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Sunday, March 26, 2017

Canadian Federal Government Rejoins Reality

Rick Salutin wrote an article that is popular in Modern Monetary Theory circles -- "Can we come out now that the deficit hysteria is over?" He describes how Finance Minister Bill Morneau made some sensible statements about the budget (and how that shocked the Canadian press corps). I am not going to go so far as to announce that the "Age of MMT" is upon us, but it is clear that "Harpernomics" is stone cold dead.

The article has some very entertaining quotes; it's clear that Morneau was enjoying himself.

It’s so radical they struggled for words. Peter Mansbridge began interviewing Morneau with: “How does it feel to know you’ll likely never have a balanced budget?”
I wish Morneau had said, “I’m fine, but is there anything I can do to help you through this?”
Like the Salutin article, I am not going to delve into the budget details. (I am currently up to neck in SFC modelling, as well as non-writing projects, and so I cannot delve into budget documents.) The focus here is on the messaging: the Federal Government is now going to focus on the trajectory of the debt level versus GDP (and presumably other metrics, but they would probably all be correlated with GDP).

This change of messaging shocked the Canadian press corps, which really needs to read Understanding Government Finance. However, it was presumably done to underline that Harpernomics is no more.

Last year, I discussed the first Liberal budget. I noted then: "The budget announced the plan to repeal the Federal Balanced Budget Act (page 53). (Repealing that Act in the first budget provides everyone with a lesson in elementary Canadian civics; one parliament cannot bind the hand of future parliaments in that way.)"  (It was repealed last June.)

The fact that a conservative Canadian politician misunderstood how parliamentary government worked is a sign that there is something seriously wrong with modern conservatism. Back in the stone ages when I was interested in politics (the early 1990s), Canadian conservatives took pride in defending parliamentary government from those darn "secular humanists" (or whoever they were worried about in those days; the Communists were already past tense). Anyways, what we have now is that the pendulum of politics is swinging back, which it usually does.

I think it would be premature to declare that MMT has taken over the Canadian government. However, it is just a sign of a return to realism.

There are two ways of looking at fiscal policy:
  1. in a way that is compatible with MMT; or
  2. the wrong way. 
One could easily debate about the terminology used by MMT; such debates miss that the operational details end up exactly where MMT says they should be. (Understanding Government Finance is my attempt to discuss how MMT relates to government finances, but using phrasing that is probably more familiar for readers of financial market research. This reflects the fact that I used to produce such research earlier in my life.)

The advantage of MMT is that is much less compromised by gibberish than competing schools of thought, particularly mainstream economics. The Reinhart-Rogoff study that produced the magic 90% debt-to-GDP ratio was obviously wrong even if the spreadsheet error was not present; however, the mainstream lacked the intellectual coherence to be able to convincingly reject the research when it first appeared. They are starting off in the wrong place, and so we get assertions from the mainstream about fiscal policy that are all over the map. Modern Monetary Theory starts in the right place, and it was easy to produce an argument that the 90% ratio made no sense, even using conventional tools to make the demonstration. This means that anyone who quietly embraces MMT has a huge analytical advantage over coworkers who are mired in the swamp of mainstream conformity.

As a result, we should continue to expect to hear stories about government officials embracing MMT thinking; whether this is enough to get a Job Guarantee implemented is another question.

Addendum: Criticising the Existence of Mainstream Economics

I do not agree a lot with Professor Simon Wren-Lewis, but he is at least one of the few mainstream economists who engages with post-Keynesians on his website. (Whether he cites post-Keynesians in his academic research is another question; I have not read a lot of his academic work.) He wrote another article on the macro wars, "On criticising the existence of mainstream economics". A lot of this article discusses austerity, and so it is somewhat related to this article. He tries to paint a prettier picture of mainstream incoherence on austerity than I do here; I will let the reader judge.

I just wanted to comment here on this small passage. I could probably turn this into a full length article, but I want to de-emphasise economic squabbling.  Wren-Lewis:

 Most economists would be horrified if some professional body started ruling on what the consensus among economists was. [...] I would argue that economists’ laissez faire view about defining the consensus (or lack of it) has helped the UK choose Brexit and the US choose Trump. I personally think economists need to think again about this.
However to do so would go in completely the opposite direction from what most heterodox economists wish. It would greatly increase the authority of the mainstream, when there was a consensus within that mainstream.
This argument seems utterly detached from reality. The mainstream controls the following:
  • the Riksbank "Nobel" Prize in Economics;
  • the largest economic journals;
  • faculties of the Ivy League Universities (and Oxbridge);
  • supra-national bodies;
  • central banks.
In other words, they have complete control over credentials, and ruthlessly exclude heterodox economists from these areas of power. How exactly would a "professional body" make any difference for mainstream credibility?

Of course, mainstream macro has no credibility amongst people who have to be correct about the economy, and do not care about credentialism. Nobody in finance uses DSGE macro, and when the crisis hit, central bankers had to throw out all of their DSGE models and grab dusty century-old manuscripts to guide policy.

In my view, the voting public is a lot more cagey than Professor Wren-Lewis suggests. The complete inability of mainstream economics to be useful for anything other than credential-gathering is relatively obvious to any reader of the business press, and so it is entirely reasonable to go elsewhere for information.

(If you are a fan of mainstream economics and are offended by the preceding passages, feel free to let me know what positive contributions DSGE macro has made to our understanding of economics. I did my research, and found nothing, but I am open to suggestions.)

(c) Brian Romanchuk 2017

4 comments:

  1. Professor Wren-Lewis didn't really answer this criticism did he.

    “Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce of credibility? The case for austerity undoubtedly didn’t hinge on this research alone, but imagine if a politician cited faulty medical research to approve their policies — would institutions like the BMA not feel a responsibility to condemn it?”

    And like you say, it was easily refuted before the spreadsheet errors were even known about.

    ReplyDelete
    Replies
    1. Since Wren-Lewis is and was anti-austerity, I would not spend a lot of time arguing with him that the mainstream was pro-austerity.

      The only reasonable point of argument I could have with him is that I would argue that this demonstrates that the mainstream view of fiscal policy is incoherent, and he would disagree, and it would be blah-blah back and forth. Like I wrote, I'll let the reader decide.

      To have a useful discussion, we need to look at the operational differences between the two schools of thought. I read a lot of the mainstream DSGE literature on fiscal policy -- including a paper or two by Professor Wren-Lewis -- and everything I read was either obvious or wrong. However, it takes a lot of digging through pseudo-mathematics to get to that conclusion, and that's a huge waste of my time. Therefore, I am trying to focus on positive contributions to economics (such as building the SFC library), and not squabbling.

      Delete
    2. Well Brad Delong of all people seems to agree that Professor Wren-Lewis sidestepped the criticism of R&R.

      http://www.bradford-delong.com/2017/03/the-need-for-a-reformation-of-authority-and-hierarchy-among-economists-in-the-public-sphere.html

      I am all for positive contributions to economics even though I am unlikely to make any. And I'm all for avoiding useless squabbles. But some arguments are worth making at times even if they are squabblish(?) Plus they can be fun and spark interest in the subject which in normalish times is fairly boring to most people. And if you don't show how the accepted view is wrong, why should anyone listen to the new more positive contributions?

      Delete
    3. I might write something up. The problem is trying to do it in a constructive fashion.

      Delete

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