Australia is in the grip of a group of mining oligarchs, who are spending enormous amounts of monety to shape the economic debate to suit their own very narrow interests. They are opposed to the mining tax (a resource rent tax) and have in the past denied the state (on behalf of all of us) owns the resources that they plunder for private profit. They have also sponsored national tours of leading climate-change deniers (such as Lord Monckton) who are known to trade on distortions of the truth. Overall, there personal resources guarantee them access to the daily media and they use it relentlessly. They also write books which get national coverage and have a record of suing peope who criticise their views. The result is that there is very little critical scrutiny of the propositions they advance to justify their claims. Some of the propositions are pure fantasy yet they have gained traction with the public who have been too easily duped by the promotional onslaught. Here is a little sojourn into the fantasy world on one such oligarch.
The British Prime Minister gave a – Speech – to the Confederation of British Industry Conference on November 19, 2012, where he outlined how tough his government had been in terms of imposing fiscal austerity. In other words, he was taking responsibility for Britain’s appalling dive back into (double-dip) recession, although it is hard to find that confession in his actual words. Over the English Channel, the EU is busily preparing the champagne and fine foods for its upcoming summit on the 2014-2020 EU Budget. The EU leadership is talking tough and proposing large cuts in EU-level spending not the least being harsh cuts in the Overseas Development Aid (ODA) budget. The cuts are, of-course, based on false premises – that the economies are broke and have to live within their means – even though millions of workers lie idle. The idiocy is exemplified though in the failure to understand that ODA, while perhaps provided for ethical reasons, actually improves the outcomes of the donor nation. So these so-called free marketeers cannot even identify self-interest when it is staring them in the face. So they busily go about cutting their noses off!
I get many E-mails from readers who are confused about stocks and flows. At least that is my diagnosis because from the questions that I get asked it is apparent that there is a deep misunderstanding of what a budget deficit actually is and how it is different from the stock of outstanding public debt. This is an important issue and bears on how many seek to comprehend the latest Eurostat – Flash National Accounts data – for the third quarter 2012. The data is now signalling a further descent into recession in the Eurozone and with further cutbacks being imposed on various nations, already mired in what should be called Depression, the outlook for 2013 is worse. This is a case of governments deliberately undermining their economies. The strategies in place cannot work. All they will do is add more workers to the millions that have already been forced into unemployment by this policy folly. I view the policies being imposed in Europe and the UK, for example, as criminal acts.
Sometimes there is serendipity in a researcher’s life. Usually not. But sometimes. The last few months I have been investigating the question of how to effectively design fiscal policy interventions. It is an important issue because there are multiple goals that need to be satisfied. Two clear goals can be identified to simplify matters. First, fiscal policy has to be designed and implemented in a way that ensures there is sufficient aggregate demand in the economy relative to its real productive capacity so that full employment is achieved and sustained. Second, it should be designed and implement so as to reduce inequality. The two goals are interdependent despite the myths that economics students learn about the trade-off between efficiency and equity. It is now clear that rising inequality harms the prospects for sustainable economic growth. The evidence is now starting to come in that during the neo-liberal era, fiscal policy was actively used to reduce its redistributive capacity and its capacity to reduce market-generated inequality was severely compromised. Not eliminated but substantially reduced. That is what this blog is about.
The Sydney Morning Herald carried an AFP story today (November 14, 2012) – US deficit hits $120b as fiscal cliff nears – which reported the latest US Treasury Department figures which showed that “the US budget deficit rose 22 per cent in October from a year ago, to $US120 billion ($A115.56 billion), as spending far outpaced revenue”. At which point I thought – how lucky the American people are that the Government deficit is still expanding and supporting growth unlike the expanding deficits in Europe which are expanding because of a lack of growth. It is an astounding achievement for the US people. Unfortunately all the signs are that the American polity doesn’t actually understand that their in-fighting, which has allowed the deficits to continue growing, has been good for the nation. Had they actually cut the deficits or failed to pass the debt limit extension, the US economy would be in the doldrums just like Europe. The problem now is that the political debate will reach some conclusion pretty soon and the harbingers of doom are growing stronger. But for the time being with the US budget deficit expanding and supporting growth and private saving it is a win-win.
In his – Introductory Statement – at the Press Conference last week (November 8, 2012) announcing the decision of the ECB Governing Council, ECB Boss Mario Draghi provided us with all the evidence we need that the conduct of macroeconomic policy is being based on false premises, which makes it unsurprising that the world economy is enduring slow to negative growth and millions are unemployed. The ECB decision was to keep interest rates unchanged. But that isn’t the point of this blog. We all look to monetary policy to solve the crisis when it is ill-equipped to do so. The reliance on monetary policy and the hostility towards fiscal policy is all part of the same ideological baggage that caused the crisis in the first place. Dr Draghi’s promise that the ECB would buy unlimited quantities of government bonds was held out as part of the solution but in fact only confines the central bank to maintaining solvency, which is intrinsic to any currency-issuing government anyway. But the main Eurozone problem is a lack of aggregate demand. The ECBs action do nothing to resolve that problem. Similarly, the Federal Reserve, the Bank of England, the Bank of Japan and all the rest of the central banks do not have the tools to ensure that the main problem is addressed. The crisis has confirmed that yet so deep has been the indoctrination that we (the collective) still hang on to the idea that fiscal policy is bad and monetary policy has to carry the counter-cyclical weight. The fact is that it cannot.
Regular readers and those who hear me in the media regularly will know I talk and write a lot about unemployment. I do so because it is a principle cause of poverty and disadvantage. It is also the tip of an iceberg of lost economic, social and personal opportunities. But we should not forget about trends in employment especially the rising incidence of the working poor. I raise this issue today because on Sunday the British celebrated the start of the – Living Wage Week – which runs from November 4-10. There are celebrations in all the major British cities and both sides of the labour market – workers and employers – are urged to embrace the notion that paying a living wage is not only ethical but also good for worker productivity and morale, and, hence good for private businesses.
With the natural disaster in the US now in its clean up stage the discussions have turned, in a predictable way, to “how will the US pay for this especially when it has huge deficits and debts and has to fall off a fiscal cliff anyway to stop the sky from falling in” – and narratives like that. Remember when Hurricane Irene struck in 2011? The resurgent Republicans tried to push through bills, which would have required matching cuts in other federal spending. The other Sandy reminder is that when the chips are down who do we all turn to? Government. What do you think would have been the current state, if the Republican contender was President and followed through on his promise to scrap FEMA and put emergency relief in the hands of the private sector, which apparently does things better? Chaos at best is the answer. The fact is that the federal government will be able to provide whatever financial assistance is required beyond private insurance payments. The only constraint that might hamper the recovery is the availability of real resources, which can be brought to bear. Further, it seems that the whole fiscal crisis beat up, even with the terms of the mainstream paradigm, is a beat-up, courtesy of some spurious work done by the Congressional Budget Office, that much-quoted, but seemingly, errant organisation.
Economists like to tell students about efficiency. The concept – which really distils down to – zero waste (even though that term is loaded) – is drilled into undergraduates and graduates alike as a dogma that should not be violated. Most of the attacks on government intervention by the mainstream economists are couched in terms of efficiency – or the alleged lack of it. The seemingly objective framework that defines the orthodox approach to efficiency allows all the ideological indisposition towards government involvement in the economy to be discreetly hidden. But even then the mainstream do not consistently apply their own constructs. And when the empirical world violates the utopian vision (for example, when there is mass unemployment), the response is to either blame the government some more or redefine the violation away and continue on as if nothing was amiss. This sort of intellectual dishonesty has never been more apparent than in the current period as nations struggle with a deep and enduring crisis. This blog is about two examples of that – health care and youth unemployment.
Yesterday, the Australian Prime Minister launched the latest Federal Government statement, the – Australia in the Asian Century White Paper. The White Paper is full of jargon and superficial tags – such as “Australia’s 2025 aspiration”. While I am not critical of shorthand statements to capture a policy aim, when the substance that lies below the tag is either missing or based on false premises, then the hollowness of the policy statement is revealed. Such is the case in this document. It is littered with neo-liberalism and like previous statements, such as, “by 1990 no Australian child will be living in poverty”, which was made by a previous Australian Prime Minister in 1987 – to his regret ((Source). The pledge was not only impossible to achieve given the scale of the problem faced and the time before the pledge was due but the explicit embrace of neo-liberalism by that government also rendered the goal impossible. Poverty rates and inequality have increased since then as successive governments – Labor and conservative – have abandoned the government responsibility to achieve the related goals of full employment, equity in income distribution and broad social inclusion in economic outcomes. Yesterday’s White Paper release just continues that trend.