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

Lower deficits now, undermine our grandchildren’s future

It been quite a few weeks for the prophets of doom. R&R revealed they can’t handle a simple spreadsheet competently, and then try to claim a positive number is really a negative number. And who said they said there was a threshold of debt anyway? They now deny there is a threshold. History tells us this is a new denial. Then their Harvard colleague, the so-called historian throws himself off a cliff – again – with his remarks about JMK. Again? Joe Weisenthal has – Ferguson’s Horrible Track Record on display. He reports that Ferguson has “self-immolated a number of times trying to fight an ant-Keynesian battle”. What is it about Harvard? Has there been an internal inquiry set up to consider whether R&R committed academic fraud or were just incompetent? Why do they still continue to employ Ferguson after his homophobic remarks? It is not as if he displays any acumen when it comes to economic commentary. How much does he receive in appearance fees for telling all and sundry what is not going to happen, even though he says it will? I guess as an historian, Ferguson might know one thing. Fools have a habit of reappearing and repeating the nonsense that prior fools claimed was the truth.

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Australia output gap – not close to full capacity

A national media organisation (Crikey) invited me to be one of their Fantasy Budget providers this year and this is a background blog to the preparation of my Fantasy Budget 2013-14 for Australia, which I will publish next Monday. In this blog I consider the state of the Australian economy in terms of output gaps. The Australian government is keen to claim that the economy is operating close to or at trend real output – sometimes the Prime Minister or Treasurer – and senior Treasury officials, will replace the descriptor “trend output” with “full employment”. They make that claim to justify imposing fiscal austerity on the economy, which is expressed by their most recent goal to achieve a budget surplus in the current year. They have been pursuing that strategy for several budgets now after taking appropriate steps in 2008 to allow the budget deficit to rise significantly to head off the looming disaster associated with the global financial crisis. While the stimulus was not large enough at the time it did save the economy from the type of chronic recession that most of the advanced world remains stuck in. But, once recovery was established, the conservative ideology returned and the fiscal stimulus was withdrawn too quickly and an austerity plan implemented. At the time, it was clear that they would fail to achieve a surplus because in attempting to do so they undermined the recovery, and, their tax revenue growth. Other international events (a slowing of the terms of trade and an overvalued dollar) have compounded their poorly crafted fiscal strategy. The reality is that the Australian economy is now performing well below trend and the divergence is increasing. The labour market is also producing grossly inferior outcomes and we are clearly a hundreds of thousands of jobs short of what a reasonable definition of full employment would require. The budget deficit is too small not too large and the direction of policy in the coming year should be expansionary not contractionary.

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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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