British Labour Party running scared of the usual shadows

This is an election year in the UK and unless something dramatically changes, the Labour Party will be in power for the next term of Parliament and will have to manage a poly crisis that they will inherit from 40 or more years of neoliberalism. Note, I don’t confine the antecedents to the Tory period of office since 2010 because the decline started with James Callaghan’s Labour government in the 1970s and then just got worse during successive periods of Labour and Tory rule. During that long period, there has been no shortage of economists and public officials predicting that the financial markets would soon reap chaos as a result of the public debt levels being ‘too high’ (whatever that means). The most significant chaos came in 1992 when Britain was forced out of the European exchange rate system, which it should never have joined in the first place. While all these economists are now pressuring the likely next British government to pull back on their promises to ‘assuage’ the financial markets, there is not even a scintilla of evidence to support their predictions of doom. And the Labour party leaders are too stupid to realise that.

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Prosperity of Australian households going south, while Keir Starmer praises Margaret Thatcher

I am covering a few topics today, given that I used yesterday’s post space to analyse the national accounts release. There is a further point I wish to make about the latest national accounts data. A focus on real household disposable income shows the full extent of the impacts of monetary policy (rate hikes) and fiscal policy (tax bracket creep) on household prosperity. The Australian government is overseeing one of the largest falls in household prosperity in recent history aided and abetted by the RBA. And the only thing the Treasurer has announced this week is his intention to alter the RBA Act to rescind his power to change monetary policy if it acts against the national interest. Meanwhile, the British Labour Party leader was out there praising Margaret Thatcher and equating her shock therapy to his own purges within the Labour Party of anything that resembles a progressive voice. After all that, I have some spiritual jazz for our listening pleasure.

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Fiscal austerity does not on average reduce public debt ratios

The resurgence of economic orthodoxy is a great example of how declining schools of thought can maintain dominance in the narrative for extended periods of time if the vested interests are powerful enough. In the case of the economics profession, mainstream New Keynesian theory persists because it serves the interests of capital. Recently, the IMF urged the Australian government to engage in ‘fiscal consolidation’ in order to support further interest rate hikes by the RBA aimed at reducing inflation quickly. In general, the IMF is urging nations to engage in fiscal austerity in order to bring their public debt ratios down. The problem is that even their own research shows that these fiscal adjustments on average do not succeed. And, usually, they leave a damaged society where the lower income and disadvantaged cohorts are forced to endure the bulk of the negative effects.

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Bank of Japan shifts ground – just a little but there is no sign of a major adjustment any time soon

It’s Wednesday and I use this space to write about any number of issues or items that have attracted my interest and which I consider do not require a detailed analysis. The issues discussed may be totally unrelated. Today, I provide my response to yesterday’s decision by the Bank of Japan to vary its Yield Curve Control (YCC) policy, which some commentators are frothing about. The change was very minor and is not a sign that the expansionary position of the Bank is shifting significantly. I also discuss the culture of denial in the US State Department and then rock out to come classic swamp.

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US wealth distribution – fiscal policy increases private net worth but the poor miss out

I read an interesting report this morning, which resonated with some other work I had been looking into earlier in the week. The Australian Council of Social Services (ACOSS) released a report yesterday (September 27, 2023) – Inequality in Australia 2023: Overview – which shows that “The gap between those with the most and those with the least has blown out over the past two decades, with the average wealth of the highest 20% growing at four times the rate of the lowest”. It is one of the manifestations of the neoliberal era and is ultimately unsustainable. Earlier in the week, I spent some time analysing the latest data from the US Federal Reserve on the distribution of wealth among US households. The US data goes a long way to explaining why the recent interest rate hikes have been inflationary in themselves.

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Another mythical intergenerational report from the Australian Treasury

In my most recent podcast – Letter from The Cape Podcast – Episode 14 – I provided a brief introductino to why economic reports that project fiscal crises based on ageing population estimates miss the point and bias policy to making the actual problem worse. Today, I will provide more detail on that theme. Last week (August 24, 2023), the Government via the Treasury released its – 2023 Intergenerational Report – which purports to project “the outlook of the economy and the Australian Government’s budget to 2062-63”. It commands centre stage in the public debate and journalists use many column inches reporting on it. Unfortunately, it is a confection of lies, half-truths interspersed with irrelevancies and sometimes some interesting facts. Usually, these reports (the 2023 edition is the 6th since this farcical exercise began in the 1998) are a waste of time and effort.

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Ratings downgrade on US government debt is as ridiculous as it is meaningless

It’s Wednesday and there are a few topics that warrant some comment. But at the top of the topics were headlines this morning shouting out that the US treasury bonds had been downgraded by one of those self-serving credit rating agencies, as if it was an event worthy of some import. The journalists obviously do not understand anything if they think that decision was important. The ratings downgrade on US government debt is meaningless and the rating agency involved just wants to boost its revenue by sounding important. After I explain all that we will have a quiet musical reflection to finish the day.

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Starmer must confront the reality – more spending will be required but taxes will probably also have to be higher

The question is when is a Labour Party a Labour Party? The answer is: When it is a Labour Party! Which means when it defends workers’ interests against capital and when it defends families against pernicious neoliberal cuts or constraints on welfare. Which means, in turn, that the British Labour Party is a Labour Party in name only and the British people have little to choose from with respect to the two parties vying for government – Tory and Tory-lite! The British Labour Party has been abandoning its traditional role for some time now and while it is true that society and the constraints on government have evolved/changed, some things remain the same in a monetary economy. And that means that the statements from the Labour leader in recent days about fiscal spending austerity and a refusal to reverse some of the most pernicious Tory policies fail to recognise the reality. More spending will be required in the coming years not only to redress the damage done by the years of Tory rule but also to meet the challenges ahead in terms of climate, housing, education, health and more. The real question should be not whether more spending is required but what must accompany that spending by way of extra taxation. In my assessment, the next British government will have to lift taxes to create sufficient fiscal space in order to meet the challenges facing the nation with extra spending. Starmer is clearly not wanting to have that debate, which means the British people are once again being deceived by their political class. Taxes will rise with growth but I doubt that will generate sufficient space for the extra spending that will be required.

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RBA wants to destroy the livelihoods of 140,000 Australian workers – a shocking indictment of a failed state

My early academic work was on the Phillips curve and the precision in estimating the concept of a natural rate of unemployment, or the rate of unemployment where inflation stabilises at some level. This rate is now commonly referred to as the Non-Accelerating-Rate-of-Unemployment (NAIRU) and my contribution was one of the first studies to show that the rate was variable and went up and down with the economic cycle, rendering it a meaningless concept for discretionary policy interventions. I extended that work into my PhD and built on much earlier work as a undergraduate to articulate the Job Guarantee idea. The NAIRU is unobservable and there have been various ways to estimate it from actual data. The problem is that these estimates are highly sensitive to the approach – so two researchers can get quite different estimates using the same data. Further, the estimates themselves are subject to large statistical errors meaning that we cannot be sure whether the NAIRU is say 4.5 per cent or 3.5 per cent or 5.5 per cent, say. Such imprecision makes it impossible to use the concept as a guide for monetary policy because if the NAIRU actually existed then ‘full employment’ might be at 3.5 or 5.5 per cent today but next week the estimates might be even wider. When would one want to start changing interest rates in pursuit of inflation stability – when the actual unemployment rate was down to 3.5 per cent or at 5.5 per cent or somewhere in between or at higher or lower unemployment rates, depending on what the models pumped out? You can see the problem. For some years, central bankers went quiet on the use of the NAIRU and stopped publishing their estimates exactly because they knew full well about the imprecision and that policy based on such a vague, difficult to estimate, unobservable would be discredited. That is until now. The RBA is now clearly admitting that their damaging and unnecessary interest rate hikes over the last year and a bit have been driven by the NAIRU. A sham. But a tragedy as well given the RBA’s almost obsession with pushing unemployment up by around 140,000. A shocking indictment of where we have reached as a civilisation.

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Beware: pension systems about to collapse. Not! More mainstream fiction

Sometimes, one thinks that the intellectual world should evolve as intelligent people take account of the dissonance between their ideas and the facts before them and adapt their views. I know that doesn’t happen much but it should. I have studied the philosophy of science deeply enough over my student and postgrad days and beyond into my career to know that intelligent people have the capacity to completely fool themselves and hang onto defunct ideas as part of a paradigm-resistance to change. We know why that happens: senior professors have their reputations and legacy at stake, they control appointments, promotions, access to research grants, publication success for junior academics, and continuity of lucrative consulting empires. But sometimes I still am amazed when I read some research paper that I know has taken months to research and write up and which has been presented and talked about in seminars and conferences, and after dinner drinks and all the rest of it, but which bears no correspondence with the underlying reality. That was the situation when I read a research paper from three economists who were claiming that taxes have to rise and pensions cut if governments are to escape insolvency in the face of ageing societies. This continues, obviously, to be a powerful framework for proselyting the neoliberal mantra and a narrative that most people cannot see their way through to a conclusion that is all a fiction.

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Australia national accounts – economic growth slumps to below 1 per cent annualised – unemployment on the rise

The Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, March 2023 – today (March 1, 2023), which shows that the Australian economy grew by just 0.2 per cent in the March-quarter 2023 and by 2.3 per cent over the 12 months. If we extend the March result out over the year then GDP will grow by 0.8 per cent, well below the rate required to keep unemployment from rising. Working hours dropped in the March-quarter and I expect that trend to accelerate in the coming quarters given the conduct of the central bank and treasury. The March-quarter result represents a significant decline in growth, Households cut back further on consumption expenditure while at the same time saving less relative to their disposable income in an effort to maintain consumption growth in the face of rising interest rates and temporary inflationary pressures. I expect growth to decline further and we will be left with rising unemployment and declining household wealth as a result of the RBA’s poor judgement.

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A nation does not shift to an MMT regime

Earlier this week (April 25, 2023), I saw a Twitter exchange that demonstrated to me two things: (a) some mainstream media commentators are now understanding some of the principles of Modern Monetary Theory (MMT) and relating that knowledge to practical matters that concern them (lens being applied to values); and (b) high profile financial market players still command a platform in the media but have little understanding of what MMT is and consistently issue false statements. A lot of misinformation continues to be circulated about our work. Cursory inferences, usually based on an extrapolation of what the flawed mainstream theories say about policy interventions, are then conflated with assertions about MMT. In other words, MMT is interpreted through the terminology and conceptual structure of a rival paradigm. We reject such inferences and comparisons.

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Australian National Accounts – GDP growth in decline, expect unemployment to rise – courtesy RBA sabotage

The Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, December 2022 – today (March 1, 2023), which shows that the Australian economy grew by 0.5 per cent in the December-quarter 2022 and by 2.7 per cent over the 12 months. This is a significant decline in growth, which is now insufficient to prevent unemployment from rising over the coming period. Growth is being driven largely by continued (but moderating) growth in household spending. This was augmented by the strong rebound in the Terms of Trade (commodity prices), which helped net exports make a positive growth contribution. There was growth in employee compensation (the wage measure from the national accounts) of 3.2 per cent but that was largely due to administrative decisions (for example, minimum wage increases) that impacted in this quarter rather than being the result of market pressures. Households are now saving less relative to their disposable income in an effort to maintain consumption growth in the face of rising interest rates and temporary inflationary pressures. I expect growth to decline further and we will be left with rising unemployment and declining household wealth as a result of the RBA’s poor judgement.

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Investigation into BBC bias misses the point really

This week, the British Broadcasting Corporation (BBC) released the results of an independent review into its coverage of economic matters – Review of the impartiality of BBC coverage of taxation, public spending, government borrowing and debt – which was completed in November 2022. The problem is that the Investigation conducted by this Review, while interesting and providing some good analysis, misses the overall source of the bias that our public broadcasters have fallen into. The problem is not that they might be favouring political positions of one party or another. Rather, the implicit framing and language they use to discuss economic matters is largely flawed itself. And the journalists who uncritically use these concepts and terms just perpetuate the fiction and mislead their audiences.

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The Eurozone fictions continue to propagate

There was a Financial Times article recently (January 8, 2023) – Monetary independence is overrated, and the euro is riding high – from Martin Sandbu which strained credibility and continues the long tradition of pro-Euro economists attempting to defend the indefensible – fixed exchange rate, common currency regimes. He claims that the Euro is a better system in the modern era for dealing with calamity than currency independence. However, as I explain below, none of his arguments provide the case for the superiority of the Eurozone against currency-issuing independence. Currency-issuing government can certainly introduce poor policy – often because the policy makers refuse to acknowledge their own capacity and think they have to act as if the nation doesn’t have its own currency. But the negative consequences that flow from testify to the poor quality of the polity rather than any disadvantages of the currency independence. The Euro Member States are being bailed out by the central bank and if that stopped the system would demonstrate the inherent dysfunction of its monetary architecture and nations would fail.

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Australia National Accounts – growth continues at a moderating pace

The Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, September 2022 – today (December 7, 2022), which shows that the Australian economy grew by 0.6 per cent in the September-quarter 2022 and by 5.9 per cent over the 12 months to the end of September 2022. Growth is being driven largely by continued growth in household spending (which has not yet succumbed to the cost of living squeeze exacerbated by the interest rate rises). There was a modest contribution from private capital formation. The terms of trade declined sharply signalling a negative contribution from net exports and declining real net national living standards. There was growth in employee compensation (the wage measure from the national accounts) of 3.2 per cent but that was largely due to administrative decisions (for example, minimum wage increases) that impacted in this quarter rather than being the result of market pressures.

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IMF continue to demonstrate their neoliberal biases

The IMF published a new blog the other day (November 21, 2022) – How Fiscal Restraint Can Help Fight Inflation – which demonstrates that the organisation is still stuck in a New Keynesian world and despite all the empirical dissonance that has been building over the last decades to militate against that economic approach, little evolution in thinking is apparent. The battle to dispense with the mainstream approach is going to be harder and longer than many thought.

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If its bad it must be because of Brexit or MMT or both depending

There is no doubt that the on-going pandemic has left a trail of economic problems including major supply constraints, the growing problem of long Covid and other issues that are challenging policy makers. They have been exacerbated by the behaviour of OPEC+ and the Ukraine situation. We now have a period of inflation, real wage cuts and most central banks doing their best to make matters worse. However, we now have a phenomenon that goes like this. In the UK, everything ‘bad’ that arises is apparently because of Brexit even if the trends were there before the move or the problems are being shared across all countries. I imagine even if the English cricket team loses it is because of Brexit. This phenomenon has generalised however. Now, we have the claim that all bad economic news is because governments ‘followed’ MMT or something akin to it. Those who are insecure about MMT because it does better at explaining the real world than the mainstream theories are the same as the Remainers who predicted that the British economy would crash badly in 2017 and then every year after that. To soothe their worried souls they consider any ‘bad’ news to be because of ‘MMT’ or in the case of Britain because of Brexit. Neither proposition has any foundation.

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Tax reform in Australia is needed but not because the government needs more of its own currency to spend

The public debate is conditioned by who gets a platform in the mainstream media. Even those publications that purport to be informed and appeal to a more reasoned type of reader are highly selective in who they give a voice to. I see this as a huge constraint in advancing alternative ideas that challenge the mainstream narrative and the vested interests that support it. The problem is that on economic matters these vested interests have not only captured what we might call the conservative voice. They also dominate and craft the so-called progressive agenda such that Green groups and movements, for example, are indistinguishable on macroeconomic matters, which makes it hard to contest ideas that are abroad. The UK Guardian, for example, thinks it presents a progressive angle on issues and is ‘above’ the crudity of the tabloids. But it regularly gives voice to writers who promote macroeconomic fictions and refuse to give space to those who challenge these fictions. Today (September 26, 2022) for example, it published am article – Without radical tax reform, Australia faces an insoluble public finance problem – by one Satyajit Das, who gets regular Op Ed columns in the Guardian and appears regularly on Australian public radio. His analysis distorts the public debate. Selective platforming is a blight in our media.

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Central bank priorities are not the priorities of working people

I remember a conversation I had when I was picked up hitch hiking to Melbourne from where I was living down the coast. It was during the 1970s inflationary period, which had morphed into stagflation as a result of deliberate government policy to create unemployment and discipline the wage-price spiral. The driver was a manual worker and during a conversation about the state of the economy (I was studying economics at the time) he said “the government should care about employment because at least then everyone has a job even if prices are rising”. That conversation stuck with me because it summed up what research shows in more sophisticated ways – the costs of inflation are minimal when compared to the devastating costs of unemployment. At present, our policy makers are unwilling to recognise that reality because it is not them that bear the costs.

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