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.

Whenever unemployment rises substantially – that is, whenever there is a recession, the conservatives hide out for a while because the rapid rise in joblessness does not resonate with their models of voluntary choice (that is, workers choosing leisure although they can never explain why workers would suddenly get lazy?) or with their claims that structural factors push the unemployment rate up (although welfare policies etc rarely alter much). Of-course, they love it when some “structural” policy changes during a recession which is why they are cock-a-hoop about the decision of the US government to extend unemployment benefits. It has given them some latitude to get back into the debate even if all the data is working against them. But they always oppose the use of fiscal policy and so typically, towards the tail-end of a recession, they attempt to justify the deplorable unemployment levels by playing the “structural card”. We are now seeing that again and I expect the propaganda to spread and proliferate. It should be rejected like the rest of the cant.

Remember what we were told a few months ago – that business and households were so terrified of higher future tax burdens associated with the budget deficits that they were not investing or spending and so governments were killing economic growth? This led to the deficit terrorists arguing (shouting) that the fiscal stimulus that governments had implemented to save their economies from the threat of a depression were actually undermining growth and that fiscal austerity was the key to growth. Accordingly, governments have increasingly been implementing or promising to implement so-called fiscal consolidation strategies because they have fallen prey to the austerity proponents. As the fiscal stimulus has waned across the world growth is slowing and there is now a real danger of a double-dip recession. In nations that have introduced formal austerity programs the evidence is now mounting … it damages growth and undermines business and household confidence. It has exactly the opposite effect to that predicted by the deficit terrorists which is no news to anyone who understands anything about how the economy works. The victims – the poor and disadvantaged …. AGAIN!

I read a brief report from the US Tax Policy Center – The Debate over Expiring Tax Cuts: What about the Deficit? – last week which raises broader questions than those it was addressing. I also note that Paul Krugman references them in his current New York Times column (published August 22, 2010) – Now That’s Rich. The point of my interest in these narratives is that I have been researching the distributional impacts of recession for a book I am writing. The issue also bears on the design of fiscal policy and how to maximise the benefits of a stimulus package.

There was an interesting forum in the The Economist Magazine on August 11, 2010 which considered the question – What actions should the Fed be taking?. The Economist assembled a group of academic economists (mainly) and the opinions expressed largely will make any person who understands how the monetary system operates and what the current problem is shudder in disbelief. What the discussion reinforces is that the mainstream economists really have failed to understand what the crisis was all about and do not comprehend the nature of the solution. Most of the contributions are just mindless repetition of what you might find in any mainstream macroeconomics textbook. It is very scary that these characters continue to be heard. If only the citizens knew what was going on!

I have been in Sydney today for meetings. I caught an early train and then back again in the afternoon. Trains journeys are great times to read and write and this blog has been written while crossing the countryside (Sydney is nearly 3 hours south of Newcastle by train). The trip is slower than car because the route is still largely based on the first path they devised through the mountains and waterways that lie between the two cities. The curves in places do not permit the train to go faster. The government is promising however a fast train with a much more direct path (up the F3 freeway I guess). Anyway, several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki – The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki’s argument given that it is often raised by progressives as a case against effective fiscal intervention.

The OECD is held out by policy makers and commentators as an “independent” authority on economic modelling. The journalists love to report the latest OECD paper or report as if it means something. Most of these commentators only mimic the accompanying OECD press release and bring no independent scrutiny of their own to their writing. Government officials and politicians also quote OECD findings as if they are an authority. The reality is that the OECD is an ideological unit in the neo-liberal war on public policy and full employment. They employ all sorts of so-called sophisticated models that only the cogniscenti can understand to justify outrageous claims about how policy should be conducted. In an earlier blog – The OECD is at it again! – I explained how the OECD had bullied governments around the world into abandoning full employment. Now they are providing the “authority” to justify the claims being made by the austerity proponents that cutting public deficits at a time when private spending is still very weak will be beneficial. The report I discuss in this blog is just another addition to the litany of lying, deceptive reports that the OECD publish. These reports have no authority – they are just GIGO – garbage in, garbage out!

The daily rhetoric being used to promote fiscal austerity maybe couched in the urgency of the day but we have heard it all before. In this blog I just reflect on history a little to remind the reader that previous attempts to carve public net spending, based on the “expectations” belief government was not going to tax everybody out of existence, failed to deliver. The expected spontaneous upsurge in private activity has never happened in the way the mainstream macroeconomic supply-siders predicted. Further, the chief proponents usually let it out in some way that the chief motivation for their vehement pursuit of budget cuts was to advance their ideological agendas. Of-course, the arguments used to justify the cuts were never presented as political or class-based. The public is easily duped. They have been in the past and they are being conned again now. My role is to keep providing the material and the arguments for the demand-side activists to take into the public debate.

In recent days there has been some discussion about the way different Modern Monetary Theory (MMT) thinkers might see the development of the paradigm. There has be some remarks that MMT should be explained in little steps and only then presented as a menu of policy choices so that all ideological persuasions might embrace it. There have also been statements that my US-based colleagues have agreed to that strategy and are now discounting any advocacy of full employment because the US population en masse (allegedly) find such notions repugnant. I disagree with all of those propositions. I consider that a sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed. If they don’t take that responsibility and use the fiscal capacities that they have courtesy of their sovereignty, then there will typically be mass unemployment. An understanding of MMT makes that clear. The discussion also has raised questions about the purpose of my blog and I reflect on that in what follows.

I have noticed a few commentators expressing concern about the dangers that might arise if a nation runs a persistent current account deficit. There have been suggestions that this area of analysis is the Achilles heel of Modern Monetary Theory (MMT). I beg to differ. A foundation principle of MMT is that to be able to freely focus on the domestic economy, the national government has to be freed from targetting any external goals – such as a particular exchange rate parity. The only effective way for this to happen is if the exchange rate floats freely. In this sense, the exchange rate is the adjustment mechanism for external imbalances.

I have been trying to maintain a theme focusing on the absurdity of our economic systems and the way in which governments allow themselves to be held to ransom by a small group of largely unproductive financial traders and the associated institutions (credit rating agencies). I was reminded of this again today when I read a report on growing murders of trade union officials and the purging of working conditions in various countries as the economic crisis worsened. When you juxtapose this sort of news – about things that really matter – with the nonsensical antics of the financial markets in Europe you realise we have totally lost any notion of priority.

Governments around the world are being stampeded by financial commentators and international organisations (IMF, OECD, G-20) to implement austerity programs to get their “deficits under control”. All sorts of horrendous predictions are being touted in the press daily by the deficit terrorists who focus their gaze on charts showing movements in financial ratios – such as the deficit to GDP and public debt to GDP ratios. They largely ignore history and when they do invoke it the introduce erroneous analyses which do not apply to the issue at hand. They erroneously conflate the Eurozone with sovereign monetary systems. And they never let up. But in all the talk of austerity the real dimensions of the problem get lost. That is what today’s blog is about – getting our focus down to the fact that thousands of children will die as a result of these unnecessary austerity programs which are just designed to satisfy the ideological hangups of the (mostly) high income and wealthy elites in our societies.

When I saw the headline on this article – Time to plan for post-Keynesian era – in the Financial Times yesterday (June 7, 2010) I wondered which Keynesian era we were talking about. It was written by Jeffrey Sachs who is well-known for his anti-stimulus viewpoints. The upshot of his argument, however, is that he recommends deficit reduction strategies because the bond markets will get upset otherwise. At the same time he advocates medium-term investments in green technology and education which I support but which will not be consistent with deficit reductions.