This week has seen an almighty blog ding dong between prominent New Keynesians.
Williamson kicked it off here on the 27th Nov. Arguing is highly mathematical language that QE has been deflationary.
the effect of QE is to lower the liquidity premium (collateral constraints are relaxed) which…will lower inflation and increase the real interest rate.
An idea that has been floating around in post-keynsian circles for some time. See Cullen Roache and Francis Coppola for example., with particular stress on the role of QE in providing safe collateral. Narayana Kocherlakota had briefly made such a claim in 20011 before withdrawing it.
Horror erupted with arguably the leading new Keynesian monetary theorist being threatened with ejection from the club, as summed up by Noah Smith
In a testy response, Nick Rowe called Williamson’s post “horribly wrong,” lamenting: “What the hell has gone wrong with some of the best and brightest in economics?” Brad DeLong then jumped in, accusing Williamson of mistaking an unstable equilibrium for a stable one. Paul Krugman echoed that accusation.
There were further follow ups by Williamson here, calling it a ‘teachable moment’ for his opponents to learn of their errors, and here and Krugman here, saying Williamson had not explained a story of how the effect he describes derives from individual actions.
I don’t much care for Willaimson’s NK modelling style and scary plumbing. DGSE doesn’t properly account for state, accumulation and stocks – only flows, and the Lucas ‘cash balance constraint’ is just a hack to avoid having to account for stocks. None the less Williamson seems to be moving in the right direction. His latest model has a decidedly ‘non-neutral’ role for money. Lets focus on the key mechanism in his model the changes in liquidity from QE leading to a lessening in the ‘liquidity premium’.
I have never much myself like the term and the treatment of liquidity in for example IS/LM models. If liquidity has a premium it has a price and what therefore determines that price? Quantitative stories alone don’t tell you about the demand side or the dynamics of the liquidity premium in disequilibrium. For example the price of an asset at a term will be determined by the next most beneficial asset at that term. The ‘liquidity premium’ is the difference in price with a comparable asset which is fully liquid. But we cant solely determine that price on the basis of a liquidity transformation of that asset only, the price is set by the price of the next most beneficial asset with that liquidity. Why do we want a more liquid asset? Aside from the transactional demand for money it is likely that what looked a good investment is now suboptimal, and in really bad times with negative returns money is the best asset of a bad lot. Seen in these terms we can tease out the differential components of ‘liquidity premiums which are easily confused, rate of returns on assets, the effects of inflation and the effects of risk.
This is how I see the basic macro, in terms from the godfather of QE Richard Werner.
Financial Assets Real Assets(GDP)
Nominal Rate of Return X inflation premium X risk premium <> Nominal Rate of Return (after depreciation) X inflation premium X risk premium
This sets the bounds within agents react and the context for micro, the pages on which the story is written. The inflation premium is the same on both sides of the equation. However the effect is not inflationary neutral, the adjusted rate of return on the RHS is what monetary theorists long ago (after Henry Thornton) used to term the ‘mercantile rate of return’ and on the LHS the ‘monetary rate of profit’. If the rate of change on the RHS is greater than the left hand side then the circulation of goods will parri passu not be backed by the creation of money, i.e. inflation. If the converse happens we have deflation. Where we have a differential rate of return then we see a shift in investment between the two sectors (as in the Petty/Ricardo/Malthus Silver-Corn model I discussed here) leading to an increase/decrease in the real wage which restores equality in the long term providing there is no change in the stock of money in circulation. Changes in the monetary stock, such as paying off debt or increasing the stock of money in circulation, can set off a ‘cumulative process’.
I have previously argues, for example in my paper on a stock-flow consistent alternative to IS/LM that the concept of liquidity could be fully replaced by conceptions of risk and leverage. That is correct and can explain why the ‘demand for loans’ curve (leverage) slopes down with the interest rate. But there is a role still for ‘liquidity premiums’ considered as an addition to the gradient of this curve caused by increasing risk (and not other effects) through time. Consider the following from Anderson’s Economics and the Public Welfare
“Selling on the stock exchanges at the outbreak of the war was an illustration of a fundamental principle in economic life. When there is general confidence in the uninterrupted goings on of economic life, confidence in the legal framework under which economic life operates and in the essential integrity and fairness of governments, men with capital prefer to have their capital employed. They want income from it. They want capital to work with, as giving additional scope to their personal efforts and their personal abilities. They are quite content to have their capital embodied in physical goods destined for future sale, in shares in industrial undertakings, in real estate which brings in rentals, or in loans to active men engaged in industry and commerce. But when grave uncertainties arise, and, above all, when unexpected war comes, men prefer gold to real estate. The man who has his wealth tied up in lands can make no shift. He must sit and take what comes. With the apprehension of war. however, the effort is made to convert illiquid wealth into liquid form as rapidly as possible, even though heavy sacrifices are involved.”
Jerry Bower calls this the Szlazard principle after the physicist who always kept packed suitcases at the door. At times of greatest uncertainty there will be a marked increase in the ‘liquidity’ premium.
Consider again our equation. If the risk premium on financial assets is reduced, through for example a central bank buying bonds on the secondary market, then this will underwrite the risk free return and lower the liquidity premium. This means the LHS value will increase compared to the RHS which is deflationary. We have a simple mechanism, will this satisfy the critics?
A potential objection is this a revival of the ‘natural rate’ argument which Sraffa has supposed to have disproved. He did not only that under barter there is no unique natural rate. See this paper here, Own rates, in any inter-temporal equilibrium, cannot deviate from each other by more than expected price appreciation or depreciation (including the effect of the change in the purchasing power of money) plus the cost of storage and the service flow provided by the commodity, multiplied by the liquidity premium must be equal, so that the net anticipated yield from holding assets are all are equal.
Putting this in broader context of whether the state of ‘mainstream’ economics is in good shape, as Krugman and Williamson have argued. Noah Smith
what Steve and I usually argue about is the general state of macro – he says macro is in fine shape, I say it hasn’t discovered much. I think this reversal supports my thesis. If a top-flight macroeconomist, who knows the whole literature backwards and forwards, can so easily change his workhorse model in one year, and reverse all of his main predictions and policy prescriptions, then good for him, but it means that macroeconomics isn’t producing a lot of reliable results.
But there is nothing wrong with changing your mind, as Keynes did, if a short term crisis leads to dismantling of a misguided ‘mainstream’.
Central Lincs examination – its all about deliverability.
Please do better boys you have to go through five clicks to fund they are at EiP.
From the inspectors briefing note.
The Joint Strategic Planning Committee (JSPC) has, for clearly justified reasons, not submitted one overall Local Plan for its area (NPPF paragraph 153) but has continued with its previous work on the submitted CS. This is to be followed by an Allocations Plan, which is due to be adopted around August 2016.
This means that there will be a gap of about 3 years between the two plans – possibly more if the Allocations Plan timetable slips or if development allocated in
the Allocations Plan is delayed. It is this potential ‘delivery gap’ between the two Plans which concerns me.
The simple solution here – as at BANES- is to allocate strategic sites now to ensure you have sufficient supply in your first 5/6 year period. The recently rightly has been back to comprehensive local plans.
There is no evidence on the need for gypsy and traveller sites, and no allocations are made in policy CL16. I understand that a needs assessment will be available in early December 2013. Government advice in its ‘Planning policy for traveller sites’ makes it clear that plans should identify sites (paragraph 9). The JSPC will no doubt be aware of the partial Reports issued to plans examined at Chorley and South Ribble where the lack of such allocations made those plans not sound. Similar warnings have been given to Leeds over the lack of a needs assessment.
And I would add Hull.
A senior councillor has slammed a meeting between MP Simon Reevell and a top government minister.
Dewsbury and Mirfield MP Mr Reevell met Secretary of State for Communities and Local Government Eric Pickles to discuss Kirklees Council’s decision to withdraw their Local Development Framework (LDF) and local concerns over planning issues.
Mr Reevell said he wanted the meeting to get clarification on the “absolute mess” he said the council has made of its planning future. Mr Pickles told him Kirklees should be using more up to date figures to determine their housing needs.
But deputy council leader David Sheard said Mr Pickles should be speaking directly to Kirklees to avoid a repeat of the LDF fiasco, which saw the council being forced to withdraw the LDF after it was criticised by a government planning inspector.
He said: “It seems very odd that he’s meeting with the MP who doesn’t even have responsibility for the LDF.”
Coun Sheard said the council was now working on a replacement strategy but they want a clear indication of how many houses Mr Pickles will approve. “We are now playing in the dark. We don’t want this on a nod and a wink from the MP – we want figures in writing.”
The LDF was criticised by the planning inspector for not getting its housing figures right.
Green belt land in Thornhill Lees and Cooper Bridge and the Chidswell area were earmarked to sacrificed for development under the original plan.
Further to my report on the GL Hearn Report recommending an almost quadrupling of its objectively assessed need in its plan review thanks to Village Developments for reporting to me what went on at the actual meeting.
the report by GL Hearn was recommended to be approved by the steering group consisting of five councillors who sat the Planning Policy Committee . At Committee meeting , the Council changed the wording of the report from approving the report to accepting it, that is to say not approving it . The meeting descended into farce when they voted not to accept report that they themselves commissioned . In the end they voted to receive a report . This report took 15 months to commission from a resolution to undertake an OAN in June 2012 .
The stupidity of cllrs sometimes knows no bounds. What will they say now at appeals when asked by an inspector what their objectively assessed need is? They cant rely on the adopted plan as it is out of date for relying on the RSS, especially after Hunston. So what do officers say ‘well we have rejected one OAN but members have not voted to accept any other figure’ ! And on what basis, because you dont like the results, but that is a policy choice you make AFTER OBJECTIVELY assessing need. I can’t see now on what rational basis they have for a plan review.
Mark Carney’s appearance before the Treasury Select Committee this week, and especially his Guardian interview today. clearly shows what is one his mind.
The right way to do policy – to protect against the boom and bust cycles – is to act early in a graduated, proportionate way and that reduces the probability of having to act in a bigger way later.”
He said that Britain was building half as many homes a year as Canada despite having a population twice as large, and added: “It is widely acknowledged that there is a very large supply-side issue here.
“I fully recognise that Canada is the second-biggest country in the world. It’s easy to build housing as it’s easy to find places [to build]. But it does give you a sense of the issues around the constraints on supply and the movements in prices you see as well. They all reinforce that sense that there is a supply issue. And there’s nothing the Bank of England can do to change that.”
Well Canada has 35 million population, England 53 million. Canada builds (annualised seasonally adjusted) around 196,000 units a year, in England we build around 106,000. So clearly the message from Carney to Osborne is there is nothing more I can do so you need to undertake measures to increase housebuilding, and top of Osborne’s list is liberalise planning. He has already had two rounds of this. Round one the NPPF, round two liberalising changes of use.
Late in 2012 Carney took measures to cool the Canadian housing market which by some measures is the most overvalued in the world. He clearly is using the same measures designed to achieve a ‘soft landing’. So far this has been successful in Canada, the property has cooled without crashing, though with declining inventories it is still high risk territory.
The fact that the Canadian market is experiencing a housing bubble despite a much more elastic housing market and planning system suggests that planning alone is not the cause of housing bubbles. Although it is easy to sprawl or go tall in most Canadian cities Toronto and Vancouver have housing markets which are probably the most overheated in the world. Vancouver for example has a shelter cost to income ratio of over 89% the worst in the world.
Throughout history we have seen housing bubbles explode to devastating economic effect in countries with no or weak planning systems (Melbourne 1870 for example). So planning by itself is not the cause of bubbles. Cities are constrained by geography such as the Sea or the fact that central locations are intrinsically in short supply and that supply cannot be increase (there is only one central Toronto). This is essentially Homer Hoyt’s theory of housing bubbles. The popping of housing bubbles always occurs first in the most overpriced markets and national statistics can conceal this. Rather a plentiful supply of housing has two consequences.
1) It lengthens the upside of a housing boom. So countries which have plentiful supply ride that wave longer, in the same way that countries that take measures to extend credit (such as Australia) can extend booms. But this does not prevent them eventually bursting, and because of the prolonged growth they may burst more spectacularly
2) Low housing affordability makes economies extremely sensitive to rises in interest rates. Carney
“Think about the mortgage you are taking on, the debts you are taking on,” Carney said when asked what his message was to those aspiring to get on the housing ladder. “You are taking at least a 25-year mortgage, maybe a 30-year mortgage.
Here we have a problem comparing Canada and England in terms of housing affordability. For England has terrible statistics. If one looks at house price to earnings ratios England does not look too bad compared to Canada. However this is comparing a flow (income) to a stock (house price). Canada on the other hand uses shelter-cost-to-income ratio, flow of housing payments compared to flow of income. The importance of the difference comes when we consider the sensitivity of the economy to a rise in interest rates. House prices to incomes ratios (which should be median house prices compared to median incomes) don’t show the increase in housing service costs when interest rates rise. Then the shelter-cost-to-income ratio shoots up and the most levered households with the most precarious incomes can default, flooding the market with repossessed properties and causing debt-deflation. Much of the crisis in England’s housing supply situation has been concealed by very low interest rates increasing housing affordability despite low supply.
Another problem of comparison is that many in Canad to maintain affordability have been forced out to further and further remote locations, with lower incomes and higher transport costs, transport costs subsidized through the short term fall in oil prices caused by shale.
All of this illustrates that an extreme neo-liberal response to planning will not prevent housing bubbles of their bursting. The best way of avoiding a housing bubble is to build public housing at low rents for those who would otherwise take out highly leveraged loans (sub prime) or fuel a buy to let bubble in those seeking to supply for generation rent.
Sorry no chance before to comment on the 14th Nov Recovered appeal decision in Nuneaton and Bedworth – A green belt site proposed for 150 homes + 150 permanent moorings. Planning says this is the ‘ the first such case to come across his desk following a pledge this summer to take action against inappropriate development in the green belt.’ slightly misleading as that statement drawing attention to para. 83 of the NPPF that boundaries should only be altered in exceptional circumstances through the review of a local plan has been referenced privately to MPs on many occasions by Pickles as being implemented in a previous recovered appeal decision at Thundersley.
Pickles has a problem though in that that appeal has gone to JR. One of the grounds being that this reference to the para/ 83 was faulty. One problem is that this para refers to altering plan boundaries, the ‘exceptional circumstances test’ wheras for planing applications it is the the ‘very special circumstances test’ and an application for housing in the Green Belt doesn’t not have to alter its boundary. Though arguably it can be of such a scale as to render the previous boundary meaningless at that location. Also at Thindersley the SoS did not properly weigh up the benefits of the proposal against the length of time likely to get a new plan.
In this case the SoS avoids any such arguments by not mentioning the likely time to produce a new plan. It is decided solely on vanilla and familiar very special circumstances tests. What does this mean then for Pickles ref to Para. 83, well its not worth the paper its written on. This appeal, the Exhall appeal, does indicate though little comfort for other major schemes in the Green Belt hoping to set a precedent, such as the well known Hunston site at St Albans. As here even if the recent JR fails the SoS would be likely simply to state that ‘on balance’ the Green Belt test is not met as the benefits (including new housing when there is not a 5 year supply) don’t outweigh the harm to the extent necessary yo meet the VSC test. Whereas of course outside the Green Belt the opposite almost always applies.
Planning Resource here is the Balli ref. The only thing I would add is that in the ‘other case’ referred to the Inspector used a method of calculating the 5 year supply that was found unlawful in the Hatcham/St Albans case – which itself goes to JR this week. So as many predicted the vagueness of the NPPF is leading to endless JR’s
Cotswold District Council took the case to court after its decisions to reject two housing proposals at Tetbury in Gloucestershire were overturned on appeal by the government in February.
Councillors were upset that the 289 houses are planned for Highfield Farm and Berrells Road, both in areas protected for their natural beauty.
But after hearing the local authority’s challenge to the decisions, a High Court judge yesterday effectively gave the schemes the go-ahead.
Mr Justice Lewis said the decisions on appeal to reverse the council’s refusal of outline planning permission in the two cases were “lawful”.
The court heard that the Regional Spatial Strategy for the South West had pinpointed a need for 2,022 houses in the area over the next five years.
But the planning inspector considered the council had persistently failed to deliver enough houses and added a 20 per cent buffer, making a total of 2,426.
And, because the council was only able to show it had enough land available for 1,711 over the next five years, that left a “very serious shortfall”.
Due to that shortfall, the policy restricting housing outside existing development boundaries had to be considered out of date, the inspector found.
And due to a “severe” shortfall in housing in the council’s area, the developments were in the public interest.
Lawyers for the council argued at the High Court that the inspector had misconstrued the meaning of “persistent under delivery of housing”.
The secretary of state, Eric Pickles, in allowing the appeals on the inspector’s recommendation, had also failed to take into account an important consideration.
The council argued that, in another case in the Cotswolds, a planning inspector had not added the 20 per cent buffer on the grounds he was not convinced there was a persistent record of under-delivery.
But giving judgment, Mr Justice Lewis said that, whichever way it was looked at, there had been under-delivery of housing land which could be characterised as “persistent”.
And since the decision on the other case had not been drawn to the secretary of state’s attention, he did not need to take it into account.
“The decisions of the secretary of state in the Highfield and the Berrells Road appeals are lawful,” the judge continued.
“The inspector, and hence the secretary of state who adopted her reasoning, correctly interpreted the relevant policy and reached conclusions that were open on the material available.
“The secretary of state did not fail to have regard to a material consideration.”
The reader will recall from a previous post on Ricardo’s criticisms of Bentham’s argument that the production of paper money would lead to increased output. Ricardo’s argument was based on what he himself called his key economic principle – the purchasing power of money was regulated by its cost of production. Although we often now talk of the ‘classical dualism’ of prices of goods and prices of money being determined by different laws this is reality is a monetarist dualism as Ricardo was very clear that the same principles of value theory determined both.
It struck me after writing the last letter that Ricardo missed a very good example which showed a serious weakness and necessary correction in his argument. This arose from Malthus’s well known ‘silver gathered on a sea shore’ argument in his letter to Ricardo of the 10th Sept 1819 , answered here , leading to a debate which continued to the end of Ricardo’s life.
If we suppose half an ounce of silver on an average to be picked up by a days search on the sea shore, money would then always retain most completely the same value. It would always on an average both cost, and command the same quantity of labour. The money price of labour could never permanently either rise or fall.
This scenario is oddly similar to Keynes parable of digging for money hidden in bottles and I guess was probably its source.
What Malthus was doing here was deliberately contriving a model with no fixed capital, no rent and no capital advances, other than the need to provide food to feed the laborer one day in advance. This was designed to produce a scenario where the money wages of labour was the same in Malthus’s measure of value (labour commanded) and Ricardo’s (labour embodied) to take these arguments out of the discussion and solely consider the issue of how the rate of profit and price of wages goods was regulated.
Ricardo called Malthus’s assumptions ‘extreme’ and ‘contrived’. The arguments subsequently took as read that the ‘value’ of the money produced would be of the same value and that any price effects would be due to the shifting of labour from production of wages goods to production of money. Both authors also occasionally touched on the nominal and real issues involved and the consequences to prices of the variations in production of money.
Its seems however that both missed something important. That given that prices are expressed in the nominal unit of exchange any increase in production of money would have a denominator effect on the purchasing power of the money produced. Take an extreme example of 10 labourers producing corn the other 2 gathering silver. If silver is rare to begin with and the quantities of silver gathered high then the circulation of money would rapidly increase and prices would rise. Labour would be attracted from corn to silver gathering further increasing the production of money, and leading to diminishing returns and further increasing the price of corn due to reduced supply. Eventually the profits from producing corn would rise to the same as those from producing silver and we would have an equilibrium. On the way though we have a disequilibrium process caused by increasing the stock of money. We also have an strong incentive to invest capital in corn to increase productivity due to increased corn wages. Hence the value of money in the short term is not simply to be measured in terms of cost of production but the cost of production discounted by the increase in circulation. Ricardo is right however that in the long term if we get to equilibrium the real economy adjust (and in our terms the discounting vanishes) as production changes and rates of profit are equalised.
Here we can see a fundamental modification to the law of markets which I think is equivalent to Keen’s Schumpeter-Minksy law if we break down algebraically the components of change arising from income from production and income from the effect of the change in the circulation of money.
Of course today we don’t have metallic money but money has a cost of production, and that cost is the opportunity cost, either from Crusoe type savings or from reductions in future income to pay back debt. Therefore you can extend the same silver-corn model to todays economy between those producing to increase the production of money to pay off debt and those producing for consumption. The effect is the same. The more we produce for the former the higher wages rise but always offset by the reduced purchasing power of those wages due to higher prices of wage goods. This assumes free entry. If we allow for rents from those holding the resources producing the unit of exchange real wages will not necessarily stay the same. Also if those producing for paying back debt and those producing consumer goods are the same people for different part of the working day wages will not rise but prices would, so we have a business cycle as real wages would be squeezed more and more as debt rises until debt becomes unpayable.
Malthus’s response in producing his ‘constant value of labour’ theory to rescue as he saw it this labour commanded theory deserves its own post no least because it was highly influential to Sraffa.
Regular readers of this blog will also know that it was discovered after Ricardo’s death that introducing fixed capital into the equation makes no difference (the Mill-Longfield recalculation approach – acknowledged by Torrens and JS Mill to remove objections to the theory of value). If I have time I hope to write an extended piece on what to may mind was possibly the key discovery of classical economics after the death of Ricardo was almost completely forgotten.
A desperate attempt to get the policy, and Bungalow Bob Kerslake, off the hook after the recent PAC savaging of the policy. If it is simply a reward for what would be built anyway then judged against this money shredding criteria for success the policy can never fail.
When MPs sought to discuss the government’s exciting new homes bonus initiative, Kris Hopkins, the housing minister, seemed just the man to allay any fears. But by the end of Monday’s debate, things were as cloudy as the view through a dirty window. This scheme seems to be a bit of a turkey, complained David Lammy. “I am sorry, but the honourable gentleman clearly does not understand the scheme,” said Hopkins. He rightly told MPs that “the bonus itself is not for building homes”. It is a sweetener for those local councils that allow more housebuilding. But Hopkins went further. He also said: “I am afraid the new homes bonus is not about encouraging people to build homes.” Which had many MPs scratching their heads, because if one turns to the website of Hopkins’ Department for Communities and Local Government, it says: “We’ve introduced the new homes bonus. This is a grant to local councils for increasing the number of homes and their use.” In February Mark Prisk, Hopkins’ predecessor, said: “This country needs to build more homes, and that’s why the government is giving communities a reason to say ‘yes’ to growth through the new homes bonus.” And in 2010, Grant Shapps, then housing minister, wrote to local authorities promising that: “In April 2011 we will introduce the new homes bonus, a powerful fiscal incentive for local authorities to deliver more homes.” All of which might qualify as encouragement, you might think?
Interesting report from Tandridge. They adopted their plan, subject to an early review, whilst the SEP RS was in operation. Now they reckon in the review they will have to increase their targets from 120 or so a year to around 450 or so a year, Tellingly the report says that no tone of the authorities will be able to meet its needs without loss of Green Belt.