John Weeks – Politics of Monetary Policy and Why Progressives Prefer to Tax & Spend

One of the most important victories of neo-liberalism was banning serious fiscal policy by democratically elected governments to deal with economic crises, relegating this power to monetary policy of purportedly independent, yet unelected, central banks. The result has been increasing inequality. As john Weeks points out, change means reinstating fiscal policy as a tool of government and democracy.

John Weeks is Professor Emeritus at SOAS, University of London, and associate of Prime Economics

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The recent article Richard Murphy raised fundamental issues that should guide all progressive policy making.  Perhaps the most fundamental of these is the role of fiscal and monetary policies.  He makes the fundamental point that democratically accountable governments implement fiscal policy, while almost without exception the agents of monetary policy, central banks, are either unaccountable in law or in practice.

Neoliberalism is the route by which we reached this inversion of policy making, the ascendency of the unaccountable over representative and democratic.  Since the late 1970s the ideologues of economic policy have relentlessly propagandised against fiscal policy and in favour of monetary policy, with astounding success.  Even some putatively progressive organisations endorse the neoliberal ideology that central banks, not elected governments, should serve as the initiators of economic policy.  The so-called QE for the People is an example of the allegedly progressive version of central bank supremacy, a petition for which I endorsed in a moment of insufficient analysis.

The neoliberal case for monetary policy to take the lead over fiscal policy has deep historical roots, endorsed even by some who identify themselves as Keynesians.  The superficially technical argument is that monetary policy works quickly while fiscal policy is slow and cumbersome requiring legislative approval then executive implementation.  As a result, governments should use monetary policy for short term economic management.

This “monetary-fast, fiscal-slow” argument is not technical; it is political and institution-specific.  In Britain a government could enact legislation creating a current expenditure fund and give itself the discretion to use or not use it without further parliamentary action.  This fund could be drawn upon quickly to counteract cyclical downturns; for example, more funding to the NHS for nurses and medicines, neither of which would face a short term supply problem.  By contrast, experience has taught us the ineffectiveness of monetary policy to counteract recession; to use the long-standing but inconveniently forgotten Keynesian cliché, it is like “pushing on a string”.

In the 1970s and into the 1980s to the indefensible “monetary-fast, fiscal-slow” argument neoliberal ideologues added the “populist” critique of fiscal policy.  Not only is monetary policy faster, fiscal policy falls prey to the vagaries of popular opinion.  Through fair means and foul every interest group attempts to influence elected representatives, who have no choice but to pander to those interests to win elections.  Elections become little more than the vehicle by which the vulgar masses and elite interests achieve their narrow self-interest.  By contrast, apolitical experts design monetary policy and disinterested professional in central banks implement.

This contempt for democracy lies at the heart of neoliberaliism.  Its ideological ascendency led to the dogma that central banks should be “independent”; i.e. independent of political oversight while very closely linked to financial capital.  Gordon Brown’s 1997 decision to set the Bank of England “free” received universal applause from financial capital and went largely unnoticed or not understood by the public, so frequently the case for neoliberal reactionary policies changes.

Through the prosperous-for-the rich 1990s and early 2000s the narrative of fickle fiscal policy and professionally sound monetary policy became unchallenged dogma.  When the Global Financial Crisis hit the policy constraints imposed by the dogma proved disastrous.  Attempts to implement counter-cyclical fiscal policy – a rational policy of “spending out of the recession” – were insufficient and apologetic.  Instead of being recognized as central to the solution, the resultant budget deficits served the neoliberals as evidence of fiscal failure.

In the place of a rational fiscal policy the neoliberals came eagerly with their favourite alternative, monetary policy, selling cheap money to banks under the obfuscating name “Quantitative Easing”.  Like a rose that smells as sweet whatever it is called, a name change did not alter the inherent ineffectiveness of monetary policy in recessions.

With fiscal reactionaries in power in almost every major democratic country, “QE for the People” was an idea whose time had come – surrender to the neoliberal anti-fiscal policy agenda by the explicit endorsement of central bank policy hegemony – but, allegedly, in a good cause.  It was and is a policy of despair.

There is an important sense in which “QE for the People” can serve as the fulfilment of neoliberalism.  If it involves granting “money” directly to households, it is a policy of private consumption rather than public provision.  The essential problem of current market societies is the power of private capital and the weakness of the public sector.  A programme in which central banks distribute purchasing power directly to the population increases and aggravates that problem.

Our societies – I do mean societies – in Britain, continental Europe and the United States suffer from inequality and instability arising from the concentration of corporate power.  Reducing those ills is undermined by monetary policy and facilitated by fiscal policy.  The policy choice for progressives really is that simple.



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