On March 13, 2018, the OECD released its latest Economic Outlook with accompanying “Interim projections” as at March 2018) suggesting that the current growth phase will continue through to next year as consumer and business confidence improves and translates in higher investment rates. The OECD, however, forecasts that growth in the Eurozone will decline over the next two years. The major Eurozone nations (France, Germany and Italy) are not witnessing the growing investment expenditure. The Eurozone might be seeing a little sunshine creeping out from the very dark clouds. But it is far from recovered and the future is ominously black. Key cyclical indicators remain at depressed levels, which means that when the next cycle hits, the Eurozone will be in a much worse position than before. And the reason: the fundamentally flawed design of the monetary system with its accompanying austerity bias. The reform required is root-and-branch rather than a prune here and there.
I have been (involuntarily) copied into a rather lengthy Twitter exchange in the last week or so where a person who says he is ‘all over MMT’ (meaning I presume, that he understands its basic principles and levels of abstraction and subtlety) has been arguing ad nauseum that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive. Also implicated, apparently, is the on-going sham about the ‘debt ceiling’, which according to the argument presented on Twitter is testament to the ‘fact’ that government deficits are funded by borrowings obtained from debt issuance. I received many E-mails about this issue in the last week from readers of my blog wondering what the veracity of these claims were – given they thought (in general) they sounded ‘convincing’. Were the original MMT proponents really overstating the matter and were these accounting arrangements evidence that in reality the government has to raise both tax revenue and funds from borrowing in order to deficit spend? Confusion reigns supreme it seems. Once one understands the underlying nature of the financial flows associated with government spending and taxation, it will become obvious that the argument presented above is superficial at best and fails to come to terms with the basic questions: where do the funds come from that we use to pay our taxes and buy government debt? Once we dig down to that level, the matter resolves quickly.
The Italian elections were held last Sunday (March 4, 2018) and the results are devastating for the Europhiles that think that the EU and the Eurozone, in particular, can be reformed to bring the people together in some sort of democratic paradise. Anti-establishment parties including the far right Lega Nord (who want to expel all migrants) have made spectacular gains. This follows elections in several nations where rather extreme results have emerged. What is apparent is that social democratic parties have started to lose electoral supports in large swathes and, in some, cases are now diminished and ruined forces. After hearing what the Shadow Treasurer in Australia said yesterday I can only hope the same electoral whitewash of the Australian Labor Party occurs at the next election. The message from the various national elections is pretty clear. Voters have seen through all the neoliberal nonsense that they have been bombarded with over the last decades and the miserable actual outcomes that have followed in terms of things that matter for peoples’ prosperity – jobs, real wages growth, income security, public services and infrastructure etc. They are sick of seeing the top-end-of-town walk off with the largesse while government’s attack the poorer elements in the name of ‘budget repair’. The neoliberals have pushed their luck to far. Sunday’s Italian result is just part of the evidence mounting to support that view. But, back in the Southern Hemisphere the Labour government in New Zealand the Labor opposition in Australia do not seem to have understood the trends. They are still thinking it is clever to ape the neoliberal nonsense about fiscal surpluses, AAA credit ratings and war chests to help fight future recessions. Sad sad sad.
This is Part 3 (and final) in the series which examines the robustness of claims made by two British academics about the desirability of the British government (particularly Labour) adopting further fiscal constraints on their flexibility to advance well-being in that nation. Part 3 further develops the critique and focuses on the validity of tightening voluntary constraints on government and outsourcing key parts of the fiscal policy development process to so-called ‘independent’ fiscal councils or boards. We conclude that these suggestions would further entrench the neoliberal dominance of government policy and reduce its capacity to serve the wider interest. In effect, taking this sort of advice would be counterproductive for British Labour, which really needs to to further break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. This will require more than articulating progressive-sounding social and environmental policies. It will require more than proposals to renationalise the railways. Effectively, British Labour has to reframe the macroeconomic debate and eschew the sort of reasoning that the mainstream of my profession offers. It must, in my view, embrace Modern Monetary Theory (MMT) principles to free itself from the shackles of all the neoliberal mumbo jumbo that the New Keynesians continually offer as economic verities. The reality is the the New Keynesian approach has one output – an elaborate litany of lies.
This is Part 2 of my Three Part exposition of how the standard New Keynesian approach to the specification of fiscal rules will generate poor advice for politicians desiring to achieve progressive socio-economic goals. The paper I am using to represent the New Keynesian approach has, by all indications, been somewhat influential in the formation of the macroeconomic approach currently being espoused by the British Labour Party. In that sense, the critique aims to disabuse the Labour politicians and their apparatchiks of building policy options based on fake economic knowledge, and, instead, embrace the principles of Modern Monetary Theory (MMT), which provides an accurate depiction of how the monetary system actually operates and the policy options for a currency-issuing government such as in Britain, and the likely consequences of deploying these options. The one major lesson that comes out is that the New Keynesian approach is an elaborate fraud. It plays around with so-called ‘optimising’ models asserting human behaviour that no other social scientist believes remotely captures the essence of human decision-making, and then derives conclusions from these models that are claimed to apply to the world we live in. Prior to the GFC, these ‘models’ didn’t even consider the financial sector. The fact is that nothing of value in terms of specifying what a government should do can be gleaned from a New Keynesian approach. It is barren.
The British Labour Party is currently leading the Tories in the latest YouGov opinion polls (February 19-20, Tories 40 per cent (and declining), Labour 42 per cent (and rising). They should be further in front, given the disarray of the Conservatives as they try to negotiate within their own party something remotely acceptable about Brexit. When there is this degree of political capital available, in this case for the Labour Party, a party should use it to redefine policy agendas that have gone awry. To build a narrative that will advance their cause for the future decades. British Labour has a chance to break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. In part, under Jeremy Corbyn and John McDonnell, Labour is making progressive noises on a number of fronts. But ultimately, where it really matters – the macroeconomic narrative – they are remaining firmly neoliberal and this will blight their chances of pursuing a truly progressive agenda. One of the glaring mistakes the Labour Party has made is to accept advice from neoliberal economists (so-called New Keynesians) who have instilled in them a need for fiscal rules. This is a three-part analysis of the sort of advice that Jeremy Corbyn and John McDonnell are getting and why they should ignore it. I have split it into two parts because it is long and quite involved at times.
A few things came up late last week which demonstrate the neoliberal Groupthink is alive an well at the highest levels of policy in Australia (and elsewhere). First, there was a story that a report from an Australian Broadcasting Commission (ABC) journalist on the Australian government’s corporate tax cuts was withdrawn after publication by the ABC after receiving several complaints from senior government ministers including the Treasurer and the Prime Minister. The story was not even radical. The journalist who I have had dealings with is a neoliberal herself when it comes to understanding macroeconomics. Second, one of the claims that the neoliberals make is that central banks are now firmly independent and not part of the political process. This is all part of the depoliticisation process whereby governments absolve themselves of political responsibility for policies that harm the citizens by appealing to ‘independent’ external authorities (such as the IMF, or central banks). Well we know that the claim about central bank independence is not true both in terms of the way the monetary system operates but also in the conduct of various central bankers over the last few decades. Last week, the Reserve Bank of Australia governor once again demonstrated how politically independent he is NOT by invoking key mainstream neoliberal myths about deficits and grandchildren. And then an old hack and largely failed British Labour politicians got in on the act. The Groupthink is powerful but becoming increasingly desperate under the increasing pressure from citizens for more accountability.
Last week (February 8, 2018), we witnessed the US Senate spectacle with Rand Paul embarrassing himself with his lack of economic knowledge but also embarrassing both major parties – the Republicans for their gross hypocrisy and the Democrats for their gross idiocy. The – Congressional Record – of Paul’s speech (starting S817) is a classic. Also, last week, the stables were stirring apparently, as the ‘bond vigilantes’ were strapping on their saddles and getting ready to make the US government suffer for its so-called fiscal ‘ill discipline’. These characters apparently emerge out of the darkness of fiscal profligacy to defend our interests and force the government to run surpluses. Fantasy stuff all round. In fact, Rand Paul should resign and get a job he is more suited for (which would be?) and the bond vigilantes should make sure their Shetland ponies are not to wild for them. These bond traders play this elaborate game of bluff and pretend they have the power over the government. In fact, they are mendicants queuing up for their daily dollop of corporate welfare and the government could play them out of the game anytime it chose to. The problem is that the bluff works because governments are captive to the neoliberal nonsense that my professsion preaches.
Some years ago, I started collecting information about the so-called Maghreb countries, which typically refers to the region spanned by Algeria, Morocco, and Tunisia, although sometimes Libya and Mauritania are also included in the aggregation. You will find it referred to as the Barbary Coast in English literature. I was interested (as a long-term project when I get old :-)) to write a book about how nations broke away from the yoke of colonialism only to fall into the hands of the IMF and the World Bank, which over time were becoming the leading attack dogs for the neoliberal domination of governments. That book is coming in the future. But I have also been interested in the way the Eurozone Member States have moved into Northern Africa to extract as much surplus as they can from exploiting the resources these African nations have. You know a nation is in trouble when there are nightly riots which were motivated by economic desperation and a pernicious new (so-called) Finance Law, which became law on January 1, 2018. I am, of course, talking about Tunisia. With high levels of unemployment and underemployment and a lack of job opportunities particularly severe in the interior regions, the IMF decided, in its infinite neoliberal stupidity, to force the Tunisian government to impose a harsh austerity program including pushing up value added taxes which have had the effect of driving up medicine, food and energy prices and impacting on those most affected by the lack of jobs. Smart thinking! The riots have now followed.
A few weeks ago, in my three part series answering questions about Modern Monetary Theory (MMT), I addressed the issue often raised about the fiscal policy emphasis in MMT, that it is difficult to time government spending injections to match the cyclical need. These criticisms go back a long way and were used by the likes of Milton Friedman to build up his case against discretionary fiscal activism in favour of monetary rules. Of course, that was an ideological preference, given the Monetarists wanted ‘small’ government and technocrats implementing economic policy. The basic precepts of Monetarism have not stood the test of time and the GFC and its aftermath have showed, beyond doubt, that monetary policy is an ineffective means of stimulating aggregate spending and that fiscal policy is the best way to counter non-government spending collapses. In those blogs, I outlined several ways in which fiscal policy could overcome ‘timing’ issues and deliver prompt stimulus when needed and be able to contract the stimulus in a timely manner once non-government confidence and spending had recovered. The points I raised are not new and have been discussed and made operational many times in the past. A tweet from my MMT colleague Stephanie Kelton last week reminded us of this again when the US National Resources Planning Board (NPP) was mentioned with a link to the The Internet Archive is a “non-profit library of millions of free books, movies, software, music, websites, and more” and is a fabulous resource for researchers. Reading the Report from the NPP is like music to the ears! History has a lot to say if we listen properly.