Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 14 June 2019

Bill Mitchell's fantasy about Labour's fiscal rule

My last post about outlandish attacks from some MMTers on Labour’s Fiscal Credibility Rule (FCR) was designed to be read by non-economists, and I didn’t want to bore them or waste space with all the fantasies Bill Mitchell has spread about the rule. But as I’ve had one of those fantasies tweeted back to me many times in response, I want to lay it to rest here.

That fantasy is that the Bank of England somehow has control of when the knockout happens. The knockout is when the rule is suspended and instead you have as much fiscal stimulus as is necessary to get the economy out of recession. It is triggered when interest rates hit their lower bound. At that point all monetary policy has left are unconventional policies, which are less reliable than fiscal policy, so it makes sense to go for a full fiscal stimulus. 

The way this simple rule has been spun by some is that it gives the Bank of England control over when the knockout is triggered. In reality the rule does no such thing. The Bank will have announced beforehand where the lower bound for rates is, and when a recession happens such that the Bank cuts rates to this lower bound the knockout is triggered. This is simple, unless of course you hate the rule because it is not MMT.

To see how MMters spin this as the Bank being in control of the knockout, you have to construct a fairy tale where the Bank is evil. Although they are supposed to do everything to end a recession, in this fantasy they have a higher calling, which is to impose austerity. So what the evil Bank does is announce that the lower bound is X, but when a severe recession hits they cut rates to X+0.25% and no further. They undertake all kinds of unconventional monetary stimulus but insist that rates are not at their lower bound, just because they do not want any fiscal stimulus.

What the fairy tale requires is that all 9 members of the Monetary Policy Committee (MPC), who actually set interest rates, collude to deceive the Chancellor and the public. In reality the M in MPC does not stand for Masonic - 4 of their members are external members. They would have to swear in public that the real lower bound is X and have to explain to parliamentary committees why rates have not been cut to X despite being in a major recession with rapidly rising unemployment and falling output.

I know many more past and current MPC members - both from the Bank and from outside - than I suspect Bill Mitchell does. What always impresses me is how seriously they respect the mandate they are given. They might have their individual views on fiscal policy, as Mervyn King did, but there is just no way they would collude to harm the economy because of those views. Most of those I have met are quite positive about the contribution fiscal policy can make in a severe recession, so they wouldn’t even want to deceive the public on this score even if they felt able to.

But let’s put all that to one side. After all I am sure MMTers would just say this shows I’m too much part of the elite, or I am incredibly naive, or whatever. Let’s just suppose this conspiracy happened. Each member of the MPC swore blind that rates were still not at their lower bound, and had concocted some kind of story about why rates should be kept above their lower bound despite rapidly rising unemployment and falling output etc etc.If all that happened, what would a Labour Chancellor do?

The Chancellor, together with much of the non-partisan press, would see what was going on. They would observe that in the middle of a recession the MPC were deliberately not cutting rates to the stated lower bound for no good reason other than a nefarious motive. The Chancellor would first embark on a temporary (less than 5 years) fiscal stimulus, which he is free to do under the FCR rule even without the backstop. If rates stayed at the same level for months as the recession continued, and the Bank embarked on all kinds of unconventional stimulus measures, the Chancellor would conclude, as any reasonable observer would, that the lower bound had been reached. The Chancellor would then invoke the FCR backstop, allowing him to expand on their original fiscal stimulus. Once the recession was over, I doubt very much that the current monetary framework would survive, which is yet another reason why no MPC would never embark on this fairytale.

MMters sometimes retort that the Chancellor would get political flack for triggering the backstop in this situation. In the middle of a recession with unemployment rising I doubt there would be much flack at all, besides the usual nonsense from the Tory press. But I find it supremely ironic that MMTers are prepared to use media reaction as an argument, as if the media reaction to any Chancellor adopting MMT would be all sweetness and light. Just imagine how abolishing the MPC, and saying taxes do not help finance spending, would go down with most journalists. People in glass houses shouldn’t throw stones.

Mike Norman Economics, commenting on my earlier post, says compared to Bill Mitchell I’m out of my league. That would be the league for telling fairy tales I assume. While one part of the left indulges in polemic and spinning fantasies against Labour policy, thankfully we have another part that is getting on with the serious business of preparing for a transforming government that will finally reverse what neoliberalism really is.


  1. The kalecki line to fiscal first macro nautics as I'm sure we all remember
    Is a class based rationale

    The confidence of the capitalist class mediates firm spending
    from credit sources
    One can add discussion of rate elasticity of firm spending etc

    Cult cliques like MMT
    Are metaphoric when defending their notion of best practices

    Don't mean those practices are
    Anymore then practices guided by conventional analogies
    Like belt tightening

    Ideology craves reasons bigger then the facts

  2. Obviously you know much more about the individuals who have made/make up the MPC of the Bank of England. But I don't think it is entirely implausible to believe the kind of people who make up the rate setting body of a central bank to have more of a focus on one of the bank's mandates than the other.

    For example, Paul Volcker in the 1970's decided the overriding goal of the federal reserve was to minimize inflation regardless of the impact on employment. And the rate setting policy reflected that belief.

    And in your scenario of what a Labour Chancellor might do in response to the MPC setting rates with a focus on goals other than maximizing employment and output, wouldn't the bank be able to invoke the political rhetoric of protecting the bank's "independence" and the impact on public "confidence" if that independence is threatened to prevent the Chancellor from taking the actions you suggest?

    Finally, I don't think based on past experience that we can rely on the "current monetary framework" being threatened by actual events which disprove its underlying precepts. The 2008 crisis provided a test for whether economic policy frameworks can "survive" being proven wrong by real world tests rather than theoretical attacks by academics. And you have written persuasively about how "media-macro" has survived, even thrived, the test from reality. These frameworks don't exist simply because they are "correct". They exist because they empower and benefit certain powerful groups which have a vested interest in continuing the existence of the frameworks regardless of how they actually fare in reality.

  3. Ultimately MMT is void as it lacks real substance to back up promises.
    The best it can offer is every commodity playing a devaluing game.
    Does Kumhof write less since being on the Bank of England payroll, or have I missed some important insights?

  4. Just out of curiosity, why not go aggressively negative on rates, or switch to NGDP targeting at the ZLB for expansionary policy? Miles Kimball has ideas for making negative rates more effective by applying them to cash, for example.

    I wouldn't look at examples like the ECB's insufficient negative rate policy as total failures. Rather take rates down to the neutral rate, and you should finally get traction.

  5. Economic policy and the skirmishes of failed/fake scientists
    Comment on Simon Wren-Lewis on ‘Bill Mitchell’s fantasy about Labour’s fiscal rule’

    The status of economics is this: There is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the monetary economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

    Political economics is mere opinion, theoretical economics is knowledge: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    And that is the problem: economists do not have the true theory. Because of this, economic policy guidance NEVER had sound scientific foundations. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, MMT ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept of profit wrong.

    The macroeconomic models that underlie the argumentation of both Simon Wren-Lewis and Bill Mitchell are provably false.#1, #2, #3 This, in turn, means that the whole debate about the relative merits of monetary and fiscal policy is pointless from the scientific standpoint.#4 However, scientific irrelevance does mean political ineffectiveness.

    Both Simon Wren-Lewis and Bill Mitchell are not so much scientists as political agenda pushers.#5 What is currently at the top of the agenda of political economists is NOT AT ALL Labour’s Fiscal Rule but the possibility that Jeremy Corbyn becomes the next PM.

    What Simon Wren-Lewis fails to address is the economic fact that because of the macroeconomic Profit Law it holds Public Deficit = Private Profit.#6 Therefore, the MMT policy of deficit-spending/money-creation is clearly in the interest of the Oligarchy.#7 MMTers are fake Progressives.

    Whether both Simon Wren-Lewis and Bill Mitchell do not know the macroeconomic Profit Law or whether both intentionally misled the representatives and members of the Labour Party is at anybody’s guess.

    Egmont Kakarot-Handtke

    #1 Macroeconomics: Economists are too stupid for science

    #2 MMT sucks

    #3 MMT and the canonical macroeconomic model

    #4 Against the mainstream! Against MMT!

    #5 Economics as a cover for agenda pushing

    #6 Are economics professors really that incompetent? Yes!

    #7 MMT’s true program

  6. Stepping aside from the MMT v NK battle- or fault-lines, for a moment, it does seem to a mere non-academic economist mortal, like myself, that the definition of the effective lower bound (ELB) needs to be firmed-up including when it suspends the FCR, in way that is understood and accepted; also, it is not clear -if the 'knock-out' is activated, according to the proposed (FCB) rules, how long the 'exceptional' fiscal stimulus, and, in what form, is allowed; once the MPC raisees raates above the ELB, or within the five year rolling period to balance the current budget?

    If the latter the government could extend it indefinitely, unless it was dated from the MPC decision to raise rates above the 'knockout' ELB level,which ten would need to be clearly defined within the FCB framework.

    The LCR is designed to be operated by a Labour Chancellor; it does seem that the 'knock-out' is there to to give some semblance of technocratic cover to something that he or she wants to do anyway.

    In that vein, if 'No deal' Brexit proceeds, I understand that the government plans an emergency fiscal stimulus in any case to prevent or mitigate a resulting recession. No doubt the current fiscal rule to balance the entire budget(crazy)and to reduce debt as a proportion of GDP will be extended without a blink.

    Both main parties want to raise (needed) spending on current programmes without linking such increases to salient and efficient sources of taxation, due to the anticipated electoral reaction - Conservative Contenders, including Johnson, are pledging to reduce taxes, simply to court support - defining the true fiscal crisis of the state, which can't be resolved by simply reclassifying current expenditures as investment.

    At the end of the day, all government's will adhere to fiscal rules, when it suits their own political interests, and will re-define or suspend them, when it is not.

    With due respect to SRL, I still am unclear as to how he would reconcile the use of fiscal policy as a macro-economic stabiliser in time of recession with the efficient longer-term planning of public services and investment within the context set by the true crisis of the fiscal state

    Perhaps that is because a new political economy, rather than technical refinements to NK and fiscal rule frameworks (largely discussed in a pay-wall journals) is required.

  7. Macro ignorance: Why Simon Wren-Lewis does not come to grips with the plain MMT-fraud

    Links on Simon Wren-Lewis on ‘Bill Mitchell’s fantasy about Labour’s fiscal rule’

    Egmont Kakarot-Handtke

  8. Bill's response on monetary policy used to fight recessions:

    "In this final Part, we focus explicitly on Labour Party’s Fiscal Credibility Rule – which uses these neoliberal frames – and we show that it would fail in a deep recession, causing grief to a Labour government should it be in office at that time."

  9. Thanks for this Simon. Opponents of the rule (who make the argument laid out in your post) seem to conflate two closely related but distinct ideas: the 'lower bound' and being out of ammunition. You can be at the lower bound (the MPC stated this is 0.25% I believe), but still have ample ammunition in the form of credit easing, Q.E, etc.

    As you clearly stated the rule applies when the lower bound is hit, not when the MPC has "run out of ammunition".


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