The Weekend Quiz – February 4-5, 2017 – 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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There is hope – neo-liberalism is an historical aberration

Another lesson from history coming up. People of my generation studied the great books by Charles Dickens, which apart from their literary form, left an indelible impression of life in England during the period covered by the 1834 Poor Law. We also read George Orwell’s account of working class life in Northern England in the pre-World War 2 period. These impressions meant that we heralded in the creation of comprehensive welfare states in the Post World War 2 period as evolutionary innovations made possible by increasing national prosperity. We formed a common belief that this prosperity allowed us to escape the sort of conditions that Dickens was describing in early industrial England. And if prosperity fell, we would have to rein in some of the generosity that the welfare state systems provide. How many times have you read or heard some politician or corporate lobbyist claim that advanced nations, with fiat currencies, can no longer ‘afford’ to fund comprehensive welfare states that protect the poorest citizens in their societies. Many of these speeches are made at glittering functions where business types enjoy sumptuous lunches with plenty of wine and fine food and listen to politicians talk about running out of money and the need to pull our belts in. The arguments are used to attack the comprehensive welfare systems that emerged in the post World War 2 period as governments took responsibility for improving the plight of the poor. But, an understanding of history allows us to appreciate that the modern welfare state was nothing particularly new. There had been a comprehensive welfare support system in place in Britain for 300 years before the 1834 Poor Laws ended that system. This should give us hope – 1601 Poor Law (comprehensive welfare system) -> 1834 Poor Law Amendment (demolished it and blamed the poor for their plight) -> Modern Post World War 2 welfare states (comprehensive welfare system recognising systemic failure rather than individual blame) -> neo-liberalism (back to the 1834 mentality) -> ???? – hopefully another progressive reaction to the greed driving the current system.

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The Italian elites knew all along that the Eurozone would be a disaster

There is often a discussion about whether politicians and government officials introduce policy changes that end up being damaging to the well-being of the people are ignorant or wilful. It is sometimes hard to discern what the agendas are and who knows or understands what. The release of the US Central Intelligence Agency’s declassified report – Economic Intelligence Weekly Review 9 November 1978 – tells us a lot about the deliberate deception that goes on where the citizens are kept in the dark and the politicians deliberately make decisions that they know are not in the best interests of the nation. The questions then are why do they do that and what can citizens do about it? In the case of Italy – and the decision to enter the European Monetary System (EMS) in 1978, which was the precursor to the Eurozone, the motivations are fairly apparent. They knew that the EMS would not be in the best interests of Italy from an economic standpoint but were lured by the ‘European dream’. This is the idea that ‘Europe’ (by which we mean the formal European Union) is a representation of political stability and sophistication. The southern European states never felt part of ‘Europe’ and considered that their own political stability and oversight of corrupt politicians would improve if they went along with any idea proposed by the European Union. Italy had been a foundation state but still doubted their own legitimacy. The neo-liberals that were taking over the European integration process by the late 1970s sold this line to subtlety coerce these nations into joining up. It worked. But the polity and the technocrats knew all along that entry into the EMS and later the Eurozone was not in Italy’s best economic interests.

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Another Milton Friedman legacy bites the dust

Milton Friedman and his gang at Chicago, including the ‘boys’ that went back and put their ‘free market’ wrecking ball through Chile under the butcher Pinochet, have really left a mess of confusion and lies behind in the hallowed halls of the academy, which in the 1970s seeped out, like slime, into the central banks and the treasury departments of the world. The overall intent of the literature they developed was to force governments to abandon so-called fiscal activism (the discretionary use of government spending and taxation policy to fine-tune total spending so as to achieve full employment), and, instead, empower central banks to disregard mass unemployment and fight inflation first. Several strands of their work – the Monetarist claim that aggregate policy should be reduced to a focus on the central bank controlling the money supply to control inflation (the market would deliver the rest (high employment and economic growth, etc); the promotion of a ‘natural rate of unemployment’ such that governments who tried to reduce the unemployment rate would only accelerate inflation; and the so-called Permanent Income Hypothesis (households ignored short-term movements in income when determining consumption spending), and others – were woven together to form a anti-government phalanx. Later, absurd notions such as rational expectations and real business cycles were added to the litany of Monetarist myths, which indoctrinated graduate students (who became policy makers) even further in the cause. Over time, his damaging legacy has been eroded by researchers and empirical facts but like all tight Groupthink communities the inner sanctum remain faithful and so the research findings haven’t permeated into major shifts in the academy. It will come – but these paradigm shifts take time.

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Australian Labor Party fails the fiscal test – badly

I guess the venality of the new US Presidency isn’t creating enough news for the Australian press. On January 29, 2017, the Fairfax press wheeled out the veritable debt scaremongering in this article – Scott Morrison to lift credit limit as Australia’s debt hurtles towards $500 billion – reporting that the Australian government “will be forced to lift its own self-imposed credit limit in the coming months as debt hurtles towards half-a-trillion dollars”. Instead of writing about how stupid and unnecessary this ‘self-imposed limit’ is, the journalist wanted to talk about the disaster that awaits us as the debt of the currency issuing government “hurtles” like some asteroid to its death towards half-a-trillion dollars. As I said, must have been a day that imagination in the journalistic world was lacking. The worst part of the story is not the idiocy of its logic or the fact that it links to an inane Australian Debt Clock homepage, but, rather, the reported response from the Labor Party Shadow Treasurer. The Labor party is meant to represent the workers and claims to be the progressive force in Australian politics. That ladies and gentlemen is the sick joke of all time. This is a party that has abandoned its traditional remit (to defend the well-being of workers) and instead spouts neo-liberal gibberish without knowing it.

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The Weekend Quiz – January 28-29, 2017 – 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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Upward mobility declines sharply as the rich make off with the growth

Late last year (December 2016), an interesting academic research paper was released by the National Bureau of Economic Research – The Fading American Dream: Trends in Absolute Income Mobility Since 1940 – which provides stark evidence of the way in which this neo-liberal era is panning out and suppressing the opportunities for the least advantaged. One of the constantly repeating claims made by conservatives is that if governments run deficits they are really undermining the future for their children and their children. The claim is that while the current generation is living it up (deficits are tantamount in this narrative to living a profligate existence), the next generations will have to pay for it via higher taxes and reduced services.It is a bizarre argument given that each generation chooses its own tax burden and we cannot transfer real resources through time. There is truth in the argument that if the current generation imposes terminal damage to our natural environment then we are diminishing the prospects for the future. But that is not the point that the neo-liberals make. Indeed, there is a strong positive relationship between conservative views of fiscal policy (deficits) and the propensity to engage in climate change denial. Recently released research is now showing that around 50 per cent of American children born in 1980 have incomes higher than their parents compared to 90 per cent born in 1940. The so-called ‘American Dream’ is looking like a nightmare. Other research has shown that the bottom 50 per cent of the US income distribution have not enjoyed any of the growth since 1980 and that the top-end-of-town has increased its share of income from 12 per cent in 1980s to 20 per cent in 2014. These shifts are the result of deliberate policy changes and inaction by governments, increasingly co-opted by the rich to serve their interests at the expense of the broader societal well-being. Revolutions have occurred for less.

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Back to the future – employment freezes – they only degrade services

A report in the The Washington Post (January 23, 2017) – The Trump administration just told a whopper about the size of the federal workforce – caught my attention earlier this week because it cut across some work I had been doing on public employment. The headline is self-explanatory – the accusation was that Sean Spicer lied in his first press briefing following the inauguration of the new President. The reporter in question (Christopher Ingraham) promoted his article with a Tweet and accompanying image which was then circulated widely on the Internet. The graph is what attracted my attention given that I rarely read the Washington Post, since it sold pages to the likes of Peter Peterson and allowed propaganda to parade as news. In this case, the problem was that the graph provided was highly misleading and didn’t refute anything that Sean Spicer had said about US federal government employment. Spicer had lied. But the Washington Post tweet didn’t prove that. This failing highlights an often-made confusion in the public – the difference between proportions and levels and the way graphs can lure us into wrongful conclusions. The sort of puzzle that young students in statistics are taught to work through. The other point is that employment freezes degrade public services and end up not saving cash anyway.

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