There were two related articles in the Melbourne Age this weekend, a descriptive account of credit card debt vulnerability across Australian households – Default looms for millions of Australians (October 5, 2014), and an attempted analytical piece – If we are so wealthy, why are we in so much debt? (October 4, 2014). The latter is so intent on pushing an anti federal fiscal deficit angle that it fails to tie in the fact that its two central objects – the massive build up of private debt and the pursuit of fiscal surpluses are intrinsically related. The article attempts to rail against both without remotely understanding their connection. But that is what you expect from journalists who try to venture into areas they have lots of opinions but know little about.

The debates that are played out in the parliaments around the world at present about the state of public finances are not new. The debates, which are amplified by the media who typically do not understand the issues involved yet mostly take a conservative position because they can sell more products (papers, on-line access etc) that way, appear to be pressing and all sorts of emergency language is used. The characters who write these doomsday scenarios mustn’t ever reflect on what they say from one day to another relative to the historical record. Their arguments against the use of budget deficits and invoking doomsday scenarios regarding public debt reduction are not new. Given many of these conservatives are also into the bible (pushing evangelical diatribe) they might have reflected on – Ecclesiastes 1:9 – which noted that “What has been will be again, what has been done will be done again; there is nothing new under the sun”. Indeed not. One character in history with a penchant for religion (Mormonism) however had some insights in the operations of government budgets and public debt. He was also a long-time former Chairman of the Board of Governors of the US Federal Reserve System.

The economics journalists were out in force again today in Australia after being fed their latest copy from the neo-liberal propaganda machine. In this case, the propaganda was in the form of the first report published yesterday (May 22, 2013) from the newly established Parliamentary Budget Office – Estimates of the structural budget balance of the Australian Government 2001-02 to 2016-17. The Report estimates that huge unsustainable budget deficits and has led to a flurry of media activity all just repeating what the PBO told them was the message. I wonder if any of the journalists have actually read the report in detail particularly the Appendix where the technicalities are exposed. Technicalities is too strong a word because it suggests there is something robust going on. Nothing could be further from the truth. This is another shoddy attempt to bias the public perception towards thinking the current (pitifully small relative to the scale of the problem) budget deficit is problematic.

Last week marked a turning point in Australian politics when the Australian government finally admitted that they had made a monumental political misjudgement by promising to deliver a budget surplus in the next fiscal year despite an economy that was not capable of generating sufficient revenue to render that promise realistic, much less, economically responsible. They didn’t actually admit all of that but that is what has happened in the last week. The Government has abandoned its promise to deliver a budget surplus in the coming fiscal year as tax revenue collapses around them. The reasons for that collapse relate to the slowing Australian economy, due in no small measure to the fiscal contraction already forced on the expenditure system. There was never a need for that fiscal contraction and it was obvious that the Government would fail to achieve its promised surplus. That was obvious. But the problem was that in trying to pursue the surplus they have undermined our prosperity and caused labour underutilisation rates to rise with the commensurate lost national income. They are now being pilloried on the political front for breaking their promise. The fact they made that promise suggests their political acumen is as bad as their economic management.

In his – Introductory Statement – at the Press Conference last week (November 8, 2012) announcing the decision of the ECB Governing Council, ECB Boss Mario Draghi provided us with all the evidence we need that the conduct of macroeconomic policy is being based on false premises, which makes it unsurprising that the world economy is enduring slow to negative growth and millions are unemployed. The ECB decision was to keep interest rates unchanged. But that isn’t the point of this blog. We all look to monetary policy to solve the crisis when it is ill-equipped to do so. The reliance on monetary policy and the hostility towards fiscal policy is all part of the same ideological baggage that caused the crisis in the first place. Dr Draghi’s promise that the ECB would buy unlimited quantities of government bonds was held out as part of the solution but in fact only confines the central bank to maintaining solvency, which is intrinsic to any currency-issuing government anyway. But the main Eurozone problem is a lack of aggregate demand. The ECBs action do nothing to resolve that problem. Similarly, the Federal Reserve, the Bank of England, the Bank of Japan and all the rest of the central banks do not have the tools to ensure that the main problem is addressed. The crisis has confirmed that yet so deep has been the indoctrination that we (the collective) still hang on to the idea that fiscal policy is bad and monetary policy has to carry the counter-cyclical weight. The fact is that it cannot.

One of the complaints that critics of a Job Guarantee raise is that it might compete with the private sector for labour, which they say would be unfair given the unequal capacities of the two sectors (government allegedly has an advantage) and the undesirability of allocations being based on so-called “non-market” criteria. Mostly these complaints reflect the fact that the critic hasn’t read any of the relevant literature about Job Guarantee design and rationale (it employs workers which have no private sector bid). However, when the government becomes a speculator balancing risk and return in private capital markets and, in doing so, contributes to asset price bubbles and uses its financial might to “distort” market outcomes, it is praised for being financially prudent. Welcome to the hypocrisy of the Future Fund, Australia’s so-called sovereign fund. But it gets worse. We have now learned about the types of products that the Future Fund is investing in. It comes down to the Australian government promoting increasing cancer incidence in our nation. And all because they lie about their economic capacities as a sovereign currency-issuer.

I was reading several older papers from the 1990s today as part of a project I am working on where I track predictions that leading mainstream economists were making at the time about the evolution of national and global economies. It is a very interesting exercise to build the narratives that were popular at an earlier time and then consider how far the economists got things right. I have noted that there has been some debate out in blog-land about who predicted the failure of the Euro. I am less interested in documenting which person was the first or the second – there were many who saw the design flaws from the inception and could extrapolate what they would mean if a negative shock occurred. Modern Monetary Theory (MMT) economists were among them. I am more interested in groupthink (at the paradigm level) and how the failed predictions can be used to demonstrate the inapplicability of a certain body of theory. That is, what can we learn from the failure of mainstream economists in general to see the crisis coming (and being in denial now of what the solution is). In this blog I consider a part of the thinking that explains why my profession proved to be unreliable in this regard. I renamed this blog – appending it with the term redux because on March 23rd, 2009 – I wrote a blog – Budget surpluses are not national saving.

Everyday the major financial newspapers and magazines provide Op Ed space to so-called leading economists. For the majority of the public, it is these Op Ed articles that provide their interaction with my profession. It is a pity. The majority of the reasoning presented by these characters, most who occupied senior positions in US academic departments, is spurious to say the least. The public is thus being poorly educated (to put it mildly) on a daily basis and this represents a major problem for our democracies. Voting in elections is one thing. But when citizens are voting based on faulty understandings that they have derived from these economists, then what is the value of a free vote? Today I consider the views of leading Princeton economist Alan Blinder – who is another macroeconomist who is blind to the way the economy works.

I was going to write about the so-called fiscal cliff today and would have shown that the only thing that might fall of the said cliff would be real GDP growth should the US Congress actually not extend the tax cuts and impose the spending cuts. The US economy would follow the lead from the British economy and double-dip in 2013 as sure as day follows night (or is it the other way round). The most elementary exposition of what we might call – ECO101 Macroeconomics – would tell us that. One person’s spending is another person’s income and so on. I note that some economists are arguing that ECO101 Macroeconomics is alive and well because it has had a an impeccable record in the current crisis. In my recent blogs – Fiscal austerity damages real growth and prolongs the financial downturn and Neo-liberalism has failed but we still don’t get it – I have argued that the mainstream of my profession has failed – both in anticipating the emerging crisis and providing credible solutions to remedy it. So have I overstated that claim, given that ECO101 Macroeconomics is the go-to approach at present? The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.

I often get E-mails from readers – some hostile others more reasonable – telling me that I should stop arguing for more economic growth. The reasoning is relatively straightforward – the Earth is buckling under the rapacious resources demands of the capitalist system and not only is that process likely to be finite, notwithstanding substitution via technological advances, but also in the process of exhaustion the amenity declines. The argument juxtaposes ecological claims with other claims relating to the desirability of the current neo-liberal dominated system which relies, seemingly, on creating more inequality, a reduction in government oversight and allows the worst aspects of the capitalist system to run amok. However, somewhere along the way, the 99% or whatever percentage it is (I think it is substantially lower than 99) miss the boat. The current crisis is used to demonstrate that conjecture. I haven’t time to reply to all the E-mails and I try to provide “collective” replies (which should tell you something in itself) via my blog posts. So today I am addressing that issue. The message is simple – I am very sympathetic to localised, new economy-type collective ways of organising social and economic activities. I support egalitarianism and co-operative solutions rather than competitive, dog-eats-dog approaches. I don’t mind working and giving my surplus to aid those who are unable for whatever reason to achieve the same material outcomes by their own hand. I am happy with consolidation rather than growth. But despite the romantic appeal of all this – as the solution – we have to understand that there is still something called a monetary system and a currency to deal with. Localised solutions are still constrained by the sovereign state they are located in and their fortunes are determined in no small way by the way the currency-issuing government conducts its fiscal policy. There is no escape from that.