So says Simon Wren Lewis.
To me (but possibly not him) those basic safe assets are a proper functioning state with the rule of law, resources to do things, food to produce to feed everyone and probably some earth assets to make proper use of.
So, once we’ve taken account of those, we have a functioning state – and I’d suggest that once we have that why would we need any fiscal rules?
His mainly macro blog quotes Keynes’s “anything we can actually do we can afford,”
Simon Wren Lewis continues:
However in the 1960s and 1970s that was no longer the case, and we learnt through double digit inflation, and in the UK widespread disruption, that the real constraint on what you can do is inflation rather than full employment. It was always clear, however, at least to UK and other European economists, that how close you could get to full employment before inflation set in was governed by a complex and variable set of institutional factors. So Keynes’ statement became ‘governments can do anything as long as inflation remains stable’.
I think there is great doubt about what Keynes statement became. But why the paranoid fear of inflation? A little inflation is probably good for us and indicates a flourishing economy. If it rises out of control then surely taxes can grab back the excess money?
In the UK in the decades after WWII, fiscal policy was used to stabilise the economy at full employment. Interest rates played a minor role, and arbitrary limits on personal borrowing were common. (This is similar to the policy proposal associated with MMT.[Modern monetary Theory]) This made sense under the system of fixed exchange rates created by Bretton Woods. When that came to an end in the early 1970s, interest rate changes became more powerful because of their impact on exchange rates, and that was enhanced as credit controls were gradually abolished.
Fine but ‘arbitrary limits on personal borrowing’? really?
High levels of personal borrowing is, as Steve Keen has long ago demonstrated, a threat to the prosperity and stability of the economy.
Once limits are imposed on personal borrowing, clamour for increased wages becomes greater. When people want and need things they will borrow as now – but when they are prevented from so doing they will be encouraged to seek or campaign for wage increases.
He continues on a decidedly old fashioned scenario. Inflation in the UK has been non- existant for more than a decade, but the description he offers would never suggest this.
In contrast, in a world where interest rates are varied to stabilise the economy, inflation is no longer a constraint on fiscal policy. In this world, Keynes’ statement of the title again becomes true, because central banks will look after inflation. The only cost of spending a lot or taxing too little would be high interest rates, but as these rates were set by someone else, the political cost to governments of running large deficits is more opaque as long as the increase in rates wasn’t too rapid.
But of course none of that now happens…
This is perhaps the most important point of this post. Deficit targets or more sophisticated fiscal rules only make sense in a world where interest rates are able to be used to target inflation. It follows automatically that fiscal rules make no sense when rates are stuck at their lower bound. These two sentences are sufficient to show that 2010 austerity makes no sense. The reason MMTers don’t like fiscal rules follows automatically from their wish that fiscal policy rather than interest rates target inflation.
And there’s a surprise! So they should…
But the bit below is not correct
To what extent was this deficit bias a problem? In the short and medium term for the major economies (treating the Eurozone as a country) not much, but in the longer term (by which I mean centuries rather than decades) there is bound to be a limit on how large government debt could be in relation to GDP.
Really? How has government debt got on since the 1694 foundation of the Bank of England? Goodness knows what their conception of GDP was then – well let’s be candid – it did not exist.
In fact government ‘debt’ (which is of course somebody else’s interest bearing asset) has actually gone up pretty unremittingly ever since…
Simon Wren Lewis adds:
So for that reason alone it makes sense to try and make it hard, through rules and institutions, for governments to increase debt at that rate. It should also increase welfare if governments are discouraged from increasing debt for no good reason beyond buying elections.
So buying elections through issuing money is bad.
It may be – but it is a lot worse, and usually, if recent history is any guide, when you buy elections through soliciting generous and individual donations to your political party.
It seems to me that he treats both his own views and MMT as a religion. So it is rather as if he might be wavering between Catholicism and Methodism.
Still I do consider that understanding of MMT confers an ability to understand how money works. Its understanding allows you to do stuff and its denial prevents it.
Why does Simon Wren Lewis not want to do stuff?
Or if he does, why does he believe in an entirely artificial constraint?
The Tories don’t bother with coherent ideology. They simply deceive.But they do use money creation when it suits. (See Test and Trace).
A sovereign currency is certainly MMT reality but Simon Wren Lewis said in reply to a tweet from me:
‘Not buying’ is not a proper rebuttal of course – but the Tories certainly embrace MMT, when it suits them.
So it seems to me that academic dialectic is superfluous.
We all need to recognise the reality of “anything we can actually do we can afford.”
If MP’s agreed this then that would be some liberation for their electorate…