Cyprus – Greece or Iceland? Obvious

It is a public holiday in Australia today like everywhere. So this is a relatively short blog. In the last week, the tiny nation of Cyprus has committed itself to a path that will see it stagnate for years to come and real living standards will fall. It will lose its banking sector and will find it hard to stimulate its tourism sector given it is unable to alter its exchange rate. Domestic wages and costs will have to fall dramatically before there will be any significant stimulus to tourism. The government is unable to support domestic demand growth because the Troika will not let them increase their discretionary budget deficits. And sooner or later some German or another will start demanding they sell their island to pay their bills (remember Greece). In other words, they are following the Greek path to destructive oblivion. Apparently this is because there is no better alternative. The Euro elites have spent a lot of effort telling everyone that there is no alternative to harsh austerity and the destruction of another economy. But for anyone who keeps their eyes on the data you will know that there is an alternative. A small island state – Iceland – issues its own currency and allowed their exchange rate to move with relative currency demand has emerged damaged but not in Depression. The vital signs in Iceland are positive.

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The March of the Makers – out!

I have noted before that the longer the economic crisis continues and the more data that comes out from national statistical agencies the easier it is to see how crazy the political elites who are driving austerity in their lands are. A few years ago it was a contest of ideas – austerity or not – and so anti-austerity arguments could be dismissed as “old fashioned”, “worn out”, Keynesian ideas. As the years pass the contest of ideas is being clarified by the relentless data releases from the agencies. Then those who advocate austerity have to not only explain at a conceptual level how a government can cut spending when non-government spending growth is weak and still forecast rapid growth but also have to somehow come to terms with the data that tells them their bets were wrong.

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Fiscal austerity undermines welfare now and then things get ugly in the future

The latest – EU Employment and Social Situation: Quarterly Review was released yesterday (March 26, 2013). The Press Release – summarises the main results. I will look into the full document in more detail another day. Today (March 27, 2013), the Australian Productivity Commission released a major study – Trends in the Distribution of Income in Australia – which provides a fairly detailed analysis of the “composition of the income distribution”. The connection is that fiscal austerity not only causes unnecessary damage now to the prosperity of the nations afflicted with these incompetent leaders, but it also undermines the future growth path of the nation. One of the many ways in which growth potential is being undermined is through the impact of unemployment and falling participation rates has on income inequality. The latter impact also negates key propositions that mainstream economists teach their students every day that there is a negative trade-off between efficiency and equity. So policies that promote more equitable income distributions are alleged to undermine economic growth. The evidence is exactly the opposite.

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What comes after farce?

The expression “a descent into farce” is meant to describe a terminal condition – where things have become as ridiculous (or whatever pejorative term you desire) as they can get. I think the Euro elites are carving out new grounds that will require some new terminology. Their latest iteration – the second Cyprus bailout deal – is about as bad as it gets. You would think anyway. But given the capacity to outdo themselves with incompetence and sheer bastardry, I will await further developments before I consider the latest action to be the terminal condition. It almost beggars belief that highly paid and obviously self-important senior officials (such as the Dutch Finance Minister who is the head of the Eurogroup of Finance Ministers) could in one breath say one outlandlishly stupid remark to the media and then, in the next breath, repudiate that statement with another equally nonsensical statement that flies in the face of fact and practice. So if anyone out there wants to speculate on “What comes after farce?” please let us know. The problem is that as a slapstick comedy this rates among the best except in this case, millions are unemployed. But it goes further with the Cyprus fiasco – and the Dutchman’s hints of a new model forming. First, the unemployed and poor are bearing the risks of a failed capitalist economy. But now, the consumers are being forced to take losses. Where the hell are all the capitalists? Probably wining and dining with their Euro elite mates in Brussels.

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British Budget – verging on delusion

The Olympics have come and gone. No doubt the event gave some macroeconomic respite to the British economy because major events bring immediate spending and spending drives output and national income. But the fourth-quarter 2012 real GDP data showed that the British economy had contracted by -0.3 per cent. Household final consumption expenditure slowed throughout 2012 as private investment growth contracted over the second-half of 2012. Further, despite the hope that the fiscal austerity would be painless as a result of a boost in net exports, especially given the depreciation in the British currency, the data showed the the current account deficit increased as a result of a fall in exports over 2012. It was in this context that the British government brought down the – 2013 Budget – which provides no path out of this malaise. At a time when the correct economic strategy would have included a political admission that the previous 3 budgets were detrimental interventions for the British economy and a commitment to some discretionary stimulus, the British government chose to adopt a neutral position in the coming financial year, which when taken in perspective just maintains the contractionary bias of fiscal policy. The mismanagement of the British economy thus continues.

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Huge deficits are the real problem

I am still reeling from the incompetence of the EU, the German’s who pushed the deal, the ECB and the IMF who thought they could get away with stealing ordinary deposits when they had made such a big deal early on in the crisis that guaranteeing deposits below 100k Euros was an essential part of their financial stability reforms. The mind boggles as to how stupid those decision makers are. They are so blinded by ideology that they have lost a grip on their own narrative and certainly on reality. I notice the Troika rats are pointing the blame at each other for the disastrous judgement that was exercised in the package design. And, not one Cypriot politician voted in favour of the package. The bird on both hands (stereo effect) to the Troika. And you will note I haven’t said a word about Russian oligarchs and money laundering. That is a side-show in all of this. Anyway, I needed a rest from that so turned my attention to the US labour market as I was updating the latest February 2013 labour force data and examining where things are at. I did this as I thought about the debates in the US about the budget. I think many of the politicians might have been drinking the same Kool Aid as the Troika. They have also lost a grip on reality.

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Growth and jobs are things governments can buy and summon

I left out the word not between the words “are” and “things” and replace the “or” with “and” between buy and summon. Otherwise this would have been the latest piece of insight offered by the outgoing EU Council President Herman Van Rompuy, who appears to be intellectually stretched when it comes to the most basic macroeconomic concepts despite regularly making comments that appear to be of a macroeconomic nature. Let me remind him: spending equals income and output. Growth in spending when there is massive (and rising) excess real productive capacity will generate growth in income and output. Growth in income and output almost certainly generate growth in employment. And, just in case we might be worried that any crowded-in productivity growth reduces the employment dividend and, cogniscant of the fact that there are millions of relatively unskilled workers without jobs in Europe at present, governments around the region could employ all of them if they introduced an unconditional Job Guarantee. Governments can create extra real growth and jobs anytime they choose unless the economy is already at full employment. Then they would not want to anyway. So the question that Mr Van Rompuy should be answering is why he is overseeing government machinery that refuses to give the governments this capacity. That is a question none of them will answer.

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Troika Technical Manual: How to wreck (another) country?

Cyprus is a small country of some 839 thousand people. It joined the Eurozone on January 1, 2008. That decision sealed its fate. Now the Troika are making it pay for that mistake, one that the Troika lured it into making. Such is the way of the Eurozone. The elites set the system up to suit their ideological preferences. Lure the local national elites who aspire to wine and dine in style in Brussels into becoming pro-Euro. Then attack the ordinary folks when the system collapses. But as we know, the Eurozone was a system designed to fail as soon as the first major negative aggregate demand shock hit. The shock hit in 2008. The system failed. Since then the elites have been divining ways to push the costs of those mistakes onto those who are least able to pay. How many Euro decision-makers are unemployed as a result of the crisis? How many Euro decision-makers who have since retired have lost any pension entitlements? But now the citizens of Cyprus are having their savings plundered by the Troika. The shamelessness seems to have no bounds. It is not even a strategy that will deliver the outcomes they have defined. The elites go from one blunder to the next and meanwhile all the key economic targets continue to deteriorate (like employment growth etc). And even the irrelevant targets that are the obsession of the elites also move in the opposite direction to that intended. If it wasn’t so tragic it would be the comedy of the century.

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Fiscal austerity is bad – there are no qualifications

I know people like to dream and Latvians are apparently no exception. Their latest collective dream, or at least, those of the elites that fancy wining and dining in style in Brussels, is to join the Eurozone. The Latvian government has now formally requested the EU to undertake a “Convergence Report assessment” of the Latvian economy to facilitate membership by January 2014. The opinion polls do not necessarily support the intent of the Government. But the conservatives are out in force with supporting narratives. One such attempt at making the impossible argument was from on Anders Aslund, who is one of Peter Peterson’s stooges and has co-written a book with the Latvian Prime Minister. He wrote a Bloomberg Op Ed (January 8, 2013) – Why Austerity Works and Stimulus Doesn’t – which turned out to be a major revision of all the known facts and concepts that almost everybody else (apart from the pro-austerity spivs and their hangers-on) would by now have to share. I made a few graphs. Fiscal austerity is bad. There are no qualifications.

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The denial of gravity

I was talking about economics at lunch-time today (as you do) and my company was irate about a TV interview that aired last night on the national public broadcaster (the ABC). The source of the angst was the increasing tendency of interviews on the ABC (and other media outlets) to express ill-informed opinions that serve to bias the interview and reinforce the dominant neo-liberal ideology. Such behaviour conditions the public to accept highly contestable propositions as fact, constructions of which, then defines the “solutions” and leave off the discussion table alternative scenarios and propositions that, in fact, represent the responsible policy options given the circumstances. This bias is part of a more general syndrome that defines the neo-liberal era, which is the equivalent of denying gravity. We are now fed a string of statements that parade as authoritative commentary or evidence that are, in fact, total fabrications and deny basis relationships that are at the heart of our monetary systems. This denial of “gravity” has become an art form and is used to bully us into accepting outcomes that advance the interests of the elites and undermine broader social welfare. It is a most extraordinary conflation of values and lies.

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One Ferrari does not a recovery make

I thought that blog title today was appropriate given that Aristotle was Greek. Today I explore motor vehicle registrations – well to be exact, a single registration. That is a backdrop to a brief discussion about the OECD’s latest publication – Going for Growth 2013 Report – which takes the ludicrous to a new level. These organisations need to be closed and the cash that governments pump into them to provide very amenable – some would say, over the top – working conditions (high pay, no tax obligations, well supported travel, first class facilities etc) could be diverted into something more useful. Like provide some low-paid workers with jobs. Lets assume one OECD manager earns the same wage as about 20 low-paid workers per week. The trade-off 1 job lost for 20 gained sounds a good bet to me. Anyway, amidst all the talk about structural agendas and reform zeal there is an ugly truth. There has to an easing of the macroeconomic constraint that is preventing economies from generating enough jobs. Firms need to see spending before they will increase production. Making life harder for workers through cuts to wages, conditions of work, pensions and the like will not create a single job. I lie – at least one job. Some OECD official will get assigned the job of evaluating their work and then a renewed bout of lies will emerge clothed in techno-speak. I just know that one Ferrari does not a recovery make. It tells me that the world is turning for the worse.

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Spain is not an example of reform success

There was an article in the Financial Times last week (February 12, 2013) – Europe’s labour market reforms take shape – that claimed that Spain was on the path to glory by hacking into rights of its workforce (that is, the 75 odd percent that still have jobs). It followed another Financial Times article (February 11, 2013) – Productivity is Europe’s ultimate problem – written by the deputy managing director of the IMF and redolent of the ideology that organisation spins as facts. Both articles are part of a phalanx in the conservative press that prefer to lie rather than relate to the facts. Apparently we have a new poster child – Ireland was the first one (now forgotten as it wallows in the malaise of fiscal austerity). Now, Spain is the go – a model for savage labour market reform and export led growth. Well it is a model – for how to ensure the unemployment rate and poverty rates continue to rise and you produce an economy that stops employing its 15-24 year olds. Some poster child! Spain is not an example of reform success. Rather, it demonstrates how misguided the policy debate has become and how a policy devastation is now being seen as good. Truly bizarre.

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US government has not exhausted its fiscal options

Today, I read a Bloomberg article – How the IMF Can Help Reduce Unemployment – which, in part, makes out that the IMF know what they are talking about when it comes to macroeconomic policy (that was the hilarious aspect). The article also claims that the US government has pursued “expansionary fiscal policy … aggressively but growth has remained too weak”. That claim, which surfaces most days, is being used to indoctrinate people into holding the view that fiscal policy has failed and there is little the government can now do other than turn it over the market (with very substantial handouts to the powerful lobby groups – of-course – but that isn’t really government spending is it – not like helping the pitifully poor unemployed who have no income and no power)! This theme repeats like a worn out record. The reality is that the US government didn’t give fiscal policy a chance to work fully. It was clear that the stimulus packages underpinned economic growth in 2009 and 2010 and led to an increase in private confidence (backed by growth in consumption and private investment spending). But the fiscal support was withdrawn too soon as the latest national accounts data clearly shows. The point is that the US government wasn’t aggressive enough, got cold feet too soon, and has never exhausted its fiscal options.

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Exploring directions in fiscal policy

This blog extends the discussion in yesterday’s blog – Exploring pro-cyclical budget positions – which is why I am running them on consecutive days. Not that I think any of my readers (Austrian schoolers and other conservatives aside) have memory issues! The discussion that follows focuses on ways in which we can interpret the fiscal stance of a government and hopefully clears up some of the confusion that I read in E-mails I receive from readers. I say that not to put anyone down but rather to recognise that the decompositions of budget outcomes and analysing the direction of fiscal policy on a period-to-period basis is not something that the financial press usually focuses on. In avoid detailed analysis, the press leaves lots of misperceptions unchallenged and often the wrong conclusions are drawn. I am not talking about policy preferences here. Just coming to terms with the facts is sometimes difficult for many commentators to achieve. But, of-course, the “facts” are also sometimes difficult to discover given that the methods used to produce them are often ideologically biased (I am talking here about the decomposition of the actual deficit into structural and cyclical components requires a full employment benchmark, which is where the fun starts.

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Exploring pro-cyclical budget positions

Sometimes one agrees with a conclusion but realises the logic that was used to derive the conclusion was false. Which means that the person will get things wrong when applying the logic to other situations. This is almost always the case when we encounter the reasoning offered by so-called deficit doves. These are economists who do not out-rightly reject the use of deficits but typically believe them to be cyclical phenomenon only and should thus be offset at other points in the economic cycle by surpluses – the so-called balanced budget over the cycle rule. While many progressives think that is a sensible strategy – the reality is that it is an unsustainable fiscal rule to try to follow. The same economists talk about the dangers of pro-cyclical fiscal positions but fail to appreciate that such positions are desirable in certain cases and there is a fundamental asymmetry that applies to evaluation the desirability of a “cyclical” position. Fiscal austerity (pursuing surpluses when the economy is contracting) is never appropriate whereas expanding the deficit when the economy is growing might be. It all depends. This blog aims to clear up some of these misconceptions.

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Britain caught in the mire of its own policy failure

It is a public holiday in Australia – celebrating our national day. For the indigenous Australians, it is symbolically “invasion day” – the day the colonialists came and usurped their rights and engaged in a systematic destruction of their culture and ensured they remain (collectively) among the most disadvantaged citizens on our Earth. So it is a day of shame really. It is also weird that we are gung-ho with nationalism today yet our head of state is the British queen. Taken together it is a confused society – hiding a deeply conservative form of prejudice, fear and paranoia with the anti-intellectual “larrikinism” that many associate with my nation. Not a very compelling mix to say the least. But then I know we need to be careful about generalisations like this. Today, among some pressing deadlines I took a little (depressing) journey into the latest national accounts release from the British Office of National Statistics – Gross Domestic Product Preliminary Estimate, Q4 2012. The narrative gleaned is terrible. It comes on the back of the ONS release of the – Public Sector Finances, December 2012 – which showed that budget deficit and public borrowing rose over the 12 months to December 2012. So at the half-way mark of this government’s tenure, the conclusion is clear – the British government has failed and is inflicting untold damage on its citizens – which has been temporarily interrupted but not curtailed by the Olympic Games.

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ILO …. ILF … IMF

The International Labour Organization (ILO) released its latest – Global Employment Trends 2013 – yesterday (January 22, 2013), which carried the sub-title “Recovering from a second jobs dip”. The way things are going in policy circles next year’s ILO Trends report will be titled something like “Heading into a third jobs dip”. There has been a lot of focus in the last few days on how central banks are standing ready or are about to inject liquidity into their respective economies as a further attempt to boost jobs. The press reports I have read (about Japan, UK etc) never also mention that these monetary policy gymnastics (quantitative easing) do nothing as they stand for aggregate demand. Japan will pick up its growth rate in the coming year not because the BoJ is buying bonds but because the Ministry of Finance will be increasing the budget deficit via some large spending injections. Unfortunately, the UK is determined to ensure it has a quadruple(bypass!)-dip recession. The ILO reports highlights the results of the policy folly in very sharp terms but, unfortunately, still situates that organisation within the neo-liberal orthodoxy when it comes to macroeconomic policy. Their heart is at least in the right place, they just have to move their institutional brain – about 180 degrees.

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Australian labour force data reveals a failed federal economic strategy

A few weeks ago the Federal government admitted that its obsessive pursuit of a budget surplus in the coming year at a time when private spending is still relatively weak was doomed. The slowing Australian economy had undermined its tax base as was always going to happen. The problem is that in trying to impose fiscal austerity the economy has suffered and the labour market is not producing enough jobs to even match the underlying population growth. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for December 2012 reveals that all the evils on the demand and supply side of the labour were aligned – total employment fell, full-time employment fell, unemployment rose, participation eased and working hours fell. It is certain that underemployment rose given the drop in working hours. In other words, the data is unambiguously bad. The unemployment rate rose to 5.4 per cent. The data is not consistent with any notions that the Australian labour market is booming or close to full employment. The most continuing feature that should warrant immediate policy concern is the appalling state of the youth labour market. My assessment of today’s results – a failing economy with further weakness to come. The Government should wake up to itself and even if only motivated by the federal election later this year it should reverse the direction of fiscal policy and introduce some direct job creation by way of employment-targetted stimulus.

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Neo-liberalism fails – time to wake up to that

Regular readers will know that I place the shifts in the distribution of national income (at the sectoral level) as one of the keys to understanding the current economic crisis and the what needs to be done to get out of it. I covered this early on in this blog – The origins of the economic crisis. The mainstream press is now finally latching on to this issue, which is good but sadly the media is still allowing itself to be captured by mainstream economists who have a particular and wrong view of what has been happening, why it has occurred and what the implications of it are for public policy. The fundamental changes that are needed to policy frameworks and societal narratives before the crisis is full resolved are still so far off the radar though. Until we start promoting discussions such as that which follows there will be only limited progress to a sustainable solution.

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