The catch-all category for my blogs reflecting my professional expertise as a full professor of economics.

Fiscal vandals chasing a dream

The Australian government is digging a hole for itself at present. In the May Budget it talked (neo-liberal) tough to demonstrate what it claimed was “Responsible Economic Management” – and this meant it entered a battle with the Opposition about who would deliver the biggest budget surplus. This became one of the comical (in a tragic way) features of the August federal election campaign. The respective treasury boof-heads from the Government and Opposition boasting about the size of their future budget surpluses. They also tried to win the battle of who would get there the quickest. The whole discussion was definitely mindless. Now with the Australian dollar appreciating fairly strongly the Government has realised the reduced economic activity that seems to be occurring is reducing its tax revenue prospects and therefore undermining its surplus projections. So what do they do next? Answer: announce they will cut spending by even more than originally planned. They are going to deliberately undermine employment growth and force even more people to lose their jobs at a time that labour underutilisation sits at the obscene level of 12.5 per cent and inflation is moderating. It is sadly a case of the fiscal vandals chasing a dream. The dream however is a nightmare.

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Sad day for America

I followed the US mid-term election campaign as best I could – being an outsider. Sometimes the level of debate appeared to be below that which I imagine the primates engaged in back then. I don’t intend to become a psephologist (not qualified) but I am interested in exploring why these witless conservatives have made ground. In Australia’s recent national election where the so-called progressive Labor Party (not!) lost office in their own right the swing was to the Greens rather than the conservatives. This does not appear to be the case in the US. So there are two questions I am interested in. First, what role did the neglect of the unemployed play in the election results? Second, do the result really amount to an endorsement of the neo-liberal economic approach? But the reality is that the US political debate has become so divorced from reality – which in my parlance means that it has totally failed to provide a vibrant debate about the options that the monetary system offers government to improve the lives of the citizens. Instead, candidates who have no understanding at all have been elected on the basis of a pack of lies and only demonstrate total ignorance when it comes to informed debate. In that sense, the mid-term elections have foisted a number of very dangerous individuals into office. Sad day for America!

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They have been smoking some doobies

I suddenly realised what has been going on all this time. They have been smoking some doobies – some real strong doobies and their heads are not what they used to be. How cool is that conclusion? It explains everything – why they typically miss the point of everything; why they say really dumb things most of the time; why they usually look half asleep; why they think down is up or up is down; why they continually think that what is good for them is bad for them and vice versa and all of that funk. I am so relaxed now – I actually thought there was a problem. But a bit of weed is doing it. I guess it is time for them to ease up on their intake though or their lack of concentration and awareness of reality will become entrenched. We need all the citizens we have thinking clearly and working together.

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I feel good knowing there are libraries full of books

Today’s blog might appear to be something different but in fact is more of the same. There was an article in the New York Times recently (October 10, 2010) – The Crisis of the Humanities Officially Arrives – by US academic Stanley Fish, which discussed the growing demise of the humanities in our universities. While the debate is about the role of the humanities specifically, the points Fish makes about how we appraise the value in education resonates more broadly to a consideration of the role of educational institutions and human activity in general. One of the vehicles the neo-liberals use to promote their anti-intellectual agenda is the false claims that governments are financially constrained. By appealing to this myth lots of questions about motivation are avoided. They promote the myth that some activity is “too expensive” or “not productive enough” and we are thus shoe-horned into that way of thinking. But I feel good knowing there are libraries full of books of poems and plays and stories and I know that sovereign government are not financially constrained. I might not be able to defend the quality of a poem but I can certainly explain how the monetary system works. So you poets and playwrights under threat – come aboard and learn about fiscal policy and the monetary system and spread the word.

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What is fiscal sustainability? Washington presentation

I am travelling today and have a full schedule ahead and haven’t much time to write anything. But it just happens that the multimedia presentations and documentation for the Fiscal Sustainability Teach-Ins and Counter-Conference which was held at the George Washington University, Washington DC on Wednesday, April 28, 2010 have just been made available by the team which organised the event. The Teach-In was a grass roots exercised designed to counter the conference organised by the arch deficit-terrorists at the Peter G. Peterson Foundation, which was also held on April 28 in Washington D.C. – just across town from our event. While that event also chose to focus on “fiscal sustainability”, the reality is that it will merely rehearsed the standard and erroneous neo-liberal objections to government activity in the economy. Given my time constraints today I thought it was serendipitous that this material became available overnight. So the following blog provides access to video and all the documentation for my session. Very special thanks to Selise and Lambert (and their team) for taking the time to document and prepare all this material.

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Nationalising the banks

This week is a big week for the banks in Australia being the annual reporting time when they are forced to disclose the remuneration packages that they pay out to their management. The banks have been under attack – again – for gouging their customers with spurious arguments about rising costs and falling margins. While some of their costs may have risen from the rock-bottom levels before the crisis, the evidence does not support the narrative that the banks are now presenting to the public as a precursor to further gouging. The big debate though – which is simmering – is about the purpose of banking in a monetary economy. Essentially, banks are public institutions given they are guaranteed by the government. But there is a tension between their public nature and the fact that the management of the banks claim their loyalty lies to their shareholders (and their own salaries). This tension has led to the global financial crisis and its very destructive aftermath. However, while the real economy still languishes in various states of decay, the financial sector has bounced back under the safety net of the government’s socialisation of their losses. How long will all of us citizens tolerate this? The solution to the tension is to socialise both the gains and losses of the banking sector. In that sense, nationalisation of the banking system is a sound principle to aim for. This would eliminate the dysfunctional, anti-social pursuit of private profit and ensure these special “public” institutions serve public purpose at all times.

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Wealth effects – been down that road before

In recent days, there has been some talk here about wealth effects and how they might complicate the interpretation of the multiplier. The claims made about that the multiplier understates the likely expansion as a result of the wealth effects is somewhat misleading but that is another story. The fact is that the inclusion of wealth effects has a long standing in economics. They were initially used as part of the mainstream denial that involuntary unemployment could exist in a market economy with flexible prices. This goes back to the famous Keynes versus Classics debates. In that debate, the mainstream argued that the wealth effects would be sufficient to restore full employment during a recession without any need for government intervention. The problem is that the ideas do not withstand scrutiny – either theoretically and empirically. They certainly do not provide a credible attack on the Modern Monetary Theory (MMT) claim that fiscal policy intervention is required to combat a situation where aggregate demand is deficient relative to the productive capacity of the economy. This spending gap manifests as involuntary unemployment in the absence of an appropriate policy response. Given the ideological position that these “wealth effects” have occupied in the literature I am always suspicious when someone proposes we take them seriously. That is what this blog is about.

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Back to basics – aggregate demand drives output

Sometimes we get lost in detail and forget the simple macroeconomic relationships that sit below the complexity. I also like to get lost in detail too – to work out tricky little aspects of the financial system, etc but it is always a sobering experience to go right back to the beginning. I have been forcing myself to think “basic” lately as I progress the macroeconomics textbook that my mate Randy Wray and I are writing at present. It seems that our national governments have lost their perspective to think at this basic level – to really understand what drives prosperity in their nations. The evidence for this statement lies in the various fiscal austerity plans that are being rehearsed around the world at present. The most blatant and severe example of this in the non-EMU world has just been announced in Britain. This is a case of a government driven by ideology deliberately inflicting massive damage on its citizens while lying to the population about the necessity for such a policy. Its fits my definition of a state-motivated terrorist attack. If only the people of Britain understood the most basic economic relationship – aggregate demand drives output and national income. Cut spending and prosperity falls. Only by lying to the people, has the British government been able to take this policy path.

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Why fiscal deficits drive private profit

I have been working on the macroeconomics textbook today that Randy Wray and I are hoping to publish sometime next year. We have a publisher and now just have to complete the text which is progressing well. Also today I have been wondering why UK business firms are not horrified at the latest damaging policy announcement by the new conservative British government. My thoughts generalise to any government at present in terms of the obvious need to expand fiscal policy. I brought those two things together today – the practical need for continued fiscal support for private sector activity and the development of our textbook – by considering the macroeconomic origins of profits. It is an interesting story that very few people really understand because they think micro all the time when it comes to the understanding the profits of business firms whereas you have to start thinking from a macroeconomics perspective to really understand this. It also helps you understand the relationship between the government and non-government sector more fully – a relationship which is at the heart of Modern Monetary Theory (MMT). So read on and see if you have thought about this before.

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Foreclosures – problem or not?

The news from the US housing market remains pretty bleak three years after the financial crisis began. Last week, we read that attorneys general from all 50 states were investigating allegations that some major banks inappropriately reviewed mortgage files and/or tendered false foreclosure statements which led to the eviction of thousands of delinquent borrowers from their homes. Apparently, banks and credit suppliers used “robo-signers” to sign false affidavits. The US federal regulators are meeting today (October 20, 2010) to discuss the “foreclosure crisis”. The question is whether this will become a bigger problem and spill over into the real economy and worsen the unemployment crisis. The governments have all the tools and capacity they need to ensure that any financial crisis is totally insulated from the real economy. But their reluctance to show the necessary policy leadership almost ensures that a financial crisis will spread and wreak havoc in the real economy. Their lack of policy action amounts to plain stupidity or malicious contempt for their citizens. Probably both.

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