Japan – another week of humiliation for mainstream macroeconomics

In September 2010, The Project Syndicate, which markets itself as providing the “Smartest Op-Ed Articles from the World’s Thought Leaders” gave space to Martin Feldstein – Japan’s Savings Crisis. Like a cracked record, Feldstein rehearsed his usual idiotic claims that interest rates in Japan would rise because “of the continuing decline in Japan’s household saving rate” and that “the higher interest rate would eventually raise the government’s interest bill by about 4% of GDP. And that would push a 7%-of-GDP fiscal deficit to 11%”. Then, so the story goes, “This vicious spiral of rising deficits and debt would be likely to push interest rates even higher, causing the spiral to accelerate”. At which point, Japan sinks slowly into the sea never to be seen again. It turns out that the real world is a little different to what students read about in mainstream macroeconomics textbooks. At the risk of understatement I should have said very (completely) different. Better rephrase that to say – what appears in mainstream macroeconomics textbooks bears little or no relation to the reality we all live in. Anyway, events over the last week in Japan have once again meant that this has been just another week of humiliation for mainstream macroeconomics – one of many.

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Australian national accounts – we are becoming poorer

Today, the Australian Bureau of Statistics released the – December-quarter 2015 National Accounts data – which showed that real GDP grew by 0.6 per cent in the three months to December 2015 (down from 1.1 per cent in the September-quarter. It was largely driven by Private household consumption (albeit declining) and public consumption and capital formation. Private consumption growth remained positive and contributed to growth, but it is being funded by a declining saving ratio and rising indebtedness. This was in the context of declining real wages growth and declining real net national disposable income overall and per capita. These trends are unsustainable. The government sector was responsible for 50 per cent of the total growth in the December-quarter. Without the public sector spending contribution, annualised growth would be at 1.2 per cent relative to pre-GFC trend rates of between 3 and 3.25 per cent. The negative growth in private investment means that potential output in Australia and future growth rates will be lower than otherwise. Again, not a positive sign. The other notable result was the increasing evidence that Australia continues to be in an income recession. Real net national disposable income fell by a further 0.1 per cent over the quarter and 1.1 per cent over the last year. The data continues to confirm that Australia faces a very uncertain outlook and with the annual fiscal statement coming up – now is not the time to be cutting net public spending.

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We are being led by imbeciles

After yesterday’s marathon blog, today will be easier going (and shorter). I was reading John Maynard Keynes recently – circa 1928 – that is, 8 years before the publication of the General Theory with his Treatise on Money intervening. He was railing against the principles and practice of ‘sound finance’, which he noted had deliberately caused billions of pounds in lost income for the British economy. He urged the Treasury and the Bank of England to abandon their conservative (austerity) approach to the economy and, instead, embark on wide-scale fiscal stimulus to create jobs and prosperity. He concluded that with thousands of workers idling away in mass unemployment that it was “utterly imbecile to say that we cannot afford” to stimulate employment via large-scale public works – building infrastructure etc. He considered the policy makers who opposed such options were caught up in “the delirium of mental confusion”. The stark reality is that 88 years later, he could have written exactly the same article and would have been ‘right on the money’. We are being led (euphemism) by imbeciles.

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Finland would be better off outside the Eurozone

Towards the end of last year, I wrote a blog – Finland should exit the euro. I had been undertaking some detailed research on the plight of this relatively small Eurozone nation for a number of reasons. First, it had recently undergone a major industrial decline as Nokia/Microsoft missed market trends and went from world leader to irrelevance. Second, Finland was a vocal proponent of the view that Greece should be pillaried into oblivion by the Troika – to ‘take their medicine’ (more crippling austerity). Third, the data trends were unambiguously pointing to Finland descending into the Eurozone ‘basket case’ category itself as its own conservative government imposed harsh fiscal austerity on the tiny, beleagured nation. Two things are clearer than ever about the Eurozone. First, it is a dysfunctional mess and efforts to reform it so far have only made matters worse. Second, any single nation (and all together) would be unambigously better off exiting the mess and restoring their own currency sovereignty and letting their exchange rate take up some of the adjustment. The following text covers an article that I have written for a Finnish Report coming out in May 2016 to be published by the Left Forum Finland, which is a coalition formed by the political party Left Alliance, the People’s Educational Association (KSL) and the Yrjö Sirola Foundation.

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The Weekend Quiz – February 27-28, 2016 – answers and discussion

Here are the answers with discussion for this week’s Weekend 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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The British Monetarist infestation

I have been on the search for historical turning points again today. The famous Mitterand austerity turn in 1983 is one of these points. Another, which I will consider today, was the British Labour Prime Minster James Callaghan’s speech to Labour Party Conference held at Blackpool on September 28, 1976 was laced with pro-Monetarist assertions that have been used by many on the Left as being defining points in the decline of the state to run independent domestic policy aimed at maintaining full employment. This is a further instalment of my next book on globalisation and the capacities of the nation-state, which I am working on with Italian journalist Thomas Fazi. We expect to finalise the manuscript in May 2016. Today, I am writing about the background events that turned Britain on to Monetarism. Margaret Thatcher was, in fact, a ‘johnny-come-lately’ in this respect. The British Labour Party were infested with the Monetarist virus in the late 1960s and Callaghan’s 1976 Speech just consolidated what had been happening over the decade prior. Further, it was not the oil crisis in the early 1970s that provided the open door for governments to reject Keynesian policy. In Britain, the Treasury and Bank of England were captivated by the ideas of Milton Friedman some years prior to the OPEC price push.

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Real wages falling in Australia

The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the December-quarter yesterday and annual private sector wages growth fell to 2.0 per cent (0.5 per cent for the quarter). This is the fourth consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the September-quarter 1997. Real wages in the private sector are now in decline. In the Mid-Year Economic and Fiscal Outlook published in December, the Government assumed wages growth for 2014-15 would be 2.5 per cent rising to 2.75 over 2016-17. They also assumed real wages (the difference between growth in the nominal Wage Price Index and the Consumer Price Index would be positive (0.5 per cent in 2016-17). On current trends, neither assumption will be realised, means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. There will be then the typical hysteria about the size of the fiscal deficit and the need to cut it which will be missing the point entirely. The rising deficit is just responding to a generalised decline in economic activity, falling employment and suppressed wages growth. Depending on how we measure inflation, the annual wages growth translates into a small real wage rise or fall. Either way, 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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If I was in Britain I would not want to be in the EU

The foundations of national sovereignty are the currency-issuing capacity of the national government. The foundations of a democracy include the ability of the citizens of that currency zone (the ‘national government’) to choose the political representatives at regular intervals who will make decisions on their behalf. A direct chain of responsibility between the elected officials to the voters is thus established and the citizens can take action accordingly if they feel they are being disadvantaged by the legislative outcomes. The anathema of this sort of direct responsibility and accountability is the European Union, which is cabal ruled by unelected officials (in the conventional sense) who are not held accountable for their decisions, no matter how poor they turn out to be. The history of the Eurozone is one of policy failure with millions of people rendered unemployed, in poverty, or otherwise disadvantaged by the destructive decisions made by successive European Commission administrations. There was a good reason why the French president Charles de Gaulle resisted the development of supranational power blocks in Brussels and elsewhere (for example, in Frankfurt under the Eurozone). His preference for Inter-Governmental relations, where large common issues such as climate change, migration, rule of law, etc could be decided upon by representatives of each Member State government, without surrendering national sovereignty, was sound. Given all of that, the United Kingdom should exit the dysfunctional European Union immediately and only negotiate with other states on a government to government basis.

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Democrats in glass houses – you know the rest!

So-called US ‘progressive’ economists arena flap at the moment after Gerald Friedman, an academic economist at UMass released a report on January 28, 2016 – What would Sanders do? Estimating the economic impact of Sanders programs – which suggested that the US economy could perform significantly better and deliver substantially improved outcomes for those disadvantaged citizens with Bernie Sanders in the White House. When I say progressive, I mean those who would consider themselves Democrat Party insiders (former Chairs of the US Council of Economic Advisers under previous Democratic administrations). Last week (February 17, 2016), they created a special Internet site to publish – An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman – which claimed that “no credible economic research supports economic impacts” proposed by Friedman and that “Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic”. As if the policy-making and arithmetic of these attention-seeking (neo-liberal) Democrat insiders is anything to be guided by.

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