US central bank decision to raise interest rates doesn’t make much sense

On December 14, 2016, the US Federal Reserve Bank pushed up its policy target interest rate from 0.5 per cent to 0.75 per cent. In its – Press Release – it said that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. It acknowledged that “business investment has remained soft”. But it believes that even though it has increased the rate by 25 basis points, there is still room for “some further strengthening in labor market conditions and a return to 2 percent inflation”. The logic is very confused in my view. First, the US labour market is weak (in inflation pressure terms) notwithstanding the reduced official unemployment rate. Real wages growth has been effectively zero and the broad measure of labour underutilisation (U6) remains at 9.3 per cent (as at November). Second, the emphasis on central bank policy shifts is based on a view that elements of total spending are sensitive to interest rate changes and by increasing rates, price pressures will attenuated. The only problem with that logic is that all the elements of spending in the US (private investment, household durable goods) are hardly setting the world on fire. Private investment, in particular, is in poor shape. So by the US Federal Reserve bank’s own logic (which I do not share) it should be expecting on-going further poor investment growth, which will further undermine potential productive capacity. Not a sound strategy at all.

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Our affect is driving us back to a need for continuous fiscal deficits

The field of psychology is usually ignored by mainstream economists, which, in its typically arrogant and closed practice, adopts a series of a priori assumptions about human behaviour – the so-called Homo economicus – where were are always rational and self-interested and, as a result, always make choices that maximise our present and future well-being based on available market signals. Real world forces that condition actual human behaviour, such as cognitive biases and irrationality, in general, as well as cooperative and collective behaviour is ignored by mainstream neo-classical (free market) economic theory, because admitting its dominance in human decision-making would void the entire edifice of that theory and scuttle the authority that is given to the on-going narratives about deregulation, small government, privatisation, pernicious cutting of income support, and the rest of the economic policies that have defined this dysfunctional neo-liberal era. But humans do not behave in the way economists suggest. We are a complex mass of irrationality, custom, habit, and affect. We certainly use cognitive processes in our decision making but often we take shortcuts based on affect. These tendencies are pushing our behaviour back to what was normal before the credit binge that led to the GFC. This shift in our behaviour is associated with stagnation and entrenched mass unemployment. But the reason for these parlous outcomes is not that we have returned to more normal spending behaviour but, rather, because governments have not realised that they had to return to more normal behaviour as well. Instead of promoting the benefits of austerity (in the face of all evidence to the contrary), governments should have been promoting the benefits of continuous fiscal deficits to support non-government saving desires and maintain better employment outcomes and stronger income growth. The malaise advanced nations are stuck in at present is directly the result of ideologically-motivated choices made by governments to use to use fiscal policy properly. Neo-liberal ideology remains dominant but citizens are rebelling and something has to give.

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Using welfare systems to hide the problem of deindustrialisation

There have been lots of E-mail requests overnight for commentary on the US election result. I think that space is pretty crowded at present – with Clinton supporters trying to reconstruct events to defray their responsibility (a denial strategy), in a similar vein to the Remainers in Britain in the early days after the Brexit vote. I expect to read learned columns in the New York Times and other establishment newspapers in the weeks ahead outlining, with all the gravity that is possible in the written word, how millions of Americans who voted for Trump are now regretting it. Same as in the UK. I expect to read a lot about racism and misogyny and various numbers wheeled out to show who voted for whom to prove this or that. The twitterverse has already gone crazy with this sort of ‘analysis’. Maybe later when I have had a chance to reflect on the actual data I might write something. But what part of “the people are sick of the establishment even though they don’t quite know what they are going to do about it and given the choices support those who will do little about it” is hard to understand. The neo-liberal lust has created a monster that they now cannot control. The highly concentrated mainstream media doesn’t call the shots as much as it did. The academic economists who preach fear of change but who people know from the GFC are a depreciated cohort without much insight at all are now ignored. That is how I am seeing it. A great chance for a new progressive element but also space for the worst of the right-wing to fill. A big contest is now there for ideas to play out. The only problem is that the mainstream ‘progressive’ forces (like the Democrats, British Labour Party, Socialist Parties, etc) have been so captured by the establishment that they have become the establishment – neo-liberal to the core. But today, I will write a bit about the abuse of Disability Support Pension schemes to hide unemployment and make austerity look less worse than it is.

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US employment falls in October signalling increased weakness

After last month’s US Bureau of Labor Statistics employment data (for September) I assessed that – The US labour market is nowhere near full employment. This was in the context of overtly political (ideological) and ridiculous statements made by the President of the Federal Reserve Bank of San Francisco, who had claimed that the US economy had already returned to full employment. The current BLS data release – Employment Situation Summary – October 2016 – has not altered my view. It showed that total non-farm employment from the payroll survey rose by 161,000 and the unemployment rate remained “little changed” at 4.9 per cent. But from the perspective of the labour force survey (Current Population Survey), total employment fell by 43 thousand. See below for an explanation of that paradox. The point is that employment still remains well below the pre-GFC peak and the jobs that have been created in the recovery are biased towards low pay. In general, the problem is less job creation as quality of the work being created and the capacity of US workers to enjoy wage increases. There are also wide disparities among state unemployment rates.

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The US labour market is nowhere near full employment

The president of the Federal Reserve Bank of San Francisco, John C. Williams pronounced in a recent speech (September 6, 2016) – Whither Inflation Targeting? – that “We’re at full employment”, meaning US economy that is. He must have access to different data than the US Bureau of Labor Statistics (BLS) publishes, because the official data tells a very different story once you understand what it is you have to look for in the statistics presented. Last week, the US Bureau of Labor Statistics released the September 2016 – Employment Situation – which showed that total non-farm employment rose by only 156,000 and the unemployment rate remained “little changed” at 5 per cent. The Federal Reserve President’s surmise raises the question as to whether the US has returned to where it was before the GFC. Despite his optimism, the evidence refutes the claim that the US is near full employment. It also suggests that the situation is more likely to worsen than to improve.

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US labour market in an uncertain limbo

Last week, the US Bureau of Labor Statistics released the August 2016 – Employment Situation – which showed that total non-farm employment rose by only 151,000 and the unemployment rate remained steady at 4.9 per cent. Employment growth was well below the expectation (although the banking economists are rarely close) and the question now is being raised as to whether the US has reached a cyclical peak (turning point) and things will get worse from here. While that is difficut to determine on a few months data the fact remains that the US federal government can always offset a slowdown through appropriate fiscal policy interventions if it chooses fit. To dig deeper into the data, I have analysed the Job Openings and Labour Turnover Statistics (JOLTS) which was updated by the BLS yesterday (September 7, 2016). While the number of job openings increased there was little change in the hire and separation rates, which suggests a static situation. In general, it looks as if the US labour market is cooling although perhaps describing the current situation as being an uncertain limbo is more apposite.

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Helicopter money is a fiscal operation and is not inherently inflationary

There was a Project Syndicate article (September 2, 2016) – The Unavoidable Costs of Helicopter Money – claiming that “In fact, there are major downsides to helicopter money”. Hmm. Should I read this article was my thought at the the time. Waste a few minutes of my life. I wondered if I could pen the article in advance and then check to see how close I was. The theme would be inflation. In that I was correct. But the author really innovated a bit and, in doing so, undermined his own argument. What we learn is fairly straightforward. If a government continues to increase nominal spending growth ahead of the growth in productive capacity then there will be inflation. The argument presented is, in fact, nothing to do with the monetary operations that accompany government spending – helicopter or otherwise. The inflation risk is in the spending. If private investment expenditure outstripped the capacity of the supply-side to produce the capital equipment demanded then the same outcome. Should we caution against such expenditure? Should be make it taboo? Obviously not.

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The neo-liberal race to the bottom is destroying communities and killing workers

I have been reading an interesting book – The Unwinding: An Inner History of the New America – by US journalist – George Packer – which traces the evolution of America over the period from 1978 to 2012. It is about how Americans have been dudded by the system they economic and political system that they hold dear to their hearts and how the core institutions that condition those beliefs have declined (changed) in the face of the rising dominance of the investment banksters. I am not so much interested in American history as I am the metamorphosis of Capitalism and the impact it has had on the working class. The book created a number of thought strands, which ultimately, led me to an interesting article in the Proceedings of the National Academy of Sciences of the USA (published December 8, 2015) – Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century – by Princeton University academics Anne Case and Angus Deaton. What we learn is that the neo-liberal race to the bottom in advanced nations is destroying communities and killing workers.

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Australia’s race to the bottom to part-time jobs with low-pay

To coincide with the US Bureau of Labor Statistics release of the May 2016 Employment Situation I updated my analysis on the pay characteristics of the net job creation in the US labour market – see Bias toward low-wage job creation in the US continues. The overwhelming finding was that the jobs lost in low-pay sectors in the downturn have more than been offset by jobs added in these sectors in the upturn. However, the massive number of jobs lost in above-average paying sectors have not yet been recovered in the upturn and do not look like being so, given the labour market is slowing again. In other words there is a bias in employment generation towards sectors that on average pay below average weekly earnings. In the last 12 months, 86 per cent of the net jobs added in the Australian labour market have been part-time and underemployment has risen, suggesting a rise in casual work as well. Further analysis in this blog reveals that this accelerated trend towards part-time employment creation has been accompanied by a disproportionate shift towards low-pay employment (and below-average employment in general). The shifts over the last 6 months, in particular, towards below-average employment has been alarming. So come on down to Australia as our politicians take us on a race to the bottom in the part-time nation with low-pay, that barely grows at all. We are a very stupid nation supporting the policy structures that deliver this poverty of outcomes.

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Australia – stagnant wages growth continues

The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the June-quarter 2016 today. Annual private sector wages growth remained steady at 2.0 per cent (0.5 per cent for the quarter), which is the third consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the December-quarter 1997. In the 2015-16 fiscal statement (aka ‘The Budget’), the Government assumed wages growth for 2015-16 would be 2.5 per cent rising to 2.75 over 2016-17. On current trends, that is highly unlikely to occur, which means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. Depending on how we measure inflation, the annual wages growth translates into only a modest real wage rise since January 2016 for Australian workers. More importantly, real wages are growing well below trend productivity growth and Real Unit Labour Costs (RULC) continue to fall. This means that the gap between real wages growth and productivity growth continues to widen as the wage share in national income falls (and the profit share rises). The flat wages trend is intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. The lessons have not been learned.

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