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.
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.
This is Part 2 in my two-part series analysing the 354-page report from the Scottish Growth Commission – Scotland – the new case for optimism: A strategy for inter-generational economic renaissance (released May 25, 2018). In Part 1, I considered their approach to fiscal rules and concluded, that in replicating the rules that the European Commission oversees as part of the Stability and Growth Pact, the newly independent Scotland would be biasing its policy settings towards austerity and unable to counter a major negative shock without incurring elevated levels of unemployment and poverty. In Part 2, I focus specifically on the currency issue. The Growth Commission recommends that Scotland retain the British pound, thereby surrendering its independence. Moreover, while it is part of the United Kingdom, the British policy settings have to consider the situation in Scotland. Once it leaves, it will still be bound by British fiscal and monetary settings but those settings would be designed to suit the remaining British nations. So if the British government continues with its austerity obsession, Scotland would be forced to endure that end. Hardly, the basis for an independent nation with progressive aspirations.
The 354-page report from the Scottish Growth Commission – Scotland – the new case for optimism: A strategy for inter-generational economic renaissance (released May 25, 2018) – could have been published by the IMF given its adherence to the flawed neoliberal macroeconomic framework that that institution imposes on everything. It is too generous to call the Growth Commission’s work ‘analysis’ – a series of unfounded assertions with logical extrapolation from that flawed basis is more accurate. If Scotland were to create an independent nation on the basis of the ‘blueprint’ outlined in the Growth Commission’s Report then it would soon be heading into a mediocre oblivion – a future where it would be unable to effectively counteract the fluctuations of non-government sector spending and a future where fiscal policy was forced to be pro-cyclical. Scotland would end up another failed austerity state. This is Part 1 of a two-part series where I examine the Report and its implications. In Part 2, I will examine the currency issues in more detail. I hope to be in Scotland in early October as part of my next speaking tour of Europe – more details later.
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.
I decided to write an extended blog post today (Wednesday) because events in Italy are so interesting. My usual short post on a Wednesday will resume next week. George Soros is now saying that “everything that could go wrong has gone wrong” in Europe and a financial collapse is in the wind (Source). I doubt the latter but agree with the former assessment. All the flaws in the original neoliberal design of the Eurozone have been revealed and all the reasons why those flaws were created in the first place remain in place. Nothing has changed since 1977 when the MacDougall Report concluded that the cultural and national differences between the (then) Member States of the European Communities were too great to allow an effective monetary union to be created. That assessment and the earlier work of Pierre Werner in his 1970 Report were ignored as the neoliberals in France and Germany rushed headlong to Maastricht. France thought it would have a chance to dominate and Germany was distracted by unification but still firmly in charge of what would be allowed in the new monetary system and what would not. Now, one of the biggest nations – Italy – is is turmoil as the damage of being part of the Eurozone slowly but surely erodes its capacity to deliver anything remotely like prosperity and its social and political system starts to collapse. Italy must leave the Eurozone – the sooner the better. And, that will bring a reality check for the whole disaster and encourage other nations to push for an orderly dissolution.
Although this blog post considers some very technical material its message is simple. Mainstream macroeconomic models that are used to determine policy choices by governments are deeply flawed and the evidence strongly supports a central thrust of Modern Monetary Theory (MMT) – that fiscal policy is powerful and that austerity will kill growth. In that sense, it helps us understand why various nations and blocs (such as the Eurozone) struggled after the onset of the GFC. It also explains why the deliberate attack on Greek prosperity by the Troika was so successful in demolishing any prospect of growth – an outcome that the official dogma resolutely denied as they constructed one vicious bailout after another. It also explains why New Keynesian approaches to macroeconomics are flawed and should be ignored. I was reminded this week by a research paper I had read last year (thanks Adam for the reminder) which presents a devastating critique (though muted in central bank speak) of the mainstream approach to macroeconomic modelling. A research paper from the ECB (May 2017, No 2058) – On the sources of business cycles: implications for DSGE models – provides a categorical critique of DSGE models and a range of other stunts that mainstream economists have tried to introduce to get away from the obvious – economic cycles are demand driven.
The German propagandist Joseph Goebbels would have loved the so-called ‘NHS Funding Tool’ that the London-based Institute of Fiscal Studies has wasted hours of labour producing and making available on the Internet. In fact, history would show that the German menace was probably more circumspect in his propaganda activities that the IFS, which has set about to deliberately distort the public debate in the UK over NHS funding. Its latest entry (May 24, 2018) – Securing the future: funding health and social care to the 2030s – is nothing short of a disgraceful grab for headlines. The problem is that reports such as this then feed into an uncritical press, which then furthers the fictional world that my profession has created to hide their ideological preferences against public intervention – in this case, public health systems. The IFS Report is a typical case of neoliberal analysis, which contains hidden constraints that are designed to lead towards the TINA conclusion. Britain can afford to have a first-class NHS if it chooses and the real resources are available and people desire for them to be used in that sector rather than elsewhere. My bet is that the country would be much better off if there were less bankers and investment speculators (the occupations that the neoliberals revere) and more resources in the health sector. At present, constructing the NHS challenges, which are real and growing, as a tax rise or bust type scenario is dishonest in the extreme.
Last Tuesday (May 15, 2018), the new German Finance Minister Olaf Scholz stood up in the German Bundestag and delivered his first fiscal policy presentation. Not only was “die schwarze Null” (Black Zero) sustained but in his address, the new German Finance Minister made it clear that Germany would not entertain any expansion of the EU fiscal capacity (thus rejecting Emmanuel Macron’s proposals) and wanted to delay other ‘reforms’ that Germany had previously suggested they would support (beefing up the Single Resolution Fund and the creation of the European Monetary Union). For those Europhile progressives who have been hanging their hat on the hope that the takeover of the German Finance Ministry by the SPD would be the deal breaker that the Scholz’s presentation was nothing short of a disaster. He reiterated Germany would not be shifting in any major way and that Member States just had to buckle down and follow Germany’s fiscal example – surpluses as far as the eye can see. None of this was a surprise to me. It has been clear for some time that Scholz is just a continuation of Schäuble. Indeed some pointed statements from Bundestag politicians next day in their responses suggested just that.
This is Part 2 of my mini-series analysing some of the challenges that the newly elected majority government in Timor-Leste faces. Yesterday, I documented how the IMF and World Bank had infused its ideological stance into the currency arrangements that Timor-Leste set out with as a new nation. That infusion is still apparent in the major commentary on Timor-Leste’s future options – specifically that the dollarisation should continue and that fiscal austerity should be pursued (relative to the current fiscal stance) because the nation will run out of money. What they mean is that the Petroleum Fund will eventually run out of money. There is a major difference in those statements although under the current currency arrangements they are identical. The ‘run out of money’ story is only applicable as long as the new government resists adopting its own currency. I also showed how the development process has been stalled by the austerity bias. In Part 2, I explore the currency issue directly and make the case for currency sovereignty which would require Timor-Leste to scrap the US dollar, convert the Petroleum Fund into its stock of foreign exchange reserves, and to run an independent monetary policy with flexible exchange rates, mediated with the capacity to use capital controls where appropriate. In Part 3, which will come out next Monday, I will discuss specific policy options that are required to exploit what is known as the ‘demographic dividend’ where the age-structure of the nation generates a plunging dependency ratio. To exploit that dividend, which historically delivers massive development boosts to nations, the shifting demographics have to be accompanied by high levels of employment. That should be policy priority No.1. I will also complete some Petroleum Fund scenarios to complement the policy advice.
I was going to write about the situation in Timor-Leste after its national elections were held on Saturday. But I will hold that over for another day as I get some more information. So today, I think we can learn a lot from an issue raised in the Bloomberg article (May 14, 2018) – Kuroda’s Stimulus Saves Japan $45 Billion, Easing Debt Pressures – which discusses the QE program in Japan and introduces several of the basic errors that mainstream financial commentators make when discussing these issues. The article traverses all the usual suspects including the misconception that numbers in official accounts are ‘costs’ to government and that smaller numbers in official accounts mean the government can put larger numbers in other accounts than it might have been able to. These articles are as pervasive as they are erroneous. Hopefully, as the precepts of Modern Monetary Theory (MMT) spread and are understood more journalists will endure scrutiny of the rubbish they write and the public commentary and debate will progress towards a more reasonable – realistic – appraisal of what is going on in the world of finance and money. This article is one of the worst I have read this year so far. And there have been some real terrors!
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.
One of the ways in which the neoliberal era has entrenched itself and, in this case, will perpetuate its negative legacy for years to come is to infiltrate the educational system. This has occurred in various ways over the decades as the corporate sector has sought to have more influence over what is taught and researched in universities. The benefits of this influence to capital are obvious. They create a stream of compliant recruits who have learned to jump through hoops to get delayed rewards. In the period after full employment was abandoned firms also realised they no longer had to offer training to their staff in the same way they did when vacancies outstripped available workers. As a result they have increasingly sought to impose their ‘job specific’ training requirements onto universities, who under pressure from government funding constraints have, erroneously, seen this as a way to stay afloat. So traditional liberal arts programs have come under attack – they don’t have a ‘product’ to sell – as the market paradigm has become increasingly entrenched. There has also been an attack on ‘basic’ research as the corporate sector demands universities innovate more. That is code for doing the privatising public research to advance profit. But capital still can see more rewards coming if they can further dictate curriculum and research agendas. So how to proceed. Invent a crisis. If you can claim that universities will become irrelevant in the next decade unless they do what capital desires of them then the policy debate becomes further skewed away from where it should be. That ‘crisis invention’ happened this week in Australia.
I am using today to sketch out some ideas for my next book with Thomas Fazi as a follow up to Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017). I am also lying low from the Australian media given that it is less than a week to go before the Australian Treasurer delivers his annual fiscal statement (aka ‘The Budget’). The standard of commentary and hysteria about this event and what it means seems to be getting worse. So I have a radio blackout today and am listening to music as I work instead. But here is a snippet of what Australians are being fed – in this case from our national broadcaster who, with public money, sets out (probably in a state of ignorance) to deceive its listeners (and these days, its readers). It is shocking really to think that a public broadcaster in this day and age can render such a biased (and error-ridden) rendition of a subject matter that is so important.
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.
My blog post last week – On the path to MMT becoming mainstream (April 17, 2018) – discussed the way in which the language and concepts that have been developed by the Modern Monetary Theory (MMT) authors are now permeating mainstream narratives and the media. While this has increased the pushback and hostility from both the Right and Left opposition to MMT, it is also a sign that the public understanding of the way in which the monetary system works and the policy options available to currency-issuing governments, is improving. Most recently, there is been a flurry in the US media discussing employment guarantees, which is a welcome relief from the previous saturation coverage of impoverished UBI ideas. It is fabulous, that at the policy level, the idea that the state can eliminate mass (involuntary) unemployment if it so chooses is becoming more acceptable. That’s down, in part, to the great work being done there by my MMT colleagues. There are also derivative public sector job creation proposals getting ‘airplay’ which I do not consider to be MMT-inspired nor are what I would call Job Guarantee initiatives, but which are still, to their credit, raising awareness of the need for the state to ensure there are sufficient jobs for all rather than dispatch citizens who are unable to find work to the unemployment queue. The push back is increasing and that is a sign that dissonance is being felt by the neoliberals who oppose the state taking responsibility for mass unemployment and using its fiscal capacity to render it a thing of the past. Many of the critics from the Left do not have the courage to come out and say they prefer the alternative to a Job Guarantee, which is entrenched unemployment. That leaves them carping away with no legs to stand on. The Right objections are venal as they always are – they want mass unemployment to persist to dampen wages growth and allow more real income to be captured by the top-end-of-town.
On April 20, 1018, the IMF presented its – Asia and Pacfic Department Press Briefing – in conjunction with the release of the April 2018 World Economic Outlook and the upcoming (May 9, 2018) release of its Asia and Pacific Regional Economy Outlook. The Deputy Director of the Asia and Pacific Department, one Odd Per Brekk, told the audience that Japan should continue its Quantitative Easing (QE) program and maintain transparency in its purchase volumes so as to ensure the strategy to accelerate the inflation rate up to the 2 per cent target is achieved. Part of this strategy involves shifting inflationary expectations from their recent low levels. Critics of the program shriek that the asset base of the Bank of Japan is now approaching the nominal GDP level and given that a high proportion of those assets are comprised of Japanese Government Bonds, that reversing the strategy eventually will be difficult and risks involving the Bank is huge losses, which might render it insolvent. Insolvency has no application in the case of a central bank which can never go broke. Further, the Bank never needs to reverse the QE purchases. There is no relevance in the rising assets to GDP ratio. The problem is that QE will not achieve the desired end. The Bank has expanded its QE program significantly yet the inflation rate and inflationary expectations remain well below the 2 per cent target. They will eventually work out that the mainstream theory that predicted otherwise is erroneous.
For readers who follow my Twitter account, you will be aware that occasionally I have have brief interchanges with various Europhiles who have an abiding faith in the capacity of the Eurozone to reform itself along progressive lines to make it resilient against economic cycles and capable of advancing the prosperity of all the citizens who share the currency. They were particularly incensed when my latest book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World with Thomas Fazi was published in September last year. Our argument has always been that Germany is Germany and as such there is little hope that the basic flaws in the EMU will be resolved any time soon. Well in the last week, the Europhile bubble has been well and truly pricked by the decision of new German finance minister Scholz to retain the hard-line order-liberal Ludget Schuknecht as the chief economist in the Finance Ministry. Signal: nothing is going to change in the EMU that matters.
Over the last few years, it is clear that Modern Monetary Theory (MMT) is achieving a higher profile and the attacks are starting to come thick and fast. I see these attacks as being a positive development because it demonstrates that recognition has been achieved and a threat to mainstream ideas is now perceived by those who desire to hang on to the status quo. Hostility and attack is a stage in the process of a new set of ideas becoming accepted, ultimately. Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that is is coherent, logically consistent and grounded in a strong evidence base. As part of this evolution there are now lots of what I call ‘sort of’ contributions coming from mainstream commentators. One of the ways in which mainstreamers save face is to claim they ‘knew it all along’ and that the existing body of practice can easily accommodate what might be considered ‘nuances’ or ‘special cases’. We are seeing that more now, with the more progressive mainstream economists claiming there is nothing ‘new’ about MMT that it is just what they knew anyway. Even though that approach is disingenuous it is part of the evolution towards acceptance. People have positions to protect. These ‘sort of’ contributions demonstrate a sort of half-way mentality – a growing awareness of MMT but with a deep resistance to its implications. A good example is the UK Guardian’s editorial (April 15, 2018) – The Guardian view on QE: the economy needs more than a magic money tree.
People are allowed to change their opinions or assessments in the light of new evidence. Diametric changes of position are fine and one should not be pilloried for making such a shift in outlook. Quite the contrary. But when the passage of time reveals that a person just recites the same litany despite being continually at odds with the evidence, then that person’s view should be disregarded, notwithstanding the old saying that a defunct clock is correct twice in each 24 hours. The US Congressional Budget Office (CBO) released its latest – The Budget and Economic Outlook: 2018 to 2028 (April 9, 2018) – and various commentators and media outlets have gone into conniptions over it. The economists that have responded – and they come with affiliations from both sides of US politics (although it is hard to differentiate separate ‘sides’ in the US anymore such is the demise of the Democrat Party) – have significantly embarrassed themselves. Their hysteria is not matched with the facts and they have been guilty of invoking these hysterical responses year-in, year-out for many years. A crack in a record, goes click, click, click, click and repeats ad infinitum. Sort of like the nonsensical arguments about US fiscal deficits that have appeared in the US press this last week.