The Weekend Quiz – March 18-19, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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Australian labour force – negative employment growth and rising unemployment

This analysis is coming from Brussels and the data doesn’t look any better here than it does back in Australia. The situation being revealed is very poor. The latest labour force data released today by the Australian Bureau of Statistics – Labour Force data – for February 2017 shows total employment fell by 6,400 and repeats the behaviour of the last few years where it has been zig-zagging around the zero growth line on a more or less monthly basis. Australia’s status as a part-time employment nation continues, despite a modest rise in full-time employment this month. Over the last 12 months, Australia has lost 23.2 thousand full-time jobs (in net terms) and gained 127.8 thousand part-time jobs. Overall, employment has grown by only 104.6 thousand jobs (net) – a very low annual figure. This status as the nation of part-time employment growth carries many attendant negative consequences – poor income growth, precarious work, lack of skill development etc. The failure of employment to keep pace with the labour force growth saw unemployment rise sharply in February 2017 by 26 thousand and the unemployment rate to rise by 0.2 points to 5.9 per cent. Underemployment also rose sharply by 0.3 points to 8.7 per cent and taken together (unemployment and underemployment) there were 14.6 per cent of the labour force counted as broadly underutilised (1,862.7 thousand). The teenage labour market remains in a poor state and deteriorated further in February. It requires urgent policy intervention. Overall, the Australian labour market is weak and showing no signs of improvement. The poor outlook signals the need for a policy shift biased to expansion. It is clear that the current restrictive fiscal policy position adopted by the Federal government is not sufficient to redress the inadequate non-government spending growth.

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When fake knowledge peddled by macroeconomics starts to fail the ‘investors’

Last Tuesday, in Maastricht, I gave one of two lectures I presented in a series (the other was on the previous Monday night). The first lecture, which was public, focused on the Eurozone disaster and I outlined why an orderly breakup of the failed monetary union would be in the best interest of all (I will post video of that lecture next Monday). The next lecture, which was to staff and students only, focused on the failure of macroeconomics and I juxtaposed fake news with the fake knowledge of mainstream macroeconomics. I want to expand a little on that topic. The Wall Street Journal published an article last week (March 6, 2017) – Everything the Market Thinks About Inflation Might Be Wrong – which bears on the validity of Modern Monetary Theory (MMT) relative to mainstream monetary economics. What I would call actual knowledge (MMT) and fake knowledge (mainstream theory). The article is not without its issues but it correctly notes that the underlying basis of orthodox inflation theory is false and fails to explain movements in inflation.

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Why is Europe celebrating the 60th anniversary of the Treaty of Rome?

The tiny nation of Malta (~ 420 thousand population) and the only one of two Eurozone nations that have English as one of its official languages is now hosting the EU Presidency for 2017. This was a function that was established by the Treaty of Lisbon in 2009 and allows a nation to influence the European Union’s agenda. As the rules dictate Malta shares this function with two other nations (Netherlands and Slovakia) to form the so-called Trio Presidency. There will be a lot of talk and papers produced and a lot of flags and posters are appearing in Valletta (Malta’s fortress capital) but don’t expect much to come from it. The other thing about 2017 and the EU is that they are celebrating the 60th anniversary of the signing of the Treaty of Rome later this month (signed on March 25, 1957 and operational from January 1, 1958). The European Commission is clearly keen to give the impression that the Treaty of Rome was the first step in the succession of steps that made Europe what it is today. In one sense that is correct. But in a more important sense that claim is nonsense. The reality is that the subsequent revisions of the Treaty (Maastricht and Lisbon) represented fundamental paradigm or ideological shifts in the way Europe was to be governed. The Treaty of Rome recognised that limited economic cooperation could be beneficial to all participating nations as long as it was attenuated or managed by comprehensive system of state intervention. The subsequent treaties represent a shift from the Member States having the capacity to ensure full employment to a situation where the Member States are biased to enforcing austerity and creating persistent and elevated levels of unemployment and poverty at the behest of the ideological masters in the European Commission, who are neither elected by or accountable to the people of Europe they claim to represent. So … why are they celebrating the 60th anniversary of an approach to economic policy making and nation-building that they have now completely rejected?

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US labour market improves and interest rates will rise as a consequence

On March 10, 2017, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – February 2017 – which showed that total non-farm employment from the payroll survey rose by 235,000, which built on the 227,000 net change in January 2016. The unemployment rate fell to 4.7 per cent. The Labour Force also grew strongly as participation rose by 0.1 points. The signs are more positive than a few months ago, even if broader indicators (the U6 measure supplied by the BLS ) suggest caution. Overall, there is a large jobs deficit remaining and previous analysis has shown that the jobs that have been created in the recovery are biased towards low pay. One suspects though that the Federal Reserve Bank will take the chance offered by a stronger monthly result (February) to increase interest rates a notch when it meets this week.

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US Bond Markets cannot bring down Trump

By the time this blog is published I will be heading to Malta. I will have very little spare time in the coming days so the blogs will be shorter and perhaps non-existent or as normal as the case might be. There was an article in the ABC Opinion series (March 8, 2017) – Donald Trump’s presidency might be short-lived, because ‘something’s gotta give’ – which more or less claimed that the private US Treasury Bond markets had the capacity to bring Donald Trump’s Presidency to a halt. Apparently, if the bond markets form the view that Trump won’t deliver on his promises they can somehow end his term in office. What, by driving yields up? Not likely. And even if there was a way that higher US Treasury bond yields had some link to his political tenure, the central bank could control the yields at whatever level they wanted.

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Inflation rises in Euro Area – but don’t claim it is the ECB’s doing

Eurostat released the latest inflation data for the Eurozone last week (March 2, 2017) for February 2017 – Euro area annual inflation up to 2.0%. As the title reveals the Euro area inflation rate rose from 1.8 per cent in January 2017 to 2 per cent in February 2017. The mainstream narrative is already emerging – ‘see we told you that all that central bank bond purchasing would (eventually) be inflationary’ – type of stories. Bloomberg (March 5, 2017) waded in early with the headline – Draghi Seen Keeping Cool on Stimulus Drive Amid Inflation Surge. I expect a bevy of mainstream economists who haven’t worked out yet they have nothing sensible to add to the public debate will chime in like those wind-up toys that children play with and argue they ‘knew it all along’ – QE would be inflationary. Well I am sorry to say that the data tells us if a significant element of the cost structure rises so will inflation – simple as that. The slight uptick in inflation in the Euro area does not support the mainstream argument that building bank reserves will flood the economy with ‘money’, which then drives inflation.

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The Weekend Quiz – March 4-5, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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When progressives become neo-liberals and create a Trump

When you have a madman sounding, well “presidential” (according to the obsequious US press) what would you expect a Democrat politician to say in response? Yes I am talking about the Democratic response to the speech given by the US President on February 28, 2017 to the joint session of the United States Congress. The last thing I would want is for the response to begin with a report card on how the responder was fiscally responsible because he had achieved fiscal surpluses during the GFC. But then this is the Democratic Party circa 2016 we are talking about. The Party that lost an unlosable election to a showman who is sparing of the truth. This is the Democratic Party that having just lost an election because its candidate was seen as part of the neo-liberal establishment that has brought grief on millions of Americans, decides to replace its administrative head with another neo-liberal corporatist. But this problem is not uniquely American, although Americans do like to think they are unique. All around the world, political parties who should be defending workers and the poor have morphed into right-wing look-a-likes preaching fiscal rectitude (they would do it fairer) and cuts to public services and all the rest of it. They have so let down their natural constituents that real right-wingers preaching hate against immigrants and refugees and the like have seized the political initiative and taking votes from them. Trump is a sort of hybrid of that. Until the Left abandons its notions that fiscal responsibility does not mean running fiscal surpluses as a matter of course, it will continue to lose ground. And, we will all be worse off as a consequence.

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Gas reservation is not a progressive option despite scandalous profits

In the September-quarter 2016, Australia recorded negative GDP growth (-0.5 per cent). Over the last two years, employment growth has been flat and over the last 12 months, full-time employment has dived. Underemployment has risen sharply while unemployment remains at elevated levels and participation at depressed levels (meaning hidden unemployment has risen). And over the last four quarters, wages growth in Australia has been at record lows. Sounds bad. Well for some – make that most of us. But yesterday, the ABS shone a light on one cohort of income recipients – capital – profits rose in the December-quarter by 20.1 per cent. What? And wages fell by 0.5 per cent. Phew, I thought there might be some sharing of the spoils going on – you know, the top-end-of-town letting the workers in on the action a bit. This data comes as Australian workers are being shafted by rises in energy prices as a consequence of large companies, many foreign-owned, being given carte blanche to our national energy resources. A major union’s response today has been to call for a gas reservation policy to guarantee domestic supply (which is waning as we export our heads off). Unfortunately, while the call appears to be based on reason – lower prices, guarantees to local industry etc – any move to a domestic reservation policy would slow down the shift to renewables and just shift profits from export to import operations. It is not the sort of regulation that a progressive should support.

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Disgraceful cut in wages for more than a million low-wage workers in Australia

In case you thought that neo-liberalism had gone and buried its head in shame after all the disasters that it has wrought after several decades of privatisation, outsourcing, pernicious welfare changes, fiscal austerity, out of control banksters, dramatic increases in income and wealth inequality, then Australia’s most recent effort will remind that it is still alive and well and morphing into something more nasty than we have previously seen (in this country). On Thursday (February 23, 2017), the Fair Work Commission, which is the judicial body empowered by the Federal Government to set minimum wages and conditions in all sectors (so-called ‘awards’) determined that the lowest-paid workers in Australia – more than a million of them (in an employed Labour Force of just over 12 million) – were getting too higher wages and incomes. Accordingly, they decided to cut wages – not just the real equivalent but the actual wage rates that these workers earn. The judges (who I guess do not work as a matter of course on Sunday) have fallen prey of this 24/7 greed for more profits and determined that Sunday work no longer justifies the existing penalty rates. Their decision to savagely cut them just means the bosses pocket more profits and workers move closer or into poverty with rising bankrupcties, mortgage and credit card defaults and the rest of it. The decision is a disaster for the lowest-paid (hospitality, retail and cafe) workers in this country and it will feed through to other sectors before long. The Federal government could easily legislate to stop the cuts. It won’t. The trade unions could rebel. They won’t. So it is really left to us – the citizens to do everything we can including boycotts of firms who exploit the decision to proctect the wages of the poor.

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Australia’s wage outcomes – a race to the bottom and nowhere

Yesterday (February 22, 2017), the Australian Bureau of Statistics released its latest – Wage Price Index, Australia – for the December-quarter 2016. For the fourth consecutive quarter, annual growth in wages has recorded its lowest level since the data series began in the December-quarter 1997. Real wages are barely growing and trailing productivity growth by a long way. The flat wages trend is intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. The Australian government, which should be showing leadership, is obsessing about who it can rope into a free trade deal now the US have scuttled the TPP. The lessons have clearly not been learned.

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Mainstream macroeconomics – exudes denial while purporting to be progressive

The Federal Reserve Bank of Minneapolis recently published an Economic Policy Paper (February 7, 2017) – The Great Recession: A Macroeconomic Earthquake – by Lawrence J. Christiano (who is both at Northwestern University in Chicago and the Federal Reserve), which shows us that the mainstream profession has learned very little from their failures that were exposed by the GFC. This is a paper that exudes denial while purporting to advocated awareness and progression. There is a long way to go before economics turns the corner I am afraid.

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Australian labour market – remains in a sluggish state

The latest labour force data released today by the Australian Bureau of Statistics – Labour Force data – for January 2017 shows total employment barely increased for the second month in a row and Australia’s status as a part-time employment nation firms. Over the last 12 months, Australia has lost 56.1 thousand full-time jobs (in net terms) and added only 103.4 thousand overall. This status as the nation of part-time employment growth carries many attendant negative consequences – poor income growth, precarious work, lack of skill development etc. The teenage labour market remains in a poor state but improved slightly in January. It requires urgent policy intervention. The unemployment rate fell by 0.1 points but only because the labour force contracted as participation declined. In other words, hidden unemployment rose while official unemployment fell. Not a win-win. Overall, the Australian labour market is weak and showing no signs of improvement. With weak private investment now on-going and real GDP contracting (in the September-quarter), the poor outlook signals the need for a policy shift biased to expansion. It is clear that the current restrictive fiscal policy position adopted by the Federal government is not sufficient to redress the inadequate non-government spending growth.

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The neo-liberal colony of Greece takes another step backwards

The Eurozone flash National Accounts estimates for the fourth-quarter 2016 was released yesterday by Eurostat – GDP up by 0.4% in the euro area and by 0.5% in the EU28. The annual growth rate for the Eurozone in 2016 was 1.7. The news also indicated that the Greek economy fell back into its Depression and was followed by the other basket case, Finland. Both recorded negative growth in the December-quarter, Greece -0.4 per cent, Finland -0.5 per cent. Both results reflect the on-going fiscal austerity. Spain, on the other hand, allowed by the European Commission to run large structural deficits (to keep the PPP in power) recorded another strong growth result. Perhaps if Syriza had demonstrated some spine, they too could have got away with the Spanish solution – where Brussels turns a blind eye to the blatant breach of the Stability and Growth Pact rules, while its economy starts to growth strongly. But, then history tells us that Syriza caved in almost immediately and the continued decline of the Greek situation is a direct result of the policies they were then co-opted to inflict on their own people. Deeper analysis of the Greek situation reveals how dire the future is likely to be. I present a few indicators of that future in this blog. As the neo-liberal colony of Greece takes another step backwards, it isn’t hard to understand why? Basically, the Troika conspired to destroy the prosperity of Greece as a nation and its political leadership joined that conspiracy by refusing to broach an exit from the Eurozone. Simple really.

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US labour market deteriorating – the losses from GFC will be long-lived

In September 2016, I assessed that – The US labour market is nowhere near full employment. This was in the context of an increasing number of commentators claiming that the US economy had already returned to full employment. The IMF World Economic Outlook is also estimating that the output gap in the US (actual relative to potential) has turned positive (meaning the US is beyond full employment). By way of contrast, the Congressional Budget Office considers the US had an output gap of around 0.9 per cent (actual below potential) in the December-quarter 2016. The facts point to even higher output gaps. The current BLS data release – Employment Situation Summary – January 2017 – has not altered my view. It showed that total non-farm employment from the payroll survey rose by 227,000 and the unemployment rate remained “little changed” at 4.8 per cent. But from the perspective of the labour force survey (Current Population Survey), total employment fell by 30 thousand. See below for an explanation of that paradox. The point is that employment still remains well below the pre-GFC peak and the jobs that have been created in the recovery are biased towards low pay. Additional research reveals that the losses from this sluggish economic performance will be long-lived and undermine the prospects of future generations. Fiscal austerity is bad for our grandchildren! In general, the problem is less job creation as quality of the work being created and the capacity of US workers to enjoy wage increases.

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How to create a divided society

I am travelling a lot today and using my spare time to catch up on things. I have two major end-of-February deadlines impending for publishers – my book with Thomas Fazi, which will be published by Pluto Press and launched in London in late September (more details soon); and our new Modern Monetary Theory (MMT) textbook (with Randy Wray and Martin Watts) which will be published by Macmillan later in 2017. Both manuscripts have to be delivered by the end of this month. So busy busy. Today’s blog is thus a little different and considerably shorter than usual. It loses nothing in its brevity. The main text is from a friend of mine (who wishes for professional reasons to remain anonymous) but succinctly captures the anger and angst that many progressive thinkers are feeling about how things are turning out. The culmination of several decades of neo-liberalism has been an eroding of material well-being for workers, a massive financial then economic crisis, which the world is still enduring, and, then Donald Trump as President of the United States. And the progressive political voices have been largely complicit in all of this. Sure enough, they sprout about child care, gay rights, inequality, and all the rest of it, but at the core, they have embraced the neo-liberal economic lies and gone along with or even initiated and overseen fiscal austerity, privatisation, welfare cuts, deregulation – it is just, we are told, they do all that in a more moderate and fairer manner. They don’t stop for a second to think that they also have become captive to capital. Something big has to happen to stop all this. History tells us that it will. And the longer the progressive political voices remain complicit, the probability that that ‘something’ will be violent, increases.

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Greece still should exit and escape the grip of the vandals

Greece is back in the news as the IMF, the Germans and the European Commission slug it out pretending to talk tough and propose solutions to the Greek tragedy. There is no solution of course. All the debate about whether the primary surplus target should be 3.5 per cent of GDP (European Commission position) or slightly lower (IMF position) is just venal hot air. Anybody who knows anything and isn’t protecting their past mistakes would assess that a fairly large and sustained fiscal deficit is required in Greece to rebuild some of the lost capacity and to provide an inkling of hope to the youth who are facing a lifetime of diminished prospects as a result of the decisions the adults around them took. All the talk about ‘deficits mortgaging the grand kids future’ – sick. The austerity has meant the grand kids might not ever emerge given the constrained circumstances their would-be parents will face as they progress through adulthood. The reality remains – firmly – Greece should exit the Eurozone, convert any outstanding liabiliites into a new currency at parity, and stimulate its domestic economy with expansionary fiscal policy. It should continue to impose capital controls. As part of the stimulus, it should introduce an unconditional Job Guarantee at a decent wage to provide a pathway back into employment for the many that the Troika have rendered jobless.

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MMT predicts well – Groupthink in action

This blog will be a bit different from my normal fare. It provides insights into how entrenched a destructive and mindless neo-liberal Groupthink pervades the economics profession. For the last several years I have been on the ‘expert’ panel for the Fairfax press Annual Economic Survey. Essentially, this assembles a group of well-known economists in Australia from the market, academic and institutional (for example, union) sectors and we wax lyrical about what we expect will happen in the year ahead. To be fair, there is a large element of chance in the exercise as there is in all forecasting. So I am never one to criticise when an organisation such as the IMF or the OECD or some bank economist gets a forecast wrong. The future is uncertain and we have no formal grounds for even forming probabilistic estimates, given we cannot even assemble a probability density function (an distributional ordering of all possible events ) to extract these probabilities. So guess work is guess work and you have to be guided by experience and an understanding of how the system operates and the elements within the relevant system interact. What I do rail against is the phenomenon of systematic bias in forecast errors. For example, the IMF always predicts stronger growth than occurs when it is advocating imposing austerity (thereby underestimating the costs of the policy). The systematic bias in their errors is traceable to the flawed models they use to generate the predictions, which, in turn, reflect their ideological slant against government deficits and in favour of fiscal surpluses (as a benchmark). As luck would have it, in the 2016 round of the Fairfax Scope survey, I was fortunate enough to achieve the status of Forecaster of the Year (shared with 2 other members of the panel) – see Scope 2017 economic survey: Stephen Anthony, Bill Mitchell; and Renee Fry-McKibbin tie for forecaster of the year – for detail. I tweeted over the weekend that as a result “MMT predicts well”. There was a lot underlying that three-word Tweet and it intersected with recent events that demonstrate how far gone mainstream macroeconomics is – it is in an advanced state of denial and has lost almost all traction on the real world.

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The Weekend Quiz – February 4-5, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’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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