British Labour Party surrenders … back to its Monetarist roots

Last week, the shadow British Chancellor, John McDonnell confirmed that the British Labour Party under Jeremy Corbyn will not be part of a progressive realignment of the public debate regarding fiscal policy. By that I mean, they have chosen, probably for misplaced ‘political’ concerns (leaving aside total ignorance), to reinforce in the public mind the neo-liberal myths relating to the capacities of a currency-issuing government to spend and advance prosperity. I have no doubt that John McDonnell desires, genuinely, to advance the material well-being of the working class in Britain. His public career to date would suggest that. But like many on the Left, he has been seduced by the neo-liberal snake oil into believing that fiscal rules that bind a currency-issuing government to balance, in total or in part, the fiscal situation and that such a government should submit itself to the dictates of a technocracy full of mainstream economists, is a necessary requirement of responsible fiscal management. His most recent statements really amount to surrender. The British Labour Party is staying faithful to its Monetarist roots, which were established in 1974 under Harold Wilson’s second tilt at the top job. The distractions of New Labour and now Jeremy Corbyn has not really changed anything. This is a neo-liberal party no matter what they claim and their advice and underpinnings are firmly neo-liberal.

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The Monetarism Trap snares the second Wilson Labour Government

This blog provides another excerpt in the unfolding story about Britain and the IMF. As I noted in this blog – The British Monetarist infestation – I am currently working to pin down the historical turning points, which allowed neo-liberalism to take a dominant position in the policy debate. In doing so, I want to demonstrate why the ‘Social Democrat’ or ‘Left’ political parties, who still have pretensions to representing the progressive position (but have, in fact, become ‘austerity-lite’ merchants), were wrong to surrender to the neo-liberal macroeconomic Groupthink. This is a further instalment of my next book on globalisation and the capacities of the nation-state, which I am working on with Italian journalist Thomas Fazi. We expect to finalise the manuscript in May 2016. In the last instalment, I traced back and demonstrated that Britain was engulfed in Monetarist thinking long before Margaret Thatcher took over. She really just put the ‘(rancid) cream on the top of the (inedible) cake’. I showed that the British Labour Party were infested with the Monetarist virus in the late 1960s and James Callaghan’s famous 1976 Black Speech to tge Labour Party Conference was just a formal recognition of that disease. It really just consolidated what had been happening over the prior decade. This historical journey also helps us understand that it was not the OPEC oil crisis in the early 1970s that provided the open door for governments to reject Keynesian policy. In Britain, the Treasury and Bank of England had fallen prey to Monetarist ideas following the elevation of Milton Friedman onto the world stage. These subsequent events just helped keep the insurgency moving until total dominance in the contest of ideas was won. Today, we start with the Bank of England’s so-called Competition and Credit Control (CCC), which was introduced in September 1971. This formalised the growing emphasis among the banking sector and economists that the central bank had to ‘control’ the money supply. It failed – but empirical failure doesn’t matter when people are becoming swamped with propaganda that says otherwise.

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The BIS adds to the financial turbulence and should be disbanded

In 2014, it was apparent that the Bank of International Settlements (BIS) had made itself part of the ideological wall that was blocking any reasonable recovery from the GFC. I wrote about that in this blog – The BIS remain part of the problem. I was already concerned in 2013 (see this blog – Since when did the BIS become the Neo-liberal Ministry of Misinformation?). Things haven’t improved and the latest statements from the Bank in the BIS Quarterly Review (March 6, 2016) – Uneasy calm gives way to turbulence – demonstrates two things that are now obvious. First, that the neo-liberal Groupthink that created the crisis in the first place, and, which has prolonged the malaise continues to dominate the leading international financial institutions. Second, not only are these institutions (and I include the OECD, the IMF, to BIS, among this group) impeding return to prosperity as a result of their continued adherence to failed macroeconomics, but worse, their patterned behaviour actually introduces new instabilities that ferment further crises. Someone should be held accountable for the instability these organisations cause, which, ultimately leads to higher rates of unemployment and increased poverty rates.

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The Weekend Quiz – March 5-6, 2016 – answers and discussion

Here are the answers with discussion for this week’s Weekend 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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Japan – another week of humiliation for mainstream macroeconomics

In September 2010, The Project Syndicate, which markets itself as providing the “Smartest Op-Ed Articles from the World’s Thought Leaders” gave space to Martin Feldstein – Japan’s Savings Crisis. Like a cracked record, Feldstein rehearsed his usual idiotic claims that interest rates in Japan would rise because “of the continuing decline in Japan’s household saving rate” and that “the higher interest rate would eventually raise the government’s interest bill by about 4% of GDP. And that would push a 7%-of-GDP fiscal deficit to 11%”. Then, so the story goes, “This vicious spiral of rising deficits and debt would be likely to push interest rates even higher, causing the spiral to accelerate”. At which point, Japan sinks slowly into the sea never to be seen again. It turns out that the real world is a little different to what students read about in mainstream macroeconomics textbooks. At the risk of understatement I should have said very (completely) different. Better rephrase that to say – what appears in mainstream macroeconomics textbooks bears little or no relation to the reality we all live in. Anyway, events over the last week in Japan have once again meant that this has been just another week of humiliation for mainstream macroeconomics – one of many.

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We are being led by imbeciles

After yesterday’s marathon blog, today will be easier going (and shorter). I was reading John Maynard Keynes recently – circa 1928 – that is, 8 years before the publication of the General Theory with his Treatise on Money intervening. He was railing against the principles and practice of ‘sound finance’, which he noted had deliberately caused billions of pounds in lost income for the British economy. He urged the Treasury and the Bank of England to abandon their conservative (austerity) approach to the economy and, instead, embark on wide-scale fiscal stimulus to create jobs and prosperity. He concluded that with thousands of workers idling away in mass unemployment that it was “utterly imbecile to say that we cannot afford” to stimulate employment via large-scale public works – building infrastructure etc. He considered the policy makers who opposed such options were caught up in “the delirium of mental confusion”. The stark reality is that 88 years later, he could have written exactly the same article and would have been ‘right on the money’. We are being led (euphemism) by imbeciles.

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The British Monetarist infestation

I have been on the search for historical turning points again today. The famous Mitterand austerity turn in 1983 is one of these points. Another, which I will consider today, was the British Labour Prime Minster James Callaghan’s speech to Labour Party Conference held at Blackpool on September 28, 1976 was laced with pro-Monetarist assertions that have been used by many on the Left as being defining points in the decline of the state to run independent domestic policy aimed at maintaining full employment. This is a further instalment of my next book on globalisation and the capacities of the nation-state, which I am working on with Italian journalist Thomas Fazi. We expect to finalise the manuscript in May 2016. Today, I am writing about the background events that turned Britain on to Monetarism. Margaret Thatcher was, in fact, a ‘johnny-come-lately’ in this respect. The British Labour Party were infested with the Monetarist virus in the late 1960s and Callaghan’s 1976 Speech just consolidated what had been happening over the decade prior. Further, it was not the oil crisis in the early 1970s that provided the open door for governments to reject Keynesian policy. In Britain, the Treasury and Bank of England were captivated by the ideas of Milton Friedman some years prior to the OPEC price push.

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Real wages falling in Australia

The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the December-quarter yesterday and annual private sector wages growth fell to 2.0 per cent (0.5 per cent for the quarter). This is the fourth consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the September-quarter 1997. Real wages in the private sector are now in decline. In the Mid-Year Economic and Fiscal Outlook published in December, the Government assumed wages growth for 2014-15 would be 2.5 per cent rising to 2.75 over 2016-17. They also assumed real wages (the difference between growth in the nominal Wage Price Index and the Consumer Price Index would be positive (0.5 per cent in 2016-17). On current trends, neither assumption will be realised, means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. There will be then the typical hysteria about the size of the fiscal deficit and the need to cut it which will be missing the point entirely. The rising deficit is just responding to a generalised decline in economic activity, falling employment and suppressed wages growth. Depending on how we measure inflation, the annual wages growth translates into a small real wage rise or fall. Either way, real wages are growing well below trend productivity growth and Real Unit Labour Costs (RULC) continue to fall. This means that the gap between real wages growth and productivity growth continues to widen as the wage share in national income falls (and the profit share rises). The flat wages trend is intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. The lessons have not been learned.

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If I was in Britain I would not want to be in the EU

The foundations of national sovereignty are the currency-issuing capacity of the national government. The foundations of a democracy include the ability of the citizens of that currency zone (the ‘national government’) to choose the political representatives at regular intervals who will make decisions on their behalf. A direct chain of responsibility between the elected officials to the voters is thus established and the citizens can take action accordingly if they feel they are being disadvantaged by the legislative outcomes. The anathema of this sort of direct responsibility and accountability is the European Union, which is cabal ruled by unelected officials (in the conventional sense) who are not held accountable for their decisions, no matter how poor they turn out to be. The history of the Eurozone is one of policy failure with millions of people rendered unemployed, in poverty, or otherwise disadvantaged by the destructive decisions made by successive European Commission administrations. There was a good reason why the French president Charles de Gaulle resisted the development of supranational power blocks in Brussels and elsewhere (for example, in Frankfurt under the Eurozone). His preference for Inter-Governmental relations, where large common issues such as climate change, migration, rule of law, etc could be decided upon by representatives of each Member State government, without surrendering national sovereignty, was sound. Given all of that, the United Kingdom should exit the dysfunctional European Union immediately and only negotiate with other states on a government to government basis.

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The Weekend Quiz – February 20-21, 2016 – answers and discussion

Here are the answers with discussion for the Weekend 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 impossibility theorem that beguiles the Left

Some years ago (June 27, 2007), Harvard economist Dani Rodrik outlined what he called his “impossibility theorem”, which said that “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full”. In his brief article – The inescapable trilemma of the world economy – he made the case that “deep economic integration required we eliminate all transaction costs … in … cross-border dealings” and that “Nation-states are a fundamental source of such transaction costs”. Ergo, if you want ‘deep’ integration then the Nation-state has to surrender. His “trilemma” guides his view of how the “international economic system” should be reformed. He think that if “want more globalization, we must either give up some democracy or some national sovereignty”. This view has been adopted by political parties as if the conceptual framework is in some way binding. The trilemma has been skillfully sold as a narrative by right-wing think tanks and others who serve the interests of capital. The so-called progressive politicians have fallen into the trap and have shifted their political parties closer and closer to their right-wing opponents, such that now it is hard to distinguish between the major parties in most nations. The reality is that while the impossibility theorem beguiles the Left – its applicability as a binding constraint on government is limited. It is as vapid as the statements made by these career politicians on both sides of politics that they serve the people.

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The European circus continues

Yesterday, I briefly examined how a pack of big-noting financial market traders were trapped in stupidity by patterned behaviour and self-reinforcing group dynamics (aka Groupthink). Today, we consider the neo-liberal Groupthink that continues to trap political leaders and policy makers in Europe into a web of denial and stupidity.

In both case, innocent people have suffered huge negative impacts while, by and large, the idiots have escaped fairly unscathed. The recent data from Eurostat shows that growth is fairly flat in the Eurozone and industrial production is in recession. It also shows that the banking system is in deep jeopardy and the so-called reforms that were introduced post-GFC are not considered robust by investors. With massive bank deposit flight going on and banking share prices plunging, it is clear that the ‘markets’ have lost faith in the financial viability of the Eurozone. Meanwhile. Mario Draghi winds the key up in his back and tells the world that everything is fine and the ECB is on top of the situation. With chaos descending on the monetary union again, the ECB cannot even achieve its single purpose – a stable 2 per cent inflation rate. It has failed to even achieve that over the last four years. One couldn’t write this sort of stuff if they were trying.

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It is fuelled by stupidity … That’s not stupidity that’s fraud

Yesterday, we saw the movie – The Big Short – which is entertaining to say the least but depressing in its message that widespread corruption in the corporate and public sectors not only goes unpunished, but is handsomely rewarded. I have also been watching the documentary series Making a Murderer – which follows the stunning and mystery-laded treatment of an American man caught up in a corrupt criminal justice system in the US state of Wisconsin. In that series, it appears that the criminals are those on the wrong side of the bars. I thought The Big Short was the macro version of Making a Murderer, which is a microscopic account of a small town and its nefarious police and legal fraternity. But apart from the corrupt and plainly unethical conduct exhibited by Wall Street, the rating agencies and the bank that fed on all the ridiculous products that were created to make complex what, in fact, was a simple strategy – make money of real estate, there was also plain dumbness at the centre of the collapse and the crisis. Dumbness created by a dangerous Groupthink where patterned behaviour was inculcated into the financial system and, ultimately, came back to bite most of us. While the representations of cocky, sharp, bright financial market traders with PhDs in physics or mathematics in a sequence of movies about the GFC and its aftermath lead to the conclusion that these conspirators knew what they were doing and were happy to profit for themselves at the expense of those they considered to be dumber, a recent academic research study has revealed that the traders themselves were oblivious to what they were doing and became entranced themselves by their own image. That is what Groupthink does – it builds an impervious layer for those trapped inside the group – they are insulated from reality, consistent logic, criticism and behave in self-reinforcing ways that may involve enlarged deviations from anything reasonable, smart or evidence based. Groupthink makes people dumb and compliant. The GFC was in no small measure the product of that sort of dumb compliance, which is not to reduce the enormity of the corruption involved. It, however, does reinforce my view that we should ban all these speculative products that provide no beneficial input to the real economy, if only because the sociopaths that are attracted to creating and selling them are too dumb to know what they are doing.

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The Weekend Quiz – February 13-14, 2016 – answers and discussion

Here are the answers and discussion for the Weekend 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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Ultimately, real resource availability constrains prosperity

There are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.

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Balance of payments constraints

The late Canadian economist Harry Johnson, who came at the subject from the Monetarist persuasion, was correct when he wrote in 1969 (reference below) that “The adoption of flexible exchange rates would have the great advantage of freeing governments to use their instruments of domestic policy for the pursuit of domestic objectives, while at the same time removing the pressures to intervene in international trade and payments for balance-of-payments reasons.” How does this square with those who believe that even currency-issuing governments are constrained in their fiscal flexibility by an alleged balance of payments constraint. So-called progressive economists, particularly, are enamoured with the idea that Modern Monetary Theory (MMT) is flawed because it doesn’t recognise the fiscal limits imposed by the need to maintain a stable external balance. In this blog, we trace the arguments.

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Is exchange rate depreciation inflationary?

One of the first things that conservatives (and most economists which is typically a highly overlapping set) raise when Modern Monetary Theory (MMT) proponents suggest that increased deficits are essential to reduce mass unemployment is the so-called balance of payments constraint. Accordingly, we are told that the capacity of a nation to increase domestic employment is limited by the external sector. And these constraints have become more severe in this age of multinational firms with their global supply chains and the increased volume of global capital flows. I will address the specific issue of a balance of payments constraint on real GDP growth (that is, the limits of fiscal stimulus) in a future blog. But today I want to consider the so-called Exchange Rate Pass-Through (ERPT) effects of that are part of the balance of payments constraint story. The mainstream narrative goes like this. Higher wage demands associated with full employment and/or stronger imports associated with higher fiscal deficits lead to external imbalances due to rising imports and loss of competitiveness in international markets (eroding export potential). In a system of flexible exchange rates, the currency begins to lose value relative to all other currencies and the rising import prices (in terms of the local currency) are passed-through to the domestic price level – with accelerating inflation being the result. If governments persist in pursuing domestic full employment policies the domestic inflation worsens and the hyperinflation is the result, with a chronically depreciated currency. Real standards of living fall and a general malaise overwhelms the nation and its citizens. I am sure you have heard that narrative before – it is almost a constant noise coming from the deficit phobes. Like most of the conservative economic claims and I include the austerity-lite Leftist parties in this group, it turns out that reality is a bit different. Here is some discussion on that issue.

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The capacity of the state and the open economy – Part 1

Wolfgang Merkel wrote in his recent Op Ed (February 5, 2016) – Economy, Culture And Discourse: Social Democracy In A Cosmopolitanism Trap? – that “we are dealing with a partially deliberate, partially careless surrender of the state’s capacity to regulate and intervene in an economy that structurally creates socio-economic inequality and erodes the fundamental democratic principle of political equality”. I highlight, the “partially deliberate, partially careless surrender” description of what has occurred over the last several decades as neo-liberalism has gained traction. Today’s blog continues my series that will form the content for my next book (due out later this year) about the impacts of globalisation on the capacities of the nation state. Our contention (I am writing this with Italian journalist and author Thomas Fazi) is that there has been no diminuition in the power of the state to impact on the domestic economy. The neo-liberal era has seen many commentators deny that proposition, yet, knowingly advocate use of these powers to further advantage capital at the expense of labour. The state is still central to the picture – it just helps capital more and workers less than it did during the full employment period in the Post World War II decades.

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Australian PBO – hard to take seriously – is it vaudeville or what?

The Australian government is currently engaging the population in an agonising discussion about taxation reform and proposed spending cuts. It is almost vaudeville when the Treasurer, or the Opposition Shadow Treasurer or some business leader gets up and gives us their ‘two bob’s worth’ of nonsense. We have a “revenue problem”, “no we don’t, we have a revenue problem”, “we need to raise taxes”, “no we don’t we need to cut spending”. Then the government appoints a former investment banker as Treasury Department head and he starts raving on about how government should limit its spending to a maximum of 25 per cent of GDP without any argument being provided as to why that limit is meaningful, how it is derived, how it can be achieved if desirable, and all the rest of it. Sounds like a good idea. The Eurozone has destructive fiscal rules (Stability and Growth Pact) that we just whipped out of thin air and sounded important. We may as well, like dumb sheep, follow the race to the bottom. Meanwhile, real GDP growth falls further below trend and the disadvantaged workers endure elevated levels of unemployment and hardship. It is enough to drive one to drink. And then yesterday, the Australian Parliamentary Budget Office (PBO), which is one of those neo-liberal concoctions introduced by governments around the world to deflect responsibility for decisions from the politicians and frame the public debate in a particular way, published a new report (February 3, 2016) – National fiscal outlook – Report no. 01/2016. The mind boggles how people can write this stuff and go homeat night and take themselves seriously.

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The reality of Germany and the buffoons in Brussels intervenes …

This week, I seem to have been focused on central banking this week, which is not my favourite topic, but is all the rage over the last several days given the decision of the Bank of Japan to use negative interest rates on any new bank reserves and then continue to pump reserves into the system via its so-called QQE policy (swapping public and corporate bonds for bank reserves), and then imposing a tax on the reserves so created. Crazy is just one euphemism which comes to mind. So still on that theme and remembering that the Bank of Japan explicitly stated that the combination of QQE and the tax on reserves (they call it a negative interest rate – same thing) was introduced to increase the inflation rate back up towards its target of 2 per cent per annum, I thought the following paper was interesting. The paper from the Research Division of the Federal Reserve Bank of St Louis (published July 2015) – Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay – considers the unconventional monetary monetary policy interventions taken by the US Federal Reserve Bank between 2007 and 2009 and comes to the conclusion that “there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity”. Maybe the Bank of Japan and the ECB bosses should sent this researcher an E-mail and request his evidence. They don’t seem to have been able to escape from the straitjacket of their neo-liberal Groupthink.

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