When economists ignore the elephant called reality and applicability

I have sat through many economic seminars in my time where there is a sense of suspended reality necessary so the presenter can run through the exercise of bringing their latest research idea to the academic community. This suspended reality normally relates to the a priori assumptions made to condition the exercise and the framework within with the exercise is conducted. It typically involves ignoring the elephant in the room called reality and applicability. The ruse goes like this – assume a, b and c (where none of these assumptions capture the most important aspect of the object of study); then use these analytical tools (none of which reflect how the actual mechanisms being studied operate); and QED we show this. I no longer go to seminars like this – life is too short. An example of this sort of exercise appeared recently in summary form on VoxEu site (June 6, 2017) – Japanese frugality versus Italian profligacy? – written by an MIT academic. Perhaps the salient aspect is that the author was previously a Central Bank governor in Cyprus (2007-12) and a member of the Governing Council of the European Central Bank (2008-12). That experience may have led to his clouded judgement. But more so is the fact that he is a Friedmanite! One of them! That explains everything. The blindness. The failure to see the obvious. The neo-liberal ideology.

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Australian labour market data – mixed signals with underemployment rising

The latest labour force data released today by the Australian Bureau of Statistics – Labour Force data – for April 2017 shows that while employment rose by 37.4 thousand, full-time employment fell by 11,600 and monthly hours worked fell by 0.12 per cent. Underemployment rose by 0.1 points. The employment growth did outstrip the underlying growth in the population and with the participation rate steady, unemployment fell by 19,100. The unemployment rate fell by 0.2 points. Certainly the employment growth was modest compared to last month. Broad labour underutilisation remains high at 14.3 per cent with unemployment and underemployment summing to 1,836.7 thousand persons. The teenage labour market also showed some improvement although full-time employment fell. It remains in a poor state.

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US labour market – hard to read at present but probably improving

On April 7, 2017, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – March 2017 – which showed that total non-farm employment from the payroll survey rose by only 98,000, a considerable shortfall when compared to the previous two months. The unemployment rate fell to 4.5 per cent (down 0.2 points). The question is whether this month’s results signal a slowdown after the positive ‘Trump’ spike or is just a monthly variation that will iron itself out over the longer period. Whatever the direction, there is still a large jobs deficit remaining and the jobs created since the recovery are still biased towards low pay sectors.

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Currency-issuing governments never have to worry about bond markets

How many times have to heard a politician claim they had to cut government spending and move the fiscal balance to surplus because they had to engender the confidence of the bond markets. Apparently, this narrative alleges that if bond markets are not ‘confident’ (whatever that means) then they will stop begging treasury departments for more debt issues and the government, in question, will run out of money and then pensions will stop being paid and the public service will be sacked and public trains and buses will stop running and before we know it the skies will blacken and collapse on us. The narrative ignores the usual statistics that bid-to-cover ratios are typically high (hence my ‘begging’ terminology) which are supplemented by well documented cases where the bond dealers (including banks etc) do actually beg central banks to stop driving yields down in maturity segments where these characters have pitched their “business model” (read: where they make the most profits). The facts are exactly the opposite to the neo-liberal pitch. Currency-issuing governments never need to worry about how bond markets ‘feel’. Essentially, the bond markets are irrelevant to the ability of such a government to design and implement its fiscal plans. And, the central bank always can counteract any tendencies that the bond markets might seek to impose where governments do actually issue debt.

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Big business wants government to cut funding them immediately (if only)

Maybe the Australian Government should examine all its contracts with the biggest 121 companies in Australia and cancel them. Perhaps it should, where these companies provide public infrastructure consider setting up not-for-profit public companies to compete against the private 121 (thus lowering prices) and direct all public procurement to these new public institutions. The reason I suggest that is because the Business Council of Australia, which represents the largest companies in Australia (membership equals 121) is demanding the Australian government introduce rather sharp spending cuts or “suffer the consequences”. Okay, a good place to start, might therefore be to cut all public assistance to the companies that are members of the BCA, which would generate huge reductions in government spending. Do you think they would be so aggressive if that was on the table? Not a chance. This is a tawdry lot of corporatists who have had a long history of whingeing about government intervention unless, of course, it is helping grease the profits of their membership. Why the media has given their latest calls for fiscal rectitude the coverage it has reflects on the quality of our media these days.

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The Weekend Quiz – March 4-5, 2017 – 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 – February 26-26, 2017 – 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 ECB should not become a fiscal agent

On November 29, 2016, Mario Draghi, the President of the ECB wrote to Mr Jonás Fernández, a Spanish European Parliament member in reply to a request for clarification from the Chairman of the EP’s Committee on Economic and Monetary Affairs (ECON). The Letter discussed whether it would be legal under the Lisbon Treaty for the ECB to engage in direct monetary transfers to citizens bypassing the Member States and whether such a policy would be beneficial for economic growth. Several commentators have seized on the response from the ECB as saying that such a policy innovation would be both legal and beneficial. My view is that, in forming this conclusion, they have not fully understood the difference between a monetary and a fiscal operation. While I think the policy would produce positive results, in the sense that it would stimulate growth and employment and reduce unemployment, I also believe it would be illegal under the Treaty. Further, I don’t think it is a progressive position to argue that a group of unelected and unaccountable technocrats in the central bank should be in charge of economic policy. That should be the responsibility of the democratically-elected members of the government who are fully accountable every electoral cycle. The ECB should not become a fiscal agent. Rather, if the Eurozone elites cannot implement (which they cannot) a full federal treasury function then it should disband the monetary union in an orderly way.

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More fun in Japanese bond markets

The Japanese bond market has been very interesting in the last week proving yet again that private bond markets cannot set yields on government bonds if the government does want then too. Next time you hear some mainstream economist claiming a currency issuing government is running deficits at the will of the investors (read bond markets) politely tell them they are clueless. Japanese once again provides the real world Modern Monetary Theory (MMT) laboratory – every day it substantiates the underlying insights contained within MMT and refutes the core mainstream propositions. The financial media referred to the Bank of Japan as putting a whipsaw to the bond markets, which in context means that the BoJ is forcing the ‘markets’ into confusion (Source). The bond markets have misinterpreted recent Bank of Japan conduct in the JGB markets (less purchases than expected, and even missing a scheduled buy up) as a sign that the Bank was weakening on its QQE commitment from last September that it would hold the 10-year JGB yield to zero and thereby allow the longer investment rates to fall. Why they doubted that commitment is another matter but within a few days over the last week the Bank demonstrated that: (a) it remains committed to that target; and (b) it has all the financial clout it needs to enforce it; and (c) the bond market investors do not call the shots.

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Australian Labor Party fails the fiscal test – badly

I guess the venality of the new US Presidency isn’t creating enough news for the Australian press. On January 29, 2017, the Fairfax press wheeled out the veritable debt scaremongering in this article – Scott Morrison to lift credit limit as Australia’s debt hurtles towards $500 billion – reporting that the Australian government “will be forced to lift its own self-imposed credit limit in the coming months as debt hurtles towards half-a-trillion dollars”. Instead of writing about how stupid and unnecessary this ‘self-imposed limit’ is, the journalist wanted to talk about the disaster that awaits us as the debt of the currency issuing government “hurtles” like some asteroid to its death towards half-a-trillion dollars. As I said, must have been a day that imagination in the journalistic world was lacking. The worst part of the story is not the idiocy of its logic or the fact that it links to an inane Australian Debt Clock homepage, but, rather, the reported response from the Labor Party Shadow Treasurer. The Labor party is meant to represent the workers and claims to be the progressive force in Australian politics. That ladies and gentlemen is the sick joke of all time. This is a party that has abandoned its traditional remit (to defend the well-being of workers) and instead spouts neo-liberal gibberish without knowing it.

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When mainstream economists jump the shark and lose it completely

There was an Op Ed last week from an Australian academic who attacked Modern Monetary Theory (MMT) along the lines that its proponents are “a bunch of cranks” and practice “charlatanism”. He also considers us to be sellers of “snake oil” and other nasty things. It was an extraordinary public intervention given that the argument was based on assertions drawn from an intermediate mainstream macroeconomics textbook, bereft of historical understanding and bereft of any real knowledge of the way the monetary system and the institutions within it (government, central bank, commercial banks) actually work. The MMT critique went like this: (a) misrepresent MMT through attributing claims to its proponents that are not remotely to be found in the literature; (b) claim you are not misrepresenting the MMT literature by selective quotes that are not actually consistent with the misrepresentations; (c) bring in one liners from textbooks that have been demonstrated to have no real world application and are patently wrong in many key elements of the banking system and the way bond markets operate; (d) call us fools for not knowing any of this. Well, it doesn’t take long into the article to realise who the fool is. The other point is that MMT is now clearly at the stage of development where the mainstream think they have to attack us and put us down. That is the next stage in our development (following years of being totally ignored). Progress is being made.

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The Weekend Quiz – January 14-15, 2017 – 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 – December 31-January 1, 2016-17 – 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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Austerity is the enemy of our grandchildren as public infrastructure degrades

The Australian economics media is awash with claims that Australia will likely lose its AAA government bond credit rating next week in the wake of last week’s disastrous GDP figures (negative growth recorded in the September-quarter 2016) and the widening fiscal deficit at the federal level as tax revenue slumped 15.3 per cent in the September-quarter and the trade account deficit widened. This is a non-news story really. I was asked by a journalist to comment on it the other day and I told him that he would be better-off sorting his socks in his drawer than wasting any time on this topic. A real problem, which, in part is being created by this obsession with ratings, is the massive and growing shortfall in public infrastructure in Australia and other nations as governments cut back public investment in an attempt to reduce fiscal deficits. The reality is this: What the credit rating agencies do is irrelevant to the Australian government. What is not irrelevant is the growth in public infrastructure. It is our legacy to our grandchildren. With populations getting older and dependency ratios rising, the next generations will have to be more productive than the current generation if standards of living are to be maintained, much less, increased. That will require better public infrastructure. Our stupid austerity mindset – justified by on-going lies about the government running out of money and being degraded by the rating agencies – is undermining the very strategies and actions that we require to benefit our children, their children and ourselves as we age. We are a really stupid nation.

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The Weekend Quiz – December 10-11, 2016 – 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 ‘post-truth’ era – nothing new in mainstream economics

The dictionary says Post Truth is the “fact or state of being post-truth; a time period or situation in which facts have become less important than emotional persuasion”. But I prefer to be direct – not to mince words – Post Truth is lying, plain and simple. It is making stuff up that is untrue, in denial of the facts, and, in cases where volition drives the lying, using strategic and well-thought out tools of psychological persuasion, fear, threats etc to make it look as though the statements are factual rather than lies. The interesting thing for me at the moment in this respect is that we are increasingly being told we are now in this Post Truth era. That social media has created this Post Truth era and that something should be done about it. Oxford English Dictionary announced recently that the Word of the Year 2016 is…, you got it, “post-truth” which they claim is a “concept … [which] … has been in existence for the past decade”. Its use has apparently “spiked in frequency this year” as a result of the Brexit referendum and the US election. Two things then are worth noting. First, there is nothing new about the idea of lying to influence public opinion. Indeed, as I will explain (briefly) the whole edifice of mainstream economics, including New Keynesian economics has been ‘post-truth’ since its inception. Second, the fact that it is getting attention now is because the establishment are starting to feel the pinch – their usual media power is losing traction with the democratising influences of the Internet – and their cosy worlds of influence are under threat from a rabble. And this applies to so-called progressive Left (the socialist politicians in Europe, the Labour politicians in Australia, Britain and elsewhere) who have so bought into the neo-liberal myth machine that they cannot understand why they are now losing support from their traditional sources (working class people). The ‘post-truth’ era is apparently upon us. But the reality is that there is nothing new about lying in mainstream economics. It is built upon a lie. It is just that the lying that is spreading on the Internet (‘fake news sites’) are damaging the establishment. That is why they are now complaining. They have never complained about the incessant lying from the economics profession.

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Poor fiction from the OECD – the organisation should be abolished

In assessing the role of the multilateral international institutions such as the IMF, the World Bank, and the OECD, one has to have an idea of what their purpose is. The IMF was created to provide funding support to nations under the Bretton Woods system of fixed exchange rates when their trading accounts endangered their capacity to sustain the agreed parities. After the system collapsed in August 1971 (effectively), the IMF had no further purpose. It reinvented itself as a neo-liberal attack dog on government intervention, and, as such, has no progressive (productive) role to play and should be scrapped. Similarly, the World Bank. The OECD was created (as the Organisation for European Economic Co-operation (OEEC)) to manage the Marshall Plan funds that Canada and the US provided to reconstruct Europe at the end of World War II. It has similarly outlived its productive purpose and is now a major source of disinformation. Even in the realm of fiction, there are much better fiction writers than exist within the bowels of the OECD in Paris. Its latest entreaty, specifically – Using the fiscal levers to escape the low-growth trap – from the exemplifies the way in which the OECD chooses to perpetuate myths about government policy options, even when its message might appear reasonable to progressive eyes and ears. That is the problem really, by buying into the neo-liberal scam that mainstream economists have been running for the last 3 or 4 decades, progressive politicians and their apparatchiks have no room to move and will applaud the OECD’s current message, not realising how destructive that complicity becomes. That has been the problem all along and Trump, Brexit and the rising extremism in Europe is the outcome. Reap what you sow!

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The case against free trade – Part 4

I am travelling most of today and do not have much time. However, there were a few more issues I wanted to raise in relation to the ‘Free Trade’ mini-series of blogs but on Tuesday I ran short of time and thus I thought I would take this chance to round the discussion off. So this blog might be considered Part 4 in that series on free trade. In Part 1, I showed how the mainstream economics concept of ‘free trade’ is never attainable in reality and so what goes for ‘free trade’ is really a stacked deck of cards that has increasingly allowed large financial capital interests to rough ride over workers, consumers and undermine the democratic status of elected governments. In Part 2, I considered the myth of the free market, the damage that ‘free trade’ causes’. In Part 3, fair trade was considered along with so-called ‘free trade’ agreements. Today, some nuances and additional thoughts are provided. The aim of this mini-series is to build a progressives case for opposition to moves to ‘free trade’ and instead adopt as a principle the concept of ‘fair trade’, as long as it doesn’t compromise the democratic legitimacy of the elected government. There is also a video of my keynote presentation at UMKC in September 2016 available in this blog.

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ECB – every which way but to the point

Eurostat released the latest national accounts data for the Eurozone yesterday (October 31, 2016) – Preliminary flash estimate for the third quarter of 2016 – which showed that real GDP grew by 0.3 per cent in the third-quarter 2016, unchanged from the second quarter and below the previous two quarters by 0.2 per cent. In this context, there was an interesting article in the latest ECB Research Bulletin (October 28, 2016) – The recovery of investment in the euro area in the aftermath of the great recession: how does it compare historically? – written by Philip Vermeulen, a senior economist at the central bank. I say interesting for two reasons: (a) the subject matter is inherently of interest; (b) the manner in which the article dodges around the obvious is a reflection of the institutional intellectual capture of the bank, even though the disclaimer is that the views expressed “do not necessarily represent the views of the European Central Bank and the Eurosystem”.

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The Weekend Quiz – October 29-30, 2016 – 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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