Unemployment and Inflation – Part 10

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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British Budget – verging on delusion

The Olympics have come and gone. No doubt the event gave some macroeconomic respite to the British economy because major events bring immediate spending and spending drives output and national income. But the fourth-quarter 2012 real GDP data showed that the British economy had contracted by -0.3 per cent. Household final consumption expenditure slowed throughout 2012 as private investment growth contracted over the second-half of 2012. Further, despite the hope that the fiscal austerity would be painless as a result of a boost in net exports, especially given the depreciation in the British currency, the data showed the the current account deficit increased as a result of a fall in exports over 2012. It was in this context that the British government brought down the – 2013 Budget – which provides no path out of this malaise. At a time when the correct economic strategy would have included a political admission that the previous 3 budgets were detrimental interventions for the British economy and a commitment to some discretionary stimulus, the British government chose to adopt a neutral position in the coming financial year, which when taken in perspective just maintains the contractionary bias of fiscal policy. The mismanagement of the British economy thus continues.

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Troika Technical Manual: How to wreck (another) country?

Cyprus is a small country of some 839 thousand people. It joined the Eurozone on January 1, 2008. That decision sealed its fate. Now the Troika are making it pay for that mistake, one that the Troika lured it into making. Such is the way of the Eurozone. The elites set the system up to suit their ideological preferences. Lure the local national elites who aspire to wine and dine in style in Brussels into becoming pro-Euro. Then attack the ordinary folks when the system collapses. But as we know, the Eurozone was a system designed to fail as soon as the first major negative aggregate demand shock hit. The shock hit in 2008. The system failed. Since then the elites have been divining ways to push the costs of those mistakes onto those who are least able to pay. How many Euro decision-makers are unemployed as a result of the crisis? How many Euro decision-makers who have since retired have lost any pension entitlements? But now the citizens of Cyprus are having their savings plundered by the Troika. The shamelessness seems to have no bounds. It is not even a strategy that will deliver the outcomes they have defined. The elites go from one blunder to the next and meanwhile all the key economic targets continue to deteriorate (like employment growth etc). And even the irrelevant targets that are the obsession of the elites also move in the opposite direction to that intended. If it wasn’t so tragic it would be the comedy of the century.

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Spain is not an example of reform success

There was an article in the Financial Times last week (February 12, 2013) – Europe’s labour market reforms take shape – that claimed that Spain was on the path to glory by hacking into rights of its workforce (that is, the 75 odd percent that still have jobs). It followed another Financial Times article (February 11, 2013) – Productivity is Europe’s ultimate problem – written by the deputy managing director of the IMF and redolent of the ideology that organisation spins as facts. Both articles are part of a phalanx in the conservative press that prefer to lie rather than relate to the facts. Apparently we have a new poster child – Ireland was the first one (now forgotten as it wallows in the malaise of fiscal austerity). Now, Spain is the go – a model for savage labour market reform and export led growth. Well it is a model – for how to ensure the unemployment rate and poverty rates continue to rise and you produce an economy that stops employing its 15-24 year olds. Some poster child! Spain is not an example of reform success. Rather, it demonstrates how misguided the policy debate has become and how a policy devastation is now being seen as good. Truly bizarre.

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Keynes and the Classics Part 9

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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Keynes and the Classics Part 7

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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ILO …. ILF … IMF

The International Labour Organization (ILO) released its latest – Global Employment Trends 2013 – yesterday (January 22, 2013), which carried the sub-title “Recovering from a second jobs dip”. The way things are going in policy circles next year’s ILO Trends report will be titled something like “Heading into a third jobs dip”. There has been a lot of focus in the last few days on how central banks are standing ready or are about to inject liquidity into their respective economies as a further attempt to boost jobs. The press reports I have read (about Japan, UK etc) never also mention that these monetary policy gymnastics (quantitative easing) do nothing as they stand for aggregate demand. Japan will pick up its growth rate in the coming year not because the BoJ is buying bonds but because the Ministry of Finance will be increasing the budget deficit via some large spending injections. Unfortunately, the UK is determined to ensure it has a quadruple(bypass!)-dip recession. The ILO reports highlights the results of the policy folly in very sharp terms but, unfortunately, still situates that organisation within the neo-liberal orthodoxy when it comes to macroeconomic policy. Their heart is at least in the right place, they just have to move their institutional brain – about 180 degrees.

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Keynes and the Classics – Part 4

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

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We need more artists and fewer entrepreneurs

When the early neo-liberal governments in Britain, Australia and New Zealand wanted to craft the public debate so that we wouldn’t realise that privatisation was just selling wealth that we already owned collectively to enrich a few of us as well as all the parasitic lawyers and brokers who managed the sales, they pushed the idea that we were all shareholders now. The old idea of capitalists versus workers was dead because we were all basically capitalists and the wealth would grow accordingly. What a disaster that initial experience with the neo-liberal myth has been. Now, that governments are deliberately creating unemployment and undermining paid-work opportunities with fiscal austerity, the public debate is being bombarded with a variation on that same theme. Now we are being told that it is so passe to think in terms of workers and bosses because in reality we are all basically entrepreneurs. Even the most lowly-paid casualised worker who is unfortunate enough to have to eke out an existence via labour hire companies is cast gloriously as a profit-seeking entrepreneur. The rot is seeping into our educational institutions as well.

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The culpability lies elsewhere … always!

Two papers have come out in the first week of January that provide further evidential support for the argument that the majority of macroeconomics that is taught in standard university programs is worthless. The first (published January 3, 2013) – Growth Forecast Errors and Fiscal Multipliers – from the IMF attempts to explain why the planned fiscal austerity measures in advanced economies have been more damaging than mainstream economists predicted. It is an excruciating attempt at regaining credibility for the seriously wayward IMF. The problem is that its credibility is so far in deficit that it has a lot of consolidation to do before anyone should believe them again. The second paper (published January 2013) – A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts – from researchers at the Federal Reserve Bank of New York “presents new survey evidences on workers’ response to the 2011 payroll tax cuts”. The results of the survey? Much higher estimates of the consumption propensities than were predicated from mainstream economic theory. Implication? The standard theory taught to students is wrong and should be disregarded.

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Saturday Quiz – December 29, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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 humanities is necessary but not sufficient for social transformation

I am researching a project at the moment on the role of humanities (and social sciences) in enhancing standards of living and rendering societies open, empathetic (to the disadvantaged) and dynamic. It is in the face of trends within Universities to concentrate funding and attention on the so-called STEM disciplines (Science, Technology, Engineering and Mathematics) and contract funding for the humanities (and social science). The funding cuts undermine the viability of these areas and whole departments have been closed – having been declared by the bean counters – as being uneconomic. This is reinforced by conservative neo-liberal political diatribes which seek to construct the humanities/social sciences as bastions of “left-wing” radicalism and post-modernist degradation (for example, eschewing studies in sexuality, gender, ethnicity etc). There is strong evidence available to show that studying the humanities is a socially transformative endeavour (for example, the Clemente program). But like all “individual” initiatives, there is a danger that the reasoning used to justify them will fall foul of compositional fallacies. We have to defend the humanities to enrich individuals. But we also have to use that empowerment to challenge the elites on the macroeconomics battleground. The two motivations are self-reinforcing. The former is not a sufficient condition for social transformation.

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Autumn Statement was a confession of abject failure

The half-way mark came last week for the suffering, seemingly, ever stoical British. Why they are ever stoical in the face of an exploitative, class society where the rich always find ways to push the losses of their caprice and incompetence onto the poor is a cultural story I have never understood (despite living in Britain for a time in the 1980s). But the Autumn Statement (December 5, 2012) from the failed Chancellor marks the half-way point in the British government’s tenure on office. At this stage, the assessment is that it has unambiguously failed in its mandate and its now transparent attack on the poor is the only thing that is obvious. All that can be said is that the half-way mark is gone and the national election draws nearer every day. The pity is that the display by British Labour, in their response to the Autumn Statement, was worse than pathetic. They better hurry up with alternative policy development, which doesn’t include proposing deficit cuts that are more “humane” than the current Government’s approach.

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Win-win – US budget deficit expands and supports growth and private saving

The Sydney Morning Herald carried an AFP story today (November 14, 2012) – US deficit hits $120b as fiscal cliff nears – which reported the latest US Treasury Department figures which showed that “the US budget deficit rose 22 per cent in October from a year ago, to $US120 billion ($A115.56 billion), as spending far outpaced revenue”. At which point I thought – how lucky the American people are that the Government deficit is still expanding and supporting growth unlike the expanding deficits in Europe which are expanding because of a lack of growth. It is an astounding achievement for the US people. Unfortunately all the signs are that the American polity doesn’t actually understand that their in-fighting, which has allowed the deficits to continue growing, has been good for the nation. Had they actually cut the deficits or failed to pass the debt limit extension, the US economy would be in the doldrums just like Europe. The problem now is that the political debate will reach some conclusion pretty soon and the harbingers of doom are growing stronger. But for the time being with the US budget deficit expanding and supporting growth and private saving it is a win-win.

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Eurozone policy makers destroying prosperity

In the last week, several major data releases have been published by Eurostat, culminating in yesterday’s release of the September unemployment which shows that the jobless rate has risen to its highest in the currency union’s history. There are now 18.49 million people in the Eurozone without work and that is the tip of the iceberg when it comes to assess the wasted production and lives that the fiscal austerity is creating. Just in the last month, a further 146,000 became unemployed. More than 25 per cent of available workers are unemployed in Greece and Spain. We have moved from describing this tragedy as a recession. This is now a full blown Depression of the scale of the 1930s travesty and, once again, its depth is a direct result of policy failure. All the indicators are coming together and providing an unambiguous verdict – that the Eurozone policy makers destroying prosperity and have relinquished any sense of capacity to govern, where that term means the capacity to advance public purpose and improve welfare.

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Monetary policy will not save the day

Day 2 in Darwin – hot – but back to business. Thanks for all the nice remarks. The IMF once again demonstrated why their entire public funding should be withdrawn by the contributing governments, who could spend it more usefully introducing direct job creation schemes. Once again they have downgraded their growth forecasts as if the situation has changed from when they last told us what they thought would happen. Nothing has changed except the IMF have worked out their previous forecasts were wrong. But then they could never have been right given the policy agendas that the IMF and its repressive partners (such as the EC and the ECB) are pushing on nations that deserve better. More generally, the failure of the IMF to produce reliable estimates is linked to the overall misunderstanding of the relative roles of fiscal and monetary policy that exists among commentators and economists. The neo-liberal dislike of fiscal policy skews the debate towards thinking that monetary policy will save the day. Unfortunately, an understanding of how monetary works and the current problem would not lead one to that conclusion. Only a significant renewed fiscal policy stimulus will arrest the decline towards recession. The IMF has one thing correct – the world economy is backsliding. But then we knew that a long time ago while they were still trumpetting the virtues of fiscal austerity and solid growth prospects.

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The Celtic poster child demonstrates the failure of austerity

The IMF boss claimed yesterday that her organisation believed that austerity and growth “can be reconciled and should not be mutually exclusive” (see analysis in blog). She lied just like the IMF has been lying regularly since the crisis began. She also claimed that the IMF forecasts have been trending down. The fact is that they keep revising them down because they are continually wrong. They want to dress their austerity bullying up in a favourable light by claiming growth will be higher. The reality is always different and growth, quite predictably, comes in lower. Their poster child – Ireland – was the first nation to succumb to the austerity narrative. The latest national accounts from Ireland released last week continue to provide a bleak outlook on what is happening there. Austerity is killing the economy – slowly but surely. Joseph Stiglitz said that fiscal austerity is tantamount to economic suicide. Ireland is leading the way. Despite massive austerity, Ireland is still going backwards and people are becoming poorer. Claims that Ireland’s austerity approach provides a model for other nations to follow because it produces growth cannot be sustained from the data. Further, as I will show in another blog – the poor economic performance is making it impossible for Ireland to achieve the ridiculous fiscal benchmarks that the Troika have imposed on it. It is folly all round. Pity the workers and the common folk.

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5.4 into 1 does not equal 5.4

I am doing a bit of cleaning up old filing boxes each day now as the date I will be moving offices approaches. It is actually an interesting process – looking through boxes and articles that have been stored away for some years now. Today, I came across an article that was in the US Magazine Challenge (March-April, 1982) entitled The Guilds of Academe and written by one Jack Barbash, who was an academic at the University of Wisconsin. It discussed the way in which the economics profession protects its belief system from criticism and avoids, as far as possible, addressing real world problems. The mainstream will talk as if they are addressing a real world problem – such as entrenched unemployment – but when you realise the models they are dabbling with you know that they are really talking about nothing real at all. This leads onto a forthcoming book by some British conservative MPs who have the temerity to argue that the British unemployment problem is due to the workers being to idle and diverted by pop music to bother working. You know instantly that the underlying model has come from a mainstream economist who hasn’t recently looked out the window or read any data.

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ECB deficit funding or persistent mass unemployment

Yesterday’s Statement from the US Federal Reserve Open Market Committee (FOMC) stated that the US economy is slowing and the “housing sector remaining depressed” and employment growth slow. The US central bank indicated that moderate growth would persist for the immediate future but that it was threatened by events overseas (read Europe). And over in Europe – the pressure is mounting on the ECB, which knows it must continue to work out ways to fund member states but is being constantly pummelled by the inflation-phobes in Germany (and elsewhere). The problem in Europe is not sovereign debt but a lack of spending. Even within the flawed European monetary system design, the ECB has the capacity to fund increased spending. Those who claim this would be disastrous have a strange view of the consequences of not doing that. This debate resonates with that between Keynes and the Classics in the 1930s. The former demonstrated categorically that without external policy intervention (for example, fiscal stimulus) economies tend to states of chronic mass unemployment with massive income losses (and other pathologies) being the result. Do the Euro leaders really want that state to evolve? They are at present doing everything they can to ensure it does.

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The non-existent but remarkable austerity-depreciation mechanism

The conservative lobby (often dominated by Austrian school types) are increasingly running the narrative that neither monetary or fiscal stimulus can engender growth as nations wallow in stagnation. Their rejection of the use of fiscal stimulus – aka spending of one sort or another – would appear to be in denial of the basic macroeconomic rule – one person’s spending is another person’s income – or in a sectoral sense – government spending equals non-government income. Their arguments against monetary policy have some resonance with my own views. But, for example, is any one really going to argue that if the government hired all the unemployed and paid them a stable wage (in excess of any income support they might be receiving) that the shops would not experience rising sales, which, in turn, would stimulate rising orders to suppliers and increased production and higher growth. Are they really saying that all stimulus spending leaves the shores via net exports? While historical evidence is often cited, when one digs further it becomes clear that the evidential basis of the anti-government claims cannot be substantiated. And – the arguments reduces to a rather crude expression of their dislike of government activity.

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