It’s Wednesday and a blog-light day as usual combined with some great jazz. But it is worth commenting briefly on yesterday’s monetary policy decision, which saw the Reserve Bank of Australia hold its policy rate at the record low of 0.1 per cent. That was no surprise. Mildly surprising given all the hype about the size of the public debt at present was the RBA’s decision to expand its asset purchasing program by an addition $A100 billion. In effect, the RBA is doing what many central banks are now doing – buying up the debt that has been issued to match (not fund) the expansion of fiscal deficits by governments as they try to deal with the negative consequences of the pandemic. While all this has helped the Australian economy record the disastrous economic impacts of the virus the state of affairs is still very poor. And the RBA knows that and is urging extending fiscal and monetary policy support until “at least” 2024. Yet, the Federal government is starting to talk about cutting fiscal support next month. This tension in aggregate policy was evident before the crisis. And it has been a global tension. The neoliberals haven’t disappeared. Austerity is in the wind. More struggle is necessary.
It’s Wednesday and I have been tied up most of the day on things that keep me from writing. But I offer some comments on today’s inflation data from the Australian Bureau of Statistics which will help you understand that we have to be very careful in analysing that data because quite often CPI increases are driven by government policy which allows administered prices to rise. Short conclusion: a rising inflation rate does not signal a growing economy necessarily. I also provide details about my current lecture series at the University of Helsinko, which the broader public are invited to participate in. And then some fusion.
It’s Wednesday and I usually try to write less blog material. But given the holiday on Monday and a couple of interesting developments, I thought I would write a bit more today. And after that, you still get some great piano playing to make wading through central bank discussions worth while. The Financial Times article (January 4, 2021) – Investors believe BoE’s QE programme is designed to finance UK deficit – is interesting because it provides one more piece of evidence that exposes the claims of mainstream macroeconomists operating in the dominant New Keynesian tradition. The facts that emerge are that the major bond market players do not believe the Bank of England statements about its bond-buying program which have tried to deny the reality that the central bank is essentially buying up all the debt issued by the Treasury as it expands its fiscal deficits. This disbelief undermines many key propositions that students get rammed down their throats in macroeconomics courses. It also provides further credence to the approach taken by Modern Monetary Theory (MMT).
The answer to the question posed in the title is No! Lawrence Summers’ macroeconomic assessment does not stack up. In – Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1? (December 30, 2020) – I developed the framework for considering whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payment as part of its latest fiscal stimulus. Summers was opposed to it claiming that it would push the economy into an inflationary spiral because it would more than close the current output gap. Today, I do the numbers. The conclusion is that there is more than enough scope for the Government to make the transfers without running out of fiscal space.
It’s Wednesday and my blog-light day. Today, I provide the English-text for an article that came out in the leading Japanese business daily, The Nikkei yesterday on Modern Monetary Theory (MMT) and its application to the pandemic. Relevant links are provided in the body of the post. The interesting point I think is that ‘The Nikkei’ is the “the world’s largest business daily in terms of circulation” and has clear centre-right leanings. The fact that they are interested in disseminating ideas that run counter to the mainstream narrative that the centre-right politicians have relied on indicates both a curiosity that is missing in the conservative media elsewhere, and, the extent to which MMT ideas is becoming more open to serious thinkers. I have respect for media outlets that come to the source when they want to motivate a discussion on MMT rather than hire some hack to write a critique, which really gets no further than accusing MMT of being just about money printing.
Victoria went the so-called ‘double doughnut’ again today with zero new infections and zero deaths – the fourth consecutive day. It now has the lowest number of people sick with the virus (known) since the start of the pandemic in Australia in February. Only 38 active cases remain in Victoria after its 12 week lockdown. There is no community transmission reported now in Victoria and the other day Australia recorded zero (community transmitted) cases overall. So things are less tense than they were. I still haven’t been able to travel to my office in Melbourne which I have been away from since the lockdowns started in June. But hope springs eternal that the NSW government will open the border and let us move freely between the States. At the same time, the NSW government is demonstrating its economic incompetence. The State Treasurer announced that in the midst of the worst crisis in 100 years, it is cutting the pay of its public servants when it brings down its fiscal statement. Clue: when in a deep recession with records levels of household debt dramatically constraining growth in household consumption expenditure, which in turn, is killing growth, then the sure fire way to make matters worse by cutting the very source of consumption expenditure – yes, you get it – workers’ wages.
Yesterday’s data from the Australian Bureau of Statistics (October 28, 2020) – Consumer Price Index, Australia – for the September-quarter 2020, illustrates what a lot of people do not fully grasp. Inflation can be driven by administrative decisions and can be curtailed or restrained by varying those decisions. No tax rises or cuts to government spending are needed. The data also reflect on the reasons that predictions from mainstream (New Keynesian) economic models fail dramatically. Mainstream economists claim that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions. Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success. Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The Reserve Bank of Australia has now purchased more than $50 billion worth of federal government bonds and a smaller amount of state and territory government debt. And yet inflation is well below the lower bound of the RBA’s inflation targetting range. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.
I gave some advice to a politician last week who had read some MMT literature that he said indicated that using the Job Guarantee reduces inflationary pressures in a recovery relative to a situation where a nation had an unemployment buffer stock. I was surprised by the question because the assertions didn’t appear congruent with the facts. It appeared to be rehearsing and endorsing the standard neoliberal supply-side agenda that defined the so-called ‘activation’ approach to unemployment, which militated against job creation programs in favour of training initiatives – the full employability rather than the full employment mindset. The fact is that long-term unemployment always lags behind the overall unemployment movements given it takes time for people to work their way through the duration categories until they get to 52 weeks, after which the national statistician terms a person long-term unemployed. The longer the recession the higher average duration of unemployment becomes and the larger the pool of long-term unemployed as people start to flow into that category. However, the way we think about solutions has been influenced by the myths about the way long-term unemployment behaves, which we summarise as the – ‘irreversibility hypothesis’. This idea has influenced governments to rely on training approaches rather than job creation as solutions to unemployment. And, it has led to the various pernicious unemployment management policies where the victims of the system’s failure to create enough jobs are considered culpable in their own misfortune and shunted through a series of compliance processes in order to receive income support, which do little to get them work.
The Australian Bureau of Statistics (ABS) published the June-quarter – Private New Capital Expenditure and Expected Expenditure, Australia – data today as part of the sequence of data releases relating to next Wednesday’s release of the second quarter National Accounts. Remember that this data is ‘backward’ looking, in that it tells us what has gone in the three months from April to the end of June. But it does provide the first signal of the impact of the first-stage lockdowns in April have had on capital formation. Today’s release confirms the worst with Total new capital expenditure falling by 5.9 per cent in the quarter and 11.5 per cent over the last 12 months. Investment in Building and structures fell by 4.4 per cent over the quarter and 9.4 per cent over the 12 month period, while investment in Equipment, plant and machinery fell by 7.6 per cent for the quarter and 13.8 per cent over the year. Crucially expected investment for 2020-21 has nose-dived (down 12.6 per cent on previous plans). By allowing the economy to go into recession and sustain mass unemployment and falling sales, the Australian government has made matters worse. Within the safe health constraints, it could have easily added another $A100 billion to its stimulus and seen unemployment drop to relatively low levels, major construction work undertaken in social housing to address the chronic shortfall, and invest in forward-looking green infrastructure. Instead, it has chosen to penny pinch and today’s figures are just the start of the damage this policy void is causing. This is another case of neo-liberal austerity white-anting the capacity of the economy to deliver prosperity for all.
It’s Wednesday and my light blog day produces a video or two. The first is a presentation I recently made to the New Zealand Fabian Society and the second is some exquisite trumpet playing from Chet Baker.