Really enjoying the podcast. I hear plenty of analysis in media generally about the potential of MMT but very little scrutiny of the potential pitfalls. It seems to be a bit like Crypto in that sense - it has its disciples. The notion that inflation is the only limitation on MMT seems to be massively understated. We seem to be getting first hand experience of that now.
A full podcast exploring the theory and deficiencies of MMT would be interesting.
If wages don't go up, then has the true cost of lockdowns been a large real pay cut? Would people still want them if they had known ex-ante?
Soc media is awash with graphs showing real salaries falling behind various cost of living measures over the last 50+ years. Are these true? Is there a lower bound or could the trend theoretically put us back to subsistence?
Just listened to the podcast on whether the government is responsible for the cost of living crisis. I agree the factors influencing inflation are largely external, but this country is continually being run at the limits (no buffer) and that includes the provision of decent public services. Therefore we have very little ability to respond to shocks. COVID impact on the health service and by extension the real economy is a perfect example. So the state is indirectly responsible for the cost of living crisis, as people generally have no buffer to absorb. I dont hear economists make this link in any sensible way to ensure people will vote for and demand serious reform.
It’s the lack of reform - in many areas- that is puzzling. I’ve been writing articles about structural reform for decades, as have several other economists.
Jim you made a comment about an economy being unable to function if the banking system crashed. As I understand it the Icelandic banks went bust and they seem to have come out the other end ok and their people did not obviously lose everything.
Thanks for replying on todays podcast. I hadn’t been looking at it from a burn the bond holders perspective. Just why did it not seem so bad overall for their people. Having read a bit more about it now it was pretty bad for everyone for a few years but they seem now to have come out the other end ok.
Sounds a lot better than the Irish situation where we stick to emergency measures like USC as a permanent fixture in the taxation system. Not to mention fact that we burned the national pension reserve fund in the process. There really is no retrospective analysis of how we got here, and so the mistakes will be compounded into the future. #verydepressing
I think it’s interesting that you’ve recently commented on the "widespread" perception that QE benefitted the rich at the expense of the poor.
I started to reply to this and found myself connecting this issue with another more current hot button topic.
Please excuse the rambling, it’s all quite emotional for me, as I lost everything when the party stopped in ‘08/09, but if I hadn’t I’d certainly have been on the gravy train for solvent investors that quickly followed.
When the Great Recession hit, and sovereign bond yields were all climbing to unsustainable levels, as the ECB could not buy sovereign debt, it enabled private banks and hedge funds to borrow at the discount window at a fraction over 0% to go off and buy these bonds and enable EU countries to continue to fund themselves. Whatever the motivation was, the ultimate consequence was that private capital had an arbitrage of up to 10% (and sometimes more) on essentially free money, with the benefit of an implicit guarantee. The ability to borrow amounts of €500m and above, at negligible interest rates, and immediately get an enormously positive return is what led to “the greatest transfer of wealth from the poor to the rich in economic history”
That this would later be compounded by selling off massive portfolios of distressed assets, to the same wealth funds, to shore up our banks balance sheets, is even more egregious - and they then were given favourable treatment in how they extracted profits from those same assets. Many of our citizens are still dealing with the entities established to extract maximum value as quickly as possible from these hastily disposed-of portfolios. Said portfolios largely comprised of peoples homes and businesses.
Little wonder then that these very funds would subsequently be enabled to invest (on favourable terms) in housing markets that had now been decimated by government policies (fuelled by populist reaction against builders/developers) leaving our construction sector hollowd out.
Now the funds which were given the keys to the kingdom, are reviled as “cuckoo funds” when in fact they are the main source of funding for private housing in Ireland.
housing crisis:
The current idiocy being peddled is that more supply will produce lower prices so we can all buy at a price similar in real terms to those acquired by our parents.
This is patently wrong on two fronts:-
1. What our parents bought (or in my case what I paid £26,500 for in 1983, my parents bought in 1960 something, for less than £5,000) had none of the comforts of even the most modest housing built today. And, we were quite prepared to live for years without holidays, cars, long weekends away, restaurant dining or even decent heating or television.
2. Nowadays, an A-rated apartment, with en-suite bathrooms and flash kitchen, is the minimum standard allowed to be built. Stripping away the site costs and with the developer acting as a non-profit, it would still not enable housing to be provided at an affordable cost if we limit access to debt, as we have chosen to do (another abreaction to the excesses of late Celtic Tiger property mania).
Construction costs are high, not because of developers, but because building personnel are in short supply and must be paid a market rate (should we ask them to work free of charge?). Also, our government policies ensure high levies and tax-take from housing development. On top of this a hostile tax treatment of indigenous developers means margins are …well, marginal.
If we somehow bumble through and eventually reach a supply-surplus in our economy, then it’s conceivable that prices could come down - but only for secondhand properties: new properties would stop being built of course. Needless to say, existing home owners wouldn't be happy.
Developers are NOT non-profit organisations, in the same way that car manufacturers and hotels and food producers and energy suppliers aren’t. Treat them with respect - I’ve seen close-up how state housing construction isn’t cheaper than private.
Restore mortgage rules to allow people afford to buy at a price that is sustainable for the developer to build and sell at, instead of condemning them to paying maybe twice in rent what they would on a mortgage. Lowering/reducing access to purchaser credit clearly doesn’t produce a situation where developers can sell at a lower price. Houses aren’t similar to boxes of cornflakes or iPhones.....
IN OTHER WORDS, START WITH REALITY, AND WORK FROM THERE.
Thanks for your very thoughtful and insightful comments. You supply useful context: housing used to be cheap when we paid construction workers a pittance, didn’t build particularly high quality houses and many young people emigrated. In the early 1960s, a time that you mention, over 50% of Irish exports were cows. We sometimes forget just how much has changed. Planning, in my view, is a disaster. I once paid a mortgage rate in Ireland of 17%. I could go on..
Thanks for the feedback on my feedback guys! Some of my points seem to have been misconstrued in your podcast today, but I'll give you the benefit of the doubt and attribute that to my not explaining myself fully in my comments yesterday. I'm not going to go into them in detail. Suffice to say that it wasn't me who termed QE a conspiracy theory. That must have been somebody else. I agree with you fully that QE was the only option at the time of the GFC and right through the Covid pandemic . I was referring to the unintended consequences that have ensued, which you have alluded to with your comments on MMT.
Hi Alan - we’ve been getting tons of comments from various sources so please don’t take anything as being directed at you. Apologies if it came across that way. We are completely committed to open and constructive dialogue, particularly with anyone that disagrees with us. Keeps it all fresh and we are the first to admit we don’t have all the answers.
Hi Chris, Why does MMT not work for you? Governments that issue their own currency can create as much money as needed for the economy to produce the necessary goods and services. Taxation, though it is needed for other reasons, isn't required to fund public spending. Is there anything controversial about this understanding of the economy? I'm not an economist so genuinely trying to understand.
Hi Ralph, that's a good summary of MMT that you have written there. That, really, is all there is to MMT which means there is no properly articulated view of how an economy works. No model of the economy that be be tested against the data. It's not scientific in that there is no hypothesis that can be tested against the data. Not even a theory of inflation. it doesn't tell us - at all - what that quantity of money is necessary to produce the goods and services. It doesn't say anything with any kind of precision or scientific rigour. To repeat: There is no model of the economy. There really isn't anything there.
Thanks. Some MMTers would say, though, that it's not a new theory, just an explanation of how the economy works. Right or wrong? They haven't come with a better name for the T, but 'Theory' doesn't appear to be what they're arguing MMT is.
Really enjoying the podcast. I hear plenty of analysis in media generally about the potential of MMT but very little scrutiny of the potential pitfalls. It seems to be a bit like Crypto in that sense - it has its disciples. The notion that inflation is the only limitation on MMT seems to be massively understated. We seem to be getting first hand experience of that now.
A full podcast exploring the theory and deficiencies of MMT would be interesting.
Here’s a link that deals with MMT in a way I wish I had written https://noahpinion.substack.com/p/the-nyt-article-on-mmt-is-really
Thanks Barry. We will return to MMT - probably several times.
If wages don't go up, then has the true cost of lockdowns been a large real pay cut? Would people still want them if they had known ex-ante?
Soc media is awash with graphs showing real salaries falling behind various cost of living measures over the last 50+ years. Are these true? Is there a lower bound or could the trend theoretically put us back to subsistence?
Just listened to the podcast on whether the government is responsible for the cost of living crisis. I agree the factors influencing inflation are largely external, but this country is continually being run at the limits (no buffer) and that includes the provision of decent public services. Therefore we have very little ability to respond to shocks. COVID impact on the health service and by extension the real economy is a perfect example. So the state is indirectly responsible for the cost of living crisis, as people generally have no buffer to absorb. I dont hear economists make this link in any sensible way to ensure people will vote for and demand serious reform.
It’s the lack of reform - in many areas- that is puzzling. I’ve been writing articles about structural reform for decades, as have several other economists.
Jim you made a comment about an economy being unable to function if the banking system crashed. As I understand it the Icelandic banks went bust and they seem to have come out the other end ok and their people did not obviously lose everything.
Thanks for replying on todays podcast. I hadn’t been looking at it from a burn the bond holders perspective. Just why did it not seem so bad overall for their people. Having read a bit more about it now it was pretty bad for everyone for a few years but they seem now to have come out the other end ok.
Sounds a lot better than the Irish situation where we stick to emergency measures like USC as a permanent fixture in the taxation system. Not to mention fact that we burned the national pension reserve fund in the process. There really is no retrospective analysis of how we got here, and so the mistakes will be compounded into the future. #verydepressing
I think it’s interesting that you’ve recently commented on the "widespread" perception that QE benefitted the rich at the expense of the poor.
I started to reply to this and found myself connecting this issue with another more current hot button topic.
Please excuse the rambling, it’s all quite emotional for me, as I lost everything when the party stopped in ‘08/09, but if I hadn’t I’d certainly have been on the gravy train for solvent investors that quickly followed.
When the Great Recession hit, and sovereign bond yields were all climbing to unsustainable levels, as the ECB could not buy sovereign debt, it enabled private banks and hedge funds to borrow at the discount window at a fraction over 0% to go off and buy these bonds and enable EU countries to continue to fund themselves. Whatever the motivation was, the ultimate consequence was that private capital had an arbitrage of up to 10% (and sometimes more) on essentially free money, with the benefit of an implicit guarantee. The ability to borrow amounts of €500m and above, at negligible interest rates, and immediately get an enormously positive return is what led to “the greatest transfer of wealth from the poor to the rich in economic history”
That this would later be compounded by selling off massive portfolios of distressed assets, to the same wealth funds, to shore up our banks balance sheets, is even more egregious - and they then were given favourable treatment in how they extracted profits from those same assets. Many of our citizens are still dealing with the entities established to extract maximum value as quickly as possible from these hastily disposed-of portfolios. Said portfolios largely comprised of peoples homes and businesses.
Little wonder then that these very funds would subsequently be enabled to invest (on favourable terms) in housing markets that had now been decimated by government policies (fuelled by populist reaction against builders/developers) leaving our construction sector hollowd out.
Now the funds which were given the keys to the kingdom, are reviled as “cuckoo funds” when in fact they are the main source of funding for private housing in Ireland.
housing crisis:
The current idiocy being peddled is that more supply will produce lower prices so we can all buy at a price similar in real terms to those acquired by our parents.
This is patently wrong on two fronts:-
1. What our parents bought (or in my case what I paid £26,500 for in 1983, my parents bought in 1960 something, for less than £5,000) had none of the comforts of even the most modest housing built today. And, we were quite prepared to live for years without holidays, cars, long weekends away, restaurant dining or even decent heating or television.
2. Nowadays, an A-rated apartment, with en-suite bathrooms and flash kitchen, is the minimum standard allowed to be built. Stripping away the site costs and with the developer acting as a non-profit, it would still not enable housing to be provided at an affordable cost if we limit access to debt, as we have chosen to do (another abreaction to the excesses of late Celtic Tiger property mania).
Construction costs are high, not because of developers, but because building personnel are in short supply and must be paid a market rate (should we ask them to work free of charge?). Also, our government policies ensure high levies and tax-take from housing development. On top of this a hostile tax treatment of indigenous developers means margins are …well, marginal.
If we somehow bumble through and eventually reach a supply-surplus in our economy, then it’s conceivable that prices could come down - but only for secondhand properties: new properties would stop being built of course. Needless to say, existing home owners wouldn't be happy.
Developers are NOT non-profit organisations, in the same way that car manufacturers and hotels and food producers and energy suppliers aren’t. Treat them with respect - I’ve seen close-up how state housing construction isn’t cheaper than private.
Restore mortgage rules to allow people afford to buy at a price that is sustainable for the developer to build and sell at, instead of condemning them to paying maybe twice in rent what they would on a mortgage. Lowering/reducing access to purchaser credit clearly doesn’t produce a situation where developers can sell at a lower price. Houses aren’t similar to boxes of cornflakes or iPhones.....
IN OTHER WORDS, START WITH REALITY, AND WORK FROM THERE.
Steven
Thanks for your very thoughtful and insightful comments. You supply useful context: housing used to be cheap when we paid construction workers a pittance, didn’t build particularly high quality houses and many young people emigrated. In the early 1960s, a time that you mention, over 50% of Irish exports were cows. We sometimes forget just how much has changed. Planning, in my view, is a disaster. I once paid a mortgage rate in Ireland of 17%. I could go on..
Thanks for the feedback on my feedback guys! Some of my points seem to have been misconstrued in your podcast today, but I'll give you the benefit of the doubt and attribute that to my not explaining myself fully in my comments yesterday. I'm not going to go into them in detail. Suffice to say that it wasn't me who termed QE a conspiracy theory. That must have been somebody else. I agree with you fully that QE was the only option at the time of the GFC and right through the Covid pandemic . I was referring to the unintended consequences that have ensued, which you have alluded to with your comments on MMT.
Hi Alan - we’ve been getting tons of comments from various sources so please don’t take anything as being directed at you. Apologies if it came across that way. We are completely committed to open and constructive dialogue, particularly with anyone that disagrees with us. Keeps it all fresh and we are the first to admit we don’t have all the answers.
Hi Chris, Why does MMT not work for you? Governments that issue their own currency can create as much money as needed for the economy to produce the necessary goods and services. Taxation, though it is needed for other reasons, isn't required to fund public spending. Is there anything controversial about this understanding of the economy? I'm not an economist so genuinely trying to understand.
Hi Ralph, that's a good summary of MMT that you have written there. That, really, is all there is to MMT which means there is no properly articulated view of how an economy works. No model of the economy that be be tested against the data. It's not scientific in that there is no hypothesis that can be tested against the data. Not even a theory of inflation. it doesn't tell us - at all - what that quantity of money is necessary to produce the goods and services. It doesn't say anything with any kind of precision or scientific rigour. To repeat: There is no model of the economy. There really isn't anything there.
Thanks. Some MMTers would say, though, that it's not a new theory, just an explanation of how the economy works. Right or wrong? They haven't come with a better name for the T, but 'Theory' doesn't appear to be what they're arguing MMT is.
Here is a link to a longer version of my critique https://noahpinion.substack.com/p/the-nyt-article-on-mmt-is-really