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February 08, 2017



"None of this is to say that fiscal policy should never tighten. It should, when real interest rates are at more “normal” levels."

Or you just leave interest rates at zero and tighten bank lending on the asset side (loans that do not meet criteria for public purpose become a gift.) Adjusting via interest rates is silly and positive interest rates is giving away free money to rich people.

The mainstream is basically saying, control demand through interest rates and try to manage public debt-servicing requirements through fiscal policy.

This amounts to saying, government should try to boost demand (i.e. total spending) by doing anything other than actually spend. And it should try to minimize any inflation risk associated with the interest owed on public debt by means other than tailoring interest-rate settings to that purpose.

Functional finance is a “radical” reversal of this logic.

It amounts to saying, the surest way to boost demand (spending) is for government actually to spend. And the best way to ensure that interest payments on public debt pose no inflation risk is through the appropriate setting of interest rates.


"so that conventional monetary policy can act as a cushion when the next downturn comes."

Why not boost the auto stabilisers?

Ralph Musgrave

“We want to get interest rates away from their zero bound..” says Chris. Where does he get that idea from? Ideally interest rates should be at their free market level. At least it’s widely accepted in economics that prices (including the price of borrowed money) should be at free market levels, except where the free market has clearly gone wrong (“market failure” as it is called by economists).

An obvious and flawed objection to the latter point is that the mere fact of a recession or excess unemployment is evidence that interest rate declines have not gone far enough. In fact there is no obvious obstruction to interest rates falling in a recession. In contrast, there is a very obvious obstruction to the market’s other (and I would suggest main) cure for recessions, namely the Pigou effect. (That’s the fact that given a recession in a perfectly free market, wages and prices would fall, which raises the real value of money, which in turn encourages spending. The obstruction is Keynes’s “sticky downwards” phenomenon: the fact that it is plain impossible to cut wages at least in unionised sectors.

In short, interest rate adjustments are daft: the best cure for a recession (as advocated by MMTers and Positive Money) is simply to create new base money and spend it, and/or cut taxes, while leaving interest rates to market forces.


Jeremy Corbyns pick as a replacement (apparently) Rebecca Long-Bailey supports budget surpluses, but could not name a country that runs a budget surplus when asked on the Daily Politics.

Another thirty years of Austerity!

Budget surpluses are followed by recessions.

Inflation risk comes from zero bound interest rates, as there is no cost to borrowing for speculation.

Please don't mention the Philips Curve.

When will the madness end?

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