There was an interesting forum in the The Economist Magazine on August 11, 2010 which considered the question – What actions should the Fed be taking?. The Economist assembled a group of academic economists (mainly) and the opinions expressed largely will make any person who understands how the monetary system operates and what the current problem is shudder in disbelief. What the discussion reinforces is that the mainstream economists really have failed to understand what the crisis was all about and do not comprehend the nature of the solution. Most of the contributions are just mindless repetition of what you might find in any mainstream macroeconomics textbook. It is very scary that these characters continue to be heard. If only the citizens knew what was going on!

Next Saturday (August 21, 2010) Australia gets to choose a new federal government which will govern for the next three years. These are crucial years because the economy is still mired in the uncertainty that accompanied the financial crisis and private spending is still very subdued. Growth around the world is still being supported by fiscal stimulus and without it economic activity will decline again. The majority of the economic indicators in Australia and elsewhere are pointing to a new slowdown as the fiscal stimulus wanes. So it is absolutely essential for the next Australian government to maintain strong fiscal support. The only problem is that both the major parties are having a battle to win votes on the platform of who can get the biggest budget surplus in the shortest period of time. It doesn’t bear thinking about. The conclusion is that none of the main parties are worthy of a vote. And the third party in contention (at least for the balance of power) – The Greens – are similarly blighted when it comes to macroeconomic policy. How did we get into this mess?

Today I am catching up on things I read last week. Each year, there are various publications provided to high school students telling them about all the programs that are on offer at Universities. The prospective students use these publications to help them decide which program they want to pursue after high school and at which university or other higher educational establishment they might want to pursue it at. There is a lot of lobbying by institutions to get favourable reviews. But there is never a catalogue published which advises students where not to study. So today I am noting three economics departments which should be on the blacklist of any student who is considering undertaking the studies in that discipline. They are on my blacklist because of the questionable competency of at least some of their staff members. I will expand this list over time!

I have been in Sydney today for meetings. I caught an early train and then back again in the afternoon. Trains journeys are great times to read and write and this blog has been written while crossing the countryside (Sydney is nearly 3 hours south of Newcastle by train). The trip is slower than car because the route is still largely based on the first path they devised through the mountains and waterways that lie between the two cities. The curves in places do not permit the train to go faster. The government is promising however a fast train with a much more direct path (up the F3 freeway I guess). Anyway, several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki – The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki’s argument given that it is often raised by progressives as a case against effective fiscal intervention.

The policy balance continues to be wrong in the US and elsewhere. While central banks are politically “free” to change their policy settings, fiscal authorities appear to be hamstrung by some absurd politics at present. In the midst of economic pain and suffering, governments (and oppositions) are proposing policy settings which will worsen that pain. They then sell the message that more pain will deliver good outcomes to their electorates without having a clue whether that it true or not. In doing so they defy all empirical experience and rely on defunct and failed theory for their authority. It is as if “They’re just sticking a finger in the air and guessing”. The other tragedy in all of this is that the monetary policy changes that have been invoked are largely ineffective in terms of expanding aggregate demand. This is in contradistinction to fiscal policy which is very effective in expanding spending, if used properly. Of-course, this policy mayhem is just a reflection of the dominance of the neo-liberal paradigm which actively eschews effective government involvement in the economy.

Every day now as the Australian federal election day approaches (August 21) the calls for fiscal austerity increase and the justifications become further removed from reality. I note The Greens, who are held out as our only hope are still running their neo-liberal line that budgets should be balanced over the cycle (see Neo-liberals invade The Greens! for more discussion on that). But the US political scene is even more moribund than ours if that is possible. Even the progressives are claiming there is a fiscal crisis. The facts speak otherwise.