Daily macroeconomic income losses from unemployment

This is a short background blog which will support the release of my Fantasy Budget 2013-14, which will be part of Crikey’s Budget coverage leading up to the delivery of the Federal Budget on May 14, 2013. The topic of this blog is the estimated losses arising from persistent unemployment. Most people fail to associate on a daily basis how much the economy (and hence individuals and their families) forgoes in terms of lost output and income as a result of the government refusing to use its non-inflationary fiscal capacity to create employment.

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Australia output gap – not close to full capacity

A national media organisation (Crikey) invited me to be one of their Fantasy Budget providers this year and this is a background blog to the preparation of my Fantasy Budget 2013-14 for Australia, which I will publish next Monday. In this blog I consider the state of the Australian economy in terms of output gaps. The Australian government is keen to claim that the economy is operating close to or at trend real output – sometimes the Prime Minister or Treasurer – and senior Treasury officials, will replace the descriptor “trend output” with “full employment”. They make that claim to justify imposing fiscal austerity on the economy, which is expressed by their most recent goal to achieve a budget surplus in the current year. They have been pursuing that strategy for several budgets now after taking appropriate steps in 2008 to allow the budget deficit to rise significantly to head off the looming disaster associated with the global financial crisis. While the stimulus was not large enough at the time it did save the economy from the type of chronic recession that most of the advanced world remains stuck in. But, once recovery was established, the conservative ideology returned and the fiscal stimulus was withdrawn too quickly and an austerity plan implemented. At the time, it was clear that they would fail to achieve a surplus because in attempting to do so they undermined the recovery, and, their tax revenue growth. Other international events (a slowing of the terms of trade and an overvalued dollar) have compounded their poorly crafted fiscal strategy. The reality is that the Australian economy is now performing well below trend and the divergence is increasing. The labour market is also producing grossly inferior outcomes and we are clearly a hundreds of thousands of jobs short of what a reasonable definition of full employment would require. The budget deficit is too small not too large and the direction of policy in the coming year should be expansionary not contractionary.

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What part of the word failure don’t the Euro elite understand?

The – Eurostat homePage – today (May 1, 2012) told the story of policy failure. On April 30, 2013 there were two major data releases – Euro area unemployment rate at 12.1% and Euro area annual inflation down to 1.2%. Record unemployment and a contracting and very low inflation rate. That is recession. That is the average. Some nations are now experiencing the Great Depression Mark II. And still the policy leaders make public statements that things are easing because borrowing rates are down and fiscal consolidation is bringing deficits down. On May Day 2013 it would be appropriate for a major workers’ revolt throughout Europe to protest over the continued rise in unemployment and the failure of the elites to deal with it. The question that the riot could pose is: What part of the word failure do these leaders not understand?

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The indecent inconsistency of the neo-liberals

Last weekend, the Australian government announced a major new funding initiative for farmers. The so-called – Farm Finance Program – will handout millions to farmers who are struggling to make ends meet. Whenever I see these special assistance packages being handed out to the rural sector, which is politically well-organised, I reflect on the plight of the unemployed. With unemployment rising in Australia as the economy goes into reverse on the back of failing private demand and deliberately imposed fiscal cutbacks, the decision to hand out economic largesse to the farmers wreaks of inconsistency. The unemployed have diminishing chances of getting a job at present and the income support provided by government is well below the poverty line. That poverty gap is increasing and the Government refuses to increase the benefit claiming fiscal incapacity. They also say they are jobs focused, despite employment growth being flat. The comparison of the vastly different way the government treats farmers relative to unemployed highlights, once again, that the way we construct a problem significantly affects the way we seek to solve it. The neo-liberal era has intensified these inconsistencies which have undermined the capacity of public policy to achieve its purpose – to improve the welfare of the citizens. The research question is: Why do we tolerate such inconsistent ways of thinking about policy problems and their solutions?

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US national accounts – growth but for how long?

Last Friday (April 26, 2013), the US Bureau of Economic Analysis – published the – US National Income and Product Accounts – for the March-quarter 2013 (the advanced estimates – subject to later revision). The US economy continues to grow despite the fiscal drag coming from the government sector, principally the federal government. But the outlook is not that bright given that this data does not include the impacts of the “sequester”, which will start to reveal themselves more clearly in the June-quarter data. The signs are not good, however. Most recent data, which will feed into the second-quarter result is suggesting the economy is slowing under the weight of the fiscal drag. The point is that there is still a huge output gap in the US (my estimate – around 10 per cent) and no signs of an inflationary surge. Combining that information with the parlous state of the labour market indicates that the US federal government should be increasing their net spending rather significantly at present. The fact that all levels of government are now retarding growth is not a responsible act.

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Saturday Quiz – April 27, 2013 – 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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Buffer stocks and price stability – Part 1

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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Austerity as law not political discretion

I agree that we should have speed limits and other traffic regulations to prevent mayhem and carnage on our roads. There are other laws I agree with such as protecting children from sexual predators and laws protecting citizens from police brutality and processes to allow us to monitor and prosecute corruption in public office etc. They all make sense to me. Many other laws I would scrap because they are petty infringements on our liberty. But I would never enshrine a particular fiscal policy stance in law or even in codes such as fiscal rules. Such practice defeats the purpose of having the fiscal policy capacities, which is to respond to economic circumstance such that public purpose including full employment can be maintained at all times. Creating legal frameworks that stop governments from exercising their discretion are not only counter-productive but also highly destructive as we are seeing now in the Eurozone. I prefer the people to be able to tell politicians what they should be doing in this respect not judges. However, the Euro elites have been moving towards making austerity law and eliminating political discretion that disagrees with them. And, come to think of it, when some judges disagree with them on a matter of law, the EU elites just instruct their puppets to ignore the courts and proceed as before.

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Australia – inflation benign and plenty of room for fiscal stimulus

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the March 2013 quarter today and while the inflation rate rose a little, this was mainly due to the fact that the base March-quarter 2012 was unusually low, thus distorting the annualised figure. When we continue the most plausible recent trends the annual inflation rate is below 2 per cent and falling. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now well within the inflation targetting range and are probably trending down. This suggests that the RBA will probably consider the inflation outlook to be benign or “too low” and will instead have to shift their focus to the failing labour market, which in the last month showed signs of considerable deterioration after a flat 12-15 months. The inflation trend clearly contradicts the commentators who have been predicting the opposite on the basis of the (modest) rise in the budget deficit over the last few years as the downturn hit Australia. Their standing in the predictions stakes continues to be dented by the data. The evidence is suggesting that the economy is slowing under the weight of the federal government’s obsessive pursuit of a budget surplus. The benign inflation outlook provides plenty of room for further fiscal stimulus.

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