Modern Monetary Theory (MMT) economists have argued from the outset that using interest rate rises to subdue inflationary pressures may in fact add to those pressures through their impact on business costs. Businesses with outstanding trade credit or overdrafts will use their market power to pass the higher borrowing costs on to consumers. In more recent times, we have seen other mechanisms through which central bank rate hikes actually add to inflation. Regular readers will know that I have been discussing how landlords have been passing on higher mortgage costs in tight rental markets, which then creates a vicious cycle – interest rates up, rental costs up, CPI up because rents are a significant component, inflation rises, interest rates rise. Repeat. The tight rental markets are in part, a consequence of the neoliberal austerity bias, which has seen governments seriously underinvest in social (low income) housing. In recent days, we have witnessed another conflation of neoliberalism and destructive policy insanity. Earlier this month, Australians received messages from the companies that provide them with electricity announcing that the Australian Energy Regulator (AER) had approved price rises of between 19.6 per cent and 24.9 per cent in various East coast states. How did that happen, especially as world coal prices are dropping rapidly and are now below the pre-pandemic levels? And how does the bias towards monetary policy exacerbate this situation?
The question is when is a Labour Party a Labour Party? The answer is: When it is a Labour Party! Which means when it defends workers’ interests against capital and when it defends families against pernicious neoliberal cuts or constraints on welfare. Which means, in turn, that the British Labour Party is a Labour Party in name only and the British people have little to choose from with respect to the two parties vying for government – Tory and Tory-lite! The British Labour Party has been abandoning its traditional role for some time now and while it is true that society and the constraints on government have evolved/changed, some things remain the same in a monetary economy. And that means that the statements from the Labour leader in recent days about fiscal spending austerity and a refusal to reverse some of the most pernicious Tory policies fail to recognise the reality. More spending will be required in the coming years not only to redress the damage done by the years of Tory rule but also to meet the challenges ahead in terms of climate, housing, education, health and more. The real question should be not whether more spending is required but what must accompany that spending by way of extra taxation. In my assessment, the next British government will have to lift taxes to create sufficient fiscal space in order to meet the challenges facing the nation with extra spending. Starmer is clearly not wanting to have that debate, which means the British people are once again being deceived by their political class. Taxes will rise with growth but I doubt that will generate sufficient space for the extra spending that will be required.
Yesterday’s US inflation data from the Bureau of Labor Statistics (July 12, 2023) – Consumer Price Index Summary – June 2023 – shows a further significant drop in the inflation rate as some of the key supply-side drivers continue to abate. The annual inflation rate is now back to 3 per cent and dropping fast. The risk now is that the conduct of the Federal Reserve will drive the US into a deflationary period with rising unemployment. Given that inflation peaked in the third-quarter 2022, that wages growth has been relatively subdued, and inflationary expectations’ survey evidence suggests no-one really thinks the inflation was going to endure, means that the US Federal Reserve’s logic is deeply flawed and not fit for purpose. They have been chasing an obsession that exists in a parallel universe to the real world. The risk is that they will continue to chase that obsession and use the fact that unemployment has still not risen much to claim there has to be higher unemployment. However, hopefully, the 3 per cent inflation rate result yesterday will cut-off any wild claims that they have to get the inflation down more quickly or risk a wages or expectations explosion. All cant of course.
I have been looking for signs that the concerted efforts by most central banks (bar the eminently more sensible Bank of Japan) to kill growth and force unemployment up have actually been effective. My prior, of course, is that the interest rates will not significantly reduce growth in the short run, but may if they go high enough start to impact on spending patterns of low income households. The next data that will help us associate the interest rate effects on spending by income quintile in the US comes out in September 2023, so I will watch out for that. The most recent national accounts data from the US, however, does not support the mainstream belief that monetary policy is the most effective tool for suppressing expenditure. Far from it.
Last Friday (July 7, 2023), the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – June 2023 – which revealed that the the US labour market has probably reached a turning point but is certainly not contracting at a rate consistent with an imminent recession. There was a continuing weakening of net employment growth. Further, the weaker conditions are evidenced by the decrease in new job openings and rising underemployment (workers forced into part-time work for economic reasons).
In 1978, during my postgraduate studies at the University of Melbourne I came up with the idea of a Job Guarantee – although I didn’t call it that then. I have written about it extensively since then and you can see some of the non-academic work published in this blog under the category – Job Guarantee. Among the many blog posts is this one – Some historical thinking about the Job Guarantee (February 25, 2021) – where I discuss some of the provenance of the idea. It is hard to get people interested in this idea because they dismiss it as just another public sector job creation scheme and then make all sorts of claims about inefficiency, ‘make work’ and all the rest of the ruses that are used to divert attention from the substance of an idea or proposal. In fact, the way I conceived the Job Guarantee and the way it has subsequently become a central part of the body of knowledge now known as Modern Monetary Theory (MMT) is not as a job creation program, but, rather, as a comprehensive price stability framework exploiting the dynamics of buffer stock mechanisms. Anyway, it seems that the UN might be interested in the idea of guarantee employment now after the special Rapporteur on extreme poverty and human rights published – The employment guarantee as a tool in the fight against poverty – in April 2023. The question is whether this is a job creation program or closer to the concept of a Job Guarantee.
Recently, I wrote about the conditions that dictate what impacts interest rate changes will have on aggregate spending and demand-driven inflation in direction, magnitude and temporality – see RBA governor’s ‘Qu’ils mangent de la brioche’ moments of disdain (June 8, 2023). It is highly likely in many cases, the decisions by central banks to increase interest rates, ostensibly to ‘fight inflation’ actually make inflation worse. More people are starting to understand that point even though central bankers appear to be still talking big about further interest rate rises. But the evidence is mounting against their position and ultimately that evidence is exposing the deep flaws in mainstream macroeconomics. I argue today that the problem is not only that the interest rate hikes can be inflationary but they are also facilitating a major reinforcement of the class divisions in our societies whereby the low income cohorts are transferring massive income benefits to the higher deciles. I also discuss cricket which recently has provided a demonstration of how the class divisions work. Then some music, given it is a Wednesday.
There appears to be confusion among those interested in Modern Monetary Theory (MMT) as to what the implications for a green transition that will fasttrack the transition to renewable energy will require by way of government. I regularly see statements that government deficits will have to be ‘massive’ for extended periods because the private (for profit) market entities will not move fast enough to deal with the climate emergency in any effective way. The confusion inherent in these claims is that they fail to separate the ‘size’ of government from any particular ‘net spending’ (deficit) recorded by government. The two outcomes are quite separable and have to be if government action is to achieve sustainable outcomes, not only in terms of environmental goals but also price stability goals. So let’s work all that out. Failing to do so, leads MMT activists to make claims that open them up to criticism from those who understand the point I am making but have different ideological agendas. So they make erroneous claims such that ‘MMT just advocates big deficits’, or that ‘MMT thinks that deficits do not matter’. But they have been lured into that position, in part, by the social media behaviour of some MMT activists.