Discussions about fiscal statements, analysis and controversies from an MMT perspective

Fiscal policy must be the tool of choice to respond to major climate related calamities – BIS

“Fiscal support can manage the direct economic fallout from extreme weather events.” That quote came from an interesting new research paper published in the 98th edition of the Bank of International Settlements Bulletin (February 10, 2025) – Macroeconomic impact of extreme weather events. The paper seeks to tease out what the economic impacts and policy implications are of the climate changes that are now manifest in various extreme weather events, such as droughts, wildfires, storms, and floods, which are increasing in incidence across the globe. The researchers recognise that such events are increasingly imposing “high economic costs” and “social hardship” on communities around the world. Their conjecture is that the “most extreme weather events have been rising and are likely to increase further” which will challenge policy makers. They discuss the implication of this increased exposure to such events for fiscal and monetary policy but recognise that fiscal policy must be the frontline tool to respond to the damage caused by such events.

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The Left has created the swing to the Right – some reflections

The last several decades of what is termed the neoliberal era has led to some fundamental changes in our social and economic institutions. It was led by the interests of capital reconfiguring what the polity should be doing, given that most of the significant shifts have come through the legislative or regulative capacity (power) of our governments. In turn, this reconfiguration then spawned shifts within the political parties themselves such that the traditional structures and voices have changed, in some cases, almost beyond recognition. The impacts of these shifts have undermined the security and prosperity of many citizens and redistributed massive wealth to a small minority. The anxiety created as the middle class has been hollowed out has been crying out for representation – for political support. Traditionally, support for the socio-economic underdogs came from the Left, the progressive polity, which, after all was the Left’s raison d’être. But that willingness by the Left politicians to give voice to the oppressed has significantly diminished as it surrendered the macroeconomic debate to the mainstream and got lost in post modernism. As a consequence, the ideological balance has demonstrably shifted to the Right, and the former progressive parties have been abandoned. My thesis is that the Left has created a burgeoning return of the Right with a daring and resolve that we haven’t seen for decades. The election and aftermath of Donald Trump’s elevation to presidency demonstrates the situation. Last weekend’s general election in Germany demonstrates the situation. And today a poll was released in Australia that suggests the current Labor government, which slaughtered the conservatives in the last election just 3 years ago are now facing a clear loss to the Opposition – that is advocating Trump-style radicalism. As the saying goes – you get what you deserve.

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Britain and its fiscal rule death wish

Governments that adhere to the mainstream macroeconomic mantras about fiscal rules and appeasing the amorphous financial markets have a habit of undermining their own political viability. As Australia approaches a federal election (by May 2025), the incumbent Labor government, which slaughtered the Conservative opposition in the last election, is now facing outright loss to a Trump-style Opposition leader if the latest polls are to be believed. That government has shed its political appeal as it pursued fiscal surpluses while the non-government sector, particularly the households, endured cost-of-living pressures, in no small part due to the relentless profit gouging from key corporations (energy, transport, retailing, etc). The government has not been riven with scandals or leadership instability. But its amazingly fast loss of voting support is down to its unwillingness to take on the gouging corporations and also to claim virtue in the fiscal surpluses, while the purchasing power loss among households has been significant. The same sort of death wish is arising now in the UK, although the British Labour government is at the other end of its electoral cycle which gives it some space to learn from its already mounting list of economic mistakes. The British government situation is more restrictive than the case of the Australian Labor government because the former has agreed to voluntarily constrain itself via an arbitrary fiscal rule.

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ECB should take over and repay all the joint debt held by the European Commission after the pandemic

There are repeating episodes in world macroeconomics that demonstrate the absurdity of the mainstream way of thinking. One, obviously is the recurring debt ceiling charade in the US, where over a period of months, the various parties make threats and pretend they will close the government down by failing to pass the bill. Others think up what they think are ingenious solutions (like the so-called trillion dollar coin), which just gives the stupidity oxygen. Another example is the European Union ‘budget’ deliberations which involve excruciating, drawn out negotiations, which are now in train in Europe. One of the controversial bargaining aspects as the Member States negotiate a new 7-year deal is the rather significant quantity of joint EU debt that was issued during the pandemic to help nations through the crisis. How that is repaid is causing grief and leading to rather ridiculous suggestions of further austerity cuts and more. My suggestion to cut through all this nonsense is that the ECB takes over the debt and insulates the Member States from repayment. After all, the debt wasn’t issued because the Member States were pursuing irresponsible and profligate fiscal strategies.

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Economics as politics and philosophy rather than some independent science

Last week, I wrote about – The decline of economics education at our universities (February 6, 2025). This decline has coincided and been driven by an attempt by economists to separate the discipline from its roots as part of the political debate, which includes philosophical views about humanity and nature. In her 1962 book – Economic Philosophy – Joan Robinson wrote that economics “would never have been developed except in the hope of throwing light upon questions of policy. But policy means nothing unless there is an authority to carry it out, and authorities are national” (p.117). Which places government and its capacities at the centre of the venture. Trying to sterilise the ideology and politics from the discipline, which is effectively what the New Keynesian era has tried to do, fails. The most obvious failure has been the promotion of the myth of central bank independence. A recent article in the UK Guardian (February 9, 2025) – You may not like Trump, but his power grab for the economic levers is right. Liberals, take note – is interesting because it represents a break in the tradition of economics journalism that has been sucked into the ‘independence’ myth by the economics profession.

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Field trip to the Philippines – Report

I have been working in Manila this week as part of a ‘knowledge sharing forum’ at the House of Representatives which was termed ‘Pathways to Progress Transforming the Philippine Economy’ that was run by the Congressional Policy and Budget Research Department, attached to the Congress (Government). I am also giving a presentation at De La Salle University on rogue monetary policy. It has been a very interesting week and I came in contact with several senior government officials and learned a lot about the way they think and do their daily jobs. I Hope the interactions (knowledge sharing) shifted their thinking a little and reorient to some extent the way they construct fiscal policy. This blog post reports (as far as I can given confidentiality) what went on at the Congress.

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The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process

Last week I noted in my review of the Australian government’s Mid-Year Economic and Financial Outlook (MYEFO) – Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in (December 19., 2024) – that the forward estimates were suggesting the federal government’s fiscal deficit would be 1 per cent of GDP in 2024-25, rising to 1.6 per cent in 2025-26 before falling back to 1 per cent in 2027-28. The average fiscal outcome since 1970-71 has been a deficit of 1 per cent of GDP. I noted that the media went crazy when these estimates were released – ‘deficits as long as the eye can see’ sort of headlines emerged. It was fascinating to see how far divorced from reality the understandings in Australia are of these matters. Meanwhile, the RBA keeps claiming that productivity is the problem and the reason they are maintaining ridiculously high interest rates even though inflation has fallen back to low levels. My advice to all these characters is to take a little trip to Hokkaido (Japan) and see what nation building is all about. The Japanese government has already invested ¥3.9 trillion for semiconductor industry development since 2021 (that is, 0.7 per cent of GDP) and the Ishiba government recently announced a further ¥10 trillion (1.7 per cent of GDP). Meanwhile, the overall deficit is around 4.5 per cent of GDP and no-one really blinks an eyelid. The Japanese government is investing heavily in high productivity sectors and revitalising regions in the process.

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Australian government announces a small shift in the fiscal deficit and it was if the sky was falling in

Yesterday (December 19, 2024), the Australian government published their so-called – Mid-Year Economic and Fiscal Outlook 2024-25 (MYEFO) – which basically provides an updated set of projections and statuses of the fiscal position six months after the major fiscal statement was released in May. One would have thought the sky was falling in given the press coverage in the last 24 hours. The standard of media commentary in Australia on fiscal matters is beyond the pail.

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British Labour Government is losing the plot or rather is confirming their stripes

At the moment, the UK Chancellor is getting headlines with her tough talk on government spending and her promise to keep an “iron grip on the public finances”, which she defined as “taking an iron fist against waste”. Okay. This tough guy talk (guy being generic) seems to be the flavour of the month with the incoming US administration also talking about creating a Department of Government Efficiency (DOGE) to hack into public sector spending and employment. Once again we see a Labour government consorting with the ideas of the conservatives. And extreme conservatives nonetheless. The British Chancellor has also determined that public officials are incapable of understanding the priorities and means to provide public services and is going to force the department officials to appear before a so-called ‘independent committee’ of bankers and other financial market types who will scrutinise the financial plans with the aim of cutting 15 per cent over three years from each department’s budget. Another example of conforming to neoliberal ideology. The problem with all this talk, which generalises into public discussions about government spending, is that there is an implicit assumption that it is dysfunctional and just goes up in smoke (waste) somewhere. I never hear these politicians acknowledge that if they actually succeed in making these cuts then a spending gap will emerge and that gap has to be filled in some way or the economy moves towards recession. In other words, what a person might deem to be wasteful expenditure, will always be underpinning GDP and employment growth. Clear up the ‘waste’ and there are additional consequences that may not be considered desirable. At least these politicians and their advisors should make that clear to the public.

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Austerity cultist Kenneth Rogoff continues to bore us with his broken record

One would reasonably think that if someone had been exposed in the past for pumping out a discredited academic paper after being at the forefront of the destructive austerity push during the Global Financial Crisis, then some circumspection might be in order. Apparently not. In 2010, Carmen Reinhart and Kenneth Rogoff published a paper in one of the leading mainstream academic journals – Growth in a Time of Debt – which became one of the most cited academic papers at the time. At the time, they even registered a WWW domain for themselves (now defunct) to promote the paper and tell us all how many journalists, media programs etc have been citing their work. While one can understand the self-promotion by Rogoff and Reinhart, it seems that none of these media outlets or journalists did much checking. It turned out that they had based their results on research that had grossly mishandled the data – deliberately or inadvertently – and that a correct use of the available data found that that nations who have public debt to GDP ratios that cross the alleged 90 per cent threshold experienced average real GDP growth of 2.2 per cent rather than -0.1 per cent as was published by Rogoff and Reinhart in their original paper. So all their boasting about finding robust “debt intolerance limits” arising from “sharply rising interest rates” – and then “painful fiscal adjustments” and “outright default” were not sustainable. Humility might have been the order of the day. But not for Rogoff. He regularly keeps popping up making predictions of doom based on faulty mainstream logic.

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