Last Wednesday (November 22, 2023), the Tory government in Britain released their fiscal update known…
This is the third and final part of this series where I examine claims made by senior advisors to the British Labour Party that a fiscal policy that is designed using the insights provided by Modern Monetary Theory (MMT) would be “catastrophic” and render the British pound worthless. In Part 1, I examined the misunderstanding as to what MMT actually is. A senior Labour advisor had claimed, in fact, that any application of MMT would be “catastrophic” for Britain. He talked about MMT “policy prescriptions”, which disclosed an ignorance about the nature of MMT. In Part 2, I considered the British Labour Party’s Fiscal Credibility Rule and demonstrated that its roots were in core neoliberal ideology and any strict adherence to it would not be consistent with progressive outcomes. I noted that it was likely to promote a private ‘debt-bias’ that was unsustainable. In this final part, I explore some economic history over the last five decades to give some further force to the argument presented in Part 2. And I finish by arguing that a well governed, rule of law abiding Britain with a government building and maintaining first-class infrastructure, with excellent public services (energy, transport, health, education, training, environmental certainty, etc), with a highly skilled labour force, and regulative certainty, would be a magnet for profit-seeking private investment irrespective of whether it was running a continuous fiscal deficit or not. Yet, it is highly likely, given Britain’s history, that such a deficit (both on current and capital contexts) would be required.
The previous blog posts in the series:
1. MMT is just plain old bad economics – Part 1 (August 9, 2018).
2. MMT is just plain old bad economics – Part 2 (August 13, 2018).
Response to responses
At the outset, I see my blog as an extension of my role as an educator.
The point is that the matters I write about are not without controversy and very much not in the mainstream psyche. That means I have to explain and contexualise the argument in greater detail or put myself open to criticism that I have ignored this or that.
Education is more than a 280 character Tweet. One character overnight criticised the length of my blog posts – as a snide put down.
The same person then, in ‘smart-guy’ mode, claimed to summarise yesterday’s blog for everyone in a Tweet.
Sad to say, it seems that even though my blog post was long in his view, he still didn’t understand it.
For example, he accused me of claiming that public capital investment is a neoliberal policy.
Of course, regular readers will know I would never think that nor have I ever written or said that. Claiming otherwise is just attention-seeking lying.
What I said was that the Labour Party’s Fiscal Rule is framed within neoliberal concepts and language. That is entirely different matter.
Frame lies and you privilege them!
My points about the Golden Rule component of the Rule were fourfold: (a) there is a problem distinguishing capital from current expenditure; (b) in a deep recession, the Golden Rule may not be flexible enough to prevent significant output and employment losses; (c) in a recession, it would make it virtually impossible to meet the debt commitment within the Rule, and (d) it creates a private-debt bias.
He also said I failed understand the Labour Party’s fiscal rule.
Well I quoted the Rule from its source and here is the relevant section again:
Labour will close the deficit on day-to-day spending over five years … we would commit to always eliminating the deficit on current spending in five years, as part of a strategy to target balance on current spending after a rolling, five-year period.
This was written in a section where we were also told that “everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.”
The household budget analogy no less. Neoliberal framing! Lies. And these characters are claiming the Labour Party is adopting a progressive macroeconomics!
Anyway, what this constraint in the Rule says is obvious. It allows ‘current’ spending (whatever that is) to exceed ‘current’ revenue (from taxes) in Year 1, Year 2, Year 3 and even Year 4, but after 5 years it has has to balance. And that rolling average then starts in Year 2 and ends in Year 6 (another balance), then Year 3 to Year 7 (another balance).
Yes, the Government can suspend the rule in “exceptional circumstances” but this (according to the Rule) would only follow when “the Monetary Policy Committee decides that monetary policy cannot operate”.
That is, the unelected and unaccountable Bank of England determines when the elected Government can step in and break the Fiscal Rule.
The rule clearly means that the Government cannot run continuous recurrent deficits by their own choice, which may be necessary to ensure schools are well provisioned, hospitals have enough resources, and all the rest of it.
Overall, education is a slow burn process. It needs in-depth analysis and discovery. My blog posts are long because I take the time to provide that analysis. I am an educator not a social media hero.
The social media world is perverting our sense of literature and debate.
For example, his attempt to summarise my blog post in a Tweet indicated that I had mentioned “Something about Friedman, Kyland and Prescott”. End of point.
Apart from his spelling problems (it is Kydland), how many of my readers would know what that one line summary of what were several paragraphs in my blog post meant?
Hardly any I would guess, particularly the reference to Finn Kydland and Edward Prescott.
The fact is that their work has been a major part of the shift to what we popularly think of as ‘free market’ macroeconomics.
Their contribution (if you can call it that) is used as an authority to justify the entire framework of macroeconomic policy setting in the modern era, including the ruse about central bank independence, which I demonstrate has damaged progressive outcomes.
How many of you understand their place in the history of economics? Not many I would think. Which is not a shortcoming, given the work is part of the academic literature in macroeconomics.
That is why I determined it was productive to spend a little time contexualising the roots of the Fiscal Rule. It hasn’t come out of a void. It is embedded in a copious literature that spans techniques and ideologies.
I see my blog as a conduit to translate as best I can this complex literature into meaningful prose that non-economists can understand and benefit from knowing.
My role as an educator is, thus, to educate – that is, to increase knowledge, which, in turn, empowers people to challenge the status quo if they feel it is not delivering on their aspirations.
A few smart-guy Tweets is not education. And that is why I never engage in these futile Twitter exchanges.
A little economic history
Now lets look at British economic history since 1975.
Here is a four-panel graph which covers the period between the March-quarter 1975 to the March-quarter 2018. The graphs are the Bank of England’s bank rate (its policy rate), the annual inflation rate, the quarterly real GDP growth rate and the official unemployment rate.
I was unsure of the best way to present the graph given that in its current form it is very long (in pixels) and you will have to go back and forth with the text. But I did it this way so you could better align the time axis and I have also added 3 blue vertical lines to mark certain periods.
The graph is useful in considering how Labour’s Fiscal Rule might operate.
The graph tells me (along with other rather more extensive knowledge of what was happening over this period) that:
1. Monetary policy changes (interest rate shifts) are not a very reliable way to discipline the inflation rate. In the first two periods marked by the vertical blue lines, inflation kept rising even when interest rates were pushed up to dramatic levels (related, in part, to the currency instability).
2. Every time, interest rates have been hiked for extended periods, a recession has followed. But as we will see presently, in the case of the 1980s and 1990s, those monetary policy shifts were accompanied by significant contractionary fiscal shifts. In other words, fiscal policy cuts were reinforcing the interest rate hikes.
3. Every time, a recession occurs, unemployment shoots up sharply and then takes a long time to fall again even after economic growth has returned.
4. The high inflation rates following the OPEC oil shocks (and the elevated expectations that accompanied the high rates) only really were expunged by the severe recessions of the 1980s and then early 1990s.
The sustained output gaps were crucial in moderating inflation rather than any move to make the Bank of England ‘independent’.
And they came at the cost of huge income losses and elevated unemployment levels.
In all this period (except the GFC) the MPC of the Bank of England would never tell the Government “that monetary policy cannot operate”, which is the condition within Labour’s Fiscal Rule that allows the Government to “suspend” its operation and use fiscal policy more broadly (over and above the Golden Rule) to stimulate the economy.
Yet, it is obvious that on several occasions during this period, the fiscal deficit would have had to be increased rather significantly to arrest the output and employment losses.
The next graph shows the fiscal and monetary policy shifts from 1970 to 2014 (using annual data which presents average positions over each year).
The fiscal policy shift is the annual change in the fiscal deficit as a per cent of GDP – so if it is positive it means policy overall is tightening and vice versa.
The monetary policy shift is the annual change in the Bank of England’s policy rate – so if it is positive (rising) then rates have risen over the year and vice versa.
So you can see in the late 1970s, monetary policy was tightened sharply as it was again in the late 1980s (leading into currency strife that came to a head with Black Wednesday – September 16, 1992).
In both periods, the interest rate levels were also very high (see previous graph).
The previous graph shows that deep recessions followed soon after.
But look at the fiscal policy shifts. There was a substantial contraction starting in 1979, which continued through to the late 1980s, with some cyclical pressure on the structural policy positions in 1983 and 1984. The discretionary policy stance in this period was very contractionary and reinforcing the monetary policy shifts.
Macroeconomic policy settings were thus significant contributory factors to the major recessions and elevated unemployment that marked (scarred) these periods.
The average fiscal deficit over this period, despite the periods of extreme austerity, was 3.42 per cent of GDP. During this time span, there were several periods when unemployment was to excessive and required higher fiscal deficits than the Government was willing to pursue.
In other words, the average should have been much higher given the behaviour of the non-government sector had the Government privileged a full employment strategy.
We don’t have coherent government capital infrastructure spending for the entire period (the current national accounts series starts at the March-quarter 1997).
But the public investment to GDP ratio over that period averaged just 2.4 per cent.
For the period, 1970-71 to 2016-2017, the current fiscal balance in Britain averaged 1.3 per cent of GDP while the capital balance has averaged 2 per cent.
The following graph shows these two balances over that period.
This period, of course, includes the very damaging periods of fiscal austerity which sent unemployment skyrocketing.
If I set the current fiscal balance to zero over the periods of austerity, for example, which would have lessened the increase in unemployment, the average rises to 1.6 per cent of GDP.
The point is that during these periods, the Bank of England;s MPC would not have ceded control of macroeconomic policy to the Treasury in order to suspend the Fiscal Rule.
But it would be improbable that growth could continue unless the capital deficit rose dramatically and was well outside anything approaching historical averages.
This would be in the context of an already elevated capital effort given the laudable Labour Party Mandate to increase productivity and nationalise some major components of essential services, and, to pump money into the NHS, education, and the environment.
The government can clearly raise taxes to match any extra recurrent spending it deems necessary to fulfill its mandate, but that defeats the purpose that a recurrent deficit at several times during this period would have been required.
My conclusion is that the Government would not be able to keep within their debt targets during periods when the MPC had primary carriage under the Fiscal Rule.
The more obvious conclusion is why would they bother setting themselves up for failure in this way.
Answer: Ideology (or a surrender to an ideology for perceived short-run political purposes).
The many, though, do not benefit from this framing as history tells us.
MMT policies would render the currency worthless
This was the claim made by a senior advisor to the Shadow Chancellor in Britain, which motivated this exploration in the first place. I didn’t set out to attack the British Labour Party. I just wanted to correct lies being spread about MMT by those who had fallen prey to neoliberal framing.
To repeat, this is what was written in a social media exchange a week or so ago:
MMT is just plain old bad economics, unfortunately, and a regression of left economic thinking. An economy “with its own currency” may never “run out of money”: but that money can become entirely worthless … its prescriptions are close to catastrophic … Any country that isn’t the US trying to apply MMT’s prescriptions would find itself in the same position.
As I noted in – MMT is just plain old bad economics – Part 1 – there are no non-MMT policy prescriptions.
Please read that again if you didn’t get the point being made.
In that sense, what we are arguing about is what might be the progressive policy options that flow from an understanding of MMT.
That is the only sensible way to frame this.
It is not sensible to attack MMT as a body of work because Bill Mitchell, as a left-leaning progressive, for example, wants legislative bans on the financial sector engaging in speculative activities that do not enhance the capacity of the real economy to deliver better outcomes to workers and their families.
Or wants banks to carry all their assets on their own balance sheets.
Or wants the government to outlaw trade with nations that abuse the rights of trade unions to form.
Or wants governments to introduce legislation that caps corporate salary payments and brings them into line with social standards.
Or wants governments to refrain from issuing debt of any kind to private markets, which just ends up as corporate welfare.
Or is happy for the government to run continuous fiscal deficits if by doing that it is providing income support to the non-government sector to allow it to reach its savings aspirations while still maintaining full employment.
All of those ‘policy prescriptions’ come from my understanding of MMT as one of its original architects but reflect my value-system (my ideological disposition).
I could have said I want governments to run surpluses and squeeze the hell out of the non-government sector in order to create an elevated pool of mass unemployment because I know that will suppress wage demands and allow capital to get a greater share of national income.
That would be a ‘policy prescription’ that might reflect a right-wing thinker. Both policy stances could be derived from a firm understanding of MMT.
I doubt from earlier statements and Tweets etc that have followed that this nuance has ever been understood by the defenders of Labour’s Fiscal Rule.
So what could the Shadow Chancellor’s advisor be thinking about?
First, take the Labour Party’s current policy – Our Manifesto – which outlines a range of policies that a new Labour government would pursue.
1. “Creating an economy that works for all” – this includes ensuring workers get better pay (including women), bringing the financial system to heel, increase public investment etc.
All of which a progressive person like me would support.
Although I notice the Manifesto does not have a commitment to full employment which is disturbing, especially in the context that the Party announced it would consider introducing a UBI.
So perhaps the Shadow Chancellor’s advisor think a commitment to full employment is going to render the currency worthless. I wondered about that in Part 1.
2. “A fair taxation system” – clearly a progressive ambition.
Despite the nonsense I have read on Twitter in the last days (unfortunately because people keep copying me into their rants) that MMT proponents do not think taxes are important, the reality is that taxation plays a central role in the understanding MMT provides about the operations of the monetary system and the capacities of the currency-issuing government within it.
What we don’t say, however, is that the government has to ‘tax the rich’ (or anyone) to raise funds in order that it can spend.
That error (taxes fund spending) is inherent in the Labour Party’s fiscal rule and the many statements that the Shadow Chancellor and his staff have made over the last several years.
That factual error and associated framing is not a reflection of a progressive position in any shape or form.
Yes, I want to tax the rich. But not to get their money. Rather, to deprive them of that purchasing power. Two very different things.
I want them to have less resources as part of a process to limit their power in society.
But then on Twitter the idiots have been banging on about how MMT (and yours truly) have nothing to say about power in society. Good try!
3. “Infrastructure investment” – yes, I have consistently argued for more public investment in capital goods – better schools, hospitals, universities, public transport, parks, gardens, etc etc.
I have also consistently argued that nationalisation should be a central strategy for a progressive government to get essential services like transport, energy, telecommunications, etc back into public hands to deliver benefits for all and take private profit out of the equation.
4. “Transforming our financial system” – all of Labour’s policies here I would support. But then I would go further as above.
5. “A new deal for business” – including forcing companies to broaden their responsibilities (public, environment, etc) are all fine.
6. “Widening ownership of our economy” – including nationalisation of essential services, helping workers take over companies, etc – all fine.
7. “Sustainable energy” – excellent.
8. “Balancing the books” – I put this last for obvious reasons, even though the actual Manifesto places it earlier in the ordering of the policy areas.
Given that most of the policy options outlined in Areas 1 to 7 are unobjectionable it must be the statements that MMT proponents have made under “Area 8 Balancing the Books” that the Shadow Chancellor’s advisor thinks will send the currency worthless.
Which is why I have spent some time in Parts 1 and 2 of this series outlining what the Fiscal Rule means and its implications.
The Manifesto tell us that:
Our Fiscal Credibility Rule is based on the simple principle that government should not be borrowing for day-to-day spending.
What “simple principle” is that?
Answer: mainstream macroeconomics.
MMT response: why would a currency-issuing government be wanting to borrow at all?
So this is the nub.
The statement that MMT would drive the currency worthless must be predicated on the fact that we argue that:
1. There is no particular issue with a government running a continuous fiscal deficit as long as inflation is stable and the saving aspirations of the non-government sector are being met. In other words, as long as the economy is operating at full employment.
My value system would add the constraint as long as this level of economic activity was also environmentally sustainable.
2. There is no need for a currency issuing government to issue any debt to match its net spending – whether the net spending is composed of a recurrent spending deficit and/or a capital spending deficit.
Such debt-issuance amounts to corporate welfare because it provides a credit-risk free asset to the non-government speculators which they can use to price other assets or seek as a safe haven (and guaranteed annuity) when there is uncertainty.
A progressive government has no reason to continue practices that were relevant during the fixed exchange, convertible currency period following World War 2.
3. Having said that, there is no extra inflation risk involved from a government that runs a fiscal deficit and matches it with debt issuance compared to a government that runs the same fiscal deficit and just instructs the central bank to credit relevant bank accounts in the non-government sector.
The inflation risk is in the net spending not the monetary operation that might accompany it.
There is an inflation risk in all spending (government, private domestic – consumption and investment, external exports).
There is nothing particularly unique in this regard with respect to government spending.
4. Taxes are issued to create a demand for the currency rather than to fund government spending. There is no need to tax the rich to get funds that will allow the government to spend. We might want to tax the rich more to reduce their access to resources and their power.
5. The idea of central bank independence is false. Even at the operational level, the central bank and treasury functions of government have to work together closely on a daily basis to ensure the management of the cash system is effective (meaning: to ensure the central bank can meets its policy target).
This operational sense is quite apart from the fact that the central bank is always a creature of the government. Claiming it is independent is just a depoliticisation strategy.
So trying to map those points into something we might call an “MMT policy prescription” is difficult.
But I suppose the Shadow Chancellor’s advisor thinks that running continuous deficits will be catastrophic.
Or reframing the relationship between the central bank and the treasury so the public understood clearly what the operational links that bind the two together are.
Or announcing that the Government is no longer issuing any debt to match its net spending.
Which if you think about it just means that we are really back to Britain circa 1976 with Denis Healey lying about the need for the British government to borrow from the IMF because it has run out of money.
That lie was driven by Healey’s growing acceptance of Milton Friedman’s Monetarism and the microeconomic analogue which demanded governments extensively deregulate the labour and financial markets and tilt the balance of power firmly into the hands of capital.
It was driven by the false belief that global financial capital was more powerful than the legislative capacity and sovereignty of the national government.
It was driven by the rejection of any use of capital controls or other legislative curbs on the unproductive currency speculation.
Healey could have easily trapped the speculative funds that were attacking the pound at the time. But he was ideologically against that and was lunching with IMF officials who were leading the charge in rejecting these sensible legislative imposts on out-of-control profit seekers who only wanted to benefit themselves without regard for the costs their actions might impose on anyone else.
Thomas Fazi and I deal with this period in detail in our latest book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
The following blog posts provide some further background and detailed analysis (among other blog posts I have written on this topic):
1. On the trail of inflation and the fears of the same … (December 3, 2015).
2. Globalisation and currency arrangements (January 11, 2016).
3. The capacity of the state and the open economy – Part 1 (February 8, 2016).
4. Is exchange rate depreciation inflationary? (February 9, 2016).
5. Balance of payments constraints (February 10, 2016).
6. Ultimately, real resource availability constrains prosperity (February 11, 2016).
7. The British Monetarist infestation (February 25, 2016).
8. The Monetarism Trap snares the second Wilson Labour Government (March 9, 2016).
9. The Heath government was not Monetarist – that was left to the Labour Party (March 15, 2016).
10. Britain and the 1970s oil shocks – the failure of Monetarism (March 16, 2016).
11. British trade unions in the early 1970s (March 31, 2016).
12. Distributional conflict and inflation – Britain in the early 1970s (April 7, 2016).
13. The British Labour Party path to Monetarism (April 13, 2016).
14. Britain approaches the 1976 currency crisis (April 21, 2016).
15. The 1976 currency crisis (April 26, 2106).
16. The Bacon-Eltis intervention – Britain 1976 (May 11, 2016).
17. British Left reject fiscal strategy – speculation mounts, March 1976 (May 18, 2016).
18. The US government view of the 1976 sterling crisis (May 25, 2016).
19. The British Cabinet divides over the IMF negotiations in 1976 (June 8, 2016).
20. The 1976 British austerity shift – a triumph of perception over reality (June 13, 2016).
21. The conspiracy to bring British Labour to heel 1976 (June 15, 2016).
22. The British Left is usurped and IMF austerity begins 1976 (June 29, 2016).
23. Why capital controls should be part of a progressive policy (July 6, 2016).
Quite a body of work in fact, which provides detailed responses to the questions about whether currencies can be made worthless, what governments can do when their floating currency is under attack from speculation, what ultimately drives material well-being.
The summary might be that:
MMT does not deny and has never denied that crises, particularly pertaining to currencies can occur.
These will be more likely to occur when the currency is pegged in some way and the central bank is committed to maintaining the parity.
These will be more likely to occur if the government borrows in a foreign currency.
These will be more likely to occur if non-government spending growth is driven by accessing foreign currency denominated credit and repayment is dependent on strong export markets.
These will be more likely to occur if the government fails to maintain full employment and a strong investment climate for firms.
These will be more likely to occur if there is a lack of governance capacity, unstable political processes prone to military takeovers, and endemic corruption among public officials, an inability or unwillingness to maintain the rule of law, with contractual certainties, and things of that ilk.
There is no reason why a currency crisis would follow if the government announced it was no longer issuing debt to match its net spending.
If you are statistically and econometrically competent then you will know that there is no robust statistical result linking fiscal deficits to currency crises.
We can find extreme cases in every dataset. But sound statistical practice does not take ‘outliers’ into account when trying to establish generalised behaviour about the data generating process that is disclosed by real world data.
I have done a lot of this type of modelling, including at the very sophisticated end.
Capital is more interested in chasing profit-making opportunities.
A well governed, rule of law abiding Britain with a government building and maintaining first-class infrastructure, with excellent public services (energy, transport, health, education, training, environmental certainty, etc), with a highly skilled labour force, and regulative certainty, would be a magnet for profit-seeking private investment.
Why would anyone think that the currency markets would dump the pound when it would be the vehicle that was necessary to acquire in order to pursue these profitable investments?
And, if, in some extreme and rare instance, speculative agents started to act in a destructive way, then the government has the capacity to insulate the economy from those effects.
Think about what Iceland has just demonstrated.
The claim that running continuous fiscal deficits and not issuing debt would drive a currency worthless discloses a deep insecurity in those who propagate it.
It also buys into the neoliberal frame that seeks to stop governments spending on welfare for the low-income citizens, while retaining the corporate welfare from debt-issuance.
The financial markets are just not that powerful – that is the reality.
They rely on the legislative framework and the regulative structure set by government to operate. Without that framework being supportive to destructive speculation, they are considerably constrained.
Further, the central bank can always control yields on government debt, which makes domestic bond markets supplicant not in any way running the show!
Finally, there have been a lot of Tweets saying that the position taken by MMT proponents on macroeconomics (for example, that the government does not need to tax to raise funds in order to spend) is not politically savvy and that progressives have to frame macroeconomics in the language and metaphors that dominate in the public debate.
I have written about this regularly. The last blog post that covered this sort of reasoning in any detail was – The ‘truth sandwich’ and the impacts of neoliberalism (June 19, 2018).
As George Lakoff, a leader in understanding how people come to accept statements that pertain to their reality, said:
Start with the truth (if you lead with the lie, you privilege it) …
Avoid retelling the lies. Avoid putting them in headlines, leads or tweets … Because it is that very amplification that gives them power.
This advice is well grounded in cognitive linguistics and cognitive psychology. Those who think they are playing a politically savvy game by using neoliberal concepts to advocate progressive policy agendas just reinforce the neoliberal policy agenda.
A huge literature from those who know these things supports that conclusion. It is political idiocy to use neoliberal framing to advance progressive policy debates.
The smart guys out there who purport to give advice to Labour parties around the world don’t seem to understand the knowledge that that extensive research literature has generated.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.