I criticised Dan Jarvis' economic plan yesterday, and I think rightly so. I am hoping that John McDonnell's plan, to be announced today, makes more sense but I am not wholly optimistic. According to the Guardian, who have clearly been briefed:
[McDonnell] will say that Labour would balance tax revenues and day-to-day spending over a five-year cycle; but this target would exclude long-term investment projects, allowing Labour to spend billions on projects such as housing, railways or high-speed broadband.
Thankfully there appears to be an exception clause:
Labour's new target would be suspended when interest rates were close to zero, leaving the Bank of England little firepower left to stimulate the economy. The Bank's monetary policy would make the decision about when to trigger this so-called “knock out”.
In other words, the plan would not have applied in the last seven years. But this does leave big questions needing answers even if, as is obviously true, this plan accords much more closely than anything the government is offering to the obviously wise (on this occasion) wishes of the OECD and IMF, who are both demanding fiscal stimulus now.
The most obvious concern is political. This looks so much like Gordon Brown's 'golden rule' that the hark back to the Brown / Balls era is just too easy to make.
Second, like my complaint about Dan Jarvis, if this is offered as a plan without a reason it falls short of a vision and merely becomes a managerial tool. This is unfortunate, to say the least: I think people do buy vision and in this case there could be a vision people want to hear. That vision, as I explained in the talk I gave on Monday, would be of fiscal expansion until such time as wage increases created the inflation that we need again, full employment at higher levels of productivity was created and the wage share of the economy had increased. That is a vision.
Third, and maybe the speech when it comes out will show I am wrong on this, but there are problems with what John McDonnell has said. The biggest, as I have explained time and again on this blog, is that fiscal balance, whether it be short or long term, is beyond the gift of any Chancellor. Sectoral imbalances will persist whatever a Chancellor says. In that case to offer balance and to indicate a time scale makes no sense at all.
To elaborate, a government balanced budget depends on at least four things. The first is revenue. The second is spend. The third is the level of investment and the fourth is the balance of trade. These factors when combined decide whether the rest of the economy saves or borrows or not, and since the government is depositor (i.e, borrower) of last resort then, come what may, if everyone else in the sterling economy net saves then the government will borrow and there is little they can do about it by issuing edicts to balance the books. This is why such rules make little sense.
Instead all Chancellors can do is explain what they are going to do within the constraints under which they really operate, which would be a step in the right direction of firstly explaining their proper role as economic managers and secondly in assuming a little humility. And, I stress, there are several things they can do.
The first is they can make good decisions on spending.
Second, they can seek to boost their revenues. The only sure way to achieve this is by growth and on this issue there is a massive difference of opinion between Labour and the Conservatives that should be highlighted as the core of what Labour is saying if it wants to create electoral space for itself. The Conservatives think that cutting government spending boost the economy, even in a recession. Labour thinks that in a recession government spending boosts growth. Put technically, the Conservatives think the multiplier on government spending is less than one and Labour thinks it is more than one, as (now) do the IMF and OECD. That's all this debate is about: this is the difference in philosophy explained.
But that that means is that Labour can say training pays back in tax yield.
And investment to increase housing, business, transport, broadband and energy all pay back in tax paid.
And so these activities do not drain the Exchequer, they return money to it because they deliver growth of more than the sum that the government spends and so they boost government income and so they actually are the way to balance the books. Not maybe today, but quite emphatically over time.
And over that same time they increase national earnings and so cut the trade deficit.
And that encourages business to invest, which it is not right now.
And they also reduce dependency and so encourage spending by households who are now saving because of fear of unemployment.
What is more, by increasing skills and productivity they increase wage share and create the inflation that we need as an economy.
And in the process they actually change the sectoral balances, meaning that the government's books could balance.
So that is a plan. And a fiscal rule is not.
I really hope we get more than a fiscal rule.
NB: This follow on blog may also be of interest
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Richard, to what extent do you think it is now possible for any party to propose sound economic policy when the wider public debate and knowledge around economics and economic policy is shackled to the dogma of treating government finances as that of a household? Is it possible for any party to win the support of the wider electorate with a fiscal expansionary policy?
Very hard
That is why the blog just published is important
The political reality and the economic reality have become so uncoupled since the crisis that I struggle to see how they can be brought back together. How can a political party or politician win by proposing the policies that are so clearly economically necessary? Politically we have dug ourselves into an economic hole from which it will be very difficult to climb out.
There is widespread acceptance across the economics world for expansionary fiscal policy and large infrastructure expenditure. This clearly involves increasing government debt but any politician or party who were to support such a scheme has probably just committed electoral suicide.
Elect dinosaurs, expect stone age policies. Some of ‘Old’ Labour are sadly just that, a bit too old in their thinking and grasp of how the world works. Not what’s needed, I’m afraid. Perhaps you should go and advise them some more, Richard 🙂
The mainstream media will report it has a fiscal rule even if that is not what McDonnell intends. For instance I was not aware of the exception clause until I read this blog, I have not heard it mentioned anywhere else.
The purpose of the speech is for McDonnell to establish himself as a sober-suited man you can trust with your money. Electoral politics is about the emotion of leadership and how the public perceives you. Clever people are there to work out the detail behind closed doors and at economics conferences that only political nerds like me attend. Start bothering Jo Public with too much detail that you are failing to explain clearly and they’ll conclude you’re trying to bamboozle them because you don’t know what you’re talking about.
So read the follow up post on the political divide where I suggest the messaging
I think McDonnell is of the opinion that the game’s up when it comes to explaining economic policy to the masses. It’s too easy a target to respond with ‘you can’t spend more than you earn – it’s common sense’ and the person in the street thinks ‘yeah, that’s right’.
If ever there was a time to print and spend money, then this is it. But it won’t happen due to the ignorance of politicians.
I have to believe otherwise
No one should give up an trying to explain a bit of economics to the masses or at least trying to make the case for investment. But you have to do it without jargon. In some circles as soon as you talk about fiscal rules, quantitative easing of any colour, people will switch off.
In these cases may be talk about things like savings bonds, which people can buy and get interest. These bonds both provide an income to pensioners and fund better infrastructure. It’s win win!
I can imagine the Today interviewer saying but aren’t you just creating more debt, to which the answer is “No, we are creating a savings product, that is very attractive to the market!”
The last point is vital
And one I say often
Remember Jane Austen? A good husband had thousands in the three per cents: government bonds, in other words
I’d like to think that the ‘fiscal rule’ bit is a smokescreen. But as such, it is the ‘same old politics’ – no different to what the Tories do. Say one thing but do another. Shame.
Poor old Labour.
They are so scared of the British people not being able to learn the truth that Labour did not actually bankrupt the country that they daren’t argue their case.
I would sum that up as not only Labour lacking faith in the British people being able to change their mind but also shows a lack of faith in their own ability to put these misconceptions right. So instead , Labour tries to ape the Tories.
Labour has got to stop treating their relationship with the British public as though they have been rejected in some sort of love affair.
Over 35 years of neo-lib tosh has resulted in life actually getting harder for people and that has never been so pronounced as now. The neo-lib dream has now completely failed.
Labour can be different NOW but not necessarily by re-hashing old leftist policies but by encompassing new attitudes as seen in this blog and other emerging and renewed ideas about good economics that have come about because of long term analysis of neo-lib ideas that have simply not worked.
The neo-lib experiment is over. The results are out. They are known.
It is time for real change. C’mon Labour – just bloody do it!
I’m sure that if they did this, the other progressive party’s might follow.
I’d prefer to hear Labour saying they’re going to make it impossible for there ever to be another Duncan Smith in power, that MPs who habitually and obviously lie and mislead would be immediately pulled up and genuinely punished where they were found to have no justification. If Smith had been properly punished when he and his wife were apparently caught with their hands in the till, much of what’s going on wouldn’t be happening. Instead, he’d have been out of public life as he should have been. Government as it is is simply no good to us, and sadly I see no sign of anyone in Labour addressing this, just offering more of the same but from them. Nah, not good enough. When’s McDonnell’s approach to incorporating the blockchain, for instance? I get the impression we’d need the smelling salts if the suggestion were made to him. If we want a decent future, it’s no good supporting people who appear firmly wedded to the past. There’s a new economy emerging as a virtual commons develops, and I doubt there’ll be much left of the old one soon for the relics on either side to be squabbling over.
I would not trust the right wing neo liberal spin put on it by the Guardian which has become little more than a parody of the Daily Mail.
Better off sticking with more reliable sources such as
http://off-guardian.org/
Great post, Richard.
I’ve begun work on an article for publication somewhere (not sure where yet) about how the very notion of “fiscal rules” as set out by John McD today may be conceding too much to the Tories and working within the neoliberal framework rather than breaking out of it. Instead we need to set some overall objectives- reducing inequality, spreading prosperity, saving the environment- and set our fiscal policy to achieve those objectives. Your post here already covers some of the points I had intended to make, but I will see if I can add some value when I begin drafting the article over the weekend.
I think that Bernie Sanders should send Stephanie Kelton over on secondment for a few weeks, to teach John above sovereign currency issue and sectorial balances. I was in such despair when I read this. Why is he saying it? He has enlisted a stream of economists who know better. Perhaps you should write to Corbyn expressing your misgivings.
There are those here more than capable of doing that
Without the MMT tax babble
Hi Richard,
Have you written about your objections to MMT anywhere? I’ve seen you comment in unfavourable terms but much of it seems from my limited understanding to match with your own views. I therefore assume there are some specific points you object to. I’d be interested to read a summary or blog on those. When first trying to learn about economics a year or so ago I discovered both MMT and this blog. I have since looked for arguments against MMT but was disappointed in the quality and right wing nature of most counter arguments. It would be interesting to read of the weaknesses from someone more on the left.
Thanks.
I have made clear four objections
One its attitude to tax
Two its predilection for formulaic policy solutions E. G. The job guarantee
Three it’s failure to recognise the need for government debt
Four the cult of MMT – I do not trust anything that is z cult
Please take this in the spirit of learning.
I have recently read a critique of MMT by Thomas Palley who is a post Keynesian, he denounces neoliberalism, but is suspicious of MMT, but only certain aspects. I read his book “From financial Crisis to Stagnation” – in it he reasons that Keynesian reconstruction is the answer to the GFC.
He regards the central constructs of MMT to be well known, well established and Keynesian, but regards the full employment guarantee not causing inflation to be wrong (using the Phillips curve). I do not think it is right but he is right that MMT is not that new, and based on Keynes, Kalechi and Abba Lerner.
Palley agrees with them about taxation and states that it is old and well established that national governments do not use tax for revenue in the way local governments/states do.
He says on page 6 of this paper here that national taxation destroys money, and national government expenditure creates money, http://www.thomaspalley.com/docs/articles/macro_theory/mmt_response_to_wray.pdf
From this I feel that if a genuine post Keynesian who is criticising MMT agrees with them about tax, saying that it is old hat and obvious, then it is probably correct, or at least objective.
Technically they are right about tax
It is their consequent indifference to tax as a social issue that is my problem
Richard – the ‘Taxes don’t Pay for anything’ argument is a basic of MMT theory of course. But we do need to observe that Government’s adopting accounting procedures that ‘disguise’ this. For example, in the UK we have something (for historical reasons) called the ‘Consolidated Fund’ which records Tax ‘as if’ it were revenue so this makes it look like its ‘taxpayers money’ and used as support for ‘the Government’s a household’ argument.
If I’m right, I think MMT (and maybe yourself?) would argue that this is an ‘arbitrary’ accounting choice to do with gold standard history and hides the reality that taxes destroy money and Government spending creates new assets.
Could you clarify what your view of this accounting procedure is. Thanks. Simon
I think the accounting is a red herring and is as archaic as the national insurance fund – and has no influence at all on policy
Bernie is getting the message across better than Labour is over here see:http://www.rawstory.com/2016/03/the-momentum-story-how-the-bernie-sanders-crowd-can-still-win/
Doesn’t it seem bizarre that the US is now ahead of us in terms of getting a progressive message across (more analogies with the 30’s)?
Even though Kelton is advising Sanders he still has to be careful about what he says -he certainly woudn’t survive if started talking about MMT theory in the raw.