British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
This week’s theme seems to be the about how the so-called progressive side of the economic and political debate keeps kicking ‘own goals’ (given a lot of this is happening in Britain where they play soccer) or finding creative ways to ‘face plant’ (moving to Europe where there is more snow). Over the other side of the Atlantic, as America approaches its mid-term elections, so-called progressive forces who give solace to the New Democrats, aka Neoliberal Democrats are railing against fiscal deficits and demanding that the left-liberals in the Democratic Party be pushed out and that the voters be urged to elect candidates who will impose austerity by cutting welfare and health expenditure and more. And then we have progressive think tanks pumping out stuff about banking that you would only find in a mainstream macroeconomic textbook. This is the state of play on the progressive side of politics. The demise of social democratic political movements is continuing and it is because they have become corrupted from within by neoliberals. And then we had a little demonstration in London yesterday of the way in which the British Labour Fiscal Rule will bring the Party grief. The Tories are just warming up on that one.
There were a number of things that caught by attention recently that demonstrated the point clearly.
The first was from the so-called US-based Progressive Policy Institute, which markets itself as being “radically pragmatic” whatever that means.
It says it is the “the intellectual home of the New Democrats and earned a reputation as President Bill Clinton’s ‘idea mill'”.
It is about introducing “mold-breaking ideas”.
I suppose they might have thought the pernicious – Personal Responsibility and Work Opportunity Act – which was a signature Clinton initiative was ‘mould-breaking’.
That policy didn’t attack the real issue of welfare dependence – low-wage work and underemployment – but rather personalised those systemic failures and set about destroying the safety net in America.
Peter Edelman was a lawyer in the Clinton Administration but “resigned to protest Bill Clinton’s signing the welfare reform legislation”.
He noted in his 2001 Edward C. Sobota Memorial Lecture to the Albany Law School (New York) – Poverty & Welfare: Does Compassionate Conservatism Have a Heart? – the Law:
Let me say quickly what this 1996 law did … The message was cut the welfare rolls. The larger politics was, we’ve had too much welfare, and too much dependency and that is the reason why people don’t take responsibility for themselves, why they go out and have babies when they are not married.
The result was that a “huge decrease, well over fifty percent” in people on welfare rolls and “forty percent of those no longer on the rolls … have no job and no welfare”.
He said that this amounted to “over one million women and over two million children, neither have a job nor have cash assistance”. He called them “America’s disappeared”.
He noted that “homeless shelters for mothers and children in every city in America are overflowing”.
Many were pushed off the welfare rolls because they couldn’t attend interviews due to “child care or perhaps didn’t even know they had been summoned”.
The result was that “the bottom ten percent of single mothers … actually lost income over the last four years” and entered “extreme poverty”.
Those who managed to get jobs have such low wages that “they are still in poverty”.
That was a Democrat President claiming to be following a progressive policy line.
I don’t know what role the Progressive Policy Institute played in that shameless attack on the disadvantaged in America but they certainly influenced the policies adopted by the so-called New Democrats, which was a US analogue of the Third Way Blairite disasters that has severely compromised the British Labour Party and the Australian Labor Party.
New Democrats are just neoliberals.
They favour privatisation deregulation, free trade with investor dispute mechanisms, cutting welfare (as above), running fiscal surplus via public spending cuts and cutting taxes for high income earners.
In his 2013 book – Up from Conservatism – journalist and editor Michael Lind said that the rise of the New Democrats which he equated with Neoliberal Democrats had fractured the Democratic Party.
He said that the “left-liberals … are liberal both on economic issues … and on social issues”. The Neoliberal Democrats were conservative on economic issues but liberal on social issues.
He concluded that:
… left-liberals and neoliberals really should not be in the same party. Neoliberal Democrats have more in common with elite economic conservatives (if not with the populist far right) than they do with left-liberal Democrats.
He wrote that:
American overclass elites use their control of both the neoliberal Democrats and the conservative Republicans deliberately to weaken unions, slash entitlements, and raise taxes on working Americans – and then, when their victims notice what is going on, they blame the results of pro-overclass policies on ‘historical forces’ which are usefully vague and even more usefully unstoppable.
These explanations – globalisation, etc – are “not an explanation” but “an alibi”.
This is the theme of our current book- Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
These neoliberals who parade as something progressive are experts at depoliticising their compliance with the financial market elites who urge them to deregulate and privatise and introduce venal attacks on the welfare of the poor.
The Progressive Policy Institute’s is urging the Democratic Party to avoid the “ultra-left’s ‘free for all’ agenda”.
In their Op Ed (October 16, 2018) – Kim for USA Today, “Socialists won’t be on many ballots this fall. Moderate Democrats are surging – we read that:
… the progressive left have pushed hard this cycle for a campaign agenda heavy on government giveaways, such as free health care (“Medicare for All”), free college, guaranteed jobs and perhaps even free money (“universal basic income”) … [but] … the insurgent left has been broadly rejected in one primary after another …
The PPI’s latest salvo (October 18, 2018) written by one Ben Ritz who is not long out of an undergraduate program – Defunding America’s Future: The Squeeze on Public Investment in the United States – is typical of the stuff the so-called ‘progressives’ are pumping out these days.
The Report opens with:
Policymakers who have chosen to slash critical public investments in future generations while simultaneously saddling these generations with a mountain of debt are jeopardizing the long-term economic health of the United States.
It goes on to talk about “America’s deteriorating fiscal condition” which must be addressed to “avoid fiscal ruin”.
The case is made by demonising the US public debt ratio and claiming that “all this borrowing comes at an enormous cost …”
He praises the previous “Clinton Administration” which “was in its fourth consecutive year of budget surpluses” but fails to mention that those surpluses precipitated the massive rise in private debt, which ultimately caused the GFC.
The PPI wants to rein in “spending on Medicare, Medicaid, and Social Security”.
At one point I got confused. I thought I might have been reading the absurd document put out earlier this week by the President’s Council of Economic Advisers (CEA) – The Opportunity Costs of Socialism.
That Report is hysterical by the way (funny and overwrought).
Talk about ‘own goals’ – it seeks to criticise single-payer health care but then presents evidence that shows it is superior.
At one stage it is shown that the ‘socialist’ states of Denmark, Norway, Sweden and Finland are inferior to the ‘free market’ Amercia because the “weekly cost of owning and operating a pickup truck” is higher in the former.
But you can see my confusion between it and the PPI tirade on fiscal deficits etc.
They want the Democrats to seize the day to topple the “king of debt” (Trump) but this will require significant increases in taxes and even larger cuts to “expensive health and retirement programs.”
It rails against those elements in the Democratic Party that “propose tens of trillions of dollars in new social spending on top of the unfunded promises the federal government already has made, without offering credible ways to pay for either.”
Perhaps young Ritz should read a bit more widely and understand the economics a bit better.
But, talk about doing the work for the conservatives.
Just as Michael Lind concludes that “left-liberals and neoliberals really should not be in the same party”, organisations such as the PPI should stop using the term progressive.
Then we read that the recent news from Spain (October 15, 2018) – El Gobierno promete a Bruselas el mayor ajuste estructural de los últimos seis años y reducir el gasto hasta el 40,9% del PIB.
The coalition government in Spain which combines the Spanish Socialist Workers’ Party (PSOE), Podemos and Basque and Catalan nationalists was formed after the Conservative PP were thrown out in a no confidence vote in June 2018.
Podemos, which is notionally against austerity but spouts neoliberal economic ideas, had forced the Government to adopt some new spending measures – raising pension, improving paternity leave and raising the minimum wage.
But in drawing up the new fiscal statement for 2019 which it will send to Brussels for approval, the Sanchez government has foreshadowed cuts in public spending – to its lowest level against GDP since 2007.
The Government told the European Commission that:
Será el mayor ajuste estructural realizado en nuestro país en los últimos seis años …
In English (perhaps we should leave it in Spanish!): “It will be the biggest structural adjustment made in our country in the last six years …”
They also are increasing taxes.
The fiscal austerity plan was endorsed up by the Autoridad Independiente de Responsabilidad Fiscal (AIReF) or Independent Authority for Fiscal Responsibility – the unelected and unnaccountable technocrats, which is music to the European Commission’s ears.
Depoliticisation – in action.
And need I remind you that Spain’s unemployment rate is still 15.8 per cent and its youth unemployment rate is 33.8 per cent.
And also need I remind you that in 2016, the European Commission turned a blind eye to the rising and illegal deficits under the PP government because the growth that those deficits drove was good for the PP party coming into the national election later that year.
I wrote about that sordid illustration of European Commission hypocrisy in this blog post – Spanish government discretionary fiscal deficit rises and real GDP growth returns (April 12, 2015).
Now, the Socialist Party is doing the European Commission’s bidding. Typical.
So from fiscal policy to monetary policy.
And the ‘progressive’ dilemma continues.
There was a research paper published by the Greenwich Political Economy Research Centre (at the University of Greenwich) – Macroeconomic Evidence and Policy Proposals Beyond Unconventional Monetary Policy (June 13, 2018) – which purported to examine the divergences in prosperity among Eurozone Member States.
The analysis of unemployment and output gap divergences was fine.
But then things became a bit tricky when it started talking about the ECB’s Quantitative Easing program.
It aims to “analyse whether QE-led expansion of the money base has effectively triggered an expansion of lending activity to the real economy”.
And my first question when I read that is why would you seek to analyse that issue?
Well, they have bought the mainstream line that among other things QE stimulates a “bank lending channel” because it allegedly “allows banks to concede new loans more easily”.
Where did they get that from? A mainstream textbook that says loans are reserve-constrained?
After a graph and some further writing, they conclude that:
By the end of 2017, almost 40 percent of ECB-created liquidity was kept idle on credit institutions’ deposit accounts at the ECB itself rather than being fruitfully utilised for the extension of new loans to the real economy. This is an astonishing amount. It goes without saying that this fact considerably diminishes the alleged capability of QE to stimulate the provision of loans to the real economy from the supply side by injecting new money into the economy.
The “alleged capability” was always a figment of the mainstream economists and the journalists who blindly parroted the textbook narratives.
In this blog post – Quantitative easing 101 (March 13, 2009) – which was written very early in the GFC and at a time when QE was in vogue – I demonstrated that:
1. QE is just an asset swap – reserves for bonds.
2. The asset swap drives up prices of the bonds, which lower their yields, and this might stimulate borrowing under some circumstances.
3. Banks do not loan out reserves (except overnight to each other).
4. Loans create deposits and are not reserve constrained.
5. Reserves are added later if necessary.
6. Loans are restricted by the demand from credit-worthy borrowers.
So why is a heterodox economics research unit still publishing stuff that is based on pure mainstream myths about how the banking system works.
Their graph entitled – “Excess reserves-money base ratio” does not provide any information about the “the will or capability of credit institutions to provide credit to the real economy in order to finance investment (or consumption) expenditures and induce economic recovery.”
It is no surprise that the demand for credit slumped dramatically in the Eurozone during 2008 and is yet to fully recover.
No-one was wanting to borrow when governments were imposing fiscal austerity and unemployment was rising.
The ECB could do very little about that using the sort of instruments that could get through the scrutiny of the European Commission. QE was, in fact, a breach of the Treaty but the Council turned a blind eye because they knew that it was the only thing keeping governments solvent.
What the ECB could have done to stimulate activity was to directly fund government spending on job creation and infrastructure building and give euro-denominated handouts to citizens.
But that would have been a step too far and it would be a fiscal operation anyway.
The Greenwich Paper is correct to say though that:
There are some good reasons to believe that even ultra expansionary unconventional monetary policies, if not coordinated with other policy measures, cannot be the optimal policy recipe in order to revitalize fast, sustained and sustainable economic development in the eurozone.
That insight applies generally – not just to the Eurozone.
Monetary policy is an inferior tool for counter-stabilisation.
It is indirect, non-targetted, and ambiguous in impact.
The Greenwich Paper lists alternative policies to help combat divergence but only considers fiscal policy reform in the context of the European Investment Bank being given more funds and a new agenda (to fund new businesses and innovation processes). More subsidies to private business in other words.
And, finally in this trip across ‘progressive’ policy space, we end up in Britain and the Fiscal Credibility Rule. Yes, I haven’t given up on that topic just yet.
Yesterday, we saw a classic example of how the Rule can be used (vicariously or not) to politically bash the Labour Party.
On September 18, 2018, Verso published a new book – Economics for the Many – that the Shadow Chancellor and his staff put together as a result of his New Economics conferences.
There is a pot-pourri of offerings in the book from various writers and Verso (the publisher) claims that the “essays … lay out a vision for a new economics”.
Except it is hard to distinguish the economics in the book from old mainstream approach that has helped create the problem the book is meant to be addressing.
The problem facing British Labour, if this collection is anything to go by, is that there is a confused policy message coming out.
The Financial Times, which channels the sentiments of the corporate and financial sector, picked this up in their review (September 24, 2018) – Economics for the Many, edited by John McDonnell.
The FT captures the tension that is evident in the book:
One chapter presents a pretty orthodox macroeconomic grounding with sensible budgetary rules. Another complains about the “disastrous consequences” that have arisen from “those who worry endlessly about ‘fiscal rules'”.
I don’t need to tell you who wrote the “orthodox macroeconomic grounding with sensible budgetary rules”.
It extols the virtues of the Labour’s Fiscal Credibility Rule along the lines that we are now familiar with.
In the “orthodox” macro chapter, Simon Wren-Lewis muses about whether the estimates of tax revenue will be sufficient to match the spending proposals in the Manifesto and some fiscal dynamics – all couched in the language of the Rule – with the accompanying neoliberal framing.
He mused about what would happen if “given the Brexit slowdown, interest rates would have remained at their lower bound.”
As I pointed out on Tuesday in my blog post on Tuesday – The British Labour Fiscal Credibility rule – some further final comments (October 23, 2018) – his assumption that the British policy rate was at the zero-lower bound, upon which a lot of the confidence in the viability of the Fiscal Rule is based, is flawed.
Even when rates went as low as 0.25 per cent in August 2016, the Bank of England’s Monetary Policy Committee did not consider the lower bound had been reached.
And that was after the worst recession in decades.
He also tried to dismiss concerns that the estimates of tax revenue growth provided by the Institute of Fiscal Studies would force the Labour Party to violate the Fiscal Rule.
It was a tortured sort of analysis – defensive and missing the point entirely that the purpose of fiscal policy is not to hit a particular set of fiscal (financial) targets, but, rather, to ensure that there is full employment, price stability and sustainable growth, which is equitably shared by all citizens rather than being overwhelmingly captured by the top-end-of-town.
Yesterday, in the context of the Tory promise to end austerity, the British Prime Minister verballed him to put pressure on Labour in Parliament.
She held the book up in the House of Commons and said:
I actually have a book here that’s edited by the Shadow Chancellor … And in article by an economic adviser to the Labour Party he says about their last manifesto: ‘The numbers did not add up’ … [and concluded] … that this was a welcome feature and largely irrelevant.
The PM also said the Fiscal Rule would return the British fiscal situation to “square one” (that is, bad).
The reality, if you have read the chapter, is that Wren-Lewis actually wrote that the IFS had said the numbers didn’t add up but if that was to be the case then it didn’t really matter anyway.
Because the fiscal stimulus would be good for the economy
So while the PM was crudely misinterpreting the text in the chapter yesterday, the Fiscal Rule was still used as a battering ram. And as time passes, the Tories will refine their attacks for sure.
The problem is obvious.
By couching the Labour Policy in this ‘fiscal straitjacket’ (the Rule), all sorts of erroneous claims will be made about it.
The political focus will be on tax estimates, spending overruns, etc all of which are largely incidental.
When this was pointed out, the Shadow Chancellor’s staff claimed that those making these statements were just doing the work of the Tories.
That is not true at all.
The Fiscal Rule, given its construction and language, is already doing the work for the Tories. And they will use it to crucify Labour whenever they can.
If the Fiscal Mission was rewritten to talk about full employment, price stability and sustainable growth, which is equitably shared by all citizens and the public was continually re-educated to understand how all of this is possible via the deployment of real resources without a focus on largely irrelevant ‘financial ratios’ then the Tories would be unable to mount crude attacks like the one the PM tried on yesterday.
This is not to say that within the Government, economists would not be interested in estimating tax revenues and spending patterns. Of course, policy effectiveness requires that any government has an idea of the quantitative outcomes of its policy interventions.
But all of that doesn’t have to become a public sideshow.
Further, regular readers will know I hate democratically elected governments outsourcing key policy analysis to so-called ‘fiscal commissions’ and I consider technocracies that have political status to be anti-democratic and dangerous.
That should not be read to mean there is no role for technocrats. Clearly, politicians are usually not qualified to generate detailed policy structures with appropriate forecasts etc.
So they always are reliant on those with technical skills to do this work.
The difference is that the work is contained within the Government and in the service of the government mandate. It should never be privileged to have a ‘political’ voice where some CEO of a fiscal commission makes press statements and releases public reports on their own bat.
Academics are there to hold governments to account – although mostly they don’t these days.
The public bureaucracy (where the technicians) are is there to serve the political process.
This blog post has traversed a number of issues which can all be linked to the one conclusion – a progressive politics needs to free itself from neoliberal language, constructs and economists.
The demise of social democratic political parties is largely due to their co-option by neoliberal economic forces which makes them indistinguishable from the conservatives on most issues that attract attention.
As Michael Lind concludes: “left-liberals and neoliberals really should not be in the same party”.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.