Debt is not debt

Some economists who are pushing the so-called de-leveraging story to explain the current downturn consider that the only sustainable basis for economic recovery requires that overall debt levels in the economy decline dramatically. They rightly argue that this requires a significant reduction in private debt. But they also argue that the public debt increases associated with the net public spending (the stimulus packages) – they erroneously use the term “to fund” the net spending – is self-defeating. In other words, they claim we are just substituting public debt for private debt and creating a new form of vulnerability (public insolvency – higher inflation etc) as we eliminate the private leverage. Apart from the failure of this story to link the private debt explosion with the pursuit of budget surpluses in the past, the major error that this camp makes is of the “oranges and apples” variety. That is, debt is not debt!

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Minimum wage decision – one of the worst ever!

Sometimes in public policy a poor decision is made. Other times you conclude a very bad decision has been made. Then there are times when you witness one of the worst decisions that could be made. Today’s Australian Fair Pay (Not) Commission decision falls into this latter category. It was a decision made by highly-paid officials in secure employment which will impacts disastrously on the lowest paid workers and their families. in the context of a demand-deficient (that is, spending failure) downturn, the FPC has denied the low-paid workers a pay rise. The decision consolidates the triple whammy attack against the poor which is the Government is largely turning a blind eye too while it swans around preaching social inclusion.

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The labour market is getting sicker

While all the green shooters out there are constantly searching for signs that things are improving the fact is they are typically focusing on financial variables. So they feel good that the share market is recovering a bit (for the time being). But I almost always focus on real variables and then more usually on the labour market. Employment is the connection that the vast majority of us have with the economy and the distribution system and the quality and quantity of employment is a crucial indicator of how well things are travelling. The latest data out today reinforces the data from last week and shows one thing and one thing only – the labour market is sick. It also points to the urgent need for a third stimulus package which unlike its predecessors should be “job laden”. If the Government fails to take responsibility in the coming weeks and funds direct job creation projects on a massive scale then the situation will worsen and we will be stuck with high rates of labour underutilisation for the next several years.

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The problem of being a macro economist

Saturday morning traditions … a long early ride on my bike (70 odd kms), then off to the local cafe for a cup of tea. Yes, time to read an actual paper paper. Time to talk about the state of the swell and wind direction (off-shore and pumping at present). The big match (Saints v Geelong, both unbeaten after 13 rounds – note no rugby here!). Perhaps some local gossip (who paid off who to get what development up!) … that sort of thing. Probably some politics. But no, before anything interesting could be raised by the assembled regulars … someone (a non-economist who claims he is just interested) had to begin proceedings with “Bill, why does the federal government borrow when you say it does not have too?” Can you put a sock in it, please! What about the surf? But why if they don’t have too? Saturday morning … the problem of being a macro economist. Things started getting ugly at this point.

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Balance sheet recessions and democracy

A regular reader sent me a recent financial market report written by Tokyo-based economist Richard Koo which raises some interesting issues about the association between prolonged recessions and democracy. Koo has achieved some notoriety in the last decade or more by coining the term “balance sheet recession” to describe what happened to Japan during its so-called “lost decade”. He also applies the analysis to the present global economic crisis. While he is not a modern monetary theorist, he recognises the need for considerable fiscal intervention and the futility of quantitative easing. So this blog is about all of that.

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Compact with Retrenched Workers – not a job in sight!

Current problem: jet lag. I keep saying to myself – 1 day for every time-zone. I have a week to go! Today I have been in Brisbane discussing the Functional Economic Regions geography which I have created to improve spatial analysis in Australia. The new geography is now being used by other social scientists because it represents an improvement on the standard geographical boundaries that ABS uses to disseminate regional data. I might write a blog about this one day although it is very technical and rather dry. But life as a researcher is “10 per cent inspiration and 90 per cent perspiration” although for me the 10 might be a little lower! After all I am a stupid modern monetary theorist! But today’s blog is about the Compact with Retrenched Workers – the latest policy joke emanating from Canberra.

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What else but a fiscal stimulus?

Today the ABS released the May 2009 Retail Sales data which showed that retail spending is continuing to grow despite the gloom that surrounds the economy. The main culprit – the fiscal package. While the jumps in retail sales earlier in the year were tentatively ascribed to the fiscal intervention it was clear we had to wait a few more months before we could be more definite in our assessment. As of now we can confidently say that the early interventions by the Government have had positive impacts on the economy. Whether they will last depends on what happens to unemployment. If it continues to rise then ultimately this will undermine the positive spending trend. Then significantly more fiscal intervention will be needed.

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