There was an unedifying and fairly undignified war on Twitter recently about whether Modern Monetary Theory (MMT) economics advocate using taxes to deal with inflation. Like all these Twitter ‘debates’, the opening proposition was a ‘gotcha’ attempt that was correct from one angle but then missed the point when it was applied to whether MMT is a valid framework or not. The responses from the MMT ‘activists’ were also overly defensive and reflected the fact that they had fallen for the framing trap presented by the antagonist. In this blog post, I want to clarify the MMT position on the use of taxes and inflation policy. What you will learn is that both positions presented in that Twitter war were largely erroneous, and, conflated concepts, either knowingly (probably not) or unknowingly, to leave a muddy mess. As the cloud became thicker, the ‘debate’ descended, as all these Twitter exchanges seem to, into unhelpful accusations of racial insult, claims of ignorance and stupidity, and worse. Not very helpful.
It’s Wednesday and I am pushed for time today. My local community is in the last stages of trying to stop a massive overdevelopment in our midst, which will damage the social cohesion and environmental amenity in our neighbourhood, while delivering massive profits to a greedy property developer. I have to appear before a tribunal today to document the impacts of the development on these things. Property developers are the scourge. So are mainstream economists like Larry Summers who is proposing that unemployment be deliberately increased by more than 2.3 million and held at that level or higher for years in order to reduce the current (transitory) inflation. Who would be so stupid? And after getting really mad about that and Keir Starmer’s abandonment of working class representation, we can soothe our souls with some Roy Elridge.
I am back at about 70 per cent but improving. This morning was good news although it should have been better. Australia’s minimum wage setting authority – the Fair Work Commission (FWC) – increased the federal minimum wage by 5.2 per cent or $A40 a week to $A812.60. In their decision – – Annual Wage Review 2021-22 – the FWC sought to protect the real living standards of the lowest-paid workers in the nation after receiving a ‘direction’ from the new Federal Labor Government to do so. They failed. Real wages for low-paid workers will still fall over the next 12 months, just not by as much as they would have had not the Federal government intervened and supported a 5.1 per cent rise (which was the March-quarter inflation rate). So good but should have been better. The major employer groups argued for variously very low nominal rises, while at the same, they enjoying booming profits and rising productivity growth. A scandalous indictment of our system.
Political leaders have been keen to promote individualism over the last several decades because it suits the class interests they serve. Margaret Thatcher denied the existence of society. John Major, who shafted her to take over the Tories in 1990 and pressured the UK to join the EU, claimed there was a society but that he would render it “classless” so that everyone has the opportunity to shine according to their talents. Within the Tory tradition, David Cameron, who effectively through bungling paved the way for the UK to leave the EU (finally) told the people “There is such a thing as society; it’s just not the same thing as the state” and promised to create a “Big Society” where we all worked together to volunteer and provide public services as charitable endeavours. On the Labour side, in 1999, Tony Blair clarified all these claims to classlessness by declaring that “the class war is over”. Class struggle is dead. We are all on the same side now. All sharing in a commonwealth that we create together. I recall a BBC program I saw around the turn of this century that declared the ‘class system’ was dead and that we had all become elevated, together, in the middle class.
It only took about 6 decades or so. And, in between, there has been denial, fiction, and diversions. But here we are 2022 and work that was explicit in the 1960s is now being recognised by the central bank of the largest economy. In fact, the foundations of this new acceptance goes back to the C19th and was developed by you know who – K. Marx. Then a socialist in the 1940s wrote a path breaking article further building the foundations. And then a group of Marxist economists brought the ideas together as a coherent theory of inflation early 1970s as a counter to the growing Monetarist fiction that inflationary pressures were ultimately the product of irresponsible government policy designed to reduce unemployment below some ‘natural rate’. I am referring here to a Finance and Economics Discussion Series (FEDS) working paper – Who Killed the Phillips Curve? A Murder Mystery – published on May 20, 2022 by the Board of Governors of the US Federal Reserve System. I suppose it is progress but along the way – over those 6 decades – there have been a lot of casualties of the fiction central banks created in denial of these findings.
The Australian Bureau of Statistics released the latest version of – Private New Capital Expenditure and Expected Expenditure, Australia – today (May 26, 2022), which is part of several releases leading up to the publication of the March-quarter National Accounts next Wednesday. Today’s business investment data shouws that private new capital expenditure in Australia fell by 0.3 per cent in the March quarter but was up by 4.5 per cent on the year. With the uncertainty continuing about the extent and duration of the current supply-side disruptions, the decline in business investment was, in fact, modest. And the expected investment plans signal that there is still no sense of crisis among those responsible for capital expenditure. One of the challenges facing the new Federal government is to maintain optimism in the economy in order to avoid the current-quarter decline in business investment becoming consolidated. If the new Treasurer keeps harping on about the $A1 trillion debt and the need to cut the fiscal deficit, they will fail that challenge and business will get spooked and we will head towards recession with on-going inflationary pressures.
It’s Wednesday and I just finished a ‘Conversation’ with the Economics Society of Australia, where I talked about Modern Monetary Theory (MMT) and its application to current policy issues. Some of the questions were excellent and challenging to answer, which is the best way. You can view an edited version of the discussion below and then enjoy The Meters.
On May 4, 2022, the RBA increased interest rates claiming they had evidence of accelerating wages growth. For the last few years, the RBA had been signalling that they would not move on interest rates until there was a concerted increase in wages growth, which has been at record low levels for some years now. Well, today, we found out the RBA was poorly informed because the latest wages data shows that wages growth has been flat in each of the last three quarters. The is no acceleration. Wages growth is not driving the inflation trajectory. Workers are enduring massive real wage cuts and the RBA has made that worse by pushing up mortgage rates for those exposed. Today (May 18, 2022), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the March-quarter 2021. The WPI data shows that nominal wages growth was 2.4 over the 12 months. Private sector wages growth has remained at low levels. The last time wages growth was higher was in the December-quarter 2014. While the conservatives are railing about inflation now and looking to target workers’ wages (further cuts), the evidence is that the wages side is not driving any inflationary pressures – the opposite is the case. The business sector, as a whole, thinks it is clever to always oppose wages growth and the banks love that because they can foist more debt onto households to maintain their consumption expenditure. But the reality is clear – there can be no sustained recovery for the economy post Covid without significant increases in the current rate of wages growth.
Yesterday (May 11, 2022), the US Bureau of Labor Statistics released the latest – Consumer Price Index Summary – April 2022 – which showed the monthly increase in the CPI to be 0.3 per cent, the lowest monthly increase since August 2021 and, as it happens, just about right on the average monthly growth rate from January 1947 and April 2022. The result suggests a tapering of price pressures. The Energy component fell by 2.7 per cent in April after spiking at 11 per cent in March. Further, the growth in food prices fell for the third consecutive month. All of this has nothing to do with the recent interest rises imposed on the economy by the US Federal Reserve. They were already in train and confirm the transitory nature of this period of price instability. The US Treasury Department also published its most recent fiscal statistics yesterday – Monthly Treasury Statement – for April 2022, which reports a staggering $US533,794 fiscal shift between April 2021 and April 2022 – the fiscal drag embodied in that shift is massive and calls into question the conduct of the US Federal Reserve – why did they think they needed to push the economy towards recession? Fiscal policy is already working in that direction!
Last week, I provided a graph in this blog post – The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation (May 2, 2022) – which showed negotiated wages growth in Europe was declining and real negotiated wages had fallen sharply over the last several months. I am continually on the lookout for evidence that the current inflationary episode, no matter how alarming, is not being driven by structural forces in the labour market even though unemployment rates have fallen somewhat. A music segment follows.