Reality check for the austerians

Individuals often carry history on their shoulders by virtue of the positions they hold and the actions they take. When these individuals hold views about the economy that are not remotely in accord with the way the system operates yet can influence economic policy by disregarding evidence then things become problematic. It is no surprise that my principle concern when it comes to economics is how we can keep unemployment and underemployment low. That was the reason I became an economist in the late 1970s, when unemployment sky-rocketed in Australia and has been relatively high ever since. So when I read commentary which I know would worsen unemployment (levels or duration) if the opinion was influential I feel the need to contest it. That has been my motivation in economics all my career. A daily contest given that the mainstream of my profession is biased to keeping unemployment and underemployment higher than it otherwise has to be. Today I present a simple reality check for the austerians.

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Europe continues to demonstrate it has no answers

Der Spiegel carried the story (May 6, 2011) – Greece Considers Exit from Euro Zone. I thought that if the story was true then Greek leadership must finally be coming to their senses. The reality is that the EMU bosses have once again stalled the judgement day and provided some soft relief for an economy that continues to deteriorate. Everyone knows what the problem is – the EMU doesn’t work and without a federal fiscal redistribution mechanism it will never be able to deliver prosperity. Every time an asymmetric demand shock hits the Eurozone, the weaker nations will fail. Trying to impose fiscal rules and austerity onto the EMU monetary system just makes matters worse. Greece should definitely leave the Eurozone. Life will be difficult then but the adjustment mechanisms that would then be available to the government (floating exchange rate and currency monopoly) are more people-friendly (capable of increasing jobs and income) than the way they are currently pursuing the problem (internal devaluation and demand contraction). Europe continues to demonstrate it has no answers worth considering.

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Hot News: Navy SEALs stake out US building

Restoring Fiscal Sanity in the United States: A Way Forward. Essentially, the article is a non-article but a sign-up page to access a speech of the same title by David M. Walker, former top public accountant in the US (Comptroller General) which apparently makes him qualified to speak about monetary systems. The speech is full of nonsense but it gave me some insights into what seems to be unfolding in the national capital over there in America. While I was at the airport today I heard some very sensational news – Navy SEALs stake out US building! Perhaps I am the first to blog about this development. Twitter universe – where are you?

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Saturday Quiz – April 23, 2011 – 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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Budget deficit basics

I get many E-mails every week from people asking me to explain exactly what a deficit is. They understand that a budget deficit is the difference between revenue and spending but then become confused as a result of being so ingrained with narratives emanating from politicians and lobbyists who misuse terms and always try to conflate deficits and debt. So today’s blog is a basic primer on deficits and why you should welcome them (usually) and why we all should sleep tight when the government is in deficit. So – budget deficit basics …

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Letter to Paul Krugman

I haven’t enough time to write a blog today because I have been writing a letter to Paul Krugman following his recent articles in the New York Times. That has taken up my spare time today. So as not to disappoint I have made by letter available for all to read. I am sure Paul won’t mind. So read on …

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I am now advocating biblioclasm …

So I guess it is time to build those very large bon-fires and burn all the mainstream macroeconomics textbooks that have poisoned the minds of millions of students for years. Mankiw, Blanchard, Barro to name a few. Burn them all. I also think it is time to delete all the computer code that supports mainstream economics models. My long-held belief that these actions would be educative and liberating have been ratified by a recent IMF conference that seems to have concluded that “the macroeconomic models that had been relied upon in the past and had informed major aspects of monetary and macro-policy had failed”. So all the supporting literature needs to be deleted. I am now advocating biblioclasm …

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The third great US “reds under the bed” scare

As an outsider, I am always perplexed by American attitudes. Some of the great writers have come from the US so their schooling system must have something going for it. Some of the great musicians have come from the US so there is creativity there. I could go on. But then you think back to the 1950s, when a whole nation was whipped up in the great propaganda traditions that would have made the Reich’s Ministry of Propaganda under Joseph Goebbels proud. Except this was America, alleged land of the free, unless you happen to take that seriously and find out that in fact the place is a repressive society bound to torture people and use martial force to suppress minority viewpoints. I refer here, specifically, of-course, to the McCarthy purges. Remember the Nazis hated the communists too. But today I read a speech from a governor of one US state who has identified a continuing red menace that will eat up the freedom of all US citizens and is the work of a sneaky but determined group of left-wing zealots (with Chinese overtones). If it wasn’t so serious it would be comical and all we would have to do is send the men in the white coats out to the governor’s office to take him away for treatment. The problem is that this is the third great US “reds under the bed” scare and like the previous scares this one is damaging millions.

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Saturday Quiz – February 12, 2011 – 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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Saturday Quiz – February 5, 2011 – 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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Please note: there is no sovereign debt risk in Japan!

Sometimes you read an article that clearly has a pretext but then tries to cover that pretext in some (not) smart way to make the prejudice seem reasonable. That is the impression I had when I read this Bloomberg opinion piece by William Pesek (January 31, 2011) – Pinnacle Envy Signals New Bubble Is Inflating – which I was expecting to be about real estate bubbles but which, in fact, turned out to be an erroneous blather about Japanese debt risk. Please note: there is no sovereign debt risk in Japan!

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The madness along the Atlantic crosses the Pacific

Today the Australian government demonstrated how poor their grasp of macroeconomics is and how badly they are managing our economy. In response to the very destructive floods that have ravaged the most populated states on the east coast (Queensland, NSW and Victoria) and wiped out billions in income-generating assets and businesses, they decided to increase taxes to “pay” for the reconstruction relief. This is at at time when the economy is slowing, inflation is moderating and the banks cannot get enough treasury debt to satisfy their prudential requirements. Further, it is at a time when there are 12.5 per cent of willing labour resources lying idle and long-term unemployment is rising. I noted in yesterday’s blog – Its grim on both sides of the Atlantic – that things are really bleak in the UK (now contracting again courtesy of its government policies) and in the US (about to contract courtesy of its government’s mismanagement). In both cases, the malaise is being caused by a dysfunctional ideology being imposed by policy makers onto very fragile economies. Well it seems that the madness along the coastlines of the Atlantic has crossed the Pacific. The imposition of a flood levy is a nonsensical and destructive policy act.

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Not the time to be cutting spending or raising taxes

Today I have had several media requests for interviews about various topics including the flood reconstruction in the eastern states of Australia and their implications for the budget aims of the Federal government (to record a surplus in 2012-13). My position seems to be alone in the debate. In the conservative pro-business publication – Business Spectator article (January 19, 2011) – A flood levy would not break Labor – we read more about the alleged budget dilemma facing the Government as a result of the devastating floods that Australia is currently enduring. To put the article in context, the author was a former advisor to past Labor government ministers – which when you read it tells you how far to the right the political “centre” has gone. While I doubt that the floods alone will undermine economic growth over the next 12 months, I certainly consider that the Australian economy requires further fiscal stimulus to keep growth going and the response to the disaster is a politically acceptable way to inject that stimulus. It is certainly not the time to be trying to raise taxes or cut spending in other areas to “pay for” the reconstruction effort.

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Just speak to the truth …

The title of today’s blog comes from a speech given on January 12, 2011 by Richard W. Fisher, boss of the Federal Reserve Bank of Dallas – The Limits of Monetary Policy – which carried the sub-title – Monetary Policy Responsibility Cannot Substitute for Government Irresponsibility. It is a speech littered with ideological assertions parading as sensible public commentary. It will resonate with the deficit terrorists and reinforce the policy agenda that will only make the situation in the US worse not better. The ideas were echoed elsewhere in the world in the last week. Japan is considering hiking tax rates “because they want more private growth and less public net spending”. The (un)truth brigade have thus been out in force in recent days – spreading a litany of lies and falsehoods which only aim to perpetuate their irrational obsession that government economic activity is bad. I only wish they would just speak the truth.

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Flooded with nonsense

As the days go by we begin to realise the huge scale of the problem that the floods in Northern Australia are presenting our country. Whole communities are being forced to leave their homes and major disruptions to economic activity (in very important regions) are being experienced. The floods are being labelled the worst in Australian history (well the white European occupation of indigenous land history) although that depends on the area – certainly the worst since the early 1950s. The areas that are affected are major sugar, coal, iron-ore and food production regions. So real GDP growth will be reduced and this will exacerbate the already slowing economy. What should be the correct federal government response? Answer: to expand the budget deficit (via discretionary spending increases) to ensure that essential public infrastructure is replaced and private economies are able to function again. What is the current federal government contemplating? Answer: spending cuts. My assessment of this: they have no credibility as fiscal managers.

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Public infrastructure does not have to earn commercial returns

The Australian government released the business plan for NBN Co today which outlines the “cost-benefit” case for creating a monopoly wholesaler of fibre-based broadband services in Australia and investing some $A27 billion in public funds to create the network. The business case has been the focus of much political debate over the last year or so and as usual most of the debate has been conducted on a spurious basis – that is, the assumption is that the budget outlays proposed represent a “cost” to government and that by committing funds to this project the government is less able to “afford” other projects – presumably because there is some “budget balance outcome” that it cannot deviate from. Neither proposition is valid. While this blog has an Australian flavour the general economic principles apply to all national governments contemplating large-scale public infrastructure developments. The general point is that the provision of public infrastructure does not have to earn commercial returns.

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Saturday Quiz – December 18, 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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Men and women with white coats needed

The next few days are very tight for me – travel and meetings. So the blogs might be shorter (cheers I hear!). The thing about blogs which I find interesting is that I normally have to write in a very tight fashion (for academic publication) and editorial discrimination becomes paramount. Whereas the blog is a flowing environment and the only limit I place is the time I spend per day. Within that time span I just type and what comes out comes out with only spelling corrections. The grammar is sometimes not as correct and hyperbole and colloquialisms are rife. But that is a liberating offset to my usual literary output each day. Anyway, I thought the quote of the day (actually December 10, 2010) was – The Eurozone in bad need of a psychiatrist. Well perhaps it is the leaders and their hangers-on who need this help. And when the shrinks have finished with Brussels and Frankfurt they can stop in at London on route to Washington. Canberra can follow sometime soon after. The problem is that we have a person-made mess that is relatively easy to address and yet the ideological straitjacket that has been imposed on the solution amounts to cutting the wound wider and deeper so the blood loss is even greater. Madness! And the rest of us go along with it and elect politicians who say they will whip us even harder. Bring in the men and women with the white coats! For everybody …

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