The capacity of the state and the open economy – Part 1

Wolfgang Merkel wrote in his recent Op Ed (February 5, 2016) – Economy, Culture And Discourse: Social Democracy In A Cosmopolitanism Trap? – that “we are dealing with a partially deliberate, partially careless surrender of the state’s capacity to regulate and intervene in an economy that structurally creates socio-economic inequality and erodes the fundamental democratic principle of political equality”. I highlight, the “partially deliberate, partially careless surrender” description of what has occurred over the last several decades as neo-liberalism has gained traction. Today’s blog continues my series that will form the content for my next book (due out later this year) about the impacts of globalisation on the capacities of the nation state. Our contention (I am writing this with Italian journalist and author Thomas Fazi) is that there has been no diminuition in the power of the state to impact on the domestic economy. The neo-liberal era has seen many commentators deny that proposition, yet, knowingly advocate use of these powers to further advantage capital at the expense of labour. The state is still central to the picture – it just helps capital more and workers less than it did during the full employment period in the Post World War II decades.

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The Weekend Quiz – February 6-7, 2016 – answers and discussion

Here are the answers with discussion for yesterday’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 PBO – hard to take seriously – is it vaudeville or what?

The Australian government is currently engaging the population in an agonising discussion about taxation reform and proposed spending cuts. It is almost vaudeville when the Treasurer, or the Opposition Shadow Treasurer or some business leader gets up and gives us their ‘two bob’s worth’ of nonsense. We have a “revenue problem”, “no we don’t, we have a revenue problem”, “we need to raise taxes”, “no we don’t we need to cut spending”. Then the government appoints a former investment banker as Treasury Department head and he starts raving on about how government should limit its spending to a maximum of 25 per cent of GDP without any argument being provided as to why that limit is meaningful, how it is derived, how it can be achieved if desirable, and all the rest of it. Sounds like a good idea. The Eurozone has destructive fiscal rules (Stability and Growth Pact) that we just whipped out of thin air and sounded important. We may as well, like dumb sheep, follow the race to the bottom. Meanwhile, real GDP growth falls further below trend and the disadvantaged workers endure elevated levels of unemployment and hardship. It is enough to drive one to drink. And then yesterday, the Australian Parliamentary Budget Office (PBO), which is one of those neo-liberal concoctions introduced by governments around the world to deflect responsibility for decisions from the politicians and frame the public debate in a particular way, published a new report (February 3, 2016) – National fiscal outlook – Report no. 01/2016. The mind boggles how people can write this stuff and go homeat night and take themselves seriously.

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The reality of Germany and the buffoons in Brussels intervenes …

This week, I seem to have been focused on central banking this week, which is not my favourite topic, but is all the rage over the last several days given the decision of the Bank of Japan to use negative interest rates on any new bank reserves and then continue to pump reserves into the system via its so-called QQE policy (swapping public and corporate bonds for bank reserves), and then imposing a tax on the reserves so created. Crazy is just one euphemism which comes to mind. So still on that theme and remembering that the Bank of Japan explicitly stated that the combination of QQE and the tax on reserves (they call it a negative interest rate – same thing) was introduced to increase the inflation rate back up towards its target of 2 per cent per annum, I thought the following paper was interesting. The paper from the Research Division of the Federal Reserve Bank of St Louis (published July 2015) – Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay – considers the unconventional monetary monetary policy interventions taken by the US Federal Reserve Bank between 2007 and 2009 and comes to the conclusion that “there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity”. Maybe the Bank of Japan and the ECB bosses should sent this researcher an E-mail and request his evidence. They don’t seem to have been able to escape from the straitjacket of their neo-liberal Groupthink.

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The ECB could stand on its head and not have much impact

As the Bank of Japan began its hopeless quest to stimulate growth with negative interest rates (see my blog yesterday – The folly of negative interest rates on bank reserves), the latest data from the ECB came out on lending to households and non-financial institutions. It tells an interesting story. The story has to be framed within the knowledge that oil prices have now fallen by some 77 per cent. But the major factor that is not usually mentioned when commentators talk about ECB policy changes and the likely impacts is the on-going and manic fiscal austerity in the Eurozone, which puts the whole region in a recession-type straitjacket, where monetary policy changes, weak in impact at best, have little hope of achieving anything positive. The logic of the reliance on monetary policy for counter-stabilisation is also built on a failure to understand what drives the economic cycle. The belief that banks will suddenly lend just because the central bank imposes a tax on their reserve deposits (negative interest rates) or offers them cheap loans to on-lend to households and firms is misplaced. Banks do not loan out their reserves and firms will not borrow from banks no matter how cheap the money is if there are no profitable opportunities to pursue. It is time the authorities abandoned their neo-liberal myths and got real. The Eurozone needs a massive fiscal expansion and it needed it 7 or 8 years ago. The ECB is the only institution in the flawed system that can provide the financial resources to make that happen and it could, with Brussels approval, bypass the ‘no bailout’ clauses in the Treaty to make that happen. It won’t, and the Eurozone will muddle on with increased poverty rates and rising social instability. What folly!

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The folly of negative interest rates on bank reserves

On Friday (January 29, 2016), the Bank of Japan issued a seven-page document – Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” – which left me confounded. Do they actually know what they are doing or not? For years, the liquidity management conducted by the operations desk at the Bank has been impeccable, in the sense that they have maintained near zero interest rates in the face of growing fiscal deficits. There was always some doubt when they were the early users of quantitative easing which many claimed was to provide the banks with more reserves so that they would increase their lending to the private domestic sector in order to stimulate growth, after many years of rather moderate real performance to say the least. Of course, banks are not reserve constrained in their lending so the the only way that this aspect of ‘non-conventional’ monetary policy would be stimulatory would be if investment and purchasers of consumer durable were motivated to borrow at the lower interest rates that the asset swap (bonds for reserves) generated. The evidence is that the stimulus impact has been low and that there are many other factors other than falling interest rates governing whether borrowers will approach their banks for loans. In their latest announcement, the logic appears to be that by reducing reserves they will induce banks to lend more. Go figure that one out!

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The Weekend Quiz – January 30, 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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Listening to past Treasurers is a dangerous past-time

On January 23, 2016, a former Australian Treasurer Peter Costello (1996-2007) gave a speech to the Young Liberals (the youth movement of the conservative party in Australia) – Balanced Budgets as a Youth Policy – which was sad in the sense that some people never get over being dumped as out of touch and unpopular and was ridiculous in the sense that it is a denial of reality and macroeconomic understanding. He mounted the same old arguments that have been used to justify the pursuit of fiscal surpluses (grandchildren etc) but failed to recognise that his period as Treasurer was abnormal in terms of our history and left the nation exposed to the GFC as a result of the massive buildup in private sector debt over his period of tenure. The only reason he achieved the surpluses was because growth was driven by the household credit binge which ultimately proved to be unsustainable. Fiscal deficits are historically normal and should not be resisted. They are the mirror image in a national accounting sense of non-government surpluses, which historically, have proven to be the best basis for sustained growth and low unemployment.

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