The International Labour Organization (ILO) released its Global Employment Trends for Youth 2012 report today (May 22, 2012). It is harrowing reading and I will consider it later in the week. It tells us that youth unemployment is rising and will be unlikely to see any improvement until at least 2016. The ILO recommend a raft of government initiatives which would require budget deficits to expand. But, of-course, the dominant political narrative is to cut deficits in the false belief that this will engender growth. Exactly the opposite is happening and for good reason. I came across an article from 1982 today which tells us why austerity is dangerous and damaging. It also conditions us to understand that budget deficits are neither good nor bad but policy choices can be.

How bad is it going to get? That was the question that the UK Guardian asked the head of the UK Office for Budget Responsibility in an interview last week. It was in relation to the likely fallout if Greece defaults and leaves the Eurozone. He replied that the UK would be irreparably damaged. The fact is that Greece has already defaulted. The other fact is that if they do leave the EMU (which would be the best strategy) the impact on currency-issuing nations such as Britain can be managed away by sensible fiscal policy. For those who are predicting deep gloom the culprit is not the possible actions of Greece or any Eurozone nation but rather the irresponsible pursuit of austerity among sovereign nations. The reason Britain has a double-dip recession is all down to the decisions its own government have made. Organisations like the OBR support the flawed decisions with poor forecasting. Taken together this malaise reflects a mainstream macroeconomic framework that is incapable of providing policy advice which will deliver sustained prosperity to the population. The same flawed theoretical framework spawns the ever-growing hysteria about what will happen if Greece exits. The mania is reaching proportions similar to those a few years ago when rising budget deficits were predicted to cause huge hikes in interest rates and/or hyperinflation. All these forecasts fail because they are made by those who do not understand how the system works.

I was going to write about military expenditure today in the light of large cuts to defense spending that the Australian government made in last week’s Budget and the decision by the Obama Administration to make it easier for American firms to export military equipment (to who knows where!). The concept of the military-industrial complex is interesting and, to some extent, the issues that are being raised by the US decision were discussed during the Great Depression (I have been reading a lot of material from the 1930s lately). While some might (from a micro perspective) conclude that reducing spending on the military is a good thing (less violence etc) they also have to be mindful of the macro perspective which considers a $ spend on a tank to be equivalent in its impact on aggregate demand as a $ spent on public education – well nearly. But I will write about that tomorrow. There were two interesting interventions into the public debate in Australia yesterday from the current Treasury boss and the recently departed Treasury boss which have general application everywhere. While they are current I thought I would consider these general points today.

I am taking a brief rest from the Eurozone crisis – which will probably blow up again in the coming weeks as the Spanish austerity drives the bond markets in the opposite direction than was intended by the Troika – and the latter call for even harsher cuts to unemployment benefits at the same time as their austerity policies force unemployment to continue its inexorable rise upwards. Today, I have been reading the latest OECD Report (April 12, 2012) which is attracting attention – Fiscal Consolidation: How much, how fast and by what means?, which is part of their Economic Outlook series. It is really a disgraceful piece of work but will give succour to those politicians who are intent of vandalising their economies and making the disadvantaged pay more and more for the folly of the elites. It is an amazing situation at present. I am also reading a book – Pity the Billionaire – which I will review in the coming week. It examines how it is that the the popular response to the crisis which was caused by an excess of “free markets” is to attack government regulation and intervention and demand even freer markets. The OECD are part of the battery of institutions that fuel this crazy right-wing conservative response (the “unlikely comeback” in Pity the Billionaire terms) to the crisis through their highly tainted publications.

The Australian Treasurer wrote an Op Ed in the Melbourne Age today (April 4, 2012) – Return to surplus is the right move at the right time – trying to defend his obsessive pursuit of a budget surplus in the next financial year. It was in direct response to an article yesterday (April 3, 2012) from the Melbourne Age economics editor Tim Colebatch – Budget cuts will bring on recession. Tim Colebatch’s commentary was a followup to his article last week (March 30, 2012) – Swan’s foolish surplus fetish – which I considered in this blog – A seriously reckless act. The pressure is mounting on the Government to abandon their reckless pursuit of the surplus. Even the conservative State premiers have expressed concern (States warn Wayne Swan over budget cuts. It is clear that the forecasts that the surplus were based on have no hope of being realised over the relevant horizon. The Australian economy is performing well below what the Treasury expected and deteriorating. The surplus obsession is based on these overly optimistic forecasts. The Government would be advised to assume the worst case scenario at present and calibrate its May Budget accordingly, rather than persist with the myth that the Treasury has it right.