I read an article in the Financial Times earlier this week (September 23, 2023) -…
It is Wednesday and only a relatively short blog post. Yes, some more on that Fiscal Rule that seems to be causing people to lose sleep (not me). First, we had the Duck Test debate about the British Labour Party Fiscal Credibility Rule. Those promoting the Rule have been at lengths to deny its neoliberal framing, language and concepts. Not an easy task when the Rule talks about a currency-issuing government wanting to avoid “putting the rent on the credit card month after month”. Sounds like a duck to me. Then there was the ‘all critics (me) are stupid’ approach because they (I) apparently didn’t understand the Rule, simple as it is in construction. That didn’t end well either. Now, rather innovatively, we have the introduction of the Secret British Labour Party Fiscal Credibility Rule – which tells us that the actual British Labour Party Fiscal Credibility Rule, you know, the one published by the “General Secretary of the Labour Party on behalf of the Labour Party” is not the real rule. There is another one that us silly billy types have failed to detect and only those who have close personal contact with the members of the Monetary Policy Committee of the Bank of England could possibly know about. So in our ignorance we have no right to criticise the Rule or to impute nasty motivations from the MPC (not that we did impute anything anyway). And, to put the icing on the cake, we now are told that the Chancellor can abandon this ‘Secret’ Rule whenever he/she likes and does not require the imprimatur of the MPC anyway – so butt out all of you. Of course, only those who are part of our insiders’ club can know anything about this. Summary: Losers getting more lost each time they try to come up with a justification for the duck!
The latest salvo in the Fiscal Credibility Rule descent in stupidity came in the form of a blog post from Rule co-designer Simon Wren-Lewis – Bill Mitchell’s fantasy about Labour’s fiscal rule (June 14, 2019).
Apparently, I am spreading “fantasies … about the rule” and one of those fantasies is being “tweeted back to … [SWL] many times in response” and he is sick of it and wants that annoyance known. Petal.
Apparently, the fantasy in question:
… is that the Bank of England somehow has control of when the knockout happens. The knockout is when the rule is suspended and instead you have as much fiscal stimulus as is necessary to get the economy out of recession. It is triggered when interest rates hit their lower bound. At that point all monetary policy has left are unconventional policies, which are less reliable than fiscal policy, so it makes sense to go for a full fiscal stimulus.
Well to find out about something, one might reasonably consult that something, especially if it is print and published. That would always be a good place to start.
So, in that vein, let’s read the actual document entitled – Fiscal Credibility Rule – again for clarification.
It says in the relevant sections:
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 …
Rather than an arbitrary cut off for GDP forecasts, we will give the Bank of England’s Monetary Policy Committee the authority to suspend the rule in the circumstances when it is clear that fiscal policy needs to work together with monetary policy to get the economy moving again.
1. It talks about monetary policy (in general) – which in modern parlance refers to the full array of interventions at the command of the central bank.
It does not differentiate between conventional and unconventional monetary policy. Certainly the Bank of England in its official statements considers the full array of policy tools to be part of its concept of monetary policy.
The Rule makes it clear that the rule can be suspended when the MPC “decides that monetary policy cannot operate” any longer.
What that means in the parlance is the MPC determines that decisions it might make about rates or other interventions at is behest can no longer provide any leverage on overall spending in the economy and that, as a consequence, it has exhausted its effective policy capacity.
No reasonable person would interpret that in any other way, especially, one that reads the literature on these topics.
2. “Only the MPC can make this decision” – that appears to be rather forthright and definitive. The Rule, as published, says that the 9 members of the MPC are the ones (the only ones) who can declare that monetary policy has reached the point of ineffectiveness (using their logic).
3. The MPC has “the authority to suspend the rule” – no-one else is given the authority to do that. Back to point (2). The Rule doesn’t say that the Chancellor has that authority.
Now whatever you might think about the duck-status of the Rule or otherwise, the procedures it outlines are fairly clear. And, they are intentionally so because they reflect (using the duck logic) the New Keynesian orthodoxy that monetary policy should be the primary counter-stabilisation force and that decisions should be ‘independent’ of the political process.
Now according to SWL the Rule as published is not a reality.
He wrote that the:
… simple rule has been spun by some is that it gives the Bank of England control over when the knockout is triggered. In reality the rule does no such thing.
As above – doesn’t the Rule exactly state that the Bank of England has control over when it can be suspended (“knockout”)?
Which means that while he accuses me of living in a fantasy world, it would rather appear that his own “reality” is a fiction.
He goes on with his fiction:
To see how MMters spin this as the Bank being in control of the knockout, you have to construct a fairy tale where the Bank is evil.
Not at all. The wording of the published Rule tell us that the Bank of England is “in control of the knockout”.
And further, in any of my written or oral presentations about this topic I have never made any inferences about whether the MPC members are individually or collectively evil. One doesn’t have to get personal at all to make the points I have made.
This evil stuff is all part of his decline into fiction.
The rest of SWL’s rant about the character of the MPC members is pure hilarity and irrelevant.
He then decides to pull rank:
I know many more past and current MPC members – both from the Bank and from outside – than I suspect Bill Mitchell does.
Which is unsurprising given geography.
I know more about RBA officials than I suspect SWL does. I probably personally know a lot more senior Eurosystem central bank officials than SWL given the cocentration of my research over many years and the network I have built in the process.
His superior knowledge allows him, according to his story, to attest to their good character.
Okay, the 8 guys and 1 gal are top people. That is irrelevant to the point.
And Simon ‘I am well connected to the MPC and you are not’ Wren-Lewis then puts “all that to one side” so he can tell the world what the real (secret) Fiscal Credibility Rule says.
The Chancellor, together with much of the non-partisan press, would see what was going on … [a recession and the MPC was still running monetary policy because they thought they could still stimulate the economy] … The Chancellor would then invoke the FCR backstop, allowing him to expand on their original fiscal stimulus.
So according to SWL, the published Fiscal Credibility Rule is not the actual Rule.
His new rule – the secret one – allows the Chancellor to trigger the suspension if he/she forms the view that monetary policy is no longer effective.
I think the economics journalists should ring John McDonnell today and ask him to clarify this matter.
Questions might be:
Does he consider the Labour Party’s Fiscal Credibility Rule gives him the right to suspend the rule without prior Bank of England say so?
If the MPC has not yet declared its monetary policy tools to be ineffective, is he still able (under the Rule) to ignore them and abandon the ‘discipline’ of the Rule?
That should be an interesting Q&A.
In the social media to and fro that SWL referred to above (the ‘one fantasy’ that kept getting thrown up at him – I was not a participant in that to and fro by the way) he asserted that monetary policy had become ineffective during the GFC.
Apparently, his contacts in the MPC told him so.
He was asked whether he could provide any official recognition of that assertion – like a reference to an official statement or publication from the MPC or the Bank – and he could not.
Just whispers among the insiders!
As I have noted several times, the Monetary Policy Committee of the Bank of England continued to believe (and state) that they had effective policy capacity, even when they cut the Bank Rate to 0.25 per cent.
For example, a fairly recent statement on this came in the – Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 20 June 2018 (published June 21, 2018).
We read that:
The MPC continues to expect to maintain the stock of purchased assets until Bank Rate reaches a level from which it can be cut materially, reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy. Since the previous guidance, the Committee has reduced Bank Rate from 0.5% to 0.25% in August 2016 and has noted that it could lower it further if required.
1. It specifies the Bank rate (interest rate adjustment) “as the primary instrument for monetary policy” not the only instrument.
2. It believes they can lower the rate below 0.25 per cent “if required”, meaning they do not believe they have reached the point where even the primary instrument of monetary policy is ineffective.
Further, in oral evidence to the House of Commons Treasury Committee – on February 23, 2016, Bank of England governor, Mark Carney told the Committee members:
What we have done as the MPC … is to think more carefully about where the effective lower band is for interest rates. Back in 2009‑10, the MPC stopped at 0.5% and then began to purchase assets because, at the time, the feeling was that, given the balance sheets, particularly building societies’, lower interest rates would be counter‑productive. It would undercut the capital position of building societies and further restrict access to credit. A more effective way to provide that stimulus was through asset purchases.
In the intervening years, building societies have, by and large, rebuilt their capital positions. We gave a judgment, as the MPC in the past year, that we felt that we could, if necessary, go below that 0.5% towards zero. We did not give a judgment that we felt that it would be appropriate or productive to go negative, given the importance of building societies to this financial system and the economy, and given the capital position.
This sort of statement can be found in earlier official publications from the Bank.
This is what we call evidence. It is what researchers seek out. Looks and whispers from mates on the MPC is not evidence.
SWL may be privy to all sorts of opinions from his contacts in the MPC and I am sure he is. But in the world that we operate in as professionals, the official view of policy institutions are those that are expressed in their statutory publications or other press releases.
These might be at odds with what SWL is getting told by his contacts. But the reality of the Bank’s official stance is in those official documents and it is that stance that the officially published Fiscal Credibility Rule relates to.
John McDonnell should now clarify this issue.
If the published Fiscal Credibility Rule is only a smokescreen and his real intent would be to take control of fiscal policy in situations where the conditions specified in the official Rule were not met then he should publicly state that.
If the SWL version of the Rule is correct, then the whole purpose of the Rule as stated by its defenders (to allay concern of the City, to build coalitions with mainstream economists who think this way, to stop speculative runs on the pound and all the rest of the justifications for the ‘duck’), would be defeated.
I think the defenders who claim to have progressive intentions have become so trapped by the ‘duck’ nature of this thing that they are now clutching at straws.
And, now, I return to my ‘fantasy’ world.
And to chill out after that …
Here is some music I have been listening to this morning. It is from one of my favourite post-minimalist composers – Max Richter.
It is from the re-released album (May 2018)- The Blue Notebooks – which was originally released on February 26, 2004 on Fat Cat Records.
It was originally recorded as a protest by Max Richter to the Iraq invasion in 2003.
This track On the Nature of Daylight was re-recorded for the new release, with different musicians. The new album is called The Blue Notebooks – 15 Years Edition.
It still resonates after first hearing it in 2004.
Perhaps the Fiscal Credibility Rule gang could do with some “daylight”?
If you are in Melbourne tonight and want to hear some live music …
Then my band – Pressure Drop – is playing at the Maori Chief Hotel, 117 Moray St, South Melbourne, from about 20:00 to late.
This is a great little inner city pub in Melbourne which has consistently supported live music. Such venues need the support of all of us.
And, what else is there to do on a Wednesday night in Melbourne anyway?
Lots of great dub, rock steady and reggae coming up tonight. We will throw some jazz in there somewhere too!
I can also discuss Modern Monetary Theory (MMT) during breaks in the sets!
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.