I am covering a few topics today, given that I used yesterday's post space to…
In Part I, I considered an Australian-based attack on MMT from a Labour Party stooge. In this Part, I shift to Britain to address the recent article by a Northern Labour MP – Jonathan Reynolds – who is apparently, if his arrogance is to be believed, making himself the Labour Party spokesperson on matters economic. For the title of his recent article (June 4, 2019) was, afterall – Why Labour doesn’t support Modern Monetary Theory – which begs the question as to who actually doesn’t support MMT – all of Labour? Party? Politicians? Members? Who? I know of hundreds if not thousands of Labour Party members that are fully supportive of Modern Monetary Theory (MMT). So who is he talking about? The overriding issue that I introduced in Part 1 was that it is crazy for progressive politicians to use neoliberal frames, language and concepts when discussing their economic policy ambitions. Not only has the track record of the mainstream approach has been so poor but wallowing in these frames etc leads the so-called progressive side of politics to become trapped in the neoliberal tradition. The Reynolds article is no exception and if his view is widespread within British Labour then it will have a problematic future.
The Labour List apparently claims its purpose is to foster high quality debate
The Labour List, where the article was published, says that its mission is to be:
… the leading place for news, views and debate about the Labour Party … We are supportive of the Labour Party, but independent of it. There will always be debate within Labour and our purpose is to provide a forum for the full range of views rather than to take sides.
Well they appear not to live up to that charter.
A debate means different views have to be aired.
The editor of Labour List has not sought input from any of the core MMT economists to provide “the full range of views” and has denied a sitting Labour MP (Chris Williamson) the right to reply to this absurd piece from Reynolds.
When someone approached the Editor via Twitter with a reasonable request to seek input from one of the core MMT economists, he was met with the response:
I suggest you don’t tell me what to do.
And then some sycophant came in behind her vilifying the person who had made the request along the lines of “What makes you think you can dictate the editorial of other publications, just by virtue of being a Labour member?”
One would have thought a publication (Labour List) that was seeking to be “the leading place for news, views and debate about the Labour Party” would welcome diverse input from the Party’s own members.
But I forgot … the politburo doesn’t allow debate!
I note they did publish an article over the weekend just gone as a defense of MMT. The problem is that the author is not one of the core MMT group and thus makes simple errors that distract the readers’ attentions.
What could “Labour doesn’t support Modern Monetary Theory” mean?
When you consider the proposition that Reynolds is entertaining at first principles, you realise how confused he has become. It is the same confusion that formed advisor to the British Shadow Chancellor expressed in his recent Tribune article against MMT.
Think about the title of his article – “Why Labour doesn’t support Modern Monetary Theory”.
If he knew what he was talking about he would thus have to be claiming that the British Labour Party must disagree with the following propositions:
1. The British government has a currency monopoly in the issuance of the British pound.
2. All tax obligations to the British government can only be liquidated using that currency.
3. The non-government sector cannot get that currency (and therefore pay taxes) unless the British government spends that currency into existence.
4. The British government can never run out of that currency.
5. The British government can never become insolvent in any liabilities it has denominated in that currency – unless, of course, for political reasons it deliberately defaulted. There would never be a financial reason for such a default.
6. The British government can purchase anything that is for sale in that currency including all idle labour.
7. The Bank of England sets the interest rate and can control yields in any segment of the yield curve it chooses.
8. The funds to purchase Government bonds come from spending that has been previously made by the Government, which hasn’t yet been taxed away.
9. The bond markets must accept the conditions that the Government sets with respect to the sale of bonds and has no discretion outside of those conditions other than not to participate. In that event, the spending desires of the government are not impeded.
10. All spending, whether government or non-government carries an inflation risk. There is nothing particularly significant about government spending in that regard.
11. There is no diminution in the risk of inflation from government spending as a result of the government choosing to issue accompanying bonds or not. The funds to purchase the bonds were part of the unspent wealth portfolio of the non-government sector and were not being cycled into the spending stream.
12. Governments do not have to issue any debt in order to spend beyond their tax take. As noted this would not reduce the inflation risk from the spending.
13. The idea that by issuing debt, governments push up interest rates and ‘crowd out’ private spending that is interest-sensitive is a denial of how the modern monetary system operates.
First, the idea of a finite pool of saving that the government and non-government compete over is false. Deficit spending increases the pool of saving by stimulating GDP and national income.
Second, private banks do not loan reserves (debt issuance just swaps reserves for bonds). Banks make loans to any credit-worthy customers and in doing so create the necessary deposits. They handle their reserve requirements as part of the payments system separately from this lending process. So there can be no crowding out in any financial sense.
14. Monetary policy is proven to be ineffective in controlling the spending cycle within usual ranges. In fact, increasing interest rates is likely to be inflationary because it pushes up business costs and pumps higher incomes into the hands of the creditors.
I could detail more elements that define the core of MMT but these are sufficient. Note I have said anything about “printing money”.
So if “Labour doesn’t support Modern Monetary Theory” which one of these statements about the real world and its institutions, which apply in Britain as they do elsewhere, does Jonathan Reynolds claim “Labour doesn’t support”?
You see the problem.
Misrepresentation writ large
Reynolds sets the scene with this:
It is widely understood to hold that countries with a sovereign currency (such as our Pound Sterling) can print as much money as they like to meet spending commitments, without any adverse consequences occurring, because the central bank can always print more money.
Understood being the operative word.
No-one who ‘understands’ our work would make that statement.
“Widely understood” is a literary connivance to suggest support when only ignorance would prevails.
Further, that is a statement he has copied from various critics who also have not understood our work.
And it is not that the core body of MMT is so esoteric or complex that it evades comprehension. It is purely because these lazy minds have not bothered to take the time to read the core literature.
That is clear in most of the critiques I have seen.
It is also interesting that even in this poorly constructed opening, Reynolds basically recognises that a currency-issuing government such as in Britain has no financial constraints.
25 years ago, when we started out on this Project the small group of original MMT developers were always confronted with claims that government did face such financial constraints.
At least, the debate has now moved on to things like inflation rather than solvency.
There are a few old guarders who keep pushing the insolvency argument but they are close to the Max Planck funeral status.
It is also not true that anyone with serious understandings of MMT claims that the British Labour Party:
… is in fact committed to austerity because we do not support it … Claiming John McDonnell, Jeremy Corbyn or anyone else in the Labour Party are closet neoliberals is, with respect, absurd.
That is a false allegation.
The problem that has been noted is not that the Labour Party wants to become a party of austerity but that it maintains the neoliberal frames, language and concepts, whether they believe them or not, which will end badly for them in a political sense.
Reynolds claims that:
All of Labour’s plans are underpinned by our fiscal credibility rule, an overarching economic policy drawn up in conjunction with Nobel Prize-winning economists including some who have spent much time attacking neoliberalism.
We considered these issues in our recent Tribune article – For MMT (June 5, 2019).
See also my last blog post on the topic – The British Labour Fiscal Credibility rule – some further final comments (October 23, 2018).
First, the wording in the so-called Fiscal Credibility Rule is neoliberal – constructing government fiscal policy within the ‘household budget analogy’ – “everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.”
No-one who knows anything about the British government’s financial capacities as a currency-issuer would ever talk about a government “credit card”. Households that use the currency have credit cards. Governments issue the currency and never have to seek credit.
Second, the Fiscal Credibility Rule’s intent is neoliberal, in that it constructs fiscal sustainability and best-practice fiscal policy in terms of financial ratios rather than in relation to a broader context focusing on things that matter.
Why is it a responsible strategy to “close the deficit on day-to-day spending at the end of a rolling five-year period, and make sure government debt is lower at the end of any five-year period”?
The rolling bit gives them wiggle room in a recession but the requirement, in the words of the Rule itself “to ensuring that, at the end of every Parliament, Government debt as a proportion of trend GDP is lower than it was at the start” will not be sustainable in a deep recession without austerity.
There is no issue in a growth phase as GDP growth will probably outstrip the growth in debt (numerator rises by less than the denominator).
But the problem will be if Britain entered a deep recession (as it did in 2009).
Yes, the Rule has an opt out:
When the Monetary Policy Committee decides that monetary policy cannot operate (the “zero-lower bound”), the Rule as a whole is suspended so that fiscal policy can support the economy. Only the MPC can make this decision …
But this, in itself, is neoliberal depoliticisation. It gives policy primacy to the unelected, unaccountable Bank of England MPC. Classic neoliberal ploy.
It is only when they decide, that the Rule can be suspended.
And, as I noted in the my blog post – (October 23, 2018) – among others, during the GFC even when interest rates had fallen to 0.25 per cent, the MPC determined that monetary policy was still effective and there was further room for monetary action.
See the Bank’s Press Release (August 4, 2016) – Bank of England cuts Bank Rate to 0.25% and introduces a package of measures designed to provide additional monetary stimulus.
In other words, during the worst crisis to face Britain since the Great Depression, the Fiscal Credibility Rule would not have been suspended, and, as I have shown, the debt ratio would not have been able to be reduced in a single five-year term irrespective of whether one calculated it using actual, trend or any other GDP construct.
I see defenders of the Fiscal Rule continually (to this day) on Twitter claiming that this so-called Opt Out would protect Britain during a recession. They are in denial of the reality that Britain experienced during the GFC. How bad would it have to get before the MPC ceded control to the Treasury? Very bad, if not catastrophic, if history is anything to go by.
Which makes the words of Reynolds “we recognise the importance of suspending these targets in the case of an economic shock that stops monetary policy dealing with the problem” appear rather wan. The Labour Government would not be able to suspend those targets. A pack of MPC technocrats would have the final say and history tells us, as above – they wouldn’t concede to the Treasury.
Third, so while the Labour Party is decidedly not supportive of austerity, its Fiscal Credibility Rule will force austerity on it during a deep recession, unless it abandons it. And then, of course, the wrath will be brought down on it – because they have created the logic that would lead to such criticism.
Why not have a Fiscal Credibility Rule that says the deficit is sufficient when public services are of high quality and everyone who wants to work can find enough hours?
That would be providing a context that matters and shift from the narrow, self-referential financial criteria.
Fourth, why would Reynolds hold out the “(not) Nobel-Prize” in economics as an overarching authority on anything.
The “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009” (introduced because economists felt inferior as a result of being left out of Alfred Nobel’s bequest) is a ‘boy’s club’ (only one woman has ever received the award – Elinor Ostrom in 2009) that seeks to ratify the dominant paradigm.
I should add that Ostrom was against government regulation, not an economist, and when she did receive the award many male mainstream economics professors were aghast, with one writing that:
The announcement of her prize caused amazement to several economists, including some prominent colleagues, who had never even heard of her (Source).
Her award caused a lot of “disdain and name-calling on economics blogs”.
Also, think of the types that get this award.
For example, Eugene Fama was given one and he is the guy who thought financial markets on average always delivered efficient outcomes if left unregulated.
Kyldland and Prescott were given one – they are the Real Business Cycle crazies who claim any unemployment is a supply-side phenomenon reflecting how much people want to work. Their theory has zero empirical correspondence with the real world data.
Scholes and Merton were given one – they founded Long-Term Capital Management in 1993 which subsequently collapsed in the late 1990s. Their theories were criticised heavily (the book by Roger Lowenstein published in 2000 is worth reading on this).
I could go on.
Fifth, which actual “Nobel Prize-winning economists” have had input to British Labour Policy. Economists = plural.
As far as I understand from the statements that John McDonnell himself has made, there has only been one such person – Joseph Stiglitz.
And as far as I understand, Stiglitz was mostly consulted about industry policy, although the Committee he joined hardly met and splintered because several panel members objected to Jeremy Corbyn’s leadership.
The Prospect Magazine published an – Interview: Joseph Stiglitz-economics and its discontents (September 15, 2016) – which disclosed some interesting facts about the involvement he had with the short-lived Advisory Council:
The word in the press has been that the council was never convened. Stiglitz qualifies insisting “No, it did meet. But … I didn’t go to that meeting because I couldn’t get there.” Although the whole thing “has now been put on hold,” he did have “a little bit of a sense” of what they discussed at the meeting he missed: “I saw one document they came out with, which I thought was clever … saying that when you reach the zero lower bound of monetary policy … the case for fiscal policy … was strengthened.”
He also said that “I don’t know enough about the workings of the UK political system to know what is the best way of achieving those goals”.
If that was his ‘input’ to the Fiscal Credibility Rule then I doubt I would be advertising it as being the work of “Nobel Prize-winning economists”.
Sounds like spin to me.
Then we get the statement:
Advocates of MMT instead claim governments with sovereign currencies like the UK can simply spend whatever they like …
Lie. No MMT advocates would ever say that.
Aside from the valid concern that printing additional money nearly always leads to higher inflation …
Who talks about “printing additional money” – none of the MMT economists.
What he is trying to assert, albeit clumsily, is that the expansion of bank reserves causes inflation.
Where is the evidence for that?
Why has the ECB failed to hit its inflation target for years and inflation is declining despite massively adding reserves to the system?
Why has Japan been fighting deflation for years?
Why has the US, which engaged in massive asset buildups on the Federal Reserve Bank’s balance sheet not seen accelerating inflation?
And so on.
The next step in his argument is this British exceptionalism that keeps coming out in these discussions.
Apparently, because “many businesses and individuals need access to foreign currencies as part of their essential business activities, not to mention the fact that the UK is dependent on imports for any number of life’s essentials”, there would be “dramatic international consequences in the form of a currency crisis and capital flight” if what?
Well he doesn’t actually say ‘what’ would trigger this, other than to write “over issuance of a currency”! I guess he is talking about the ‘printer gone crazy again’ claim.
But importantly, he doesn’t grasp the fact that every day the British government is spending its currency into existence and the Bank of England is playing its part in that process – busily crediting bank accounts on behalf of the Treasury and managing the liquidity implications arising from the additional reserves.
That is the point I made at the outset – the government is already doing what he thinks will lead to disaster.
That is what MMT is about – allowing us to understand that. It is not some new regime that anyone is moving to.
Which then makes statements like:
Far from allowing a radical domestic programme, MMT would quickly result in the UK facing conditions even worse than the austerity inflicted by the Conservatives and Lib Dems since 2010.
Notice – the inference that MMT is some new regime. Sorry Jonathan, you are embedded in a monetary system that MMT allows you to understand.
Unfortunately, you didn’t go to school long enough (the MMT one) and that has meant you have fallen into this mistaken conception that MMT is some scary new system.
Sorry to disappoint.
But on this exceptionalism argument (“particularly in a country like the UK”) I thought the following graphs might be interesting. I chose four different countries:
1. The UK obviously.
2. Japan – external surpluses, high gross public debt, continuous deficits for nearly three decades, low inflation, zero interest rates, low unemployment, industrial goods exporters with relatively stable terms of trade, and a stable currency.
3. US – external deficits, variable performance and all the rest.
4. Australia – smaller economy with external deficits since the early 1970s, mostly fiscal deficits, low interest rates, commodity exporter facing massive swings in our terms of trade, very high material standard of living etc.
The first graph shows the annual inflation for the four countries from January 1971 to March 2019 (note the Australian data is quarterly and interpolated between months, which doesn’t alter the point).
See anything particularly special about the inflation history of the UK? You will struggle.
All four nations were impacted by the two OPEC oil shocks in the 1970s. There were some other eccentricities in the data (for example, the little Australian spike in early 2000s due to the introduction of the GST).
But overall the inflation history is similar for the nations despite massively different economic structures and export-import performance.
Now, look at the next graph which shows the evolution of the currencies against the US dollar over the same period.
There are notable differences between the nations with Australia experiencing much larger swings in our currency than the other nations and Japan very stable.
For Australia, though, these swings are driven by terms of trade shifts (commodity prices) and have nothing to do with the fiscal position of the government.
Yet the inflation histories are similar.
Reynolds studied politics and history and then law at the University of Manchester. He is obviously oblivious to that University’s part in the perpetuating the Monetarist myths in the 1970s when it hosted the famous ‘Manchester Inflation Project’.
Brian Pullen, who taught Modern History at the University (now retired) wrote in his well-researched book – A History of the University of Manchester 1973-90 (Oxford University Press, 2013) that:
Members of the Economics Faculty debated the causes of inflation and the merits of restricting the money supply and cutting public expenditure, even at the cost of increasing unemployment. Financed for five years by the Social Sciences Research Council, the Manchester Inflation Project followed the lead of two youngish, internationally known professors, David Laidler and Michael Parkin, who had recently migrated from the University of Essex and would leave together for the University of Western Ontario in 1975.
I was a PhD student at the University of Manchester at the tail end of the ‘Inflation project’ and spoke, first-hand, on a daily basis with some of the core Monetarists in Britain at the time.
They persisted in claiming that the central bank was responsible for inflation, despite the early attempts by the Bank of England (under the CCC policy) to control the money supply, following the monetary targetting dictates of Milton Friedman, being a monumental failure.
I discussed that failed experiment in this blog post – The Monetarism Trap snares the second Wilson Labour Government (March 9, 2016).
The Inflation Project failed to find any relationship between “currency issuance” (whatever that means in Reynolds’ head) and the inflation performance.
Reynolds is merely rehearsing the failed logic that his alma mater was at the centre of, a little before his time there.
Further, why did Reynolds omit any mention of the Job Guarantee – which is the MMT price stability framework – in his discussion about inflation? And why didn’t he make it clear that under current proposed policy, a future Labour Government would use unemployment to control inflation rather than an employment buffer stock (as in MMT)?
Reynolds also seems to think that because “quantitative easing was pursued in the UK in response to extraordinary economic conditions” that it would be different if there was continuous growth going on.
There is no explanation given. It is clear that adding reserves to the banking system via an asset swap with the central bank doesn’t cause inflation in bad times nor good times.
The Eurozone has been growing in recent years but the ECB has been adding massively to its bond acquisitions. Same for the Bank of Japan.
Where is the inflation and currency crises? Nowhere!
His assertions are just typical neoliberal scaremongering.
The problem is the ‘boy cried wolf’ once too often – a long-time ago – and the claims have no credibility any more.
And finally, he tries to tar the credibility of MMT by writing that:
… it supporters include members of the Tea Party and Trump supporters in the US.
Good. It means they understand the workings of the monetary system and the capacities of the currency-issuing government within it and so their political statements will be unable to rely on the usual neoliberal lies about ‘how to pay for it’, ‘the government has no money’ and all the rest of it.
It means their ideologies are exposed in the public debate.
If they have an MMT understanding then, for example, they would not be able to say that we cannot pursue a Green New Deal because we would not be able to pay for it.
Or that the Social Security system will go bust financially.
Or any number of lies that conservatives hide behind to justify taking policy actions that they know are unpopular and further the interests of the top-end-of-town at the expense of the rest of us.
So it is a good thing that the Right and the Left develop an MMT understanding. Then the quality of our public debate, and, in turn, our democracies, will be enhanced.
The Reynolds input reflects another progressive politician that is eager to ‘walk the plank that he erects for himself’.
He thinks it is better to keep the public in a state of ignorance about the alternatives, effectively, in the naive belief that the ‘markets’ will be nice to them.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.