When ministers, in response to demands for more public spending, declare there is no magic money tree they are in literal terms lying. One of the things that make governments that use their own national currency quite different from households is their unique ability to create money. This is no great economic revelation, as it has been taught to first year economics students for as long as there were first year economics students. There is a very simple relationship between spending, taxation, borrowing and money creation. If we include paying the interest on its debt as part of government spending, then we can express that relationship in the form of an equation: Government spending – taxes = new borrowing + new money creation A great deal of confusion… [Read More...]

The wisdom or otherwise of the American Rescue Plan, which included $1,400 direct payments to individual Americans, has been a constant debate since it was enacted at the end of 2020 and the beginning of 2021. The main criticism has been that it overheated the US economy, and therefore added to inflation already high because of post-pandemic supply problems and energy price hikes. That increase in inflation has led the Fed to increase short term interest rates, and how high those interest rates will need to go to stabilise inflation, and/or whether they will lead to a US downturn, we are yet to see. In much of Europe, by contrast, there has been no equivalent fiscal stimulus. Instead there was much more general fiscal support, in the… [Read More...]

It is common to talk about how UK Prime Ministers have become more presidential over time. Cabinet government, where the PM is first among equals, has gradually been replaced by a more presidential system where the PM is more influenced by those working in No.10 than those around the cabinet table. However, to describe the system as presidential, with an obvious comparison to the US, is misleading because Congress can severely limit the power of the President. A presidential PM with a large majority in parliament has much more political power over legislation than most US Presidents. Is Johnson’s time at No.10 just another point on that steady progress away from cabinet government? In two important senses it represents more of a step change, a change which… [Read More...]

For many people things started going very wrong in the UK the moment the Brexit referendum result was announced. There can be no doubt that Brexit has been a disaster on almost every level. In economic terms this disaster is well established: if you have any remaining doubts, listen to Adam Posen giving the first presentation at the recent UK and a changing EU conference on Brexit. He shows how we have become a more insular country in terms of trade, FDI and migration: this has already led to lower UK growth while the implications of lower trade, FDI and migration for future productivity growth have yet to be felt. In addition, Brexit has led to higher food prices (see this conference presentation), adding to the cost… [Read More...]

Renewables are now the cheapest form of energy generation. If all energy use in the UK was based on electricity, and all electricity was generated by renewables, our current cost of living crisis would be far less severe, and of course we would not be adding to climate change. Furthermore, there is huge potential in the UK (and most other countries) for far more renewable energy production than we currently have. So why isn’t this happening faster? That is the question addressed in a new book by Eric Lonergan and Corinne Sawers. In many ways it is a very optimistic book, because it suggests the problem of climate change is mainly solvable with known technology, and there are no insurmountable barriers for doing this with sufficient speed… [Read More...]

A recent post was entitled “How Austerity created Brexit, and the economic and political decline of the UK”, and it tried to argue that the UK economy and politics had started going seriously awry in 2010 rather than in 2016. Some people responded that the real date from which things started going wrong was 1979 i.e, the advent of neoliberalism. In a sense they are right, and I have made this argument myself when I have talked about neoliberal overreach. By ‘overreach’ I meant that the continuing pursuit of neoliberal goals would transform neoliberalism into a kind plutocratic authoritarian populism we saw under Trump and we see in the UK under Johnson. (For why that represents a major change, see below.) In 2017, just after Jeremy Corbyn’s ‘glorious defeat’… [Read More...]

I think most people understand that the inflation we are seeing at the moment across the developed world has very little if any to do with excess demand (the famous too much money chasing too few goods) but is about external shocks to the price of commodities, and supply problems that emerged because of the pandemic and the recovery from it. In addition both types of inflationary shock are likely to be temporary: commodity prices are unlikely to continue to rise and most supply problems caused by the pandemic will be resolved. If this is the case, why do central banks need to raise interest rates, particularly as higher commodity prices will reduce real incomes which is deflationary? Given the normal lags in monetary policy, higher rates… [Read More...]