In the last week, we have heard from the Chief Economist at the OECD (Laurence Boone), who has been touted on social media as offering a fundamental shift in economic thinking at the institution towards fiscal dominance. This is an example of a series of public statements by various New Keynesian (that is, mainstream macroeconomists) who are apparently defining the new macroeconomics of fiscal dominance. The point is this. Within the mainstream macroeconomics there was always scope for discretionary fiscal intervention under certain conditions. The conditionality is what separates their version of the possibilities from those identified and explained by Modern Monetary Theory (MMT). Just because these characters are coming out of their austerity bunkers to scramble to what they think is the right side of history doesn’t mean their underlying economics has changed. If you dig, you will find the same framework in place, just nuanced a little to suit the times. But the leopard hasn’t changed its spots. The underlying train wreck is still there and will be rehearsed again at some future date unless we push forward in abandoning the whole New Keynesian approach.
So Britain finally became free – sort of – from the European Union last week. I haven’t fully read the terms of the departure but the progress I have made so far in the text (several hundred pages) leads me to conclude that Britain has not gone completely free from the corporatist cabal that is the European Union. The agreement will see a Partnership Council established which locks Britain in to an on-going bureaucratic process dominated by technocrats – the sort of things the EU revels in and gets it nowhere. Overall, though, despite all the detail, Britain’s future policy settings will be guided by its polity and resolved within its own institutions. That means that the Labour Party has the chance to really push a progressive agenda. I doubt that it will but there are no excuses now. Which brings me to look at some data which shows how the fiscal rules imposed by the European Union, particularly in the 19 Member States who surrendered their currencies, have constrained prosperity and worked against everything that citizens were told.
It’s Wednesday and I usually try to write less blog material. But given the holiday on Monday and a couple of interesting developments, I thought I would write a bit more today. And after that, you still get some great piano playing to make wading through central bank discussions worth while. The Financial Times article (January 4, 2021) – Investors believe BoE’s QE programme is designed to finance UK deficit – is interesting because it provides one more piece of evidence that exposes the claims of mainstream macroeconomists operating in the dominant New Keynesian tradition. The facts that emerge are that the major bond market players do not believe the Bank of England statements about its bond-buying program which have tried to deny the reality that the central bank is essentially buying up all the debt issued by the Treasury as it expands its fiscal deficits. This disbelief undermines many key propositions that students get rammed down their throats in macroeconomics courses. It also provides further credence to the approach taken by Modern Monetary Theory (MMT).
The answer to the question posed in the title is No! Lawrence Summers’ macroeconomic assessment does not stack up. In – Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1? (December 30, 2020) – I developed the framework for considering whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payment as part of its latest fiscal stimulus. Summers was opposed to it claiming that it would push the economy into an inflationary spiral because it would more than close the current output gap. Today, I do the numbers. The conclusion is that there is more than enough scope for the Government to make the transfers without running out of fiscal space.
Comments made last week by the former Clinton, Obama and now Biden economist Lawrence Summers contesting whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payments was met with widespread derision and ridicule from progressive commentators. There were Tweets about eviction rates, bankruptcy rates, poverty rates, and more asserting that the widespread social problems in the US clearly meant that Summers was wrong and a monster parading as a progressive voice in the US debate. I didn’t see one response that really addressed the points Summers was making. They were mostly addressing a different point. In fact, the Summers statement makes for an excellent educational case study in how to conduct macroeconomic reasoning and how we need to carefully distinguish macro considerations from distributional considerations, even though the two are inextricably linked, a link that mainstream macroeconomics has long ignored. So while Summers might have been correct on the macro issues (we will see) he certainly wasn’t voicing progressive concern about the distributional issues and should not be part of the in-coming Administration. This is Part 1 of a two-part analysis. In Part 2 we will do some sums. In this part, we will build the conceptual base.
It’s Wednesday and my blog-light day. Today, I provide the English-text for an article that came out in the leading Japanese business daily, The Nikkei yesterday on Modern Monetary Theory (MMT) and its application to the pandemic. Relevant links are provided in the body of the post. The interesting point I think is that ‘The Nikkei’ is the “the world’s largest business daily in terms of circulation” and has clear centre-right leanings. The fact that they are interested in disseminating ideas that run counter to the mainstream narrative that the centre-right politicians have relied on indicates both a curiosity that is missing in the conservative media elsewhere, and, the extent to which MMT ideas is becoming more open to serious thinkers. I have respect for media outlets that come to the source when they want to motivate a discussion on MMT rather than hire some hack to write a critique, which really gets no further than accusing MMT of being just about money printing.
Yesterday, I discussed the results of recent research that demonstrated the ‘trickle down’ hypothesis, which has been used to justify the sequence of tax cuts for high income recipients, was without any empirical foundation. While mainstream economists have been enchanted with that hypothesis, heterodox (including Modern Monetary Theory (MMT) economists have never considered it had any validity – neither theoretical nor empirical. But it is good that mainstream researchers are now ratifying that long-held view. Today, I am discussing another case of the mainstream catching up. When I say catching up, the implications of these new empirical studies are devastating for key propositions that the mainstream macroeconomists maintain. The ECB Working Paper series published an interesting paper (No. 2509) yesterday (December 21, 2020) by an Italian economist from the Bank of Italy – Losers amongst the losers: the welfare effects of the Great Recession across cohorts. In brief, the research found that younger people bear disproportionate burdens during recession in the short-run, but also, face diminished prospects over the longer-term. The paper bears on some of the major fictions that have been propagated to disabuse governments of using fiscal deficits to smooth out the economic cycle – namely, the alleged burden that is created by the current generation’s excesses (the deficit) for their children and grandchildren (who according to the narrative have to pay back the debt incurred by the excesses). This is another case of evidence being produced that ratify the analysis that MMT economists have been advancing for the last 25 years.
On December 10, 2014, I wrote this blog post – Trickle down economics – the evidence is damning. The discussion was about how inequality undermines growth and that redistribution of national income towards higher income groups does not stimulate income growth for lower income groups. It provided evidence that destroys the basic tenets of mainstream economics and supports a wider social and economic involvement of government in the provision of public services and infrastructure, particularly to low income groups. The ‘trickle down’ fiction was propagated in the late 1970s and early 1980s by the likes of Margaret Thatcher and Ronald Reagan and dovetailed with the emerging dominance of supply-side thinking. Behind ‘trickle-down’ was a nasty neo-liberal plot to undermine state activity and rewind the gains made by the workers under the welfare states and unionism over the course of the C20th. Now a new report from researchers at the London School of Economics – The Economic Consequences of Major Tax Cuts for the Rich – repeats the evidence, and, perhaps because we are further down the road in realising how deficient mainstream macroeconomics is, new evidence of something that we have known since the ideas first came out of the sewers, might push the paradigm shift a little further.
It is Wednesday, so just a few snippets and some music. My main comment today is on the report released yesterday (December 15, 2020) by the national body Infrastructure Australia. The report – Infrastructure beyond COVID-19: A national study on the impacts of the pandemic on Australia – once again demonstrates the way in which mainstream macroeconomics, which has restricted government investment in essential instrastructure over the last three decades or so, has created poor outcomes and has failed to prepare the nation for the future. This sort of myopia just repeats itself across all nations. Hopefully, the fiscal response to the pandemic, even though in many countries it has been inadequate, is demonstrating that the mainstream approach is deeply flawed and provides no guidance for the way policy should be conducted into the future.
It is Wednesday and so just a few snippets before we get funky. Yes, jazz-funky. That should do it. In the last week, a credit ratings agency downgraded the rating of the state of Victoria to AA from AAA claiming that the the state was in fiscal trouble. They also downgraded the credit rating for the NSW government credit from AAA to AA+. You might wonder how the hell these corrupt and irrelevant organisations managed to survive the GFC, given the sectors complicity with the financial frauds and overreach that drove the world to near financial ruin? Well they survive because people still believe in the fictions that lie behind the whole concept of government debt ratings. Should anyone be worried about these changes in Victoria and NSW? Not at all. The announcements were just noise and tell us, in part, how far we have to go in expunging these fictions from our understandings.