The world is full of people who know better than you.
If you show any interest in unorthodox economic ideas you’ll probably hear from them.
“That idea is ridiculous. It would never work. Stop embarrassing yourself. Get back in your lane.”
There are plenty of aggressively confident people out there, but it doesn’t mean they always know what they’re talking about.
Last year, a former governor of the Bank of England, Mervyn King, even criticised the current generation of policymakers for failing to acknowledge how much the world had changed since the global financial crisis.
He also wanted to know why they were so resistant to new ways of thinking.
“Following the Great Depression, there was a period of intellectual and political upheaval,” he said.
“First Keynesian and then rational expectations revolutions altered our views on economic policy.
“No-one can doubt that we are once more living through a period of political turmoil. But there has been no comparable questioning of the basic ideas underpinning economic policy.
“That needs to change.”
That was in October last year — well before our summer bushfires and this year’s recession-inducing lockdowns.
King was calling on policymakers to acknowledge the world’s advanced economies (including Australia) had been stuck in a “low-growth trap” for at least a decade.
He said they were clinging to a particular model of how monetary policy operated and it was preventing them from fixing the problem.
“The conventional way of looking at things has misled us in both the diagnosis of, and the prescription for, our current economic problems,” he said.
“If we are to escape the low-growth trap, the diagnosis of the phenomenon is relevant.
“Conventional wisdom attributes the stagnation largely to supply factors as the underlying growth rate of productivity appears to have fallen.
He said since the global economy was suffering from a sustained lack of demand, countries would have to work together to reallocate resources around the world to revitalise demand.
“Escaping from this low-growth trap is a different proposition than climbing out of a Keynesian downturn and requires different remedies,” he said.
Economic policymakers can be wrong
Now King could be wrong himself, of course.
But economic policymakers (in central banks, treasuries, and governments) are certainly not infallible.
They’re not omniscient. They can be wrong on major questions. Their models can prevent them from seeing how the world works.
And if they admit that possibility, they shouldn’t be so resistant to different ideas — especially in the wake of the current economic calamity that’s putting central bank printing presses in overdrive.
Robert Hormats, a former senior economic and trade adviser to five different US presidents, says this pandemic is forcing the US Government to embark on an involuntary experiment with modern monetary theory (MMT), and the same has been said about the United Kingdom.
That type of analysis, once unthinkable, is becoming more common.
But what about the massive scale of stimulus spending that will be required to fix our economy over the next decade?
Should we be thinking differently about who should have responsibility for it, given its unprecedented nature?
In the late 1990s, Nicholas Gruen, a prominent Australian economist, began arguing Australia needed to create an independent statutory agency, much like the Reserve Bank, but with responsibility for the stance of fiscal policy — that is, the balance between government spending and taxation.
He suggested it could be called the Central Fiscal Authority.
He said modern economies had become too complicated and we shouldn’t expect politicians to know what scale of spending and taxation was necessary to promote sustainable growth through an economic cycle.
He said such an agency shouldn’t take daily spending decisions away from a government because it must be the government’s prerogative to implement its spending plans and to meet its fate at the ballot box.
But there would be definite advantages to distancing the stance of fiscal policy from day-to-day government (a government’s fiscal policy “stance” refers to how its level of spending and taxation influences aggregate demand).
He said an independent fiscal body could advise that tax rates had to be lifted or dropped slightly and that deficit spending had to increase or decrease to match prevailing economic conditions.
It could stop governments pursuing damaging austerity policies during downturns and spending too much during expansions.
In a crisis like today’s, it could also set the level of deficit spending that would be necessary to fully employ our real resources — our workers, factories, machines, land and raw materials — to drag the economy out of recession quickly.
Twenty-odd years later, Gruen is still keen on the idea.
“It’s more important than ever,” he told the ABC this week.
“The idea I developed in the late 90s was designed before this series of paroxysms (the 2008-09 financial crisis and the coronavirus recession), which are so profound that they call into question the interface between monetary and fiscal policy. It’s even more important in that context.”
Interestingly, there’s some overlap between Gruen’s idea for an independent fiscal authority and some of the ideas coming from proponents of MMT.
Gruen said he hadn’t made up his mind about MMT, but if a country wanted to dramatically increase the rate of money printing to finance deficit spending it would need an independent authority overseeing it.
“Otherwise, you’d just expect a disaster,” he said.
“Now, we should be prepared to print money at the moment, and I would much prefer it to be a people’s quantitative easing, which means printing money to hand to people.
“But you have to do that within an independent framework, and if you give an independent authority the power to print money, it also needs the power to take the money back out of circulation using fiscal methods — in other words by raising taxes.”
Getting the right amount of money in the system
Gruen also said we could all agree on the basic outline of MMT.
“And that is, when there’s slack in the economy it’s a rookie error to think of money as a scarce resource, because money is a costless fluid,” he said.
“So then the question becomes: how do we come up with a system that has the right amount of fluid — money — in the system? And that’s an interesting question.
“According to MMT, the real constraint in the economy is not the cost of extra money in the system, like interest rate costs or something, but the constraints imposed by real resources, so eventually if there’s too much money in the system there’ll be too much money chasing too few goods, and you’ll get inflation and that’s bad.
“And that’s when MMT proponents say the role of taxes is not to pay for government, but to drain resources out of the private sector so they can do the things that governments want them to do and to keep inflation in check.
“If nothing else, MMT’s quite a good marketing pitch for creating a Keynesian populist logic to counteract the austerian populist logic that encourage everyone to think that the government’s going to go broke,” he said.
He then referred to a quote from the famous British economist John Maynard Keynes.
“The difficulty lies, not in the new ideas, but in escaping from the old ones.”