The FT has published the most extraordinarily confused editorial today. It is on the future direction of macroeconomic policy, and so well within what should be its field of competence. But what has been delivered looks to be the result of heated arguments that have resulted in the most uncomfortable of compromises that makes no sense at all.
The editorial opens well, saying:
Fiscal orthodoxy has changed. Organisations such as the IMF and the OECD have told governments that, with low interest rates seemingly here to stay, the costs of excessive borrowing are much lower for advanced economies than previously thought. The benefits, too, are greater, given the need for governments to take some of the burden off central banks in supporting crisis-hit economies. In these circumstances, the aim of balancing the budget can, at least temporarily, be dropped.
It would be very hard to disagree with a word of that. The FT has understood the predicament we face. And, as they note:
This thinking can command support across the political spectrum.
Their examples are weak, and weakened by their admission that in crises wrong conclusions, based on consensus, can be drawn. As they noted:
That consensus can be wrong was on display after the 2008 financial crisis, when many organisations – including this newspaper – advocated fiscal retrenchment. The facts have changed and economists have, sensibly, changed their minds. Inflation, economic growth and interest rates failed to recover as anticipated after the financial crisis. This not only kept borrowing costs down but demonstrated that cutting spending may have had a bigger negative impact than expected.
So, the FT has admitted that austerity failed. But, in the next paragraph they go on to say:
This is not a reason to abandon the goal of fiscal sustainability.
By which they suggest that the debt obsession should continue. They evidence this by saying:
Governments can, usually, simply roll over their debt stock at reasonable interest rates. There is, however, an ever-present risk that the market will move against governments and the cost of borrowing will rise to such an extent that the choice will be between a painful default or vicious austerity. Keeping a watchful eye on the public finances can prevent societies from ever having to make such a choice.
At this juncture I began to think that, lockdown or not, the FT should get out more.
Have they not noticed that QE has broken the power of bond markets? The dependence on them has simply vapourised. With it control of long term rates has moved from the market to government, whilst control of short term rates is guaranteed to a government notionally owing £800 billion or so on central bank reserve accounts. But the FT still thinks the power rests with the markets. That is pure wishful thinking, and that is never a good basis for economic policy.
But as if one bout of pontification one remove from reality was not enough, they added:
Either way, a looser fiscal approach must not change the role of central banks.
Heaven forbid that the financially powerful be stripped of their illusion of power, even if we now know that central bankers work at the behest of Treasuries and that interest rate policy is dead, if not forever (as I think likely) then at least for a very long time, stretching beyond all current planning horizons, to come.
And what the FT then convincingly proves is that it does not understand the realities of the new fiscal policy that we must have, and on which we are also dependent. They say:
Inflation-targeting central banks should only “print” money to hit their inflation targets and not finance government spending: quantitative easing is justified by low inflation and not high deficits. Interest rates should be set based on the needs of the economy and not finance ministers. UK investors are already questioning whether the Bank of England is simply offsetting government borrowing. Central banks must even more jealously guard their credibility when debts are high. The facts have changed, but not everything else should.
This is so confused. Start with the claim that ‘QE is justified by low inflation and not high deficits.' Surely, even the most elementary thinking might suggest that maybe low inflation was the result of low demand as a consequence of which high deficits are required to promote economic recovery? In other words, such analysis would note that in the situation we are in (and the FT has contextualised this argument in this way) the claims made here are the same?
And then wonder why interest rates required by finance ministers are not those required by the economy? Excepting the obvious fact that in current circumstances (again, the only relevant context) rates have hardly changed for a decade, why is it suggested that there might be a difference? Or is the FT simply saying democracy is not to be trusted, joining the ranks of fascists by doing so?
And what is the problem with the Bank funding the deficit? After all, it funds all government spending in the first instance, as a matter of fact. Or is the FT in denial about the reality of the government spending cycle that every informed person now appreciates to be true?
What then is this unchanged thing that does not alter when the facts do? Could it just be the anti-democratic dogma of neoliberalism, which even if does not accord with the facts, or explain them, or indicate a route out of our malaise must, nonetheless, be believed because the interests of the wealthy require its perpetuation? It would seem so.
It's as if the FT was saying ‘austerity does not work, long live austerity!'
Actually, that is exactly what they are saying.
It would seem that the oppressors are always with us.
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I saw your headline and went off to read the editorial…… but picked the wrong one! I read the one titled “Pandemic has exposed UK’s threadbare safety net” which has an entirely different thrust. I then read the one you refer to and I am left agreeing with you that the FT is very confused.
They get half way there and then panic. As Hilaire Belloc wrote “..always keep a-hold of Nurse for fear of finding something worse”.
So, what is it that causes the panic? I am not sure but when I find out I will let you know!
🙂
So, what is it that causes the panic?
I would suggest it is the unexpected arrival of reality in the very form you have spent your life denying. The opening pages of Keynes’ “General Theory” is a comprehensive dismantling of Pigou’s Classical Economics, by selecting what Pigou thought was his strong-point; employment. Keynes selects a quotation from Pigou’s ‘Economics of Welfare’ (1920), in a coruscating analysis which in fact goes to the root of the failure of economics as a discipline; its inability to cope with the complexity of reality, and its failure to discover tools of empirical analysis adequate for the job it claims to fulfil, a task in which neoliberalism has dismally failed to do any more than emulate and persist in using Pigou’s blinkers: “Throughout this discussion, except when the contrary is expressly stated, the fact that some resources are generally unemployed against the will of the owners is ignored. This does not affect the substance of the argument, while it simplifies its exposition” (Pigou, 4th edition, p.127). Keynes places the first half of the last sentence in italics: Keynes, ‘General Theory’; Ch.2,I, footnote 1).
Keynes incidentally excuses Ricardo from this failure, but only because Ricardo claims only to be interested in the distribution of resources but not in establishing “the volume of the available resources” in Keynes words.
Mr Parry,
For the avoidance of doubt my use of the second person plural in the opening of my comment is not intended to apply to you, but rather to the I suspect the frantic, baffled denizons of the FT’s editorial offices!
I am dismayed when it seems two of the possibly most influential voices on finance, the IFS and the FT, quite routinely show that they do not understand, either wilfully or through ignorance and lack of research.
Then you have to ask, who are they speaking to? Certainly not you or me. They are speaking to the still-in-charge financial community, government and bankers, central or otherwise and neoliberal hawks everywhere. Bailey also said, early last year as the crisis hit, that he is not there to finance government, so he already agrees with the FT. (I wonder what his job is then?)
[…] one, Labour remains committed to it. That is deeply disappointing. It's as if Labour believes, as the FT obviously does, that the game of lies around the role of the central bank must be maintained so that we can […]
The FT seem to want interest rates to rise as their readership is mainly interested in making unearned or easy income. When crisis arise, whether banking, economic, health, environmental et al get in their way they get flustered but want to be seen as as taking all these factors into account so getting completely confused trying to please everyone while masking their real purpose in keeping capitalism going in the interests of the tiny minority they speak for.
They are basically worried about saying print and be damned. Not that MMT advocates that at all, but in their defence they are trying to appear “prudent”. Prudence has always been seen as the good thing, Gordon Brown was especially a big fan. It is almost as if we need an authoritative voice saying, “well we can print but we must be careful that we may cause other problems here”. It is a fear of what might happen, of course you and the readers of this blog have no qualms about any of that.
So let them prattle and worry, but keep explaining, as you are, that really there is no need to be worried. Today we may require some monetary adjustment, that will help us get to tomorrow. By which time things will have changed and we can stop doing what we did yesterday and implement some other monetary fiscal policies to reflect what needs doing as and when the time arrives. We have discovered a tool to help us do this, that is all. Nothing should be set in stone forever or one policy prescribed for all economic outcomes. That is what MMT offers in my view.
I agree with all above but in addition what we are seeing is the typical misleading way the MSM works in the newspapers:
1) Show false empathy – convince the reader that you care, acknowledge a problem.
2) Then begin to gently bring in other counter arguments – sow doubts as you also discuss further.
3) Then conclude that is just not possible to help and say ‘Oh Dear!’.
I think it’s quite enlightening to look at the brief appraisal Martin Wolf made of Stephanie Kelton’s The Deficit Myth in the middle of last year.
“This book by a prominent advocate [of MMT] is going to be influential. In my view, it is right and wrong. It is right, because there is no simple budget constraint. It is wrong, because it will prove impossible to manage an economy sensibly once politicians believe there is no budget constraint.”
https://www.ft.com/content/74448b70-b144-11ea-a4b6-31f1eedf762e
He seemed to me to be saying, ‘Kelton is right, but this cannot be admitted, because politicians cannot be trusted to manage the economy responsibly under MMT’. I wouldn’t quite phrase this in your terms (i.e. the FT are joining the ranks of Fascists by saying that democracy is not be trusted), but Wolf certainly did seem to be saying that governments (democratic or otherwise) can’t be trusted to be responsible. Maybe this helps to explain the FT editorial.
Agreed
My conclusion logically follows