Democracy in Europe requires Eurozone breakup

On December 21, 2015, there was an article on the Social Europe portal – A New Plan for Greece And Europe: A Defining Moment For European Social Democracy – which I found interesting, though very incomplete, given its title. In fact, the ‘New Plan’ is really a series of fairly general statements, which at times, are somewhat inconsistent if you extend them into the necessary detail that they imply. For example, one of their key observations is that within the European Union there is a “wide and growing gap between national control over budgets that people have voted for and the post-national governance imposed on them”. Which would suggest that the solution requires that there is an aligning of the fiscal responsibility and control at the level of the currency-issuing unit. However, there is no hint of that in their ‘Plan’. They talk about an “Enhanced respect for the fiscal sovereignty of Greece” but fail to articulate how that can occur within the common currency when the Greek government has no currency-issuing capacity. Of course, if we want to increase the fiscal sovereignty of any Eurozone nation, then the only sustainable way of doing that is for that nation to re-establish its own currency and exit the monetary union. However, this would appear contrary to their “pan-European” sentiments, which dominate their overall vision. In short, once again the bogey person of the pan-European appears to be taken as a given and then specific matters that might appear inconsistent with that old ‘social democratic’ obsession in Europe are glossed over.

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Mental illness and homelessness – fiscal myopia strikes again

Yesterday, as I was going about my business in San Francisco, I passed a man lying in the gutter outside the Westfield Centre on Market Street (the swish multilevel shopping complex with some expensive label stores), who was poorly dressed, given the weather (cold) and was clearly having some sort of episodic fit. The street was packed with Sunday shoppers most of whom were well-heeled. I asked the person I was with whether we should ring 000 to get some sort of professional help for the man and he told me that it would be futile because they wouldn’t come out anyway. It was not an isolated incident. Throughout the city the extent of homelessness and the public nature of mental illness is stark. There are choruses of shouts, anguished cries, megaphoned self-dialogues emanating from almost every street corner, doorway, alleyway, train station and whatever. People who should be in care, suffering and crying out. For the richest country in the world to tolerate this degree of human rights violation is almost unimaginable. While the Australian health system is far from perfect, our mentally ill citizens are much better cared for in state facilities and are not left on the street, homeless, suffering from a variety of obvious physical and mental maladies – and basically abandoned by the system. There are some who escape the net and wander the streets of our cities, but, in general, we do not accept that the mentally ill should be left to their own devices. It tells me that any American claim to greatness is a pitiful, self deceit. This is a heartless society where citizens who are most in need of state support are the least able to access it.

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British floods demonstrate the myopia of fiscal austerity

Last year (June 10, 2015), I wrote a blog – The myopia of fiscal austerity – which in part recalled my experiences as a PhD student at the University of Manchester during the Thatcher years. I noted that during my period in the city there were two major failures of public infrastructure – first, a rat plague due to spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester; and, second, widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought hometo me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The problem wasn’t confined to Manchester. Margaret Thatcher’s destructive reign undermined public infrastructure throughout Britain. It seems that the Conservative British government is repeating history, this time the impacts are significantly more severe in human and property loss. In early December, the North-West of England experienced devastating floods. Areas south of Carlisle down through Lancaster were inundated with floodwater, which destroyed houses washed away bridges and claimed human life. On November 5, 2014, the British National Audit Office released a report – Strategic flood risk management – which warned the British government that “current spending is insufficient to meet many flood defence maintenance needs”. Now the repair bill will be many times the claimed expenditure that was cut in the name of fiscal austerity.

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Friday Lay Day – Travelling all day today

Its my Friday Lay Day blog and, today, I am travelling for most of it on my way to the US. I will be giving a talk on Monday morning in San Francisco on employment guarantees at the ASSA meetings. Later next week (Wednesday and Thursday), I will be in Los Angeles. I have some free time each of the next several days if anyone out there would like to catch up. I will be back into blogging action on Monday (and the quiz will be available tomorrow). Note also that I won’t be attending to moderating comments for an extended period today. That means that those with external links might sit in the queue for some time and I will get around to dealing with them when I have a connection again. For the next several hours I will be immersed in a novel about post-Colonial Jamaica, the CIA, gangs, and that sort of stuff. I am currently reading – A Brief History of Seven Killings – which is a very long and detailed book written by the US-based, Jamaican author Marlon James. Here are a few more snippets.

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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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Spain in limbo but has not rejected austerity

On the Sunday before last (December 20, 2015), Spain conducted a general election, which has left the nation in limbo. Alex Tsipris, the Greek Prime Minister, still trying to hang on to the image that he is a progressive leader in some way, tweeted once the results were known that “Austerity has now been politically defeated in #Spain, as well. Parties seeking to serve society made a strong showing #20D”. I wonder who he is trying to kid … “as well” – as well as where? Certainly not in Greece, which was the implication of his tweet. And, to be clear, certainly not in Spain. While the conservative Popular Party (PP), which has overseen the most recent imposition of austerity and is firmly pro-EU and pro-euro, did not gain an absolute majority, they did win the most seats (123 in the Spanish parliament) and were well ahead of the other major austerity party, yes, the Spanish Socialist Party (PSOE), which won 90 seats). Even the left-wing We Can party (Podemos), who won 69 seats is not planning to exit the common currency. There is no hope of an anti-austerity coalition forming.

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There was no reason for the US to raise interest rates

Last week (December 16, 2015), the US Federal Reserve Bank raised its policy interest rate by 25 basis points (1/4 percentage point) for the first time since 2005. In its – Opening Statement – the Federal Reserve chairperson said that the decision reflected the Bank’s judgement that there had been “further improvement toward our objective of maximum employment” and that it “was recently confident that inflation would move back to its 2 per cent objective over the medium term”. They did, however, acknowledge that “some cyclical weakness likely remains” and referred to the significant drop in labour force participation, the rise in underemployment, and the almost non-existent wages growth. Taken together, it was a strange decision to take given that the labour market is still a long way from where it was pre-crisis (unemployment has been replaced by underemployment and non-participation) and that the price level inflation is well below their two per cent target (even taking into account the extraordinary drop in energy prices).

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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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Benefit tourism – another neo-liberal fallacy

One of the tools that right-wing elements use to control the public debate about government spending and to justify their attack on public deficits is migration. There are many aspects to this public manipulation that invokes raw fear, ignorance and prejudice among the population. One of the elements, which plays on job insecurity and the range of fiscal myths that characterise the neoliberal era, is the claim that so-called ‘benefit tourism’ is rife and if left unchecked will bankrupt national governments and lead to higher burdens on ‘taxpayers’. So we are often told that migrants from poorer nations move to access welfare benefits that are superior to those offered by their own nations and that these movements are parasitic in nature and do not advance the interests of the host country citizens. Last week (December 10, 2015), the Irish-based EU organisation, the European Foundation for the Improvement of Living and Working Conditions (Eurofound) released a report – Social dimension of intra-EU mobility: Impact on public services – which examines “the extent to which mobile citizens from central and eastern European Member States … take up benefits and services in nine host countries” by “mobile citizens from 10 central and eastern European Member States” (the so-called EU10 mobile citizens). The Report should be read by all those who wish to contribute to this debate or understand what the facts are. Essentially, the Report finds that mobile citizens from poorer nations have lower take-up rates of welfare support in host countries than natives. That really should be the end of the ‘benefit tourist’ assertions. But then most of these public debates are not based on evidence or logic.

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Australian government fiscal outlook – irresponsible and will fail

Australia has been caught up in a almost national hysteria the last few days as the Federal government’s Mid-Year Economics and Fiscal Outlook (MYEFO) release approached. The MYEFO was released yesterday (December 15, 2015) and the sky is still firmly above us, albeit slightly overcast today with storms approaching. I can assure everyone the storms are meteorological events associated with the early summer rather than any moves by international credit rating agencies to detonate their heavy artillery and sink the continent into the Pacific and Indian oceans. The mainstream media coverage of the buildup to the MYEFO has been nothing short of extraordinary and demonstrates that no matter how wealthy a nation’s per capita, how educated it’s people appear to be, public debate is conducted at levels of ignorance that the cavemen and women would laugh at. I have spoken to several journalists in the last few days who by their questioning expose a basic lack of understanding of the macroeconomic implications of the data that has been released in the MYEFO. Basically, the Outlook shows that the federal fiscal deficit is larger than previously estimated (in the May 2015 Fiscal Statement aka ‘The Budget’) and this demonstrates the automatic stabilisers in operation to put a floor under the slowing economy. This counter-cyclical movement is something that we should be comforted by because as private spending contracts and the economy slows the expansion of the deficit limits, to some extent, the job losses and the number of businesses that might become insolvent. However, the mainstream reaction has been hysterical (as in hysteria) with all sorts of predictions about national insolvency, credit rating agencies downgrading us, and “deficits for as long as you can see”. The problem is that the so-called average Australian believes all this nonsense and doesn’t understand that the rising deficit is a good thing in the context of poor developments in private spending.

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UK household spending falling yet corporate profitability at record levels

Last week (December 8, 2015), the British Office of National Statistics released its updated – Family Spending, 2015 edition – which provides a detailed breakdown of household spending for 2014. What is interesting about the release from my perspective, in addition to seeing how household spending changes in composition over time, is what it says about distributional forces in the UK and the way in which households are losing out to corporate interests under the policy directions of neo-liberal British Labour and Conservative governments. In real terms, household spending overall is a lower in 2014 than what it was at the turn-of-the-century. British households are also saving less as a percent of their disposable income than they were 10 years ago. The weight share in national income has fallen dramatically over that time. Yet, real GDP growth (that is, real national income) has risen by around 27 per cent since the turn-of-the-century. It doesn’t take a genius to work out where that real income that it the workers have lost has gone. There are several components to this story and this blog looks at some of them.

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Friday Lay Day – ruminations on MMT and the JG

It’s my Friday Lay Day blog and today I’m spending some time travelling and some time thinking about the Modern Monetary Theory (MMT) textbook that I’ve been promising to finish for some time. I can confidently say now that we are on track to finish the first edition by March 2016. Randy Wray and I have taken on a third author (Martin Watts) and have agreed on a completion plan. More information on availability will be available in the new year as we get closer to completion. This week I noted a lot of comments (particularly with respect to my Job Guarantee post) that suggested many readers still do not exactly know what MMT is. Further, there was a heterodox conference in Sydney this week, where MMT proponents were accused of being neo-liberals and politically naive. Unfortunately, other commitments prevented me from attending the conference this year but I read the paper in question and wondered why salaried academics would bother writing it. So a few reflections on both those matters today.

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Australian Labour Force – improvement but credibility stretched

Today’s release of the – Labour Force data – for November 2015 by the Australian Bureau of Statistics once again brings into question the validity of drawing assessments about the state of the labour market on the basis of monthly changes in the data. Today’s release shows that employment increased by 71,400 (0.6 per cent) on the back of a similar substantial increase last month. The estimates strain credibility although they are not necessarily at odds with what other data is suggesting. The direction is probably correct – that is, the labour market has improved (the Employment-Population ratio reliably indicates that). The ABS estimated that despite the dramatic increase in employment, unemployment fell by only 2,800 as a result of a 0.3 percentage points surge in the participation rate (again stretching credibility). Perhaps a signal on how volatile the data is, the ABS estimated the teenage participation rate rose by 0.7 percentage points on theh back of a estimated 0.8 point rise in October – again rather fanciful. The cautious position is to look at the trend over the last several months and that suggests that the labour market has improved. However, the teenage labour market remains very week with no discernible upwards trend revealing itself yet. If the forecasted decline in private investment occurs over the next 12 months, then this improvement in the labour market data will not persist.

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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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On the trail of inflation and the fears of the same …

Today I’ve been following a document trail concerning the French government decision to adopt the so-called Barre Plan in 1976. This is part of the research on doing for my next book on why the Left abandoned progressive economic strategies and became what we now think of as austerity-lite merchants. I am hoping the manuscript will be finished by April 2016 and the book will emerge a bit later in the year. while the approach that will be taking is emerging, the strategy is to pinpoint key events in history where significant economic policy changes occurred and to analyse the rationale that was used to defend those policy shifts and to assess whether the circumstances that applied at those points in time provide any guidance to current day challenges. One of the big events that lead to deep uncertainty among Social Democratic politicians and their advisers, which arguably, was a key driver in the shift of these parties to the Right, was the Stagflation of the 1970s. The phenomenon of the simultaneous coincidence of accelerating inflation and rising unemployment had not previously been witnessed in the period following the Second World War. It needs a careful analysis because much of the popular understanding of this period and the claims that it demonstrated a failure of Keynesian policy approaches are incorrect and provide no basis for rejecting fiscal intervention to maintain full employment.

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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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IMF continues with its wage-cutting line

In November 2015, the IMF released an IMF Staff Discussion Note (SDN/15/22) – Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area – which purports to measure “the short-run economic impact of wage moderation and the implications for policy in the context of the euro area crisis”. It juxtaposes the impacts of the so-called internal devaluation approach with the impacts of Eurozone monetary policy. It recognises that the euro zone countries cannot use exchange rate depreciation to boost domestic demand but argues that instead, “lower nominal wage growth … and lower inflation or higher productivity growth relative to trading partners is needed”. The paper presents the standard mainstream arguments that: 1) wage cuts improve employment through increased competitiveness; 2) interest rate cuts stimulate overall spending; 3) quantitative easing stimulates overall spending. There is very little empirical evidence to support any of these statements, especially when fiscal austerity is accompanying these policy measures. The discussion does acknowledge wage cuts may be deflationary and “work in the opposite direction of the competitiveness affect”, in other words, domestic demand and overall growth declines. The unstated message is that internal devaluation doesn’t really improve competitiveness when it is imposed across the currency bloc and undermines domestic spending, which further impedes any export growth (because domestic income drives import demand).

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Friday lay day – The Stability Pact didn’t mean much anyway, did it?

It’s my Friday lay day blog and I am spending most of today reading French documents from the 1960s. The French theme is appropriate given recent statements by the ‘new Napoleon’ a.k.a. François Hollande this week about his intentions to ignore the rigid fiscal rules imposed on Eurozone Member States and expand the fiscal deficit to allow him to employ a significant number of extra workers in various areas of policing and security. While abandoning the “Stability Treaty” to use Hollande’s own words, by which he means the Stability and Growth Pact and its associated and pernicious fiscal rules and oversight, is an admirable display of leadership, the fact that he can only see to do this by engaging in more machinery to entrench the ‘war on terror’ more deeply is disturbing. It would have been much better if he just admitted that fiscal rules governing the Eurozone Member States are unworkable and prevent a government from fulfilling its responsibilities to advance the well-being of its citizens. He is now open to debate in France was the Conservatives who clearly favour more state police, security and military expenditure, such is their xenophobia, but are now demanding that such expenditure is done within the narrow limits of the fiscal rules and are therefore calling for reductions in spending on health and public services. I doubt that even this new Napoleon will be able to sale free of the fiscal straitjacket that is the Eurozone, major security threats notwithstanding.

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Australia – wages growth at record low as redistribution to profits continues

The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the September-quarter yesterday and annual private sector wages growth fell to 2.1 per cent (0.5 per cent for the quarter). This is the third consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the December-quarter 1997. In the 2015-16 fiscal statement, the Government assumed wages growth for 2014-15 would be 2.5 per cent rising to 2.75 by 2017. On current trends, that is highly unlikely to occur, which means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. Depending on how we measure inflation, the annual wages growth translates into a small real wage rise or fall. Either way, real wages are growing well below trend productivity growth and Real Unit Labour Costs (RULC) continue to fall. This means that the gap between real wages growth and productivity growth continues to widen as the wage share in national income falls (and the profit share rises). 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 lessons have not been learned.

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