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

Austerity as law not political discretion

I agree that we should have speed limits and other traffic regulations to prevent mayhem and carnage on our roads. There are other laws I agree with such as protecting children from sexual predators and laws protecting citizens from police brutality and processes to allow us to monitor and prosecute corruption in public office etc. They all make sense to me. Many other laws I would scrap because they are petty infringements on our liberty. But I would never enshrine a particular fiscal policy stance in law or even in codes such as fiscal rules. Such practice defeats the purpose of having the fiscal policy capacities, which is to respond to economic circumstance such that public purpose including full employment can be maintained at all times. Creating legal frameworks that stop governments from exercising their discretion are not only counter-productive but also highly destructive as we are seeing now in the Eurozone. I prefer the people to be able to tell politicians what they should be doing in this respect not judges. However, the Euro elites have been moving towards making austerity law and eliminating political discretion that disagrees with them. And, come to think of it, when some judges disagree with them on a matter of law, the EU elites just instruct their puppets to ignore the courts and proceed as before.

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The day the Australian media failed the public, again

For those who don’t know about cricket, it is good to get a high score in each of the innings. Just like baseball. An innings score of 350 runs in Cricket would be respectable. So imagine the headlines – Big problem, team only scores 130 runs in final innings! The whole cricket world then gets itself in a lather about this with experts blabbing on national TV about only 130 runs. As an after thought, the news bulletin also announced – “and team pulls off a thrilling victory”. Imagine, some bean counter expert coming out in the middle of a game of football and telling the teams that the game is being called off because the budget for goals had been exhausted. The two points – context with respect to meaning and aims and where does the unit of account come from – have been sadly lost in the current economic debate. Even journalists who know better have done a great disservice to the Australian public today by choosing to present an uncritical version of a report that is at best incompetent but also much worse than that. This morning Australians have been bombarded via TV, radio and the printed media with economists, appearing seriously self-important but, at the end of it all, all they are doing is making stuff up and are probably too stupid to know otherwise.

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Elementary misuse of spreadsheet data leaves millions unemployed

Remember, earlier this year, when the IMF admitted they had made errors in their modelling of expenditure multipliers. They had been tramping into countries with their jackboots telling all and sundry that fiscal austerity would promote growth because their multiplier estimates told them so. Millions of job losses later, they came clean. It turns out that when they revised their multiplier estimates exactly the opposite was the case. Now they acknowledge that spending multipliers are in range of 1.5 1.75, meaning that increasing government spending adds at least 150 cents in the dollar spent extra to the economy. Now, the darlings of the austerity cultists – Rogoff and Reinhart – has been exposed for poor research standards – to wit, errors in spreadsheet coding. Meanwhile, Cyprus is being driven into oblivion. Who is ever going to take responsibility for these travesties?

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Australian government logic – destroy the future to save it

The Australian government announced its new agenda for public education yesterday. It announced that it would spend an addition $A14.5 billion, overwhelmingly in the public schooling system, over the next six years. A major Report released last year showed that the last few decades of neo-liberal cuts to public education have undermined the quality of outcomes. Australia now trails behind nearly every advanced nation in this respect. The Report called for a massive injection of funds into the public schooling system. So we should applaud the Government announcement. The problem is that it thinks it still has a major fiscal problem (deficit currently around 3.2 per cent of GDP). As a consequence it thinks it has to cut spending elsewhere to fund the public school initiative. This is a wrong logic for two reasons. First, real GDP growth is falling and unemployment is rising fast which indicates that we need more aggregate demand not less (or the same). Second, it has chosen to get the cash to help restore the credibility of the public schooling system from the higher education system. Destroy the future to save it sort of logic. Another mindless demonstration of its fiscal ignorance.

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It’s simple math

Have you ever examined the Japanese yield curve? I check it on a daily basis. At present, it looks to have a normal shape (longer-maturities with slightly higher yields) than near-term assets. It is also quite low – like really low. The short-end around 0 and the long-end not much above it. It has been that way for a long time. If I assembled a group of economists – which we might call “distinguished experts” – and let them have the yield curve data and told them that inflation in this nation was low to negative and had been for two decades, and economic growth was mostly positive – and then asked them to write a story about the evolution of budget deficits and public debt ratios over the same period what do you think they would say? Alternatively, if we started with some other facts – like – increasing and relatively large budget deficits and the highest gross central government debt to GDP in the world – what would they say about inflation, growth and bond yields? The two sets of answers would be diametrically opposed to each other. The reason: because they don’t understand what drives the data. Their textbook macroeconomic models are totally wrong and have no explanatory capacity at all. It is really simple maths – a currency-issuing government can spend up to what is available for sale in that currency; can set yields and interest rates at whatever level is desires; does not need to issue debt anyway and so the notion of a financial collapse is misguided at best; and will cause inflation if it spends too much (defined as pushing the economy beyond its real capacity to produce). Simple really. Pity our “distinguished experts” didn’t see it.

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Society buckled and is damaged but has never disappeared

Remember that her own party got rid of her in the end because she even became a liability to them. She was always a liability to the prosperity of the British people and despite her obsession with incentives and individual action, she undermined both by wrecking the macroeconomy in Britain. The news today is all about the death of the former British PM. There will be a lot of revisionism going on. I don’t plan on a chapter and verse discussion of the legacy of the shopkeeper’s daughter. Apart from the cruelty that was imposed on individuals, particularly the poor, her policies hollowed out the British economy and opened up the door for the parasitic financial sector to take centre stage, with the disastrous consequences that are now for all to see. I could talk about all of that. But to me the biggest impact of her period in office was that it marked the beginning of the end of the social democratic parties. Labour and the Tories became neo-liberal lookalikes. Sure enough, the Tories spoke better and had better table manners. But when the economic policy positions were distilled to their essence, the Labour Party, like so-called progressive parties everywhere, started to sound more right-winged than the Tories themselves. That is what I think is her grim legacy for the weak and the poor of the world.

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Very unintelligent indeed

I had a long flight today and other things to catch up on after the Easter period. But the stunning news yesterday from Eurostat that the EU17 unemployment rate has now risen (in February 2013) to 12 per cent. Each month’s Labour Force data sets a new record peak for the Eurozone. Each month that unemployment rises, the real GDP losses that are being deliberately created by the existing policy regime mount. As I show in this blog, those losses are enormous and will never be regained – that income has been lost forever. The human dimensions of the crisis are also huge. And the evidence mounts that the conceptual underpinning of the policy framework doesn’t hold water. This is an extraordinary period of history where a flawed theoretical approach which doesn’t stack up when confronted with the data, is being used to create a flawed monetary system design, which has failed categorically when judged against any reasonable criteria of social purpose, and then the leaders impose even worse policy designs over that failure. Sometime in the future, humans will judge the current generation to be very unintelligent indeed.

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US problems are cyclical not structural

Last week (March 28, 2013), the – US Bureau of Economic Analysis – released the – revised (third estimate) – fourth-quarter 2012 US National Accounts data, which showed that real GDP grew by 0.4 per cent in the December quarter and 1.7 per cent for the 12 months to December 2012. The estimates were revised upwards from a quarterly growth rate of 0.1 per cent, largely due to higher estimated consumption and investment growth. In the six years to the December-quarter 2007 (the most recent real GDP peak) the average quarterly growth rate was 0.62 per cent. The US economy is still labouring with a huge cyclical output gap. That doesn’t stop a range of commentators from arguing otherwise. Other than the hysterical (and inaccurate) – David Stockman blast – there was a somewhat more measured article by Jeffrey Sachs in the New York Times (March 31, 2013) – On the Economy, Think Long-Term – which claims that the US problem is not cyclical but structural. For non-economists, that means that the policy solutions are quite different. In the absence of hysteresis, fiscal and monetary policy cannot solve a structural problem. The only problem with Professor Shock Therapy’s hypothesis is that it doesn’t stack up with the evidence. The evidence does not support the assertion that job polarisation in the US is constraining economic growth. The evidence continues, unequivocally, to support the view that the US economy is suffering from a major cyclical downturn (output gap) and needs a carefully targetted, aggregate demand stimulus.

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Fiscal austerity undermines welfare now and then things get ugly in the future

The latest – EU Employment and Social Situation: Quarterly Review was released yesterday (March 26, 2013). The Press Release – summarises the main results. I will look into the full document in more detail another day. Today (March 27, 2013), the Australian Productivity Commission released a major study – Trends in the Distribution of Income in Australia – which provides a fairly detailed analysis of the “composition of the income distribution”. The connection is that fiscal austerity not only causes unnecessary damage now to the prosperity of the nations afflicted with these incompetent leaders, but it also undermines the future growth path of the nation. One of the many ways in which growth potential is being undermined is through the impact of unemployment and falling participation rates has on income inequality. The latter impact also negates key propositions that mainstream economists teach their students every day that there is a negative trade-off between efficiency and equity. So policies that promote more equitable income distributions are alleged to undermine economic growth. The evidence is exactly the opposite.

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A chicken in every pot!

It is a busy day today with meetings in one capital city, then a presentation a bit later in the day in another city – so time is short. Over the weekend, I watched an episode of the recent Ken Burns’ documentary – The Dust Bowl – which traces the events surrounding the drought during the Great Depression in the so-called – Dust Bowl – of the United States. It is worth watching if only for the stark reminder of how the main body of my profession is so deluded. I should add that as a strict vegetarian the title of my blog is rather offensive but it is faithful to history and that has value in itself. While the neo-liberal historical revisionist teams relentlessly attempt to airbrush all fact out of the Great Depression the inescapable truth is that thousands of American adults and their children would have died during the Dust Bowl crisis had not the American government intervened with food parcels and then major public sector job creation schemes such as the Civilian Conservation Corps (CCC) and later the Works Progress Administration (WPA). Government fiscal stimulus saved America. No “chickens” were put in “pots” by the “market” during that time. Rather it was the government that fed and clothed the people. Nothing has changed since.

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