It will be a relatively short blog today as I am off travelling again. Yes, I was home one day! Real GDP gaps, which measure the extent to which economies are producing below their potential (indicated by full employment of labour and existing capital resources), remain large across many of the large advanced economies. That means one thing – current output growth is not strong enough given the real resources available to these nations. It means another thing – that potential growth will start to fall as investments in productive capital and human capital falters as a result of the lack of demand for current output. Given current capacity (labour and capital), the utilisation of it depends on spending and spending alone. That means another thing. Policies that deliberately undermine the current demand for output will not help economies to exit this crisis. So the only debate worth having is how to stimulate spending and that leaves all the discussions about the need for fiscal austerity on the sidelines of irrelevance. At what point will the economists supporting austerity realise that?
Today’s article from the relics (my office clear out continues) is actually two articles. One by Arthur Okun and the other by fellow US macroeconomist Gardner Ackley. Both economists are now dead but during their careers were aware of the role of government in a monetary economy. They were antagonistic to the conservative views of economists that wanted to push fiscal rules such as balanced budgets. They understood that these views not only undermined democracy but also made it impossible for governments to pursue their legitimate goals of promoting public purpose. In the current environment, if they were still alive they would be castigating those who seek to impose pro-cyclical fiscal austerity. Their insights remain relevant today. Just think about yesterday’s public finance data release in Britain. The debt reduction forecasts from the British government are in tatters because tax revenue is collapsing further and welfare spending is rising. The operation of the automatic stabilisers is signalling that the British government has more than adequately demonstrated its incompetence.
I am doing a bit of cleaning up old filing boxes each day now as the date I will be moving offices approaches. It is actually an interesting process – looking through boxes and articles that have been stored away for some years now. Today, I came across an article that was in the US Magazine Challenge (March-April, 1982) entitled The Guilds of Academe and written by one Jack Barbash, who was an academic at the University of Wisconsin. It discussed the way in which the economics profession protects its belief system from criticism and avoids, as far as possible, addressing real world problems. The mainstream will talk as if they are addressing a real world problem – such as entrenched unemployment – but when you realise the models they are dabbling with you know that they are really talking about nothing real at all. This leads onto a forthcoming book by some British conservative MPs who have the temerity to argue that the British unemployment problem is due to the workers being to idle and diverted by pop music to bother working. You know instantly that the underlying model has come from a mainstream economist who hasn’t recently looked out the window or read any data.
Here is a list of my professional colleagues who have learned nothing in the last 5 years. That is no surprise because they didn’t learn very much before that about how the monetary system works anyway. If their ideas were to be implemented I would guess that very few of them would publicly recant and admit they were wrong. They would obfuscate, deny, misconstrue but they wouldn’t admit they were wrong. At least prospective students have a good list of departments to avoid should they wish to study economics in the US. Keep it handy for future reference. Back in February 2010, there was a letter by 20 economists supporting the Tory proposals for fiscal austerity published in the Sunday Times. It was an unashamed attempt to influence the result of the May 2010 election. A week later 60 economists wrote that the 20 were nuts. It seems that some of the 20 rats have now deserted the Tory ship but won’t really tell us why.
Eurostat released the second-quarter 2012 National Accounts data for the Europe yesterday and, predictably, the recession is deepening in many countries. The Southern European nations saw their performance worsen and data shows that Spain’s house prices fell by 11.2 per cent last month (Source) and have fallen by 31 per cent since the crisis began in 2008. The deflationary impact of that alone would push the economy into recession. The Euro elites claim they will do everything to resolve the situation. And anything they do undertake – just makes it worse. Meanwhile, across the Atlantic, the Romney camp has put out a very suspect economic paper – authored by some notable suspects in the propaganda campaign the neo-liberals are sponsoring to prevent governments from acting responsibly. The economic paper has been categorically demolished – even in the mainstream media. So it is another day – some more evidence against fiscal austerity – and still the criminals maintain their grip on the throne.
The European leaders are preparing for yet another summit, where the good food will be served and the fine wine will be flowing. One loses count of how many summits there have been since the crisis began. They all promise to deliver the solution but usually end up with some weak worded document about fiscal integration and growth, which quickly descends into increasingly zealous statements about obedience to fiscal rules and monitoring and punishment frameworks and, if you will excuse me, the whole Spanish Inquisition thing! I don’t mean to malign the Spanish here. Rather just calling up historical patterns of behaviour that always end in pain and suffering. The latest signs are that the ECB is continuing to keep the whole boat from sinking while the Germans continue to claim they are the victims. The Euro leadership continues to be obsessed with rules. The financial markets continue to punish the whole setup. Another day in the European crisis. There is a collective denial operating at present and until facts are faced up to (which might require some humble (vegetarian) pie being eaten rather than what is probably on offer in Rome during the current summit) – nothing much is going to be achieved other than rising unemployment and social dislocation. This is truly a mad situation.
Over the last week, a Londoner and a Glaswegian have publicly embarrassed themselves with statements made about the current economic situation. One is an academic historian who hasn’t fully understood history. The other a politician who is seeking to deny the obvious and somehow blur his own culpability in driving the British economy back into a double-dip recession. I guess the smokescreen approach works if yesterday’s Greek vote is anything to go by. I saw a headline in Bloomberg this morning which said that “Greece avoids chaos …”, which prompted me to wonder what chaos might look like if it is not hospitals unable to get access to essential supplies, a government killing its private sector by cutting spending and not paying legitimate bills, and an unemployment rate creeping towards 25 per cent and 50 per cent for youth. The Greeks were bombarded it seems with wilful lies and even then the conservatives on just led the vote count from their main anti-austerity rival. In all the denials and bluster, what I know categorically is that in the real world where we all live – sustaining rates of youth unemployment above 50 per cent – is definitely not protecting the grandchildren.
The current British Government is refining the concept of work and Travel away from home allowances as it seeks to create dynamism and flexible and effective job creation programs. The answer appears to be that the workers don’t get paid, they are bussed to remote locations and are required to sleep under bridges prior to undertaking their unpaid work. As the the official Government statements tell us “The Work Programme also ensures value for money”. These developments are beyond even the dreams of the most entrenched neo-liberal.
In the New Scientist last year (June 13 , 2011) there was an interview – A field guide to bullshit – with London-based academic philosopher Stephen Law about his book – Believing Bullshit: How not to get sucked into an intellectual black hole. I thought about that when I was reading the documentation relating to the latest con by the British government – its StartUp Loan scheme which will give tiny loans to vulnerable youth to launch businesses into a recessed economy. In fair times, the failure rate of small business is very high. Put inexperienced youth in the frame and it gets higher. Overlay a double-dip recession that will get worse (with perhaps an Olympic blip delaying the decline) over the next 12 months and you have another policy that will do very little to bring the 1 million plus youth unemployed back into productive life. The neo-liberals in the UK are increasingly chanting slogans like “MAKE A JOB DON’T TAKE A JOB” to extol the virtues of people creating their own work as a way of covering up the fact that the Government is deliberately destroying employment prospects (especially for the young). Schemes like the StartUp Loans join a long history of proposals designed to deal with mass unemployment which fail to understand the cause of the problem. Modern Monetary Theory (MMT) tells us that mass unemployment arises because the budget deficit is too small given the saving intentions of the non-government sector. Aggregate demand has to rise to reduce unemployment. Providing a pittance to small businesses will not relieve the demand constraint on the labour market. It might redistribute the unemployment but will not do anything to significantly reduce it.
I had a little reminisce today and took a mental journey back to the North of England where I studied for a time. Although this time (early 1980s) was just before the digital age, I have collected bits of information about the economic and social life of workers and capitalists in early industrial England. And, of-course, there are some wonderful accounts in the wider literature of what life was like in those days. These were times when there were no unions, no job security, no income support, no safety standards, and little or no sanitation of public health regulations in the urban areas where workers were sequestered by the ruling elites. While the rich industrialists erected open spaces and promenades to surround their luxury residential facilities, the workers mostly lived in filth and died dreadful deaths. There was a reason that this way of doing business was attacked by growing worker discontent throughout England and Europe in the late 1840s and beyond. There is a reason trade unions formed. There is a reason that governments were forced by popular pressure to introduce income support and labour market regulations. People can only be put down for so long and the capitalist system is built on a very small minority seeking to repress the rights and rewards of the vast majority. Once the greed pushes the balance too far to the minority – their hegemony is threatened. We might be in 2012 but the elites are once again driving us all back to 1844 or thereabouts. They will rue the day.