Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 15 March 2018

No spring in the UK air

I was not going to write anything about the non-event of Hammond’s Spring statement, in part because I confess I am tired of writing about the Conservative party’s hopeless macroeconomic policy. It is like being forced to second mark all the fails from a first year economics exam. There is a danger that if you keep on writing things like ‘the government is not like a household’ and ‘pro-cyclical policy is a mistake’ your writing becomes illegible or you start writing everything in capital letters. I can sense Chris Dillow is also running out of patience, 

So this time I will ignore macroeconomics and write instead about political economy and distribution. The political economy of modern Conservatism is extreme laissez faire in the following sense. The belief is that if you let businessmen (they are usually men) get on with things, and take away red tape, regulations, and reduce taxes, all will be well. There is no need to help with public sector investment and R&D initiatives, or worry about rent extraction: the private sector can always do things better itself. The public sector does not support the private sector, but just gets in the way. An obvious consequence is that the Chancellor is reduced to a glorified bookkeeper, and political success comes with balancing the books and shrinking the state

The results of this approach have been disastrous. This laissez faire experiment took place in the most favourable of circumstances: a recovery from a very deep recession which if history is any guide should have seen rapid growth. The result has been the slowest recovery for as long as anyone can remember. This chart from the Resolution Foundation shows this clearly.

The economic approach of those on the right of politics has therefore failed, and failed big. 

Perhaps it has been unlucky. Perhaps for some as yet unexplained reason the financial crisis has doomed the subsequent recovery. Perhaps the tepid recovery is a consequence of the particular mistakes of austerity and Brexit rather than a reflection of the overall laissez faire approach. That debate has begun in progressive circles, but in the mainstream media and among Conservative politicians we still hear talk of ‘strong and stable’. It is as if everyone is living in a postmodern world where the economy can be whatever government politicians wish it to be.

I have talked in the past about how this fiction of a strong economy can be sustained despite being obviously false. I argued that this deceit won the Conservatives the 2015 election. But I think there is another factor I have not mentioned before, and that is how the burden of austerity has been spread.

This chart from the IFS tells us all we need to know. On the horizontal axis are income deciles, with the richer to the right. On the vertical axis is the loss (or small gain) as a result of fiscal measures. The grey line shows what happened under the Coalition government. Austerity hit the poor most, but the richest also lost income. Austerity under a Conservative government, either already under way or (mostly) planned, hits the poor most and actually slightly benefits the ‘almost rich’.

We can say quite clearly, and without caveats, that the poor have born the brunt of austerity in terms of income gains or losses. In that sense we have not, and nor will we be, all in this together. Jonathan Portes estimates these changes will increase child poverty by 1.5 million over the next 5 years. Since Margaret Thatcher, Conservative governments have been and continue to be regressive (transferring money from the poor to the rich) and have increased poverty.

This chart also tells us how we can have political commentators talking about the end of austerity. Political commentators are secure in the upper half of the income distribution. For them, austerity has indeed come to an end. But for those who are working class, poor or left behind austerity is very far from over. No wonder they say “that’s your GDP, not ours” when real wages have been steadily falling yet political commentators let government politicians get away with talking about a strong economy.

Austerity has hit and will continue to hit those who can least bear it, but it has had very little impact on your average Conservative party member, or your average political commentator working for the BBC. This government has not just continued where Mrs Thatcher left off in dividing this country by class, but it has also divided it by age and divided it once again over Brexit. We may have just had the spring statement, but the country is still in the winter of its discontent.   

Tuesday, 13 March 2018

Budget deficits, fiscal councils and authoritarian regimes

Budget deficits are a constant temptation for politicians. If you want to cut some taxes it is politically easier to do this by borrowing than by raising other taxes or reducing spending. If the electorate were fully informed this should not be the case, but they are not fully informed. We have clear evidence that many (not all) politicians succumb to this temptation: economists call it the problem of deficit bias. Running deficits are attractive because in most cases they do no immediate harm. In the past I have likened them to drinking or eating too much: do it once and no great harm is done, but do it repeatedly and problems arise, if only because taxes have to increase to pay the interest on the mounting debt.

This point about no immediate harm is vital to understand. It means that if there is a good reason to run large deficits that increase government debt, like an economic downturn (automatic stabilisers), or fighting a deep recession (interest rate lower bound) or high return public investment projects or disasters (natural or man made), then you should do so. Like eating too much, you can always eat less later. Fear that you might not eat less later should never be a reason for not using fiscal policy to fight a recession, or undertake much needed investment. It would be like stopping Christmas because you might eat too much.

If that is all obvious to you then skip the next three paragraphs. Some MMT economists or their followers sometimes argue that deficits never matter. If monetary policy cannot control demand and inflation and fiscal policy has to do it instead, then this is correct. It is the fighting a deep recession point above. But in reality, outwith the interest rate lower bound, interest rates are used to control demand and inflation. MMT would like fiscal policy to control inflation always, in which case the deficit is whatever it needs to be to do that task, but for the moment monetary policy is used instead. That means that the need to control inflation is not a direct constraint that removes the deficit temptation for politicians.

That is why we had deficit bias in most countries before the global financial crisis, and it is why Trump is cutting taxes and raising the deficit now. To say mounting government debt as a result of deficit bias does not matter is not credible. Even if you think the higher taxes required to cover servicing higher debt has no disincentive effect, the political consequences of high taxes cannot be favourable. To say that governments could pay for tax cuts by creating money misses the point that the bond/money mix is delegated to central banks for inflation control.

I can completely understand where MMTers are coming from. We have just been through a period where politicians have pretended the deficit was all important, and this pretense has inflicted great harm. But that does not make the opposite point of view that the deficit never matters right. As so often happens, the political right have abused economics (pretending the government is like a household) for political ends, and some on the left have reacted not by pointing out what economics actually says, but by saying we need a new economics.

Fiscal councils are a vital part of combating deficit bias for many reasons.They are no longer the oddball idea that a few of us kept going on about just 15 years ago, but as this VoxEU ebook shows they are now a standard part of how fiscal policy is done in (almost?) every advanced economy. My chapter in this ebook argues that they are a necessary part of what I call the consensus assignment. In most places they work with fiscal rules rather than being a substitute for them. They are necessary because sometimes governments try a cheat fiscal rules (PFIs in the UK) and sometimes simple fiscal rules need to be broken for some of the reasons outlined earlier.

Fiscal councils are almost always advisory bodies. (Although the more politicians do the wrong thing with fiscal policy, the greater will be calls to change this.) They have no power to tell governments what to do, and their only influence comes from their ability to adequately scrutinise what the government is doing, which in turn depends on both the voice they have within the political system, their competence [1] and their independence. Establishing that, preserving that and sometimes enhancing that are a constant battle, precisely because these bodies take away the ability of politicians to pull the wool over the voters’ eyes.

Because an effective fiscal council acts as a watchdog over the decisions of finance ministers, they become vulnerable to political attack. We now have networks that can help defend them. Fiscal councils within the EU have established their own Network. In addition within the EU the new Fiscal Board has a dual role, of both being a kind of fiscal council for the European Commission, but also to act as a champion of independent, effective EU fiscal councils as Michal Horvath suggests here. It was therefore good to see this Board warn and the Network warn against moving the Danish fiscal council away from Copenhagen. The OECD also conducts valuable assessments of fiscal councils (see Spain here), although whether the OECD has the ability and agility to defend a fiscal council under attack outside the EU is less clear.

These defences are important, because it is so easy for governments to compromise fiscal councils, by denying them information and resources, or by appointing political heads. Governments that go even further and dismiss existing fiscal councils are even more worrying. The first time I became aware of what was happening in Hungary, as I relate here, was when they abolished a strong and very active fiscal council lead by George Kopits. Far worse has happened since in Hungary, but perhaps from this experience abolishing a fiscal council is a good early warning signal of authoritarian regimes. We have also seen unprecedented attacks on the CBO by Republicans in the United States. Ironically these attacks show us that fiscal councils in some cases have become, and in other cases can become, a vital part of a pluralist democracy.

[1] That competence includes understanding when high deficits are sensible and when government debt should rise. Any fiscal council which only ever advises deficits should be lower will lose any reputation for competence.

Saturday, 10 March 2018

The three mistakes of centrism

Paul Krugman quite rightly often complains about people he calls professional centrists, who always suggest there is a middle road between the ‘extreme’ views of Democrats or Republicans. He noted that such centrists always have to blame both sides, and would typically fail to note that although the Democrats have stayed pretty much in the centre of politics, the Republicans have been gradually moving further right.

Centrists of this type were quite rightly attacked during the height of austerity, because milder cuts were not the answer. In the UK the right answer was to have no cuts until the recovery was secure and interest rates were clear of their lower bound. The centrists at the time in the UK were the Labour party (too far, too fast) and that compromise policy not only missed the point but was also unpopular because it satisfied no one. It certainly didn’t satisfy Labour party members, which is why Labour are now led by Corbyn.

But doesn’t Corbyn’s victory mean that the UK today needs centrists, because we have not just got a Conservative government which has morphed into UKIP but also an opposition led by the hard left. Here is Philip Stephens attacking the Labour leadership peddling snake oil populism of the left variety. If you search my blog you will see that I normally think Stephens gets things right, but I think there are three major problems with this diagnosis of where we are.

The first mistake is a variety of the failure I talked about above, which is to fail to see how the political landscape has changed. Here is the first paragraph from Stephens' article.
“John McDonnell has a plan. The Labour party’s would-be chancellor prefers Marx to markets. So he intends to nationalise the energy, water and railway industries, impose big tax rises on businesses and wealthy individuals, shackle the banks, and pump up public spending and borrowing. The organising goal, he told the Financial Times in a revealing interview, is “an irreversible shift in the balance of power and wealth in favour of working people”.”

If you think this is damning stuff, look at the detail. Nationalisation - just returning some industries to public ownership, much as they are in many European countries. Taxes on business - just reversing cuts to corporation tax made by George Osborne since 2011. Higher taxes on the wealthy will only begin to reverse inequality at the top that began growing in the 80s. Shackle the banks? - about time too. Pump up spending and borrowing - in reality just borrowing to invest, with current spending held by a fiscal rule which, outwith a liquidity trap recession, is not very different from the rule of the Coalition government of 2010. The killer line about an irreversible shift in power - from Harold Wilson’s 1974 manifesto (HT George Eaton).

So Stephens is wrong to say this is another 1983 suicide note. McDonnell might prefer Marx to markets, but Labour’s 2017 manifesto gives us a world that if it had been proposed to Harold Wilson he would have thrown it out as involving too much privatisation and too many tax cuts for the rich. Labour’s manifesto is just a modest reversal of some of the things that have happened since Thatcher introduced us to neoliberalism.

But why wasn’t the 2017 manifesto like 1983, given the current Labour leadership? The answer leads us to the second mistake many centrists make: to imagine that any leader from the hard left can impose their will on a soft left parliamentary party. Stephens mentions this, but it is far more central than he suggests. Labour will be extremely lucky to get an overall majority at the next election, and even if they do there are plenty of MPs that will happily vote against their government the moment that Corbyn and McDonnell overstep the centre left mark. Give them 20 years and it is possible to imagine that they might be able to create a PLP more in their image, but they do not have 20 years and those who follow will be from a different generation with different reference points.

There is a third mistake which is in some ways the most important. I cannot beat Anthony Barnett’s way of expressing it: if all you want to do is stop Brexit and Trump and go back to what you regard as normal, you miss that what was normal led to Brexit and Trump. It all goes back to austerity. Even if you like aspects of neoliberalism, as centrists surely do, what happened with austerity and the scapegoating of immigrants is what I describe as neoliberal overreach. It was overreach not just because it was wrong and immensely destructive, but it laid the grounds for Brexit.

None of that happened by accident. Austerity might, just possibly, have started as pure political opportunism, but the fact that it was sustained despite all the harm it was doing suggests a deep malaise on the political right. No one can doubt this following Brexit. A party that can produce Prime Ministers as incompetent as first Cameron and then May, and can pursue without any real revolt a hard Brexit policy, is seriously sick and needs a long period of intensive care. The kind of care that you can only get with many years in opposition.

But that is only half the story of why Brexit happened. The other half is obvious, yet so many centrists seem to wish to ignore it. Brexit was brought to us by a right wing press that has become a propaganda vehicle for a few wealthy press barons. Britain has become a worse country because of this right wing press, which when it is not demonizing the EU and Remainers it is doing the same to immigrants and those it calls scroungers. It should be no surprise that newspapers that can show so little regard for truth and humanity would give us something like Brexit, and they will go on giving unless something changes.

A government of centrists will only take us back to where we were before all this kicked off in 2010. We need to do better than go back to the normal that gave us austerity and Brexit. We need a radical government that can begin the process of reforming our economy so that it works for all working people, that can tackle extreme inequality at the top and reform the press so that it is not a mouthpiece for a wealthy few. A government led from the left are our only real hope of achieving that. Centrists will be an important voice during that government, but they must not stop us ensuring the likes of austerity and Brexit will not happen again.

Thursday, 8 March 2018

Tangled up in red

There have been three constants in the Brexit negotiations so far. The first is that the UK side makes speeches, and the EU side drafts agreements. In a way this is logical, because of the second constant, which is that the clock is always ticking. The ticking clock means the EU has nearly all the power in these negotiations. That leads to the third constant, which is that whatever is finally agreed is pretty close to the original EU drafts. It is obvious if you think about it. The EU side has the power and they also have a clear purpose and unity in achieving it. The UK side is weak and divided with no clear purpose, so the best it can do is to give speeches so UK voters get the impression the UK is influencing what is going on.

The EU published yesterday a framework for an FTA between the UK and the EU. Given the logic above that means any agreed FTA will be pretty close to this framework. It has been designed by the EU to be compatible with Theresa May’s red lines. The EU is quite clear that it would be possible to have fewer barriers to trade than this FTA framework involves, but this would require changing the UK’s red lines. These red lines include that the UK will not be part of any customs union with the EU or the Single Market for goods.

Some have interpreted this framework as implying that the EU is prepared to compromise on the hard line it took on the Irish border last week. However the document starts by noting that “negotiations can only progress as long as all commitments undertaken so far are respected in full”. That includes the first stage agreement involving the Irish border, which gave three possible options: an agreement between the UK and EU so strong that it meant no hard border was required, a technological solution, or Northern Ireland staying in the EU customs union. The second option is magical thinking. 

What the EU FTA framework shows is that the first option is not going to happen. The UK are not going to get an FTA much better than this, precisely because they are not as yet prepared to accept the obligations that go with a customs union or the Single Market. So Northern Ireland has to remain in a customs union with the EU to avoid a physical border, and there is no reason why the EU should compromise over this. 

That means that the EU's FTA document is for the remaining UK, and would involve a customs border between two parts of the UK. It seems incredible that the Conservative party could accept that, and the DUP will certainly not. As a result, the UK will carry on pretending that an alternative solution is possible, and saying that the EU should “get on with” looking at the first two options for the border. The EU has no intention of doing that, because the EU does not do magical thinking over Brexit.

This impasse could be broken by parliament if enough Conservative MPs had the nerve to vote for the UK to remain in the customs union, as Labour now wish. That would be absolutely the right thing to do, because the arguments that we should stay out of a customs union are absurd. We are likely to get much better trade deals with third countries as part of the EU than outside. It already looks like we will lose deals the EU has already made. And with Trump in the White House raising tariffs it is crazy. 

Ironically one reason Tory rebels may fail to rebel is that the delusion that there are other solutions to the Irish border problem will be broken sometime in the autumn anyway because of the second constant, the ticking clock. The clock in this case is that the EU will not agree to a transition period until the UK signs up to the legal version of the first stage agreement. So sign the UK will.

Whenever the UK government is finally forced to concede that it will have to agree to stay in a customs union with the EU the Brexiters should finally break with the government. That is the event that May has been so desperately trying to avoid, which is why she has got herself so tangled up with her red lines. If May understands what is going on, then she will spend the next few months trying to convince the Brexiters that signing the legal version of what she already agreed in December is not the commitment to the UK staying in a customs union that it in fact is. Declaring that it was something the UK could not sign was not a wise way to start that process. May is all tangled up in her red lines, and the country is all tangled up in blue. 

Postscript (09/03/18) Yesterday Donald Tusk said he was putting "Ireland first". The UK had to provide "specific and realistic" plans to avoid a hard border in Ireland before Brexit talks could make any progress. 

Tuesday, 6 March 2018

Was Labour’s decision on EU immigration in 2004 a mistake?

The Labour government decided to let people from the A8 eastern and central European countries that had just joined the EU to have free access to the UK from 2004. Most other member countries delayed the point at which free movement from these countries was allowed. As a result, we had a large influx of migrants from Poland and other countries from 2004.

The received wisdom seems to be that this was a huge mistake. Jack Straw called it a spectacular mistake. Ed Miliband said the government had got it wrong. I’m reminded of this by Ian Jack, who recently in the Guardian gave us eight reasons that we ended up with Brexit. One was that decision by Labour. He writes

“immigration had begun to die as a political issue until, in 2004, Tony Blair’s government decided to open the UK labour market to the eight eastern and central European countries that had joined the EU.”

Here is data on UK immigration and Ipsos-Mori’s running poll on how many people think immigration is an important issue. (You can see data on all the issues here.)

It is certainly true that immigration has ceased to be viewed as an important issue (blue line) in the late 1990s. But immigration’s importance as an issue rose dramatically not from 2004, but well before 2004. From 2004 to 2008 it increased a little, but then declined as worries about the economy took centre stage.

This does not fit Jack’s story about a dead issue reignited by immigration from the EU in 2004, unless voters were anticipating the decision. It seems more likely that voters were responding the large increase in non-EU immigration that happened after Labour came to power, as the chart below shows.

But even that seems improbable: did it really take people a few years to notice. Here I show that there is a variable whose timing correlates with the increasing importance of immigration as an issue with only a slight lead: news stories about immigration. I give lots of evidence that suggests that the relationship is causal: press coverage about immigration, which in most papers is invariably negative, causes people to say immigration is an important issue.

Once you allow the press to have an important causal role on attitudes, and as I describe here there is good evidence that they do, the story that the 2004 decision was a big mistake can be seen in a different light. What we can say is that high immigration from the late 90s allowed the press to write about immigrants flooding the country, and the 2004 decision allowed them to say the same thing about EU immigrants after 2004. But then the 2004 decision is only a mistake because newspapers weaponised it.

To his credit Jack does list among his eight reasons for Brexit the UK press, and suggests as I have done that the difference between the vote in England and Scotland owes something to the press being “far more rabid” in England. Our rabid right wing press were always going to weaponize EU immigration whenever it happened. Labour could only have delayed A8 immigration until 2011. That would still have given newspapers plenty of time to write negative stories about EU immigrants before the referendum in 2016, as they of course did in spades. As immigration from the EU between 2004 and 2011 is likely to have provided economic benefits for natives, it is not obvious that the 2004 decision was a mistake at all.

Saturday, 3 March 2018

The economic and political cost of UK austerity

The UK now has a surplus on the government’s current budget. George Osborne tweeted “We got there in the end — a remarkable national effort. Thank you.” This has been a remarkable period in UK macroeconomic history, but not in the way Osborne thinks. A majority of economists have always been against trying to reduce the deficit when interest rates are stuck at their lower bound, a majority Osborne chose to ignore. So what has been the cost of this “remarkable national effort”?

The first time I looked at this I did a very simple calculation. The OBR estimate (here, chart E) that fiscal consolidation took just under 1% out of the economy in 2010/11 and over 1% in 2011/12. I wanted to get a simple estimate that no one could suggest was too high. As actual output was pretty flat until 2013, I assumed that output was 2% lower in 2011/12 (1% from the previous year plus the additional 1%) as a result of fiscal consolidation, remained 2% lower in 2012/13, but then fully recovered by 2013/14. That gave a total output loss of 5%, which is almost £4,000 per household.

I think we can now do things a little more scientifically. (If you are not into these sorts of calculations, you can skip to the paragraph starting £10,000.) I originally took the OBR estimates which had embedded in them a declining influence on GDP over time, based on historical experience. I think it is wrong to use these, because the reason that the impact of fiscal consolidation normally declines is that monetary policy counteracts it. This didn’t happen after the Great Recession because interest rates were stuck at their lower bound and QE was pretty ineffective. The OBR have now provided estimates of the ‘direct’ effect of fiscal consolidation, that take out the impact of the decay from past consolidation. See here for a detailed discussion.

The Impact of UK fiscal consolidation on GDP
Fiscal impacts
Direct impact on growth
Impact on level of GDP, no decay
80% decay
Cumulated loss


The table above starts in row 2 with the direct impact of fiscal consolidation (the orange bars in Chart E). There are reasons for thinking these numbers are too low, because they still embody some within year offset from monetary policy, but lets go with them. Suppose there was no tendency for GDP to rebound from these impacts (like kicking a ball each time it stops). The third row computes the total impact on the level of GDP in each year.

Assuming zero decay from fiscal consolidation is too strong, even when interest rates are at their lower bound. For example the impact of tax or transfer cuts are likely to be greater in the short term than the longer term. QE had some impact. So row 4 assumes a decay of 0.8 i.e. only 80% of the fiscal consolidation remains in aggregate demand the following year. This is very crude and no substitute for a proper model based estimate, but I do not know of any recent model based estimates so it is the best we can do. The final row shows the accumulated loss of output: the total cost of fiscal consolidation over the whole period. The final figure suggests the national effort to reduce the deficit cost over 15% of GDP, which when GDP is around 2 trillion and there are 27 million households, gives over £10,000 per household.

There is a big objection that this calculation. If GDP had been 2% higher in 2016/17, say, the Bank of England would have raised interest rates because that level of GDP would have been inflationary. In other words I should be using a much higher decay factor as we come closer to 2017. However there is an even stronger counterargument to that. I argued here that austerity was a cause of the productivity slowdown that began in 2012. By delaying the recovery for three years, austerity made firms put productivity enhancing projects on hold, and we have seen no sign as yet of any catch-up. I think it is reasonable to assume that the productivity slowdown caused by austerity led to a reduction of at least 2% of GDP from the supply side by 2015. That nullifies the argument that the bank of England would have had to raise rates if austerity had not happened. [1]

£10,000 for each household is an average figure, but we know that austerity did not fall evenly, but was concentrated on those at the bottom end of the income distribution. It is certain that cuts to social care and the NHS cost lives: it is just a question of how many thousands of lives we are talking about.

And then there is the political cost of austerity. The Coalition government, and particularly our current Prime Minister, has used immigration as a scapegoat for the impact of austerity. With the help of the right wing press that scapegoating has worked. In particular, as I show here, many people believe that immigration has been bad for public services like the NHS. In reality the opposite is true, but the government and press have succeeded in creating what I call a politicised truth: something that is believed to be true just because politicians and the media keep saying it is.

The government may well have pursued this line even if austerity had not happened, but it gained some of its potency because austerity did lead to pressure on public services like the NHS. That in turn helped create the atmosphere required to gain a majority for leaving the EU. Austerity, for this and other reasons, created the conditions that allowed Brexit to happen. Those who think the UK descended into political madness with Brexit are wrong: the madness started with austerity in 2010.

The final point is that austerity was completely unnecessary. By austerity I mean cutting the deficit when interest rates could not be cut to offset the impact of fiscal consolidation. There is zero evidence that the markets demanded austerity in 2010, and plenty of evidence they did not. Even if the markets had panicked at the size of the deficit, the Bank of England would have bought government debt as part of its QE programme.

The unusual feature of the Great Recession was not just its size, but that for the first time since the 1930s governments started reducing spending in what should have been the recovery period. They have never done that since the 1930s because economic textbooks and state of the art models say it is a stupid and costly thing to do.

Of course the deficit needed to be reduced, but the government could easily have waited for a few years until the recovery was well underway and interest rates were well above their lower bound. The £10,000 per household is not the cost of deficit reduction. If the government had been patient it could have reduced the deficit with no cost at all. Whatever the motive for George Osborne disregarding the lessons of history, his actions have lost the average household £10,000 worth of resources and caused additional ongoing economic and political damage to the economy. Not so much a “remarkable national effort” as a predictable man made disaster.

[1] There is an argument that without austerity interest rate would have increased in 2011, because they nearly were anyway. But that would have been a huge mistake by the Bank, who were panicked by higher inflation. One of the reasons inflation was high was austerity: the increase in VAT. So I think letting austerity off the hook and passing the hook to the Bank of England because of something they might have done is not a very convincing argument.

Thursday, 1 March 2018

The dangers of pluralism in economics: the case of MMT

MMT (Modern Monetary Theory) is a ‘school of thought’ in economics, by which I mean that it deliberately sets itself apart from the mainstream. I like a lot about MMT as a set of ideas. On the key issue of whether monetary or fiscal policy should be used as the main stabilising tool, although I go with the mainstream in looking to monetary policy outwith the lower bound, I think that issue should always be kept open, and too many mainstream economists just presume that monetary policy must be better. I am also attracted to the idea of some version of a Job Guarantee type scheme, and the mainstream has often failed to recognise the amount of autonomy the banking system has to create demand. I could go on but you get the idea. As I result, I have tried probably more than most mainstream economists to engage with MMT ideas.

As far as I can see there is nothing in MMT that cannot be presented using standard mainstream tools. But I also know that the microfoundations hegemony in mainstream macro excludes many, like MMT economists, who would prefer to do macro in different ways. I dislike the microfoundations hegemony for reasons I have set out elsewhere. For that reason I cannot argue that MMT, or any other school of thought, should be part of the mainstream, because right now it would be impossible because of the microfoundations hegemony. [1]

Having said all that, I think MMT sometimes demonstrates many of the dangers of a school of thought. It tends to be antagonistic to the mainstream, and some (not all) of its leading lights give their followers the idea that the only truth is to be found within MMT, and everything the mainstream says has to be wrong. That proposition is so absurd but I can understand why it can be believed. It was a long time ago, but I was told as a student that neoclassical economics was fundamentally flawed, and would soon be replaced in some kind of Kuhnian revolution. I know how easy it is to follow your political instincts and thereby miss out on so much important and useful knowledge.

It is very difficult not to come across MMT followers (MMTers) if you write a blog on macroeconomics. Most recently this happened when I wrote this on Trump’s tax cuts. Now unusually this post examined how to discuss these tax cuts split into two parts: one which followed the mainstream view where monetary policy controlled inflation, and another that described an MMT view where fiscal policy controls inflation.

My post was criticised by some MMTers on twitter. Not because I had got the MMT part wrong, but because I had argued in the mainstream part that a deficit generated by a tax cut could alter the intergenerational distribution of income. Now this idea is standard, but it can confuse, because you cannot transfer real resources (output) through time in a closed economy. I show how it can be done in an overlapping generations framework here. It is much easier to see how it can happen in an individual open economy, because a generation can consume overseas goods as well as domestically produced goods.

If that all seems a bit abstract, it is also important. I have argued in the past that one of Margaret Thatcher’s failures was to give taxes from the North Sea back to consumers (who spent rather than saved them) instead of following Norway in creating a sovereign wealth fund. Subsequent generations have therefore been deprived of the benefits of North Sea oil. By giving tax cuts funded by borrowing, governments can do the opposite of creating a sovereign wealth fund: future generations inherit more government debt which they have to service.

Those MMTers criticising my blog said such intergenerational transfer was impossible. I tried the best I could to explain why it was possible, but the responses I got ranged from intelligent denialism to simple insults along the lines that I was neoliberal, I didn’t care about the working class and so on.

I’m used to that kind of interchange as a result of Brexit. But there was an important difference here. I was not attacking MMT, but outlining how things work in a mainstream view. So I was not attacking their school or their politics. They had no reason to be defensive. But it was clear to some that I was the enemy simply because I was not an MMTer. This very tribal attitude reflects one of the dangers of plurality in economics. Another is language. MMTers have their own way of describing things, so if you say something like a ‘tax financed increase in government spending’ you are jumped on: according to MMT tax never finances spending, but follows it, or something like that. I don’t mean to make fun, and I can see what they are trying to do, but talking separate languages is a key problem when you have different schools of thought, particularly if you insist that only your language is the right language.

Another problem is that schools of thought also tend to be political. As a result, to use Paul Romer’s phrase, all too often scientific discourse is replaced by political discourse. To some of these MMTers because I was a mainstream economist I had to be neoliberal, as if those two things had to go together. The idea that deficits could redistribute income between generations moved from being an economic statement to a political one. Presenting models that showed how it could happen meant those models had to be unrealistic, without specifying why that lack of realism mattered to the issue in hand.

It is a shame, because these MMTers are clearly interested in economics because of their political interest, so I would love them to be discussing both mainstream as well as MMT ideas. I probably spent too much time on twitter with them as a result. Those that tell them the mainstream is neoliberal and a waste of time are in my view almost criminal because that attitude leads to such a waste of enthusiasm and interest.

It does not have to be like this. I have had plenty of good discussions with MMT academics and some supporters which I have found interesting. They have been courteous and not aggressive. But not all the leading lights in MMT encourage these things. Such as those who write
“Wren-Lewis just should stick to Twitter. He seems to like that. It would save us the time reading the other stuff.”

He wrote that, and worse still which I will not repeat, because he is angry that Labour have adopted a fiscal rule based on my own work with Jonathan Portes rather than MMT’s ideas. Actually I didn’t enjoy the conversations he is referring to at all, and I should have stopped much earlier because it was a waste of time, but as I said above it is a shame to see people who have closed themselves off to so much interesting and, for them, politically useful knowledge.

As I said, I do not blame anyone being in a macroeconomic school of thought because the current mainstream is exclusionary. Many MMTers are open and my discussions with them have been interesting for me at least. But unfortunately some in MMT appear to want to make it a kind of cult, where only MMT sees the truth and everything in the mainstream is neoliberal and wrong. They attract followers because of their politics, but then they turn their followers into converts with closed minds. Which I think is a real shame and completely unnecessary, because MMT is strong enough to stand on its own feet and encourage open minded thinking, not dogma.

[1] I do not think that is the only aspect of the mainstream that excludes other schools. There is too little room in mainstream journals to discuss policy or history in a discursive, holistic way. I happen to like the way most mainstream economists use models to discuss issues, but sometimes it is useful to make sure we are not abstracting from what is really important.