Here are the answers with discussion for the 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.
Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.
On January 23, 2016, a former Australian Treasurer Peter Costello (1996-2007) gave a speech to the Young Liberals (the youth movement of the conservative party in Australia) – Balanced Budgets as a Youth Policy – which was sad in the sense that some people never get over being dumped as out of touch and unpopular and was ridiculous in the sense that it is a denial of reality and macroeconomic understanding. He mounted the same old arguments that have been used to justify the pursuit of fiscal surpluses (grandchildren etc) but failed to recognise that his period as Treasurer was abnormal in terms of our history and left the nation exposed to the GFC as a result of the massive buildup in private sector debt over his period of tenure. The only reason he achieved the surpluses was because growth was driven by the household credit binge which ultimately proved to be unsustainable. Fiscal deficits are historically normal and should not be resisted. They are the mirror image in a national accounting sense of non-government surpluses, which historically, have proven to be the best basis for sustained growth and low unemployment.
On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.
I use the descriptor ‘failure’ in a selective way, although it is probably the meaning that that vast majority of citizens would ascribe to the term. In this context, I’m thinking that successful policy improves the lives of the most disadvantaged citizens in a region. A small minority of people might think of success in terms of how rich the top end of the distribution becomes (in wealth or income). Yesterday (January 25, 2016), a UK research group, the Centre for Cities released their latest – Cities Outlook 2016 – which is a comprehensive analysis of how the larger cities in Britain are performing across a variety of indicators. In this release, the theme was centred on the claim by the British Chancellor that his policy design was intending to produce a “higher wage, low-welfare economy in Britain”. The report suggests the British government has failed and that “almost half of lower wages, and higher welfare, than the national average” and “welfare spending since 2010 has grown at a much faster rate in high-wage cities”. I’ve also been trying to disentangle the impacts of deindustrialisation on urban spaces, which began in the 1980s, from the more recent impacts of policy austerity, driven by misguided understandings of the capacities of currency-issuing governments. I want to address the claim from the Left, that the shifting patterns of capitalist production across regional spaces, is inevitable and undermines the capacity of cities to prosper. The shifting patterns might be inevitable but the conclusion that is drawn about the options available to cities are largely incorrect.
There was an article a few weeks ago purporting to show that public deficit expansion (increased net public spending) has never worked. I won’t link to the article because I would not want the Magazine to get any advertising revenue via my blog and also because, frankly, the article is one of those reinvent history efforts – along the lines of when the facts do not align with theory the way forward is to just make up some new facts and deny what actually happened. But one of the examples use to justify the claim “Keynesian deficit spending … over and over again … has not worked” is the Ireland and Denmark experience in the 1980s when these nations “reduced their government budget deficits, which according to Keynesian theory should have depressed the economy. But on the contrary, the economies did particularly well”. This example is often used these days to justify the claim that deficit spending does not promote growth and fiscal austerity does not damage growth. However, no ‘Keynesian’ theory I know suggests that cutting the fiscal deficit will ‘depress’ the economy. It all depends … and that is what this article (like all the others that use this example) fails to recognise or admit. It bears also on current events in Canada and Argentina, which are demonstrating some other interesting facets of macroeconomics.
Here are the answers with discussion for the 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.
Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.
I have been continuing the research for my next book (hopefully to be finished by May 2016) on the way in which the neo-liberals convinced policy makers including those in progressive social democratic political parties that the globalisation of finance and capital flows meant that the currency-issuing state was no longer capable of maintaining full employment through appropriate use of fiscal policies. The tenet we are entertaining is that the state never went away, it was just co-opted by capital to serve its interests. This will be a two-part blog and centres on a critical period in economic history in the mid-1970s, which marked the break with the full employment system which had moderated the excesses of capitalism. This was the period when the neo-liberal period dawned, and which steadily, opened the way for these excesses to reemerge, in all their indecent indulgence and destruction. It is also the period in which a series of economic myths crystallised into the mainstream narrative we know today, which opposes government deficits and allows unemployment to remain elevated at excessive levels. It is really important to understand what went on then because we are living with the legacy of the falsehoods introduced during this period.
Sometimes one reads a press article that is so obviously misleading that it is hard to know where to start with it. But perhaps the conclusion is the best place to start sometimes. Such is the case of a Bloomberg article (January 15, 2016) – What #ResistCapitalism Gets Wrong – written by American academic Noah Smith. Basically, the article attempts to attribute all of the post-Second World War prosperity to the “free market economy”, which he says is “a term many use synonymously with ‘capitalism'”. By the end of the article we learn that in fact that prosperity does not come from ‘free market’ liberalisation and that strong governments are essential for growth and reductions in inequality. The “boring old mixed economy” where, in Noah Smith’s words “government really is instrumental in creating growth”. Start with the conclusion and read backwards is my advice in this case.