Yesterday (October 21, 2020), the British Office of National Statistics (ONS) released the latest – Public sector finances, UK: September 2020 – which, predictably tells us that government borrowing was “£28.4 billion more than in September 2019 and the third-highest borrowing in any month since records began in 1993” and that the public debt ratio has risen to “103.5% of … GDP … this was the highest debt to GDP ratio since … 1960.” Shock horror. While I yawn. The financial media went to town on the data. The Financial Times article (October 22, 2020) – UK government borrowing reaches record in first half of fiscal year – claimed the second wave that is now sweeping the northern hemisphere “have dampened hopes” that the stimulus “could be quickly scaled back” which has “fuelled concerns over the US’s mounting public debt”. It didn’t clarify as to who was concerned or why. The old canards seem to die slowly. Meanwhile, the IMF has changed tack somewhat after its tawdry display during the GFC. Overall, we should be relaxed about the records being set (deficits, public debt) and focus on what the net spending is doing to advance our interests. Focusing on the financial parameters will just divert our attention away from what is important.
Its Wednesday so a shorter blog post today with an interview I recently did with financial market educational professionals, the i3 (Investment Innovation Institute) where I cover a range of topics of current interest from an Modern Monetary Theory (MMT) perspective. Then we get down with some very cool music. And that is it. And I turned off the debate today in the US after 5 or so minutes and wondered what the hell that nation has become. None of the contenders is electable would be my conclusion.
Last week, there were some rather significant shifts in the public discourse surrounding macroeconomic policy and challenges made to the orthodox economics taboos that have been used to prevent governments from acting in the best interest of the citizens. First, the Australian treasurer broke away from the government’s previous obsession with fiscal surplus pursuit to announce that for the foreseeable future it was only going to concentrate on jobs and growth. In his statement, he basically refuted all the mainstream macroeconomic claims about fiscal deficits – higher interest rates, lower private investment, lower growth, lower private sector confidence etc. There is really nothing left of the mainstream position now and any politician or economist that tries to resurrect the ‘debt and deficit’ narratives of the past will find it hard gaining the same politician traction that they were able to garner some years ago at the height of the neoliberal period. And, if that was not enough, a former Federal treasurer attacked the ‘high priests’ of the central bank, demanding they buy up government bonds and help the government run “Mountainous” deficits to achieve full employment. The flood gates opened just a bit more after those interventions along the way to jettisoning all the mainstream nonsense that should have been abandoned decades ago.
The German daily business newspaper Handelsblatt published an interesting article last week (September 17, 2020) –
Schäuble fordert Debatte über lockere Geldpolitik der EZB – which said that the former German Finance Minister and now President of the Bundestag was calling for a debate on the ECBs ‘loose’ monetary policy. He has circulated a letter and a discussion paper among the new discussion group within the Bundestag, created after the German Constitutional Court had ruled adversely in relation to the ECBs public asset purchase programs. The letter criticises the low interest rate policy of the ECB and the various asset purchase programs conducted by the ECB. It appears to be in denial with the state of affairs across Europe, which are heading catastrophic territory with the second wave of the virus gathering pace and authorities having to face the need for a second lockdown.
Regular readers will know that for the last few years I have been documenting the way that the dominant paradigm in macroeconomics (New Keynesianism) is slowly disintegrating as the dissonance between its empirical predictions and reality becomes too great to ignore and justify. The once-in-a-century pandemic hasn’t given us much to celebrate in 2020. One cause for optimism, perhaps, is that we might finally jettison the mainstream economics fictions about government deficits and debt, which have hampered prosperity over several decades. Last week (August 27, 2020), the US Federal Reserve Bank Chairman, Jerome Powell made a path breaking speech – New Economic Challenges and the Fed’s Monetary Policy Review – at the annual economic policy symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole. On the same day, the Federal Reserve Bank released a statement – Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. We have now entered a new phase of the paradigm shift in macroeconomics.
At last week’s National Cabinet meeting (August 21, 2020), the governor of the Reserve Bank of Australia continued to play a political role in the economic debate despite hiding behind the veil of ‘independence’ from such matters. A few weeks ago, the federal government claimed the state and territory governments were not doing enough by way of fiscal stimulus to reduce the job losses associated with the pandemic. The Federal government is essentially trying to force the political consequences of its own failure to increase its net spending by enough and the resulting real economic damage that has resulted onto the states and territories. The RBA governor seems to be playing along with this agenda. Last Friday, he called for the states and territories to double their fiscal stimulus outlays (by $A40 billion) and stop fussing about credit ratings. The problem is that if they did that, the conservatives would immediately start claiming the debt was unsustainable and would damage the states’ credit ratings. Just as they regularly do to advance their political agendas to cut the size of state governments. While the mainstream economists urge ‘fiscal decentralisation’ they do so because they know states are not currency issuers and will then be open to attacks about tax burdens etc, which then bias the political debate towards cutting services etc. In general, the spending responsibilities should be at the level of the currency-issuer. And, the RBA governor should get back to fulfilling the legal charter of the RBA – to ensure there is full employment and price stability. His institution is achieving neither – with negative inflation and massive labour underutilisation. If he really wanted to increase job creation he could signal that the RBA would purchase any debt issued by governments at all levels who announced, and, made operational, large scale job creation programs. That would work.
Last week, the Reserve Bank of Australia governor, Philip Lowe, confirmed that the claim that the central bank is independent of the political process is a pretense. The Governor was adopting a political role and made several statements that cannot be analytically supported nor supported by the evidence available over many decades. He is insistent on disabusing the public debate of any positive discussion about Modern Monetary Theory (MMT), which, of course, I find interesting in itself. More and more people are starting to understanding the basics of MMT and are realising that that understanding opens up a whole new policy debate, that is largely shut down by the mainstream fictions about the capacities of the currency-issuing government and the consequences of different policy choices. People are realising that with more than 2.4 million Australian workers currently without enough work (more than a million officially unemployed) that the Australian government is lagging behind in its fiscal response. They are further realising that the government is behaving conservatively because it still thinks it can get back to surplus before long and so doesn’t want to ‘borrow’ too much (whatever that means). An MMT understanding tells us that the government can create as many jobs as are necessary to achieve full employment and the central bank can just facilitate the fiscal spending without the need for government to borrow at all. They are asking questions daily now: why isn’t the RBA helping in this way. The denial from the RBA politicians (the Governor, for example) are pathetic to say the least.
Today, the Australian Treasurer is out in force telling us that the fiscal situation is dire and that they have to start making cutbacks. Meanwhile in the real world, the unemployment rate continues to rise, businesses continue to fail, and the lowest paid workers, are being forced to continue working in dangerous health situations because they cannot ‘afford’ to stay at home like the better paid workers and protect their health. Its doesn’t bear scrutiny. My research centre released an updated report this week that also bears on the situation. The current fiscal stimulus is probably, at least $A100 billion short of where it should be, yet the government is announcing cuts. It will not turn out well. Meanwhile, across town, the Reserve Bank governor has been trying to deny the RBA has the currency capacity to allow the Treasury to keep spending without issuing debt. Already, the Labor party are making political points out of the rising public debt, which just makes them unelectable really, rather than savvy. The RBA governor’s intervention also just proved he is prepared to deny history and evidence to make political points, which had the other consequence of demonstrating how lacking in ‘independence’ the central bank is from the political process. And so it goes on.
Last week (July 14, 2020), a former deputy governor of the Reserve Bank of Australia (RBA), Stephen Grenville wrote an article – Modern Monetary Theory and mainstream economics converging. The title suggests a gathering of minds between two paradigms – the degenerative mainstream macroeconomics and the emerging Modern Monetary Theory (MMT). I wouldn’t represent what is happening in that way. Convergence implies a harmonious process. The reality is that some of the mainstream economists have realised that their approach is deeply flawed and events over many years have demonstrated those flaws, while ratifying the empirical content of central MMT propositions. Our position has been consistent over 25 years. Now, the mainstream is fracturing and economists are trying to save face and remain relevant by suggesting, in various ways, that they knew all of the MMT insights all along, or variants on that theme. They didn’t. They were deeply opposed and hostile to key MMT insights that are now becoming widely acknowledged as correct. In trying to maintain this image of convergence, Stephen Grenville’s article, while quite insightful in many ways, misleads his readership and mispresents key MMT elements.
Today’s blog post is a draft for another deadline I have this week, this time writing for a European publication on the state of affairs in the Eurozone. I have four major pieces of work to finalise this week so, as in yesterday, I am using this time to progress those goals. For many regular readers it will be nothing new. But, putting the arguments together in this way might just provide some different angles for people who haven’t thought about things in this way before. Regular transmission will resume on Thursday (probably).