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.
I read a report just released yesterday (March 9, 2016) – The uneven impact of welfare reformby the Centre for Regional Economic and Social Research, which is located at the Sheffield Hallam University in Britain. It showed that the British Government is successfully prosecuting a class war against the disadvantaged and, increasingly, against segments of ‘middle’ Britain. It confirms the view I formed in 2010 when the Conservative government was elected and announced its first fiscal statement in June of that year that it was intent on pursuing some unfinished business – to wit, entrenching the attacks on workers and income support recipients and redistributing national income in favour of capital. These attacks were somewhat interrupted by the urgency to deal with the meltdown associated with the GFC. Leopards don’t change their spots and the Conservatives are intent on finishing off the agenda that began back in the 1970s with the attacks on unions and public services. I was thinking about the report as I was reflecting on a radio program I heard the other day about how the Australian National Library is being forced to make severe cuts to its archival services among other things in response to federal government austerity plans. Mindless is the first word that came into my head when I was listening to the program. In the case of Britain, the attacks are being dressed up as ‘welfare reform’. In the case of Australia, the spending cuts are being dressed up as ‘efficiency dividends’. The neo-liberal nomenclature is an attempt to obscure what is really going on – a massive attack on society, its disadvantaged, and its cultural institutions. Neo-liberals hate society and anything that provides inclusive access to all in the benefits that society can deliver. These cuts are deliberately targeted to reduce social inclusion and undermine information access.
This blog provides another excerpt in the unfolding story about Britain and the IMF. As I noted in this blog – The British Monetarist infestation – I am currently working to pin down the historical turning points, which allowed neo-liberalism to take a dominant position in the policy debate. In doing so, I want to demonstrate why the ‘Social Democrat’ or ‘Left’ political parties, who still have pretensions to representing the progressive position (but have, in fact, become ‘austerity-lite’ merchants), were wrong to surrender to the neo-liberal macroeconomic Groupthink. This is a further instalment of my next book on globalisation and the capacities of the nation-state, which I am working on with Italian journalist Thomas Fazi. We expect to finalise the manuscript in May 2016. In the last instalment, I traced back and demonstrated that Britain was engulfed in Monetarist thinking long before Margaret Thatcher took over. She really just put the ‘(rancid) cream on the top of the (inedible) cake’. I showed that the British Labour Party were infested with the Monetarist virus in the late 1960s and James Callaghan’s famous 1976 Black Speech to tge Labour Party Conference was just a formal recognition of that disease. It really just consolidated what had been happening over the prior decade. This historical journey also helps us understand that it was not the OPEC oil crisis in the early 1970s that provided the open door for governments to reject Keynesian policy. In Britain, the Treasury and Bank of England had fallen prey to Monetarist ideas following the elevation of Milton Friedman onto the world stage. These subsequent events just helped keep the insurgency moving until total dominance in the contest of ideas was won. Today, we start with the Bank of England’s so-called Competition and Credit Control (CCC), which was introduced in September 1971. This formalised the growing emphasis among the banking sector and economists that the central bank had to ‘control’ the money supply. It failed – but empirical failure doesn’t matter when people are becoming swamped with propaganda that says otherwise.
In 2014, it was apparent that the Bank of International Settlements (BIS) had made itself part of the ideological wall that was blocking any reasonable recovery from the GFC. I wrote about that in this blog – The BIS remain part of the problem. I was already concerned in 2013 (see this blog – Since when did the BIS become the Neo-liberal Ministry of Misinformation?). Things haven’t improved and the latest statements from the Bank in the BIS Quarterly Review (March 6, 2016) – Uneasy calm gives way to turbulence – demonstrates two things that are now obvious. First, that the neo-liberal Groupthink that created the crisis in the first place, and, which has prolonged the malaise continues to dominate the leading international financial institutions. Second, not only are these institutions (and I include the OECD, the IMF, to BIS, among this group) impeding return to prosperity as a result of their continued adherence to failed macroeconomics, but worse, their patterned behaviour actually introduces new instabilities that ferment further crises. Someone should be held accountable for the instability these organisations cause, which, ultimately leads to higher rates of unemployment and increased poverty rates.
Here are the answers with discussion for this week’s Weekend 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.
In September 2010, The Project Syndicate, which markets itself as providing the “Smartest Op-Ed Articles from the World’s Thought Leaders” gave space to Martin Feldstein – Japan’s Savings Crisis. Like a cracked record, Feldstein rehearsed his usual idiotic claims that interest rates in Japan would rise because “of the continuing decline in Japan’s household saving rate” and that “the higher interest rate would eventually raise the government’s interest bill by about 4% of GDP. And that would push a 7%-of-GDP fiscal deficit to 11%”. Then, so the story goes, “This vicious spiral of rising deficits and debt would be likely to push interest rates even higher, causing the spiral to accelerate”. At which point, Japan sinks slowly into the sea never to be seen again. It turns out that the real world is a little different to what students read about in mainstream macroeconomics textbooks. At the risk of understatement I should have said very (completely) different. Better rephrase that to say – what appears in mainstream macroeconomics textbooks bears little or no relation to the reality we all live in. Anyway, events over the last week in Japan have once again meant that this has been just another week of humiliation for mainstream macroeconomics – one of many.
After yesterday’s marathon blog, today will be easier going (and shorter). I was reading John Maynard Keynes recently – circa 1928 – that is, 8 years before the publication of the General Theory with his Treatise on Money intervening. He was railing against the principles and practice of ‘sound finance’, which he noted had deliberately caused billions of pounds in lost income for the British economy. He urged the Treasury and the Bank of England to abandon their conservative (austerity) approach to the economy and, instead, embark on wide-scale fiscal stimulus to create jobs and prosperity. He concluded that with thousands of workers idling away in mass unemployment that it was “utterly imbecile to say that we cannot afford” to stimulate employment via large-scale public works – building infrastructure etc. He considered the policy makers who opposed such options were caught up in “the delirium of mental confusion”. The stark reality is that 88 years later, he could have written exactly the same article and would have been ‘right on the money’. We are being led (euphemism) by imbeciles.
Towards the end of last year, I wrote a blog – Finland should exit the euro. I had been undertaking some detailed research on the plight of this relatively small Eurozone nation for a number of reasons. First, it had recently undergone a major industrial decline as Nokia/Microsoft missed market trends and went from world leader to irrelevance. Second, Finland was a vocal proponent of the view that Greece should be pillaried into oblivion by the Troika – to ‘take their medicine’ (more crippling austerity). Third, the data trends were unambiguously pointing to Finland descending into the Eurozone ‘basket case’ category itself as its own conservative government imposed harsh fiscal austerity on the tiny, beleagured nation. Two things are clearer than ever about the Eurozone. First, it is a dysfunctional mess and efforts to reform it so far have only made matters worse. Second, any single nation (and all together) would be unambigously better off exiting the mess and restoring their own currency sovereignty and letting their exchange rate take up some of the adjustment. The following text covers an article that I have written for a Finnish Report coming out in May 2016 to be published by the Left Forum Finland, which is a coalition formed by the political party Left Alliance, the People’s Educational Association (KSL) and the Yrjö Sirola Foundation.
Here are the answers with discussion for this week’s Weekend 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.
I have been on the search for historical turning points again today. The famous Mitterand austerity turn in 1983 is one of these points. Another, which I will consider today, was the British Labour Prime Minster James Callaghan’s speech to Labour Party Conference held at Blackpool on September 28, 1976 was laced with pro-Monetarist assertions that have been used by many on the Left as being defining points in the decline of the state to run independent domestic policy aimed at maintaining full employment. This is a further instalment of my next book on globalisation and the capacities of the nation-state, which I am working on with Italian journalist Thomas Fazi. We expect to finalise the manuscript in May 2016. Today, I am writing about the background events that turned Britain on to Monetarism. Margaret Thatcher was, in fact, a ‘johnny-come-lately’ in this respect. The British Labour Party were infested with the Monetarist virus in the late 1960s and Callaghan’s 1976 Speech just consolidated what had been happening over the decade prior. Further, it was not the oil crisis in the early 1970s that provided the open door for governments to reject Keynesian policy. In Britain, the Treasury and Bank of England were captivated by the ideas of Milton Friedman some years prior to the OPEC price push.
The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the December-quarter yesterday and annual private sector wages growth fell to 2.0 per cent (0.5 per cent for the quarter). This is the fourth consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the September-quarter 1997. Real wages in the private sector are now in decline. In the Mid-Year Economic and Fiscal Outlook published in December, the Government assumed wages growth for 2014-15 would be 2.5 per cent rising to 2.75 over 2016-17. They also assumed real wages (the difference between growth in the nominal Wage Price Index and the Consumer Price Index would be positive (0.5 per cent in 2016-17). On current trends, neither assumption will be realised, means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. There will be then the typical hysteria about the size of the fiscal deficit and the need to cut it which will be missing the point entirely. The rising deficit is just responding to a generalised decline in economic activity, falling employment and suppressed wages growth. 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.
So-called US ‘progressive’ economists arena flap at the moment after Gerald Friedman, an academic economist at UMass released a report on January 28, 2016 – What would Sanders do? Estimating the economic impact of Sanders programs – which suggested that the US economy could perform significantly better and deliver substantially improved outcomes for those disadvantaged citizens with Bernie Sanders in the White House. When I say progressive, I mean those who would consider themselves Democrat Party insiders (former Chairs of the US Council of Economic Advisers under previous Democratic administrations). Last week (February 17, 2016), they created a special Internet site to publish – An Open Letter from Past CEA Chairs to Senator Sanders and Professor Gerald Friedman – which claimed that “no credible economic research supports economic impacts” proposed by Friedman and that “Making such promises runs against our party’s best traditions of evidence-based policy making and undermines our reputation as the party of responsible arithmetic”. As if the policy-making and arithmetic of these attention-seeking (neo-liberal) Democrat insiders is anything to be guided by.
Here are the answers with discussion for the Weekend 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.
Some years ago (June 27, 2007), Harvard economist Dani Rodrik outlined what he called his “impossibility theorem”, which said that “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full”. In his brief article – The inescapable trilemma of the world economy – he made the case that “deep economic integration required we eliminate all transaction costs … in … cross-border dealings” and that “Nation-states are a fundamental source of such transaction costs”. Ergo, if you want ‘deep’ integration then the Nation-state has to surrender. His “trilemma” guides his view of how the “international economic system” should be reformed. He think that if “want more globalization, we must either give up some democracy or some national sovereignty”. This view has been adopted by political parties as if the conceptual framework is in some way binding. The trilemma has been skillfully sold as a narrative by right-wing think tanks and others who serve the interests of capital. The so-called progressive politicians have fallen into the trap and have shifted their political parties closer and closer to their right-wing opponents, such that now it is hard to distinguish between the major parties in most nations. The reality is that while the impossibility theorem beguiles the Left – its applicability as a binding constraint on government is limited. It is as vapid as the statements made by these career politicians on both sides of politics that they serve the people.
Yesterday, I briefly examined how a pack of big-noting financial market traders were trapped in stupidity by patterned behaviour and self-reinforcing group dynamics (aka Groupthink). Today, we consider the neo-liberal Groupthink that continues to trap political leaders and policy makers in Europe into a web of denial and stupidity.
In both case, innocent people have suffered huge negative impacts while, by and large, the idiots have escaped fairly unscathed. The recent data from Eurostat shows that growth is fairly flat in the Eurozone and industrial production is in recession. It also shows that the banking system is in deep jeopardy and the so-called reforms that were introduced post-GFC are not considered robust by investors. With massive bank deposit flight going on and banking share prices plunging, it is clear that the ‘markets’ have lost faith in the financial viability of the Eurozone. Meanwhile. Mario Draghi winds the key up in his back and tells the world that everything is fine and the ECB is on top of the situation. With chaos descending on the monetary union again, the ECB cannot even achieve its single purpose – a stable 2 per cent inflation rate. It has failed to even achieve that over the last four years. One couldn’t write this sort of stuff if they were trying.
Here are the answers and discussion for the Weekend 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.
There are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.
The late Canadian economist Harry Johnson, who came at the subject from the Monetarist persuasion, was correct when he wrote in 1969 (reference below) that “The adoption of flexible exchange rates would have the great advantage of freeing governments to use their instruments of domestic policy for the pursuit of domestic objectives, while at the same time removing the pressures to intervene in international trade and payments for balance-of-payments reasons.” How does this square with those who believe that even currency-issuing governments are constrained in their fiscal flexibility by an alleged balance of payments constraint. So-called progressive economists, particularly, are enamoured with the idea that Modern Monetary Theory (MMT) is flawed because it doesn’t recognise the fiscal limits imposed by the need to maintain a stable external balance. In this blog, we trace the arguments.
Wolfgang Merkel wrote in his recent Op Ed (February 5, 2016) – Economy, Culture And Discourse: Social Democracy In A Cosmopolitanism Trap? – that “we are dealing with a partially deliberate, partially careless surrender of the state’s capacity to regulate and intervene in an economy that structurally creates socio-economic inequality and erodes the fundamental democratic principle of political equality”. I highlight, the “partially deliberate, partially careless surrender” description of what has occurred over the last several decades as neo-liberalism has gained traction. Today’s blog continues my series that will form the content for my next book (due out later this year) about the impacts of globalisation on the capacities of the nation state. Our contention (I am writing this with Italian journalist and author Thomas Fazi) is that there has been no diminuition in the power of the state to impact on the domestic economy. The neo-liberal era has seen many commentators deny that proposition, yet, knowingly advocate use of these powers to further advantage capital at the expense of labour. The state is still central to the picture – it just helps capital more and workers less than it did during the full employment period in the Post World War II decades.
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.