Live Stream on Currencies footage – Helsinki, October 2, 2021

It is a public holiday today celebrating – Labour Day – which recognises the struggles to successfully gain an 8-hour working day for workers. The first of the many marches in this struggle occurred in my hometown of Melbourne on April 21, 1856, and history shows that this march was successful in achieving the first 8-hour day decision in the world, without loss of pay. So today we think of that. If workers unite they have the capacity to achieve great things. What follows is a brief report and footage from a debate I participated in on October 2, 2021, which was organised by some groups in Helsinki, Finland.

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(Modern) Marx and MMT – Part 2

This is Part 2 of my analysis of the way that fundamental ideas in Modern Monetary Theory (MMT) are totally consistent with a reasonable interpretation of Marx’s work. The motivation to clarify these issues came after I spoke at an event last weekend in the UK and shared a panel with a critic who claimed that Marx’s work established that MMT is wrong to assume that unemployment is a monetary phenomenon (insufficient spending) and that government spending can do anything about it. The claim was based on a view that Marx thought that capitalist firms have some unique logic that if they decide not to produce no amount of sales orders will induce them to expand production even if they have massive excess capacity (‘machines lying idle’) and a huge pool of idle labour to draw upon. No reasonable reading of Marx’s work would lead to that conclusion. In this part, we will consider what Marx thought about crisis and some later developments of his reproduction schemes, which make it clear that effective demand drives capitalist output, which conditions their employment decisions.

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ECB researchers find fiscal policy is very effective and more so if central banks buy up the debt

The ECB published a Working Paper recently (September 2021) – Monetary and fiscal complementarity in the Covid-19 pandemic – which represents progress in the narrative. While the technical model that the ECB uses is just an ad hoc attempt to reverse engineer the reality so they can claim they can explain it, what is useful from the exercise is that the old mainstream narratives that fiscal policy is ineffective in providing permanent boosts to real output (or that austerity does not permanently damage the growth trajectory) can no longer be sustained. The taboo surrounding central bank purchases of government debt because they cause accelerating inflation can no longer be sustained. The claims that fiscal deficits drive up interest rates can no longer be sustained. Now the public debate just has to reflect that reality and we will have made progress. Of course, this is all core MMT – we knew it all along!

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They never wrote about it, talked about it, and, did quite the opposite – yet they knew it all along!

During the GFC, a new phenomenon emerged – the ‘We knew it all along’ syndrome, which was characterised my several mainstream New Keynesian macroeconomists coming out and claiming that some of the insights provided by Modern Monetary Theory (MMT) economists were banal and that their own theoretical framework already accommodates them. The pandemic has brought a further rush of the ‘We knew it all along’ syndrome. Apparently, mainstream macroeconomics is perfectly capable of explaining the fiscal reality the world has found itself in and there is no need to MMT, which, by assertion, is saying nothing new. These sorts of statements are not coming from Facebook or Twitter heroes who might have done a few units in economics or even acquired a degree in the discipline. They are coming from senior professors in the academy. The curious thing, which really lifts their cover, is that if you examine the academic literature you won’t find much reference to these sorts of ‘insights’ at all. What you find, and what students are taught, are a completely different set of propositions with respect to fiscal policy. So if they ‘knew it all along’ why didn’t they ever write about it? Why is their published academic work replete with conclusions that run contrary to the conclusions MMT economists make? You know the answer. These ‘knew it all along’ characters have just been caught out by the poor empirical performance of their paradigm and now they are trying to salvage their reputations and position by trying to blur history. They really should be sacked.

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Monetary policy is not effective in dealing with a pandemic – it must support active fiscal policy

It’s Wednesday and I have now settled back into my office after being stuck away from home for 9 weeks as a result of border closures between Victoria and NSW. So I am reverting back to the usual Wednesday pattern of limited writing, although today, the topic is worthy of some extended narrative. Before we get to the swamp blues music segment, I am analysing a speech made by the RBA governor yesterday on the role of monetary policy during a pandemic, whether low interest rates are driving house prices too high, and, what should be done about that. The conclusion is that he supports better use of fiscal policy – sustaining supportive fiscal deficits and dealing with the distortions that are contributing to high housing prices, via amendments to taxation (eliminating incentives for high income earners to buy multiple properties) and public infrastructure policies (more social housing).

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The dying embers of New Keynesian reasoning

Lawrence Summers is a New Keynesian economist. That means something. While there are nuances that exist between members of that school of thought, mostly to do with policy sensitivities and speeds of adjustment, the New Keynesian paradigm has demonstrated clearly that it is incapable of capturing the macroeconomic dynamics in any consistent manner, despite it being the dominant approach in the profession. So, it is no wonder when Summers provides opinions the underlying logic he demonstrates is similarly flawed. Unfortunately, he keeps getting important platforms to express these opinions, which continues to blight the public policy debate. He was at it again when he started lecturing the US Federal Reserve Bank on the conduct of its asset-purchasing program.

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ECB nearly comes clean – higher fiscal deficits, higher QE

Last year, the US Federal Reserve dropped a bombshell on mainstream macroeconomics by abandoning the consensus approach to monetary policy, which prioritised fighting inflation over maintaining low levels of unemployment, and, increasing interest rates well before any defined inflationary pressures were realised – the so-called forward guidance approach. It has also been buying massive quantities of US government debt and controlling bond yields in the markets as a result. Attention has been on the ECB to see where it would pivot too and whether it was going to abandon its own massive government bond buying program any time soon, which has been effectively funding the fiscal deficits of the 19 Member-States of the Eurozone. Recent statements have indicated the QE programs in Europe will not be ending any time soon. And an ECB Board member all but tied the scale of the purchasing programs to the size of the fiscal deficits as a guide to how long and how large the QE interventions would be.

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Inflation is coming, well, it could be, or, it might happen, gosh …

One could make a pastime observing the way that so-called ‘expert’ commentators change their commentary as the data unfolds. As one rather lurid prediction fails, their narrative shifts to the next. We have seen this tendency for decades when we consider the way mainstream economists have dealt with Japan. The words shift from those implying immediacy (for example, of insolvency), to those such as ‘could’, ‘might’, ‘perhaps’, ‘under certain conditions’ and more. The topics shift. The commentariat were obsessed with ‘this time is different’ during the GFC and the ‘debt insolvency threshold’ rubbish that the likes of Reinhardt and Rogoff propagated. That is, until they were sprung for spreadsheet incompetence. More recently, we have apparently forgotten how many governments were about to go broke and the mania has shifted to inflation. The data shows some price spikes earlier in the year which set of the dogs. Now, things might be shifting again. It is a pastime following all this. Short memories, no shame is the only requirement that is required to be a mainstream economics commentator. Prescient knowledge is not included in that skill set.

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