haroldchorneyeconomist

The Conservative party in the Canadian  House of Commons debate on Bill C 20 has raised some constructive suggestions about how to fine tune the wage subsidy and income support measures in Bill C20. But unfortunately some of their speakers in parliament, notably Pierre Poilievre from Ontario, has spoken out against the rising deficit and the role of the Bank of Canada in helping to keep interest rates low and supply liquidity to the capital markets by expanding its purchase of Treasury bills, government bonds and corporate bonds. What was perfectly acceptable in the era of the financial crisis of 2008-2009 is now suddenly unacceptable in financing the war against Covid -19. Deficit hysteria is now once again loose among the Conservative party . This is a pity, since it is ill-informed and illogical considering all of the current circumstances and the fact that John Maynard Keynes was published by the great British Conservative politician and publisher Harold Macmillan who defended Keynes‘s work throughout the 1930s and 1940s.( Alister Horne, Macmillan 1891-1956 vol.1 ,pp.63,103,107 and 290,London:Macmillan, 1988)

Winston Churchill once said that the greatest mistake of his political career was returning to the gold standard against the advice of Keynes in 1925. It is unclear exactly who M.Poilievre is listening to but he should think about getting a different advisor. There is no danger of inflation at the present and foreseeable future . The current danger rather lies in disinflation and even deflation.

The Finance Minister Bill Morneau has once again revealed the Government‘s commitment to sensible progressive economic policy from which there is additional room to continue to provide income support for both business and working people who have lost their jobs.The statement which is over 160 pp including charts and tables opens with a quick snapshot of the current situation.As we can see from the chart 2 below taken from the report real GDP growth in 2020 has been sharply negative and unemployment has risen to 10%. But without the 300 plus billion of deficit spending the results would have been significantly worse.The various programs of income support and support for business will begin to expire by September so the government will need to both reform and renew some of  them depending on the circumstances we face with the pandemic and the economy and in the light of suggestions received about how to improve their effectiveness. Despite the usual complaints about deficit spending from fiscal conservatives and politicians who hold those views the debt to GDP ratio is very reasonable at 49 %.

Chart 1.5 also taken from the snapshot shows that Canada leads the way in significant income and liquidity support for the economy as a percentage of the GDP among G20 countries at 13.8 % of the GDP along with Germany.

Its now July 6 and the U.S. is facing a major spike in Covid-19 following their premature opening of the economy. This seems likely to lead to further lockdowns in the months to come. Here in Quebec the situation is better although there are still new cases but for the time being we appear to be doing better as the number of new cases falls below 80, about the preceding average of the past five days, We cannot be complacent with such a deadly virus and the number of deaths remains a tragic legacy.

But this fall, I and my colleagues will be offering a full complement of courses for both undergraduate and graduate students online. In my case these will be Poli 204 and poli 610. In the case of Poli 204 which is  an Introduction to Canadian politics there is an e book available, from the publisher or one can order the physical text from the publisher . The text is L.Tossuti, E.Mintz, K.Brock and D.Barrie,Canadian Politics Today Democracy, Diversity and Good Government, North York: Pearson, 2020 isbn 978-0-13-528447. 

In the case of poli 610 the texts are John Maynard Keynes, The General Theory of Employment Interest and Money which is widely available;

Haroldchorneyeconomist, posts on Keynes, the deficit, debt management, monetarism, the depression of the 1930s, the financial crash and crises, quantitative easing, laissez-faire and the impact of covid- 19. A comprehensive list of the most important posts will be provided;

a biography of Keynes chosen from the following Robert Skidelsky, Keynes the Return of the Master; Peter Clarke,Keynes :The Twentieth Century ‘s Most influential economist; Zachary Carter, The Price of Peace:Money, Democracy and the Life of John Maynard Keynes ; Richard Davenport -Hines, Universal Man:The Seven Lives of John Maynard Keynes; Donald Moggridge,Maynard Keynes An Economist‘s Biography.

A.Fitzgibbons, Keynes‘s Vision

More details to follow including the Course outlines.

Two weeks ago I wrote a letter to the Editor at The Globe and Mail critiquing  Konrad Yakabuski for the deficit hysteria he was presenting in an opinion piece on the Bank of Canada and the pandemic . The paper didn’t publish the letter. I reproduce it below .

Its difficult to discuss such a tragedy that has cost so many lives in economic terms. But to make certain the damage from the pandemic is not made worse by poor policy decisions we need to understand the full impact of the shock of lock downs and widespread premature death. The cost of the loss of so many good people before their time cannot be overestimated. For their loved ones the loss is incalculable.

In narrow economic terms the change in the GDP and rise in unemployment  is a useful place to begin. Month to month from March to April the Canadian economy as measured by the GDP shrank by 7.2 %. The American GDP fell over the one month period March to April by11.75 %. Over the year to year period the American GDP fell by 13.7 %.

In the period of 12 months August 1929- August 1930 American GNP fell by 20 % over the year.Given the current rate of decline it is possible perhaps even likely that the decline in American GDP will equal or surpass the record of 1929 to 1930.

.So if the period is standardized as 12 months even if the rate of change in unemployment slows down the unemployment shock in the US is very substantial . There are also definitional issues in assessing the impact since many workers currently laid off will not all immediately be hired back immediately once a safe effective vaccine is found .

In Canada the unemployment rate has jumped to 13.7 % already higher than the average of just over 13 % for the whole decade 1930 to 1939. In four of these years 1932 1933 1934 and 1935 the rate was above 14.2%.reaching a peak of 19.3 % in 1933 then falling to 9.1% in 1937 and rising to 11.4 % in 1938 and 1939.(p.29, Harold Chorney, The deficit and Debt Management, CCPA 1989 from M.C.Urquhart and K.A.H.Buckley  Historical Statistics of  Canada) Wages and salaries fell fro m $2948 million dollars in 1929 to $1796 million in 1933 recovering to 2,633 million dollars in 1939. The GNP fell from 6134 million $ in 1929 to $3,510 million in 1933 recovering to $5636 million by 1939.

 In the UK the rise in unemployment was very substantial also. In 1929 long term unemployment was 43000 in 1929 . It rose to 288,000 by 1937. The GDP fell by 5.4 % from 1929 to 1932.(Crafts, N. F. R. “Long-Term Unemployment in Britain in the 1930s.” The Economic History Review, vol. 40, no. 3, 1987, pp. 418–432. JSTOR, http://www.jstor.org/stable/2596253. Accessed 13 June 2020.) In April of 2020 the GDP fell by 20.4 % suggesting a sharp rise in unemployment. Currently the data on unemployment is out of date based on March results when the rate was close to 4 %. But because of widespread furloughs temporarily supported by income replacement programs UK unemployment is likely to be underestimated until June data is released. From April 2019 to April 2020 the UK suffered a fall in the GDP of 24.5%.(The Office of National Statistics , cited in W.Schomberg & David Miliken, U.K. economy fell by a quarter during ‘catastrophic‘ March and April The Globe and Mail, June 13,  2020, p.B3) 

So its too soon to make a judgement on whether the pandemic has had worse narrow economic consequences than the crash of 1929 and the Great Depression. But the evidence is quite strong that much more stimulus, more public works and income replacement is necessary for Canada, the UK and the U.S.

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The covid pandemic has had already a very significant impact beginning with the tragic death of over 100,000 people in North America alone. 6545 in Canada, 7633 in Mexico and a staggering 99,459 in the United States. World wide the total number of deaths is 347,873.As the New York Times Sunday edition made clear with its entire front page devoted to the names and short biography of a thousand of the American victims these are more than numbers but fellow human beings who loved and were loved, each of them much more than a number.

These shocking statistics have caused a number of politicians and analysts to a major rethinking of the public policy consensus on the role of the state and the degree of state intervention. Much of it is based on the growing renaissance in Keynes style analysis of what has been transpiring. Markets have been overwhelmed, unemployment has soared and aggregate demand and supply disrupted due to the virus and the threat it poses and the fear that it spreads.

Ideas that have been discussed in depth like basic income or the guaranteed annual income around since the 1960s are being discussed in the quality press and in the media. The leading market capitalist countries are mulling over these issues and already a number of states have spent billions on income replacement and job protection programs that would have been rejected by Neo-con voices a bare five months ago. Canada is spending 4.5 % of its GDP on these programs . The US even more 10.7 % of its GDP, The Euro zone 3.2 %, Japan 20 % the UK 2.9% (The Globe and Mail,May 23, 2020.p.A15) Fiscal conservatives and some orthodox monetarists have sounded the alarm about inflation but these arguments ring hollow in the face of falling inflation rates and low global oil prices. Furthermore , there is growing discussion of income inequalities and the way in which the virus has hit hardest on vulnerable low income persons. There is the possibility of a new emerging consensus on social and economic policy that tilts in a progressive direction.The key democratic aspiration for a more just and ecologically balanced outcome is within reach as the rational alternative to a more authoritarian and unequal world.

Once again President Trump has made a useful suggestion to stimulate growth in the economy with which the chairman of the Federal Reserve disagrees. The chairman Jerome Powell has suggested that the Fed for the time being is not considering this option. But its quite possible that if excessive reluctance or the necessary closure of retail business and its  impact on spending  and cash hoarding continues this policy option will be debated. It is useful to discuss the pro and cons of such a policy now. Currently Denmark (-0.75), Switzerland(-0.75), Sweden( -0.25)and Japan (-0.10) have negative interest rates . The ECB has used them in the past.The more transparent Fed policy making is, the better ,because it permits a wider range of debate and discussion. Negative interest rates have been used before and proved to be quite workable although there is no consensus about how effective they were in reversing excessive disinflation and deflationary tendencies. Essentially they are meant to encourage investment and spending rather than hoarding cash. They involve charging a small fee for holding money as unspent savings. As such there is an inevitable clash between those who believe in thrift and those who believe the key to recovery is spending and investment.Critics of the policy suggest that they might have perverse effects on cash hoarding outside of the banks.

Keynes wrote at length about the increased attachment to cash which he called increased liquidity preference in a time of crisis which leads to a rise in the rate of interest as there are limits to the amount of cash in circulation. Keynes puts it as follows in his Quarterly Journal of Economics article in Feb. 1937, The General Theory of Employment. He writes:

When, as happens in a crisis, liquidity preferences are sharply raised, this shows itself not so much in increased hoards-for there is little if any more cash which is hoardable than there was before-as in a sharp rise in the rate of interest, i.e.securities fall in price until those ,who would now like to get liquid if they could do so at the previous price, are persuaded to give up the idea as being no longer practicable on reasonable terms.A rise in the rate of interest is a means alternative to an increase of hoards for satisfying an increased liquidity preference.Nor is my argument affected by the admitted fact that different types of assets satisfy the desire for liquidity in different degrees.The mischief is done when the rate of interest corresponding to the degree of liquidity of a given asset leads to a market capitalisation of that asset which is less than  its cost of production ( JMK, The General Theory and After,Part II Defense and Development.  Collected Works p.111.

Hence the need for quantitative easing in the current circumstances when the need for near zero interest rates is paramount. Simply increasing the velocity of money will not not satisfy the need and because of liquidity preference will not happen.People will tend to hang on to cash  balances rather than spend them. Corporations with large retained earnings might also avoid spending them on government bonds because of the risk of losses when interest rates rise from their near zero level and asset prices fall. The general public beecause of covid 19 contamination fears  will also try to avoid using cash -a phenomenon already widespread in Montreal- and rely on credit cards and debit cards.

But not everyone has these or uses them particularly in the underground economy which is a significant part of the small trader economy. Economists generally estimate the size of the underground economy as ranging from 8 to 14% of the economy . This only strengthens the need for greater central bank monetization of the debt or QE while the crisis lasts.  Contrary to monetarist dogma there is currently and for the foreseeable future no danger of this policy causing an inflation problem since the deflationary forces growing out of the sharp fall in oil prices  and the wave of job losses is far more powerful.

March 27 2020 , The current Covid19 crisis and the American and Canadian response to it by both the President and the Congress and the Fed , the Prime Minister, Parliament and the Bank of Canada is once again proof that Keynes is still very relevant and critically important in understanding how to fund countervailing policy to rescue the economy and society when it is attacked by a horrible scourge pandemic that tragically will cost the lives of many thousands or more of people world wide. There no longer is talk of excessive deficit spending, fear of inflation , condemnation of printing money and the whole range of deficit hysteria. Once again its crystal clear that massive disinflation and probable deflation will be the order of the day for awhile. Despite enormous deficit  spending and large bouts of QE which Keynes, Lerner , and Takahashi, called for in the 1930s and John Hotson, Mario  Seccareccia and myself called for more than thirty years ago , most economists and policy analysts will be supportive this time. Despite the barrage of criticism we faced we were correct in arguing for the wisdom of this set of policy tools. We should see a sharp recovery after the spending occurs  and we are able to pass beyond the epidemic and find safe vaccines and treatments. This program will need to be assessed as to how large the expenditure and income replacement needs to be and what needs to be adjusted as it is implemented.