“Coppola Comment” Comment

“Coppola Comment” Comment

Frances Coppola is always an enjoyable read, enunciating good sense in lucid prose. But she can be teasing, as in her latest blog.

Growth:

     Like organisms, I believe economies can grow until they approach maturity, when they will enter a ‘steady-state’. It is neither possible nor desirable to grow for ever. By the way, GDP cannot be used as a measure of improvement unless corrected for devaluation of the currency, and for change in the population. True growth (in wealth) would have to involve either an increase in population or productivity (per worker), or both.  I cannot see why anyone should want a mature economy to grow.  No sane Briton could want an increase in the population (of Britain), nor an increase in the ratio of concrete to green-space, in Britain. There will (in Britain) be even less interest in the growth of economies elsewhere in the world. 

Inflation:

     I suppose inflation is (in essence) the willingness of some people (sufficient people) inside a currency zone to pay more for a standard item (or sufficient basket of items).  And I suppose this could happen if the items become more scarce, or if the currency becomes more plentiful. 

     I assume that the conventional aim of 2% inflation depends entirely on politics and psychology; not on economics. People are unwilling to accept a lowering of money wages. If government wishes to lower real wages (for whatever reason), that can be achieved most easily by fixing money wages and waiting for inflation (devaluation). In Japan, with a mature and stable economy, I cannot see why anyone could possibly want inflation, whether in the form of devaluation, or of growth.  (If Japan wanted inflation, I think that could be achieved, with a printing press.) 

Interest Rates:

     From Cowen, I read “Peter Olson and David Wessel write:

‘The natural rate of interest, also called the long-run equilibrium interest rate or neutral real rate, is the rate that would keep the economy operating at full employment and stable inflation’.”  When base interest rate was the only lever the Central Bank could pull, the Olson and Wessel definition probably made some sense; the central bankers spent their time sliding the lever up and down while watching their two indicators of success. Quantitive easing provides another lever for the Central Bank, and doubtless upsets the theory of ‘natural interest rate’.  Even without the complication of quantitative easing, it seems quite possible that the concept of Natural Interest Rate contains internal contradictions: [a] Full employment may not be ‘natural’. [b] Full employment, when achieved, might not be compatible with the interest rate required for stable inflation (unless stable inflation is used to provide a definition of “full employment”).

Coppola clearly knows all that, and in her blog is not so much dismayed, as laughing at the discomfort of the economists who were armed not with basic principles but with rules of thumb.