Richard Murphy and James Meadway have been debating Labour’s fiscal credibility rule. Richard says it commits Labour to austerity; James says it doesn’t. I agree with James.

Let’s take Richard’s strong point. As I understand it, this is that public borrowing is the counterpart of private sector saving. The fact that a government deficit today co-exists with record-low bond yields tells us that the deficit is due to a global savings glut (or investment deficiency): accounting identities tell us that the counterpart to government borrowing is the UK’s current account deficit, which is another phrase for the rest of the world’s excess of saving over investment.

Given that post-Brexit uncertainty is causing firms to delay spending, it’s possible that the global savings glut will soon be also accompanied by the return of a significant corporate sector financial surplus, which would increase government borrowing.

Richard’s right that a fiscal rule which commits the government to fiscal balance in a world where the private sector wants to save would depress the economy and be self-defeating – just as Osborne’s austerity was.

However, there are three safeguards against this. The biggest is the knockout clause – that the rule will not apply when interest rates are at the zero bound. As John McDonnell said:

We will reserve the right, for as long as monetary policy is unable to undertake its usual role due to the lower bound, to suspend our targets.

A world in which the private sector is saving massively will be one in which rates are near zero, so the rule won’t apply.

Secondly, the same savings glut which gives us big public borrowing also gives us ultra-low bond yields. These mean that McDonnell’s promise to reduce the ratio of government debt to (trend) GDP is compatible with big borrowing. The maths of debt sustainability tells us that with index-linked yields at minus 1.4% and assuming trend growth of 2% any primary deficit of less than 3% of GDP would reduce the debt-GDP ratio. As the government is currently running a deficit of 1.1% of GDP, this implies that a significant fiscal easing is compatible with the fiscal rule.

Thirdly, policy-makers have another tool to support the economy: helicopter money. As Martin and Eric have argued, central banks can simply write people cheques.

I suspect, therefore, that Richard is wrong to say that Labour’s fiscal rule commits it to austerity. It doesn’t. Right now, it would be entirely consistent with reflationary policies.

All this said, he raises a good question. The fact that yields on top-quality government bonds around the world are at record lows tells us that there is an acute shortage of safe assets – a shortage which is doing terrible damage to people’s ability to save for retirement, among other things. The obvious solution to this is for governments to simply create more such assets by borrowing. So, why does Labour need a fiscal rule?

One big reason, I think, is political. Labour must establish economic “credibility”. In the eyes of our asinine media, this credibility requires a plan not for jobs but for the public finances. John McDonnell’s rule does just this without damaging the economy. When you’re faced with a rabid dog, you should throw it a bone.