As more people become aware of Modern Monetary Theory (MMT), extreme reactions emerge to basic concepts that, in any reasonable sense, should evade such reactions. For example, when the concept of the Job Guarantee (JG) is explained the reactions include hysterical comments such as “This is Socialism”; “MMT advocates the government employing everyone – they are stealth Communists”; “MMT is Communism in disguise”; and the rest. I get several E-mails along these lines per week – all which go into the trash immediately – so why bother sending them! I also get many (polite) E-mails suggesting that we (MMTers) should adopt a compromise line and embrace the ideas of those, who while clearly holding ideas that are inconsistent with MMT, do advocate government-led stimulus in the present context. Apparently we should also use terminology that is consistent with the mainstream to minimise the chasm that has to be be crossed to jettison that orthodoxy and accept MMT. These tactical suggestions have resonated once again in the current little dispute about whether various economists, who operate in the New Keynesian paradigm are channeling Minskian ideas. The suggestion is that, while they might not have foreseen the crisis and hold to various theoretical concepts that are inconsistent with MMT development, we should, as a matter of strategy, form alliances with these economists because they are now advocating policy more or less similar to that proposed by MMTers. So our common purpose should be prioritised over our theoretical differences. I disagree. History shows us that it is very dangerous to develop a new approach by minimising the differences between it and the dominant, but erroneous paradigm just to make it easier for adherents of the latter to embrace the former.

I was going to write about the so-called fiscal cliff today and would have shown that the only thing that might fall of the said cliff would be real GDP growth should the US Congress actually not extend the tax cuts and impose the spending cuts. The US economy would follow the lead from the British economy and double-dip in 2013 as sure as day follows night (or is it the other way round). The most elementary exposition of what we might call – ECO101 Macroeconomics – would tell us that. One person’s spending is another person’s income and so on. I note that some economists are arguing that ECO101 Macroeconomics is alive and well because it has had a an impeccable record in the current crisis. In my recent blogs – Fiscal austerity damages real growth and prolongs the financial downturn and Neo-liberalism has failed but we still don’t get it – I have argued that the mainstream of my profession has failed – both in anticipating the emerging crisis and providing credible solutions to remedy it. So have I overstated that claim, given that ECO101 Macroeconomics is the go-to approach at present? The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.

I often get E-mails from readers – some hostile others more reasonable – telling me that I should stop arguing for more economic growth. The reasoning is relatively straightforward – the Earth is buckling under the rapacious resources demands of the capitalist system and not only is that process likely to be finite, notwithstanding substitution via technological advances, but also in the process of exhaustion the amenity declines. The argument juxtaposes ecological claims with other claims relating to the desirability of the current neo-liberal dominated system which relies, seemingly, on creating more inequality, a reduction in government oversight and allows the worst aspects of the capitalist system to run amok. However, somewhere along the way, the 99% or whatever percentage it is (I think it is substantially lower than 99) miss the boat. The current crisis is used to demonstrate that conjecture. I haven’t time to reply to all the E-mails and I try to provide “collective” replies (which should tell you something in itself) via my blog posts. So today I am addressing that issue. The message is simple – I am very sympathetic to localised, new economy-type collective ways of organising social and economic activities. I support egalitarianism and co-operative solutions rather than competitive, dog-eats-dog approaches. I don’t mind working and giving my surplus to aid those who are unable for whatever reason to achieve the same material outcomes by their own hand. I am happy with consolidation rather than growth. But despite the romantic appeal of all this – as the solution – we have to understand that there is still something called a monetary system and a currency to deal with. Localised solutions are still constrained by the sovereign state they are located in and their fortunes are determined in no small way by the way the currency-issuing government conducts its fiscal policy. There is no escape from that.

My friend Sean Carmody, sometime commentator and always obstinately objective, introduced me to this work – The Debunking Handbook – written by a physicist and psychologist. It serves to focus thoughts because it considers the pitfalls that arise in an exercise aimed at debunking myths and strategies that might be deployed to effectively achieve this aim. The authors appear to be motivated by the climate change debate but the discussion is equally effective in the context that I work within – how to convince people that mainstream macroeoconomics is largely devoid of meaningful content and predictive capacity.

I have had very little time today (worse than usual). I gave a 3 hour lecture today on Modern Monetary Theory (MMT) and unemployment to a final-year class in the Social Work program at the University of Newcastle. It was interesting trying to work out how to explain all these concepts, which are intrinsically hard, to a group that has no background in economics. Just the language we use is not universal and so I spent quite a bit of time working out how to communicate. Anyway, the following blog is short as a consequence. But knowing I didn’t have much time, and the blog I am thinking about will require some more digging, I decided to take the chance today to write an Op Ed that was requested from a newspaper in Buenos Aires and which I am late in delivering. They only wanted 5,000 odd characters so it forced me to be disciplined. It is about fiscal austerity and will be translated into Spanish for their readers.

The NSW Bureau of Crime Statistics and Research (BOCSAR) released an interesting study yesterday (March 13, 2012) – The effect of arrest and imprisonment on crime – which might be a strange topic for a Modern Monetary Theory blog to highlight. On the contrary, this type of research provides an invaluable reality check against those who think that entrenched unemployment during a recession is more efficient than fiscal initiatives that aim to directly generate public sector employment. We already know that that the daily real GDP losses that arise from an economy operating at less than full employment are massive. The BOSCAR report adds another loss in the form of higher crime rates. It confirms long-standing research findings that shows that unemployment causes higher property and violent crime rates.

On Wednesday, we learned that the real GDP growth rate had halved in the December 2011 quarter (to 0.4 per cent) and business investment had contracted. Next day, we learned that the Australian labour market has deteriorated with employment contracting, unemployment rising and since November 2010, 140 odd thousand workers have left the labour force, presumably because employment growth had stalled. We already know that 2011 was a jobless year. Today, the Australian Bureau of Statistics released their International Trade in Goods and Services for January 2012, which shows that our trade balance went from a $A1325 million surplus to a $A673 million deficit (a “turnaround of $1,998m”). Unless that changes in the coming months, the contribution to growth from net exports will be solidly negative. All of these events have reduced the tax revenue for the government. But the response of the Government, which is pursuing a budget surplus this year at all costs, is that they will now have to cut their spending harder. Last year, the Treasurer claimed the authority for this pursuit was none other than John Maynard Keynes. More recently, the British Secretary of State for Business, Innovation and Skills claimed – Keynes would be on our side – in relation to the imposition of fiscal austerity. The reality is otherwise – Keynes would not support fiscal austerity under the current circumstances. The strategy is bereft of any credible authority and is being driven, variously, by politics and ideology.

Amidst all the political turmoil in the Australian government this week, there was a highly significant report issued by the government (finalised December 2011 but released by the Government on February 20, 2012) – Review of Funding for Schooling – which showed not only how unequal our education system is but also how far behind we have fallen relative to other nations (particularly those that are more important trading partners). For a government which pretends to be concerned with equity and efficiency the Report posed huge challenges. Not only did it suggest current policy was failing, the Report estimated that over AU$5 billion should be invested in education reform to not only improve standards but also ensure that the massive inequalities between rich and poor with respect to educational access and outcomes are reduced. The response by the Australian government was that its priority remained the achievement of a budget surplus in 2012. Here is a classic demonstration of how a failure by the Government to understand the characteristics of the monetary system that it runs leads to poor outcomes in the short-run, but also undermines the future prosperity of the nation.