How things are changing. After the British election in December, the policy terrain in the UK has shifted such that the Tories are now being lectured to about the dangers of a stimulus package, while British Labour seems to be promoting leadership candidates that mostly were part of the problem that led to their failure. In the latter context, we are seeing King or, should I say Queen makers, who I would have thought were unelectable trying to influence the leadership choice. And former Labour advisors tweeting and what have you about what Labour should be doing when it was their advice that got the Party into the mess it is currently in. Meanwhile, the Tories have an almost open field to finish the first stage of the Brexit process off, and, secure the ongoing support of the voters that abandoned Labour in the election. The Tories will have restored sovereignty to Britain and freed themselves from the restrictive, neoliberal environment of the European Union. Now don’t get me wrong, I have no truck for the Tories. And all along, I considered that Brexit would deliver great outcomes for Britain in the hands of the Labour party as long as they simultaneously abandoned their neoliberal obsession with fiscal rectitude, as expressed by their ridiculous Fiscal Credibility Rule. Labour will now have to rue their ill-conceived abandonment of the Leave voters in favour of the cosmo Remainers. For now, the Tories have open slather – the worst of the outcomes possible. However, the only attenuating factor is that Boris Johnson is a smart operator and will be keen to ensure that the voters in the Midlands and the North remain Tory on an ongoing basis. That means he will have to do abandon the Tory austerity bias and invest billions into the regions that have been torn apart by his parties obsession with fiscal surpluses. That might, for a while, provide some good news for Britain.
Apparently, there are now five leadership hopefuls left in the contest.
Of the remaining five, all were Remainers of varying intensity, with only one, Lisa Nandy expressing concern after the referendum about Labour’s shift towards reneging on its commitment to honour the June 2016 referendum result and the increasing call prior to the election for a second referendum.
The other candidates kept hammering on about the need for a ‘Peoples’ Vote’, which was code for repeating the process until they got their own way, irrespective of what the majority of voters wanted.
They got the ‘Peoples’ Vote’ in December, with the Tories dramatically increasing their majority. This left Labour in the wilderness with nowhere to go unless it changes its position significantly.
I thought it was apposite that one of the more intransigent internal critics of Jeremy Corbyn’s leadership and strident advocates for a ‘Peoples’ Vote’, who declared she would push for Britain to re-enter the European Union if elected, has been nominated by Birmingham MP Liam Byrne to become the leader of the Labour Party (Source).
For those with a short memory here is a photo that should disqualify him from any influence within the British Labour Party.
The handwritten letter was written when Byrne was Chief Secretary to the Treasury in 2010 and upon his leaving he penned the message:
I’m afraid there is no money.
This was in the context of the GFC and Gordon Brown’s government pursuing fiscal austerity before the economy had recovered because, in Byrne’s own words “the responsible thing to do was draw up a long-term plan to cut spending … to halve the deficit in just four years” (Source).
So he wrote the note for the incoming Tory Chancellor, which of course gave David Cameron and George Osborne all the political ammunition they needed to discredit Labour and to justify their own pernicious austerity program, at a time when Britain required ongoing stimulus for many years to regain stability after the crisis.
Anything Liam Byrne might have to offer the Labour Party after that should be disregarded.
So it looks like the Labour Party hasn’t learned very much and the old influencers are still pulling strings in the leadership battle. The five candidates who will go through to the next round hardly inspire confidence of a significant turnaround in Party policy in the areas that need to dramatically change.
I will talk about some of those changes in my seminars in London and Manchester in February.
The Tories and stimulus
I read this article in the Daily Telegraph (January 12, 2020) – Try as he might, the Chancellor cannot escape the constraints of budget deficit – from Roger Bootle (it is behind a paywall but if you examine the source code all the text is there).
Roger Bootle is a former financial market economist and has been a supporter of the Tory austerity over a number of years.
His only saving grace is that he is opposed to the European Union, but for very different reasons to my own opposition to the neoliberal cabal.
He wrote in 2015 that (Source):
… Mr Osborne had to impose some early fiscal pain …
However, he is no New Keynesian who believes in the “the doctrine of ‘expansionary fiscal contraction'”, which all the austerians were pushing at the time to pretend that what they were doing was promoting growth.
He also doesn’t believe in the other myth that accompanies that nonsense – “Ricardian equivalence … the idea that fiscal expansion has no impact because households and firms understand that it implies higher future taxes and they reduce their current spending accordingly.”
He wrote that “Economists who believe that people behave like this give the subject a bad name.”
But his support for austerity came down to his view that “The UK was fighting for fiscal credibility” and that the markets would turn on the government soon, even though “the debt to GDP ratio was not that high”.
He even acknowledged that the “financial markets have gobbled up British government debt” with the relatively high fiscal deficits.
But like all these soothsayers, he believes that in some mysterious future, the financial markets will turn on the British government and stop buying the debt and sell off the currency.
They never analyse that. The ‘sell off’ bit is the scaremongering. Why buys the sterling assets and why is not part of the story.
Remember, for there to be a sell off there has to be buyers!
He also espoused the view that while fiscal policy had to be tightened through austerity, monetary policy could “offset the effects of fiscal tightening” via Quantitative Easing.
So “Mr Osborne’s tough early stance was about right” even though the economy tanked badly after showing signs of recovery after the GFC as a result of the fiscal support.
Fast track to January 2020.
In his Telegraph article, he is now giving out warnings to the Tory Chancellor not to introduce a large stimulus package, which I believe will be necessary to smooth the transition out of the European Union.
The Tories will also think it is necessary to shore up their new voters and to close the door on British Labour who will probably come up with an even more ridiculous Fiscal Credibility Rule than before in a pathetic attempt to show voters they are responsible.
That sort of reasoning was driven by the same paranoia that Roger Bootle invokes – that the amorphous financial markets are just waiting to pounce and kill the pound if the government dares to run a fiscal deficit!
I will address that issue at the end.
First, here is Bootle’s argument.
He notes that the Tories have shifted from a position where “the Government was absolutely obsessed with reducing the budget deficit and the ratio of debt to the size of the economy” to the current position where “the case for fiscal restraint has all but disappeared.”
He thinks the Tories:
… are in for a rude awakening.
1. He realises with rates low in financial markets – investors are clamouring for risk-free assets (government bonds).
2. Central bankers are now calling for fiscal stimulus.
So his whole idea (“rude awakening”) is predicated on the “things can change” vagary that these soothsayers invoke to push their message when they have zero evidence to rely on.
The more amorphous and vague they are the better because then they can keep the scare going for longer even after, for example, Japan has shown the way for nearly three decades.
And then, once you have bought the “things can change” snakeoil, it is easy to lure you into the conclusion that:
If and when market conditions do change, it will be easier for the management of the public finances if the debt ratio is lower rather than higher.
In other words, according to this logic, an austerity bias is necessary.
And the horror story continues by – yes – as we would hope (:-)) – by talking about the “the exchange value of the pound”.
It gets confusing.
Fiscal stimulus, according to Bootle, is “likely to strengthen the exchange rate” but the UK needs “a stronger currency like a hole in the head”.
It is hard to get on terms with this.
The usual mainstream argument is that fiscal deficits cause a sell-off in the currency. So there are limits on borrowing.
But, for Bootle, the limits on borrowing relate to the need to reduce the exchange rate – because “the UK is running a huge current account deficit and seriously needs to improve its competitiveness”.
Neither position is tenable.
Which then relates to his next concern: “does it matter what it spends money on?”
Bootle claims that Britain is neither experiencing serious mass unemployment where any fiscal stimulus will be beneficial nor at full employment, where “extra government spending must squeeze out spending by the private sector.”
His reasoning about the latter is somewhat erroneous.
He thinks the squeeze comes “as market rates of interest rise in response to increased government borrowing”.
But there is no reason for yields to rise at full capacity. As long as there are credit-worthy borrowers walking into banks, the latter will create loans which create deposits, irrespective of what the government is doing.
So there is no finite pool of savings which drive interest rates up.
What happens at full employment is that the government has a choice:
1. Maintain the current nominal growth in spending and hence the relative size of the government and non-government sectors.
2. Try to gain a greater share of real productive resources, which requires the government to introduce complementary policies (to the spending increase necessary to elicit that increasing share) which deprive the non-government sector of the use of the resources that the government wishes to transfer into public use.
In that sense, the government is squeezing out private spending.
If it didn’t do that, then inflation would be the upshot as the total nominal spending growth in the economy would be incompatible with its productive capacity.
Roger Bootle does believe “the amount of spare capacity in the economy is greater than official estimates suggest”, which means that firms will initially respond to a fiscal stimulus by increasing output, which will have the beneficial effect of also increasing productivity.
His preference is for increased public investment, given that “the UK’s rate of both public and private investment is very low compared to most other advanced countries”.
But he does not think the government should be relaxing “current spending”, which is spending on employment, consumables (which provide services in the current year), such as the NHS and other service delivering departments.
Although he thinks the election promises should be “honoured”, the government should be reducing current spending to free up room for “major tax cuts”.
Overall, this is the standard argument from a ‘deficit dove’.
It is based on a sequence of myths, that are shared by the austerians, who just give them more weight:
1. Governments have to fund their spending.
2. Recurrent spending should always be covered by taxation revenue.
3. Private investment is usually “more beneficial” relative to public investment because the “public sector has a poor record of assessing the costs and returns to investment”.
4. Tax cuts have to be ‘paid for’ with recurrent spending cuts.
These underlying contentions are mostly wrong.
If public debt was truly a problem, then the government could simply not continuing matching their deficits with debt-issuance.
For more discussion about that option, please read these blog posts (among others):
1. OMF – paranoia for many but a solution for all (November 28, 2013).
2. On money printing and bond issuance – Part 2 (August 27, 2019).
3. On money printing and bond issuance – Part 1 (August 26, 2019).
If tax cuts are deemed appropriate, then there is no need to adjust spending downwards, unless it is concluded that the deficit should not change.
That assessment can only be made in relation to the state of the overall economy, rather than a knee-jerk view that all recurrent shifts in the fiscal position have to be product of exact offsets.
There is also no evidence that private investment decision making leads to superior outcomes in terms of resource usage.
The sort of vague paranoia that Roger Bootle is expressing here – the “things can change” vagary – is also deeply held within the British Labour Party.
When I criticised the Fiscal Credibility Rule, I was told by Labour insiders (including the Shadow Chancellor) that I didn’t understand the financial markets.
Apparently they did.
When I met with the Shadow Chancellor in October 2018, it was clear that they believe that the financial markets in Britain (the ‘City’) will crucify a government that runs a progressive policy campaign without the fiscal rule.
It means that British Labour has not advanced much since the mid-1970s when Dennis Healey mislead the British people by claiming that the government had run out of money and had to borrow from the IMF.
Amorphous sorts of claims about destroying a currency etc abound but the fact is that if the government brings its legislative capacity to bear the financial markets are the losers not the power brokers.
Iceland, a tiny little country with a huge financial system (relatively), has demonstrated exactly how that legislative capacity can overpower even the most powerful foreign banking interests.
The point is that Labour’s Fiscal Credibility Rule was really a document designed to appease the financial markets.
It is some mumbo jumbo that British Labour naively thinks will placate the currency traders and others who might bear malice against its undoubted progressive policy agenda.
The problem is that this reinforces the narrative that deficits and public debt are in some way ‘bad’.
I think this degree of paranoia is misplaced and reflects a fundamental failure to understand the financial markets and what they require.
I have had several meetings in recent months with some of the largest investment managers in the world. These are the people who the Shadow Chancellor and his advisors are fearful of.
They have been seeking me out to learn about Modern Monetary Theory (MMT) because they realise that by adhering to the views of the mainstream economists, they have been exposing their investors to losses and reduced returns.
I never give investment advice. But I am happy to educate and move more people away from mainstream economics.
The point is that the British Labour advisors and the politicians have fundamentally misunderstood the situation.
First, austerity around the world and a reliance on monetary policy has generated financial market outcomes that are unsustainable for financial investors.
All around the world, interest rates and yields on assets are falling and we are now seeing negative interest rates on long-term bonds becoming the norm.
The pension funds and insurance funds are also facing a major asset-liability mismatch as a result.
And to resolve the mismatch, they are seeking to generate higher returns on their assets, which means they are taking on higher risk and exposing themselves to higher probabilities of insolvency in the face of any new crisis.
It is an unsustainable position.
And it is making life very difficult for the large investment funds who seek stable returns.
What they are hankering over is an end to the neoliberal era of passive fiscal policy and monetary policy interventions that are driving yields into negative territory.
They are getting on board the shift to fiscal dominance that the central bankers are demanding.
They are becoming increasingly attracted to MMT because they can see that we have consistently articulated the case for fiscal dominance.
After many years of monetary policy dominance, which has failed to deliver on its promises, the game is up.
That is why these investment bankers have been talking to me about policy choices etc.
So if the British government forgets about stupid fiscal rules and just uses its fiscal capacity to improve service delivery, invest in nation building infrastructure that will crowd-in private investment, then also given that Britain enjoys the rule of law (provides contractual certainty and enforceability), has a skilled labour force, etc. then far from selling off the currency, I would expect FDI to be flooding in.
This is also in the context of the world being awash with savings which are just sitting in unproductive deposits somewhere because there are insufficient investment opportunities available as a result of the austerity bias.
So the very people that the British Labour politicians think would destroy the currency if they break out of the neoliberal framing and rules, would, in fact, be shifting massive flows of investment into Britain – and pushing sterling up.
But I am forgetting.
Labour lost. They took bad advice and made stupid decisions that abandoned their loyal voters.
So, it will be the Tories who have the opportunities to stimulate growth in a post-Brexit Britain and further damage the Labour Party’s electoral prospects.
For more discussion about this theme, please read these blog posts (among others):
1. Is the British Labour Party aboard the fiscal dominance train – Part 1? (September 23, 2019).
2. Is the British Labour Party aboard the fiscal dominance train – Part 1? (September 24, 2019).
3. ECB confirms monetary policy has run its course – Part 1 (September 17, 2019).
4. ECB confirms monetary policy has run its course – Part 1 (September 18, 2019).
5. On money printing and bond issuance – Part 1 (August 26, 2019).
6. On money printing and bond issuance – Part 2 (August 27, 2019).
8. We are approaching a period of fiscal dominance (August 12, 2019).
9. Forget the official Rule, apparently, there is a secret Fiscal Credibility Rule (June 19. 2019).
10. 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.
The Labour Party leadership battle inspires no confidence.
The same failed advisors are out there in the social media handing out more advice.
Remain is still dominating the urban cosmo narratives.
Meanwhile, the Tories, with an increasingly clear way forward, are seizing the opportunities.
The problem is that “things can change” and by that I don’t mean that the financial markets will do anything. I mean that the Tories are not social democratics. Their DNA is mean and nasty. So don’t expect the stimulus to create a progressive dreamworld.
But then the British people have Labour to blame for allowing the Tories to take control of the Brexit process.
That is enough for today!
(c) Copyright 2020 BIll Mitchell. All Rights Reserved.