I have been doing some work again on the costs of unemployment and this blog gives a snapshot of part of that research. One of the strong empirical results that emerge from the Great Depression is that the job relief programs that the various governments implemented to try to attenuate the massive rise in unemployment were very beneficial. At that time, it was realised that having workers locked out of the production process because there were not enough private jobs being generated was not only irrational in terms of lost income but also caused society additional problems, such as rising crime rates. Direct job creation was a very effective way of attenuating these costs while the private sector regained its optimism. In fact, it took about 50 years or so for governments to abandon this way of thinking. Now we tolerate high levels of unemployment without a clear understanding of the magnitude of costs that that policy position imposes on specific individuals and society in general. The single most rational thing a government could do was to ensure that there were enough jobs to match the available labour force. Mostly, they fail badly to achieve this level of sophistication.
Today we examine two propositions: (a) 100-percent reserve banking; and (b) national government spending without taxation and debt issuance. Believe it or not the two propositions have been related in the debates over many years. Modern monetary theory (MMT) is agnostic to the first proposition although individuals within the paradigm have diverging views. However in the case of the second proposition it is central to MMT that a currency-issuing government has no revenue-constraint and should not issue debt to match net spending. Further, taxation is an effective tool for attenuating overall agggregate demand rather than raising revenue for a government that can spend regardless.
Today we consider the causes of mass unemployment of the sort that most nations are enduring at present. This also involves the consideration of the relationship between wages and employment. This is an area in economics that has been hotly contested across paradigm lines for years. Mainstream economic commentators still claim that the employment situation can be improved if wages are cut. They are wrong. Modern monetary theory (MMT) is clear – mass unemployment arises when the budget deficit is too low. To reduce unemployment you have to increase aggregate demand. If private spending growth declines then net public spending has to fill the gap. In engaging this debate, we also have to be careful about using experience in one sector to make generalisations about the overall macroeconomic outcomes that might accompany a policy change.
… who needs enemies. I am forming the view that many so-called progressive economic think tanks and media outlets in the US are in fact nothing of the sort. Tonight’s blog is Part 1 in a series I will write but the series really started in November 2009 when I wrote about The enemies from within. Today I read two position pieces from self-proclaimed progressive writers which could have easily been written by any neo-liberal commentator. True, the rhetoric was guarded and there was talk about needing to worry about getting growth started again – but the message was clear – the US has dangerously high deficits and unsustainable debt levels and an exit plan is urgently required to take the fiscal position of the government bank into balance. Very sad.
Welcome to the billy blog Saturday quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following five questions. Your results are only known to you and no records are retained.
… su tiempo para salir de la UEM. On Wednesday I was up in freezing Iceland and we saw how the threats of being prevented entry into the EMU had led the Icelandic government into bowing to the unjustifiable bullying of the UK and Dutch governments and violating the wishes of its own populations. A greater authority (the President) intervened and hopefully the Icelanders will tell goliath to take a walk. Today I have travelled south into the EMU – to Spain where the weather is kinder but the economic climate is very harsh indeed. The situation in Spain tells us all that the Euro system was always built on corrupted neo-liberal rhetoric and now it is buckling asunder as the first real test of its logic is causing havoc among ordinary people. I am sure those officials in their warm offices and well-paid jobs in Frankfurt and Brussels are not enduring what a significant minority of Spaniards are now going through. One statistic is enough to tell you the EMU system is a failure – 53 per cent of Spanish youth (16-19 year olds) who want to work are unemployed! So … España se está muriendo … su tiempo para salir de la UEM (Spain is dying … its time to leave the EMU).
Today the Australian Bureau of Statistics released the November Retail Sales data, which is being seen as a likely signal as to whether the RBA will increase interest rates when it meets next in February. The data shows that retail sales are holding up as the fiscal stimulus targetted at consumption gives away to a focus on public infrastructure investment. However, there are other signs that the Australian economy is not yet out of the danger zone.
What do you do when your government is selling you out? Get the titular head (president) to intervene. That is what seems to be happening in Iceland at the moment. While the president is being accused of being an old political hack who longs to be back in the limelight, the more accurate interpretation is that he is reflecting the mood of the population which have been abandoned by a government intent on big-noting itself on the world stage by pushing for EMU admission. The sources of the problems in Iceland mirror those that have been at work globally to undermine the stability of the financial system and plunge real economies into deep recession – a religious belief in the efficacy of unregulated markets and the efficiency of entrepreneurial zeal. Both beliefs are now in shatters along with many economies not the least being Iceland. It is time that Iceland invoked its status as a modern monetary economy whose government has sovereign status in its own currency and started showing leadership to advance public purpose.
In yesterday’s blog, I discussed one of the more novel ways that the conservative lobby against government spending is mobilising to present their case. In that paper, it was argued that spending “funded” by taxation is always captive to political lobby groups who ensure the government will waste spending and undermine the productivity of the economy. Alternatively, the author claimed that government spending should be disciplined by financial markets who would reduce the waste that is inherent in public outlays. While there were several flaws in the argument the one that we deal with today focuses on the assumption that financial markets allocated resources optimally.
Today I was reading some academic articles on the implications of budget deficits. In general, the amount of effort that goes into these articles doesn’t match the quality of the argument. They all have predictable formats – some proposition, then invoke neo-classical assumptions, do some mathematics (mostly second-rate in quality), then make a conclusion that was given anyway by the structure of the exercise. As a consequence there is no information content at all in these articles. Just gymnastic exercises. However, one article I read presented a new slant on the case against government spending. It also resonated with my reaction to the release of a major report on executive salaries in Australia today, which quashed hopes that shareholders would have more say in disciplining the companies they own. The debate generalises and points to the conclusion that financial markets are mostly unproductive and have conned us into thinking otherwise.