The British government does not have to appease the financial markets

Sometimes one journalistic piece captures the problem facing those who are trying to change the economics narrative and promote an alternative framing that is ground in the reality of the system rather than one that serves to reinforce the dominant ideology of the elites. The opinion article by Larry Elliot in yesterday’s UK Guardian (October 13, 2024) – Labour’s challenge is complicated by the triumph of finance. That’s bad news for UK plc – is one such article. It summarises how far the progressive debate and the British Labour Party has become trapped by fiction. It demonstrates clearly how if we start off assuming that there is a rigid constraint on decision-making then the bind will lead, invariably, to poor decision making because the opportunity set is so artificially limited by the starting assumption. I am amazed really that progressives in Britain (and everywhere by the way) still adopt this flawed framework for debate and decision-making. So let’s work it out properly.

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More misery and dysfunction coming for France – as the fiscal rules bite

For all those Europhile progressives who have held out that reform is the way to deal with the neoliberalism of the European Union and even, in some cases, claimed that the austerity mindset was over (once the fiscal rules enshrined in the Stability and Growth Pact were temporarily suspended during the pandemic), the behaviour of the French government should wake them out of their delusional reverie. The new Prime Minister addressed the National Assembly last week and outlined a new fiscal direction involving significant expenditure cuts and tax hikes. His plan will not satisfy the European Commission, however, who under the Excessive Deficit Protocol (EDP) have indicated they want a faster transition back to the fiscal rule thresholds (that is, even harsher austerity than Barnier is proposing). This policy shift is in the context of an elevated unemployment rate (which is rising) and an already significant output gap. The austerity is likely to push the unemployment rate towards 9 per cent (around) and will be a disaster for the prosperity of the French people who are still enduring the cost-of-living fallout from the pandemic and the Russian-Ukraine situation. Add in the possible impacts of the Middle East crisis and we have a failed state. Once again the fiscal rules defined within the EMU architecture are going to deliver shocking outcomes.

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Biocapacity constraints and full employment – Part 1

This week, the Australian government (Labor) did the unthinkable. It approved three thermal coal mine expansions in NSW – the Environment Minister approved the expansion of the Whitehaven Coal mine until 2044, the Mount Pleasant mine until 2048 and the Ravensworth mine until 2032. For a government that claims to hold superior ‘green’ credentials to the main opposition this was a major disappointment and once again demonstrated that the lobbying power of foreign-owned capital, which is only chasing massive profits and care little about the well-being of the environment or its workers, is dominant in public decision-making. It brings into question whether there is a solution to the environmental crisis (the 1.7 times biological capacity problem) while resource allocation remains determined by those seeking private profit, who reluctantly bow to regulative constraints, while continually trying to get around them. In this blog post, the first of a few, I provide some insights drawn from my current research that will come out in my next book (with Dr Louisa Connors) on degrowth and related topics. The question that has to be answered is whether the solution to a sustainable future includes maintaining the capitalist system. Today, I talk about how capacity constraints may prevent full employment from being possible and extend that analysis to the current context where environmental capacity is more important than productive capacity.

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Australian Treasurer refuses to use his legislative power to rein in the rogue RBA

It has been quite the week in central banking terms in Australia. We had the Federal Greens economic justice spokesperson demanding that the Federal Treasurer use the powers he has under the Reserve Bank of Australia Act 1959 and order the RBA to lower interest rates. Then we had the Treasurer playing the ‘RBA is independent’ game, which depoliticises a major arm of economic policy, a (neoliberal) rort that ordinary people are finally starting to see through and rebel against in voting intention. Then an ABC journalist finally told his readers that the RBA was using a flawed theory (NAIRU) and was screwing mortgage holders relentlessly for no reason. Then the RBA Monetary Policy Board met yesterday and held the interest rate constant despite the US Federal Reserve lowering the US funds rate by a rather large 50 basis points last week and continued their pathetic narrative that inflation was too high and ‘sticky’. And then, today (September 25, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for August 2024, which exposed the fallacy of the RBA’s narrative. The annual inflation rate is now at 2.7 per cent having dropped from 3.5 per cent in July and the current drivers have nothing to do with ‘excess demand (spending)’, which means the claims by the RBA that they have to keep a lid on spending – which really means they want unemployment to increase further – are plainly unjustifiable. As I said, quite a week in central banking. My position has been clear – the global factors that drove the inflationary pressures are resolving and that the outlook for inflation is for continued decline. This was never an ‘excess demand’ episode and there was no case for higher interest rates, even back in May 2022, when the RBA started hiking.

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More economists are now criticising the British government’s fiscal rules – including those who influenced their design

There is renewed debate in Britain at present on the use and design of the new government’s fiscal rules, which many people are now saying will force expenditure cuts which will “damage the ‘foundations of the economy”, according to the Financial Times article (September 16, 2024) – UK spending cuts would damage ‘foundations of the economy’, Reeves told. Those reported ‘telling’ Reeves include British economists, who were instrumental in the design of the rules that the new Chancellor has taken on and deemed necessary to rigidly control government spending. The economists claim that if Reeves continues to operate according to the fiscal rule “inherited by the Labour government” it will cut public investment expenditure significantly and undermine prosperity. I agree that the application of the ‘Fiscal Rules’ will be damaging but I find it amusing that some of the ‘Letter Writing Economists’ were prominent in advocating such rules in the past as the way ahead for British Labour are now criticising those rules.

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The ‘MMT is dead’ crowd are silent now the yen is appreciating

It’s Wednesday and I am mostly thinking about Japan today. In just over a week’s time, I will once again head to Japan to work at Kyoto University. I will be there for several weeks and will provide regular reports as I have in previous years of what is happening there. The LDP leadership struggle is certainly proving to be interesting and there is now a view emerging that the hoped for break out from the deflationary period has not happened and further fiscal expansion is necessary. This is at a time when the yen is appreciating and the authorities are worried it is making the external sector noncompetitive. That is, light years away from the predictions made by the ‘MMT is dead’ crowd when they saw the depreciating yen during 2022 and beyond. It just goes to show that trying to interpret the world from the ‘sound finance’ lens will generally lead to erroneous conclusions.

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British House of Lords Debt Report starts with false premises and then just repeats conventional fictions

On Tuesday (September 10, 2024), the UK House of Lords Economic Affairs Committee released their first report for the Session 2024-25 (HL Paper 5) – National debt: it’s time for tough decisions – which was the result of their decision to hold an inquiry – How sustainable is our national debt? – into whether “UK’s national debt is on a sustainable path” and whether “the Government’s fiscal rule regarding the national debt is meaningful”. They didn’t need a large-scale investigation to come up with answers to those questions: Yes and Not meaningful- are my answers based on the reality of the currency status of the British government.

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Treasurer-central bank stoush – a case of the pot calling the kettle black

The Reserve Bank of Australia has certainly attracted headlines this last week or so starting with the claim by the Federal Treasurer that the monetary policy stance is “smashing the economy” (Source), while a past Labor Treasurer and now Labour Party National President (Wayne Swan) was much more openly critical of the RBA conduct over the last few years. Things then came to a point when the new RBA governor gave a speech the day (September 5, 2024), the day after the National Accounts came out with the news that the GDP growth rate had slumped to 0.2 per cent for the June-quarter (well below trend), and told her audience (a Foundation that “supports research into adolescent depression and suicide”) that around 5 per cent of mortgage holders were falling behind payments and many would “ultimately make the difficult decision to sell their homes” (Source) as they would be forced into default. Meanwhile, the conservatives (and economists) have claimed the Government is impugning the ‘independence’ of the RBA. It is a case of – The pot calling the kettle black – and demonstrates how ridiculous the policy debate has become in this latter years of the neoliberal era.

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Australian National Accounts – 3 months ago the economy was barely moving – it will be worse now

Today (September 4, 2024), the Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, June 2024 – which shows that the Australian economy grew by just 0.2 per cent in the June-quarter 2024 and by just 1 per cent over the 12 months (down from 1.5 per cent). If we extend the June-quarter result out over the year then GDP will grow by 0.8 per cent, well below the rate required to keep unemployment from rising. GDP per capita fell for the sixth consecutive quarter and was 1.5 per cent down over the year. This is a rough measure of how far material living standards have declined but if we factor the unequal distribution of income, which is getting worse, then the last 12 months have been very harsh for the bottom end of the distribution. Household consumption expenditure contracted by 0.2 per cent – a sign that the economy is heading into recession. There is now a very real possibility that Australia will enter recession in the coming year unless there is a change of policy direction. Both fiscal and monetary policy are squeezing household expenditure and the contribution of direct government spending, while positive, will not be sufficient to fill the expanding non-government spending gap. At the current growth rate, unemployment will rise. And that will be a deliberate act from our policy makers.

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Some debriefing on continuous fiscal deficits and debt issuance

A government cannot run continuous fiscal deficits! Yes it can. How? You need to understand what a deficit is and how it arises to answer that. But isn’t a fiscal surplus the norm that governments should aspire to? Why frame the question that way? Why not inquire into and understand that it is all about context? What do you mean, context? The situation is obvious, if it runs deficits it has to fund itself with debt, and that becomes dangerous, doesn’t it? It doesn’t ‘fund’ itself with debt and to think that means you don’t understand elemental characteristics of the currency that the governments issues as a monopoly. These claims about continuous deficits and debt financing are made regularly at various levels in society – at the family dinner table, during elections, in the media, and almost everywhere else where we discuss governments. Perhaps they are not articulated with finesse but they are constantly being rehearsed and the responses I provided above to them are mostly not understood and that means policy choices are distorted and often the worst policy decisions are taken. So, while I have written extensively about these matters in the past, I think it is time for a refresh – and the motivation was a conversation I had yesterday about another conversation that I don’t care to disclose. But it told me that there is still a lot of work to be done to even get MMT onto the starting line.

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Real wages in Australia continue to fall as profits boom

Today (August 13, 2024), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the June-quarter 2024, which shows that the aggregate wage index rose by 4.1 per cent over the 12 months (down 0.1 point on the last quarter). In relation to the June-quarter CPI change (3.8 per cent), this result suggests that workers achieved modest real wage gains. However, if we use the more appropriate Employee Selected Living Cost Index as our measure of the change in purchasing power then the June-quarter result of 6.2 per cent means that real wages fell by 2.1 per cent. Even the ABS notes the SLCI is a more accurate measure of cost-of-living increases for specific groups of interest in the economy. However, most commentators will focus on the nominal wages growth relative to CPI movements, which in my view provides a misleading estimate of the situation workers are in. Further, while productivity growth is weak, the movement in real wages is such that real unit labour costs are still declining, which is equivalent to an ongoing attrition of the wages share in national income. So corporations are failing to invest the massive profits they have been earning and are also taking advantage of the current situation to push up profit mark-ups. A system that then forces tens of thousands of workers out of employment to deal with that problem is void of any decency or rationale. That is modern day Australia.

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Major macroeconomic policy reform is needed to reduce the reliance on monetary policy

There is some commentary emerging that is finally starting to question the reliance on monetary policy (setting interest rates) as the primary macroeconomic policy tool with fiscal policy forced into a passive role. In Australia, this debate has intensified in the last week following the hubris from the new Reserve Bank governor, who thinks her role is to sound like a ‘tough guy’ dishing out threats of ever increasing interest rate rises even as inflation falls. There was an Op Ed in the Sydney Morning Herald today (August 12, 2024) – Maybe only a recession will fix macroeconomic management – by the Economics Editor Ross Gittins, which challenges the current macroeconomic consensus. Some of this argument is acceptable. But when he advances his alternative proposal of “a new independent authority” to set monetary and fiscal policy, the reality is that this would be as bad as we have now. More on that later.

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British Chancellor fails the basic test – language is meant to impart meaning

Language is meant to bring meaning to discourse. That means we want to use terms that convey information that is of use to us in making our way in the world. The problem is that economists have perverted that process and introduced a metaphorical language that is intended to persuade the reader/listener to accept a particular view of the world but which undermines their ability to actually understand the phenomenon in question. Marx knew long ago how language could be constructed to advance the interests of the ruling class. The mainstream economics commentary that is also used by politicians falls into this category. Terms are used that have no meaning in an elemental sense but provide support for ideological agendas. We, the public, allow that to happen because we are ignorant about the context. It becomes a vicious cycle of lies and fictions which undermine human and environmental sustainability but certainly transfer income to the top-end-of-town. A recent path setting address to the House of Commons by the new Chancellor is a classic example of this reality denial.

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MMT and international trade – some further considerations in a degrowth context

One of the undercurrents at the recent UK MMT Conference in Leeds was the apparent unwillingness of MMT economists to acknowledge their mistake in dealing with international trade. In our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure (published July 2024) – we devote a chapter to this issue. There are various strands to the criticisms we receive ranging from claims we are simply wrong at the most elemental level to others claiming trade has no part in the MMT framework. All miss the point and I am surprised people have tried to make a ‘career’ (or advance their egos) on this issue. As I have noted several times in the past, the issue is nuanced but the elementary facts are not. I am now working on a section for my new book (with Dr Louisa Connors) on ‘degrowth’ and system viability from an MMT perspective and so I am linking the trade aspects of MMT with this narrative to provide further clarification of how nuanced this area of discussion can be. Here is a little glimpse of that work.

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The new British Labour government will have to abandon its fiscal rule or deliver very little

It’s the Wednesday pot-pourri – British politics, self promotion, events, sport and music. Politicians invariably claim that the situation they inherit when they take office following an election is untenable and that the ‘public finances’ are worse than they had initially thought. Of course, the idea that ‘public finances’ can be good or bad or somewhere in between is a misnomer and just reflects the ignorance of the fiscal capacity that governments have (that is, currency-issuing governments). There is no such thing as a deteriorating public finance situation. So when Rachel Reeves got up after being elected the new Chancellor of the UK she was just posturing and telling the British people that they should not expect much better than what the Tories delivered. What can be good or bad or somewhere in between is the state of public infrastructure and public services. And after 14 years of devastating Tory rule, one can safely conclude that there is a huge deficit in the UK in that context. The question then is what can be done about it. My reading of the situation is that if Labour want to actually improve things significantly in terms of public service provision and the viability of Britain’s infrastructure then it will have to abandon its mindless fiscal rule. And it would be better that they do that quicksmart while they enjoy such a large domination of the Parliament.

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Australian government tax cuts – the most vulnerable are being hoodwinked

I am still catching up after being away in the UK last week. I will reflect on that trip in another blog post. So, today, we have a guest blogger in the guise of Professor Scott Baum from Griffith University who has been one of my regular research colleagues over a long period of time. He indicated that he would like to contribute occasionally and that provides some diversity of voice although the focus remains on advancing our understanding of Modern Monetary Theory (MMT) and its applications. Today he is going to talk about income tax cuts and cost of living relief. Over to Scott …

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Special pleading from Japan’s fossil fuel financing megabanks reaches new heights

In our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure – which will be launched in the UK next Wednesday, we devote a chapter to what we refer to as the Japanese irony. This relates to the fact that while the conduct of policy in Japan is justified in mainstream terms, the more extreme policy settings that emerge produce outcomes that expose the deficiencies of the mainstream theories. At present, we are observing more examples of this. The latest matter of interest in Japan (from my watch) is the pressure the three megabanks are putting on the Bank of Japan policy makers to push up bond yields and interest rates. There is no reason based in financial stability concerns or community well-being for the Bank of Japan to agree to their demands. They just amount to special pleading from Japan’s fossil fuel financing megabanks for more corporate welfare to boost their profits.

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Central bankers live in a parallel universe

It’s Wednesday, which means a few (sometimes unrelated) items are discussed or analysed. Today, we see that real wages in 16 of the 35 OECD countries are still below the pre-pandemic levels, which tells us among other things that the inflationary pressures were not wage induced. Further, a speech yesterday by the Federal Reserve boss demonstrated quite clearly how central bankers fudged the whole rate hike narrative. And after all that, some music from the 1960s.

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ECB estimates suggest meeting current challenges will be impossible within fiscal rule space

In the recent issue of the ECB Economic Bulletin (issue 4/2024) there was an article – Longer-term challenges for fiscal policy in the euro area – which demonstrates why the common currency and its bevy of fiscal rules and restrictions is incapable of meeting the challenges that humanity and the natural world face in the coming years. The ECB article is very interesting because it pretty clearly articulates the important challenges facing the Member States and provides some rough estimates of what the fiscal implications will be if governments are to move quickly to deal with the threats posed. However, it is clear from the analysis and my own calculations that significant austerity will be required in areas of expenditure not related to these challenges. Given the current political environment in Europe, it is hard to see how such austerity can be imposed and maintained in areas that impact the daily lives of families. What is demonstrated is that the architecture of the EMU is ill-equipped to deal with the problems that Member States now face. The common currency and fiscal rules were never a good idea. But as the challenges mount it is obvious that Europe will have to change its monetary system approach in order to survive.

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I make a prediction about the relationship between US government debt and impending crisis

Over time we observe a pattern of idiocy in the financial press, where different fictions, dressed up as allegedly shattering propensities, are regularly cycled through in succession, each one getting headlines for a day or so, only to be replaced by the next sensationalised issue. So-called experts or corporate bosses are wheeled out and make horrendous predictions that one country or another is entering a catastrophe of its own making – too much government spending, too much debt, or some other policy position – is usually fingered as the culprit. None of the predictions ever come to pass and the media never follow up to reflect on why. They are too busy pushing out the next headline and the next issue, which, in turn, will be replaced by something else, and then something else, and so on, until the initial prophesy of dooms is recycled, despite failing dismally to engage with the real world when it was last aired. And this pattern has unfolded over decades. Who ever checks the veracity of the predictions? How does the reputation of these so-called experts survive continual failure? The problem is that most of us believe this fiction and elect politicians and accept poor economic policy based on the fictional world we live in. Anyway, I have a prediction … read on.

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