Listening to past Treasurers is a dangerous past-time

On January 23, 2016, a former Australian Treasurer Peter Costello (1996-2007) gave a speech to the Young Liberals (the youth movement of the conservative party in Australia) – Balanced Budgets as a Youth Policy – which was sad in the sense that some people never get over being dumped as out of touch and unpopular and was ridiculous in the sense that it is a denial of reality and macroeconomic understanding. He mounted the same old arguments that have been used to justify the pursuit of fiscal surpluses (grandchildren etc) but failed to recognise that his period as Treasurer was abnormal in terms of our history and left the nation exposed to the GFC as a result of the massive buildup in private sector debt over his period of tenure. The only reason he achieved the surpluses was because growth was driven by the household credit binge which ultimately proved to be unsustainable. Fiscal deficits are historically normal and should not be resisted. They are the mirror image in a national accounting sense of non-government surpluses, which historically, have proven to be the best basis for sustained growth and low unemployment.

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European-wide unemployment insurance schemes will not solve the problem

On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.

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The Modigliani controversy – the break with Keynesian thinking

I have been continuing the research for my next book (hopefully to be finished by May 2016) on the way in which the neo-liberals convinced policy makers including those in progressive social democratic political parties that the globalisation of finance and capital flows meant that the currency-issuing state was no longer capable of maintaining full employment through appropriate use of fiscal policies. The tenet we are entertaining is that the state never went away, it was just co-opted by capital to serve its interests. This will be a two-part blog and centres on a critical period in economic history in the mid-1970s, which marked the break with the full employment system which had moderated the excesses of capitalism. This was the period when the neo-liberal period dawned, and which steadily, opened the way for these excesses to reemerge, in all their indecent indulgence and destruction. It is also the period in which a series of economic myths crystallised into the mainstream narrative we know today, which opposes government deficits and allows unemployment to remain elevated at excessive levels. It is really important to understand what went on then because we are living with the legacy of the falsehoods introduced during this period.

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Currency-issuing governments have unlimited financial resources to fight recession

The elites are gathering for another junket aka the World Economic Forum, in the frosty, but salubrious surrounds of Davos this week (January 20-23, 2016). The Monday morning temperature there is forecast to be -22°C. According to the Forum’s homePage – Searching for the 21st century dream at Davos – the delegates are going to be reimagining life under the theme “Mastering the Fourth Industrial Revolution”, which is spin for eating a lot of gourmet food, drinking a lot of expensive wine, and, denying the presence of the very large elephant in the conference venue. I suppose it is easy for them to live in denial when the sort of policy regimes they have influenced have categorically failed and will continue to do so with the result that millions remain unemployed and poverty rates are rising. Apparently, the elites have to “‘defetish’ … dialogues about future technologies” and the “onset of a new era of ‘limits’ is a chance we must not miss to imagine and engineer the futures we want”. Here is some gratuitous advice to the elites – forget the robots; forget worrying about the so-called “inflection point … where social, economic and political crises meet rapid technological change, where progress feels like disruption, not promise”; and, instead, more fully understand why this obsession with “a new era of ‘limits'” (by which they mean fiscal limits on governments) has sidetracked any hope of progress and deliberately disrupted people’s lives in a way that dwarf the impacts of technological change.

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The Weekend Quiz – January 16, 2016 – answers and discussion

Here are the answers with discussion for The Weekend Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Globalisation and currency arrangements

In today’s blog, I continue the discussion that I started last Thursday, and, specifically, focus on the critique that commentators have made about the loss of state control of their economies as a result of globalisation. The thesis advanced by many analysts is that globalisation has reduced the capacity of the nation-state and forced governments to adopt free market policies at the microeconomic level and austerity at the macroeconomic level, for fear that capital flight will destroy their economies. It is a neatly packaged thesis that the political Left has imbibed, and, in doing so, has undermined the progressive basis of these institutions and left voters with little choice between right-wing parties and the social democratic parties who formally represented the interests of workers and acted as mediators in the class conflict between labour and capital. The major distinguishing feature these days between these two types of parties, who were previously poles apart in approach and mandate sought, is that the so-called progressive side of politics now claims it will implement austerity in a fairer way. These austerity-lite parties, buying into the myth that globalisation has undermined the capacity of the state to pursue full employment policies with equitable income distribution, do not challenge the basis of austerity, but just quibble over who should pay for it. The aim of this research which will appear in my next book (with co-author Thomas Fazi) is to outline a manifesto by which progressive activists and political movements can claim back the space the current generation of sham progressives have ceded to the neo-liberals.

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Saturday Quiz – January 9, 2016 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Saturday Quiz – January 2, 2016 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Bernie Sanders on the right track but need to address the main game

On December 23, 2015, the Democrat Presidential candidate Bernie Sanders published an Op Ed – Bernie Sanders: To Rein In Wall Street, Fix the Fed – which, correctly, in my view, concluded that Wall Street (taken to be the collective of banksters wherever they might be located) “is still out of control” and policy reform has done little to alter the “too big to fail” problem that was identified in the early days of the GFC as one bank after another lined up for government assistance. Larry Summers replied to the Op Ed in his blog – The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed – challenging several of the proposals advanced by Sanders. The problem is that the progressive voice of Bernie Sanders labours under some basic misconceptions about how the monetary system operates and therefore plays into the hands of those who have created the mess. Conversely, Summers clearly understands basic elements of the monetary system but continues to advocate policies which avoid addressing the main issue – the power of the financial markets.

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Finland should exit the euro

I think the progressive side of politics has a real problem when it is increasingly gazumped in policy insights by politicians and/or commentators from the populist, xenophobic, racist, homophobic, far right-wing. Whether Finland’s Foreign Minister Timo Soini is all of those things or just nationalistic and far right (one of the members of his Finns party wants homosexuals and some foreigners rounded up and sent to some remote Baltic Sea island), he is certainly correct when he told the press yesterday that “Finland should never have signed up to the single currency union” and “could have resorted to devaluations had it not been for its Euro membership” (Source). Earlier this month (December 4, 2015), Statistics Finland published the latest National Accounts data for the third-quarter 2015, which showed that real GDP declined by 0.5 per cent in that quarter and by 0.2 per cent over the previous 12 months. In the past 12 months, both exports and imports declined by 3.4 per cent, the former signalling declining markets and the latter declining domestic income – both bad. Investment spending fell by 3.9 per cent in the year to September, which will further undermine the nation’s potential growth. It is now becoming the basket case of advanced Europe.

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Saturday Quiz – December 19, 2015 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Friday Lay Day – Canadian central bank governor bucks the mainstream Groupthink

It’s Friday again, my blog Lay Day, which means I fast track the blog entry in favour of other writing tasks. But one thing that is worth noting today (and I’m sort of catching up on recent events in my reading of them), is a speech that the Governor of the bank of Canada (its central bank) gave to the Empire Club of Canada in Toronto on December 8, 2015. The speech – Prudent Preparation: The Evolution of Unconventional Monetary Policies – was somewhat of a revelation given that it was coming from a central banker. Essentially, he admitted that monetary policy in the current situation was relatively ineffective and that expanding fiscal policy was the appropriate government strategy to address the cyclical downturn in non-government spending. He also disabused his audience of the notion that the current low growth environment was of a ‘structural’ nature. He said that the slow non-government spending growth was cyclical and reflected the reality of precarious private balance sheets and low confidence in the future. He channelled the writing of John Maynard Keynes, explicitly, which in itself, was a significant public recognition, especially by a central bank governor. So Canada has now elected a new government that is promised to increase the fiscal deficit to stimulate job creation and economic growth. It also has a central bank governor that implicitly is urging the government to use its fiscal policy capacities in that way. What a refreshing change!

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The Job Guarantee and contributory unemployment benefits systems

The unemployment rate in Finland is climbing steadily and in October 2015 was 9.6 per cent (seasonally adjusted) and the employment to population ratio stood at 60.1 per cent and was trending down. Finland is fast becoming the next basket case of the Eurozone. What was once a highly supportive society is steadily being turned into a austerity-ridden backwater. The latest news, however, that the Finnish government is due to debate a proposal to provide every citizen with a basic income of €800 a month has excited the progressives – unfortunately. The proposal currently being prepared by the national agency that administers the Finnish welfare system (KELA) would offer this basic allowance in lieu of all other existing benefit payments. It would be paid regardless of whether the person received income from any other source. I have been considering the Finnish welfare system over the last month or so since my visit there in October. This is in relation to a series of queries I had from activists there who were keen on the Modern Monetary Theory (MMT) Job Guarantee proposal but were wondering how it would situate itself within the existing system of unemployment benefits in Finland. This blog captures my thoughts on both of those topics.

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Saturday Quiz – December 5, 2015 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Friday lay day – Eurozone, lessons have not been learned

It’s my Friday Lay Day blog and my head is firmly in the 1960s and being helped along by music from the early 1970s. I’m currently trying to trace the evolution of intellectual ideas in the French Ministry of Finance as it gained ascendancy in the late 1960s over the Planning Ministry, which was Keynesian in outlook. It is no easy task. The current situation in Europe is approaching laughable in a sort of tragic sense, given the millions of people who are unnecessarily unemployed as a consequence of the incompetence and folly of the political class. The latest manifestation of this folly was the Monetary Policy decision released by the European Central Bank yesterday (December 3, 2015) which was met with derision from commentators and the financial markets responded by pushing the value of the euro up, which will further exacerbate the ECB’s claim that it wants to increase the inflation rate.

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Recessions are always a problem and can always be avoided

There was an article in the Fairfax press this morning (December 1, 2015) – ‘Australia headed for recession’: Yanis Varoufakis, former Greek finance minister – which featured the erstwhile finance minister stating the obvious. Last week’s investment data, which I analysed in this blog – Australia – investment spending contracts sharply, recession looming – makes it clear that unless is a substantial shift in the austerity mindset of the fiscal policy makers then the continued and accelerating contraction in private capital formation will drive the economy into recession. That conclusion is not rocket science – it is staring us in the face. When tomorrow’s National Accounts data is released we’ll know more about the trajectory of the economy in the September-quarter. But it is clear that real GDP growth is declining, and the non-mining sector of the economy is not taking up the slack that has been created by the end of the commodity prices boom which drove the mining sector strongly for several years. What was objectionable about the Fairfax article was the assertion by the erstwhile finance minister that “the recession itself would not be the problem … because some recessions are necessary”. No recession is necessary and they are always extremely damaging especially to those who disproportionately bear the consequences – aka the most disadvantaged citizens in the society.

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The demise of French greatness and the European Left

The GFC clearly, in my view, demonstrated that the political positions held by both the left- and right-wing governments in the West with respect to economic policy were untenable. Both sides of politics in each major and country adopted versions of market liberalism where the overlap was more dominant than the differences. While the left maintained some emphasis on social policy and the right maintained an emphasis on individual freedom (which was more about corporate freedom than anything), the fact remains that these differences were blurred by the dominance of the free market approach in each of their platforms. It is ironic, that as a consequence of the GFC, the bureaucratic state is more dominant now than it was, especially in the European Union where the political and technical elite interacts with the so-called market to create what has been called the democratic deficit. We now have technocrats in the European bureaucracy, in the IMF, in the World Bank and other multilateral organisations who contrive to implement policies which have allowed the benefits of economic activity to be increasingly diverted to beneficiaries who are at the top end of the income and wealth distribution. Today’s blog continues reporting some of the research I’ve been doing for my next book on the demise of the Left and the subjugation of public purpose in the name of austerity. It seems that we have concentrated on fiscal austerity but the general notion of austerity, which is now the centrepiece of political positions in most advanced countries, goes well beyond just fiscal policy. The response to the recent events in Paris demonstrate how far the state is willing to centralise authoritative controls on the rights of their citizens.

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Time for George Osborne to expand discretionary deficit spending

The British Office of National Statistics released the latest – Public Finance, October 2015 – last week (November 20, 2015), which showed that the British fiscal deficit has grown by around 16 per cent in the past 12 months and is around £2.2 billion higher than was forecast by those who care to forecast such things. The hysterical press reaction was quite amazing. For example, the so-called progressive UK Guardian described the results as “shock UK deficit figures” and said that the recorded deficit was the “worst … for six years”, despite the fact that any informed dialogue about fiscal balances would eschew the use of terms ‘worst’ or ‘better’ to describe such outcomes. Meanwhile, the US press went haywire with claims of a scandal of what effectively amounts to the government hiding revenue from itself. Quite amazing.

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Overt Monetary Financing – again

Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The New Yorker columnist John Cassidy decided to weigh into this topic in his recent article (November 23, 2015) – Printing Money. The topic is, of course, what we now call Overt Monetary Financing (OMF), which simply means that all of the unnecessary hoopla of governments matching their deficit spending with bond-issuance to the private bond markets, as if the latter are funding the former, is dispensed with. That artefact from the fixed exchange rate Bretton Woods system is maintained as a voluntary procedure by fiat-currency issuing governments but only provides financial assets to the non-government sector in the form of ‘corporate welfare’. The debt issuance of debt has nothing to do with funding the spending and is used by all and sundry to attack such spending for creating so-called ‘debt mountains’. OMF brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.

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Takahashi Korekiyo was before Keynes and saved Japan from the Great Depression

This blog is really a two-part blog which is a follow up on previous blogs I have written about Overt Monetary Financing (OMF). The former head of the British Financial Services Authority, Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The paper advocated OMF but in a form that I find unacceptable. I will write about that tomorrow (which will be Part 2, although the two parts are not necessarily linked). I note that the American journalist John Cassidy writes about Turner in his latest New Yorker article (November 23, 2015 issue) – Printing Money. Just the title tells you he doesn’t appreciate the nuances of central bank operations. He also invokes the Zimbabwe-Weimar Republic hoax, which tells you that he isn’t just ignorant of the details but also part of the neo-liberal scare squad that haven’t learnt that all spending carries an inflation risk – public or private – no matter what monetary operations migh be associated with it. I will talk about that tomorrow. Today, though, as background, I will report some research I have been doing on Japanese economic policy in the period before the Second World War. It is quite instructive and bears on how we think about OMF. That is the topic for today.

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