In the latest IMF Finance and Development journal (March 2023), there is an interesting article…
Governments should not ‘cool’ an economy or cut deficits when there are millions unemployed still
It’s Wednesday and only a few items today. It seems that the mainstream economists are emerging again and making all sorts of claims that fiscal policy has to target lower deficits and monetary policy needs to tighten (interest rates rise) to stop our governments going broke and inflation going wild. It really is like a tired broken record, isn’t it. They have sort of gone underground during the crisis and more are thinking it is time to reassert the nonsense of the past. And so it goes. But at least Wednesday brings music to this blog – and what a treat we have today.
The demand for higher interest rates ruse
The New York Times carried a guest essay (November 22, 2021) – Powell Needs to Cool the Economy Now to Avoid Recession Later – which was written by one of those ‘free market’ economist types from the American Enterprise Institute.
He must have been having conniptions over the last few years as fiscal policy took over and deficits rose.
He was commenting on Biden’s decision to reappoint Jerome Powell for another four years as boss of the Federal Reserve Bank.
Apparently, “Mr. Powell has his work cut out for him”.
Oh, simply because there is “inflation rising to alarming levels” and “the Fed should be making moves to cool the economy.”
Some temporary spikes during a pandemic is nothing to be alarmed about.
And why would the US government desire to “cool the economy” when the US labour market is still around 4,204 thousand jobs short from where it was at the end of February 2020 and there are no fundamental wage pressures emerging?
And why would the US government want to stop the recovery in its tracks (more in a moment on whether monetary policy would do that) when it is clear that the lower paid occupations have not participated proportionally in the jobs recovery to date and many groups have endured real earning cuts over the course of the pandemic?
We get to the nub fairly quickly in the article:
At present, the Fed is erring too much on the side of maximum employment. Instead, Mr. Powell must tip the scales back in favor of price stability.
So, just a rehearsal of the last thirty years, which, thankfully, the current Federal Reserve boss, to his credit, has abandoned because he knew that concentrating on price stability alone was maintaining elevated unemployment rates and massive losses in income via the constrained GDP growth.
Further, in general, I don’t think that increasing interest rates does much for inflation containment anyway, unless the rates go so high that the economy comes to a screeching halt, and by then so much damage is done that it doesn’t matter.
Rising interest rates increase business costs and if they have market power to set prices and mark-up unit costs then you know what happens next.
Moreover, the current price pressures are mostly being driven by the supply side of the economy – bottlenecks.
I discussed that most recently in this blog post – The current inflation trajectory still looks to be transitory (November 22, 2021).
Increasing borrowing costs will do nothing to ease those bottlenecks.
It is just a case of seeing the supply side sort itself out – containers have to move to where they are required, ships have to go to the right places, etc etc.
Which we then get to why all the financial market economists are screaming for higher interest rates.
I have written about this before – they are waving the inflation flag as a ruse to get the rates up because their companies have bet millions that rates will rise.
All their short selling will come to grief if interest rates are not pushed up.
That says nothing about the well-being of the citizens.
The financial markets don’t care about that objective.
They just want their short trades to make big profits and hang the rest.
The fiscal repair ruse
The bank economists were at it again in Australia when they were interviewed and demanded the Australian government ‘repair the budget’.
The Sydney Morning Herald published an article yesterday (November 23, 2021) – Politically fraught, but budget repair needs to start soon: economists – which sought the views of Australian economists.
A selective view that is.
The authors Shane Wright and Jennifer Duke conduct the regular forecasting panel (of which I am a member), which draws opinion from a wide group of economists – academics, those working for unions, not-for-profits, and the financial market economists working for banks.
They get a diversity of opinion although their articles following the survey usually struggle to portray that diversity.
They know, at least, that I am vehemently opposed to all this talk of ‘fiscal repair’.
So I was disappointed they chose to run an uncontested line in this article just rehearsing the views of mainstream economists.
Apparently, various events – including falling terms of trade – will mean that the:
… nation’s finances may take a further hit …
What could that mean?
Well it means in an accounting sense that tax revenue falls below what the Federal government predicted because they relied on iron ore, coal and LPG prices being higher than they are likely to be when the accounting is done (over the next year).
So what you ask?
Exactly, so the fiscal deficit will be higher than they predicted.
Does this matter?
Not in the slightest.
One economist they interviewed set the tone – “it was definitely time to start budget repair”.
Apparently, she wanted a switch in the expenditure mix, which might be sensible, given the waste on pet projects that is currently evident.
But, she also wants the switch to be a level cut.
And, that requires an answer to a different question (to those relating to waste and pork barreling).
The relevant question then is what is the state of the labour market?
Last time I looked in detail – Australian labour market – more than 2 million workers without work – 14.7 per cent (November 11, 2021) – and – Wages growth in Australia goes from terrible to bad as real wage cuts continue (November 17, 2021) – the labour market was in a parlous state still.
The economy was nowhere near full employment and there was no wage pressure at all.
So, what is the purpose of fiscal policy?
In this ‘budget repair’ narrative, there is some numbers or thresholds that seem to matter.
Even the existence of a fiscal deficit is problematic in that narrative.
But in the real world, the purpose of fiscal policy is to advance well-being and when there are 14.7 per cent of the available workforce not working in one way or another (underemployed or unemployed) and thousands of workers hidden in unemployment outside the official workforce, it is nonsensical to talk about cutting the deficit.
At present, with the pandemic still causing damage and the urgency of climate change calling, the direction of fiscal policy should be to increase the discretionary deficit not cut it.
Further, the whole nomenclature reveals a misunderstanding of what the purpose of fiscal policy is.
When I have a tooth problem, I go to the dentist for a repair job.
When my bike needs a new chain, I go to the shop to get a repair.
When a piano key gets stuck due to a worn out spring or lever, I call in the repair expert.
We repair things that are broken because that is the only way we can get restore their purpose – to bite, to convey or make sounds.
Repair in that context is an appropriate term.
But the concept has no application in discussing fiscal policy because our assessment can only be made in relation to the purpose and context.
If there is 14.7 per cent of workers not working at present, that is the context.
It means that fiscal policy is too tight relative to the current non-government spending growth and the productive capacity of the economy.
For these economists, ‘repair’ means cut to restore some level.
One of the interviewees claimed that ‘repair’ could be delayed because “the debt position is considered sustainable
Which is another furphy.
The “debt position” just defines the non-government sector wealth that is stored in the form of government bonds.
What does sustainable mean when the debt is risk-free and the federal government can always meet any liabilities it incurs in its own currency?
And how does the fact that the Reserve Bank has bought most of the debt issued since the pandemic affect the analysis?
Government lending to itself and paying itself back!
That is what has been happening.
Music – Move on Up
This is what I have been listening to while working this morning.
The early 1970s, after the disaster at Altamont in December 1969, which, arguably, sort of burned the hippies out, was a period of hope.
Curtis Mayfield – was one of the prominent hope providers and his debut album in 1970 – Curtis – contained one of my favourites songs of all time – Move on Up.
We were moving beyond 25 minute guitar solos and even longer drum solos as our heads cleared from the 1960s and Curtis Mayfield got us moving again.
For Curtis Mayfield, the album was a break from his previous pop band (The Impressions) and he started to embrace the funk fusion, which still had the influences of the psychedelic era that preceded it.
He also was seeing his music in political terms – embracing the struggles of the black movements of the time.
His band was very large and featured some of the great R&B and funk players of the time.
This song has 4 chords throughout – beautiful, flowing chords – and a great refrain. It is a great song to play in a band.
The album track went for 8:49 minutes. When they released the single they cut it to 2:53 and was gone in a blink.
No wonder it didn’t do very well initially as a single – all us hippies were still just getting warmed up after 2:53!
Curtis Mayfield died prematurely after a nasty accident while playing in 1990 and one of the great artists was gone.
The only downside of the song is that Joe Biden used it during his 2020 Presidential campaign.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.
This Post Has 11 Comments
Just yesterday I saw a youtube interview with Mark Blyth and a woman, not Carrie.
In to the woman said the the ratio of national debt to GFP is a ratio of a ‘stock’ to a ‘flow’.
She implied that such ratios should be ‘improper’ (my word).
In Physics it is ‘improper’ to use numbers measured in different reference frames.
. . .E.g., dividing the distance to a star on Earth (at rest) by the time it took for a spaceship to get there as measured on the ship going at 99.99% of light speed.
Is she right that the debt/GDP ratio is totally bogus just or this reason?
What happens when you get to a crossroads and all available exits are deadends?
Mainstream economics is a deadend.
Comunism is a deadend.
Socialism never worked.
And climate change hobbled all traditional models of development.
Maybe, we should start by building a new road.
MMT is a good place to start.
Everything that we can view as truth can be a good brick to lay the road ahead.
As far as I’m aware there are no significant relativistic effects that need be considered in terrestrial economics. So the comparison with the space ship is a bogus argument.
The debt is a stock ($) and GDP is a flow ($ per unit of time). There nothing wrong with dividing one into the other providing the unit of time isn’t forgotten. So, strictly speaking, if the unit of time is one year, a Debt/GDP ratio should be measured in years. In other words the result of the division would be different in we chose months or decades for GDP.
Thanks for the interesting reply.
OK, you didn’t grok the analogy to relativity.
So, this ratio is meaningless for other reasons.
Mainly, for a student of MMT that the debt is also the assets of the people who hold the bonds.
And because, the debt can only be rolled-over (incl. interest) forever, the debt Point Of View of the national debt is without meaning. And therefore, that just leaves the assets POV.
How about this analogy? The national debt is a vertical line on a graph. The GDP is the area under a line on a graph, between the start time and the end time. Dividing a line by an area is meaningless.
Article (scare story) in the G today on Turkey caught my eye https://www.theguardian.com/world/2021/nov/23/turkish-lira-sinks-to-fresh-low-after-erdogan-insists-on-interest-rate-cuts ‘Turkey’s currency slumped yesterday to a fresh low against the dollar… Investors took flight amid concerns at his (Erdogan’s) unorthodox management’. Slump, low and of course investor (currency speculator) flight are of course terrible things. There are two contrasting quotes, from Erdoğan “we were either going to give up on investments, manufacturing, growth and jobs, or take on a historic challenge to meet our own priorities” and one from a currency trader, “Another disastrous experiment… weak monetary policy.” Not keen on Erdoğan but currency speculators can make him look very reasonable.
“It really is like a tired broken record, isn’t it.”
Because it is all geopolitical and foreign policy demands it. Every world power which has expanded its borders has done the exact same thing. The are only interested in the real resources and to take those they have to put the nation state they have invaded into a straight jacket. Only difference is that it is bankers that carry out the invasion not soldiers.
The ruling class in each nation state that has been invaded works with the invader for many reasons. Rome and the British mastered it. If Hitler had won world war 2 he would have looked to set it up in the same way. Europe wouldn’t look that much different to what it is today under Hitler. Something similar to the Euro would have replaced the swastika.
We wasted 20 years calling them stupid . The truth is the ruling class knew exactly what they were doing. They know exactly how things really work. To hide it, they use all the power they have and ask their own citizens to play the 3 card monte every time they vote.
For me it is time to stop playing the 3 card monte. Time to stop calling them stupid and treat it as the class war it is. Ask Boadicea, Robert the Bruce, Martin Luther King, Gandhi and the IRA. They worked out what you needed to do a long time ago. You have to be prepared to put your life On the line to force through change.
There is no better example of the Scottish clan leaders who worked with their invader and got rewarded for it. It is no different the world over today. Russia and China refuse to play unless it is them who are going to get the real resources.
When you look at the poll tax riots and Brexit and when the left and right United with a cause it scares the living daylights out of them. Only problem is when the left and right go back home to their entrenched positions. The ruling class got the poll tax through by stealth and just increased it over time to what it would have been without the riots. They’ll probably reverse Brexit because they can just wait it out. They have the wealth to wait 50 years if they have to.
So if you are going to put your life On the line to try and implement change you have to make sure the changes stick. Which is extremely difficult when you only live for 70 years and every year the ruling class get 5 year olds into a class room and brainwash them until they are 18. As they get the next generation ready to support their right to be leaders and their cause.
Many people put their lives on the line to get the social changes after the war. The next generation gave them all up willingly and cheered and waved flags when they did it. The ruling class just waited it out, played the long game because they can and pumped and primed the next generation.
It is easy to think all you have to do is win the intellectual debate. When really it is a class war and always has been. Those that did put their lives on the line will tell you all about it. If the majority won’t even support Julian Assange what chance does anybody have. This generation just wants the latest I phone.
They want you to believe you can implement change by winning the intellectual debate. They want you to go down that route. As they place a guard every 100 paces along that route to protect the system. MMT’rs have come across many of these guards over the years. You get passed one and another is standing 100 paces away who learned how you got passed his colleague and makes it more difficult the next time around. The system learns from its mistakes and makes sure any loop hole is closed. See Trump and Bannon and Alex Jones for details. They are closing that loop hole in America right now as we speak. Never again will they get into the white house via those channels again. They are shutting it down and will make sure moving forward they will decide who you can vote for.
The liberal ruling elites use fake progressives to silence true progressives. The guards every 100 paces to protect the system. It’s like the owners of a prison who order “trustee” inmates to torture regular inmates. If the “trustees” don’t torture, they are tortured themselves after being thrown to the regular inmates. The liberal establishment’s function is to protect the rich and those marching for freedom and liberty today are their “trustees”
You come across them in every profession and there are thousands of them in every below The line comment section in every mainstream online newspaper. MMT’rs are confronted by them on a daily basis.
Chris Hedges has been highlighting for years – The Rule of the Uber-Rich Means Either Tyranny or Revolution
“The German psychoanalyst and sociologist Erich Fromm in his book “Escape From Freedom” explained the yearning of those who are rendered insignificant to “surrender their freedom.” Totalitarian systems, he pointed out, function like messianic religious cults.
“The frightened individual,” Fromm wrote, “seeks for somebody or something to tie his self to; he cannot bear to be his own individual self any longer, and he tries frantically to get rid of it and to feel security again by the elimination of this burden: the self.”
This is the world we live in. The totalitarian systems of the past used different symbols, different iconography and different fears. They rose up out of a different historical context. But they too demonized the weak and persecuted the strong. They too promised the dispossessed that by subsuming their selves into that of demagogues, or parties or other organizations that promised unrivaled power, they would become powerful. It never works. The growing frustration, the ongoing powerlessness, the mounting repression, leads these betrayed individuals to lash out violently, first at the weak and the demonized, and then at those among them who lack sufficient ideological purity. There is, in the end, an orgy of self-immolation. The death instinct, as Sigmund Freud understood, has a seductive allure.
History may not repeat itself. But it echoes itself. Human nature, after all, is constant. We will react no differently from those who went before us. This should not dissuade us from resisting, but the struggle will be long and difficult. Before it is over there will be blood in the streets.
This devolution of the economic system has been accompanied by corporations’ seizure of nearly all forms of political and social power. The corporate elite, through a puppet political class and compliant intellectuals, pundits and press, still employs the language of a capitalist democracy. But what has arisen is a new kind of control, inverted totalitarianism.
Inverted totalitarianism does not replicate past totalitarian structures, such as fascism and communism. It is therefore harder to immediately identify and understand. There is no blustering demagogue. There is no triumphant revolutionary party. There are no ideologically drenched and emotional mass political rallies. The old symbols, the old iconography and the old language of democracy are held up as virtuous. The old systems of governance-electoral politics, an independent judiciary, a free press and the Constitution-appear to be venerated. But, similar to what happened during the late Roman Empire, all the institutions that make democracy possible have been hollowed out and rendered impotent and ineffectual.
Alienation has been further accelerated by social media. People at public events stare at their phones instead of talking to each other. They stare at their phones inside museums, at spectator events, and while driving, eating, and screwing. They take selfies while sitting on the toilet. They feel naked without their phones, like a baby without its pacifier. Their addiction to dopamine fixes makes them constantly check their emails and Twitter accounts, and frequently hear phantom ringtones. It makes them desperate for constant reassurance that they exist.
Social media creates nationwide echo chambers that sustain tribes which compete with each other for the coveted status of “victim.” Tribal bickering and rampant narcissism in turn keep the peasants from uniting against their rich owners, and from collectively addressing things like climate change and runway pollution. It makes leftists scream “Fascist!” while right-wingers scream, “Communist!”
All sides have regressed to infantile dream worlds. All sides cheer for wars that make rich people richer, and poor people into homeless refugees. Created by their own wars but the blame are out into their enemies. ”
This will not be won by winning the intellectual debate. They will have to be hung from every lamp post until they surrender. It’s time to stop playing the 3 card monte because money has replaced the vote.
Meanwhile we have Lord King (former BofE gov’nor) lecturing that “A satisfactory theory of inflation… has to explain how changes in money – whether dire tly via QE or indirectly via changes in interest rates – affect the economy” and that central bank balance sheets were “unsustainable”. The man clearly needs to take time out to learn some MMT before any more lecturing.
Mainstream economists function as a priesthood, selling indulgences to capitalists for stipends.
Jack Lang was a very interesting Labour politician in Australia.
Got Corbynised in the,exact same way as Corbyn and Bernie did only 90 years earlier. When he came up with the Lang plan.
Lord King should be put in charge of our road network.
No doubt he would control the traffic flow by closing off parts of the road network, because a satisfactory theory of congestion has to explain how changes in the number of miles on the road network affect the total miles per hour untaken by road users.
This was written in 1963 in a book entitled Studies of a small Democracy by David Hamer.
‘The most distinctive contemporary feature of New Zealand as a ‘small democracy’ is probably our insistence, proclaimed to the world in no uncertain terms in the Canberra Pact and at the founding of the United Nations, that the state must maintain full employment. That this problem of employment should have come to figure so prominently in our politics reflects the exceptionally wide variance between our basic economic situation and the human needs of our society. In a country whose economic well-being is dependent on primary production for export and whose economy is therefore founded on commercial farming, people do seem very superfluous. . . . This situation of superfluousness and precariousness with regard to employment has been felt all the more keenly because we are a small and isolated country. And, because we are a democracy, these feelings have become the material of political pressure and political action, so that, after the bitter experience of two depressions, ‘full employment’ and ‘social security’ became basic principles of our government’s policy.’
What in the hell has happened since then…