I am aware that Simon Wren-Lewis has written a new price on Labour's Fiscal Credibility Rule for the New Statesman. As usual, I fundamentally disagree with him, but a response will take more time than I have this morning, and will have to follow.
Howard Reed wrote a good comment on the piece though on Facebook and offers what might be called a middle ground view. I thought it worth sharing:
Very interesting discussion of Labour's fiscal credibility rule by Simon Wren-Lewis. This is a topic that James Meadway and Richard Murphy among others, have written about intelligently in recent months. My own view (FWIW) is:
- the Labour FCR is better than any previous attempts at such a rule (e.g. the current rules drawn up by Osborne, the New Labour rules, the 1980s MTFS, etc)
- my preference would be for a very loose rule which effectively just says “govt debt should not be allowed to grow explosively” and - linked to this - “govt debt should be reduced when financing debt becomes an unacceptable burden”. In other words focus on debt, not deficits. Note also that financing costs are extremely low at the moment - suggesting significant room for expansion
- Having said that, I accept James's arguments that the FCR doesn't unduly constraint a Corbyn govt's freedom of fiscal manoeuvre (particularly if a wide definition of ‘investment spending') is used
- running persistent deficits doesn't necessarily increase debt/GDP as this depends on the inflation rate and the growth rate of real GDP. If we accept a higher equilibrium inflation rate, or we can get higher growth, then the economy can run persistent deficits without increasing debt/GDP.
- I think the dichotomy Simon presents between using interest rates vs taxes for macroeconomic management is misplaced; a combination of both works best (and in fact this was the pre-monetarist paradigm used in 1945-1976 or thereabouts; fiscal policy for demand management with monetary policy in a supporting role).
Thoughts welcome!
The floor is yours....
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I’m worried (perhaps hopeful) that these discussions present a picture of more disagreement than really exists. My view of the Fiscal Credibility Rule (as a non-expert observer) has always been that it is a necessary protection against the inevitable monstering from the Media and the interests behind it. Fundamentally all of you believe that the State must do more by mobilising existing national resources and understand that money is just a tool as described by MMT. We have to get away from the household analogy (thanks for the Rory Stewart eye-opener Richard) but to do that we need a progressive government in power. And currently the only possibility is Corbyn’s Labour, and it needs support.
But we still need the debate on what the left is meant to be doing
If I may, the single most incendiary issue concerning the misrepresentation of MMT is that Government spending can be ‘unlimited’ or forever. This is just la-la land stuff as we know that Government MMT policy is for specific outcomes i.e. full employment – or should we say – less or no unemployed.
These statements turn up all the time in so-called MMT critiques and are like pouring oil on a fire. So for me, the clarification as to how and when Government turns off the tap is where we need to work harder. We need to be clear in that Government spending will respond when objectives are met.
We seem to accept unemployment in society (unless of course, it happens to us personally) – so we need to make a further case for the full the employment objective. Society thinking these days aligns with employers – we must get rid of staff because it is not efficient if we have too many.
But equally, it is inefficient to have people milling around receiving benefits. It is not any better chasing them to take jobs which actually do not improve their lives because of low wages and other costs.
What I’m getting at it is far more productive for Government to invest in job creation say through GND than it is to budget to maintain a cheap pool of reserve labour by paying benefits. Is this case one that could be made better? I know its been made – but can it be improved.
Given that GND would kick start and add vim to our response to the environmental crisis – that also needs to be pushed to the fore more.
But I also feel a cloying sense of Neo-liberal thinking permeating the debate once again and I get really frustrated at being made to look at these problems through faulty lenses. A Government deficit is just evidence that money has been spent. It is not a crime scene. Nor is it debt. Why would a Government print money only to then store it indefinitely? It’s printed to spend god dammit. That is why money was created – to enable things to happen.
As for Government debt – real debt – as in it has issued bonds – I get sick of the sense that it is wrong for the Government to raise money this way when we know (1) there is a market for it that is productive and beneficial to investors and society in its own way and (2) the British Government has never not paid out. In fact although yields might be low, it is a damn sight more steady than the crap offered by the markets and it’s so-called higher return/higher risk ethos which goes wrong quite a lot!!
The other issue however, is the detailed linked thinking to MMT from other areas of the economy. Is there enough? For MMT, the Government’s fiscal policy would need to be more complex to respond to reactions from the economy. After years of over-simplified reductionist Neo-Liberalism, can Government learn how to deal with complexity again?
We’d need a root and branch reform of company and business law too. The investor first syndrome for example has to be dealt with; the pension funds have to be reoriented from their narrow focus on fund value. Otherwise my worry is that MMT will be like pouring water into the sand.
I would like to see money valued in markets and society in line with its actual use as Richard Douthwaite advocated – arguing in The Ecology of Money (2008) – that the money in circulation is not all the same and that it was about time we dealt with it. Even if we disagreed about what Douthwaite proposed, the principle is a one worth considering in other ways.
It might enable those who face seeing their hoarded money reduce in value because of inflationary forces from MMT to avoid a such a loss in value? Or at least a proper assessment of what that value actually is in the first place. This may well melt the resistance to MMT from the investment sector.
A type of pound for investment purposes (spending)?
A type of pound for storing value (wealth)?
Can it be done? I don’t know – I really don’t – but thinking anew is the key. The orthodox cages we inhabit need to be removed.
Many excellent questions
The one I am really working on is this:
We’d need a root and branch reform of company and business law too. The investor first syndrome for example has to be dealt with; the pension funds have to be reoriented from their narrow focus on fund value. Otherwise my worry is that MMT will be like pouring water into the sand.
It’s an interesting comment, but I feel misses a couple of key points from Labour’s Fiscal Credibility Rule.
Firstly, no progressive or heterodox economics commentator should EVER be including sentences like “..everybody knows that if you’re putting the rent on the credit card month after month, things needs to change”. This is a classic neoliberal conflation of macro and micro economic narratives. As such, it serves to perpetuate the myth that the government must act like a household and reduce its borrowing – presumably especially when revenues are falling due to economic slowdowns. This is a recipe for austerity bias in policy-making and exactly the opposite of a counter-cyclical policy approach that would be required in such circumstances. How easy will it be for Conservatives to hit Labour with their fiscal pledge to not “run up the credit card bill”. This sentence in the FCR should be ditched without delay.
Secondly, focusing on debt, rather than deficits is irrelevant and any Fiscal Rule that accepts government debts as unmanageable (or even potentially so) fails to understand the underlying revelation of MMT. The sovereign, currency issuing monopolist does not NEED to fund its spending through taxation or borrowing while its debts are payable in the currency of issue. Debts at 250%/GDP are the norm in Japan and have been for years. Their inflation (due to pressure on the Yen) and interest rates should be rocketing (according to orthodox theory at least), but their interest rates are negative, they have low inflation, high exports and virtually full employment. Japan’s problem is inflation in the sense that they can’t generate any!! The Japanese propensity to save causes the deficits to rack up the debt. And this is the key point MMT reveals – government debt=non government savings.
If Labour is to have any Fiscal Rule, my feeling is that it should say “Labour will deliver prosperity, full employment and stable prices through a complete understanding of the monetary, banking and fiscal systems and the power this gives us”.
No targets are required.
You are guilty of the MMT fallacy of pretending tax is not needed
And Japan does not have debt of 250% because QE has, of course, cancelled it
But you are right revthe language issue
Hi Richard
I’m not pretending tax isn’t needed!
Please read what I wrote again!
“The sovereign, currency issuing monopolist does not NEED to fund its spending through taxation”
It needs taxes, but *not* to fund its acquisition of goods and services priced in sterling…i.e its spending.
As you have pointed out many times, the spend must precede the drain. You can’t empty a bath tub until it’s had some water added 😉
But this has to be very carefully written to ensure it us understood
And the reality is, tax is needed, and always will be
The ordering is different but in a credible system tax will always be required
Thank you Richard.
I do try.
Hi Richard
The Japanese Central Bank holds approximately 50% of its government’s bonds….so even with 125% of Debt/GDP ratio, not government/CB held, they still have negative interest rates! And of course our own BoE holds 33% of our own National Debt.
I thought I had written the point about taxation not being needed to *fund* spending rather clearly! Shows what I know, eh?
Looking forward to your full destruction of SWL and his piece on the FCR!!
Regards, Jon
The BoE owns less than 25% of UK ‘debt’
I am not sure where your statistics are coming from
Indeed you are correct – just under 25% now.
Although Wikipedia claims it is nearer to 33%!!!! I had been looking at ONS figures of National Debt vs BoE holdings including QE at £435bn.
https://en.wikipedia.org/wiki/United_Kingdom_national_debt
I don’t think the precise amounts are as relevant as the principles they reveal.
‘Fiscal credibility’ is on exactly the same page as Philip Hammond’s idiotic intervention that unbelievably questions whether it makes economic sense to save the planet.
How NOT to save a planet: Worry about some numbers on a spreadsheet.
That’s spot on Stephen.
Mike Berners-Lee (author of “There is no Planet B”) says that dealing with climate change (the climate emergency as he calls it) requires a complete rethink of how we live, a rethink of economics, politics, business, a reset of our values. You can see on this Blog the glimmerings of efforts in that direction, but dinosaurs like Hammond block the way, drag us all into arguing about “Fiscal credibility”, and it seems to me that all the indicators are taking us in the wrong direction, and towards catastrophe.
He is right
I now think that