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.


  1. Agree Mitchell is nuts to threaten legal action and does his cause no favours.
    But the fact remains that a currency issuing government borrowing in its own currency never has to go bust and doesn't have to borrow unless it has a trade deficit. That taxes destroy money and government spending creates it, so we never tax and spend but only spend and tax.
    That's why the fiscal rule looks like a misunderstanging at best - or a misselling of the way the monetary system works at worst.

  2. The one thing I can say about MMT is they are consistent, and use terms and language that is unambiguous.

    I do believe John McDonnell well understands the need to pump money into the economy, but is well aware of the poisonous Neo-Liberal doctrine that most think to be true, therefore has to be circumspect at this time in order to get elected without first reversing the mindset of millions of people.

    I have to say that as much as I personally disliked Ted Heath, unlike the rest of the Neo-Liberal leaders that peddled and persisted with this bankrupt dogma, he at least recognised in the space of just one year of implementing it that it was pure fantasy economics.

    What of course did it for him was the quadrupling of the Oil prices which he took the blame for by expanding the economy, whilst the rest like sheep followed Friedman's doctrine as though it were gospel exacerbating the problems rather than curing them. Thatcher then of course took it all to the next level.

    Mark Blyth in my view makes it abundantly clear that economists that think they can predict the future by creating Mathematical models to fit their theories, are making some heroic conclusions about a world they simply can't predict. Like Milton Friedman whom he called a 'Fake' economist.

    MMT on the other hand, explain how the financial sector actually works, and leave it to us all to decide for ourselves how we plan our futures.

  3. My experience with MMT online has been bad as well. Seems like they're just interested in recruiting young converts, not in debate with people with similar views. Somewhat cultish IMO. They're high strung and over-the-top and in the end block *me* for not agreeing with them. They couldn't outflank me on the left or play the radical card b/c I'm fairly radical in my views. So they resort to insults and all sorts of rhetorical BS.

  4. You are getting close to the heart of the debate.

    Let's ignore the obnoxious MMT twitter types and their strange leader. (Is it really that bad if economists reach a wider audience than the subscribers of AER? If my answer would be based solely on the response you get on MMT, it would be clear yes but if I consider the clear success of MMT in shifting the political debate (see Joe Weisenthal’s (correct) analysis), it is a definite no).

    In my opinion the paragraph,

    "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.",

    clearly articulates the key differences in where the difference in analysis is coming from.

    Maybe it is due to the fact that I am German, but the Axel Webers, Ottmar Issings, Jean-Claude Trichets, Philipp Hildebrands and especially the Jürgen Starks of this world make this concern not fantastical at all.

    And if such a scenario arises, how would you get rid of the MPC members if you have given total independence to them beforehand? There are not only Paul Tuckers on the boards of central banks.

    I understand your fear of democratization of monetary policy, but it is currently far more likely that the fear of it, will lead you to rather dark places.

    1. Explain how central banks have been getting forecasts wrong for so long ?
      Explain how Govt's push austerity for so long knowing full well that austerity kills growth,increases private debt and hurts the masses ?
      Yet still they keep on doing it.

      Just remember that Govt officials are well paid and are backed by a media that pushes the same nonsense for their own benefit.

      Maybe you would like to stand against that ?
      Or maybe you are just happy to tag along thinking a different Neoliberal govt will be different to the last.
      Around in a circle we go.

  5. Simon, Bill responds to this in his blog today challenging your view that he has misinterpreted the rolling window concept and that the MPC did not, in reality, consider it had reached the lower bound ( 2009) and that the ideological will was not there to relax the 'rule' had it existed at the time, he writes (after an extensive analysis of the MPC's response to the crash):

    'The problem is that even in the GFC – the worst crisis in decades – the suspension clause would not have been triggered.
    Yes, the Chancellor could tear the Rule up. But then the politics would get tricky. That is why I have been critical.'

    The worse thing that Labour is doing is to 'placate' the markets when, in reality (as QE showed) the bond markets can (and should) dance to the Government's tune because the Government has been freely elected.

    Why continue to do the 'bond market vigilante shuffle' when recent history tells us it is not necessary and impedes a progressive agenda not to mention handing out lollipops to the least productive (or positively destructive) agents of the financial sector?

  6. Every point you make lands except the point on the rolling target.

    Imagine a scenario where finance ministry runs 1% current deficit for 4 years before the economy tips into recession. In the 5 years preceding the fiscal expansion the government was running a balanced budget. The rule would necessarily require a 4% surplus in the 5th year would it not? A pro-cyclical fiscal rule like that damages stability.

    Please correct me if I am misinterpreting the rule.

    As a general point the rule's crude distinction between current and capital as unproductive vs. productive spending does not in my mind make for good economic policy.

    I agree with your general point that Bill persistently refuses to engage his critics and uses the term neo-liberal as a by-word for things he dislikes.

  7. Slander is one thing, but libel is another.
    Whatever did you say? Or not?

  8. The govt doesnt borrow to fund spending.
    Govt borrowing clears excess reserves from the banking system taking pressure off the cash rate.

    It is only by agreement that govt bonds are issued with deficit spending, there is no legislation.
    So borrowing looks like it is funding spending because it all adds up to that .... that's the veil.


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