The daily rhetoric being used to promote fiscal austerity maybe couched in the urgency of the day but we have heard it all before. In this blog I just reflect on history a little to remind the reader that previous attempts to carve public net spending, based on the “expectations” belief government was not going to tax everybody out of existence, failed to deliver. The expected spontaneous upsurge in private activity has never happened in the way the mainstream macroeconomic supply-siders predicted. Further, the chief proponents usually let it out in some way that the chief motivation for their vehement pursuit of budget cuts was to advance their ideological agendas. Of-course, the arguments used to justify the cuts were never presented as political or class-based. The public is easily duped. They have been in the past and they are being conned again now. My role is to keep providing the material and the arguments for the demand-side activists to take into the public debate.

Last year (May 2009) I wrote that Flat Earth theory returns – budget aftermath. In that blog, I asked the reader to imagine the time when it was the mainstream view that the Earth was flat, representing an infinite plane. The view largely died at around 3 BC but there are still some characters out there who worry about falling off the South Pole. After all the Nile River runs for thousands of kilometres and drops barely a few feet over that distance which doesn’t fit well with convexity does it? We have been referring to the hysterical commentators and lobby groups who are seeking to undermine the use of fiscal policy as deficit terrorists. However, when I think about term it actually gives these characters too much credit. Terrorists are probably smart and possess skill notwithstanding that they are usually misguided. So we have decided to resurrect the term I used in that blog last year – flat earth theorists (FETs) – because that association more adequately captures how mindless they are.

There are several strands to the mainstream neo-liberal attack on government macroeconomic policy activism. They get recycled regularly. Yesterday, I noted the temporal sequencing in the attacks – need for deregulation; financial crisis; sovereign debt crisis; financial repression and so on. Today, I am looking at another faux agenda – the demand that central banks should be independent of the political process. There has been a huge body of literature emerge to support this agenda over the last 30 odd years. The argument is always clothed in authoritative statements about the optimal mix of price stability and maximum real output growth and supported by heavy (for economists) mathematical models. If you understand this literature you soon realise that it is an ideological front. The models are note useful in describing the real world – they have no credible empirical content and are designed to hide the fact that the proponents do not want governments to do what we elect them to do – that is, advancing general welfare. The agenda is also tied in with the growing demand for fiscal rules which will further undermine public purpose in policy.

Yesterday, I was walking over to the library and I ran into an old colleague who has been dragooned back into teaching macroeconomics on a casual basis. The person was telling me that they were dreading taking the class next week because the topic was banking and the relationship between reserves and the money supply. Accordingly, the person said the chapter in the textbook specified by the lecturer-in-charge was about the money multiplier. The person I met is familiar and sympathetic to Modern Monetary Theory (MMT) and posed the question “how can I do it?”. My answer was that students deserved better and that the lecture should develop the multiplier from a critical perspective so that students know about it but realise how far-fetched it is as a depiction of how the banking system actually operates.

I have been resisting writing about the US health care fiasco because frankly the whole debate is a fiasco and demonstrates the ability of mainstream economics to obscure a widespread understanding of how the monetary system operates and the opportunities that system provides a currency-issuing government. But I have had more E-mails on this topic over the last few weeks than most other issues (bar EMU). Most readers want some analysis from a Modern Monetary Theory (MMT) perspective and so here it is. If only to stop the E-mails.

My RSS feed and E-mails have brought some shockers in the last few days from the financial markets – official bulletins from banks that don’t make any sense at all (US about to default-type arguments); hysterical Austrian school logic (from a large player in the Asian markets) and news commentary from a so-called business insider magazine. The latter should immediately close its doors and declare they are not competent to comment on matters relating to banking. Coincidentally, I also received several E-mails in the last few days asking me to comment on the particular Austrian document noted above that has been circulating within financial markets recently. I deal with that later in the post. Anyway, apart from my main research and other writing activities this blog stuff is “all in a day’s work” – Friday March 19, 2010.