Friday lay day – Is MMT applicable to the Eurozone?

Its my Friday lay day and I am catching up on reading today. But one thing I have had to complete by today is the introduction to the German Translation of my friend Warren Mosler’s 2010 book – The Seven Deadly Innocent Frauds of Economic Policy. The publisher wanted an introduction for the German readership that helped them relate the discussion in the book to the reality in Europe – given that the Economic and Monetary Union is a perverted hybrid of a fixed exchange rate/fiat currency system that works for no-one really. So you may be interested in reading my introduction. Then a dose of the master guitarist completes my Friday blog.

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Modern Monetary Theory and Value Capture

I live in a Federation where the national government has the currency-issuing capacity and the states rely on their taxation and borrowing capacities to fund their spending. Our system is subject to significant vertical fiscal imbalances in that the Australian Constitution and subsequent decisions gives the major taxing capacity to the federal government but the large spending responsibilities remain at the state level. There are also significant ‘horizontal fiscal imbalances’ between the states and territories due their different capacities to exploit their own tax bases. As a result, there is a complicated system of federal-to-state transfers to ensure that all states have the capacity to deliver infrastructure and services of an ‘equal’ standard to all citizens. In particular, state governments face problems in providing adequate infrastructure while many of their decision deliver windfall gains to land owners where major infrastructure projects are adjacent (such a train or road system). While Modern Monetary Theory (MMT) considers such national infrastructure projects are best funded at the national level where the national government faces no financial constraints (given it is the currency issuer), the reality is that state governments also engage in infrastructure development. As a second-best technique to ensure that states do not play the austerity card and deprive their regions of essential infrastructure development, a system of Value Capture can be beneficial. It is a progressive tax system that can also reduce the tendency to real estate asset price bubbles.

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European Left face a Dystopia of their own making

Last week, I re-read an article from May 1, 2012 by Abraham Newman – Austerity and the End of the European Model – that was published in Foreign Affairs. The article carried the sub-title “How Neoliberals Captured the Continent”. The author is a US political scientist and observed that given the unprecedented austerity that the European politicians have inflicted on their nations with such damaging consequences, the “Tea Party loyalists in the United States should be green with envy”, The hard-line US Republicans don’t go close to their European brethren. The thrust of the article was that independent of the short-term effects of the austerity it “will transform Europe’s political economy in the long term, lending credence to neo-liberal ideas of limited government and loosely regulated markets. The irony of this transformation is that it reinvigorates the very ideas that helped cause the financial crisis in the first place …” This is a theme that I share. It is also a starting point for a very interesting essay I read last week by Slovenian lawyer Bojan Bugaric – Europe Against the Left? On Legal Limits to Progressive Politics – published May 2013. I have been seeking to understand these perspectives more deeply as part of my larger book project concerning the demise of the European left.

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Saturday Quiz – November 7, 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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The Eurozone – being ‘trapped in a dysfunctional monetary system’

On November 6, 2000, the Financial Times correspondent Wolfgang Münchau wrote in his article ‘Weak euro reflects uncertainty of euro-zone’ that “structural reforms alone will not determine whether the Emu is viable … The Europeans have no system of transfer payments and the EU budget is too small for this purpose … the euro-zone countries cannot remain as they are: they must move towards full economic union”. He also observed that the “current is clearly flowing in the opposite direction: EU governments increasingly emphasise inter-governmental co-operation as opposed to a wider role for supra-national institution”. I examined that ‘current’ extensively in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – as it was (and is) a major reason the monetary union has failed. And, further, the cultural and national barriers which prevented the creation of a system-wide fiscal union are still insurmountable. Münchau is one of several journalists and commentators who have shifted their positions on the desirability of the common currency yet remains wedded to the idea of retaining it – as if returning to national currency sovereignty would be a disaster. I opposed the Maastricht proposal when it was made public and remain opposed. Restoring national currencies, while initially disruptive will not in the long-term prove to be worse than what Münchau admits is a state where nations are “trapped in a dysfunctional monetary system”.

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With idle labour equal to 14.5 per cent, the fiscal deficit is too low

The fiscal position of a government that issues its own currency should never be a focus of attention other than to understand why it have evolved to its current level – whether it is reflecting mainly discretionary policy choices or cyclical effects (automatic stabilisers). If there was accelerating inflation and high GDP growth then one might be tempted to conclude the fiscal deficit is to expansionary and needs to be cut back. One might equally conclude that private spending is too strong and needs to be cut back. But when there is declining growth and very high and persistent labour underutilisation rates, it is hard to argue that the fiscal deficit needs to be cut. It is, in fact, lunacy!

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US economy slowdown – not likely to be a trend

Last week (October 27, 2015), the British Office of National Statistics published its – Gross Domestic Product Preliminary Estimate, Quarter 3 2015 – which revealed that the British economy is slowing and heading back into recession under current policy settings. The annual real GDP growth rate declined for the third successive quarter as the impacts of the world slowdown and domestic policy austerity start to take their toll. Later in the week (October 29, 2015), the US Bureau of Economic Analysis released their estimates of – Gross Domestic Product, 3rd quarter 2015 (advance estimate) – which showed that the US economy has also slowed rather appreciably in the third quarter and “increased at an annual rate of 1.5 percent” after having increased by 3.9 per cent in the second-quarter of 2015. We will have a better picture of the state of the US economy on November 24, 2015, when the estimates are revised based on updated data. The most obvious reason for the slowdown was the sharp drop in private inventory investment, a slowdown in exports and investment. Households maintained a relatively stable saving ratio – 4.7 per cent of disposable personal income compared to 4.6 per cent last quarter.

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Saturday Quiz – October 31, 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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Friday lay day – the tide is turning but there is a long way to travel yet

Its my Friday lay day so less blog more other things. I noted yesterday that I can sense that the tide is turning in the policy debate. There is now increased commentary that talks up the need for larger deficits and claiming we should not be worried about debt ratios and all the rest of the irrelevant financial ratios that blight the political capacity of governments to maintain high levels of employment and growth. The IMF and the OECD is increasingly urging governments to spend more on infrastructure even though they retain their blighted (and wrong) notion of ‘fiscal space’. Just a few years ago these organisations led the charge for austerity. The evidence has not supported their previous zeal. While those who desire a more evidence-based and theoretically consistent macroeconomics debate applaud the shift in rhetoric and sentiment, there is still the danger that the debates will be based on erroneous principles or blurred reasoning. It is good that the tools and arguments of Modern Monetary Theory (MMT) are being use in the mainstream media to analyse important economic issues. But we also have to be careful to make sure our stories that accompany those tools and concepts don’t just create more fog – and resistance. The evidence suggests that there is still a long way to travel yet … but the tide is slowly turning. I will just keep at it!

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British government analysis shows fiscal stimulus effective in supporting growth

The British Office of National Statistics published the – Gross Domestic Product Preliminary Estimate, Quarter 3 2015 – yesterday (October 27, 2015) which showed, unsurprisingly, that the British economy is slowing and heading back into recession under current policy settings. The annual real GDP growth rate declined for the third successive quarter as the impacts of the world slowdown and domestic policy austerity start to take their toll. The British government really has to reflect back on 2012 and realise that with non-government spending weak and a household sector carrying very high levels of indebtedness, now is not the time to be trying to cut discretionary net public spending. There is a need for a public spending injection to restore growth while the world works out which way it is going to go.

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The British Tax Credits system is a sign of New Labour failure

In 2012, the British government, which had for the first two years of its last term, realised that it was going to drive the economy back into deep recession if it maintained its fiscal austerity plans. It had spent the previous two years telling everyone how it had to cut into the fiscal deficit to save Britain but by 2012 the data was telling the government that their view of the world did not accord with reality. As a consequence they curtailed the austerity onslaught and allowed the deficit to grow and support growth. The result was that Britain avoided a triple-dip recession and the nation demonstrated to its EU partners across the Channel how stupid and reckless the Eurozone’s fiscal austerity was. But ideology often comes back to the fore when the emergency is over. Now with continued, albeit weak growth and a renewed electoral mandate, courtesy of the pitiful British Labour Party, the Tories are once again talking tough and in the Spring 2015 ‘Budget’, the austerity returned with vengeance. The focal point at present of that austerity is the impending parliamentary vote on cutting the benefits to low income families in Britain via the Tax Credits system. The attempt to force harsh austerity onto the poor in Britain is vile in its conception. But the Tax Credits system in the first place is the result of weak-kneed decisions by New Labour to avoid forcing British employers to pay a decent minimum wage which would have eliminated ‘working poverty’. Now the chickens are coming hometo roost. And as usual, when austerity is introduced it is the poor that suffer. A disgrace all around really.

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Saturday Quiz – October 24, 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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The Eurozone Groupthink and Denial continues …

I have been going back through my snippets library looking at what economists and politicians said back earlier in the crisis and comparing the predictions with reality to try to understand better why Europe is lagging behind. I have been compiling national profiles for various nations lately to ensure I remain cogniscant of the detailed developments that have been occurring. It takes some organisation. I have been concentrating by interest on Finland, Spain and Portugal lately. It astounds me when I read or hear that the Eurozone has been a success because the currency is stable. Even that last statement is false given the monetary union is fighting deflation at present with recessed output levels and entrenched mass unemployment. The current statements coming out of European leaders accord almost directly with the same sort of things they were saying in 2010 as the region was plunging deep into recession. It seems that they have learned nothing. Some of the past leaders have retired with handsome pensions and will not be held to account for their policy incompetence. Others remain in office and their public statements demonstrate that they cannot see beyond the blindness of the Groupthink that defines the patterned behaviour of the elite European policy-making institutions.

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Saturday Quiz – October 17, 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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Fiscal policy rules

The World’s financial system would have collapsed in 2008 and early 2009 if the governments of the day (including their central banks) had have maintained the dominant belief held by most mainstream economists that fiscal policy is not capable of an effective stimulus to real economic activity and that building central bank reserves to historically massive levels would cause accelerating inflation. Within a short time, all that orthodox posturing that had been shared by politicians, their advisors, and the mainstream financial and economics media was abandoned and pragmatism reigned supreme. Well sort of! The system was saved because governments largely ignored the dominant mainstream economics view. At the time, I thought that this shift in policy practice was the beginning of a paradigm shift in macroeconomics. The crisis clearly demonstrated the poverty of the orthodox theoretical framework and the policy prescriptions that flowed from it. The dominant theoretical models didn’t even have banking sectors included such was the arrogant ignorance of the profession. However, I was wrong or perhaps a bit hasty in thinking that the defences built up by the orthodox economics Groupthink would fall so quickly in the face of this amazing failure. There was a period of quietness within the profession, save for the manic interventions of some of the more extreme Monetarist elements who called on the governments to do nothing other than continue deregulation and target even bigger fiscal surpluses. But the conservative voices progressively gathered volume as the crisis moved from the probability of collapse to a deep (balance-sheet) recession and the attacks on the fiscal and monetary policy shift that occurred in 2008 and 2009 began to reach fever pitch. Governments retreated somewhat and the recoveries were then stalled and we are where we are now as a consequence – still bearing the residual damage of the GFC with many of the trigger points still unresolved and facing a new calamity. Maybe the paradigm shift is still coming. Let’s hope so.

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Saturday Quiz – October 10, 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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Friday lay day – the Unit Labour Costs obsession in Finland

Its my Friday lay day but today is going to be anything but. I am in Helsinki at present and it has been a busy few days so far. The concept of Unit Labour Costs (ULCs) is being used by the right-wing government in Finland to bash the population into submission so they can impose the nonsensical austerity. The Finnish government is trying to get rid of some public holidays and reducing wages for sick leave, overtime and working on Sundays. This is the starting point for a broader austerity attack on the public sector and the prosperity of the people. They are calling for a decline in ULCs of at least 5 per cent. The rationale is that with growth flat to negative for five years or so and the massive export surplus they had disappeared the only way to stop unemployment going through the roof is to cut labour costs relative to productivity – that is, cut ULCs. They have been caught up in the ‘dangerous obsession’ that prosperity can only be gained through ‘export competitiveness’ (whatever that actually is) and the domestic economy has to be sacrificed at the net exports altar. International competitiveness is a slippery concept at best but so-called internal devaluation is rarely a successful strategy.

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Monetary policy didn’t work as intended

I read two articles (among others) on the flight over to Europe yesterday that are worth commenting on. The two articles discussed the role of monetary policy and, in particular, whether the policy changes to address the crisis had achieved their aims. I read these articles as I was doing some computations which would suggest that the main game in town remains fiscal policy. The first article was in the Wall Street Journal (October 4, 2015) – How the Fed Saved the Economy – written by former US Federal Reserve Chairman Ben Bernanke. He claims that the US is approaching full employment because of the ‘extraordinary’ policy innovations that the US Federal Reserve Bank introduced during his period as Chairman. The second article was in the New York Times and argued that monetary policy authorities do not have the necessary policy tools to combat the next crisis. The NYTs article captures the ideological bias that entered policy discussions since the emergence of Monetarism in the 1970s. It makes out that policy is powerless, which is largely only a statement about monetary policy. It is a reflection of how perceptions of what we think monetary policy can achieve are way out of line with reality. But that is core Modern Monetary Theory (MMT). But that doesn’t mean that policy overall is powerless. Governments can always prevent a financial crisis and a recession from occurring if they are willing to use their fiscal capacities. Of course, that capacity is the anathema to the neo-liberals which is really the problem. There is no policy powerlessness. Just an ideological bias against using the available tools properly and responsibly.

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US labour market – the recovery is now stalling

The US Bureau of Labor Statistics published the latest – Employment Situation – September 2015 – on October 2, 2015, and the data shows a weakening labour market overall. At least it will silence the squad that are calling for higher interest rates for a time. The data shows that after 7 years of recovery mode employment growth is now starting to slow and it is likely that the change in employment in 2015 will be less than the annual change last year. All the main indicators were weak – employment, participation fell, hours of work fell, earning growth was zero – which is consistent with an overall slowdown. In seasonally adjusted terms, total payroll employment increased by 142,000 in September while the Household Labour Force Survey data showed that employment fell by 236 thousand. In the first 9 months of 2015, the average monthly change in non-farm payroll employment has been 198,000 whereas the corresponding figure for 2014 was 260,000. The unemployment rate was unchanged at 5.1 per cent but would have been higher had not the participation rate fallen by 0.2 percentage points to 62.4 per cent. The participation rate is now at its lowest level since September 1977 The other sign that the labour market is weaker is that the Employment-Population ratio fell slightly to 59.2 per cent (from 59.4 per cent). There is also evidence that a significant proportion of the jobs that are being created are in low pay, precarious areas of the labour market.

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Why banks are pushing the US central bank to increase interest rates

A few weeks ago I wrote – US Federal Reserve decision correct – there is no ‘normal’ – and suggested that the reason Wall Street and other well-to-dos were busily invading the media at every opportunity berating the US central bank for not increasing interest rates was because they had a vested interest in rates rising. They massage their call for higher interest rates in terms of global concerns for inflation (mostly) but just below the surface (they are mostly pretty crude in their advocacy) is the real reason – their own profit bottom line improves. On October 1, 2015, the Bank for International Settlements published its Working Paper no. 514 – The influence of monetary policy on bank profitability. The research demonstrates my very point. They find that when the short-term interest rate rise (that is, the policy rate set by the central bank) “bank profitability – return on assets” also rises. They also find that this “effect is stronger when the interest rate level is lower”. The overall conclusion is that “unusually low interest rates … erode bank profitability”. So forget all the spurious arguments about inflation risk etc that the financial media (who are really just ghost writers for the top-end-of-town) write ad nauseum. The real reason the Wall Street lobby keeps pushing for rate hikes is because they want more profit.

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