Last week, I posted a graph in this blog post – RBA cuts rates as a futile exercise as Dr Schwarze Null demands fiscal action (October 2, 2019) that showed that over the 12 months to August 2019, 312 thousand jobs have been created (net) in Australia. The stunning result is that 301 thousand (96.5 per cent) of those net jobs have been in the public sector. The private labour market is thus stagnating. I was interested to delve further into that result to see if I could bring more detail to bear. That is what this blog post is about. A data exercise to enrich our understanding and knowledge.
A short blog post today – being Wednesday. I am still catching up on things after being away for a few weeks. The British Institute of Fiscal Studies (IFS) offered its latest contribution to Project Fear this week with their claim that the fiscal response to a no-deal Brexit would “would send government debt to its highest level in more than half a century”. Sounds scary. Which, of course, was the intention. That is what Project Fear is about. Creating illusions of disaster to discipline the political debate in a particular direction. Nothing new about that. But the media, including the UK Guardian had lurid headlines such as – No-deal Brexit would ‘push national debt to levels last seen in 60s’ (October 8, 2019). But if you think about it the worst case estimates are hardly anything to worry about, even if we took the estimates seriously and were concerned about movements in public debt ratios for a currency-issuing nation (which I am not). Here are a few graphs so that all my British friends can come from under their bed covers and face the day with a smile as the No-Deal data gets closer.
Last Friday (October 4, 2019), a group of former central bank governors and/or officials in Europe, issued a statement damming the conduct of the European Central Bank. You can read the full text at Bloomberg – Memorandum on ECB Monetary Policy by Issing, Stark, Schlesinger. The timing of the intervention is interesting given the change of boss at the ECB is imminent. As I explain in what follows, the Memorandum should be disregarded. Its central contentions are mostly correct but the alternative world it would have Europe follow would be a disaster for many of the Member States and the people that live within them. It would almost certainly result in the collapse of the monetary union – which would be a good outcome – in the face of massive income and job losses and the social and political instability that would follow – which would be a bad outcome. What it tells me is that the monetary union is a massive failure. It would be far better to dissolve it in an orderly manner to avoid those massive income and job losses and to support the restoration of full currency sovereignty and national central banks. That would be the sensible thing to do.
In last week’s blog post – Leading indicators are suggesting recession (October 3, 2019) – we saw some conflicting signals about the state of the US economy. The PMI data was looking quite awful whereas another composite index was telling a different story. On Friday (October 4, 2019), the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – September 2019 – which reveals a slowing labour market, but, one that is still adding jobs. The commentators claim it is operating below expectation but the current trend is fairly predictable given the slowdown in overall economic growth. The US labour market is still adding jobs, albeit at a slower pace than last year. The Broad labour underutilisation ratio (U-6) remains high (but fell in September by 0.3 points) even though the official unemployment is now hovering around levels not seen since the late 1960s. The worry is that the jobs being added represent a significant hollowing out of jobs in the median wage area (the so-called ‘middle-class’ jobs), which is reinforcing the polarisation in the income distribution and rising inequality. There is no hint, yet in the data, that a recession is coming any time soon.
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.
Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.
In the last two days, some major leading indicators have been released for the US and Europe, which have suggested the world is heading rather quickly for recession. It seems that the disruptions to global trade arising from the tariff war is impacting on US export orders rather significantly. The so-called ISM New Export Orders Index fell by 2.3 percentage points in September to a low of 41 per cent. The ISM reported that “The index had its lowest reading since March 2009 (39.4 percent)”. This is the third consecutive monthly fall (down from 50 per cent in June 2019). Across the Atlantic, the latest PMI for Germany reveals a deepening recession in its manufacturing sector, now recording index point outcomes as low as the readings during the GFC. Again, exports are being hit by China’s slowdown. However, while export sectors (for example, manufacturing) are in decline and will need the trade dispute settled quickly if they are to recover, the services sector in Japan, demonstrates the advantages of maintaining fiscal support for domestic demand. Japan’s service sector is growing despite its manufacturing sector declining in the face of the global downturn. The lesson is that policy makers have to abandon their reliance on monetary policy and, instead, embrace a new era of fiscal dominance. With revenue declining from exports, growth will rely more on domestic demand. If manufacturing is in decline and that downturn reverberates through the industry structure, then domestic demand will falter unless fiscal stimulus is introduced. It is not rocket science.
I am now back in Australia after the latest cross-country run and so am falling back to routine. Which means a relatively short Wednesday blog post. Yesterday, the Reserve Bank of Australia cut their policy interest rate by 0.25 points to 0.75 per cent, a record low level. The RBA governor cited the weakness in the labour market as the reason for the cut and continued to suggest that the Government, which is pursuing its mindless austerity goal to record a fiscal surplus as the economy tumbles towards recession, should expand fiscal policy to kick-start growth. Once again, a central bank is being pushed into ‘record-making’ policy territory because the treasury-side of government will not use its fiscal capacity responsibly. This is now a global trend and even the likes of Dr Schwarze Null is calling for more fiscal action. Another day passes that demonstrates the mainstream New Keynesian approach is rapidly being abandoned by policy makers and an era of fiscal dominance approaches. Not before time.
There will be no blog post today as I am travelling for the next 24 hours or so back from the US. It has been a very busy two weeks or so that has taken me to many cities and meetings with many different people. A lot of different agendas to absorb and think about. From West Africa to the struggles within the US, to the Eurozone and the chaos of Britain. But the commonality is a desire to understand MMT and apply it to better deal with the problems that face us and our planet. While I am flying I will not be attending to comments that need moderation. So it might be some time before you see your comment published (or not). I am now preparing for my next foray which will take me to Japan later this month.
Japan is about to walk the plank again when it follows through on a previous government decision to increase the consumption tax by a further 2 per cent on October 1, 2019. That means it rises from 8 per cent to 10 per cent. The latest fiscal documents suggest the government is hyper-sensitive to the historical experience, which tells us that each time they have fallen prey to the deficit terrorists who have bullied them into believing that their fiscal position is about to collapse, consumption expenditure falls sharply and the government has to respond by increasing the deficit even further to compensate. But, notwithstanding their caution (as evidenced by some permanent and temporary spending measures to offset the significant loss of non-government purchasing power that will follow the consumption tax hike, the fact remains that the policy shift will be undermine non-government spending and growth and is totally unnecessary. Moreover, the main problem in Japan at present is the lack of spending overall – non-government consumption expenditure has not yet recovered from the last consumption tax hike in April 2014. So far from raising taxes, the data on the ground is telling us that they should be increasing the fiscal deficit. This is another example of a few conservative politicians, being told by unaccountable mainstream economists to introduce policies that will damage the material prosperity of the ordinary Japanese worker and their families. And when we consider that the time is approaching when the debt-servicing burden for the government is approaching negative territory, then the consumption tax hike looks even more ridiculous.