Australian growth rate halves as obsession with budget surplus continues

Today the ABS released the Australian National Accounts – for the December 2011 quarter which shows that the quarterly real GDP growth rate was 0.4 per cent, down from 0.8 per cent in the September quarter. For the year, the Australian economy grew by 2.3 per cent down which when compared to trend (around 3.25 per cent) reveals how sluggish our recovery after the crisis has been. The worrying sign is that private business investment contracted and offset the growth coming from household consumption, net exports and inventory building. Growth is also being held back by the Government’s obsessive pursuit of a budget surplus in the coming fiscal year. The fiscal drag is damaging output and employment prospects and dampening expectations in the private sector. The growth rate is not strong enough to make a dent in the unemployment and underemployment ranks. The case for continued government support for higher growth remains especially with inflation now falling.

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Athens burned, while I played Sudoku

Today, I am back in Greece. Yesterday, there was a confidential in-house “Staff Note” leaked from the Institute of International Finance, which purported to estimate the costs of a disorderly default on Greek government debt. Most of the paper was about ECB and related “contingent liabilities” which summed to around €1 trillion. However, once you understand the nature of those “contingent liabilities” in the context of the capacity of the ECB as the currency-issuer in the EMU and compare them with the real losses being endured by the Greek economy and its people, then you soon realise that the Greek government should reintroduce its own currency immediately. The European elites, however, are too busy playing Sudoku to appreciate that, ultimately, their ideologically-motivated austerity will not only impoverish Greece, but will also cause their whole monetary system to collapse.

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Look after the unemployment, and the budget will look after itself

There was a Wall Street Journal article (March 5, 2012) – The High Cost of the Fed’s Cheap Money – which is full of statements like “could eventually lead to an economic calamity” etc. The WSJ article basically rehearses a confused form the old supply-side tradition of the pre-Great Depression era where the claim was that “supply creates its own demand” (so-called Say’s Law) which was shorthand for the proposition that flexible prices and interest rates would ensure that whatever was supplied would be purchased. The same sort of arguments were used in a recent lecture to Harvard EC10 students by the Director of the US Congressional Budget Office. It is extraordinary that these myths, which were part of the body of economic theory that led the world into the current crisis, still have currency. They should start by understanding what Keynes meant when he said “Look after the unemployment, and the budget will look after itself”.

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Saturday quiz – March 3, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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Some appalled economists – just missing the boat

In January 2011, 44 per cent of Spanish working people below the age of 25 were unemployed. A year later Eurostat report (in its March 1, 2012 publication) – Euro Indicators – that the rate has climbed to 49.9. For the overall labour force in Spain, the unemployment rate rose from 21.7 per cent to 23.3 per cent over the same period. That is Great Depression-type magnitudes. At the other end of the unemployment spectrum, currently, is The Netherlands. Their overall unemployment rate has risen from 4.3 per cent in January 2011 to 5 per cent in January 2012. Notwithstanding the massive underemployment in The Netherlands (almost 50 per cent of the working age population work part-time – average is less than 20 per cent for EU) and the large proportion of workers hidden from unemployment by disability support pensions – this is a low unemployment rate. And therein lies the rub. The Dutch Centraal Planning Bureau released its latest – Short-term forecast yesterday (March 1, 2012) which showed that over the next 4 years it will violate the current Stability and Growth Pact (SGP) and face fines under the Excessive Deficit Procedure. And to put a finer point on this – the Dutch government has been one of the more rabid proponents of fiscal austerity and one of the first to heel-click in line to sign Germany’s … sorry the EU’s fiscal compact. All of that should tell you that the current leadership in Europe has no viable solution to its crisis. Some French economists have come up with a solution. This blog considers their work and concludes they are on the right track but haven’t penetrated all the neo-liberal myths that they seek to highlight.

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Societies that exclude their youth will rue the day

The British Office of National Statistics released a new report yesterday (February 29, 2012) – Young people in work – 2012 – which provides a scary view of how austerity is impacting on the future British adults. It shows that the employment rates of 16-24 year olds in Britain have fallen dramatically in the least several years and that they are bearing the brunt of the recession. The evidence once again highlights the nonsense of imposing fiscal austerity on a nation that is struggling to generate private spending growth sufficient to provide ample employment growth. Once again, the myopia of fiscal austerity is staggering. What does the British government think that British society is going to look like in 20 years when its future adults are being excoriated by the lack of opportunity that the government policy is creating as a deliberate act? Collapsing youth employment rates mean that this cohort is being excluded from the activities which promote stability both in individual terms (self esteem etc) and societal terms. Societies that indulge in this sort of exclusion will rue the day.

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When common sense fails

I was at a social function last weekend and the conversation turned to economics – surprise surprise. I was the only professional economist in the group. I try very hard to avoid discussing economics in these circumstances because experience tells me that misunderstandings quickly occur as the “intuitive” or “common-sense” economists seek the floor. I would much rather talk about weeds growing than the sustainability of budget deficits in times like that. But, alas, someone said “but we’ve got a 50 million-dollar deficit who is going to pay for that?” Another member of the group, who is very articulate and fairly well-read in Modern Monetary Theory (MMT) but not a professional economist stepped in to save the day. She proceeded to explain how common sense is a dangerous guide to reality and that not all opinions should be given equal privilege in public discourse. The conversation deteriorated because the “deficit worrier” and others immediately personalised this observation and considered it to be a attack on their life’s experience. Notwithstanding the tenseness of the situation, it was an interesting demonstration of the flaws in logic that govern the way people think about economics and the way politicians exploit our (flawed) reliance on common sense. Our propensity to generalise from personal experience, as if the experience constitutes general knowledge, dominates the public debate.

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Age discrimination against our teenagers should end

I haven’t much time to write today – I’m off to Sydney later where I will be a speaker at the following event – Open Forum: Young and old-age discrimination and the economy. I will be sharing the podium was the Age Discrimination Commissioner of the Australian Human Rights Commission, a Federal government agency. The topic is how can Australian businesses and government make better use of our youth and senior citizens. As regular readers will know I regularly try to push the parlous state of the teenage labour market into the policy arena, with varying degrees of success. But today’s event is high-profile and provides a good platform for advancing these issues. This blog covers some of the issues that I will raise.

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The British government can never run out of money

Last week, the UK Office of National Statistics released their – Second Estimate of GDP Q4 2011 – which updates (once more information is available) the flash estimates that were released recently. The information confirms that the British economy went backwards in the fourth-quarter 2011 and confirmed that the September quarter 2011 growth was overestimated and the latest publication revised that downwards from 0.6 per cent to 0.5 per cent, a small revision but downwards nonetheless. There is now a real prospect of the economy entering a double-dip recession. The British government is now under pressure to revise its current budget strategy in order to prevent that probability. However the response of the British government (courtesy of the Chancellor) is to defend its ideological position with outright lies. The Chancellor claims that the British government can do nothing about the slide into recession because it is run out of money. Modern Monetary Theory (MMT) demonstrates its impossibility of that event occurring from a financial perspective. What the Chancellor really is telling the British people is that the government refuses to stop unemployment rising. Why the Opposition and the Press are not exposing these lies is a further problem.

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