For some time I have been promising to write a blog about the role that manufacturing plays in a modern economy. There is a strong presumption, especially from the progressive side of the political debate that manufacturing – or what you produce – defines the capacity for a nation to enjoy growth in real wages and therefore standards of living. So when I have said in the past that I am against industry protection I usually get attacked from the left and I note that this if often coming from people who think it is cute to sound technical by saying the government should balance their budget over the course of the business cycle. As if! Neither viewpoint coming from that quarter has much credibility. I take a more experiential viewpoint. People prefer to consume than to work. What we consume is more likely to give us joy than what we produce especially if the latter is in the context of exploitative capitalist production relationships. I am painting this in black and white terms to garner your interest. Clearly it is more complicated but in general I do not think you need a manufacturing sector to enjoy strong growth in material living standards and perhaps a polluting manufacturing sector erodes the capacity to enjoy broader concepts of growth and well-being. My flame resistant suit is now in place … so here goes.

Whenever unemployment rises substantially – that is, whenever there is a recession, the conservatives hide out for a while because the rapid rise in joblessness does not resonate with their models of voluntary choice (that is, workers choosing leisure although they can never explain why workers would suddenly get lazy?) or with their claims that structural factors push the unemployment rate up (although welfare policies etc rarely alter much). Of-course, they love it when some “structural” policy changes during a recession which is why they are cock-a-hoop about the decision of the US government to extend unemployment benefits. It has given them some latitude to get back into the debate even if all the data is working against them. But they always oppose the use of fiscal policy and so typically, towards the tail-end of a recession, they attempt to justify the deplorable unemployment levels by playing the “structural card”. We are now seeing that again and I expect the propaganda to spread and proliferate. It should be rejected like the rest of the cant.

The denials continue. In the Wall Street Journal yesterday (August 30, 2010) we see the latest desperate attempt by Harvard (and Stanford) professor Robert Barro to redefine away the recession. The article – The Folly of Subsidizing Unemployment claims that if the US government had not have extended unemployment benefits to 99 weeks “the jobless rate could be as low as 6.8%, instead of 9.5% …” Barro has consistently claimed that the government fiscal intervention has largely caused the recession to persist. As we will argue his track record at predicting and/or explaining economic outcomes is very poor. Simple facts always contradict his fantasy world of Ricardian Equivalence and Natural Rates. I am also adding Stanford to my list of universities which sensible students should boycott if they want to learn some economics given Barro’s presence there. The list is getting longer.

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City. While not all of the papers and discussion are yet available for public scrutiny there were some notable presentations (that you can access in full) which suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession.

Yesterday, I indicated that I would provide some commentary on the latest Morgan Stanley briefing (August 25, 2010) – Sovereign Subjects – which received a lot of press coverage in the last few days and roused the interest of many of my readers. I cannot link to it as it is copyrighted. But the MS document is another example of how you can spread nonsense by ignoring the elephant that is sitting in the corner of the room. The MS briefing is essentially a self-aggrandising rant which perpetuates the standard neo-liberal myths and offers nothing new. I sincerely hope that the author’s company and all of their clients take his advice and lose significant amounts of their investment funds. The more losses are made in this respect the more quickly people will see through the cant that is served up by these clowns.

I often read articles that follow their own logic impeccably except they leave the main part of the story out. They ignore the elephant that is staring at them from the corner of the room. In doing so they avoid facing up to uncomfortable realities and just perpetuate the standard myths that characterise economic debate in this neo-liberal era. Some other articles build on this deception and just plain invent things to beguile their readers into thinking they have something important or valid to say. Tomorrow I will review the latest Morgan Stanley briefing (August 25, 2010) which is an example of the latter. But in general the conservative commentators exploit the fact that the general public do not what the debates are in economic theory and thus litter their proselytising with spurious claims while the elephant laughs away in the corner. It is almost comic book stuff except the standard of narrative in most comics is vastly superior to the trash is pumped out daily in the World’s press.

I come across new evidence every day that supports the Modern Monetary Theory (MMT) perspective on fiscal policy. Today the Australian Bureau of Statistics released the latest Construction data which provides very clear testimony to the effectiveness of the recent fiscal interventions in Australia. So I thought I would devote this blog to exploring some of the characteristics of this data and see what it means for assessing the impact of the fiscal stimulus in Australia. The conclusions that I draw are consistent with the insights that many different data series are telling us at present. The fiscal stimulus was effective and as it is withdrawn by a budget surplus-obsessed government the economy is suffering. The data today is a further nail in the deficit terrorist coffin.

Remember what we were told a few months ago – that business and households were so terrified of higher future tax burdens associated with the budget deficits that they were not investing or spending and so governments were killing economic growth? This led to the deficit terrorists arguing (shouting) that the fiscal stimulus that governments had implemented to save their economies from the threat of a depression were actually undermining growth and that fiscal austerity was the key to growth. Accordingly, governments have increasingly been implementing or promising to implement so-called fiscal consolidation strategies because they have fallen prey to the austerity proponents. As the fiscal stimulus has waned across the world growth is slowing and there is now a real danger of a double-dip recession. In nations that have introduced formal austerity programs the evidence is now mounting … it damages growth and undermines business and household confidence. It has exactly the opposite effect to that predicted by the deficit terrorists which is no news to anyone who understands anything about how the economy works. The victims – the poor and disadvantaged …. AGAIN!