A mild criticism of MMT by Simon Wren-Lewis.

Summary. SWL argues against using fiscal policy alone to regulate demand on the grounds that monetary policy is easily delegated to experts. In fact, as Positive Money has argued for years, the decision as to what the SIZE OF the deficit should be is easily delegated to experts, though of course strictly POLITICAL decisions, like what proportion of GDP goes to public spending should remain with politicians.

Plus, assuming MMT’s “permanent zero interest rate and zero government borrowing policy is correct”, and assuming that policy has been implemented, then it just shouldn’t be possible to implement monetary policy.

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The relevant article by SWL is entitled “Labour’s fiscal credibility rule isn't neo-liberal – whatever MMTers say”, published by the New Statesman.

SWL starts by criticising Bill Mitchell for claiming Labour’s fiscal credibility rule is neo-liberal. I’ve no quarrel with SWL there: i.e. I also find Mitchell’s “neo-liberal” charge very strange.

Next, in the para starting “MMT wants to go…”, SWL says that MMT wants to “…use fiscal policy to stabilise the economy at all times, and not just when monetary policy is out of action. This is not a ridiculous proposal. The question is whether it would work as well as the current regime. Most macroeconomists prefer using interest rates when possible because rates can be moved quickly. This also enables the decision to be easily delegated to experts, which avoids party political influence interfering with macrostabilisation.”

First, note that SWL does not flatly disagree with the MMT stance there, since he says “This is not a ridiculous proposal.”

Second, the fact that interest rates can be changed quickly does not mean the ACTUAL EFFECT of those changes comes quickly. Indeed, there’s a Bank of England publication which claims the full effect of an interest rate change takes a full year to materialise.

Third, SWL’s main argument for interest rate changes rather than fiscal stimulus is that “This also enables the decision to be easily delegated to experts…”.

Well it’s true that decisions on interest rate changes can be easily delegated to experts: indeed, that has actually been done in numerous countries without difficulty.

But it’s not actually difficult to delegate the decision on how large the fiscal deficit / surplus should be to experts either!! Indeed, Positive Money has been advocating just that for near ten years. And Bernanke recently gave an approving nod to that sort of set up.

Of course strictly POLITICAL decisions like what proportion of GDP is allocated to public spending and how that is split between education, health etc should remain with politicians, as Positive Money rightly says. But the “size of the deficit” decision is easily delegated to experts.

As to exactly where to find the latter “Positive Money” point, PM has made the point in numerous publications, but PM’s submission to the Vickers Commission (jointly authored by the New Economics Foundation) is just one example. See pages 10 to 12.


MMT’s permanent ZIRP / no government borrowing policy.

Another weakness in SWL’s argument is that assuming MMT’s “permanent zero interest rate policy / no government borrowing” policy is correct, and assuming that has been implemented, then monetary policy will be impossible. (For some arguments behind the zero government borrowing idea, see my article here.)

That is, interest rate cuts would be impossible since they are already at zero (unless on goes for negative rates, but that involves well known problems). Plus if there is no government debt, then QE is impossible (unless the authorities buy up private sector assets, but that’s non optimal in that those private assets are presumably in private hands because they are BETTER held in private than public hands).