There are many similarities between a resilience approach to macroeconomics and the Minsky/Bagehot approach – the most significant being a common focus on macroeconomies as systems in permanent disequilibrium. Although both approaches largely agree on the descriptive characteristics of macroeconomic systems, there are some significant differences when it comes to the preferred policy prescriptions. In a nutshell, the difference boils down to the question of when and where to intervene.
A resilience approach focuses its interventions on severe disturbances, whilst allowing small and moderate disturbances to play themselves out. Even when the disturbance is severe, a resilience approach avoids stamping out the disturbance at source and focuses its efforts on mitigating the wider impact of the disturbance on the macroeconomy. The primary aim is the minimisation of the long-run fragilising consequences of the intervention which I have explored in detail in many previous posts(1, 2, 3). Just as small fires and floods are integral to ecological resilience, small disturbances are integral to macroeconomic resilience. Although it is difficult to identify ex-ante whether disturbances are moderate or not, the Greenspan-Bernanke era nevertheless contains some excellent examples of when not to intervene. The most obvious amongst all the follies of Greenspan-era monetary policy were the rate cuts during the LTCM collapse which were implemented with the sole purpose of “saving” financial markets at a time when the real economy showed no signs of stress1.
The Minsky/Bagehot approach focuses on tackling all disturbances with debt-deflationary consequences at their source. Bagehot asserted in ‘Lombard Street’ that “in wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them”. Minsky emphasised the role of both the lender-of-last-resort (LOLR) mechanism as well as fiscal stabilisers in tackling such “failures”. However Minsky was not ignorant of the long-term damage inflicted by a regime where all disturbances were snuffed out at source – the build-up of financial “innovation” designed to take advantage of this implicit protection, the descent into crony capitalism and the growing fragility of a private-investment driven economy2, an understanding that was also reflected in his fundamental reform proposals3. Minsky also appreciated that the short-run cycle from hedge finance to Ponzi finance does not repeat itself in the same manner. The long-arc of stabilised cycles is itself a disequilibrium process (a sort of disequilibrium super-cycle) where performance in each cycle deteriorates compared to the last one – an increasing amount of stabilisation needs to be applied in each short-run cycle to achieve poorer results compared to the previous cycle.
Resilience Approach: Policy Implications
As I have outlined in an earlier post, an approach that focuses on minimising the adaptive consequences of macroeconomic interventions implies that macroeconomic policy must allow the “river” of the macroeconomy to flow in a natural manner and restrict its interventions to insuring individual economic agents rather than corporate entities against the occasional severe flood. In practise, this involves:
- De-emphasising the role of conventional and unconventional monetary policy (interest-rate cuts, LOLR, quantitative easing, LTRO) in tackling debt-deflationary disturbances.
- De-emphasising the role of industrial policy and explicit bailouts of banks and other firms4.
- Establishing neutral monetary-fiscal hybrid policies such as money-financed helicopter drops as the primary tool of macroeconomic stabilisation. Minsky’s insistence on the importance of LOLR operations was partly driven by his concerns that alternative policy options could not be implemented quickly enough5. This concern is less relevant with regards to helicopter drops in today’s environment where they can be implemented almost instantaneously6.
Needless to say, the policies we have followed throughout the ‘Great Moderation’ and continue to follow are anything but resilient. Nowhere is the farce of orthodox policy more apparent than in Europe where countries such as Spain are compelled to enforce austerity on the masses whilst at the same time being forced to spend tens of billions of dollars in bailing out incumbent banks. Even within the structurally flawed construct of the Eurozone, a resilient strategy would take exactly the opposite approach which will not only drag us out of the ‘Great Stagnation’ but it will do so in a manner that delivers social justice and reduced inequality.
- Of course this “success” also put Greenspan, Rubin and Summers onto the cover of TIME magazine, which goes to show just how biased political incentives are in favour of stabilisation and against resilience. ↩
- From pages 163-165 of Minsky’s book ‘John Maynard Keynes’:
“The success of a high-private-investment strategy depends upon the continued growth of relative needs to validate private investment. It also requires that policy be directed to maintain and increase the quasi-rents earned by capital – i.e.,rentier and entrepreneurial income. But such high and increasing quasi-rents are particularly conducive to speculation, especially as these profits are presumably guaranteed by policy. The result is experimentation with liability structures that not only hypothecate increasing proportions of cash receipts but that also depend upon continuous refinancing of asset positions. A high-investment, high-profit strategy for full employment – even with the underpinning of an active fiscal policy and an aware Federal Reserve system – leads to an increasingly unstable financial system, and an increasingly unstable economic performance. Within a short span of time, the policy problem cycles among preventing a deep depression, getting a stagnant economy moving again, reining in an inflation, and offsetting a credit squeeze or crunch…….
In a sense, the measures undertaken to prevent unemployment and sustain output “fix” the game that is economic life; if such a system is to survive, there must be a consensus that the game has not been unfairly fixed…….
As high investment and high profits depend upon and induce speculation with respect to liability structures, the expansions become increasingly difficult to control; the choice seems to become whether to accomodate to an increasing inflation or to induce a debt-deflation process that can lead to a serious depression……
The high-investment, high-profits policy synthesis is associated with giant firms and giant financial institutions, for such an organization of finance and industry seemingly makes large-scale external finance easier to achieve. However, enterprises on the scale of the American giant firms tend to become stagnant and inefficient. A policy strategy that emphasizes high consumption, constraints upon income inequality, and limitations upon permissible liability structures, if wedded to an industrial-organization strategy that limits the power of institutionalized giant firms, should be more conducive to individual initiative and individual enterprise than is the current synthesis.
As it is now, without controls on how investment is to be financed and without a high-consumption, low private-investment strategy, sustained full employment apparently leads to treadmill affluence, accelerating inflation, and recurring threats of financial crisis.” ↩
- Just like Keynes, Minsky understood completely the dynamic of stabilisation and its long-term strategic implications. Given the malformation of private investment by the interventions needed to preserve the financial system, Keynes preferred the socialisation of investment and Minsky a shift to a high-consumption, low-investment system. But the conventional wisdom, which takes Minsky’s tactical advice on stabilisation and ignores his strategic advice on the need to abandon the private-investment led model of growth, is incoherent. ↩
- In his final work ‘Power and Prosperity’, Mancur Olson expressed a similar sentiment: “subsidizing industries, firms and localities that lose money…at the expense of those that make money…is typically disastrous for the efficiency and dynamism of the economy, in a way that transfers unnecessarily to poor individuals…A society that does not shift resources from the losing activities to those that generate a social surplus is irrational, since it is throwing away useful resources in a way that ruins economic performance without the least assurance that it is helping individuals with low incomes. A rational and humane society, then, will confine its distributional transfers to poor and unfortunate individuals.” ↩
- From pg 44 of ‘Stabilising an Unstable Economy’: “The need for lender-of-Iast-resort operations will often occur before income falls steeply and before the well nigh automatic income and financial stabilizing effects of Big Government come into play. If the institutions responsible for the lender-of-Iast-resort function stand aside and allow market forces to operate, then the decline in asset values relative to current output prices will be larger than with intervention; investment and debt- financed consumption will fall by larger amounts; and the decline in income, employment, and profits will be greater. If allowed to gain momentum, the financial crisis and the subsequent debt deflation may, for a time, overwhelm the income and financial stabilizing capacity of Big Government. Even in the absence of effective lender-of-Iast-resort action, Big Government will eventually produce a recovery, but, in the interval, a high price will be paid in the form of lost income and collapsing asset values.” ↩
- As Charlie Bean of the BoE suggests, helicopter drops could be implemented in the UK via the PAYE system. ↩