There are several different strands of mainstream economic thinking and these differences manifest in the way they think about monetary and fiscal policy. The extreme mainstream position is that fiscal policy is ineffective because it 100 per cent crowds out private spending. The only role for aggregate policy then is to allow an independent (politically speaking) central bank to adjust interest rates up and down to regulate inflation (via expectations). There isn’t much for economists to do if that view was accurate. Then there are mainstreamers who think that budget deficits are generally damaging to private spending because they drive up allegedly drive up interest rates and crowd out private spending, the latter which, is considered to be more efficient because it is backed by the so-called wisdom of the “market”. So generally monetary policy should be used to stabilise aggregate demand such that inflation is stable. However, this group of economists find some time for budget deficits when there is a “liquidity trap”. From the perspective of Modern Monetary Theory (MMT) – whether there is a liquidity trap or not is irrelevant.

I have been busy today writing computer code to reconfigure a new server to replace our dearly departed main server. Once I get embroiled in that sort of process I recall how much I forget. Fortunately, it comes back. But the good news is that we have a new machine working now and are retrieving material from various backups. Anyway, that seemingly pedestrian activity is, in fact, a pleasant relief from reading what is out there in the economics media masquerading as informed comment. One of the worst articles for 2011 so far was in today’s Wall Street Journal which tried to introduce a new notion of crowding out – that deficits are forcing foreign investment into government bonds at the expense of private capital formation. The authors then applied the usual neo-liberal nonsense that only private markets can allocated financial flows productively to conclude that the deficits are undermining growth in the US and destroying jobs. Their analysis not only stretches the empirical truth but also conceptually gets things back-to-front.

I haven’t much time today. I gave a talk at a conference in Melbourne today (as noted in yesterday’s blog). I will edit the audio soon and post the presentation for those who might be interested. In general I made the obvious point – if you want people to reach their potential and participate in the economy there has to be enough jobs and hours on offer. But the blog topic today relates to a speech made by a senior RBA official in Sydney yesterday which has excited some conservatives. In that speech, the RBA indicated that it would always lend to private banks which had high quality assets (in AUD) but might be experiencing a temporary liquidity problem and were unable to meet its reserve obligations. This function is part of the public good responsibilities of the central bank and does not mean that they prop up failed capitalist businesses. The speech made the valid distinction between illiquid firms and insolvent firms. The point of relevance to Modern Monetary Theory (MMT) is that the central bank cannot control the money supply because as part of its commitment to financial stability it must be prepared to provide reserves to the private banking system. That point is in contradistinction to the mainstream macroeconomics which starts by teaching students that the central bank controls the money supply. Overall, the central bank must treat financial stability as a public good and therefore must always guarantee reserves on demand.

In yesterday’s blog, I mentioned that Paul Krugman gave a plenary lecture over the weekend just gone at a conference held at Cambridge University. The conference – 75th Anniversary of Keynes’ General Theory – seems to have been a remarkable event. First, I don’t know everything but I always know when there is a major “Keynesian/Post Keynesian” conference and sometimes I even go. In the case of the 75th Anniversary conference I didn’t even know it was being held. It seems that wasn’t exceptional. As Ann Pettifor points out the UK Post Keynesian Economics Study Group, which is a leading group who focus on studying Keynes and, arguably, has the leading UK Keynesian scholars among its membership, “found out about the conference by accident.” Second, if you examine the speaker’s list and read the papers that are available you might wonder what this conference had to do with Keynes. Certainly if the Cambridge organisers were aiming to “honour” the message that Keynes gave, then they had a strange way of doing that. The reality is that the celebration of 75 years since Keynes was a farce.

Let Peter Costello work his magic at IMF – mounted a case for our former Treasurer (one of the worst this country has ever had) should get the baton and head to Washington. The problem is that Costello left a destructive mess in his wake and is a budget surplus obsessive. What the IMF needs is a budget deficit-biased head.

Restoring Fiscal Sanity in the United States: A Way Forward. Essentially, the article is a non-article but a sign-up page to access a speech of the same title by David M. Walker, former top public accountant in the US (Comptroller General) which apparently makes him qualified to speak about monetary systems. The speech is full of nonsense but it gave me some insights into what seems to be unfolding in the national capital over there in America. While I was at the airport today I heard some very sensational news – Navy SEALs stake out US building! Perhaps I am the first to blog about this development. Twitter universe – where are you?

I am still away from my office and have had a full-day of meetings today – so very little time to write. But earlier today I read another one of those articles from a senior US academic economist about the need to cut aged pensions in the US because the government is running out of money. Martin Feldstein – a Harvard professor – has been found to have engaged in highly questionable conduct (to say the least) by investigations into the causes of the financial crisis. Feldstein must surely know that the government cannot run out of money. Which brings into question his motivation for providing misleading interventions into the policy debate. He has demonstrated over a long period his willingness to hide behind the “authority” of economic theory in order to pursue an ideological obsession with privatisation and deregulation. When writing what seemed to be academic papers or opinion pieces supporting financial deregulation, for example, he didn’t at the same time declare that he was personally gaining from such a policy push. His subsequent track record as a board member of companies, some of which collapsed in the crisis (AIG) or triggered the collapse has been appalling. Feldstein is not the sort of person anyone should take advice from much less pay for it.

I am travelling over the next few days and have limited time to write my blog. Today though I am writing about the latest US National Accounts data which I had the chance to examine carefully over the last couple of days. Clearly the news that real GDP growth has falling sharply in the first three months of 2011 is evidence that the current policy mix with an emphasis on public spending cuts is not working. At the same time the political debate is about to consider the public debt limit which expires in a few weeks. The conservatives are once again threatening not to extend this limit. One notable commentator said the failure of the US Congress to extend the limit would be the “most asinine act’ ever by them. I think that was an understatement. When you put the debate in the context of what is happening in the real economy (real growth down, jobless claims up) you have to conclude that the current behaviour of the US political leadership is worse than asinine.

Over the weekend, Iceland once again showed some pluck and rejected an onerous agreement to repay debts incurred by the failed private banks to the British and Dutch governments. The Icelandic government has been trying to lumber the population with these debts largely because the politicians aspire to join the Eurozone and they have been willing to sacrifice the welfare of their own population in pursuit of that misguided goal. According to Iceland Statistics there are (as at January 1, 2011) – 318,452 people living in Iceland with 23,596 between the age of 0-4 years; 21,194 in the 5-9 years cohort and 21,802 10-14 year olds. That is 66,592 children that the people of Iceland have decided not to burden with debt obligations.

Today I catch up on a number of threads that have been in the media in the last week or so. It is all bad. The focus is on Alan Greenspan’s extraordinary intervention into the policy debate declaring the financial sector unable to be effectively regulated. I have a solution for that! But as I read the data trends every day and listen to the politicians outlining their legislative ambitions I realise that there have not been many lessons learned at all. The neo-liberals are back in charge – unshamed – when they should have been driven out of every town in every land. Their leading lights are coming out of their rat holes and are once again lecturing us on how self-regulated markets are best and how we have to tolerate the occasional crisis as part of the wealth maximisation process. It beggars belief how this all is represented as credible policy input. It is time to get angry.

Apparently, the US government has just announced that their budget deficit is the largest in absolute terms. Given that the US makes a net gain of one person every 16 seconds, I guess they recorded a record population today as well. Nine records were also set yesterday by junior athletes at the annual sport’s carnival held by the Charlestown Secondary School (Nevis, US). The latter are certainly more interesting and have more relevance for the health of the community. The fact is that the budget outcome is like a score at a sport’s game. Imagine if the cricket authorities decided to place a limit of how many runs a team could score in the current World Cup. You wouldn’t have much of a game. And then they decided to become austere about it and cut the available runs! Just like the runs on the scoreboard, the budget numbers (dollars) can be whatever it takes. The record deficit is not going to stop any game. The fact is that with the extent of idle capacity that you witness in the US, the record needs breaking again very soon!