The news from the US housing market remains pretty bleak three years after the financial crisis began. Last week, we read that attorneys general from all 50 states were investigating allegations that some major banks inappropriately reviewed mortgage files and/or tendered false foreclosure statements which led to the eviction of thousands of delinquent borrowers from their homes. Apparently, banks and credit suppliers used “robo-signers” to sign false affidavits. The US federal regulators are meeting today (October 20, 2010) to discuss the “foreclosure crisis”. The question is whether this will become a bigger problem and spill over into the real economy and worsen the unemployment crisis. The governments have all the tools and capacity they need to ensure that any financial crisis is totally insulated from the real economy. But their reluctance to show the necessary policy leadership almost ensures that a financial crisis will spread and wreak havoc in the real economy. Their lack of policy action amounts to plain stupidity or malicious contempt for their citizens. Probably both.

Answer: out towards the far right. Today’s blog adds to my previous posts where I consider so-called progressive interventions in the policy debate and show that they are really nothing more than attenuated forms of neo-liberalism. The evidence is that what goes for progressive input these days bears no resemblance to what we used to consider represented progressive thinking. The way the population has been inveigled into accepting policy positions and justification that are represented as “centrist” but are, in fact, what we used to call right-wing positions is one of the success stories of the neo-liberal era. The tendency of so-called progressive organisations to mimic the language and concepts of the right is one of the main constraints on advancing a solid attack on the conservative orthodoxy that created and perpetuated the crisis and which is setting nations up for a repeat in the coming years.

I read an interesting briefing yesterday (October 13, 2010) from the latest Morgan Stanley “Daily Downunder” report Money for Nothing. I cannot link to it because it is a subscription service. The briefing is notable because while it is thoroughly mainstream in its tack, it does present for the first time an awareness that the underlying national income distribution in favour of an ever increasing profit share is problematic and will not sustain a stable recovery. The report also clearly demonstrates that fiscal policy promoted real income growth over the last few years – the only source of private income growth – but this growth has been captured by profits without commensurate growth in employment. The argument resonates with earlier blogs that I have written and confirms two things: (a) the deficit terrorists who want to push for increasing fiscal austerity are dangerous and if successful will push the world economy back into recession; and (b) apart from sustaining the fiscal support for aggregate demand and private saving there needs to be a comprehensive redistribution of income towards the wage share. As a first step a major policy intervention focused on job creation will help achieve that desired redistribution. But more structural policy interventions are required to reverse the neo-liberal attack on the wage share. Once we realise that we have to reject the whole logic of neo-liberalism. That is the challenge – and the necessity – in the period ahead – if broadly shared prosperity is to return.

Today I provide some alternative insights to to recent (not so) Nobel prize awards in Economics. It is claimed that the work of the three winners has “conferred the greatest benefit on mankind” (being the criteria for the award). The reality is that the major insights to be drawn from this trio is that mass unemployment does not exist and that unemployment is largely voluntary or a function of over-generous income support policies by “misguided” governments. The policy recommendations to be drawn from their work focus on cutting the meagre benefits that governments provide to the unemployed in times of strife. The winners’ work tells us that they think workers are lazy and do not search effectively enough, in part, because they have it too good in their jobless state. I rank their work among the most distressing and obscene of all the disgraceful con jobs that the mainstream of my profession has deliberately foisted on the public policy process.

Its very balmy weather over here in the Netherlands at present – like early October and people were out in T-shirts are 21:00 last night. I went to Brussels in the afternoon and didn’t even take an overcoat! But in contrast, the economic climate is decidedly chilly. Each week new evidence emerges which demonstrates categorically that the fiscal austerity proponents have not clue about how real economies and monetary systems function. The world is not behaving as they predicted. The models and analysis they provided to governments as support for withdrawing fiscal support are bereft of any credibility. It is also common for economic commentators and policy makers to argue that problems are manifest and complex and there are no silver bullets. Well what Modern Monetary Theory (MMT) tells you is that when there is a recession (and/or tepid growth) such as the world is enduring now and the non-government sector is drowning in debt and unwilling to expand spending the only solution is to expand public spending. That proposition is not manifest or complex. Its simple – more public spending is required.

I am writing this on late Friday afternoon European time. Today has been very busy and so I don’t have a lot of time to write this blog. I had a birthday in my immediate family to deal with and so some special celebrations were in order. Then I had meetings with two government officials – one from the Flemish government and the other from the Dutch government – they travelled down to Maastricht for consultations. The topic was the Job Guarantee and how they could implement such a buffer stock employment scheme into their own policy thinking. I will write up some thoughts about this meeting next week. Then I had to wade through a new International Labour Organization (ILO) report – World of Work Report 2010 – which has estimated that high unemployment will persist for much longer than they had previously forecast. The talk is that the “product market” (real output) recession is now becoming an entrenched labour market recession. Meanwhile, I also read the latest IMF World Economic Outlook report and noticed they were advocating changes to macroeconomic policy positions across the advanced world that would by their own reckoning increase unemployment and prolong recovery. They are still appealing to the nonsensical idea that fiscal austerity is good for a nation. Their view now is nuanced but still a disgraceful mis-use of econometric modelling. So only a relatively short tour through this work today.

Today I am heading into the lands of austerity – those scorched, barren places where people with increasingly hollowed out faces are being forced by their misguided polities to forego wages and conditions and pensions and their happiness because some neo-liberal told them that government deficits were bad and all that. I am off to London this afternoon (I am typing this on the train to Sydney) and then to Maastricht University where visit each year and my colleague Joan Muysken is located. I have been thinking about various efforts that have emerged in the recent period suggesting that a new progressive agenda (narrative) is required to reverse the onslaught of neo-liberalism. This is clearly a topic close to my own heart. I have been thinking about the development of an alternative economic paradigm for my whole academic career. So whenever I see some progressive efforts I am always interested. This blog considers that question. So now a long flight then I will report on how hollow those faces are becoming.

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.

In the last few days I have read some really loony stuff. One article from an esteemed investment advisor (which I will not dignify by a link) was arguing that the build up of public debt is signalling the death knell for democracy and that capitalism will survive but our freedoms will be gone. I asked some basic questions – which freedoms are they exactly? – and – Why should a rise in private wealth lead to constitutional change or revolution that would deprive us of a vote? But the trend in policy is becoming very clear. Fiscal policy makers are succumbing to the relentless attacks from the deficit terrorists and withdrawing the essential stimulus that has been propping up growth. Most economies are starting to slow again as a result. The response is to seek solace in monetary policy – as if it is effective. The point is that the neo-liberal years have seen the promotion of monetary policy as the principle counter-stabilisation tool – driven by the obsession with inflation. This ceding of macroeconomic policy responsibility to unelected officials in central banks was a major erosion of our democratic rights. Moreover, it has been a failed policy strategy. It is neither an effective inflation control nor does it promote growth. So we are just heading back to where the crisis started. Pity the unemployed.

When I give public lectures about economic policy I often pose the question – how should we judge the effectiveness of public policy? I pose a simple rule of thumb! I judge whether social and economic policy is effective not by how rich it makes society in general but how rich it makes the poor! I see richness in broad terms which embrace both economic and social valuations. Applying this rule of thumb has led me to conclude that the majority of nations in the advanced world are now failed states with run-down and corrupted public institutions. The conclusion is more stark when applied to less developed nations suffering under the neo-liberal yoke imposed on them by institutions like the IMF and the strong donor nations. But the rising poverty in the advanced world as a result of the extended current crisis is making it clear that our economic systems and the policy regimes that are being imposed on them by the neo-liberals are no longer delivering satisfactory outcomes. There needs to paradigm change – urgently.

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.

The headline news for today was that the actor Kevin McCarthy died at the age of 96. He was the star of the legendary 1956 science fiction movie the Invasion of the Body Snatchers which was about a doctor who tried to tell the world that it was being invaded by the emotionless alien Pod People. The movie was in the “so bad that it was good” category. Given the ending was open, perhaps we can persuade some of the Pods to return and subsume a few neo-liberals and also some progressives who have neo-liberal tendencies. There has been a lot of noise lately about why Modern Monetary Theory (MMT) is essentially misguided because it ignores the dangers of the external sector. The claim goes that while there is no financial constraint on government spending, expansionary policy leads to an expanding current account deficit and rising foreign debt levels which are unsustainable over any period longer than a few years. Okay, we have heard this all before. Here are some thoughts.

Yesterday, two public statements were made which caught my roving eye. First, the British Government claimed they were going to cut harder than planned to weed out the unemployed who took income support payments to support their “lifestyles”. That was the approach the previous conservative government took in Australia between 1996 and 2007 and so we have experience with it. It failed dismally to achieve anything remotely positive. Second, the OECD released their Interim Assessments to update the May Economic Outlook publication. It showed that the GDP growth forecasts for 2010 and beyond were being revised sharply downwards. The OECD now claims there are many negative indicators and that governments should not push ahead with their austerity plans if the world economy is really slowing. The British government has used the earlier May EO forecasts (which were overly optimistic) as authority to justify their proposed cutbacks. Well now that authority is gone. However, their proposal to further cut back public spending would seem to be in denial of what is now obvious to even the right-wing hacks at the OECD. It is time for George to admit his austerity push is purely ideological in motivation.

Answer: Probably not! Elections bring out all sorts of revelations and epiphanies. We have seen that in spades in the last few weeks as the two main parties, both rejected as viable governments by the electors have struggled to lure the all important casting vote from the independents who are not only identifiable for the first time (there are even cartoons about them now) but who have taken advantage of their day (or 3 years in the sun) to lever as much out of the parties as possible. So last night, with the government returned as a minority operation at the behest of the vote of three independents and a Green MP, we suddenly see a renewed interest in regional development, public education and parliamentary process. The US President has also found a path to Damascus or at least he is trying to convince voters that he has – even making speeches to industrial workers with his sleeves rolled up. The reality is likely to be different but at least the topic of unemployment is centre stage for a day or so. And dare I add – with some support from the IMF.

For some time I have been promising to write a blog about the role that manufacturing plays in a modern economy. There is a strong presumption, especially from the progressive side of the political debate that manufacturing – or what you produce – defines the capacity for a nation to enjoy growth in real wages and therefore standards of living. So when I have said in the past that I am against industry protection I usually get attacked from the left and I note that this if often coming from people who think it is cute to sound technical by saying the government should balance their budget over the course of the business cycle. As if! Neither viewpoint coming from that quarter has much credibility. I take a more experiential viewpoint. People prefer to consume than to work. What we consume is more likely to give us joy than what we produce especially if the latter is in the context of exploitative capitalist production relationships. I am painting this in black and white terms to garner your interest. Clearly it is more complicated but in general I do not think you need a manufacturing sector to enjoy strong growth in material living standards and perhaps a polluting manufacturing sector erodes the capacity to enjoy broader concepts of growth and well-being. My flame resistant suit is now in place … so here goes.