US central bank decision to raise interest rates doesn’t make much sense

On December 14, 2016, the US Federal Reserve Bank pushed up its policy target interest rate from 0.5 per cent to 0.75 per cent. In its – Press Release – it said that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. It acknowledged that “business investment has remained soft”. But it believes that even though it has increased the rate by 25 basis points, there is still room for “some further strengthening in labor market conditions and a return to 2 percent inflation”. The logic is very confused in my view. First, the US labour market is weak (in inflation pressure terms) notwithstanding the reduced official unemployment rate. Real wages growth has been effectively zero and the broad measure of labour underutilisation (U6) remains at 9.3 per cent (as at November). Second, the emphasis on central bank policy shifts is based on a view that elements of total spending are sensitive to interest rate changes and by increasing rates, price pressures will attenuated. The only problem with that logic is that all the elements of spending in the US (private investment, household durable goods) are hardly setting the world on fire. Private investment, in particular, is in poor shape. So by the US Federal Reserve bank’s own logic (which I do not share) it should be expecting on-going further poor investment growth, which will further undermine potential productive capacity. Not a sound strategy at all.

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The Weekend Quiz – December 17-18, 2016 – answers and discussion

Here are the answers with discussion for this Weekend’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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Australian labour market – weak and in need of fiscal stimulus

The latest labour force data released today by the Australian Bureau of Statistics – Labour Force data – for November 2016 shows total employment barely increased and the ABS said the trend to part-time work remains. Over the last 12 months, Australia has produced only 84.9 thousand (net) jobs with 107.2 thousand of them being part-time jobs. In other words, full-time employment has fallen by 22.2 thousand jobs over the same period. This status as the nation of part-time employment growth carries many attendant negative consequences – poor income growth, precarious work, lack of skill development etc. The teenage labour market remains in a poor state and was treading water in November. It requires urgent policy intervention. Overall, with weak private investment now on-going and real GDP contracting (in the September-quarter), the Australian labour market is weak and there needs to be a policy shift. We will learn next week when the Federal government makes its Mid-Year Fiscal statement whether they have taken heed of the message in the data over the last few months. Australia needs a rather sizeable fiscal stimulus. My bet is that the Government will not have the good sense to introduce this required boost to total spending. But the deteriorating data is staring us all in the face now! There is no room for nuance. It is at the stage where the Federal treasurer should resign and admit his failure (see below).

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Austerity is the enemy of our grandchildren as public infrastructure degrades

The Australian economics media is awash with claims that Australia will likely lose its AAA government bond credit rating next week in the wake of last week’s disastrous GDP figures (negative growth recorded in the September-quarter 2016) and the widening fiscal deficit at the federal level as tax revenue slumped 15.3 per cent in the September-quarter and the trade account deficit widened. This is a non-news story really. I was asked by a journalist to comment on it the other day and I told him that he would be better-off sorting his socks in his drawer than wasting any time on this topic. A real problem, which, in part is being created by this obsession with ratings, is the massive and growing shortfall in public infrastructure in Australia and other nations as governments cut back public investment in an attempt to reduce fiscal deficits. The reality is this: What the credit rating agencies do is irrelevant to the Australian government. What is not irrelevant is the growth in public infrastructure. It is our legacy to our grandchildren. With populations getting older and dependency ratios rising, the next generations will have to be more productive than the current generation if standards of living are to be maintained, much less, increased. That will require better public infrastructure. Our stupid austerity mindset – justified by on-going lies about the government running out of money and being degraded by the rating agencies – is undermining the very strategies and actions that we require to benefit our children, their children and ourselves as we age. We are a really stupid nation.

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Cash transfers are not squandered on booze but do not replace the need for jobs

Some years ago I was asked to design a framework for the implementation of minimum wage system in South Africa as part of an ILO project my research group was involved. We were evaluating the first five years of the Expanded Public Works Programme in South Africa, which was a cut-down employment guarantee program (limited by supply-side constraints on public expenditure largely conditioned by the bullying of the South African government by the IMF). One of the issues I had to deal with was the belief among many economists that the existing cash transfer system introduced by the South African government after 1994 should be expanded into a full-blown Basic Income Guarantee and that any notion of employment guarantees should be rejected. Our work demonstrated quite clearly (in my view) the flawed logic in this argument. The cash transfer system was productive as it stood but was no reasonably extensible into a widespread income guarantee without significant negative consequences. The creation of an employment guarantee scheme to absorb the social transfers and leave them as supplemental to cope with varying family structures was a much better option. That conclusion holds for less developed nations and advanced nations alike.

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Australia – where victims become criminals

Last Monday’s blog – I, Daniel Blake – essential viewing – provided a review of the latest Ken Loach movie and put the institutional details with respect to the inhumane way the unemployment and sickness benefit support system had evolved in Britain in the context of earlier developments in Australia which pioneered this nasty ill-treatment of disadvantaged citizens. In today’s blog, I am updating the situation in Australia and discussing some recent (and shocking) data, which has come to light courtesy of the Senate estimates process within the Australian Parliament. There is one institution within Australia’s Parliamentary system that hasn’t fallen foul of the lying theatrics that define the main legislative process. I refer to the Senate Finance and Public Administration Legislation Committee which forces government bureaucrats to provide detailed data on contentious issues, which the ruling party (the government) prefers not to release or draw attention to. A most recent example demonstrates the total failure of a key aspect of the income support system in Australia and the reason is simple – a neo-liberal Groupthink has crippled the capacity of the Australian government to do anything constructive and obvious. Ideology allows policy makers to enact cruel and distasteful policy machinations on those who have all but nothing. Australia – where victims become criminals. It is disgusting really and makes one ashamed to show one’s passport when travelling.

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The Weekend Quiz – December 10-11, 2016 – answers and discussion

Here are the answers with discussion for this Weekend’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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The ‘post-truth’ era – nothing new in mainstream economics

The dictionary says Post Truth is the “fact or state of being post-truth; a time period or situation in which facts have become less important than emotional persuasion”. But I prefer to be direct – not to mince words – Post Truth is lying, plain and simple. It is making stuff up that is untrue, in denial of the facts, and, in cases where volition drives the lying, using strategic and well-thought out tools of psychological persuasion, fear, threats etc to make it look as though the statements are factual rather than lies. The interesting thing for me at the moment in this respect is that we are increasingly being told we are now in this Post Truth era. That social media has created this Post Truth era and that something should be done about it. Oxford English Dictionary announced recently that the Word of the Year 2016 is…, you got it, “post-truth” which they claim is a “concept … [which] … has been in existence for the past decade”. Its use has apparently “spiked in frequency this year” as a result of the Brexit referendum and the US election. Two things then are worth noting. First, there is nothing new about the idea of lying to influence public opinion. Indeed, as I will explain (briefly) the whole edifice of mainstream economics, including New Keynesian economics has been ‘post-truth’ since its inception. Second, the fact that it is getting attention now is because the establishment are starting to feel the pinch – their usual media power is losing traction with the democratising influences of the Internet – and their cosy worlds of influence are under threat from a rabble. And this applies to so-called progressive Left (the socialist politicians in Europe, the Labour politicians in Australia, Britain and elsewhere) who have so bought into the neo-liberal myth machine that they cannot understand why they are now losing support from their traditional sources (working class people). The ‘post-truth’ era is apparently upon us. But the reality is that there is nothing new about lying in mainstream economics. It is built upon a lie. It is just that the lying that is spreading on the Internet (‘fake news sites’) are damaging the establishment. That is why they are now complaining. They have never complained about the incessant lying from the economics profession.

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