Tuesday, 9 November 2021

Strange argument by Simon Wren-Lewis on fiscal rules.

SW-L is a former Oxford economics prof. He argues in an article entitled “The danger of imprecise exceptions from fiscal rules” that the danger of imprecise fiscal rules is that come a serious recession, interest rates may quickly fall to zero, with the result that govt and central banks' main weapon against recessions is then rendered impotent.

Well there's a simple solution to that non-problem which is not to have interest rate adjustments as the main tool used aginst recessions!!! Instead, have the system advocated by Ben Dyson (founder of Positive Money) and ( I think ) most MMTers, which is come a recession, just have to state create and spend more money (and/or cut taxes)!!!! Milton Friedman also argued against artificial interest rate adjustments, except in emergencies.

The latter of course is a combination of fiscal and monetary policy in that govt spending rises (and/or taxes are cut) and more money is created. Or if you like,fiscal and monetary policy are joined at the hip.

The latter “adjust fiscal and monetary stimulus at the same time” policy does of course require some thinking through (shock horror). But frankly it's not too difficult. VAT in the UK was adjusted twice in the recession after the 2007 bank crisis. And govt spending departments can perfectly well be told to prepare for possible changes in what they are allowed to spend per year. Plus upping the state pension and other benefits maybe on a temporary basis is not difficult.

Moreover, who pays for the extra interest on govt debt and other debts when interest rates rise? It's taxpayers in the case of govt debt, and “taxpayers” includes millions of below national income households. And in the case of mortgages, it's those with mortgages who pay – they pay extra interest to those who have cash to spare and who dump money in banks!

None of that smells to me like social justice.

Moreover, Wren-Lewis likes to cite the fact that adjusting interest rates is simple for the authorities compared to fiscal changes. Well King James I thought transporting the unemployed to the colonies would be a quick and easy cure for unemployment. Perhaps it would have been. But that's not a brilliant argument for that policy.

More to the point is whether a policy actually makes economic sense. If it does, and the authorities find it a trifle awkward to implement, who cares? Not me.

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