Religious persecution continues

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.

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The Euro bosses ignore all the lessons

I was thinking about the recent European Council meeting today which was held in Brussels over the weekend. It is clear that the Eurozone bosses are choosing to ignore all the lessons that the current crisis has provided to them about the basic design flaws of their monetary system. They think the solution to their problems is to make it even harder for member governments to provide net spending to their economies at times of stress. They fail to articulate the most basic macroeconomic fact that confronts them – unemployment is rising across the zone and production generally is stagnant because there is not enough demand for sales of goods and services. If the private sector won’t provide that demand then the government sector has to given that they cannot rely on net exports to cure the deficiency. By deliberately restricting governments and effectively forcing them to engage in pro-cyclical fiscal responses the Euro bosses are not only prolonging the agony the citizens are facing but are also engaging in a self-defeating strategy. As we are seeing budget deficits are rising as austerity is imposed. The solution to the Eurozone problems is to disband the zone and restore individual currency sovereignty at the national level. It would be painful to do that but in the medium- to long-term it will be less painful than the trajectory they are following.

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I feel good knowing there are libraries full of books

Today’s blog might appear to be something different but in fact is more of the same. There was an article in the New York Times recently (October 10, 2010) – The Crisis of the Humanities Officially Arrives – by US academic Stanley Fish, which discussed the growing demise of the humanities in our universities. While the debate is about the role of the humanities specifically, the points Fish makes about how we appraise the value in education resonates more broadly to a consideration of the role of educational institutions and human activity in general. One of the vehicles the neo-liberals use to promote their anti-intellectual agenda is the false claims that governments are financially constrained. By appealing to this myth lots of questions about motivation are avoided. They promote the myth that some activity is “too expensive” or “not productive enough” and we are thus shoe-horned into that way of thinking. But I feel good knowing there are libraries full of books of poems and plays and stories and I know that sovereign government are not financially constrained. I might not be able to defend the quality of a poem but I can certainly explain how the monetary system works. So you poets and playwrights under threat – come aboard and learn about fiscal policy and the monetary system and spread the word.

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What is fiscal sustainability? Washington presentation

I am travelling today and have a full schedule ahead and haven’t much time to write anything. But it just happens that the multimedia presentations and documentation for the Fiscal Sustainability Teach-Ins and Counter-Conference which was held at the George Washington University, Washington DC on Wednesday, April 28, 2010 have just been made available by the team which organised the event. The Teach-In was a grass roots exercised designed to counter the conference organised by the arch deficit-terrorists at the Peter G. Peterson Foundation, which was also held on April 28 in Washington D.C. – just across town from our event. While that event also chose to focus on “fiscal sustainability”, the reality is that it will merely rehearsed the standard and erroneous neo-liberal objections to government activity in the economy. Given my time constraints today I thought it was serendipitous that this material became available overnight. So the following blog provides access to video and all the documentation for my session. Very special thanks to Selise and Lambert (and their team) for taking the time to document and prepare all this material.

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Back to basics – aggregate demand drives output

Sometimes we get lost in detail and forget the simple macroeconomic relationships that sit below the complexity. I also like to get lost in detail too – to work out tricky little aspects of the financial system, etc but it is always a sobering experience to go right back to the beginning. I have been forcing myself to think “basic” lately as I progress the macroeconomics textbook that my mate Randy Wray and I are writing at present. It seems that our national governments have lost their perspective to think at this basic level – to really understand what drives prosperity in their nations. The evidence for this statement lies in the various fiscal austerity plans that are being rehearsed around the world at present. The most blatant and severe example of this in the non-EMU world has just been announced in Britain. This is a case of a government driven by ideology deliberately inflicting massive damage on its citizens while lying to the population about the necessity for such a policy. Its fits my definition of a state-motivated terrorist attack. If only the people of Britain understood the most basic economic relationship – aggregate demand drives output and national income. Cut spending and prosperity falls. Only by lying to the people, has the British government been able to take this policy path.

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Where has the centre gone?

Answer: out towards the far right. Today’s blog adds to my previous posts where I consider so-called progressive interventions in the policy debate and show that they are really nothing more than attenuated forms of neo-liberalism. The evidence is that what goes for progressive input these days bears no resemblance to what we used to consider represented progressive thinking. The way the population has been inveigled into accepting policy positions and justification that are represented as “centrist” but are, in fact, what we used to call right-wing positions is one of the success stories of the neo-liberal era. The tendency of so-called progressive organisations to mimic the language and concepts of the right is one of the main constraints on advancing a solid attack on the conservative orthodoxy that created and perpetuated the crisis and which is setting nations up for a repeat in the coming years.

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Less income, less work, less income, more work!

I have some good news that some of you may have already heard about but it is worth repeating. Harvard deficit terrorist Gregory Mankiw, who poisons the minds of millions of economics students with his preposterous textbook is going to work less because he has faces lower income as a result of the temporary Bush high marginal tax rates cuts being terminated. Apparently, he is getting a sudden preference for leisure. While there is a desperate need for more fiscal expansion in the US at present it seems that the US government could help all of us by mixing the net spending injection with some marginal tax rate adjustments targetted towards high income earners. By fine tuning the top marginal rates they should be able to get Gregory to give up work altogether and then the rest of us would be better off as a result. Meanwhile, the UK government also claiming to be against budget deficits thinks it will make its poorest citizens work more by ensuring they have less income. Notwithstanding the lack of jobs the inconsistency of the logic is something else. Go figure!

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There are riots in the street but the IMF wants more unemployment

I am writing this on late Friday afternoon European time. Today has been very busy and so I don’t have a lot of time to write this blog. I had a birthday in my immediate family to deal with and so some special celebrations were in order. Then I had meetings with two government officials – one from the Flemish government and the other from the Dutch government – they travelled down to Maastricht for consultations. The topic was the Job Guarantee and how they could implement such a buffer stock employment scheme into their own policy thinking. I will write up some thoughts about this meeting next week. Then I had to wade through a new International Labour Organization (ILO) report – World of Work Report 2010 – which has estimated that high unemployment will persist for much longer than they had previously forecast. The talk is that the “product market” (real output) recession is now becoming an entrenched labour market recession. Meanwhile, I also read the latest IMF World Economic Outlook report and noticed they were advocating changes to macroeconomic policy positions across the advanced world that would by their own reckoning increase unemployment and prolong recovery. They are still appealing to the nonsensical idea that fiscal austerity is good for a nation. Their view now is nuanced but still a disgraceful mis-use of econometric modelling. So only a relatively short tour through this work today.

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Not the best way to keep interest rates down

The article by Fairfax economics editor Ross Gittins today (September 27, 2010) – How to limit the looming interest rate rises – is a testament to how ingrained the neo-liberal thinking is when it comes to discussing sensible economic policy. He argues that the Australian government needs to get back into budget surplus as quickly as possible and then continue to generate bigger and bigger surpluses and pay down all the outstanding public debt. Evidently this is because we are experiencing strong export conditions and face a dramatic inflationary threat. However, even if that is true (the boom and inflation threat) there are better ways to manage the adjustment process so that inflation remains stable especially when the private sector is still so heavily indebted (as a result of the last credit binge). The other policy options available to the Australian government clearly warrant continued budget deficits. The sticking point: Gittins and most other commentators think that when you have 13 per cent of your willing labour resources idle you are approaching full capacity. I consider that the fact that that proposition has currency is the ultimate evidence of the success of neo-liberalism in poisoning our judgement and distorting the policy debate and policy choices.

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Failed states and ideologies

When I give public lectures about economic policy I often pose the question – how should we judge the effectiveness of public policy? I pose a simple rule of thumb! I judge whether social and economic policy is effective not by how rich it makes society in general but how rich it makes the poor! I see richness in broad terms which embrace both economic and social valuations. Applying this rule of thumb has led me to conclude that the majority of nations in the advanced world are now failed states with run-down and corrupted public institutions. The conclusion is more stark when applied to less developed nations suffering under the neo-liberal yoke imposed on them by institutions like the IMF and the strong donor nations. But the rising poverty in the advanced world as a result of the extended current crisis is making it clear that our economic systems and the policy regimes that are being imposed on them by the neo-liberals are no longer delivering satisfactory outcomes. There needs to paradigm change – urgently.

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Private deleveraging requires fiscal support

The Economist feature column Economics by invitation where they ask some commentators to share their thoughts on some topical issue is running with household debt this week (September 11, 2010). The topic – How far along the process of deleveraging are we? – is examining the extent to which the record levels of private indebtedness are being run down and household balance sheets reconstructed. I also noted in the discussions that have been on-going about trade and deficits on my blog that someone said that there is no evidence that budget surpluses have caused the “sky to fall in”. In this blog I explain how budget surpluses are intrinsically related to the rising indebtedness of the private sector and hence under most conditions are destabilising.

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Saturday Quiz – September 11, 2010 – answers and discussion

Here are the answers with discussion for yesterday’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.

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The US President isn’t trying hard enough

Answer: Probably not! Elections bring out all sorts of revelations and epiphanies. We have seen that in spades in the last few weeks as the two main parties, both rejected as viable governments by the electors have struggled to lure the all important casting vote from the independents who are not only identifiable for the first time (there are even cartoons about them now) but who have taken advantage of their day (or 3 years in the sun) to lever as much out of the parties as possible. So last night, with the government returned as a minority operation at the behest of the vote of three independents and a Green MP, we suddenly see a renewed interest in regional development, public education and parliamentary process. The US President has also found a path to Damascus or at least he is trying to convince voters that he has – even making speeches to industrial workers with his sleeves rolled up. The reality is likely to be different but at least the topic of unemployment is centre stage for a day or so. And dare I add – with some support from the IMF.

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Defaulting on public debt as a way to progress

Today I consider the idea that governments which have surrendered their sovereignty either by giving up their currency issuing monopoly, and/or fixing their exchange rate to the another currency, and/or incurring sovereign debt in a foreign currency might find defaulting on sovereign debt to be their best strategy in the current recession. I consider this in the context that any government that has surrendered their sovereignty is incapable of pursuing policies across the business cycle that serve the best interests of their population. While re-establishing their currency sovereignty may not require debt default, in many cases, default will necessarily be an integral part of the move back to full fiscal sovereignty. This is especially the case for nations that have borrowed in foreign currencies and/or surrendered their currency issuing capacities to a common monetary system. So here are some thoughts on when default is a way for a nation to progress.

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What you consume or what you produce?

For some time I have been promising to write a blog about the role that manufacturing plays in a modern economy. There is a strong presumption, especially from the progressive side of the political debate that manufacturing – or what you produce – defines the capacity for a nation to enjoy growth in real wages and therefore standards of living. So when I have said in the past that I am against industry protection I usually get attacked from the left and I note that this if often coming from people who think it is cute to sound technical by saying the government should balance their budget over the course of the business cycle. As if! Neither viewpoint coming from that quarter has much credibility. I take a more experiential viewpoint. People prefer to consume than to work. What we consume is more likely to give us joy than what we produce especially if the latter is in the context of exploitative capitalist production relationships. I am painting this in black and white terms to garner your interest. Clearly it is more complicated but in general I do not think you need a manufacturing sector to enjoy strong growth in material living standards and perhaps a polluting manufacturing sector erodes the capacity to enjoy broader concepts of growth and well-being. My flame resistant suit is now in place … so here goes.

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The structural mismatch propaganda is spreading … again!

Whenever unemployment rises substantially – that is, whenever there is a recession, the conservatives hide out for a while because the rapid rise in joblessness does not resonate with their models of voluntary choice (that is, workers choosing leisure although they can never explain why workers would suddenly get lazy?) or with their claims that structural factors push the unemployment rate up (although welfare policies etc rarely alter much). Of-course, they love it when some “structural” policy changes during a recession which is why they are cock-a-hoop about the decision of the US government to extend unemployment benefits. It has given them some latitude to get back into the debate even if all the data is working against them. But they always oppose the use of fiscal policy and so typically, towards the tail-end of a recession, they attempt to justify the deplorable unemployment levels by playing the “structural card”. We are now seeing that again and I expect the propaganda to spread and proliferate. It should be rejected like the rest of the cant.

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Even the most simple facts contradict the neo-liberal arguments

The denials continue. In the Wall Street Journal yesterday (August 30, 2010) we see the latest desperate attempt by Harvard (and Stanford) professor Robert Barro to redefine away the recession. The article – The Folly of Subsidizing Unemployment claims that if the US government had not have extended unemployment benefits to 99 weeks “the jobless rate could be as low as 6.8%, instead of 9.5% …” Barro has consistently claimed that the government fiscal intervention has largely caused the recession to persist. As we will argue his track record at predicting and/or explaining economic outcomes is very poor. Simple facts always contradict his fantasy world of Ricardian Equivalence and Natural Rates. I am also adding Stanford to my list of universities which sensible students should boycott if they want to learn some economics given Barro’s presence there. The list is getting longer.

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Fiscal stimulus and the construction sector

I come across new evidence every day that supports the Modern Monetary Theory (MMT) perspective on fiscal policy. Today the Australian Bureau of Statistics released the latest Construction data which provides very clear testimony to the effectiveness of the recent fiscal interventions in Australia. So I thought I would devote this blog to exploring some of the characteristics of this data and see what it means for assessing the impact of the fiscal stimulus in Australia. The conclusions that I draw are consistent with the insights that many different data series are telling us at present. The fiscal stimulus was effective and as it is withdrawn by a budget surplus-obsessed government the economy is suffering. The data today is a further nail in the deficit terrorist coffin.

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If only the citizens knew what was going on!

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!

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How could you vote for any of them?

Next Saturday (August 21, 2010) Australia gets to choose a new federal government which will govern for the next three years. These are crucial years because the economy is still mired in the uncertainty that accompanied the financial crisis and private spending is still very subdued. Growth around the world is still being supported by fiscal stimulus and without it economic activity will decline again. The majority of the economic indicators in Australia and elsewhere are pointing to a new slowdown as the fiscal stimulus wanes. So it is absolutely essential for the next Australian government to maintain strong fiscal support. The only problem is that both the major parties are having a battle to win votes on the platform of who can get the biggest budget surplus in the shortest period of time. It doesn’t bear thinking about. The conclusion is that none of the main parties are worthy of a vote. And the third party in contention (at least for the balance of power) – The Greens – are similarly blighted when it comes to macroeconomic policy. How did we get into this mess?

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