Adair Turner was in Bristol on Wednesday (11th Nov) for a Festival of Economics to talk about the financial crash, continuing stagnation, and possible ways of reviving the economy. ‘Between Debt and the Devil’ attributes the crash to rising levels of private sector debt created by a financial sector where 80% of lending fuels consumption and drives up property prices rather than finding its way into investment. Lurking deeper in the background is the way rising inequality skews demand, the problem of global trading imbalances, and the fall in the cost of capital on the back of new technologies. And the way out? With the private sector now paying down debt a lack of demand continues to slow the economy. Ultra-loose monetary policy (zero interest rates and Quantitative Easing) has helped but a more effective stimulus is required. His answer is ‘overt money finance’, aka ‘helicopter money’; the government effectively prints money to finance more directly an increase in demand. The ‘new money’ is an asset for the people spending it, but not a liability for the government (like QE) so if issued at the right time and in moderation it will not generate inflation. ‘Helicopter money’ goes back to Milton Freedman. Forget Keynesian stimulus vs. Monetarist austerity. Turner sees ‘overt money finance’ as part of ‘the dominant new Keynesian model of monetary economics’.
There are technical questions here, but political ones too. ‘Overt money’ reinforces the demand for an independent central bank, otherwise governments could generate inflation by abusing their new found source of income. Turner thinks governments can decide how to spend the money but it should be for the bank to decide how much money to issue just as the bank, not government, now decides on interest rates. You can see the point. Governments have used all sorts of tricks to generate mini booms before elections but an independent bank won’t stop governments trying to buy votes with give-away budgets or the subsidized sale of council houses and shares. You have to clean up politics for that. Independence can make matters worse. It is part of a growing trend to outsource political decisions as if they were technical ones. The so-called Office for Budget Responsibility has done nothing to make Osborne’s budgets any less irresponsible. It was grotesque to hear Labour people offering to put their budget plans before the Office mandarins to get a stamp of approval.
There is a bigger question – what are we trying to fix? Economic stimulus of almost any kind is better than a slump but without structural reform it is just chucking good money after bad. The financial sector is parasitic; much of what it does has no useful purpose, much of it is plain destructive but it sucks in an ever greater proportion of domestic corporate profits, up from around 16% in the mid 80s to 41% at the end of the first decade of the 21stC. Turner hopes the banks have been ‘fixed’ by changing the regulatory rules but hardly anyone believes that.
Adair Turner’s lecture was stimulating, informative, and thought provoking. If a technocratic fix is what is needed, he is probably the man to provide it. If we want more than a technocratic fix the politicians will have to pick it up.