A return to full employment in Australia will require significantly higher deficits

Last week, the Australian Labor Party (the federal opposition) released a new policy platform, which it hopes will give it some electoral leverage in the upcoming federal election. The Party announced that they would be attacking poverty and inequality by restoring full employment. The UK Guardian political editor opined in her article on Friday (March 18, 2016) – A shift in political thinking is giving Labor a sense of purpose – that the announcement by Labor was a policy breakthrough and a recognition that the neo-liberal claims about free markets etc, that emerged in the 1980s, are no longer a viable basis on which to base policy. I agree. I also agree that a currency-issuing government should always pursue full employment. But the reality is that this pledge from the ALP is going to be as hollow as all the other value statements it makes in an attempt to convince the electorate that it is a progressive party looking out for the workers and the disadvantaged. A lot of jobs have to be created to restore true full employment, which will require significantly larger fiscal deficits. Meanwhile, the ALP is claiming it will return the fiscal balance to surplus.

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We are being led by imbeciles

After yesterday’s marathon blog, today will be easier going (and shorter). I was reading John Maynard Keynes recently – circa 1928 – that is, 8 years before the publication of the General Theory with his Treatise on Money intervening. He was railing against the principles and practice of ‘sound finance’, which he noted had deliberately caused billions of pounds in lost income for the British economy. He urged the Treasury and the Bank of England to abandon their conservative (austerity) approach to the economy and, instead, embark on wide-scale fiscal stimulus to create jobs and prosperity. He concluded that with thousands of workers idling away in mass unemployment that it was “utterly imbecile to say that we cannot afford” to stimulate employment via large-scale public works – building infrastructure etc. He considered the policy makers who opposed such options were caught up in “the delirium of mental confusion”. The stark reality is that 88 years later, he could have written exactly the same article and would have been ‘right on the money’. We are being led (euphemism) by imbeciles.

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Finland would be better off outside the Eurozone

Towards the end of last year, I wrote a blog – Finland should exit the euro. I had been undertaking some detailed research on the plight of this relatively small Eurozone nation for a number of reasons. First, it had recently undergone a major industrial decline as Nokia/Microsoft missed market trends and went from world leader to irrelevance. Second, Finland was a vocal proponent of the view that Greece should be pillaried into oblivion by the Troika – to ‘take their medicine’ (more crippling austerity). Third, the data trends were unambiguously pointing to Finland descending into the Eurozone ‘basket case’ category itself as its own conservative government imposed harsh fiscal austerity on the tiny, beleagured nation. Two things are clearer than ever about the Eurozone. First, it is a dysfunctional mess and efforts to reform it so far have only made matters worse. Second, any single nation (and all together) would be unambigously better off exiting the mess and restoring their own currency sovereignty and letting their exchange rate take up some of the adjustment. The following text covers an article that I have written for a Finnish Report coming out in May 2016 to be published by the Left Forum Finland, which is a coalition formed by the political party Left Alliance, the People’s Educational Association (KSL) and the Yrjö Sirola Foundation.

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Democrats in glass houses – you know the rest!

So-called US ‘progressive’ economists arena flap at the moment after Gerald Friedman, an academic economist at UMass released a report on January 28, 2016 – What would Sanders do? Estimating the economic impact of Sanders programs – which suggested that the US economy could perform significantly better and deliver substantially improved outcomes for those disadvantaged citizens with Bernie Sanders in the White House. When I say progressive, I mean those who would consider themselves Democrat Party insiders (former Chairs of the US Council of Economic Advisers under previous Democratic administrations). Last week (February 17, 2016), they created a special Internet site to publish – An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman – which claimed that “no credible economic research supports economic impacts” proposed by Friedman and that “Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic”. As if the policy-making and arithmetic of these attention-seeking (neo-liberal) Democrat insiders is anything to be guided by.

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The impossibility theorem that beguiles the Left

Some years ago (June 27, 2007), Harvard economist Dani Rodrik outlined what he called his “impossibility theorem”, which said that “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full”. In his brief article – The inescapable trilemma of the world economy – he made the case that “deep economic integration required we eliminate all transaction costs … in … cross-border dealings” and that “Nation-states are a fundamental source of such transaction costs”. Ergo, if you want ‘deep’ integration then the Nation-state has to surrender. His “trilemma” guides his view of how the “international economic system” should be reformed. He think that if “want more globalization, we must either give up some democracy or some national sovereignty”. This view has been adopted by political parties as if the conceptual framework is in some way binding. The trilemma has been skillfully sold as a narrative by right-wing think tanks and others who serve the interests of capital. The so-called progressive politicians have fallen into the trap and have shifted their political parties closer and closer to their right-wing opponents, such that now it is hard to distinguish between the major parties in most nations. The reality is that while the impossibility theorem beguiles the Left – its applicability as a binding constraint on government is limited. It is as vapid as the statements made by these career politicians on both sides of politics that they serve the people.

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The capacity of the state and the open economy – Part 1

Wolfgang Merkel wrote in his recent Op Ed (February 5, 2016) – Economy, Culture And Discourse: Social Democracy In A Cosmopolitanism Trap? – that “we are dealing with a partially deliberate, partially careless surrender of the state’s capacity to regulate and intervene in an economy that structurally creates socio-economic inequality and erodes the fundamental democratic principle of political equality”. I highlight, the “partially deliberate, partially careless surrender” description of what has occurred over the last several decades as neo-liberalism has gained traction. Today’s blog continues my series that will form the content for my next book (due out later this year) about the impacts of globalisation on the capacities of the nation state. Our contention (I am writing this with Italian journalist and author Thomas Fazi) is that there has been no diminuition in the power of the state to impact on the domestic economy. The neo-liberal era has seen many commentators deny that proposition, yet, knowingly advocate use of these powers to further advantage capital at the expense of labour. The state is still central to the picture – it just helps capital more and workers less than it did during the full employment period in the Post World War II decades.

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Australian PBO – hard to take seriously – is it vaudeville or what?

The Australian government is currently engaging the population in an agonising discussion about taxation reform and proposed spending cuts. It is almost vaudeville when the Treasurer, or the Opposition Shadow Treasurer or some business leader gets up and gives us their ‘two bob’s worth’ of nonsense. We have a “revenue problem”, “no we don’t, we have a revenue problem”, “we need to raise taxes”, “no we don’t we need to cut spending”. Then the government appoints a former investment banker as Treasury Department head and he starts raving on about how government should limit its spending to a maximum of 25 per cent of GDP without any argument being provided as to why that limit is meaningful, how it is derived, how it can be achieved if desirable, and all the rest of it. Sounds like a good idea. The Eurozone has destructive fiscal rules (Stability and Growth Pact) that we just whipped out of thin air and sounded important. We may as well, like dumb sheep, follow the race to the bottom. Meanwhile, real GDP growth falls further below trend and the disadvantaged workers endure elevated levels of unemployment and hardship. It is enough to drive one to drink. And then yesterday, the Australian Parliamentary Budget Office (PBO), which is one of those neo-liberal concoctions introduced by governments around the world to deflect responsibility for decisions from the politicians and frame the public debate in a particular way, published a new report (February 3, 2016) – National fiscal outlook – Report no. 01/2016. The mind boggles how people can write this stuff and go homeat night and take themselves seriously.

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The government really is instrumental in creating growth

Sometimes one reads a press article that is so obviously misleading that it is hard to know where to start with it. But perhaps the conclusion is the best place to start sometimes. Such is the case of a Bloomberg article (January 15, 2016) – What #ResistCapitalism Gets Wrong – written by American academic Noah Smith. Basically, the article attempts to attribute all of the post-Second World War prosperity to the “free market economy”, which he says is “a term many use synonymously with ‘capitalism'”. By the end of the article we learn that in fact that prosperity does not come from ‘free market’ liberalisation and that strong governments are essential for growth and reductions in inequality. The “boring old mixed economy” where, in Noah Smith’s words “government really is instrumental in creating growth”. Start with the conclusion and read backwards is my advice in this case.

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Currency-issuing governments have unlimited financial resources to fight recession

The elites are gathering for another junket aka the World Economic Forum, in the frosty, but salubrious surrounds of Davos this week (January 20-23, 2016). The Monday morning temperature there is forecast to be -22°C. According to the Forum’s homePage – Searching for the 21st century dream at Davos – the delegates are going to be reimagining life under the theme “Mastering the Fourth Industrial Revolution”, which is spin for eating a lot of gourmet food, drinking a lot of expensive wine, and, denying the presence of the very large elephant in the conference venue. I suppose it is easy for them to live in denial when the sort of policy regimes they have influenced have categorically failed and will continue to do so with the result that millions remain unemployed and poverty rates are rising. Apparently, the elites have to “‘defetish’ … dialogues about future technologies” and the “onset of a new era of ‘limits’ is a chance we must not miss to imagine and engineer the futures we want”. Here is some gratuitous advice to the elites – forget the robots; forget worrying about the so-called “inflection point … where social, economic and political crises meet rapid technological change, where progress feels like disruption, not promise”; and, instead, more fully understand why this obsession with “a new era of ‘limits'” (by which they mean fiscal limits on governments) has sidetracked any hope of progress and deliberately disrupted people’s lives in a way that dwarf the impacts of technological change.

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The co-option of government by transnational organisations

Today, some more analysis of the debate about globalisation and the capacities of the nation-state. We consider the debates in the early 1970s about the power of transnational corporations and the claims that they undermined the capacity of the nation-state to further the interests of the population. On the one hand, the free-market liberals claimed that the emergence of the transnational corporation was a move towards increased global efficiency and the nation-state, which served narrower interests, would be swept aside, along with its regulative structures, by this trend. Global welfare (and solutions to international poverty) would be maximised by the demolition of national borders by transnational capitalism. This view considered the nation-state to be ‘dispensable’ – that it only served narrow interests and the global organisation of production no longer required national governments to operate in this way. The Marxist position was, understandably, at odds with this view. It considered the nation-state to be indispensable to the growing needs of international capital. This was in the sense that governments could provide essential stability to reduce the risk of transnational operations. My position is more in line with the latter view although it clearly recognises the relevance (and power) of the national governments in which they choose to operate. Further, these transnational corporations are typically very large firms within the nations they operate. it is hard to differentiate the political clout that being large exerted from the influence of being global. Certainly, the early literature was not clear on that issue.

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Ireland demonstrates that fiscal deficits promote growth

On December 10, 2015, the Irish Central Statistics Office (CSO) released the – National Accounts, Quarter 3, 2015 – data, which showed that real GDP had increased by 1.4 per cent over the last quarter while real GNP had declined by 0.8 per cent. On an annual basis, real GDP increased by 6.8 per cent in the September-quarter 2015 and real GN increased by 3.2 per cent over the same period. I’ll discuss the difference between GDP in GNP later but is clear that Ireland is in terms of real economic growth leading the Eurozone at present. In narrow terms, it is also clear that over the last two years the nation has recorded consistent growth. A question that is often asked is whether Ireland defies those who claim that austerity is flawed strategy. I get various E-mails along those lines, some polite, some rude. My answer to the polite ones is that it is difficult to hold out Ireland as an example of austerity-led growth. Ireland is, in fact, a rather strange Eurozone Member State, and is more firmly plugged in to the Anglo world than other Eurozone nations. It just happens, that while the Irish government was suppressing domestic demand through austerity from as early as 2009, significant trading partners (such as, Britain, the US and China) were maintaining expansionary fiscal positions, which allowed Ireland to resume growth. Further, a narrow focus on the growth cycle misses significant aspects of national prosperity. Even with two years of economic growth, real earnings growth is flat to negative, the rate of enforced deprivation remains around 30 per cent, and there is a rising proportion of people at risk of poverty. On top of that, net emigration of skilled workers continues, which means that the official unemployment rate is much lower than it would have been if these workers had not left the country.

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Australian government fiscal outlook – irresponsible and will fail

Australia has been caught up in a almost national hysteria the last few days as the Federal government’s Mid-Year Economics and Fiscal Outlook (MYEFO) release approached. The MYEFO was released yesterday (December 15, 2015) and the sky is still firmly above us, albeit slightly overcast today with storms approaching. I can assure everyone the storms are meteorological events associated with the early summer rather than any moves by international credit rating agencies to detonate their heavy artillery and sink the continent into the Pacific and Indian oceans. The mainstream media coverage of the buildup to the MYEFO has been nothing short of extraordinary and demonstrates that no matter how wealthy a nation’s per capita, how educated it’s people appear to be, public debate is conducted at levels of ignorance that the cavemen and women would laugh at. I have spoken to several journalists in the last few days who by their questioning expose a basic lack of understanding of the macroeconomic implications of the data that has been released in the MYEFO. Basically, the Outlook shows that the federal fiscal deficit is larger than previously estimated (in the May 2015 Fiscal Statement aka ‘The Budget’) and this demonstrates the automatic stabilisers in operation to put a floor under the slowing economy. This counter-cyclical movement is something that we should be comforted by because as private spending contracts and the economy slows the expansion of the deficit limits, to some extent, the job losses and the number of businesses that might become insolvent. However, the mainstream reaction has been hysterical (as in hysteria) with all sorts of predictions about national insolvency, credit rating agencies downgrading us, and “deficits for as long as you can see”. The problem is that the so-called average Australian believes all this nonsense and doesn’t understand that the rising deficit is a good thing in the context of poor developments in private spending.

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Friday lay day – Is MMT applicable to the Eurozone?

Its my Friday lay day and I am catching up on reading today. But one thing I have had to complete by today is the introduction to the German Translation of my friend Warren Mosler’s 2010 book – The Seven Deadly Innocent Frauds of Economic Policy. The publisher wanted an introduction for the German readership that helped them relate the discussion in the book to the reality in Europe – given that the Economic and Monetary Union is a perverted hybrid of a fixed exchange rate/fiat currency system that works for no-one really. So you may be interested in reading my introduction. Then a dose of the master guitarist completes my Friday blog.

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Neo-liberal myths constrain our understanding of poverty

I was on a panel last night discussing the causes of poverty in Australia. The panel was rather diverse with housing, welfare and other representatives. There was a crowd of around 400 I believe. The format was difficult given that the panel of six was assembled in line at a table so could not see each other easily. But the real problem was that the facilitator, a national journalist, who had the role of asking questions to the panellists, chose to assert the standard neo-liberal macroeconomic myths in response to statements I made with respect to the causes and solutions to poverty. I was confronted with as-if facts such as “they have to get the money from somewhere before they can spend” in response to questions about public debt eventually becoming too large and foreigners funding our national (currency-issuing) government. I thought a facilitator was not meant to have an agenda but in this case holding out these neo-liberal myths perpetuated the standard agenda which guarantees that poverty will continue to worsen. There is a lot of work to be done before people will identify these neo-liberal myths as non-knowledge and readily understand that national, currency-issuing governments such as in Australia have no financial constraints and they spend out of ‘thin air’. Once that knowledge is accepted a whole new world opens up that allows us to see the path to reducing poverty and inequality.

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Friday lay day – will the German refugees end up in Minijobs?

Its my Friday lay day blog and I am catching up on things that I put to one side while I was away in Finland. But I have been doing some research on the impacts of the massive refugee flows into Northern Europe from the military conflicts in the Middle East. A more detailed analysis will appear later. The very difficult problem facing Europe, in particular, at present, and the World, in general is how to cope with the millions of people that are being displaced from their homelands by war, terrorism and/or environmental degradation. It is no easy task to deal with. The seemingly unending flow of refugees into Turkey and then greater Europe is challenging the archaic decision-making processes of the European Union. Once again it brings into relief the need for a ‘federal’ European government that can make binding decisions across the Member State space and provide fiscal backup to ensure those decisions are viable from a resource perspective. There was a Reuters report (October 15, 2015) – Refugee spending will drive our economy, Germany says – which noted that the refugee flows could underpin an economic boom in Germany, the first nation to announce it would settle large numbers of the asylum seekers. Here is part of the framework I am developing to consider this issue.

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Why banks are pushing the US central bank to increase interest rates

A few weeks ago I wrote – US Federal Reserve decision correct – there is no ‘normal’ – and suggested that the reason Wall Street and other well-to-dos were busily invading the media at every opportunity berating the US central bank for not increasing interest rates was because they had a vested interest in rates rising. They massage their call for higher interest rates in terms of global concerns for inflation (mostly) but just below the surface (they are mostly pretty crude in their advocacy) is the real reason – their own profit bottom line improves. On October 1, 2015, the Bank for International Settlements published its Working Paper no. 514 – The influence of monetary policy on bank profitability. The research demonstrates my very point. They find that when the short-term interest rate rise (that is, the policy rate set by the central bank) “bank profitability – return on assets” also rises. They also find that this “effect is stronger when the interest rate level is lower”. The overall conclusion is that “unusually low interest rates … erode bank profitability”. So forget all the spurious arguments about inflation risk etc that the financial media (who are really just ghost writers for the top-end-of-town) write ad nauseum. The real reason the Wall Street lobby keeps pushing for rate hikes is because they want more profit.

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Friday lay day – the neo-liberal real wage scandal

Its my Friday lay day and I am trying to finish one paper that is due and also prepare the presentations that I will be giving in Finland next week. But I was reading a Briefing Paper (No 406) from the US Economic Policy Institute (published September 2, 2015) – Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay – that resonated with me today. One of the defining characteristics of the neo-liberal era has been the divergence between real wages growth and productivity growth. It has been a deliberately engineered divergence as policy makers have shifted from mediating the distributional struggle between labour and capital to being ‘pro-business’ and introducing a range of initiatives that have allowed capital to gain greater shares of national income and build a booty that has then been pumped into the increasingly deregulated financial markets. Oh, and to allow the bosses and their managers to take out obscenely high salaries and swan around in private jets. The dynamics unleashed by these distributional shifts helped cause the Global Financial Crisis. A sustainable recovery with progressive outcomes (reductions in income inequality etc) will only be possible if Governments abandon the ‘pro-business’ bias and instead introduce policies that ensure real wages grow in line with productivity (along with other changes).

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Canada – by hook or by crook there will fiscal deficits

The December 2014 – Financial System Review – published by the Bank of Canada presents some chilling data, which tells me that the Canadian government’s embrace of neo-liberal orthodoxy is taking the nation down a dangerous path. The Review was obviously written before the latest global growth trends became apparent to the likes of the IMF who have now finally worked out that the policy structures in place which emphasise internal devaluation and fiscal austerity in most places are killing off growth. Canada is now very exposed because of its policy failures. The problem is that the political class in Canada is obsessed with recording fiscal surpluses and seem unable to understand that the only reason it has been able to reduce the fiscal deficit in the post-GFC period is because the economy has experienced a resources boom which is now over and the household sector incurred unsustainable levels of debt. Both sources of spending growth are now unlikely to continue and business investment is now contracting as the opportunities in the resources sector diminish. The Government and the main opposition party are heading into the national election boasting that each will achieve a fiscal surplus in the coming year. That is now unlikely because the downturn in the economic cycle (Canada is now in recession) will work against the aspirations of the politicians. They will end up with a fiscal deficit whether they like it or not. If they take the (stupid) neo-liberal path and fight against the private spending cycle, Canada will end up with what I call a ‘bad’ deficit driven by the automatic stabilisers – a rising deficit with rising unemployment and declining growth. Alternatively, it can take the sensible path and introduce new discretionary spending programs to allow a ‘good’ deficit to emerge where the public spending supports the moderation in private spending and unemployment does not rise. That is the preferred path but I doubt that either major party in Canada is mature enough and educated enough to take that action.

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Capitalists shooting their own feet – destroy trust and layer management

There was a wonderful article – The Origin of Job Structures in the Steel Industry – written by Katherine Stone and published in 1973. It was part of an overall research program that several economists and related disciplines were pursuing as part of the radical economics that was being developed at Harvard and Amherst in the early 1970s. One of the major strands of this research was to understand labour market segmentation and how labour market structure, job hierarchies, wage incentive systems and more are used by the employers (as agents of capital) to maintain control over the workforce and extract as much surplus value (and hopefully profits) as they can. It challenged much of the extant literature which had claimed that factory production and later organisational changes within firms were technology-driven and therefore more efficient. The Harvard radicals found that to be unsustainable given the evidence. They also eschewed the progressive idea that solving poverty was just about eliminating bad, low pay jobs, an idea which had currency in that era. They showed that the bad jobs were functional in terms of the class struggle within capitalism and gave the firms a buffer which allowed them to cope with fluctuating demand for their products. It also allowed them to maintain a relatively stable, high paid segment (primary labour market) which served management and was kept docile via hierarchical incentives etc. I was reminded of this literature when I read a recent paper from Dutch-based researchers on the way firms have evolved in the neo-liberal era of precarious work. Much is made of the supposed efficiency gains of a more flexible labour market. How it spurs innovation and productivity through increased competition and allows firms to be more nimble. The entire ‘structural reforms’ agenda of the IMF, the OECD, the European Commission and many national governments is predicated on these myths. The Dutch research shows the irony of these manic neo-liberals.

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The total Greek election farce – RIP democracy

Last weekend, the Greece people (or a declining proportion of them) elected a new national government. It was a farce. There was no competing electoral mandates sought. The population know what is in store for them. The policy mandate in force wasn’t even supported by popular vote. It comes from the Troika, which now effectively governs the Colony of Greece. The new Prime Minister, who sold the people out prior to the election, is now talking about making changes. Yeh, right! He is now just a tool for the Troika. National elections where the people do not vote for anything much don’t look like a healthy democracy to anyone who isn’t in denial as to what has been going on. Democracy is about the people being able to change governments that do them harm. In the Eurozone that is an old-fashioned idea. National elections have become a sop, a pretense. And the people knew it and stayed away in droves. The Greek election was a total farce – democracy died.

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