When you’ve got friends like this – Part 10

In wishing us all happy new year, Jared Bernstein also pounded his readers with a confused macroeconomic logic, that if applied, would in all likelihood make their new year (collectively) worse. His article (December 29, 2012) – My Views on Spending Cuts and Entitlements – is another one of those cases when friendly fire shoots the progressive movement in the foot. You can read the previous editions of this theme – When you’ve got friends like this – to see what the problem is. In fact, I think I am being rather reasonable in only having this series extend to Part 10 so far. Given what is out there parading as progressive macroeconomic thinking the series might have been much longer than that by now. The simple point is that a truly progressive social agenda has to be grounded in solid macroeconomic principles. Trying to carve out a progressive agenda within a mainstream macroeconomic framework undermines the credibility of the former and plays straight into the hands of the conservatives.

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Modern Monetary Theory and environmental sustainability – Part 1

There is regular commentary here that seeks to argue that Modern Monetary Theory (MMT) is flawed, bereft or worse because apparently it avoids any discussion of the natural environment. This apparently arises from the inherent conclusion in MMT that growth in aggregate demand (and real GDP) is required to maintain high levels of employment, which are considered both economically and socially desirable. This is the first part of a two-part blog on this topic. We will see that MMT is highly sympathetic to the challenges posed by anthropogenic global warming (a catch-all term) and central policy indications that follow from an understanding of MMT (for example, the superiority of employment buffer stocks) lead to an understanding of how MMT is a green paradigm as opposed to mainstream (neo-liberal) economics and much of Post Keynesian thinking, the latter which relies on generalised expansion as the solution to entrenched unemployment. We conclude that those who seek to dismiss MMT because it doesn’t satisfy their particular pet solution to climate change issues have probably not read some of the earlier MMT literature nor understood fully what is required to develop and disseminate a new way of thinking about the economy. Further, MMT is not a theory about everything! What we will see is that when MMT advocates economic growth it does so with a very different view of what that economic growth might be comprised of and driven.

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Saturday Quiz – December 29, 2012 – 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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Keynes and the Classics – 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 by the end of this year. 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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Peace and love – if only it was true

Despite my constant utterances about short or relatively short blogs, today will truly be a short blog although I am aware that that descriptor is at all times relative. Is a short blog a few lines (which then raised the question of what is a Tweet) or a few paragraphs or what? Anyway, here are some thoughts that came out while I have been reading today.

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Australian government’s monumental fiscal failure

Last week marked a turning point in Australian politics when the Australian government finally admitted that they had made a monumental political misjudgement by promising to deliver a budget surplus in the next fiscal year despite an economy that was not capable of generating sufficient revenue to render that promise realistic, much less, economically responsible. They didn’t actually admit all of that but that is what has happened in the last week. The Government has abandoned its promise to deliver a budget surplus in the coming fiscal year as tax revenue collapses around them. The reasons for that collapse relate to the slowing Australian economy, due in no small measure to the fiscal contraction already forced on the expenditure system. There was never a need for that fiscal contraction and it was obvious that the Government would fail to achieve its promised surplus. That was obvious. But the problem was that in trying to pursue the surplus they have undermined our prosperity and caused labour underutilisation rates to rise with the commensurate lost national income. They are now being pilloried on the political front for breaking their promise. The fact they made that promise suggests their political acumen is as bad as their economic management.

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Saturday Quiz – December 22, 2012 – 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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Full employment definition

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 by the end of this year. 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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Keep the helicopters on their pads and just spend

I was looking back through snippets I save (like a magpie) today and remembered that I hadn’t written anything in response to this Financial Times article (October 12, 2012) – UK needs to talk about helicopters – which demonstrates that a good argument can be housed in a faulty analytical structure. The reference to helicopters comes from Milton Friedman and is popularly known as “printing money” and dropping it on the populace from high. The practice – is described as the ultimate heresy for central bankers. From an Modern Monetary Theory (MMT) perspective, there is clearly no need for a sovereign government to issue debt to the private sector. Given the political issues relating to debt buildup, it would be preferable if governments moved away from that practice altogether. Whatever accounting arrangements they put in place with the central bank to ensure that its spending desires were reflected in appropriate credits going into the banking system are largely irrelevant. The inflation risk is in the spending not the monetary operations that might accompany it.

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Government budgets bear no relation to household budgets

Today (December 19, 2012), the economics editor for the Sydney Morning Herald (Ross Gittins) wrote an Op Ed piece – It’s the weak recovery that worries, not surplus – which urged his readers to reorient their thinking about the Federal government’s obsession with achieving a budget surplus in the coming year. In that sense, it was welcome article from an influential journalist. But closer reading demonstrates that the writer is straddling the line between comprehension and myth-perpetuation. Many readers have asked me to pin-point the strengths and weaknesses of the article for their own edification. So lets proceed. The key point is that the budgets of currency-issuing national governments bear no relation to household budgets. If we do not jettison that myth then very little progress can be made on the more complex parts of the narrative that leads to the conclusion that such a government can never run out of money and all the negative consequences that are alleged to necessarily follow the use of budget deficits (higher interest rates, inflation, eventual insolvency) are lies, which aim to perpetuate a dominant paradigm rather than advance the welfare of all of us.

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The humanities is necessary but not sufficient for social transformation

I am researching a project at the moment on the role of humanities (and social sciences) in enhancing standards of living and rendering societies open, empathetic (to the disadvantaged) and dynamic. It is in the face of trends within Universities to concentrate funding and attention on the so-called STEM disciplines (Science, Technology, Engineering and Mathematics) and contract funding for the humanities (and social science). The funding cuts undermine the viability of these areas and whole departments have been closed – having been declared by the bean counters – as being uneconomic. This is reinforced by conservative neo-liberal political diatribes which seek to construct the humanities/social sciences as bastions of “left-wing” radicalism and post-modernist degradation (for example, eschewing studies in sexuality, gender, ethnicity etc). There is strong evidence available to show that studying the humanities is a socially transformative endeavour (for example, the Clemente program). But like all “individual” initiatives, there is a danger that the reasoning used to justify them will fall foul of compositional fallacies. We have to defend the humanities to enrich individuals. But we also have to use that empowerment to challenge the elites on the macroeconomics battleground. The two motivations are self-reinforcing. The former is not a sufficient condition for social transformation.

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What have mainstream macroeconomists learn’t? Short answer: nothing

Last week (December 10, 2012), the Bank of International Settlements released a working paper – The financial cycle and macroeconomics: What have we learnt? – which not only recognised that the accepted mainstream macroeconomic theory is critically deficient but also implied that the response to that failure in the context of the global financial crisis is not likely to be satisfactory. Faced with a major credibility crisis at the onset of the GFC, there has been a mad rush by mainstream economists to add financial sector to their models. It might surprise you that the major models used to teach students and motivate research in macroeconomics didn’t even have financial sectors included, among other glaring deficiencies. Now there is a flurry of work to address that deficiency. The problem is that all this effort, which will produce countless papers at academic conferences, will not address the fundamental issue – the mainstream macroeconomics framework is rotten to the core. The BIS paper provides some insights into that issue. When it comes down to the fundamental question: What have we learn’t? If the we is referring to the dominant body of macroeconomists that teach in universities, publish research in the journals and occupy key positions in policy-making bureaucracies, then the answer is simple: Nothing! (thanks Roger). But we have also learn’t that Modern Monetary Theory (MMT) has demonstrated itself to be a credible framework.

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Saturday Quiz – December 15, 2012 – 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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The possibility of mass unemployment – 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 by the end of this year. 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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Australian primary education dumbed down by dumb politicians

Last week the former RBA governor, Bernie Fraser said that Australia was suffering from the “stupidity of government” by pursuing a budget surplus in present circumstances. He described our fiscal policy approach as being “just plain dumb”. It seems that the politicians are reflecting the standards that are now apparent in our educational system. The nation was shocked today with the news that we are not as smart as we like to make out. This Sydney Morning Herald story (December 12, 2012) – Australia’s disaster in education – is representative of many articles and discussions across today’s media offerings. The reports said that our children achieved “disastrous results in the latest international reading, maths and science tests”. The shock that the nation is experiencing is large today, about as large as the collective indifference to the damage that two decades or more of poor fiscal policy practice has been. We have allowed our governments to run down public infrastructure in pursuit of budget surpluses. We have let them deliberately reduce the capacity of our schooling system so that we can no longer keep pace with international standards. We have believed that this strategy exemplified responsible fiscal policy. It just shows how dumb our society has become. It also reveals, once again, the failure of the neo-liberal policy regime that dominates.

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Youth Guarantee has to be a Youth Job Guarantee

Last week, Eurostat released the latest – Retail Sales – data for the EU. It formalised what has been obvious for some time – private spending in the European economy is going backwards. But didn’t leading economists, including Nobel Prize winners, tell us a few years ago that if governments imposed austerity, the private sector would lose their worries about future tax hikes and start spending? Didn’t the current British Government say the same thing as a justification for the ficsal austerity that now looks like pushing the UK into a triple-dip recession (almost unheard of)? The answer is that these economists and politicians tried to convince us that there was such a thing as a fiscal contraction expansion. Fancy words like Ricardian Equivalence were dragged from the sordid annals of mainstream macroeconomics to give this notion some “authority” (because they knew hardly anyone understood what it was anyway). The wash up is they were wrong. And millions more are unemployed and moving towards or into poverty as a consequence. There is a wholesale failure of government at present in most advanced nations. A current proposal in Europe is to introduce a Youth Guarantee. However, for it to be effective it has to include a Job Guarantee component as its centrepiece. More supply-side activation is part of the problem and cannot be part of the solution.

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Saturday Quiz – December 8, 2012 – 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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Labour market measurement – Part 3

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 by the end of this year. 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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Australian Labour Force data – the fiscal policy sabotage continues

Yesterday, the third-quarter National Accounts data revealed that real GDP growth is trailing behind the underlying population growth which means that per capita incomes have been falling. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for November 2012 reveals that employment growth is also failing to keep pace with the underlying population growth and the only reason unemployment is not skyrocketing is that more workers are dropping out of the labour force as a result of the lack of job opportunities being created. The data is unambiguously bad. The unemployment rate fell to 5.2 per cent but only because the participation rate fell. The fact that workers are giving up looking for jobs is a portent of a very sluggish labour market. So unemployment fell but hidden unemployment rose. The trend performance of the labour market is flat and these monthly shifts are merely fluctuating around that flat trend. The data is not consistent with any notions that the Australian labour market is booming or close to full employment. The most continuing feature that should warrant immediate policy concern is the appalling state of the youth labour market. My assessment of today’s results – worrying with further weakness to come. The government has in the past few weeks insisted it will pursue its budget surplus obsession and announced further cuts in discretionary net spending. Not only will that act of fiscal vandalism fail but in doing so it will further undermine a very weak labour market.

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A national disgrace – the abandonment of full employment

Yesterday, I indicated that I would comment on an article that was published in the Melbourne Age (December 3, 2012) – Dimming of the light on the hill – which documented the Federal government’s abandonment of any commitment to achieving full employment. The by-line of the article read that “(o)nce it was a political mantra for the Labor Party, but the goal of full employment has dwindled to a distant memory”. This article is one of the first I have seen in years that tackles this question. It is a topic that most regular readers will realise is one that I have spent most of my career promoting for discussion. My Phd is about it. Many of my published articles and books is about it in one way or another. Modern Monetary Theory (MMT) is about it. But the mainstream media avoids discussing it and, instead, accepts the line peddled by the government and its crony economists that a lie is the truth. That 12.5 per cent labour underutilisation rates are in some way consistent with full employment. Our grasp of history is poor in this nation and this article serves to remind us of what was once a truth. It also reminds us that the abandonment of full employment as a policy objective by our Federal government ranks up there with the other (many) national disgraces, including, for example, our treatment of indigenous Australians and our treatment of refugees. Why do we gain succour from (unnecessarily) treating the most disadvantaged among us so poorly?

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