If there is confusion amongst New Keynesians as to my previous post, “Foundational MMT and Simon Wren-Lewis”, then I cannot help that. I have spoken in plain English. My point is that the only “fiscal rule” there should ever be is one that targets prosperity and nothing else: full stop. I do not need to consider monetary policy to arrive at that conclusion. The only operating target there should ever be is that which fills the spending gap. If that gap be large, then fill it. If that gap be small, then fill it. That is the basic function of fiscal policy and so, logically, for a national government like the U.S. or U.K. the only fiscal rule should be to target prosperity: nothing else.
Prosperity is not a supernatural phenomenon and is it not achieved by allowing government the so-called “room” to borrow today, then requiring taxes to cover current spending five years from now. Such an errant viewpoint is rooted in mysticism called “faith in the market”. Regularly, we hear nonsensical arguments from the mainstream such as, “Monetary policy is superior to fiscal measures. A reduction in the real interest rate will easily address a deficient flow in consumer spending.”, or “We are in the liquidity trap. That is why our wheels are spinning. Let us stimulate the market just a bit with fiscal measures and then hope that the market will lift itself out of the doldrums.” The key word here being “hope”.
In a monetary economy where the national government alone is the sole issuer of the currency that the domestic economy uses and depends on, only the national government through its use of fiscal policy can create long lasting prosperity with absolute certainty, or it can, through austerity and fiscal rules, suppress it altogether with absolute certainty as many governments have done for the last forty years. Both the U.S. and U.K. governments possess flexible policy options and since the financial crisis, they have demonstrated a proclivity for choosing an errant option of that flexibility combining monetary policy with fiscal austerity, or in plain English, choosing privation over prosperity.
Some might say that the U.K. has indeed sought austerity, but not necessarily the United States. I would reply that, yes, the U.S. government has not been as strident as the U.K. or Australia in pursuit of its austerity fetish and the wholesale slaughter of the well-being of the citizenry and that of the economy. However, for the U.S., it is still austerity nonetheless. Austerity is not necessarily a reduction in government expenditure. It is the intentional targeting of fiscal policy away from the public purpose. Whether full blown austerity or austerity lite, it is all austerity and all austerity is madness.
Of equal madness is the reliance on monetary policy to guide the economy to full employment and prosperity. Wren-Lewis wants to know why did I not mention monetary policy when discussing “fiscal rules”? Because monetary policy has nothing to do with why I question fiscal rules and secondly, because monetary policy is impotent and not worth discussing, unless we are discussing coordination efforts with fiscal policy. Nevertheless, in this reply I will address monetary policy, not for Wren-Lewis’s benefit, but that of the general public’s. It is to the general public alone that I now speak.
I: Monetary Policy Alone is Ineffective
Whether typical, through the manipulation of interest rates, or atypical such as Quantitative Easing (QE) and a Negative Interest Rate Policy (NIRP), monetary policy is wholly ineffective in addressing a large scale drop in consumer spending for the precise reason that, empirically, monetary policy is not spending.
1: It is imperative to note that Loanable Funds Theory, which is touted by the likes of Paul Krugman as reality, is not descriptive of the real world whatsoever. It simply does not exist. Banks operate within what is called “the credit creation model” as described in this Bank of England paper. An explanation of the credit creation model in easy to understand terms can be found here. In short, banks do not lend out reserves and savers do not provide “money” for loans, thus negating entirely the intended purpose of monetary policy’s atypical approach of QE: to stimulate the economy. QE is but a mere asset swap for liquidity. Judging by observational evidence, something which is anathema to orthodoxy, the mountainous level of excess reserves remaining in the system after QE demonstrates that reserves are not being lent out. Since the reserves remain on the balance sheet of the central bank and never enter the economy, we can easily conclude that QE will not result in inflation. Again, observational evidence has shown this to be the case as deflationary environments persisted after operations. Furthermore, since commercial banks do not require reserves before they can lend, QE will not result in credit expansion either and as we’ve seen, it has not done so.
If we are to consider ourselves sensible to any degree, we would examine the intent of atypical monetary policy and that inspection would give us clear insight. If QE is the building up of excess reserves with the intent to stimulate bank lending and NIRP is the attempt to reduce the amount of excess reserves with the intent to stimulate bank lending, then both cannot possibly have the same outcome. Any reasonable person would conclude that if banks supposedly require reserves first in order to lend and building reserves with QE failed to stimulate lending, then reducing that which banks absolutely need beforehand to lend cannot possibly stimulate lending. Therefore, atypical monetary policy is a disconnect from the real world. Considering also the fact that the credit creation model’s explanations are in keeping with observational and empirical evidence, Loanable Funds Theory is also a disconnect from the real world.
The defensive claim that banks are being “stingy” is entirely absurd and nothing short of rationalization. Such must be regarded at once as unscientific: an excuse to justify the continued acceptance of the fantasy intermediaries viewpoint.
In light of the fact that Loanable Funds Theory is inapplicable to the real world, the credit creation model throws orthodoxy’s explanations for stagnation such as the “zero lower bound” argument and its prescriptions for such deficiencies into serious question. The “zero lower bound” argument is also nothing but rationalization. It is an excuse to justify the mystical “faith in the market” mentality as well as the continued belief in Loanable Funds Theory and reliance on inept monetary policy. It is insensible to insist that we are merely in a liquidity trap and all we need do is give the market a fiscal boost, then let the market take over with monetary policy at the ready while we adhere to our fiscal rules to “pay for” the fiscal boost when the argument is based on something that doesn’t exist. That is absurd and questioning the veracity of such reasoning is not, in my opinion, “going too far”, nor is it unprofessional. For economics to be considered an actual profession, then surely scientific scrutiny is highly warranted and must be welcomed, not resisted.
The following points that I am about to make may seem redundant now, but they are still necessary for the general public’s edification.
2: Since customer deposits are not being doled out through the manipulation of interest rates, a real interest rate reduction will not address a deficient flow in consumer spending. A monetary economy is fueled by spending. Consumer spending places pressure on the supply-side to produce, resulting in decreased unemployment. Conversely, when consumer spending contracts, the supply-side sheds jobs and unemployment increases. The source of consumer spending is the national government’s fiscal operations which add currency to the domestic economy, relieving pressure on the savings of consumers, enabling them to increase their spending. Since monetary policy is not spending, typical or atypical monetary policy operations will be ineffective in reversing a downturn, especially one of considerable magnitude.
3: Again, by close examination of atypical monetary policy we can also derive clear insight into what is termed “government borrowing”. The actual purpose of a treasury bond is made quite clear when the central bank intentionally sets its target rate at or near zero prior to engaging in QE operations. Since the central bank is about to build excess reserves, maintaining a positive rate well above zero would necessitate the use of treasury bonds to eliminate the excess reserves that the central bank is creating through QE operations when interbank competition drives the overnight rate below the central bank’s target rate (interest on reserves is beside the point here). Since we know beforehand that the U.S. and U.K. governments are not revenue constrained, again, observational evidence should lead one to conclude that as the purpose of treasury bonds for a currency-issuing national government such as the U.S. or U.K. government is not one of any financial necessity, it must be one of reserve management and interest rate support.
In other words, the purpose of a treasury bond within a free-floating, inconvertible fiat currency regime is not to conduct fiscal policy, but monetary policy. As these governments need not tax or borrow back their own currency to fund their spending operations and because of points 1, 2 and 3 collectively, we conclude that monetary policy alone is ineffective and requires coordination with fiscal policy.
Fiscal policy contains two basic elements: The injection of currency into the non-government sector and taxation. Injections raise aggregate demand and taxation reduces the non-government sector’s spending power. As spending is needed to immediately address insufficient aggregate demand and stagnation and as fiscal policy is the only means available to a national government to do so, it can be easily seen that creating a “fiscal rule” which allows so-called “room” for the government to borrow today (which it doesn’t actually need to do to begin with), but five years from now requires the government to cover current spending with taxes (which then will only reduce spending power) is an entirely self-defeating and nonsensical approach.
4: The money multiplier is also non-existent as is outlined in this paper from the Federal Reserve. The money multiplier mythology remains persistent within orthodoxy as well as classrooms, ready to baptize yet another generation of economists into the Church of Confusion. Again, it is my position that in light of damning evidence to the contrary, we are right to question the veracity of any claims which continue to promote the existence of that which is mythological.
5: Since we know that the credit creation model accurately describes the real world, we also understand that the central bank cannot and does not control the money supply. The central bank can control the price of money, but were it to attempt to control the quantity of reserve balances, interbank competition would send the overnight rate above the central bank’s target rate and thus, the central bank would lose control of monetary policy. In other words, the central bank cannot do both. The credit creation model which describes the real world, demonstrates that the money supply is actually composed of commercial bank IOUs which are then pegged to the government’s unit of account, manifesting as a deposit which is created at the same time a loan is created. When the borrower spends the deposit, the borrower indeed demands High Powered Money (HPM), but the HPM merely shifts between reserve accounts held at the central bank never entering the economy. Should a bank find itself short of reserves later on, it will obtain them on the interbank market or from the central bank itself. As lending increases, so does the money supply and as loans are extinguished, the money supply contracts. The money supply then is, in fact, endogenous, determined by the demand for bank credit and not controlled by the central bank. This then condemns the Quantity Theory of Money viewpoint which errantly assumes that the central bank controls the money supply. The claim that a rise in the money supply will automatically result in accelerating inflation should be regarded by the general public as pure nonsense.
Ultimately, monetary policy does not result in the injection of net financial assets (NFAs) into the domestic economy – that is the purview of fiscal policy alone. Monetary policy is indirect, blunt, it cannot ensure that any regional deficiencies are addressed and, in my opinion, is quite psychological. Asserting that monetary policy can “encourage” a reversal of a deficient flow of non-government spending is a psychological statement and asks us to have hope in something that simply does not exist. Loanable Funds Theory says that the interest rate is determined by the supply of and demand for loanable funds. Since we know that such a concept does not exist, then there can be no supply of nor a demand for customer deposits leading to an increase in needed spending through the use of monetary policy. Thus, “Encouragement”, or better said, chimera is no substitute for realistic direct fiscal action.
The aforementioned five points outline my reasons to the general public why a reliance on monetary policy alone is not in the best interests of any economy and why is it the not product of scientific thought, but rather, it is the product of errant thought and rationalization. Of course, there are technical explanations, but in the interest of facilitating understanding with the public, I have reduced those explanations into simple terms.
An over reliance on monetary policy while the fiscal position of national governments has been one of austerity since the global financial crisis, is precisely why there has been little to no recovery. It is why we are still experiencing the effects of the crisis eight years later and it is why we must forego a reliance on monetary policy to save the day. Again, monetary policy must coordinate with fiscal policy to be effective. Simply put, fiscal policy is the injection of NFAs which will raise aggregate demand necessary for full employment, then monetary policy can set rates which will result in the best level of investment. So, monetary policy is not all that we need and no, we do not need fiscal rules governing the fiscal operations of national governments which experience no hard financial constraints.
II. Fiscal Rules Should Be Abandoned
Fiscal rules are totally unnecessary voluntary constraints created by mystics called “mainstream economists” and placed on the fiscal policy of governments that experience no hard financial constraint and have flexible policy options, as well as on those with financial constraints and inflexible options. For nations with real financial constraints and inflexible options, such as those within the seething cauldron of inhumanity called the European Monetary Union, fiscal rules are a noose around the neck of the government which work to ensure that deflation, high unemployment and poverty will run rampant into eternity. But why impose artificial restraints on governments that possess an infinite capacity to issue currency and flexible options? Those in the mainstream who propose fiscal rules must be either unaware that certain governments such as the U.K. and U.S. governments experience no hard financial constraint and have flexible policy options, or in the case of those like Simon Wren-Lewis, perhaps they do not actually realize the implications of such a reality. Then again, perhaps Simon does and chooses to ignore the implications. I cannot say.
Fiscal rules come in many shapes and sizes, from the unnecessary type like John McDonnell’s recent proposal that the government can borrow now, but within 5 years, taxes must cover current spending, to the outright insane, such as Germany’s proposal to make deficits illegal.
The silliness of fiscal rules can be traced back to neo-liberalism’s fearmongering about accelerating inflation. Inflation was and still is a priority for macroeconomic policy. In plain English and not econobabble, it means that around forty years ago, economists who represent mainstream “thought” today, convinced policymakers to worship the market god and also his brother NAIRU, the god of accelerating inflation. According to the Church of Orthodoxy, NAIRU is a wrathful god who stands ready to inflict accelerating inflation on nations whose governments use fiscal policy to interfere with will of the market. As neo-liberal church dogma teaches, in the post-World War II era, governments embraced heresy by deficit spending to attain and maintain policies of full employment. In the late 1960’s, NAIRU’s patience had finally run out and he declared that man must surely pay for this sin of government-induced prosperity. So, NAIRU said, “Behold! I shall punish man for this sin. Therefore, let accelerating inflation afflict many nations. The weeping and gnashing of teeth shall be exceedingly great.” Throughout the 1970’s, the Great Inflation plagued nations and there was indeed weeping and gnashing of teeth. NAIRU struck policymakers dumb in order that they would choose the incorrect response to the Great Inflation, which they did, making the situation worse. Of course, governments weren’t aware of the existence of NAIRU, so the new religion and their sin had to be explained to them.
After extensive efforts on the part of certain mystics to evangelize policymakers, governments wished to repent in dust and ashes for the “artificial”, man-made prosperity they achieved. The mystics told governments there was but one way to repent: Governments everywhere had to shun the use of fiscal policy and instead, rely on monetary policy. But to be in the market god’s continued favor, NAIRU demanded human sacrifice in the form of involuntary unemployment. If governments maintained a pool of unemployed workers at all times, then NAIRU would be appeased and the market god would grace everyone with true prosperity. Governments were told that there was a “certain number” out there which was the “natural” rate of unemployment and should they ever try to lower that rate using fiscal policy, NAIRU would have a conniption fit and destroy the world with accelerating inflation.
And so, it came to pass that a great question mark appeared over the heads of rational, scientifically-minded people while governments listened to the delusional sermons of these mystics. Thus, for the last forty years, national governments world-wide have promoted the religion of neo-liberalism; maintaining unemployment to avoid accelerating inflation being the core doctrine. Wage suppression, union busting and deregulation also became essential doctrines. Fiscal rules were enacted to discipline fiscal policy, starving domestic economies of much needed currency while we were told that inept monetary policy’s tinkering and adjustments would lead us to the promised land.
Forty years later, because of orthodoxy’s total failure to understand, or the outright rejection of how a modern monetary economy functions, the results manifest as stagnation, vast income inequality, deflation, mountainous private debt levels, high unemployment and social collapse.
III: Foundational MMT, or the “We already knew this” Stuff
The truth is that we live within a modern monetary economy. Today, national governments like the U.S. and U.K. issue a sovereign currency that is not pegged to gold nor any other currency. These currencies float freely on an exchange and are inconvertible. The U.K. government will give you nothing in exchange for your Pounds but Pounds. The U.S. government will give you nothing in exchange for your US Dollars but U.S. Dollars. What then is a Pound or a U.S. Dollar?
A Pound or a U.S. Dollar is just a number. Cash (paper notes and coin) is nothing more than a physical representation of a number. For instance, a $20 bill is a piece of paper that physically represents twenty of something. That something is the government’s chosen unit of account, or “currency”. In this case, dollars. The number twenty alone has little meaning, since we do not know what the number represents. It could be twenty apples, twenty cars, twenty kids, twenty New Keynesians who think that federal taxes fund federal spending, etc. We need to define the number. So, by placing a symbol in front of that number, we are able to define the number:
Twenty dollars. But what if we did this:
Now, the number twenty represents something else entirely. In this example, the number twenty is twenty British pounds. The difference between the two is the national government that issues the unit of account.
Mathematics tells us that numbers are infinite. Thus, we can type as large of a number on a computer screen as we wish:
100, 1,000, 10,000, 1,000,000,000,000,000,000
Now consider the following:
$100, $1,000, $10,000, $1,000,000,000,000,000,000
Here again, instead of typing numbers, we’ve typed numbers that are clearly defined. The numbers have become dollars. You and I can type dollars of any size on a computer screen, or write them down, or enter them into a spread sheet, but they never become currency. We cannot spend those numbers that we type. This is because, you and I have no authority to issue currency. However, such is not the case for the federal government. When the federal government enters a bank account and types a number on a computer screen, that number appears in the banking system and becomes “money”.
The national government can type as large of a number that it wishes in a bank account and when it does, the national government spends. To illustrate this concept, let us assume that there are zero dollars in the private sector. Dollars presently do not exist, but the banking system is already set up and waiting to receive dollars from the federal government. The government enters a bank account and types the number 5,000. Now, there are $5,000 in the U.S. private sector. Next, it enters another bank account and types the number 500. Now, there are $5,500 dollars in the U.S. private sector. Entering yet another bank account, the federal government types the number 100,000 and now there are $105,500 in the U.S. private sector.
The insight here is that when the federal government types a number in a bank account, it is creating NFAs and spending at the same time. In short, when the federal government spends, it is spending NFAs into existence. The further insight is that if the government spends NFAs into existence, then it has no supply of currency on hand first before it spends. Therefore:
The supply of Pounds available to the U.K. government and the supply of U.S. Dollars available to the U.S. government is always equal to infinity.
Some claim that everyone knew this already.
However, the aforementioned basic statement is not a fundamental MMT insight as some suggest. A national government which possesses an infinite capacity to issue currency clearly does not have to tax or borrow to fund its spending. Therefore, the fundamental insight of MMT is that:
A sovereign currency-issuing government like the U.S. or U.K. has absolutely no hard financial constraint and so, these governments have flexible policy options.
Apparently, Wren-Lewis doesn’t know this already or he wouldn’t be making nonsensical statements such as “fiscal rules should target the deficit”, nor would he be heralding the fiscal rule of within 5 years, taxes must cover current spending as a much better fiscal rule. As I said in my previous article, if he did understand this already, he would have said, “fiscal rules should target prosperity and nothing else”, because, as I have stated plainly at the beginning, there is only one fiscal rule and that is to fill the spending gap. In other words, deficits should be ongoing, targeted to the appropriate level that ensures actual full employment and that the public’s well-being (basic necessities, medical care, education, infrastructure, disability, pensions, etc.) are sustained and guaranteed indefinitely: the budget be damned.
In fact, the term “budget” is highly misleading when used in the context of the fiscal spending operations of the U.S. and U.K. governments since it suggests that these government’s finances are analogous to household finances. It is my opinion that the term should be dropped entirely in favor of the term “Fiscal Agenda”. “The Fiscal Agenda of the Government of the United States, 2017” states clearly to all the true purpose of fiscal policy and allows us to ask a question that refocuses our attention to reality: “What is the U.S. government’s agenda for the domestic economy in 2017: Prosperity or privation?”
The concern of entities within the domestic economy might very well indeed be budgetary, because these entities are users of the government’s currency. But, for the issuer of currency, the concern is not financial. It is not the budget that should be questioned, but the real resources available to that government.
IV: Real Resources and Inflation
The correct mindset of the U.S. and U.K. governments must be to observe all of the real resources within their respective nations and then each should ask, “What are my real resources available to me and how can I best use these resources for the benefit of my citizens?”
That is always the question for these governments, whether the subject is Social Security, infrastructure, the NHS or any public purpose spending. The question is never one of affordability from a monetary standpoint, ever. As to the NHS, the question for the U.K. government is always, “Does the U.K. have enough doctors, nurses, hospitals, researchers, medicines and all of those things necessary to ensure the good health and treatment of the population given our current level of medical understanding?” If the answer is yes, and clearly it is, then there can be no question as to the affordability of the NHS for the U.K. government and there can be no justification, whether financial or real resource related, to eviscerate it or to privatize it. If the answer is no, then the question becomes, “Can these resources be increased and if not, how can I maximize them for this purpose?”
Similarly, the question of Social Security for the U.S. government is always, “Is the labor supply large enough to produce enough goods and services and are there enough real resources available to produce goods and service from to meet the needs of beneficiaries along with the rest of the population?” If the answer is yes, then there is no question as to the affordability of Social Security for the U.S. government and there can be no justification on affordability grounds, whether financial or real resource related, to eviscerate it or to privatize it. If the answer is no, then the question is, “Can the labor supply and/or the availability of other real resources be increased or redirected efficiently?”
At no time is there a financial question for the U.S. and U.K. governments. These governments can easily afford anything that is available for sale in their respective currencies. However, if real resources are lacking, then no amount of spending will correct the situation. This then leads us to inflation concerns.
If there are idle labor resources that are for sale in the U.S. and U.K. and it is clear that these nations have the infrastructure necessary and real resources available to increase output, then we conclude that some production is intentionally left idle. They are left idle precisely because of inadequate levels of deficit spending, not because monetary policy is in the zero lower bound and “out of ammunition”. It must be understood that the national government controls the unemployment rate through net spending and taxation, which is fiscal policy, not monetary policy. Strapping the national government with “fiscal rules” targeting the deficit, ties the government’s hands behind its back. Thus, in no way can it sustain full employment indefinitely and so, fiscal rules virtually guarantee recession and the continued existence of poverty. If we understand this reality, we then can also understand that budget deficits pose no immediate danger of demand-pull inflation prior to a situation of macroeconomic efficiency; that being actual full employment, or maximum output. Should the budget deficit exceed the economy’s actual ability to respond with increased output, then demand-pull inflation will occur. But, if there is much idle labor available for sale and should deficit spending be employed by the national government to increase aggregate demand, then the pressure on business to increase its production will result in that labor being absorbed, thus increasing output rather than resulting in any dramatic increase in the price level. Output is the only “room” we should concern ourselves with: Is there room for increased output? While it is true that bottlenecks in supply chains can occur just prior to maximum output, my point here is not to suggest Keynesian pump-priming as the goal of fiscal measures. The budget deficit should be continuous, targeted at a level sufficient enough to ensure full employment and the public well-being in perpetuity and the most efficient manner to achieve that target is through automatic deficit management. In other words, allowing the budget deficit to automatically respond to the needs of the economy, rather than making a constant political determination as to the appropriate level of deficit spending necessary to sustain a condition of full employment and ensure well-being. Abandoning the specious concept of NAIRU is essential to this end.
By rejecting orthodoxy’s reliance on the Phillips Curve and replacing its NAIRU methodology which seeks to maintain a pool of unemployed workers to prevent inflation, with a pool of employed workers (Job Guarantee) that are paid a fixed minimum wage, any inflationary pressures can easily be attenuated without resulting in unemployment. When workers respond to the national government’s efforts to reduce aggregate demand, whether that be accomplished through raising taxes or reducing spending, they do so by shifting from private sector work to a fixed wage pool. It is clear any labor for sale with no takers means that that labor has zero market value. Therefore, if the national government purchases the idle and unwanted labor at a minimum wage, it is not interfering with the structure of market wages and so, no inflationary pressures can result from that purchase. It can be seen that such a scheme demonstrates there is no trade-off between unemployment and inflation, rendering mainstream reliance on the Phillips Curve and NAIRU extremely questionable. Though I am an advocate of a Job Guarantee and unapologetically so, I do not mention the Job Guarantee here in a capacity of advocacy, but merely to demonstrate that I am not suggesting pump-priming to be the only solution. Finally, the question turns to the use of the central bank as a fiscal device.
As I previously mentioned, the purpose of treasury bonds is not one of government financing, but one of interest rate support and reserve management. Therefore, bonds conduct monetary policy, not fiscal operations. Should the central bank be so ordered to immediately credit the accounts of citizens with the intent of reducing the level of private debt and/or increasing aggregate demand and do so without bond issuance from the treasury, then that is still fiscal policy in operation and not monetary policy. Having said that, my point here is not to argue if whether or not central bank spending without bond issuance is desirable, but to illustrate to the public that the activity is fiscal. Furthermore, the mainstream claim that the act of the central bank crediting bank accounts amounts to “printing money” is nonsensical. It does not require that paper notes be printed and so, the act is not the gold standard era’s “printing money” operation to fund spending. The term has been resurrected from the defunct gold standard era to waterboard an already tortured and abused public with threats of accelerating inflation and hyperinflation should the national government actually do its job. I reject “printing money” claims, I reject any reliance on monetary policy over fiscal and I especially reject neo-liberalism and its demands for “fiscal rules”.
Over the last forty years, monetary policy has been the center of attention and it has been the center of attention long enough. It has had well beyond its deserved time for discussion and based on observational evidence, it need not be discussed in a positive light any further. One policy that has had no discussion beyond its so-called “dangers” is fiscal policy. We are urged to avoid fiscal policy at all costs. Monetary policy might be all that we need we are told. And my reply is, elvish medicine might be all that Frodo Baggins needs, but what has that to do with the real world? It is a fantasy.
Now, some New Keynesians might say, if your claim is so, then you need to write a paper containing empirical evidence that demonstrates why it has been a failure. No, I don’t – That is my answer to them. I need not do so, because the general public is my target and they do not care for the abstract math and convoluted explanations that are required to make orthodoxy’s fantasies seem real. They want to hear the truth in a plain language and so, that’s what I have tried to do here.
So, Wren-Lewis asks me why I didn’t bring up monetary policy when discussing fiscal rules and then believes that I am missing the point and rationalizing. The reason why Simon thinks that I am missing the point and rationalizing, is because he is missing my point entirely. Perhaps he is so awash in orthodoxy’s “monetary policy at all costs” and New Keynesian “zero lower bound” nonsense that he cannot set these things aside long enough to understand my point concerning “fiscal rules”. That is the entire reason why I opened my last article with a discussion on language. It was as predictable as the sunrise that simple English would not be understood. So, I am speaking on a different wave length than he and he is not understanding me. Perhaps he believes that I am somehow arguing within the boundaries of New Keynesian thought, which to him, is “reality” and thus, I am not making sense to him.
I apologize, but I do not wish to pretend that nonsense is something quite sensible.
The confusion might be because observational evidence is not part of his vocabulary. I cannot say. When you look at the state of the world today and you see that aggregate demand is so low as to be pathetic, it doesn’t take much to realize that if monetary policy has been the tool we rely upon while the fiscal position of national governments has been one of austerity, then clearly, there is a problem with the so-called superiority of monetary policy. The government should deficit spend for prosperity at all times and then monetary policy can set the rate which results in the best investment.
New Keynesians dream up new “fiscal rules”, which are really part of the austerity regime, then insult our intelligence with this liquidity trap clap-trap, telling us that we are in the zero lower bound and monetary policy cannot ensure full employment under these conditions, thus we need a little boost from fiscal stimulus, but not too much. If we do that, then we will magically exit the zero lower bound and prosperity will emerge.
That is complete nonsense.
V: What is Macroeconomics?
Finally, what is macroeconomics? What should its purpose be? Should the purpose be endless academic games, adding to and tweaking models which are nothing more than neoclassical fantasy, or to borrow a term from Hicks, “classroom gadgets” that are designed to divine the will of the market, or should its foundational purpose be one grounded in reality with efficiency being its central concern?
We are humans and humans make mistakes. To quote Seneca, “Errare Humanum Est” – To err is human. It is also possible for humans to learn from their mistakes. We possess that capacity, but if we fail to make use of that capacity, then what use are we in this endeavor we call “macroeconomics”? The literature that condemns orthodox thought is quite extensive, yet it either goes ignored by the mainstream, or it is merely rationalized away. Sir John Hicks himself recanted IS-LM in his 1981 paper, IS-LM: An Explanation. Have New Keynesians read it and if not, will they even bother to do so? Who knows. Clearly then, no amount of working papers containing empirical evidence will matter. The mainstream profession simply shields its mysticism from consignment to oblivion by masquerading as “science”.
It behooves one to then examine the profession of economics as a whole. We ask the question: Over the last forty years, has orthodoxy been able to deliver prosperity and stability? The answer is, no. As to the question “why”, the answer is: Because, they are playing with their models and we should not disturb them with inconvenient things like evidence. And this would be fine, and all well and good, were these models grounded in reality. But, they’re not. They are dysfunctional to their core and adding on new sectors or tweaking them will not change the outcome. It will still be nonsense. We cannot persist any longer on this unscientific journey, which I view to be mysticism. We cannot achieve prosperity by ignoring observational evidence and reality. If we choose to ignore reality, we will be of no use to anyone regardless of how intelligent we might be.
The profession resembles a modernized form of Etruscan haruspicy. It is the taking of a model based on pure fantasy then opening its belly and examining the entrails for the purpose of divination. The market is viewed as sovereign and we as mere mortals can do nothing but adjust to its will. However, we can defy the market’s will through a national government’s fiscal policy action, but NAIRU help us if we do, for our own destruction draweth nigh! We will only bring ruin down upon the world. And that is precisely the nonsense we have been told by these mystics for over forty years now: We will bring about financial armageddon with the use of fiscal policy.
That is mysticism.
To encapsulate the state of the economics profession today, I would point to the state of astronomy during Galileo’s time. Mainstream opinion denied reality for the sake of mysticism then, and mainstream opinion in economics denies reality today for the sake of mysticism. Prior to the financial crisis, New Keynesian models didn’t even recognize a financial sector. They denied that it had any significance. Lo and behold, the financial crisis comes and then afterwards, New Keynesians say ”Let’s just go ahead and plug a financial sector in. Ah, look! The financial crisis is easily understood. We can hold on to our beliefs in the face of damning evidence to the contrary.”
I would question the veracity of that and I think that we are right to do so when human lives are at stake. Some claim to know the truth and choose to either misrepresent that truth or to outright ignore it. If they’ve already known this, why do they not act like it? The only answer that I can conceive is to promote and defend the way they want the world to work, instead of how it actually works. In short, orthodox “economics” is game of pretense: “This is how I think the world should work and I will create a model which confirms what I believe and call it ‘truth’.”
Nevertheless, as I have always done, I take the case to the people. It is they who will tick the box in the voting booth, installing public servants who are willing to reject mainstream “analysis” and who are willing to implement real change for the better, ridding national governments of these ridiculous “fiscal rules”. It is the public which is most important here and it is the public’s well-being to which the profession must be attentive and strive to ensure in perpetuity. We achieve that with only one rule for fiscal policy in mind and that must be to target prosperity and nothing else.