Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 22 October 2018

MMT and Labour’s fiscal rule

I’m afraid this will probably only interest those familiar with MMT, but in its favour it has to me at least a surprising end. Bill Mitchell has been criticising Labour’s fiscal rule for some time, and my work that lay behind it (with Jonathan Portes) in particular. In one posts he says “Wren-Lewis just should stick to Twitter. He seems to like that. It would save us the time reading the other stuff.” In his latest post on the subject, after he met John McDonnell and his team, involves general assertions that the rule is neoliberal, but he does have two concrete criticisms. He has the following objection to a current balance target.
“But as I’ve written many times in the past, if a nation encounters a serious recession that results in a significant deficit, and then within the last years of the rolling window, it may have to introduce major cuts in recurrent outlays in order to move the recurrent balance towards zero.”

Now that is a cogent criticism of a fixed date rule, which does suffer from the danger of a recession just before its time period ends. The only problem is that Labour’s current balance target involves a rolling window. It is a target for the current balance (what Mitchell calls the recurrent balance) over the next five years. One year later it remains a target for the next five years. That is what ‘rolling’ means. So you never get caught out by an event ‘just before the target date’. With a rolling target this criticism makes no obvious sense.

Incidentally, this rolling window allows the government to pursue a countercyclical policy if it wishes to do so. The standard assumption is that mild booms and downturns are reversed by monetary policy within 5 years, so as long as the fiscal stimulus was not planned to last more than 4 years it is quite consistent with a rolling target. Whether government would want to when interest rates are doing the stabilisation is another matter.

What about a more major recession, where rates hit their ZLB. The rule’s knockout then applies, and fiscal policy becomes the primary stabilisation tool. This brings us to his second criticism.
“I noted that this was another neoliberal aspect of the approach. The reason for that conclusion is that the rule as stated requires the Monetary Policy Committee of the Bank of England to indicate to the Treasury that its monetary policy instruments are no longer effective. So in effect, the elected and accountable Chancellor can only enjoy fiscal freedom when the technocrats in the Bank of England handover the imprimatur to him. That is a basic Monetarist tenet – that monetary policy has primacy over fiscal policy. That is neoliberal central. Moreover, the MPC may not indicate monetary policy ineffectiveness, even if the target interest-rate is at zero (the so-called zero bound). As we have seen in the recent years, central banks have been willing to explore all sorts of weird and wonderful policy interventions to remain relevant in the macroeconomic policy sphere.”

Again its a cogent criticism. But this time Bill must know he is not talking about Labour’s rule, because he talked to Labour’s team. The MPC is asked to indicate when interest rates have reached their lower bound, not when they think all monetary policy instruments are ineffective.

MMTers on twitter tried to defend this line by saying the Bank might deliberately deceive. But think what that would have to involve. In a major recession the MPC would keep rates deliberately high and claim that they could cut them if they wished, but they do not wish to do so. I think the concern in that rather fantastical scenario is whether the MPC is any longer fit for purpose.

For much of the time I was arguing with MMT twitter about all this Bill Mitchell was copied in, but he did not respond to my criticisms of his post. But at one point he did send me this about a particular tweet I wrote

“Stop slandering me or you will face the legal consequences. I have nothing to do with the way others behave on Twitter.”

This is a first for me at least. Given this threat I cannot tell you what I wrote that provoked that, or give you a link to it, because I cannot afford a court case. Of course Bill Mitchell is not responsible for what his twitter followers say, but he is responsible for his distortions about what Labour’s fiscal rule says. I have criticised the way he argues his case in his defence of Lexit here.

After that threat I did then take the opportunity of asking him why he distorted his description of the ZLB knockout in the way I describe above, but he never replied. I wrote this about MMT and its followers, and these events only confirm this view.

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