The coming period will be an interesting test. I say interesting in the sense of an intellectual curiosity rather than anything that my sense of humanity might find to be acceptable. I am referring to the widespread acceptance by politicians around the world that fiscal austerity is good for growth. Governments are increasingly getting bullied into adopting austerity measures apparently thinking they will help their economies grow. My bet is that the austerity measures will undermine growth and when growth finally returns it will be tepid and as a result of other factors not related to the austerity. In the meantime there will be massive casualties among the poor and disadvantaged. So if the Flat Earth Theorists (FETs) are correct in a few months we should be seeing rapid growth and reductions in the deficits. Of the countries that have led the charge (for example, Ireland) things don’t look good for the FETs. So we will see. If they are wrong you can be sure that various ad hoc responses to anomaly will be forthcoming. For example, I lost my briefcase on the way to work which had a key to growth in it! Excuses like that. The mainstream have never and will never admit they are wrong. The task will be to show the people that this rabble of economists should be ignored.

Last year (May 2009) I wrote that Flat Earth theory returns – budget aftermath. In that blog, I asked the reader to imagine the time when it was the mainstream view that the Earth was flat, representing an infinite plane. The view largely died at around 3 BC but there are still some characters out there who worry about falling off the South Pole. After all the Nile River runs for thousands of kilometres and drops barely a few feet over that distance which doesn’t fit well with convexity does it? We have been referring to the hysterical commentators and lobby groups who are seeking to undermine the use of fiscal policy as deficit terrorists. However, when I think about term it actually gives these characters too much credit. Terrorists are probably smart and possess skill notwithstanding that they are usually misguided. So we have decided to resurrect the term I used in that blog last year – flat earth theorists (FETs) – because that association more adequately captures how mindless they are.

Governments are starting to realise that the recovery is slowing and the previous estimates of growth are probably overly optimistic. The IMF and OECD have been pushing inflated forecasts throughout the crisis because they cannot face the fact that the policies they have advocated caused the crisis in the first place. So, in denial, they want to make it look as if things are better than they are so they can get back onto their mantra – cuts in deficits, etc. The austerity packages are being introduced into an environment where the probability of a global double dip recession is rising by the day. But worst, are the shameless sense of priorities being rehearsed by economists and policy makers as they carve into welfare and pension entitlements, privatise valuable public assets (handing them over the “markets”) and increase unemployment. But then the mantra comes back – the forced extra pain won’t be as bad as we expect. So the international agencies and mainstream economists inflate the good things and reduce the significance of the bad things as a way of covering their grubby tracks. And all the while, these estimates and prognostications are based on economic models that failed to explain the crisis or its remedy. It is back to ground zero – and the pain will mount for the most disadvantaged.

It is interesting how the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks.

When I saw the headline on this article – Time to plan for post-Keynesian era – in the Financial Times yesterday (June 7, 2010) I wondered which Keynesian era we were talking about. It was written by Jeffrey Sachs who is well-known for his anti-stimulus viewpoints. The upshot of his argument, however, is that he recommends deficit reduction strategies because the bond markets will get upset otherwise. At the same time he advocates medium-term investments in green technology and education which I support but which will not be consistent with deficit reductions.

Today I am writing about child cruelty. We would all react to child cruelty in the same way – it is repugnant and undermines the chances of the child maturing into a fully functional adult replete with capacities that promote self esteem and allow meaningful and enduring relationships. So what would we think of child cruelty when a high level government agency is engaged in it? What would we think of a government that was poisoning the minds of the young? Many Americans write to me accusing me of being a communist sympathiser and claiming that freedom was subjugated under those regimes via brutal indoctrination mechanisms embedded in their societal infrastructure. Maybe it was. But the Americans don’t actually have to look very far nor resort to history to find regimes that use indoctrination to oppress their citizens’ free spirits, including the intellectual development of their children. On Thursday, June 3, the Director of the US Congressional Budget Office wrote his Letter to a Seventh Grader. It contains pure indoctrination designed to develop fears about budget deficits at an early age.

Today I was reflecting on a book I read a few weeks ago which has been picked up by progressives and the mainstream alike as a visionary construction of the latest crisis and its remedies. It is so comprehensively wrong that I am amazed celebrated. It reinforces another theme that the mainstream conservatives are increasingly rehearsing in the media and in policy debates – governments have exhausted their options and have to take fiscal austerity measures as the only way to bring their public debt ratios under control. The point is clear – there is very little concrete argument about how the proponents of austerity see growth returning. There is a lot on cutting peoples’ living standards via prolonged unemployment, the retrenchment of pension and health entitlements etc; transferring public assets via privatisations – but not a lot on how austerity promotes growth. Further, the idea that sovereign governments have exhausted their fiscal space is just a total fallacy. They may have exhausted their political space but that is quite a different matter requiring a different solution.

I have been writing a fiction novel lately in my spare time (which is when I don’t sleep)! It is about the usual themes – individual struggle, tragedy and perhaps realisation. I haven’t yet conceived how it is going to end yet but it will either be very grim or full of splendour. Black and White I am! The interesting part of the exercise is trying to define one’s style separately from one’s academic style. I read a biography of Jack Kerouac recently and it talked about how he obsessed about trying to develop a unique style but kept falling back to be like one or another of the great authors of the day. It was only once he typed a lot that he started to find his own distinct identity as a writer. For me, the blog helps develop alternative ways of writing outside the terse cloistered world of technical economics. Anyway, I didn’t write much fiction today (yet) but I sure did read a lot of it.

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.

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.