To see it, let’s assume Labour were to take power today. There is a pressing need not just for more infrastructure spending but for more current government spending – on the NHS, local government, courts, prisons and so on. Let’s say that Labour does raise such spending, and therefore aggregate demand.
The Bank of England would regard this as inflationary. It raised rates last week because it believes “the UK economy currently has a very limited degree of slack”. A fiscal expansion would eat further into this slack thus prompting the Bank to raise rates to suppress demand.
Of course, the Bank of England might well be wrong to believe this*. But even if it is, rates will rise in response to a fiscal stimulus.
In this sense, Richard is right to say that “austerity will remain in place”, in the sense that we’ll suffer ongoing weak growth and continued mass unemployment – the difference being that it'll be due to tighter monetary rather than tight fiscal policy. And he’s right to say that, as things stand, Labour is leaving Carney & Co in charge.
In this context, the question of financing the extra government spending is a red herring: even if it were accompanied by higher taxes, there would be some rise in rates – remember the balanced budget multiplier?
The question is: what to do about this?
One solution would be to remove the Bank’s operational independence or, less radically, to raise its inflation target: doing so might be justified as a means of offsetting the Bank’s bias to over-estimating the Nairu.
It’s easy, though, to see why Labour might be loath to do this. Doing so would invite its critics to invoke folk memories of Labour’s failure to control inflation in the 70s.
It would also be only a temporary fix. Jo has a point when he says:
One doesn't have to sign up to a constant NAIRU to acknowledge that at some point higher demand is going to induce inflationary pressures. I sometimes get the impression this is not sufficiently acknowledged in MMT.
The constraint upon full employment is genuine – even if nobody knows for sure where exactly it is. Jo is therefore right to say that fiscal policy alone cannot achieve full employment.
He’s also right to say we need a progressive supply-side policy – ways of boosting productivity, capacity and competition to enable the economy to grow without generating so much inflation. It is here that Labour’s attack upon neoliberalism should lie: a national investment bank, worker democracy and even a citizens’ basic income.
But, but, but. It is unclear whether such policies really can do much to boost trend growth. In a famous paper (pdf) John Landon-Lane and Peter Robertson argued that national policies can do little to affect trend growth, and Dietz Vollrath has shown that they can’t increase productive potential very quickly.
This is not to counsel despair. Getting rid of the Tory-Centrist fiscal squeeze would be a good idea; a little higher inflation or interest rates would be no disaster; and lots of supply-side policies such as better education, stronger competition policies and worker democracy are good ideas even if they don’t do much to raise growth.
Instead, we must remember the old Marxian question: how much can policy achieve within the constraints of capitalism? Yes, some of these constraints are illusory (such as capital flight). But some of them are not.