurring in the first place. He advocated the formal separation of capital and current items in the government budget into distinct ‘capital’ and ‘ordinary’ (or current) budget accounts, respectively.
  Keynes drew a sharp distinction between debt-financed capital spending and current expenditure. If full employment was maintained the ordinary budget should remain balanced over the long-term and as such, public debt should eventually decline as a proportion of national income. Keynes viewed budget deficits as a consequence of the failure of policy-makers to achieve full employment rather than as a desirable recourse to remedy unemployment during a recession.
  Keynes proposed several policies to raise total investment, including: lowering the long-term rate of interest through a monetary or wage policy; eliminating the influence of speculation and the volatility of expectations; and redistributing income in order to increase the economy’s propensity to consume. However, Keynes’s core solution was the state management of investment – the so-called ‘socialisation’ of investment. Public investment spending would dampen fluctuations in total demand and reduce the cyclical component of involuntary unemployment.
  Lerner’s theories versus Keynes come down to an interpretation of cause and effect. Keynes saw under-investment as a recurring cause of demand deficiency and state investment as the optimum means of addressing this structural problem.

• David Raw 4th Jul '18 - 7:26pm

  @ Barnard I’d tread carefully about the Birling family in 1912 if I were you.

  They, in fact, represent the mill owning Liberal Party establishment in Bradford (in 1912 still a Liberal stronghold on the limited franchise). Jack Priestley (and his Dad the founder of school meals) was (whisper it soft) a socialist. You’ll frighten some of the LDV regulars if you’re not careful.

• Nick Baird 4th Jul '18 - 7:43pm

  @Peter Martin – “There’s basically only two options for Brexit:
  We can have a Free Trade Agreement with the EU, or we can leave and trade under WTO terms.”

  Hardly. We want (probably, but who knows) still to be part of Euratom, Galileo, the European arrest warrant etc.

  But we don’t want (probably, but who knows) freedom of movement and the ECJ.

  There’s a myriad of possible permutations, but nowhere near enough time left…….

• Peter Martin 4th Jul '18 - 10:48pm

  @ JoeB,

  I don’t believe there was any great disagreement between Lerner and Keynes. This link explores the relationship between the two:
  http://socialdemocracy21stcentury.blogspot.com/2010/09/would-keynes-have-endorsed-modern.html

  You might have had more of a point if you’d said that a Government’s liabilities in its own issued currency (including bonds denominated in that currency) was more double entry accountancy than Keynes.

  Little Jackie Paper,

  You’re absolutely right that there does need to be an optimum political zone. Yes the ECB could write off the liabilities of Greece, Italy and others but it would also have to write off the assets of Germany. Germany could “call in” its euro assets but what would it do with them? If it spent the euros buying stuff from the rest of the EU its trade surplus would turn into a trade deficit. That’s what Germany should do but won’t! It needs to do that to make Target 2 imbalances move towards balance.

  If it calls them in and doesn’t spend them then they just end up being banked again with the ECB and nothing changes.

  Germany is like the miser in his cave counting out his gold coins. Those could be circulating in the wider economy to make everyone wealthier , including our miser, but he prefers to accumulate as many as possible and do nothing with them.

  @ Nick Baird,

  As I understand it, Euratom isn’t technically part of the EU. Canada and the USA have similar co-operative arrangements on scientific projects and extradition of criminals etc. I’d like to see the UK and the EU have essentially the same relationship as the USA and Canada. ie Friendly, with co-operation, but with a degree of separateness too.

  @ Bernard Aris,

  You’re saying Dutch economists are better than I thought? So how come the eurozone is in such a mess? What is the Netherlands doing to try to persuade Germany to change its passion for austerity inducing economics.

• paul barker 5th Jul '18 - 3:27pm

  The “Political Betting” site has an interesting article up the effect of Brexit on the British Right – “The Sick Rose”. Its well worth reading, especially for anyone with Leave sympathies.

• Joseph Bourke 5th Jul '18 - 4:53pm

  Peter Martin,

  Lerner postulated that government’s fiscal policy should be governed by three rules:

  -The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
  – By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
  – If either of the first two rules conflicts with principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.
  Keynes’ budget policies and stabilization policies call for the following:
  1. Where total investment is less than the amount of saving that would be generated at full employment, social investnent would be necessary to maintain full employment.
  2. Countercyclical variation in incomes via taxes and, therefore, spending should not be relied on to maintain full employment.
  3. Public investment should consist of those projects that provide a real return over time, either in cash retums such as public enterprises, or indirect return such as school buildings. Such investment should be done from the point of view of the public good rather than private return.
  4. The government should not deficit finance current expenditures. Public investment expenditures should be financed by borrowed funds that are repaid over the service life of the project. Tax revenue should be budgeted so as to meet these payments.
  5. There should be no deficit in the current or ordinary budget over the business cycle. In economic downturns, automatic stabilizers might result in current deficits. However, in prosperous times, the current budget should automatically run a surplus.
  While Lerner may be basing his advice on his interpretation of Keynes theoretical constructions, the policy prescriptions are quite different.

• Jen 5th Jul '18 - 6:17pm

  “Car driver-liberal” is one of the best ways of describing or defining what would here be a wing of the Lib Dems I have ever seen. Thank you for crafting it Bernard!

• Peter Martin 5th Jul '18 - 9:48pm

  @ Joe B,

  “The government should not deficit finance current expenditures”

  It really all depends on you define current and capital. Whatever Keynes might have thought prudent to say politically in the pre-war era was discarded during the war years when he started to have some influence on govt policy. The government did what it took to keep the war effort going and keep inflation under control. All very Lerneresque.

  “There should be no deficit in the current or ordinary budget over the business cycle”

  Again it all depends on what “ordinary” means. And also it depends on how much money is leaving the economy to pay for net imports. If you let the pound float and so–called ‘hot money’ is attracted into the economy, which is always defined as the capital account, that has to mean the current account (trade) is in deficit.

  The government can’t allow that deficit to be funded entirely by the creation of private debt. It just leads to the creation and bursting of asset bubbles.

• Peter Martin 5th Jul '18 - 10:05pm

  @Paul Barker,

  “Its well worth reading, especially for anyone with Leave sympathies.”

  It’s well worth reading for anyone with Remain sympathies too. What are we being asked to Remain a part of? Notwithstanding the appalling attack on Jo Cox which we all condemn, the UK far right are under reasonable control. They’ve no chance of any further electoral success in the foreseeable future.

  This is in itself, a dangerous thing. If far right activists feel frustrated they are more likely to indulge in acts of terrorism. They’ve less to lose.

  Not as dangerous as the situation in France though. There, the population are so disenchanted, that the contest for President could only be won, by the establishment, by somehow pretending that Macron was a ‘newbie’. It would be like the UK Conservative, LibDems, and Labour Parties standing aside for a totally new grouping as the only way of defeating UKIP.

  Besides France, we see the rise of the far right everywhere in the EU. That’s what happens when the working classes are squeezed by austerity economics.

• JoeB 6th Jul '18 - 12:32am

  Peter Martin,

  Keynes’ notion of capital was a physical notion-a man-made item that yielded a real service to its user over time.
  He believed that aggregate real income would continue to increase as more and more capital is accumulated. This increase in income results in an increase in aggregate savings and an increase in the average propensity to save. This leakage required ever increasing amounts of injections in the form of investment to maintain a reasonably full level of employment and income. If such investment were not forthcoming,
  unemployment and slow economic growth would result. To achieve such ever increasing amounts of investment in capital would be difficult by relying on the profit motive and yields from ownership of capital as these yields would have to fall as capital became less scarce. In addition to long-term insufficient amounts of private investment, short-term fluctuations in investment were quite likely, causing periodic recessions and booms. He believed the answer to both of these problems was a
  planned program of social investment to be conducted on the basis of needed public services but the scale of which would depend (assuming urgent social needs had been met) on the level of expected private investment relative to the full-employment level of savings. Public investment could fill the gap left by insufficient private investment and public investment could be adjusted in its delivery to offset short-run fluctuations in private investment. Deficits in the current or ordinary budget were a symptom of insufficient private and public investment. They were not a cure for unemployment. Borrowing to finance public investment was justified on the grounds that the capital acquired provides a real return over time. Further, such borrowing was to be
  associated clearly with the cost of the particular services to be provided and amortized with scheduled payments from tax revenues.
  If current account deficits are not offset by foreign direct investment then the government deploys the foreign surplus in public investments aimed at increasing international competitiveness.

• Peter Martin 6th Jul '18 - 8:55am

  @ JoeB,

  There’s still a big problem with trying to define types of spending. Yes we can say spending on hospitals and schools is capital. But what about the end product? ie Educated children and healthier ex-patients? Are they “a man-made item that yields a real service to its user over time.”?

  Not really! ‘Cos the govt doesn’t own them. So we can’t count the salaries of doctors and teachers as capital spending. But we can count the wages of bricklayers and electricians who work on the buildings. We can probably even count the demolition workers’ wages who pull down the buildings at the end of their useful life!

  Does this really make any sense? It’s useful to be able to justify some deficit spending this way to those who can’t, or won’t, understand how public spending works but it really doesn’t make any difference in the end.

  The government isn’t a business. A surplus isn’t a profit and a deficit isn’t a loss. They represent net inflows or outflows of money into the economy by government. If the economy is losing money to pay for net imports then the Govt needs to deficit spend more. If Germany doesn’t like us doing that they can all spend their ££ they earn selling us stuff rather than saving them via the Bundesbank. Its their call!

  If people are saving, rather than spending, the Govt needs to spend more. If everyone else is spending too much they need to spend less and tax more. It’s not that hard providing we just understand that they need to do the opposite of what everyone else is doing to keep the economy ticking along at just the right temperature.

• JoeB 6th Jul '18 - 1:57pm

  Peter Martin,

  there a problem with implementing Keynesian policies in an open economy regardless of how you define capital. Wartime controls on prices, wages and capital transfers are ineffective in peacetime and simply won’t be accepted in a democracy. Keynes proposals of accelerating or slowing down capital sending is easier said than done.
  Government isn’t a business, but it needs to get value for money from its spending. Wasteful spending simply depletes the resources of taxpayers and users of the currency. Public spending increases need to be targeted at universal public goods, be purposeful and deliver value for money.
  Individuals in aggregate will net save during their working lives and net spend during retirement with troughs and peaks subject to consumer sentiment. Investment by firms is driven by consumer demand. Hence, the essential element of state management of the economy is the maintenance of confidence. Consumers need confidence that they have a steady and reliable source of wage or investment income. Consumption falls and the propensity to save increases when confidence falls.

  Keynes put much focus on uncertainty and the need to both maintain confidence in normal times by socialising an adequate level of public investment to employ savings, and revive ‘Animal Spirits’ with countercyclical public investment in a downturn.

  The post-war experience of stagflation tells us that a country cannot simply spend its way to prosperity or ignore investor confidence in public debt markets. Taking these lessons on board should inform economic policy going forward.

• Peter Martin 6th Jul '18 - 3:10pm

  @JoeB,

  ” Consumption falls and the propensity to save increases when confidence falls.”

  This depends which confidence is being challenged. If inflation is higher than interest rates, as it usually is, then it doesn’t make any sense to save. Maybe that’s what needs to happen with money. An element of use-it-or-use-it. This pushes consumption up and whittles away at debt levels.

  I would agree that “the essential element of state management of the economy is the maintenance of confidence” but this needs to be a confidence that the economy is running as well as it possibly can be. A confidence that asset prices are real and aren’t just an artifice of a private debt induced asset bubble. Also a confidence that the economy is being managed for the public good and not just to maximise the profits of the 1%.

• Peter Martin 8th Jul '18 - 3:58pm

  @ Joe B,

  “Government isn’t a business, but it needs to get value for money from its spending. Wasteful spending simply depletes the resources of taxpayers and users of the currency”

  In general I would agree that Govt does need to spend wisely. But that’s not quite for the same reasons as we need to spend wisely.

  This is definitely Keynesianism:

  “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

  If anyone is actually thinking that Keynes is saying we should dig holes etc then they need to read the passage again and especially the last sentence.

• Joseph Bourke 8th Jul '18 - 5:48pm

  Peter Martin,

  I think the paragraph quoted in your comment is a good example of Keynes approach to theory versus practice. The utilization of abstract thinking to demonstrate the application of theory but an emphasis on pragmatism for the development of practical policy.
  In Keynes critique of Lerner’s functional finance, this is perhaps the key issue as this paper concludes https://varoufakis.files.wordpress.com/2014/01/ta-on-debt-paper-1.pdf
  “In relation to theory versus practice, Keynes’s stance might also be described as prudent. But although he was more cautious than Lerner about public debt trajectories, Keynes was not a debt conservative…it is the case that Keynes in 1940s policy deliberations endorses as a general (but not completely inflexible) principle that public debt should be used only to finance capital expenditures.
  He also affirmed many times that the endogeneity of the budget balance with respect to activity levels makes debt-financed expenditure at least partly self-correcting, via the consequent increase in tax revenues and reduction in other outlays . In summary, one could say that from the standpoint of Keynes’s policy sensibility, Samuelson suggested Lerner was guilty of …an unwillingness to bend the application of theory to practice, or of a certain temperamental unsuitability to practical policy design.

  Keynes commented on Lerners lack of ‘judgment and intuition’ sometimes leading Lerner into ‘preposterous conclusions’ noting that many contemporary economists ‘looked upon him as a crank’; … most of his policy recommendations looked like gimmicks’;
  Lerner considered … the translation of logical rules into practical policies the task of politicians, not economists’ – and Scitovsky speaks of ‘his lack of interest in and limited knowledge of how real economies actually operate’ making Lerner ‘blind to political realities’, his ‘overly simple picture of economic reality’ leading him to prescribe ‘overly simple cures for its woes’.
  Keynes’s ‘deep understanding of the political process, was a burden under which Lerner did not labor’. Keynes’s more considered views on debt, taken altogether, suggest the conclusion that policy management of the psychology of the debt market (or equivalently, the yield curve) was the key difficulty that Lerner did not face.”

• Peter Martin 8th Jul '18 - 10:50pm

  @ Joe B,

  Another economist worthy of mention is Kalecki. I can’t find the reference now but at one time Keynes was conceding that Kalecki was correct academically but his argument wasn’t one that any politician would accept – let alone use it as part of Government policy.

  The evidence is that Keynes was as aware as his contemporaries of just how the economy actually worked, but chose to moderate what he was saying to obtain better acceptance. When faced with politicians who were blinkered in their approach on the question of government debt, for example , he would have talked about running a deficit in the bad times only. ie Take them along in ‘baby steps’ !

  But Keynes knew the score. IMO. He would have been well aware that a country running a permanent deficit in its trade has also to run a permanent deficit in its government budget. It’s just arithmetic.

  We also need to appreciate that the nature of money, except possibly in wartime, wasn’t like it is now. In Keynes’ lifetime money was usually either tied to gold directly, or indirectly by being pegged to a currency (the $) which was itself guaranteed against gold.