I know I said I was not going to write a blog today but I changed my mind. It will be a short blog only. I was considering the continued dogmatic assertions that mainstream economists make that the central bank still controls the money supply and that money multiplier is alive and well but has just disappeared for a while. This recent mainstream post is typical of these on-going erroneous assertions by mainstream macroeconomists about the way the monetary system and the institutions within it operate. The fact is that the monetary multiplier is not dead – I can say that confidently because I know it was never alive!

As governments around the world are setting about to scorch their economies with austerity programs very little opposition is coming from my profession. It is quite astounding to me that the more extreme elements (the Ricardian Equivalence theories) are holding sway at present. These notions have been discredited often (see my blog – Pushing the fantasy barrow for a discussion). Generally, the austerity push is not being supported by any credible economic theory which enjoys empirical support. I get the impression that policy makers are now altering settings in an ad hoc manner without any real understanding of how the economy works. It is a triumph of neo-liberal dogman. However, in terms of evidence-based critiques of the austerity push, Bloomberg Opinion published an interesting article (July 13, 2010) – U.K. Bust Needs Big Spender – written by UK academic Vicki Chick and author/debt activist Ann Pettifor (thanks BM). The Op Ed summarises a more detailed research paper which demonstrates that key assumptions of the austerity proponents do not hold over a long historical period. The short message is that things are going to get worse.

Overnight a kind soul (thanks M) sent me the latest Goldman Sachs US Economist Analysis (Issue 10/27, July 9, 2010) written by their chief economist Jan Hatzius. Unfortunately it is a subscription-based document and so I cannot link to it. It presents a very interesting analysis of the current situation in the US economy, using the sectoral balances framework, which is often deployed in Modern Monetary Theory (MMT). While it relates to the US economy, the principles established apply to any sovereign nation (in the currency sense) and demonstrate that some of the top players in the financial markets have a good understanding of the essentials of MMT. But the bottom line of the paper is that the US is likely to have to endure on-going and massive employment gaps (below potential) for years because the US government is failing to exercise leadership. The paper recognises the need for an expansion of fiscal policy of at least 3 per cent of GDP but concludes that the ill-informed US public (about deficits) are allowing the deficit terrorists to bully the politicians into cutting the deficit. The costs of this folly will be enormous.

The daily rhetoric being used to promote fiscal austerity maybe couched in the urgency of the day but we have heard it all before. In this blog I just reflect on history a little to remind the reader that previous attempts to carve public net spending, based on the “expectations” belief government was not going to tax everybody out of existence, failed to deliver. The expected spontaneous upsurge in private activity has never happened in the way the mainstream macroeconomic supply-siders predicted. Further, the chief proponents usually let it out in some way that the chief motivation for their vehement pursuit of budget cuts was to advance their ideological agendas. Of-course, the arguments used to justify the cuts were never presented as political or class-based. The public is easily duped. They have been in the past and they are being conned again now. My role is to keep providing the material and the arguments for the demand-side activists to take into the public debate.

In recent days there has been some discussion about the way different Modern Monetary Theory (MMT) thinkers might see the development of the paradigm. There has be some remarks that MMT should be explained in little steps and only then presented as a menu of policy choices so that all ideological persuasions might embrace it. There have also been statements that my US-based colleagues have agreed to that strategy and are now discounting any advocacy of full employment because the US population en masse (allegedly) find such notions repugnant. I disagree with all of those propositions. I consider that a sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed. If they don’t take that responsibility and use the fiscal capacities that they have courtesy of their sovereignty, then there will typically be mass unemployment. An understanding of MMT makes that clear. The discussion also has raised questions about the purpose of my blog and I reflect on that in what follows.