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The New Keynesian fiscal rules that mislead British Labour – Part 2

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.

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The New Keynesian fiscal rules that mislead British Labour – Part 1

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.

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Snowbound in the North

I am now in Europe (just) and will be here for the next two weeks. Next weekend, I will be speaking at some events in Barcelona and I will circulate details when I know more. This week I am giving three lectures at the University of Helsinki as part of a new postgraduate course they are offering. Tomorrow through Thursday, I will publish a three-part blog post series on The New Keynesian fiscal rules that mislead British Labour. I am examining the input from the academy that has clearly influenced decisions taken by the British Labour Party leadership in recent years. It is influence that they should have ignored. The fundamental principles that underpin the New Keynesian approach to macroeconomics do not form a suitable basis for a progressive socio-economic policy agenda. While that approach concedes that in the short-run fiscal policy can be used to ‘stabilise’ a recessionary situation, the overall advice is that austerity then has to be imposed to ‘smooth’ tax burdens on future generations and minimise public debt. The tax burdens arise because they claim taxes fund government spending and the public debt oscillations arise because they claim the government relies on debt issuance to fund the deficits that are required to meet short-term emergencies (war, recession etc). It is a jumble of gobbledygook hiding behind the precision of some simple mathematics. The latter, though, while held out as a rigourous ‘authority’ to back up the policy claims, is, in fact, incapable of providing definitive determinations of what is best for Society. It is an elaborate sham my profession inflicts on the debate. Anyway, a three-part series is coming up.

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The Weekend Quiz – February 24-25, 2018 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Welcome to the ‘homeless’ working poor – a new neoliberal KPI

In advanced nations, poverty used to be a thing of old age, once income had stopped due to retirement and savings depleted. Old-aged pension systems were intended as Welfare States emerged to prevent that fall into poverty. The pension systems reduced the incidence of extreme poverty and the full employment era that followed the Second World War, where governments committed to using their fiscal capacities (spending and taxation) to ensure there were sufficient jobs for all, allowed workers to improve incomes and saving. Research in the early 1970s (particularly from the US, where the pension systems were less generous and working conditions less regulated) started to disclose the incidence of the ‘working poor’. In more recent times, the concept of the working poor has spread from the US to most advanced nations. In this modern era of renewed real wage repression, rising energy costs and housing costs, workers are not only facing increased risk of poverty but also of homelessness. Welcome to Australia – the nation with the second highest median wealth per adult in the world. Yesterday (February 21, 2018), the Australian Bureau of Statistics (ABS) released the – Wage Price Index, Australia – for the December-quarter 2017. Private sector wages growth was 1.9 per cent in the December-quarter continuing the seven consecutive quarters of record low growth. However, with the annual inflation rate running at 1.9 per cent, real wages growth was static. And with real wages growth lagging badly behind productivity growth, the wage share in national income is now around record low levels. This represents a major rip-off for workers. The flat wages trend is also intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. And now, the latest data shows that workers are experiencing increased homeless. It is not just a problem of the ‘working poor’ now. Welcome to the ‘homeless’ working poor – a new neoliberal KPI.

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The ‘tax the rich’ call bestows unwarranted importance on them

It is Wednesday, so only a few snippets only today, while I am working on six lectures I have to give in Helsinki over the next two weeks. The first of those lectures will be a public event. And looking at the weather I am about to undergo around a 45 degree Celsius turnaround from where I am today in Australia to where I will be next week! That is what happens when you go to Finland in the early part of the year. Anyway, here are some items of interest I hope.

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There is no European citizen – cultures and narratives diverge in the Eurozone

I have noted before that when someone asks me where I come from I immediately (and innately) respond Australia. If questioned further I might tell them I grew up in Melbourne, Victoria. Sure enough, I am a Victorian (with some of the cultural attachments that that denotes) but that affiliation is weak compared to my nationality. That doesn’t make me a xenophobe or a nationalist. It just says I am culturally from that geographic area. If I ask my friends from Italy, Spain, France, the UK, Germany, Belgium, Netherlands, Finland, Norway, etc the same question, they will answer they are from those nations. They never immediately respond by saying they are European. I can get them to say they are European but that is not their innate cultural association. The point is that there is really no such thing as a European citizen. They are all citizens of their individual Member States with little shared culture and quite diverse histories (not to mention languages etc). An interesting study came out from European economics think tank Bruegel last week (February 15, 2018) – Tales from a crisis: diverging narratives of the euro area – highlights the consequences of these differences and concludes that it makes “for an extremely challenging context within which to conduct a uniform monetary policy across different countries”. I would add economic policy in general to that assessment.

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Censorship, the central bank independence ruse and Groupthink

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.

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The Weekend Quiz – February 17-18, 2018 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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