Yesterday I promised to stay clear of analysing the US economy for a while given how much mis-information is flowing out of there. Today I break that promise to myself. Last week (July 7, 2011) the rabid US Republican Paul Ryan released a “House Budget Committee document” – The Debt Overhang and the U.S. Jobs Malaise – which drew on work produced by Stanford Professor John B. Taylor. You can sort of understand politicians who lie and embellish but when a text-book writing, senior economic professors misuses our art to misrepresent the situation you have to wonder. Whoever Mark Twain got that phrase “Lies, damned lies, and statistics” from they must have been reading Taylor’s blog in recent years.

The US Bureau of Labor Statistics published the latest labour force data on Friday and the results can be summarised in one word – shocking. Meanwhile the so-called US political leadership met at the White House to determine how they could make sure the US labour market deteriorated even faster than the latest BLS data shows it is. Other senior White House officials appeared on American TV networks engaging in what can only be related to early teenage male behaviour – ours will be bigger than our opponents. The ours being the trillions they plan to cut from the US federal deficit. With the US labour market in clear decline and the top level talks being about trillions of cuts in public spending you can only conclude one thing – the US leadership has gone missing.

A few things came up today which I thought I would write about – albeit briefly (but then that is all relative I suppose). In general I am scaling down blog activity on Fridays. But today the Australian government released a final evaluation report on one of its big fiscal stimulus infrastructure projects. The Report attracted the typical biased headlines – massive government waste. Over in the UK, the wreck of News Limited’s News of the World proved – once again – that the private sector cannot be trusted to self-regulate resonating what we learned from the financial crash but seem to have forgotten already. These two observations are related and so today I consider the notion of government waste.

Today will be a relatively short blog as an attempt to honour my Friday promise to myself to make more space for other things I want to do. Further I have had some major hardware crashes at my research centre which have taken time today. But I had to comment on an Op-Ed article in the UK Guardian (June 30, 2011) – Public spending has not been cut, it’s just been stopped from rising – which was written by one Baron Desai. The good Baron tries to give us (and a fellow Lord) a lesson in macroeconomics. Unfortunately, before one starts lecturing they should first understand the topic. In this case, it is all about aggregate demand and the way government spending adds to that (including the operations surrounding government spending).

Overnight, the US Bureau of Labor Statistics released their latest Mass Layoffs data (May 2011) which showed that the number of mass layoff events in May increased by 2 percent. Further, another month went by and the US national unemployment rate remained unchanged at (a very high) 9.1 percent. There is very little happening to reduce it and the omens are bad. Also yesterday the US Federal Reserve decided to keep interest rates on hold in the 0 to 1/4 per cent range indefinitely and the Congressional Budget Office (CBO) released its 2011 Long-Term Budget Outlook. The statements accompany the central banks decision by its Chairperson Ben Bernanke about long-run fiscal problems and the very aggressive message in the CBO Outlook suggest that the politicians will continue to retard the US economic recovery and lock millions into entrenched unemployment and poverty. The US leaders are sure making a mess of things and the advice they are getting is appalling. The omens are clear – aggregate demand growth is desperately required to attack unemployment. But the land of the free is sliding further into oppression – self-induced by its political class.

Everything is Greek today in the financial press. The number of commentators who are concluding that Greece has to exit the Eurozone are increasing. It is obvious and it is only the obsessive desire of the Euro bosses to preserve the interests of a few banks at the expense of the welfare of millions that is keeping the EMU together at present. If they stepped outside their mainstream straitjacket for a moment they would see that the ECB could guarantee all French and German bank assets at the stroke of a pen. This mainstream blindness comes out in all sorts of ways. The problem is that social science of which economics is a branch (yes I am in that school rather than placing economics in “business”) – suffers in relation to the other sciences because it is hard to pin down things given the lack of controlled environments. With human behaviour essentially shifting the mainstream economists can get away with all sorts of lies and deceptions most of the time because it is too hard to prove otherwise. But sophisticated analysis is really not necessary. Over the last two decades we have had some real-life experiments going on before our very eyes that allow us to see through the cant that is mainstream theory. How many more experiments do we need before my professional colleagues are totally discredited?

I am travelling today and so have to steal time to write this blog between other commitments. Later this week I am presenting a paper at a workshop on stock-flow consistent macroeconomics and I was thinking over the weekend just gone what I would do with the time I have for the presentation (1 hour). I started putting together a database of IMF forecasts out to 2016 for various nations and simulating the implications for the sectoral balances. Then I thought I would discuss the internal inconsistencies of those forecasts from a stock-flow perspective and the implications of those inconsistencies. I will write a blog later in the week on that once I have finalised the presentation. But the preliminary thinking led to today’s blog. In policy you have to wish for the possible.

It is going to be brief today – it is a holiday in Australia. Queen’s Birthday no less. Can you believe that we are still under the yoke of our colonial masters? Anyway, a winter’s holiday – pouring rain and cold. But I read a couple of things today which I thought were worth interrupting other work to write about as they establish some general principles relevant to understanding Modern Monetary Theory (MMT). The discussion also highlights the recurrent nature of the prophecies of doom – that come from the likes of the Peter G. Peterson foundation now but others in the past. We were told in the 1930s that profligate governments would go bankrupt. They didn’t but when they cut back there economies went broke. The Japanese government was predicted to become insolvent in the 1990s along with hyperinflation and skyrocketing interest rates. Nothing happened other than the fiscal austerity that was imposed as a result of the political pressure arising from these predictions sent the economy back into recession. Same as now … fiscal austerity – imposed because allegedly budgets are unsustainable – will drive economies back towards and into recession. When will we ever learn?

Progressives who comment on macroeconomic matters invariably invoke the ghost of John Maynard Keynes as a motivating influence presumably because the popular perception – albeit shallow – is that Keynes supported generalised fiscal expansion in times of high unemployment. A striking example of this “association” is the recent Australian Fabian Society essay (April 11, 2011) by the Australian Treasurer Wayne Swan – Keynesians in the recovery.

I read two articles in the last few days which tell me that the bond market traders generally do not understand the intrinsic characteristics of the monetary system and that IMF economists have even less of a clue. The bond traders attribute to themselves an air of importance that it not a reflection of their real role in the monetary system. However, my own profession continues to disgrace itself and is nothing more than a propaganda machine. The mainstream economists are too stupid to realise that their models and frameworks do not explain anything that we are interested in. But such is their position of dominance in the policy space that their neo-liberal grandstanding is given credit. It is embarrassing but worse it is dangerous. Anyway, sometimes a journalist comes to the correct conclusion but for the wrong reasons. While the conclusion is correct, the erroneous reasoning does as much damage by way of misinformation than if the overall conclusion was also wrong. It is a case of being right for wrong reason equals wrong.

I am travelling today and then have commitments at the other end. So very little time to write. But I did read some interesting papers over the weekend which bear on the question of whether fiscal policy in the US was effective or not. The neo-liberals (mainstream macroeconomists) claim that fiscal policy is not effective. The extremists among them invoke – Ricardian Equivalence – which claims that private households and firms fear that the rising deficits will require higher tax rates and so they save more now – which means that for every dollar of new government spending there is a dollar less of private spending – so no effect. All the evidence contradicts the extreme view. There is also mounting evidence that the recent fiscal interventions have been very effective. A study I read yesterday went a step further and analysis the impact of targetting low income groups. They found that type of public spending was very expansionary. Their results support my contention that a Job Guarantee would be a very effective (and cheap) fiscal solution (as a first step) to a private spending collapse. But for all the naysayers – sorry, the evidence is mounting that fiscal policy saved the world.

I have said it before that when the facts get in the way of mainstream economic theory – which is just about always – the professors (my peers) tell their students that the facts are wrong. They have a pathological obsession with hanging on to their theories. Apart from the arrogance that accompanies this I have never really been able to work it out. As a tenured professor I could overnight become an adherent of the Austrian School or whatever and my job wouldn’t be threatened. A tradesperson who loses his/her skills has a problem. But academic life is different. We can explore new ideas any time we choose and take time to develop the news skills commensurate with these ideas. That, in part, is what research is all about. So it is more about their unwillingness to let go of what are essentially religious beliefs that leads the mainstream economists to constantly pump out rubbish and lie when they are found out (by the facts). The overwhelming fact is that the push for austerity is not based on any evidence-based understanding of how the system works. It is driven by stylised economic models that bear no relation to the real world and fail when confronted with data from the real world. As the clock ticks by – tick tock tick tock – the evidence mounts that nations that introduce austerity fare poorly.

I have been travelling the last two days and have disrupted work patterns. But I did manage to read a few things in between other things today which made my hair stand on end and suggest that the austerity debate has moved ground. So desperately lacking is the real evidence which might support the economic claims the conservatives have been using to justify their manic desire to savage public spending when there is 10 per cent unemployment (and worse) – that the deficit terrorists are now appealing to morality – that public deficits and debt are immoral. It makes you wonder why these characters just don’t become stand-up comedians. But given how dangerous they are as a result of their positions in government it is clearly not a laughing matter. I would seek to try these characters for crimes against humanity when it becomes obvious to everyone how wrongful their actions are. It is interesting though – the descent into “moral” arguments means that you can conclude that even the conservatives know that the bevy of economic arguments that they use to justify their damaging policies are nonsense. But there is a new emerging problem. As I write today the entrenched unemployment that the deficit terrorists are now acknowledging they will cause to worsen is giving rise to employers discriminating against the most disadvantaged workers that are seeking work. What this tells us is that the employers have too much power.