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A voice from the past – budget deficits are neither good nor bad

The International Labour Organization (ILO) released its Global Employment Trends for Youth 2012 report today (May 22, 2012). It is harrowing reading and I will consider it later in the week. It tells us that youth unemployment is rising and will be unlikely to see any improvement until at least 2016. The ILO recommend a raft of government initiatives which would require budget deficits to expand. But, of-course, the dominant political narrative is to cut deficits in the false belief that this will engender growth. Exactly the opposite is happening and for good reason. I came across an article from 1982 today which tells us why austerity is dangerous and damaging. It also conditions us to understand that budget deficits are neither good nor bad but policy choices can be.

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Failed forecasts reflect flawed economic understanding – nothing else

How bad is it going to get? That was the question that the UK Guardian asked the head of the UK Office for Budget Responsibility in an interview last week. It was in relation to the likely fallout if Greece defaults and leaves the Eurozone. He replied that the UK would be irreparably damaged. The fact is that Greece has already defaulted. The other fact is that if they do leave the EMU (which would be the best strategy) the impact on currency-issuing nations such as Britain can be managed away by sensible fiscal policy. For those who are predicting deep gloom the culprit is not the possible actions of Greece or any Eurozone nation but rather the irresponsible pursuit of austerity among sovereign nations. The reason Britain has a double-dip recession is all down to the decisions its own government have made. Organisations like the OBR support the flawed decisions with poor forecasting. Taken together this malaise reflects a mainstream macroeconomic framework that is incapable of providing policy advice which will deliver sustained prosperity to the population. The same flawed theoretical framework spawns the ever-growing hysteria about what will happen if Greece exits. The mania is reaching proportions similar to those a few years ago when rising budget deficits were predicted to cause huge hikes in interest rates and/or hyperinflation. All these forecasts fail because they are made by those who do not understand how the system works.

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What is “good” at the macro level may well be disastrous at the micro level

I have been reading about the Great Depression lately and comparing the sort of pressures that governments were placed under during that time to cut deficits which were rising on the back of a collapse in economic activity to what is going on today. There are many interesting parallels and déjà vu experiences. That research took me into some literature on the way the governments bow to industry demands as aggregate demand collapses. In turn, that led me to the way the military-industrial complex operates. Which took me into another literature on the role of the military-industrial complex in creating wars to provide markets for their goods – the merchants of death. And so it goes. That is the nature of research – it just takes one on a journey and usually to destinations previously not imagined. But this journey also clarifies some issues that readers regularly write to me about. The relationship between Modern Monetary Theory (MMT) as a macroeconomic framework and issues that issues that lie below the aggregate level – such as distributional issues. There are links clearly (for example, income distribution affects aggregate demand) but in other ways what is “good” at the macro level may well be downright disastrous at the micro level. But in dealing with the disaster at the micro level, we always have to be mindful of the way dealing with that disaster impacts on the aggregates. This is particularly important in considering issues relating to trade. The military-industrial complex is an excellent case study of these challenges. Here are some early thoughts.

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The current and former Treasury boss speak

I was going to write about military expenditure today in the light of large cuts to defense spending that the Australian government made in last week’s Budget and the decision by the Obama Administration to make it easier for American firms to export military equipment (to who knows where!). The concept of the military-industrial complex is interesting and, to some extent, the issues that are being raised by the US decision were discussed during the Great Depression (I have been reading a lot of material from the 1930s lately). While some might (from a micro perspective) conclude that reducing spending on the military is a good thing (less violence etc) they also have to be mindful of the macro perspective which considers a $ spend on a tank to be equivalent in its impact on aggregate demand as a $ spent on public education – well nearly. But I will write about that tomorrow. There were two interesting interventions into the public debate in Australia yesterday from the current Treasury boss and the recently departed Treasury boss which have general application everywhere. While they are current I thought I would consider these general points today.

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Oh what a difference a President makes!

The world’s press is once again whipping up the “Greece to exit” frenzy and wheeling out all manner of mainstream economists who are issuing the most strident warnings that Greece needs the Euro and will walk the plank if it exits. Most of this is conservative hype. The reality is that while the exit would be immediately costly – the situation is currently so dire and the outlook so negative – that these “costs” have to be weighed against the almost immediate return to growth should the nation exit and default. Apparently, the Greek political elites (the President and the two main party leaders) are proposing that the recent election, which overwhelmingly rejected the Troika-led austerity, be ignored and, instead, a government of technocrats – all of whom will play ball with the Troika, be installed to rule the nation. The machinations of the neo-liberals never cease to amaze me. Greece should take a lesson out of the Iceland book. But then they had a President who seemingly cared about national interest.

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The fantasy Barro(w) is still being pushed

I read the latest “fiscal stimulus has not made a jot of difference” Op Ed from Harvard’s Robert Barro as a classic example of how mainstream economists manipulate data that few understand well to support a case that is the opposite of the facts. nd wondered why he bothers. My profession are experts at either denying that facts are facts (the “when all else fails” strategy – that is, if the facts are inconsistent with the theory then the facts are wrong) or using data selectively when they know most people interpret economic data in a superficial and intuitive manner that often leads to wrong conclusions. The Wall Street Journal article (May 9, 2012) – Stimulus Spending Keeps Failing – which carried sub-title challenge “If austerity is so terrible, how come Germany and Sweden have done so well?” was typical Barro. I realise he cannot perform a detailed data analysis in a standard Op Ed (which is one of the great advantages of blogs). But with the sparse word-limit available in an Op Ed, the writer should also stick to the facts and draw relevant rather than spurious conclusions from the facts presented.

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The ECB cannot go broke – get over it

CNBC’s Head of News, one Patrick Allen produced this article (May 10, 2012) – European Central Bank Leveraged Like Lehman – which several readers E-mailed to me suggesting that there was a problem that had to be addressed and would prevent the ECB funding member state deficit increases in pursuit of growth. The only problem I am afraid to say is the “author” doesn’t know much about the subject that he is writing about. This, sadly, in a general problem out there in commentary land. The article was in fact reporting the views of one Satyajit Das who gets a lot of airtime on national radio in Australia and elsewhere but perpetuates many of the mainstream myths about the way the monetary system operates and its limits and propensities. Das mixes factual statements (which I agree with) with causalities and reasoning (which I do not agree with). The journalists then build their stories based on an uncritical precising of so-called experts like Das and the myths then spread. Let us be absolutely clear. There is no meaningful comparison between the ECB and Lehman or any central bank and any private bank. Further, the ECB cannot go broke.

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The myths that abound in Federal Budget Papers

Last night’s Federal Budget in Australia proved once again how dominant the macroeconomic myths are in policy development. You can read my pre-Budget comments – Budget 2012: a recipe for disaster – and apart from the 2011-12 deficit being larger than the Government planned as a result of the slowing economy undermining its estimated tax revenue (in other words, the Government was overly optimistic in its forecasts last year) I would not have written much different after seeing all the Budget documents. It remains the largest fiscal consolidation attempted in one fiscal year (equivalent to 3 per cent of GDP) at a time that GDP is growing around 2.5 per cent.and I cannot see private spending growth picking up to fill the gap. Outcome – a movement towards recession. Conclusion – poor fiscal management. But the Budget Papers that the Government releases are always interesting reading and one day I plan to trace the evolution of the shifts in macroeconomic ideology through the way the papers are presented (format, tables, and narratives). There you learn what the economists in Treasury think and the ideas espoused are generally applicable to the international debate given that the tentacles of the dominant paradigm of the day spread widely. In Budget Paper No 1, Statement 4 – Building Resilience Through National Saving we are provided with a demonstration lesson of how a fiat monetary system does not work and a classic depiction of the way the mainstream narrative deceives the citizens.

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US labour market on a knife-edge – stimulus is needed

Last week (May 4, 2012), the US Bureau of Labor Statistics released its latest – Employment Situation Summary – for April 2012. The data revealed that employment growth in the US is now slowing but remains positive (payroll data) although the household survey data (which uses a broader concept of employment) revealed a fall in total employment. More indicative of the state of the US labour market was the decline in the participation rate as workers once again gave up looking for jobs that were not there! While the official unemployment rate fell by 0.1 percentage points to 8.1 per cent in April, the reality is that the labour supply contraction disguises the true picture. If we added the workers who dropped out of the labour force back into the unemployment numbers then the unemployment rate would have risen to 8.4 per cent. The US economy is thus at another turning point. Private spending growth does not appear capable at present of filling the gap left by a declining public spending contribution. Unless the government provides a renewed stimulus it is likely the US economy will head backwards and unemployment will rise.

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Australian government about to deliver a 5000-odd word suicide note

Today has been a busy pre-Budget night day (the Treasurer delivers the 2012-13 Budget tomorrow night). I was invited to write an Op Ed for the ABC’s The Drum – a site which explores news and analysis in more detail than the usual 750 word newspaper column. The Drum column is reproduced below. I have also been wondering about the implications for Europe and beyond of the election outcomes in France and Greece. I suspect the latter will be more interesting given Hollande will be unlikely to rock the boat too much. But I need to read more of the French literature that has emerged in the last 24 hours to really get a feel for what is likely to happen there. I will have more to say about the Australian federal budget when it is actually unveiled tomorrow night but it looks like being the case that Australian government is about to deliver a 5000-odd word suicide note.

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