Yesterday I was listening to the ABC Radio National program – Counterpoint – which interviewed author David Freedman about his 2007 co-authored book A Perfect Mess. I was very interested in this book when it was published. It is about the value of mess and the costs that organisational freaks impose on us. In the case of fiscal policy – the essence of good macroeconomic management is to allow policy settings to be responsive when needed. Why? To ensure that government action supports aggregate demand and is consistent with private sector saving desires. The control freaks want to impose “organisation” on governments by legislating debt brakes and this type of organisation amounts to a fundamental denial of the need for fiscal policy to be reactive and flexible. That is, of-course, no surprise given that deterministic fiscal rules are proposed by ideologues that are fundamentally opposed to public intervention in the first place. Deterministic fiscal rules in fact undermine public responsibility.
Sometimes you read an article that clearly has a pretext but then tries to cover that pretext in some (not) smart way to make the prejudice seem reasonable. That is the impression I had when I read this Bloomberg opinion piece by William Pesek (January 31, 2011) – Pinnacle Envy Signals New Bubble Is Inflating – which I was expecting to be about real estate bubbles but which, in fact, turned out to be an erroneous blather about Japanese debt risk. Please note: there is no sovereign debt risk in Japan!
The latest data from the UK provides us with further evidence that mainstream economic theory and its policy advice is dangerous and should be disregarded. We are now some six months or more into the period of fiscal austerity in Britain even though many of the cut backs and tax hikes etc have not yet been introduced. But the British households and firms have known since the election result in May what was ahead of them and so have had time to make adjustments to their spending and saving patterns to take into account the expected future. Modern Monetary Theory (MMT) predicted that as a result of the fiscal austerity plans, the British economy would slow down again as private consumers and firms cut back on their own spending driven strongly by the fear of unemployment and flat sales conditions that accompany that situation. Mainstream theory pushed the notion of Ricardian Equivalence which claims that that private spending is weak because we are scared of the future tax implications of the rising budget deficits. But, the overwhelming evidence shows that firms will not invest while consumption is weak and households will not spend because they scared of becoming unemployed and are trying to reduce their bloated debt levels. Recent data shows that the Ricardians in UK have had a wonderful Xmas. Not!
The stories that are headlined on Page 1 of the New York Times in its on-line edition late January 21, 2011 are almost beyond belief and are like spoofs – if only. I must admit the shock factor is diminishing in this neo-liberal era where the most absurd ideas are brush-stroked up to appear normal. Some time ago I would have just laughed and concluded that some extremist or another was getting a moment of airplay – a day in the sun and would then disappear to a dark room where they would continue writing endless handwritten letters to all and sundry outlining their crackpot ideas and schemes for the renewal of humanity – which always seemed to involve some communist purge (the reds are everywhere you know) and handing over authority to citizen militia’s. But these nutty ideas are gathering pace. It seems the deficit terrorists are getting bored with their predictions of inflation (that doesn’t arrive) or rising interest rates (which do not arrive) – so they have to invent even more bizarre angles. They get so far out there that sometimes even I cannot believe they could be serious.
It is a holiday week in Australia – the cricket is on (not interested); the weather is good and it is virtually impossible to get a tradesperson to fix a new electricity connection. But who am I to complain when our fortunes are compared to the costs being endured in other nations where governments have deliberately followed policy trajectories which are designed to inflict damage on their real economies – in the mistaken belief that TINA rules. TINA (There Is No Alternative) is one of those neo-liberal ploys which hoodwinks citizens into believing that gross damage is better than really gross damage but which is really an agenda for retrenching the welfare state and freeing markets up for further private sector rape. There are alternatives to what is going on at present and it requires much stronger public sector intervention. I was thinking about this today when I was reviewing the latest data from Latvia which is now being held out as the “model” for the rest of Europe to follow. It is clear that eventually growth does return to these ravaged economies but that doesn’t validate the policy approach. It just says that business cycles cycle. The real way of assessing the alternatives is to compare how deep the policy-induced damage becomes and how long it lasts. The neo-liberal austerity line does not look good in that regard.
The so-called architect of the euro monetary system – died recently in Rome. I guess architects like to leave behind objects of style and beauty that also function well. There is a huge debate among architects about form and function and whether ornamentation is functional. Form follows function has been the catch cry of modernists in architecture and I am most familiar with the debate when it is applied to software development (and its architectural characteristics). Anyway, the euro architect has left behind a monetary system that neither has form or function. It is an ugly creation that is increasingly revealing its dysfunction. But try telling that to the EU leadership who have just finished another summit in Brussels, where I suppose the cuisine and setting was sumptuous and the wine was top class. And like all previous summits all that was forthcoming was further political rhetoric about the irreversibility of the euro and the political commitment to defend it. In real terms this translates into imposing a state of more or less permanent unemployment and austerity on millions of Europeans. Eventually the gap between the leader’s rhetoric and the underlying reality will become so wide the system will crumble. But in the meantime the EMU is a bankruptcy machine.
I have been travelling for most of today and unable to write very much. But there were are few things I penned which might be of interest. I was sent a news report today which appeared in the local Fairfax press and related to yesterday’s ABS release of the detailed labour force estimates by region. This usually garners a lot of regional interest and the estimates are used by politicians, business groups etc to further their own vested interests. Rarely do any of the public statements that are made about this detailed data actually tell an accurate story. The news report in question was a classic case of this. What we should always understand is that the labour force framework is complicated and falling unemployment is not necessarily a good outcome.
The next few days are very tight for me – travel and meetings. So the blogs might be shorter (cheers I hear!). The thing about blogs which I find interesting is that I normally have to write in a very tight fashion (for academic publication) and editorial discrimination becomes paramount. Whereas the blog is a flowing environment and the only limit I place is the time I spend per day. Within that time span I just type and what comes out comes out with only spelling corrections. The grammar is sometimes not as correct and hyperbole and colloquialisms are rife. But that is a liberating offset to my usual literary output each day. Anyway, I thought the quote of the day (actually December 10, 2010) was – The Eurozone in bad need of a psychiatrist. Well perhaps it is the leaders and their hangers-on who need this help. And when the shrinks have finished with Brussels and Frankfurt they can stop in at London on route to Washington. Canberra can follow sometime soon after. The problem is that we have a person-made mess that is relatively easy to address and yet the ideological straitjacket that has been imposed on the solution amounts to cutting the wound wider and deeper so the blood loss is even greater. Madness! And the rest of us go along with it and elect politicians who say they will whip us even harder. Bring in the men and women with the white coats! For everybody …
I am working on a book at present on the way recessions entrench growing disadvantage beyond the costs that the actual crisis period imposes on the unemployed and others. The idea is that the neo-liberal era has systematically been associated with a trend towards erosion of working conditions and a rising inequality in outcomes far beyond anything that could remotely be justified by disparate individual or sectoral productivity trends. It is clear that the rise of the financial sector has been generated a massive redistribution of national income in most countries away from workers and productive sectors. As part of this research I am delving beyond the usual “economic” analysis that I might take of recessions. I am also trying to document how recessions occur and how the recessions of the last 40 years have reflected a growing disregard by our governments for their legitimate responsibilities to advance public purpose. In turn, this disregard has seen them turn a blind eye to corruption and incompetence in the private sector while we were being told that by privatisation and deregulation they had solved the macroeconomic problem and we would enjoy unparalleled prosperity. It was a con job of major proportions and now the question should be who is going to pay for all the damage they caused?
My friend Marshall Auerback has described the EMU has the Roach Motel – a very North American term but one which resonates everywhere. The full article – is recommended reading. Very amusing and perspicacious. He says – “The Germans might occupy the penthouse suite, but it’s the penthouse suite of a roach motel” which is apposite. The latest decisions of the EU finance ministers after an emergency meeting in Brussels over the weekend will just hold the ultimate crisis at bay for a little while longer. The EMU is currently surviving because the ECB has stepped in as the “missing” fiscal agent and keeping the bond markets at bay. While the ECB is the only entity in the EMU which has currency sovereignty and can “fiscally fund” member state deficits permanently, the underlying logic of the monetary system will continue to ensure these on-going crises will spread across the union. The EU bosses are just buying time and “kicking the can down the road a bit” at the moment. Ultimately, to survive the system has to add a unified fiscal authority and abandon the fiscal (Maastricht) rules (not politically possible) or accept the experiment has failed and dissolve the union. The latter option is clearly preferred and while the can is being kicked down the road apiece the EU leaders should be dismantling the Roach Motel and setting the captives free.