They’re just sticking a finger in the air and guessing

The policy balance continues to be wrong in the US and elsewhere. While central banks are politically “free” to change their policy settings, fiscal authorities appear to be hamstrung by some absurd politics at present. In the midst of economic pain and suffering, governments (and oppositions) are proposing policy settings which will worsen that pain. They then sell the message that more pain will deliver good outcomes to their electorates without having a clue whether that it true or not. In doing so they defy all empirical experience and rely on defunct and failed theory for their authority. It is as if “They’re just sticking a finger in the air and guessing”. The other tragedy in all of this is that the monetary policy changes that have been invoked are largely ineffective in terms of expanding aggregate demand. This is in contradistinction to fiscal policy which is very effective in expanding spending, if used properly. Of-course, this policy mayhem is just a reflection of the dominance of the neo-liberal paradigm which actively eschews effective government involvement in the economy.

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The poor are more generous and compassionate than the rich

I have been reading a lot of psychology research in recent months which is a very broadening experience. Mainstream economists rarely include research from the wider social sciences. However, I have always been interested in finding out what other social scientists are up to and how their work bears on the human society that I have spent a career studying. At present, the neo-liberals are on the rise again and are driving governments to introduce harsh fiscal withdrawals using the supposition that this is fiscally responsible behaviour. Their position is unsupported by credible logic or empirical research. In fact, the overwhelming body of evidence rejects the theoretical models they parade to defend their positions. One of the under currents of their proposals is that by cutting public welfare payments and support governments can not only “save” money (and reduce their deficits) but also free the welfare space for private charity. They eulogise the benefits and virtue of private charity but demonise public support for disadvantage. So today I read an interesting article from some psychologists who have examined whether those with economic resources are generous or not. The results of their work are that the poor are more generous and compassionate than the rich. Another evidential flaw in the neo-liberal mantra that should worry all of us.

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More fiscal stimulus needed in the US

Yesterday (July 21, 2010), US Federal Reserve Chairman Ben Bernanke presented the – Semiannual Monetary Policy Report to the US Congress – before the Committee on Banking, Housing, and Urban Affairs, in the US Senate. His assessment was rather negative and the most stark thing he said was that the rate of growth is not sufficient and will not be sufficient in the coming year to start reducing the swollen ranks of the unemployed. So the costs of policy inaction at this stage are already huge but growing by the day. These are deadweight losses that will never be made up again. While the US political system is now so moribund that it appears incapable of producing policy outcomes that will advance public purpose and restore stronger economic growth, the data that is freely available points to the need for a further fiscal stimulus. It is such an obvious strategy that the US government should employ.

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The myth of rational expectations

The increasingly alarmist commentator Niall Ferguson was at it again the Financial Times (July 20, 2010) in his article – Have Keynesians learnt nothing?. The article has a simple presumption – we are getting scared of deficits and as a result inflation is inevitable. What? We are scared because we expect there will be inflation and so we will act accordingly and start pushing up wages and prices to defend ourselves in real terms. The result will be inflation. This is a playback of the so-called rational expectations literature which Ferguson proudly cites as his authority. The problem is that the theory is defunct – it never was valid and only a butt of depressed cultists still hang on to it as their religion because they learned it when they were young and in doing so lost their capacity to experience the joys of wider education. We really must feel sorry for them.

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Myths about pay and value

Today I read a study – A Bit Rich – published in December 2009 by the New Economics Foundation, which is a UK-based think tank aiming to provide an alternative narrative to mainstream economics. That agenda obviously interests me. The study investigates the relationship between pay and value by taking a case study approach and extending our concept of value to include both social and environmental benefits and costs. What they find is that the financial sector is a negative contributor (by some) to society whereas low paid occupations (cleaning etc) are vastly underpaid. What this tells me is that we need a fundamental re-alignment of pay scales in addition to bringing real wage growth into line with productivity growth. We need to reduce the real take of some of the higher paid occupations (especially in the financial sector) and increase the rewards of those currently trapped in low-paid jobs but who serve valuable functions in the overall scheme of our societies’ well-being.

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Money multiplier – missing feared dead

I know I said I was not going to write a blog today but I changed my mind. It will be a short blog only. I was considering the continued dogmatic assertions that mainstream economists make that the central bank still controls the money supply and that money multiplier is alive and well but has just disappeared for a while. This recent mainstream post is typical of these on-going erroneous assertions by mainstream macroeconomists about the way the monetary system and the institutions within it operate. The fact is that the monetary multiplier is not dead – I can say that confidently because I know it was never alive!

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Modern monetary theory and inflation – Part 1

It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element. That is what this blog is about.

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Fiscal austerity – the newest fallacy of composition

The origins of macroeconomics trace back to the recognition that the mainstream economics approach to aggregation was rendered bereft by the concept of the Fallacy of Composition which refers to errors in logic that arise “when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part)” (Source). So the fallacy of composition refers to situations where individually logical actions are collectively irrational. These fallacies are rife in the way mainstream macroeconomists reason and serve to undermine their policy responses. The current push for austerity across the globe is another glaring example of this type of flawed reasoning. The very fact that austerity is being widely advocated will generate the conditions that will see it fail as a growth strategy. We never really learn.

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Who should be sac(k)ed?

When I saw the headline on this article – Time to plan for post-Keynesian era – in the Financial Times yesterday (June 7, 2010) I wondered which Keynesian era we were talking about. It was written by Jeffrey Sachs who is well-known for his anti-stimulus viewpoints. The upshot of his argument, however, is that he recommends deficit reduction strategies because the bond markets will get upset otherwise. At the same time he advocates medium-term investments in green technology and education which I support but which will not be consistent with deficit reductions.

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Poisoning the minds of the young

Today I am writing about child cruelty. We would all react to child cruelty in the same way – it is repugnant and undermines the chances of the child maturing into a fully functional adult replete with capacities that promote self esteem and allow meaningful and enduring relationships. So what would we think of child cruelty when a high level government agency is engaged in it? What would we think of a government that was poisoning the minds of the young? Many Americans write to me accusing me of being a communist sympathiser and claiming that freedom was subjugated under those regimes via brutal indoctrination mechanisms embedded in their societal infrastructure. Maybe it was. But the Americans don’t actually have to look very far nor resort to history to find regimes that use indoctrination to oppress their citizens’ free spirits, including the intellectual development of their children. On Thursday, June 3, the Director of the US Congressional Budget Office wrote his Letter to a Seventh Grader. It contains pure indoctrination designed to develop fears about budget deficits at an early age.

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Saturday Quiz – May 29, 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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Fiscal policy worked – evidence

At the end of 2008 and into 2009, as the real sectors in our economies were starting to experience the aggregate demand collapses instigated by the banking crisis, most governments took steps to stop the meltdown from becoming the next Depression. At times, the unwinding private spending looked to be pushing the world to those depths. So after years of eschewing active fiscal policies, governments suddenly rediscovered the fiscal keyboard key and in varying magnitudes pushed fairly large expenditure injections into their economies. Most of the mainstream economists who had been teaching their students for years that this would be futile were silent because they had to hide out in shame given their textbook models could neither explain how we got into the mess nor how to get out of it. But there were some notable exceptions from Harvard and Chicago who came out attacking governments for being profligate. They claimed their models would demonstrate that the fiscal interventions would come to nothing (Barro, Becker, Taylor all were leading this charge). Lesser lights, then emboldened, joined the throng screaming that proponents of the stimulus strategy should provide evidence. Well the evidence has been mounting and the conservatives should just lock their office doors and go home to their families in shame.

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Central bank independence – another faux agenda

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.

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What is it really all about?

I trawl the financial and economics news from all and sundry, write and think economics all day most days, get embroiled in the technical and political arguments about monetary systems and labour market dynamics, and ideological battles and all this energy is constructed and conducted at the “level of the debate”. But the debate at that level is largely irrelevant and we get sidetracked by it. So can sovereign governments do this or that? But my interest in unemployment and inequality started when I was young and was particularly honed during my student days in the late 1970s in Melbourne when I realised that governments were deliberately imposing joblessness on my fellow citizens by retreating under pressure applied by the ideological attacks of the emerging neo-liberals. I realised then that underneath all this monetary talk are people who suffer and get left behind. And so we have to keep reminding ourselves – what the hell is all this really about?

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A fiscal consolidation plan

Another day passes and lots more reading done. Some of it interesting but a significant amount of it tedious even enraging. I hum my mantras as I read to stay calm. But among the things I read there were some stand outs – not all of which I will have time to write about today. But this news report – Estonia Wants Stricter Euro Budget Rules – came in overnight, which caught my eye. Further examination, revealed how skewed policy priorities have become over the course of this economic crisis. The most costly things for an economy are ignored and aspirations that will impose future costs are promoted. Driving this policy agenda (madness) are the false messages that the IMF continually put out which spread a mélange of lies and non-sequiturs across the policy debate. I came up with a fiscal consolidation plan myself today as a result. I will disclose it later.

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Labour force data – no boom yet!

Australia’s economy is apparently booming. At least that is what all the current public rhetoric is suggesting. Wage breakouts are apparently looming and the Mining boom (is) too hot for Canberra to handle. Today the ABS released the Labour Force data for April 2010 and the data reveals that while there are positive developments in the labour market, employment growth remains sluggish and is barely keeping pace with the growth in the population. Unemployment rose a tad as a result. While the bank economists have hailed today’s figures as “stellar” and indicative of an economy “near full capacity”, I consider their judgement to be seriously impaired and biased. Conditions in the Australian labour market are, in fact, fairly subdued. As I said last month – with the declining fiscal stimulus and private spending remaining subdued – today’s data doesn’t represent a place we would want to be in for very long.

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It will only take 6 months

I followed the attacks on pro-Israeli New York Times war monger Thomas Friedman some years ago, which centred on his support for the invasion of Iraq and his repeated prognosis that it would only take 6 months to decide the fate of the conflict. The six months never really materialised and by 2007 he was arguing, just as vehemently as he argued for war, for US disengagement because the strategy had failed. He was imbued with the WMD mania that was used by the US, Australian and UK governments to “justify” the unjustifiable despite them knowing there were no such dangers. So he is a guy who obviously knows what he is talking about! In his latest column he tries his hand at economics with a similar intellectual arrogance and lack of judgement that he brought to the Iraq issue.

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Teaching macroeconomics students the facts

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.

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People are now dying as the deficit terrorists ramp up their attacks

Three people are dead in Athens as the people turn ugly against an even uglier ideological push against their welfare. The EMU is now facing an untenable future. Senior policy makers within the EU are now lecturing the UK about the need for harsh fiscal measures following the election. And the UK goes to the polls today and the polls are suggesting “sweeping gains” for the conservatives who are unfit to govern and will drive their economy even further backwards if elected. All of this is unnecessary. All of it a reflection of a failed ideology trying to re-assert itself. The upshot will be that the Eurozone will wallow in crisis for years to come and the rest of us are taking policy positions that will lead to the next crisis – if not a double-dip recession later this year.

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Another economics department to close

Today I decided that there is another macroeconomics research unit that needs to be closed down. My decision was reached after I read the latest paper from the Bank of International Settlements – The future of public debt: prospects and implications – which confirms that the Monetary and Economic Department of that organisation is publishing deficit terrorist literature. The paper is so bad that I am sorry I read it. I may avoid BIS publications altogether in the future. But if I apply that reasoning I am going to be back to reading Stieg Larsson novels and there are only three of them and I have already read them!

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