The NSW Bureau of Crime Statistics and Research (BOCSAR) released an interesting study yesterday (March 13, 2012) – The effect of arrest and imprisonment on crime – which might be a strange topic for a Modern Monetary Theory blog to highlight. On the contrary, this type of research provides an invaluable reality check against those who think that entrenched unemployment during a recession is more efficient than fiscal initiatives that aim to directly generate public sector employment. We already know that that the daily real GDP losses that arise from an economy operating at less than full employment are massive. The BOSCAR report adds another loss in the form of higher crime rates. It confirms long-standing research findings that shows that unemployment causes higher property and violent crime rates.

On Wednesday, we learned that the real GDP growth rate had halved in the December 2011 quarter (to 0.4 per cent) and business investment had contracted. Next day, we learned that the Australian labour market has deteriorated with employment contracting, unemployment rising and since November 2010, 140 odd thousand workers have left the labour force, presumably because employment growth had stalled. We already know that 2011 was a jobless year. Today, the Australian Bureau of Statistics released their International Trade in Goods and Services for January 2012, which shows that our trade balance went from a $A1325 million surplus to a $A673 million deficit (a “turnaround of $1,998m”). Unless that changes in the coming months, the contribution to growth from net exports will be solidly negative. All of these events have reduced the tax revenue for the government. But the response of the Government, which is pursuing a budget surplus this year at all costs, is that they will now have to cut their spending harder. Last year, the Treasurer claimed the authority for this pursuit was none other than John Maynard Keynes. More recently, the British Secretary of State for Business, Innovation and Skills claimed – Keynes would be on our side – in relation to the imposition of fiscal austerity. The reality is otherwise – Keynes would not support fiscal austerity under the current circumstances. The strategy is bereft of any credible authority and is being driven, variously, by politics and ideology.

I was at a social function last weekend and the conversation turned to economics – surprise surprise. I was the only professional economist in the group. I try very hard to avoid discussing economics in these circumstances because experience tells me that misunderstandings quickly occur as the “intuitive” or “common-sense” economists seek the floor. I would much rather talk about weeds growing than the sustainability of budget deficits in times like that. But, alas, someone said “but we’ve got a 50 million-dollar deficit who is going to pay for that?” Another member of the group, who is very articulate and fairly well-read in Modern Monetary Theory (MMT) but not a professional economist stepped in to save the day. She proceeded to explain how common sense is a dangerous guide to reality and that not all opinions should be given equal privilege in public discourse. The conversation deteriorated because the “deficit worrier” and others immediately personalised this observation and considered it to be a attack on their life’s experience. Notwithstanding the tenseness of the situation, it was an interesting demonstration of the flaws in logic that govern the way people think about economics and the way politicians exploit our (flawed) reliance on common sense. Our propensity to generalise from personal experience, as if the experience constitutes general knowledge, dominates the public debate.

Amidst all the political turmoil in the Australian government this week, there was a highly significant report issued by the government (finalised December 2011 but released by the Government on February 20, 2012) – Review of Funding for Schooling – which showed not only how unequal our education system is but also how far behind we have fallen relative to other nations (particularly those that are more important trading partners). For a government which pretends to be concerned with equity and efficiency the Report posed huge challenges. Not only did it suggest current policy was failing, the Report estimated that over AU$5 billion should be invested in education reform to not only improve standards but also ensure that the massive inequalities between rich and poor with respect to educational access and outcomes are reduced. The response by the Australian government was that its priority remained the achievement of a budget surplus in 2012. Here is a classic demonstration of how a failure by the Government to understand the characteristics of the monetary system that it runs leads to poor outcomes in the short-run, but also undermines the future prosperity of the nation.

I wrote recently about Eugene Fama, a Chicago economist who basically denied that a breakdown in the financial markets had caused the current crisis. Please see – Yesterday austerity, today growth – but leopards don’t change their spots – for further discussion. Last week (February 17, 2012), one of Fama’s colleagues wrote a Bloomberg Op Ed – How 3 Myths Drive Europe’s Response to Debt Crisis. The article by one Harald Uhlig, from the Department of Economics at the University of Chicago demonstrates the way that the Chicago School likes to obfuscate issues. He develops a model, which purports to show that the imposition of fiscal austerity and zero impact on the standard of living of the population. The only problem is that the model not only makes some false conclusion, within its own logic, but is also inapplicable as a vehicle for explicating problems that might arise in a modern monetary economy. This is typical Chicago economics – a stylised but irrelevant analytical framework.

I’ve been travelling for most of today (now back in Newcastle) which has cut the time available to write anything. So this will be a relatively short blog and focuses on the way in which my profession is always trying to reconstruct economic issues when they find some policy proposition uncomfortable. The vehicle to demonstrate this phenomenon is an article published by Bloomberg (February 10, 2012) – Sachs Says Krugman Is ‘Crude Keynesian’. It summarised the radio interview (mp3 link – running for nearly 15 minutes) with Columbia University’s Jeffrey Sachs. The latter is well-known for providing advice to the old Soviet economies, which led to the massive transfer of public wealth to the private oligarchs via privatisation. Under Sachs’ guidance, the so-called “shock therapy”, hastily imposed deregulation, privatisation and the abandonment of price controls (on rent etc) on the previously planned economies – with disastrous consequences. In the Bloomberg interview, Sachs is highly critical of “macro” interpretations of the current problems – claiming that the major challenges are all micro in origin.