Traditional lefty economists….

I think that the desire for safe assets should be a factor influencing any fiscal rule..

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?

He continues:

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?

Beats me.

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:

@sjwrenlewis· I don’t buy this theory of money. See @ericlonners on this.

Eric Lonergan wrote ‘Angrynomics’ together with Mark Blyth, who actually does accept MMT.

‘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…


  1. Neil Wilson -

    You can always tell a false analysis of MMT. They never mention the Job Guarantee. And that’s because they don’t understand what it does.

    It is the analysis behind the Job Guarantee – that mainstream believe they are using interest rates to stabilise inflation but actually they are using an unemployed buffer stock, and an employed buffer stock is superior – that is the core to the MMT inflation stabilisation process.

    The Job Guarantee replaces interest rate targeting, and the unemployed buffer stock that is the real mechanism, as the inflation stabiliser in the MMT view. It is superior and leads to higher output for any given interest rate.

    And the highest output then comes from locking interest rates at zero permanently.

    1. Peter May -

      That’s a fair point.
      It always seems to me that raising interest rates could just as equally contribute to inflation rather than curb it, but some of what your asking is that the BoE should, like the Fed, have a full employment remit.

      Personally I consider we should completely avoid any ‘buffer stock’ of unemployed, but if MMT is working as it should everyone should actually be employed, otherwise the labour resources available are not being properly used.
      Which leaves tax as the inflation control.

    2. Schofield -

      Yes the unemployed buffer stock is acting as an endogenous inflation stabiliser but how do you fit an exogenous inflation raiser like the triple Arab oil price rises in the 70’s to the endogenous one Neil, I’m curious?

      1. Peter May -

        Good point!

      2. Schofield -

        Since there’s no reply from Neil part of the answer lies in this comment by Bill Mitchell in response to the Volcker Response to tackling US inflation:-

        “But as a result of the higher rates, there was a dramatic increase in capital inflow in pursuit of dollar-denominated financial assets, which pushed the exchange rate up from the Autumn of 1980 to November 1982 (by around 40 per cent against the major currencies).

        This severely undermined US exports and the recession.

        Unemployment started to escalate sharply.”

        One lesson emerges which is not to allow your nation to become dependent on a monopoly supplier or cabal of such and especially energy. Developing sustainable resources of energy and ensuring the use of that energy is as efficient as possible (highly insulated buildings for example) makes good geo-political sense. Not readily apparent to the gormless right-wing political parties British voters keep electing!

  2. Michael Green -

    What may be missing is the difference between SPENDING and INVESTMENT.
    When I go to Sainsburys and buy my groceries, I have no direct interest in what happens to the money after I spent it.
    If I buy shares in Sainsburys, I have a direct interest in what happens to my investment.
    Because the Government is responsible for the whole economy, it retains an interest in the money it spends. Some of that money will come back as tax to the Government quite quickly. Some will be spent and re-spent, coming back gradually to the Government.
    So that when the Government says it is spending £10 billion on health, at worst it it only spending £1 billion or £2 billion. More likely it is spending nothing at all, and may even get £11 billion back from the £10 billion it spends.

    1. Schofield -

      You are right. A factor missing in many individuals thinking is that some of the money that’s created ex nihilo receives a legal “temporary exemption” from redemption. That “exemption” can last a long time. Homes are a good example given they are many people’s primary financial investment outside of private pensions. There are of course also many tax breaks for businesses on their deployment of capital and their profit receipts such as off-setting losses elsewhere in businesses they own.

    2. Peter May -

      Much agree with that – and we see something of that crystalising in ‘Will the NHS have an increased budget to take account of the increase in National Insurance?’
      It is a ludicrous question when you stop to think about it, but demonstrates clearly that in money matters in polite society we absolutely continue to chase our own tails…

      1. Schofield -

        The “chasing of tails” begins because few understand our use of money as a cycle of creation and cancellation. If you tell the average voter that government can “create” money (the medium of exchange) from nothing immediately panic sets in that abnormal inflation will be triggered completely forgetting it’s the government’s job (and only its subject to re-election) to get the cancellation part of the cycle right.

        On the other hand tell them that as part of the money cycle government simply “lends” money into the economy then because this is more familiar to members of the private sector then panic is reduced. I mean that’s the normal way people buy houses, cars, set up businesses, etc.! Indeed some rub their hands at the prospect of their house price rising because of increased lending volume!

  3. Schofield -

    Has somebody not told Simon Wren-Lewis that the Americans didn’t return to the Gold Standard to keep Arab oil producers happy and yet inflation is currently running at a low level in the United States and has been for several decades! So bang goes his argument! He could argue that the manipulation of currency, taxation and trading standards has allowed some countries an unfair trade advantage in achieving price point in global markets and therefore the moderation of abnormal inflation but that is a completely different argument to the one he tries to make.

    I think Simon Wren-Lewis is a Gold Bug like Larry Elliott of the Guardian and neither of them understanding sovereign governments and licenced banks create the medium of exchange from nothing and it can’t be any other way. Taxes and treasury bonds therefore help regulate the production of this medium of exchange relative to real resource availability.

  4. MigT -

    Yep, even above “lower bound”, it’s not clear that interest rates reliably work like economists (like SWL) think.

    And didn’t the double digit inflation of the 1970s have an awful lot to do with quadrupling oil prices?

    The Adam Tooze piece SWL addresses is good IMO.

    1. Schofield -

      I quite like the following point (see below) of Adam Tooze’s article which relates to the point I was trying to make in Peter May’s post on Social Care the failure to understand that with the gold standard the value of all the gold ever mined is only a very small fraction of all the value of transactions that take place globally every year! So much so you would need to carry a microscope to identify a speck of gold as a very large value unit of currency! I’m sure that was true in the run up to the First World War and before.

      “Why did left-wing parties, such as the British Labour party, cleave to the conservative financial and monetary orthodoxies of the 1920s all the way through to the nadir of the Great Depression in 1931, even though this disabled their progressive social and economic policies and led to disaster? An important part of the answer is that progressive liberals and social democrats saw in the gold standard and tight budgets a guard against militarism. The really big spenders, up to that point in history, were war-mongers not socialists. Support for disarmament and peace went hand in hand with austerity.”

      1. Peter May -

        A very interesting point,
        Although of course Hitler never bothered with gold and in my view actually had a very good understanding of money creation.
        He achieved power basically on the back of austerity…

      2. MigT -

        Yeh, great point.

        Though I doubt that today’s Labour MPs who maunder about “tax payers’ money” on BBC Question Time have the first clue about it.

  5. Peter May -

    @MigT I very much fear you’re correct…

  6. Schofield -

    Here’s the part of Margaret Thatcher’s 1983 speech that refers to “taxpayers’ money”:-

    “One of the great debates of our time is about how much of your money should be spent by the State and how much you should keep to spend on your family. Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay—that “someone else” is you. There is no such thing as public money; there is only taxpayers’ money.”

    Clearly most Labour MP’s should be in the Conservative Party such is their level of monetary system illiteracy!

    1. Peter May -

      Quite right.

      On the same lines as the idea that Blair was actually Thatcher’s greatest creation.

      It must be true because apparently she fervently agreed..

      1. Schofield -

        Yes I forgot that bit. Thatcher and Blair I always regard as Murdoch’s off-spring. That old bugger never seems to want to die!

    2. Peter May -

      I agree – and thanks for the link!

  7. Schofield -

    You are right Hitler through Hjalmar Schacht had a very good understanding of how money worked. Schacht I think understood the basis of how the Bank of England was designed in which the issue of banknotes was piggy-backed on top of specie money (gold and silver coins). The issue of Mefo bills was the same. I think Schacht knew as a banker how easy it was to con people. Many British people think the rich merchants, mainly goldsmiths, who subscribed for the setting up of the Bank of England lent that subscription to the government. They didn’t they gave them banknotes to the equivalent of that amount but very quickly exceeded.

    Of course the German economy took off just like the English economy did and later the other countries in the UK union with the parallel currency. Even more so when private sector banks began issuing their own “piggy-backed” currency convertible into Bank of England banknotes or specie money. IOU’s abounding!

  8. Jim -

    How good (i.e. responsive/effective) are interest rate changes at tackling inflation? And how good would tax changes be at tackling inflation? If the aim is just to remove money from circulation could a financial transaction tax set at a varying rate do the trick?

  9. Peter May -

    Yes, I agree the financial transaction tax could be a very good system – although it might not overall remove that much ‘everyday’ money, it could be tweaked to catch some of the hotter (ie least desireable) transactions…

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