The myopia of fiscal austerity

When I was studying in the UK during the dark Thatcher years there was a rat plague in Manchester. The reason was traced to the public spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester. Later that year (December 1982), there were widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought hometo me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The latest focus in Britain is on rising waiting lists in hospitals and increasing violence in prisons. All these examples of austerity compound and reverberate throughout society in countless little ways that accumulate to one huge mess. The Thatcher years were highly destructive for the well being of the British people contrary to the myths that the conservatives pump out. The current period will be of a similar ilk. And spare a thought for the long-term damage in places like Greece! It is beyond belief.

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Fiscal stimulus does not necessarily mean large government

There was an interesting if not ego-centric interchange last week involving the New Keynesian economist Paul Krugman and others about whether the sort of macroeconomic policy positions one takes is more motivated by ideological motives (about the desirable size of government) rather than being evidence-based. Apparently, if you support austerity it is because you really just want smaller government and vice versa. This is an oft-stated claim made by conservatives. That if you support fiscal stimulus and government regulation that you are automatically in favour of big (intrusive) government. The point is not valid. Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government.

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Why no-one should vote for the Australian Labor Party

It is a public holiday in Australia today – Queen’s Birthday, a reflection of our past as a colony. Not a lot has actually changed and we still cannot shed the monarchy. Anyway, not many people reflect on the monarchy today given it is deep winter and football matches are on as part of the holiday. But in keeping with the holiday spirit, I will only write a short blog today. The topic is why no-one should vote for the Australian Labor Party although the argument is applicable to all parties like it, who formerly represented the interests of workers and who are now dominated by politicians who have embraced the neo-liberal macroeconomic myths as if they are truths and, if that wasn’t bad enough, have become active proselytizers of this destructive religion. I might write a few words about the on-going Eurozone saga too, given the extraordinary comments by leading European politicians overnight. Then I will head like thousands of others to the football!

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Saturday Quiz – June 6, 2015 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! 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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Friday lay day – Minimum wage in Australia creeps up

Its my Friday lay day blog but no rest for the wicked today. The Fair Work Commission, the Federal body entrusted with the task of determining Australia’s minimum wage handed down its – 2014-15 decision – on June 2, 2014. Here is my annual review of that decision plus some. The decision meant that more than 1.86 million of our lowest paid workers (out of some 11.6 million) received an extra $16.00 per week from July 1. This amounted to an increase of 2.5 per cent (down from last year’s rise of 3 per cent). The Federal Minimum Wage (FMW) is now $656.90 per week or $17.29 per hour. For the low-paid workers in the retail sector, personal care services, hospitality, cleaning services and unskilled labouring sectors there was no cause for celebration. They already earn a pittance and endure poor working conditions. The pay rise will at best maintain the current real minimum wage but denies this cohort access to the fairly robust national productivity growth that has occurred over the last two years. The decision also maintains the gap between the low paid workers and other wage and salary recipients, who themselves are suffering a major wages squeeze as corporate profits rise. The real story though is that today’s minimum wage outcome is another casualty of the fiscal austerity that the Federal Government has imposed on the nation which is destroying jobs and impacting disproportionately on low-paid workers.

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The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency

The IMF has taken to advertising for the ratings agency Moody’s. It is a good pair really. Moody’s is a disgraced ratings agency and the IMF has blood on its hands for its role in less developed nations and for its incompetence in estimating the impacts of austerity in Europe. Neither has produced research or policy proposals that can be said to advance the well-being of nations. Moody’s has shown a proclivity to deceptive behaviour in pursuit of its own advancement (private largesse). The IMF struts around the world bullying nations and partnering with other institutions to wreak havoc on the prosperity of citizens. Its role in the Troika is demonstrative. Anyway, they are now back in the fiscal space game – announcing that various nations have no alternative but to impose harsh austerity because the private bond markets will no longer fund them. They include Japan in that category. Their models would have drawn the same conclusion about Japan two decades ago. It is amazing that any national government continues to fund the IMF. It should be disbanded.

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Australian National Accounts – the fragility of growth increases

The – March-quarter 2015 National Accounts data – released by the Australian Bureau of Statistics today confirms that the Australian economy was stuck in a weak growth state in the last three months of 2014. Real GDP growth grew by by a 0.9 per cent in the March-quarter 2015. The annual growth rate of 2.3 per cent down from 2.5 per cent in the December-quarter, and still well below trend. But the March-quarter result is stronger than the last 3 quarters. One should not be optimistic about the future though. Australia is now firmly caught up in what we call an ‘income recession’ where the total market value of goods and services (GDP) is outpacing the flow that Australian residents enjoy as income. Real net national disposable income fell by 0.2 per cent over the last year. While private consumption growth remained positive, it is not being driven by wages growth (which have fallen overall in the last year). Rather, the savings ratio fell and indebtedness in on the increase – signs of trends that ultimately led to the GFC> Further, despite corporate profits rising, private investment growth was negative. With the fiscal position now leaning towards austerity, today’s data paints a fairly uncertain picture for the Australian economy for the remainder of this year. Now is not the time for fiscal retrenchment. With real GDP growth well below that needed to reduce unemployment and underemployment, the government needs to stimulate the economy to boost income and employment growth. This would also allow wages to grow and take the squeeze off households.

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Time to end the human rights atrocity in Gaza

There were three new data and analysis releases in the past week in advanced Western nations (the US, the UK and Australia) that indicate that the policy settings that are in place are not delivering prosperity and should be changed to allow governments more fiscal freedom to stimulate growth. But while these nations continue, variously, to endure the costs that the wrongful policy settings have wrought, a World Bank report issued last week (May 27, 2015) – Economic Monitoring Report to the Ad Hoc Liaison Committee – allows us to understand a little bit (in numbers and narrative) the terrible (“staggering”) cost of the blockade on the Gaza economy and living standards of the Palestinian people in that region. The plight of the advanced world is nothing by comparison, not that I want to get into a relativist defense of the situation in the advanced world.

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Bank of England finally catches on – mainstream monetary theory is erroneous

The Bank of England released a new working paper on Friday (May 29, 2015) – Banks are not intermediaries of loanable funds – – facts, theory and evidence (updated June 2019) – which further brings the Bank’s public research evidence base into line with Modern Monetary Theory (MMT) and, thus, further distances itself from the myths that are taught by mainstream economists in university courses on money and banking. The paper tells us that the information that students glean from monetary economics courses with respect to the operations of banks and their role in the economy is not knowledge at all but fantasy. They emphatically state that the real world doesn’t operate in the way the textbooks construe it to operate and, that as a consequence, economists have been ill-prepared to make meaningful contributions to the debates about macroeconomic policy.

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