Why history matters

In this recent blog – Who is in charge? – I outlined the case that all the so-called “financing” arrangements that government deploy which are held out to us as being required to allow them to spend are in fact voluntary and reflect deep-seated ideological anti-government positions. I wanted to make the point that it is governments not amorphous “bond markets” that ultimately in command of the destiny of their nations and that citizens are being grossly mislead by lies and half-truths into believing that governments have to introduce harsh austerity packages to appease the markets because if they do not the latter will “close them down”. I continue with that theme today and address some issues raised in the comments that accompanied that blog.

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Doomed from the start

Today I have been studying data from the EMU economies where the individual member states surrendered their currency sovereignty and comparing it to other nations which have sovereign currencies (Australia, Denmark, Japan, the UK and the US). This is part of a larger project I am involved in. While the glare of the spotlight is currently on Greece and how the EMU handles the issue, most commentators conveniently forget that this problem has been many years in the making and is both a product of initial design folly and subsequent behaviour by some member states.

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Its a hard road

As one dead-end traps the mainstream deficit terrorists’ relentless “hyperinflation is coming”, “the deficits are large and unsustainable” campaign another road is opened. New ways are found of pushing the same boring message. I read several papers and article today that all try to come up with a new tack – a new way of scaring the bjesus out of us and steer our minds towards what they assert is misguided government policy. They actually just don’t like any government claim on real resources because they think there is less for them then. Even when they don’t want to create jobs for the unemployed they resent government employing these people because it would just be a “waste of resources”. Its got worse as I read on. I tell you keeping up with all this stuff is surely going to be “a hard road till I die”.

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The further down the food chain you go, the more the zealots take over

Today I am travelling to the Baltic States of Estonia and Latvian, both of which are mired in a very deep recession bordering on depression. What you see in these economies is a demonstration of right-wing neo-liberal ideology at its crudest … and the damage it causes … at its magnified worst. Both economies are an indictment of the economics profession and the multi-lateral agencies like the IMF and the European governments. It is hard to come to terms with national governments who could easily enjoy currency sovereignty – voluntarily choosing to do otherwise for ideological reasons and then using what policy space they have left to inflict harsh pro-cyclical cutbacks on the economies they are meant to be nurturing. It is surreal at best and sometime in the future there will be retrospective consensus that this era we are living in was dominated by cruel and tyrannical policy makers.

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Looking beyond the peak

Today the ABS released the Labour Force data for December 2009 and it confirms that the Australian economy is still recovering under the steam of the fiscal stimulus. Total employment has grown by three times more than expected and participation is constant. Which means that unemployment has started to fall although underemployment hasn’t budged. While the media commentators today (including myself) have been fairly upbeat I have been reminding the public in media interviews that I have done that broader labour underutilisation (sum of unemployment and underemployment) remains at 13.5 per cent. But optimistically the trend is now looking as though the aggregate unemployment rate may have peaked. So it is now to start looking beyond the peak.

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100-percent reserve banking and state banks

Today we examine two propositions: (a) 100-percent reserve banking; and (b) national government spending without taxation and debt issuance. Believe it or not the two propositions have been related in the debates over many years. Modern monetary theory (MMT) is agnostic to the first proposition although individuals within the paradigm have diverging views. However in the case of the second proposition it is central to MMT that a currency-issuing government has no revenue-constraint and should not issue debt to match net spending. Further, taxation is an effective tool for attenuating overall agggregate demand rather than raising revenue for a government that can spend regardless.

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What causes mass unemployment?

Today we consider the causes of mass unemployment of the sort that most nations are enduring at present. This also involves the consideration of the relationship between wages and employment. This is an area in economics that has been hotly contested across paradigm lines for years. Mainstream economic commentators still claim that the employment situation can be improved if wages are cut. They are wrong. Modern monetary theory (MMT) is clear – mass unemployment arises when the budget deficit is too low. To reduce unemployment you have to increase aggregate demand. If private spending growth declines then net public spending has to fill the gap. In engaging this debate, we also have to be careful about using experience in one sector to make generalisations about the overall macroeconomic outcomes that might accompany a policy change.

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When you’ve got friends like this … Part 1

… who needs enemies. I am forming the view that many so-called progressive economic think tanks and media outlets in the US are in fact nothing of the sort. Tonight’s blog is Part 1 in a series I will write but the series really started in November 2009 when I wrote about The enemies from within. Today I read two position pieces from self-proclaimed progressive writers which could have easily been written by any neo-liberal commentator. True, the rhetoric was guarded and there was talk about needing to worry about getting growth started again – but the message was clear – the US has dangerously high deficits and unsustainable debt levels and an exit plan is urgently required to take the fiscal position of the government bank into balance. Very sad.

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Spending multipliers

Several readers have E-mailed about the concept of a multiplier in macroeconomics particularly in light of comments I made yesterday about the current debate as to whether the deficits will be expansionary and whether it would be better to cut taxes rather than increase spending. There appears to be a lot of confusion about the most basic concepts involved so this blog seeks to address some of those issues. It is not a comprehensive literature review.

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One hell of a juxtaposition

Tonight we consider the tale of two countries with some other snippets of good taste included for interest. In the last few days the Japanese government has announced the largest fiscal stimulus in its modern era (since records have been kept) while Ireland announced its 2010 budget which has been characterised as the harshest in the republic’s history. Both countries are mired in recession with only the most modest signs of any recovery. So on the face of it this is one hell of a juxtaposition. What gives?

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When former politicians and bureaucrats get bored with golf …

What do you get when a bunch of former politicians who have an inflated sense of self-importance and cannot stay out of the public glare? Well one answer is nonsense. The related answer is the so-called Pew-Peterson Commission report Red Ink Rising, which was released in December 2009 with the by-line “A Call to Action to Stem the Mounting Federal Debt”. And with the Copenhagen climate change talks being the big public interest story of the week it was only a matter of time before soon goon started mapping the public debt-hysteria debate into the climate change debate to bring home the message to all of us that we are doomed unless we do something drastic. Its been quite a day down here!

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Lost in a macroeconomics textbook again

Today’s Australian newspaper, sadly our national daily carries a story – Stimulating our way into trouble – by Griffith University professor (and ex-federal treasury official) Tony Makin. I pity the students who have to study with him. The article continues the News Limited campaign against the government stimulus package and demonstrates the extent that is prepared to use the services of so-called experts (that is, titled mainstream economists) who seem prepared to grossly mislead the readership to advance their ideological strategy. Whatever it takes seems to be the strategy. Anyway, once again the mainstream macroeconomics textbook is called upon to make policy statements.

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Building bank reserves is not inflationary

Today I am working in Dubbo, which is in the western region of NSW and getting into the remote parts of the state. There is a great beauty to enjoy in remote Australia which often passes people by. My field trip is in relation to continuing work I am doing with indigenous communities in this region. I will report on this work in due course. But today’s blog continues the theme I developed yesterday on bank reserves. In yesterday’s blog – Building bank reserves will not expand credit – I examined the dynamics of bank reserves but left a few issues on hold because I ran out of time. One issue is the possible impact of expanding bank reserves on inflation. This is in part central to the mainstream hysteria at present about the likely legacies of the monetary policy response to the crisis. The conclusion is that everyone can relax – the only problem with the monetary policy response is that it will be ineffective and more fiscal policy effort is required.

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The comedy begins

The political debate in Australia is never very inspiring. But in the last few days it has reached new heights … that is, lows. The Federal Opposition has now decided to address its rock-bottom political support by changing its shadow front-bench significantly and installing some of the most conservative members they could drag out. The strategy is clearly to “talk tough” and “take the fight up to the government” and all that sort of thing. The only problem is that it is already turning the public debate into a comedy show. I predict this conservative configuration will talk their way into oblivion much faster than the previous shadow cabinet. In the process, we will have plenty to laugh about.

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Direct public job creation now being debated

In Sunday’s New York Times, the Room for Debate series focused on one of my favourite topics – Should Public-Sector Jobs Come First?. The debate turns out to be very disappointing because even the so-called progressive offerings fall short of advocating an effective solution to the jobs crisis. Only one implies an understanding that the policy design proposed should not be compromised by an errant understanding of the way the fiat monetary system operates. Proposals that assume there is a financial constraint on government will almost certainly be second-rate. The debate could have been energised had the NYT sought expert opinion from those that are developing and implementing large public sector employment programs.

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When I should have been reading Phantom comics

Today I was in Sydney for some meetings and also I attended the first sessions of the Society of Heterodox Economists conference. I took some papers with me to read on the train coming back to Newcastle. Sitting on the train for 3 hours presents a good opportunity to catch up on back-reading. While I would have been better off reading the Phantom comic that I had in my bag, I chose, instead, to read the latest fiscal analysis provided by the IMF. The paper I discuss here is typical of the whole debate at present. It cannot provide any evidence to advance its scary “deficit and public debt” vision, but it doesn’t let the facts get in the way of presenting it anyway. My professional assessment. These guys should get a real job.

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More calls for job creation … but then

In the last few days I have seen more calls from commentators for policy makers to take new initiatives to generate jobs and growth. Some of these calls have come from commentators and research centres that sit on the “progressive” side of the macroeconomic debate. Unfortunately, their proposals are always compromised by their demonstrated lack of understanding of how the monetary system operates. In my view these proposals actually undermine the need to advance an understanding that sovereign governments can create true full employment and should do so as a matter of urgency. By playing ball with the conservatives and choosing to focus on deficit outcomes these progressives divert the policy focus away from the real issues. In short, the federal budget deficit outcome should never be the focus of policy.

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Structural deficits and automatic stabilisers

In the coming period and probably years you should expect to hear, read and be submerged with mainstream economists coming out and assessing the structural budget deficit. Across most economies, these so-called “experts” will be arguing that the structural deficit in the nation is too high and deep cuts are needed to bring it into surplus. The importance of this debate is that they use the structural deficit estimates as an indicator of the fiscal stance being taken by the government and thus separate out the effect of the automatic stabilisers. The problem is that it is an inexact science. The mainstream approach is highly dependent on the NAIRU concept (see below) and thus will err on the side of concluding that the deficit is “too big” and “likely to cause inflation”, whereas it is probable that the deficit will be too small to underpin private savings and high levels of employment.

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Dubai is not a case of sovereign default

The Australian financial press today pushed the message “Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001”. Last time I knew, Dubai was an emirate and Argentina a sovereign nation. While the current crisis in Dubai is clearly an issue it is not an instance of sovereign default. Some research is required.

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An unholy gathering is emerging

I mentioned in yesterday’s blog that there is a growing number of deficit-terrorists out there who are trying to appear reasonable to separate themselves from the more loony Austrian-school fringe. They are appearing reasonable by saying that “now we should have deficits” but soon (unspecified) “we will need surpluses” to “pay back the excesses”. That sort of spurious reasoning. Even some self-styled progressives who want us to think they are both reasonable people and knowledgeable commentators are starting to emerge within this broad camp. But in general their arguments reflect, at best, an ignorance of how the monetary system operates. This unholy gathering will prove to be very damaging to the need for a broader understanding of how these operations and how government fiscal interventions impact.

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