The catch-all category for my blogs reflecting my professional expertise as a full professor of economics.

Ratings agencies and higher interest rates

On Friday, April 24, 2009 there was a story in the Australian entitled Deficit spike may lift rates as Government considers $300bn debt blowout which introduced the next step in the neo-liberal fight to retain control of the policy debate – the dreaded ratings agencies. Accordingly, the Government spending (wait for it) … “blows out the deficit” and this will “jeopardise Australia’s triple-A credit rating, leading to higher interest rates.” So if you cannot win the “crowding out” battle to justify an attack on deficit spending its time to wheel out those credit rating agencies to scare the children of our land. As you will read this sort of reasoning is nonsensical in the extreme.

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How large should the deficit be?

Today I am in Melbourne (my home town) presenting a workshop on skills development for the new green jobs economy which is a joint Victorian Government/Brotherhood of St Laurence show. But that is not what I am writing about here. Regular readers of billy blog will know that when I talk about budget deficits I typically stress two points: (a) that the Government is not financially constrained and therefore all the hoopla about debt and future tax burdens are just a waste of time. But just because the Government can buy whatever is for sale by crediting relevant bank accounts doesn’t mean they should not place limits on the size of the deficit; and so (b) given the federal deficit “finances” private saving, it should therefore be aim to “fill” the spending gap left by the private desire to save. If the Government does that then it can maintain full employment and price stability and move towards a more equitable society. So it is of importance that we have some idea of the size of this spending (or output) gap.

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What if the IMF are right?

Yesterday, after sort of saying it the day before and getting close to saying it late last week, and having to wait for the central bank governor to say it first, our Prime Minister, then in quick lock-step, our Treasurer both said the R-word. What gives with this political posturing. The Opposition is largely irrelevant at the moment anyway. The reluctance of the Government to admit the obvious is repugnant. It has been very obvious that the economy is in very bad shape and had been heading that way for some years despite the chimera of prosperity – as the snowball of future recession was growing in size with the private sector debt and the fiscal surplus. Right now, the Government needs to introduce policies that really arrest what we have known for months – that employment is going south and unemployment heading in the opposite direction. Perhaps today’s terrible projections from the International Monetary Fund will sharpen their focus on large-scale public sector job creation initiatives.

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Boondoggling and leaf-raking …

There was a story in The Australian newspaper today entitled RED schemes are good written by a former minister in the Whitlam government in the early 1970s. He was extolling the virtues of the old Regional Employment Development scheme, which was a public works direct job creation scheme. He was suggesting such schemes may again find favour as the recession deepens. The RED scheme was a less generous version of the Job Guarantee and suffered as a result of its modesty. It was never based on any fundamental understanding of a modern monetary economy as as such was always a “defensive” program. Defending itself continually from the conservative, soon-to-be, neo-liberal critics. That made me recall my favourite conservative “put down” term – boondoggling and raking – which is used whenever direct public job creation is mentioned as a possibility. Then I recalled a letter that was written by the previous Federal Employment Minister explaining in 2004 why my Job Guarantee proposal was a crock. One thing followed another …

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Money multiplier and other myths

Policies such as Quantitative Easing which has been in the news lately are predicated on a mistaken belief about the way the banking system operates and how the non-government and government sectors interact. One of the hard-core parts of mainstream macroeconomic theory that gets rammed into students early on in their studies, often to their eternal disadvantage, is the concept of the money multiplier. It is a highly damaging concept because it lingers on in the students’ memories forever, or so it seems. It is also not even a slightly accurate depiction of the way banks operate in a modern monetary economy characterised by a fiat currency and a flexible exchange rate. So lets see why!

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Free public broadband is required

I have resisted writing about the so-called National Broadband Plan (NBP) up until now because the level of debate is quite frustrating. Once again, on a crucial issue that goes to the heart of national development, we are all being hoodwinked by spurious neo-liberal logic. Like all these debates, once it is constructed along an inapplicable macroeconomics, then all sorts of nonsensical points are raised that sound reasonable but are not. For example, the current debate appears centred on how the Government will ever be able to pay back the debt that will be incurred to build the network if consumers find it too expensive to use? On the face of it, the question is seductively sensible. But if you understand the choices open to the Australian government as the sovereign issuer of the currency then you will immediately recognise that the question and related concerns are fundamentally flawed.

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The Future Fund scandal

Today I was looking through annual reports of the Australian Future Fund, which is an example of what is known the world over as a sovereign fund. I have been keeping an eye on the performance of the Future Fund not the least because it is so exposed by its stake in Telstra, which has gone downhill ever since the previous regime persuaded Australians to buy a stake in something they already owned!. Anyway, most people have been conned by the Future Fund concept – it is shrouded in lies and deceit. In general, the idea of a sovereign fund is based on a misunderstanding (deliberate or otherwise) of the way the modern monetary economy operates. So its time to debrief and make it clear that these policy choices by governments generally undermine public goods and full employment.

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The dreaded NAIRU is still about!

The dreaded NAIRU is still about! I was thinking – rather optimistically – that it would just disappear from whence it came! But sorry to disappoint. Some economists just won’t learn. Yesterday the ABS released the latest data from the Australia Treasury Model (TRYM) database. You can get it here. Among other things of great interest that you can find in that database, is the Treasury TRYM model’s estimates of the so-called NAIRU. Sounds scary. Well, it stands for the the Non-Accelerating Inflation Rate of Unemployment and has a central place in neo-liberal mythology. The NAIRU is an important component of the TRYM model and influences the way it produces economic outcomes and policy simulations. So how much reliance should we place on this important component of the policy making process. Answer: not much!. My conclusion: any model that relies on a NAIRU is a crock!

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The green shoots of recovery … been looking!

In the last few weeks gardening has entered the macroeconomic discourse again. All over the place – apparently – little green shoots are emerging which bode well for the future. But are there any actual signs? Recent data releases from the US and today’s Index of Economic Activity in Australia suggest that the green shoots are still somewhat subterrainean in inclination. The latest data confirms the message that last week’s Labour Force data sent very loudly – the product and labour markets are now starting to align in a very ugly way and much more fertiliser (organic) is needed in the form of government stimulus …. sorry to repeat it, but, preferably in the form of direct job creation.

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The unemployed cannot find jobs that are not there!

The unemployed cannot find jobs that are not there! I have written about that topic extensively. So today I have been examining what vacancy data is telling us about the labour market. The relationship between unfilled job vacancies and unemployment (the so-called UV ratio) is well entrenched in economics. The UV ratio is a good indicator of the state of the labour market because it tells us (approximately) how many people there are for each unfilled job. Of-course, it understates the degree of slack because it fails to include underemployment. Anyway, you can also determine whether there are significant supply-side issues going on which would require supply-side policies. As you will see in the following graphs – it is all demand side! Which tells us, yet again, that job creation is required.

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