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How to study economics and actually enjoy it.

Millions of students pursue degrees and careers in economics every year, and most start from a sense of deep curiosity. But nearly all face doubts at one point or another. Often it comes in the form of slow creeping fatigue and a gradual narrowing of interests. Other times it’s a crisis, pulling the whole field into question. Even INET’s President Rob Johnson nearly dropped out of Princeton. What’s going on?

By Gonçalo Fonseca & Heske van Doornen | It’s not the students’ fault. It is the field that is in a pickle. Economics has undergone a lot of transformation in recent decades, becoming increasingly narrow in scope, and divorcing itself from much of the ‘real world’. So if you are an econ student in a slump, questioning whether you picked the right field, this is for you.

These 8 principles show you how to approach economics without compromising your curiosity. They can help you do good work, allow you to enjoy what you are doing, and set you up to make a meaningful difference.

1. Know what to expect

Most economics programs are constructed linearly. The intro courses present a small set of basic models and the intermediate course adds more detail. Most people expect that their senior year—or at least grad school—will introduce something new. So they are disappointed when they see the same models again, just with more calculus. What to do? Do not wait for them to serve you something else. Take matters into your own hands.

2. Keep your questions front and center

Think about the questions that brought you to the field. Did you want to understand why the markets go up and down? How did inequality get so high? How businesses innovate? What AI will do to our jobs? Let those questions be your driving force. If you find that the analytical tools you are taught cannot address them, don’t blame your questions. Go looking for more tools.

3. Think for yourself, always.

Textbooks often present themselves as objective. But economics is not settled. It may be a science, but it is a human science, with inevitable faults. So it must be approached with a wider lens, and recognized as open-ended, with room for debate.

4. Stay connected to the real world

The models you learn are presented as universal. Relevant in any context and at any time. But stock market crashes and labor laws are not made in a void. They are made in a social and historical context. Economics is a topic, not a technique. So start with the questions, and let the answers come from anywhere. Sometimes, you will need your textbook model. Other times, you will need something else.

5. Don’t feel guilty about going broad

It is often said that scholars are willing to sacrifice five miles of breadth for one inch of depth, as an entire academic career can be built on that inch. But that trade-off is flawed. Real issues are intertwined, big and complicated. Exploring new areas improves your work. Five miles of breadth can lead you to excavators that will let you dig with MORE depth!

6. Take responsibility for your own learning

Chances are your textbook is dull and unconvincing. So you will have to get your nourishment somewhere else. Some teachers do a great job at this, but if yours is not one of them, it is on you. Explore courses and lectures by teachers other than your own. Go down a History of Economic Thought rabbit hole. Go beyond the model minutia and get the overview.

7. Know that economics needs you

We have a climate crisis to solve, financial markets to regulate, increasing inequality to deal with, and a host of complex issues around global markets and trade. The future of work is uncertain and gender disparities continue to loom. There is no shortage of pressing questions that need answering. So if economics feels cold, dull, and limiting, and you are tempted to turn your back on it, DON’T. Don’t leave economics to economists. The world needs people like you—the critical, the observant, the restless, to make economics BETTER.

8. Remember that you’re not alone

Students all over the world are faced with this conundrum. That sounds sad but it is not. Because all these people are linking up, supporting each other, and letting their questions lead the way. They are shaping the future of the field. The Young Scholars Initiative has 21 different working groups, each focusing on different topics. You are invited to join us and to be the change you’d like to see.

We are in this together.

About the Authors:
Gonçalo L. Fonseca is a research fellow at the Institute for New Economic Thinking and author of the History of Economic Thought Website. Heske van Doornen is Manager of the Young Scholars Initiative and co-founder of this blog. Twitter: @HeskevanDoornen

Starting a Revolution with Lord Keynes

By Alessandro Bonetti

In this period of crisis, political and economic discussions are polarized. On the one hand, some persist in defending the standard neoliberal dogmas, even if they hide behind the curtain of apparent change. On the other hand, others advance vague palingenesis.

For instance, let’s think about the European question. Some continue to blindly believe in a dream that has turned out to be a dark nightmare, while others, in excessive simplification, advocate the dismantling of European institutions and a return to an idealized past.

But there is no past where we can go back to. Nor can we settle for the present in which we live.

What then, if anything, can we do?

We must cultivate a utopia of the possible. Thinkability is a necessary prerequisite for the feasibility of each project. We must remain grounded, bearing in mind that the main task of the government and politicians is to ensure the current well-being of the communities under their care, and not to take too many risks for the future – as Keynes said:

“[This] long run is a misleading guide to current affairs. In the long run we are all dead”, the British baron famously enunciated. And he added: “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”
A Tract on Monetary Reform, 1923

History unfolds here and now, through our choices. Yet, in this moment we all risk being dead not just in the long term, but also in the short term if we do not act decisively and immediately.

We have to imagine new ways out of problems, thinking outside prearranged schemes. We must not abandon ourselves to pessimism. As early as 1930, Keynes warned:

“Both of the two opposed errors of pessimism which now make so much noise in the world will be proved wrong in our own time – the pessimism of the revolutionaries who think that things are so bad that nothing can save us but violent change, and the pessimism of the reactionaries who consider the balance of our economic and social life so precarious that we must risk no experiments “.
Economic Possibilities for Our Grandchildren, 1930

We must not be pessimistic, but rather disillusioned and creative at the same time. Reformists, but not moderates. The true revolutionary is the reformist because he knows how to be pragmatic but, at the same time, he knows how to cultivate the ideal of a different world. He knows he is acting inside history. And therefore, he knows how to escape the dialectic between opposing ideological positions.

Of course, the meaning of the words “reformism” and “reforms” has been distorted in recent years by political movements and international organisations soaked to the bone in the most ideological neoliberalism. Let’s try to clean it up.

The nature of the true reformist is described by the Italian economist Federico Caffè in a famous article published in the newspaper “Il Manifesto” on January 29, 1982, called “The solitude of the reformist”.

The reformist is alone, between two fires.

On the one hand, the anti-establishment folks deride him, contrasting his proposals with “future palingenesis”, “vague, with indefinite contours”, which “are generally summarized in a formula that we do not know what it means, but which has the merit of a magical pull effect”.

On the other, even reactionaries mock him, who think “that there is very little to reform, neither now nor ever, as the spontaneous operation of the market provides for everything, provided that it is allowed to act without useless hindrances”.

The “neoliberal rhetoric” does not scratch the reformist too much. On the contrary, it spurs him to fight with even more tenacity. What he “feels with greater melancholy” are the attacks of those who consider him not radical enough. But he is used to being misunderstood and therefore does not give up his intellectual vocation. On the contrary, he knows that he is actually more radical than the maximalist because he knows that “he operates in history”. His proposals want to affect concrete reality, his action takes place “within a ‘system’, of which he does not want to be either the apologist or the undertaker; but, within the limits of his possibilities, a member who is prompt to make all those improvements that are immediately feasible and not abstractly desirable. He prefers the little to the whole, the achievable to the utopian, the gradualism of transformations to an always postponed radical transformation of the ‘system'”. Because the system does not always manage to escape alternative and radical transformations.

True reformism is not just realistic. It is Keynesian.

Keynes wrote that “the fact that all things are possible is no excuse for talking foolishly” (The Economic Consequences of the Peace, 1919). On the contrary, the wide possibility of reality is a challenge to think and imagine what is possible and necessary.

Keynesianism is method and content; method because it rejects paralyzing dogmatism, and content because it offers tools and values to build the future.

The Keynesian does not sanctify capitalism, and he does not consider it the only possible choice. But neither does he condemn it in full. He studies it, rejecting any ideology. He has understood that there is great confusion between the partisans of capitalism and those of anti-capitalism. The former often take reactionary attitudes and reject progressive reforms “for fear that they may prove to be first steps away from capitalism itself” (The End of Laissez Faire, 1926). Many of the latter, on the other hand, who “are really objecting to capitalism as a way of life, argue as though they were objecting to it on the ground of its inefficiency in attaining its own objects” (ibidem), while they should criticize it for the domination of technics that it tends to impose on humankind and for the alienation that is not only suffered by the exploited, but by modern man in a broader sense.

The Keynesian has a phenomenological and open-minded approach to capitalism. An approach that does not translate into ideological subjection to one school of thought or the other. With great clarity Keynes wrote that “capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable” (The End of Laissez Faire, 1926).

The Keynesian is capable of thinking otherwise, of freeing himself from the shackles of useless ideologies and easy enthusiasms. And, after long reflection, he comes to the conclusion that “the political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty” (Liberalism and Labour, 1926).

None of the three points can be waived. All three are essential to humanity.

Against the illusions of a future palingenesis, the Keynesian observes that it is not sufficient that the state of affairs we are trying to promote be better than the previous state. it must be sufficiently better to compensate for the evils of the transition.

On the other hand, addressing those who advocate a (depressing) liberal conservatism, he counterposes the need to promote employment through active government involvement, making clear that “the world is not so governed from above that private and social interest always coincide” (The End of Laissez Faire, 1926).

Keynes guides us towards a revolution that is first of all personal, secondly cultural, and finally economic and social. He urges us “to be bold, to be open, to experiment, to take action, to try the possibilities of things” (“Can Lloyd George Do It?—The Pledge Examined” 1929). Of course, the defenders of orthodoxy obstruct the path. But they must “be treated with a little friendly disrespect and bowled over like ninepins” (ibidem).

This article was originally published on the Italian magazine Kritica Economica.

About the Author: Alessandro Bonetti is a MSc Economics student at Bocconi University (Milan) and coordinator of the magazine Kritica Economica.

The Social Determinants of Health in the Age of COVID19

With the ongoing pandemic and economic crisis, there is much to discuss. To inform the debates taking place in the YSI community, Luisa Scarcella and Aleksandar Stojanović have kicked off a special webinar series in which to unpack some of the accompanying challenges. For the first session, Luisa invited Professor Sir Michael Marmot, Professor of Epidemiology and Public Health at University College London, Director of the UCL Institute of Health Equity, and Past President of the World Medical Association. His work reveals the interrelated nature of health and socioeconomic inequality; a highly relevant topic today.

When economists talk about health, they usually talk about the healthcare system. They don’t often talk about what makes people sick in the first place. But Marmot does, and he finds that our people’s health is closely tied to the socio-economic conditions they are in; lower socio-economic conditions lead to worse health, and increasing socioeconomic inequality yields a widening health gap. His findings are compelling:

In the developed world, general life expectancy has stagnated since WW2; that is unprecedented for peacetime. But for the lower economic classes, it’s even worse. In the UK, the life expectancy of the poor has been decreasing for a decade now. It’s no coincidence, Marmot argues, that this trend emerged in a context of harsh austerity measures. Having reduced the purchasing power of the underprivileged, healthy living is increasingly out of reach.

Other advanced economies, the US in particular, show similar trends. There, too, structural inequalities give rise to job insecurity, housing insecurity, food insecurity, racism, and violence. These disadvantages translate into worse health for the poor. So, to improve the health of the American people, a better healthcare system would only be the beginning. To actually improve public health, the US would need to address the socio-economic inequalities that underlie it.

These insights offer a fresh take on the national responses to the COVID-19 outbreak, too. Many governmental remedies are receiving criticism for ‘treating the symptom and not the cause,’ echoing Professor Marmot’s plea. On top of that, most nations’ stimulus packages do not sufficiently alleviate the economic despair of the most vulnerable groups, leading to a worsening of the socio-economic conditions that are associated with bad health. The issues Marmot points out may only accelerate during this crisis.

Marmot’s work demonstrates the interconnected nature of many of the societal challenges we study in YSI: socioeconomic inequality, societal fragmentation, the concentration of economic and political power, and ultimately human despair. As Rob Johnson commented: “We must continue trying to understand how and why the political economy produces these conditions and tolerates them.”

A recording of Professor Marmot’s webinar is available here. Marmot’s book, the Health Gap, provides a more detailed account of his findings.

Is Money View Ready to Be on Trial for its Assumptions about the Payment System?

A Review of Perry Mehrling’s Paper on the Law of Reflux

By Elham Saeidinezhad | Perry Mehrling’s new paper, “Payment vs. Funding: The Law of Reflux for Today,” is a seminal contribution to the “Money View” literature. This approach, which is put forward by Mehrling himself, highlights the importance of today’s cash flow for the survival of financial participants. Using Money View, this paper examines the implications of Fullarton’s 1844 “Law of Reflux” for today’s monetary system. Mehrling uses balance sheets to show that at the heart of the discrepancy between John Maynard Keynes’ and James Tobin’s view of money creation is their attention to two separate equilibrium conditions. The former focuses on the economy when the initial payment takes place while the latter is concerned about the adjustments in the interest rates and asset prices when the funding is finalized. To provide such insights into several controversies about the limits of money finance, Mehrling’s analysis relies deeply on one of the structural premises of the Money View; the notion that the payment system that enables the cash flow to transfer from a deficit agent to the surplus agent is essentially a credit system. However, when we investigate the future that the Money View faces, this sentiment is likely to be threatened by a few factors that are revolutionizing financial markets. These elements include but are not limited to the Fed’s Tapering and post-crisis financial regulations and constrain banks’ ability to expand credit. These restrictions force the payment system to rely less on credit and more on reserves. Hence, the future of Money View will hinge on its ability to function under new circumstances where the payment system is no longer a credit system. This puzzle should be investigated by those of us who consider ourselves as students of this View.

Mehrling, in his influential paper, puts on his historical and monetary hats to clarify a long-standing debate amongst Keynesian economists on the money creation process. In understanding the effect of money on the economy, “old” Keynesians’ primary focus has been on the market interest rate and asset prices when the initial payment is taking place. In other words, their chief concern is how asset prices change to make the new payment position an equilibrium. To answer this question, they use the “liquidity preference framework” and argue that asset prices are set as a markup over the money rate of interest. The idea is that once the new purchasing power is created, the final funding can happen without changing asset prices or interest rates. The reason is that the initial increase in the money supply remains entirely in circulation by creating a new demand for liquid balances for various reasons. Put it differently, although the new money will not disappear on the final settlement date, the excess supply of money will be eliminated by the growing demand for money. In this situation, there is no reflux of the new purchasing power.

In contrast, the new Keynesian orthodoxy, established by James Tobin, examines the effects of money creation on the economy by focusing on the final position rather than the initial payment. At this equilibrium, the interest rate and asset prices will be adjusted to ensure the final settlement, otherwise known as funding. In the process, they create discipline in the monetary system. Using “Liquidity Preference Framework”, these economists argue that the new purchasing power will be used to purchase long-term securities such as bonds. In other words, the newly created money will be absorbed by portfolio rebalancing which leads to a new portfolio equilibrium. In this new equilibrium, the interbank credit will be replaced by a long-term asset and the initial payment is funded by new long-term lending, all outside the traditional banking system. Tobin’s version of Keynesianism extracted from both the flux of bank credit expansion and the reflux of subsequent contraction by only focusing on the final funding equilibrium. It also shifts between one funding equilibrium and another since he is only interested in final positions. In the new view, bank checkable deposits are just one funding liability, among others, and their survival in the monetary system entirely depends on the portfolio preferences of asset managers.

The problem is that both views abstract from the cash flows that enable a continuous payment system. These cash flows are key to a successful transition from one equilibrium to another. Money View labels these cash flows as “liquidity” and puts it at the center of its analysis. Liquidity enables the economy to seamlessly transfer from initial equilibrium, when the payment takes place, to the final equilibrium, when the final funding happens, by ensuring the continuity of the payment system. In the initial equilibrium, payment takes place since banks expand their balance sheets and create new money. In this case, the deficit bank can borrow from the surplus bank in the interbank lending market. To clear the final settlement, the banks can take advantage of their access to the central bank’s balance sheet if they still have short positions in reserve. Mehrling uses these balance sheets operations to show that it is credit, rather than currency or reserves, that creates a continuous payment system. In other words, a credit-based payment system lets the financial transactions go through even when the buyers do not have means of payment today. These transactions, that depend on agents’ access to liquidity, move the economy from the initial equilibrium to the ultimate funding equilibrium.

The notion that the “payment system is a credit system” is a defining characteristic of Money View. However, a few developments in the financial market, generated by post-crisis interventions, are threatening the robustness of this critical assumption. The issue is that the Fed’s Tapering operations have reduced the level of reserves in the banking system. In the meantime, post-crisis financial regulations have produced a balance sheet constrained for the banking system, including surplus banks. These macroprudential requirements demand banks to keep a certain level of High-Quality Liquid Assets (HQLA) such as reserves. At the same time, the Global Financial Crisis has only worsened the stigma attached to using the discount loan. Banks have therefore become reluctant to borrow from the Fed to avoid sending wrong signals to the regulators regarding their liquidity status. These factors constrained banks’ ability to expand their balance sheets to make new loans to the deficit agents by making this activity more expensive. As a result, banks, who are the main providers of the payment system, have been relying less on credit and more on reserves to finance this financial service.

Most recently, Zoltan Pozsar, a prominent scholar of the Money View, has warned us that if these trends continue, the payment system will not be a credit system anymore. Those of us who study Money View realize that the assumption that a payment system is a credit system is the cornerstone of the Money View approach. Yet, the current developments in the financial ecosystem are fundamentally remodeling the very microstructure that has initially given birth to this conjecture. It is our job, therefore, as Money View scholars, to prepare this framework for a future that is going to put its premises on trial.

Elham Saeidinezhad is lecturer in Economics at UCLA. Before joining the Economics Department at UCLA, she was a research economist in International Finance and Macroeconomics research group at Milken Institute, Santa Monica, where she investigated the post-crisis structural changes in the capital market as a result of macroprudential regulations. Before that, she was a postdoctoral fellow at INET, working closely with Prof. Perry Mehrling and studying his “Money View”. Elham obtained her Ph.D. from the University of Sheffield, UK, in empirical Macroeconomics in 2013. You may contact Elham via the Young Scholars Directory

Brexinomics

In analyzing the consequences of Brexit, economists have relied heavily on ‘scenario testing.’ But this tool may not be fit for purpose.

As the UK embarked on Brexit, economists were given a range of opportunities in which to provide some guidance as to how the tricky process of Brexit was going to go. A sub-discipline was entitled ‘Brexinomics’. This article looks at a tool used by economists, known as scenario testing and questions the reliance on this tool to navigate us through Brexit.

On June 23rd 2016, the UK decided to travel on the unknown road ahead known as Brexit. Economists were called on to provide some navigation for policy makers, the markets and businesses. The task was (and still is) to provide policy makers with how the economy will react either a ‘hard Brexit’, ‘soft Brexit’, or any kind of new rearrangement with the EU.

The Treasury and Bank of England have the most influential roles when it comes to acting as an economic advisor to the government. One of the methods that has been particularly relied on by these organisations is referred to generically as scenario testing.

What is scenario testing and what can it actually tell us?

Scenario testing is a broad term given to the use of economic modelling to predict how a certain event is going to impact the rest of the economy. Analysts aim to predict the future impact on the economy arising from any-one number of things. Scenario tests are predominantly conducted using a global econometric model that contains large amount of data and equations that aim to describe the behaviour of the economy. These models are used by governments and central banks alike.

Since the announcement of the Brexit Referendum, scenario tests have been frequently referred to in news articles and senior politicians alike to provide a picture of what a post-Brexit world might look like. In 2016, the HMT published a document titled ‘HMT analysis: The immediate economic impact of leaving the EU’. In this document, they published the table below in which they outline the response of the economy to a leave vote in the referendum.

There are two shock scenario responses listed. These refer to a moderate and severe response of the economy to a leave vote in the referendum. The table shows that in the year following a leave vote 17/18, the economy is expected to contract by around 3.6%. In the severe case it is listed as -6% which would have been worse that the financial crisis of 2009 in the UK which saw a peak decline of -4.2%. In 2017, year growth on change was actually 1.7% (Office of National Statistics). That is a marked difference from the projected values.

This reveals that scenario tests are not suitable to handle something like Brexit, and their poor performance in outlining the economic effects of a leave EU vote is unsurprising.

A better use of scenario tests is to look at the overall impact on the economy of specific one-off economic events or policy changes, like a change in oil prices. A change in oil prices would typically start with changes in the income for oil-exporting countries and rises in costs for oil-importing countries. For the oil importing countries, the initial increase in oil prices would then lead to an increase in inflation as the cost of production increases. These different impacts can be modelled by scenario tests and they can provide a scale of the final economic impact owing to an initial increase in oil prices.

However, the number and scale of policy unknowns in Brexit means that a scenario test is always under-identified. We are dealing with infinite number of policy unknowns.

This leads on to the second issue with scenario tests is that they work under the assumption of ceteris paribus. This assumption is that all other things will remain equal during and after the specific economic event that is being analysed has occurred. With something like Brexit, there is no ceteris paribus, as all other things will not necessarily remain equal.

Brexit has the possibility of creating restrictions on migration, along with restrictions on trade and restrictions on capital flows. These could all happen simultaneously. Even if a scenario test could adequately model each of these events on their own, it is not able to consider interactions between different simultaneous policy changes. It seems unlikely that previous data could be used to show us what would happen in the event of all three of these policy changes simultaneously occurring given that this is not something that has occurred before.

Despite all these shortcomings, there is still often reference in the media to results of scenario tests conducted by key organisations. Scenario tests still seem to be providing some comfort in predicting what a post-Brexit world might look like.

There are two amendments that economists need to make. The first is to limit the scope and expectations of what previous data can tell us. Given the unprecedented nature of Brexit, it seems that historical data might not have the information to show us what could happen in the event of any kind of Brexit deal. It unlikely to accurately provide a percentage point increase/decrease in GDP in the case of any type of new arrangement with the EU.

The second amendment, is to move on from the empirical macroeconomic models and look at methods that will provide a truer reflection of how individuals might behave in response to the new arrangement with the EU.

What are the alternatives?

There have been already a number of surveys conducted that ask individuals and businesses alike, what they would do in ‘Brexit-like’ events i.e. a restriction on migration leading to labour shortages. Piecing together information from macroeconomic surveys is more likely to provide a truer picture as it will give us actual behavioural responses from economic agents.

About the Author
Kanya Paramaguru is a PhD student at Brunel University London. Her current research focuses on using empirical time-series methods in Macroeconomics.

10 years after the financial crisis and its lasting effects on Americans

By Breshay Moore.

This year marks the 10th anniversary of the 2008 financial crisis. Although the crisis is remembered for foreclosures, bank failures and bailouts, many American citizens are still unaware of what caused it. Understanding this is important to prevent future crises and think about what kind of financial system we want to have: one that serves people and invests in communities, or one that enriches a handful of wealthy bankers and money managers while making our economy less fair and safe for the rest of us.

In simple terms, the financial crisis was a result of deregulation of the financial sector, and reckless and predatory practices by greedy financial players all across the board, from mortgage lenders to Wall Street traders to the largest credit rating agencies.

In the lead-up to the crisis, mortgage lenders were engaging in fraudulent and deceptive sales practices to make toxic mortgage loans to home buyers, which they knew the borrowers could not afford. Predatory lenders particularly targeted people of color, especially women of color, for these higher-rate loans. Meanwhile, these risky mortgages were packaged and sold to investors around the world, becoming implanted throughout the financial system. The economy went into a recession in late 2007, defaults on mortgage payments increased and housing prices plummeted, resulting in billions of dollars in mortgage losses. This had a chain reaction in the financial system because of the number of financial institutions that had stakes in the housing market. These string of events shook the entire economy, fueling the worst recession in the US since the Great Depression.

Millions of families lost their homes or jobs. Median wealth among households fell tremendously: From 2005 to 2009, median wealth among Hispanic households fell by 66 percent, by 53 percent among Black households, by 31 percent among Asian households, and by 16 percent among white households. Millions of people also suffered major drops in income, property values, retirement savings, and general economic well-being. The crisis produced lasting effects. Families are still struggling economically, especially in communities of color.

After all the damage was done, no one was held accountable. Financial players made billions of dollars in bonuses and profits. Instead of helping the communities that were most affected, Congress and The Federal Reserve began bailing out big banks with public money. We recently learned that 30 percent of the lawmakers and 40 percent of the top staffers involved in the congressional response to the crisis have since gone to work for Wall Street.

In 2010 President Barack Obama introduced legislation containing important reform measures in response to the crisis. The Dodd–Frank Wall Street Reform and Consumer Protection Act created rules to protect consumers and regulate the financial industry. This law created the Consumer Financial Protection Bureau (CFPB) to promote transparency and fairness in the consumer-finance industry, and to holding financial institutions accountable for engaging in predatory and discriminatory practices. This independent agency has done a lot for consumers, and has returned more than $12 billion in relief to more than 29 million cheated consumers.

In return for all the money that Wall Street has poured into political campaigns and lobbying, President Trump and Congress have been working hard to undo rules that regulate the financial sector. Countless bills have been introduced and passed in Congress to deregulate banks and lenders. One of these bills, S. 2155, which became law in May, not only increases the risk of future financial disasters and bank bailouts, but makes it easier for mortgage lenders to discriminate on the basis of race, ethnicity and gender. Sixteen Democrats and an Independent supported the GOP in pushing this deregulatory bill. The vote did not go unnoticed and public sentiment is not on their side. In fact, 88 percent of all likely voters — across party lines — support holding financial companies accountable if they discriminate against people because of their race or ethnicity. And 64 percent of voters think big banks and finance companies continue to require tough oversight to avoid another financial crisis.

The lack of restrictions on banks and other financial institutions put consumers and the economy at risk. The 10th anniversary of the financial crisis should encourage us to redouble our efforts to push for changes to our financial system so that it works for us not just for Wall Street.

Breshay Moore is a Senior at Towson University, studying Advertising and Public Relations. She was recently a Communications and Campaign intern for Americans for Financial Reform.

Victorian despite themselves: central banks in historical perspective

Central banks have not always been independent, inflation targeting bodies, and to treat them as such is to obscure their complex histories and alternative institutional constellations

Central banks have not always been independent, inflation targeting bodies, and to treat them as such is to obscure their complex histories and alternative institutional constellations. By Pierre Ortlieb.

Donald Trump’s most recent feud with the Federal Reserve reached a new peak late last week as the U.S. President lambasted the institution’s policy stance. “I don’t have an accommodating Fed,” he noted. Commentary on Trump’s outburst is perhaps even more alarming than his words themselves. For instance, The Week noted that Trump’s encroachment on Fed independence was “essentially unprecedented”; imperiling the central bank’s status as a guardian of price stability was reckless, foolish. This reading of the history of central banks is misguided, however. Our current paradigm of independent central banks deploying their tools to maintain low inflation is a deeply contingent historical phenomenon and obscures central banks’ frequent role as publicly-controlled institutions and fiscal buttresses throughout their centuries of existence.

The contemporary notion of independent, conservative central banks was enshrined gradually over the 1990s, a decade in which over thirty countries – developed and developing – guaranteed the legal and operational independence of their monetary authorities. This institutionalization of inflation-averse central banks has come hand-in-hand with an aversion to “inflationary” deficit financing and fiscal expansionism, which has been restrained by an exclusive focus on price stability. This has come to be treated as the best practice approach to central banking, a paradigm which, until recently, was rarely questioned among policymakers. Reaction to Donald Trump’s comments has been emblematic of this.

Yet the history of central banks shows them to be far more intertwined with states and treasuries than current commentary or policy would suggest. At their founding, central banks frequently served not as constraints on the state, but rather as fiscal agents of the state. The inception of the Bank of England (BoE) in 1694, for example, was the result of a compromise that granted the state loans to finance its war with France, while the BoE was granted the right to issue and manage banknotes. As a result of this bargain, the market for public debt in the United Kingdom exploded in the 18th century, and government debt peaked at 260 percent of GDP during the Napoleonic wars. This both facilitated the expansion of Britain’s hegemonic financial position and enabled the industrial revolution, as borrowing at low risk made vast industrial development possible.

Direct state financing was, however, not the only means through central banks fostered favorable monetary conditions and growth during this era. The use of various “gold devices” to manage credit conditions from within the straitjacket of the gold standard was commonplace. The Reichsbank, for example, granted interest-free loans to importers of gold and inhibited gold exports to establish de facto exchange controls and some degree of exchange rate flexibility.

Various central banks also pursued sectoral policies, lending government-subsidized credit at lower real interest rates to key developmental industries. The 1913 Federal Reserve Act, for instance, was designed such that it would improve the global competitiveness of New York financial institutions. It is important to note that at the time, these central banks were largely established as private institutions with government-backed monopolies; yet this did not alter the fact that, in practice, they served as crucial instruments for the expansion and development of Western economies. Beyond the US and the UK, central banks across Western Europe, such as the Banque de France (1800), the Bank of Spain (1874), and the Reichsbank (1876), served a similar initial function as developmental agents of their respective states.

Nevertheless, this was not a uniform or constant system. The existence of the gold standard itself constrained the use of monetary instruments to foster growth across developed economies during the late 19th century. Furthermore, Victorian-era British policy came to revolve around sound finance and fiscal discipline, as the use of a central bank to finance the national state was increasingly in tension with Britain’s central position in the international trading system. Inflationary fiscal deficits were seen as inhibiting growth and dampening international investment. This “Victorian model” focus on price stability produced a paradigm shift in the UK away from expansionary deficit financing towards more restrained policy.

Despite interludes, the use of central banks as macroeconomic instruments endured and emerged reinforced in the aftermath of the Great Depression and the Second World War. After 1945, governments across the Western world adopted full employment objectives as part of the consensus of “embedded liberalism,” a practice which often also involved nationalizing central banks, so they could serve as tools of macroeconomic policy. Credit allocation came to serve social goals, and central banks were given additional tasks such as managing capital flows to maintain low interest rates. In France, the Banque de France was brought under the umbrella of the National Credit Council, the institution charged with managing financial aspects of government industrial and modernization policies. While other countries employed different mechanisms in implementing this consensus, the overarching aim of monetary institutions serving social goals was broadly shared across developed countries in the postwar era, as it had been during the 19th century during the infancy of central banks.

This consensus of central banks undergirding fiscal policy fragmented and fell apart from the 1970s onwards. The experience of stagflation, the increasing influence of financial institutions in policymaking, as well as a growing academic consensus on the dangers of central bank collusion with governments, dismantled both the expansionary fiscal state and the subservient central bank. The “Volcker revolution” in the United States was a first step in the gradual, post-Nixon institutionalization of a price stability-focused, independent central bank. The Bank of England was granted operational independence in 1997 by Labour Chancellor Gordon Brown, while the ECB has been independent since its inception in 1998.

The current paradigm of independent, inflation targeting central banks thus obscures the messy history of central banks as public institutions. Since their inception, monetary authorities have performed various different roles; while they served as guardians of price stability in Victorian England, they have originally served as developmental and fiscal agents for expansionary states, and have frequently continued to do so in the centuries since. Treating central bank independence as an ahistorical best practice approach is misleading, and we should recall that there have been alternatives to the current framework. As some have heralded the end of the era of central bank independence, while others have underscored the benefits of re-politicizing monetary policy, it is worth bearing this history in mind.

About the Author: Pierre Ortlieb is a graduate student, writer, and researcher based in London. He is interested in political economy and central banks, and currently works at a public investment think tank (the views expressed herein do not represent those of his employer).

Economics: An Illustrated Timeline

Do you keep getting confused about the different schools of thought in economics? Do you always forget what Walras was about, and when Marx was around?

This timeline has your back. It provides an overview of historic events, schools of thought, and the people involved.

About the author: Heske van Doornen holds an MSc in Economic Theory and Policy from the Levy Economics Institute and a BA in Economics from Bard College.

Sources: The Economics Book, Economie!, www.preceden.com, www.econlib.org, www.whistlinginthewind.org, www.hetwebsite.net