I was reading several older papers from the 1990s today as part of a project I am working on where I track predictions that leading mainstream economists were making at the time about the evolution of national and global economies. It is a very interesting exercise to build the narratives that were popular at an earlier time and then consider how far the economists got things right. I have noted that there has been some debate out in blog-land about who predicted the failure of the Euro. I am less interested in documenting which person was the first or the second – there were many who saw the design flaws from the inception and could extrapolate what they would mean if a negative shock occurred. Modern Monetary Theory (MMT) economists were among them. I am more interested in groupthink (at the paradigm level) and how the failed predictions can be used to demonstrate the inapplicability of a certain body of theory. That is, what can we learn from the failure of mainstream economists in general to see the crisis coming (and being in denial now of what the solution is). In this blog I consider a part of the thinking that explains why my profession proved to be unreliable in this regard. I renamed this blog – appending it with the term redux because on March 23rd, 2009 – I wrote a blog – Budget surpluses are not national saving.

I was going to write about the so-called fiscal cliff today and would have shown that the only thing that might fall of the said cliff would be real GDP growth should the US Congress actually not extend the tax cuts and impose the spending cuts. The US economy would follow the lead from the British economy and double-dip in 2013 as sure as day follows night (or is it the other way round). The most elementary exposition of what we might call – ECO101 Macroeconomics – would tell us that. One person’s spending is another person’s income and so on. I note that some economists are arguing that ECO101 Macroeconomics is alive and well because it has had a an impeccable record in the current crisis. In my recent blogs – Fiscal austerity damages real growth and prolongs the financial downturn and Neo-liberalism has failed but we still don’t get it – I have argued that the mainstream of my profession has failed – both in anticipating the emerging crisis and providing credible solutions to remedy it. So have I overstated that claim, given that ECO101 Macroeconomics is the go-to approach at present? The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.

In yesterday’s blog – A nation cannot grow without spending – I challenged a view that dominates the European debate which says that fiscal austerity (choking discretionary net public spending) supplemented with vigorous so-called “structural reforms” (aka ransacking wages and working conditions) will promote growth. The corollary of this view is that fiscal austerity alone will fail and the reason Europe is going backwards is not because of the austerity but rather, because the structural reforms process has not been implemented quickly or deeply enough. In all of this there is a basic denial of the fundamental macroeconomic insight – spending equals output which equals income. An economy can only growth if there is spending (aggregate demand) growth. That requires a demand-side solution irrespective of the state of the supply side. Supply improvements might reduce the danger of inflation or improve the quality of output but people still have to purchase the output for growth and innovation to persist. A related argument is that fiscal stimulus aimed at fostering growth will cause inflation and be self-defeating. This view prevails in mainstream macroeconomics as taught in the universities of the world. Some mainstream economists do qualify this view and give conditional support to the fiscal stimulus solution by appealing to what they term the “liquidity trap”. This blog is about that argument.

Evidence is a lovely thing sometimes. Like the speck of blood on a bomber jacket that has finally convicted the racist killers in London, 19 years after the crime was committed. In a different way, economic data is continually flowing in that makes vocal elements in my profession look like idiots. The only question is how long will it take for the rest of the world to know that and for governments to stop being influenced by the opinions of these economists. Over the last few decades I have been compiling interviews and commentaries from leading economists so that I can compare their predictions with the evolving reality. Economists typically make categorical statements such as – rising budget deficits will push up interest rates and choke off private spending – and then buttress those comments with arcane models that were negated both conceptually and empirically years ago. Invariably, when the mainstream economists do make predictions or empirical statements they are invariably wrong and then it is interesting to see how they respond to the anomaly – the dance that follows to try to maintain the upper-hand in the debate. They typically respond by nuancing the issue. But there are also times when their predictions are unambiguously wrong and ad hoc responses (of the Lakatosian type) make them look even more stupid. Then they bury their head in the sand and go into denial mode and their ideology takes over. The best antidote to this sort of dogma is evidence.

A bit of a different blog today. I was rummaging through some boxes of papers today in search of some “non-digitised” notes which I wanted to consult as part of the development of our macroeconomic textbook, which Randy Wray and I hope to get out sometime next year. I came across some old drafts of papers I wrote in the early 1990s which had handwritten annotations etc. The old way of doing things. I thought it was interesting to compare the final published version of one such paper with the unpublished draft. That is what this blog is about – looking back to an article I wrote in 1993 (“Demystifying the Deficit”). A little journey back in time – but with alarming overlaps with what is going on today.

On the first day in her new job the IMF boss was interviewed by the in-house survey unit and asked to outline her agenda. She clearly thinks the IMF remains a centrepiece of the international monetary system. The evidence would suggest otherwise. The conduct of the IMF over its long history has not advanced prosperity and once the fixed-exchange rate system collapsed as unworkable the rationale for the IMF also disappeared. In trying to reinvent itself over the last 40 years, the IMF has become an exemplar of neo-liberal free market thinking and action and caused many of the larger crises that have evolved during this period. Its role in the current crisis exemplifies its culpability. It turns out that a leading mainstream economists also thinks it is time to shut the doors at 700 19th Street, N.W., Washington, D.C. 20431.

I have noted in recent weeks a periodic reference to long-run neutrality of money. Several readers have written to me to explain this evidently jargon-laden concept that has pervaded mainstream economics for two centuries and has been used throughout that history, in different ways, to justify the case against policy-activism by government in the face of mass unemployment. It is once again being invoked by the deficit terrorists to justify fiscal austerity despite the millions of productive workers who remain unemployed. I have been working on a new book over the last few days which includes some of the theoretical debates that accompany the notion of neutrality. There will also be a chapter in the macroeconomics text book that Randy Wray and I are working on at present on this topic. Essentially, it involves an understanding of what has been called the “classical dichotomy”. It is a highly technical literature and that makes it easy to follow if you are good at mathematical reasoning. It is harder to explain it in words but here goes. I have tried to write this as technically low-brow as I can. The bottom line takeaway – the assertion that money is neutral in the long-run is a nonsensical contrivance that the mainstream invoke to advance their ideological agenda against government intervention. It is theoretically bereft and empirical irrelevant. That conclusion should interest you! But be warned – this is just an introduction to a very complex literature that spans 200 years or so.

I have been working on the macroeconomics textbook today that Randy Wray and I are hoping to publish sometime next year. We have a publisher and now just have to complete the text which is progressing well. Also today I have been wondering why UK business firms are not horrified at the latest damaging policy announcement by the new conservative British government. My thoughts generalise to any government at present in terms of the obvious need to expand fiscal policy. I brought those two things together today – the practical need for continued fiscal support for private sector activity and the development of our textbook – by considering the macroeconomic origins of profits. It is an interesting story that very few people really understand because they think micro all the time when it comes to the understanding the profits of business firms whereas you have to start thinking from a macroeconomics perspective to really understand this. It also helps you understand the relationship between the government and non-government sector more fully – a relationship which is at the heart of Modern Monetary Theory (MMT). So read on and see if you have thought about this before.

The attacks on the use of fiscal policy to stabilise the domestic economies of nations that are still languishing in the aftermath of the financial crisis has moved to a new dimension – a escalation in the attack on China and its stupid policy of managing its currency’s exchange rate. The debate is interesting because it is in fact a reprise of discussions that raged in previous historical periods. Each time there is a prolonged recession, governments start suggesting that the problem lies in the conduct of other governments. There is a call for increasing protection (“trade wars”) or demands for some currency or another to appreciate (“currency wars”). The prolonged recession is always the result of the governments failing to use their fiscal capacity to maintain strong aggregate demand in the face of a collapse in private spending. Typically, this failure reflects the fact that the governments succumb to political from the conservatives and either don’t expand fiscal policy enough or prematurely reign in the fiscal expansion. These episodes have repeatedly occurred in history. And at times, when some “offending” governments have been bullied into a currency appreciation (for example) the desired effects are not realised and a host of unintended and undesirable outcomes emerge. This debate is another example of the way mainstream economics steers the policy debate down dead-ends and constrains governments from actually implementing effective interventions that generate jobs and get their economies back on the path of stable growth. So the yuan appreciation debate – just another sideshow. I wonder why we bother.

Many readers have written to me asking me to explain the British Treasury view during the Great Depression. This view was really the product of several decades of literature which culminated in the political process during the 1929 British election where the number one issue of the day was mass unemployment. The Treasury View was thoroughly discredited in the immediate period after it was articulated and comprised one side of the famous Keynes versus the Classics debate. When propositions – such as the Earth was flat – are shown to be incorrect constructions of reality the ideas cease to be knowledge and instead become historical curiosities which allow us to benchmark how far our education systems have taken us. However, the same cannot be said for my profession.

I have always been antagonistic to the mainstream economic theory. I came into economics from mathematics and the mainstream neoclassical lectures were so mindless (using very simple mathematical models poorly) that I had plenty of time to read other literature which took me far and wide into all sorts of interesting areas (anthropology, sociology, philosophy, history, politics, radical political economy etc). I also realised that the development of very high level skills in empirical research (econometrics and statistics) was essential for a young radical economist. Most radicals fail in this regard and hide their inability to engage in technical debates with the mainstream by claiming that formalism is flawed. It might be but to successfully take on the mainstream you have to be able to cut through all their technical nonsense that they use as authority to support their ridiculous policy conclusions. That is why I studied econometrics and use it in my own work. It was strange being a graduate student. The left called be a technocrat (a put-down in their circles) while the right called me a pop-sociologist (a put down in their circles). I just knew I was on the right track when I had all the defenders of unsupportable positions off-side. But an appreciation of the empirical side of debates is very important if a credible challenge to the dominant paradigm is to be made. That has motivated me in my career.

I don’t run a blog on demand service. But today a specific request – almost a desperate plea – from one commentator to provide some analysis of a specific article coincided with many requests I have had for clarification about when a government is revenue constrained. The specific article in question apart from being one of the worst examples of uniformed economics journalism covers the ground about levels of government perfectly. So I decided to behave like a blog on demand service today despite wanting to write about how the US is a failed state. That will wait until Monday though and by then even more Americans will have slipped into poverty driven there by failed US government policy and a sclerotic system of government dominated by two main parties that are now incapable of governing in the public interest.