2 Ingelesez: “…. John McDonnell (…) once again announced that the British Labour Party would constrain itsself with a so-called “fiscal credibility rule” if elected.

The BBC Report (March 11, 2016) – Labour announces ‘fiscal credibility rule’ quoted him as saying it was an attempt to regain “economic credibility”.

McDonnell was quoted as saying:

We know now from the world’s central banks that the world economy is looking at stagnation, and there needs to be a new rule … And we want people to have confidence in a Labour government. That means we are introducing a new fiscal credibility rule.

3 Ingelesez: “New Keynesian economists, which dominate my profession include Paul Krugman among their ranks are part of the problem not part of the solution. They failed to anticipate the financial crisis because their ‘models’ did not even include a banking sector!

In this blog – Mainstream macroeconomic fads – just a waste of time – I considered so-called New Keynesian models of the macroeconomy which dominate the mainstream of my profession.

Anyway, the “paper is about the search for” a “fiscal rule” to “guide fiscal policymakers”.

The neo-liberal credentials of the authors are immediately exposed when they say:

… one single simple rule to guide fiscal policy may never be found … basic theory suggests that fiscal policy actions should be very different when monetary policy is constrained in a fundamental way, while the reverse is not in general the case. There are two major examples of where this will be true. The first is when interest rates are at the zero lower bound …

There is no difference between a zero-rate state and a non-zero rate state for the conduct of fiscal policy.

Essentially, to think otherwise is to believe that monetary policy is the primary, effective counter-stabilising policy tool and, it is only when that effectiveness is reduced (when there is no more room for rates to fall) that fiscal policy should be more active.

This is a basic neo-liberal belief – which has been pushed into the public debate as a sort of technical claim to hide the fact neo-liberals just hate fiscal policy and want to limit government discretion as much as possible.”

4 Ingelesez: “Monetary policy is largely ineffective as a counter-stabilising policy tool, irrespective of how much scope there is for changing interest rates up or down.

As an example, please read my blog – The ECB could stand on its head and not have much impact – …”

5 Ingelesez: “Fiscal policy is always effective and should be the primary tool to ensure full employment. That requires a very basic set of policy positions being followed by government, which I outline in this blog – The full employment fiscal deficit condition

I won’t go into the rest of the paper that is apparently underpinning McDonnell’s position. It is GIGO – garbage in, garbage out. A typical New Keynesian piece of irrelevance.

Three low lights in the paper:

1. It extols the virtues of an unelected, technocratic (full of neo-liberals) “fiscal council, with a wide monitoring mandate” which “can provide a backstop against the possibility that a government may start trying to manipulate policy for political ends”.

A basis of democracy is that governments introduce policy that satisfies political ends! That is the nature of a political economy – the economy should work for us.

Having the unelected mandarins on high pay with secure jobs telling us that 15 per cent broad labour underutilisation rates signal time for governments to ‘cut deficits’ (‘repair!’) is the anathema of responsible government in a democracy.

2. There is no mention of what a government should be aiming to achieve other than to achieve either deficit or debt targets within a standard GIGO cost minimisation framework. The only mention of unemployment is to invoke (once) Milton Friedman’s concept of a natural rate of unemployment, which has been used to justify persistent mass unemployment (as above).

3. The authors deliberately conduct their ‘technical’ analysis assuming (in their words) “financing through printing money”. In other words, they set up an artificial situation, where the currency-issuing capacities of the government are suppressed and the state is treated as equivalent to a ‘household’. Ridiculous.”

6 Ingelesez: “British Labour has until Thursday May 7, 2020 before they have to face the national electorate. More than 4 years.

They could have chosen to use that time to challenge the fundamental tenets of the macroeconomics debate by educating the public on the myths of neo-liberalism.

They could have abandoned their neo-liberal roots and engaged the public in a truly progressive process, which would have sunk the neo-liberal paradigm.

Instead, they have chosen to surrender to the neo-liberal mainstream and in using the language and metaphors of that approach have led the public to believe that deficits are always bad etc.

Then they will just say that they will cut the deficit in more equitable ways. Hopeless.”