Nothing good in sight for the UK economy despite the Olympics

The British Office of National Statistics have published two new data releases in the last week which show that the British economy is plunging further into a deepening recession. On July 20, 2012, it published the Public Sector Finances, June 2012, which showed that the deficit is increasing. Then it published the – Gross Domestic Product, Preliminary Estimate, Q2 2012 – yesterday (July 25, 2012), which showed that the British economy had contracted n real terms by a staggering 0.7 per cent in the June quarter. The one hope on the near horizon for the British economy might be the Olympic Games, which are being use to gloss over the savage recession that the British government has deliberately created. However, a closer understanding of the way in which events such as the Olympic Games impact on the host economy suggests that the majority of benefits are already in the data and the dismal future facing Britain will not be attenuated by the running and jumping (and the rest of it).

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Saturday quiz – July 21, 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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Some notes on Aggregate Supply Part 2

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 – weak and weakening

Last month my Labour Force commentary was entitled – Australian labour market – good signs but wait for the reversal. It didn’t take very long for the reversal to come, although I caution anyone drawing trends from month-to-month variations in this sort of data. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for June 2012 reveals a weakening labour market with all the negative signs concurring – falling full-time employment, falling participation, falling hours worked and rising unemployment. If the labour force had not have contracted due to the falling participation rate, the unemployment rate would have been closer to 5.5 per cent rather than 5.2 as officially recorded. Certainly this 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 – weak and weakening.

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Neo-liberals on bikes …

I had an interesting conversation with a lunch visitor today about Germany (he lived and studied there) and its role in the Eurozone crisis. Yes, we talk economics even at times of rest! We discussed some of the events leading up to the Euro crisis and the important role played by the so-called progressive political parties in Germany. The conservative Christian Democrats are sounding like lunatics at the moment with the “You will have austerity and enjoy it” mantras. The focus on their harsh and destructive stance supporting fiscal austerity has taken the spotlight off the real culprits – the SPD and the Greens. We should never forget the role that they played – over the period of the Gerhard Schröder’s federal government (1998-2005) – in creating the pre-conditions that have ensured the crisis will be long and very damaging. We should also remember that Green parties have developed a tendency to be “neo-liberals on bikes” as a means of gaining power. The problem is that once they are pedalling in that direction they lose the capacity to pursue truly green policies, which extend beyond the remit of having clean building codes and sound urban design.

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Growth is lagging because spending is lagging – the solution is clear

A recurring theme in the press and one that I get several E-mails about a month is that a national government has “more space to net spend” if its past history of deficits and debt are lower than otherwise. This is also related to the acceptance by many so-called progressive economists that national government budgets should be balanced over the course of the business cycle – that is, it is fine to go into deficit when there is a downturn but the government should pay it back via surpluses when the economy is strong. Neither proposition has merit but serve as powerful buttresses for the continuation of the neo-liberal attack on government fiscal freedom and full employment. Government deficits have not caused the crisis. Growth is lagging because spending is lagging. If the non-government sector cannot sustain aggregate spending to ensure unemployment drops then there is only one sector left in town folks!

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The US economy is precariously poised

Last week (June 6, 2012), the US Bureau of Labor Statistics released the Employment Situation Summary – for June 2012, which revealed that the US economy had added 80,000 net jobs in the last month, well below the quantity that economists had been estimating. The US national unemployment rate was unchanged at 8.2 percent. The BLS said that the “Nonfarm payroll employment continued to edge up” but the commentators labelled the result “soft”. The US policy makers continues to ignore the plight of the unemployed. The data shows that June 2012 is the 41st consecutive month that the national unemployment rate has exceeded 8 per cent, which is the longest period of above 8 per cent unemployment in the history of the data series (from January 1948). The danger now is that the economy will fall prey to the political debate leading up to the November election and resulting policy responses will truly push the economy over the cliff into recession. The US economy is precariously poised at present and some fiscal commitment to supporting growth is urgently needed.

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If only they were operating in the tradition of Minsky!

In the last week, it was alleged that economists such as the IMFs Olivier Blanchard were alleged to be working in the tradition of Hyman Minsky, which by association inferred that they were on top of the crisis – foresaw it, understand why it occurred and offer the best ways out of the mess. Please read my earlier blog – Revisionism is rife and ignorance is being elevated to higher levels – for an introduction to this issue. I argued that this attempted association is plainly false and Blanchard’s monetary economics is more in the Monetarist tradition, which is the anathema to the endogenous money framework that Hyman Minsky worked within. This is no small issue. The economists mentioned are often in leading positions (media, universities, policy) and influence the way the public (and students) think about the policy choices available. By promoting erroneous understandings of the way the monetary system operates, such economists become part of the problem not the solution, no matter if they are currently opposing fiscal austerity. If only they were operating in the tradition of Minsky!

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On strategy and compromise

As more people become aware of Modern Monetary Theory (MMT), extreme reactions emerge to basic concepts that, in any reasonable sense, should evade such reactions. For example, when the concept of the Job Guarantee (JG) is explained the reactions include hysterical comments such as “This is Socialism”; “MMT advocates the government employing everyone – they are stealth Communists”; “MMT is Communism in disguise”; and the rest. I get several E-mails along these lines per week – all which go into the trash immediately – so why bother sending them! I also get many (polite) E-mails suggesting that we (MMTers) should adopt a compromise line and embrace the ideas of those, who while clearly holding ideas that are inconsistent with MMT, do advocate government-led stimulus in the present context. Apparently we should also use terminology that is consistent with the mainstream to minimise the chasm that has to be be crossed to jettison that orthodoxy and accept MMT. These tactical suggestions have resonated once again in the current little dispute about whether various economists, who operate in the New Keynesian paradigm are channeling Minskian ideas. The suggestion is that, while they might not have foreseen the crisis and hold to various theoretical concepts that are inconsistent with MMT development, we should, as a matter of strategy, form alliances with these economists because they are now advocating policy more or less similar to that proposed by MMTers. So our common purpose should be prioritised over our theoretical differences. I disagree. History shows us that it is very dangerous to develop a new approach by minimising the differences between it and the dominant, but erroneous paradigm just to make it easier for adherents of the latter to embrace the former.

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Mass unemployment is involuntary

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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Neo-liberalism has failed but we still don’t get it

One of the puzzles that accompany this gruelling economic crisis is why neo-liberal economic thinking, which when applied caused the crisis and has delivered very little to so many, remains the dominant paradigm in economic policy making and has managed to turn a disaster for practitioners of that ideology into a triumph. How is it that the leading voices now are preaching exactly the same policies that caused the crisis as the solution to the crisis. Is there that much asymmetry? I noted a recent comment on my blog (Tom) that raised issues relating to the philosophy of science along the lines of how are we to judge whether the mainstream macroeconomics paradigm has failed. I understand the demarcation issues involved and the problems of “truth testing”. But we can take a more simple approach to the question. Here are two ways we know that the mainstream approach failed – they didn’t have a clue what was happening in the years leading up to the crisis and now they are scrambling in a stunned state to add banks and financial markets to their defective models. The problem is that they are just building more defective approaches. But the continued dominance demonstrates that their failures are not yet fully understood.

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Employment guarantees should be unconditional and demand-driven

There was an interesting paper published by the World Bank (March 1, 2012) – Does India’s employment guarantee scheme guarantee employment? – which offers some insights into how the Indian employment guarantee works. I thought it was an odd title because by definition the NREGA scheme is an employment guarantee. The relevant issue is a guarantee to whom. The World Bank research confirms the outcomes of my own work on the Indian scheme that it’s conditionality reduces its effectiveness. Those who gain jobs benefit but there is a shortage of jobs on offer relative to the demand for them. Modern Monetary Theory (MMT) shows that an unconditional, demand-driven employment guarantee, run as an automatic stabiliser, is the most superior buffer stock approach to price stability. Conditional (supply-driven) approaches not only undermine the job creating potential but also reduce the capacity of the scheme to act as a nominal anchor.

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Rising working poor proportions indicates a failed state

The Sydney Morning Herald’s economics editor Ross Gittins wrote an article today (June 20, 2012) – This is no Sunday school: prosperity comes with pain – where he argued that the real world is not like his Sunday School (where all was forgiven) and that “discord and suffering are the price we pay for getting richer”. He might have also qualified that statement by saying that some get richer while others endure discord and suffering. I thought about that because I have been reading a number of related reports on the concept of the working poor – workers who for various reasons (pay, hours of work, job stability) live below the poverty line. I usually focus on the pain that unemployment brings but the working poor, many of whom are full-time workers, are also a highly disadvantaged cohort. It is not enough to just create growth that creates full employment. The policy framework also has to take responsibility for making sure that no-one who works is in poverty. A rising proportion of workers classified as working poor indicates according to metrics I use a failed state. The US is one such state.

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Thinking in a macroeconomic way

As noted last week, 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. Anyway, this is what I wrote today.

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Selective versions of history, driven by a blinkered ideology, always fail

I read this New York Times article (June 9. 2012) – Europe Needs a German Marshall Plan – by a history professor at Harvard Charles S. Maier with some interest. And then a few days later (June 12, 2012) – the other end of the spectrum appeared – Why Berlin Is Balking on a Bailout – written by the conservative (but difficult to stereotype) German economics professor Hans-Werner Sinn. The two articles demonstrate that selective versions of history always fail, especially when they are overlaid and driven by a blinkered ideology that prevents a full understanding of why things happen. The Harvard historian understands how European reconstruction occurred and has articulated what that means for the current European malaise. The German economics professor, imbued with Ordo-liberalism, cannot see beyond his blinkers.

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Technocrats move over, we need to read some books

I was reading the recently published (June 11, 2012) – CBI Education and Skills Survey 2012 – from the Confederation of British Industry today. A day after the Report was published, the British Office of National Statistics released the latest (April 2012) – Index of Production – data which shows that “the seasonally adjusted Index of Production fell by 1.0 per cent” over the 12 months to April 2012 and that in the last month the “seasonally adjusted Index of Manufacturing fell by 0.7 per cent”. That is a large collapse. Since 2008, British production has slumped by 10 per cent overall even though the currency has depreciated by around 20 per cent against the Euro over the last 5 years. Earlier today I saw news footage of ignorant males (mostly) beating each other up over a soccer game in Warsaw. And in recent national elections, polarisation towards the extremes is evident. And all the while, technocrats that dominate organisations such as the IMF and the ECB are, inexorably, pushing economies into even more dire situations that we could have imagined four years ago, when the neo-liberal bubble burst. And in my own sector (higher education) the buzz is STEM and technocrats are using that buzz agenda to pursue strategies that will diminish our futures irrevocably. All these events, outcomes, strategies etc are related and cry out for a major shift in thinking by governments and educational institutions.

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Australian labour market – good signs but wait for the reversal

Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for May 2012 reveals a stronger labour market than last month with full-time employment growth evident and participation rising. The oddity of the results are that monthly hours worked declined indicating weakness. While the unemployment rate rose to 5.1 per cent (and is still way too high), the reason for the rise in unemployment is that employment growth was outstripped by labour force growth which is a sign of a strengthening labour market. Of-course, the data is highly variable between months and the trend remains weak. Certainly this data is not consistent with the outstanding real GDP growth figures revealed in yesterday’s National Accounts. The most disturbing aspect of the labour market data remains the appalling state of the youth labour market. My assessment of today’s results – good signs but I will wait for the reversal next month.

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Australian national accounts – strong growth creates a puzzle

The ABS released the – Australian National Accounts – today for the March 2012 quarter and the results have stunned all commentators including yours truly. Last quarter, the real GDP growth rate had slumped to 0.6 per cent (this was revised upwards from 0.4 per cent). But in the March 2012 quarter the Australian economy grew by a staggering (fast) 1.3 per cent – driven by both private consumption and private investment are driving growth. For the year, the Australian economy grew by 4.3 per cent which when compared to trend (around 3.25 per cent) suggests a boom. But over the same quarter, employment growth fell by 0.7 per cent and full-time employment fell by 0.2 per cent. That dislocation is very puzzling. There appears to be a divergence occurring between our real output performance and our labour market performance. More analysis is required to fully understand that divergence. Clearly, the data is also indicating that growth can be unbalanced (concentrated in space and particular sectors) which poses policy challenges. For now though, the real GDP growth estimates are good. It is likely we have seen the peak of the investment cycle though (as China slows) and that will have implications for income growth, and, hence, household consumption growth.

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The grandeur of the Jubilee

The current British Government is refining the concept of work and Travel away from home allowances as it seeks to create dynamism and flexible and effective job creation programs. The answer appears to be that the workers don’t get paid, they are bussed to remote locations and are required to sleep under bridges prior to undertaking their unpaid work. As the the official Government statements tell us “The Work Programme also ensures value for money”. These developments are beyond even the dreams of the most entrenched neo-liberal.

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Industry job dynamics in Australia

I have been number crunching today – heavy sort of crunching. One of the on-going discussions in the Australian context is the dual pattern of growth that is being observed here – which has arisen largely because, in essence, we are a primary commodity producer (and exporter) rather than an industrial nation. At present, some sectors (such as manufacturing and tourism) and regions (such as Sydney and Melbourne) are struggling while other sectors (such as mining) and regions (such as Western Australia, Northern Queensland and the Northern Territory) are booming. The East Coast where the majority of Australians live and work is probably close to recession. These trends – popularised by the term ‘two-speed economy’ – whereby serious sectoral and regional imbalances accompany overall economic growth, challenge the fundamental patterns of our economic and social settlements and threaten the financial viability of many Australian households. So I was computing job destruction and job creation rates today as part of an investigation of how the labour market is reacting the dual nature of economic outcomes at present. And then … the ABS published the Retail Sales data for April 2012 today and, as usual, everyone could interpret it in their own way. But it does bear somewhat on how we consider this dual growth pattern.

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