I am aware that Jonathan Portes had a rather bizarre, straw-man based, attack on modern monetary theory published in Prospect yesterday. In this he did, amongst other unsubstantiated claims, suggest that I am 'the UK's most prominent proponent', which must be pleasing Bill Mitchell no end.
I will be asking Prospect for a right to reply and will wait to hear before drafting my response.
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I thought the article was quite good on the whole – although surely proponents of MMT are arguing against *false* choices on how to pay for decent public services rather than saying there aren’t any choices to make. For example, proponents of austerity have been telling us since 2009 that we need to cut public spending “or else” – but this was always a nonsense, and remains so. And I’m pretty sure Jonathan would agree; he’s been one of the biggest mainstream critics of austerity. But of course there’s a question about how much to spend on healthcare, or education, under any economic system, given that spending can’t be infinite. That’s just kind of obvious. Also Simon Wren-Lewis is on record as saying he agrees with a large part of MMT anyway (not all of it, but quite a bit of it).
I’m confused as to why you’ve been held up as the main proponent of MMT – probably a read-across from “people’s QE” and the Green New Deal. I guess Bill Mitchell is based in Australia, so is ruled out on those grounds.
Prospect should definitely give you a RoR, no question.
I wholeheartedly endorse the ROR for Richard.
Just one point: We need to remind the proponents of austerity that, in applying their nostrums, we actually got the “or else” they warned about! We certainly did here in the North.
The request has been sent
A RoR is absolutely required. His “argument” shows how far we still have to go in clearing out the intellectual dross from many an economist. If that’s typical of his thinking, I amazed that he’s given any credibility, so full of holes is it, saying things that are untrue of MMT and producing no evidence for his “tax and spend” assertions, for example.
I agree
Of course MMT is not about infinite expenditure.
You spend the money you need until the problem is solved. That is why you spend it in the first place. And if you manage delivery you should be able to deliver. Yes – throwing money at things can make things better.
Have we ever done that? Spend what we need? I don’t think so in my life time. Ever since the NHS was created, its budgets have been under attack because of politically charged ‘choices’. Yet management costs in the NHS have also gone up.
Portes has fallen for caricatures
“Have we ever done that? Spend what we need?”
It happens every time there is a big enough war. The government creates however much money it needs. War bonds are just a way of covering that fact up.
Portes has written an awful, confusing article with a stupidly provocative headline that grabs mismatching suggestions from the periphery of MMT and misses its core meaning completely.
Not once does he simply state the central MMT contention that inflation and productive capacity are the only real and ongoing constraints on monetary financing (in a fiat currency issuing state). And I’m not quite sure that he fully understands that.
He fluffs around the whole thing whilst making condescendingly unnecessary observations about Bangladesh and trying to defend Labour’s “fiscal credibility rule”.
NOW Richard, when replying do remember that there is a potential trap ( and its a big one) where where the “fiscal credibility rule” is concerned and it is in 2 parts. The first is this caveat (taken straight from Labour’s document):
“When the Monetary Policy Committee decides that monetary policy cannot operate (the “zero-lower bound”), the Rule as a whole is suspended so that fiscal policy can support the economy.”
What that is really saying is that when interest rates are at or near zero (as they have been for about 10 years) the whole neo-liberal concept of using monetary policy to guide aggregate demand can be thrown clear out the window and fiscal policy can take over.
It can be argued that this a clever device that uses the pretext of fiscal rectitude as a reason for ditching neo-liberalism and reinstalling Keynesian demand management.
As for the rectitude and any austerity implications it might carry – there is this:
“we would commit to always eliminating the deficit on current spending in 5 years” and this: “our target for eliminating the deficit excludes investment.”
Now depending on how one is meant to distinguish “current spending” from govt. “investment” that could mean that there is no readily identifiable form of fiscal constraint at all. And to the extent that there is a restriction on “current spending” it could be addressed through tax reform (taxing the rich etc.) and expanding the spend rather than making cuts (I think that might be the idea actually- using budget responsibility as a pretext for tax reform- or it could be).
So I humbly submit that it is important to be keenly aware of these points so that you are not accused of misunderstanding them in your reply. You have pointed to the fact that that Portes has raised a strawman argument. It would be a pity if you gave him any room to return that accusation.
Noted…..
Marco,
Good points there.
Something I’m still not totally clear on is their definition of “current spending” and “investment”. If for instance current spending includes any and all public sector payroll then it strikes me that this induces a bias towards outsourcing which may cause an inbuilt leak of value to the shareholders and management of outsource companies.
If investment only means infrastructure and doesn’t cover research, technology development or training then it may bias a government following these rules towards big infrastructure projects that risk becoming white-elephants.
Neil Wilson did a blog post on this a while ago and by his estimations the government would be forced by these types of rules to “invest” in white elephants to maintain sufficient spending to maintain full employment.
Core MMT, by contrast just tells it how it is and leaves government with maximum freedom of action to deliver it’s democratic mandate.
Adam, re this:
“Something I’m still not totally clear on is their definition of “current spending” and “investment”.
I’m not sure but I don’t think that it is meant to be clear.
As for the idea of public sector payroll vs outsourcing, the contractor would be current as much as the civil servant would and there’s no issue of investment or non-investment in that suggestion anyway.
To be honest, I’m not going to put much thought into it. The idea gives them a bit of cake-and-it-too flexibility and I suppose that is its purpose to some extent. This is not straight economics. There’s a bit of politics and trickiness in it as well.
Marco,
Yeah fair enough, makes sense.
So do you see the current Labour fiscal policy and fiscal rule as politically astute?
It could be. Even Johnathan Portes loudly dissing MMT could be construed as a wise political move. In effect he’s saying “these MMTers are a bit fringe and slightly mad – we’re completely orthodox by comparison so don’t worry about us.”
Could it be a message designed to placate centrist/neoliberal types who Labour are currently trying to woo?
I suppose Labour can hardly appease the City if it’s main economic advisers cannot put significant space between themselves and some of the more radical heterodox schools of economic thought. If that’s true it’s just even more reason for Richard and others to keep criticising Portes and Wren-Lewis and Labour’s fiscal rules.
It emphatically appeases the neoliberal types
And I know enough to say that is its intention
Yes Adam,
You more or less have my drift.
To avoid being shot by Richard I won’t say that the Fiscal Rule idea is “astute” as you put it, but it is expedient and, for its own political purposes, quite cleverly expedient. Clearly it is not what it purports to be but it purports well enough to put Labour’s opponents in a difficult position on that particular point.
I do nonetheless have some reservations about it. It allows the party to ditch monetarism in circumstances where monetary policy has failed (which is pretty much now and the foreseeable future) but, should that happen if they were in government, and their Keynesian fiscal policies succeeded (the economy lifts), then we might be in a position where higher interest rates become viable again – and then – according to the fiscal rule, we return once again to monetary policy as the main means of demand management (until monetary policy fails again).
That isn’t smart, its looking way down the track, but its still a bit dumb unless they were never really intending to hang on to this rule in its current form, which is another distinct possibility.
But then again government “investment” isn’t covered by the rule, as we have observed, so that in itself renders the whole debate futile as the rule, to very significant extent, doesn’t really exist.
I should also say that in the current political climate, globally, this ‘rule’ this piece of clever caution probably isn’t necessary. The strongest Democrat candidates in the US, for example, are progressive candidates and they wouldn’t bother with it. Current public support for economic conservatism is ambivalent at best. Austerity is out. Virtually no one gives a damn about fiscal rules anymore. Its all a bit passe.
As to this :
” it’s just even more reason for Richard and others to keep criticising Portes and Wren-Lewis and Labour’s fiscal rules.”
Well I suppose Richard and others should look at it objectively, see it for what it is and call it out for what it is. Right now Portes’ greatest offence that I can see is not the fiscal rule. Its his writing of a silly misleading article about MMT.
The fiscal rule is bad politics
That’s my biggest criticism of it
BTW I should have included this link with my initial comment. I forgot.
http://labour.org.uk/wp-content/uploads/2017/10/Fiscal-Credibility-Rule.pdf
“…proponents of austerity have been telling us since 2009 that we need to cut public spending “or else” — but this was always a nonsense, and remains so. And I’m pretty sure Jonathan would agree; ”
The issue is that Jonathan still talks within the frame of what the correct deficit should be. A tory might argue that we should have no deficit, and balance the books absolutely . Jonathan argues that there needs to be a deficit, however there is a limit to how much of a deficit there is – and this limit is proportional to GDP – the higher the GDP, the more deficit we can afford.
Indeed he has tweeted the following “Simon [Wren Lewis] has written more than I have about this, but the idea that if Brexit reduced GDP, that this wouldn’t constrain government ability to spend on public services is pure fantasy. Obviously.’
Its both sides of the same coin, that the amount of spending the government can safely do, is proportional to the GDP.
MMT says its actually inversely proportional – the more the economy is active, the *less* the government can spend safely without risk of inflation.
You are right
Your suggestion is rightly Keynesian. He (Portes et al.) may be confusing the idea of ‘GDP’ with that of productive capacity.
If it helps (?) Bill wrote in response to the accusation that he had called McDonnell ‘neoliberal’ over the fiscal credibility rule, “What I actually said was that the Labour Party’s Fiscal Rule is framed within neoliberal concepts and language. That is entirely different matter.
My points about the Golden Rule component of the Rule were fourfold: (a) there is a problem distinguishing capital from current expenditure; (b) in a deep recession, the Golden Rule may not be flexible enough to prevent significant output and employment losses; (c) in a recession, it would make it virtually impossible to meet the debt commitment within the Rule, and (d) it creates a private-debt bias.”
I think that for most of us who are interested in MMT Labour’s problem is that they continue to play by the rules set out by 40 years of TINA and focus more on debt and deficit ratios as an issue than seeing government deficit/surplus balances as a question of relationships between spending, resources (and resource allocation) and the non-governmental sector. That failure of all governments since 1979 is what leads to their myopia in recognising the private debt mountain as being a consequence of their own budget balancing obsession.
Deborah, re this:
“What I actually said was that the Labour Party’s Fiscal Rule is framed within neoliberal concepts and language. That is entirely different matter.”
That’s interesting. So there is more than one strawman in Portes complaint?
Hmmm.
The one thing that drives me crazy about people who don’t understand MMT is that they, for whatever reason, just don’t understand that there is no significant difference between dollars and bonds, spare the interest. And that the interest rate is a policy choice set by the central bank, or at least it can be (Japan has been doing so for a few years now).
@ Marco
‘“Something I’m still not totally clear on is their definition of “current spending” and “investment”.
I’m not sure but I don’t think that it is meant to be clear. ‘
I think you’re spot on – it’s designed to SEEM financially prudent so you can answer the question how can we pay for it? Because telling the great unwashed that money can be created out of thin air but taxes also need to be paid is just too radical.
To be honest when politicians have to deal with the Mail and Express and the ignorant BBC they may have a point. But then to criticise MMT with such incompetence is surely just unnecessary. Even I manage to show it up! http://www.progressivepulse.org/economics/mmt-as-nonsense-economics-or-not
Thanks Peter,
I generally agree. My reading of Portes’ article is as follows:
1. He looks over at the US and sees that these MMT types are getting a bit of currency (no pun intended) and attention at the moment.
2. Being a New Keynesian (which isn’t like Post-Keynesian its more like New Labour) He doesn’t like that and besides which, those MMT folks raised a bit of in-principle fuss about the Labour Fiscal Rule about a year ago or more. That annoyed him.
3. So he needlessly dredges up a dormant old dispute and adds a bit of extra bother to it by writing a misleading article with a silly, provocative headline.
A lot of this has to do with the attention that MMT and associated concepts are getting internationally of late as well as the idea that his school of thought is being eclipsed by time and events. He should be pleased that his school of thought and their general approach hadn’t already been flushed in 2008. But that’s another story for another episode.
I have to say his timing was rather odd….
Jonathan Portes might better have understood MMT if he had started from its recognition that the limit to what an economy can achieve is the level and quality of the real resources available to it. The constraint is a real one not a financial one. It is the quality and deployment of these resources which constrain what the economy can achieve. It is only once all the economy’s resources are fully utilised that inflation becomes an issue to be addressed.
You are right
All a deficit really is in this context, is a record of money being created and then spent.
If you have created that ‘real’ money (in a sovereign, fiat sense) – then how can that deficit be a debt?
The taxes released from spending that money can be seen as a sort of return on the investment or cash injection. It is a sensible thing to do.
I think that the problem is the word ‘deficit’ which seems to be related to the word ‘deficient’ – lacking. What a totally awful word with which to hobble the power of Government to do the right thing and meet its obligations.
Pilgrim Slight Return says:
“All a deficit really is in this context, is a record of money being created and then spent.”
I’m not clear what you mean here by, ‘in this context’.
Surely the deficit is just a total of incomplete transactions (?)
[…] have not had time to finish my response to Jonathan Portes on MMT, and I will be publishing one here since Prospect are allowing me just 1875b words to respond and I […]
Yep Jonathan Portes does the usual bogie man trick of comparing apples & oranges, in this case Bangladesh & the UK. No serious proponent of MMT has ever said that Governments with sovereign currency can spend ‘willy nilly’ but yet again the classical economists (who did not foresee the GFC) level this at MMT advocates. Indeed it’s interesting that he agrees that there is no shortage of money and that Governments as described by MMT can create as much money as they wish. Yet having agreed this point he seems to be incapable of understanding that Governments must spend money into existence before taxing… think about it, if Governments didn’t spend money into existence where did tax payers get the money to pay their taxes ??
However it is comforting to see that not only that these people are attacking MMT but also it very satisfying to realise that they are wrong
Agreed it’s not a great article. It repeats most of the usual canards about MMT.
It also explains in large measure why the UK is in the state it is if this guy is a key political adviser, because he’s out of his depth.
Even I can see that. With no formal economics ‘education’ at all I can still recognise political posturing, stupidity and ignorance.
Comments on the situation in Bangladesh entirely make the point that Portes simply has no grasp of how understanding MMT can completely transform an economy.
To say that Bangladesh doesn’t have the trained educated specialists to operate a universal health service points up that lack of insight quite powerfully.
[…] read Jonathan Portes’ attack on modern monetary theory in Prospect with some bemusement. Firstly that is because many in the UK modern monetary theory community will […]