They are all in the same mindless club

The Australian Bureau of Statistics (ABS) released the latest – Building Activity data today (April 18, 2012) which shows that in the December 2011 quarter real activity continued to contract. This is the most recent data release that reinforces the conclusion that the Australian economy is starting to slow down and is now well below the pre-crisis trend growth rates of somewhere between 3 and 3.5 per cent. Within this environment we would expect the federal government as the currency-issuer to be showing leadership and providing fiscal stimulus to support higher growth and allow the private sector to continue deleveraging given their excessive debt levels. The problem is that governments these days do not seem to know what good economics is. Our government thinks responsible fiscal management is to deliberately undermine spending growth (when inflation is falling) and push unemployment up. The only thing that we can say about that is that they are in good company. The governments that are imposing damaging fiscal austerity on their economies are in the same mindless club.

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Deny the facts when they contradict the theory

I was reading a working paper from the Bank of International Settlements the other day – The “Austerity Myth”: Gain Without Pain? (published November 2011) and written by Roberto Perotti. The author can hardly be described as non-mainstream and has collaborated with leading mainstream authors in the past. His work with Harvard’s Alberto Alesina in the 1990s has been used by conservatives to justify imposing fiscal austerity under the guise that it would provide the basis for growth. In this current paper, Roberto Perotti tells a different story – one that has been ignored by the commentators who still wheel out his earlier work with Alesina as being the end statement on matters pertaining to fiscal austerity. In his current work, we learn that the conditions that allowed some individual nations in isolation to grow are not present now and that his current research casts “doubt on … the “expansionary fiscal consolidations” hypothesis, and on its applicability to many countries in the present circumstances”. Why don’t the conservatives quote from that paper?

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OECD – all smoke and mirrors

I am taking a brief rest from the Eurozone crisis – which will probably blow up again in the coming weeks as the Spanish austerity drives the bond markets in the opposite direction than was intended by the Troika – and the latter call for even harsher cuts to unemployment benefits at the same time as their austerity policies force unemployment to continue its inexorable rise upwards. Today, I have been reading the latest OECD Report (April 12, 2012) which is attracting attention – Fiscal Consolidation: How much, how fast and by what means?, which is part of their Economic Outlook series. It is really a disgraceful piece of work but will give succour to those politicians who are intent of vandalising their economies and making the disadvantaged pay more and more for the folly of the elites. It is an amazing situation at present. I am also reading a book – Pity the Billionaire – which I will review in the coming week. It examines how it is that the the popular response to the crisis which was caused by an excess of “free markets” is to attack government regulation and intervention and demand even freer markets. The OECD are part of the battery of institutions that fuel this crazy right-wing conservative response (the “unlikely comeback” in Pity the Billionaire terms) to the crisis through their highly tainted publications.

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Saturday quiz – April 14, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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A fiscal collapse is imminent – when? – sometime!

Sometimes I wonder how it is that a bright person can stick to a story for so long when the evidential record is so contrary to the predictions that their story keeps forcing them to make. Then again the predictions are often couched in terms of “might” and “We don’t know what will trigger such a wave of selling” (don’t know!) and “interest rates would shoot up” (would!) and “if the number of people trying to sell them surges” (if) and “inflation would erode” (would! again). So nothing concrete – just a series of assertions. So such a person is never really confronted with the reality that they know “shite” (a word I read in a book by an Irish author I have just finished – In the Woods by Tana French – recommended). This sort of denial is an overwhelming characteristic of the mainstream of my profession. I would love to be proved wrong if private households and firms do turn out to be Ricardian and fiscal austerity leads to a boom with full employment. I would abandon my MMT leanings within a flash and get on the prosperity bandwagon. Why is it that the mainstream, which has the dominant influence on policy makers – and therefore get to see their theories applied in the real world – not adopt a similar position. The predictive capacity of their paradigm is next to zero!

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Australian labour force data – tentative improvement

Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for March 2012 provides some positive news for once although as you will read the underlying trend situation remains weak. The labour force data tells us that employment grew, working hours grew, participation rose and unemployment fell, albeit only by a smidgin. Given the monthly variability in the data it is not yet cause for celebration. The pattern of growth/contraction in employment growth has been well documented over the last 18 or so months with nothing much happening in net terms when one takes a longer view (say 6 months or so). The outlook is not very positive either given the Federal government’s obsessive pursuit of a budget surplus which will cut economic growth by some percentage points. The most disturbing aspect of the labour market data remains the appalling state of the youth labour market. This should be a policy priority for the government. But they have gone missing in action – lost in their surplus mania. My assessment of today’s results – positive but cautiously so.

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IMF struggling with facts that confront its ideology

I haven’t a lot of time today (travel) but I thought the latest offering of the IMF was interesting. In their latest World Economic Outlook (April 2012 – which will be released in full next week) they provided two advance chapters – one – Chapter 3 – Dealing with Household Debt – demonstrates just how schizoid this organisation has become. They are clearly realising that their economic model is deeply flawed and has failed to predict or explain what has been going on over the last five years. That tension has led to research which starts to get to the nub of the problem – in this case that large build-ups of debt in the private domestic sector (especially households) is unsustainable and leads to “significantly larger contractions in economic activity” when the bust comes. They also acknowledge that sustained fiscal support is required to allow the process of private deleveraging to occur in a growth environment. But then their ideological blinkers prevent them from seeing the obvious – that sustained fiscal deficits are typically required and that in fiat monetary systems this is entirely appropriate when . Which then leads to the next conclusion that they cannot bring themselves to make – the Eurozone is a deeply flawed monetary system that prevents such fiscal support and should not be considered an example of what happens in fiat monetary systems. Some progress though!

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The Academic Spring

The term Arab Spring is now entrenched in the lexicon although what it actually refers to – liberty or more oppression – is now a question in its own right. There is another Spring occurring – smaller, more obscure perhaps, but with significant potential to change the way academic research is disseminated and the way funding agencies treat universities. In the case of the economics discipline it offers significant scope to break down some of the barriers that allow the mainstream economics paradigm to retain dominance despite it being largely bereft of empirical support. I am talking about the Academic Spring, which is a grass roots revolt that is gathering pace. You can find out how to join this revolt at the end of the blog.

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Governments should not worry about deficits

Another relatively short blog coming up today – it is still holidays here and very sunny. There was an interesting Bloomberg article the other day (April 5, 2011) – Don’t Worry About Deficit That Will Heal Itself – which although containing some conceptual flaws arrives at the correct conclusion. That governments would be far better pursuing real goals – such as ensuring there is adequate infrastructure investment, putting into place appropriate climate change initiatives and maintaining high levels of bio-security – that becoming obsessed with fiscal horizons that they have very little control over. Further, in attempting to control these horizons, governments tend to err on too much austerity (for example, the UK and the Eurozone), which not only undermines growth but also thwarts their deficit reduction goals (via the automatic stabilisers). The lesson to be drawn from all of this is that – Governments should not worry about deficits.

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