The climate emergency requires us to reset our understanding of fiscal capacity. It is already, probably, too late.

In Tuesday’s fiscal statement, the Australian government made a lot of noise about dealing with the climate emergency that the nation faces but in terms of hard fiscal outlays or initiatives it did very little, deferring action again, while ‘the place burns’. The Climate Council assessment was that the government “still seems to be on a warm-up lap when it comes to investing in climate action” (Source) and recommended the nation moves from a “slow job” to a “sprint”. I have previously written about the myopic nature of neoliberalism. There are countless examples of governments penny pinching and then having to outlay dollars to fix the problem they create by the austerity. The climate emergency is of another scale again though. And penny pinching now will cause immeasurable damage to humanity. Food security will be threatened. Urban environments will become unliveable. Pandemics will increase if we don’t stop clearing and if we release viruses stored in permafrost. And all the rest that awaits us. Now is the time to reset our understanding of fiscal capacity. It is already, probably, too late.

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British currency gyrations are about weak government not fiscal deficits

The British government has descended into high farce. It is rather embarassing to watch adults behave in the way they have conducted themselves in the last longtime. I also note that the usual suspects are out in force claiming (spuriously) that the economic turmoil that has beset Britain demonstrates categorically that Modern Monetary Theory (MMT) is deeply flawed and the real world is now teaching us that we should be discarded into the dustbin of history – or rather disgrace. These characters, which include so-called progressives think that hard core fiscal rules, like the British Labour Party took into the last election would have saved the day for Britain. I guess they are now mates with the IMF, who in their latest fiscal monitor – Fiscal Monitor – overnight (published October 12, 2022) – called for fiscal restraint. Also, central bankers who met in Washington over the last few days decided they had become the elected and accountable government making gratuitous threats that if fiscal policy wasn’t turned to austerity, they would punish citizens with further interest rate hikes. It is actually hard to find anything of sense in the current economic debate. It is despairing really.

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The Ministry for the Future has some MMT lessons on fiscal policy

A close friend send me some pages from a book she is reading – Ministry for the Future – by author Kim Stanley Robinson, which was published in 2020. It is about an organisation that is chartered with defending the rights of future generations and they pursue various projects accordingly. Its major challenge is climate change, after a “deadly heat wave in India” and the narrative allows the author to entertain very interesting discussions about economics, ecology and society. It is classified as “hard science fiction” because while the work reflects the imagination of the author, he bases the narrative on “scientific accuracy and non-fiction descriptions of history and social science” to bring home the challenges we face with climate etc. The pages I received came from Chapter 73 (pages 365-366), which has a two-page discussion about Modern Monetary Theory (MMT). The author writes in his future scenario that “Enough governments were convinced by MMT to try it. That it influenced so much policy through the late thirties was regarded as a sign either of progress or of desperate fantasy solutions.” While the discussion is interesting, I want to focus on one of the ideas the author presents because they illustrate an important distinction between ‘Keynesian’ and ‘Post Keynesian’ thought on fiscal policy and MMT analysis.

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European Commission processes still biased towards fiscal austerity

I keep reading that the European Commission has abandoned the Stability and Growth Pact (SGP) and that the euro is no longer a problem. I beg to differ. On June 6, 2021, the European Commission released a – Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union – which updated their latest views on the state of fiscal balances in the EU. The Report confirms the Commission’s intention to return to the Excessive Deficit Mechanism process in 2023. The problem is that the whole assessment process is biased towards fiscal austerity. I show why in this blog post.

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Fiscal stimulus disappears into saving – solution – bigger stimulus was needed in the first place

On February 7, 2020, the Reserve Bank of Australia’s Governor, Philip Lowe appeared before the Federal House of Representatives Standing Committee on Economics to discuss the – Reserve Bank of Australia Annual Report 2019 – which is a bi-annual event where the Parliament scrutinises the activities of the unelected and largely unaccountable central bank. The – Transcript – of the session makes interesting reading. The discussion highlighted how mainstream economists fail to understand the nature of the monetary system. Last year, the Federal government introduced a fiscal stimulus (tax cut) as a bribe in the May election campaign. But economic growth continued to slow, in the face of flat real wages growth and an overall fiscal contraction (despite the tax cuts). The tax cuts didn’t stimulate private spending growth and mainstream economists then claim this proves that fiscal policy is ineffective, and by implication, that Modern Monetary Theory (MMT) is a load of nonsense. The problem is that the tax cuts were used by households to reduce the precarious debt levels that have been building up as they try to maintain spending growth in the face of fiscal drag and flat real wages growth. All that this episode tells us is that the government really should have introduced a much larger fiscal stimulus in the first place to help the balance sheet restructuring effort and provide net growth stimulus.

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Euro policy elites deliberately destroyed jobs and income to achieve erroneous fiscal goals

As Mario Draghi’s tenure at the helm of the ECB draws to a close, he becomes (slightly) more pointed and looser with his public statements. On Friday (October 11, 2019), he gave a speech – Policymaking, responsibility and uncertainty – at the Università Cattolica in Milan on the occasion of receiving the Laurea Honoris Causa (honorary degree). He broadened the scope of his policy ambit by saying that “I will not focus strictly on monetary policy or the business of central banking, but I would like instead to share my thoughts on the nature of policy responsibility.” In the same week, the Eurogroup (the European Finance Ministers) of the European Commission released a press release – Remarks by Mário Centeno following the Eurogroup meeting of 9 October 2019 (October 10, 2019) – which announced that they had agreed to a “a budgetary instrument for the euro area – the so-called BICC”. Don’t get too excited. The BICC will only achieve the status of an “Inter-Governmental Agreement”, meaning it will not be embodied in the Treaties. Also, the Member States will have to contribute funds in advance and must “co-finance” withdrawals. And, as usual, there was no mention of the fund size, which will be miniscule if history tells us anything. But this is all context for Mario Draghi’s Speech.

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Is the British Labour Party aboard the fiscal dominance train – Part 2?

I am typing some of this on the train from Brighton back to London, after a day of speaking events in Brighton, where the British Labour Party conference is currently being held. I spoke at two events: (a) the GIMMS event on MMT and the Green New Deal and a video will be available soon; and (b) at an event alongside British Labour MP Chris Williamson, where were talked about how an Modern Monetary Theory (MMT) understanding can enhance the progressive policy cause and advance a transformation towards a ‘socialist’ (whatever that might be) state. It was great to see everyone at the events. The second event was attended by many people involved in the Labour Party itself and I hope that being exposed to new ideas will activate further grassroots resistance to the neoliberal system that undermines our material prosperity. So this two-part series is a reflection on the state of economic policy thinking within British Labour in the context of the paradigm shift that is going on now, around the world, in macroeconomic policy thinking. As I noted in – Part 1 – we are now seeing economists and policy makers, lining up, to tell us that a reliance on monetary policy has run its course and a new era of fiscal policy dominance is the only viable way ahead. That means that New Keynesian economics is over. That means that fiscal credibility rules that reflect an adherence to neoliberal constructs will need to be abandoned. And it seems that British Labour are lagging behind these major shifts that have been going on in economic policy thinking. Only Modern Monetary Theory (MMT) offers a consistent and credible path for Labour to make the shift into this era.

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Is the British Labour Party aboard the fiscal dominance train – Part 1?

As I type this (Sunday), I am heading to Brighton, England from Edinburgh. We had two sessions in Edinburgh yesterday (Saturday) and it was great to share ideas with some really committed people. We had to dodge a Hollywood closure of the streets (‘Fast and Furious 9 had commandeered the inner city to film a car or two swerving out of control or whatever, and I hope the city received heaps for the inconvenience to its citizens. But, with the direction now south, and tomorrow’s two events (more later), I am thinking the place of the British Labour Party in the progressive struggle. It doesn’t look good to me. The news overnight has been that the Party’s “head of policy and the author of the party’s last election manifesto” (quoting the Times today) has quit the Party claiming “I no longer have faith we will succeed”. The blame game starts and, as usual, Jeremy Corbyn’s leadership is in focus. The Times cartoon had the caption “They’ve got what it takes to form a government” with two ducks (in Brighton) looking at a sign against a wall saying “Labour Civil War Chaos”. What should we make of all this? My take is this: there is a clear paradigm shift going on in macroeconomic policy thinking. Every day (it seems) a new article pops up with someone claiming monetary policy has run its course and a new era of fiscal policy dominance is the only viable way ahead. That means that the central bank imprimatur on policy – determining whether such policy can continue to be effective and relying on interest rate adjustments etc as the primary counter-stabilisation policy – is over. That means that New Keynesian economics is over. That means that fiscal credibility rules that are neoliberal central are over. And that is why I think British Labour are looking poorly in the polls. They have taken advice from a number of characters who have pushed them into a ‘New Keynesian’ mindset and they are now ‘yesterday’s news’. They have missed the boat on these major shifts that have been going on. That is why they need a major shift in macroeconomic thinking. Only Modern Monetary Theory (MMT) offers a consistent and credible path for them to make that shift.

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Progressive media criticising fiscal stimulus as a recession threatens – such is the modern Left

I have regularly noted how the UK Guardian, the so-called newspaper for progressives as opposed to The Times, which serves the Tories, has been a primary media instrument for propagating neo-liberal economic myths. It has also been part of Project Fear, which the Remainers thought would see the June 2016 Referendum resolved in their favour, and have ever since been moaning about the need for another vote – you know, democracy as long as it delivers what you want. But when the Tories outflank them by electing Boris Johnson who then determines he will take the intransigent European Union on by calling their bluff and pushing ahead with Brexit by hook or by crook, the Remainers scream about democracy being trampled and all the rest of it. And when the Johnson Tories announce that they will introduce a significant fiscal stimulus to head-off any possible non-government recessionary forces (which is sensible and responsible fiscal conduct), the Remainers open their beloved Guardian to find their favourite journalists raving on about how such a move is risky because it will ‘damage public finances’ and predicting, derisively, that the Government will have to break their ridiculous fiscal rules because of the scale of the stimulus required. This is par for the course for the Europhile Left these days – champions of neoliberalism.

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British Chancellor and his Shadow – arm in arm promoting fiscal myths

Last week (June 20, 2019), the British Chancellor (for now) gave his – Mansion House dinner speech 2019 – Philip Hammond – at the Lord Mayor’s residence just across the road from the Bank of England in London, which should have conditioned the content of his speech. The guests at Hammond’s evening were mostly male bankers with the usual cohort of politicians. This event is the UK equivalent of the US President’s State of the Union speech except at the British event, both senior economic officials, the Chancellor and the governor of the Bank of England address the audience. The Chancellor’s speech, aimed mostly at the potential PM candidates tried to claim that the if Britain was to exit the EU without a ‘deal’ then the Government would run out of money. He didn’t use those words but shrouded the message in buzz-terms such as “fiscal space” and “fiscal headroom”, which are among those mainstream macroeconomic terms that mean nothing when coming from a guy like Hammond. Worse, was the response over the weekend by the Shadow Chancellor.

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The effectiveness and primacy of fiscal policy – Part 3

This is the final part of my three-part series on the why I have confidence in the primacy of fiscal policy over monetary policy and eschew any proposals, by other Modern Monetary Theory (MMT) advocates or others, to replace the so-called ‘independent’ central bank, with an ‘independent’ fiscal authority, which they seem to think would take the ‘politics’ out of fiscal policy decision-making and focus it on advancing the well-being of the people. Such a proposal is not core MMT. It is an opinion that, in my view, is based on deeply flawed logic and would would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. In this final part, I extend the reasons that progressives should oppose such outsourced decision-making and, instead, advocate the introduction of processes that always make our elected politicians fully responsible for the decisions they take on our behalf. Our polity should be always be held accountable for those decisions and not be allowed to defer responsibility to an external source (like an ‘independent’ central bank or fiscal authority).

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The effectiveness and primacy of fiscal policy – Part 2

This is the second part of a three-part series discussing the political issues that give me confidence in the primacy of fiscal policy over monetary policy. The series is designed to help readers see that the recent criticisms of Modern Monetary Theory (MMT) as being politically naive and unworkable in a real politic sense have all been addressed in the past. In Part 1, I gave examples of how ‘agile’ or ‘nimble’ fiscal policy can be when an elected government has it in their mind to use their spending and taxation capacities to change the direction of the non-government economic cycle. It is simply untrue that fiscal policy is inflexible and cannot make effective, well-designed policy interventions. In this second part, I will address aspects of how such interventions might be organised. Specifically, some people have advocated that MMT might replace the so-called ‘independent’ central bank, with an ‘independent’ fiscal authority, which they seem to think would take the ‘politics’ out of fiscal policy decision-making and focus it on advancing the well-being of the people. The intentions might be sound but the idea is the anathema of what progressives, interested in maintaining democratic accountability would propose. I consider such an independent fiscal authority would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. Politicians are elected to take responsibility and make decisions on our behalf. They should be always be held accountable for those decisions and not be allowed to defer responsibility to an external source (like an ‘independent’ central bank or an external fiscal authority).

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The effectiveness and primacy of fiscal policy – Part 1

I did an interview overnight with a WSJ journalist from London on the ‘political’ aspects of Modern Monetary Theory (MMT). This blog post covers some of that conversation, although I started writing this a few weeks ago. Regular readers will recall I was promising a post about the ‘nimbleness’ of fiscal policy. That promise instigated the request from the WSJ. When I write about Modern Monetary Theory (MMT), I try to be careful to distinguish between what we might consider the core MMT principles (theory, description, accounting) and the imposition of my own values (political and otherwise) that is informed by those core principles. That separation is important and should (but doesn’t) stop others misrepresenting the core principles by appealing to proposals that might flow from the value imposition. An example of this separation (and confusion), a topic which I receive many E-mails from people which seek clarification, is the concept of setting up an independent fiscal authority. The proposal to establish such an authority is not a core MMT principle. It might reflect an opinion that has been expressed by someone writing about MMT but that is as far as it goes. For the record, I am deeply opposed to establishing such an authority. It would constitute the continuation of the neoliberal practice of depoliticisation and further increase the democratic deficit that is common in our nations these days. Politicians are elected to take responsibility and make decisions on our behalf. Can we trust them? We have elections to deal with those issues. Should technocrats rule? Technocrats do not stand for election. They give advice but have no democratic responsibility. Is fiscal policy agile enough to be an effective source of counter-stabilisation against the non-government spending cycle? That is what this blog post is about. This is Part 1 of a three-part series. Part 2 will be published on Monday.

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The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1

Pathetic was the first word that came to mind when I read this article – The Italian Budget: A Case of Contractionary Fiscal Expansion? – written by Olivier Blanchard and Jeromin Zettlemeyer, from the Peter Peterson Institute for International Economics. Here is a former IMF chief economist and a former German economic bureaucrat continuing to rehearse the failed ‘fiscal contraction expansion’ lie that rose to prominence during the worst days of the GFC, when the European Commission and the IMF (along with the OECD and other groups) touted the idea of ‘growth friendly’ austerity. Nations were told that if they savagely cut public spending their economies would grow because interest rates would be lower and private investment would more than fill the gap left by the spending cuts. History tells us that the application of this nonsense caused devastation throughout, with Greece being the showcase nation. The damage and carnage left by the application of these mainstream New Keynesian ideas are still reverberating in elevated unemployment rates, high poverty rates, broken communities and increased suicide rates, to name a few of the pathologies it engendered. But the ‘boys are back in town’ (sorry Thin Lizzy) and Blanchard and Zettlemeyer are falling in behind the IMF and the European Commission against the current Italian government by demanding fiscal cutbacks. It will turn out badly for Italy if the government buckles under this sort of pressure. It once again shows that the mainstream economics profession has learned very little from the GFC. For them the story stays the same. It is one that we should reject in every circle it arises. This is Part 1 of a two-part analysis of the latest incarnation of this ruse my profession inflicts on societies.

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British fiscal statement – no end to austerity as the Left face plants

Last night in Britain (October 29, 2018), the British Chancellor released the – Budget 2018 – aka the 2018 fiscal statement (my terminology, to avoid triggering the flawed household budget analogy). The detailed analysis is being done by others and I haven’t had enough time to read all the documents produced by the Government and others yet anyway. But of the hundreds of pages of data and documentation I have been able to consult, the Government is trying to win back votes while not particularly changing its austerity bias. That is fairly clear once you dig a little into the outlook statement produced by the Office of Budget Responsibility (OBR). The Government’s strategy is also unsustainable because it continues the reliance on debt accumulation in the non-government sector, which will eventually hit a brick wall as the balance sheet of that sector becomes overly precarious. Nothing much has been learned from the GFC in that respect. The Government can only cut its debt by piling more onto the non-government sector. Second, the response of the Left has been pathetic. The Fabians, for example, has put out a document that uses all sorts of neoliberal frames and language, making it indistinguishable from something the mainstream macroeconomists would pump out – the anathema of the constructs and language that the Left should be using. There is a reason the political Left has fallen by the wayside over the last 3 or so decades. And their penchant to write and speak like neoliberals is part of the story.

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The British Labour Fiscal Credibility rule – some further final comments

Over the last weekend, it seemed that we had a return of the Spanish Inquisition with a prominent British academic, who by his own words designed the fiscal rule that British Labour has unwisely adopted, repeatedly demanding that MMT Tweeters confess to knowing that I was completely wrong on my interpretation of the fiscal rule. It is apparent that my meeting with the British Shadow Chancellor in London recently and my subsequent discussion of that meeting has brought the issues relating to the fiscal rule out into the open, which is a good thing. It is now apparent that British Labour is still, to some extent, back in the 1970s, carrying an irrational fear of what financial markets can do when confronted with the legislative authority of a sovereign government. I am not a psychologist so I cannot help them heal that irrational angst. But the claims that I misunderstood the fiscal rule – which are being repeated daily now by the fanboys of the rule are just ludicrous. The rule is simple. And it will bring Labour grief politically. Rolling windows or not!

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Australian fiscal statement 2018-19 – an election stunt, limited economic coherence

The Australian Treasurer brought down the 2018-19 Fiscal Statement (aka Budget) on Tuesday evening with much fanfare. The one message that dominated the cant and hypocrisy was that there will probably be an early election, maybe later this year. The Government is scandal-ridden, is enduring destructive infighting over leadership and policy direction, and has made some monumentally disastrous decisions in the current term of office (for example, denying the need for a Royal Commission into the financial sector, which they were bulldozed into finally accepting, and, which is now revealing massive corruption in our banks and insurance companies). Being so far down in the opinion polls means one thing. They use the annual ‘fiscal’ show to make themselves look good and dollop out (albeit with a lag) some scraps (tax cuts) to the masses, while reserving the huge tax cuts for the top-end-of-town. And, for the first time in as long as I can remember, I didn’t even bother to listen to the Treasurer’s speech. In fact, I could write some text generating code which would generate a ‘Budget Speech’ that was remarkably similar to the Treasurer’s speech. So why waste 30 minutes in the evening listening to it. I would prefer to be sorting socks in my sock draw!

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The path out of the low wage trap is limited by fiscal austerity

During my postgraduate study years I read a 1954 article by American economist Clark Kerr entitled – The Balkanization of Labor Markets – which attacked the mainstream labour market views that there was mobility within labour markets such that poverty arising from low-pay was a function of workers’ preferences for low education and more leisure (that is, unemployment). As such, there was no reason for the government to intervene to improve wages or job security. Kerr’s thesis was that there was not a ‘single’ labour market accessible to all, where individual mobility would result from personal investment in education and skill development. Instead, he argued that the US labour market was “segmented” by institutional arrangements, which trapped some demographic cohorts into low-pay and insecure jobs. Poverty could arise from these traps. The idea morphed into the segmented labour market literature of the late 1960s and early 1970s. The applications were mostly Anglo because in non-Anglo countries there appeared to be more resistance to institutional arrangements that undermined the chance for workers to enjoy job security with decent pay. However, in recent years (decade) the trend towards precarious work where certain groups (women, youth, migrants) are trapped in low pay and frequent spells of unemployment has spread, with devastating consequences. The largest European economies – Germany and France – are now bedevilled with this issue and with a bias towards fiscal austerity, the path for workers out of the trap is limited.

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Fiscal policy is effective, safe to use, and markets know it

The Federal Reserve Bank of Kansas City has just hosted its annual Economic Policy Symposium at Jackson Hole in Wyoming where central banks, treasury officials, financial market types and (mainstream) economists from the academy and business gather to discuss economic policy. As you might expect, the agenda is set by the mainstream view of the world and there is little diversity in the discussion. A Groupthink reinforcing session. One paper that was interesting was from two US Berkeley academics – Fiscal Stimulus and Fiscal Sustainability – which the news reports claimed suggested that governments should be increasing fiscal expansion even though they may be carrying high levels of public debt. The conclusion reached by the paper is correct but the methodology is mainstream and so progressives should not get carried away with the idea that there is signs that some give is emerging, which will lead to more progressive outcomes. A progressive solution will only come when the neo-liberal dominance of my profession is terminated and an entirely new macroeconomics paradigm based on Modern Monetary Theory (MMT) is established. There is still a long way to go though.

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Japan is different, right? Wrong! Fiscal policy works

Japan is different, right? Japan has a different culture, right? Japan has sustained low unemployment, low inflation, low interest rates, high public deficits and high gross public debt for 25 years, but that is cultural, right? Even the mainstream media is starting to see through the Japan is different narrative as we will see. Yesterday (August 14, 2017), the Cabinet Office in Japan published the preliminary – Quarterly Estimates of GDP – which showed that the Japanese economy is growing strongly and has just posted the 9th quarter of positive annual real GDP growth. Private consumption and investment is strong, the public sector continues to underpin growth with fiscal deficits and real wages are growing. The Eurozone should send a delegation to Tokyo but then all they would learn is that a currency-issuing government that doesn’t fall into the austerity obsession promoted by many economists (including those in the European Commission) can oversee strong growth and low unemployment. Simple really. The Japan experience is interesting because it demonstrates how the reversal in fiscal policy can have significant negative and positive effects in a fairly short time span, whereas monetary policy is much less effective in influencing expenditure.

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