I was at a social function last weekend and the conversation turned to economics – surprise surprise. I was the only professional economist in the group. I try very hard to avoid discussing economics in these circumstances because experience tells me that misunderstandings quickly occur as the “intuitive” or “common-sense” economists seek the floor. I would much rather talk about weeds growing than the sustainability of budget deficits in times like that. But, alas, someone said “but we’ve got a 50 million-dollar deficit who is going to pay for that?” Another member of the group, who is very articulate and fairly well-read in Modern Monetary Theory (MMT) but not a professional economist stepped in to save the day. She proceeded to explain how common sense is a dangerous guide to reality and that not all opinions should be given equal privilege in public discourse. The conversation deteriorated because the “deficit worrier” and others immediately personalised this observation and considered it to be a attack on their life’s experience. Notwithstanding the tenseness of the situation, it was an interesting demonstration of the flaws in logic that govern the way people think about economics and the way politicians exploit our (flawed) reliance on common sense. Our propensity to generalise from personal experience, as if the experience constitutes general knowledge, dominates the public debate.

Today I am in the nation’s capital, Canberra presenting a class at the European Studies Summer School which is being organised by the Centre for European Studies at the Australian National University. My presentation is entitled – the Euro crisis: fact and fiction. I will have more to say about that in another blog. Today I am considering the issues surrounding the decline in personal consumption spending and increased household saving ratios. The argument is that this behaviour which is now clearly evident in most economies marks an end to the credit-led spending binge that characterised the pre-crisis period of the neo-liberal era. But with that era coming to an end and more typical (“normal”) behaviour emerging, the way we think about the government (as the currency-issuer) will also have to change. There is clearly resistance to that part of the story, in part, because there is a limited understanding to the central role that the government plays in the monetary system. As private sectors become more cautious, we will required continuous budget deficits to become a part of this return to the “new” normal.

Happy New Year – first serious blog for 2012. What does a macroeconomist like me do on the second day of the new year when the sun is shining warmly (about 29 degrees celsius) and everyone is seemingly on holidays? Answer: read up on central bank balance sheets. The truth is that I read two speeches today as part of another piece of research I am doing and they contained a few statements that help us understand the difference between Modern Monetary Theory (MMT) essentials and the way the mainstream economists misrepresent the monetary operations in the economy. The speeches were presented by a senior official at the Bank of International Settlements and they confirm that the central bank of the central bankers is now part of the problem. This organisation has now become part of the neo-liberal propaganda machine which is making things worse rather than better.

It is a public holiday in Australia today and I am not working a full day. But I have been collecting some items from the past five or so years which I am weaving into the text book that Randy Wray and I hope to have out in the coming year. When academics or others comment on public affairs it is clear that our commentary is to a certain extent time-dependent. The language we use, the topics we focus on and the conclusions we draw. So some things that are written sound quaint when we go back to them after some years. I hoard information and occasionally I access my databases to see who said what in some year and compare it to what might have happened in the interim and then what the same person might be saying in retrospect. It is an interesting exercise and when applied to my own profession reveals some amazingly nonsensical predictions or assessments. The global crisis has provided a major event to test many of the assessments made prior to the crisis. The most surprising thing is that the same sort of assessments made prior to the crisis that were demonstrated to be entirely false are still being made and still influencing policy design. But the most robust assessments have withstood the crisis and remain relevant today. I include the developments in Modern Monetary Theory (MMT) in this latter category. Mainstream macroeconomics was largely wrong before the crisis and is wrong now (for the same reasons) and should be disregarded.

A bit of a different blog today. I was rummaging through some boxes of papers today in search of some “non-digitised” notes which I wanted to consult as part of the development of our macroeconomic textbook, which Randy Wray and I hope to get out sometime next year. I came across some old drafts of papers I wrote in the early 1990s which had handwritten annotations etc. The old way of doing things. I thought it was interesting to compare the final published version of one such paper with the unpublished draft. That is what this blog is about – looking back to an article I wrote in 1993 (“Demystifying the Deficit”). A little journey back in time – but with alarming overlaps with what is going on today.

It is the season of “mini-budgets” with the Australian Treasurer launching the Mid-year Economic and Fiscal Outlook 2011-12 yesterday (November 29, 2011) and his British counterpart – the Chancellor of the Exchequer – releasing his Autumn Statement. At least Australia has summer coming tomorrow to look forward to. Both documents outline strategies of failed governments. I am watching the Australian Treasurer on the news screen at the airport right now as he asserts over and over again that even though they are now forecasting a rise in the unemployment rate over the next year there is “growth in the pipeline” and so aiming to achieve the largest fiscal consolidation in history (of the world) in one year is still a sensible strategy. I described the strategy on national radio last night as madness! Worse applies to the British government’s fiscal strategy. I consider that to be venal rather than misguided.

There was an Bloomberg Op Ed today (November 22, 2011) – Protesters Ignore American Love of Entrepreneurs – by Harvard economist Edward Glaeser. It is an attack on the OWS movement and an appeal to how great American entrepreneurship is. The ideas resonate with some recent work I have been doing on the impacts of national income redistribution under neo-liberalism on aggregate demand and the role of the financial sector. The link is that entrepreneurship in the US is not what it was and it is an illusion to think that the past two decades or so bears much similarity to the heyday of US entrepreneurship, whatever your view of the latter is. The entrepreneurs are disappearing in American and being replaced by rapacious wealth shufflers who add nothing to productive capacity or general prosperity.