As some will have noted, the blog has had rather more discussion of Labour's planned fiscal rule in the last few days than I might have expected a week ago. The latest comment worthy of discussion is from Simon Wren-Lewis , who is one of its authors.
I confess I am disappointed by Simon's response. He accuses me of making suggestions that are wrong. I not only disagree, I also think that Simon's responses are incorrect.
Let me address this first. Simon says
Richard says so many false things about this rule it is difficult to know where to start.
But he does, saying:
It is not ‘neoclassical'.
Yes it is: the whole logic of central bank independence is, in my opinion, based on neoclassical thinking. I would suggest it is hard to disagree.
Then he says:
It does not ‘have its roots in microeconomics'.
Yet again, yes it does. Almost all the macro Simon does has its roots in micro, because that is how it was developed. This is the way neoclassical economics works.
As a result for Simon to say:
It does not assume ‘markets allocate resources efficiently'.
is also wrong. Micro does that. And, as I show below, Simon assumes that has happened in his analysis.
Whilst to say:
It does not make any assumptions about how money is created
is again wrong. It clearly thinks this is a commercial bank operation, which I would largely contest. As a result Simon's suggestion that:
To say that Labour's rule is based on a microeconomics perspective but MMT has a macro perspective is complete and utter nonsense.
With respect, I disagree, as I do with this:
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.
So in other words, you can justify Labour's rule on the basis of any macroeconomics you like so long as it is neoclassical, which has its roots in micro, which does what he says. MMT does not make that assumption. In which case I am not wrong in pointing this out. So I offer a small note to Simon: you cannot win an argument by rigging the assumptions so that you must do so. The assumptions are also fair game. And I apologise for having to waste you, the reader's, time pointing this out.
Having dealt with this issue let me move to Simon's more substantial claim, which is this:
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.
This Simon justifies by saying:
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.
Apart from the fact that the assumptions about 2022 are wildly different from anything I can imagine that is likely to be happening by then, if by chance those assumptions are true Labour is not going to win an election. Why would they? The Tories would correctly be able to claim they had everything under control and in good shape if the assumptions are true. And governments in that situation win elections. Planning for this scenario is, then, politely called a waste of time.
But let me also note something that Simon ignores. What Simon says is that if elected in this scenario Labour would want to invest, and could. His argument is, then that the resources to permit investment must exist, or will be displaced from elsewhere. So two assumptions apply, that he does not state but which he must have made. Either there are spare resources - which must mean unemployed people in reality - because if there weren't the resources to build the investments would not exist; or, alternatively, if those resources were not spare then Labour would have decided that to reallocate resources to investment would be more effective than leaving them in their existing use, presumably related to consumption (by default). And, I stress, that decision can be rational because the multiplier effect on investment produces a yield greater than that from allocating resources to consumption. In other words, the investment creates a return in excess of the value lost by the reallocation of resources to it.
In either case why is there necessarily inflation? The simple answer is there isn't. If there are spare resources (because as Danny Blanchflower and I would agree, the natural rate of unemployment is lower than most neoclassical macroeconomists) then the proposed investment makes use of these and because slack is used there would not need by any inflation.
Alternatively, if resources had to be reallocated from activity not as useful then the additional return the investment generates over that created in the previous use of the resources in turn creates capacity to absorb increased demand, so inflation need not, again, need to follow.
So why does Simon think it does? I can only suggest that this is because Simon has implicitly assumed the market has already optimally allocated resources. In other words, his assumption is that the investment Labour wants to deliver breaks an equilibrium position. Support for this idea is implicit in Simon's language. Note he says:
Suppose Labour comes to power in 2022, and nominal interest rates by then are at 2%, and inflation is steady at target.
We have 'normalised' in other words. Equilibrium has been restored, and Labour would simply be upsetting the economic applecart by investing in a way 'outside the rule' with inflation then bound to follow, if that is what you assume, as I suggest Simon does. But as I have noted, that's not going to come to pass. More importantly, the assumption is, as I previously noted, that markets have optimally allocated resources and Labour will be disrupting them. The implication is obvious. It is that 2% interest rates and inflation are a desired normal when it is not at all clear why either should be, except that they might comfortably fit with the neoclassical macro model of optimal conditions created by independent central banks. In other words, Simon is again winning this argument by assuming he already has.
Having then dismissed this argument by showing that the risk of inflation built into Simon's assumptions need not be real, I turn to Simon's next claim, which is:
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.
I am struggling here. As I am with this comment:
That is not what serious MMT economists would recommend.
Well, of course serious MMT economists do not say inflation should be ignored. That's why some emphasise tax as a way to control it, and others suggest the Job Guarantee. In practice, the reality is MMT economists will necessarily suggest a mix of the two: fiscal policy necessarily and in essence always requires that. But why then Simon's comment that inflation has to be uncontrolled for his rule to be bettered? He's adamant he is right, concluding his comments with this:
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.
This is just wrong, and seriously so. First, that's because the whole, standard macroeconomic basis for reaching this conclusion is wrong. I have already noted why, above. But, I would also draw attention to an article by Danny Blanchflower published in 2012 which does, I think, ably argue the same point, quoting in the process Oliver Blanchard, who wrote in 2008 that:
This, of course, is exactly what Simon has done. If evidence that his analysis is neoclassical was required, then this is it.
And what upsets so many macroeconomists is that MMT, and thinking based on it, does not work in this way. Instead of starting with theory it looks at the real world. Modern monetary theory is, of course, theory based, but it starts from observation. As a result it looks to see if there are unused resources and unmet demands in the economy. If there are (and quite clearly that is the case at present in the UK, on both counts) then it argues that the creation of additional credit within the economy to utilise those resources to meet that demand makes sense. Having also noted that the reality must be that the private sector is not using those resources, or meeting that demand as a matter of fact, then it is pointless to rely upon that sector to do so to create optimal economic outcomes for the people of the jurisdiction. If the private sector was going to do that, it would have already done so, but it hasn't. In that case the creation of this additional credit is a task that must fall to the government.
I stress that it is additional credit (and in this context, I make clear that all money is debt and so, by corollary, also credit, because both sides of the transaction have to exist) that is vital here. The aim is to enable things to happen that might not otherwise do so. So the need is not for additional tax to be raised to fund spending: raising additional tax in the position noted would reduce demand in the first instance, which is precisely the opposite of what is required. In other words, the suggestion Simon makes that taxes would have to be raised to fund investment is, in this scenario, completely wrong: the ordering of events is in reverse of what is required economically.
MMT recognises this. It says that, as a matter of fact, governments have to create credit in the form of new money before taxes can, as a matter of fact, be paid. If they did not do so then the money to make settlement would either not exist or would, as previously noted, have to be withdrawn from the existing active economy, and so reduce activity within it, which is the exact opposite of what an investment strategy would require.
And having suggested that this new credit be created MMT does not then demand that it be withdrawn from the economy by tax. This is because MMT does not think that government spending is funded by taxation, because all government spending is in fact funded by new credit creation in the first instance. This new credit is then either cancelled by way of taxation, which is an essential fiscal function to control inflation (the importance of which to MMT makes a mockery of Simon's claim that MMT is not concerned with inflation control) or it is left outstanding and either formalised as so-called government debt (which is, in fact, the balance of private sector savings balances deposited with the government, and so something quite fundamentally different from its neoclassical representation) or is left on account between the government and its central bank, which is precisely what quantitative easing has done. The idea, then, that tax has to rise to fund additional spending is completely shattered: no such necessary (and I stress the word 'necessary') relationship exists.
This is not to say though that tax might rise. This will only happen if and when the new investment succeeds in its aim of creating full employment at living wage rates within the economy. And of course, at that point the additional wealth to pay the additional tax would have been created. In other words, it would not be an additional cost at that time. But this is the point of optimality on which MMT focuses: its aim is to ensure sufficient credit money is available within an economy to create optimal outcomes for the people of a country when markets will not do that, whatever the reason might be. The focus is not, as Simon has it, on base interest rates and inflation rates. You will note his assumptions did not even make reference to unemployment or real economic conditions. Simon's focus, which is based on the neoclassical belief in central bank independence and a belief that it is interest rates that must control inflation, come what may (which point he acknowledges), is straightforwardly willing to sacrifice employment opportunities to achieve that goal and MMT is not.
That does not mean MMT is indifferent to inflation: far from it, in fact, although I accept that many MMT economies, like some neo-Keynesians (Paul Krugman included), think that an obsession with the 2% inflation rate is unnecessary and a higher inflation target would be quite acceptable. Rather, MMT puts the focus elsewhere. But precisely because that new focus would put more resources to use in the economy the outcome would be higher growth, lower steady, more tax revenue (assuming a consistent tax base and rates) and, to use the language of neoclassical economics, an equilibrium point at a higher level of overall economic activity that would guarantee to consign austerity to history. I regret to say that there is nothing in Simon's logic that does, despite his claims, guarantee that. Indeed, I think that the exact opposite is likely precisely because he thinks that any increase in investment would have to be matched by withdrawing current funds from the economy in the form of taxation, which would be completely counter=productive to this goal.
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There are simply two reasons why a sovereign government like the UK’s should not make Austerianism, the balancing of the government’s accounts, a permanent policy. These are:-
The private sector never optimizes employment and therefore demand except in rare boom times because of the risk uncertainty inherent in investment.
https://www.srcf.ucam.org/marshall/documents/KeynesGeneralTheoryLecture.pdf“>https://www.srcf.ucam.org/marshall/documents/KeynesGeneralTheoryLecture.pdf
A sovereign government can optimize demand because it can create money, reserves and cash (bank notes and coins) without creating a liability on a balance sheet. A clearing bank, however, can’t do this because it creates two liabilities on a balance sheet when it accepts deposits or creates deposits through a loan. Firstly, it has a liability to make the deposit money available to the depositor either in the form of government cash. Secondly, it has a liability to obtain reserves from the government to participate in the payments settlement system when a deposit needs to be transferred to a recipient with an account at another bank.
http://neweconomicperspectives.org/2013/06/do-banks-create-money-from-thin-air.html#more-5545
Of course, the critical word in the first sentence is “permanent” in the phrase “permanent policy” because a sovereign government cannot let the creation of money either by itself or by the clearing banks become substantially out of line with the availability of real resources because abnormal inflation may occur. I use the word “may” because increases in productivity help keep inflation in check. It can use fiscal or monetary policy or a combination of the two in the shape of increased taxation or a rise in interest rate to combat any abnormal rise. A government can obviously also use the same policies in reverse to combat deflation as well as directly injecting money into the economy.
The above “two reasons nutshell” explanation is why the Labour Party is being led seriously astray by its economic advisors to the detriment of the nation’s well-being.
Oops incomplete sentence! Should read “Firstly, it has a liability to make the deposit money available to the depositor either in the form of government cash or to spend electronically.”
Typo alert:
“although I accept that many MMT economies, like some neo-Keynesians ”
Should read : ….many MMT economists, like….
I despair – I really do.
This bloke ‘teaches’ at Oxford of all places. He does not teach. He inducts students into bad economic ideas. That’s the nicest thing I can say. Even a MMT/political economy part-timer like me can see this. Wren – Lewis smacks of status quo.
I’ve gone to Wren-Lewis’ website and read what he has said himself. I’d recommend you click on Richard’s link and do the same. What you’ll read is poorly written refutation of Richard’s arguments (and others too) presented with a thin intellectual veneer. I imagine that Lewis has done this a lot over years and perfected this craft in order to keep him in the manner to which he has become accustomed to. Oh those fabulous college banquets eh, Simon?
It’s when W-L talks about having to raise taxation to cut the ‘deficit’ spending where he really shows his neo-classical roots. Raising taxes for whom Simon? Everyone? Or what about just the insanely rich and the Financial sector who are undertaxed? And again – he is of course suggesting that this would ‘balance the books’ – another neo-liberal lie about fiscal priorities.
I quote the grate(sic) man:
‘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’. I mean – come on. We are all grown ups are we not? We’ve moved on from this haven’t we?
Oh – and he mentions concerns about inflation – how original! Taxing the rich and the Financial/corporate sector would surely take the sting out of inflation as would taxing land and house sales would it not? And we could certainly do with some wage and benefit inflation instead of the contraction we have seen which means now that Aldi and Lidl are the supermarkets of choice for the nation (yeah – some choice!).
When W-L talks about Labour’s fiscal rules stabilising the economy – what sort of ‘stable state’ does W-L and Jon Mc have in mind? The one we live in now? Where households like mine are breaking into savings? Perhaps W-L should stop doing the theoretical math and read what is really going on out here:
bilbo.economicoutlook.net/blog/?p=39928
I have never ever read such a cap doffing, plutocracy pleasing surrender to vested interests as this. W-L seems to think that the OBR is God and here forever. Orthodox, Biased Repression is what they are about.
W-L hides behind technical terms like ‘assignment’ and ‘transmission mechanisms’ and seems to view these as cast in Mount Doom an unable to be modified , improved or changed in any way by a democratically elected Government. This in itself undermines Government sovereignty and democracy. Who is meant to be in charge here Simon?
Further intellectual paucity from W-L is what seems as his adherence to the same methodologies (tweaked to give the apparition that they are being managed by Labour) that have got us here in the first place. The lack of appreciation of the contribution that MMT could make to the situational leadership required to get this country back on its feet is glaring. Austerity has not worked and we are in a mess. What we don’t need is more of the bloody same. We need something new and daring. And if it works or not, then we’ll need to try something else won’t we?
Labour’s ‘fiscal rule’ is as if Labour are asking permission from the markets to help wider society!
For ‘Labour’s fiscal rule’ read instead ‘Labour’s fiscal fool’. Designed to try to restore Labour’s economic credibility, I’m afraid it’s spineless appeasement and nothing more.
It’s the equivalent of prostrating oneself before a ruler – the City perhaps?
Well – not in my name Corbyn – not in my name.
@Pilgrim Very Slight Return
What gets me is the private sector clearing banks are creating money to pump into the economy and this money just like the government created money injected into the economy also runs the risk of too much being created and jacking up inflation but no “quantity creation rule collar” for the bankers. The only sane conclusion to draw is John McDonnell can’t be very smart or much of a socialist can he to buy into this heavily biased Neoliberal advice!
Schofield
I could not agree with you more. W-L is a market worshipper who thinks – like New Labour did – that we can just leave the City to get on with it. Unfortunately the City is ruled by greed – something that macro economics does not need.
My money’s on ‘not too smart’. It’s sad, he seems dour and earnest and honest and decent but also a relic from Labour’s beer and sandwiches past, out of his depth in matters economic. Cometh the hour, we must hope this particular man leaveth. Who could usefully replace him? Are there candidates the assembly (this one) of whom would approve?
Apologies
The link to Bill Mitchells piece is not activated. I’ll try again here:
http://bilbo.economicoutlook.net/blog/?p=39928
Typo?:
“…the outcome would be higher growth, lower steady, more tax revenue…”
Lower steady?
unemployment
The sources of inflation are not easy to predict and cannot always be directly related to an increase in the amount of money created within an economy and consequently binding government to a rule concerning its rate of increase makes little sense. Noticeably the Labour Party’s economic advisers are not arguing for such a rule to be applied to the clearing banks. Why not to be consistent? Here is an article examining the historical data on inflation:-
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Riffing on my last point why aren’t the Labour Party’s economic advisers advising that the private sector clearing banks be limited on a five year programme in regard to the amount of money they can “exchange” on their balance sheets in order to contain inflation to a 2% target? Here’s Dan Kervick explaining what is meant by “exchange” in greater detail:-
“The other way in which the monetary sovereign’s monetary scorecard is different from a private sector scorecard is connected with the first difference: A monetarily sovereign government reserves for itself the power of adding or deleting monetary points on its own scorecard or any other scorecard, at its own discretion, without any requirement that an equal number of monetary points are debited from any other scorecard or credited to any other scorecard. And the monetary sovereign uses its power to guarantee that it is the ‘sole’ entity in the monetary system that possesses such power. The monetary sovereign, in other words, wields the exclusive power to create and destroy money in the monetary system it controls. Currency users in the private sector, on the other hand, can only ‘exchange’ monetary points in ways that make the books balance. To the extent that agents other than the monetary sovereign are permitted to engage in money-creating and money-destroying operations, these operations take place only with the permission of the monetary sovereign, and under the guidance or supervision of the monetary sovereign.”
http://neweconomicperspectives.org/2011/12/public-money-for-public-purpose-toward-7.html
I agree with this
It is as if Steve Keen had never Debunked.
Richard this is really simple. Simon Wren Lewis , James Meadway and others of a like mind cannot understand that all money, whether by government or banks , is created out of thin air . So they come up with all the nonsense they spout to try and disprove this fact . Unless and until they understand this they will never get anything right and just babble on about interest rates and inflation targeting and blah, blah , and the politicians whose ear they have will believe them and thus take no responsibility for economic policy and disempower themselves in the process. You’ve said it many times on this blog that central bank independence is a fiction, but what that fiction has done is to allow politicians to tell the big lie that the government doesn’t have any money of it’s own and get people to believe it . Again unless and until this fiction is dispensed with nothing will change.
This is one of your very best, Richard.
Thank you
Why not identify some of the weaknesses in the PQE / taxation/ inflation / Sterling discussion instead of patting everyone on the back.. or do you see no weakness?
I note you said Simon W-L debunked me the o9ther day.
And now you say? I suspect I know….
I absolutely agree with some of the criticisms put forward by Simon W-L.. the point I make is that the respondents on this link would suggest PQE etc is 100% bullet proof. They provide “blind” supporting rhetoric, never anything remotely critical. In any discussion there has to be critical argument.
But you offer none at all…..
“The best budget person I ever met was my mum, who understood real economics” (meaning she knew how to make ends meet) – John McDonnell in “Economics 101” hosted by Martin Wolf –
https://www.bbc.co.uk/programmes/b0bbtbcs
I rest YOUR case Richard.
Martin Wolf ends the programme with a plea for economic education and says most people understand the idea of budgeting but some fundamental ideas are difficult to grasp, e.g. “the idea that what is true for a household is not necessarily good for a country”.
Top trolling of McDonnell by Martin Wolf perhaps.
I heard it …. and was not impressed
Liz Truss and John McDonnell both doing household analogies
And the discussion on the nature of money did not get beyond the introduction
Weak….
The one thing I did agree with was 95% of people do not understand 95% of what the Bank of England say. I am sure that is true
I heard that stuff from McDonnell and was horrified. I’d hoped for better than that. It was an opportunity for a bold statement pointing out that radical ideas will be necessary because of where we have sunk to. What chance is there that Labour could achieve even its 2017 manifesto objectives with this idea of economics? The people at the IEA, the Taxpayers Alliance, The Adam Smith Institute, must be laughing their heads off! He referred to having held a series of seminars on economics around the country. Is there a paper giving the conclusions reached? I’ve not seen any reporting. Does anyone have any links?
It’s all been pretty mundane stuff
This extract from Simon Wren-Lewis’s recent article “Labour’s fiscal rule is progressive” seems like gobble-de-gook to me:-
“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).”
I thought it was common ground that a monetary sovereign government doesn’t have to tax or borrow to create money, reserves and cash and that taxation, amongst several uses, helps to contain inflation as a “reclaiming” or “extraction” process. Obviously as soon as a clearing bank loans are spent into the economy by dint of the same logic they too have to be subject to the “reclaiming” process for the same inflation containing reason. Therefore why only apply a fiscal collar to government money creation and not apply an “exchanging” of money quantity collar clearing bank money creation? Simon Wren-Lewis’s argument doesn’t seem to add up to me!
Of me
I just took a while to say it
Yes Schofield,
I saw that and being schooled in gobble-de-gook the 3 things that struck are all false assumptions:
1. That all deficit spending is financed by gilts and that taxes must directly pay for borrowing. This among, other things, overlooks the role of growth and the multiplier; the self- financing aspects of deficit spending that some of W-L’s “New Keynesian” contemporaries seem to understand quite well.
2. That rubbish about taxes “discouraging labour supply” is seriously antique. It seems to be premised on the idea that all tax is income tax on wage earners that won’t work more hours if those hours push them into a higher tax bracket. For one thing, Labour has been in oversupply (unemployment and underemployment for 30 odd years and there are plenty of taxes (wealth, financial, consumption) that have nothing to do with labour supply.
3. Taxes on the City and the seriously rich would not be “unpopular” in this day and age.
@ Marco Fante
In reference to:-
“1. That all deficit spending is financed by gilts and that taxes must directly pay for borrowing.”
I just can’t believe that an economics professor, particularly at Oxford University, has such little understanding of balance sheet accounting in relation to how a sovereign monetary system works. Not to understand that a sovereign government can create money, reserves, and cash liability free but the clearing banks can’t because creating banks loans means you have the liability of obtaining reserves (only available from the sovereign government) to ensure smooth payment settlement when those loans are spent into the economy beggars belief.
Not much point voting Labour when they hog-tie themselves from the get-go and therefore can’t lay their hands on adequate money to put right the numerous problems in British society!
Schofield,
Re. this: “Not much point voting Labour”
I wouldn’t be jumping to that conclusion on the basis of this discussion. I am fairly confident in saying that in practice the “fiscal rule” is a guideline or principle, a discussion point that is more for show than anything else and no one is going to be deeply committed to it.
Besides which the main point in voting Labour is that they are not Tories. I think that, for many voters, that has always been the case.
@ Marco Fante
“Besides which the main point in voting Labour is that they are not Tories. I think that, for many voters, that has always been the case.”
That sounds so much like the old cliche of “damning with faint praise” or that on your school report “could do better”!
Not sure Deng Xiaoping would have settled for this and in fact history shows he didn’t but fused Marx with Friedrich List, the latter being of the following wisdom:-
“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.”
https://web.archive.org/web/20071201123623/http://www.polisci.berkeley.edu/courses/coursepages/Spring2005/ps137b/PRECIS16.pdf
With an ailing British economy some existing or soon-to-be political leader is faced with the exact same dilemma Deng Xiaoping who’s economic and monetary system understanding made sense to get the country out of the hole it had dug for itself! Today that understanding has to be MMT and getting to grips with the condition now prevalent in many Western developed economies “Globalisation Without Compensation” made more acute by Austerianism and ironically by Deng Xiaoping’s global trading tactics.
“We cannot solve our problems by using the same kind of thinking we used when we created them.” (Albert Einstein – allegedly). That’s why I’m pretty sure Prof. S W-L (and other ‘distinguished’ economists with similar credentials), will stick by his academic guns and continue to discredit the underlying principles of MMT which don’t accord with everything he’s learned and taught.
What I don’t also get is how splitting a future Labour government’s creation of money (from thin air) into capital (investment) and current relates to needing a mono-fiscal collar for government money creation for current spending alone. It doesn’t make any difference arbitrarily splitting it because it all ends up circulating in the economy and if the government misjudges its and the clearing banks creation of money so too much is pumped into the economy relative to real resources and the economy’s productivity capacity then the government has to take action to dampen down inflation. Judging money creation amounts is hardly an exact science!
Richard,
I think some of your message may have been lost in the generosity of the detail.
Having read Wren-Lewis’ post it seemed to me that the devil wasn’t as much in the detail but the general premise. His defence openly rests on the assumptions of the moderately (?) neo-liberal “New Keynesian” school that failed to forecast or explain the GFC and still fails to deal with its ongoing outcomes.
One such outcome is the fact that interest rates have been stuck near zero for years and yet Wren-Lewis’ insists upon the importance of monetary policy despite the fact that monetary policy has been paralysed for a decade. Similarly, his emphasis on inflation seems more than excessive given that, from the GFC onwards, the Brexit devaluation (a cost push) is the only thing that has managed to lift inflation above the target rate.
He writes as if the the last 10 years had never happened. A classic case of zombie economics. And yes, you are right in suggesting that his preference for monetarism (in its contemporary version) over fiscal policy, is neo-liberal. Its a basic neo-lib tenet.
I was also glad to see that you picked upon on Wren-Lewis’ reliance on “what if” scenarios that might suit him noting, as you have, that: “Simon is again winning this argument by assuming he already has”. It was a point that needed to be made.
Just finally, and I know that I am a dog with a bone on this point, but I don’t think that MMT economists (or any economists) can simply rely on the idea that demand-pull inflation should not occur in an economy that is operating below full capacity. That, though true to some extent, relies on the assumption of highly competitive markets that we don’t actually have for the most part. As incomes and demand would rise in response to stimulus, an excessive proportion of that value of can be captured by oligopolists through increased prices. The relatively low inflation of the current era is the product of underemployment and stagnant wage growth. In a situation of truly rising employment and higher wage growth, the issue of market power would need to be addressed.
Fair point in the last para
It is a fair point but I always understand these discussions as focusing on one plank of proposed policy in depth but alluding implicitly that other areas of the economy will need to be adjusted too. This has always been axiomatic to me. You cannot adjust one parameter of travel without adjusting others. The same would apply to the realisation of a ‘courageous state’.
What should happen is that Labour/progressives at least do some good old fashioned scenario planning. And rather than a ‘set it and forget it’ budget policy, it would have to be more involved than it is now.
I imagine that the markets will put in a concerted effort to undermine a new Labour/progressive administration so whoever comes in will need to be prepared.
Think back to 2010 and how the fast the Tories moved to cut this and that. We need just as a quick response to put that right. None of this 2 years or so of Tory spending plans rubbish that New Labour burdened itself with initially.
Thanks for this Richard. Excellent work.
SWL and his colleagues can never agree with you of course. That would mean conceding that their entire careers have been for nowt (worse than nowt?).
They’d much rather continue to hobble our economy and doom many millions to unemployment than risk losing their own jobs.
Bill Mitchell discussed Labour’s “New Keynesian” (aka Neoliberal) Fiscal Rule at length earlier in the year. It’s in three parts:-
http://bilbo.economicoutlook.net/blog/?p=38776
http://bilbo.economicoutlook.net/blog/?p=38779
http://bilbo.economicoutlook.net/blog/?p=38796
While I totally agree with you, there is a point to be made about the vagueness of the current mainstream MMT approach to inflation. Saying that we either need to increase taxes or decrease spending is a bit of a wave off and has a ting of monetarism to it. Does any serious MMT economist think adding 10% to the top tax bracket will beat down a wage price spiral?
There is a much better MMT consistent view of inflation here:
http://econintersect.com/a/blogs/blog1.php/how-to-approach-the-problem-2
And some very smart possible add-ons to pass with a JG that would decrease the risk of wage price spirals here:
http://econintersect.com/a/blogs/blog1.php/the-job-guarantee-wage-price
http://econintersect.com/a/blogs/blog1.php/more-on-the-job-guarantee
Who said it was only top rates?
1 commentor in this post:
“Oh — and he mentions concerns about inflation — how original! Taxing the rich and the Financial/corporate sector would surely take the sting out of inflation as would taxing land and house sales would it not?”
But more generally I hear something along the lines of ‘once we see inflation the government needs to tax more or spend less’ all the time from MMT advocates, I’ve been guilty myself. It’s phrases of that type I was complaining is overly vague and has a tinge of monetarism to it. I know they know better but it gets repeated enough that people who don’t follow as close don’t quite get it. Government spending in and of itself isn’t creating the inflation and deciding what program to cut to slow inflation would be next to impossible. Hence the linked alternatives.
@ UserFriendly
Talking of “vagueness” in connection with inflation has it not occurred to you that here’s Jeremy Corbyn wanting to “take back control” from Brussels but ignorantly accepting the same type of idiotic and destructive Eurozone Neoliberal “collar” on government spending as part of his party’s policy? Has it also not occurred to you to wonder that if there’s genuine concern about inflation there should also be a “collar” for the money created by private sector clearing banks proposed by Labour’s economic advisers but conspicuous by its absence? After all the money created by these private sector banks also swirls around in the economy just like government created money!
Quite frankly the current Labour Party leadership aren’t really progressive just the same old know-nothing Neoliberal flat-earthers the UK’s had with the majority of its political parties since the end of the progressive Labour Party in 1947. Why bother voting for any of the UK’s political parties? Even the Green Party scares the punters not knowing how uncomfortable the hair-shirt will be they’ll have to wear! Time to start afresh!
Here’s Part 2 of Bill Mitchell’s smack down of Corbyn’s economic advisers:-
http://bilbo.economicoutlook.net/blog/?p=40071
Well said
I have not ploughed through Bill as yet
I thought mine was long….
@ Richard
Actually I thought Bill was pretty succinct for most of this Part 2 smack down only wandering a bit off subject for me as he neared the end but clearly Labour’s economic adviser’s irrationality has fired him up even to the point of giving us a Part 3 installment which he promises to be even more succinct!
On Twitter Simon has said he does not understand my arguments
@ Richard
“On Twitter Simon has said he does not understand my arguments.”
Sounds like you should extend an invitation to Simon Wren-Lewis and James Meadway to sit down with you and maybe Stephanie Kelton or Bill Mitchell when they’re next in town to go through why MMT is saying New Keynesianism won’t do what is says on the can!
They know where I am
@ Schofield
I wasn’t defending anyone in that comment so I don’t quite understand the attack. And since I’m stuck in the united states of hell I have no say in who you elect.
All we are talking about I believe here is using the capacity of tax to destroy the value of money in a constructive way especially when it may have a cooling effect on inflation in an MMT context.
Those at the top can afford 20% VAT better than those at the bottom (and increasingly the middle) so however tax is used in this way it must be fair (and 20% VAT is far from fair especially as income disparity increases).
Taxes on assets (which tend to cause bubbles – credit ones) – are they high enough? Taxes on wages – too high? Land – not taxed at all? Consumption taxes – not fair? I see taxes going up in some places and going down in others – something that has always been discussed on this blog. Fair taxation – that is what it is called.
I can’t see how monetarism has anything to do with it as monetarism seems to be about controlling the money supply on the demand side – not tax – and if it is – well it’s just tax cutting all the time.
In the words of the old peace song: ‘All we are saying is, give tax a chance’ .
I like that a lot!!!!!
@ Pilgrim Very Slight Return
Not so catchy and clumsy but should be ‘All we are saying is, give equitable tax a chance’ .
Pointing out that a tax on the wealthy won’t do anything to dampen inflation is not the same thing as saying don’t tax the wealthy. I can assure you I would support much more extreme limits on wealth and income than you do. Personally I think we should exterminate every last millionaire so we have a shot a building a fair and functional system.
@ UserFriendly
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Paragraph 1 in my first link:
“In my previous post I laid out why the Phillips Curve theory of inflation is wrong and why it was misguided to try to rebuild it. The key point I made in that regard was that inflation is a complex, multifaceted historical process and any attempt to reduce it to some abstract timeless law would always end in failure and confusion”
I don’t know why everyone here seems to think I’m saying things I’m not. Pointing out that MMT says things like ‘once we see inflation the government needs to tax more or spend less’ is an overly vague expression that sounds like its endorsing the Quantitative Theory of Money does not mean I don’t believe MMT, nor does it mean I don’t understand what MMT advocates are trying to explain with that phrase. It means I think MMT should have a specific tax hike or spending cut in mind and say that instead. Because it should be obvious to everyone that not all tax hikes or spending cuts would stop inflation.
I hope we are aware of that
Also, this repeated accent on inflation; “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.” from Wren-Lewis, is it not theatre designed to appeal to the casual armchair economist, setting off the alarm bells we had indoctrinated into us at school when we were taught that printing money is (catches breath) a Bad Thing as it immediately leads to hyperinflation and we’ll all be struggling to the bakers with our wheelbarrows full of worthless banknotes notes just for a loaf of bread… that’s school where we weren’t taught about the Rentenmark (printed) or the Marks which followed (printed) or Bradburys (printed) or Worgl (different altogether!) but still, we weren’t exactly educated to believe there was any kind of alternative at all, were we? So WL’s viewpoints and he himself are perhaps afforded the status they have not so much because they’re accurate but because it’s understood they’ll appeal to the sorely under- and mis-educated masses and leave them satisfied they have an understanding of the economics of the situation when in fact they have anything but. Am I suggesting conspiracy here? Not on WL’s part, but certainly I am of the mechanics behind the silent unseen machinery which promotes him and his views and those of similar philosophy. I suggest too there is the answer for how he comes to be teaching at Oxford and Richard isn’t and won’t be.
@ Bill Kruse
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Don’t you think Deng Xiaoping knew hyper-inflation wouldn’t be automatic when China’s state owned banks started writing off and rolling over bank loans to private enterprises when he started promoting their creation? Don’t you think he realised that productivity competition which resulted in an emphasis on price and quality would inevitably sort the wheat from the chaff after the “let’s be free market capitalist’s” learning curve had been mastered?
It’s not really what I suppose; it’s what the voting armchair economists suppose that’s the issue. I doubt they’ve ever given much thought to where China suddenly got all that money from. Thinking’s not really what they do. Sadly, voting’s what they do 🙁
I love this line in Bill Mitchell’s Part 2 smackdown of the Labour Party leaderership and its economic advisers:-
“Sometimes I think that people have become so inured to the shifts that have occurred under the neoliberal era that they forget context and live in a totally fictional concept of normality.”
In other words we now very much live in an economically and monetarily illiterate “flat-earth” society! A sort of continuation of Middle Ages’ superstition!
Regarding economics, one created at school via the primacy effect and routinely reinforced as adults by articles referencing the false paradigm in the media. Mind control. We think we know, but we don’t know. I wonder what else we may have been misled about?
I can’t wait to read it – thanks for the heads up!
Here’s another “killer argument” from Bill Mitchell’s smack down:-
“So far from being a period marked by ‘deficit-bias’ the last four decades in Britain have been marked by a ‘private debt bias’ which has rendered the British economy prone to crises. The Labour Party Fiscal Rule will not reverse that trend and will probably reinforce it.”
Very good series of posts Richard. You certainly caused some movement in the force, I followed the thread to various bloggers. I do not have anything more to add to you arguments and am delighted that the MMT issue is pushed forward. The Tories will simplify to ‘back to the 1970s’ argument, anyway, that’s all. As a Labour Party member and LVTer, however, I really don’t expect Labour to spell out all the underlying details of the model for the voters – Then fight an election on those theoretical issues! Just the basics of the ‘Household’ analogy problem. The Labour Manifesto is what is on many issue : vague.
No, politics is closer to warfare. Labour needs to learn from Thatcher. We need to fight an election on ‘the enemy within’, FIRE sector – the banks, rentier and the City of London. As the poster above points out, there is no choice but to vote for Labour to remove the Tory darkness. Learn to hold your nose, Keynes did! Like Wren Lewis, he could hardly be bothered with Labour party members (or 99% of MP’s). The odd note to Hugh Gaitskell and that was it.
If I were to add something to your excellent work and all the contributions above it, would be about the self appointed character of an economist like Wren Lewis, in the modern age. We really have to understand we are dealing with religious figures akin to Jesuits in the Catholic Church. Has anyone, for example, else noticed his recent work on the BBC:
‘The Knowledge Transmission Mechanism (KTM) is how knowledge produced by academics and other researchers is translated into public policy. Evidence based policy is the result of this mechanism working.’
While I agree with much of this, notice he has a top, (Bishop) down, model of knowledge. There is no transmission method, back up the chain of academic command. This is the real demarcation between a proper social science like sociology and his mainstream economics. The intention in much of sociology is to empower people with a theoretical frame and data to resit the order above them. In essence, Wren Lewis always jumps from politics (decided) to maroc/micro without the need for a debate about Political Economy. But this is what grassroots, bottom up, Political Economy like MMT and LVT demands. His order simply cannot accept a discussion forcing itself from the demos below. Reformation needed.
In conclusion, he needs to see himself as Keynes, unpleasant ‘Dentist,’ not a high table, Catholic Master. It seems to me he really has no place in a Labour Party clearing out other Blairites from the ranks! In case some of the good folks here haven’t seen it by now, consider/Google: Mark Blaug’s discussion with Paul Samuelson on the religious nature of the mainstream economics and the balanced budgets ideal. ‘Economic Science’ used in the end to ‘scare’ the voters. You couldn’t make it up could you?
blaug interviews samuelson
@ Too many Mikes and MikeW’s here
Samuelson could have have kept it short and bitter by taking a leaf out of Leona Helmsley’s book and said:-
“Only Little People pay taxes and accept intimidation!”
http://heteconomist.com/prominent-c20th-economist-explains-how-the-lie-is-for-our-own-good/
https://en.wikipedia.org/wiki/Leona_Helmsley
It seems telling that Simon has blocked your reply in his own comments section. And he hasn’t published any comments.
Now there’s a comments policy.
I was not aware of this
I wouldn’t read anything very much in to this. There can be quite a lag on his blog between the posting of comments and their publication.
The issue as I see it is that those promoting MMT and those subscribing to what Prof. Wren-Lewis describes as the “consensus or conventional assignment” are talking past each other. It looks highly unlikely that a shared understanding can be arrived at.
In the meantime, though, for good or ill, John McDonnell has locked Labour in to the fiscal rule devised by Prof. Wren-Lewis and Jonathan Portes. Politically, he can’t move far from that ground, though there will be kite-flying to explore badly needed (but politically sellable) wriggle room – such as the recent proposal to give the BoE a productivity target in addition to its inflation target. There is little pint laemning where he has ended up. A lot must be swallowed in the effort to achieve the most pressing requirement – the elction of a Labour government.
My view is that the focus should switch to squeezing the economic rents being captured by the corporate capitalists, high net worth individuals and the managerial elites in the public sector – and the armies of flunkies and functionaries they hire. It is they who are making like so damnably hard for the “just managing” about whom Theresa May hypocritically expressed so much concern and who contributed much to the Brexit result.
The problem is not what is required to get elected
It’s that he believes it
@ Adam S
“It seems telling that Simon has blocked your reply in his own comments section. And he hasn’t published any comments. Now there’s a comments policy.”
Sounds like Simon has been hob-nobbing with Jeremy after all!
https://www.theguardian.com/politics/2018/aug/09/corbyn-hopes-to-avert-calls-for-public-vote-on-brexit-at-conference
Maybe Simon needs to learn from the great physicist Richard Feynham; ‘It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong.’ It’s time thinking like his is consigned to the scrap heap.