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Is the British Labour Party aboard the fiscal dominance train – Part 1?

Summary:
As I type this (Sunday), I am heading to Brighton, England from Edinburgh. We had two sessions in Edinburgh yesterday (Saturday) and it was great to share ideas with some really committed people. We had to dodge a Hollywood closure of the streets (‘Fast and Furious 9 had commandeered the inner city to film a car or two swerving out of control or whatever, and I hope the city received heaps for the inconvenience to its citizens. But, with the direction now south, and tomorrow’s two events (more later), I am thinking the place of the British Labour Party in the progressive struggle. It doesn’t look good to me. The news overnight has been that the Party’s “head of policy and the author of the party’s last election manifesto” (quoting the Times today) has quit the Party claiming “I no longer

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As I type this (Sunday), I am heading to Brighton, England from Edinburgh. We had two sessions in Edinburgh yesterday (Saturday) and it was great to share ideas with some really committed people. We had to dodge a Hollywood closure of the streets (‘Fast and Furious 9 had commandeered the inner city to film a car or two swerving out of control or whatever, and I hope the city received heaps for the inconvenience to its citizens. But, with the direction now south, and tomorrow’s two events (more later), I am thinking the place of the British Labour Party in the progressive struggle. It doesn’t look good to me. The news overnight has been that the Party’s “head of policy and the author of the party’s last election manifesto” (quoting the Times today) has quit the Party claiming “I no longer have faith we will succeed”. The blame game starts and, as usual, Jeremy Corbyn’s leadership is in focus. The Times cartoon had the caption “They’ve got what it takes to form a government” with two ducks (in Brighton) looking at a sign against a wall saying “Labour Civil War Chaos”. What should we make of all this? My take is this: there is a clear paradigm shift going on in macroeconomic policy thinking. Every day (it seems) a new article pops up with someone claiming monetary policy has run its course and a new era of fiscal policy dominance is the only viable way ahead. That means that the central bank imprimatur on policy – determining whether such policy can continue to be effective and relying on interest rate adjustments etc as the primary counter-stabilisation policy – is over. That means that New Keynesian economics is over. That means that fiscal credibility rules that are neoliberal central are over. And that is why I think British Labour are looking poorly in the polls. They have taken advice from a number of characters who have pushed them into a ‘New Keynesian’ mindset and they are now ‘yesterday’s news’. They have missed the boat on these major shifts that have been going on. That is why they need a major shift in macroeconomic thinking. Only Modern Monetary Theory (MMT) offers a consistent and credible path for them to make that shift.

The polling situation in Britain

The latest results from the most recent (September 18, 2019) – Politico Poll of Polls for “National parliament voting intentions” are:

1. Conservative – 33 per cent.

2. Labour – 24 per cent.

3. Liberal Democrats – 20 per cent.

4. Brexit Party – 13 per cent.

5. Greens – 4 per cent.

6. SNP – 4 per cent.

7. UKIP – 1 per cent.

The relevant point is the trend which is shown in the following rather difficult to read graph (given it had to be squeezed into the screen). You can see the clear full graph at the Politico site linked above.

The red line is Labour, the Blue line is the Tories, the aqua line is the Brexit Party and the orange line is the Liberal Democrats.

The data is for the last 12 months. Those little dots around each line are the actual observations that have been smoothed by a Kalman filter to get the ‘trend’ lines as shown.

On November 3, 2018, Labour and the Conservatives were tied on 39 per cent and the Liberal Democrats were on 8 per cent. The Brexit Party did not exist.

The Liberal Democrats rise started on April 24, 2019 and although their appeal started to flatten out in early June 2019, they have surged again in the current month.

While the Tories and Labour took big hits from around April 2019, around the time the Brexit Party emerged, Labour has been stuck around its current proportion since early June.

The Tories have recovered somewhat, mostly at the expense of the Brexit Party. They now look as though they could hold government, which I guess is why Labour refused the Prime Minister’s offer of a General Election. When has an Opposition ever declined to go to the polls?

Is the British Labour Party aboard the fiscal dominance train – Part 1?

The on-going paradigm shift in macroeconomic policy

Recent blog posts on this theme are as follows:

1. ECB confirms monetary policy has run its course – Part 1 (September 17, 2019).

2. ECB confirms monetary policy has run its course – Part 1 (September 18, 2019).

3. On money printing and bond issuance – Part 1 (August 26, 2019).

4. On money printing and bond issuance – Part 2 (August 27, 2019).

5. Inverted yield curves signalling a total failure of the dominant mainstream macroeconomics (August 20, 2019).

6. We are approaching a period of fiscal dominance (August 12, 2019).

But this the topic of fiscal dominance has been a core theme of Modern Monetary Theory (MMT) since we started this project some 25 years ago.

In fact, MMT economists are the only ones who have consistently argued that a reliance on monetary policy for counter-stabilisation is an ineffective way to run a monetary economy.

We have consistently shown, against massive push back from the dominant New Keynesians, as monetary policy works by altering the cost of borrowing, it is an indirect way of managing aggregate spending fluctuations (in either direction).

It is uncertain because while borrowers face lower costs, those who earn interest income have less purchasing power.

Further, when there is pessimism about future returns on capital investment and a heightened risk of unemployment, potential borrowers will not seek credit no matter how low the costs of funds goes.

The current neoliberal obsession with fiscal surpluses, buttressed by voluntary fiscal rules that restrict the flexibility of fiscal policy – in both good and bad times – is counterproductive and the next period has to see more fiscal stimulus from governments.

Just this morning I read two articles in the popular financial media that signal the shift that is going on.

The Bloomberg article (September 21, 2019) – A Long-Despised and Risky Economic Doctrine Is Now a Hot Idea – says that:

Hardly anyone thinks central banks can fix a stalling world economy with their current tools. So some of the biggest names in finance are trying to invent new ones.

And all the so-called ‘new ideas’, “foresee the once all-powerful central bankers taking a more junior role, and collaborating with governments.”

While I am somewhat tired of reading about fiscal policy dominance as being a ‘Hit Idea’ it remains the fact that more people are converging on it and leaving behind the New Keynesian neoliberalism which privileged central banks above the elected government in macroeconomic policy making.

It also recognises that MMT, which says that:

… government spending and taxes are better tools to steer the economy than interest rates, has also been gaining support. MMT is relaxed about monetary financing of budget deficits, and doesn’t see it as much different from selling bonds.

Totally relaxed in fact.

It is the most effective way to stabilise the cycle to maintain high levels of employment and distribute the rewards of economic growth to all.

They quote a financial market commentator who sounds the death knell for New Keynesian orthodoxy:

Central bank independence increasingly looks like a brief historical episode that peaked around the turn of the century … Like it or not, get used to the new normal of dependent central banks.

Only MMT has consistently supported that “new normal”.

All the Johnny-come-latelys who are now recognising that the neoliberal normal has failed are welcome.

And this article (September 18, 2019) – The Return of Fiscal Policy – tells the same story.

It says:

Policymakers around the world are coming to realize that it is neither wise nor feasible to rely constantly on central banks for economic-policy support.

I don’t agree with a lot of the article as it is still trying to escape from the neoliberal frames but there is no doubt that it is part of the shift going on.

The point is clear.

With governments refusing to use fiscal policy in a responsible way, central banks, in the face of stagnating growth and rising recession risk, have been forced to implement ever ridiculous monetary policy initiatives (see my blog posts on last week’s ECB policy decisions) despite the clear evidence that those policy moves have been largely ineffective in achieving their stated aims and have motivated a number of negative side-effects (for example, asset price inflation).

So is the British Labour Party catching the same train?

So where is the British Labour Party in this shift?

I consider that it is stuck in the old paradigm – with a policy rule that allows for monetary policy dominance. Their major fiscal statement allows for some fiscal flexibility but would be at the behest of the Bank of England Monetary Policy Committee.

In other words, the elected Chancellor, who is answerable to the people via the ballot box, takes orders from the Monetary Policy Committee and cannot suspend the ‘Fiscal Rule’ until the MPC says so.

The Party is thus being left behind because they have been taking advice from economists that are stuck in the old paradigm, notwithstanding their efforts to claim otherwise.

At the heart of this old paradigm is British Labour Party’s so-called Fiscal Credibility Rule, a product of its liaison with New Keynesian academics.

I have written extensively about the ‘Rule’ – see these blog posts (among others):

1. Forget the official Rule, apparently, there is a secret Fiscal Credibility Rule (June 19. 2019).

2. The British Labour Fiscal Credibility rule – some further final comments (October 23, 2018) – this post has an extensive list of links to earlier blog posts on this topic.

It was designed by economists who have repeatedly written that the conduct of macroeconomic policy, designed to address fluctuations in non-government spending and maintain stable growth and stable inflation, is best left to unelected and largely unaccountable central bank policy committees

This is the mainstream view that is rapidly being discredited by the evidence of the failure of central banks to achieve their stated targets, the array of negative interest rates out to the distant regions of the yield curve, the stagnation in real wages growth, the rising and unsustainable wealth and income inequality, the rising private debt levels, and the low to zero growth that many economies are now trapped in as a result of this reliance on monetary policy and the associated bias towards fiscal austerity.

The ‘Rule’ that they came up with, which I have long argued has trapped the British Labour Party in a neoliberal straitjacket, and, which, is now looking like being left behind by the shifts in policy thinking everywhere, is outlined in this document – British Labour Fiscal Credibility Rule.

Let’s make sure we know exactly what is says because the proponents of the ‘Rule’ and supporters of it have regularly tried to offer spurious interpretations of it to cover their tracks.

First, there is the issue of framing and language.

As the period of fiscal dominance consolidates, we will see new framing and language emerge.

The British Labour Party ‘Fiscal Rule’ exemplifies the way Labour-type parties thought is was being ‘credible’ by dancing with the neoliberals, using their frames and language.

They seem oblivious to the fact that using neoliberal frames only reinforces them.

So, while the Labour Party might claim to advance a progressive agenda, the fact remains that if they frame those intentions in the metaphorical language of the neoliberals then they just privilege those frames and reinforce the attitudes that are triggered by them.

As an example, the ‘household budget’ analogy is one of the most powerful ways in which citizens are mislead by mainstream macroeconomists about fiscal policy and the capacities of government.

The fact is that the currency issuing government is the monopoly issuer of the currency and, thus, has no financial constraints.

Our experience as householders using the currency the government issues, provides us with no knowledge of the choices and constraints facing such a government.

Which raised the question as to why a so-called progressive political party such as the British Labour Party would want to place the household ‘budget’ analogy at the core of its ‘Fiscal Rule’.

The ‘Rule’ does just that:

While there are exceptional times when shocks from the private sector mean that government has to step in to help, everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.

Pure neoliberal framing and language.

The British government does not have a ‘credit card’ that will default if continually spends more than its revenue.

In other words, the ‘Fiscal Rule’ leaves British Labour locked in the old paradigm and it should abandon it forthwith.

But there is more to this and we will explore the broader operational concerns in Part 2 tomorrow.

Conclusion

My view is that to stay abreast the current trends, which are moving quickly towards the basic MMT approach, even though several mainstream economist are trying to claim they knew all this stuff all along, British Labour must refresh the panel that it seeks advice from.

There is no scope anymore for views that espouse the dangers of fiscal deficits and the desirability of fiscal ratios that promise to reduce public debt ratios and the like.

Sure enough, the New Keynesians are desperately trying to reposition themselves as the world passes them by. But if British Labour really wants to be progressive and stay ahead of the curve it should distance itself from these characters and seek advice from genuine MMT economists.

In Part 2, I will argue that the Fiscal Credibility Rule ties British Labour to the old paradigm and makes it look very old-fashioned in terms of the direction of policy debates around the world.

European-UK-US Speaking Tour September 2019 – Where am I today?

I have two events today.

1. September 23, 2019 – Brighton Labour Party Fringe Event (GIMMS – 14:00 start) – public event.

2. I am appearing with British Labour MP Chris Williamson from 16:00 today and we will be talking about MMT and the Green New Deal. I cannot yet disclose the venue given the efforts by some to close all such events down. The thugs associated with the Labour movement have been bullying venue owners to prevent Chris from speaking at the Brighton Fringe Events.

The venue we will be speaking at together will be disclosed later today (Monday) and we will be able to walk from the GIMMS event at Dorset Gardens Methodist Church.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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