Gordon Campbell on British apologies, and interest rates
Gordon Campbell on British apologies and interest rate fiddlingFirst published on Werewolf
In April this year, the British High Commissioner to India laid a wreath and expressed official “regret” for the massacre that occurred in Amritsar on 13 April, 1919. In brief, British troops fired on a large crowd of unarmed people who had gathered together initially for a spring festival, but who then took part in protesting the arrest of two local officials. At least 379 people were killed by the British fusillade, although some contemporary estimates put the death toll at around 1,000. Even Winston Churchill, not usually a critic of colonial excess, said at the time that the decision to fire on the crowd at Amritsar was “shameful”.
Britain’s expression of official regret came on the 100th anniversary of the slaughter, and it received mixed reviews in India. As in New Zealand this week with respect to the actions in 1769 by Captain James Cook, there were calls in India for Britain to issue a formal apology for Amritsar. Fat chance. If Britain couldn’t bring itself to say “sorry” for its needless massacre of hundreds of unarmed men, women and children barely a century ago during the heyday of colonial rule, it was never going to go any further this week in Gisborne, and actually apologise for a “first contact” incident in which nine people died, 250 years ago.
Unfortunately, Amritsar has now set the rule to be followed. The very worst of actions will qualify only for the very least of concessions. If the British High Commissioner had uttered anything stronger than “regret” to iwi in Gisborne, there would have been repercussions for its current relationship with India. Sure, no doubt, this week’s expression of official regret in Gisborne was sincere. But it will always be Britain’s interests that prevail, and dictate the course of events – right now, and in the distant past.
Inflation, interest rates etc
Recent research indicates that Gyles Beckford may have spent as much as 31.7% of his entire waking life talking about whether the Reserve Bank will or won’t cut interest rates this time, and whether said cuts will be enough/not enough to have any/not much/a whole lot of an effect on growth, and on inflation.
If economic journalists are doomed to trudge around on the same old mousewheels – Dow up, FTSE down etc – so these days, are the central bankers. In the 1990s, the awesome powers of central bankers would cause markets to tremble before them, and read significance into their every utterance, tonal shift and arch of eyebrow. Nowadays, central bankers can hack away at interest rates and nothing will happen. There is virtually no effect on growth, prices, wages or investmnent decisions. Unemployment is low, yet contrary to the old Philips curve wisdoms, even the scarcity of labour isn’t lifting wages, and that inertia has consequences for spending, prices, investment and growth. Inflation, once a raging wildfire across the global economy now lies all but dormant. When it comes to inflation, it is all quiet – too quiet - on the Western front.
What to do? On the bright side, many of the quack nostrums of the 1980s – like the Laffer curve, which claimed that handing out big tax cuts would deliver self-financing lashings of new investment and growth – have been consigned to the dustbin of history. We’ve also learned that GDP is a poor way to measure how well an economy is working, for everybody. Whatever the flaws in the wellbeing approach, it is a better yardstick than the crude GDP we used to rely on before.
In short, we’ve all learned some humility in the wake of the Global Financial Crisis. Among other things, the GFC proved conclusively that economic de-regulation is a pathway to disaster. The post-GFC policies of austerity have also failed pretty badly, too. In countries where the state speedily responded with bailouts and loosened their monetary policy, their economies recovered faster, and inflicted far less pain on ordinary citizens than what transpired at the hands of the austerity purists.
So… now that all sane people are neo-Keynesians once again, it has been only a wee bit surprising to hear the centre-right and the captains of commerce calling for the Ardern government to do something about the economy, and about the persistently dire levels of business confidence. Amusingly, the response they’re calling for appears to involve socialist stuff like quantitative easing (aka “printing money”) and the building of big infrastructural projects. In their hour of need, the centre-right seems to be yearning to re-invent the Soviet Union. Funny how things turn out.
Inflation, and its cures
A word of caution. When the business news rattles on about the inflation range, and the potential impact of interest rate cuts… a large dose of humility would be in order. Basically, when we talk about inflation, we have no idea what we’re talking about. As the Financial Times conceded last year, the US Federal Reserve and other central banks are now uncertain about… what causes inflation; what effects it has; what to count in measuring it; how low, or high, it should be; and how to move it up and down.
There’s a fancy way of confessing that, as the FT says, central banks are really flying blind. Daniel Tarullo gave a speech to the Brookings Institution two years ago, after his resignation from the Fed’s Board of Governors, and he put it this way: “We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policymaking.” Ulp.
Meanwhile Reserve Bank governor Adrian Orr and his new-fangled Monetary Policy Committee are doing the same old, same old, but cutting interest rates has lost its mojo. Its much the same story in Australia as well. Orr’s counterpart across the Tasman is Philip Lowe, and Lowe hinted this week that further cuts were inevitable after interest rates were slashed to a new record low of 0.75%, the third cut in four months. Lowe explained that central banks were being forced to react to slowing growth, and he called on the government and businesses to act. How? Lowe urged the government to increase spending (big infrastructural projects!) and introduce “structural measures” to lift the nation’s productivity.
Here’s how the Sydney Morning Herald has summarised Lowe’s kitbag of responses, which – incidentally – demonstrate a readiness to think outside the square that seems well beyond anything we’ve heard thus far from Adrian Orr:
The [Australian Reserve] Bank hopes by driving down the jobless rate the overall jobs market will tighten so much that workers will get bigger pay increases than they've enjoyed for the best part of six years. That, in turn, will get inflation moving back towards the RBA's target band. Unusually for a central banker, Lowe has openly advocated higher wages, including in the public sector where federal and state governments have put caps on pay increases for an extended period. He has also urged governments of all persuasions to bring forward infrastructure projects and for a new round of structural reforms that could help the economy to grow faster and more efficiently. And the bank has started planning for other ways to boost the economy [as] it takes interest rates towards zero. These "unconventional monetary policies" include everything from printing cash to buying shares in publicly listed firms.
Beyond Australia…well, here’s a list of a few other countries where central bankers seem to be in the same leaky boat as Adrian Orr, paddling away with their ineffectual interest rate cuts. Hat tip to Reuters for the following list:
Mexico: For the second time in a row, Mexico’s central bank cut its key interest rate by 25 basis points to 7.75% on Sept. 26, citing slowing inflation, widening slack in the economy, and expectations for a slight economic recovery.
Egypt: Egypt’s central bank trimmed its key interest rates by 100 basis points on Sept. 26, its second cut in as many months, after inflation fell further.
The Philippines: The central bank cut its benchmark interest rate to 4.0% on Sept. 26, its third reduction this year to bolster a slowing economy against the risk of weakening global growth.
Paraguay: The central bank cut its policy rate by 25 basis points to 4.00% on Sept. 23.
China: China cut its new one-year benchmark lending rate for the second month in a row on Sept. 20, to 4.20%, as the central bank sought to reduce borrowing costs lower for an economy hit by the Sino-U.S. trade war.
Hong Kong: The central bank lowered interest rates on Sept. 19 to 2.25% in step with a rate cut by the Federal Reserve, just as months of anti-government protests and fallout from U.S.-China trade tensions start to take a toll on the economy.
Indonesia : The central bank on Sept. 19 stepped up efforts to help lift growth by cutting interest rates for a third straight month to 5.25%, while also relaxing some lending rules in a bid to further stimulate Southeast Asia’s biggest economy.
Jordan: The central bank said on Sept. 18 it was cutting its benchmark interest rate by 25 basis points to 4.25% in a move to help spur economic growth.
Saudi Arabia/UAE/Qatar: The central banks of Saudi Arabia, the United Arab Emirates and Qatar cut their key interest rates on Sept. 18 and 19, following the U.S. Federal Reserve decision to slash rates for the second time this year.
Brazil: Policymakers cut the benchmark interest rate to a new record low of 5.50% on Sept. 18 as expected and suggested more rate cuts are in the pipeline, apparently sharing New Zealand’s concerns about an increasingly uncertain global outlook and tame domestic inflation.
Vietnam: The central bank said on Sept. 13 it was cutting several interest rates to increase liquidity and support economic growth, which the country hopes will stay near 7% this year.
Turkey: The central bank cut its policy rate by 325 basis points to 16.5% on Sept. 12, delivering its second aggressive policy easing in less than two months as it seeks to boost a recession-hit economy and put last year’s currency crisis behind it.
Russia: The central bank delivered its third rate cut this year, trimming the key interest rate to 7% on Sept. 6 amid slowing inflation, and said another rate cut was possible at one of the next three board meetings.
Ditto interest rate cuts for Georgia, Ukraine and Armenia. So… maybe we shouldn’t be all that surprised to discover this week that what was – by our standards – a very large point cut in interest rates in July is reportedly failing to have much effect?
Central banks will continue to do what they do. But obviously, their ammunition is virtually spent.
What else is there?
Supposedly… the Arden government has a sacred duty to do everything it can to improve economic conditions for those two Aryan Twins of commerce: “confidence” and “certainty”. Well, tough. Few people outside the boardrooms and no one who has ever had to labour within the precariat will sympathise with the current round of corporate complaints. After all… since late 2017, the lack of business confidence has been almost entirely self- inflicted. Throughout 2018 and since, the business community has chosen to sulk in its tent about the election result, despite relatively good growth conditions and fairly benign terms of trade. Now that the wolf of global recession and the US/China trade war really are at the door, business is expecting the coalition government to come to its rescue.
How? No doubt on the election trail next year, National Party leader Simon Bridges will be holding out the promise of tax cuts and ignoring the track record. From Reagan to Bush to Trump, all the tax cuts experiments in Christendom have failed to foster substantial amounts of investment and sustainable growth - and especially so in the god-fearing, tax cutting state of Kansas which was eventually forced to go into reverse, and have the Kansas state legislators formally re-instate the taxes they had cut.
However, since Election 2020 is just around the corner…it is worth considering the evidence to date from Trump’s massive income and corporate tax package of late 2017. An IMF paper on the subject has drawn heavily on this detailed analysis by the Congressional Research Service (CRS) which – among other signs of it being unimpressed by the cuts – found (p 4) that nope, tax cuts do not pay for themselves via the growth they generate, not by a long shot.
And besides, as Bloomberg News reported in June:
The CRS report finds only a very modest growth bump in 2018… but this may have been due to random fluctuation -- after all, 2014 and early 2015 saw an even bigger bump, which then faded. One would expect the tax cut to have some sort of effect on the economy, since economic theory predicts that tax cuts both stimulate aggregate demand and make the economy more efficient. Yet looking at a graph of growth, one has to squint very hard to see a change…
But hey… what about the role of tax cuts in fostering investment? Surely, after reducing the crushing burden of corporate taxes, wouldn’t a hundred flowers of productive investment be then freed to bloom? Apparently not. Here too, the observable effects are more modest than one would expect, and seem likely to be eclipsed by the effects of the US/China trade war:
The real question is whether the tax cuts increased investment. The rationale for lowering corporate taxes, in a nutshell, is that corporate taxes discourage businesses from investing, holding back national wealth growth in the future. Thus, if the cuts had any positive effect, we’d expect to see it in the investment numbers first. [And] In fact, investment looks like it might have accelerated a bit in late 2018…
But even here, there are several caveats. On the 2018 evidence, the tax cuts probably had little to do with the bump in investment. That’s because:
First, the CRS report notes that investment grew most strongly in intellectual property, and less strongly in structures. But they estimate that the tax cuts made structures much cheaper, even as investing in intellectual property got a bit more expensive. So any acceleration in investment might be due to factors other than taxes.
Finally, there could be a stronger factor at work here than tax rates. Arguably, the smaller than expected impact on business investment noticeable downstream from the Trump tax cuts can be explained by the concentration of monopoly power that is becoming such a problematic feature of the modern market economy. First, here’s the disappointing effect:
….although Trump’s tax cuts probably gave a small bump to investment, it was fairly disappointing as tax cuts go -- and especially so given that Trump’s tax cut was heavily weighted toward the corporate side, which should have increased the impact.
And why so? The conclusion is devastating for the few holdouts on the centre-right of politics, who still appear to believe in the old timey tax cutting, supply-side gospel that still gets them going in the boardroom backblocks of corporate New Zealand. Hate to be a bearer of bad news but..:
The IMF paper attributes the sluggish response of investment to the prevalence of market power. The authors find that investment rose less for companies with higher price mark-ups -- a standard measure of a company’s power to dominate a market. This fits with the thesis that monopoly power is increasingly making the U.S. economy unresponsive to standard market forces. The benefit of corporate tax cuts might simply be one more piece of conventional economic wisdom that no longer applies. In any case, Trump’s tax cut looks like it underperformed in 2018. The effect in the long run might be more positive, but given the drag from the trade war and other events, that will be hard to know. The most reasonable conclusion seems to be that corporate tax cuts are not a particularly powerful tool for boosting economic growth in the U.S. The Trump tax cuts should be the last piece of evidence needed to end the illusion of supply-side economics.
Thank goodness for Elizabeth Warren, who is at least seems aware of the threat to market competition posed by the concentration of monopoly and quasi -monopoly power within the US economy – and naturally, she has a plan to deal with it. It would be nice to think that Adrian Orr and Co could move our economic debate in similar directions. We’re a tiny economy, and that small size leaves us easily vulnerable to the concentration of market power. Unfortunately, Geoffrey Palmer and his colleagues in the 1980s skipped the classes on anti-trust law before they sold state monopolies into private hands.
Aretha Franklin preached a different gospel, one that asked us to think, and to feel:
Ain't no psychiatrist, I ain't no doctor with
But it don't take too much high IQ's
To see what you're trying to do to doing to me…