There was a conference on the 10th death anniversary of Wynne Godley last year. If you haven’t seen it, the video recordings/presentation/remarks are in that link.
Now, there’s a special issue by the JPKE about the conference with papers as in the cover:
Happy reading!
A good macroeconomic model would use national accounts and the flow of funds with behavioural hypotheses. It’s complicated by the fact that prices of goods and services change. It’s not just that if prices of goods and services change, you’re consumption would change in response to that, but also because say the deposits you hold in the bank is worth less.
So your behavioural equations need to be modified. It’s not easy. Wynne Godley recalls in his book Monetary Economics:
And no lesser authority than Richard Stone (1973) made the same mistake because in his definition of real income he did not deduct the erosion, due to inflation, of the real value of household wealth.
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References
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Stone, R. (1973) ‘Personal spending and saving in post war Britain’ in H.C. Bos, H. Linneman and P. de Wolff (eds), Economic Structure and Development: Essays in Honour of Jan Tinbergen (Amsterdam: North Holland), pp. 75–98.
The system of national accounts does recognise the importance of this but there aren’t any real variables defined. Real as opposed to nominal. Instead holding gains (formal phrase for “capital gains”) is divided into two parts: real holding gains and neutral holding gains. So,
Nominal holding gains = real holding gains + neutral holding gains.
Assets prices can rise differently than prices of goods and services. Para 12.89 says:
The real holding gain on an asset is defined as the difference between the nominal and the neutral holding gain on that asset. The values of the real holding gains on assets thus depend on the movements of their prices over the period in question, relative to movements of other prices, on average, as measured by the general price index. An increase in the relative price of an asset leads to a positive real holding gain and a decrease in the relative price of an asset leads to a negative real gain, whether the general price level is rising, falling or stationary.
Of course we should consider holding gains and losses on liabilities as well.
This is anyway complicated practically. I haven’t yet seen national accounts of any country producing such tables. But the SNA—including the 2008 SNA—doesn’t have any framework beyond this. This is because it considers that economic behaviour would be different for real holding gains or losses, as opposed to just the flow aspect.
In other words, if your (nominal) income is $100 and there’s a 10% inflation, your consumption would fall. But you might not react the same if you have a real holding loss of $10.
But to a first approximation you could simplify and bring real holding gains into real income. I have simplified quite a bit and these are quite challenging things, so I refer you to Wynne Godley and Marc Lavoie’s (G&L)’s book Monetary Economics.
I wrote this post after an online discussion about the government “inflating away the nominal debt”. Although such claims are loaded, there is some logic to it. In inflation accounting, holding gains/losses appear in incomes. Modeling involves going back and forth between real and nominal variables.
An original writing is that of Wynne Godley (and Ken Coutts and Graham Gudgin)—a 1985 paper titled Inflation Accounting Of Whole Economic Systems. In that you see the equation:
(Snipped from the 2012 reprint).
So the government disposable income (in addition to taxes and central bank profits, also has the holding losses due to the fact that prices of goods and services has increased in the period, not just because of changes in prices of government bonds).
Of course, there’s also the loadedness of the phrase “inflating away the debt”. That’s a different matter, my point here is to address the intuition of why inflation can be thought of as bringing revenue to the government and reducing its debt.
Yesterday, March 13th had a special event, a virtual conference in honour of the great Wynne Godley.
If you hadn’t joined it, you can still view the recordings which have now been made available, thanks to Gennaro Zezza, who organised the event.
Here’s another poster, prior to the event. You can find the picture here.
Picture credit: Levy Institute on Twitter.
All videos now seem available. Check again with the conference page for the presentation or write-ups.
📅 Conference: The Legacy Of Wynne Godley
Levy Economics Institute has announced a virtual conference in commemoration of Wynne Godley on May 13th.
The site says that you can join by Google Meet.
Marc Lavoie’s talk is Wynne Godley And The Monetary Circuit. There’s a roundtable Godley’s Approach In The Current Crisis.
There are several new speakers who didn’t attend the conference in honour of Godley in 2011 such as Ken Coutts, Graham Gudgin, Bill Martin.
Poster from Levy Institute’s Facebook page.
Graham Gudgin And Ken Coutts – “How Did The Economics Profession Get It Wrong On Brexit?”
Graham Gudgin and Ken Coutts, both Keynesians in the Cambridge tradition, presented a seminar on the 31st of January at St. Catherine College, Cambridge on how “remainers” exaggerated the risks of Brexit. The link has the audio and the presentation. The title is the link.
In an article today Europe Mulls Major Step Towards “Fiscal Union”, Reuters reports that Angela Merkel is pushing for a “giant leap forward”:
After falling short with her “fiscal compact” on budget discipline, German Chancellor Angela Merkel is pressing for much more ambitious measures, including a central authority to manage euro area finances, and major new powers for the European Commission, European Parliament and European Court of Justice.
She is also seeking a coordinated European approach to reforming labor markets, social security systems and tax policies, German officials say.
Until states agree to these steps and the unprecedented loss of sovereignty they involve, the officials say Berlin will refuse to consider other initiatives like joint euro zone bonds or a “banking union” with cross-border deposit guarantees – steps Berlin says could only come in a second wave.
“Kaldorians” jumped to highlight the serious defects in the European plan for integration when officials were working on the Maastricht Treaty. One of the implicit assumption on which the dogma of “free trade” is pushed is that current account deficits do not matter. The government’s task is to only make markets free in this view. The Euro Area was formed with the highly incorrect notion (among various others) that nations can simply solve their “balance of payments problem” by getting rid of it altogether.
I was reading this article by Ken Coutts and Wynne Godley from 1990 [1] where the authors point to different kinds of arguments put forward by others to defend this position (“current account deficits do not matter” provided markets are made free).
There appear to be six different lines of argument to the effect that the current account deficit can be ignored …
… (v) A different kind of argument makes a comparison between a nation with an external deficit and a relatively poor region within a nation. It is pointed out that there is no balance of payments problem for Scotland or for Northern Ireland and from this it is concluded that as soon as Britain joins a European monetary union its balance of payments ‘problem’ will disappear permanently …
… The argument (v) that a region within a country cannot have a balance of payments ‘problem’ ignores the fact that if a region imports more than it exports its trade deficit is automatically paid for by fiscal transfers.[footnote: Strictly speaking, the fiscal transfers will always exactly compensate for any trade deficit only after allowing for the acquisition of financial assets by the private sector as implied by the ‘New Cambridge’ identity (exports less imports equals net government outlays plus the ‘trade’ deficit). The identity says, of course, nothing whatever about the level of real income and output which trading performance will have generated]. The point may be illustrated by considering an extreme case where a region consumes tradables but cannot produce them at all. In this case there will be a trade deficit exactly equal to imports of tradables, but the flow of government expenditure and net transfers will provide a minimum level of income support and keep life of a kind going without any borrowing at all taking place. If an uncompetitive region were not in receipt of fiscal inflows, its inhabitants would have no alternative but to emigrate or starve. This example illustrates that merely by sharing a common currency with another area, a region or country does not automatically dispose of its balance of payments problems since its prosperity still depends on how successfully it can compete in trade with other areas. The Delors Report itself correctly observes that a monetary union transforms a weakness in the ability to compete successfully from being a balance of payments problem into a regional problem to which there is only likely to be a solution by using the instruments of regional policy.
The movement toward more integration by giving higher powers to the European Parliament was also suggested by Wynne Godley and Marc Lavoie in 2007 [2]:
… Alternatively, the present structure of the European Union would need to be modified, giving far more spending and taxing power to the European Union Parliament, transforming it into a bona fide federal government that would be able to engage into substantial equalisation payments which would automatically transfer fiscal resources from the more successful to the less successful members of the euro zone. In this manner, the eurozone would be provided with a mechanism that would reduce the present bias towards downward fiscal adjustments of the deficit countries.
References