ECB researchers find fiscal policy is very effective and more so if central banks buy up the debt

The ECB published a Working Paper recently (September 2021) – Monetary and fiscal complementarity in the Covid-19 pandemic – which represents progress in the narrative. While the technical model that the ECB uses is just an ad hoc attempt to reverse engineer the reality so they can claim they can explain it, what is useful from the exercise is that the old mainstream narratives that fiscal policy is ineffective in providing permanent boosts to real output (or that austerity does not permanently damage the growth trajectory) can no longer be sustained. The taboo surrounding central bank purchases of government debt because they cause accelerating inflation can no longer be sustained. The claims that fiscal deficits drive up interest rates can no longer be sustained. Now the public debate just has to reflect that reality and we will have made progress. Of course, this is all core MMT – we knew it all along!

Read more

They never wrote about it, talked about it, and, did quite the opposite – yet they knew it all along!

During the GFC, a new phenomenon emerged – the ‘We knew it all along’ syndrome, which was characterised my several mainstream New Keynesian macroeconomists coming out and claiming that some of the insights provided by Modern Monetary Theory (MMT) economists were banal and that their own theoretical framework already accommodates them. The pandemic has brought a further rush of the ‘We knew it all along’ syndrome. Apparently, mainstream macroeconomics is perfectly capable of explaining the fiscal reality the world has found itself in and there is no need to MMT, which, by assertion, is saying nothing new. These sorts of statements are not coming from Facebook or Twitter heroes who might have done a few units in economics or even acquired a degree in the discipline. They are coming from senior professors in the academy. The curious thing, which really lifts their cover, is that if you examine the academic literature you won’t find much reference to these sorts of ‘insights’ at all. What you find, and what students are taught, are a completely different set of propositions with respect to fiscal policy. So if they ‘knew it all along’ why didn’t they ever write about it? Why is their published academic work replete with conclusions that run contrary to the conclusions MMT economists make? You know the answer. These ‘knew it all along’ characters have just been caught out by the poor empirical performance of their paradigm and now they are trying to salvage their reputations and position by trying to blur history. They really should be sacked.

Read more

The Bank of Goldman Sachs at Threadneedle Street

As I provided a detailed analysis of the National Accounts release yesterday, today, I am writing less via the blog and am shifting the Wednesday music feature to Thursday. That makes sense. Today, I am bemoaning the creation of the Bank of Goldman Sachs, formerly known as the Bank of England. Groupthink seems to plague this institution. And then, to restore equanimity, we have a music tribute to Lee ‘Scratch’ Perry who died in Jamaica this week.

Read more

Brexit is delivering better pay for British workers (on average)

I find it amusing when some self-styled ‘progressive’ commentator, usually writing in the UK Guardian newspaper, bemoans Brexit and points to claims by business that there is a shortage of workers. The ‘shortage’, of course, is results from not being able to access unlimited supplies of cheap foreign workers as easily as before. When I see a shortage of workers, I celebrate, because it means employers will have to break out of their keep wages growth low mentality to attract labour; that they will have to offer adequate skills training to ensure the workers can do the work required; and, that unemployment will be driven as low as can be. What is not good about that? Brexit has done a lot of things, one of them being to provide the British working class to arrest the degradation in their labour market conditions that neoliberalism has wrought in a context of plenty of low wage labour always being in surplus. A similar thing will come from the pandemic in Australia where our external border has been shut for nearly 18 months now.

Read more

ECB nearly comes clean – higher fiscal deficits, higher QE

Last year, the US Federal Reserve dropped a bombshell on mainstream macroeconomics by abandoning the consensus approach to monetary policy, which prioritised fighting inflation over maintaining low levels of unemployment, and, increasing interest rates well before any defined inflationary pressures were realised – the so-called forward guidance approach. It has also been buying massive quantities of US government debt and controlling bond yields in the markets as a result. Attention has been on the ECB to see where it would pivot too and whether it was going to abandon its own massive government bond buying program any time soon, which has been effectively funding the fiscal deficits of the 19 Member-States of the Eurozone. Recent statements have indicated the QE programs in Europe will not be ending any time soon. And an ECB Board member all but tied the scale of the purchasing programs to the size of the fiscal deficits as a guide to how long and how large the QE interventions would be.

Read more

Keynes on national self-sufficiency

One of the emerging discussions is what will the post-coronavirus world look like both within nations and across nations. There is a growing thread about the worries of increased state authoritarianism as governments have imposed an array of restrictions. There is also an increasing debate about the need for nations to return to enhanced national self-sufficiency to avoid the disruptions in the global supply chain that the pandemic has created. In 1933, John Maynard Keynes gave a very interesting lecture on this topic in Dublin. In this blog post, I consider that lecture and assess its currency in the contemporary setting.

Read more

Trends in the Northern Ireland labour market – Part 1

The article in the Socialist Worker Review (No. 89, July/August 1986, pp. 19-21), by Eammon McCann – The protestant working class – has kept me thinking for some years. I recalled it the other day when I was updating my Northern Ireland labour market data and working on some text. As a result of reading this article many years ago, I became very interested in the labour market dynamics in Northern Ireland, in particular, as they impact on the debate about unification and EU membership (yes, I have always been anti-EU). In that vein, I have been following the trends over time rather closely. More recently, the central place of the North Ireland Protocol in the Brexit discussions has increased the relevance of this research. I also benefitted from some very interesting conversations a few years ago with my host in Galway (forever thankful Niall), while I was visiting the Republic of Ireland on a speaking trip. These conversations filled in many gaps in my understanding of some of nuances of the issues involved. These trends provide some good background to what has been happening in a region that is undergoing significant change and how we might assess the Northern Ireland Protocol in a post-Brexit world. It also helps us understand the demise of the DUP as a relevant political force. They represent a different era. From my understanding, it is also the major economic changes that have been taking place in Northern Ireland that are more likely to influence the trend away from identifying as either unionist or nationalist or proceeding along ‘religious’ lines. A working class impoverished by austerity is a powerful solidifying force. The labour market has changed dramatically over the last several decades. In this multi-part series, I provide some reflections on these issues. This is part of a book project I am working on (more about which later).

Read more

Austerity has damaged the ability of Greece to defend itself against fire threats

It is Wednesday and I have been busy on other writing projects. But today I offer some data analysis on the Greek fire tragedy as well as a short video promoting a very important festival that is coming up. Then I offer some personal insights on the accusation by the right-wing press that on-line learning is just a ruse for lazy “work-shy” professors. And to calm us after all that – we have some fine jazz from 1960.

Read more

The pandemic exposes the damage that neoliberalism has caused

Australia is now locked into a new phase of the pandemic where NSW is in danger of allowing the virus to run free throughout the population due to the incompetence of the conservative state government. For the duration of the pandemic up until now, the NSW government has been lecturing the other states (mostly run by Labor governments) about how they had a superior health system (health is organised along state/territory lines in Australia) and how they valued freedom more than the dictatorial Labor states that go into lockdown very quickly if a case threatens. It turns out NSW has just been lucky to now and the latest outbreak has revealed their ‘freedom first’ approach is a false freedom. Sydney has been locked down for weeks now and cases are still rising and it seems the contact tracers have lost control. But the hubris from the NSW government has really exposed a much deeper malaise that has been evident for years now as a result of the way neoliberalism has reconfigured the public sector and the role of government. The pandemic is just exposes the erosion of government capacity to provide public services and infrastructure and deal with public emergencies. That is one of the important revelations to come out of the pandemic.

Read more

Has global trade peaked?

I have recently updated my trade databases as I write a book chapter on the topic. I am also curious about the dramatic growth in freight charges over the last 12 months in international shipping. I have a friend who runs a business importing cement who is now paying 5 times the freight charges now than he was a year ago. Why that would be the case is an interesting question. I have previously written about the way that the neoliberal ideology became conflated with the trends towards globalisation in supply chains. Globalisation, was then weaponised with the ‘free market’ ideology, which undermined key aspects of the benefits of trade, particularly for poorer nations. The ‘free market’ mantra became code for increasing the rate of surplus extraction from these nations by financial interests in the richer nations – a sort of more sophisticated version of the way colonialism sucked wealth from the colonies to the benefit of the metropolitan economies. But in recent years (since about 2007), a fundamental shift in the relationship between trade volumes and income growth (a relationship that is often used as a proxy for the pace of globalisation) has occurred. Some think this indicates that peak trade has been reached. There are good reasons for thinking that to be the case.

Read more

Inflation rises in Australia – but transitory factors and natural disasters are the reason

Today, my on-going inflation watch turns to Australia, given the release today (July 28, 2021) of the latest – Consumer Price Index, Australia – for the June-quarter 2021. The data is consistent with what we are seeing across many nations as supply chains are disrupted by the pandemic. Energy prices are adjusting back upwards and because the base from which we are judging these quarterly rises was lower as a result of price suppression during the downturn, the recovery in the pre-pandemic price levels deliver larger than usual price increases (when the base is higher). In Australia’s case, a major recent flood and a long drought before that have also complicated matters by driving up food prices. All these impacts are transitory. The CPI rose by 0.8 per cent in the June-quarter 2021 and over the 12-months to June 2021 it rose 3.8 per cent. But the key to understanding the trends in the data is to appreciate that the less volatile series were still rising at rates below the RBAs inflation targetting range – the Trimmed Mean rose just 0.5 per cent and the Weighted Median rose 0.5 per cent. So nothing to see here. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

Read more

The central banks don’t seem to be worrying about inflation

It’s Wednesday and I have been tied up most of the day with commitments. So we will have to be content today with a couple of snippets. The first about the on-going inflation mania and the way in which the ECB seems oblivious to it. The second about the gross incompetence of the Australia government, who has put the health of the nation at risk and forced state governments to invoke rolling lockdowns as only a small number of us are vaccinated and cases keep seeping out of a flawed quarantine system (the latter being the federal responsibility). And once the anger subsides from that little discussion, we have the usual Wednesday music offering to restore peace.

Read more

The Weekend Quiz – June 26-27, 2021 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Read more

Restricting population growth is good for local workers

In the aftermath of the 1991 recession, which was the worst economic downturn in Australia since the Great Depression of the 1930s, I wrote a series of articles that we published in academic journals. In part, they were theoretical pieces that conjectured about the impact of rapid population growth on the labour market, which at the time was characterised by persistently high unemployment and rising underemployment (the recession had replaced full-time with part-time work). My conjecture was that high rates of immigration at a time of slow employment growth would lock unemployed workers into long-term unemployment. Of course, I could not test that proposition because the government maintained the relatively high immigration levels and other factors might have been responsible for the rising long-term unemployment. Last week’s Australian Labour Force data showed that unemployment and the unemployment rate has fallen rather quickly in recent months as the economy recovers slowly from the pandemic recession. Historical comparisons show the unemployment response this time has been much larger than in the previous recessions. The other key point is that the working age population has grown at historically low rates as a result of the border closures. It seems that my conjectures in the early 1990s were correct, despite getting flack at the time from mainstream economists who were pushing the line that immigration is always good for the labour market.

Read more

MMT and Power – Part 2

This is Part 2 of a series that is developing here on the topic of Modern Monetary Theory (MMT) and power. I often read that Modern Monetary Theory (MMT) is defective because it has no theory of power relations. Some critics link this in their narrative to their claim that MMT also has no theory of inflation. They then proceed to attack concepts such as employment buffers, on the grounds, that MMT cannot propose a solution to inflation if it has no understanding of how power relations cause inflation. These criticisms don’t come from the conservative side of the policy debate but rather from the so-called Left, although I wonder just how ‘left’ some of the commentators who cast these aspersions actually are. The problem with these criticisms is that they have clearly adopted a partial approach to their understanding of what MMT is, presumably through not reading the literature widely enough, but also because of the way, some MMT proponents choose to represent our work. In Part 1, I examined how the economics discipline evolved from political economy to a narrow focus on the ‘economy’ as if it existed in a void of power. I also disabused readers of the notion that MMT ignores the link between money and the real econoy, which is a regular claim offered by critics from the Left. I also questioned critics who seem to want MMT to be a theory of everything. As I regularly point out MMT cannot predict who wins the football this week, but that isn’t a criticism. In Part 2, I am going to complicate things a little by expanding on the MMT is the MMT is a lens narrative as if we can neatly separate values from facts. I will also explain how power enters into the dominant theory of inflation in MMT.

Read more

The monetary and fiscal normality of Wolfgang Schäuble – stagnation and entrenched unemployment

I have been working on an article that will come out in the press soon on inflationary pressures. It is obvious that characters like Larry Summers and Olivier Blanchard are trying to stay at the centre of the debate by issuing various lurid threats about the likelihood of an inflation outbreak in the US and elsewhere. Last week, the Financial Times published an article (June 3, 2021) by the former German Finance Minister and now President of the Bundestag, Wolfgang Schäuble – Europe’s social peace requires a return to fiscal discipline. I was initially confronted with the juxtaposition of this author, who bullied all and sundry during to the GFC to ensure an austerity mindset was maintained at great cost to the millions who were deliberately forced to endure unemployment, with the photo of John Maynard Keynes under the title of the article. The title didn’t seem to match the picture. My first impressions were correct. Lessons have not been learned.

Read more

The aftermath from my recent podcast on the Job Guarantee and UBI

Given I provided a detailed National Account analysis yesterday, I am using today as a blog lite day with just some snippets and then a musical offering – as per my usual Wednesday practice. I did an interview for Real Progressives last week and some of the social media reaction has been hysterical – claims that Modern Monetary Theory (MMT) has gone political and that MMT advocates abandoning the capitalist system and so on so forth. Some of this stuff is coming from self-identified ‘progressives’, which makes me wonder how much meaning term retains. In some cases, the attacks were really Trojan horses for the dislike of my Brexit stance or my attacks on the British Labour Party for pushing an unworkable and neo-liberal inspired fiscal credibility rule, which they had to change just before the election anyway because it was unworkable in its original form. So the resentment of those who hang onto the ‘European dream’ for the UK manifests as stupid, lying attacks on anything I say. Fine. More importantly, Switzerland is having a little ‘Brexit’ sort of move itesel, that has angered the European Union and is another chink in the now very depleted European ‘dream’. And if all that is a bit much, we can finish with some Jazz.

Read more

ECB realises it has to keep funding Member State deficits for the foreseeable future

Well, the Melbourne virus outbreak has scuttled lots of plans and events. We wouldn’t be in this situation if the Federal government had have invested in dedicated quarantine facilities last year when they were told to and taken advice to ensure their vaccination purchases were sufficient. Anyway, that is for another day. Today, I have been examining European data and matching them against a recent interview (May 26, 2021) – Interview with Fabio Panetta, Member of the Executive Board of the ECB, conducted by Jun Ishikawa – that Nikkei published yesterday. Things have changed a bit in Europe since the GFC although the fundamental problem of the Eurozone remains – there is a disjuncture between fiscal responsibility and fiscal capacity and the only way that that mismatch is being addressed is the via the on-going ECB funding of fiscal deficits, despite the denial that that is what is happening. It is plainly obvious to all.

Read more
Back To Top