Democrats in glass houses – you know the rest!

So-called US ‘progressive’ economists arena flap at the moment after Gerald Friedman, an academic economist at UMass released a report on January 28, 2016 – What would Sanders do? Estimating the economic impact of Sanders programs – which suggested that the US economy could perform significantly better and deliver substantially improved outcomes for those disadvantaged citizens with Bernie Sanders in the White House. When I say progressive, I mean those who would consider themselves Democrat Party insiders (former Chairs of the US Council of Economic Advisers under previous Democratic administrations). Last week (February 17, 2016), they created a special Internet site to publish – An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman – which claimed that “no credible economic research supports economic impacts” proposed by Friedman and that “Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic”. As if the policy-making and arithmetic of these attention-seeking (neo-liberal) Democrat insiders is anything to be guided by.

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The Weekend Quiz – February 20-21, 2016 – answers and discussion

Here are the answers with discussion for the Weekend 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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Australian labour market – looking pretty wan indeed

Last month, employment growth was basically flat (slightly negative). Participation decreased. The signs were ominous. Today’s release of the – Labour Force data – for January 2016 by the Australian Bureau of Statistics show that those ominous signs have worsened. Total employment growth fell again with massive drops in full-time jobs, unemployment increased sharply and the unemployment rose by 0.2 per cent on the back of the declining employment and steady participation. The teenage labour market continued to deteriorate with the adjusted unemployment rate (taking into account the sharp fall in participation since the downturn) of 28.2 per cent rather than the official estimate for January 2016 of 18.3 per cent. Overall, with private investment forecast to decline further over the next 12 months, the Australian labour market is looking pretty wan indeed.

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The impossibility theorem that beguiles the Left

Some years ago (June 27, 2007), Harvard economist Dani Rodrik outlined what he called his “impossibility theorem”, which said that “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full”. In his brief article – The inescapable trilemma of the world economy – he made the case that “deep economic integration required we eliminate all transaction costs … in … cross-border dealings” and that “Nation-states are a fundamental source of such transaction costs”. Ergo, if you want ‘deep’ integration then the Nation-state has to surrender. His “trilemma” guides his view of how the “international economic system” should be reformed. He think that if “want more globalization, we must either give up some democracy or some national sovereignty”. This view has been adopted by political parties as if the conceptual framework is in some way binding. The trilemma has been skillfully sold as a narrative by right-wing think tanks and others who serve the interests of capital. The so-called progressive politicians have fallen into the trap and have shifted their political parties closer and closer to their right-wing opponents, such that now it is hard to distinguish between the major parties in most nations. The reality is that while the impossibility theorem beguiles the Left – its applicability as a binding constraint on government is limited. It is as vapid as the statements made by these career politicians on both sides of politics that they serve the people.

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The European circus continues

Yesterday, I briefly examined how a pack of big-noting financial market traders were trapped in stupidity by patterned behaviour and self-reinforcing group dynamics (aka Groupthink). Today, we consider the neo-liberal Groupthink that continues to trap political leaders and policy makers in Europe into a web of denial and stupidity.

In both case, innocent people have suffered huge negative impacts while, by and large, the idiots have escaped fairly unscathed. The recent data from Eurostat shows that growth is fairly flat in the Eurozone and industrial production is in recession. It also shows that the banking system is in deep jeopardy and the so-called reforms that were introduced post-GFC are not considered robust by investors. With massive bank deposit flight going on and banking share prices plunging, it is clear that the ‘markets’ have lost faith in the financial viability of the Eurozone. Meanwhile. Mario Draghi winds the key up in his back and tells the world that everything is fine and the ECB is on top of the situation. With chaos descending on the monetary union again, the ECB cannot even achieve its single purpose – a stable 2 per cent inflation rate. It has failed to even achieve that over the last four years. One couldn’t write this sort of stuff if they were trying.

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It is fuelled by stupidity … That’s not stupidity that’s fraud

Yesterday, we saw the movie – The Big Short – which is entertaining to say the least but depressing in its message that widespread corruption in the corporate and public sectors not only goes unpunished, but is handsomely rewarded. I have also been watching the documentary series Making a Murderer – which follows the stunning and mystery-laded treatment of an American man caught up in a corrupt criminal justice system in the US state of Wisconsin. In that series, it appears that the criminals are those on the wrong side of the bars. I thought The Big Short was the macro version of Making a Murderer, which is a microscopic account of a small town and its nefarious police and legal fraternity. But apart from the corrupt and plainly unethical conduct exhibited by Wall Street, the rating agencies and the bank that fed on all the ridiculous products that were created to make complex what, in fact, was a simple strategy – make money of real estate, there was also plain dumbness at the centre of the collapse and the crisis. Dumbness created by a dangerous Groupthink where patterned behaviour was inculcated into the financial system and, ultimately, came back to bite most of us. While the representations of cocky, sharp, bright financial market traders with PhDs in physics or mathematics in a sequence of movies about the GFC and its aftermath lead to the conclusion that these conspirators knew what they were doing and were happy to profit for themselves at the expense of those they considered to be dumber, a recent academic research study has revealed that the traders themselves were oblivious to what they were doing and became entranced themselves by their own image. That is what Groupthink does – it builds an impervious layer for those trapped inside the group – they are insulated from reality, consistent logic, criticism and behave in self-reinforcing ways that may involve enlarged deviations from anything reasonable, smart or evidence based. Groupthink makes people dumb and compliant. The GFC was in no small measure the product of that sort of dumb compliance, which is not to reduce the enormity of the corruption involved. It, however, does reinforce my view that we should ban all these speculative products that provide no beneficial input to the real economy, if only because the sociopaths that are attracted to creating and selling them are too dumb to know what they are doing.

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The Weekend Quiz – February 13-14, 2016 – answers and discussion

Here are the answers and discussion for the Weekend 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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Ultimately, real resource availability constrains prosperity

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.

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