Today is Wednesday and after several meetings and preparing for a workshop tonight I am powering away on some writing deadlines for academic-type articles etc. But, on Monday, I didn’t have time to finish the discussion on the pandemic trade-off between saving lives and protecting our material prosperity, particularly the future prosperity of the younger generations. And, just as it always is the case, the unfinished parts of the story I provided was picked up by a rather harsh critic. I chose not to make the comment public because while one of the points made was valid in part (as above), the general tenor was not a view I choose to publicise or give credence to. So today I will elaborate a little more because it also provides a lesson in data analysis, which many people would not really cotton onto straight away. And after we have mashed our brains on outliers etc, we can get funky with some music. Such is life on a Wednesday.
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.
Many issues that become ‘hot topics’ in public debates are really non-questions despite the heat they raise. All sorts of experts advance views, television current affairs programs trawl over them with various of these experts making careers for themselves, politicians take up hours of their time and our time discussing them, yet, when you really break the issue down – there is nothing much to see. The seemingly very erudite debates, discussions, opinions are all based on false starting premises, which are assumed and rarely discussed. This sort of charade is all the legacy of living in the fictional world created by my profession, which has distorted public discourse so badly that we now have people saying old people should be allowed to die terrible deaths from COVID so the young people can have jobs. These are old people who worked all their lives to help build our nations, who fought in World Wars to defend our freedom from daunting enemies, old people who cared for us personally, and old people who mostly, probably, have the joy of life before them each day they open their eyes, just like any of us. The problem is that the whole construction is based on a false premise: being that there has to be widespread economic damage if we choose to protect the health of our peoples. That premise is based on the failure to understand that the currency-issuing government can attenuate any economic losses if it chooses to adopt appropriate economic policy interventions. The fact that real GDP and employment has fallen significantly this year is testament to a failure to use fiscal capacity. We should be better informed before we get into elaborate but flawed debates that essentially come down to turning one population cohort against another.
Given I presented a full analysis of the National Accounts release yesterday, I am calling today Wednesday and not writing much by way of blog posting, to give me more time to write other things that have to be done. But there is one issue that I will deal with today and regularly comes up and indicates that we are making progress. And after that we can all ‘Rise and Shine’ with some beautiful music.
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.
The Australian Bureau of Statistics (ABS) published the June-quarter – Private New Capital Expenditure and Expected Expenditure, Australia – data today as part of the sequence of data releases relating to next Wednesday’s release of the second quarter National Accounts. Remember that this data is ‘backward’ looking, in that it tells us what has gone in the three months from April to the end of June. But it does provide the first signal of the impact of the first-stage lockdowns in April have had on capital formation. Today’s release confirms the worst with Total new capital expenditure falling by 5.9 per cent in the quarter and 11.5 per cent over the last 12 months. Investment in Building and structures fell by 4.4 per cent over the quarter and 9.4 per cent over the 12 month period, while investment in Equipment, plant and machinery fell by 7.6 per cent for the quarter and 13.8 per cent over the year. Crucially expected investment for 2020-21 has nose-dived (down 12.6 per cent on previous plans). By allowing the economy to go into recession and sustain mass unemployment and falling sales, the Australian government has made matters worse. Within the safe health constraints, it could have easily added another $A100 billion to its stimulus and seen unemployment drop to relatively low levels, major construction work undertaken in social housing to address the chronic shortfall, and invest in forward-looking green infrastructure. Instead, it has chosen to penny pinch and today’s figures are just the start of the damage this policy void is causing. This is another case of neo-liberal austerity white-anting the capacity of the economy to deliver prosperity for all.
It’s Wednesday and my light blog day produces a video or two. The first is a presentation I recently made to the New Zealand Fabian Society and the second is some exquisite trumpet playing from Chet Baker.
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.
Today, the Prime Minister of Australia indicated that the ‘effective’ unemployment rate in Australia is heading to 13 per cent as a result of the harsh lockdowns that have just begun in Victoria as it reels under a second wave of coronavirus (Source). The effective rate incorporates the official estimate (based on activity tests – search and willingness), the number of workers who have dropped out of the labour force due to a lack of opportunities, and those on wage subsidies who are not working at all. The Stage 4 Melbourne lockdown for the next six weeks will cut GDP by a further 2.5 per cent. While economists fuss about microeconomic losses, the daily output and income losses from the unemployment and underemployment are massive, not to mention the huge personal, family and community losses. A responsible government, which issues its own currency and can procure any productive resources that are idle, would be doing everything it could to ensure these losses do not occur. It is not rocket science. The Federal government could ensure those who are unable to work due to the lockdown maintain their current incomes. The overwhelming impression I am getting as we enter the fourth month of this crisis is that the federal polity in Australia is lost. The scale of the disaster has so confronted the neoliberal DNA of the major parties that they are failing to articulate a coherent and viable short- and medium-term plan to deal with the crisis. The challenge is for the government to abandon its inclination to see a ‘return to surplus’ as a benchmark it aspires to. That mentality is making this disaster a catastrophe. We can do much better.
The University of New South Wales Business School seems to be making headlines for all the wrong reasons. They have (at least) two attention-seeking academics that are not helping the reputation of the University. The first, thought he was being smart by trying to put Modern Monetary Theory (MMT) down and lie about my own work only to make a fool of himself. I note that someone at The Conversation, which damaged its credibility publishing the piece, has now edited the original piece (taken my name out of the text). The stupidity of the attack on MMT remains however. I dealt with that in this blog post – When mainstream economists jump the shark and lose it completely (January 23, 2017). Now, another academic who thinks somehow she is a wonderful communicator bringing economics to the public, is causing a national debate about freedom of speech and all the rest of it. She is arguing that the Australia should not have followed its lockdown strategy, and, instead should have allowed around up to 25,000 Australians to die in order to protect the economy. So far, only 155 have died. The controversy is being constructed as one of free speech and academic freedom. But academics should only be free to make statements using their university attribution if they are based on evidence that can be supported. I don’t dispute the academic’s right to be provocative. I do dispute her command of the evidence and her ignorance of matters macroeconomic. That is the problem here. Short recommendation: I would not study economics in this Department.