Economic policy today is dominated by rules: deficit limits, debt targets, inflation targets, and interest rate rules. But what if these rules are the problem, not the solution?
In this video, I argue that these rules were designed to constrain government, not serve society. Instead of starting with arbitrary limits, we should begin with what people actually need: healthcare, education, housing, and a sustainable economy.
This means rethinking the role of tax, interest rates, and the state itself.
It's time to ask a fundamental question: should rules come before people?
This is the audio version:
This is the transcript:
I want to suggest something to you that is quite radical in economic terms. I want to suggest we should forget the rules.
What am I talking about? Fiscal rules, deficit rules, debt targets, inflation targets, and monetary rules. All of these have been created by neoliberal economists, and they're treated as sacred by people like Chancellors of the Exchequer and economic commentators, but they are not the economic necessity that they're made out to be. These rules were written for one purpose, and that was to constrain government. I don't believe we should be following them. It's time to forget the rules.
In most of life, we state our goals first when we're thinking about action. We then create rules which are designed to help achieve our goals. But economics has done the reverse. It starts with deficit limits and spending caps, and inflation targets and interest rate rules, and only then does it ask what society wants, let alone what it can afford. This makes no sense at all. It's time to throw away these rules and start again in the way that we think about the economy.
Governments are bound at present by fiscal rules; debt-to-GDP targets dominate debate. Central banks fixate on inflation targets and nothing else. Fully funded spending rules demand that the government always sell debt to cover deficits. Economic policy is constrained before goals are discussed as a result.
This is what neoliberalism is all about. Its intention is to limit the role of government, and these rules are designed to achieve that outcome. They limit what government can do. They restrict investment in public services. They delay spending on the climate transition. They justify austerity and downturns, and they narrow democratic economic choice.
I am opposed to all of those things. Governments are uniquely capable of large-scale action.
Only governments can fund universal healthcare.
Only governments can provide mass education.
Only governments can stabilise economies in crises.
Only governments can organise the long-term transition to manage climate change that we know we need.
This is the proper role of government, and when we look at those proper roles, we have to ask the question: what kind of society do we want?
Do we want better healthcare outcomes?
Do we want accessible and properly funded education for everybody from cradle to grave, or at least until they've done their PhD?
A fairer distribution of income and wealth? Isn't that important?
And do we want a sustainable economy and full employment?
If we do, this requires a different way of economic thinking.
These rules won't work for us. We have to start the other way around. We have to start by saying: what is it that society requires if we are going to live well? Then we have to identify the labour and skills that are needed to deliver those outcomes and the infrastructure and materials that are necessary for that purpose. Only then should we be considering the finance required to mobilise these resources.
Then once we've done that, we have to consider something else, but it comes this far down the list. We have to consider the inflationary consequences of putting these resources to use. And if we've decided that these things are what we want and they are our priorities as a society, we then have to decide how to manage the inflationary consequences that arise as a result.
The job there is one for taxation. Tax is not primarily about funding spending. We know that. Tax withdraws excess spending power from the economy, and it does so to control inflation. That is the reason why we have to withdraw excess spending power from the economy. If achieving our goals for society puts excess spending power into the economy, tax has to bring it back, and in the process reshape incentives and behaviour and support macroeconomic stability. If, therefore, to achieve our goals, we need more tax, we shouldn't say it's not possible; we say it has to be done because that's the consequence of achieving the goal of more healthcare, more education, more climate transition, or whatever else it is that we need, more housing or whatever.
This is a proper decision-making process. We start with reality. We end up with how to manage the finances. This is what a useful rule would look like, but it isn't what we've got.
Let me give you another example where a rule does not work at present. We have an interest rate rule that sets a target. The target is related to inflation. We don't set interest rates because of the financial consequences that they have for the economy as a whole. We set them with regard to the supposed impact that interest rates have on inflation, even though there's little evidence that inflation is effectively controlled by varying interest rates.
The reality is that interest rates should be used to steer financial flows. They should be used to ensure that money goes to where it's best needed. They should be directed at creating productive investment and removing money from speculation. There should be a policy that encourages productive investment by small businesses, for example. There should be support for housing that people live in. There should be funding for public services and infrastructure. All of these things are influenced by interest rate policy, but all of them are ignored at present.
We should be using the power that the government has to set interest rates, not to control inflation, which is the job that taxation has to do, but to run the economy without artificial limits, whilst trying to achieve the role that we want for resources to deliver within our democracy.
Markets cannot by themselves deliver that. We know that. Forty-five years of market hegemony have proved that markets have delivered poor outcomes. It is time for the rules to change to reflect that fact.
Policy space has been deliberately narrowed to date. That has to end. We have to decide the outcomes that societies need, identify the real resources required, and then design the institutions to mobilise them.
The Bank of England needs reform as a result.
We need to use fiscal and monetary tools pragmatically.
We need to judge policy by the outcomes we get, not by the rules that we use, in other words.
Rules can be useful coordination tools, but they must be adaptable. They should enable progress. They should not prevent necessary action. Economics is meant to serve society. That is what functional finance says, but we've got an economics that doesn't allow that.
We now need to ask some questions.
Are fiscal rules helping society, or are they preventing solutions to real problems?
Should democratic goals come first? I've already discussed what they might be.
Please tell me what you think in the comments. This is important. This is where the core of our economic debate should now be. What do we want from the economy that we live in? This is an occasion when you can tell us, and that will influence our future thinking.
If you think this is a debate worth taking part in, please like this video, subscribe to our channel, join the conversation, and share what we're saying here, because the more people involved, the better things will be.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Absolutely agree with you Richard.
Economic rules are not laws, they are inventions usually to reflect an opinion an economist wants to project. It is clear human economic behaviour does not follow the rules that have been invented.
For example I do not have perfect choice when buying anything these days.
Neoliberalism fosters the demand for popularism which in turn creates the demand for more neoliberalism.
Agreed the fiction that external inflation issues can be controlled by the Bank of England shows that the rules have no relation with the real world.
Tax should be used to redistribute so that the whole of the UK society benefits.
Fiscal Rules come about because Economists believe their discipline is a science. It isnt, its an art.
What matters is the outcome not how you get there
Most of the rules and by extension what passes for neo-libtard “thinking” is based on circular logic which, ipso-factor, is disconnected from on the ground reality. Doing economics by walking around would give a more real & thus better result. 20th cent economics wanted to turn itself into a “science” – hence all the pointless equations (I remember looking @ them when I did my MBA & point blank regarded them as rubbish). Outcomes, that’s what counts, not theory. Current outcome: lower & middle classess getting much poorer, uppers getting much richer – all becuase of “fiscal rules” etc. I despise Thatcher, but it is likely she would be deeply unhappy with the outcomes of her “experiment”. The problem is, her neo-libtard experiment has momentum & as the last 12 years of visitng this blog have shown, it is very very difficult to overcome. Same for “how to price energy” – libtards in control and deaf to all reason. In the case of the BoE, inverse decimation of the upper ranks is probably the way forward (9 our of 10 of the useless buggers fired, no compo no pension – let em discover how the other half lives). Meanwhile, another pointless & brainless article in the Guardian today on energy prices.
Thanks all round again.
Might it be that two contrasting approaches to assessing, measuring and managing perfomance are?
1) By considering inputs (cf. Mr. Nozik)
2) By considering outcomes
Might it be that the second is more accurate/realistic and the second more theoretical and, perhaps, subject to manipulation by and for particular minority power groups?
Replace rules by guidelines such as: Does this policy increase or decrease the wellbeing of society as a whole?
What is the ecological impact of proposed measures/policies?
Do these measures byaccord with human rights and international agreements?
Are they conducted by democratic consent?
Maybe one step along the road, would be for government, or a think-tank not based in Tufton Street, to publish the “rules”, with the date each was invented, who invented it, whether it is statutory or merely “convention”, and the dates on which it has been changed or abandoned.(Eg: Golden Rule, Gordon Brown, invented 1997, enacted & codified 1998, goalposts moved 2005, effectively ignored 2008 (crash), 2020/21 (covid), and 2026-? (crazy illegal war).
Any Budget should require the Chancellor to go through the list in parliament, explaining the changes, and where the “targets” have been met or missed.
If they don’t wish to do that, then they could be offered a bottle of single malt and a loaded revolver, and escorted somewhere private behind the Speaker’s Chair.
Forget the rules
I agree that the changes outlined are desperately needed. However if we ask people to “forget the rules” there is a danger that there will be a natural reluctance. We expect to “play by the rules” and to “respect the rules based order “of international relations. Without rules there is anarchy and chaos and nobody wants to embrace that. We could be accused of recklessness or irresponsibility as the opposition did in response to Zac questioning some of the “rules”.
But if we talk instead about “outdated and harmful practices “then I think we would have a better chance of cut through. We expect professionals to keep up to date with best practice and certainly not to cling to conventions and practices which because of new information and evidence from implementation are no longer effective or even downright harmful. A reasonable person would accept that this must apply to economic practice as well even if they are not an economist. It can then be seen that those who continue to promote and impose policies which are proven not to have worked for the majority are the real dangerous mavericks not us.
So let us call out these “rules “and their promoters for what they actually are. Our powerful message is that there is hope for a caring society but only if we replace these outdated ineffective and harmful practices with a better understanding of what economic policies lead to well -being.
A key component of the neoliberal agenda has been the “de-priveliging” of the civil service begun by Margaret Thatcher in 1989. It’s been pursued by successive governments ever since, and indeed the process has accelerated since 2010. The result, of course, has been declining performance in many areas. If government is to develop policies that meet society’s needs rather than follow an economic rule-book, we will need a competent civil service. Thatcher’s deliberate strategy of undermining the civil service’s ability to provide detailed and well researched policy advice must now be reversed.
Agreed
Apologies. “1989” should have been “1979”. It’s been a very long and thorough process of managed decline and it will be difficult to rebuild the in-house skills. But it must be done. It’s part of the reason why we’re in such a mess.
As you would say, Richard, much to agree with.
I’m surprised though by your statement that tax is not primarily about funding spending. I fear that I must have missed something because what I thought I understood from you was that tax isn’t at all about funding spending.
I have been following your blog for a number of years now and this is where you have been leading me. I am not an economist but studied economic history so have enough knowledge of economics to enable me to learn from you. The idea that the rules are unnecessary and damaging to society is where my thoughts have been heading. Thank you for confirming this.
I’m not an economist but have been following your thoughts and find them most illuminating.
I think I get why taxes are not what the government spends and thought it all seemed sensible. But I cannot see where VAT fits into this. Does it control excess income, I don’t think so as people with excess income have a low proportion of spend on food etc, anyway it seems to stay the same, so what is it for?
It collects tax.
Recovering money is essential.
VAT is not the best way of doing so. But is invaluable for being a tax sheet rates can be changed quickly within the MMT sphere.
Again Richard you cant say it enough : ‘We start with reality. We end up with how to manage the finances. ‘<p>
It chimes with Keynes ‘anything we can actually do we can afford'<p>
And I think one of your previous phrases – ‘we create wealth by actually doing things ‘ or words to that effect
Thanks
I was imagining if you were the economic advisor to a government what the response would be. ‘This is too much too soon’, ‘how do we know it will work? most likely – not to mention the apoplexy of the Treasury! There would, no doubt, be unforeseen consequences and some need to tailor the approach but reason dictates this is more likely to succeed than the deeply flawed and failed neoclassical approach.
There would, of course, be a good deal of push back so a plan to deal with that should go along with this good advice.
Brilliant post Richard. One of your very best. Absolutely agree.
How and when are we going to get a government with the intellect to actually develop (as you are doing on your blog) a collective overall vision of the society we want, and then have the guts and be given the space to implement that vision against the inevitable avalanche of opposition from the neoliberal lobby? Sadly LINO has neither the intellect nor the backbone. I can’t see a realistic alternative, unless Labour can be changed from within. I subscribe to Mainstream.
Your blog is a beacon of hope. Thank You.