Too much private credit undermines growth and increases inequality

The OECD has just published a new Economic Policy Paper (June 2015) – Finance and Inclusive Growth – which challenges the notion that the financial market deregulation in the period prior to the GFC, which led to a rapid increase in the absolute and relative size of the financial sector, was beneficial. It argues that in the aftermath of the credit binge, with the private sector overladened with debt, further credit “expansion is likely to slow rather than boost growth”, particularly if taken up by households. The research also shows that “Financial expansion fuels greater income inequality” and that government needs to reform the sector to stabilise growth and reduce inequality. What the paper doesn’t say (it is the OECD after all) is that their research also undermines arguments that it is better to base growth on private debt accumulation rather than public debt accumulation which matches deficits. Thus strategies in place in Australia, the UK and the Eurozone for governments to pursue surpluses which then require the private sector to increase debt to drive consumption are fraught and will ultimately fail. Again!

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A central bank can always prevent government default

I have received a lot of E-mails over the weekend about a paper released by the CEPR Policy Portal VOX (June 20, 2015) – Can central banks avoid sovereign debt crises? – which purports to provide “new evidence” to support the conclusion that “the ability of the central bank to avert a debt self-fulfilling debt crisis is limited”. It is another one of those mainstream attempts to brush away reality and draw logical conclusions from a flawed analytical framework. When one digs a bit the conclusion withers on the vine of a stylised economic model that leaves out significant features of the monetary system – such as for starters, a currency-issuing government can never go broke in terms of the liabilities its issues in its own currency. All the smoke and mirrors of stylised New Keynesian mathematical models cannot render that reality false.In other words, the paper and the lineage of papers it draws upon should be disregarded by anyone who desires to understand how the monetary system operates and the capacity and opportunities that the currency-issuing government (including its central bank) has within that system.

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Why investment expenditure is insensitive to monetary policy

The June quarter 2015 edition of the Reserve Bank of Australia Bulletin has an interesting article – Firms’ Investment Decisions and Interest Rates – which further erodes the mainstream economics claim that business investment is negatively related to interest rates in any continuous way. The implications of the RBA research are many. First, it further helps us understand why monetary policy (adjusting interest rates) is not a very effective way of managing aggregate spending. Second, the research undermines the validity of the mainstream claims that crowding out of private expenditure occurs when government spending rises. The paper finds that investment decisions by firms is not sensitive to interest rate variations within certain ranges. Third, it demonstrates that business investment is driven significantly by subjective sentiment rather than being an exact process driven by quantifiable metrics.

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Saturday Quiz – June 20, 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 – Job Guarantee becomes a mainstream preference

Its my Friday lay day blog. So a rather short blog but with a research trail that can occupy the reader for hours if they pursue all the links. It seems that the mainstream American is rather progressive. Who would have thought given that public opinion is being continually drowned out by the deafening shrieking from the conservative think tanks and their media bully boys. In March 2013, a research paper from Northwestern and Princeton academics – Democracy and the Policy Preferences of Wealthy Americans – demonstrated the vastly different policy preferences held by high income Americans (in this case the top 1 per cent of the income distribution) relative to the general public. The research was motivated by the observation that the “wealthy exert more political influence than the less affluent do” and so if their preferences were not representative of American society in general then that would be “troubling for democratic policy making”. The authors find that the high income earners in the US are not only very active politically but hold ultra conservative views “concerning taxation, economic regulation, and especially social welfare programs” that are not remotely shared by the general public. The results might surprise people.

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Seeking zero fiscal deficits is not a progressive endeavour

There was a most extraordinary Opinion piece in the British paper The Independent last weekend (June 13, 2015) – Labour should have managed the economy better when in power. It was written by the aspiring Labour spokesperson on business, innovation and skills, one Chuka Umunna, who in the days following their electoral loss advanced his name for leadership. His outlook, inasmuch at it represents where the British Labour Party is heading will render them irrelevant for years to to come (the Tories do this stuff better) and is almost indistinguishable from the growth strategy advanced by the Conservative Australian government in its most recent fiscal statement – more private debt driven by fiscal surpluses. We have been there before – it turned ugly as it always was going too. It is quite clear that comprehension of basic macroeconomics is light on the ground when it comes to Umunna and his ilk. A very sorry state.

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Germany should look at itself in the mirror

It has been argued for some years that one of the important consequences of Germany’s obsession with fiscal surpluses in recent years, articulated by Chancellor Merkel and Finance Minister Schäuble as the “Schwarze Null” austerity policy, is that Germany has been under-investing in its physical infrastructure. But it has taken the recent industrial unrest to bring that to the fore into the public debate. Even the IMF is now getting on the bandwagon. In its in-house journal (Finance and Development, Vol.52, No.2, June 2015) there was an article – Capital Idea – which says that “By increasing spending on infrastructure, Germany will help not only itself, but the entire euro area”. At present, Germany is trying to take the high moral ground in the Greece negotiations, but its motivations are obvious – it doesn’t want the generosity that the rest of the world has shown to it in the past (debt forgiveness) to be given to Greece now because that would allow the Greek government to stimulate growth and demonstrate that the austerity path is destructive and myopic. It doesn’t suit Germany’s own vision of itself (as articulated by its own crazy government) for an anti-austerity stance to be given any oxygen. But if it looks at itself in the mirror it would see an economy that is barely capable of economic growth itself, most recently has zero employment growth, has decaying physical infrastructure such that bridges are roads are becoming dangerous, has generated no meaningful real wages growth in years, and as a consequence, has a workforce that is now showing signs of open revolt. Some moral high ground.

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Time to expand public service employment

Back in 2010, in the early days of the GFC, the then Australian Labor government was weathering a conservative storm for daring to introduce a large-scale (and rapid) fiscal stimulus. The package had several components but the most controversial were the decision to introduce a homeinsulation program to create jobs quickly but leave a residual of green benefits (lower energy use in the future). The program had problems but still produced fantastic macroeconomic benefits. It was little wonder that the program stumbled operationally given its complexity and the degraded capacity of the Federal public service, which has been degraded by several decades of employment cuts and restructures under the neo-liberal guise of improving ‘efficiency’. However, that mantra might be finally turning. An article in the right-wing Australian Financial Review (June 14, 2015) – Time to end outsourcing and rebuild the public service – made the extraordinary argument for that publication that public service employment had to increase to allow the government to do what the Federal Communications Minister calls “the legitimate work of the public service”. Wonders never cease.

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George needs a bowl of Cornflakes! Colloquially speaking that is!

In 1723, a rather bizarre book was published in London (and then reprinted in Boston a year later) called Onania; or, The Heinous Sin of Self-Pollution, And All its Frightful Consequences, in both Sexes, Considered: With Spiritual and Physical Advice to those, who have already injured themselves by this abominable Practice.. The author was an anonymous Puritan minister who equated “masturbation, homosexuality and bestialy”. It was “addressed predominantly to adolescent males” but was applied to all ages. The book is full of metaphor – and exhorted a “hope in God” to “awaken … the Guilty” who are “Daily, and often-times Dangerously wounded by this foul Practice” and to stop the “Innocent and Unwary from falling into it”. It represented part of a conservative literature that was intent on pursuing its moral agenda by scaring people into believing that certain activities would be injurious to their health and life-threatening. The agenda exploited ignorance among the general population and traded on this ignorance to advance an agenda based on myth. With George Osborne’s Mansion House Speech last week, not a lot has changed. But I have a cure for him!

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