Challenging a paradigm

In my travels today, I have hour-to-hour commitments (sort of like wall-to-wall) and so I have called in our guest blogger, Victor Quirk to provide some further fuel for debate in my absence. I will be back in my office on Monday although the Saturday quiz will appear tomorrow sometime. So today Victor is talking about how we go about challenging a paradigm from his perspective as a political sociologist. Over to him.

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Australian Labour Force data – bad news again

I have very limited time today as I am heading to the airport soon and have a full set of commitments once I get to where I am going. But today the Australian Bureau of Statistics (ABS) released the Labour Force data for December 2010. As usual the bank economists got it wrong and grossly overestimated the growth in employment (last month they grossly overestimated it). Today’s data shows that the labour market has falling in a heap – employment growth is barely above the zero line and the participation rate fell sharply. While this combination led to a decline in unemployment and the unemployment rate it just meant that we have traded unemployment for hidden unemployment – not a good option. The situation is now very unclear and the impact of the natural disasters that have consumed Queensland and are heading south will clearly cause a contraction in real economic activity in the coming months before the reconstruction phase gets into gear. If the Federal government continues with its moronic line that it will see oversee a net contraction in fiscal policy despite promising billions for the reconstruction phase then the labour market will contract. This will mean that the modest gains in reducing labour underutilisation that we have seen in the recovery period to date will probably be lost – mining boom notwithstanding. Today’s data definitely doesn’t support the claims by the Government and the RBA that there is an inflation threat building and fiscal and monetary policy should contract. The data tells me exactly the opposite is the case. There is still plenty of slack in the Australian labour market and employment growth is doing nothing to mop it up.

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When you know they don’t quite get it

I am travelling and engaged with commitments today and so am fitting this blog into a shorter time-span than I usually make. The floods in Australia have now become tragic (loss of many lives) but the Prime Minister still is insisting that the Federal government “will bring the budget to surplus in 2012-13, and, yes, that will entail some tough choices” even though it is being predicted that the impact on real growth of the Queensland economy virtually shutting down at present might be of the order of 1 per cent (see this account). Given the tepid economic growth that was revealed in the September quarter this would suggest that we are going back into recession territory. My advice to PM Julia in relation to her surplus aspirations – “automatic stabilisers – learn about them”. You can see the negative impact of the excessive rain over the last few months on coal exports already – see ABS data release yesterday for International Trade in Goods and Services. Anyway, I was thinking about this early today before I started attending to my commitments here (in Melbourne) and it related to something that I read in the New York Times this week. The issue is that so-called progressives often let the team down by using inappropriate constructs in the public debate. I am never absolutely sure whether they use these constructs because they don’t know better or they want some point of intersection with the mainstream debate. I usually conclude the former and there are times when you realise you know they don’t quite get it.

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A code of ethics doesn’t go far enough

I am travelling for most of this week with a very disrupted working routine – in between commitments. So this blog is shorter than usual and also somewhat unfinished in its conception. But the topic is the current call for the American Economic Association to introduce a code of ethical conduct for professional economists in the light of revelations in recent years about the abominable behaviour that many (academic) economists have displayed where they provide expert opinion in public in their guise as an independent economist but at the same time are being paid stipends of one form or another by corporations who would be affected by policy changes that the economists are talking about. This is usually in the context of such economists calling for more extensive deregulation. My view is that a more serious challenge to my profession has to be made. A code of conduct is fine but when the whole carcass of the profession is corrupted and rotten something more comprehensive is required – a major rethink about how we teach economics – nothing short of a scientific revolution is required. The whole body of mainstream economics needs to be trashed.

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Monetary system not behaving according to textbooks – system is wrong!

In a speech in Maryland on January 7, 2011, one of the US Federal Reserve Governors, Elizabeth A. Duke spoke about current monetary trends in the US. It was hot on the heels of the testimony that the Federal Reserve boss Ben Bernanke made to the US Senate (January 7, 2011). They echoed similar messages. The reality is that the US economy is stagnating with very moderate growth and a very weak labour market. The overwhelming reliance on monetary policy as the saviour (low interest rates and quantitative easing) is misguided and will not provide the spending support that the private sector requires to regain their confidence again. But the interesting point to come from Duke’s speech was her observation that the US monetary system is not behaving according to how the mainstream macroeconomics textbooks (and thousands of orthodox teachers) depict it. That comes as no surprise when it is clear from the perspective of Modern Monetary Theory (MMT) that the textbooks are a joke. But given the monetary system is not “behaving itself” you can guess what all those mainstream professors are out there telling their students. Simple, the system is wrong!

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Saturday Quiz – January 8, 2011 – answers and discussion

Here are the answers with discussion for yesterday’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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Flooded with nonsense

As the days go by we begin to realise the huge scale of the problem that the floods in Northern Australia are presenting our country. Whole communities are being forced to leave their homes and major disruptions to economic activity (in very important regions) are being experienced. The floods are being labelled the worst in Australian history (well the white European occupation of indigenous land history) although that depends on the area – certainly the worst since the early 1950s. The areas that are affected are major sugar, coal, iron-ore and food production regions. So real GDP growth will be reduced and this will exacerbate the already slowing economy. What should be the correct federal government response? Answer: to expand the budget deficit (via discretionary spending increases) to ensure that essential public infrastructure is replaced and private economies are able to function again. What is the current federal government contemplating? Answer: spending cuts. My assessment of this: they have no credibility as fiscal managers.

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Modern monetary theory and inflation – Part 2

The UN Food and Agriculture Organisation (FAO) released their monthly index of food prices yesterday (January 5, 2011) which showed that the index reached a record high in December 2010 “surpassing the levels of 2008 when the cost of food sparked riots around the world, and prompting warnings of prices being in “danger territory”” (Source). There are several reasons why food prices will move even higher – the catastrophic floods in Northern Queensland being among them. The rising food prices are once again leading to calls for interest rates to rise in order to minimise the inflationary consequences. That motivated me to write Part 2 of my series on inflation – in this case supply-side motivated inflations. In Part 1 of the series – Modern monetary theory and inflation – Part 1 – I concentrated on demand-side origins.

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