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

There is nothing new under the sun

The debates that are played out in the parliaments around the world at present about the state of public finances are not new. The debates, which are amplified by the media who typically do not understand the issues involved yet mostly take a conservative position because they can sell more products (papers, on-line access etc) that way, appear to be pressing and all sorts of emergency language is used. The characters who write these doomsday scenarios mustn’t ever reflect on what they say from one day to another relative to the historical record. Their arguments against the use of budget deficits and invoking doomsday scenarios regarding public debt reduction are not new. Given many of these conservatives are also into the bible (pushing evangelical diatribe) they might have reflected on – Ecclesiastes 1:9 – which noted that “What has been will be again, what has been done will be done again; there is nothing new under the sun”. Indeed not. One character in history with a penchant for religion (Mormonism) however had some insights in the operations of government budgets and public debt. He was also a long-time former Chairman of the Board of Governors of the US Federal Reserve System.

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The ultimate boondoggle courtesy of slack government policy

Workers, particularly low-paid ones, are regularly sent up in comedy or satire. The 1959 British movie – I’m All Right Jack – was an acidic attack on the British trade union movement although it also parodied the stuffy upper-class British industrialists as well. In 2003, a British author Magnus Mills published the book – The Scheme for Full Employment – which is a satirical attempt to deride Keynesian full employment policies. Boondoggling and leaf-raking is the term that invokes the ultimate put down by the conservatives who laud the virtues of the private sector and accuse the public sector of creating waste and sloth every time someone proposes that the government introduce a large-scale job creation program to alleviate the dreadful damage that mass unemployment causes. Well the New York Times investigative team has discovered the ultimate boondoggle that has been made possible because of slack government policy. And, it involves our friends in the financial markets – those so-called productive, entrepreneurial free marketeers.

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Balanced budgets are rarely appropriate

The Fairfax press published the latest opinion piece from one of its economics editors (Ross Gittins) over the weekend (July 20, 2013) – The budget facts that Canberra isn’t telling you. If the stated facts are what Mr Gittins thinks apply to a sovereign economy such as Australia, then it is fortunate that Canberra is staying quiet. He claims that the fiscally prudent position is for governments to run a balanced budget on average every decade. He also says that the government doesn’t really have to do anything other than let the automatic stabilisers achieve that outcome once the structural settings are in place. The problem is that these sort of mindless fiscal rules are rarely going to achieve appropriate outcomes, when the latter is expressed in terms of full employment objectives and other real outcomes. In the current context, where there are major private sector balance sheet risks and an ongoing external deficit of around 3.5 per cent, the pursuit of a balanced budget would be an act of vandalism. Further, given the non-government spending dynamics, it is likely that continuous budget deficits will be required into the indefinite future.

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A case for public banking

I read an interesting research paper from staff at the New York Federal Reserve Bank (published March 2013) – How Much Do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data – which reported on an innovative study of the links between problems within individual banks and the investment performance of firms that deal with those banks in the context of highly concentrated banking sectors. While the study uses Japanese data, the findings are relevant for all nations, given that banking is typically highly concentrated across all advanced nations. The interesting conclusion that I draw from the study is that short of bank nationalisation, the findings provide support for the creation of public banks which utilise the currency monopoly enjoyed by government to provide a more stable environment for business firms during times of crisis in the private banking sector.

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The blood on the criminals’ hands is thick and won’t wash away

On Monday (July 8, 2013), the IMF released its “preliminary findings” of the – Article IV Consultation with the Euro Area. The nomenclature and turn of phrase alone are symptomatic of the organisation’s incapacity to come to terms of the problem it is addressing and its own role in creating and perpetuating the problem. On the one hand, they clearly acknowledge that “the economic recovery remains elusive, unemployment is rising, and uncertainty is high”. But on the other hand, they urge more of the same and claim the policies that have created this mess represent “progress”. The Euro area can do two things to improve the situation of citizens who live within it. First, abandon the voluntary fiscal rules which have not theoretical justification and allow nations to expand deficits to address the massive output gaps. If need be, fund the deficits via the ECB. Second, once the crisis is over, create a process whereby the monetary union voluntarily dissolves itself in an orderly manner. That is the only sure way of minimising the on-going damage. Oh, and third, withdraw all funding from the IMF and enter multilateral negotiations to create a new agency that helps poor nations defend themselves against speculative attacks on their currencies. And, while I am at it, fourth, reach an international accord to outlaw any speculative transaction that does not advance the real economy. That will keep them all busy and get the millions of people that the IMF and the Euro elites have deliberately made jobless busy again too.

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In a few minutes you do not learn much

There was an article in the New York Times at the weekend – Warren Mosler, a Deficit Lover With a Following – which seems to have attracted some attention. The attention has spanned from the vituperative personal attacks on the article’s subject, all of which would seem to be factually in error, to claims that proponents of Modern Monetary Theory (MMT) are “just nuts”. The latter assessment apparently was drawn after a few minutes consideration by a US economist. I don’t think one learns very much in a few minutes. But the output over the years of the particular economist quoted by the NYTs tells me he hasn’t learned much after presumably many hours of study. I suppose that if you are mindlessly locked into the mainstream macroeconomics textbook models then that is to be expected.

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Since when did the BIS become the Neo-liberal Ministry of Misinformation?

One despairs when a sober institution gets ahead of itself, usually because they make hiring mistakes, and start to think they know stuff. This is an organisation that is steeped in statistical analysis and should have a very good idea of empirical regularities. They know that interest rates have been “essentially zero” in Japan since the 1990s and they know that what hasn’t happened as a consequence. They know that central banks have been “expanding their balance sheets” (now “collectively at … three times their pre-crisis level”) and what hasn’t happened as a consequence (inflation). But as the neo-liberal paradigm has concentrated its control of the policy debate, this organisation has morphed from playing a useful role as a coordinator of central banking into a propaganda unit pumping out misinformation and outright lies and distorting the public debate. Welcome to the Bank of International Settlements, which is now firmly ensconced with the likes of the IMF, the OECD, the ECB, the EU, the World Bank, and others as being part of the problem the World economy faces.

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It is hard to defend the 1 per cent by claiming their contribution added value

Writer of popular textbooks on macroeconomic myths, N. Gregory Mankiw has just put out a paper – Defending the One Percent – which is due for publication in the Journal of Economic Perspectives. The paper presents a narrative about the shift in the US personal income distribution (sharply towards higher inequality) since the 1970s in terms of rewards forthcoming to exceptionally skilled entrepreneurs who have exploited technological developments to provide commensurate added value (welfare) to all of us. As a result, rewards reflect contributions and so why is that a problem? In other words, the “left” (as he calls the critics of the rising inequality) are wrong and are in denial of reality. That view is unsustainable when the evidence is combined with a broad understanding of the research literature. Ability explains the tiniest proportion of the movements in income distribution. Social power and class, ignored by the mainstream economics approach, provides a more reliable starting point to understanding the rising inequality.

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Real wage cuts do not stimulate employment

In last week’s blog – Massive real wage cuts will not improve growth prospects – I considered the mounting evidence that austerity is leading to massive cuts in real wages for workers in Britain without commensurate gains in employment being evident. I have been doing some detailed work on the movements in employment and real wages in Britain over the last decade or so and today some of the more accessible work is presented. You will soon see that the mainstream view that cutting real wages is good for the economy is as absurd as the argument that a fiscal contraction expansion is the path to prosperity. Both policy options are the path to entrenched unemployment and increased poverty rates – exactly the outcome that has befallen the British population as a result of their moronic government policy stance.

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Full employment is still low unemployment and zero underemployment

You won’t see much debate or coverage of the desirability of making full employment the central goal of economic policy these days. The politicians, infested with neo-liberalism, do not admit they have abandoned full employment as a policy goal. Instead, they lie and wheel out various flawed analyses that try to make out that full employment now occurs at much higher rates of labour underutilisation in the past. Norway tells us that that proposition is a lie. In Australia, the government still tries to suggest that a state where more than 14 per cent of available labour is idle in one way or another represents close to full employment and a justification for fiscal austerity. We believe them because we have been seduced by the lies and our educational systems have downplayed critical scrutiny. But until we cut through the swathe of lies and misinformation we won’t get back to the bountiful state of full employment where not only workers enjoy higher incomes but dignity becomes a priority. Whatever else the liars say, full employment is still a state of very low unemployment and zero underemployment.

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