Fiscal policy worked – evidence

At the end of 2008 and into 2009, as the real sectors in our economies were starting to experience the aggregate demand collapses instigated by the banking crisis, most governments took steps to stop the meltdown from becoming the next Depression. At times, the unwinding private spending looked to be pushing the world to those depths. So after years of eschewing active fiscal policies, governments suddenly rediscovered the fiscal keyboard key and in varying magnitudes pushed fairly large expenditure injections into their economies. Most of the mainstream economists who had been teaching their students for years that this would be futile were silent because they had to hide out in shame given their textbook models could neither explain how we got into the mess nor how to get out of it. But there were some notable exceptions from Harvard and Chicago who came out attacking governments for being profligate. They claimed their models would demonstrate that the fiscal interventions would come to nothing (Barro, Becker, Taylor all were leading this charge). Lesser lights, then emboldened, joined the throng screaming that proponents of the stimulus strategy should provide evidence. Well the evidence has been mounting and the conservatives should just lock their office doors and go home to their families in shame.

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Central bank independence – another faux agenda

There are several strands to the mainstream neo-liberal attack on government macroeconomic policy activism. They get recycled regularly. Yesterday, I noted the temporal sequencing in the attacks – need for deregulation; financial crisis; sovereign debt crisis; financial repression and so on. Today, I am looking at another faux agenda – the demand that central banks should be independent of the political process. There has been a huge body of literature emerge to support this agenda over the last 30 odd years. The argument is always clothed in authoritative statements about the optimal mix of price stability and maximum real output growth and supported by heavy (for economists) mathematical models. If you understand this literature you soon realise that it is an ideological front. The models are note useful in describing the real world – they have no credible empirical content and are designed to hide the fact that the proponents do not want governments to do what we elect them to do – that is, advancing general welfare. The agenda is also tied in with the growing demand for fiscal rules which will further undermine public purpose in policy.

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What is it really all about?

I trawl the financial and economics news from all and sundry, write and think economics all day most days, get embroiled in the technical and political arguments about monetary systems and labour market dynamics, and ideological battles and all this energy is constructed and conducted at the “level of the debate”. But the debate at that level is largely irrelevant and we get sidetracked by it. So can sovereign governments do this or that? But my interest in unemployment and inequality started when I was young and was particularly honed during my student days in the late 1970s in Melbourne when I realised that governments were deliberately imposing joblessness on my fellow citizens by retreating under pressure applied by the ideological attacks of the emerging neo-liberals. I realised then that underneath all this monetary talk are people who suffer and get left behind. And so we have to keep reminding ourselves – what the hell is all this really about?

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The sick Celtic Tiger getting sicker

All the recent Eurozone attention has been focused on Greece because they are the first EMU nation that the bond markets took an exception too although the other, immediately vulnerable southern nations are starting to feel the pinge. Meanwhile, Ireland, which along with the Baltic non-Euro states, were the first nations to implement harsh austerity programs (tax increases, public spending cuts), has stayed under the radar. The line I read often is that the Irish are more easy-going than the Latins and will accept the harshness with a smile. I wonder about that. But Ireland might soon be back on the main screen because despite all the IMF and EU predictions about the adjustment path that would accompany the austerity (things would get better relatively quickly), things have become worse. Just as Modern Monetary Theory (MMT) would predict. And when you analyse the data in more detail, they are looking a lot worse than Greece. This also just exposes that the problem is the deficit and debt ratios but the fundamental design of the Euro system and the fiscal rules it forces onto member states.

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Saturday Quiz – May 22, 2010 – 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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Rescue packages and iron boots

Today, I thought I would provide some background to the Euro crisis to advance some understanding of why the conservatives in Europe are advocating highly destructive solutions to their crisis. So I went back to some notes that I have accumulated over the years to try to put the sort of nonsensical fiscal rules that are now being proposed by very influential German economists into some sort of context. What you will see is that the context doesn’t in any way help to justify the rules. They are crazy by any reasonable assessment. But at least you will see them in a wider context. I hope.

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I wonder what they will do with the new building

The ECB is embarking on a major construction project to erect new building at the east end of Frankfurt, which will be completed on current plans by the end of 2013. It will replace the old wholesale market which supplied fruit and vegetables to Frankfurt and surrounds. One suspects the health of the citizens was better served in this former land use. I wonder what they will do with the new building when the Eurozone collapses. Perhaps it could be a nice retirement village for the executives who will be looking for something to do.

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No wages breakout in Australia evident

Today the Australian Bureau of Statistics released the Labour Price Index, Australia data for the March 2010 quarter and it shows that we are back on the path to suppressing real wages growth while productivity growth has picked up strongly. The ABS results show that the annualised growth to March 2010 was 2.9 per cent which was steady but down on the higher growth achieved during the expansion. This is barely keeping pace with inflation and well below labour productivity growth. In recent months, I have noted that commentators are increasing claiming that a wages breakout will lead to an inflation breakout unless the government quickly tightens fiscal policy. Today’s data provides more evidence that this argument is flawed and reflects ideological fervour rather than being grounded in the facts. Today, we also heard the speech made at the National Press Club by the Opposition Shadow Treasurer in response to last week’s Government’s budget. The conclusion from my analysis of that speech: there is no political choice in Australia. All the parties are lost in deficit hysteria and the rest of us will endure the costs.

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A fiscal consolidation plan

Another day passes and lots more reading done. Some of it interesting but a significant amount of it tedious even enraging. I hum my mantras as I read to stay calm. But among the things I read there were some stand outs – not all of which I will have time to write about today. But this news report – Estonia Wants Stricter Euro Budget Rules – came in overnight, which caught my eye. Further examination, revealed how skewed policy priorities have become over the course of this economic crisis. The most costly things for an economy are ignored and aspirations that will impose future costs are promoted. Driving this policy agenda (madness) are the false messages that the IMF continually put out which spread a mélange of lies and non-sequiturs across the policy debate. I came up with a fiscal consolidation plan myself today as a result. I will disclose it later.

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