Richard Murphy—A challenge to Simon Wren-Lewis on modern monetary theory and Labour’s fiscal credibility rule

Richard Murphy challenges Simon Wren-Lewis to put up or shut up.

So my question is, I suppose, inevitable. What I would like Simon to do is show how he and Jonathan Portes have written, as he claims, a rule that delivers a real-world political economic solution (because that is what Labour's rule is, because it is not an academic paper) that is the same as modern monetary theory. And I want him to show this even though:

i) The rule he has written works subject to financial constraints, and not the constraints of the physical economy, and

ii) It does so even though it requires a balanced current expenditure budget and modern monetary theory quite specifically does not;

iii) MMT does not set time limits for actions to resolve funding issues and the Portes / Wren-Lewis rule does.

What I would also like to see is Simon's own explanation of why MMT does work, since he accepts it does, and his explanation as to why Jonathan Portes is wrong in that case.

Of course, the explanation can be theoretical, but I should add that this is really about the political economy. This would not matter nearly so much if Labour had not adopted the Portes / Wren-Lewis rule. So the explanation has to work at that political economic level as well: i.e. the power relationships inherent in the two approaches also have to be the same for the challenge to be achieved as that is what political economy is concerned with....

Actual policy is where the rubber hits the road.

Tax Research UK
A challenge to Simon Wren-Lewis on modern monetary theory and Labour’s fiscal credibility rule

Richard Murphy

Richard Murphy — Why the left and Labour really do need to adopt the core ideas of modern monetary theory

Important for those interested in MMT. It is a must-read if British or interested in the UK affairs.

Richard Murphy takes Jonathan Portes (and Simon Wren-Lewis) to task for betraying Labor and the left, while misrepresenting MMT.

The issues that MMT addresses in terms of political economy are social, political and economic, as well as cultural and institutional. A lot of different expertise needs to be brought to bear in addition to theoretical economists. Academic economists don't own this debate. Neither do financial professionals. While both these areas of expertise are required, they are not the only necessary ones. Given the broad context, many inputs are relevant in addition.

One of these areas is the so-called Green New Deal. The issues involved are fundamentally economic but they are also fundamentally social as an existential threat and fundamentally political in that a political solution is required. Moreover, it's a huge engineering problem, since the energy system is involved. It's also a global challenge that in which all will have to cooperate.

Any viable solution will require changing institutional arrangements, e.g., legal requirements, and it will also require a cultural shift that involves mass education, since the low-hanging fruit is conservation in an environment where consumption is promoted. It is a huge undertaking, which is a big reason that it is a hot potato that few are brave enough to pick up — not to mention, smart enough.

What MMT has to offer in particular is the knowledge that the only constraint on currency sovereigns addressing issue of public purpose is availability of real resources. The financial constraint is inflation and inflation is a consequence of resource scarcity relative to demand. Governments can address this by controlling demand through taxation or increasing availability of real resources through public investment. 

This being a finite world there are physical limits. Knowledge is potentially unlimited, however, limited only the ability to tap potential. Ignorance limits potential, and willful ignorance and dissimulation are culpable.

Richard Murphy broaches these issues skillfully. Good job — although I don't agree with everything he says, notably, about the job guarantee.

Tax Research (UK)
Why the left and Labour really do need to adopt the core ideas of modern monetary theory

Richard Murphy

Also

Tax justice and MMT

See also

Labour’s chief economic adviser [James Meadway] confirms it is committed to the thinking that will deliver yet more austerity (6 Aug 2018)

* Demand is the term that economists use to describe the ability and willingness of buyers to purchase a product or service. … 

This general idea of demand is often called notional demand, which is composed of both latent demand and effective demand.

Even if a buyer needs or would be willing to purchase a particular product or service, he cannot do so if he lacks the necessary funds or if he does not know about that product or service. This portion of market demand is called latent demand.

Effective demand is a representation of the actual amount of goods or services that buyers are purchasing in a given market. Effective demand is the difference between notional demand and latent demand. Effective demand is a reflection of the extent to which buyers' income, perceptions and needs combine to result in an actual purchase rather than a mere desire to purchase.

— Ronald Kimmons, What Is the Difference Between Demand and Effective Demand?

Simon Wilson — What is QE for the people?

Presents both side on the issue about as well as can be expected in this kind of venue.

In his campaign presentation on the economy a few weeks ago, Corbyn suggested giving the BoE “a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects: QE for people instead of banks”. The plan is based on proposals from Corbyn’s main economic adviser, tax campaigner Richard Murphy.…

Murphy suggests that this form of QE is only now being considered because “money has only recently been properly
understood for the first time”. He seems to believe that advances made in the subfield of economics known as “modern monetary theory” (MMT) make people’s QE feasible. (Crudely, adherents of MMT hold that governments with the power to issue their own currencies will always be solvent, and that inflation is caused primarily by resource constraints, rather than monetary growth.)

Here's the contra:

By contrast, most other economists, commentators and politicians – Labour and Conservative – view people’s QE as having obviously dangerous inflationary consequences.

Why is that?

It would fatally compromise the BoE’s standing on global credit markets. As Robert Peston put it in his BBC blog,m“the lore of central banks – which, rightly or wrongly is almost universally accepted by investors – says that central banks should only look at whether there is too much or too little money in the economy… and not at narrowerquestions, such as whether there are enough roads or houses being built in Britain”. 

If markets believe the BoE is no longer exercising judicious restraint in its creation of new money, and is instead the de-facto vehicle for funding politically popular projects, sterling would weaken and inflation rise.

By how much? That’s impossible to say. But even if we are not talking about Weimar Germany, there is little doubt that investors would conclude that the risk of investing in sterling and the UK had grown.

In other words, because "expectations." 

Money Week
What is QE for the people?
Simon Wilson