Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I am Australian but not a proud one. That doesn’t mean anything other than I don’t consider nationalism to be a particularly appealing trait. I would perhaps defend our borders from attack and I prefer Australia winning at sport than the English (but not the West Indies!). But when I read a newspaper headline (March 24, 2011) – Australia tops index ranking for maintaining strong fiscal balance – I feel ashamed that I live in such a nation. Given the methodology that went into construct this index, Australia would be better off being down the bottom of the rankings – by choice rather than inaction. Just when you thought the public debate about fiscal policy couldn’t deteriorate any further … it plunges to new depths. This index is published in a new “study” (I would not actually give it the gravitas of a study) – is actually an exercise in reductio ad absurdum ad infinitum aka total BS.
At the outset, can I just say that it appears Stanford University is now awarding masters degrees which are of a standard that I would fail if I was an examiner.
I refer to a recent publication – The Sovereign Fiscal Responsibility Index (SFRI) – which was produced by 4 masters students from the project completed by a team of four students from the International Policy Studies (IPS) and Masters in Public Policy (MPP) programs at Stanford University.
It took them 6 months to complete – conclusion: they wasted 6 months of their precious lives.
It was supported by the right-wing fanatical organisation – Comeback America Initiative – which says it is about “Keeping America Great”. From what I read of their work they will only succeed in making America a laughing stock as it races to the bottom towards mediocrity – driven by a religious zealotry that invokes fear and mis-information among the populace.
The head man at the CAI is none other than David Walker – former U.S. Comptroller General and CEO of the U.S. Government Accountability Office (GAO) and current head deficit terrorist in the US who is given regular oxygen by the likes of Fox News etc.
It seems that the CAI funded the Stanford project under the direction of Walker although an academic named Joe Nation supervised it. They say that the “client for this project” was CAI, which in normal parlance means that the Stanford Institute for Economic Policy Research provided commissioned research paid for by CAI that supported these graduate students.
But given how poor the quality of the research is this amounts to a disgraceful act of prostitution by Stanford. I advise all prospective students to avoid studying in the Public Policy Program at that institution if you have any self respect and seek to be educated rather than indoctrinated with propaganda.
Further, the Report is full of disarming statements such as “non-partisan” – yeh right – as long as you only consider the erroneous neo-liberal paradigm – and says it obtained its data from the “International Monetary Fund (IMF) and other authoritative, trusted, and neutral international organizations”.
When I think of the IMF I do not come up with descriptors such as “authoritative, trusted, and neutral”. They are the antithesis to the public conduct of the IMF and its long record of poor forecasting, poor outcomes and politically-biased interventions. To think of the IMF and its partner institutions as being neutral and trusted is a joke.
It reeks of desperation – as if these “authorities” will give the Report some gravitas and readers will fail to notice there is no substance at all in the actual document. They might have done the study “under the guidance of the Honorable David M. Walker” but if that impresses you then a sad person you must be – ill-informed about the way the system operates and prepared to lie about the actual state of the economy and the opportunities available to government to fix it.
What exactly is honourable about David M. Walker? His public statements which mislead listeners about the way the US monetary system works and the possibilities it provides the US federal government are dishonourable.
The “Report” turns out to be a front for Walker who is now an out of control missile so obsessed with fear about public deficits and public debt that he seems to have lost a grip on reality.
The Report says that it aims:
The goal of this project is to provide a simple but comprehensive analytic tool and framework for citizens, research institutions, and advocacy groups alike to use in understanding sovereign fiscal responsibility and sustainability. It is specifically intended to illustrate where the United States is, where it is headed, and how it compares with other nations in the area of fiscal responsibility and sustainability.
Yes, I love simple analytical tools and frameworks. Rules of thumb are excellent guides to complex situations and happenings. I use them all the time to gauge my impression of how things are going and where they might go next.
But these tools have to be grounded in a coherent framework not a bed of lies. The house is only as good as the foundation.
This Report fails from the outset because it is built on an erroneous framework – the mainstream macroeconomics government budget constraint and the analogy that the government is like a big household – and hence its budget is financially constrained. Please read my blog – I am now advocating biblioclasm … – for more discussion on this point.
It says nothing of importance about the United States at all and by comparing the US with nations that are part of a different monetary system (for example, the Eurozone nations) the authors reveal the extent of their ignorance.
I should say that the authors are Masters students who might be forgiven for jumping ahead of themselves – strutting before they know anything much. But you cannot forgive the likes of Walker and the supervisor Joe Nation – their involvement reflects a much deeper malaise.
Allow me to cut through all this stuff and propose some edits (as if I was the supervisor).
The opening sentences of the Report might usefully have read:
The Governor of the Bank of Japan has publicly admitted that the Bank of Japan can always directly purchase Japanese government debt and thus facilitate public spending without recourse to the bond markets. The Japanese yen floats freely on the foreign exchange markets and the Japanese government does not borrow in foreign currencies. Any sovereign nation shares these characteristics. None have any fiscal solvency risk at all. However, that doesn’t mean they rank highly on our fiscal responsibility index. Many nations have high rates of unemployment and other idle productive capacity (machines, buildings, equipment etc). The governments of these nations are fiscally irresponsible because they have the capacity to bring those idle resources back into production.
The authors might then usefully scrap the rest of the Report – and write it off as youthful exuberance. Then we can all go home and write letters to our politicians telling them to get started on being fiscally responsible – in most cases we would finish our letters by saying – you need to run higher budget deficits at present!
To understand these proposed edits I suggest you do some background reading in Modern Monetary Theory (MMT) by consulting my suite of blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3.
Then you will be armed to combat any resistance to my proposed edits.
Emphasis is everything
If you read the full text of the document you will soon realise this is not something that has been written about Planet Earth. If I was asked to list the major socio-economic concerns in the world at present I would include:
- Casualisation and loss of job and income security
- Sluggish real GDP growth reliant on fossil fuel energy
Fiscal responsibility has to be considered in the context of these real outcomes and aspirations. To produce a document that purports to be about how governments might be fiscally responsible then you might expect extensive discussions about the state of idle resources in each nation – which gives the national government fiscal space to bring these resources back into production in addition to a discussion about the type of monetary system the government runs (or accedes to).
In the latter context, we would distinguish between nations such as Australia and the US etc who float the currencies that the national government issues as a monopolist and those who have given up this sovereignty by joining some monetary system where the currency is not issued by national governments and they do not float freely across national borders (such as, Greece etc).
You would clearly outline the perils in trying to compare the EMU nations which are all financially constrained and at the behest of the bond markets (or the mercy of the ECB – the ultimate fiscal authority in the Eurozone) with sovereign nations which are not financially constrained and can spend whenever they choose. For these nations the bond markets have not real importance despite what the politicians themselves might think (and do).
But then if you then try to find any mention of my key socio-economic concerns in the Report – you will find these words never appear. That fact alone is staggering and reveals how impoverished this piece of scuttle is.
I don’t intend to go into the Report line by line. I have read it closely though. I thought I would examine the final results (the rankings) in more detail.
The following graph shows the 2010 national unemployment rates (horizontal axis) and the final Fiscal Responsibility Index scores (vertical axis) from the Report. The data is from the OECD Main Economic Indicators. The black line is a significant regression relationship which indicates that countries with higher unemployment rates tend to perform more poorly on the Index ranking.
Surprised by that? You should not be. In general the nations with the highest unemployment rates had the worst cyclical downturn and experienced the largest increases in their budget deficits. Given they all follow the arcane practice of issuing government debt to match $-for-$ the net public spending increase it was obvious public debt levels would rise.
While the Report says these nations have no fiscal space left, the reality is exactly the opposite – they have the highest unemployment rates and therefore the most idle labour. That labour is the “fiscal space” – and the national governments can always afford to purchase that labour and put it to productive use.
The following graph tells the story in another way. It shows the percentage change in real GDP between 2007-2009 (horizontal axis) and the final Fiscal Responsibility Index scores (vertical axis) from the Report. The GDP data is from the IMF World Economic Outlook database. The black line is a significant regression relationship which indicates that countries with lower real GDP growth in that period tended to perform more poorly on the Index ranking.
Surprised by that? You should not be. Please see above.
The point is that the Report is only measuring the differential impacts of the recession albeit in a roundabout manner which is inefficient. Trying to suggest that the public debt ratio or the deficit to GDP ratio have meaning in their own right is the fatal error these authors make.
A rising budget deficit, in the recent historical context, is telling us that the particular nation’s economy has deteriorated in real terms. It tells us nothing at all about solvency risk or capacity to pay. We know logically by understanding the nature of the monetary system that a government like the US can always pay its US dollar bills. So can the British government, the Japanese government and almost all other governments.
We don’t need to go to an elaborate 6-month exercise computing financial ratios to know that. And if we want to find out how bad people’s lives are as a result of cyclical deterioration, it is better to focus on the variables that matter – as outlined above in my list of key socio-economic concerns.
I would have failed this Master’s thesis had I been the examiner. It reflects a very poor understanding of the subject matter, has a very incomplete bibliography (which is tantamount to be poor scholarship) and is largely a sequence of major analytical errors. The Report is basically an exercise in Reductio ad absurdum ad infinitum But Stanford seems to think that is an appropriate standard. Just goes to show!
Something the Report can do
The only interesting thing I was able to use the text for was this word cloud (top 200 words) weighted by frequency. It gives you an idea of what to expect.
You won’t find the word unemployment, underemployment, poverty etc among the frequencies. That is more than an oversight – it is a travesty of scholarship.
It just gets worse each day. We are living through an anti-intellectual period disguised as informed research and commentary. The heathens are at the gates!
Lucky its the weekend and I can retire to … reading economics! (and detective novels, playing in my band, etc).
But just reflect on the statement by the Bank of Japan Governor the other day about the capacity of the central bank to facilitate all national government spending if push comes to shove. I don’t need to say anymore than that!
The Saturday Quiz will be back sometime tomorrow.
That is enough for today!