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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Ultimately, real resource availability constrains prosperity

There are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.

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European-wide unemployment insurance schemes will not solve the problem

On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.

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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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US labour market appears to be marking time

Last week (December 8, 2015), the US Bureau of Labor Statistics published the latest – Employment Situation – December 2015 – and the data shows that “Total nonfarm payroll employment rose by 292,000 in December, and the unemployment rate was unchanged at 5.0 percent”. The BLS noted that they had revised their estimates of the change in total non-farm payroll employment for October up by 9000, and the estimates for the change in November up 41,000. In other words, “employment gains in October and November combined worth 50,000 higher than previously reported”. The BLS also note that “over the past 3 months, job gains of averaged 284,000 per month.” This information was widely interpreted as a strong result with the employment growth spread across several industries and services. Construction employment was also strong for the third consecutive month. However, other indicators suggest a more static picture. Broad measures of labour underutilisation indicate no significant improvement in the latter part of 2015 in the US labour market. Further average hourly earnings were static and of not risen as strongly as in previous recoveries. The participation rate was unchanged at 62.4 per cent and remains well below previous peaks. As I have shown before, despite the robust employment growth, there is a bias towards jobs at the lower end of the pay distribution (see blog – US jobs recovery biased towards low-pay jobs.

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Democracy in Europe requires Eurozone breakup

On December 21, 2015, there was an article on the Social Europe portal – A New Plan for Greece And Europe: A Defining Moment For European Social Democracy – which I found interesting, though very incomplete, given its title. In fact, the ‘New Plan’ is really a series of fairly general statements, which at times, are somewhat inconsistent if you extend them into the necessary detail that they imply. For example, one of their key observations is that within the European Union there is a “wide and growing gap between national control over budgets that people have voted for and the post-national governance imposed on them”. Which would suggest that the solution requires that there is an aligning of the fiscal responsibility and control at the level of the currency-issuing unit. However, there is no hint of that in their ‘Plan’. They talk about an “Enhanced respect for the fiscal sovereignty of Greece” but fail to articulate how that can occur within the common currency when the Greek government has no currency-issuing capacity. Of course, if we want to increase the fiscal sovereignty of any Eurozone nation, then the only sustainable way of doing that is for that nation to re-establish its own currency and exit the monetary union. However, this would appear contrary to their “pan-European” sentiments, which dominate their overall vision. In short, once again the bogey person of the pan-European appears to be taken as a given and then specific matters that might appear inconsistent with that old ‘social democratic’ obsession in Europe are glossed over.

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Mental illness and homelessness – fiscal myopia strikes again

Yesterday, as I was going about my business in San Francisco, I passed a man lying in the gutter outside the Westfield Centre on Market Street (the swish multilevel shopping complex with some expensive label stores), who was poorly dressed, given the weather (cold) and was clearly having some sort of episodic fit. The street was packed with Sunday shoppers most of whom were well-heeled. I asked the person I was with whether we should ring 000 to get some sort of professional help for the man and he told me that it would be futile because they wouldn’t come out anyway. It was not an isolated incident. Throughout the city the extent of homelessness and the public nature of mental illness is stark. There are choruses of shouts, anguished cries, megaphoned self-dialogues emanating from almost every street corner, doorway, alleyway, train station and whatever. People who should be in care, suffering and crying out. For the richest country in the world to tolerate this degree of human rights violation is almost unimaginable. While the Australian health system is far from perfect, our mentally ill citizens are much better cared for in state facilities and are not left on the street, homeless, suffering from a variety of obvious physical and mental maladies – and basically abandoned by the system. There are some who escape the net and wander the streets of our cities, but, in general, we do not accept that the mentally ill should be left to their own devices. It tells me that any American claim to greatness is a pitiful, self deceit. This is a heartless society where citizens who are most in need of state support are the least able to access it.

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There was no reason for the US to raise interest rates

Last week (December 16, 2015), the US Federal Reserve Bank raised its policy interest rate by 25 basis points (1/4 percentage point) for the first time since 2005. In its – Opening Statement – the Federal Reserve chairperson said that the decision reflected the Bank’s judgement that there had been “further improvement toward our objective of maximum employment” and that it “was recently confident that inflation would move back to its 2 per cent objective over the medium term”. They did, however, acknowledge that “some cyclical weakness likely remains” and referred to the significant drop in labour force participation, the rise in underemployment, and the almost non-existent wages growth. Taken together, it was a strange decision to take given that the labour market is still a long way from where it was pre-crisis (unemployment has been replaced by underemployment and non-participation) and that the price level inflation is well below their two per cent target (even taking into account the extraordinary drop in energy prices).

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Benefit tourism – another neo-liberal fallacy

One of the tools that right-wing elements use to control the public debate about government spending and to justify their attack on public deficits is migration. There are many aspects to this public manipulation that invokes raw fear, ignorance and prejudice among the population. One of the elements, which plays on job insecurity and the range of fiscal myths that characterise the neoliberal era, is the claim that so-called ‘benefit tourism’ is rife and if left unchecked will bankrupt national governments and lead to higher burdens on ‘taxpayers’. So we are often told that migrants from poorer nations move to access welfare benefits that are superior to those offered by their own nations and that these movements are parasitic in nature and do not advance the interests of the host country citizens. Last week (December 10, 2015), the Irish-based EU organisation, the European Foundation for the Improvement of Living and Working Conditions (Eurofound) released a report – Social dimension of intra-EU mobility: Impact on public services – which examines “the extent to which mobile citizens from central and eastern European Member States … take up benefits and services in nine host countries” by “mobile citizens from 10 central and eastern European Member States” (the so-called EU10 mobile citizens). The Report should be read by all those who wish to contribute to this debate or understand what the facts are. Essentially, the Report finds that mobile citizens from poorer nations have lower take-up rates of welfare support in host countries than natives. That really should be the end of the ‘benefit tourist’ assertions. But then most of these public debates are not based on evidence or logic.

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Friday Lay Day – ruminations on MMT and the JG

It’s my Friday Lay Day blog and today I’m spending some time travelling and some time thinking about the Modern Monetary Theory (MMT) textbook that I’ve been promising to finish for some time. I can confidently say now that we are on track to finish the first edition by March 2016. Randy Wray and I have taken on a third author (Martin Watts) and have agreed on a completion plan. More information on availability will be available in the new year as we get closer to completion. This week I noted a lot of comments (particularly with respect to my Job Guarantee post) that suggested many readers still do not exactly know what MMT is. Further, there was a heterodox conference in Sydney this week, where MMT proponents were accused of being neo-liberals and politically naive. Unfortunately, other commitments prevented me from attending the conference this year but I read the paper in question and wondered why salaried academics would bother writing it. So a few reflections on both those matters today.

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On the trail of inflation and the fears of the same …

Today I’ve been following a document trail concerning the French government decision to adopt the so-called Barre Plan in 1976. This is part of the research on doing for my next book on why the Left abandoned progressive economic strategies and became what we now think of as austerity-lite merchants. I am hoping the manuscript will be finished by April 2016 and the book will emerge a bit later in the year. while the approach that will be taking is emerging, the strategy is to pinpoint key events in history where significant economic policy changes occurred and to analyse the rationale that was used to defend those policy shifts and to assess whether the circumstances that applied at those points in time provide any guidance to current day challenges. One of the big events that lead to deep uncertainty among Social Democratic politicians and their advisers, which arguably, was a key driver in the shift of these parties to the Right, was the Stagflation of the 1970s. The phenomenon of the simultaneous coincidence of accelerating inflation and rising unemployment had not previously been witnessed in the period following the Second World War. It needs a careful analysis because much of the popular understanding of this period and the claims that it demonstrated a failure of Keynesian policy approaches are incorrect and provide no basis for rejecting fiscal intervention to maintain full employment.

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Recessions are always a problem and can always be avoided

There was an article in the Fairfax press this morning (December 1, 2015) – ‘Australia headed for recession’: Yanis Varoufakis, former Greek finance minister – which featured the erstwhile finance minister stating the obvious. Last week’s investment data, which I analysed in this blog – Australia – investment spending contracts sharply, recession looming – makes it clear that unless is a substantial shift in the austerity mindset of the fiscal policy makers then the continued and accelerating contraction in private capital formation will drive the economy into recession. That conclusion is not rocket science – it is staring us in the face. When tomorrow’s National Accounts data is released we’ll know more about the trajectory of the economy in the September-quarter. But it is clear that real GDP growth is declining, and the non-mining sector of the economy is not taking up the slack that has been created by the end of the commodity prices boom which drove the mining sector strongly for several years. What was objectionable about the Fairfax article was the assertion by the erstwhile finance minister that “the recession itself would not be the problem … because some recessions are necessary”. No recession is necessary and they are always extremely damaging especially to those who disproportionately bear the consequences – aka the most disadvantaged citizens in the society.

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The massive Eurozone real income losses continue to mount

Eurostat released the third quarter National Accounts data for Europe on Friday (November 13, 2015) – GDP up by 0.3% in the euro area and by 0.4% in the EU28 – which showed real GDP growth slowing in the Eurozone (down from the slug-like 0.4 per cent) and nations such as Finland and Estonia (one of the previous ‘poster children’ for austerity) heading into basket-case territory. Finland contracted by a sharp -0.6 per cent in the Third-quarter 2015 and has been in recession since the Estonia contracted by 0.5 per cent as did the beleaguered Greece. Portugal stagnated at zero growth. The so-called European recovery is looking distinctly wan! As at the third-quarter 2015, the Eurozone as a whole as still not reached real GDP levels equal to the peak in the March-quarter 2008. The overall 19 economy monetary union is still smaller than it was before the crisis began some 7.5 years ago. But to envisage how large the losses are of the failure of the policy makers to quickly restore growth, we have to also estimate where the Eurozone economy would have been had the GFC not occurred and pre-GFC growth rates were maintained. Then we have staggering losses of national income to consider across the failed monetary union. A very damaging folly has been inflicted on the people of Europe as a result of the neo-liberal Groupthink that dominates policy making.

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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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US labour market – the recovery is now stalling

The US Bureau of Labor Statistics published the latest – Employment Situation – September 2015 – on October 2, 2015, and the data shows a weakening labour market overall. At least it will silence the squad that are calling for higher interest rates for a time. The data shows that after 7 years of recovery mode employment growth is now starting to slow and it is likely that the change in employment in 2015 will be less than the annual change last year. All the main indicators were weak – employment, participation fell, hours of work fell, earning growth was zero – which is consistent with an overall slowdown. In seasonally adjusted terms, total payroll employment increased by 142,000 in September while the Household Labour Force Survey data showed that employment fell by 236 thousand. In the first 9 months of 2015, the average monthly change in non-farm payroll employment has been 198,000 whereas the corresponding figure for 2014 was 260,000. The unemployment rate was unchanged at 5.1 per cent but would have been higher had not the participation rate fallen by 0.2 percentage points to 62.4 per cent. The participation rate is now at its lowest level since September 1977 The other sign that the labour market is weaker is that the Employment-Population ratio fell slightly to 59.2 per cent (from 59.4 per cent). There is also evidence that a significant proportion of the jobs that are being created are in low pay, precarious areas of the labour market.

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The non-austerity British Labour party and reality – Part 2

In Part 1 of this two-part blog I laid out a general analytical framework for considering fiscal rules that might allow governments to borrow for infrastructure as long as all current expenditure is at least matched by taxation and other current receipts. This is more or less the rule that the British ‘Charter of Budget Responsibility’ imposes and the approach that the new (previously called radical left) British Labour Party leadership aspires to obey. I use previously called ‘radical left’ advisedly because as the days pass the utterances of the economic leadership make it difficult to differentiate between Labour and the Tories. The main difference appears to be the worn out “we will tax the rich and the crafty tax dodgers to balance the budget”. A nonsensical stance for a progressive political force and verges on Game Over syndrome. John McDonnell’s presentation to the National Labour Conference yesterday was a further walk into obscurity. By claiming they are not “deficit deniers” and will close the deficit as a priority they have walked right through the Tory framing door. Not lingered on the doorstep and then sought more salubrious premises. But they are right inside – trapped into the same mantra – yes, they will cut the deficit but it will be a fairer cutting. The rich will pay. And pigs might fly.

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Monetary liquidity operations and fiscal policy interventions

Today, is the official launch of my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in Maastricht, which is an appropriate geographic location given the book proposes to dismantle the Eurozone. It just happens to be the place (Maastricht University), where we established CofFEE-Europe (a sister centre to my research centre in Australia). There are two excellent guest speakers (see below) and I am very grateful that they agreed to accept the invitations. The upshot is that I haven’t all that much time today. Over the next few days I will address some points that were raised in question time or at the reception (aka cup of tea and cakes) after the event in London last Thursday evening. There is still work to be done if the progressive side of politics is to fully understand Modern Monetary Theory (MMT) and the implications of it for policy development and choice.

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PQE is sound economics but is not in the QE family

The conservative forces including those ‘Tories’ that are within the British Labour Party (aka New Labourites) continue to gather their forces to counter the growing threat posed by Jeremy Corbyn to their secure world as neo-liberal, Tory-lite hopefuls. They are part of a phalanx of critics, including mainstream economists who seek to diminish his credibility. At the extreme end of this bunch are the evil ones who have accused Corbyn of being antisemitic and a friend to Islamic terrorists. I am reliably informed that the same tactics have been deployed against Bernie Sanders in the US. It tells us that desperation has replaced any sense of decency or reason. It also tells us that the Tory-lites are finally seeing the evidence that their day in the sun has gone and they are being cast into irrelevance. Not before time, I should add. But all is not clear on the Corbyn front either. Today, I want to discuss what appears to be a major economic policy proposal – the so-called People’s Quantitative Easing (or PQE). There are elements of a good idea in this proposal but the QE reference and the resulting language is all wrong, in that it betrays as lack of understanding of the difference between a monetary

policy operation and a fiscal policy intervention. The concept should be re-framed so that a consistent narrative can be provided and that a good policy proposal gains the wings it needs. PQE is a wealth generating policy which is in contradistinction to QE which just shuffles wealth portfolios.

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Corbyn should stop saying he will eliminate the deficit

The New Labour group are clearly getting desperate in Britain and Blair himself has come out again to vilify Jeremy Corbyn and predict a Labour annihilation at the next general election. Clearly Blair and his cronies haven’t understood that their time in the sun is over. They recreated the Labour Party into a Tory mirror image on key issues and the grass roots of the Party is now reclaiming the lost ground. The UK Guardian article (August 12, 2015) – Syriza’s Greece: the canary in the cage for Corbyn’s Britain? – illustrates how stuck in the neo-liberal mud the British economic debate has become. It tries to claim that Corbyn is a throwback to the past and the policies that old Labour tried in the 1970s failed and would fail again. Clearly, the writer and most of the commentators which resonate the same message haven’t really understood the difference between a currency-issuing government and one bound by a mania for fixed exchange rates and fiscal surpluses. Increasingly, the attempts by Corbyn’s support base to appear to be ‘fiscally responsible’ tells me that he will not succeed in altering the debate if he continues to promote ideas that equate fiscal responsibility with deficit elimination. Fiscal responsibility is equated with achieving full employment with price stability – and in the current climate that would require a fiscal deficit some percent of GDP larger than what it is at present. Corbyn’s camp should be talking about that rather than deficit elimination, which is a ridiculous policy target to aspire to.

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Ireland – the quantity-adjusting recovery

There was an interesting – Letter to the New York Times – last week (August 3, 2015) from an Irish academic (Stephen Kinsella) in response to an Op Ed by the German economist Hans-Werner Sinn (July 24, 2015) – Why Greece Should Leave the Eurozone. I found it interesting because for the last few weeks, since the latest – Irish national accounts data (July 30 2015) showed Ireland to be the fastest growing Eurozone nation I have been investigating what has been going on. The Op Ed by Sinn did not appear to accord with the data that I was examining. The subsequent ‘Letter’ confirmed that. The bottom line is that Ireland is not an example of a “supply-side” internal devaluation inspired recovery. In fact, it is an example of a straightforward “Keynesian” quantity adjustment aided by Ireland’s very open economy and the fact that is has been favourably disposed to growth elsewhere supported by on-going fiscal deficits.

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