Why we have to learn about the NAIRU (and reject it)

I have very little time today to write, first a very long flight and then preparation for a major release tomorrow of our latest Employment Vulnerability Index (EVI), which measures the risk of localised communities in Australia of unemployment as the economy slows. We have a very neat mapping tool and I will write about that tomorrow once the press launch occurs (first thing). But I am also working on various other papers and, as usual, have become immersed in the Phillips curve. I remember when I first started by PhD at the University of Manchester in the early 1980s, my then supervisor said to me on the first day that once I started modelling inflation and unemployment (the Phillips curve) I would never stop. Among other truths he uttered during my time in that dank part of the world that statement was spot on. Every now and then I return to the topic and update, revise, re-create and (sometimes) even innovate. So today’s blog is just a collection of snippets of the more accessible things I have been working on over the last few days. It starts with a graph that appeared in the IMF’s World Economic Outlook in April 2013. Then follow the graphs. Conclusion: The NAIRU as estimated is a very dangerous concept for the well-being of ordinary people.

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Eurozone – what do they propose as an encore?

During the late 1980s and into the 90s when the Monetarists (mostly holed up in Britain) were boasting that the widespread privatisation and labour market deregulation strategies they had instigated were containing inflation and setting up their economies for sustained growth with reductions in unemployment my response was “what do they do they do for an encore”. It was obvious that if you scorched domestic demand and pushed up unemployment that the inflation rate would drop and the reduced imports would flatter the external balance. The question then was – what do you do next? Once growth returns in domestic demand rises on the back of increased income growth, imports start catching up and workers start demanding wage rises to make up for lost real income during the deflation and you end up with nothing much being achieved except for a extended period of lost real income, and rising inequality given the lower income groups carry the burden of the recession. The conservatives became slightly more astute in more recent years arguing that the recession provided the opportunity for nations to undergo radical restructuring so that growth could be driven by exports as a result of increased competitiveness. That’s the European model at the moment. Is it working? The IMF doesn’t think so.

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Currency sovereignty is what matters

There is a literature emerging that suggests that a Eurozone nation would be no better off with its own currency then and is within the monetary union. The claim is that these nations have not performed any worse than nations outside the Eurozone during the current crisis. A recent paper by an American economist (Andrew Rose) – Surprising Similarities: Recent Monetary Regimes of Small Economies – is being used as the authority to support this claim. The intent is clear – to deny that the Eurozone as a monetary system is inferior to systems where the nation issues its own currency and sets its own interest rates. However, these studies skate over the currency sovereignty issue and cast the differences between nations in terms of exchange rate arrangements or whether their central bank targets inflation or not. The real issue is whether the monetary system is characterised by the government facing a financial constraint or not in its spending – that is, whether it issues its own currency, sets its own interest rates and resists issuing debt in a foreign currency. Once you consider those basic aspects of the monetary system then it becomes obvious that the Eurozone nations as a whole have performed worse than other advanced Non-Eurozone nations which have enjoyed more fiscal flexibility.

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More public infrastructure means higher taxes – False, go to bottom of the class

Metaphors! They are more than a fancy way of emphasising some point – that is, their power goes beyond meagre linguistic construction. The research suggests they are part of our deep mental or neural capacity, which we draw on to sort out facts and ideas. They are conceptual devices intrinsically linked to the way we think abstractly. Metaphorical language reinforces our ideology (worldview) and so it is no surprise that political parties have become very interested in framing their messages using simple and common metaphors which resonate with the way we feel about things. George Lakoff, a cognitive linguist, considers we do not make our political choices on the basis of rational dissection of competing facts and arguments but rather respond to central (or grand) metaphors with reinforce our worldview. We thus consider facts or argument within that framework of thought. I am doing a bit of work in this area as a way of understanding why central Modern Monetary Theory (MMT) propositions (which are so patently obvious and have strong explanatory capacity) evade acceptance among people, even those who express liberal perspectives (in this context meaning – are open to new ideas).

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Disingenuous at best

In light of the – An Open Letter from Howard Schultz, ceo of Starbucks Coffee Company – which contains “a respectful request that customers no longer bring firearms into our stores or outdoor seating areas”, I felt it necessary to request that all readers of my blog leave all weapons (guns, rocket launchers and any other armaments that you carry on a regular basis) away from their side when they read my blog. Otherwise, violence might erupt as the arrogance of the neo-liberals scales new heights – five years into the crisis. To get your ire up several notches, you might read the latest article (September 16, 2013) by Greg Palast – Larry Summers: Goldman Sacked (thanks Gustavo). Remember keep your weapons out of reach! Then you might reflect (keeping as calm as you can) on the latest offering from the German Finance Minister, Wolfgang Schäuble in the Financial Times (September 16, 2013) – Ignore the doomsayers: Europe is being fixed. The triumphalism throughout the article demonstrates to me that Mr Schäuble has standards of excellence that lie well below what is conventionally considered to be (barely) reasonable. What he uses as the benchmark for defining mediocrity is beyond imagination. These are crazy times – when these economic criminals walk the streets at large, puffed up by their own arrogance and delusion, slapping themselves and their mates on the back, demanding credit for the human wreckage that their actions created, made worse and ensured will span generations. While we see youth unemployment rates of 62.5 per cent and rising suicide rates, these characters see glory and fulfillment. A most strange period of history and future generations will reflect on these apes poorly.

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Eurozone nowhere near creating a truly federal structure

I have been trawling through the AMECO database for part of today as a means to learn more about what is happening in Europe as austerity continues into its fourth year for most nations. One of the neo-liberal mantras has been that the enduring crisis has been the result of major imbalances in current accounts (trade in goods and services and associated income flows) between the European nations. This reasoning implicates excessive wages growth in highly regulated labour markets, which also undermines the incentives for productivity growth (hence competitiveness declines and export markets shrink and imports become attractive). Alleged fiscal laxity is also implicated – excessive public employment growth, which apparently is less productive and encourages excess wages growth (stronger trade unions, better job protection). Taken together these claims are made about the peripheral Euro nations, which are in such trouble at present. This discussion has underpinned the policy push for austerity and largely denies the alternative view (which I largely adhere to) that the monetary union was ill conceived from day one and its design was incapable of resisting the major negative aggregate demand shock that arose in 2008. There was no federal fiscal capacity and no uniform banking rules. Any way, I am looking into some of the components of the first story – and examining what has been happening to unit labour costs. This blog reports the early stages of that work.

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The spurious distinction between the short- and long-run

There was an interesting article in the Wall Street Journal (July 7, 2013) by US economist Alan S. Blinder – The Economy Needs More Spending Now . I am building a little database of what well-known economists said in 2008, 2009 and 2010 at the height of the crisis and in the early days of the fiscal and monetary interventions and what they are saying now. There is a lot of dodging and weaving I can tell you. Stories change, previous prognostications of certainty now appear highly qualified and nuanced and facts are denied. Alan Blinder was worried that the US Federal Reserve rapid building of reserves would have to be withdrawn quickly because otherwise banks would eventually lend them all out and inflation would accelerate. Of-course, banks don’t lend their reserves to customers and the predictions were not remotely accurate. In the article noted, Blinder continues to operate at what I am sure he thinks is the more reasonable end of mainstream macroeconomics. He is advocating more spending as a means of boosting higher economic growth. But when you appreciate the framework he is operating in, you realise that he is just part of the problem and part of the narrative that allows the IMF to talk about “growth friendly austerity” – the misnomer (or outright lie) of 2012-13.

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Australia – the good and bad of the Economic Policy Statement

Last week, the Australian government issued an – Economic Statement – which provided updated estimates from Treasury (since the May 2013 Budget) of the state of the economy and the budget position. The good news is that the Government is allowing the deficit to rise after a year of contraction as part of its obsessive and impossible pursuit of a budget surplus this year. The bad news is that the Government is not allowing the deficit to rise enough and as a result unemployment is forecast to rise significantly above its already high levels. The reason? It is still trapped in its obsessive budget surplus mania even though the reality is forcing them to postpone when they claim they will deliver that outcome. The conclusion? The Treasury clearly is reeling from its massive forecasting errors (revenue is $Axx billion down of what they forecast in the May 2012 Budget and $AxX billion down on what they forecast in the May 2013 Budget). It is also realising that they cannot fight against a significant private sector spending slowdown.

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Austerity fails – its in the numbers

The latest Eurostat public finance data for Europe on July 22, 2013 – Euro area government debt up to 92.2% of GDP demonstrates the failure of the Euro policy agenda on its own terms. It is clear the indecency of the policy elites is reflected in the way they use nomenclature. Massive rises in unemployment and poverty is called modernisation or labour market reform. The argument bifurcates at that point. How can you argue with someone who thinks like that? But we all know what a financial ratio is. They are without nuance. A public debt ratio is what it is. And when the leaders say they are doing everything they can to reduce them and the cost all this “modernisation” is a price worth paying to reduce the public debt ratios we can conclude that they are failing if the debt ratios continually rise as they impose harsher austerity (sorry, increase the degree of modernisation). That is what the hard numbers are shouting. And that means that someone in Europe should just blow the whistle and call time is up and get rid of the whole swathe of policy leaders.

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Balanced budgets are rarely appropriate

The Fairfax press published the latest opinion piece from one of its economics editors (Ross Gittins) over the weekend (July 20, 2013) – The budget facts that Canberra isn’t telling you. If the stated facts are what Mr Gittins thinks apply to a sovereign economy such as Australia, then it is fortunate that Canberra is staying quiet. He claims that the fiscally prudent position is for governments to run a balanced budget on average every decade. He also says that the government doesn’t really have to do anything other than let the automatic stabilisers achieve that outcome once the structural settings are in place. The problem is that these sort of mindless fiscal rules are rarely going to achieve appropriate outcomes, when the latter is expressed in terms of full employment objectives and other real outcomes. In the current context, where there are major private sector balance sheet risks and an ongoing external deficit of around 3.5 per cent, the pursuit of a balanced budget would be an act of vandalism. Further, given the non-government spending dynamics, it is likely that continuous budget deficits will be required into the indefinite future.

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Madness continues – macro conditionalities on regional transfers in Europe

When 17 countries together have failed to grow for the last 12 months and each successive quarter has seen the growth rate fall increasingly (-0.1 per cent June 2012, -0.7 per cent September 2012, -1.0 per cent December 2012 and -1.1 per cent March-quarter 2013) and the same 17 countries have seen the collective unemployment rate rise (or remain static) for the last 24 months from 9.9 per cent (May 2011) to 12.2 per cent (May 2013) when is it appropriate to conclude that the macroeconomic policy mix is wrong and substantial changes need to be implemented. Answer: Yesterday! Further, why would those same countries decide to implement further policy changes, which will not only make it harder to grow but go against the whole idea of the collective in the first place? Answer: Besotted by destructive neo-liberalism. Welcome to Europe and macroeconomic conditionality on regional funding.

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The blood on the criminals’ hands is thick and won’t wash away

On Monday (July 8, 2013), the IMF released its “preliminary findings” of the – Article IV Consultation with the Euro Area. The nomenclature and turn of phrase alone are symptomatic of the organisation’s incapacity to come to terms of the problem it is addressing and its own role in creating and perpetuating the problem. On the one hand, they clearly acknowledge that “the economic recovery remains elusive, unemployment is rising, and uncertainty is high”. But on the other hand, they urge more of the same and claim the policies that have created this mess represent “progress”. The Euro area can do two things to improve the situation of citizens who live within it. First, abandon the voluntary fiscal rules which have not theoretical justification and allow nations to expand deficits to address the massive output gaps. If need be, fund the deficits via the ECB. Second, once the crisis is over, create a process whereby the monetary union voluntarily dissolves itself in an orderly manner. That is the only sure way of minimising the on-going damage. Oh, and third, withdraw all funding from the IMF and enter multilateral negotiations to create a new agency that helps poor nations defend themselves against speculative attacks on their currencies. And, while I am at it, fourth, reach an international accord to outlaw any speculative transaction that does not advance the real economy. That will keep them all busy and get the millions of people that the IMF and the Euro elites have deliberately made jobless busy again too.

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Since when did the BIS become the Neo-liberal Ministry of Misinformation?

One despairs when a sober institution gets ahead of itself, usually because they make hiring mistakes, and start to think they know stuff. This is an organisation that is steeped in statistical analysis and should have a very good idea of empirical regularities. They know that interest rates have been “essentially zero” in Japan since the 1990s and they know that what hasn’t happened as a consequence. They know that central banks have been “expanding their balance sheets” (now “collectively at … three times their pre-crisis level”) and what hasn’t happened as a consequence (inflation). But as the neo-liberal paradigm has concentrated its control of the policy debate, this organisation has morphed from playing a useful role as a coordinator of central banking into a propaganda unit pumping out misinformation and outright lies and distorting the public debate. Welcome to the Bank of International Settlements, which is now firmly ensconced with the likes of the IMF, the OECD, the ECB, the EU, the World Bank, and others as being part of the problem the World economy faces.

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Incroyable! – France – cap-in-hand and grateful – and sinking fast

Mr Barroso, European Commission President has a way with words. In January 2013, he declared “that the existential threat against the euro has essentially been overcome”. More recently (April 3, 2013) he pronounced “that the EU has come through the worst of the crisis”. Really? And, just yesterday he was at it again, lecturing France on the need to hack into welfare payments and worker protections. Meanwhile, Eurostat released the first-quarter 2013 National Accounts publication – Euro area GDP down by 0.2% and EU27 down by 0.1% – a few hours after Barroso was on French radio delivering his threats. The data is shocking which is a euphemistic way of saying _ _ _ _ _ _ _ (fill in your own expletive). There are now 10 Eurozone nations in recession. The overall monetary union has been contracting for six consecutive quarters (that is, 1.5 years). And the situation will deteriorate even further. When does someone conclude that the current policy framework is a total failure and causing massive permanent damage? When will these lug heads in Brussels realise they are not only destroying the fabric of prosperity but also jettisoning their political aspirations – for one Europe? Amazing.

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Neo-liberalism – the antithesis to democracy

I recall a professor in my student days (formal that is, given we are always students if we remain open) telling a postgraduate class that economic development could only occur if the social democratic pretensions of the left, including tolerance of trade unions, were suppressed – “in the interests of progress”. He laughed and said that it was no surprise that the most right-wing nations grew the fastest. His poster child was South Korea. I recalled that experience when I read two articles recently in the UK Guardian. They are reflections on how neo-liberalism is really the antithesis to democratic ideals. The so-called free markets have nothing to do with freedom or political inclusion.

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What part of the word failure don’t the Euro elite understand?

The – Eurostat homePage – today (May 1, 2012) told the story of policy failure. On April 30, 2013 there were two major data releases – Euro area unemployment rate at 12.1% and Euro area annual inflation down to 1.2%. Record unemployment and a contracting and very low inflation rate. That is recession. That is the average. Some nations are now experiencing the Great Depression Mark II. And still the policy leaders make public statements that things are easing because borrowing rates are down and fiscal consolidation is bringing deficits down. On May Day 2013 it would be appropriate for a major workers’ revolt throughout Europe to protest over the continued rise in unemployment and the failure of the elites to deal with it. The question that the riot could pose is: What part of the word failure do these leaders not understand?

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Austerity as law not political discretion

I agree that we should have speed limits and other traffic regulations to prevent mayhem and carnage on our roads. There are other laws I agree with such as protecting children from sexual predators and laws protecting citizens from police brutality and processes to allow us to monitor and prosecute corruption in public office etc. They all make sense to me. Many other laws I would scrap because they are petty infringements on our liberty. But I would never enshrine a particular fiscal policy stance in law or even in codes such as fiscal rules. Such practice defeats the purpose of having the fiscal policy capacities, which is to respond to economic circumstance such that public purpose including full employment can be maintained at all times. Creating legal frameworks that stop governments from exercising their discretion are not only counter-productive but also highly destructive as we are seeing now in the Eurozone. I prefer the people to be able to tell politicians what they should be doing in this respect not judges. However, the Euro elites have been moving towards making austerity law and eliminating political discretion that disagrees with them. And, come to think of it, when some judges disagree with them on a matter of law, the EU elites just instruct their puppets to ignore the courts and proceed as before.

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Unemployment is skyrocketing – but we have treaty obligations!

And that is the problem. The Treaty (of Lisbon) and all the related Eurozone legalities that define the way the Brussels bureaucracy interacts with the member states is incapable of delivering prosperity to its citizens. In the last week, a senior Dutch economics official (boss of very conservative Centraal Planbureau) has delivered a wake-up call to European policy makers. In his departing press briefings the CPB chief, who is no Keynesian (rather he is a rigid supply-sider) has called for flexibility with respect to the application of the fiscal rules and an easing of the planned austerity because his nation’s economic performance is deteriorating fast. The Southern malaise is now impacting on the richer, more smug northern nations, as it always was going too. Many economists remain in denial of what is happening. It is 2013 not 2009. The world has been caught up in this crisis for 5 years. It is an entrenched crisis and the data is now showing us that the recent manifestation of the crisis is being driven by fiscal austerity. The initial impacts of the GFC were large but recovery had commenced and have now been killed off by the fiscal zealots. While the departing CPB boss called on the Dutch government to ignore the Stability and Growth Pact rules for the next few years, he also observed, that the nation had “treaty obligations”. That is the problem. These obligations prevent responsible fiscal positions, which in the current circumstances, would suggest budget deficits of several more percent of GDP than the 3 per cent rule being fully supported by the ECB.

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US President engaging in economic vandalism

Last week (April 5, 2013), the – US Bureau of Labor Statistics – released their latest – Employment Situation – March 2013 – which showed that in seasonally adjusted terms, total employment decreased by 206,000 in March and the labour force shrunk by a further 496,00 persons. The twin evils – falling jobs growth and declining activity. While the unemployment rate fell to 7.6 per cent (from 7.7 per cent) that is an illusory improvement. The fact is that the participation rate fell by 2 percentage points and thus hidden unemployment rose. The 290 thousand fall in official unemployment arose because the drop in employment was more than offset by the fall in the labour force. There is nothing virtuous about any of that. The facts are that it is getting harder again for Americans to get work and easier for them to lose it. The data is signalling a fairly poor outlook and hardly the time for the President to be submitting austerity budgets. But in the same week that the data came out, the President did just that. The latest budget submissions from the Administration, designed to placate the mad Republicans, is an act of economic vandalism.

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Very unintelligent indeed

I had a long flight today and other things to catch up on after the Easter period. But the stunning news yesterday from Eurostat that the EU17 unemployment rate has now risen (in February 2013) to 12 per cent. Each month’s Labour Force data sets a new record peak for the Eurozone. Each month that unemployment rises, the real GDP losses that are being deliberately created by the existing policy regime mount. As I show in this blog, those losses are enormous and will never be regained – that income has been lost forever. The human dimensions of the crisis are also huge. And the evidence mounts that the conceptual underpinning of the policy framework doesn’t hold water. This is an extraordinary period of history where a flawed theoretical approach which doesn’t stack up when confronted with the data, is being used to create a flawed monetary system design, which has failed categorically when judged against any reasonable criteria of social purpose, and then the leaders impose even worse policy designs over that failure. Sometime in the future, humans will judge the current generation to be very unintelligent indeed.

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