Minimum wage decision – one of the worst ever!

Sometimes in public policy a poor decision is made. Other times you conclude a very bad decision has been made. Then there are times when you witness one of the worst decisions that could be made. Today’s Australian Fair Pay (Not) Commission decision falls into this latter category. It was a decision made by highly-paid officials in secure employment which will impacts disastrously on the lowest paid workers and their families. in the context of a demand-deficient (that is, spending failure) downturn, the FPC has denied the low-paid workers a pay rise. The decision consolidates the triple whammy attack against the poor which is the Government is largely turning a blind eye too while it swans around preaching social inclusion.

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The problem of being a macro economist

Saturday morning traditions … a long early ride on my bike (70 odd kms), then off to the local cafe for a cup of tea. Yes, time to read an actual paper paper. Time to talk about the state of the swell and wind direction (off-shore and pumping at present). The big match (Saints v Geelong, both unbeaten after 13 rounds – note no rugby here!). Perhaps some local gossip (who paid off who to get what development up!) … that sort of thing. Probably some politics. But no, before anything interesting could be raised by the assembled regulars … someone (a non-economist who claims he is just interested) had to begin proceedings with “Bill, why does the federal government borrow when you say it does not have too?” Can you put a sock in it, please! What about the surf? But why if they don’t have too? Saturday morning … the problem of being a macro economist. Things started getting ugly at this point.

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Balance sheet recessions and democracy

A regular reader sent me a recent financial market report written by Tokyo-based economist Richard Koo which raises some interesting issues about the association between prolonged recessions and democracy. Koo has achieved some notoriety in the last decade or more by coining the term “balance sheet recession” to describe what happened to Japan during its so-called “lost decade”. He also applies the analysis to the present global economic crisis. While he is not a modern monetary theorist, he recognises the need for considerable fiscal intervention and the futility of quantitative easing. So this blog is about all of that.

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Bad luck if you are poor!

Greetings from College Park, Maryland (pronounced Marrilynd! in Australian). It is near Washington (DC) and I have work here (at the UMD) and in the capital for the next 2 days. Weather is hot but we are 189 kms or 2.8 hours from the nearest surf according to Google maps, which is equivalent to being landlocked to me! So no quick surf before work! Losers! I came down here late yesterday (5 hour drive) after a workshop at the Levy Institute jointly hosted with the United Nations Development Program, which was held in upstate New York. No summer up there at the moment but the Catskills Mountains are very beautiful – it is near to Woodstock. Anyway, I left the workshop thinking – bad luck if you are poor!

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More back to fiat monetary system basics!

Yesterday I reported on a document I received from one of the largest international investment banks in the world. That document is part of that organisation’s advice it gives to bond investors. I used some of the document to illustrate that the understandings of how a modern monetary system operates that I write about here are also now out there in the real world – in the financial markets where bonds are bought and sold. I didn’t identify the document because it is a subscribers-only publication sent to me by the author and I respect his privacy. Today’s blog provides some more insights that will help you better understand the public debate and allow you to cut through the nonsense being peddled by all and sundry.

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The budget deficits will increase taxation!

I am now in New York on business for the next few days then off south to the capital Washington. In this blog I want to outline the horrible scenario that everyone has been predicting would happen – the increasing fiscal deficits will increase taxation. I know that has been on our minds. I have reached the ineluctable conclusion that future taxation will increase as a direct consequence of the current deficits. The tax revenue gained by the government will also reduce future deficits. Wouldn’t it be preferable that we didn’t push future taxation up and instead controlled net government spending? If you believed that you would have rocks in your head. In this blog I will be also be discussing debt, inflation, and other nasties.

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Time for a reality check on debt – Part 1

I am now in the US with a hectic week ahead. At present I am in Florida and for those who haven’t been here just imagine taking a landscape and pouring as much concrete as you can mix over as much of that landscape that you can access. Then once that sets, you build massive high-rise buildings and suburbs that span hundreds of kilometres and you have it. Oh, and plant a few palm trees as you concrete. But then there is surf nearby and before work this morning I am off to check it out. Anyway, in between other things I have been reading the so-called public debt exposition that appears in the latest issue of the The Economist Magazine. It will take a few blogs to work through it but here is Part 1. It might happen that there will be no Part 2 if I get so sick of reading this nonsense.

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W comes before V

The talk at present is that while we are hoping for a V we might have to accept a W. Its all about shape. The shape of the future. The shape of the recovery! In Post-Lehman World Will Mean W-Shaped Recoveries we read that Japan’s former economic and fiscal policy minister, Hiroko Ota said that “The worst is over but I can’t say the economy is heading for a recovery at all”, Japan’s recovery may be W-shaped instead of V-shaped. There are some very real reasons why W might rule over V. They all relate to the lack of understanding of the characteristics of a fiat monetary system and the opportunities that such a system presents the sovereign government. Unfortunately, the ignorance (or wilful neglect) among policy makers may force millions of people to endure unnecessary hardship.

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Today’s mantra – 13.4 per cent wasted labour

Today’s ABS Labour Force data confirms one thing. Whatever else the commentators say about the figures are not as bad as expected or that employment is still growing or whatever – there are 13.4 per cent of the willing and available labour resources not being fully utilised by this economy. Around 657 thousand have no jobs at all and another 866 thousand have a job but want more hours and cannot find the work. 1.5 million wasted workers is an appalling state that demands urgent action – like direct public sector job creation. Each day that we waste the capacity of those workers is another day of income and opportunity lost down the drain. It should be the absolute number one policy priority. And what it tells me is that the budget deficit is way to low as a percentage of GDP at present.

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Animal spirits – optimism that may not last

Its winter here in Newcastle! Today my shark-o’clock morning surf expedition was freezing! Full wetty and still cold! But for northern hemisphere readers pleased be warned that freezing means a water temperature of 19 degrees celsius and air temperature of 14 celsius. Anyway, the sudden sensation of cold reminded me of my mortal origins. One thing led to another and I was soon thinking of animal spirits! This is what JM Keynes said drives the business cycle up and down. And today (and yesterday) we have been reminded of the role that sentiment might play in economic life. The news is probably good and suggests that this downturn might be more moderate for Australia than the global experience would have indicated. But it might also be bad. Ahh, economics!

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Debt and deficits again!

The euphoria over a 0.4 quarterly growth figure which translate into annualised GDP growth being at least 2.5 per cent less than would be required to keep the unemployment rate from rising should be attenuated by the fact that National Accounts data is very slow to come out. The picture it paints which conditions our current expectations and debates is old – at least 3 months old by definition. And it is sobering when amidst all the self-congratulation and applause for our strong export performance that newer data has come out today which suggests that GDP growth is probably now negative although we won’t find that out for three more months. Meanwhile the debt and deficits argument continues in the public debate. Here is an update.

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A response to (green) critics – finale (for now)!

Well the conservatives are scrapping between themselves, which is just as well because it might derail their drivel campaign about the trillion (whatever!) dollar debt wave that we are about to drown under. Me, I will surf it out with my longboard and enjoy the experience! Anyway, seems Mike wants to end our little engagement which is fine because tomorrow I will be talking about “R we or R we not”. National Accounts are out at 11.30. So this blog summarises where I think we are at. Remember that it started with the blog – Neoliberals invade The Greens! and the space theme continued with Mike conjuring up the Mitchell Strikes Back and today The return of Mitchell. Whatever, it is more clear than ever that the conservative macroeconomics has The Greens in its grip – sadly.

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A response to (green) critics … Part 2

I was going to write about retail sales and company profits data today but the short story is that retail sales continue to defy the predictions (stimulus packages work). I ran a regression model today to generate a (reasonable) forecasting model of retail sales behaviour up to the point the stimulus packages were announced (November 2008) and then projected out to April 2009 and compared the dynamic trend with the actual data. Every data point since November 2008 is above the trend (which is why the ABS has abandoned its trend series for the time being). But it does tell you that the Australian economy is withstanding the world downturn. We will know more on Wednesday, when the national accounts (GDP) data comes out. Anyway, there has been more engagement with the “other side” or should I say “another side” today and I guess I should respond to that. And so the saga continues for another day.

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A response to (green) critics … Part 1

In the days following my blog – Neo-liberals invade The Greens – I have had some interesting responses. Mostly they have been negative and personal but some have been positive and constructively trying to develop the debate. My blog was not an attack on green values – far from it. But it did pinpoint major macroeconomic failings with the current official policy of The Australian Greens which I consider need to be remedied in order to render the other excellent components of their platform viable. I would also note that it is very dangerous to start critiquing a theoretical argument if you really do not understand the basis of the argument. Here is some thoughts in this regard.

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Gold standard and fixed exchange rates – myths that still prevail

There has been a lot of E-mail traffic coming in after my blog on The Greens the other day. At the heart of the matter is the fundamental difficulty people have in appreciating that there has been a fundamental shift since the 1970s in the way our monetary system operates. This shift redefines how we should think about macroeconomics and the role of a national government which issues its own currency. The defenders of The Greens economic policy clearly misunderstand this historical shift. To really get to the heart of how a modern monetary system functions you have to appreciate the difference between a convertible and non-convertible currency and a fixed versus a flexible exchange rate system. The economics that apply to convertible currency-fixed exchange rate systems bears no relation to that which applies to the fiat currency-flexible exchange rate systems that prevail in most economies today. So before you attack my macroeconomics, make sure you understand what a government can do in a modern monetary paradigm. Otherwise, you are a dinosaur and they became extinct.

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Social inclusion principles – another failed vision

The Australian Government has now released its so-called Social inclusion principles which are apparently intended “to guide individuals, business and community organisations, and government on how to take a socially inclusive approach to their activities”. I couldn’t find a commitment to full employment among the principles. Pity about that. Another strategy that is rich in rhetoric but squibs the essential nature of the problem. My advice: scrap the plan and start again.

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Life-time employment and employment guarantees

In the Sydney Morning Herald print edition today (later found in the Tapei Times there was an interesting article – Japan pays a price for lifetime jobs about the way the Japanese are coping with the recession. The story documents the Japanese life-time employment approach which explains why that country can have lower unemployment rates even though its economy is contracting fast. However, once you think about his scheme you realise that it is not without problems. The sentiment and collective will is admirable. But there is a superior buffer stock approach available which also embraces these social values but delivers better outcomes overall – I call it the Job Guarantee.

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Democracy, accountability and more intergenerational nonsense

Since last week’s Federal Budget was released there has been an hysterical response from the Opposition, the media and the Government in reply. Claims of forecast errors, forecast manipulation and more have been in our faces every day. The temporary Opposition Leader even suggested that we need a new independent body – the Parliamentary Budget Office (PBO) to discipline government and stop it lying about the medium term forecasts and its economic policies. The comical side of this very sad week has been provided by the Shadow Treasurer’s struggle with averages. It was so hilarious that I am actually enjoying his attempts to sound as if he knows anything about macroeconomics. He doesn’t but that doesn’t stop him. But overall, once again I think the debate reflects a poor understanding of how the economy works.

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A sad place – a $58 billion deficit and soaring unemployment!

I must have just woken from a bad dream. Did I read this week that the Australian Government will record a deficit of $A58 billion or 4.9 per cent of GDP but are forecasting unemployment will rise from its present parlous level of 5.4 per cent to 8.5 per cent by the middle of 2012? It must be a joke. If it is serious then this lot deserve to be a one-term government not that I have any hope that the alternative (conservative or green) would do any better. They are all caught up in this neo-liberal straitjacket which has been increasingly tightened over the last 30 years and now ensures that our national government will not use its economic policy capacity responsibly. Our current Federal Government not only continues to abandon full employment but is also abandoning the unemployed. What a place!

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Structural deficits – the great con job!

There has been a lot of talk lately about the need for the Government to plot a course over the coming years back into fiscal surplus. Our perceptions of fiscal responsibility are being conditioned by the relentless media campaign that this is the best thing for the Government to do. We are being told that cyclical deficits are unavoidable at this time but the “structure of the budget” should point us back to surplus as soon as possible. This campaign is being supported by official looking documents that are produced by Treasury (notably the Budget papers) which have all sorts of technical terms in them that only the cognoscenti understand. The term structural deficit is being touted around in these documents and appearing in the opinion columns. But the way this concept is being represented is very misleading and is deliberately being used to obfuscate the lack of intention by this Government to seriously pursue full employment. Well lucky for me I am part of the cognoscenti and cannot be so easily fooled. Here is the truth.

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