Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 22 April 2016

Some thoughts on Paul Mason’s McDonnell road show talk

John McDonnell has got quite a collection of talent to give talks on economics around the country, and the latest is Paul Mason. His talk is wide ranging and certainly not academic in tone, as befits the occasion, and I agree with the broad thrust of it, although not all the details. Here are a few thoughts.

The impending second crisis.

There seems to be a general presumption in certain circles that we are heading for another crash. (Perhaps I could call it ‘the end of capitalism is nigh syndrome’.) This is always a possibility (of course), but I do not think it is a probability. In the UK, do not be fooled by the referendum blip (or pause). I think it is quite likely that Prime Minister Osborne will by 2020 be presiding over strong growth, as everything that was put on hold before the referendum comes on stream. I also think we may see rapid Eurozone growth before then.

On a related theme, there is also a widely held view that after the referendum the Conservative party will fall apart - it is the Corn Laws all over again. I would put that probability much smaller than the chance we might vote to Leave, or that Boris gets to be our next PM.

Fiscal rule

I’m glad he likes Labour's new fiscal rule. He writes: “There’s a school of thought among Labour supporters, and some academics, that the deficit is irrelevant, that “taxing the rich” solves all your problems. It does not.”

‘I did not know you could do that’

His reference to the Macdonald government coming off the gold standard is certainly apposite. Too often the centre left gets trapped by what it sees as unbreakable economic or political convention, only to see the other side break it (think minimum wage).

Monetary policy

What is said in this central section sounds radical, but I think it is meant to be read in the context of the impending next recession that I talked about earlier. What I think he is worried about is that, in that context, any fiscal action would need monetary support, and with the current regime it might not get it. In other words the economy tanks, the next Labour government wants to stimulate but inflation stays close to 2%, and the Bank of England does not cut rates to allow the fiscal rule's knock out to apply. For this reason he supports the proposal, which has a number of notable advocates, that the inflation target be raised to 4%.

I would agree this could be an issue: what economists called the ‘divine coincidence’ (that inflation would always provide the appropriate signals) just does not seem to work very well any more. Whether raising the inflation target to 4% is the best way of dealing with the problem, as opposed to for example an intermediate NGDP target, I’m less sure about but I’m open to persuasion. I agree with Paul that this is a problem involving the central bank's mandate, rather than its independence.

He also supports Corbyn’s original Peoples QE proposal. He cites me as opposing it, but in fact I did not oppose the idea as an alternative to the QE that the Bank would want to do otherwise. What I thought was wrong with Corbyn’s QE was that it appeared either to negate central bank independence, or make a National Investment Bank conditional on the Bank wanting to do QE. In the past I have talked (here, or via Tim Harford here) about how governments and the central bank could cooperate to do money financed fiscal stimulus. In other words Corbyn's QE is fine as an alternative to conventional QE in the context of recession fighting, but not as a general way to finance an investment bank.

I suspect he is also just a little bit worried that the bond vigilantes might finally arrive. I think there is no way that will happen, but we have some history of a central bank governor who worried that it might and gave the wrong advice as a result. If that happened again, we would want monetary policy makers to offer monetary finance of any fiscal stimulus (in exchange for a government commitment to always recapitalise the central bank on request), rather than urge fiscal constraint. Perhaps one way to do that would be to make the central bank’s ability to do unconventional monetary policy conditional on that money finance offer being made.    


  1. Mason was hostile to Krugman while writing on his BBC blog, and now seems to have embraced Krugman's 4% inflation target.

    Only the eight years too late.

  2. 1. Lucky you never, ever, do predictions.

    2. "Centre left". McDonnell? Mason? Arf.

    3. "What I thought was wrong with Corbyn’s QE was that it appeared either to negate central bank independence, or make a National Investment Bank conditional on the Bank wanting to do QE"

    Which is odd as the more basic thing wrong with it was that Corbyn proposed it as a general tool for financing nice stuff, rather than as an alternative to monetary policy at the zlb.

  3. Dear Simon, Although it is not the main topic could you elaborate just a little on the possibility of seeing strong eurozone growth in the next 4 years? What would be the trigger in the absence of any fiscal stimulus?

  4. Or even strong UK growth, in the face of continuing austerity and the drive towards a surplus.

  5. Many years ago central bankers spoke little and did even less. Nowadays we have arguments about whether central bankers should target inflation at 4% rather than 2%. Don't you find this rather odd? After all they are saying that a central plank of monetary management is an increase in the cost of living!

    Now I appreciate that, at the back of this, is a desire (perhaps unstated) to inflate away the debt burden but, again, as it's lower interest rates that have been a prime factor in the increase in the debt burden we appear to be recommending higher inflation to clean up what could be termed earlier negligence.

    It seems to me that the institutional framework for economic and monetary management is getting weirder by the day ( the Japanese are the poster boys for this) and people, including yourself, just seem to accept the slowing moving and ever yet more incomprehensible, policies that emerge.

    I certainly disagree with your comments re the economy over the next few years. It seems to me inconceivable that we won't have some sort of crash and I think both DC and GO will be gone in the next two years, and not of their choice.

  6. The Tories are not idiots - having witnessed Brown, they will not make GO PM.

  7. "presiding over strong growth .... I also think we may see rapid Eurozone growth before then."

    Huh? The IMF and OECD warn there is a need for “urgent collective policy action” to avoid a synchronised downturn. Larry Summers says a recession in the US, which is the remaining major economy with OK growth, is a 50% chance in the next 2-3 yrs and they weon't get the 0.4% interest rate cut needed and will have to start preparing for a fiscal stimulus today to be ready when it happens. (Good luck since Democrats will never get the House if Clinton is the candidate for President, and today's Republicans are not the stimulus-happy ones of the good old Bush days!)

  8. This looks like an ad hominem attack, but it really isn't. Paul Mason can have a whole day to prepare and underarm bowling from Guru-Murthy, and he still ties himself in knots, stammering in his explanation of what should be straightforward and grabbing a hold of the word "Basically" as if it was a life jacket. Channel 4 News skirts with Ofcom censure in nearly every broadcast. Mason was recruited from the BBC for reasons that I've never understood. His main talent, in my opinion, is to do a more than passable "You are the messiah, and I should know I've followed a few", whenever he meets someone like Varoufakis who reassures him that even if he doesn't understand the details about "recycling", or co-co bonds, or Basel Rules, or whatever, he's still right because Yanis (or whoever) agrees with him. Mason's a type. I can't see him without thinking about trying to walk up the steps to Glasgow University's Queen Margaret Union and having to push past some Socialist Worker seller who - to paraphrase Healey - "Had read [a line of] Marx at 18 and thought it rather good".


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