It was the last day of the 12th Path to Full Employment Conference/17th National Unemployment Conference in Newcastle, which I host. The papers were interesting all day and I will report on some of them another day. But overnight, the big news was that the US Senate has finally succeeded in forcing the US Federal Reserve Bank to release details of more than 21,000 transactions it made as a reaction to the rapidly escalating global financial crisis. The lending rose to $US3.3 trillion at its peak and dwarfs the volumes involved in QE1 and QE2 amounts. This is relevant to a debate in the banking literature about the separation of monetary policy functions (setting interest rates) and the broader monetary interventions we have been witnessing in this crisis, which bear close similarity to fiscal policy functions. The question is which macroeconomic policy functions should be accountable to the ballot box. My view is all of them!

Yesterday, parachute gangs from the ECB and the IMF were being dropped into various EMU nations whose only problem is that they are members of an unworkable monetary system and happened to get hit by a major demand shock. Today the IMF cavalry are apparently heading to Dublin for a “short, focused consultation”. Conclusion: Ireland is being invaded by hostile forces. I also read rumours overnight that Germans are refusing Euro notes not printed in the Bundesland. It is probably an outright lie of a similar quality to the many being spread by the deficit terrorists seeking to regain their “credibility” (an impossible mission) any way they can. In this context I get many E-mails from people each week telling me that I do not understand that the latest decision by the US Federal Reserve Bank “to flood the world with printed money” is putting it on the brink of insolvency! I also read that in a Bloomberg Business Week feature article today. And people believe this stuff. It is as much a lie as the fallacious stories recently about the US President’s Asian travel costs which the right-wing in the US (Beck, Limbaugh, Savage etc) perpetuated without scrutiny (see this analysis to see how this lie began). Anyway, rest easy … the US Federal Reserve cannot go broke!

I keep reading that the inflationary expectations genie is about to jump out of the bottle and far from being benign and supportive will wreak havoc on real wealth. I also keep reading that the gold price is rising because of these increasingly robust fears of future inflation. It is one of those themes that get trotted out to alert us to the dangers of government intervention in the economy. It takes about one sentence to get to Zimbabwe and usually Weimar then gets dropped in. I know the characters that perpetuate this sort of stuff have had their minds poisoned by their undergraduate macroeconomics indoctrination but we do become adults eventually and should be able to question everything. If I am doubt I work out the logic of a problem and then confront the logic with some real world data to see if the logic at least is consistent with what actually happens. I am no empiricist but I don’t buy the idea that if the facts refute the theory then the facts must be wrong. Today I went off looking for those pesky inflationary expectations. I found them … looking forlorn. Just another ruse!

1 + 1 equals 2. The world is not flat. Night follows day (usually). You are born and then you die. Spending equals income. The mid-term elections in the US proved that religious zealots target positions of high office in our democracies. They are emboldened by a righteousness brought on by their faith. In the context of economic policy this religious fervour violates the most simple facts. The most simple story in macroeconomics that every student should have ingrained in them in the first two weeks of study is that spending equals income. It is as basic to macroeconomics as 1 + 1 equals 2 is to arithmetic. The mainstream economists know this but because it implies a role for net government spending that insults their religious passions they invent all sorts of elaborate lies and myths which purport to show that cutting spending increases it. These “proofs” are equivalent to those which try to show that 1 + 1 does not equal 2?. They are logical bereft and empirically vacant. The problem is that everyone citizen who forms the same view and votes accordingly increases the chance that their job will be next to go. Meanwhile the religious persecution of those without jobs continues.

I have been working on the macroeconomics textbook today that Randy Wray and I are hoping to publish sometime next year. We have a publisher and now just have to complete the text which is progressing well. Also today I have been wondering why UK business firms are not horrified at the latest damaging policy announcement by the new conservative British government. My thoughts generalise to any government at present in terms of the obvious need to expand fiscal policy. I brought those two things together today – the practical need for continued fiscal support for private sector activity and the development of our textbook – by considering the macroeconomic origins of profits. It is an interesting story that very few people really understand because they think micro all the time when it comes to the understanding the profits of business firms whereas you have to start thinking from a macroeconomics perspective to really understand this. It also helps you understand the relationship between the government and non-government sector more fully – a relationship which is at the heart of Modern Monetary Theory (MMT). So read on and see if you have thought about this before.

I have always been antagonistic to the mainstream economic theory. I came into economics from mathematics and the mainstream neoclassical lectures were so mindless (using very simple mathematical models poorly) that I had plenty of time to read other literature which took me far and wide into all sorts of interesting areas (anthropology, sociology, philosophy, history, politics, radical political economy etc). I also realised that the development of very high level skills in empirical research (econometrics and statistics) was essential for a young radical economist. Most radicals fail in this regard and hide their inability to engage in technical debates with the mainstream by claiming that formalism is flawed. It might be but to successfully take on the mainstream you have to be able to cut through all their technical nonsense that they use as authority to support their ridiculous policy conclusions. That is why I studied econometrics and use it in my own work. It was strange being a graduate student. The left called be a technocrat (a put-down in their circles) while the right called me a pop-sociologist (a put down in their circles). I just knew I was on the right track when I had all the defenders of unsupportable positions off-side. But an appreciation of the empirical side of debates is very important if a credible challenge to the dominant paradigm is to be made. That has motivated me in my career.

I don’t run a blog on demand service. But today a specific request – almost a desperate plea – from one commentator to provide some analysis of a specific article coincided with many requests I have had for clarification about when a government is revenue constrained. The specific article in question apart from being one of the worst examples of uniformed economics journalism covers the ground about levels of government perfectly. So I decided to behave like a blog on demand service today despite wanting to write about how the US is a failed state. That will wait until Monday though and by then even more Americans will have slipped into poverty driven there by failed US government policy and a sclerotic system of government dominated by two main parties that are now incapable of governing in the public interest.

There was an interesting forum in the The Economist Magazine on August 11, 2010 which considered the question – What actions should the Fed be taking?. The Economist assembled a group of academic economists (mainly) and the opinions expressed largely will make any person who understands how the monetary system operates and what the current problem is shudder in disbelief. What the discussion reinforces is that the mainstream economists really have failed to understand what the crisis was all about and do not comprehend the nature of the solution. Most of the contributions are just mindless repetition of what you might find in any mainstream macroeconomics textbook. It is very scary that these characters continue to be heard. If only the citizens knew what was going on!

The policy balance continues to be wrong in the US and elsewhere. While central banks are politically “free” to change their policy settings, fiscal authorities appear to be hamstrung by some absurd politics at present. In the midst of economic pain and suffering, governments (and oppositions) are proposing policy settings which will worsen that pain. They then sell the message that more pain will deliver good outcomes to their electorates without having a clue whether that it true or not. In doing so they defy all empirical experience and rely on defunct and failed theory for their authority. It is as if “They’re just sticking a finger in the air and guessing”. The other tragedy in all of this is that the monetary policy changes that have been invoked are largely ineffective in terms of expanding aggregate demand. This is in contradistinction to fiscal policy which is very effective in expanding spending, if used properly. Of-course, this policy mayhem is just a reflection of the dominance of the neo-liberal paradigm which actively eschews effective government involvement in the economy.