Last week (June 20, 2019), the British Chancellor (for now) gave his – Mansion House dinner speech 2019 – Philip Hammond – at the Lord Mayor’s residence just across the road from the Bank of England in London, which should have conditioned the content of his speech. The guests at Hammond’s evening were mostly male bankers with the usual cohort of politicians. This event is the UK equivalent of the US President’s State of the Union speech except at the British event, both senior economic officials, the Chancellor and the governor of the Bank of England address the audience. The Chancellor’s speech, aimed mostly at the potential PM candidates tried to claim that the if Britain was to exit the EU without a ‘deal’ then the Government would run out of money. He didn’t use those words but shrouded the message in buzz-terms such as “fiscal space” and “fiscal headroom”, which are among those mainstream macroeconomic terms that mean nothing when coming from a guy like Hammond. Worse, was the response over the weekend by the Shadow Chancellor.
It is Wednesday and only a relatively short blog post. Yes, some more on that Fiscal Rule that seems to be causing people to lose sleep (not me). First, we had the Duck Test debate about the British Labour Party Fiscal Credibility Rule. Those promoting the Rule have been at lengths to deny its neoliberal framing, language and concepts. Not an easy task when the Rule talks about a currency-issuing government wanting to avoid “putting the rent on the credit card month after month”. Sounds like a duck to me. Then there was the ‘all critics (me) are stupid’ approach because they (I) apparently didn’t understand the Rule, simple as it is in construction. That didn’t end well either. Now, rather innovatively, we have the introduction of the Secret British Labour Party Fiscal Credibility Rule – which tells us that the actual British Labour Party Fiscal Credibility Rule, you know, the one published by the “General Secretary of the Labour Party on behalf of the Labour Party” is not the real rule. There is another one that us silly billy types have failed to detect and only those who have close personal contact with the members of the Monetary Policy Committee of the Bank of England could possibly know about. So in our ignorance we have no right to criticise the Rule or to impute nasty motivations from the MPC (not that we did impute anything anyway). And, to put the icing on the cake, we now are told that the Chancellor can abandon this ‘Secret’ Rule whenever he/she likes and does not require the imprimatur of the MPC anyway – so butt out all of you. Of course, only those who are part of our insiders’ club can know anything about this. Summary: Losers getting more lost each time they try to come up with a justification for the duck!
Last week, the EU finance ministers (the ‘Eurogroup’) met (June 13, 2019) in Luxembourg as part of their regular schedule. There was a lot of talk in the lead-up to the meeting whether Emmanual Macron’s push for a more coherent EU fiscal capacity to act as a counter-stabilisation capacity for the beleaguered Economic and Monetary Union (EMU). As is normal, there was no progress made and the press reports said that the finance ministers “continued to clash over almost every feature of the new fiscal tool, including the source of funding” (Source). No surprises at all. So the ‘fix the roof while the sun is shining’ agenda, that many Europhile Left commentators have been hoping for, was abandoned. The roof still has gaping holes and the EMU will once again fail badly when the next economic cyclical downturn comes through. And further, the lack of leadership in the fiscal area is creating a massive dilemma for the ECB and its conduct of monetary policy. In effect, the lacuna is demonstrating to all and sundry that monetary policy is incapable of achieving the aims despite the ECB deliberately breaching the legal framework established for it in the Treaties. The Eurozone dysfunction goes to a new level – and it is a time of growth.
If there were two lessons that can be taken from the GFC among others then we should know, once and for all, that, first, monetary policy (in all its glorious forms these days) is not a very effective tool for influencing the level of economic activity nor the price level, and, second, that fiscal policy is very effective in manipulating total spending and activity. Of course, those lessons provided the evidence that turned macroeconomics on its head because for several decades, as the Monetarist surge morphed into all manner of variants, tried to eulogise the primacy of monetary policy and rejected the use of fiscal policy. There were all sorts of justifications – time invariance, lags, politicians cannot be trusted, etc – but at the heart of the shift towards supposedly independent central banks was the political desire to neuter the capacity of governments to use their currency capacity to advance the well-being of the many, while at the same time, using that same capacity to advance the interests and real income shares of the few. Depoliticisation worked a treat for the top-end-of-town. The problem is that the lessons have not been learned and all manner of commentators still think that monetary policy is the king. Eventually, we will move beyond that but the pain of holding on to the myth is damaging for people, especially those who are without work, are underemployed or have been forced into early retirement by the poor economic performance in this austerity-biased era.
The debates about MMT are expanding. There are weird offerings springing up each day. I read something yesterday about how MMT is really just Marxism in disguise and therefore a plot to overthrow entrepreneurship. Well in a socialist society there will still be a monetary system! Most of the critiques just get to their point quickly – MMT is about wild printing presses undermining the value of the currency! That should summarise 25 years of our work nicely. But there are also other developments on a global scale. A few weeks ago there was a lengthy debate in the Japanese parliament during a House of Representatives Committee hearing considering whether the October sales tax hikes should continue. The Finance Minister, Taro Aso was confronted by Committee members who indicated that it was useless denying that Modern Monetary Theory (MMT) was some abstract theory that was wrong because the Japanese are already “doing it”. The Minister told the hearing that MMT was dangerous and would undermine financial markets if anyone said otherwise. An interesting discussion took place. It highlighted some key features of MMT. It also indicates that progress is being made in the process of education aimed at giving people a better understanding of how the monetary system that we live within operates.
I appeared on the ABC radio program – The Economists – today (April 25, 2019). The topic of today’s shows is – Debt, deficits and good housekeeping: what’s the fuss about?. The presenters talked among themselves for about 10 minutes and then brought me on for an additional 20 minutes to provide more commentary and detail. Australian listeners can listen to the repeat program on Radio National at 13:30 on Friday. Overleaf I provide details of how anyone can access the program audio. Given the topic, it starts off with a great 8-second snippet from AC-DC (a great band).
Eurostat released the latest fiscal data for 2018 on Tuesday (April 23, 2019) which showed that – Euro area government deficit at 0.5% and EU28 at 0.6% of GDP – apparently a cause for celebration if you can believe the news reports that have accompanied the data release. The problem is that these numbers are meaningless without a context. And a relevant context is how well the monetary system is accommodating the advancement of material well-being among the citizens of Europe. On that ‘functional’ criterion, the horror story, more or less continues. Data relating to the real world (as opposed to the world of fiscal numbers on bits of paper) tell us that the damage from the GFC interacting with a dysfunctional monetary system design still lingers and the 19 Member States are still highly vulnerable to the next crisis. The austerity mindset remains and these fiscal outcomes indicate a failure of policy. Nothing to celebrate at all.
In a few weeks I am off to Britain again to participate in a series of events. Two of these events will be in Scotland where we (Warren and I) will discuss, as outsiders, issues pertaining to the monetary arrangements that might accompany a move to Scottish independence. It is a controversial issue in itself, but, unfortunately, is also intertwined with the vexed issue of EU membership. And the complication then becomes that progressives, who might otherwise be attracted to the Modern Monetary Theory (MMT) way of understanding the monetary system, also exhibit the standard misconstrued Europhile view that the EU, neoliberal though it is, can be reformed and that an independent Scotland should be part of that mess. And, in doing so, they then take problematic positions on the currency question. So a sort of ‘nest of vipers’ sort of situation, from the Aesop’s fable – The Farmer and the Viper. As in the Fable, the Europhiles embrace of the EU will always pay them back in grief. Anyway, while I am always cautious discussing the pro and con of situations where I have no direct material stake and a less than full understanding of specific cultural and historical influences that are at work, the Scottish question is interesting and demonstrates many of points that nations should be cogniscant of when discussing monetary sovereignty. And besides I have to get up in Edinburgh and Glasgow in a few weeks so as a researcher I am trained to be prepared and seek the best understanding that I can of the complexity of the situation. I will be writing a few posts on the Scottish issue as I prepare for that speaking tour.
This morning, I declared that I was angry on a multitude of levels. I am part of a local community group that is fighting greedy developers, corporate real estate speculators and a compliant local council over an outrageous abuse of planning. That really gets me mad. NSW, the state I reside in mostly, just re-elected a corrupt conservative government, largely because the former leader of the Labor opposition couldn’t keep his hands out of the clothing of a female journalist and his successor mouthed off about Asians taking our jobs. Bloody hell, the Labor Party had it won, and then lost it. Angry. Then we go a little higher in the hierarchy to the fiscal statement (aka ‘The Budget’) which the conservative Australian government brought down last night. And outrageous piece of chicanery and economic malpractice. What is worse is the head of the Federal Opposition’s policy think tank – the John Curtin Research Centre – put out an Op Ed late last week accusing the Conservative government of not doing enough to “address debt” and shirking “serious, structural repair” and not having a public “debt ceiling”. What the F&*k! Did the IMF write this piece? The ‘think tank’ claims it is a “social democratic think-tank dedicated to developing ideas and policies for a better Australia”. Yes, folks that is what social democracy means in Australia – neoliberalism! More on the fiscal statement in what follows. And if I wasn’t already hugely mad enough with all of that, I read that the British Labour Party is desperate for Britain to stay in the Single Market – lock-stock-and-barrel. What! This is the most advanced expression of neoliberalism. I guess it is consistent with their ridiculous ‘Fiscal Credibility Rule’ that keeps the current Labour Party firmly in the Blairite tradition – scared to death of those creeping, amorphous financial markets and so lacking in confidence that they hang on to the grim lies that Dennis Healey introduced to Labour narratives in the mid-1970s. Mad as hell about that! And then we get to Brexit central. The people voted in a majority to LEAVE! It was a correct decision for the long-term, progressive future of Britain. The cosmopolitan liberals couldn’t cope with the idea of, maybe, having to queue up at the border of the 27-nation European Union when they go on their next ski holiday. Their answer – vilify the voters who knew the EU was the exemplar of neoliberalism and do everything to stop the departure. Enter a totally incompetent Tory government to oversee the departure and you get an almighty mess. For once I agree with the former Bank of England governor – Britain should get out next week with no deal and announce a major fiscal stimulus to keep the economy moving while adjustment occurs. So I am glad I have a full head of hair! Then I read another plethora of anti-MMT pieces and my humour improved. A bit of comedy is always important!
This is the final part of my three-part series on the why I have confidence in the primacy of fiscal policy over monetary policy and eschew any proposals, by other Modern Monetary Theory (MMT) advocates or others, to replace the so-called ‘independent’ central bank, with an ‘independent’ fiscal authority, which they seem to think would take the ‘politics’ out of fiscal policy decision-making and focus it on advancing the well-being of the people. Such a proposal is not core MMT. It is an opinion that, in my view, is based on deeply flawed logic and would would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. In this final part, I extend the reasons that progressives should oppose such outsourced decision-making and, instead, advocate the introduction of processes that always make our elected politicians fully responsible for the decisions they take on our behalf. Our polity should be always be held accountable for those decisions and not be allowed to defer responsibility to an external source (like an ‘independent’ central bank or fiscal authority).