IMF changes tune on industry policy – shamelessly – Part 1

In 1975, Tony Benn, a Left Labour member in the British Parliament and Secretary for Industry, proposed an alternative industrial plan to revitalise British industry. At the time, the Prime Minister and Chancellor were becoming attracted to Monetarism and started framing and implementing the austerity-type fiscal strategies that are common today. Benn opposed this approach, and, instead proposed a far-reaching alternative economic strategy that involved increased industrial planning to revitalise British industry. The growing ‘free market’ orthodoxy at the time, spearheaded by the IMF and the World Bank, which had transformed into neoliberal enforcement agencies, were vehemently opposed to any form of industry policies or state intervention. As a result, Benn was basically shut out of the debate and this helped transform social democratic politics into the mess it is today. Ironically, now the IMF is changing its tune. It has recently rediscovered how effective industry policies of the type Benn was proposed actually can be if supported by coherent policy structures. Irony two is that these supportive policy structures are the opposite to those typically proposed by the IMF. At the time, there were economists (such as yours truly) who knew that the descent into neoliberalism would be a disaster and hamper growth and more equal distributions of wealth and income. But that view was also shut out. Now, without shame, the IMF are basically admitting the decades of insufferable neoliberal policies that they forced onto nations may have been wrong. Industry policy is back in focus. Imagine if they never had seduced the world with their snake oil. British politics, for one, would have been quite different. Brexit could very well happened in 1975 under a Labour government. And more. This is Part 1 of a two-part series which will finish tomorrow.

Read more

Australian government’s fiscal statement – pitiful and irresponsible election ploy

This morning, I declared that I was angry on a multitude of levels. I am part of a local community group that is fighting greedy developers, corporate real estate speculators and a compliant local council over an outrageous abuse of planning. That really gets me mad. NSW, the state I reside in mostly, just re-elected a corrupt conservative government, largely because the former leader of the Labor opposition couldn’t keep his hands out of the clothing of a female journalist and his successor mouthed off about Asians taking our jobs. Bloody hell, the Labor Party had it won, and then lost it. Angry. Then we go a little higher in the hierarchy to the fiscal statement (aka ‘The Budget’) which the conservative Australian government brought down last night. And outrageous piece of chicanery and economic malpractice. What is worse is the head of the Federal Opposition’s policy think tank – the John Curtin Research Centre – put out an Op Ed late last week accusing the Conservative government of not doing enough to “address debt” and shirking “serious, structural repair” and not having a public “debt ceiling”. What the F&*k! Did the IMF write this piece? The ‘think tank’ claims it is a “social democratic think-tank dedicated to developing ideas and policies for a better Australia”. Yes, folks that is what social democracy means in Australia – neoliberalism! More on the fiscal statement in what follows. And if I wasn’t already hugely mad enough with all of that, I read that the British Labour Party is desperate for Britain to stay in the Single Market – lock-stock-and-barrel. What! This is the most advanced expression of neoliberalism. I guess it is consistent with their ridiculous ‘Fiscal Credibility Rule’ that keeps the current Labour Party firmly in the Blairite tradition – scared to death of those creeping, amorphous financial markets and so lacking in confidence that they hang on to the grim lies that Dennis Healey introduced to Labour narratives in the mid-1970s. Mad as hell about that! And then we get to Brexit central. The people voted in a majority to LEAVE! It was a correct decision for the long-term, progressive future of Britain. The cosmopolitan liberals couldn’t cope with the idea of, maybe, having to queue up at the border of the 27-nation European Union when they go on their next ski holiday. Their answer – vilify the voters who knew the EU was the exemplar of neoliberalism and do everything to stop the departure. Enter a totally incompetent Tory government to oversee the departure and you get an almighty mess. For once I agree with the former Bank of England governor – Britain should get out next week with no deal and announce a major fiscal stimulus to keep the economy moving while adjustment occurs. So I am glad I have a full head of hair! Then I read another plethora of anti-MMT pieces and my humour improved. A bit of comedy is always important!

Read more

The Job Guarantee is more than a Green New Deal job creation policy

Everywhere I read it seems, the ‘Green New Deal’ appears. I wrote a bit about it last week in my evaluation of the latest US job numbers – US labour market moderated in November and considerable slack remains (December 11, 2018). The point I made there was that a shift to a green economy would possibly generate around 21 million jobs (14 per cent of total US employment), which given reasonable estimates of excess capacity would require a huge shift in the employment structure and multiples of the available idle labour supply. Of course, that is the objective – to shift workers from fossil fuel, carbon intensive industries into sustainable activities. That is no easy task and would require a fundamental shift in the government-market balance in terms of resource allocation. The market alone will not accomplish that shift in a desirable manner. Cue – more regional and occupation planning. I have also been seeing an increasing number of Tweets talking about a ‘Just Transition’ framework, something I have written about in the past. And there are now Tweets out there equating that with a Job Guarantee. At that point, we get ahead of ourselves. We must see the Job Guarantee in perspective and not ask it to do too much. That is what this blog post is about.

Read more

The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1

Pathetic was the first word that came to mind when I read this article – The Italian Budget: A Case of Contractionary Fiscal Expansion? – written by Olivier Blanchard and Jeromin Zettlemeyer, from the Peter Peterson Institute for International Economics. Here is a former IMF chief economist and a former German economic bureaucrat continuing to rehearse the failed ‘fiscal contraction expansion’ lie that rose to prominence during the worst days of the GFC, when the European Commission and the IMF (along with the OECD and other groups) touted the idea of ‘growth friendly’ austerity. Nations were told that if they savagely cut public spending their economies would grow because interest rates would be lower and private investment would more than fill the gap left by the spending cuts. History tells us that the application of this nonsense caused devastation throughout, with Greece being the showcase nation. The damage and carnage left by the application of these mainstream New Keynesian ideas are still reverberating in elevated unemployment rates, high poverty rates, broken communities and increased suicide rates, to name a few of the pathologies it engendered. But the ‘boys are back in town’ (sorry Thin Lizzy) and Blanchard and Zettlemeyer are falling in behind the IMF and the European Commission against the current Italian government by demanding fiscal cutbacks. It will turn out badly for Italy if the government buckles under this sort of pressure. It once again shows that the mainstream economics profession has learned very little from the GFC. For them the story stays the same. It is one that we should reject in every circle it arises. This is Part 1 of a two-part analysis of the latest incarnation of this ruse my profession inflicts on societies.

Read more

Eurozone fiscal rules bias nations to stagnation – exit is the remedy

It is Wednesday and I am doing the final corrections to our Macroeconomics textbook manuscript before it goes off to the ‘printers’ for publication in March 2019. It has been a long haul and I can say that writing a textbook is much harder than writing a monograph not only because the latter are more exciting in the drafting phase. The attention to detail in a textbook that runs over 600 pages is quite taxing. Anyway, that is taking my attention today. I also plan to write some more about Brexit in the coming weeks and Japan (tomorrow). But today, I have updated some ECB data on household and corporate borrowing and the cost of borrowing to see what sort of recovery is going on. With nations such as Germany now recording negative growth in the third-quarter, it is clear that the Eurozone is stalling again. The explanation doesn’t require any rocket science. It is all there in the behaviour of the non-government sector (saving more overall) and fiscal rules that are too tight to offset that saving desire. The reliance on monetary policy is an ineffective tool to provide the offset in non-government saving overall. Fiscal policy has to be reinstated to the primary position and that means nations such as Italy must consider exiting the dysfunctional monetary union that biases nations to recession and stagnation.

Read more

British fiscal statement – no end to austerity as the Left face plants

Last night in Britain (October 29, 2018), the British Chancellor released the – Budget 2018 – aka the 2018 fiscal statement (my terminology, to avoid triggering the flawed household budget analogy). The detailed analysis is being done by others and I haven’t had enough time to read all the documents produced by the Government and others yet anyway. But of the hundreds of pages of data and documentation I have been able to consult, the Government is trying to win back votes while not particularly changing its austerity bias. That is fairly clear once you dig a little into the outlook statement produced by the Office of Budget Responsibility (OBR). The Government’s strategy is also unsustainable because it continues the reliance on debt accumulation in the non-government sector, which will eventually hit a brick wall as the balance sheet of that sector becomes overly precarious. Nothing much has been learned from the GFC in that respect. The Government can only cut its debt by piling more onto the non-government sector. Second, the response of the Left has been pathetic. The Fabians, for example, has put out a document that uses all sorts of neoliberal frames and language, making it indistinguishable from something the mainstream macroeconomists would pump out – the anathema of the constructs and language that the Left should be using. There is a reason the political Left has fallen by the wayside over the last 3 or so decades. And their penchant to write and speak like neoliberals is part of the story.

Read more

The British Labour Fiscal Credibility rule – some further final comments

Over the last weekend, it seemed that we had a return of the Spanish Inquisition with a prominent British academic, who by his own words designed the fiscal rule that British Labour has unwisely adopted, repeatedly demanding that MMT Tweeters confess to knowing that I was completely wrong on my interpretation of the fiscal rule. It is apparent that my meeting with the British Shadow Chancellor in London recently and my subsequent discussion of that meeting has brought the issues relating to the fiscal rule out into the open, which is a good thing. It is now apparent that British Labour is still, to some extent, back in the 1970s, carrying an irrational fear of what financial markets can do when confronted with the legislative authority of a sovereign government. I am not a psychologist so I cannot help them heal that irrational angst. But the claims that I misunderstood the fiscal rule – which are being repeated daily now by the fanboys of the rule are just ludicrous. The rule is simple. And it will bring Labour grief politically. Rolling windows or not!

Read more

Precarious private balance sheets driven by fiscal austerity is the problem

The media has been giving a lot of attention in the last week to the 10-year anniversary of the Lehman Brothers crash which occurred on September 15, 2008 and marked the realisation, after months of denial, that there was a financial crisis underway. Lots of articles have been published recently about what we have learned from this historical episode. I thought that the Rolling Stone article by Matt Taibbi (September 13, 2018) – Ten Years After the Crash, We’ve Learned Nothing – pretty much summed it up. We have learned very little. Commentators still construct the crisis as a sovereign debt problem and demand that governments reduce fiscal deficits to give them ‘space’ to defend the economy in the next crisis. They are also noting that the balance sheets of the non-government sector components – households and firms – are looking rather precarious. They also tie that in with flat wages growth and a run down in household saving. But the link between the fiscal data and the non-government borrowing data is never made. So we are moving headlong into the next crisis with very little understanding of the relationship between government and non-government. And we are increasingly relying on private sector debt buildup to fund growth as governments retreat. Everything about that is wrong.

Read more

Fiscal space has nothing to do with public debt ratios or the size of deficits

The Project Syndicate is held out as an independent, quality source of Op Ed discussion. When you scan through the economists that contribute you see quite a pattern and it is the anathema of ‘independent’. There is really no commentary that is independent, if you consider the term relates to schools of thought that an economist might work within. We are all bound by the ideologies and language of those millieu. So I assess the input from an institution (like Project Syndicate) in terms of the heterodoxy of its offerings. A stream of economic contributions that are effectively drawn from the same side of macroeconomics is not what I call ‘independent’. And you see that in the recurring arguments that get published. In this blog post, I discuss Jeffrey Frankel’s latest UK Guardian article (August 29, 2018) – US will lack fiscal space to respond when next recession comes – which was syndicated from Project Syndicate. Frankel thinks that the US is about to experience a major recession and that its government has run out of fiscal space because it is not running surpluses. We could summarise my conclusion in one word – nonsense. But a more civilised response follows.

Read more

The fundamental realignment of British society via fiscal austerity

In my analysis of the UK fiscal statement that George Osborne released on March 23, 2011 – I don’t wanna know one thing about evil (April 29, 2011) – I noted that the imposition of fiscal austerity in Britain meant that any hope of growth was really dependent on a combination of export growth and household consumption growth. With the former source unlikely and household income growth sluggish (and falling in real terms), households would have to run deficits, which necessitated running down savings and/or increasing borrowing. British households were already overloaded with debt at the time. The New Keynesian economic orthodoxy claimed that my concerns about a growth strategy that was ultimately reliant on increasing household indebtedness were misplaced because the debt would be accompanied by increased wealth via rising house prices. Well the most recent data available from the British Office of National Statistics and other sources (house prices) shows that my concerns were real. Real housing prices have been falling for the last few years in Britain and are now growing at their slowest pace since 2013. Further, ONS data shows that “UK households have seen their outgoings surpass their income for the first time in nearly 30 years” and they “are borrowing more and saving less”. At the same time, households are accumulating more debt than assets and borrowing more by way of non-mortgage loans to cover the squeeze on disposable incomes. Also, it is not just mortgage debt that has been rising. The real burden of short-term household debt (credit cards etc) in Britain has risen dramatically over the last 20 years. The rising debt and household deficits are also concentrated at the lower end of the income distribution and wealth inequality is rising significantly. Then we learn that in excess of 30 per cent of British children are living in poverty. So in the face of withering fiscal austerity that is impacting severely on the prosperity of the current generation of adults, the policy failure is also ensuring that the disadvantage will be taken into the next generation of adults and their children. Deprivation breeds deprivation. This is a fundamental realignment of British society that will take it back to C19th-type relativities.

Read more

Australian fiscal statement 2018-19 – an election stunt, limited economic coherence

The Australian Treasurer brought down the 2018-19 Fiscal Statement (aka Budget) on Tuesday evening with much fanfare. The one message that dominated the cant and hypocrisy was that there will probably be an early election, maybe later this year. The Government is scandal-ridden, is enduring destructive infighting over leadership and policy direction, and has made some monumentally disastrous decisions in the current term of office (for example, denying the need for a Royal Commission into the financial sector, which they were bulldozed into finally accepting, and, which is now revealing massive corruption in our banks and insurance companies). Being so far down in the opinion polls means one thing. They use the annual ‘fiscal’ show to make themselves look good and dollop out (albeit with a lag) some scraps (tax cuts) to the masses, while reserving the huge tax cuts for the top-end-of-town. And, for the first time in as long as I can remember, I didn’t even bother to listen to the Treasurer’s speech. In fact, I could write some text generating code which would generate a ‘Budget Speech’ that was remarkably similar to the Treasurer’s speech. So why waste 30 minutes in the evening listening to it. I would prefer to be sorting socks in my sock draw!

Read more

US labour market tepid – there is plenty of scope fiscal expansion

On May 4, 2018, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – April 2018 – which showed that total non-farm employment from the payroll survey rose by just 164,000 in April, which was an improvement on the very modest rise in March. The Labour Force Survey data, however, showed that employment only rose by 3 thousand) in April 2018 but was accompanied by a substantial fall in the labour force (236 thousand) which meant that total unemployment fell by 239 thousand. The unemployment rate fell to 3.93 per cent (from 4.07) but this does not signal a stronger labour market. There is still a large jobs deficit remaining. Finally, there is no evidence of a wages breakout going on. Taken together, the US labour market is showing no definite trend up or down at present and it is still some distance from being at full employment.

Read more

Donald Trump’s tariff hikes are not good policy

I am generally not in favour of trade protection. I grew up in a country that had very extensive protection (tariffs, import quotas) on manufacturing goods, which was justified on a number of grounds – capacity to shift to defense industries; stable employment; and more abstractly, an expression of becoming a ‘modern’ nation, leaving our agrarian roots behind. The initial move to impose high tariffs was that a young industry would take time to develop – the so-called infant industry argument, which goes back to the 1790 Report on Manufactures written by American economist Alexander Hamilton. The problem is that the infant never really grew up and the tariffs just became a cosy rent-sharing margin for unions and multinational corporations. Meanwhile consumers paid excessive prices for deficient-quality motor vehicles (among other products). It is clear that as trade opens up there are workers and regions that lose – and lose badly. The answer is not try to reinvent the past through protection. Rather, it is to use the government’s fiscal capacity to create new opportunities in these regions to ensure that workers disadvantaged by import competition can transit into new jobs with stable incomes. That option is often overlooked because modern governments have become obsessed with austerity. And, as I argue below, that obsession will in the context of Donald Trump’s tariff hikes, work against the European nations that are running ridiculously large current account surpluses.

Read more

Eurozone policy failures laid bare

On March 13, 2018, the OECD released its latest Economic Outlook with accompanying “Interim projections” as at March 2018) suggesting that the current growth phase will continue through to next year as consumer and business confidence improves and translates in higher investment rates. The OECD, however, forecasts that growth in the Eurozone will decline over the next two years. The major Eurozone nations (France, Germany and Italy) are not witnessing the growing investment expenditure. The Eurozone might be seeing a little sunshine creeping out from the very dark clouds. But it is far from recovered and the future is ominously black. Key cyclical indicators remain at depressed levels, which means that when the next cycle hits, the Eurozone will be in a much worse position than before. And the reason: the fundamentally flawed design of the monetary system with its accompanying austerity bias. The reform required is root-and-branch rather than a prune here and there.

Read more

The New Keynesian fiscal rules that mislead British Labour – Part 3

This is Part 3 (and final) in the series which examines the robustness of claims made by two British academics about the desirability of the British government (particularly Labour) adopting further fiscal constraints on their flexibility to advance well-being in that nation. Part 3 further develops the critique and focuses on the validity of tightening voluntary constraints on government and outsourcing key parts of the fiscal policy development process to so-called ‘independent’ fiscal councils or boards. We conclude that these suggestions would further entrench the neoliberal dominance of government policy and reduce its capacity to serve the wider interest. In effect, taking this sort of advice would be counterproductive for British Labour, which really needs to to further break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. This will require more than articulating progressive-sounding social and environmental policies. It will require more than proposals to renationalise the railways. Effectively, British Labour has to reframe the macroeconomic debate and eschew the sort of reasoning that the mainstream of my profession offers. It must, in my view, embrace Modern Monetary Theory (MMT) principles to free itself from the shackles of all the neoliberal mumbo jumbo that the New Keynesians continually offer as economic verities. The reality is the the New Keynesian approach has one output – an elaborate litany of lies.

Read more

The New Keynesian fiscal rules that mislead British Labour – Part 2

This is Part 2 of my Three Part exposition of how the standard New Keynesian approach to the specification of fiscal rules will generate poor advice for politicians desiring to achieve progressive socio-economic goals. The paper I am using to represent the New Keynesian approach has, by all indications, been somewhat influential in the formation of the macroeconomic approach currently being espoused by the British Labour Party. In that sense, the critique aims to disabuse the Labour politicians and their apparatchiks of building policy options based on fake economic knowledge, and, instead, embrace the principles of Modern Monetary Theory (MMT), which provides an accurate depiction of how the monetary system actually operates and the policy options for a currency-issuing government such as in Britain, and the likely consequences of deploying these options. The one major lesson that comes out is that the New Keynesian approach is an elaborate fraud. It plays around with so-called ‘optimising’ models asserting human behaviour that no other social scientist believes remotely captures the essence of human decision-making, and then derives conclusions from these models that are claimed to apply to the world we live in. Prior to the GFC, these ‘models’ didn’t even consider the financial sector. The fact is that nothing of value in terms of specifying what a government should do can be gleaned from a New Keynesian approach. It is barren.

Read more

The New Keynesian fiscal rules that mislead British Labour – Part 1

The British Labour Party is currently leading the Tories in the latest YouGov opinion polls (February 19-20, Tories 40 per cent (and declining), Labour 42 per cent (and rising). They should be further in front, given the disarray of the Conservatives as they try to negotiate within their own party something remotely acceptable about Brexit. When there is this degree of political capital available, in this case for the Labour Party, a party should use it to redefine policy agendas that have gone awry. To build a narrative that will advance their cause for the future decades. British Labour has a chance to break out of its recent Blairite neoliberal past and present a truly progressive manifesto to the British people that will force the Tories to move closer to the centre and squeeze the extreme right-wing elements. In part, under Jeremy Corbyn and John McDonnell, Labour is making progressive noises on a number of fronts. But ultimately, where it really matters – the macroeconomic narrative – they are remaining firmly neoliberal and this will blight their chances of pursuing a truly progressive agenda. One of the glaring mistakes the Labour Party has made is to accept advice from neoliberal economists (so-called New Keynesians) who have instilled in them a need for fiscal rules. This is a three-part analysis of the sort of advice that Jeremy Corbyn and John McDonnell are getting and why they should ignore it. I have split it into two parts because it is long and quite involved at times.

Read more

The path out of the low wage trap is limited by fiscal austerity

During my postgraduate study years I read a 1954 article by American economist Clark Kerr entitled – The Balkanization of Labor Markets – which attacked the mainstream labour market views that there was mobility within labour markets such that poverty arising from low-pay was a function of workers’ preferences for low education and more leisure (that is, unemployment). As such, there was no reason for the government to intervene to improve wages or job security. Kerr’s thesis was that there was not a ‘single’ labour market accessible to all, where individual mobility would result from personal investment in education and skill development. Instead, he argued that the US labour market was “segmented” by institutional arrangements, which trapped some demographic cohorts into low-pay and insecure jobs. Poverty could arise from these traps. The idea morphed into the segmented labour market literature of the late 1960s and early 1970s. The applications were mostly Anglo because in non-Anglo countries there appeared to be more resistance to institutional arrangements that undermined the chance for workers to enjoy job security with decent pay. However, in recent years (decade) the trend towards precarious work where certain groups (women, youth, migrants) are trapped in low pay and frequent spells of unemployment has spread, with devastating consequences. The largest European economies – Germany and France – are now bedevilled with this issue and with a bias towards fiscal austerity, the path for workers out of the trap is limited.

Read more

Australian inflation outlook benign – room for fiscal stimulus

Central banks around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been building up their balance sheets (massively) by creating reserves in return for government and corporate paper in an attempt to push their inflation rates up. But the data suggests their efforts are in vain. Which should inform all those who think that if the government stopped issuing debt to match their deficits there would be horrible inflation to think again. Progressives should be calling for their governments to abandon the gold standard practice of issuing debt, which would change the political dialogue considerably. Australia is also struggling to push it inflation rate into the so-called policy range of 2 to 3 per cent. Last week’s Australian Bureau of Statistics inflation data release – Consumer Price Index, Australia – data for the September-quarter 2017 showed that the September-quarter inflation rate was 0.6 per cent with an annual inflation rate of 1.8 per cent (down from 1.9 per cent last quarter). The headline inflation rate has been below the Reserve Bank of Australia’s lower target bound of 2 per cent for nearly two years now. Clearly, within their own logic where an inflation rate within the 2 to 3 per cent band reflects successful monetary policy, the RBA is failing. The RBA’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are also now below the lower target bound and are not showing signs of moving up. The most reliable measure of inflationary expectations has also fallen quite sharply. With the labour market data demonstrating weakness and the economy stuck in this low inflation malaise, it is clearly time for a change in policy direction.

Read more

The ‘infinite-horizon fiscal gap’ is just an infinity of nonsense – try measuring that!

The ‘infinite-horizon fiscal gap’ is just an infinity of nonsense. That is, if such a level of ridiculousness can be measured, which it cannot. So suffice to say a pretty large dose of nonsense. Certainly nothing to take seriously. Anyone who sprouts this nonsense declares themselves unqualified to discuss notions of sovereignty and the capacities of a currency-issuing state. But while some mainstream economists are firmly stuck in their Groupthink-riddled stupors with their ‘infinite-horizon fiscal gap’ calculations producing ever increasing (scaremungous) $ sums that the US government is allegedly unable to ever pay, the movers and shakers of the political scene, such as the Koch Brothers in the US, feel no compunction to stick with a consistent line attacking fiscal deficits. A few years ago they were predicting mayhem and insolvency just like the stupified academics. How things change when some dollars are up for grabs even if the fiscal deficit has to rise to transfer that largesse to the non-government sector. Then it is look the other way on the deficit and send us the cash. Sickening.

Read more
Back To Top