The catch-all category for my blogs reflecting my professional expertise as a full professor of economics.

Fiscal austerity damages growth – latest evidence

Republican Presidential (Bush) and Presidential hopeful (Romney) advisor and a principal deficit terrorist, Glenn Hubbard has once again re-cycled his obsession about the apparent necessity for the US to pass a balanced budget amendment which would require governments to eschew their fiscal responsibility and behave like automatums irrespective of the state of the cycle or the behaviour of the other sectors (external and private domestic). In his latest New York Times article (August 11, 2013) – Republicans and Democrats Both Miscalculated – (with T. Kane), we see a tired conservative hack, worn out from repeated failed attempts to push a balanced budget amendment into US law, wimpering about the need for another vote on this issue, but signifying a boring lameness that is being overtaken by the duration of time that has elapsed without the doomsday arriving and more recent evidence refuting the position outright.

Read more

The spurious distinction between the short- and long-run

There was an interesting article in the Wall Street Journal (July 7, 2013) by US economist Alan S. Blinder – The Economy Needs More Spending Now . I am building a little database of what well-known economists said in 2008, 2009 and 2010 at the height of the crisis and in the early days of the fiscal and monetary interventions and what they are saying now. There is a lot of dodging and weaving I can tell you. Stories change, previous prognostications of certainty now appear highly qualified and nuanced and facts are denied. Alan Blinder was worried that the US Federal Reserve rapid building of reserves would have to be withdrawn quickly because otherwise banks would eventually lend them all out and inflation would accelerate. Of-course, banks don’t lend their reserves to customers and the predictions were not remotely accurate. In the article noted, Blinder continues to operate at what I am sure he thinks is the more reasonable end of mainstream macroeconomics. He is advocating more spending as a means of boosting higher economic growth. But when you appreciate the framework he is operating in, you realise that he is just part of the problem and part of the narrative that allows the IMF to talk about “growth friendly austerity” – the misnomer (or outright lie) of 2012-13.

Read more

Australia – the good and bad of the Economic Policy Statement

Last week, the Australian government issued an – Economic Statement – which provided updated estimates from Treasury (since the May 2013 Budget) of the state of the economy and the budget position. The good news is that the Government is allowing the deficit to rise after a year of contraction as part of its obsessive and impossible pursuit of a budget surplus this year. The bad news is that the Government is not allowing the deficit to rise enough and as a result unemployment is forecast to rise significantly above its already high levels. The reason? It is still trapped in its obsessive budget surplus mania even though the reality is forcing them to postpone when they claim they will deliver that outcome. The conclusion? The Treasury clearly is reeling from its massive forecasting errors (revenue is $Axx billion down of what they forecast in the May 2012 Budget and $AxX billion down on what they forecast in the May 2013 Budget). It is also realising that they cannot fight against a significant private sector spending slowdown.

Read more

There is nothing new under the sun

The debates that are played out in the parliaments around the world at present about the state of public finances are not new. The debates, which are amplified by the media who typically do not understand the issues involved yet mostly take a conservative position because they can sell more products (papers, on-line access etc) that way, appear to be pressing and all sorts of emergency language is used. The characters who write these doomsday scenarios mustn’t ever reflect on what they say from one day to another relative to the historical record. Their arguments against the use of budget deficits and invoking doomsday scenarios regarding public debt reduction are not new. Given many of these conservatives are also into the bible (pushing evangelical diatribe) they might have reflected on – Ecclesiastes 1:9 – which noted that “What has been will be again, what has been done will be done again; there is nothing new under the sun”. Indeed not. One character in history with a penchant for religion (Mormonism) however had some insights in the operations of government budgets and public debt. He was also a long-time former Chairman of the Board of Governors of the US Federal Reserve System.

Read more

The ultimate boondoggle courtesy of slack government policy

Workers, particularly low-paid ones, are regularly sent up in comedy or satire. The 1959 British movie – I’m All Right Jack – was an acidic attack on the British trade union movement although it also parodied the stuffy upper-class British industrialists as well. In 2003, a British author Magnus Mills published the book – The Scheme for Full Employment – which is a satirical attempt to deride Keynesian full employment policies. Boondoggling and leaf-raking is the term that invokes the ultimate put down by the conservatives who laud the virtues of the private sector and accuse the public sector of creating waste and sloth every time someone proposes that the government introduce a large-scale job creation program to alleviate the dreadful damage that mass unemployment causes. Well the New York Times investigative team has discovered the ultimate boondoggle that has been made possible because of slack government policy. And, it involves our friends in the financial markets – those so-called productive, entrepreneurial free marketeers.

Read more

Balanced budgets are rarely appropriate

The Fairfax press published the latest opinion piece from one of its economics editors (Ross Gittins) over the weekend (July 20, 2013) – The budget facts that Canberra isn’t telling you. If the stated facts are what Mr Gittins thinks apply to a sovereign economy such as Australia, then it is fortunate that Canberra is staying quiet. He claims that the fiscally prudent position is for governments to run a balanced budget on average every decade. He also says that the government doesn’t really have to do anything other than let the automatic stabilisers achieve that outcome once the structural settings are in place. The problem is that these sort of mindless fiscal rules are rarely going to achieve appropriate outcomes, when the latter is expressed in terms of full employment objectives and other real outcomes. In the current context, where there are major private sector balance sheet risks and an ongoing external deficit of around 3.5 per cent, the pursuit of a balanced budget would be an act of vandalism. Further, given the non-government spending dynamics, it is likely that continuous budget deficits will be required into the indefinite future.

Read more

A case for public banking

I read an interesting research paper from staff at the New York Federal Reserve Bank (published March 2013) – How Much Do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data – which reported on an innovative study of the links between problems within individual banks and the investment performance of firms that deal with those banks in the context of highly concentrated banking sectors. While the study uses Japanese data, the findings are relevant for all nations, given that banking is typically highly concentrated across all advanced nations. The interesting conclusion that I draw from the study is that short of bank nationalisation, the findings provide support for the creation of public banks which utilise the currency monopoly enjoyed by government to provide a more stable environment for business firms during times of crisis in the private banking sector.

Read more

The blood on the criminals’ hands is thick and won’t wash away

On Monday (July 8, 2013), the IMF released its “preliminary findings” of the – Article IV Consultation with the Euro Area. The nomenclature and turn of phrase alone are symptomatic of the organisation’s incapacity to come to terms of the problem it is addressing and its own role in creating and perpetuating the problem. On the one hand, they clearly acknowledge that “the economic recovery remains elusive, unemployment is rising, and uncertainty is high”. But on the other hand, they urge more of the same and claim the policies that have created this mess represent “progress”. The Euro area can do two things to improve the situation of citizens who live within it. First, abandon the voluntary fiscal rules which have not theoretical justification and allow nations to expand deficits to address the massive output gaps. If need be, fund the deficits via the ECB. Second, once the crisis is over, create a process whereby the monetary union voluntarily dissolves itself in an orderly manner. That is the only sure way of minimising the on-going damage. Oh, and third, withdraw all funding from the IMF and enter multilateral negotiations to create a new agency that helps poor nations defend themselves against speculative attacks on their currencies. And, while I am at it, fourth, reach an international accord to outlaw any speculative transaction that does not advance the real economy. That will keep them all busy and get the millions of people that the IMF and the Euro elites have deliberately made jobless busy again too.

Read more

In a few minutes you do not learn much

There was an article in the New York Times at the weekend – Warren Mosler, a Deficit Lover With a Following – which seems to have attracted some attention. The attention has spanned from the vituperative personal attacks on the article’s subject, all of which would seem to be factually in error, to claims that proponents of Modern Monetary Theory (MMT) are “just nuts”. The latter assessment apparently was drawn after a few minutes consideration by a US economist. I don’t think one learns very much in a few minutes. But the output over the years of the particular economist quoted by the NYTs tells me he hasn’t learned much after presumably many hours of study. I suppose that if you are mindlessly locked into the mainstream macroeconomics textbook models then that is to be expected.

Read more
Back To Top