The document discusses economic policy failures and criticisms of the consensus economic model (CM). It argues that the CM makes incorrect assumptions that asset bubbles and money supply can be ignored, and that there is only one equilibrium state of the economy. Due to these wrong assumptions, the CM's conclusions are flawed and it cannot accurately guide economic policy or management. A new model is needed that incorporates factors like asset prices and uses three policy instruments - interest rates, fiscal policy, and tax policy - to control demand, money supply, and asset prices separately.
Juspay Case study(Doubling Revenue Juspay's Success).pptx
The failures of Economic Policy
1. The Failures of Economic Policy –
Blame Theory, Not Central Bankers.
Andrew Smithers
www.smithers.co.uk
Pension PlayPen
12th September 2023
2. Slide 1. Possible Causes of Failure.
• Bad luck.
• Bad management.
• Bad theory.
3. Slide 2. Examples of Failure.
• Slow growth with deep recessions.
• Asset bubbles and financial crises.
• Rapid inflation.
4. Slide 3. Can We Blame the Management?
• Only if policymakers have a sound theory to follow.
• And the right policy instruments.
• Today they have neither.
5. Slide 4. One Equilibrium or Several?
• One is the consensus model’s (CM’s) wrongheaded view.
• We have three not one.
• The CM ignores asset bubbles and money supply.
6. Slide 5. The CM’s Logic is Sound – The Errors Lie in
the Assumptions.
• The CM is based on three key assumptions.
• If they were correct, it would be simple to manage the economy.
• They are wrong – wrong assumptions bring wrong conclusions.
7. Slide 6. Models Must be Tested.
• The CM was invented before it could be tested.
• We now have the data and they show that the CM is wrong.
• It must therefore be replaced by a better model.
8. Slide 7. The CM’s Mistakes.
• Short-term interest rates, bond yields and equity returns are not related.
• Investment does not rise and fall with real short-term interest rates.
• Companies do not “profit maximise”.
9. Slide 8. Always Keep a Hold of Nurse.
• Policy must be based on some theory.
• I propose that we use the Stock Market Model.
• Plus pragmatism on money supply.
11. Slide 10. Testability.
• Economics must be a science as defined by Karl Popper.
• Its assumptions must be testable and robust when tested.
• The return on equity is the key to this.
14. Slide 13. The Cost of Capital.
• We know, at any time, the cost of equity, short-term debt and long-dated
bonds.
• We know the proportions of each that companies use.
• So we know the cost of capital.
15. Slide 14. Three Things Can Go Wrong.
• Demand may be too strong or too weak.
• Money supply may grow too fast or too slowly.
• Asset prices may be too high or too low.
16. Slide 15. Three Problems Require Three Separate
Controls.
• Interest rates controlled by Central Banks.
• Budget deficits controlled by Governments.
• Add Tax Policy controlled by Governments.
18. • Ultra low interest rates cannot stop slumps.
• Budget deficits are then needed.
• But large deficits can’t be permanent.
Slide 17. Keynes’ Incomplete Revolution.
19. • Liquidity traps were assumed to be short-lived (cyclical).
• The 21st Century has shown this is not true.
• An ever-rising debt/GDP is not safe or sensible.
Slide 18. Cyclical and Structural Liquidity Traps.
20. • Subsidising investment boosts it by more than the cost.
• Raising taxes on consumption cuts demand by no more than the rise.
• Tax policy can thus manage demand.
Slide 19. We Need to Manage Demand Another Way.
21. • The CM’s wrong assumptions cause its wrong conclusion.
• We must discard it, both for teaching theory and as a guide to policy.
• We must introduce tax policy as a third policy instrument.
Slide 20. Conclusions.