Its very balmy weather over here in the Netherlands at present – like early October and people were out in T-shirts are 21:00 last night. I went to Brussels in the afternoon and didn’t even take an overcoat! But in contrast, the economic climate is decidedly chilly. Each week new evidence emerges which demonstrates categorically that the fiscal austerity proponents have not clue about how real economies and monetary systems function. The world is not behaving as they predicted. The models and analysis they provided to governments as support for withdrawing fiscal support are bereft of any credibility. It is also common for economic commentators and policy makers to argue that problems are manifest and complex and there are no silver bullets. Well what Modern Monetary Theory (MMT) tells you is that when there is a recession (and/or tepid growth) such as the world is enduring now and the non-government sector is drowning in debt and unwilling to expand spending the only solution is to expand public spending. That proposition is not manifest or complex. Its simple – more public spending is required.

Today I am heading into the lands of austerity – those scorched, barren places where people with increasingly hollowed out faces are being forced by their misguided polities to forego wages and conditions and pensions and their happiness because some neo-liberal told them that government deficits were bad and all that. I am off to London this afternoon (I am typing this on the train to Sydney) and then to Maastricht University where visit each year and my colleague Joan Muysken is located. I have been thinking about various efforts that have emerged in the recent period suggesting that a new progressive agenda (narrative) is required to reverse the onslaught of neo-liberalism. This is clearly a topic close to my own heart. I have been thinking about the development of an alternative economic paradigm for my whole academic career. So whenever I see some progressive efforts I am always interested. This blog considers that question. So now a long flight then I will report on how hollow those faces are becoming.

In the last few days I have read some really loony stuff. One article from an esteemed investment advisor (which I will not dignify by a link) was arguing that the build up of public debt is signalling the death knell for democracy and that capitalism will survive but our freedoms will be gone. I asked some basic questions – which freedoms are they exactly? – and – Why should a rise in private wealth lead to constitutional change or revolution that would deprive us of a vote? But the trend in policy is becoming very clear. Fiscal policy makers are succumbing to the relentless attacks from the deficit terrorists and withdrawing the essential stimulus that has been propping up growth. Most economies are starting to slow again as a result. The response is to seek solace in monetary policy – as if it is effective. The point is that the neo-liberal years have seen the promotion of monetary policy as the principle counter-stabilisation tool – driven by the obsession with inflation. This ceding of macroeconomic policy responsibility to unelected officials in central banks was a major erosion of our democratic rights. Moreover, it has been a failed policy strategy. It is neither an effective inflation control nor does it promote growth. So we are just heading back to where the crisis started. Pity the unemployed.

When I give public lectures about economic policy I often pose the question – how should we judge the effectiveness of public policy? I pose a simple rule of thumb! I judge whether social and economic policy is effective not by how rich it makes society in general but how rich it makes the poor! I see richness in broad terms which embrace both economic and social valuations. Applying this rule of thumb has led me to conclude that the majority of nations in the advanced world are now failed states with run-down and corrupted public institutions. The conclusion is more stark when applied to less developed nations suffering under the neo-liberal yoke imposed on them by institutions like the IMF and the strong donor nations. But the rising poverty in the advanced world as a result of the extended current crisis is making it clear that our economic systems and the policy regimes that are being imposed on them by the neo-liberals are no longer delivering satisfactory outcomes. There needs to paradigm change – urgently.

I don’t run a blog on demand service. But today a specific request – almost a desperate plea – from one commentator to provide some analysis of a specific article coincided with many requests I have had for clarification about when a government is revenue constrained. The specific article in question apart from being one of the worst examples of uniformed economics journalism covers the ground about levels of government perfectly. So I decided to behave like a blog on demand service today despite wanting to write about how the US is a failed state. That will wait until Monday though and by then even more Americans will have slipped into poverty driven there by failed US government policy and a sclerotic system of government dominated by two main parties that are now incapable of governing in the public interest.

The Economist feature column Economics by invitation where they ask some commentators to share their thoughts on some topical issue is running with household debt this week (September 11, 2010). The topic – How far along the process of deleveraging are we? – is examining the extent to which the record levels of private indebtedness are being run down and household balance sheets reconstructed. I also noted in the discussions that have been on-going about trade and deficits on my blog that someone said that there is no evidence that budget surpluses have caused the “sky to fall in”. In this blog I explain how budget surpluses are intrinsically related to the rising indebtedness of the private sector and hence under most conditions are destabilising.

For some time I have been promising to write a blog about the role that manufacturing plays in a modern economy. There is a strong presumption, especially from the progressive side of the political debate that manufacturing – or what you produce – defines the capacity for a nation to enjoy growth in real wages and therefore standards of living. So when I have said in the past that I am against industry protection I usually get attacked from the left and I note that this if often coming from people who think it is cute to sound technical by saying the government should balance their budget over the course of the business cycle. As if! Neither viewpoint coming from that quarter has much credibility. I take a more experiential viewpoint. People prefer to consume than to work. What we consume is more likely to give us joy than what we produce especially if the latter is in the context of exploitative capitalist production relationships. I am painting this in black and white terms to garner your interest. Clearly it is more complicated but in general I do not think you need a manufacturing sector to enjoy strong growth in material living standards and perhaps a polluting manufacturing sector erodes the capacity to enjoy broader concepts of growth and well-being. My flame resistant suit is now in place … so here goes.

Yesterday, I indicated that I would provide some commentary on the latest Morgan Stanley briefing (August 25, 2010) – Sovereign Subjects – which received a lot of press coverage in the last few days and roused the interest of many of my readers. I cannot link to it as it is copyrighted. But the MS document is another example of how you can spread nonsense by ignoring the elephant that is sitting in the corner of the room. The MS briefing is essentially a self-aggrandising rant which perpetuates the standard neo-liberal myths and offers nothing new. I sincerely hope that the author’s company and all of their clients take his advice and lose significant amounts of their investment funds. The more losses are made in this respect the more quickly people will see through the cant that is served up by these clowns.

The Australian federal election campaign is in full swing and last night the federal opposition in Australia staged their policy launch for the federal election to be held on August 21, 2010. This is a campaign where both sides of politics are running on their respective claims to be better at implementing fiscal austerity measures. It has become a matter of who is promising the biggest budget cuts the earliest. It has made the parties barely distinguishable in terms of their overall policy appeal and has rendered both unfit to govern this country. It used to be said that procyclical fiscal policy was destabilising. This was typically in the context of neo-liberals claiming that expansionary policy always came too late and added to private spending that was already on the rebound and thus increased the inflation risk. But the reverse doesn’t appear to apply for the mainstreamers. Cutting public spending when private spending is weak is being held out as virtuous and the only way to engender growth. This inconsistency exposes the ideological nature of the austerity measures, which reflect as one UK commentator said recently – a desire to complete the neo-liberal demolition of the welfare state started 30 years ago but still incomplete or a reflection that the deficit hawks are total lunatics.

Recently (July 2010), the Bank of International Settlements released their latest working paper – Countercyclical capital buffers: exploring options – which discusses the concept of counter-cyclical capital buffers. This is in line with a growing awareness that prudential regulation has to be counter-cyclical given the destabilising pro-cyclical behaviour of the financial markets. Several readers have asked me to explain/comment on this proposal. Overall it is sensible to regulate private banks via the asset side of the balance sheet rather than the liabilities side. The countercyclical capital buffers proposal is consistent with this strategy and would overcome the destabilising impact of a reliance on minimum capital requirements that plagued the first two Basel regulatory frameworks. However, I would prefer a fully public banking system which can deliver financial stability and durable returns (social) with much less risk overall.