Fiscal credibility, ptui!

Yesterday, I went to a meeting on Brexit, Free-movement and immigration; conversation in the bar afterwards segued from, “why did a Corbyn led PLP argue to abstain on the Tories Immigration Act?” via a  post match analysis of Lewisham Deptford’s Brexit/Anti-Brexit meeting to consider the radicalism of Labour’s 2017 Manifesto and the development of macro economic policy since then; it doesn’t do so well when compared with the Corbynomics of 2015. One of the key developments since then has been the development of Labour’s Fiscal Credibility Rule, which promises to only borrow to invest.

To those who think this is smart, I ask why so-called current account spending on education is not seen as “investing” in Human Capital, but this is not it’s main problem.

However, I awoke this morning to see one of Richard Murphy’s tweets where he is contending with Jonathan Portes & Simon Wren Lewis, the rule’s author’s it would seem. It got a little testy. Anyway, here’s Richard, detoxifying, or not the twitter spat, and making the point that the Fiscal Credibility Rule is not based on Modern Monetary Theory. because it acknowledges the monetary constraint, and not the real world one. Murphy refers to his earlier piece, A challenge to Simon Wren-Lewis on modern monetary theory and Labour’s fiscal credibility rule in which he critiques the Fiscal Credibility Rule. My precis of his position is that the rule is based on a neo-classical approach, fundamentally legitimises austerity and fetishises debt reduction. I had a look for the Portes/Wren Lewis original position and assume that “Issues in the design of fiscal policy rules” is it.

My research took me to this, which Bill Mitchell claims to be his last words on the Fiscal Credibility Rule, the article contains the following powerful line,

The problem is that this reinforces the narrative that deficits and public debt are in some way ‘bad’ and as I note below this will not turn out well.

One of the problem’s exposed by Bill Mitchell’s article is that it suggests that the Fiscal Credibility Rule is a bit like Lord Buckethead’s nuclear deterrent policy, it only works if the secret is kept, in this case that Labour does not believe that the Fiscal Credibility Rule is a necessary macro-economic constraint even if the economists that wrote it do so.

ooOOOoo

To some extent, this article is just a reading list, there’s not so much of me in it., but I have promised myself a precis of Chapter 7/8 of Fazi and Mitchell’s Reclaiming the State, which is a relatively simple and short exposition of MMT. …

Brexit and Labour’s 2017 Manifesto II

In my article “Brexit and Labour’s 2017 manifesto“, and on my wiki article, “Stability & Growth Pact”, I talk about the reasons supporters of Labour’s 2017 manifesto might believe that they need to leave the EU to run fiscal deficits, nationalise critical businesses and offer state aid. I had come to the conclusion that our current terms of membership allowed the UK to pursue whatever macro-economic policies it chose and to be able to pursue its nationalisations. There would seem to be some questions on state aid and some people have raised the issue of the Railway Directive and its possible impact on the single market and nationalisation. A campaigning comrade of mine, from Southampton Itchen CLP has researched these issues and produced the following report, overleaf,  which he also published on Facebook wall.

He concludes, the notion that all EU activity is driven solely by Neo-Liberal ideology is in my opinion a mistaken assumption. In many instances there are additional rationales underpinning the EU rules that go beyond mere market obsession. The EU has pressed for more open networks in telecoms and energy but open access across national energy networks is critical for renewable energy production being made viable on a grand scale. Whereas in the water sector, where it is not feasible to create overlaying pan-European services, the EU has never shown any interest in legislating for open networks.

I would not go so far as to suggest the EU does not have an over optimistic view of the market system or tend to assumptions about private sector performance vs public sector that are not sustained by the economic models relied upon and it is possible to have a good discussion about Ricardo’s theory of comparative advantage.

On the other hand, free market supremacy is a pretty widespread assumption in the modern western world. The victory of the Neo-Liberal ideology has been to shift public perceptions to accept the ‘private good, pubic bad’ mantra as a gospel truth. That human beings in the EU broadly accept the same mantra is not really a surprise. The challenge to us as socialists is not just to reshape the UK economy to provide for greater equality and justice but to begin to reshape the underlying assumptions about human and market behaviour that underpin much of the capitalist economic system. …

Dallio on Economics

I am tidying the flat of items I have kept for too long, and came across an unread copy of Ray Dallio’s “How the Economic Machine Works”. I had been pointed at it by a then work colleague who had asked me to comment.

I didn’t feel in the mood to read it, and know I don’t want to keep it and so I googled it to create a bookmark but came across this 30 minute video, which can of course be consumed at double speed.

Dallio constructs a macro-economic model based on productivity growth, and credit cycles.

I have problems with his ignoring of the impact of monopoly on prices which given his rigid adherence to demand pull inflation theories could be a problem because he requires that over pricing leads to a dropin demand which doesn’t necessarily occur in monopolistic markets. He treats savings as a purchase of assets i.e. as spending; I am not sure that’s right.

He makes no mention of the marginal propensity to spend/save i.e. ignores the fact that the poor spend more of any incremental income than the rich. There is a limited discussion of fiscal policy.

He argies that the real economy i.e. the economy in terms of goods and services ignoring prices, grows at the rate of macro productivity growth.

There is no mention of international trade in his model.

I am unclear what causes the turn round in his long term debt cycle i.e. why does it change from benign to catastrophe. (Is it just animal spirits reacting to inflation and/or the micro debt burden? Or maybe its banks getting cold feet about the creditworthiness of thier borrowers.)

He argues that when the long term credit cycle moves to bust there are only four things that policy makers can do in order to reduce the total debt burden, restore creditworthiness and start spending again,

  • Cut spending (Austerity)
  • Reduce debt (Defaults & Restructuring)
  • Redistribute wealth (from the wealthy)
  • and print money

He argues that the first three are deflationary i.e. will reinforce the recession but the final one does not. (I can’t see how taking money from the rich and giving it to the poor is deflationary because of the short term higher propensity to spend of those with lower incomes.) He argues that these policies need to be balanced and that changes in income/product must be greater than the change in the debt burden. This reminds me that he does not seem to discriminate between domestic and government debt.

He finishes with three personal lessons, the last of which I heartily agree,  don’t borrow too much, don’t charge too much, and keep yourself up to date i.e. improve your productivity. …

Brexit and Labour’s 2017 manifesto

Some Lexiters claim that the EU treaties will inhibit a Labour Government if it tried to implement its 2017 manifesto. It is argued that the single market would inhibit industrial policy and the stability and growth pact would inhibit macro-economic policy. I don’t think this is so and have written up my notes on my wiki.

The single market does not inhibit an industrial policy, and the stability and growth pact has no enforcement mechanism for the UK. (Another opt-out which we will lose if we leave and seek to rejoin). 🤔 …

The day after the night before

The day after the night before

That was a shock, a soul deadening shock. In the words of the meme, I felt a grief for the loss of the future I thought I and my children had. How did this happen? How could we have voted to follow the corrupt and the vain, Johnson and Farage. The answer may have been most rapidly and accurately identified by John Harris of the Guardian in an article, entitled “If you’ve got money, you vote in … if you haven’t got money, you vote out” in which he identifies those whom we’ve known about for years, who can be described in a number of ways. In my micro blog post, “Pebbles”, I describe them as ‘globalisation’s losers’, the working class whose towns, communities and institutions have been smashed during the neo-liberal ascendency, communities that Labour stopped listening to and representing in 1997 leading to a loss of 5 million votes between 1997 and 2010. Making this even more problematic for Labour is that nearly ⅔ of Labour’s voters, voted remain, and just as globalisation’s losers cannot be ignored, nor can Labour’s majority of remainers. What is to be done? …

The end of economic growth

Earlier this month, the Guardian in its Economics’ Blog, published an article called “Are the UK growth pessimists right?” The article itself is unclear, partly because it wants to make the point that Social Democrats need growth to painlessly share the wealth more equitably and fund their social investment programs. The article argues that UK economic indicators are beginning to look up, that doomsayers have always been wrong before and that technological innovations have always revitalised capitalism. …

Budget 2013

Osborne’s budget was not good for him and the Tories, and they were partly lucky, and partly cunning as they buried in stories that focused on other issues. There were four headline issues to consider, Macroeconomics, Tax, Housing and Beer. …