The effectiveness and primacy of fiscal policy – Part 3

This is the final part of my three-part series on the why I have confidence in the primacy of fiscal policy over monetary policy and eschew any proposals, by other Modern Monetary Theory (MMT) advocates or others, to replace the so-called ‘independent’ central bank, with an ‘independent’ fiscal authority, which they seem to think would take the ‘politics’ out of fiscal policy decision-making and focus it on advancing the well-being of the people. Such a proposal is not core MMT. It is an opinion that, in my view, is based on deeply flawed logic and would would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. In this final part, I extend the reasons that progressives should oppose such outsourced decision-making and, instead, advocate the introduction of processes that always make our elected politicians fully responsible for the decisions they take on our behalf. Our polity should be always be held accountable for those decisions and not be allowed to defer responsibility to an external source (like an ‘independent’ central bank or fiscal authority).

The objections to an independent fiscal authority – continued

Part 2 of this series ended with a criticism of the overall concept of independent central banks.

The point was that the calls for an independent fiscal authority seem to be based on the idea that if monetary policy is now administered by so-called ‘independent’ central banks, then if we reinstate the primacy of fiscal policy, we can achieve the same political separation from economic policy decision-making by creating an ‘independent’ fiscal authority.

The problem I indicated was that the whole claim about central bank independence is a neoliberal sham to allow elected politicians to depoliticise economic policy. Our central banks are anything but independent of the political process.

We now continue.

Second, who would appoint such a fiscal authority? Who would ensure its non-partisanship?

I often read that bodies such as the British Office of Budget Responsibility or the US Congressional Budget Office are non-partisan, because they are seemingly separate from the politicians.

But when you realise that they are stacked with mainstream macroeconomics, who push that distorted and erroneous view of the operations of the monetary system, you realise that they are not non-partisan at all, but rather, bastions of neoliberalism.

They also display a rigid Groupthink and generate biased and typically systematically wrong forecasts as a result.

So how would that be better than having the politicians taking responsibility for the policy stance?

Obviously, politicians have to take advice from its bureaucracy. A progressive government would need to ensure that the technical advice they received was pluralistic in origin and not dominated by mainstream macroeconomists.

Economic policy has to be informed by sociologists, psychologists, historians, heterodox economists and statisticians. None of those are likely to be appointed to a fiscal authority under current practices, especially given the dominance of mainstream New Keynesian economics in graduate programs.

Third, building on the last point, progressives who claim to prioritise democratic values, should never advocate establishing institutional structures that undermine those values and allow the elected politicians to avoid taking direct responsibility for the economics policies in place at any point in time.

I have written about this topic before and in my recent book with Thomas Fazi – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – we devoted some time to developing the argument against depoliticisation.

It will also feature in the followup book we are currently working on and hope to have out by the end of this year or early 2020. Hope springs eternal!

Depoliticisation has been a hallmark feature in the growing dominance of neoliberalism.

Dennis Healey, the Chancellor in the Wilson/Callaghan British Labour government used the ploy that the government had run out of money and had to go to the IMF successfully to effectively end the ‘Keynesian’ era in Britain and pave the way for Margaret Thatcher’s Monetarist purge on the public sector.

In his 2009 article – The Politics of Economic Policy Making in Britain: A Re-assessment of the 1976 IMF Crisis – Chris Rogers argued that governments that become co-opted by capital and seek to engender policy environments that provide a stable environment for private profits face a dilemma.

On the one hand, they want to appease capital. But, on the other hand, they need to stay popular to remain in power.

The contradiction here is that to appease capital, they sometimes have to introduce “policies likely to have social consequences for the labour movement – most obviously lower wages”, which undermines their broad popularity and their claims to be advancing the well-being of all.

The solution that neoliberalism invoked was to “to depoliticise difficult aspects of policy in order to shift any blame for their social consequences”.

The claim that the IMF was forcing Britain to introduce austerity in 1976 was a classic, early case, of this dishonest tactic to preserve political hegemony while ensuring policies that undermined the well-being of the majority were introduced.

Depoliticisation is about reducing the resistance of trade unions and social interest groups. It gives these groups no target to put pressure on.

It is part of a process to redefine the concept of the public sector.

It was accompanied by neoliberal constructs such as user pays that was situated within the broader practice of the so-called – New Public Management.

NPM saw the public bureaucracy abandoning responsibility for service delivery, and instead, became ‘contract brokers and managers’ for outsourced services, concepts such as social benefits (and policy targets) were subjugated to ‘business-type’ objectives like Key Performance Indicators (KPIs).

These KPIs tended to construct the government as a ‘business’ with customers receiving public services delivered by privatised or outsourced non-government organisations.

For example, the unemployed became ‘customers’ of privatised, former public employment service agencies.

The trend to depoliticisation was accelerated under so-called progressive governments such as the Blair Labour government in the UK and the Hawke-Keating Labor government in Australia.

In his 2001 article – New Labour and the Politics of Depoliticisation – Peter Burnham defined depoliticisation as (p.128):

… the range of tools, mechanisms and institutions through which politicians can attempt to move to an indirect governing relationship and/or seek to persuade the demos that they can no longer be reasonably held responsible for a certain issue, policy field or specific decision.

[Reference: Burnham, P. (2001) ‘New Labour and the Politics of Depoliticisation’, British Journal of Politics
and International Relations
, 3 (2), 127-149 – (library subscription required)].

He noted that the British Blair Labour Government fell prey to the narrative that social democratic governments (“Old Labour”) could not longer:

… meet the high expectations of its traditional supporters and trade union militants or convince financial capital of the probity of its economic policies.

The solution for Blair was to “build on the on the experience of the Major administration” by “placing at one remove the political character of decision-making”.

This is where the Labour Party’s obsession with ‘credible rules’ really became entrenched in social democratic practice.

And, unfortunately, they persist in the current British Labour Party’s Fiscal Credibility Rule, which I have written extensively about in the past.

British Labour and social democratic parties everywhere introduced (p.129):

… a form of technocratic managerialism emphasising the constraints imposed by ‘global capital’ …

The ‘constraints’ were unquestioned and these governments were willing to subjugate the interests of workers and general well-being to satisfy the unspecified demands of the amorphous financial markets.

So this move to ‘rules-based’ economic policy-making where technocratic managers are privileged over the discretion of elected politicians, was part of the general neoliberal narrative that the nation state was powerless in the face of the global capital.

We analysed that myth in detail in – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World.

Proposals to place fiscal policy decision-making into the hands of these depoliticised organisations are thus part of the core neoliberal attack on government discretion and policies designed to advance the interests of workers in general.

Of course, the proponents of these depoliticised arrangements do not blink when, in times of emergency, governments quickly intervene to prevent corporate losses, such as the large bailouts in the early days of the GFC.

Then, discretionary fiscal policy is just fine. Hypocrites.

The other point worth emphasising is that there is a deep literature that argues that these shifts under the neoliberal era have compromised our democracies.

For example, I can recommend the 2013 book by Wolfgang Streeck and Armin Schäfer – Politics in the Age of Austerity – which provides ample evidence that these depoliticised trends have reduced:

… the responsiveness of governments to voters.

The articles in the book argue that:

… democracy depends on choice. Citizens must be able to influence the course of government through elections and if a change in government cannot translate into different policies, democracy is incapacitated.

The way citizens have responded to this democratic deficit is to “turn away from party politics” and embrace extreme-type political movements.

Further, there is a robust literature in political science now that traces the way that these neoliberal processes have alienated citizens from the political process and have increased their distrust of politicians.

American sociologist Mabel Berezin’s chapter in Wolfgang Streeck and Armin Schäfer’s book draws a convincing link between depoliticisation, the demise of social democratic parties and the rise of right-wing populist movements.

[Reference: Berezin, M. (2013) ‘The Normalization of the Right in Post-Security Europe’, Politics in the Age of Austerity, Wolfgang Streeck and Armin Schäfer (eds), pp. 239-261.]

In his 2016 article, Colin Crouch (which is extends the analysis presented in his 2004 book – Post-democracy) argues that while “contemporary western societies” are different from the “world’s many dictatorships”, it remains true that the trend in these post-industrial societies is towards “post-democracy” where “the small circles of overlapping business lobbyists and a politico-economic elites” dominate the decision-making with limited accountability.

[Reference: Crouch, C. (2016) ‘The March Towards Post-Democracy, Ten Years On’, The Political Quarterly, 87(1): 71-75.]

He argues that depoliticisation has allowed the financial:

… institutions, and a few giant firms in a number of other economic sectors … [to] … become so great that they are subject to the rules of neither the market economy nor the democratic polity.

The operations of the European Union, in concert with the ECB and the IMF during the crisis was an advanced expression of this anti-democratic shift.

Sure enough, the “the deals were democratically ‘ratified’ by national parliaments, which also legitimated the temporary appointment of extra-parliamentary heads of government” but under threat of insolvency or some other form of technocratic takeover under the terms of the neoliberal Treaties.

Meanwhile the citizens become dislocated from the mainstream political process which not only gives the corporate interests are freer rein but also channels anxiety into extreme movements that are the anathema of progressive ideals.

Finally, depoliticisation is justified or advanced by appeal to the argument that we can no longer trust our politicians to do the right thing by the people. This ‘trust’ conjecture permeates the earlier points above.

There are several points that can be made and that would require a separate post.

But, briefly, we must develop institutions that ensure that those who enter politics are not just self-serving but rather committed to public service.

There are a lot of initiatives that could be thought of here.

For example, we must stop the growing ‘revolving door’ where corporate elites moves seamlessly into key political positions and then, when they become unpopular or otherwise, transit back into private positions and take their public knowledge and influence to advance the corporate interests ahead of the general well-being.

There are also many initiatives about funding of parties that will improve the quality of our polity.


To reiterate, the idea of creating outsourced fiscal authorities that are outside of the political process, is not a core MMT proposition.

I oppose the idea because I believe it is part of the neoliberal depoliticisation that has reduced our capacity to make informed judgements about the effectiveness of our governments.

It has given our elected officials cover to divert their own culpability in implementing policies that undermine our well-being and advance narrow corporate interests.

Progressives should never support such tendencies.

By forcing politicians to take direct and transparent responsibility for all economic decisions, we at least get a clear signal which we can deliver judgement on at the next election.

Upcoming Event – Bill Mitchell and Warren Mosler to speak at GIMMS Seminar – Birmingham, May 11, 2019

This event is being organised by GIMMS and will run from 14:00 to 17:00.

The event will be held in – The Library of Birmingham, The ICC, Broad Street, Birmingham.

Following the launch in March of the textbook ‘Macroeconomics’ and in anticipation of the inauguration of the MMT training college later this year, the event will focus on giving academics, teachers and the wider public the tools with which they can take a more critical approach to the subject by comparing and contrasting heterodox and orthodox approaches to theory and policy.

Join us for what will, without doubt, be an informative event aiming to challenge our preconceptions about how money works and how such an understanding offers a lens through which we can develop solutions to the pressing economic, social and ecological issues we face.

Tickets are £11.25 (including Eventbrite fee) and can be purchased HERE.

Tickets are going quickly.

Note: Neither Warren nor myself are receiving any payment for our presentations. The tickets go to cover the venue costs.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

This Post Has 18 Comments

  1. Totally agree Bill. The so called independent Banks are just a tool to control the existing structure forever. They came into being when the world became engulfed with neoliberal mania. An independent fiscal authority is exactly the same. Only the name is different.

  2. All large scale institutions, democratic included, must rely on a small army of professionals be it ‘experts’ or administrators or both working behind the scenes to guide, in good faith or otherwise, the decisions and help with implementation of what is decided. Typically this part of the institution transcends the institution itself. It tends to maintain its own culture, convictions, ideologies and traditions which may have the long forgotten origins or unrelated private motives. This is especially applicable to political institutions. Politicians are the front flashy end of these structures, a facade as it were. Many are short lived. All come and go. The institutions however remain. These supporting structures are typically populated with appointed, self- or otherwise, rather than elected individuals. Some of them may leave when ‘administration’ changes. Many however do stay. When not involved in ongoing ‘political’ projects these individuals may be employed by (or employ) private organizations with agendas or specific long term perhaps even political goals. This implies that in order to engender a true change it is not enough to simply replace a politician or two. One must replace an entire generation or two of so called advisors and other powerful yet unelected individuals who are able and willing to play a role in the process. This is a long term game which must begin at the very foundations of the society. Much of what society requires of us is against our nature or best interests. It is very hard to convince someone to act in a manner that will bear a fruit past one’s life expectancy.

  3. I can see why you are opposed to an Independent fiscal authority. However, would you be also opposed to fiscal policy rules such as “If Inflation expectations rise above X% the government cuts spending by Y% and/or raises taxes by Z%”

    I would have not a shred of doubt that any elected politicians would break such a rule at a the blink of an eye if it stood between him and re-election.

  4. I am amazed how much confidence you have in abilities and intensions of elected governments. Economist P. Bernholz counted 29 episodes of hyperinflation since 1914, all of which were created by reckless governments and their reckless fiscal spending.
    Cf. Peter Bernholz “Monetary Regimes and Inflation” , pp. 8

  5. Re: the UK OBR, this was, I’m sure, a device invented by George Osborne with a view to shackling future Labour governments in regard to their public spending.
    And he was probably counting on the likelihood that by the time a Labour government came to power, the OBR would have been there for so long that people wouldn’t even think to question its right or reason for existence.
    Not that he would ever take advice from the likes of me, but I’ve long thought that one of the first things that Jeremy Corbyn should do if he were to come to power would be to rename and reform the OBR to be something like “The Department of Full Employment”, and part of their remit could be to oversee the Job Guarantee (i.e. “advise” local authorities how to administer it, and make sure that they did so. Of course, the neolibs in its ranks would have to either go, or attend compulsory MMT Bootcamp… 🙂 )

  6. @ Dirk:

    From your own source read chapter 2.2 where the author differentiates between different monetary regimes. From those three, take only the third, “discretionary paper money standard”, because only these are relevant. Also from your source: “If several currencies are linked by a system of fixed exchange rates only one country can follow an independent monetary policy.” So exclude these from that long list of “episodes of hyperinfaltion”. The remaining cases are actually pertinent to MMT.

    In other words, how many of those “episodes of hyperinflation” happended in regimes with a sovereign floating currency, without having isued debt denominated in a foreign one and not in a system of fixed exchange rates? Not that many are left. Alone ten entries in the list refer to events that happened before the fall of Bretton Woods in 1971. The French entry is from 1789 (!) for christs sake! Not exactly a modern monetary system, methinks.

    The rest of the list is comprised of emerging and fledgling economies heavily reliant on imports and thus extremely susceptible to exchange rate fluctuations. Often having found necessary to borrow in order to afford their most basic needs, the additionally found themselves burdened by the interest payments on those debts. The most prominent case of hyperinflation in Zimbabwe involved a huge supply shock due to the expropriations in their agricultural sector as Bill expertly layed out a couple of weeks ago. The Venezuela situation has more to do with a sharp fall in oil prices and the pressure of sanctions than their money supply or government deficits, imho.

    As I already asked you before, where is the inflation to go along the massive spending in form of QE-programms in Japan & the US (even Europe despite the common currency)?

    How come the US has now had fiscal deficits since the Clinton era, a record sovereign debt and has increased their monetary base from 800k mio. dollars in 2008 to around 3 300k mio. today, and the inflation rate has been stable at around 2% (with brief periods at -2% on the onset of the GFC and 4% a couple of years after that)?

    At some point the neo-classicals need to refer to events in the present in monetary regimes that are actually in use today and stop crying Weimar almost a hundred years later. Otherwise they should continue their work in history instead of economics departments.

  7. @HermannTheGerman

    “As I already asked you before, where is the inflation to go along the massive spending in form of QE-programms in Japan & the US (even Europe despite the common currency)? ”

    The inflation is in massive increases in asset prices, which are, for good reasons not part of the consumer price basket, but if you are in the market for such assets the effect is the same. The Inflation is also in sharp increases in prices for non-tradable goods, like tuition fees, medical services and public services. The sharp rise in prices for these non-tradables was largely offset by falling prices for things like cars, consumer electronics etc., which is why headline Inflation rates are low. And yes, price baskets are a very flawed methods for estimating price level changes.

  8. Dirk,

    That is caused by having an unregulated market (often subsidized) on things everyone needs to have. In fact, it’s not even a market, you (mostly) don’t choose whether you have a heart surgery or a college degree, you just have to (mostly), so they can, and do, charge whatever they want.
    Which is why it shouldn’t be private in the first place.

  9. @ Dirk
    “And yes, price baskets are a very flawed methods for estimating price level changes.”

    But these are the methods available and used to build the case against expansionary fiscal policy. You don’t get to disregard the methods when you don’t like the results they yield. There is absolutely no reason to believe that any of the advanced nations’ economies is at full capacity and couldn’t actually respond to higher demand with higher outputs. There are quite a few posts in this blog about the farcical NAIRU and how it is used to justify any level of unemployment because of inflationary risks.

    Furthermore, I agree with Paulo Marques in that most of those price bubbles are due to monopolistic business practices and a predatory financial industry awash in cash to lend out but MISSING CREDIT-WORTHY CUSTOMERS! Instead they “invest” in real estate and provide big companies loans to buy their own stock back. Simply put, follow the money!

    A fraction of the fiscal assets created to “save” the banks and “guarantee their solvency” in the hands of those who actually need it and will most likely spend it (ever heard of propensity to spend?) would have had a much higher chance to actually have an expansive effect than that contractionary expansion BS we are continually fed by neo-classical economists. The recoveries* of the US vs the EU after the crisis proved as much. In fact there is a good case to make about Obamas stimulus package having been way to small.

    Finally, if the same amount spent on QE would have been spent directly in green infrastructure, single-payer healthcare and education (e.g. cancellation of student debt) and had it actually been too much, any infaltionary pressure could have been countered among other things with appropriate taxation to drain assets out of the system. Again, MMT includes extensive consideration of inflation control and Bill has plenty of posts on this subject in this blog.

    All in all, austerians have preferred to incur very real poverty and suffering on the populations of entire countries because of their unfounded inflation angst. They say we can’t turn on the AC in the servants quarters at 40°C because they might freeze to death!

    *I’m well aware of the “recovery” not actually reaching the bulk of the population, but I refer here strictly to gdp.

  10. I’ve got a lot of time for Bill. Love the blog.

    But for what it’s worth, I find that some of the noises that are being made MMTrs are sounding increasingly suspect. Not you Bill, your work is of a higher standard.

    Nevertheless, I would love to hear or be directed to an opposing view (in relation to what follows)…

    At the moment, the way I see it is that some proponents of MMT assume that government can get the inflation mix right through spending and taxation alone, if monetary policy is abandoned. (i.e interest rates at zero, nix govt bonds, or subordinated to fiscal policy which is effectively the same thing)

    In the back of my mind, I have the fact that monetarists in 1970’s swore black and blue that the private sector could manage inflation if only government abandoned fiscal policy (leaving the government as a nightwatchman, that would focus only on security and financial stability via the interest rate mechanism (RBA inflation targeting, Greenspan put))

    Many of those same Neoliberals (sic) thought that only the private sector should pick winners and thereby price risk (I.e. to reduce the impact of the business cycle).

    My reading (so far) is that MMTrs seem to be saying (and this is by no means clear to me) that only government should price risk (via a job guarantee) and thereby pick winners.

    Creating a job guarantee is great. I much prefer a job guarantee to say a deposit guarantee, or 1.75% p.a indexed over 30 years, or a “strong dollar.”

    But I don’t see how a JG is any different to a privatized banking system in a pragmatic sense. Of course the effectiveness of privatized banking system can be compromised by perverse short term incentives. But the effectiveness of bureaucratic economic allocation has it’s own set of potentially perverse incentives that must be negotiated.

    Putting feelgood and power theories aside, isn’t a “job” simply a pragmatic economic activity that creates and maintains a certain risk premium (and price signal) in the market, by putting labour power into action? Why is government in a better position to do this than the private sector?

    In any case, both MMT and monetarism appear to be extreme economic views, both share a common starting point: being popularized in extreme economic times…

    I suspect that MMT is only going to gain more traction as the western everyman (sic) spirals further into debt induced poverty. A job guarantee is a very lucrative proposition to a person with negative savings facing zero real growth in wages and a lifetime of interest repayments.

    Given my binary understanding (above), I fear the day that MMTrs will follow Maggie and be the next to say, TINA!

    Readers, please feel free to rip my reasoning apart, so that I may learn. That’s why I’ve posted. Thanks for opportunity to ask Bill!

  11. Rob@4:56, I never read anywhere that MMT says “that only government should price risk (via a job guarantee) and thereby pick winners.” I don’t even know how you might end up with that conclusion. But maybe (hopefully) I misunderstand what you mean.

    And there is no equivalence between a Job Guarantee and a deposit guarantee that I can see. And I can’t understand why you would even compare the JG to a privatized banking system- I don’t see the connection at all.

    And “isn’t a “job” simply a pragmatic economic activity that creates and maintains a certain risk premium (and price signal) in the market, by putting labour power into action?”… You are getting way too esoteric for me. I know what a ‘job’ is- and it isn’t anything about ‘risk premiums’ and ‘price signals in the market’.

  12. Thanks Jerry. I may well be connecting dots that are not there. I’ll go and read some more!

  13. Jerry – I’ve read some more… but I’m still a little confused. Hopefully you’ll set me straight.

    On the JG, Bill says…

    “By buying labour resources that have no alternative bid for their services the government shifts workers from the inflating sector to the fixed price sector and eventually price pressures stabilise.”

    “[If used in an inflationary period The JG] is a coercive mechanism that creates job losses, but, substitutes those losses with a Job Guarantee job instead of unemployment.”

    So the JG is an inflation hedge (or can be used as one), as well as being an aggregate demand stabiliser in times of deflation.

    When talking about the role of Bank Deposits in an economy Bill says:

    “At the individual bank level, certainly the “price of reserves” will play some role in the credit department’s decision to loan funds. But the reserve position per se will not matter.”

    “So the profitability of the loan desk is influenced by what they can lend at relative to the costs of the funds they ultimately have to get to satisfy settlement. So the price that the bank has to pay for deposits (one source of such funds) impact on the profitability of its lending decisions”

    “Domestically-sourced deposits are usually cheaper seeking funds on money markets and/or the central bank”

    So giving each Australian bank a AUD$20 billion marker (via the deposit guarantee) certainly affects the “price of reserves” and credit expansion.

    I go a bit further and say that if you accept that credit expansion affects inflation (even if that affect is modest or derivative), the deposit guarantee can also be seen as an aggregate demand stabiliser and inflation hedge, in much the same way as a JG is intended to function.

    That’s why I drew a comparison between the deposit guarantee and the job guarantee.

    To my mind both affect inflation – one does so by protecting the integrity of money capital, the other does so by protecting the productivity of labour.

    Drawing an equivalence between the decision makers in a JG environment and privatized banking is based on the same logic.

    Moreover, given the political pressure to intervene in the business cycle, both are policies that can be used to manipulate inflation in this context. (Of course these policies have other political aims, free lunches for bond holders or social well-being of the majority)

    Jerry, am I being muddle headed? Is there something here or am I reaching…

  14. Rob, you say “So the JG is an inflation hedge (or can be used as one), as well as being an aggregate demand stabiliser in times of deflation.” Yes that’s right- that’s exactly how I understand the idea. Plus there are ‘side’ benefits like avoiding long term unemployment and the social and personal problems that go along with that and ‘supply side’ benefits of keeping the otherwise unemployed attached to the labor market.

    Your ideas about bank deposit insurance are very interesting and I’m not sure I quite understand them. My guess would be that deposit insurance would slightly increase the willingness of people to make and keep deposits at a bank and therefore somewhat lower the banks cost of funding loans. Maybe that gets passed along in a lower interest rate to borrowers and maybe that increases the desire to borrow. Bank loans certainly add to aggregate demand and spending and any excess spending has the possibility of causing inflation. So if you can make a case that deposit insurance leads to more bank lending then it would add to aggregate demand. But I don’t see how this is counter-cyclical in nature and therefore I don’t understand how it would stabilize the economy. But I’m not the expert on this stuff so you might well be correct. It is interesting so thanks for explaining what you were thinking.

  15. Hi Jerry,

    I’ve been doing some more reading and try to figure out how deposit insurance can be counter cyclical.

    I think it has to do with the velocity of money.

    Talking about the velocity of money, Bill says…

    “…there are many studies which have shown that velocity of circulation varies over time quite dramatically.

    …. and more importantly, capitalist economies are rarely operating at full employment. The fact that economies typically operate with spare productive capacity and often, with persistently high rates of unemployment, means that it is hard to maintain the view that there is no scope for firms to expand real output when there is an increase in nominal aggregate demand growth.

    Thus, if there was an increase in availability of credit and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing real output to maintain or increase market share rather than by pushing up prices.

    In other words, there is no truism at the behavioural level. [Bill describes the monetarist’s assumption about the consequences of a constant velocity of money as an accounting truism].
    Whether this central bank operation causes an increase in the inflation rate depends on the state of the economy as noted above [by which Bill means the state of the velocity of money in the economy].”

    I say …the deposit guarantee acts to maintain or restore the velocity of money at the “behavioral level” and may therefore be used as inflationary tool by a savvy government in a counter-cyclical way.

    If government is trying to maintain or restore a certain level of the velocity of money it is by definition counter cyclical.

    By ensuring reserves, the government signals to the banking system.

    This signal is interpreted by the banking system as a broad based discount to prevailing loan risk premiums (which is always expressed in interest rate proxies for the “real” price of money).

    The bank may use this information to lend to existing customers on more favourable terms (the government’s immediate restorative aim), or make riskier loans (the lenders profit seeking goal and the neo-liberal mandarins’ ideological “side benefit”).

    In any case, the natural conclusion of my position is that should work in reverse.

    As the government withdraws their guarantee, the velocity of money should be affected and this affect should be expressed in increased risk spreads.

    I think that this may have happened globally in the market for senior financial debt (bank bonds) as a result of the Bail-in requirements of Basel III. Whilst deposit insurance was never applied to these bonds, the privileged status of bank bond-holders (amongst creditors) has been fundamentally altered (which I would argue is the same thing). So in that market, I would seek to identify a trend of widening spreads that would in turn indicate that velocity has dropped.

    Funnily enough, it might even be a factor in the current woes of Deutche Bank (but this a whole different story).

    Then again, maybe not. Again Jerry, please let me know if you think I’m talking smack and need to return to the textbooks.

  16. A quick rejoinder –

    How does an MMT resolve this current German conundrum any faster or more compassionately than neoliberalism?

    “Germany’s Economy Runs on Low Wages – The European giant can rely on an army of poorly paid workers to weather a downturn.” Bloomberg Opinion, L Bershidsky, April 9, 2019

    I admit that it could be that I’ve taken the bait here.

    Maybe the notion of a permanent “buffer stock” of low paid (largely migrant and female) workers is not the problem.

  17. Bill, I don’t know if you will allow this link, but, with great respect, I think you should consider doing so.
    It’s a 15 minute BBC Radio 4 programme, broadcast today (Tuesday 9th April 2019), and is quite timely, since we are discussing the IMF, and have been discussing the part played by the then UK Labour government, under Harold Wilson, and then James Callaghan.


    1976: Borrowing into the future
    The Decade That Invented the Future: The 1970s
    Peter Jay, former economics editor of both the Times and the BBC, explores the legacy of the financial crisis in 1976 that led Britain to borrow billions from the IMF.

    I’m guessing that many of us here will disagree with some of the points he makes, but nevertheless, it is interesting to hear them expressed. Not only was he an economics editor (quite well known on TV at the time), he was the son-in-law of Jim Callaghan, and so quite close to the action, at least in an indirect way.
    (His Wikipedia page claims that he supports Keynesian economics).

  18. @Mike Ellwood

    I’d like to thank you for that link, which I wouldn’t otherwise have known about. Jay’s perspective is (shall we say) challenging; to me the outlook he articulates seems one frozen in time, like those prehistoric flies perfectly preserved in amber. I guess he and I are roughly-speaking contemporaries, yet our respective takes today on the events he reflects upon are very different.

    Incidentally, although he self-identifies as a Keynesian what he really clearly is is a neo-Keynesian. I’m reminded of Sir Austin Robinson’s anecdote about the occasion when Keynes, having been the guest of honour at a dinner in Washington the previous evening of the local Keynesian Society, remarked at breakfast “I think I was the only non-Keynesian there”.

    By the way, I would also commend – as being equally pertinent here – the preceding episode in the series “1975: Europe Referendum”. Quite an eye-opener!

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