Dear Treasurer, I have a plan for your $60 billion

On Friday, we had the extraordinary admission from our Federal government that they had overestimated the injection required to fund their wage subsidy JobKeeper program by some $A60 billion. When the overall program was announced the Treasury allocated $A133 billion to it. So now they are admitting to a 45 per cent forecasting error, which sort of dwarfs the worst errors that the IMF makes, and they sure make some bad mistakes in their projections. Whatever the reason for the mistake, the way the Treasurer has defended it is quite repugnant – claiming virtue out of the incompetence. And while all the Labor Party economists are talking about seeing the error from space, none of them picked it up or had the nous to realise that the figures didn’t add up when the Government originally released them. I am the only economist who wrote that the figures published by the Government didn’t make sense. I did that on April 29, 2020. I also wrote to the Treasury and the Treasurer requesting answers to questions that reflected my concern. They didn’t bother replying. Now everyone is wise after the fact. Anyway, the $A60 billion is a nice round figure. And I outline a plan in this blog post on exactly how the Treasurer can spend it and improve the well-being of more than a million Australians with a stroke of the pen.

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The advanced nations should take the lead of Pakistan in job creation

Last Thursday (April 30, 2020), the US Department of Labor’s – Unemployment Insurance Weekly Claims Report – showed a further 3,839,000 workers filed for unemployment benefits in the US, taking the cumulative total since March 14, 2020 to 30,589,000. In a labour force of 164 million odd, that implies the unemployment rate is already around 22 per cent. The highest rate endured during the Great Depression was 24.9 per cent in 1933, which prompted the US President to introduce the major job creation program to stop a social disaster – the New Deal. History tells us that the major job creation programs (starting with FERA then morphing into the WPA) were opposed by the conservative (mostly) Republicans in the Congress. As is now! It wasn’t just the unemployment that mattered. Hours of work were also cut for those who maintained their jobs and some estimates suggest over 50 per cent of America’s labour force were underutilised in one way or another (read David Kennedy’s 2001 book for a vivid account of this period). The problem now is that the US has a Presidency that is unlikely to take the bold steps that Roosevelt took in the 1930s, even though the latter was a fiscal conservative and the former does not appear to be so inclined. However, some nations are leading the way – and they put the more advanced nations to shame in this regard.

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A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points

When Kevin Rudd was faced with the threat posed by the unfolding GFC in late 2008 his government became very pragmatic and immediately ditched the narrative they had been pushing out throughout that year about inflation being a threat and the need for tighter fiscal policy and surpluses. They introduced, in two rounds, a fairly significant fiscal stimulus (around 4.2 per cent of GDP) which effectively saved the Australian economy from entering a recession. A significant part of that intervention was that it had various temporal properties – a cash handout in December 2008 designed to get spending power into the hands of consumers just before Xmas (the famous ‘flat screen’ payment – there were a lot of TVs purchased), which obviously was an immediate focus, and, a longer term component, which included their plan to put insulation into every home. This was aimed at job creation clearly, to address the cyclical needs, but, it was also intended to address the longer term climate crisis, that were beyond the GFC cycle. When appraising what government’s should be doing now – to deal with the socio-economic consequences of the medical crisis – that style of thinking is essential. The questions that need to be asked are: 1. What can be done now to avert an economic collapse? 2. What do we want to change about the pre-structure of the economy into the future? 3. How can we use the stimulus intervention to make those changes, while addressing Question 1. In this blog post, I go through some of that style of thinking. I also provide some specific estimates of the investment needed to introduce a Job Guarantee in Australia.

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Bank of England official blows the cover on mainstream macroeconomics

It is quite amusing really watching the way orthodox economists who know the game is up work like gymnasts to avoid actually spelling out directly what the facts are but spill the beans anyway. Last week (April 23, 2020), an ‘external member’ of the Bank of England’s Monetary Policy Committee, one – Gertjan Vlieghe – gave a speech – Monetary policy and the Bank of England’s balance sheet. If the message was taken seriously, then the way monetary economics and macroeconomics is taught in our universities should change dramatically. At present, there is only one textbook that seriously caters for the message that is inherent in the speech – Macroeconomics (Mitchell, Wray and Watts). The speech leaves out important insights but essentially allows the reader to appreciate what Modern Monetary Theory (MMT) has been on about, in part, for 25 years.

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The European Commission non-stimulus is a waiting game before new austerity is imposed

Things are a little odd when a Minister for Finance & Public Expenditure and Reform of a nation (Ireland) informs the press that if his government isn’t cautious in its fiscal response to the largest medical and economic crisis in a century then the “bond vigilantes” will turn on them. And this is in the context of governments around the world issuing long-term debt at negative interest rates and the relevant central bank is buying billions of government bonds with its currency-issuing capacity. But that is what the Irish Finance Minister did last week ((Source). Fear of God strategy Number 1. That still works in god-fearing places. He referred to the “the fiscal architecture we are anchored in within the euro area” which will ultimately impose Excessive Deficit Procedures as the medical crisis eases (see his April 23, 2020, Speech on Stability Programme Update). Code for a renewed bout of austerity once people have stopped dying. A wonderful prospect. And while currency-issuing governments around the world are introducing variously large direct fiscal stimulus packages (that is, spending going into the economy immediately), the European Union is once again demonstrating their inability to respond to crisis. Nothing has been learned from the GFC.

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How to discuss MMT without discussing it – BIS style

On October 13, 2019, the Bank of International Settlements published a paper – Exiting low inflation traps by “consensus”: nominal wages and price stability – (which was based on a speech one of the authors was to make in late November at a conference in Colombia). The reason I cite this paper is because it talks about Modern Monetary Theory (MMT) – in pejorative terms, without really knowing what MMT is. But the most interesting aspect of it was the admission that the mainstream theory that they use to set up the ‘straw person’ they tear down cannot explain real world events. The BIS unwittingly admits that the mainstream macroeconomics really is adrift and the analytical frameworks that arise from it (DSGE etc) are incapable of explaining real world developments. So I thought that was worth documenting.

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The Weekend Quiz – November 9-10, 2019 – answers and discussion

Here are the answers with discussion for this Weekend’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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The Weekend Quiz – October 19-20, 2019 – answers and discussion

Here are the answers with discussion for this Weekend’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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ECB confirms monetary policy has run its course – Part 2

This is Part 2 of my two-part commentary and analysis of the – Monetary policy decisions – by the ECB (September 12, 2019). In Part 1, I discussed the shifts in the deposit rate and the changes to the Targeted longer-term refinancing operations (TLTROs). In Part 2, I am focusing on the decision to introduce a two-tiered deposit rate on excess reserves, which is designed to reduce the costs of the penalty arising from the negative deposit rate regime that the ECB has had in place since June 2014. But the most important aspect of the ECB decision was not the monetary policy changes, which will have relatively minor impacts on the real Eurozone economy. The telling part of the whole episode was Mario Draghi’s comments on fiscal dominance. We are entering a new era where the neoliberal obsession with so-called monetary policy reliance is becoming increasingly discredited and exposed by the evidence base. Fiscal dominance is approaching. And the only body of work that has consistently argued for this approach to macroeconomic policy making has been Modern Monetary Theory (MMT) despite what the mainstream economists who are now starting to realise their reputations are in tatters might say.

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Apparently Brown could but Boris cannot – British progressive journalism at its worst

It is Wednesday and my blog post-lite day. A few topics – thugs in Britain. Mindless ‘progressive’ journalism trying to tell readers that while Gordon Brown could use fiscal policy tools (spending and taxation) to advantage to stimulate the British economy, Boris Johnson cannot. Piffle and the lies from the UK Guardian are getting more desperate by the week. And some notes on guns. Then a nice bit of guitar playing. Tomorrow, I will be extending my ideas on the Green New Deal.

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There are no financial risks involved in increased British government spending

On July 26, 2018, UK Guardian columnist Phillip Inman published an article – Household debt in UK ‘worse than at any time on record’ – which reported on the latest figures at the time from the Office of National Statistics (ONS). He noted that the data showed that “British households spent around £900 more on average than they received in income during 2017, pushing their finances into deficit for the first time since the credit boom of the 1980s … The figures pose a challenge to the government … Britain’s consumer credit bubble of more than £200bn was unsustainable. A dramatic rise in debt-fuelled spending since 2016” and more. While keen to tell the readers that British households were “living beyond their means”, there was not a single mention of the fiscal austerity drive being pursued by the British government over the same period. Nor was there mention of the fact that the entire British fiscal strategy since the Tories took office was predicated, as I pointed out years ago in this blog post – I don’t wanna know one thing about evil (April 29, 2011), on this debt binge continuing. A year later (July 20, 2019), the same columnist published this article – Labour and Tories both plan to borrow and spend. Is that wise? – which like its predecessor fails to present a comprehensive, linked-up, analysis for his readers and makes basis macroeconomic errors along the way.

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How social democratic parties erect the plank and then walk it – Part 1

There is now a procession of wannabee Modern Monetary Theory (MMT) critiques coming out of the woodwork all around the place seeking cover from the criticisms coming from the likes of Larry Summers, Paul Krugman, and Kenneth Rogoff, who are regularly referred to as “the world’s leading economic thinkers” or “Nobel Prize-winning economists” as if any of that established authority. These ‘Nobel Prize’ winners are not Nobel Prize winners at all – the economics prize is not part of the original Nobel gift and was instead invented by a bank because economists were feeling left out (inferior). But in recent days, across two jurisdictions, where the so-called party of the workers – the Labour Party in the UK and the Labor Party in Australia – are struggling to gain electoral traction, and in the Australian case, just lost an election against one of the worst governments we have ever had, we have seen two erroneous attacks on MMT that really sums up the existential crisis facing social democratic parties – the loss of identity and revolutionary zeal. This is Part 1 of a two-part series examining how ‘walk the plank that you erect yourself’ strategies play out within our so-called progressive social democratic parties and deliver abysmal results.

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The Weekend Quiz – March 30-31, 2019 – answers and discussion

Here are the answers with discussion for this Weekend’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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The Weekend Quiz – March 23-24, 2019 – answers and discussion

Here are the answers with discussion for this Weekend’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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The Weekend Quiz – January 19-20, 2019 – answers and discussion

Here are the answers with discussion for this Weekend’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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The Weekend Quiz – January 5-6 – answers and discussion

Here are the answers with discussion for this Weekend’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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The British Labour Fiscal Credibility rule – some further final comments

Over the last weekend, it seemed that we had a return of the Spanish Inquisition with a prominent British academic, who by his own words designed the fiscal rule that British Labour has unwisely adopted, repeatedly demanding that MMT Tweeters confess to knowing that I was completely wrong on my interpretation of the fiscal rule. It is apparent that my meeting with the British Shadow Chancellor in London recently and my subsequent discussion of that meeting has brought the issues relating to the fiscal rule out into the open, which is a good thing. It is now apparent that British Labour is still, to some extent, back in the 1970s, carrying an irrational fear of what financial markets can do when confronted with the legislative authority of a sovereign government. I am not a psychologist so I cannot help them heal that irrational angst. But the claims that I misunderstood the fiscal rule – which are being repeated daily now by the fanboys of the rule are just ludicrous. The rule is simple. And it will bring Labour grief politically. Rolling windows or not!

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Real resource constraints and fiscal policy design

There is an interesting dilemma currently emerging in Australia, which provides an excellent case study on how governments can use fiscal policy effectively and the problems that are likely to arise in that application. At present, the Australian states are engaging in an infrastructure building boom with several large (mostly public sector) projects underway involving improvements to road, ports, water supply, railways, airports and more. I travel a lot and in each of the major cities you see major areas sectioned off as tunnels are being dug and buildings erected. Not all of the projects are desirable (for example, the West Connex freeway project in Sydney has trampled on peoples’ rights) and several prioritise the motor car over public transport. But many of the projects will deliver much better public transport options in the future. On a national accounts level, these projects have helped GDP growth continue as household consumption has moderated and private investment has been consistently weak to negative. But, and this is the point, there have been sporadic reports recounting how Australia is running out of cement, hard rock and concrete and other building materials, which is pushing up costs. This is the real resource constraint that Modern Monetary Theory (MMT) emphasises as the limits to government spending, rather than any concocted financial constraints. If there are indeed shortages of real resources that are essential to infrastructure development then that places a limit on how fast governments can build these public goods. The other point is that as these shortages are emerging, there is still over 15 per cent of our available labour resources that are being unused in one way or another – 714,600 are unemployed, 1,123.9 thousand are underemployed, and participation rates are down so hidden unemployment has risen. So that indicates there is a need for higher deficits while the infrastructure bottlenecks suggest spending constraints are emerging. That is the challenge. Come in policies like the Job Guarantee.

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The Weekend Quiz – June 9-10, 2018 – answers and discussion

Here are the answers with discussion for this Weekend’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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The Weekend Quiz – April 21-22, 2018 – answers and discussion

Here are the answers with discussion for this Weekend’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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