They better keep the vacuum on or else!

While the Eurozone leaders appear to be obsessed with a relentless series of meetings which discuss largely irrelevant problems that they identify, there is a growing chorus that is highlighting the reality facing the region. It is patently obvious that the only short-term solution to the Euro crisis is for the ECB to keep its vacuum cleaner on and keep “hoovering” up the debt of governments who are unable to gain access to funds in private bond markets at reasonable yields. While the long-term solution is an orderly dismantling of the monetary union, the ECB is the only show in town at present that can in the spiralling crisis and ensure that the Eurozone countries return to growth as quickly as possible. This is even more paramount now Germany has recorded a negative quarter of growth with worse expected in the coming months. It beggars belief that the Euro elites have engineered a crisis of such a proportion that that their worst fears become the only solution.

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Labour market deregulation will not reduce unemployment

Underlining the current obsession with fiscal austerity is an equally long-standing obsession with so-called structural reform. The argument goes that growth can be engendered by deregulating the labour market to remove inefficiencies that create bottlenecks for growth even when fiscal austerity is slashing aggregate demand and killing growth. The 1994 OECD Jobs Study the provides the framework for this policy approach. The only problem is that it failed even before the crisis emerged. But with policymakers intent on slashing aggregate demand, which they know will kill growth, they have to offer something that they can pretend will generate growth. The structural reform agenda has zero credibility in the same way that fiscal austerity has zero credibility.

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Britain needs more hours of work not less

A striking characteristic of the last few decades has been the way the so-called “progressive” political parties have adopted policy frameworks and thinking that were previously the exclusive domain of the conservatives. Nothing could be more obvious than the way in which all the major parties around the world now speak neo-liberal economics as if it was the only way of thinking about the economy and economic policy. Slowly but surely the options that parties are willing to consider have been narrowed down and policy is now conducted in a straitjacket which cannot deliver prosperity for all as well as advancing environmental objectives. It is understandable that during recessions expectations become downgraded by workers about the types of jobs they will except, by consumers about the level of spending they can sustain, and by firms about what investment projects will be viable in the period ahead, etc. But it is strange that when the prevailing economic paradigm not only caused the great recession but is prolonging it at great cost, that the major parties remain locked down in the neo-liberal mire – blinded to other options. It is clearly time to think outside of this box and that is what I try to promote in this blog. But we also have to be careful that when we go wandering we are still on solid macroeconomic ground.

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Rehn fiddles, while Europe burns

According to the popular legend Nero, Roman Emperor from 54 to 68 and the last in the Julio-Claudian dynasty allegedly “fiddled while Rome burned” (played his lyre and singing) during the fire in 64 which destroyed most of Rome. His rule (and dynasty) ended 4 years later. The imagery of this out-of-touch and cruel leader strumming/plucking his stringed instrument (rumour notwithstanding) while his city and, soon after, his dynasty collapsed is powerful. Last Friday, Eurostat released the latest unemployment data for November 2011. The results were shocking with unemployment rates in Spain now close to 23 per cent (as at November 2011 and rising) and Greece 18.8 per cent (as at September 2011) and rising. Greece’s unemployment rate rose 4.8 per cent in the first 9 months of last year. Meanwhile, the European Commission is occupying itself with other concerns. Its Economic and Monetary Affairs Commissioner and Vice President, Olli Rehn has been sending letters out to member states indicating that he is disappointed they are falling behind their budget deficit reduction targets under the Excessive Deficit Procedure (embedded in the Stability and Growth Pact) and that the EC would be considering fines.

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Hungary helps to demonstrate MMT principles

I have received a lot of E-mails overnight about developments in Hungary. The vast majority of these E-mails have suggested that these developments (sharp rise in government bond yields since November) coupled with the fact that the Hungary uses its own currency (the forint) and floats in on international markets provide problems for the Modern Monetary Theory (MMT) understanding of the monetary system. I have been digging into the data on Hungary for some months now as I learn more about the history of the nation and its political and institutional structure. I am always cautious researching foreign-language material because outside of documents published in Dutch or French my comprehension skills are weak and I know that even in English documents there are tricks in trying to come to terms with the way data is collected, compiled and disseminated. However, unlike many non-English-speaking nations, access to very detailed data for Hungary in English is reasonable. I will have more to write about their problems in the future as I accumulate and process more information. But at present what I can say is that Hungary is a very good example of what a government with its own currency should not do and the current developments reinforce the insights available from MMT rather than present us with problems. Hungary is in deep trouble exactly because it has violated some of the basic macroeconomic principles defining sound fiscal and monetary policy.

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Evidence – the antidote to dogma

Evidence is a lovely thing sometimes. Like the speck of blood on a bomber jacket that has finally convicted the racist killers in London, 19 years after the crime was committed. In a different way, economic data is continually flowing in that makes vocal elements in my profession look like idiots. The only question is how long will it take for the rest of the world to know that and for governments to stop being influenced by the opinions of these economists. Over the last few decades I have been compiling interviews and commentaries from leading economists so that I can compare their predictions with the evolving reality. Economists typically make categorical statements such as – rising budget deficits will push up interest rates and choke off private spending – and then buttress those comments with arcane models that were negated both conceptually and empirically years ago. Invariably, when the mainstream economists do make predictions or empirical statements they are invariably wrong and then it is interesting to see how they respond to the anomaly – the dance that follows to try to maintain the upper-hand in the debate. They typically respond by nuancing the issue. But there are also times when their predictions are unambiguously wrong and ad hoc responses (of the Lakatosian type) make them look even more stupid. Then they bury their head in the sand and go into denial mode and their ideology takes over. The best antidote to this sort of dogma is evidence.

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Back to William Beveridge requires a commitment to true full employment

I have been digging back in time and re-reading Unemployment: a problem of industry by William Beveridge (published 1909). Beveridge is most known for his 1944 book – Full Employment in a Free Society and the related Social Insurance and Allied Services – (1942 aka the Beveridge Report). The point is that to understand the motivation for the Beveridge Report you also have to appreciate the earlier document and the role that it played in labour history in the UK (and elsewhere). Why am I considering this? The British Labour Party is appealing to the 1942 Report as a motivation to introduce radical reform to the British welfare system. They think that by attacking the most disadvantaged citizens in Britain at a time when unemployment is so high and poverty is rising that they will gain some traction with the electorate. The word despicable comes to mind. However, it is clear they are just remaining faithful to their earlier corrupt past.

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BIS now part of the neo-liberal propaganda apparatus

Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.

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Historically high budget deficits will be required for the next decade

Japanese economist Richard Koo recently published his latest paper – The world in balance sheet recession: causes, cure, and politics – which reminds us that patience is the virtue that is required right now and that the major political responses to the crisis are exactly the opposite to what is required to safely steer the World economy back into health. The insights he provides, mostly consistent with Modern Monetary Theory (MMT), demonstrate how the current political cycle (and the imperatives that are being imposed) is so far out of kilter with what responsible macroeconomic management requires. The world economy will require continuous and historically large budget deficits in most advanced nations for many years to come. The demands for fiscal consolidation talk about this year and next year and surpluses in a few years. The reality is that deficits will be required to support growth while the private sector reconstructs its unsustainable balance sheet for more than a decade. We have to get use to that or suffer the consequences. To repeat: Historically high budget deficits will be required for the next decade – at least.

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Wrong is still wrong and should be disregarded

It is a public holiday in Australia today and I am not working a full day. But I have been collecting some items from the past five or so years which I am weaving into the text book that Randy Wray and I hope to have out in the coming year. When academics or others comment on public affairs it is clear that our commentary is to a certain extent time-dependent. The language we use, the topics we focus on and the conclusions we draw. So some things that are written sound quaint when we go back to them after some years. I hoard information and occasionally I access my databases to see who said what in some year and compare it to what might have happened in the interim and then what the same person might be saying in retrospect. It is an interesting exercise and when applied to my own profession reveals some amazingly nonsensical predictions or assessments. The global crisis has provided a major event to test many of the assessments made prior to the crisis. The most surprising thing is that the same sort of assessments made prior to the crisis that were demonstrated to be entirely false are still being made and still influencing policy design. But the most robust assessments have withstood the crisis and remain relevant today. I include the developments in Modern Monetary Theory (MMT) in this latter category. Mainstream macroeconomics was largely wrong before the crisis and is wrong now (for the same reasons) and should be disregarded.

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