The FT has reported this morning that Anneliese Dodds is to set out plans for Labour's new economic strategy in a speech today. They note that:
Calling for a “responsible fiscal framework” based on “pragmatism, not dogmatism”, she will commit Labour to a rolling target of balancing the government's current budget in the future, which would allow increased capital spending.
There would also be an exception to the rule for times of crisis, which would allow for a delay in budgetary consolidation while the Covid-19 recovery was continuing, but Labour is planning two defences against inevitable Tory jibes about fiscal recklessness.
The first is an idea from the Institute for Fiscal Studies that would set a “fiscal anchor”, stopping a free-for-all in public spending increases. The second is that Labour is determined to attack what it regards as Conservative waste in public spending during the crisis and put in place safeguards to prevent a repeat under a Labour government.
Any reference to the IFS in this context is unfortunate. Given that they do not understand macroeconomics and say they do not do it, using them for guidance is bound to represent misplaced faith. But I have read what they have to say fiscal anchors. It is this:
In the meantime, some fiscal anchor could be useful — not least given the prime minister's desire to cut taxes, and next year's spending review. Given current heightened uncertainty, rather than targeting measures of borrowing or debt, one short-term option could instead be to set a maximum amount of permanent discretionary fiscal loosening that the chancellor would be prepared to implement. If an increase in investment spending financed by borrowing was thought to be appropriate, such an anchor could apply just to the current budget. For example, the chancellor could commit to ensuring that any permanent tax cuts or further permanent increases in day-to-day spending would be entirely financed through tax rises or cuts to other spending. But because it would not constrain actual borrowing or debt, these could still increase if the underlying fiscal outlook deteriorates, or if the chancellor chooses to raise investment spending or deliver a temporary fiscal stimulus package
What are the problems then, because I doubt I would be writing this if there wasn't one? I suggest they are threefold.
First, this is a fiscal rule, and these are hostages to fortune. As the IFS says (on this occasion with some relevance) in the same report as that just noted:
The last two decades have seen the implementation of numerous fiscal targets. Some have been quite well designed (most notably Mr Osborne's 2010 fiscal mandate, which has much in common with the first half of Labour's proposed fiscal rule). But many have been poorly designed; and many have been committed to, only subsequently to be missed or abandoned.
Let's leave aside the IFS's praise for austerity for a moment. Instead note that even they think most fiscal rules are poorly designed. The reason is one that eludes them of course.
Their report makes very clear that the purpose of any fiscal rule is to prevent the growth in government debt. In other words, the whole point of any fiscal rule is to limit the activity that government can undertake within society, even when there is need to be met.
It is not, in that case, the detail of a fiscal rule that is a problem, although such is the complexity of the economy that any rule will, inevitably be too simplistic to help. It is instead the very purpose of the rule that is the problem. Implicit in any rule are the ideas that:
- too much government activity is a bad thing because it squeezes out the market, when there is no evidence yet found that this is true in the UK;
- that government must be constrained from doing things that people want, and
- that government is constrained by debt.
None of these assumptions should in any way be entertained by Labour, in my opinion. The last, in particular, is simple nonsense. QE has shown that debt is not a constraint on government so why would Labour want to suggest it is unless it wants to suggest it agrees with these other rather dangerous assumptions?
Second, the only reason for having a fiscal rule is to admit that there is a lack of trust in Labour. There were no such things before 1997. Gordon Brown believed people did not trust Labour's economic judgements, so he introduced the idea. Anneliese Dodds will, by accepting that a rule is needed, accept by implication that people still do not trust Labour. As the IFS also noted:
In the end, there is a tension between having clear and measurable short-term targets which impose real constraints and allowing chancellors full discretion to make appropriate decisions. Were governments fully rational and trustworthy — and this widely seen to be the case — rules would not be needed. The rules themselves will always be second-best. The less trust and confidence there is in a government's handling of the economy, the greater the benefits from having a transparent, measurable and constraining set of rules.
Having a rule is, then, an admission that Labour is already on the back foot economically when there is literally nothing about the last decade or so of Tory economic management that puts them in any position of authority.
Third, and most importantly, the reason to reject the idea of the fiscal rule is that it accepts the whole package of neoliberal economics. There is of course nothing new in this. John McDonnell did exactly the same thing, with a ludicrous fiscal rule that even included reference to ‘maxing out the credit card'. Anneliese Dodds will, then be following in a long Labour tradition of making this mistake. But it is still a mistake.
The last decade has proved that governments do not operate at the behest of bond markets, as was once thought. Instead, bond markets operate with the consent of government, which can and will provide them with more or less debt to trade entirely at the will of government. This is a massive change in relationship. Fiscal rules pretend that this change has not happened.
Fiscal rules also pretend that government interest costs are set by the whim of markets. Again, over the last decade it has become absolutely apparent that this is not the case. So a fiscal rules is, again, misguided.
And what we now know is that the idea that deficits, tax and debt are the only variables in government finances is nonsense. Money creation is the other option available to any government. What is more it is the one that the last decade has proved must be used time and again to ensure that the economy can simply function, and yet nowhere is this idea implicit within any of the logic of fiscal rules.
I am, in that case, suggesting that Anneliese Dodds is making a political error today. She is telling the electorate that Labour cannot be trusted to manage the economy unless it shackles itself to rules that the Tories demand but would not follow. That explains why Labour cannot win with such a policy, and probably will not.
And she is making the mistake of tying Labour to neoliberal thinking that is so very obviously of no relevance now, as has been proven by events since 2008.
But worst if all, she is accepting a framework for economic management that does not reflect any of the realities of the modern macro environment. Gordon Brown may not have known this, but both theory and practice provide no excuse for Labour not doing so now.
We live in a new era, where money creation to achieve policy goals is a key part of government economic activity. Labour is pretending that this option does not exist, and that government is still a household constrained by markets, when evidence is now very clear that government is the market maker. Offering old policy in a new era is always a recipe for disaster. I am afraid that Labour is setting itself up to fail.
And is there an alternative? Yes, of course there is. All Labour needs to say is that it will manage the economy to deliver full employment in a sustainable economy by implementing a Green New Deal to be the basis of the future real prosperity that we all deserve and the finances will literally follow and fall into place - because they always do at full employment. Unfortunately, what Labour is saying prevents that possibility. And that is really bad news.
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I believe Mr A. Einstein’s quote about doing the same thing and expecting different results being the definition of insanity fits well here. Sadly.
I’ll have a crack at my fiscal rule:
1. Government spending is required to give enhancement to national capital,
whether human,physical or virtual, to give stability and sustainability for the people of the country.
2. Income and capital will be taxed and distributed to ensure the efforts of all the people are recognised, and will be designed to ensure appropriate living standards for our people. Tax rates and bands will be designed to ensure appropriate economic activity is maintained, allowing return of mental, physical and financial investment.
Started out intending to be neutral, ended up a bit further left sounding.
The role of any government is to be left leaning
If not there is no role for govermment
In short, and relatively record time, the new “better than sliced bread” Labour leader has seen fit to reveal the secret “deed poll” by which a long time ago he changed his name from “Keir Starmer” to “Blair Starmer”.
This historically sly transubstantiation manoeuvring (commonly known as a “sell-out”) should now be seen for what it is an indelible feature of the Labour Party it’s happened far too many times!
Perhaps a party name change, after all one would not want to mislead voters, would one?
I know, “New Labourscum” which would then fight for votes with the Toryscum party. Labour and Tory helping to differentiate between two groups of basically scummy individuals, with no brains, fewer policies and synthetic empathy for most UK serfs.
In this day & age when the difference between policies is wafer thin (“Labour is determined to attack what it regards as Conservative waste in public spending during the crisis and put in place safeguards to prevent a repeat under a Labour government” – so given toryscum are spending bugger all on the public weal, Labourscum will do the same but more efficienctly – they will spend bugger all more efficienctly) it is important that UK plebs are able to differentiate between two more or less identical groups. Tressels “Ragged Trousered Philanthropists” is often quoted – the key bit for me is his description towards the end of the book of an election (circa 1905), the policy similarity between “Liberals” and “Tories” being identified and the synthetic differences manufactured to suggest to voters (circa 20% of the total adult pop) that they had a choice . What Tressel did not know was that both parties were very busy collaborating in the dvevelopment of World War 1. But that as they say, is another story. Sir Stalin is a B.Liar re-tread, that’s all, with Dodds a version of Brooon the ideological moron.
The number of voters who will think “I wasn’t sure who to vote for but now that Labour have added an additional fiscal rule they’ve got my support” must be close to nil.
So this must be a policy for donors. Maybe they approached someone and got told “we’re not sure you’d be responsible in government.”
Policy made for the rich. Not good, not good.
There is a need for just two fiscal rules:
1) if the economy is overheating then cool it down with a combination of tax rises and spending cuts.
2) if it is running too cold then do the opposite.
Yes, Labour is toast (cold toast left uneaten at the end of breakfast service in a dodgy B&B).
At a time when we need some energy and passion – Starmer and now Dodds are trying to play safe cards. In investment terms you balance risk and reward. No risk ultimately becomes high risk as there can never an upside.
I think any of us opposed to the current Eton crop, are crying out for hope, for green policies, for something to be said on jobs. Starmer did get somewhere close to the caring economy recently, but it was far too timid to be noticed.
I am all for pragmatism and happy to sacrifice some “purity” for power but the willingness of Labour to engage in economic policy debate within narrow confines set by neo-liberals is depressing.
The “Golden Rule” should be something along the lines that “The aim of Government spending and taxation is to support the creation of an economy that uses all our human and natural resources in a sustainable manner for the benefit of everyone”.
Rather than accept the IFS as the arbiter of all things fiscal Labour should dare them to disagree with this new Golden Rule.
Once accepted, this Golden Rule should be the yardstick by which any policy is measured – does it provide widespread benefit? Not “how do we pay?”!!
Agreed
One word response to Labour:
‘Dire’.
Thanks for nothing Annelise. How can you expect voters to vote for ‘more of the same’?
It produces just one thing: stasis.
Just what the Establishments want – stable chaos, business as usual.
Indeed. The LP’s whole raison d’etre in this parliament is to reassure ”The Establishment”. They think they have to do this to ”win power”. They may end up holding the levers of power, but doing nothing worthwhile with them.
While I agree with what you say, surely the biggest obstacle to MMT being accepted by the average voter/politician is that the country in general is so wedded to the household budget theory of government finances. Not to mention think tanks who have the ear of the media and politicians. I have yet to speak to anybody who accepts that governments can issue money when they need to without having to pay ALL the money back (Bankruptcy/Greece etc.). Even attempts to explain QE are met with rolling eyes and a dismissive wave of the hand. Surely the first priority is to get people to understanding the fundamentals of MMT and that they are real and credible options.
In these circumsatnces I can understand the Labour Party looking to sound credible under the huge cloud of the conventional wisdom of household budgeting. How on earth do we get MMT to become part of the mainstream discussion on the economy?
By keeping on poit9ing out that it is what is actually being done, in effect
My current favourite answer is ‘how much national debt has been repaid since WWII?’ People are genuinely surprised (I was!) that the answer is almost never.
Follow that with ‘has the sky fallen in?’
It does get them thinking – and that is the important aspect – if we can help people to think, that starts a useful process. You cannot un-know what you know.
As you say, the only reason for a “fiscal rule” is to tie the government’s hands, so either they don’t implement a policy as they would wish because it would “cost” too much, or they increase taxes to meet the “rule” when otherwise they would not choose to do so. Or is it just window dressing, and doesn’t actually change what the government does. Either way, it is sending a political message that Labour can be trusted with the public finances, implicitly accepting a public perception that Labour cannot be trusted with the public finances.
Rather the accepting and playing into that narrative, Labour should be attacking the economic incompetence of the Conservatives. Not so much that the public deficit is ballooning, as it often does under the Conservatives – that is what you expect when there is a pandemic and lockdown and Brexit – but rather the very poor spending and policy choices that are being made – the cost of PPE, test and trace, etc, defence rather than international aid, coal mines, airports, etc.
For example, billions of public funds have been spent (quite rightly) on vaccine research, so we now have several coronavirus vaccines developed using public funds. But now we are spending billions more to buy the vaccines. How much are we paying for each dose and why? Is that just covering the cost of production, or have the pharma companies socialised the cost of development and privatised the profits from sales? Yes, we are relying on the powerful combination of public funding and private competition, but that should not mean profiteering. At the very least, there may be a case for an excess profits tax.
Agreed
It’s all very well getting upset with Labour’s plans on this blog when most of the commenters (including me) are convinced by MMT based economic theory. But most voters aren’t.
If I say to almost anyone I know that governments with a sovereign currency can’t run out of money they a) don’t believe it for one second and b) cite 1930s Germany, Zimbabwe and Venezuela. Can’t get past them at all.
The 2019 Labour manifesto was lambasted for economic irresponsibility, Starmer’s Labour would get the same treatment if they so much as hinted at an MMT based economic policy. And the general public would be convinced that the critics were right, because that is what they, themselves believe.
It’s a shame that Labour can’t work the same con trick as the tories. Pretend to be economically ‘sound’ (neo-lib) but actually issue money hand over fist to hand it out to their cronies.
Or perhaps that *is* what Labour are trying for? Don’t frighten the horses (voters) now, preserve the illusion. Do whatever you like when in power… tories have proved that anything is possible…
Informed people do read this blog….I know
So I will keep plugging away
Oh, absolutely, Richard. Please do.
Your blog has been an inspiration to many.
@Maggie Downie
In effect hyperinflation is by definition always caused by printing too much money . The key is ‘too much’.
So “When confronted with 1930s Germany, Zimbabwe and Venezuela hyperinflation” I always say they were caused by austerity and ineffective taxation, which usually steers the discussion on to other territory. It’s the period before the actual hyperinflation that caused it.
Also there’s a Cato Institute (no less) study showing how rare hyperinflation is – from post revolutionary France in 1795 until the date of the report in 2012, there were 56 examples of hyperinflation, where hyperinflation is defined as starting in the month where the price level increases by 50% or more and finishes when the rate drops below 50% and stays there for at least a year.
https://www.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8_1.pdf
@ Maggie Downie
Your argument sounds pretty much the same as the 147 Republican Party politicians in Congress and their supporters not being able to work out that ratifying the Electoral Colleges votes last Wednesday is in fact a Parliamentary rite of passage confirming their support for American Constitutional Democracy. Of course, some of those 147 politicians are fascists and racists and don’t give a damn preferring a Herrenvolk Democracy where only one ethic group has the right to vote. Imposing a fiscal rule as Starmer’s Labour Party proposes is a massive form of denial of a right for a government to act in the interests of the well-being of all the people. There are no ifs or buts about this. The fact that the government is able to wield the best collateral retirement promise in money creation primarily through taxation enforcement gives great power for national well-being. Essentially Starmer is a traitor for not making the effort to understand MMT or if he does turning his back on the British people for the purposes of aiding a set of elite vested interests just like Blair:-
http://www.theguardian.com/money/2016/mar/14/tony-cherie-blair-property-empire-worth-estimated-27m-pounds
http://www.telegraph.co.uk/news/politics/tony-blair/11052965/Tony-Blair-gives-Kazakhstans-autocratic-president-tips-on-how-to-defend-a-massacre.html
I’m not going to mention Blair in the context of the Iraq War because there’s no evidence of corruption.
I agree with Maggie about the perception problems that campaigning on MMT poses for Labour (or any other party). But as she says in her second post, that’s also exactly why continued efforts to change understanding such as yours, Richard, are needed. Max Weber said that politics is a slow boring of hard boards. Very true.
We’ll have to see exactly what Dodds says this evening. However, what I found encouraging in her Today programme interview this morning was her emphasis on moving to a much longer-term view of what was needed for the economy (a 20-year horizon rather than a 5-year horizon were the figures she used). That seemed to me a definite move in the right direction, potentially giving a progressive government much more room for major investment, and also canny, in the sense that I think it could easily be understood and accepted by most people.
@ Peter Cave
It’s now very clear Peter that the UK government has the best ability to create a financial instrument namely currency that has the greatest “repeatable” short term stability than any other financial instrument (government gilts are backed up by this “top in its class” ability).
This puts it in a great position to do good for the nation. To attempt to put handcuffs or a straitjacket on the nation’s currency like the current Labour Party leadership proposes is morally wrong, an act of national treachery! Starmer needs to stop acting like a wimp scared of the likes of the Rupert Murdoch’s of this world and start running a campaign to explain MMT to the nation. He has four years to do it. Time enough for anyone!
Another , maybe inchoate, attempt to redraft Annellesa Dodds. Tries to avoid Gordon Brown’s suggestion that he had abolished the economic cycle completely:
‘The disastrous ten years of austerity, reduced economic growth, reduced productivity , increased inequality and insecure jobs and ran down public services – so that the country was unable to cope with the pandemic and produced the present calamity. The IMF, OECD etc. and many mainstream economists have recognised this.
After the 2008 crash and in the pandemic, governments have shown that increased borrowing and debt is not the only option to keep the economy going. Instead they have created money through the Bank of England known as QE Quantitative Easing. But much of this money has gone into inflating the prices of existing assets – property and the stock market – boosting inequality even further.
Instead, we will ensure the money is used to invest in jobs, in the Green New Deal, and in the services we need.
We will manage the economy so as to reduce carbon emissions by 7% a year . maintain full employment, keep the economy growing, and prices stable.
We will use all levers available, – tax, money creation, borrowing, interest rates to maintain sustainability’
This will go down well in those Red Wall seats Labour lost at the last election.
If Labour ever hopes to get back into power it should be focussing on the economic issues that its voters, actual and potential care about.
What Shadow Chancellors have to say doesn’t get much space in the Press so to waste on this issue (as reported) isn’t very smart.
Do Starmer and Dodds get it but are too scared to say it for fear of ridicule?
Or do they just not get it?
(MMT of course)
If they do get it, then why not challenge the orthodox view? Do they think they can’t win the argument? If they do get MMT, then the argument in favour of is very compelling, if delivered clearly.
If they just don’t get it, then……… are they open to persuasion?
If not, they don’t really have much to offer.
Tory or Tory Lite will be the choices available.
I will keep trying
The only hope is that they are ‘doing a Tory’, as I like to call it. Campaigning on one set of policies, then ignoring half the manifesto and doing something else entirely once in power.
Probably not, but it seems to have worked well enough for the Tories over the years.
See also The Gipper, who famously stated, “If you’re explaining, you’re losing.”
Reagan didn’t bother to explain that his government was doubling the US national debt with his tax cuts and vast military spending and so is still revered by Republicans to this day as a Conservative superstar.
Haven’t had time to read all posts on this, so maybe my post will be a repeat of someone else’s.
However, President-elect Joe Biden is taking the polar opposite route to Labour’s myopic proposals.
See:
https://m.businesstoday.in/lite/story/joe-biden-to-announce-coronavirus-relief-plan-worth-trillions-of-dollars-next-week/1/427533.html?__twitter_impression=true
I despair. Labour’s approach is a classic example of fighting a war with the (often failed) strategy and weapons as the last one.
As to apparently trying to distract from the allegedly ruinously expensive Labour 2019 Manifesto, which had a (costed – even if anathema to an MMT approach) price tag of £83bn, Dodds and Starmer don’t seem to have noticed that Sunak has “spent” many times that – is it 5 times? I forget – since becoming Chancellor.
As I said, I despair.
Me too, Andrew
I’m increasingly of the opinion that a rules-based fiscal framework doesn’t make sense. Why should the objective be to balance the current budget? I don’t think France (for example) has balanced the current budget since 1974. So what? Does anybody in the real world actually care? As long as the government can avoid a “death spiral” into default on its debts, that seems the only ‘rule’ we need. In fact, in some circumstances even a default might actually be a good thing!
Maybe it’s time for a radical “anti-rule” macroeconomics.
It is Howard
[…] wrote yesterday about Labour's dedication to fiscal rules, and how ill-advised this was. I have now read Anneliese […]
I wrote to Public Finance magazine in 2008 saying that the boot was now on the other foot. Instead of bankers kicking the public sector , the public sector should be asserting itself as the saviour of the banks.
PFI debts should have been written off; caps put on salaries; and an investment bank created to direct funds to large infrastructure projects with good returns.
That was while Labour was last in power. Its failure to respond appropriately was another reason why Labour lost power.
It will never regain power until it relearns how to use power.
Business as usual may be a comforting message to the bankers but doesn’t cut it with most people.
Labour are like the hens in the chicken coop shown the open door and freedom (or in this case the insights of MMT).
They prefer the comfort of servitude to the opportunity to be something else.
Annelise Dodds looks and talks like a frightened chicken.
All they need is a plausible story to give to the markets but it seems they cannot even muster that.
I could be mistaken but I thought that neoliberal economics was promoted (campaigned for) by network of think tanks here and in the US.
Is there any group(s) doing the same for MMT (I’m aware of GIMMS)?
Thanks Richard for bringing MMT (+ all the other issues you highlight on this blog) to my world view