Public infrastructure does not have to earn commercial returns

The Australian government released the business plan for NBN Co today which outlines the “cost-benefit” case for creating a monopoly wholesaler of fibre-based broadband services in Australia and investing some $A27 billion in public funds to create the network. The business case has been the focus of much political debate over the last year or so and as usual most of the debate has been conducted on a spurious basis – that is, the assumption is that the budget outlays proposed represent a “cost” to government and that by committing funds to this project the government is less able to “afford” other projects – presumably because there is some “budget balance outcome” that it cannot deviate from. Neither proposition is valid. While this blog has an Australian flavour the general economic principles apply to all national governments contemplating large-scale public infrastructure developments. The general point is that the provision of public infrastructure does not have to earn commercial returns.

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Saturday Quiz – December 18, 2010 – 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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Men and women with white coats needed

The next few days are very tight for me – travel and meetings. So the blogs might be shorter (cheers I hear!). The thing about blogs which I find interesting is that I normally have to write in a very tight fashion (for academic publication) and editorial discrimination becomes paramount. Whereas the blog is a flowing environment and the only limit I place is the time I spend per day. Within that time span I just type and what comes out comes out with only spelling corrections. The grammar is sometimes not as correct and hyperbole and colloquialisms are rife. But that is a liberating offset to my usual literary output each day. Anyway, I thought the quote of the day (actually December 10, 2010) was – The Eurozone in bad need of a psychiatrist. Well perhaps it is the leaders and their hangers-on who need this help. And when the shrinks have finished with Brussels and Frankfurt they can stop in at London on route to Washington. Canberra can follow sometime soon after. The problem is that we have a person-made mess that is relatively easy to address and yet the ideological straitjacket that has been imposed on the solution amounts to cutting the wound wider and deeper so the blood loss is even greater. Madness! And the rest of us go along with it and elect politicians who say they will whip us even harder. Bring in the men and women with the white coats! For everybody …

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Saturday Quiz – December 4, 2010 – 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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All macroeconomic policy should be accountable through the ballot box

It was the last day of the 12th Path to Full Employment Conference/17th National Unemployment Conference in Newcastle, which I host. The papers were interesting all day and I will report on some of them another day. But overnight, the big news was that the US Senate has finally succeeded in forcing the US Federal Reserve Bank to release details of more than 21,000 transactions it made as a reaction to the rapidly escalating global financial crisis. The lending rose to $US3.3 trillion at its peak and dwarfs the volumes involved in QE1 and QE2 amounts. This is relevant to a debate in the banking literature about the separation of monetary policy functions (setting interest rates) and the broader monetary interventions we have been witnessing in this crisis, which bear close similarity to fiscal policy functions. The question is which macroeconomic policy functions should be accountable to the ballot box. My view is all of them!

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The Australian economy loses to the snail

Three months ago, I wrote that Australia continues to grow but the signs are not all good in response to the moderating National Accounts data for the June quarter and associated data releases. My position in the national debate was lambasted as heretical and my competence was questioned because as all the bank economists, politicians, and related officials know Australia is close to full capacity and full employment and is about to burst at the seams courtesy of the “once-in-a-hundred” years commodities prices boom. My response, if only that was true! Sure enough, unemployment rose last month and there have been many signs that my judgement that the fiscal withdrawal and rising interest rates were cruelling growth was sound. Today’s Australian Bureau of Statistics release of the National Accounts data for the September quarter should shut those who are talking things up continually up. The Australian Bureau Statistics shows the Australian economy is growing barely faster than the zero line of no growth. And our so-called mining boom is not sufficient to generate a positive net exports contribution. The reality does not match the direction of policy or the rhetoric that is being used to justify the withdrawal of fiscal support. Bad luck if you are unemployed, underemployed or one of those that will certainly lose their jobs as employment growth stalls, again!

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When you haven’t got a Plan B

The UK is still in the grip of a serious slowdown and the British government has begun its fiscal austerity program which will savage net public spending and cause wide spread job losses. But the Chancellor is still boasting that Plan A – scorch the economy – will be maintained and he has sought legitimacy for his position in the release by the UK Office for Budget Responsibility (OBR) of its Economic and Fiscal Outlook November 2010 yesterday (November 29, 2010). When one examines the OBR document in detail one could be excused for thinking it was a “colouring-in” exercise with a difference – you know, draw nice colourful bar charts to tell the story that you want based on assumptions that will not survive empirical scrutiny in coming months and years. The problem for Britain is that there does not appear to be a Plan B. It is all or nothing and while the “lab rat” nature of the policy experiment is intellectually interesting for researchers such as myself I don’t want to glean enjoyment from what will be the increased suffering of millions. Plan A will fail because the assumptions and projections are unrealistic. When you haven’t got a Plan B then that failure will be very costly.

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Education – a vehicle for class division

Yesterday I wrote, in part, about the way in which the term long-run is mis-used by the mainstream economists to assert “natural rate” theories, which essentially deny a role for government macroeconomic policy in stabilising the business cycle and reducing mass unemployment. I also get asked by readers (several times now) to provide some discussion of what were known as the Cambridge capital controversies in the 1960s and 1970s. They are related in fact to the notion of the long-run. These were rather esoteric debates which are now largely ignored by the mainstream despite the fact that the results of the debate showed, beyond any shadow of doubt, that the whole body of neo-classical distribution theory (that is, marginal productivity theory) is plain wrong. MPT was developed to justify the claim that capitalism delivers “fair” income distributions because everybody gets back what they put in. The Cambridge debates killed the legitimacy of those claims. But my profession continued oblivious because the results would have meant that a major part of the mainstream apology to capitalism would have to be jettisoned. Who understood the debates anyway? It was easy to just sweep the results under the carpet. I still plan to provide some commentary in this regard as I used to teach a course in capital theory covering these debates. But in thinking about them I started thinking of prior questions which also feed into a policy debate in Australia at present. It relates to educational outcomes and class.

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Money neutrality – another ideological contrivance by the conservatives

I have noted in recent weeks a periodic reference to long-run neutrality of money. Several readers have written to me to explain this evidently jargon-laden concept that has pervaded mainstream economics for two centuries and has been used throughout that history, in different ways, to justify the case against policy-activism by government in the face of mass unemployment. It is once again being invoked by the deficit terrorists to justify fiscal austerity despite the millions of productive workers who remain unemployed. I have been working on a new book over the last few days which includes some of the theoretical debates that accompany the notion of neutrality. There will also be a chapter in the macroeconomics text book that Randy Wray and I are working on at present on this topic. Essentially, it involves an understanding of what has been called the “classical dichotomy”. It is a highly technical literature and that makes it easy to follow if you are good at mathematical reasoning. It is harder to explain it in words but here goes. I have tried to write this as technically low-brow as I can. The bottom line takeaway – the assertion that money is neutral in the long-run is a nonsensical contrivance that the mainstream invoke to advance their ideological agenda against government intervention. It is theoretically bereft and empirical irrelevant. That conclusion should interest you! But be warned – this is just an introduction to a very complex literature that spans 200 years or so.

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The US Federal Reserve is on the brink of insolvency (not!)

Yesterday, parachute gangs from the ECB and the IMF were being dropped into various EMU nations whose only problem is that they are members of an unworkable monetary system and happened to get hit by a major demand shock. Today the IMF cavalry are apparently heading to Dublin for a “short, focused consultation”. Conclusion: Ireland is being invaded by hostile forces. I also read rumours overnight that Germans are refusing Euro notes not printed in the Bundesland. It is probably an outright lie of a similar quality to the many being spread by the deficit terrorists seeking to regain their “credibility” (an impossible mission) any way they can. In this context I get many E-mails from people each week telling me that I do not understand that the latest decision by the US Federal Reserve Bank “to flood the world with printed money” is putting it on the brink of insolvency! I also read that in a Bloomberg Business Week feature article today. And people believe this stuff. It is as much a lie as the fallacious stories recently about the US President’s Asian travel costs which the right-wing in the US (Beck, Limbaugh, Savage etc) perpetuated without scrutiny (see this analysis to see how this lie began). Anyway, rest easy … the US Federal Reserve cannot go broke!

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Live coverage now on

It has become like a sporting event. We now have the live coverage with commentators and up to the minute news updates and scores. The only problem is that we are actually viewing the dynamics of a monetary system – in this case, a system so poorly conceived and blinded by ideology and cultural prejudices that it is was certain to collapse. But only 3 or maybe 4 years ago the same ideologues who constructed this failure were telling us that some nations within this monetary system should be the role models for all of us to follow. Now the live coverage is of the crisis that these “role” models are in. It is no surprise though – I disagreed with the entreaties to “believe” in this model when the hype was at its maximum. I wrote several years ago “when this crisis comes it will be very big” in relation to the growing private sector indebtedness and the move to fiscal austerity as the neo-liberal madness climaxed. It was only ever a matter of time. Anyway, live coverage is now on …

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What is fiscal sustainability? Washington presentation

I am travelling today and have a full schedule ahead and haven’t much time to write anything. But it just happens that the multimedia presentations and documentation for the Fiscal Sustainability Teach-Ins and Counter-Conference which was held at the George Washington University, Washington DC on Wednesday, April 28, 2010 have just been made available by the team which organised the event. The Teach-In was a grass roots exercised designed to counter the conference organised by the arch deficit-terrorists at the Peter G. Peterson Foundation, which was also held on April 28 in Washington D.C. – just across town from our event. While that event also chose to focus on “fiscal sustainability”, the reality is that it will merely rehearsed the standard and erroneous neo-liberal objections to government activity in the economy. Given my time constraints today I thought it was serendipitous that this material became available overnight. So the following blog provides access to video and all the documentation for my session. Very special thanks to Selise and Lambert (and their team) for taking the time to document and prepare all this material.

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Nationalising the banks

This week is a big week for the banks in Australia being the annual reporting time when they are forced to disclose the remuneration packages that they pay out to their management. The banks have been under attack – again – for gouging their customers with spurious arguments about rising costs and falling margins. While some of their costs may have risen from the rock-bottom levels before the crisis, the evidence does not support the narrative that the banks are now presenting to the public as a precursor to further gouging. The big debate though – which is simmering – is about the purpose of banking in a monetary economy. Essentially, banks are public institutions given they are guaranteed by the government. But there is a tension between their public nature and the fact that the management of the banks claim their loyalty lies to their shareholders (and their own salaries). This tension has led to the global financial crisis and its very destructive aftermath. However, while the real economy still languishes in various states of decay, the financial sector has bounced back under the safety net of the government’s socialisation of their losses. How long will all of us citizens tolerate this? The solution to the tension is to socialise both the gains and losses of the banking sector. In that sense, nationalisation of the banking system is a sound principle to aim for. This would eliminate the dysfunctional, anti-social pursuit of private profit and ensure these special “public” institutions serve public purpose at all times.

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The paranoid style – fiscal consolidation

I happened to re-read an article from the 1960s today – The paranoid style in American politics – written by Richard Hofstadter which was published in the November 1964 edition of Harper’s Magazine. It is one of those articles you should re-read from time to time to remind yourself that not a lot changes. What we call the deficit terrorists now were alive and well then and predicted that anything government amounted to a descent into communism with accompanying mayhem. The facts are clear. The US and most of the world enjoyed positive contribution from government net spending (budget deficits) for most of the post Second World War period and managed to avoid becoming communist (although they might have been better off if they had!). Today, the same paranoia is evident in the interventions into the policy debate from the deficit terrorists. They are so anxious. But underlying their alleged anxiety is a visceral hatred of anything government (except when the handouts are in their favour). None of the calls for fiscal consolidation are based on any firm understanding of how the monetary system works.

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Saturday Quiz – September 25, 2010 – 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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Saturday Quiz – September 4, 2010 – 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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The IMF continue to demonstrate their failings

On the first day of Spring, when the sun shines and the flowers bloom, the IMF decide to poison the world with some more ideological positioning masquerading as economic analysis. I refer to their latest Staff Position Note (SPN/10/11) which carries the title – Fiscal Space. I think after reading it the authors might usefully be awarded an all expenses trip to outer space. It is one of those papers that has regressions, graphs, diagrams and all the usual trappings of authority. But at its core is a blindness to the way the world they are modelling actually works. I guess the authors get plaudits in the IMF tea rooms and get to give some conference papers based on the work. But in putting this sort of tripe out into the real policy world the IMF is once again giving ammunition to those who actively seek to blight government intervention aimed at improving the lives of the disadvantaged. The IMF know that their papers will be picked up by impressionable journalists who are too lazy to actually seek a deeper understanding of the way the monetary system operates but happily spread the myths to their readers.

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Monetary policy under challenge … finally

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City. While not all of the papers and discussion are yet available for public scrutiny there were some notable presentations (that you can access in full) which suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession.

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Saturday Quiz – August 21, 2010 – 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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How could you vote for any of them?

Next Saturday (August 21, 2010) Australia gets to choose a new federal government which will govern for the next three years. These are crucial years because the economy is still mired in the uncertainty that accompanied the financial crisis and private spending is still very subdued. Growth around the world is still being supported by fiscal stimulus and without it economic activity will decline again. The majority of the economic indicators in Australia and elsewhere are pointing to a new slowdown as the fiscal stimulus wanes. So it is absolutely essential for the next Australian government to maintain strong fiscal support. The only problem is that both the major parties are having a battle to win votes on the platform of who can get the biggest budget surplus in the shortest period of time. It doesn’t bear thinking about. The conclusion is that none of the main parties are worthy of a vote. And the third party in contention (at least for the balance of power) – The Greens – are similarly blighted when it comes to macroeconomic policy. How did we get into this mess?

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