As the days go by we begin to realise the huge scale of the problem that the floods in Northern Australia are presenting our country. Whole communities are being forced to leave their homes and major disruptions to economic activity (in very important regions) are being experienced. The floods are being labelled the worst in Australian history (well the white European occupation of indigenous land history) although that depends on the area – certainly the worst since the early 1950s. The areas that are affected are major sugar, coal, iron-ore and food production regions. So real GDP growth will be reduced and this will exacerbate the already slowing economy. What should be the correct federal government response? Answer: to expand the budget deficit (via discretionary spending increases) to ensure that essential public infrastructure is replaced and private economies are able to function again. What is the current federal government contemplating? Answer: spending cuts. My assessment of this: they have no credibility as fiscal managers.

Happy new year to everyone! It is starting out pretty poorly despite the nice weather and personal fun. On the last day of last year, the British Government released its Giving Green Paper, which apparently provides some detail about how it sees its Big Society concept working. As one commentator said it reads like it was written by a bunch of amateurs. But what it tells me is that the conservatives haven’t really evolved much since Maggie Thatcher declared there was no such thing as society. The Big Society is just a reprise of that concept with some mention of mobile phone apps and ATMs to match the historical period of technology that the latest attack on the welfare of the citizens is occurring. The Big Society is a blatant relinquishment of essential government roles and in that sense is a politically cynical attempt to cover up the impossibility of individual action relaxing systemic spending gaps. My training as a macroeconomists tells me that individuals cannot ease such macroeconomic constraints. Only the national government via appropriately sized budget deficits can do that. Which is exactly the responsibility the British government is recoiling from. The Big Society aka BS. More the fool anyone who believes in it.

It is a beautifully warm and sunny end to the 2010 which in general has been a pretty awful year. Yesterday, US Department of Labor released the latest Jobless Claims data. That was good news and suggested that not only has the fiscal expansion in the US been supporting growth but that the economy may be turning the corner – albeit very slowly. Earlier in the week the extremists – the unrelenting deficit terrorists who don’t understand what has been going on were at it again. Like an old gramophone record stuck in a worn out groove they chanted their mantras about record debt levels and how best to cut the deficit. They appear to be stuck in a pre-1971 monetary system as well and haven’t yet caught up with the fact that times have changed. We have CDs, DVDs, MP3s and a fiat monetary system. Anyway, I guess we know have an inkling as to their problem now – see this blog – We always knew it – their brains are thinner!. They do not seem capable of understanding that if you want deficits to fall then you need growth. Growth occurs because spending equals income – public or private the cash till operators don’t discriminate. When there is insufficient private spending to support robust growth, then you have to supplement it with public spending. End of story.

Research has shown conclusively in the past that those who undergo mainstream economics training are more selfish, less co-operative, less honest and less generous than other groups. These insidious qualities are reinforced and strengthen over the course of their undergraduate years. There has also been conjecture about the political role played by conservative economists – that is, that they provide authority for the industrial and financial elites to lobby politicians to introduce policy regimes that create the conditions whereby these groups can appropriate an ever increasing share of real income. They have been used to perpetuate the myth that the “business cycle” was dead and hence governments should have limited involvement in the “market economy” which was promoted as being self-regulating and capable of maximising wealth creation for the benefit of everyone. It was clear that this was always a sham and ideologically based rather than ground in any theoretical legitimacy or evidence-based standing. The fact that the mainstream failed to predict the crisis and have no tools in their models to provide a solution to the dramatic private spending collapse reinforced the notion that mainstream economists were ideological warriors. But new research has provided another clue – their brains are thinner!