His perspective on events and ability to clearly communicate the intricacies of policy considerations is enviable.
Particularly, his identification of the appropriate metric, output gap and productivity, by which to understand just how below trend the financial crisis has left us. Also, his explanation of "Hysteresis" a concept proposed by Larry Summers as a way to understand the current extended effects of the crisis. Here he writes:
" Why is it that the recession turned spare capacity into lost capacity? One answer lies in the ugly word
This is an idea borrowed from physics. If an insulated wire is wrapped around an iron bar, and an electric
current is then passed along the wire, the iron bar becomes magnetised. Some of this magnetism remains
even after the current has been switched off. A shock has a long-lasting effect. This is labelled hysteresis.
An economy experiences hysteresis not when output falls relative to potential output, but when potential
output itself falls as a result of a recession. What happens is that the recession itself shrinks productive
capacity: the economy’s ability to produce output is impaired.
The intuition behind it is simple enough: if you let a recession last long enough for capital and labour to
rust away you will lose growth potential, on account of discouraged workers, lost skills, broken banks and
missing investment in future productivity. By not taking steps to offset the negative shock of the recession
with the positive shock of a stimulus, the coalition government cost the country 10 per cent or more of
As he navigates through the limitations inherent in the current paradigm related central banks/QE and relative importance of managing the public debt so not to "destroy confidence in the state’s ability to control its spending, and jeopardise the independence of the central bank." He concludes that printing money directly for public spending while currently in the policy dialogue "only be a remedy of the last resort."
Still he comes to a particularly strong transitional conclusion, with strong real world support, of differentiating between current and capital spending and the deployment of public investment banks as a work around to support much needed investment.
"In our present situation, with little spare capacity, the government needs to think much more carefully about what it should be borrowing for. Public finance theory makes a clear distinction between current and capital spending. A sound rule is that governments should cover their current or recurrent spending by taxation, but should borrow for capital spending, that is, investment. This is because current spending gives rise to no government-owned assets, whereas capital spending does.If these assets are productive, they pay for themselves by increasing government earnings, either through user charges or through increased tax revenues. If I pay for all my groceries “on tick” my debt will just go on rising. But if I borrow to invest in, say, my education, my increased earnings will be available to discharge my debt."
Calling for a publicly funded British Investment Bank he cites examples like the European Investment Bank and German KfW (Kreditanstalt für Wiederaufbau) that successfully support infrastructure and export financing.
"Unfortunately, the conventional view in Britain is that a government-backed bank would be bound, for one reason or another, to “pick losers”, and thereby pile up non-performing loans. Like all fundamentalist beliefs, this has little empirical backing....George Osborne has rejected this route to modernisation. Instead of borrowing to renovate our infrastructure, the Chancellor is trying to get foreign, especially Chinese, companies to do it, even if they are state-owned. Looking at British energy companies and rail franchises, we can see that this is merely the latest in a long history of handing over our national assets to foreign states. Public enterprise is apparently good if it is not British."
From the Functional Finance perspective we see the limitations of monetary policy and private finance to restore output and productivity as a clear obligation for our democratically elected representatives to act. While not ideal, funding quasi government organizations as a politically feasible route to that objective is worth highlighting