But, But, Fiscal Rules *ARE* Modern Monetary Theory

So, so many not grasping their own assertions

Let’s be straightforward here - Modern Monetary Theory is the only reason anyone would have fiscal rules in the first place. Further, they’re essential to making MMT itself work. Anyone who doesn’t grasp this is not grasping their own theory.

Which is what makes this so amusing:

Fiscal rules are relatively new. They didn’t exist until the Maastricht Treaty in 1992. They spread across the globe following neoliberal politics. They are purely political in nature and are not based on any solid economics.

Just to give that pencil sketch of MMT. Governments spend then tax back the excess money they’ve created by their spending. The limitation on how much they can do this is real resources, not money. The signal that “too much” is being printed is inflation which is curtailed by a rise in taxation to recover that excess money printing and spending.

That is a fair pencil sketch of what MMT says and we’ll run with that as all being true. We can even put aside my normal insistence that there will always be too much spending and not enough taxation - because spending is fun and taxing isn’t. We can even test that. QE was lots and lots of lovely printing and spending and the resistance to doing QT to recover that excess print and spend now we’ve inflation is proof perfect of the contention.

So, MMT really only became a true description once we moved to fully fiat money in 1971 or so. Previous systems with fixed FX rates, or links to gold, or bimetallism and so on, didn’t allow print and spend to extend to inflation. Because interest rates necessary to protect the FX rate, or having to devalue the FX rate, or the lack of gold, curbed the print and spend before inflation did. Although Henry VIII had a damn good go with the Great Debasement and so on.

Politics doesn’t react all that well nor quickly to a change in the real world. So, fiscal rules don’t turn up until 20 years after the real fiat economy has arrived. Fine, fair enough by me.

But those fiscal rules are an essential part of that modern monetary theory for a fully fiat money economy. That’s why they’re called “modern”. Not because someone just thought them up but because they describe that modern - fully fiat - economy. The nature of money is now modern, the theory about money needs to be modern.

As to why the necessity think through the MMT prescription. We print and spend and the limitation is inflation. OK. But do we actually want to wait until the inflation arrives in order to increase tax/reduce the print? Well, no, we don’t. Because that is also the insistence - to everyone - that inflation is coming.

No, really, “We’ll print and spend until the economy is at full production and the signal for that will be inflation” is also, by very definition “We’ll print and spend until inflation” and also, again by definition, “There will be inflation”.

Inflation is - at least sometimes, leave aside whether always - driven by expectations of inflation. So are interest rates so driven. The statement “There will be inflation” pushes up inflationary expectations and also interest rates right now.

So, how do we curb this? By saying that we’re not going to print and spend until inflation arrives. We’re going to, instead - and here’s the neat trick! - print and spend up to the point where inflation would arrive if we printed and spent more but only up to that point.

Because, you know, we’re assuming that we’re being run by wise technocrats who can both calculate this and also do this.

OK.

So, what is a rule that says we’ll only print and spend up to the point that inflation starts to appear? Even, if we step back one piece of logic, that we’ll only print and spend up to the point that all resources are in use and the economy is at full production?

It’s a fiscal rule, isn’t it, buggerlugs?

True, true, it might be a different fiscal rule from the current one - cover current expenditure with tax, borrow (or, very MMT, print) to invest. But it’s still a fiscal rule. It’s a rule about matters fiscal, it’s a fiscal rule.

MMTers whining about fiscal rules are simply not understanding their own MMT. For it is only in a fully fiat money system that we’ve got to have those fiscal rules about how much and how fiscal we’re going to do.

Fiscal rules *ARE* Modern Monetary Theory.