Sticking to Neoliberaslism

I see Simon Wren Lewis is puttting his oar in in support of James Meadway – in the sense that he is supporting his Fiscal Credibility Rule (FCR). This same article is also, by the way, published in the New Statesman.

Since Simon Wren Lewis (together with Jonathan Portes – both former Treasury Civil Servants) created the rule it is unsurprising that he likes it. But he is supporting it in a way that includes MMT, which can only help the quest of where money comes from.

He says:

MMT wants to go one step further. It wants to use fiscal policy to stabilise the economy at all times, and not just when monetary policy is out of action. This is not a ridiculous proposal.

Then continues:

MMT is also a political movement of the left.

Now as I’ve previously suggested, MMT itself is certainly apolitical, but using its understandings are generally helpful to those of a left leaning outlook.


These attacks do however raise a legitimate issue. Why the need for a fiscal rule at all? Why not let the Chancellor choose the deficit depending on the economic circumstances? The answer is provided by something called deficit bias, which preoccupied economic policy before the global financial crisis (GFC). In the 30 years before this crisis, the ratio of OECD government debt to GDP almost doubled for no justifiable reason.

Contrary to many alarmists in the City, the world does not come to an end if you have deficit bias. Deficit bias just makes life harder for future governments. So it is good practice, and a sign of fiscal responsibility, for governments to follow a fiscal rule. Nothing about this good practice need be Neoliberal.

Now why on earth should we be bothered by deficit bias – every time we print a fiver we are adding to the deficit – so what’s not to like? But he goes on to use an orthodox Torygraph term, ‘fiscal responsibility’ – responsibility to whom? If the government creates money it is reponsible to its people but I doubt very many of them know or even care about fiscal responsibility. True we don’t want to create rampant inflation, but if that is the case why not say so rather than ‘fiscal responsibility’?

Personally, though I’d rather it were ‘straight’ rather than effectively a sleight of hand, I don’t have great problems with the Fiscal Credibility Rule, as long as we realise interest rates do not, in fact, work (and even if you considered that they do we should at least set different interest rates for different things). In my view it is, in effect (sorry, James Meadway) surreptitious MMT but by a less honest system. In so doing it feeds current economic thinking and it does seem remarkably uncourageous.

Still, one can argue that Labour has sufficient hills to climb without also adding the education of the electorate to their many tasks – particularly when the media is overwhelmingly hostile (and, ironically, Simon Wren Lewis has many good articles on this). Also, with the current Conservative Leadership elections, which I’ve heard referred to as the ‘Unicorn Grand National’, I have reluctant sympathy with that view.

It seems Simon Wren Lewis’s principle gripe is that he is labelled a Neoliberal by MMTers – principally, in fact, it seems, Bill Mitchell, whose ire has also been directed towards Progressive Pulse in the past!

Now what is Neoliberal? If it is economics as it currently operates then I think the charge sticks – if the FCR is new and radical then it probably doesn’t.

In the end I’d say that it is both.

So if you are being all things to all men then you probably are Neoliberal even whilst you are surreptitiously trying to undermine it.

What Neoliberalism actually is is always a problem – it is usually a shorthand insult – nobody actually stands up to say they hold it in high regard. It is usually considered to describe somebody who is socially liberal but economically conservative – typified by ex PM Cameron.

Yet when I hear his ex Chancellor, Osborne speaking it seems that he is economically conservative but based on delusional facts – such as , for example, the ‘fact’ that the the digital world was created by private enterprise!

I used to think Osborne was quite bright. I now think he should stick, as it were, to the family wallpaper business.

I suggest that Simon Wren Lewis, who although he has his heart in the right place, should not be helping to mix the glue.


  1. Charles Adams -

    Not sure that most economists would agree that interest rates do not work. There is quite good evidence that after the Taylor rule for setting rates was implemented the cycles of boom and bust were damped. The Werner article misses the time lag between growth and interest rate cycles which can be years. Wren Lewis would say that interest rate policy works as long as you are not close to the zero lower bound. But we are currently stuck at the zero lower bound and the only way out is fiscal. Once interest rates are back at 5-10% then they become effective again. But if rates start dropping and do not see green shoots then you need to bring out the fiscal guns which is what did not happen in 2010. Basically Keynes was right and there is really nothing that new in MMT (except may be the politcal angle which many do not like anyway). However, it is a nice way to introduce people to the more difficult aspects of monetary systems and I welcome that.

    1. Peter May -

      I still tend to the view that Werner is right because if the time lag can be years I don’t think anyone can possibly know whether or not interest rates are working effectively – or not!
      I also think that when ‘off’ the so called lower bound, increasing interest rates can be inflationary and interest rate uncertainty is generally bad for business (I remember black Wednesday and the exit from the ERM when interest rates were enormously increased to try and save it. It was looking very bad for my business loan…)

    1. Charles Adams -

      There is much less disagreement than sometimes implied. For example, Syll quotes Vickery (whom I would agree talks sense) but Vickrey says:

      “Government borrowing is supposed to “crowd out” private investment.

      The current reality is that on the contrary, ….. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly”

      This is not so different to Wren Lewis or MMT economists. The hard part is, how do you decide whether there are idle resources? Do you relate this to employment, inflation or some combination? Detail means that at some stage you to have to decide on metrics (real numbers) and you end up with some kind of monetary and fiscal rules. You cannot really avoid them in the real world but you can ignore them. Instead you should target inequality and maximising medium disposable income and let that direct your monetary and fiscal policy. For example, I would say that government should invest in education and offshore wind because that would provide the knowledge and sustainable energy stream that would enable more people to achieve more of what they want without damaging the environment.

      1. Graham -

        I agree with you. We are certainly in need of massive public investment, particularly in renewable industries where tidal, wave and other technologies need funding to develop, otherwise it’ll go the way of wind where manufacturing went elsewhere.

        Unfortunately, our current politicians believe in the “crowding out” myth and the “household economy” myth. (as do a lot of economists)

      2. Peter May -

        I agree but is the ‘real’ world ready for targets that ignore finance? They are always going to be asked how are they going to pay for it?
        To which incidentally I always think your reply is best – by spending it!
        The tax take will automatically increase with the spending and a more prosperous economy always pays more tax.
        Whether the self serving media as well as the City would allow politicians to get away with that is debateable…

  2. Adrian Kent -

    I had a little twitter exchange with SWL on the matter of the MPC and their apparent gymnastics regarding the zero-lower-bound. He said that it was ‘widely known’ that the ZLB had been reached at 0.5% in 2009, but searching through the minutes I found that at that time they still thought they had space to go. The first time they actually mention the ‘effective lower bound’ was in August 2016 when they decided that 0.25% wasn’t low enough to meet it!

    It seems that in the early 2010s a number of academics thought that the ZLB had been reached (including some from the BoE in 2012), but the MPC hadn’t actually considered it. My initial question to him was that if 0.25% & the slowest recovery in history aren’t enough for the MPC to reach the ZLB, what catastrophe would have to happen for them to hand over power to a Labour Chancellor (especially if it were Chris Williamson!). The only answer he gave to this was to take it up with the members of the MPC (as if it were me who was giving them the stop-go power on this!).

    1. Peter May -

      Agreed – very strange. The Fiscal Credibilty Rule is it seems to me, just triangulation for economists!

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