Somehow research gets published which contradicts the basic propositions of mainstream monetary theory yet it just gets buried and the commentariat continue on as before sprouting the myths that now occupy us on a daily basis. In February 2010, the Bank of International Settlements (BIS) published a working paper (No. 297)- The Bank Lending Channel Revisited – which falls into this category. It argues categorically that the mainstream propositions about money and banking are incorrect and uninformative. Its essential insights confirm the fundamental propositions of Modern Monetary Theory (MMT) – which when translated into the policy space – would suggest that monetary policy is not the ideal tool to resolve a major collapse in private aggregate spending and that fiscal policy will not drive up interest rates and crowd out private spending. Why these papers are suppressed in the public domain by the commentators makes for interesting speculation – all of which impugns the motives of those who hold themselves out as experts but, in fact, just peddle lies. The problem for all of us – but more so the unemployed and poor – is that they are influential lies.

I don’t have much time today. But over the weekend the talk has been of a return to the gold standard. Conservatives hark back to the gold standard as some sort of golden age when all was well with the world. They still think that prosperity is within the grasp of a society if it anchors its currency to the price of gold. It seems the US Republican party is toying with the idea again – presumably as a pitch to rope in the real conservatives (Ron Paul supporters). They couldn’t be serious though. It would be a disaster if the world attempted to go back to a system that failed when it operated and it would lead to the further immiserisation of the poor if implemented. The salient point is that it didn’t work when it was in operation. It didn’t produce lower price variability and lower inflation rates nor did it prevent bank crises and financial panics. It was abandoned because it was politically unsustainable such was the entrenched unemployment that accompanied it.

My university office is far from clean so next week when I get back there I suspect I will find some more old insightful articles in the boxes remaining to be sorted to comment on. I haven’t much time today as I am in transit. But there are two interesting developments in Australia that are worth commenting on while the iron is hot. The first is that one of Australia’s fat cat banksters, fresh from enjoying the benefits of the federal government’s loan guarantees is now advocating cuts in the unemployment benefits to make the unemployed more desperate for work. The benefit is already well below Australia’s poverty line and there are 3.6 odd unemployed for every vacancy not to mention the 8 per cent of workers who are underemployed. The bankster thinks that by pushing them further into poverty they might up house, pack their cars and travel across the other side of the continent to work in the mining sector. Little does he know. The second piece of news was that two major mining projects have been shelved by BHP as the outlook for the sector deteriorates.

Crazy ideas have a habit of re-entering the public policy debate even if they have been comprehensively rejected in theoretical and/or empirical terms. In fact, the whole edifice of neo-liberal thinking, which dominates the public debate now, was discredited by Keynes and others during the Great Depression and fell into irrelevance for most of the Post World War 2 growth period which delivered full employment. There are sub-sets of crazy ideas within the neo-liberal narrative that are in a similar position. In the early 1980s, we started to be barraged with what is known as supply-side economics, which amounted to a categorical rejection of demand-side measures (active fiscal policy intervention). One of the major claims of the supply-side approach was that deregulation and large tax cuts for the high income earners and companies would generate massive increases in real GDP growth (and national income) which would trickle down to the low-income earners. To fit this into the neo-liberal rejection of budget deficits they also had to come up with the claim that the tax cuts would actually generate offsets in tax revenue and improve the budget balance. This was the comedy that became known as the Laffer Curve. The economist who was pushing that line in the 1980s has also maintained an intense opposition to any use of fiscal policy to stimulate real GDP growth. He claims that the recent history shows that fiscal policy expansion damages growth. But when you dig into his argument you realise that the comedian is still trying to make us laugh. The only problem is that he isn’t very funny.

I was reading several older papers from the 1990s today as part of a project I am working on where I track predictions that leading mainstream economists were making at the time about the evolution of national and global economies. It is a very interesting exercise to build the narratives that were popular at an earlier time and then consider how far the economists got things right. I have noted that there has been some debate out in blog-land about who predicted the failure of the Euro. I am less interested in documenting which person was the first or the second – there were many who saw the design flaws from the inception and could extrapolate what they would mean if a negative shock occurred. Modern Monetary Theory (MMT) economists were among them. I am more interested in groupthink (at the paradigm level) and how the failed predictions can be used to demonstrate the inapplicability of a certain body of theory. That is, what can we learn from the failure of mainstream economists in general to see the crisis coming (and being in denial now of what the solution is). In this blog I consider a part of the thinking that explains why my profession proved to be unreliable in this regard. I renamed this blog – appending it with the term redux because on March 23rd, 2009 – I wrote a blog – Budget surpluses are not national saving.