Yesterday I promised to stay clear of analysing the US economy for a while given how much mis-information is flowing out of there. Today I break that promise to myself. Last week (July 7, 2011) the rabid US Republican Paul Ryan released a “House Budget Committee document” – The Debt Overhang and the U.S. Jobs Malaise – which drew on work produced by Stanford Professor John B. Taylor. You can sort of understand politicians who lie and embellish but when a text-book writing, senior economic professors misuses our art to misrepresent the situation you have to wonder. Whoever Mark Twain got that phrase “Lies, damned lies, and statistics” from they must have been reading Taylor’s blog in recent years.

I have always been sceptical of the way the US Congressional Budget Office computes its structural deficit decomposition – that is, separates out the cyclical effects (the automatic stabilisers) from the underlying policy settings. I have written about that before. This came back to my attention span again today after I read a column in the New York Times (July 10, 2011) which reported that an “extraordinary amount of personal income” for Americans is now “coming from the US government”. That combined with a really stupid Bloomberg editorial yesterday (July 11, 2011) led me to investigate further. What I found hardly surprised me but reinforced how the American people are being let down by their leaders with the financial press mostly reinforcing the lies.

The US Bureau of Labor Statistics published the latest labour force data on Friday and the results can be summarised in one word – shocking. Meanwhile the so-called US political leadership met at the White House to determine how they could make sure the US labour market deteriorated even faster than the latest BLS data shows it is. Other senior White House officials appeared on American TV networks engaging in what can only be related to early teenage male behaviour – ours will be bigger than our opponents. The ours being the trillions they plan to cut from the US federal deficit. With the US labour market in clear decline and the top level talks being about trillions of cuts in public spending you can only conclude one thing – the US leadership has gone missing.

A few things came up today which I thought I would write about – albeit briefly (but then that is all relative I suppose). In general I am scaling down blog activity on Fridays. But today the Australian government released a final evaluation report on one of its big fiscal stimulus infrastructure projects. The Report attracted the typical biased headlines – massive government waste. Over in the UK, the wreck of News Limited’s News of the World proved – once again – that the private sector cannot be trusted to self-regulate resonating what we learned from the financial crash but seem to have forgotten already. These two observations are related and so today I consider the notion of government waste.

There are several different strands of mainstream economic thinking and these differences manifest in the way they think about monetary and fiscal policy. The extreme mainstream position is that fiscal policy is ineffective because it 100 per cent crowds out private spending. The only role for aggregate policy then is to allow an independent (politically speaking) central bank to adjust interest rates up and down to regulate inflation (via expectations). There isn’t much for economists to do if that view was accurate. Then there are mainstreamers who think that budget deficits are generally damaging to private spending because they drive up allegedly drive up interest rates and crowd out private spending, the latter which, is considered to be more efficient because it is backed by the so-called wisdom of the “market”. So generally monetary policy should be used to stabilise aggregate demand such that inflation is stable. However, this group of economists find some time for budget deficits when there is a “liquidity trap”. From the perspective of Modern Monetary Theory (MMT) – whether there is a liquidity trap or not is irrelevant.

I have been busy today writing computer code to reconfigure a new server to replace our dearly departed main server. Once I get embroiled in that sort of process I recall how much I forget. Fortunately, it comes back. But the good news is that we have a new machine working now and are retrieving material from various backups. Anyway, that seemingly pedestrian activity is, in fact, a pleasant relief from reading what is out there in the economics media masquerading as informed comment. One of the worst articles for 2011 so far was in today’s Wall Street Journal which tried to introduce a new notion of crowding out – that deficits are forcing foreign investment into government bonds at the expense of private capital formation. The authors then applied the usual neo-liberal nonsense that only private markets can allocated financial flows productively to conclude that the deficits are undermining growth in the US and destroying jobs. Their analysis not only stretches the empirical truth but also conceptually gets things back-to-front.