I guess if mainstream economists use Milton Friedmanesque smears they think that will be sufficent to discredit Modern Monetary Theory (MMT). There have been a few critiques in the financial media recently along those lines. The authors tell their readers that they get the impression that MMT is just about a free lunch. Throw in Zimbabwe or Weimar are few times during the article and there you have it – rather tawdry attempts at maintaining mainstream thinking when the world has entered a new era of fiscal dominance as policy makers discard their reliance on monetary policy to stabilise economies. This policy shift is diametric to what mainstream macroeconomists have been advocating for decades as they repeatedly warned that high deficits and public debt levels and large-scale central bank bond purchases would lead to disaster. However, their predictions have been dramatically wrong and provide no meaningful guidance to available fiscal space nor the consequences of these policy extremes for interest rates and inflation. The world is leaving them behind and it is interesting to see how they are trying to reposition themselves.
I read a very interesting study by two Dutch academics last week – The ECB, the courts and the issue of democratic legitimacy after Weiss – which will be published in the Common Market Law Review (Vol 57, No 6, 2020). It examines the way in which the ECB operations and policy interventions have gone way beyond their original conception in the Maastricht Treaty and now conflict with democratic accountability. While the authors propose ways to address the democratic deficit, I am sceptical. Essentially, there needs to be a fundamental change in the Treaty and the establishment of a federal fiscal capacity embedded into a genuine European government. But then pigs might fly!
Today the UK Guardian editorial – The Guardian view on Rishi Sunak: time to create jobs, not anxiety – endorsed the introduction of a Job Guarantee to alleviate the terrible unemployment situation that Britain will create in the coming 12 months. Existing programs from the British government are “too small and too reliant on private companies to help much”. Even after the pandemic is solved (hopefully via vaccine) “the unemployment crisis will remain”. That is a positive step from the Guardian. And, it runs counter to the way many progressives are viewing the solution box, with UBI still figuring among their main options. The problem is that the UBI cannot deliver on its promises to everyone. But this blog post is not about UBI. As the Job Guarantee gains more profile in the public debate, several mainstream economists are now taking aim at it. The latest attempt, which I choose not to link to because it is not worth reading in full, invokes one of the arguments that mainstream economists developed in the late 1970s and early 1980s to justify their attacks on discretionary fiscal policy and elevate rules-based monetary policy to become the primary, counter-stabilisation tool. It was, of course part of the neoliberal putsch that has seen sub-optimal outcomes ever since for most of us and superlative outcomes for the top ends of the income distribution. The reason I note this argument is because it is general in nature and should be understood. In other words, I do not have to talk about the paper that introduces this attack on the Job Guarantee, because it just mimics the standard criticisms of government policy making that have been around for ages. So any time some new government policy approach is proposed, these characters just whip out this tired old defense. But it is useful for my readers to be on the lookout for it.
On Tuesday (November 3, 2020), the Reserve Bank of Australia made its monthly announcement with respect to the conduct of monetary policy. The governor Philip Lowe released this – Speech – to announce the decision. There were four elements to the decision, which I will explain. But the most significant aspects of the decision was to set the support rate on excess reserve balances to zero and increase their government bond buying program by 200 per cent. And the most significant aspect of that last decision was how much dodging and weaving went on to deny what they are actually doing. And, within the decision is a point that I would have expected State Premiers to be up and arms about but, instead, there was silence. All in a day of paradigm shift in economics.
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.
It’s Wednesday and just a few things today while I attend to other things (writing, meetings, etc). I will have an interesting announcement to make in a few weeks (around then) about a project I am working on that I hope have wide interest. Today, we have a podcast I recorded a few weeks ago with the Politics in the Pub, Newcastle group – now, in this coronavirus era being rebadged and reformatted as Politics in a Podcast. And then we celebrate a great musician who died last week but left some memorable songs for us to take into the future.
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.