I have already suggested this morning that the Left needs a better quality of economic debate. Something that moves us on from dependence on monetary policy, austerity, balanced budgets, independent central banks and all the related nonsense that has torn this country to shreds in the last decade, I suggest.
So, lets imagine why the Left needs something different, and what the circumstances might be when it has to deliver on any such policy. This is important. Because let's be clear, if the next election happens when Brexit has occurred, the economy is humming, the books are balanced, all is going well and people feel good about their prospects Labour is not going to win power. Let's not pretend otherwise: if austerity and Brexit deliver in combination the Tories will take the next election with a big majority.
What are the chances of that? Close to zero, in my opinion. And not just me. I'll quote from Larry Elliott (an occassional co-author of mine) in the Guardian yesterday:
During the winter of 2008-09, trade and industrial production were collapsing more quickly than they had during the Great Depression. Now imagine if something similar were to happen again. It is not the likeliest of outcomes but not all that far-fetched either. China's debt; Brexit; a global trade conflict: any of them could blow up into something serious. These sort of events form the basis of the war games that policy makers play from time to time.
I am not as optimistic as Larry: these may not be the causes of the next downturn. But there will be one. And those three things, plus a great many other toxins now in the mix, could make it grisly.
I will be candid, no fiscal rule is going to be of any consequence then. As Larry puts it:
So what options are there? Initially, the response will be more of the same: monetary and fiscal policy will be eased to the extent that it can be. But if that does not work, more radical ideas will be canvassed, including reducing the size of the state; negative interest rates; a more targeted form of QE to fund infrastructure; and tax cuts financed by the printing of money.
Larry does, I think, reference that version of QE deliberately. He is well aware that three years ago this month Jeremey Corbyn was campaigning to be Labour Party leader using my idea of People's QE, and was asking me to join him on platforms to talk about it. I had to explain to the likes of the FT at the time that such a policy was not for use in ‘normal times' but would be reserved for emergencies. Corbyn and his advisers did not get that then. Since then they've assumed that the crisis in right wing thinking that will bring them to power will not happen, and so have abandoned the idea altogether, forgetting just what it (and the modern monetary theory logic behind it) did to help get him into office in the first place.
But they're wrong to do so. And they're wrong to plan for ‘normal'. Because Labour is not going to face anything that looks remotely like being normal. It will inherit the most almight mess. And then some pretty radical thinking is actually going to be needed. I quote Larry, again:
[B]ack in August 2008 the Bank of England thought growth would be flat over the coming year if interest rates were kept at 5%. There was no suggestion that six months later interest rates would be 0.5%, QE unveiled and an emergency VAT cut announced. The lesson of 2008 is that in a crisis the impossible can become possible very quickly.
Quite so. In which case let's stop discussion of fiscal rules that are never going to be used.
Let's start talking, at least in informed left of centre economic debate, about what tools are going to be required to deal with the crisis to come.
And start having an explanation of why we can borrow.
And how we will create employment despite a down turn.
And how we will constrain financial markets if they demand austerity.
And how we will not tax people to supposedly pay for enhanced services when that is the least thing the economy will need.
And how the national accounts will be reported so that they do not suggest that there is national debt that does not exist.
And how to actually use QE on things that matter, like a Green New Deal.
And how, even, to explain that national debt is a lot better than people being overloaded with private debt.
And so on, and on.
This is what needs to happen now. Politically and economically this is what makes sense for the Left. Nothing else does. So might we get on with it, please, and stop wasting time with other nonsense?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“And how we will constrain financial markets if they demand austerity”
having just previously read your article on the left needs a better quality of economic debate, isn’t the above statement part of the reasoning that has led Meadway to try and hide behind neoliberal mantras? i almost feel (rightly or wrongly) that labour is getting cold feet!
constraining financial markets is going to have to be one of boldest and most essential policy decisions that labour will face.
Yes
Your reasoning makes perfect strategic sense, and Labour have got to get their shxt together, as the saying goes. Time is running out.
However, in spite of an inevitable worsening austerity-driven socio-economic climate, I still can’t see Corbyn delivering a victory at the next GE. He really does need to stand down asap. This is not a criticism of his personal integrity – just a pragmatic assessment of UK realpolitik. His core support-base is simply not big enough, nor in the right areas, to translate into electoral victory under FPTP against a virulently hostile populist & right-wing MSM.
As expected, the Tories will justify whatever post-Brexit situation prevails. Anything other than let Corbyn into Downing Street, for whom they have a visceral dislike. They will absolve themselves of any blame by saying it’s someone else’s fault – with the ‘intransigently hostile EU’ topping the list. They’ll have learned from Trump’s strategists (who are certainly advisers) that overt lying actually isn’t all that damaging, in the short term. The main tactic is to totally discredit the opposition.
But, as stated many times by you and others here, it would be a huge error for the LP to offer the public ‘Tory-lite’ in the hope of winning over centre-ground swing voters. It should heed your recommendations for the radical changes the nation desperately needs and make no concessions to Neo-liberalism. This probably won’t give them a victory in 2022 but it will in 2027. Time is on the side of progressive politics. For the sake of future generations, it must put aside all this internal squabbling and reunite under new, electable leadership. And any MPs who won’t sign up for change should resign now to permit damage limitation.
As is oft quoted: ‘Events, dear boy, events’ could trigger Plan B. However, depending on an Act of God to deliver victory is a bit Cargo Cultish. In the meantime, it’s wise to be constructing a long-term Plan A. Anyhow, that’s my arm-chair advice.
PS: Being the dreamer that I am, I’ve just renewed my Green Party subscription.
Language is everything.
If Corbyn and co. ever did ‘get’ it, they would need an intensive course ‘How Are You Going To Pay For It’ training to take on questions by the likes of John Humphries, Andrew Neil etc. by MMT economists.
Personally I’d have Jeremy reply by saying “I reject the premise of your question. Don’t you not know that Governments are not a household? Your question is as nonsensical as asking the FA how are they going to get the points to divvy out on Saturday afternoons. Thats nonsense, now are you going to ask me a sensible question?”
Moreover they would need to constantly talk about ‘balancing the economy’ and use phrases like Stephanie Kelton’s brilliant “Money doesn’t grow on rich people”.
That way, as I’ve highlighted before, the left could begin to debunk ‘sticky’ falsehoods with even ‘stickier’ facts.
The central concept Labour Party members need to quickly grasp is the party’s current economic advisers don’t do informed left of centre economic advice or debate they slavishly follow capital’s monetary system rules. As such they are neutering the Labour Party’s capacity to act effectively on behalf of labour the constituency the party was set up to serve!
Richard, who are you directing this to? My impression was that McDonnell and the Labour leadership were very much for expanding the use of advanced modern economics within Labour, and also promoting knowledge of these theories in the membership. For example via the new economics tour https://en.wikipedia.org/wiki/New_Economics_Tour
Do you think Labour is not investing enough resources in economic planning using modern economics? Do you know how many are working on it now? How many do you think need to be working on it? How big is the difference between what is and what is needed?
You also appear to be indicating that there is a shift away from modern economics e.g. MMT back towards monetary policy and balanced budgets. What is your evidence of this? Who do you think is primarily at fault? I assume the blame would have to sit with McDonnell but anyway can you clarify?
Was modern economic theory, for example the People’s QE, at the core of Labour economic thinking or at the periphery? My impression was the national investment bank was essentially built on People’s QE, and that was a major part of the manifesto. If it was at the core how could things have shifted without any public exposure?
I confess to being too tired to address this now
But this week’s blogs are evidence of the backsliding
At least they are creating necessary debate
I’ve come late to this debate in 2 senses.
The first is that Richard has recently posted a series of Blogs on the woeful shortcomings of the Labour economic team and Leadership’s thinking, and only now have I found time to add a comment – and only a relatively insignificant one, amid the riches stimulated by these latest Blogs of Richard’s.
The second way I come late to this discussion is that I hadn’t been paying attention, and had NO idea that Labour was cleaving to such nonsense as those three “tests”, so rightly pilloried elsewhere.
I have just responded as follows on Facebook to someone who shared Richard’s Blog http://www.taxresearch.org.uk/Blog/2018/08/06/labours-chief-economic-adviser-confirms-it-is-committed-to-the-thinking-that-will-deliver-yet-more-austerity/ as follows:
“Am shocked to find how unoriginal, how unradical and mainstream, even how potentially TINA, Labour’s economic thinking is. In a word, this is siding with McDonald and Stanley Baldwin, rather than George Lansbury and Clement Atlee, in the great decision of 1931. The National Government won the Election, but Lansbury and Atlee won the argument – THEIR policies would have avoided the Great Depression.”
What I am referring to above is Anne Pettifor’s excellent article on “the panicky Labour establishment” and the unnecessary 1931 crisis:
http://www.primeeconomics.org/articles/labours-panicky-establishment-referencing-the-wrong-period-in-history
McDonald was wrong, and Lansbury and Atlee were right – the Government could have ridden the storm, by ignoring the bankers, and protecting the vulnerable, even with Banking as it was then, with, I believe, the Gold Standard still in operation.
Now that the Gold Standard is certainly no more, and we have a fiat currency, Labour should, rather than being beholden to the 1% “masters of the universe (who, as in 1931, will only think of their needs), be arguing for what the country needs, and then financing it, by PQE, if necessary, but certainly by the low cost borrowing currently available, and likely to remain so for well into the future.
Thanks Andrew
Unfortunately Lansbury and Atlee threw the LVT baby out with the bathwater. Snowden/MacDonald enacted LVT in 1931 – it had been in every manifesto since inception of the Party. Disgust with the traitors is the only reason I can see for the LP rejecting LVT in 1945. We would never had a housing crisis, gross wealth inequality, regional imbalance or financial crashes if they had not done so.
Andrew, the gold standard was not in operation during the late thirties and early forties in the UK and US (even longer in the US). Bretton Woods introduced a kind of fixed currency system where the US fixed the price of gold and others fixed their currencies to the US dollar. It became the world’s reserve currency, as the designers of BW intended.
As for FDR, I don’t know whether his programs would have been successful as they were had the gold standard been in operation. He didn’t think so. But he was psychologically restrained and may not have been as adventurous as he was without the encouragement he got from his wife and his associate, Harry Hopkins. Hopkins has never gotten as much credit as he deserved for FDR’s various programs. A good example of FDR’s timidity was the 1937 recession, entirely due to his pulling back on his fiscal stimuli. But he learned from it.
What is the current Labour leadership learning? Richard seems to think they have learned and continue to learn nothing, and I am inclined to agree. I think Richard’s observation is a real indictment of certain members of the PLP.
Sorry, I was lazy before. I have now read all of your reference links and I understand your comments.
My first take is that more concrete advice would be helpful. How many economists are employed on the Labour economics advisory team? How many are supporters of, or at least well-versed in, MMT? How many MMT specialists need to be added? What are the practical steps that can be taken.
Also, I think a post that summarises the previous three posts would be helpful. If I repost this post to Labour forums most will not follow the references and get the key message, which I take to be the following
1. Labour is moving away from the economic ideas of MMT that will allow Labour to both deal with the upcoming crisis and to run a highly productive full employment society. This is a road to the continuation of austerity and control of the economy by bankers.
2. McDonnell must move away from Osborne’s fiscal charter that required balanced budgets as proof that Labour is competent economically, since it is 100% incompatible
Also, I think it might be possible to be an MMT follower and still play the ‘fiscal’ game. Perhaps your models might show that we can support full employment and some set of infrastructure goals while maintaining debt to GDP below some percentage, for example 150%. As an MMT person you might not care about debt levels but you can make a statement about it because your models are more precise and based on real world system dynamics (using Keen’s Minsky system simulator for example)
With that in mind, I would like to post the following question:
If you want McDonnell to renounce the Osborne charter what do you want him to replace it with? What parameters can we use to measure ‘fiscal’ health so that we can commit to them and have that be acceptable to even those who do not believe in MMT?
Ideally we could have an MMT fiscal ‘charter’ that would not be a primary driver of policy, but that we could be confident we could meet. Is that possible?
Yes
But I have not had time to do it yet
Maybe we need to start asking the orthodoxy to explain things themselves.
Like why do we need unemployment? In a centrally controlled economy unemployment is obviously a waste of human resource. What benefit does it serve in a capitalist or mixed economy? Does that benefit outweigh the human misery is causes? If it does, isn’t it our moral duty to alleviate the suffering of those who must pay the price of this benefit by giving them a decent standard of living? If the cost of that is too high, why do we need unemployment?
Can we force them to explicitly state who benefits and who pays? That would be interesting.
I hoped that the current leadership would be the ones to start fighting back against the orthodox narrative but I’m losing faith. It’s probably time to look to the rising stars. Can they be convinced?
In 1932 the Labour Party founded two sub-committees which were tasked with economic research and new radical thinking into how to deal with the seemingly unique problems and endemic economic malaise the Great Depression had created. These two committees, the NFRB and XYZ club became extremely influential.
In 1933, the committees co-published ‘What Everybody Wants To Know About Money’ which made widely available ideas such as deficit financing, the employment multiplier and increasing purchasing power rather than prices when resources are idle. It also argued for the nationalization of the Bank of England. These ideas amongst others would would become economic totems of Attlee’s first administration.
What the influence of the XYZ and NFRB committees displayed was that Attlee and the Labour hierarchy were open to radical new economic ideas. Sound money and the gold standard were completely discredited and they were well aware new ideas were required. Granted both committees were exclusive (and I welcome a more democratic approach to the debate today) but it was the attitude of the Labour leadership to the new thinking which was important.
We are at a similar impasse. Neoclassical economics and neoliberalism are discredited, they are not fit for purpose and radically different ideas are needed urgently Unfortunately it would seem Labour’s economic advisers and leadership still have their heads in their Mankiw and other neoclassical classics. As long as the Labour leadership are wedded to championing social democratic ideas within a neoliberal framework they will get nowhere. What is needed amongst the Labour leadership today is the openness to the radical new ideas such as MMT, to take a leaf from the book of the 1930’s Labour that Corbyn and McDonnell more than most claim to be the inheritors of.
Labour nominally adopted monetarism in the mid 1970’s. After 45 years it is time for the leadership to eject the current discredited paradigm and champion new economic thinking.
Thanks
Many will nit know of those clubs
Easy to find on the web
C, do you have a link to that pamphlet? Thanks.
Naked Capitalism calls out the slave mentality of the Labour Party’s economic advisers implying a vote for the Labour Party under such circumstances is not worth the ballot paper it’s written on!
https://www.nakedcapitalism.com/2018/08/richard-murphy-writers-labours-fiscal-rule-lash-austerity-mast.html
By my calculations the UK’s Labour Party is only 185 years behind the times!
“The creator of the German railways, Friedrich List, spent 12 years in the United States, where he was able to experience the American System of Political Economy. List had to face the same aversion we see today in the mainstream and collective conscience–“How are you going to fund this?” and “Where will the money come from?” In response List wrote a treatise, “On a Railway System in Saxony as the Foundation of a General German Railway System,” which appeared in the year 1833:-
‘People will probably ask me, where will Bavaria get the money to complete such giant works [railways]? I answer, that I have not yet seen any silver or gold in any of the canals or railways. To build them we use only consumer goods, steel, stones, wood, manpower, the power of animals. But is there not a surplus of all this in Bavaria? To the extent that we transform this surplus into canals and railways, which are not yet in existence, we create permanent and enduring value, we create an instrument which doubles the productive power of the entire nation. The money, however, does not leave the country, it only settles accounts.’”
Of course the same argument about the money not leaving the country applies to current as well as capital spending!
https://www.splicetoday.com/politics-and-media/economic-lessons-from-dead-people
Wonderful!
Seconded!
Spot on comment.
‘Its the real resources stupid’
Thanks for bringing up the name of Friedrich List here, Schofield. I’d forgotten quite how wonderful he was. Germany produced some great economists. Silvio Gesell springs to mind as well.
Das ist gut
as long as the money doesn’t leave the country via offshoring, imported supplies and private contracts with MNC’s
Seems to me the correct and simple reply to “How are you going to pay for it?” is simple: “With money. Next question!”
Not a single useful policy can be enacted without being in government with sufficient muscle to implement it against the wishes of the statusquo.
I believe in MMT and try to find ways to engage people in thinking about it – it is not easy, they have been mesmerised by orthodoxy.
As I see it, a Labour Government has to anticipate three separate shocks.
1) Just because it is a Labour Government, there will be a run on sterling. This should only be a short term problem. Jobs and services will still be there and domestic production will simply gain an advantage over imports. The pound should revert quickly to fair value.
2) Dropping out of the EU will also cause a fall in sterling. This, however, will be permanent as jobs and services trickle out of the UK to mainland Europe. Britain will simply be a poorer country and the EU will gain what we lose.
3) A Trump trade war will precipitate a world wide recession. It is difficult to see how this can be avoided. Other countries will have little choice but to retaliate against America, even though it is lose-lose game. Trump may not weaken sterling, but he will make us all poorer.
I’m somewhat out of the loop but maybe some readers can clarify a few things that niggle at me?
Why is UK public debt good but China’s debt is a risk? Don’t they own huge amounts of our western debt? I’ve seen some article but not yet got my hands on the great wall of debt book.
Is their practice not a form of flawed MMT in operation?
Are there no younger fresher people within labour who can be targeted with the MMT evidence to put pressure further up the ladder? All I see in the media are old weirdos who seem wedded more to obsolete dogma than 21st C reality.
Is there any grasdroots movement to challange the mainstream neoliberal/neoclassical narrative with candidates running against elected politicians on a progressive platform like Sanders has triggered in the US?
If labour are too weak to confront the blatant mischaracterisation in this zionist pro-Israel campaign how can the current leadership possibly confront the entire MSN, financial and corporate establishment with the serious radical systemic changes needed?
A paradigm shift in policy of such a magnitude is required a labour party that shuffles a couple of steps left of the right wing narrative will never cut it.
Due to work I have no time to rent today
Anyone else, please?
@Zachariah
I’ll try.
UK public debt is good in the sense that one man’s debt is another man’s asset so most UK public debt is a safe asset for your pension provider. Where UK public debt is held by foreigners it is less good but in the end helps Britain to import stuff – of particular importance for the UK which imports about half the food it eats.
China owns very little of US or UK public debt in fact, so if they decided to sell tomorrow there would be enough willing buyers. China’s own (domestic) debt is difficult to get a handle on because the statistics are dubious. It seems highly likely though that they have far too much domestic private debt but as a controlling dictatorship they realise that they are the monopoly issuer of the currency so have an infinite capacity for write offs, subsidies or even sending banks bust – as they wish.
Some parts of, or members of Labour do get it – see the MMT FOR THE BRITISH LABOUR PARTY facebook page. Also Momentum is perhaps part way there see, for example http://www.progressivepulse.org/economics/budgetary-sleight-of-hand.
Peter May, I wouldn’t call $1.17 trillion of China US debt very little. https://www.cnbc.com/2018/04/05/chinas-1-point-2-trillion-weapon-that-could-be-used-in-a-us-trade-war.html
Linking Ruml’s “Taxes for Revenue are Obsolete” from 1946 is useful, because it gets people over the first & second hurdles: he was a Federal Reserve chairman (the other side) + this idea’s been around for ages .
Agreed
@Carol Wilcox
You and I might not, but China’s US treasuries are relatively, small fry: https://chinapower.csis.org/us-debt/
“To build them we use only consumer goods, steel, stones, wood, manpower, the power of animals. But is there not a surplus of all this in Bavaria?”
Perhaps.
But what happens if there is not a surplus?
You can print all the money you like. But you cannot print steel, stones or wood. You cannot print manpower.
And that is where MMT implodes.
A shortage of steel for your projects. The shortage pushes up prices. What do you do? Print more money? Impose price controls? Nationalise the steel industry? We all know where that leads.
Small wonder only academics support MMT. The only place it works is in theory.
This is an absurd comment
The whole argument of MMT is that the constraint on action is physical and not monetary
And I would argue – have argued – that we have the humanpower to do a great deal more than we do.
So your assumption is just wrong
And MMT does work now – whether we adopt it or not
Again, you are rather missing the point
Mainly Macro blog this morning has slaughtered your arguments…
Labour’s fiscal rule is progressive
Posted: 09 Aug 2018 01:43 AM PDT
I have seen a lot of things said about Labour’s fiscal credibility rule in the last few days which are simply wrong. I think the heart of the problem is that many heterodox economists do not believe in what I call the conventional or consensus assignment outwith the lower bound for interest rates. That conventional or consensus assignment [1] is that interest rates should be used to stabilise the economy rather than fiscal policy. The whole idea of independent central banks setting interest rates is predicated on this assignment.
The assignment will not work when interest rates hit a lower bound where central banks feel they cannot cut rates any further (obviously!), so fiscal policy has to become the stabilisation instrument in that situation. The innovative feature of Labour’s rule is the knockout that allows exactly that. I do not think there is any controversy here, so I will confine myself to situations where interest rates are not at their lower bound and set at a level central banks believe will stabilise the economy.
Just as independent central banks are a (not necessary) consequence of the conventional assignment, so are fiscal rules. Without them history suggests you are likely to get deficit bias: a gradual increase in the government debt to GDP ratio over time. For a country with its own currency a rising debt to GDP ratio is never catastrophic, because the markets cannot force such a country to default. There is no magic number for the debt to GDP ratio over which disaster happens. All that stuff is austerity propaganda.
However deficit bias is not good for a variety of reasons. The most straightforward is that more taxes need to be raised to pay the interest on that debt, and taxes discourage labour supply (as well as being politically unpopular). You get deficit bias because it is too tempting for politicians to cut taxes or increase spending by increased borrowing, because to the electorate it looks like you are getting something for nothing. (Trump’s tax cuts for the rich would have been even more unpopular if he had cut spending or raised other taxes to avoid increasing the deficit). A fiscal rule is a device to discourage deficit bias.
It is not the case that fiscal rules are inherently neoliberal. A fiscal rule does not limit the size of the state in any way, as long as you are prepared to pay for higher government spending by raising taxes. Labour’s fiscal rule does not ‘enforce austerity’. Austerity in my book is cutting government spending in a way that is bound to reduce demand and therefore hurt the economy as a whole. In a fiscal credibility rule world monetary policy stabilises the economy, and if rates hit the lower bound the rule’s knock-out applies. That is the crucial difference between Labour’s fiscal rule and the one used by the Coalition government in 2010. Labour’s fiscal rule makes austerity impossible. Let me repeat that: you cannot have austerity with Labour’s fiscal credibility rule.
One false charge is that Labour’s rule would prevent a Job Guarantee scheme being introduced. The idea seems to be that, if a negative shock hit the economy, JG spending would rise and the fiscal rule would stop that happening. Note this is conceptually no different to unemployment benefits. This is not true because Labour’s rule targets the current deficit in 5 years time. In five years time monetary policy will have dealt with the negative shock, so there is no reason to adjust fiscal policy as a result of the negative shock. If by chance monetary policy fails once the 5 years are up, it gets another 5 years to try because the fiscal rule has a rolling target – it always looks five years ahead. That means government spending is never cut because there is a temporary economic downturn.
What this means is that fiscal planning under Labour will in effect always assume output is at the level that keeps inflation constant. Who decides what that long run sustainable level of output is? The OBR, much as they do now. Not the central bank, but the independent OBR. The OBR’s main job is to work out what the medium term steady inflation level of output is, and they put a lot of effort into getting it right.
At the heart of many of the objections to Labour’s fiscal rule is a wish not to follow the conventional assignment, but instead have fiscal policy rather than interest rates stabilise the economy. That alternative assignment means that fiscal policy would be whatever is required to stabilise inflation, and no rule for the deficit is required. That happened in the UK when we had fixed exchange rates and capital controls, so it is not a stupid idea. But to suggest, as so many seem prepared to do, that this choice over assignments is something more than a rather technical debate about transmission mechanisms, institutional constraints and delegation [2] is deceitful..
Which brings me to Richard Murphy’s post. Richard says so many false things about this rule it is difficult to know where to start. It is not ‘neoclassical’, it does not ‘have its roots in microeconomics’. It does not assume ‘markets allocate resources efficiently’. It does not make any assumptions about how money is created. To say that Labour’s rule is based on a microeconomics perspective but MMT has a macro perspective is complete and utter nonsense. You can justify Labour’s rule on the basis of pretty well any macroeconomics you like, as long as you accept that interest rates are stabilising the economy rather than fiscal policy.
The bottom line is that Richard tries to suggest that you could have more public spending under an MMT type assignment compared to Labour’s fiscal rule. That is also completely wrong, and if anything the opposite would be true. Suppose Labour comes to power in 2022, and nominal interest rates by then are at 2%, and inflation is steady at target. Labour are pledged to substantially increase public investment spending (which is outside the rule), which will put upward pressure on demand, at least initially. That would mean under a conventional assignment interest rates would rise to prevent inflation. But in an MMT world that wouldn’t happen. So in an MMT world how do you stop inflation rising? Either current spending would have to be cut, or taxes increased.
There is only one way that public spending for given taxes could be higher in an MMT world compared to Labour’s fiscal rule, and that is if inflation was not controlled at all. That is not what serious MMT economists would recommend. So when Richard says Labour’s rule means a Labour government would be committed to austerity policies, by which I think he means low public spending, while his MMT alternative would allow more public spending without raising taxes, he is, once again, just wrong.
[1] The term assignment comes from the idea that you have two instruments that can control inflation, fiscal policy or interest rates, and an assignment is where only one instrument is used to do the job. You could use both, of course, but if each instrument is controlled by different people with different views about the economy obvious problems could arise. Also in simple New Keynesian models it is optimal just to use monetary policy. I use the term conventional or consensus because it is the assignment that pretty well all advanced countries use, and the one most mainstream academic macroeconomists would recommend.
[2] transmission mechanism: how quickly and reliably each instrument impacts demand. institutional constraints: how quickly you can change the instrument (here monetary policy easily wins without significant institutional change). Delegation: again without major institutional change, you cannot delegate fiscal policy, so if you think delegating stabilisation policy is a good idea this favours monetary policy. As I argue here, delegation is as much about making advice public as it is about devolving power.
With respect, I laughed at the suggestions Simon made: most are ludicrous or just wrong. Which is disappointing
But your suggestion that I have been slaughtered is even funnier
But it may take until tomorrow to reply
I have work to do
Oh Richard,
So much to discuss with this Wren-Lewis offering. Overall it seems to me that he still lives in a old style, monetarist reality where some unemployment is necessary to avoid “inflation”and monetary policy is still relevant. This despite the fact that demand-pull inflation (and inflation generally) has been below target for most of the past 10 years and monetary policy has been hopelessly stuck near the zero lower bound for just as long.
Wren-Lewis claims that he is not neo-liberal (and genuinely wants to believe that) but he is though, as his blog post makes clear, for the simple reason that he is pro-monetary policy in the conventional sense of the term and anti-fiscal. That’s a basic neo-lib tenet and “New Keynesian” is to Keynesian what New Labour was to Labour.
As for this from Wren-Lewis: “So in an MMT world how do you stop inflation rising?”
Apart from the fact that he has misrepresented your view on the role of tax I would suggest the question be addressed on the fundamental level and not on his tedious “New Keynesian” terms. The fundamentals are twofold:
1. That sustained, demand-pull inflation should not occur in a competitive economy that is operating below capacity.
2. Competition policy is necessary. It breaks market power and acts to ensure that supply is competitive.
With regard to point 1, there we don’t bother with any nonsense methodology that tries to tell us that we are operating at full-capacity while unemployment and underemployment are still clearly present or while interest rates are still near zero. None of that happens (or persists) when the economy is at full capacity. What’s more we don’t conveniently ignore underemployment or refer to 3 or 4% unemployment as “full employment”.
With regard to point 2, those that may absurdly dismiss concerns about market power could be reminded that it is written into the wage and price-setting formulae that they teach in uni macro courses. As for the fact that competition policy is technically micro policy, so be it. It is the one area of micro that has a major impact on macroeconomics (via prices and inflation).
Anyhow, there’s more to be said but I will leave it at that.
I will make my offering in the morning
Unusually most is already written tonight
We are in a wavelength
Peter Wilson,
You’d get points for getting this so perfectly backwards (if such points were awarded).
Your assumption of “shortage” is the fundamental error. We have had an excess capacity of labour and capital and have done for at least 10 years. The only shortage is one of demand NOT supply.
The purpose of monetary financing, or any form of stimulus, is to stimulate employment and, as such, demand through the multiplier effect. It is there to reverse the self-reinforcing drift toward stagnation and put the excess capacity to work.
A “shortage” (relative to demand) could possibly occur if the stimulus was excessive but I don’t think anyone is proposing any wildly excessive level of stimulus.
As for your fixation with steel, current estimates suggest that China alone is capable of meeting most if not all of the world’s demand. Add the suppliers in the US, UK and Europe to that and you might begin to understand what excess capacity is.
As for this: “But what happens if there is not a surplus?”
Then you’d find that you were living on another planet.
https://www.trade.gov/steel/pdfs/global-monitor-report-2016.pdf
Forgot one: Raise more taxes.
…which gives you the ‘fiscal space’ into which you can spend the £s to buy the steel (that the just-taxed private sector no longer has the £s to buy)
I presume you know you appear to be a drowning man floundering when commenting as you do?
“The only economic discussion the Left needs is how to deal with the coming crisis”
There may be one or two other points that needs to be added to that discussion which are:
1. How to ensure that the benefits of increased employment and spending do not get captured by monopolies and oligopolies ( the bulk of UK industry) through higher prices. Failing to ensure that would result in an inflation boost that would not only reward the rent-seekers but undermine the power and scope of fiscal policy. In other other words: how to achieve higher demand without unnecessary inflation.
2. How to ensure that the benefits of increased employment and spending are not leaked away to imports, offshoring and multi-national corporate profits.
The point being Simon Wren Lewis ridicules your output and you ridicule is..is is Wren Lewis a capable economist? In most peoples eyes he most certainly is. But he disagrees with you as would (i believe) the vast majority of experienced economists out there. But it is good that disagreement comes in the way of rational argument as hopefully will your counter.
The big issue with PQE and using tax to counter inflation is there is no blueprint in any economy where this has been tried and worked. Yet there are many examples where the printing of money has destroyed a currency. That obviously doesn’t kill your argument outright but it means it will always be viewed as an “experiment’.
But i await with interest your response to Simon.
So your view is the establishment view should prevail
And when that is not working your view is….the establishment view should prevail
That is an interesting idea
And clearly a basis for problem solving
Read what I said, I didnt say that..
It’s what you implied
jamesc,
re.this:
“Wren Lewis a capable economist? In most peoples eyes he most certainly is. But he disagrees with you as would (i believe) the vast majority of experienced economists out there.”
None of whom forecast the GFC or supported those who did. An exceptional minority (Roubini, Baker, Keen et al.) did that. Those that opposed or ignored them, majority or not, have collectively been, for 10 years been a zombie waste of space. They have failed the most fundamental of tests and carried on as if no one had noticed.
Generally your tactic of boring your opponent into silence may be effective in some cases but not when you come out with stuff like this:
“using tax to counter inflation is there is no blueprint in any economy where this has been tried and worked”
That is very much something that was tried (and worked) for 25 to 30 years across the Western World during the Keynesian era and most everyone who knows this subject knows that. Apparently you don’t.
[…] the Bears: “The only economic discussion the Left needs is how to deal with the coming crisis” [Tax Research UK]. ” Labour is not going to face anything that looks remotely like being normal. It will inherit […]