When John Maynard Keynes wrote his essay – Economic Possibilities for Our Grandchildren – which was published in 1930 he considered that workers would be able to work just 15 hours a week because of the likely technological shifts over the 100 years from the date of his publication. He was right about the productivity gains that have been created but wrong about the benefits workers would gain from them. He thought the productivity would be more evenly shared out. He underestimated the capacity of capital to extract the gains for profits and capture the state to ensure it used its legislative and regulative capacity to suppress wages growth. Mainstream economists have aided and abetted the rising inequality and the reconfiguration of the state as a agent for capital. This bears on how we understand some of the apparent shifts in views by mainstream economists about fiscal deficits and central bank debt purchases. Yesterday, it was all bad. Today, all good. History warns us to be cautious in how we appraise these shifts. There is something to be said for consistency.
It is Wednesday and so just a short blog day. I note that the British Remainer Left fall over themselves to signal whenever there is any bad news about Britain that it must be because of Brexit – “see, we told you so sort of stuff”. And with the pandemic and government incompetence there have been lots of opportunities for this lot to do that. I guess it makes them feel better as the Labour Party designs its comeback based on the ‘flag’ and ‘patriotism’ and expunging any relics of Jeremy Corbyn. Good luck with that, it is bound to work! But the future of Britain will actually be determined by a range of factors now in the control of the authorities and how they handle the transition away from EU law will be a significant element in that ensuring that future works for the people rather than just isolates Britain as a neoliberal hell-hole. We received our first sign of how things might work out last week when the Bank of England’s Prudential Regulation Authority released their latest Consultation Paper (CP5/21, (February 12, 2021) – Implementation of Basel standards – which marked a sharp shift away from the lax EU banking standards. The Remainers were silent on this.
Today, we have a guest blogger in the guise of Professor Scott Baum from Griffith University who has been one of my regular research colleagues over a long period of time. Today he is writing about the uneven impact of the COVID employment crash. This theme – the spatial unevenness of fluctuations in aggregate economic activity – is one we often explore (in our past research together) because understanding these patterns is essential for designing appropriate policy interventions. It is one of the reasons we both favour employment creation programs that respond to local conditions, like the Job Guarantee. It is also the topic a new large grant application that we are currently putting in (as part of the annual funding circus in Australia). Anyway, while I am tied up today it is over to Scott …
Last week, I wrote this blog post – OECD is apparently now anti austerity – warning, the leopard hasn’t changed its spots (January 12, 2021) – which warned against accepting the idea the growing number of mainstream economists, who were now advocating fiscal dominance, was evidence of a fundamental shift in New Keynesian thinking about macroeconomics. The reality is that they haven’t really shifted much at all and Max Planck’s postulate that paradigms shift one funeral at a time remains true. There are very few cases where the senior members of a dominant paradigm, voluntarily abandon their views when the evidence becomes overwhelmingly against them. They iterate, they declare ad hoc anomalies, they try to voice ideas that a new rival paradigm is articulating which resonate better with the data. This sort of strategy is common across academic disciplines which are under assault from a combination of poor predictive performance (data incongruity) and the arrival of a more convincing alternative paradigm. It is in full swing in macroeconomics now. But don’t believe these characters are suddenly accepting Modern Monetary Theory (MMT) and realising their previous belief system was never a sound way of characterising our fiat monetary systems. If you dig you discover these characters remain charlatans and will do almost anything to maintain their status as the dominant economists.
It is Wednesday and only a few points plus a sort of reflection on a recently departed musician. The few points really relate to the latest news from Scotland that it is thinking (once again) of seeking independence but using a foreign nation’s currency (one version) or pegging to another nation’s currency (another version. We should be clear – an independent Scotland requires its own currency, which it floats on international markets and has a central bank that sets its own interest rates (that is, determines its own monetary policy). Using a foreign currency or pegging to a foreign currency immediately voids national independence. The fact that the leading players in the independence debate don’t seem to comprehend that point is a worry. The fact that there is also strong sentiment to be part of the European Union post independence also tells me that the notion of independence is not well understood or developed in Scotland. That’s the bad news today. The good news is much more interesting – check it out.
In the last week, we have heard from the Chief Economist at the OECD (Laurence Boone), who has been touted on social media as offering a fundamental shift in economic thinking at the institution towards fiscal dominance. This is an example of a series of public statements by various New Keynesian (that is, mainstream macroeconomists) who are apparently defining the new macroeconomics of fiscal dominance. The point is this. Within the mainstream macroeconomics there was always scope for discretionary fiscal intervention under certain conditions. The conditionality is what separates their version of the possibilities from those identified and explained by Modern Monetary Theory (MMT). Just because these characters are coming out of their austerity bunkers to scramble to what they think is the right side of history doesn’t mean their underlying economics has changed. If you dig, you will find the same framework in place, just nuanced a little to suit the times. But the leopard hasn’t changed its spots. The underlying train wreck is still there and will be rehearsed again at some future date unless we push forward in abandoning the whole New Keynesian approach.
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.
Comments made last week by the former Clinton, Obama and now Biden economist Lawrence Summers contesting whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payments was met with widespread derision and ridicule from progressive commentators. There were Tweets about eviction rates, bankruptcy rates, poverty rates, and more asserting that the widespread social problems in the US clearly meant that Summers was wrong and a monster parading as a progressive voice in the US debate. I didn’t see one response that really addressed the points Summers was making. They were mostly addressing a different point. In fact, the Summers statement makes for an excellent educational case study in how to conduct macroeconomic reasoning and how we need to carefully distinguish macro considerations from distributional considerations, even though the two are inextricably linked, a link that mainstream macroeconomics has long ignored. So while Summers might have been correct on the macro issues (we will see) he certainly wasn’t voicing progressive concern about the distributional issues and should not be part of the in-coming Administration. This is Part 1 of a two-part analysis. In Part 2 we will do some sums. In this part, we will build the conceptual base.
On December 10, 2014, I wrote this blog post – Trickle down economics – the evidence is damning. The discussion was about how inequality undermines growth and that redistribution of national income towards higher income groups does not stimulate income growth for lower income groups. It provided evidence that destroys the basic tenets of mainstream economics and supports a wider social and economic involvement of government in the provision of public services and infrastructure, particularly to low income groups. The ‘trickle down’ fiction was propagated in the late 1970s and early 1980s by the likes of Margaret Thatcher and Ronald Reagan and dovetailed with the emerging dominance of supply-side thinking. Behind ‘trickle-down’ was a nasty neo-liberal plot to undermine state activity and rewind the gains made by the workers under the welfare states and unionism over the course of the C20th. Now a new report from researchers at the London School of Economics – The Economic Consequences of Major Tax Cuts for the Rich – repeats the evidence, and, perhaps because we are further down the road in realising how deficient mainstream macroeconomics is, new evidence of something that we have known since the ideas first came out of the sewers, might push the paradigm shift a little further.
It is Wednesday, so just a few snippets and some music. My main comment today is on the report released yesterday (December 15, 2020) by the national body Infrastructure Australia. The report – Infrastructure beyond COVID-19: A national study on the impacts of the pandemic on Australia – once again demonstrates the way in which mainstream macroeconomics, which has restricted government investment in essential instrastructure over the last three decades or so, has created poor outcomes and has failed to prepare the nation for the future. This sort of myopia just repeats itself across all nations. Hopefully, the fiscal response to the pandemic, even though in many countries it has been inadequate, is demonstrating that the mainstream approach is deeply flawed and provides no guidance for the way policy should be conducted into the future.