It is mildly ironic that I should, today, and to engage in debate with James Meadway, who is, via John McDonnell, Jeremy Corbyn's chief economic adviser. The irony arises for at least three reasons.
First, exactly a year ago today a somewhat bemused support team to Jeremy Corbyn phoned me and asked that I go on the World at One to defend his economic policies which had, the day before, been dubbed Corbynomics by Chris Leslie, who was at the time the shadow chancellor. I agreed and unsurprisingly did a good job in team Corbyn's opinion: after all, much of that economic policy had been borrowed from this blog. For the rest of that month they let me continue in this role without any interference on their part.
It is secondly ironic because by the end of that month I been involved in three separate job discussions. The first was the result of my being head hunted to be the director of the New Economics Foundation, which would paradoxically have made me James Meadway's boss at that time. I decided that role was not for me and took the matter no further. The second offer was from John McDonnell, who wanted me to be his chief economics adviser. Matters got as far as discussing salaries. I was tempted until I understood what John really thought on issues like a fiscal rule. Then I walked away, as I have already recounted, but not before being told that James Meadway might be one of those who was being recruited to work for me. Third, I was offered the role of professor of practice in international political economy at City University, London. That one I took.*
In that case it was thirdly ironic to note James following the rather weak line John McDonnell line that suggests I am a just tax specialist when writing about me today.
I might not have pointed that out but for the weakness of the reply James had to offer to the arguments I had made. There are in essence four of them. First, he says:
To be clear, Labour is now an anti-austerity party, opposed to the rundown and break-up of our public services. The Fiscal Credibility Rule is entirely compatible with that. Richard is wrong to claim otherwise. Likewise, Owen Jones is wrong to claim that John McDonnell is offering Ed Balls' fiscal policy. He absolutely is not. He is opposed to cuts.
I'm delighted to hear it, but as I have pointed out that is not helped by the fiscal rule we're meant to be discussing. It's just puff. I have no problem with that puff, but saying I'm wrong because John McDonnell say's I'm wrong is not an argument. And as a matter of fact, any objective observer would agree this fiscal rule is remarkably similar to Ed Balls policy barring one thing, which is that:
in a critical innovation, it grants a licence to the Monetary Policy Committee to determine that when conventional monetary policy no longer operates properly (at the “lower bound”), the MPC can decide to suspend the Rule.
Since the lower bound has now existed for eight years, and is expected to continue for many more, what this really means is that there is no rule. It's all just puff, but in that case I really think John McDonnell should say he has a rule which does not apply in any currently foreseeable circumstance every time he mentions it, and he does not. Then I would not bother about it, and nor would anyone else, but John would look a bit silly.
Third there's this:
[T]he Rule does not result in a “commitment to running a current government surplus on occasion”.
At this point I felt the whole argument was becoming surreal: here is a rule committing to a balanced current budget but it is not accepted that on occasion this will mean that current spending will be less than taxation. How is that? And yes, I do know the difference between current and investment spending before anyone jumps in and made that clear in my first response.
Then there followed meaningless and pedantic discussions on People's Quantitative Easing (I remember it well) and neoliberalism (I presume the intention is to imply I am one) before the conclusion:
Richard concludes by conceding the main point that some framework – a rule, even – is required for fiscal policy. In this he is correct, particularly for a government seeking to transform how an economy operates. There are tens of thousands of people being brought together by Jeremy Corbyn's campaign to make that transformation happen. It is a shame Richard no longer wishes to be there with them.
I can assure James I would be happy to be right there with them barring one thing and that is that what they're being offered is one of three things. It's either not true, because the supposed rule is never intended to work. Or it's a misrepresentation, because it does actually require tax revenue to be greater than current government spending at some time, and I call that an austerity measure. Or it's a policy which as I have shown will make the wealthier better off, as has been the pattern in the last decade or so. But whichever it is that's not competent left of centre policy. And that's the problem.
If James would like to suggest a competent rule - and I suggested one yesterday - then I would be more than happy to support it, but this one is laden with problems.
And I'll say so if anyone else adopts it as well.
* I also mention this because I have been told by several people in the media that the Corbyn press team are briefing that I am miffed that I was not offered a job and that's just not true: I was and turned it down by very deliberately walking away.
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Just like with Ed Balls previously, this is the kind of muddled, compromised thinking that unravels under intense (sometimes unfair) scrutiny during a General Election campaign.
As Owen Jones has pointed out, not only does the policy have to be thought through , but presentation has to be absolutely first class – being ‘different’ it is undoubtedly going to be assailed without mercy.
Well you are not an economist. I think you have said (correct me if I am wrong) that you have only attended one economics lecture in your life.
I have a 2:1 degree in it
I’d be amazing if I got that on one lecture
And I am Professor of Practice in International Political Economy, City University, London
But what the heck? Why should I shatter your fantasy?
I thought a History degree was the way to go with economic competency?
Have a good holiday Richard, looking forward to reading your blog on your return. I’ll be interested to read your opinions on any meat Smith and Corbyn happen to reference in their debates.
Richard, I truly don’t know where you find the patience to even reply to these trolls.
I think the discussion at the time (while we were still considering Osborne as – ha ha! – a serious candidate for Prime Minister) was that the ‘economy-as-household’ narrative was (is) very strong and hard to beat. I think that for all the talk of PQE, the framing of the debate was such that any attempt to come up with a truly radical policy would have been very difficult indeed.
However, It seems to me that the ZLB ‘get-out clause’ is the crucial aspect of the fiscal rule. Its very inclusion, then, indicates that, for the reasons you outline above, John McDonnell knows the conditions of the rule will never apply, at least not for the foreseeable future, and so he can run deficits to his heart’s content, increasing demand when needed and so on.
If this is not the case, why include this condition at all?
Or why pretend?
That was always my question
Maybe I’m not cut out to be a politician
(I realised that by the time I was 21)
Additionally, if this is true, to come clean and say “well, we always knew it was never going to be applied, but declared it so that we might appear credible” would be very bad as it reveals bad faith and would achieve the opposite.
Apols for the separate postings, but it’s late and these things keep popping into my head after I hit submit.
It might follow then that the rule must be vigorously defended and criticism attacked so that no one ever suspect the declaration of the rule to be a subtle piece of politicking.
If this is true, McDonnell took on Osborne on his turf and won, building credibility with the neoliberals and yet never having to enact policy they would agree with.
No one has really criticised the rule (until now) and certainly no one on the right/neoliberal wing? At least not to my knowledge.
Exactly
Richard from your comment (http://www.taxresearch.org.uk/Blog/2016/08/02/a-note-to-james-meadway/#comment-763310), are you saying ‘exactly’ to my theory on the subtle victory of John McDonnell? Or to my statement saying that no one has criticised the rule?
If the former, would you concede his outmanoeuvring of Osborne on this matter is possible, then? If the latter, then it poses the question: why has no one criticised it until now?
I am saying no one has really criticised the rule
And when you look at it it falls apart
Why has no one looked? Because no one takes his chances seriously?
Far be it me telling tales but https://idgeofreason.wordpress.com/2016/08/02/james-meadway-john-mcdonells-advisor-the-benefits-of-a-constitutional-crisislike-brexit/
I recall there being a fair amount of hoo-hah about it at the time and, given that nearly everything the leadership say is scrutinised closely, criticised unfairly and misrepresented for being outside of ‘respectable opinion’, I think that the fact it wasn’t discussed in greater depth is because no one in mainstream economic opinion (at least in the press) could find anything wrong with it.
I think you raise some pertinent questions, but I think the answers to these are political rather than economic.
I have never claimed to be in the mainstream of economic opinion
It is rather worrying that John McDonnell thinks he might be
Politicians have to, unless they are in a very powerful position, have to operate to a certain degree within the narrative of the time, or else face ridicule and ultimately defenestration.
I don’t think you are in the mainstream (which I am thankful for) but I suspect that John McDonnell may have sympathies closer to yours than you think, hence the ‘get-out’ clause of the MPC suspension, meaning this rule can, at some point in the future, be quietly dropped.
Then candidly he need never have adopted it
I think Chris Dillow today makes a strong argument in support of the fiscal rule.
1. “A world in which the private sector is saving massively will be one in which rates are near zero, so the rule won’t apply.”
2. “Secondly, the same savings glut which gives us big public borrowing also gives us ultra-low bond yields. These mean that McDonnell’s promise to reduce the ratio of government debt to (trend) GDP is compatible with big borrowing.”
3. “Policy-makers have another tool to support the economy: helicopter money. As Martin Wolf has argued, central banks can simply write people cheques.”
It’s there largely for political reasons. The media attack dogs will demand much higher standards of probity from Labour on the economy than from the Tories due to the massive amount of bias already established in the mind of the electorate as to the economic competence of Labour. Made worse by most of the current Labour big hitters trying to oust Corbyn right now when they cravenly gave in to Osborne and Cameron’s constant referencing to the ‘mess Labour left behind’. As a consequence of that Labour has to ‘sound’ tough on borrowing even if the rule will not oblige them to be tough on borrowing.
So this can be summarised as (in the order Chris uses)
1) We don’t need one
2) We don’t need one and
3) We don’t need one
As I said
Actually, Chris’ argument was that I was arguing the rule guaranteed austerity
And actually it would, but for the fact it won’t be sued forreasion (1) above
Which I have noted already on this blog
So when it comes down to it Chris says the rhetoric is needed but not the rule
And I say the rhetoric is a hostage to fortune
For once that’s all you can out between us
I think we all know by now that the the Government’s deficit is everyone else’s savings.And the Government’s total liability (The National Debt plus a bit more that isn’t counted) is everyone else’s financial assets.
So if we want to reduce the Govt’s deficit, if we are really sure that’s a good idea, we should forget about cutting spending and raising taxes, and instead concentrate on preventing everyone else saving so much.
A cut in interest rates will slightly help do that. But what would be even more effective would be to spend more and tax less until inflation is something like 4 or 5%.
Then there would be a use-it-or-lose-it aspect to holding Government debt. There would be more spending and ironically a reduced deficit and even maybe a reduced debt.
That would work much better than any arbitrary fiscal rule.
The trouble with that is it sounds like fiscal profligacy [and would be painted clearly as such by mass media] rather than an investment strategy which is implied by both the fiscal rule and the medium of a National Investment Bank. Government ‘can’t’ spend what it likes and cut taxes to boot but rather it can ‘invest’ for growth. What you are describing is old fashioned demand management that was discredited in the 70’s and remains discredited. That’s not what McDonnell has proposed at all.