Graph showing UK public sector net borrowing

Labour’s economic policy is not neoliberal

At what point does over-use of a term as an insult render it meaningless? Richard Murphy tested the boundary yesterday when he accused John McDonnell’s economic advisor James Meadway of delivering “deeply neoliberal, and profoundly conventional thinking”. This was prompted by a negative comment James made about Modern Monetary Theory (MMT).

In response, Richard posted a list of MMT-inspired leading questions which, wisely in my opinion, James declined to answer. Richard then accused James – and by implication Labour – of not standing up to “the bankers” (including Mark Carney) and remaining wedded to conventional/mainstream/neoclassical/neoliberal thinking (Richard seems to regard these as equivalent terms). Labour is therefore signed up, in Richard’s view, to deliver “more Tory economic policy” and “more austerity”.

This is, to put it politely, nonsense.

At the heart of the debate is the decision taken by Labour, early in Corbyn’s leadership, to adopt a fiscal rule. This commits a Labour government to balancing the books on current spending with a rolling five year target, subject to a “knockout” when interest rates are close to zero. The rule has been a source of contention since it was announced. (I expressed misgivings about its announcement.)

My preference would be for a bit more wriggle room. The two dangers that must be balanced when setting fiscal policy are insufficient demand and private sector unwillingness to finance public deficits. Insufficient demand results in unemployment or underemployment, weak wage and productivity growth, and inadequate social provision. The dangers on the flipside are unsustainable borrowing costs and, particularly if this is countered using the power of the central bank, inflation. The relative weighting given to financial market conditions and inflation in the UK is almost always too high. But this doesn’t mean the correct weight is zero, as less-sophisticated advocates of MMT sometimes appear to think.

The first danger arises when the desired saving of the private sector exceeds private sector investment. In such a situation, achievement of “full employment output” requires a government deficit – give or take the current account. Standard macroeconomics largely assumes this problem away by arguing that, outside of the zero lower bound, interest rates can always be set at a level which will induce the optimal level of demand. Consequently, monetary policy is the only tool required. I disagree with this view: I think it’s quite possible for economies to be demand-constrained and thus require fiscal demand management across a range of possible interest rates.

But on balance I think the fiscal rule has enough flexibility to allow a Labour government to maintain sensible levels of aggregate demand. In any recession in the foreseeable medium-term future it is hard to imagine that interest rates will not be cut to near zero. In this case the rule will be suspended and fiscal policy can be used “with all means necessary”. Second, the rule doesn’t preclude significant increases in government investment spending – a central part of the Labour policy programme. Government investment spending is likely to have strong multiplier effects and should help to rebalance demand in the UK’s consumption-driven economy. Finally, the rolling five year window allows for adapting the pace of current spending to negative economic shocks.

I can also see good political reasons for the rule. It provides an immediate rebuttal to those who try to perpetuate the deeply dishonest but highly successful Tory strategy of depicting Labour as the party of fiscal irresponsibility. As I understand it, the rule was formulated by Simon Wren-Lewis and Jonathan Portes, two highly credible progressive economists. Simon has been one of the most consistent and articulate critics of Tory austerity. To accuse them, as Richard is doing, of “delivering neoliberal thinking” is ludicrous.

Aside from the straightforward inaccuracies, there is a deeper problem with Richard’s argument. He equates, as do some MMT advocates, radical or progressive policy with fiscal policy. There is no question that Labour’s economic programme would mark a decisive shift in macro management: it would be the end of austerity. (Austerity was never really about managing demand and debt, in my opinion: it was cover for the ideological aim of shrinking the state.) But the truly radical aims in Labour’s programme – although not yet fully fleshed out – are on the supply side: structural reforms, but not of the sort pushed by the IMF.

There is merit to this approach, in my view. Yes, the UK economy is demand-constrained. Aside from the direct human costs, austerity has almost certainly done long-run damage to the supply-side. It must end. But over the longer run the UK faces profound challenges from an ageing population, wide geographical disparities, and the potential risks and benefits of automation. It makes sense to focus on the supply side: to have an industrial strategy. A progressive supply-side policy is not an oxymoron. (I remain concerned about how such a programme can be reconciled with a hard Brexit, as some on the Left advocate.)

I have more sympathy with MMT than James. I see it essentially as a US-focused political campaign based around a single policy: the job guarantee. I am not convinced by the policy, but it is the focus of progressive economic and political action in the US. Stephanie Kelton has done an excellent job of debunking simple deficit scaremongering. But to claim, as Richard is doing, that rejecting MMT means accepting wholesale neoliberal orthodoxy is silly – as are several of the views that Richard attributes, without justification, to James.

The left deserves a better standard of economics debate.



  1. I can’t remember: is the MMT view that the level of demand (relative to real supply side constraints) is solely what determines inflation, and the choice between printing and borrowing money is irrelevant?

    So suppose annual expenditure minus tax revenue is 100, and we are currently financing that with 98 units of net debt issuance and 2 units of seigniorage, if we held everything constant but flipped that to 2 units debt and 98 money printing, there would be no inflationary consequences?

    reason I ask is, that if MMT means you really don’t need to worry about the cost of government debt, then I think you might have to believe the above.


    1. Aside from use of the word seigniorage I think the above is a fair description. Issuing money isn’t seigniorage: it is just issuing a very short term financial ‘liability’, so the choice of issuing bonds vis a vis money is basically a choice about the maturity structure of public ‘debt’. According to MMT, the only reason to shift this in favour of bonds is that you want to raise the rate of interest – as a monetary policy operation.

      But in your example, why would shifting the mix from bonds to money have inflationary effects?


      1. I’m not sure that I follow. I’m never terribly convinced by the ‘money is a liability’ argument which seems too semantic and insufficiently pragmatic (iir Eric Lonergan is good on this).

        But perhaps I used the wrong word. I don’t mean seigniorage revenues as in the interest income that the central bank earns being remitted to government, I mean the government issuing bonds which are purchased with printed money (reserves) by the central bank and then held on the central bank’s balance sheet in perpetuity – permanent monetary expansion or direct money financing of government expenditure. I hope I have that right. So setting QE aside for the moment, under an inflation-targeting central bank, we can expect the balance sheet to grow over time, which generates some revenue for the government in this fashion, but it’s not terribly significant and ebbs and flows (the central bank does not directly target the size of its own balance sheet). Whereas if you want to money-finance public expenditure, in a way we currently do not, the CB has to expand its balance sheet in some permanent sense.

        I don’t understand how money-financing of expenditure, in this way, is “just issuing a very short term financial liability … just a choice about the maturity structure of public debt” I think if it’s money financed like that, it’s not debt.

        I don’t have a view on whether switching from debt-financing to money-financing, holding all else constant, would be inflationary. I think there is an argument that raising money by selling bonds to the private sector subtracts from demand in a sense that raising money by selling bonds to the central bank who pays with freshly minted cash does not, so the latter may be more inflationary, but I don’t feel like I’ve pinned that down in theory, and certainly not empirically. But I was under the impression, whether right or wrong, MMTers would vehemently disagree with that argument and would claim the choice is neutral inflation-wise. That’s really what I was asking – is that impression correct?

        [next I’d want to know if there was any empirical evidence on that]



      2. Yes, MMT does acknowledge that there is fundamentally no difference between a bond and a dollar except the interest. While you certainly can go through the proof of this with separate balance sheets for the fed and treasury, it is much easier to think of them as a unified government sector. Barring political constraints (like the pointless debt limit or the requirement that bonds be issued rather than dollars when we run a ‘deficit’. there is nothing stopping the government from monetizing the entire national debt and replacing it with dollars. And actually MMT points out that this substitution is actually deflationary because all you have done is removed an income stream from the private sector (and massively disrupted the entire banking sector which would have knock on effects). Abba Learner explained this very well.
        And so has Fullwiler, who goes into more detail with the balance sheets and does a more detailed debunking of loanable funds..
        (not paywalled version)
        Proof? Why do you think QE was deflationary?


      3. Jo
        Isn’t there a difference (not saying an important one) between issuing debt and printing money? The money is not a liability (in fair value terms if perhaps it is in rudimentary double-entry bookkeeping terms). Or, hang on while I’m tying) is that just circular – because if I can redeem debt with cash that’s not a liability then the debt isn’t a liability in the first place?


  2. And still nobody looks at it from the exporters view ??

    A current account deficit can only occur if the foreign sector desires to accumulate financial (or other) assets denominated in the currency of issue of the country with the current account deficit.

    So it worth describing this from the other side of the coin and describe how an export-led growth country running an export surplus in a floating system would not be able to run an export surplus unless it did save foreign currency in this case the £. So if Japan, China and the Eurozone want to continue to run an export surplus with the UK they ” HAVE” to keep saving in £’s.

    And furthermore show that the saving of the foreign currency is how the export-led nation injects sufficient money into its own economy (via the discounting process in the banking system). And how this leads to the explicit or implicit ‘sovereign wealth funds’.

    Ultimately an export led economy cannot afford to allow its customer to disappear because there is nowhere else to shift the exports to in aggregate. Overall world demand grows only with world income and exporting is a way of importing demand. So they either have to maintain the import of demand, or internal generate more domestic demand and do the substitution – which doesn’t happen overnight.

    Moving capital around doesn’t seem to affect this underlying dynamic. Capital movements may be vast, but they are ultimately zero sum – unless the central bank is stupid enough to act as patsy in the market.

    James said if the UK used MMT the £ would become worthless

    Eh no …..

    If exporters stopped selling their goods and services for whatever reason though I can’t think of one the trade blance will adjust but won’t happen overnight.

    If james is going to go on social media and say MMT will make the £ worthless then he needs to write a piece and explain why this is the case.

    One of my favorite jokes:

    “The deficit will drive up interest rates”.


  3. The mainstream better start talking about what interest rates actually do

    7 US rate hikes and the real data does not match the theory. Pick a graph any graph you like that shows increasing interest rates fights inflation after 7 US rate hikes.

    There isn’t one.

    Because the increased cost of borrowing gets passed onto the consumer via higher prices and you also have the interest income channels. Paying interest is like basic income for people who have $

    Interest on Treasury Securities, $210.5 bln, up $17.6 bln y-o-y. This is growing at 9.1%

    The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery is the same.

    However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation!

    It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.

    Then you have Volcker. One of the most enduring clichés is the following: “Paul Volcker broke the back of inflation.” Whoever came up with this is a marketing genius because people are still walking around today, 38 years later, repeating this ridiculous lie.

    Starting in November 1970 when Arthur Burns was the Fed chairman the discount rate was 5.75% and inflation was running at 5.6% annually. By 1974 Burns had jacked up the discount rate to 8% — a 60% increase — and inflation had gone from 5.6% to 10% annually.

    By November 1976 Burns had reduced the discount rate to 5.25% from 10% and inflation had fallen to 5% annually. Then by August 1979, which is when Volcker was appointed as Fed chairman, the discount rate was all the way back up to 10.5% and inflation had jumped to 11.8%.

    Volcker continued to raise rates, pushing the discount rate to 13% by February 1980. The economy entered a recession in March of that year, but inflation was still running at 14%

    The chart below, which tracks the Fed funds rate and annual changes in the Consumer Price Index, shows clearly that the relationship between interest rates and inflation are highly correlated and not in an inverse way.

    i don’t know how many economic theories are going to have to be re written if raising interest rates actually do the opposite of what it says on the tin. Thousands probably.

    So it is time for the mainstream to find some real data after 7 US rate hikes that backs up their claims. Or we are all going to be in real trouble.


  4. Overy monetary financing or just open up the Ways and means account again

    The main contention made to support Gilts is that they manage the risk profile of private pension firms. And it is true that they do. In fact Indexed-Linked Gilts were introduced in 1981 by the Thatcher government specifically to do just that. The rationale behind them is a triumph of monetarism.

    Of course what that tells you straightaway is that the private pension industry is incapable of managing the risk profile of pensions on its own within the private sector. It requires permanent government assistance to do so. The question then is what is the purpose of the private pension industry if it can’t deliver the outcome that is required?

    A simple pension savings plan at National Savings, along the lines of the Guaranteed Income Bonds and Indexed Linked Savings Certificates, would solve the problem permanently, would be limited to individuals, and would allow them to manage their risk profile as they approach retirement (they would sell out of risky assets and transfer the money to National Savings).

    Since it would be only available to individuals and there is no need to pay middlemen, it is clearly far more efficient than the current Gilt issuing system.

    The Ways and Means Account is just an infinite overdraft with the Central Bank, and it grows over time to balance the net-savings of the private sector just as the Gilt stock does now.

    The Treasury simply doesn’t issue any Gilts any more. Any funding of private pensions in payment should be done by offering annuities at National Savings, which would also have the neat side effect of ‘confiscating’ net savings and making the deficit go down.

    It’s irrelevant what interest BOE charges on the ‘Ways and Means’ account since any profit the BOE makes from it goes back to the treasury anyway. So it can 50% if that gives the necessary level of satisfaction to mainstream economists and the gold standard, fixed exchange rate fiscal conservatives.

    What you have is a standard intra-group loan account between a principal entity (HMTreasury) and its wholly-owned subsidiary. Normally those sort of loans are interest free for the fairly obvious reason that interest charging is utterly pointless, and they are perpetual for the same reason. Rolling over is totally pointless.

    Any term money can then be issued to the commercial banks directly by the BOE – up to three month Sterling bills.

    If you are a member of a pension scheme then the savings of the current generation, plus the interest on Gilts and any income from the other assets owed pay the pensions of the current generation of pensioners. They are all, in effect, private taxation schemes that circulate money around the system.

    You’ll note that when there was a threat of people failing to save in pensions, the government introduced compulsory retirement saving – which is of course a privatised hypothecated tax.

    So in essence rather than the assets of a pension scheme being used to purchase Gilts, the assets would be used to purchase an annuity from the government dedicated to an individual. The result is that rather than the private pension receiving Gilt income from the state, to then pass onto the pensioner, the state would cut out the middleman (and their cut) and pay the pensioner directly as an addition to the state pension.

    There’s a whole private pension industry out there literally doing absolutely nothing of any real value. They can’t provide a guaranteed income in retirement without state backing in the form of Gilts. So what is exactly the point of having them?

    Get rid of the middlemen that take a hunge chunk of our pensions in the form of fees just for putting our money into state backed gilts. Get them do something useful in society instead.


  5. 1) The central bank is constitutionally barred from dealing in the foreign exchange markets, and margin trading is banned.

    2) Banks can only lend (i.e. create money) for the capital improvement of the country. Since traders then know that there will be no ‘patsy’ in the market and no leverage available to them, they have no effective mechanism to attack anything. They would run out of liquidity. To sell the currency you have to have them.

    3) No need of foreign currency in the central bank. The foreign currency, if any, is held by the government to allow it to make necessary purchases in an emergency. Most importantly it is never used to settle foreign financial liabilities. Any entity that cannot service foreign financial liabilities goes bankrupt and the foreign debts are wiped out by the bankruptcy process. Creditors then get paid in the currency achieved by selling the assets. The reason for that is straightforward – when you bankrupt a foreign loan you destroy their money.

    4) Banks would always be under threat of being placed in administration and their shareholders wiped out if they break the rules regarding the currency. That’s how you keep them in line. They’ll be no socialising the losses anymore if they want to retain thier licence.

    5) You tell banks what they are allowed to do, and NOT what they are not allowed to do. When you tell banks what they are not allowed to do, they will always find something you forgot.

    6) Bank lending is to be limited to public purpose, which means you cannot use financial assets as collateral. You can’t borrow against financial assets from the member banks. If somebody in the private sector wants to make a loan, that’s okay. But not the banks with insured deposits.

    7) And lending is done by credit analysis and not market prices of the assets underneath. You must lend by credit analysis to serve public purpose.

    8) You don’t need foreign money. Foreign firms need the custom of the British people because they have nowhere else to sell their stuff. To do that they need to either take the output of the UK, or hold the new currency. If they don’t then they won’t make the stuff, which creates space for the UK to make it for itself.

    9) There is no need to issue public debt. Overt money financing is the way to go or open the ways and means account.

    10) Introduce a job guarentee.

    11) You introduce capital controls on FPI and encourage FDI. Foreign Direct Investment (FDI) where a foreign investor provides funds to a productive enterprise in another nation, from Foreign Portfolio Investment (FPI), which represents foreign investments in a nation’s financial assets which bear no interest in an underlying productive activity in the real sector of the economy.

    All of that is just for starters.


  6. I’d be most grateful Mr Mitchell if you could point to any papers or articles you’ve written which explain why the UK government can’t create money in its own right for government spending purposes.


      1. I just find it frustrating that progressives end up accepting a ‘neoliberal’ framing, rather than shaping the debate in their own terms.


      2. Thanks very much for your reply Mr Michell. I find myself confused because as I understand it only government created money can satisfy the private sector’s desire for net savings yet balancing the government’s books, which you support, would appear to undermine this. Am I missing something here?


  7. A “neoliberal” perspective is to put the government balance (an economic residual) as a policy target with expenditure to fit. Rather than say, full employment, improved life expectancy or quality housing for all, as targets with a government balance to fit.


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