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.
Towards the end of last year, I wrote a blog – Finland should exit the euro. I had been undertaking some detailed research on the plight of this relatively small Eurozone nation for a number of reasons. First, it had recently undergone a major industrial decline as Nokia/Microsoft missed market trends and went from world leader to irrelevance. Second, Finland was a vocal proponent of the view that Greece should be pillaried into oblivion by the Troika – to ‘take their medicine’ (more crippling austerity). Third, the data trends were unambiguously pointing to Finland descending into the Eurozone ‘basket case’ category itself as its own conservative government imposed harsh fiscal austerity on the tiny, beleagured nation. Two things are clearer than ever about the Eurozone. First, it is a dysfunctional mess and efforts to reform it so far have only made matters worse. Second, any single nation (and all together) would be unambigously better off exiting the mess and restoring their own currency sovereignty and letting their exchange rate take up some of the adjustment. The following text covers an article that I have written for a Finnish Report coming out in May 2016 to be published by the Left Forum Finland, which is a coalition formed by the political party Left Alliance, the People’s Educational Association (KSL) and the Yrjö Sirola Foundation.
There are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.
In November 2015, the IMF released an IMF Staff Discussion Note (SDN/15/22) – Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area – which purports to measure “the short-run economic impact of wage moderation and the implications for policy in the context of the euro area crisis”. It juxtaposes the impacts of the so-called internal devaluation approach with the impacts of Eurozone monetary policy. It recognises that the euro zone countries cannot use exchange rate depreciation to boost domestic demand but argues that instead, “lower nominal wage growth … and lower inflation or higher productivity growth relative to trading partners is needed”. The paper presents the standard mainstream arguments that: 1) wage cuts improve employment through increased competitiveness; 2) interest rate cuts stimulate overall spending; 3) quantitative easing stimulates overall spending. There is very little empirical evidence to support any of these statements, especially when fiscal austerity is accompanying these policy measures. The discussion does acknowledge wage cuts may be deflationary and “work in the opposite direction of the competitiveness affect”, in other words, domestic demand and overall growth declines. The unstated message is that internal devaluation doesn’t really improve competitiveness when it is imposed across the currency bloc and undermines domestic spending, which further impedes any export growth (because domestic income drives import demand).
Eurostat released the third quarter National Accounts data for Europe on Friday (November 13, 2015) – GDP up by 0.3% in the euro area and by 0.4% in the EU28 – which showed real GDP growth slowing in the Eurozone (down from the slug-like 0.4 per cent) and nations such as Finland and Estonia (one of the previous ‘poster children’ for austerity) heading into basket-case territory. Finland contracted by a sharp -0.6 per cent in the Third-quarter 2015 and has been in recession since the Estonia contracted by 0.5 per cent as did the beleaguered Greece. Portugal stagnated at zero growth. The so-called European recovery is looking distinctly wan! As at the third-quarter 2015, the Eurozone as a whole as still not reached real GDP levels equal to the peak in the March-quarter 2008. The overall 19 economy monetary union is still smaller than it was before the crisis began some 7.5 years ago. But to envisage how large the losses are of the failure of the policy makers to quickly restore growth, we have to also estimate where the Eurozone economy would have been had the GFC not occurred and pre-GFC growth rates were maintained. Then we have staggering losses of national income to consider across the failed monetary union. A very damaging folly has been inflicted on the people of Europe as a result of the neo-liberal Groupthink that dominates policy making.
Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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.
Its my Friday lay day but today is going to be anything but. I am in Helsinki at present and it has been a busy few days so far. The concept of Unit Labour Costs (ULCs) is being used by the right-wing government in Finland to bash the population into submission so they can impose the nonsensical austerity. The Finnish government is trying to get rid of some public holidays and reducing wages for sick leave, overtime and working on Sundays. This is the starting point for a broader austerity attack on the public sector and the prosperity of the people. They are calling for a decline in ULCs of at least 5 per cent. The rationale is that with growth flat to negative for five years or so and the massive export surplus they had disappeared the only way to stop unemployment going through the roof is to cut labour costs relative to productivity – that is, cut ULCs. They have been caught up in the ‘dangerous obsession’ that prosperity can only be gained through ‘export competitiveness’ (whatever that actually is) and the domestic economy has to be sacrificed at the net exports altar. International competitiveness is a slippery concept at best but so-called internal devaluation is rarely a successful strategy.
In Part 1 of this two-part blog I laid out a general analytical framework for considering fiscal rules that might allow governments to borrow for infrastructure as long as all current expenditure is at least matched by taxation and other current receipts. This is more or less the rule that the British ‘Charter of Budget Responsibility’ imposes and the approach that the new (previously called radical left) British Labour Party leadership aspires to obey. I use previously called ‘radical left’ advisedly because as the days pass the utterances of the economic leadership make it difficult to differentiate between Labour and the Tories. The main difference appears to be the worn out “we will tax the rich and the crafty tax dodgers to balance the budget”. A nonsensical stance for a progressive political force and verges on Game Over syndrome. John McDonnell’s presentation to the National Labour Conference yesterday was a further walk into obscurity. By claiming they are not “deficit deniers” and will close the deficit as a priority they have walked right through the Tory framing door. Not lingered on the doorstep and then sought more salubrious premises. But they are right inside – trapped into the same mantra – yes, they will cut the deficit but it will be a fairer cutting. The rich will pay. And pigs might fly.
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.
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.
The Australian government will release the Fourth Intergenerational Report today with much fanfare, scaremongering and lies. Our boofhead Treasurer has been doing the rounds of the media outlets giving his evangelical sales pitch on how scary the future is unless we cut the fiscal deficit now and get the balance back in surplus as soon as possible. These intergenerational reports are really a confection of lies, half-truths interspersed with irrelevancies and sometimes some interesting facts. There is very little economics in these reports. What parades as economic analysis is just the usual neo-liberal mainstream nonsense that currency-issuing governments have run out of money and fiscal deficits are dangerous. The Treasurer is selling the Report on the grounds of “intergenerational theft” (the classic anti-fiscal deficit argument about mortgaging our future grand children’s future). Apparently, this justifies large cuts to the fiscal deficit now in order to turn it into a surplus so that our future generations are left with no debt. The real intergenerational theft though is embodied in a current fiscal strategy that leaves around 45 per cent of our teenagers unemployed, underemployed or NEET (Not in Education, Employment or Training) and hacks into public infrastructure provision as a strategy to create fiscal surpluses now. With private spending subdued at present and the external sector also draining expenditure from the economy relative to its income, trying to impose fiscal austerity now in the name of defending future prosperity is a grand lie and will ensure that the future prosperity is undermined.
I get several E-mails (regularly) from so-called Georgists who want to know how the Single Tax proposal of Henry George, outlined in his 1879 book Progress and Poverty, fits in with Modern Monetary Theory (MMT). I have resisted writing about this topic, in part, because the adherents of this view are vehement, like the gold bugs, and by not considering their proposals in any detail, I can avoid receiving a raft of insulting E-mails. But, more seriously, I see limited application. In general, the Georgists I have come across and the literature produced by those sympathetic to the Single Tax idea, is problematic because there is a presumption that national governments need tax revenue to fund their spending. Clearly, this is an assertion that MMT rejects at the most elemental level. But there is some scope for considering their proposal once one abandons the link between the tax revenue (which they call rent) and government spending capacity. The question that arises, once we free ourselves from that neo-liberal link, is whether a land tax has a place in a government policy portfolio with seeks to advance full employment, price stability and equity. The answer to that question is perhaps. I am writing about this today and tomorrow (with an earlier related post – Tracing the origins of the fetish against deficits in Australia) as part of my research into the life of Clyde Cameron, given I am presenting the fourth Clyde Cameron Memorial lecture tomorrow night in Newcastle. I hope this three-part blog suite is of interest. In some parts, the text is incomplete.
The British Prime Minister gave a New Year’s speech in Nottingham on Monday (January 12, 2015), where he railed about the “dangers of debts and deficits” as part of the buildup to this year’s national election in Britain. There does not appear to be an official transcript available yet so I am relying on Notes that the Government released to the press containing extracts (Source). However, it is clear that the framing used by the British Prime Minister was seeking to personalise (bring down to the household level) public fiscal aggregates and invoke fear among the ignorant. The classic approach. There was no economic credibility to the Prime Minister’s claims. But that doesn’t mean that it wasn’t a politically effective speech. So woeful was the response by the Opposition that it suggested Cameron’s speech was very effective. That is the state of things. Lies, myths and exaggeration wins elections.
Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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.
The Australian Broadcasting Commission is undergoing dramatic cuts to its budget and shedding programs and valuable staff. The ABC office in Newcastle (Australia’s 7th largest city) has been downgraded to ‘regional’ status from metropolitan status to allow the government to cut its funding even further. It is curious that when they wanted to cut University funding they declared the University of Newcastle to be a metropolitan university and therefore not qualified to receive special regional bonuses. Where the ABC should cut staff, however, is in the area of economics and finance. They have become so inept at analysing what is going on that they are now just passive mouthpieces for private sector consulting firms who pump out macroeconomic nonsense weekly, which distorts the public debate. Today, the top ABC news story is – ‘Budget is burning’, warns top economist. It is a disgrace.
Last year, the concept of secular stagnation was reintroduced into the economics lexicon as a way of explaining the lack of growth in advanced nations. Apparently, we were facing a long-term future of low growth and elevated levels of unemployment and there was not much we could do about it. Now it seems more and more commentators and economists are jumping on the bandwagon such that the concept is said to be “taking economics by storm” – see Secular Stagnation: the scary theory that’s taking economics by storm. The only problem is that it first entered the economics debate in the late 1930s when economies were still caught up in the stagnation of the Great Depression. Then like now the hypothesis is a dud. The problem in the 1930s was dramatically overcome by the onset of World War 2 as governments on both sides of the conflict increased their net spending (fiscal deficits) substantially. The commitment to full employment in the peacetime that followed maintained growth and prosperity for decades until the neo-liberal bean counters regained dominance and started to attack fiscal activism. The cure to the slow growth and high unemployment now is the same as it was then – government deficits are way to small.
The IMF published its October – World Economic Outlook – yesterday (October 7, 2014) and the news isn’t good. And remember this is the IMF, which is prone to overestimating growth, especially in times of fiscal austerity. What we are now seeing in these publications is recognition that economies around the world have entered the next phase of the crisis, which undermines the capacity to grow as much as the actual current growth rate. The concept of ‘secular stagnation’ is now more frequently referred to in the context of the crisis. However, the neo-liberal bias towards the primacy of monetary policy over fiscal policy as the means to overcome massive spending shortages remains. Further, it is clear that nations are now reaping the longer-term damages of failing to restore high employment levels as the GFC ensued. The unwillingness to immediately redress the private spending collapse not only has caused massive income and job losses but is now working to ensure that the growth rates possible in the past are going to be more difficult to achieve in the future unless there is a major rethink of the way fiscal policy is used. The myopia of neo-liberalism is now being exposed for all its destructive qualities.
The OECD yesterday released their interim Economic Outlook and claimed that real economic growth around the world was slowing because of a lack of spending. Correct. But then they determined that structural reforms and further fiscal contraction was required in many countries, including Japan. Incorrect. The fact that they have departed from the annual release of the Outlook (usually comes out in May each year) indicates the organisation is suffering a sort of attention deficit disorder – they just crave attention and their senior officials love pontificating in front of audiences with their charts and projections that attempt to portray gravitas. No one really questions them about how wrong their last projections were or that cutting spending is bad for an economy struggling to grow. All the participants just get sucked into their own sense of self-importance because the event generates headlines and the neo-liberal deception rolls on. The OECD needs a reality check on Japan, but it isn’t the only organisation that is pumping out nonsense this week.
There was an article in the Australian edition of the UK Guardian last week (September 4, 2014) – Oil tax: Norway could teach Australia a thing or two about managing wealth – which demonstrates the myths that pervade the public debate about fiscal policy and monetary systems. This particular myth relates to the opportunities that so-called sovereign funds offer currency-issuing governments and the calibration of national assets as something being
The central bankers of the World met at Jackson Hole, Wyoming last week for their annual gathering far from the madding crowd. And as far away from the mess they have helped to create as you could imagine. Out of sight out of mind I guess. The ECB boss felt it his purpose at the gathering, which you can guarantee is plush in all respects (catering, wines, etc), to urge politicians to introduce more “growth-friendly policies”. He claimed in his speech – Unemployment in the euro area – that the so-called “sovereign debt crisis” had disabled “in part the tools of macroeconomic stabilisation”. Which is only true if one accepts that a central bank should play no role in supporting fiscal policy and that fiscal policy should be constrained by innane rules that deliberately prevent it from having sufficient latitude to meet foreseeable crises. Which is about as inane as one could get. But then none of these central bankers are accountable for anything much. They can swan around to meetings and issue ridiculous statements about growth-friendly policies, while supporting austerity, and nothing much happens to them personally.