Bill Mitchell— Forget the official Rule, apparently, there is a secret Fiscal Credibility Rule

It is Wednesday and only a relatively short blog post. Yes, some more on that Fiscal Rule that seems to be causing people to lose sleep (not me). First, we had the Duck Test debate about the British Labour Party Fiscal Credibility Rule. Those promoting the Rule have been at lengths to deny its neoliberal framing, language and concepts. Not an easy task when the Rule talks about a currency-issuing government wanting to avoid “putting the rent on the credit card month after month”. Sounds like a duck to me. Then there was the ‘all critics (me) are stupid’ approach because they (I) apparently didn’t understand the Rule, simple as it is in construction. That didn’t end well either. Now, rather innovatively, we have the introduction of the Secret British Labour Party Fiscal Credibility Rule – which tells us that the actual British Labour Party Fiscal Credibility Rule, you know, the one published by the “General Secretary of the Labour Party on behalf of the Labour Party” is not the real rule. There is another one that us silly billy types have failed to detect and only those who have close personal contact with the members of the Monetary Policy Committee of the Bank of England could possibly know about. So in our ignorance we have no right to criticise the Rule or to impute nasty motivations from the MPC (not that we did impute anything anyway). And, to put the icing on the cake, we now are told that the Chancellor can abandon this ‘Secret’ Rule whenever he/she likes and does not require the imprimatur of the MPC anyway – so butt out all of you. Of course, only those who are part of our insiders’ club can know anything about this. Summary: Losers getting more lost each time they try to come up with a justification for the duck!

The latest salvo in the Fiscal Credibility Rule descent in stupidity came in the form of a blog post from Rule co-designer Simon Wren-Lewis – Bill Mitchell’s fantasy about Labour’s fiscal rule (June 14, 2019).…

Here comes the SWL smackdown I was waiting for. 😄

Bill Mitchell – billy blog
Forget the official Rule, apparently, there is a secret Fiscal Credibility Rule
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

Lars P. Syll’s Blog
My philosophy of economics
Lars P. Syll | Professor, Malmo University

Jo Mitchell — Misunderstanding M

Jo Mitchell corrects Richard Murphy on what MMT actually says.

Critical Macro Finance
MISUNDERSTANDING MMT
Jo Mitchell | Senior Lecturer, University of the West of England, Bristol

Chris Dillow — Obstacles to full employment

Is full employment sustainable? For me, this is one question posed by the row between Richard Murphy and Jonathan Portes and Simon Wren-Lewis over Labour’s proposed fiscal rule....

Disappointing for a someone that is sympathetic to Marx, as Chris Dillow identifies himself.

Stumbling and Mumbling
Obstacles to full employment
Chris Dillow | Investors Chronicle

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?

Alexander Douglas — The Big Modern Monetary Theory Debate

Philosopher Alexander Douglas on the monetary debate, with particular reference to Jonathan Portes and Simon Wren-Lewis. About economic models and modeling. 

I used to think I agreed with MMT by and large. But when I write things on what I think is wrong with macroeconomic theory, MMTists seem to disagree with me. I think I’m more comfortable with the high levels of abstraction and conceptual shorthand rampant in economic models, even if they’re literally untrue. My problem is with the logical puzzles that emerge even taking the shorthand as read. But never mind; here I’ll just say what I think about the policy debate.

The debate that most interests me is over what Portes and Simon Wren-Lewis have called ‘The Consensus Assignment’. Portes describes it thus in the article linked:

Medium
The Big Modern Monetary Theory Debate

Alexander Douglas | Lecturer in Philosophy, University of St. Andrews

Lars P. Syll — Wren-Lewis insults medical science

Medicine is to science (biology) as public policy is to economics, that is, an application. Medicine based on evidence-based science is relatively successful in diagnosis, etiology and treatment of disease. Public policy based on conventional macroeconomics is nothing like that in approach or outcomes. If there were an economic science that proves itself relative to public policy, there would not be opposing political factions offering economic arguments to rationalize their conflicting positions.

If the science were "decided" as claimed, the optimal policy would be demonstrable by theory and confirmed by evidence. That is far from the case. For example, the central bank is charged chiefly with maintaining monetary stability. Janet Yellen, the former Fed chair, recently admitted that there is no satisfactory theory of inflation, so the central bank must operate based on discretion rather than a rule. 

As a result there is seldom agreement among the committee or the economists it relies on regarding setting the policy rate. They make an "informed decision" (guess) after joint inquiry and deliberation (although the committee generally follows the lead of the chair). This is the command system that purportedly sets the most important factor in economic policy according to conventional economics. 

Given the dismal record of the central bank continuously hitting its targeted policy rate while also maintaining growth, price stability and full employment (even defined down) seriously questions the so-called science behind the process. This is wizardry rather than science, prediction rather than forecasting.

Simon Wren-Lewis doesn't understand this?

If medicine were like economics, seeking medical treatment would be like going to a witchdoctor.

Lars P. Syll’s Blog
Wren-Lewis insults medical science
Lars P. Syll | Professor, Malmo University

Brian Romanchuk — The Easy Way To Deal With Factionalism In Economics

Must-read. This should suffice as the last word on Simon Wren-Lewis's recent post. But it probably won't be.

Bond Economics
The Easy Way To Deal With Factionalism In Economics

Brian Romanchuk

Also

My comment was finally approved and posted along with many others in the moderation queue:

Tom Hickey2 March 2018 at 07:38

Who is being intransigent? As a non-economist MMT advocate (my PhD is in philosophy), it looks to me like the mainstream is the intransigent party. "The methodological debate is over."

JKH, not an MMT advocate, also makes a key point above that the mainstream largely fails to take accounting into consideration when accounting is the language of business and finance and is dismissive of its importance in comparison to mathematics.

MMT is hardly original emphasizing accounting, finance, institutional arrangements, the difference between risk and uncertainty, etc. These were pointed out by Keynes, Lerner, Tobin, Godley, Minsky, etc., before the MMT economists came on the scene.

I would argue that what seems to be needed from an outsider's point of view is a renewed debate on methodology that questions key assumptions like methodological individualism, maximization, equilibrium, etc. that the mainstream considers settled issues.

I agree that the present form of "debate" such as it is tends to get overheated. But this appear to result from the perception on the MMT side that the mainstream is being intransigent about what is settled, on one hand, and the dire results in terms of policy and its effects on real people, on the other.

It would be nice to have a calmly reasoned debate in an open forum but the parties have to be willing to join it. I don't see many mainstream economists willing to debate openly with so-called heterodox economists, not limited to MMT. Where are the Post Keynesians, the Paleo Keynesians, the Institutionalists, the Marxians, etc.

The issue usually boils down to "Where is your model?," meaning a model in the form that the mainstream stipulates, or "The methodological debate is already settled."

I get that the mainstream considers that its "orthodox" (that word should scare you) approach is the paradigm for doing normal science in economics in the Kuhnian sense, and that if the normal paradigm is to be challenged it must be approached in terms of failures and the resort to ad hoc fixes that basically negate falsifiability. I would say that this has been done adequately and most of the mainstream refuses to recognize it.

These issues are going to be settled one way or the other because they affect policy and policy is, well, political. The present system in not working for a lot people and they are not going to be convinced by the mainstream arguments much longer. The mainstream has to deliver or they will be replaced and there are various options available along a range from extreme right to extreme left. This is not just an academic debate, as the macroeconomists offering policy advice are well aware. Lives are at stake as well as political regimes.

Simon Wren-Lewis — The dangers of pluralism in economics: the case of MMT

I commented there but all comments are moderated so it may take some time to show up. Others have commented and their comments have been posted.

Mainly Macro
The dangers of pluralism in economics: the case of MMT
Simon Wren-Lewis | Emeritus Professor of Economics, Oxford University

Neil Wilson — Thoughts about the Job Guarantee: A Reply

A response to the Nov 17 thoughts of Simon Wren-Lewis

Simon Wren-Lewis has put up a very considered post on the Job Guarantee which deserves an appropriate response. I have been calling for Simon to write about the Job Guarantee for a very long time, and I’m grateful he has done so. It is a very good piece from an alternative point of view and I hope I can do it justice in this reply.

Modern Money Matters
Thoughts about the Job Guarantee: A Reply
Neil Wilson

Alexander Douglas — Simon Wren-Lewis, MMT, maths

Alexander Douglas replies to Simon Wren-Lewis on MMT.

Stories by Alexander Douglas on Medium by Alexander Douglas
Simon Wren-Lewis, MMT, maths
Alexander Douglas | Lecturer in Philosophy, University of St. Andrews

Jason Smith — Mathiness in modern monetary theory

I feel a debate coming on.

Information Transfer Economics
Mathiness in modern monetary theory
Jason Smith

Lars P. Syll — Economics — an empty and inexact science

The debate over economics "laws" continues. Science or storytelling?

Lars P. Syll’s Blog
Economics — an empty and inexact science
Lars P. Syll | Professor, Malmo University

Peter Dorman — Economics: Part of the Rot, Part of the Treatment, or Some of Each?

Peter Dorman puts his finger on what wrong with economists. Econ 101 aka "economism" (James Kwak). As Paul Krugman has said on multiple occasions the framework of conventional economists (neoclassical) is rational optimization and equilibrium.

Peter Dorman submits that this framework guiding conventional economists is not empirically based and is simply assumed as the way that market economies actually work or should work if markets are left to themselves.

These fundamental assumptions that distinguish conventional (neoclassical) economics from so-called heterodox approaches are never questioned even when facts run counter to it.

Econospeak
Economics: Part of the Rot, Part of the Treatment, or Some of Each?
Peter Dorman | Professor of Political Economy, The Evergreen State College

Simon Wren-Lewis — A self-fulfilling expectations led recession?

On the other hand, the SFC macro approach that includes finance predicted what was likely to happen and what to do to prevent it, and then when it did happen, how to fix it. Meanwhile, conventional macro is still arguing about it.

Mainly Macro
A self-fulfilling expectations led recession?
Simon Wren-Lewis | Professor of Economics, Oxford University

Jason Smith — NAIRU and other connections between inflation and employment

If you are still following this discussion, Jason Smith has some interesting observations.

Information Transfer Economics
NAIRU and other connections between inflation and employment
Jason Smith

Brian Romanchuk — NAIRU (Again)

SWL: Accepting the concept of the NAIRU does not mean you have to agree with their judgements. But if you want to argue that they could be doing something better, you need to use the language of macroeconomics.

As an applied mathematician, Brian showed how macroeconomists don't know what they are talking about with respect to NAIRU when using the language of macroeconomics because the concept is empty.

And no advanced math required to do it. Just basic logic and philosophy of science.

Philosophy is a battle against the bewitchment of our intelligence by means of our language. — Ludwig Wittgenstein, Philosophical Investigations, § 109

There are many parallels between economics and philosophy, one of the most evident is unfounded assumptions presumed to be self-evident. Scientific method was developed to circumvent this.

BR: The whole point of the standard NAIRU definition is that it is easy to observe: you just need to back out the acceleration of inflation (keeping in mind there may be other variables whose influence needs to be isolated). However, in the real world, the observed unemployment rate is affected by institutional factors -- which do not exist in a NAIRU model. Since the end result is that NAIRU estimates are inherently unreliable, the concept is wrong by definition.

This is why most mainstream macro has retreated to discussing output gaps of various types. Output gaps have to be inferred via various statistical techniques, and they are inherently fuzzier. It may be that Professor Wren-Lewis has some of these more recent models in mind when he is referring to NAIRU; but that makes as much sense as referring to post-1990 Fed Policy as monetary base targeting.

If you want to use standard academic terms, NAIRU is falsifiable, and was in fact falsified. The generalised output gaps that popped up to replace NAIRU are pretty much unfalsifiable.

To a philosopher standing outside economics looking in, it appears that many economists are so intellectually committed to finding a solutions that they convince themselves and each other that they have found one when they have not.

We have got on to slippery ice where there is no friction and so in a certain sense the conditions are ideal, but also, just because of that, we are unable to walk. We want to walk: so we need friction. Back to the rough ground! — Ludwig Wittgenstein, Philosophical Investigations, § 107

Bond Economics

NAIRU (Again)
Brian Romanchuk

Jo Michell — Thoughts on the NAIRU

If you are following this.

Critical Macro Finance

Thoughts on the NAIRU
Jo Michell

Brian Romanchuk — NAIRU And The Santa Claus Test

Although economic squabbling is fun to follow, a lot of it is the result of the use of fuzzy language. As a result, there is no way of advancing the conversation; arguments are just people clinging to different definitions. The use of mathematics in economics is supposed to eliminate this squabbling; unfortunately, the mathematical models themselves rarely fit reality. However, we need to translate the debates into operational discussions, to see whether they can be applied to the real world. If we turn to my previous article about NAIRU, we need to ask ourselves -- does the definition of NAIRU we are using pass the Santa Claus test?

Bond Economics
NAIRU And The Santa Claus Test
Brian Romanchuk

Brian Romanchuk — NAIRU Should Be Bashed, Smashed, And Trashed

Professor Simon Wren-Lewis recently wrote an article "NAIRU Bashing," in which he attempts to salvage some value out of the concept. As observed by Ramanan, his defense of NAIRU can be summarised as: There Is No Alternative (TINA), A lot of what Professor Wren-Lewis wrote might appear similar to what I have written on the topic. (I will publish the relevant excerpt from Interest Rate Cycles: An Introduction shortly, in case readers would wish to contrast and compare.) However, the belief that there is no alternative to NAIRU is silly. If economics were scholarly (as I discuss here), knowledge would be additive, and we would not have such debates....

Bond Economics
NAIRU Should Be Bashed, Smashed, And Trashed
Brian Romanchuk