A recurring theme in the press and one that I get several E-mails about a month is that a national government has “more space to net spend” if its past history of deficits and debt are lower than otherwise. This is also related to the acceptance by many so-called progressive economists that national government budgets should be balanced over the course of the business cycle – that is, it is fine to go into deficit when there is a downturn but the government should pay it back via surpluses when the economy is strong. Neither proposition has merit but serve as powerful buttresses for the continuation of the neo-liberal attack on government fiscal freedom and full employment. Government deficits have not caused the crisis. Growth is lagging because spending is lagging. If the non-government sector cannot sustain aggregate spending to ensure unemployment drops then there is only one sector left in town folks!
In the last week, it was alleged that economists such as the IMFs Olivier Blanchard were alleged to be working in the tradition of Hyman Minsky, which by association inferred that they were on top of the crisis – foresaw it, understand why it occurred and offer the best ways out of the mess. Please read my earlier blog – Revisionism is rife and ignorance is being elevated to higher levels – for an introduction to this issue. I argued that this attempted association is plainly false and Blanchard’s monetary economics is more in the Monetarist tradition, which is the anathema to the endogenous money framework that Hyman Minsky worked within. This is no small issue. The economists mentioned are often in leading positions (media, universities, policy) and influence the way the public (and students) think about the policy choices available. By promoting erroneous understandings of the way the monetary system operates, such economists become part of the problem not the solution, no matter if they are currently opposing fiscal austerity. If only they were operating in the tradition of Minsky!
One of the ways I judge whether an economy is working is whether it is able to provide enough work for those who desire it (both in number of jobs and hours of work). That is, an economy that generates purely frictional unemployment with underemployment eliminated. I know that there are many that think that emphasis is old-fashioned but those opinions are mostly provided by those that have secure, well-paid jobs. The latest Eurostat European Labour Force data, May 2012 shows that the policy framework in Europe is failing dramatically against my benchmark with the unemployment rate is now at its highest level in the Eurozone since the currency union began. I judge the Eurozone to be a failed “state”, in need of a dramatic change in policy approach. At the same time I consider it to be spectacularly successful. Time to explain …
As more people become aware of Modern Monetary Theory (MMT), extreme reactions emerge to basic concepts that, in any reasonable sense, should evade such reactions. For example, when the concept of the Job Guarantee (JG) is explained the reactions include hysterical comments such as “This is Socialism”; “MMT advocates the government employing everyone – they are stealth Communists”; “MMT is Communism in disguise”; and the rest. I get several E-mails along these lines per week – all which go into the trash immediately – so why bother sending them! I also get many (polite) E-mails suggesting that we (MMTers) should adopt a compromise line and embrace the ideas of those, who while clearly holding ideas that are inconsistent with MMT, do advocate government-led stimulus in the present context. Apparently we should also use terminology that is consistent with the mainstream to minimise the chasm that has to be be crossed to jettison that orthodoxy and accept MMT. These tactical suggestions have resonated once again in the current little dispute about whether various economists, who operate in the New Keynesian paradigm are channeling Minskian ideas. The suggestion is that, while they might not have foreseen the crisis and hold to various theoretical concepts that are inconsistent with MMT development, we should, as a matter of strategy, form alliances with these economists because they are now advocating policy more or less similar to that proposed by MMTers. So our common purpose should be prioritised over our theoretical differences. I disagree. History shows us that it is very dangerous to develop a new approach by minimising the differences between it and the dominant, but erroneous paradigm just to make it easier for adherents of the latter to embrace the former.
Sometimes I read things and consider either I live in a parallel universe or the writers do. I always conclude the latter. There is an increasing number of articles and commentaries coming out which aim to re-write history in favour of the writer’s reputation or that of his/her mates. Revisionism, which includes the practice of personal reincarnation is rife at present. Everybody seemed to predict the crisis. Even those that clearly in their own writing didn’t have a clue that the trouble was coming predicted it. As part of this process, key organisations that should be learning from the crisis such as the BIS are demonstrating that they are in an educational void. They have become just another propaganda machine. And so the crisis continues as ignorance is elevated to higher levels.
I was going to write about the so-called fiscal cliff today and would have shown that the only thing that might fall of the said cliff would be real GDP growth should the US Congress actually not extend the tax cuts and impose the spending cuts. The US economy would follow the lead from the British economy and double-dip in 2013 as sure as day follows night (or is it the other way round). The most elementary exposition of what we might call – ECO101 Macroeconomics – would tell us that. One person’s spending is another person’s income and so on. I note that some economists are arguing that ECO101 Macroeconomics is alive and well because it has had a an impeccable record in the current crisis. In my recent blogs – Fiscal austerity damages real growth and prolongs the financial downturn and Neo-liberalism has failed but we still don’t get it – I have argued that the mainstream of my profession has failed – both in anticipating the emerging crisis and providing credible solutions to remedy it. So have I overstated that claim, given that ECO101 Macroeconomics is the go-to approach at present? The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.
One of the puzzles that accompany this gruelling economic crisis is why neo-liberal economic thinking, which when applied caused the crisis and has delivered very little to so many, remains the dominant paradigm in economic policy making and has managed to turn a disaster for practitioners of that ideology into a triumph. How is it that the leading voices now are preaching exactly the same policies that caused the crisis as the solution to the crisis. Is there that much asymmetry? I noted a recent comment on my blog (Tom) that raised issues relating to the philosophy of science along the lines of how are we to judge whether the mainstream macroeconomics paradigm has failed. I understand the demarcation issues involved and the problems of “truth testing”. But we can take a more simple approach to the question. Here are two ways we know that the mainstream approach failed – they didn’t have a clue what was happening in the years leading up to the crisis and now they are scrambling in a stunned state to add banks and financial markets to their defective models. The problem is that they are just building more defective approaches. But the continued dominance demonstrates that their failures are not yet fully understood.
It is unsurprising that my profession has suddenly became enamoured with studies of financial cycles. Up until the GFC mainstream macroeconomics (theories and models) mostly ignored financial markets and banking, thinking that they were largely peripheral to understanding the business cycle. The only linkage between the financial sector and the real economy that was considered was via interest rates – the impact on investment spending and the demand for loanable funds to fund investment impacting back onto interest rates. Even within this limited context, the theories developed were hopelessly deficient and incapable of explaining anything that relates to the real economy. But now – more brash than ever – my profession is busily conjuring up financial markets to fit into their Dynamic Stochastic General Equilibrium (DSGE) models, despite these models being next to useless. In March 2009, Willem Buiter said that DSGE models “excludes everything relevant to the pursuit of financial stability.” More recent research from the BIS (link below in the text) has highlighted some salient facts about the relationship between financial cycles and business cycles. What that research implies is that push for fiscal austerity is without foundation and will not only damage the real economy but will, in the process, prolong the financial downturn and prevent a resolution that could provide the springboard for sustainable growth.
The Sydney Morning Herald’s economics editor Ross Gittins wrote an article today (June 20, 2012) – This is no Sunday school: prosperity comes with pain – where he argued that the real world is not like his Sunday School (where all was forgiven) and that “discord and suffering are the price we pay for getting richer”. He might have also qualified that statement by saying that some get richer while others endure discord and suffering. I thought about that because I have been reading a number of related reports on the concept of the working poor – workers who for various reasons (pay, hours of work, job stability) live below the poverty line. I usually focus on the pain that unemployment brings but the working poor, many of whom are full-time workers, are also a highly disadvantaged cohort. It is not enough to just create growth that creates full employment. The policy framework also has to take responsibility for making sure that no-one who works is in poverty. A rising proportion of workers classified as working poor indicates according to metrics I use a failed state. The US is one such state.
Over the last week, a Londoner and a Glaswegian have publicly embarrassed themselves with statements made about the current economic situation. One is an academic historian who hasn’t fully understood history. The other a politician who is seeking to deny the obvious and somehow blur his own culpability in driving the British economy back into a double-dip recession. I guess the smokescreen approach works if yesterday’s Greek vote is anything to go by. I saw a headline in Bloomberg this morning which said that “Greece avoids chaos …”, which prompted me to wonder what chaos might look like if it is not hospitals unable to get access to essential supplies, a government killing its private sector by cutting spending and not paying legitimate bills, and an unemployment rate creeping towards 25 per cent and 50 per cent for youth. The Greeks were bombarded it seems with wilful lies and even then the conservatives on just led the vote count from their main anti-austerity rival. In all the denials and bluster, what I know categorically is that in the real world where we all live – sustaining rates of youth unemployment above 50 per cent – is definitely not protecting the grandchildren.