In the last week, we have heard from the Chief Economist at the OECD (Laurence Boone), who has been touted on social media as offering a fundamental shift in economic thinking at the institution towards fiscal dominance. This is an example of a series of public statements by various New Keynesian (that is, mainstream macroeconomists) who are apparently defining the new macroeconomics of fiscal dominance. The point is this. Within the mainstream macroeconomics there was always scope for discretionary fiscal intervention under certain conditions. The conditionality is what separates their version of the possibilities from those identified and explained by Modern Monetary Theory (MMT). Just because these characters are coming out of their austerity bunkers to scramble to what they think is the right side of history doesn’t mean their underlying economics has changed. If you dig, you will find the same framework in place, just nuanced a little to suit the times. But the leopard hasn’t changed its spots. The underlying train wreck is still there and will be rehearsed again at some future date unless we push forward in abandoning the whole New Keynesian approach.
Last week (January 4, 2021), a number of stories emerged reporting an interview that the OECD Chief Economist had given the Financial Times where she said that governments should not invoke fiscal austerity until well after the pandemic was solved.
I read in one article that her comments “mark a U-turn of sorts for the OECD, which favoured austerity post the global financial crisis. Now, the economist … is calling for the continued use of fiscal policy up to two years after growth has bottomed out and ditching the “one-size-fits-all fiscal rules” (Source).
I wouldn’t be jumping to that conclusion.
The Financial Times published an article based on the interview last week (January 4, 2021) – OECD warns governments to rethink constraints on public spending.
The OECD economist claimed that “the public would revolt against renewed austerity or tax rises if governments sought to quickly return deficits and debt to pre-pandemic levels.”
So fear of revolt rather than incorrect economics.
She admitted that the OECD and other organisations were wrong in the aftermath of the GFC to impose austerity:
The mistake that we made was not a lack of stimulus during the trough in 2009 . . . the mistake came later in 2010, 2011 and so on, and that was true on both sides of the Atlantic … The first lesson is to make sure governments are not tightening in the one to two years following the trough of GDP.
Everyone knows the strident role that the OECD played in inflicting the terrible austerity on countries after the GFC.
So it will be interesting to learn how the internal politics of the OECD has changed so that they disavow there shocking past which has left a trail of socio-economic damage in its wake.
The Chief Economist is now claiming that “short-term numeric targets for public deficits and debt” should be abandoned and replaced by “long term sustainability goals”.
This is the same sort of code talk that Olivier Blanchard and others are using to hold themselves out as economic thought leaders – bringing the profession out of its neoliberal (recent) past into a new world of progressive thinking.
Not so fast!
The Chief Economist disavowed the use of “one-size-fits-all fiscal rules to get debt back to a target”.
So what are they now claiming about “debt sustainability”.
Well apparently there is a thirst for public debt among investors who “are willing to soak up the bond issuance of most advanced economies”.
That has always been the case!
It is risk-free – except where the nation has surrendered their currency sovereignty – such as the 19 Eurozone Member States.
So that hasn’t changed.
She added that:
… central banks will keep interest rates low for the foreseeable future …
By massive public bond purchasing programs.
In other words, an admission that the markets do not set interest rates or yields and that government can always control the yields of any liability they issue.
But you get a hint that this narrative and understanding of the fiscal capacity is not really what Modern Monetary Theory (MMT) economists outline when we read from her that:
Interest rates are set to remain low for a time long enough that we can reconsider what we do with fiscal policy …
So the fiscal dominance is only temporary while ‘interest rates remain low’ – but you can see the narrative is not quite worked out.
If central banks (part of government) can keep interest rates low for as long as they want, then the reference to “time long enough” is irrelevant.
And you further realise that the old paradigm is operating here when she talked about relegating “independent central banks … to a supporting role” and that “Monetary policy has less room to act than it did in 2010”.
The central banks have never been ‘independent’.
Here are a few blog posts (among many) where I examine that scam which was just a political tactic to depoliticise government policy and inflict austerity and elevated levels of unemployment:
1. More political interference from the central bank – oh but its independent! (August 24, 2020).
2. The central bank independence myth continues (March 2, 2020).
3. Censorship, the central bank independence ruse and Groupthink (February 19, 2018).
4. The sham of central bank independence (December 23, 2014).
5. Central bank independence – another faux agenda (May 26, 2010).
From a daily funds perspective the central banks have to work hand-in-glove with the treasury given the impact on the cash system of fiscal policy and the implications that has for liquidity management.
They cannot be independent.
The confusion continued.
On the one hand, she claimed it was “not healthy to have just monetary policy run by independent people, accountable but not democratically elected, in charge of all of the stabilisation policies”.
On the other hand, that central banks should stop “governments did not pump up demand so far that inflation became a threat”.
Which runs counter to the ‘democracy’ argument.
Further, from an economic perspective, central banks really cannot control inflation in the way that the New Keynesians believe.
If there is any further proof of that statement needed, given the performance over the last decade (and several decades in Japan), then I am unsure what it might comprise.
The blind belief that monetary policy is somehow effective unless interest rates are at a zero bound is pure New Keynesian mantra (a religious belief). It doesn’t resonate with reality.
A Reuters news report yesterday (January 11, 2021) – Covid-19 shook, rattled and rolled the global economy in 2020 – also bought into the fiction that these mainstream economists are leading a paradigm shift.
It repeats the latest claims by progressives even that fiscal policy is safe at present because public debt is cheap (yields are low).
The “global mountain of sovereign debt amassed by governments” is not going to cause an immediate need for a fiscal withdrawal because of the “historically low interest rates hovering around”.
Reuters quotes the OECD Chief economist as agreeing with this logic.
Which tells you that these characters think that if interest rates rose the outstanding public debt would become a problem.
But they never really come to terms with the reason interest rates and bond yields are low and negative in some cases.
It is because governments have used their superior capacity to render that state. The markets haven’t driven the rates down. Government policy has.
So there is no conditionality about how long large fiscal deficits can be reasonably maintained.
Indefinite is the answer should that prove to be the best way to fill the spending gap left by the desire to save overall by the non-government sector.
The Reuters article gets two things right:
1. “One offshoot of that largesse has been that consumer spending has held up better than many had expected.”
2. “Another direct effect of all that government spending has been a surge in savings among consumers in many parts of the world.”
So this debunks the mainstream claims that public spending is detrimental to private income (the crowding out and Ricardian equivalence arguments).
Government spending multiplies to fund the desire to save by the non-government sector, growth in national income, which, in turn then allows households to save.
As an aside, but not unimportant, Dr Boone (the Chief Economist) attracted a lot of criticism in 2014 when the then French President, François Hollande appointed her to be the government’s economic advisor.
The issue was that she had made her career in European banking – at various large investment banks that were at the heart of the GFC – before entering the political fray with the French Socialists (as advisor).
Commentators pointed out that her appointment didn’t quite fit with the – Speech – made by François Hollande as he pitched to be the President on January 22, 2012.
In that speech, he talked about democratizing the state, to expand the rights of parliament, to make sure appointments to positions of highest office would serve the people, and to wipe out corruption.
He talked about his socialist values and the defending the rights of workers against conservative interests who have never served their interests.
He said that:
Une crise financière déstabilise les Etats, des dettes publiques énormes donnent aux marchés tous les droits. L’Europe se révèle incapable de protéger sa monnaie de la spéculation. Notre propre pays est confronté à un chômage record et s’enfonce dans la récession autant que dans l’austérité.
That is, the financial crisis had destabilised the state and the financial markets held all the cards and were holding Europe to speculative ransom. The result has been record unemployment and recession as a result of austerity.
He said that this was eroding social stability and damaging French families.
Then he made the statement:
Dans cette bataille qui s’engage, je vais vous dire qui est mon adversaire, mon véritable adversaire. Il n’a pas de nom, pas de visage, pas de parti, il ne présentera jamais sa candidature, il ne sera donc pas élu, et pourtant il gouverne. Cet adversaire, c’est le monde de la finance. Sous nos yeux, en vingt ans, la finance a pris le contrôle de l’économie, de la société et même de nos vies. Désormais, il est possible en une fraction de seconde de déplacer des sommes d’argent vertigineuses, de menacer des Etats.
Which summarises to saying that his real enemy is the “world of finance” who have taken control of the economy, of society, and our lives. They threaten states.
He noted that the “Les banques, sauvées par les Etats, mangent désormais la main qui les a nourries. Les agences de notation, décriées à juste raison pour n’avoir rien vu de la crise des subprimes, décident du sort des dettes souveraines des principaux pays, justifiant ainsi des plans de rigueur de plus en plus douloureux.”
That is, the banks that were bailed out by the states are now damaging them through their speculative behaviour. And the rating agencies, who failed to see the GFC coming (and contributed to its coming) were now being used to justify the harsh austerity.
It was a very powerful speech.
But soon after becoming President what does he do?
Appoint a banker to be his advisor.
The journalist Eric Dupin commented on the appointment in his Slate article (June 12, 2014) – Le «remaniement» de l’Elysée est la preuve que voter ne sert à rien – which talked about François Hollande welcoming an unelected representative of the financial oligarchy to drive economic policy.
He wrote that Hollande was appointing “une représentante de l’oligarchie financière, habituée à raisonner du point de vue des «investisseurs» et de «marchés»” (used to reasoning from the perspective of the ‘investors’ and ‘markets’) and thus the “L’osmose entre la finance et l’Etat se complète”.
At the time, in her defence, Laurence Boone, she wrote that France had to modernise its social welfare system which had become “trop coûteux” (too expensive) and claimed the labour market had to be reformed along the standard neoliberal supply side ’employability’ lines.
The point of the criticism was that while François Hollande was waxing lyrical about grand socialist values and defending the workers’ rights and indicating that the world of finance was his enemy and therefore the enemy of the French people as he sought their vote, he then appointed a person to drive economic policy of a type that would undermine everything he had preached to be important without putting those neoliberal ideas to the vote.
That little vignette from history should tell you something about the current claims that the OECD is undergoing a U-turn.
There is a revolving door between the political parties, the multilateral institutions such as the IMF and the OECD, and the big investment banks. It has not served us well over the last three decades.
Just because these characters are coming out of their austerity bunkers to scramble to what they think is the right side of history doesn’t mean their underlying economics has changed.
If you dig, you will find the same framework in place, just nuanced a little to suit the times. But the leopard hasn’t changed its spots
The underlying train wreck is still there and will be rehearsed again at some future date unless we push forward in abandoning the whole New Keynesian approach.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.