The FT argued in an editorial published yesterday that:
For four decades, monetary policy has been the dominant instrument of macroeconomic policy and central banks the queens of macroeconomic policy. That era should have ended years ago. It should have ended for the same reason that reliance on fiscal policy did in the 1970s: the world has changed.
It is hard to argue with the FT's logic when it is so obviously correct, at this level. But there are issues to raise with what they had to say, nonetheless.
First, of course the FT is right to challenge the three orthodoxies of the last 40 years, which they consider to be ‘the dominance of monetary policy; the objective of low and stable inflation; and the central role of independent central banks'. Each has been destructive. They have led to over financialisation, unnecessary austerity and the undermining of a central role of democratic governments, which is economic control of their currencies and economies.
But, the question is why it has taken so long for the FT to realise this? The FT should have known this in 2010. How come it has taken the onset of the 2020s for such a position to be reached? The FT offers no explanation. Nor does it offer any apology for its own failing: it was, after all, a strong supporter of the policies it is now criticising long after it was obvious that they wee time expired.
For example, its argument that monetary policy could not now work in the event of a downturn - because the scope to cut rates by 5% no longer exists - is something that's been true for so long now that it provides the FT editorial team with no cover. And its realisation that the social and economic consequences of fiscal policy are better than those of monetary comes with no statement of regret for being on the wrong side of the issue for so long, but are worth noting nonetheless:
Yet there are deeper reasons for rediscovering fiscal policy. The most important is that its side-effects are less bad. Monetary policy works via expansion and contraction of credit, via shifts in asset prices, and via the quantity of a relevant monetary aggregate. The first has generated destabilising credit bubbles. The second can create significant economic distortions. Central banks have lost faith in the last.
And the old paranoia of the FT - that government's are subject to market whims - prevails when they say:
Fiscal policy avoids these very real dangers. The danger it creates is that governments may cease to be creditworthy. But real interest rates are now close to zero or negative. Nominal 30-year government bonds are yielding between 0.2 per cent in Germany and 2.3 per cent in Italy. One has to be desperately pessimistic to imagine that borrowing at such rates is going to create worrying sustainability problems.
It really is time that the FT did two things. The first is to note that QE shattered this idea for good. The second is that modern monetary theory explains why.
But most important is that the FT still cannot get its head around the fact that fiscal policy is not just another variant on delivering the low inflation objective of monetary policy. So it focuses on using VAT as an anti-inflation tool and argues for fiscal neutrality in its use. Almost as an aside it notes the importance of public investment in fiscal policy, and nods in the direction of what it calls the ‘energy transition, saying that:
Investments should not be turned on and off and so should not be part of stabilisation policy. But, when real interest rates are so low, it makes sense for governments to borrow, in order to invest. Indeed, lenders are essentially begging them to do so.
This, though, makes no sense unless the FT can begin going to appreciate the three key objectives of fiscal policy. These are, first, to create effective full employment for all who want it at living wages, at least. We are a very long way from this goal at present.
Second, it is to effect the social, industrial and economic policy of the government. Fiscal policy is utterly different from monetary policy. It expects a government that intervenes to achieve its goals.
And then, and last, is inflation considered an issue, and that is for the good reason that until full employment at living wages is achieved it is not an issue, as the last decade has proved.
The FT gets nowhere near recognising these fundamental differences between monetary and fiscal policy. It concludes its argument by saying:
The revival of fiscal policy has to be thought-through, in terms of its objectives and modalities. But ours is a new world. It is folly to cling to the old one.
I agree with the sentiment. But the FT has to also realise just what that means. And it has to appreciate that this means it has to suppprt a fundamentally different economic role for government to that which it has promoted for 40 years.
I argued for this different role in my book ‘The Courageous State', which is coming up for being a decade old now. The FT needs to get its head around the logic I put forward then. In essence I explained that a government that embraces monetary policy does, when seeing a problem walk away from it, saying that the market will solve it. A government embracing fiscal policy accepts that many problems require the government to solve them.
This is not, then, just an issue of economic policy. Fiscal policy is a wholly different philosophy for government. I am looking forward to the FT acknowledging that fact.
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[…] activity is part of the culture that also gave us monetary policy. As the FT has noted today, monetary policy should be consigned to history and fiscal policy should replace it. I have already […]
“I am looking forward to the FT acknowledging that fact.”
Hmmmm….how long have you got ?
At bottom it shouldn’t matter what the FT thinks, it matters that politicians think, and understand that it is the business of politics to control the economy and that bankers and financiers have a completely different agenda which has bugger-all to do with governance, except in so far as it concerns their own financial interests.
I don’t think anything will change in a major way until the banking system collapses again. Too many people believe 2008 was a quirk (the narrative says it was Gordon Brown what done it !!) and the the tinkering about with a bit of banking regulation has cured the problems. Yeah. Right.
Is it not the case that in the UK most voters are groomed to self-harm, are willing to accept many lies, or at least fail to see an issue cannot solely be resolved by one solution alone?
Two recent Guardian articles tell me this based on the following extracts:-
“…..average pay after accounting for inflation is worth less than it was before the financial crisis struck in 2008.”
https://www.theguardian.com/society/2019/dec/31/government-misses-minimum-wage-target-set-by-tories-in-2015
“Estate agents say the proportion of homes in England and Wales let by overseas-based landlords rose to 11% during the first 10 months of 2019..”
“In a globalised and hyper-commercialised world, some think it is fine that everything has its price. That logic leads one to say that if a foreign billionaire can pay more than a local can, he or she should be able to whatever the consequences. This is a poor view of the sort of society we should want.”
https://www.theguardian.com/commentisfree/2020/jan/05/the-guardian-view-on-the-uk-housing-crisis-no-plan-to-fix-it
Now we have some wanna-be Labour Party leaders saying forget Brexit the Tories won as though Britain’s ability to trade successfully has nothing to do with the detail of its relationship with the EU trading bloc.
The Labour Party’s electoral rejection seems to be also failure to realise it had groomed itself to believe it had all the answers when in reality it was failing to grapple with real concerns, economic migration, global trading and investment abuse, and the role of fiscal powers.
Helen,
(Labour) was failing to grapple with real concerns, economic migration, global trading and investment abuse, and the role of fiscal powers.
This is true and a good point. The same might be said for Lib Dems, SNP and Greens.
Regarding this:
“‘the dominance of monetary policy; the objective of low and stable inflation; and the central role of independent central banks’. They have led to over financialisation, unnecessary austerity and the undermining of a central role of democratic governments”.
To that I would add the deliberate introduction of permanent unemployment as an accepted norm. This was represented theoretically by the neo-liberal concept of a NAIRU target (non-accelerating inflation rate of unemployment) and became an integral aspect of standard monetary policy.
Let there be no mistake, ongoing low-level unemployment throughout the neo-liberal era, was intentional and served the purpose of suppressing wages as well curbing the bargaining power of workers and trade unions. Labour, as a commodity in oversupply, has less value.
That’s why the FT will never embrace your full-employment version of fiscal policy. Because they don’t want full employment.
I know that your post has alluded to this suggestion but I just wanted to say it straight out and plain.
Agreed
“Almost as an aside it notes the importance of public investment in fiscal policy, and nods in the direction of what it calls the ‘energy transition'”
Interesting.
Watch that space but be a little wary as well. Capitalist Green New Dealism is catching on. More so in the US at this point with Bloomberg anointing himself as its patron saint. That is encouraging in one sense at least but we don’t want them commoditising it (dot-com style) into another bloody bubble market fad (and crash).
Perhaps that’s where another aspect of public investment comes into play. To provide leadership (or direction) as well as stimulus.
Agreed
[…] any prospect of it, imposing such a constraint now means that any chance of a fiscal stimulus – of exactly the sort that even the FT is now calling for – is now extremely small […]