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The Ministry for the Future has some MMT lessons on fiscal policy

A close friend send me some pages from a book she is reading – Ministry for the Future – by author Kim Stanley Robinson, which was published in 2020. It is about an organisation that is chartered with defending the rights of future generations and they pursue various projects accordingly. Its major challenge is climate change, after a “deadly heat wave in India” and the narrative allows the author to entertain very interesting discussions about economics, ecology and society. It is classified as “hard science fiction” because while the work reflects the imagination of the author, he bases the narrative on “scientific accuracy and non-fiction descriptions of history and social science” to bring home the challenges we face with climate etc. The pages I received came from Chapter 73 (pages 365-366), which has a two-page discussion about Modern Monetary Theory (MMT). The author writes in his future scenario that “Enough governments were convinced by MMT to try it. That it influenced so much policy through the late thirties was regarded as a sign either of progress or of desperate fantasy solutions.” While the discussion is interesting, I want to focus on one of the ideas the author presents because they illustrate an important distinction between ‘Keynesian’ and ‘Post Keynesian’ thought on fiscal policy and MMT analysis.

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RBA aims to cut policy stimulation by adding to it

It’s Wednesday, and we have some analysis and news and then my music segment for the week. Yesterday, the Reserve Bank of Australia (RBA) stunned the nation by pushing up interest rates by 0.5 points, claiming it was the responsible thing to do given that inflation was higher than expected. They then outlined all the factors driving inflation – none of which are going to be responsive to interest rate rises. Further, when one dissects the way in which interest rate rises work through distributional effects and effects on business costs, it is not clear that increasing rates will not just add to the stimulation rather than reduce it as the RBA claims. Next, we Fact Check the Fact Checkers and after all of that we have some Tupelo Blues, to restore some sense of decorum.

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US inflation is moderating while a massive fiscal contraction is underway – recession looming

Yesterday (May 11, 2022), the US Bureau of Labor Statistics released the latest – Consumer Price Index Summary – April 2022 – which showed the monthly increase in the CPI to be 0.3 per cent, the lowest monthly increase since August 2021 and, as it happens, just about right on the average monthly growth rate from January 1947 and April 2022. The result suggests a tapering of price pressures. The Energy component fell by 2.7 per cent in April after spiking at 11 per cent in March. Further, the growth in food prices fell for the third consecutive month. All of this has nothing to do with the recent interest rises imposed on the economy by the US Federal Reserve. They were already in train and confirm the transitory nature of this period of price instability. The US Treasury Department also published its most recent fiscal statistics yesterday – Monthly Treasury Statement – for April 2022, which reports a staggering $US533,794 fiscal shift between April 2021 and April 2022 – the fiscal drag embodied in that shift is massive and calls into question the conduct of the US Federal Reserve – why did they think they needed to push the economy towards recession? Fiscal policy is already working in that direction!

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Fiscal policy shifts, not rising interest rates are required at present

Yesterday, I commented on Tuesday’s RBA interest rate rise. I wasn’t complementary. In the last two days, more data has been released since the decision, which further suggests that the RBA erred. It also suggests that part of the housing problem everyone is focused on is not due to lax monetary policy, which is the mainstream mantra, but is, rather, due to flawed tax policy. So, we have seen housing loan demand in decline and building approvals plummetting in the last month, a sign that the housing market, especially for owner-occupiers is in decline. Further, the growth in retail sales was only 1.6 per cent, and while mainstream economists are pointing to the rapid growth over the 12-month period (9.4 per cent March to March), they ignore the fact that the the March 2022 observation shows a decline on the previous month. The RBA statement yesterday did not mention housing at all, even though its decision has already pushed up mortgage rates in an already declining market. All they seem to want to do is cause massive damage to low income workers through even lower real incomes and rising unemployment and underemployment. There are fiscal options that should be pursued right now but the policy makers appear blind to them.

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IMF and World Bank at odds with each other over interest rate hikes

Today, Wednesday, we have our regular musical feature (might surprise today) as well as a brief commentary on the growing friction between the IMF and the World Bank on what governments and central banks should be doing to address the current inflationary pressures. One says hike rates (apparently thinking that will get Russia to withdraw, Covid to go away and OPEC to behave) while the other says provide better income support and wait out this transitory inflationary phase.

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Deliberately creating mass unemployment now would be the work of vandals and New Keynesians

Last week, the New York Times published the latest Paul Krugman article on inflation (which is behind its paywall). It is syndicated elsewhere and you can access it here at The Berkshire Eagle (April 13, 2022) – Paul Krugman: Inflation is about to come down — but don’t get too excited. I wondered whether the author had offered his services cheaper to the NYTs and elsewhere given his concern for inflation, and, apparently, his assertion that wages are a critical factor in sustaining it. What this article highlights is mainstream New Keynesian macroeconomics – the dominant paradigm in our teaching, research and policy circles. What it also highlights is how different the mainstream is to Modern Monetary Theory (MMT), despite characters like Krugman and his fellow New Keynesians trying to tell the world that there is nothing particularly different about MMT and the way they do economics. It also provides another chance for me to add nuance to the Job Guarantee.

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Apparently, MMT says there are no inflationary threats – which planet?

It’s Wednesday and we have the music feature to enjoy following some other news snippets. Here is an argument: Modern Monetary Theory (MMT) tells us that when there are fiscal deficits there is no problem with inflation. At present, inflation has been rising and there are deficits left over from the pandemic. Therefore “Tick off a loss for the modern monetary theorists amid rising inflation” because “Under MMT, the risk of inflation is considered minimal as governments that fully control their fiat currencies are believed to be able to control price levels”. Okay? So I think I better just terminate this blog today, say sorry for being so stupid, and start writing Op Eds demanding interest rates rise and governments cut their fiscal deficits immediately. But I won’t. Why? Because I am not stupid enough to mount that argument in the first place like some, who have the audacity to write financial columns that only demonstrate their ignorance. Good. Let’s have some music.

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Myopic meanness – Australia’s ODA cuts to its neighbours in the Pacific

Neoliberal governments and their supporters have a habit of spruiking gee whiz solutions to the world’s problems, where gee whiz means make it easier for corporations to make profits and harder for workers to get pay rises, claiming that the destiny of individuals is in their own hands (denying systemic failures), and reducing regulations that ensure equity is enhanced. Australia added another dimension to that list (which is not exhaustive) – being mean spirited when it comes to the less well-off nations in the world. The problem with this approach is that it does not live up to promise – it certainly enriches those who are already well-off – but when the rest of us realise something is wrong, the horse has already bolted and picking up the pieces becomes more ‘costly’ than before. In the last few weeks, our government has been bellowing again about China. China is a threat, China is a crook, China is this, China is that. The trigger point this time is the revelation that China’s external strategy has come to the Solomon Islands and the anti-China paranoid gang within the Australian government has a problem. The Solomon Islands are less than 1,700 kms from our mainland and the fear that China will establish a military base there is sending shivers up the spines (euphemism) of our conservative government. Perhaps if we had have been more generous to this region, the Chinese would not have so easily been able to invest there.

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A cynical fiscal statement from a crooked government

Last night (March 30, 2022), the Federal Treasurer released the annual ‘fiscal statement’ (aka ‘The Budget’), which revealed to everyone how cynical these exercises have become. The statement is normally released in May but the Federal government has to go to the polls then and they are so far behind the Opposition Labor Party in the opinion polling that they decided to bring forward the fiscal statement as a last ditch attempt to bribe the voters with pennies. I hope it doesn’t work. This is one of the most dishonest and incompetent governments we have ever had to deal with – and that is saying something given our history. While everyone is talking about the cash splash – it is offset by a range of cuts and dissipates in a few months anyway – just after the election. And the Government is once again revealing it has not foresight – to deal with the major challenges – climate, aged care, health care, higher education, social housing, etc. I can barely even write about the statement it is so bad.

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Single-payer health care should be funded by the federal government

Here is my Wednesday news blog post which ends as usual with some music – today some consummate guitar playing. Today, I discuss the dispute about M4A in the US and clear up some misconceptions. Many think that Medicare for All is defunct in the US because the ruling party – the Democrats have essentially rejected the lobbying attempts. Some people who have associated themselves with Modern Monetary Theory have, it seems, been advocating a state-based campaign to get single-payer schemes installed at that level. Is this a violation of MMT principles? Some think so. I do not. It might reflect ignorance of the nature of the sector but it doesn’t amount to a rejection of MMT. Anyway, I am a federalist and I explain why. I also bring attention to some anti-colonial struggles in the Caribbean.

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