Is the $US900 billion stimulus in the US likely to overheat the economy – Part 2?

The answer to the question posed in the title is No! Lawrence Summers’ macroeconomic assessment does not stack up. In – Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1? (December 30, 2020) – I developed the framework for considering whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payment as part of its latest fiscal stimulus. Summers was opposed to it claiming that it would push the economy into an inflationary spiral because it would more than close the current output gap. Today, I do the numbers. The conclusion is that there is more than enough scope for the Government to make the transfers without running out of fiscal space.

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Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1?

Comments made last week by the former Clinton, Obama and now Biden economist Lawrence Summers contesting whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payments was met with widespread derision and ridicule from progressive commentators. There were Tweets about eviction rates, bankruptcy rates, poverty rates, and more asserting that the widespread social problems in the US clearly meant that Summers was wrong and a monster parading as a progressive voice in the US debate. I didn’t see one response that really addressed the points Summers was making. They were mostly addressing a different point. In fact, the Summers statement makes for an excellent educational case study in how to conduct macroeconomic reasoning and how we need to carefully distinguish macro considerations from distributional considerations, even though the two are inextricably linked, a link that mainstream macroeconomics has long ignored. So while Summers might have been correct on the macro issues (we will see) he certainly wasn’t voicing progressive concern about the distributional issues and should not be part of the in-coming Administration. This is Part 1 of a two-part analysis. In Part 2 we will do some sums. In this part, we will build the conceptual base.

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My Op Ed in the mainstream Japanese business media

It’s Wednesday and my blog-light day. Today, I provide the English-text for an article that came out in the leading Japanese business daily, The Nikkei yesterday on Modern Monetary Theory (MMT) and its application to the pandemic. Relevant links are provided in the body of the post. The interesting point I think is that ‘The Nikkei’ is the “the world’s largest business daily in terms of circulation” and has clear centre-right leanings. The fact that they are interested in disseminating ideas that run counter to the mainstream narrative that the centre-right politicians have relied on indicates both a curiosity that is missing in the conservative media elsewhere, and, the extent to which MMT ideas is becoming more open to serious thinkers. I have respect for media outlets that come to the source when they want to motivate a discussion on MMT rather than hire some hack to write a critique, which really gets no further than accusing MMT of being just about money printing.

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Further evidence undermining the mainstream case against fiscal deficits

Yesterday, I discussed the results of recent research that demonstrated the ‘trickle down’ hypothesis, which has been used to justify the sequence of tax cuts for high income recipients, was without any empirical foundation. While mainstream economists have been enchanted with that hypothesis, heterodox (including Modern Monetary Theory (MMT) economists have never considered it had any validity – neither theoretical nor empirical. But it is good that mainstream researchers are now ratifying that long-held view. Today, I am discussing another case of the mainstream catching up. When I say catching up, the implications of these new empirical studies are devastating for key propositions that the mainstream macroeconomists maintain. The ECB Working Paper series published an interesting paper (No. 2509) yesterday (December 21, 2020) by an Italian economist from the Bank of Italy – Losers amongst the losers: the welfare effects of the Great Recession across cohorts. In brief, the research found that younger people bear disproportionate burdens during recession in the short-run, but also, face diminished prospects over the longer-term. The paper bears on some of the major fictions that have been propagated to disabuse governments of using fiscal deficits to smooth out the economic cycle – namely, the alleged burden that is created by the current generation’s excesses (the deficit) for their children and grandchildren (who according to the narrative have to pay back the debt incurred by the excesses). This is another case of evidence being produced that ratify the analysis that MMT economists have been advancing for the last 25 years.

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More evidence against the ‘trickle down’ orthodoxy in macroeconomics

On December 10, 2014, I wrote this blog post – Trickle down economics – the evidence is damning. The discussion was about how inequality undermines growth and that redistribution of national income towards higher income groups does not stimulate income growth for lower income groups. It provided evidence that destroys the basic tenets of mainstream economics and supports a wider social and economic involvement of government in the provision of public services and infrastructure, particularly to low income groups. The ‘trickle down’ fiction was propagated in the late 1970s and early 1980s by the likes of Margaret Thatcher and Ronald Reagan and dovetailed with the emerging dominance of supply-side thinking. Behind ‘trickle-down’ was a nasty neo-liberal plot to undermine state activity and rewind the gains made by the workers under the welfare states and unionism over the course of the C20th. Now a new report from researchers at the London School of Economics – The Economic Consequences of Major Tax Cuts for the Rich – repeats the evidence, and, perhaps because we are further down the road in realising how deficient mainstream macroeconomics is, new evidence of something that we have known since the ideas first came out of the sewers, might push the paradigm shift a little further.

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Neoliberal myopia strikes again

It is Wednesday, so just a few snippets and some music. My main comment today is on the report released yesterday (December 15, 2020) by the national body Infrastructure Australia. The report – Infrastructure beyond COVID-19: A national study on the impacts of the pandemic on Australia – once again demonstrates the way in which mainstream macroeconomics, which has restricted government investment in essential instrastructure over the last three decades or so, has created poor outcomes and has failed to prepare the nation for the future. This sort of myopia just repeats itself across all nations. Hopefully, the fiscal response to the pandemic, even though in many countries it has been inadequate, is demonstrating that the mainstream approach is deeply flawed and provides no guidance for the way policy should be conducted into the future.

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Credit rating downgrades for Australian states – next

It is Wednesday and so just a few snippets before we get funky. Yes, jazz-funky. That should do it. In the last week, a credit ratings agency downgraded the rating of the state of Victoria to AA from AAA claiming that the the state was in fiscal trouble. They also downgraded the credit rating for the NSW government credit from AAA to AA+. You might wonder how the hell these corrupt and irrelevant organisations managed to survive the GFC, given the sectors complicity with the financial frauds and overreach that drove the world to near financial ruin? Well they survive because people still believe in the fictions that lie behind the whole concept of government debt ratings. Should anyone be worried about these changes in Victoria and NSW? Not at all. The announcements were just noise and tell us, in part, how far we have to go in expunging these fictions from our understandings.

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There is no such thing as a free lunch

I guess if mainstream economists use Milton Friedmanesque smears they think that will be sufficent to discredit Modern Monetary Theory (MMT). There have been a few critiques in the financial media recently along those lines. The authors tell their readers that they get the impression that MMT is just about a free lunch. Throw in Zimbabwe or Weimar are few times during the article and there you have it – rather tawdry attempts at maintaining mainstream thinking when the world has entered a new era of fiscal dominance as policy makers discard their reliance on monetary policy to stabilise economies. This policy shift is diametric to what mainstream macroeconomists have been advocating for decades as they repeatedly warned that high deficits and public debt levels and large-scale central bank bond purchases would lead to disaster. However, their predictions have been dramatically wrong and provide no meaningful guidance to available fiscal space nor the consequences of these policy extremes for interest rates and inflation. The world is leaving them behind and it is interesting to see how they are trying to reposition themselves.

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Those in glass houses …

I saw a letter published by IPPR – who call themselves “The Progressive Policy Think Tank” – urging the BBC to change the way it conducts economic commentary. The letter – Economists urge BBC to rethink ‘inappropriate’ reporting of UK economy – was sent to the Director-General of the BBC following some “BBC reporting of the spending review” which they say “misrepresented the financial constraints facing the UK government and economy.” The H.M. Treasury – Spending Review 2020 – was published on November 25, 2020. I decided not to comment on it publicly given that my time is poor at the moment with lots of writing deadlines and travel now resuming with pent-up demand for my services (in person). It was what you would expect from the British Treasury. But some of the signatories to this latest letter criticising the BBC coverage of the Spending Review should look in the mirror. They seem to have short memories or perhaps they are learning the error of their ways. We can only hope.

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British Labour remains unelectable

What are the prospects for the British Labour Party? Since losing office in 2010, they have lost 3 subsequent general elections against one of the worst Tory governments in history. The government exemplifies bumbling incompetence. But that seems to be all that is required to outwit the Labour Party and its advisors. Since the disastrous December 2019 election, nothing much seems to have changed. Well, that is not exactly right is it. Things have become worse. They scrapped a leader that a significant portion of MPs could not support after having undermined him relentlessly in the leadup to the last election. It was as if they preferred to lose than have Jeremy Corbyn as Prime Minister. Then they kicked him out of party representation because he apparently has failed to ratify the dirty campaign against him. The new leader, was one of the most vehement proponents of the strategy that saw Labour turn its back on voters who had elected the majority of its MPS and keep harping on about a second referendum on Europe. The denial of the Brexit vote and failure to become the voice of Brexit cost Labour the last election no matter what those who try to manipulate the data to say something different might have you believe. The new leader also appears to be losing credibility over his purge of the previous leader. One can be as smooth and sophisticated as one likes. But if you don’t tell the truth, eventually, you pay the piper – even Trump has found that out, not that he exemplifies either smoothness or sophistication. And the other death knell – their fiscal rule – looks like it is now being recycled by the new Shadow chancellor. That means they will go to the next election in an unwinnable position because the citizens that they have conditioned to believe in the neoliberal macroeconomic fictions will, in turn, not believe that the Party can deliver a progressive agenda without causing financial chaos. You reap what you sow. So it doesn’t appear that they have learned very much so far.

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