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Mass unemployment – its all about demand

As I have said on enough occasions to earn the title of being a cracked record – the solution to mass unemployment is very simple – create enough jobs to satisfy the preferences for work of those who haven’t any. I attend a lot of meetings – here, there and everywhere – and listen to officials from governments and multilateral agencies say the same thing – “unemployment is a multifaceted, complex problem”. My response is always the same. No it isn’t. That sort of language – dissembling language – is just an excuse for saying that it doesn’t suit the dominant ideology to create the necessary jobs. Another simple fact is if the non-government sector cannot create the necessary jobs – well, ladies and gentlemen – there is only one other sector. Get over it. This blog reviews the latest release by the US Bureau of Labor Statistics of its – US JOLTS database – for December 2012. This data set sends some very clear and very simple messages about the causes of mass unemployment – and they all implicate the demand-side.

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US government has not exhausted its fiscal options

Today, I read a Bloomberg article – How the IMF Can Help Reduce Unemployment – which, in part, makes out that the IMF know what they are talking about when it comes to macroeconomic policy (that was the hilarious aspect). The article also claims that the US government has pursued “expansionary fiscal policy … aggressively but growth has remained too weak”. That claim, which surfaces most days, is being used to indoctrinate people into holding the view that fiscal policy has failed and there is little the government can now do other than turn it over the market (with very substantial handouts to the powerful lobby groups – of-course – but that isn’t really government spending is it – not like helping the pitifully poor unemployed who have no income and no power)! This theme repeats like a worn out record. The reality is that the US government didn’t give fiscal policy a chance to work fully. It was clear that the stimulus packages underpinned economic growth in 2009 and 2010 and led to an increase in private confidence (backed by growth in consumption and private investment spending). But the fiscal support was withdrawn too soon as the latest national accounts data clearly shows. The point is that the US government wasn’t aggressive enough, got cold feet too soon, and has never exhausted its fiscal options.

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The US labour market is still in a deplorable state

Last week (February 1, 2013), the – US Bureau of Labor Statistics – released their latest – Employment Situation – January 2013 – which showed that total “nonfarm payroll employment increased by 157,000 in January, and the unemployment rate was essentially unchanged at 7.9 percent”. The question is whether that is a good outcome or not in the scheme of things. The answer is that it remains a fairly bleak outcome especially when we consider the data more deeply. The economy is not growing fast enough to absorb the backlog of workers who were made unemployed in the downturn. There is massive waste now being endured by the economy and disproportionately being borne by the most disadvantaged workers in that economy. It is madness for the politicians to argue about debt ceilings and the rest of the irrelevancies when there is this much waste being created.

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Exploring directions in fiscal policy

This blog extends the discussion in yesterday’s blog – Exploring pro-cyclical budget positions – which is why I am running them on consecutive days. Not that I think any of my readers (Austrian schoolers and other conservatives aside) have memory issues! The discussion that follows focuses on ways in which we can interpret the fiscal stance of a government and hopefully clears up some of the confusion that I read in E-mails I receive from readers. I say that not to put anyone down but rather to recognise that the decompositions of budget outcomes and analysing the direction of fiscal policy on a period-to-period basis is not something that the financial press usually focuses on. In avoid detailed analysis, the press leaves lots of misperceptions unchallenged and often the wrong conclusions are drawn. I am not talking about policy preferences here. Just coming to terms with the facts is sometimes difficult for many commentators to achieve. But, of-course, the “facts” are also sometimes difficult to discover given that the methods used to produce them are often ideologically biased (I am talking here about the decomposition of the actual deficit into structural and cyclical components requires a full employment benchmark, which is where the fun starts.

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Not even remotely correct

There has been a bit of fun in the last week, with the IMF accusing our previous conservative government (10 increasing surpluses out of 11 years in power – 1996-2007) of being the only period of profligate fiscal policy over the last 50 years. That is hysterical really because the government in question held themselves out as the exemplars of fiscal prudence and responsibility. They were, in fact, one of the most irresponsible managers of macroeconomic policy in our history, but not for the reasons that the IMF would identify. All this shows how far fetched the research that the IMF is spending millions of public dollars (donated by member governments) has become. One week they are admitting how wrong their forecasts are with millions losing their jobs as a result and the next week they are handing out medals for fiscal prudence and backhanders for wasteful spending. I was going to analyse the underlying IMF paper today because it is illustrative of why the IMF keeps making these fundamental errors. But I was sidetracked and got lost in some data and some other things. So the IMF tomorrow (maybe) and today a little walk through some trends which confirm why the IMF has a problem recruiting good economists. It all starts with their miseducation in our universities. The point is a casual look at the data shows that the mainstream of my profession hasn’t been even remotely correct in its statements over the last 4-5 years.

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Fiscal insanity – cutting the deficit only to get a larger one

Being a researcher is interesting and frustrating. But it almost always takes one on a ride that is unpredictable, which is part of the fun. Sometimes, you hit a dead-end (often = frustrating). Other times, you end up somewhere that you never planned but which is instructive in itself (= interesting). Yesterday, my blog was about financial market criminals that seem to escape prosecution. The insulation from prosecution of white collar criminals is not confined to the financial markets. Today, the basic message is that if a nation engenders growth the budget deficit will likely fall and the benefits of the growth will be higher employment, higher national income and improved material living standards. The opposite is the case when a nation contracts. The irony is that the nation will still probably have a budget deficit, but in this case it will be accompanied by stagnation. The first deficit is good and virtuous the second bad and irresponsible (from the perspective of the government fiscal policy stance). So even if you are obsessed with reducing deficits, the best way is to engender growth. The dumbest thing a government can do if it wants a lower deficit is to impose fiscal austerity. There are a lot of dumb governments out there. The problem is they are aided and abetted by criminal types who know full well it is dumb to cut net public spending but pressure governments to do so as long as the space for spending on them expands.

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Bank criminals sail away on their yachts

Over the next few days I will be involved in transferring some of the major IT infrastructure for my research centre from our Newcastle office to our Melbourne office. This is the first stage of our plan to virtualise our server capacity – reducing costs, making it easier to manage, and giving us more independence in our new multi-campus structure. Sounds like fun doesn’t it. Not! It also wasn’t much fun reading the documents published by the UK Financial Services Authority (FSA) and the US Department of Justice last week concerning their investigations into the UBS LIBOR manipulation scandal. We read of widespread criminality and a total disregard for ethics and values. The authorities have, however, seen fit to go soft on the bank and will prosecute only a few it seems when many were involved. The point is that this is not the isolated act of a rogue trader or two. Criminality and greed is embedded in the culture of the financial sector and only major reform will get rid of it. That reform should start with the withdrawal of the license of USB to operate and then progressively the outlawing of the derivatives market and the scaling back of what banks can legally be involved in. Such major reform will not happen but until we get close to it the bad boys will continue to run loose.

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Win-win – US budget deficit expands and supports growth and private saving

The Sydney Morning Herald carried an AFP story today (November 14, 2012) – US deficit hits $120b as fiscal cliff nears – which reported the latest US Treasury Department figures which showed that “the US budget deficit rose 22 per cent in October from a year ago, to $US120 billion ($A115.56 billion), as spending far outpaced revenue”. At which point I thought – how lucky the American people are that the Government deficit is still expanding and supporting growth unlike the expanding deficits in Europe which are expanding because of a lack of growth. It is an astounding achievement for the US people. Unfortunately all the signs are that the American polity doesn’t actually understand that their in-fighting, which has allowed the deficits to continue growing, has been good for the nation. Had they actually cut the deficits or failed to pass the debt limit extension, the US economy would be in the doldrums just like Europe. The problem now is that the political debate will reach some conclusion pretty soon and the harbingers of doom are growing stronger. But for the time being with the US budget deficit expanding and supporting growth and private saving it is a win-win.

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Republican agenda – simple and venal

One of the continuing myths that economists have been responsible for is the notion of – Trickle-down economics or supply-side economics. The popular version of notion is that if there are tax cuts for high income earners and the wealth (reducing capital gains taxes) then saving and investment will rise and the economic growth and productivity growth that ensues benefits even the lowest income earner. In the current debate about the so-called “fiscal cliff” in the US, the Republicans clearly want lower marginal tax rates for the high-income earners while calling for reform to entitlements, which benefit the lowest income recipients. There are countless statements from conservative and not-so-conservative politicians and commentators that cutting the highest marginal tax rates is the best way to stimulate growth. The only problem is that the evidence does not support the claims. Without an evidential basis, the real agenda of the conservatives then becomes transparent. They want to cut entitlements at the bottom end of the income distribution and pocket more at the top end. It is really as simple and as venal as that.

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Some images from the US election

One of things that is now clear from the US election is that the rabid, religious and not-so-religious right in the US blew it. They had all the media, all the cash, yet still couldn’t pull it off. Here are three images that make me laugh and tell me a story about how the extreme right in the US have more or less shot themselves in the foot. They should have supported the ban on guns after all!

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