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

IMF continues with its wage-cutting line

In November 2015, the IMF released an IMF Staff Discussion Note (SDN/15/22) – Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area – which purports to measure “the short-run economic impact of wage moderation and the implications for policy in the context of the euro area crisis”. It juxtaposes the impacts of the so-called internal devaluation approach with the impacts of Eurozone monetary policy. It recognises that the euro zone countries cannot use exchange rate depreciation to boost domestic demand but argues that instead, “lower nominal wage growth … and lower inflation or higher productivity growth relative to trading partners is needed”. The paper presents the standard mainstream arguments that: 1) wage cuts improve employment through increased competitiveness; 2) interest rate cuts stimulate overall spending; 3) quantitative easing stimulates overall spending. There is very little empirical evidence to support any of these statements, especially when fiscal austerity is accompanying these policy measures. The discussion does acknowledge wage cuts may be deflationary and “work in the opposite direction of the competitiveness affect”, in other words, domestic demand and overall growth declines. The unstated message is that internal devaluation doesn’t really improve competitiveness when it is imposed across the currency bloc and undermines domestic spending, which further impedes any export growth (because domestic income drives import demand).

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Overt Monetary Financing – again

Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The New Yorker columnist John Cassidy decided to weigh into this topic in his recent article (November 23, 2015) – Printing Money. The topic is, of course, what we now call Overt Monetary Financing (OMF), which simply means that all of the unnecessary hoopla of governments matching their deficit spending with bond-issuance to the private bond markets, as if the latter are funding the former, is dispensed with. That artefact from the fixed exchange rate Bretton Woods system is maintained as a voluntary procedure by fiat-currency issuing governments but only provides financial assets to the non-government sector in the form of ‘corporate welfare’. The debt issuance of debt has nothing to do with funding the spending and is used by all and sundry to attack such spending for creating so-called ‘debt mountains’. OMF brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.

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The massive Eurozone real income losses continue to mount

Eurostat released the third quarter National Accounts data for Europe on Friday (November 13, 2015) – GDP up by 0.3% in the euro area and by 0.4% in the EU28 – which showed real GDP growth slowing in the Eurozone (down from the slug-like 0.4 per cent) and nations such as Finland and Estonia (one of the previous ‘poster children’ for austerity) heading into basket-case territory. Finland contracted by a sharp -0.6 per cent in the Third-quarter 2015 and has been in recession since the Estonia contracted by 0.5 per cent as did the beleaguered Greece. Portugal stagnated at zero growth. The so-called European recovery is looking distinctly wan! As at the third-quarter 2015, the Eurozone as a whole as still not reached real GDP levels equal to the peak in the March-quarter 2008. The overall 19 economy monetary union is still smaller than it was before the crisis began some 7.5 years ago. But to envisage how large the losses are of the failure of the policy makers to quickly restore growth, we have to also estimate where the Eurozone economy would have been had the GFC not occurred and pre-GFC growth rates were maintained. Then we have staggering losses of national income to consider across the failed monetary union. A very damaging folly has been inflicted on the people of Europe as a result of the neo-liberal Groupthink that dominates policy making.

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Modern Monetary Theory and Value Capture

I live in a Federation where the national government has the currency-issuing capacity and the states rely on their taxation and borrowing capacities to fund their spending. Our system is subject to significant vertical fiscal imbalances in that the Australian Constitution and subsequent decisions gives the major taxing capacity to the federal government but the large spending responsibilities remain at the state level. There are also significant ‘horizontal fiscal imbalances’ between the states and territories due their different capacities to exploit their own tax bases. As a result, there is a complicated system of federal-to-state transfers to ensure that all states have the capacity to deliver infrastructure and services of an ‘equal’ standard to all citizens. In particular, state governments face problems in providing adequate infrastructure while many of their decision deliver windfall gains to land owners where major infrastructure projects are adjacent (such a train or road system). While Modern Monetary Theory (MMT) considers such national infrastructure projects are best funded at the national level where the national government faces no financial constraints (given it is the currency issuer), the reality is that state governments also engage in infrastructure development. As a second-best technique to ensure that states do not play the austerity card and deprive their regions of essential infrastructure development, a system of Value Capture can be beneficial. It is a progressive tax system that can also reduce the tendency to real estate asset price bubbles.

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European Left face a Dystopia of their own making

Last week, I re-read an article from May 1, 2012 by Abraham Newman – Austerity and the End of the European Model – that was published in Foreign Affairs. The article carried the sub-title “How Neoliberals Captured the Continent”. The author is a US political scientist and observed that given the unprecedented austerity that the European politicians have inflicted on their nations with such damaging consequences, the “Tea Party loyalists in the United States should be green with envy”, The hard-line US Republicans don’t go close to their European brethren. The thrust of the article was that independent of the short-term effects of the austerity it “will transform Europe’s political economy in the long term, lending credence to neo-liberal ideas of limited government and loosely regulated markets. The irony of this transformation is that it reinvigorates the very ideas that helped cause the financial crisis in the first place …” This is a theme that I share. It is also a starting point for a very interesting essay I read last week by Slovenian lawyer Bojan Bugaric – Europe Against the Left? On Legal Limits to Progressive Politics – published May 2013. I have been seeking to understand these perspectives more deeply as part of my larger book project concerning the demise of the European left.

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With idle labour equal to 14.5 per cent, the fiscal deficit is too low

The fiscal position of a government that issues its own currency should never be a focus of attention other than to understand why it have evolved to its current level – whether it is reflecting mainly discretionary policy choices or cyclical effects (automatic stabilisers). If there was accelerating inflation and high GDP growth then one might be tempted to conclude the fiscal deficit is to expansionary and needs to be cut back. One might equally conclude that private spending is too strong and needs to be cut back. But when there is declining growth and very high and persistent labour underutilisation rates, it is hard to argue that the fiscal deficit needs to be cut. It is, in fact, lunacy!

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Friday lay day – the tide is turning but there is a long way to travel yet

Its my Friday lay day so less blog more other things. I noted yesterday that I can sense that the tide is turning in the policy debate. There is now increased commentary that talks up the need for larger deficits and claiming we should not be worried about debt ratios and all the rest of the irrelevant financial ratios that blight the political capacity of governments to maintain high levels of employment and growth. The IMF and the OECD is increasingly urging governments to spend more on infrastructure even though they retain their blighted (and wrong) notion of ‘fiscal space’. Just a few years ago these organisations led the charge for austerity. The evidence has not supported their previous zeal. While those who desire a more evidence-based and theoretically consistent macroeconomics debate applaud the shift in rhetoric and sentiment, there is still the danger that the debates will be based on erroneous principles or blurred reasoning. It is good that the tools and arguments of Modern Monetary Theory (MMT) are being use in the mainstream media to analyse important economic issues. But we also have to be careful to make sure our stories that accompany those tools and concepts don’t just create more fog – and resistance. The evidence suggests that there is still a long way to travel yet … but the tide is slowly turning. I will just keep at it!

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Neo-liberal myths constrain our understanding of poverty

I was on a panel last night discussing the causes of poverty in Australia. The panel was rather diverse with housing, welfare and other representatives. There was a crowd of around 400 I believe. The format was difficult given that the panel of six was assembled in line at a table so could not see each other easily. But the real problem was that the facilitator, a national journalist, who had the role of asking questions to the panellists, chose to assert the standard neo-liberal macroeconomic myths in response to statements I made with respect to the causes and solutions to poverty. I was confronted with as-if facts such as “they have to get the money from somewhere before they can spend” in response to questions about public debt eventually becoming too large and foreigners funding our national (currency-issuing) government. I thought a facilitator was not meant to have an agenda but in this case holding out these neo-liberal myths perpetuated the standard agenda which guarantees that poverty will continue to worsen. There is a lot of work to be done before people will identify these neo-liberal myths as non-knowledge and readily understand that national, currency-issuing governments such as in Australia have no financial constraints and they spend out of ‘thin air’. Once that knowledge is accepted a whole new world opens up that allows us to see the path to reducing poverty and inequality.

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Public R&D austerity spending cuts undermine our grandchildren’s future

Growth in material living standards, which is just one measure of overall (average) prosperity and contestable at that, depends on productivity growth. How national income is distributed, real wages growth in relation to productivity growth, and the employment rates also impact on how this average is reflected in the fortunes of individuals. Strong productivity growth is only a necessary condition for improved material living standards. In this period of fiscal austerity with suppressed overall growth rates and labour market deregulation that undermines working conditions and reduces the incentives to invest in best-practice technology labour productivity is falling – as will living standards in the coming years. The world is locked into an idiotic race-to-the-bottom. It is a curious period really. The hypocrisy of governments, aided and abetted by the right-wing think tanks, who claim they are cutting into public spending to reduce the drain on living standards of our children and grandchildren, is clear to see. What they are really doing is undermining the future prosperity of the next several generations at the same time that they push millions into unemployment and poverty now. Why are we so stupid that we tolerate this nonsense?

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Rising income and wealth inequality – 1% owns more than bottom 99%

This week is – Anti Poverty Week 2015 – in Australia and there are many events and happenings on to mark the time and to highlight the issue of poverty. I will be appearing on a panel on Wednesday afternoon in Newcastle (see below). I was thinking about what I might say in my short presentation next week as I read a report in the UK Guardian (October 17, 2015) – Wealth therapy tackles woes of the rich: ‘It’s really isolating to have lots of money’ – that appealed for sympathy from the rest of us for the top-end-of-town, who have to undergo psychological counselling because they are stressed out being wealthy. Apparently, they also have to engage in “stealth wealth” which means they “are hiding their wealth because they are concerned about negative judgment”. I immediately felt bad for them. Oh, the pain the top 1 per cent feel owning around 50 per cent of all the assets in the world! What a shocking plight they face. In the context of this week’s focus on Anti-Poverty, I couldn’t quite rouse the sympathy the story was seeking to elicit. Sorry!

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