Today I am continuing my recent theme of considering the flaws in the standard progressive attack on neo-liberalism. I will write sometime about manufacturing but it is Sunday and it has been a beautiful day here and I don’t feel like setting off the flamethrowers out there that clearly think manufacturing is important. It might be, but the standard arguments are based on a vertically integrated conception of the sector that we haven’t had for years anyway. But later. Today, I consider the “public debt is good” approach that progressive use to counter the manic “public debt is always bad” arguments proferred by the mainstream of my profession.

A number of readers write to me asking me about the applicability of modern monetary theory (MMT) to less developed economies and open economies generally. The issues are not entirely the same for both cases but there is a strong commonality. The aim of this blog is to advance the understanding of how MMT deals with open economy issues. They remain mysterious to most people and grossly misrepresented by those who claim to understand.

This is the first of a few blogs that I will write about asset bubbles and modern monetary theory (MMT). The point came up this week in a comment posted by Sean Carmody in response to my blog – Operational design arising from modern monetary theory. It was also raised in the current debate about MMT and debt-deflation, which I will return to on Sunday. The proposition is that if the the central bank maintains a zero target interest rate then lending rates will be so low that there will uncontrollable asset bubbles. As long as fiscal policy is used sensibly I disagree that a zero interest rate policy is destabilising.

Many readers have asked me to comment on the recent financial reform proposals from the Obama Administration. Some have tied their questions into more general requests to outline a specific modern monetary approach to the reform process. So I thought I would take this Sunday blog time to put some notes together in this regard. I cover the treasury and central bank in this blog. At some later point I will consider how to better regulate the commercial banks and the role of governments in deposit insurance.

Many readers keep calling for my views on Austrian economics. Apparently when pushing what we might call the Modern Monetary Theory (MMT) view they get hit with a barrage of Austrian school criticism along the lines that statism is dread and that by privatising everything you will improve the human condition. My first thought when I get E-mails like this is to wonder where my readers hang out in their spare time! I wasn’t aware that the Austrian school was anything more than a cobbled together bunch about as large as the modern monetary school (laughing). Anyway, I am taking the request seriously and as a start I present some background – some modern monetary armaments. We are going to war.

The media is increasingly reporting that the RBA will hike interest rates by the end of 2009. I consider this to be a nonsensical suggestion given that unemployment and underemployment will still be rising and it is unclear whether employment growth will be anything than near zero at that time. From a theoretical perspective, at the root of all the conjecture, whether the journalists actually realise it or not, is a concept called the “neutral rate of interest”, which is just another neo-liberal smokescreen. That is what this blog is about.

Today’s economics blog is about some reactions I have to the many pieces of correspondence I get each week about my work via E-mails, letters, telephone calls. It seems that there is a lot of misinformation out there and a reluctance by many to engage in ideas that they find contrary to their current understandings (or more likely prejudices). It always puzzles me how vehement some people get about an idea. A different idea seems to be the most threatening thing … forget about rising unemployment and poverty – just kill the idea!. So here are a few thoughts on that sort of theme.

Some economists who are pushing the so-called de-leveraging story to explain the current downturn consider that the only sustainable basis for economic recovery requires that overall debt levels in the economy decline dramatically. They rightly argue that this requires a significant reduction in private debt. But they also argue that the public debt increases associated with the net public spending (the stimulus packages) – they erroneously use the term “to fund” the net spending – is self-defeating. In other words, they claim we are just substituting public debt for private debt and creating a new form of vulnerability (public insolvency – higher inflation etc) as we eliminate the private leverage. Apart from the failure of this story to link the private debt explosion with the pursuit of budget surpluses in the past, the major error that this camp makes is of the “oranges and apples” variety. That is, debt is not debt!

In this blog I will complete my analysis of the concept of fiscal sustainability by bringing together the discussion developed in Part 1 and Part 2 into some general principles. The aim is to provide a blueprint to cut through the deceptions and smokescreens that are used to deny fiscal activism and leave economies wallowing in persistently high levels of unemployment. So read on.