Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.

Japanese economist Richard Koo recently published his latest paper – The world in balance sheet recession: causes, cure, and politics – which reminds us that patience is the virtue that is required right now and that the major political responses to the crisis are exactly the opposite to what is required to safely steer the World economy back into health. The insights he provides, mostly consistent with Modern Monetary Theory (MMT), demonstrate how the current political cycle (and the imperatives that are being imposed) is so far out of kilter with what responsible macroeconomic management requires. The world economy will require continuous and historically large budget deficits in most advanced nations for many years to come. The demands for fiscal consolidation talk about this year and next year and surpluses in a few years. The reality is that deficits will be required to support growth while the private sector reconstructs its unsustainable balance sheet for more than a decade. We have to get use to that or suffer the consequences. To repeat: Historically high budget deficits will be required for the next decade – at least.

It is a public holiday in Australia today and I am not working a full day. But I have been collecting some items from the past five or so years which I am weaving into the text book that Randy Wray and I hope to have out in the coming year. When academics or others comment on public affairs it is clear that our commentary is to a certain extent time-dependent. The language we use, the topics we focus on and the conclusions we draw. So some things that are written sound quaint when we go back to them after some years. I hoard information and occasionally I access my databases to see who said what in some year and compare it to what might have happened in the interim and then what the same person might be saying in retrospect. It is an interesting exercise and when applied to my own profession reveals some amazingly nonsensical predictions or assessments. The global crisis has provided a major event to test many of the assessments made prior to the crisis. The most surprising thing is that the same sort of assessments made prior to the crisis that were demonstrated to be entirely false are still being made and still influencing policy design. But the most robust assessments have withstood the crisis and remain relevant today. I include the developments in Modern Monetary Theory (MMT) in this latter category. Mainstream macroeconomics was largely wrong before the crisis and is wrong now (for the same reasons) and should be disregarded.

I am continually distracted by the daily entertainment from Europe – who could have written such a script? – bumbling from one disastrous “solution” to another, accusing each other of various sins, trying to rope Britain into their incompetence (although the latter doesn’t need any help in that department) etc. But the comedy ends as soon as the human element is considered. How long the citizens will remain docile is the big question. I had an interesting meeting the other day about a joint research project I am becoming involved in which will encompass that sort of enquiry including what has happened to the “left”. Anyway, today’s blog is a bit more pedestrian. I have been asked a lot recently by journalists and radio interviewers about the flat employment growth in Australia at present in the context of our so-called “once-in-a-hundred-years” mining boom. The mining industry has been so successful at self-promotion that people forget it only accounts for 2.1 per cent of total employment (a minuscule proportion). Anyway, the ABS released the detailed quarterly employment data for November 2011 yesterday which contains industry breakdowns. So I went digging this morning to bring my analysis up to date. Lesson: fiscal stimulus works and the Australia labour market is changing.

It amazes me that politicians actually believe the neo-liberal lies that the path to lower fiscal deficits is to cut the hell out of public spending during a recession when private sector expectations are conservative if not downright pessimistic and their spending is subdued. If you add in the fact that these politicians make these claims en masse – that is, they are all caught in this “fiscal consolidation” madness – then it becomes obvious that the only other route to growth – exports – will also be closed. The latest data from Britain is all bad and suggests that the claims that cutting net public spending would stimulate growth are wrong and also that the way to cut a deficit is not to deliberately reduce economic growth. At least 172 thousand Brits have their government to blame refers to the change in unemployment in Britain since June 2010 (just after the new Government was elected). The unemployed are the human face of the ideologically-driven vandalism that the British government is currently engaged in.

Several readers have asked me to comment on the recent New York Times Op Ed by Paul Krugman (October 30, 2011) – Bombs, Bridges and Jobs – which outlined the double standards among many conservatives who argue that “government does not create jobs” unless it engaged in military spending but still argued that such spending would be good for jobs and an increase would be welcome. It comes at a time when the new Haitian president is proposing to spend large sums of aid money on restablishing a military force in the nation despite not being able to offer basic housing, sanitation, education or health care. The appeal by the “military-industrial complex” that military spending is good for the economy is long standing and rarely refuted. After all, spending equals income and output which creates employment. But is expanding the military budget or insulating it from cuts the best way to create employment? Should we welcome, as Paul Krugman does, more military spending? The answer is that military spending has positive employment effects which are dwarfed by those pertaining to public spending on education, personal care services and other forms of public infrastructure. Haiti should build houses and schools and forget about the army.