As argued bazillions of times, the real point MMT is making is that the government’s budget constraint is the wrong constraint—the correct constraint is whether or not a particular budget position will raise inflation beyond an official target rate (say, 2%, which seems to be the choice of most central bankers).
Let me explain to Mr. Worstall and others how this could work rather easily—just as the CBO and OMB now evaluate government budget proposals regarding their effects on the budget stance, the CBO and OMB could instead shift focus on evaluating these proposals against the inflation target (I argued the same thing here, printable version here). Much like how policy makers supposedly take estimates of effects on the budget position rather seriously in making budget conditions, they could replace these with projections of inflationary effects. An inflation constraint provides more fiscal space than a budget constraint, but in no way does it provide unlimited fiscal space (again, as we’ve always argued).
We could add quite a bit of detail here if we want, but I’ll just say a few more things.
New Economic Perspectives
Replacing the Budget Constraint with an Inflation Constraint
Scott T. Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College
Replacing the Budget Constraint with an Inflation Constraint
Scott T. Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College
3 comments:
Constructive.
The challenge is finding a way to score or evaluate overall government macroeconomic policy, when one half of that policy is being carried out by the central bank and the other half is being carried out by Congress+Treasury.
A given fiscal policy may be consistent with a given inflation target if the central bank does such and such things, and a given central bank policy might be consistent with that same inflation target if the fiscal stance is such and such.
Ultimately, we need coordination between the fiscal authorities and the central bank to determine a coherent macroeconomic stance. The idea that the fiscal side should be set by the legislative branch via political branch and then the central bank should be "independent" to establish whatever monetary policy it likes in an apolitical manner is bonkers.
The people's elected representatives should be setting tax policy, spending policy and central bank rate and inflation policies all together.
I think trying to forecast the inflation rate and budgeting accordingly would be way too cumbersome.
Budgets are only made once per year, and plenty of things could change in that amount of time which invalidate the assumptions.
For example, the balance of foreign trade, people and firms sentiments and spending vs savings desires, net credit creation or destruction by the banking system.
Seems like the Job Guarantee (which he does talk about in there) is the ultimate stabilizer, since it targets directly the thing we're concerned about (employment) and should "right size" the deficit dynamically for whatever the current situation is, and without having to wait for the pols to compromise on a budget.
The central bank isn't independent. It always does what it does with a view to the fiscal policy setting of congress or parliament.
Because if it directly contradicted the elected body there would be a constitutional crisis.
As there was in the UK in 1910 when the unelected House of Lords tried to refuse the passage of a budget by the elected house - which resulted in constitutional change and the Lords having their power to review a Budget removed.
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