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.
Its my Friday lay day blog, which is sort of a dodge that allows me to be less focused. I have been holding my pen about Greece in abeyance lately until more details became clearer about what is going on in the so-called ‘negotiations’, which seems to be a euphemism so ugly given the reality that perhaps a new descriptor should be introduced. As the specific details emerge more clearly, the situation remains much the same as it was in January when the new Greek government was resoundingly elected to end austerity. Either the Greek government has to abandon its electoral mandate and capitulate and become just another ‘left-wing’ government overseeing the punishing austerity inflicted by the neo-liberal ideologues or it has to show leadership and take the nation out of the dysfunctional Eurozone and pursue its own path to more prosperous, if uncertain, times. Part of that leadership has to be to educate the public as to what the options are in a balanced rather than hysterical way. I have heard Syriza politicians claim that leaving the union would be catastrophic, which is not only false but just reinforces the public fear of exit. Further, all the nominations in February from Syriza politicians that the ‘negotiations’ to that date had been “successful” (Source), which any reasonable interpretation would have led to the conclusion that austerity was about to end in Greece, the reality now, is that the Greek government appears to be slowly capitulating to the venal demands of the Troika and the future for Greece is likely to be one of interminable economic stagnation, increasing poverty and rising social instability. But, hey, that is what success seems to mean now in this dark-age of Eurozone realities. If there weren’t real people involved in this tragedy, this could be a top selling farce.
Dutch economist Jan Pen wrote in his 1971 book – Income Distribution – that “Parents are advanced secret agents of the class society”, which told us emphatically that it was crucial that public policy target disadvantaged children in low-income neighbourhoods at an early age if we were going to change the patterns of social and income mobility. The message from Pen was that the damage was done by the time the child reached their teenage years. While the later stages of Capitalism has found new ways to reinforce the elites which support the continuation of its exploitation and surplus labour appropriation (for example, deregulation, suppression of trade unions, real wage suppression, fiscal austerity), it remains that class differentials, which have always restricted upward mobility and ensured income inequality and access to political influence persist, are still well defined and functional. This was highlighted in a new report published by the the American Economic Policy Institute (EPI) – Early Education Gaps by Social Class and Race Start U.S. Children Out on Unequal Footing (June 17, 2015). Not much has changed it seems for decades.
The OECD has just published a new Economic Policy Paper (June 2015) – Finance and Inclusive Growth – which challenges the notion that the financial market deregulation in the period prior to the GFC, which led to a rapid increase in the absolute and relative size of the financial sector, was beneficial. It argues that in the aftermath of the credit binge, with the private sector overladened with debt, further credit “expansion is likely to slow rather than boost growth”, particularly if taken up by households. The research also shows that “Financial expansion fuels greater income inequality” and that government needs to reform the sector to stabilise growth and reduce inequality. What the paper doesn’t say (it is the OECD after all) is that their research also undermines arguments that it is better to base growth on private debt accumulation rather than public debt accumulation which matches deficits. Thus strategies in place in Australia, the UK and the Eurozone for governments to pursue surpluses which then require the private sector to increase debt to drive consumption are fraught and will ultimately fail. Again!
I have received a lot of E-mails over the weekend about a paper released by the CEPR Policy Portal VOX (June 20, 2015) – Can central banks avoid sovereign debt crises? – which purports to provide “new evidence” to support the conclusion that “the ability of the central bank to avert a debt self-fulfilling debt crisis is limited”. It is another one of those mainstream attempts to brush away reality and draw logical conclusions from a flawed analytical framework. When one digs a bit the conclusion withers on the vine of a stylised economic model that leaves out significant features of the monetary system – such as for starters, a currency-issuing government can never go broke in terms of the liabilities its issues in its own currency. All the smoke and mirrors of stylised New Keynesian mathematical models cannot render that reality false.In other words, the paper and the lineage of papers it draws upon should be disregarded by anyone who desires to understand how the monetary system operates and the capacity and opportunities that the currency-issuing government (including its central bank) has within that system.
There was a most extraordinary Opinion piece in the British paper The Independent last weekend (June 13, 2015) – Labour should have managed the economy better when in power. It was written by the aspiring Labour spokesperson on business, innovation and skills, one Chuka Umunna, who in the days following their electoral loss advanced his name for leadership. His outlook, inasmuch at it represents where the British Labour Party is heading will render them irrelevant for years to to come (the Tories do this stuff better) and is almost indistinguishable from the growth strategy advanced by the Conservative Australian government in its most recent fiscal statement – more private debt driven by fiscal surpluses. We have been there before – it turned ugly as it always was going too. It is quite clear that comprehension of basic macroeconomics is light on the ground when it comes to Umunna and his ilk. A very sorry state.
Back in 2010, in the early days of the GFC, the then Australian Labor government was weathering a conservative storm for daring to introduce a large-scale (and rapid) fiscal stimulus. The package had several components but the most controversial were the decision to introduce a homeinsulation program to create jobs quickly but leave a residual of green benefits (lower energy use in the future). The program had problems but still produced fantastic macroeconomic benefits. It was little wonder that the program stumbled operationally given its complexity and the degraded capacity of the Federal public service, which has been degraded by several decades of employment cuts and restructures under the neo-liberal guise of improving ‘efficiency’. However, that mantra might be finally turning. An article in the right-wing Australian Financial Review (June 14, 2015) – Time to end outsourcing and rebuild the public service – made the extraordinary argument for that publication that public service employment had to increase to allow the government to do what the Federal Communications Minister calls “the legitimate work of the public service”. Wonders never cease.
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.
Its my Friday lay day blog and today a brief discussion about property price bubbles and how the Reserve Bank of Australia (our central bank) has fallen out with the Australian government. This week, the simmering tension between the Governor of the RBA and the Conservative Australian government more or less came out into the open when the Governor told the nation that the fiscal strategy of the Government was failing and a higher deficit was required given the circumstances. The RBA Governor has also come clean on the issue of house prices in Australia which he said he was “acutely concerned” about and called them “crazy” again, a direct contradiction of the claims by the Government that there is no problem and people should just “get a better paying job” if they wanted to buy a home. It is rare for a central banker to be so pointed about the failure of Government policy.
Today’s release of the – Labour Force data – for May 2015 by the Australian Bureau of Statistics shows that the Australian labour market was stronger than last month, when it contracted. The data continues the repeating pattern over the last 24 months or so where employment growth zig-zags around the zero line and is weak at best. Overall employment growth was relatively strong, although most of the gains were in part-time work. There was minimal shift in working hours. The unemployment rate fell to 6 per cent, which was where we were a year ago. Underemployment was unchanged over the last three months. Teenagers did not participate in the growth and that segment of the labour market remains in a parlous state and requires an urgent policy intervention. In general, there remains a need for more job creation stimulated by an increased federal government deficit.
When I was studying in the UK during the dark Thatcher years there was a rat plague in Manchester. The reason was traced to the public spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester. Later that year (December 1982), there were 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 latest focus in Britain is on rising waiting lists in hospitals and increasing violence in prisons. All these examples of austerity compound and reverberate throughout society in countless little ways that accumulate to one huge mess. The Thatcher years were highly destructive for the well being of the British people contrary to the myths that the conservatives pump out. The current period will be of a similar ilk. And spare a thought for the long-term damage in places like Greece! It is beyond belief.
There was an interesting if not ego-centric interchange last week involving the New Keynesian economist Paul Krugman and others about whether the sort of macroeconomic policy positions one takes is more motivated by ideological motives (about the desirable size of government) rather than being evidence-based. Apparently, if you support austerity it is because you really just want smaller government and vice versa. This is an oft-stated claim made by conservatives. That if you support fiscal stimulus and government regulation that you are automatically in favour of big (intrusive) government. The point is not valid. Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government.
It is a public holiday in Australia today – Queen’s Birthday, a reflection of our past as a colony. Not a lot has actually changed and we still cannot shed the monarchy. Anyway, not many people reflect on the monarchy today given it is deep winter and football matches are on as part of the holiday. But in keeping with the holiday spirit, I will only write a short blog today. The topic is why no-one should vote for the Australian Labor Party although the argument is applicable to all parties like it, who formerly represented the interests of workers and who are now dominated by politicians who have embraced the neo-liberal macroeconomic myths as if they are truths and, if that wasn’t bad enough, have become active proselytizers of this destructive religion. I might write a few words about the on-going Eurozone saga too, given the extraordinary comments by leading European politicians overnight. Then I will head like thousands of others to the football!
Its my Friday lay day blog but no rest for the wicked today. The Fair Work Commission, the Federal body entrusted with the task of determining Australia’s minimum wage handed down its – 2014-15 decision – on June 2, 2014. Here is my annual review of that decision plus some. The decision meant that more than 1.86 million of our lowest paid workers (out of some 11.6 million) received an extra $16.00 per week from July 1. This amounted to an increase of 2.5 per cent (down from last year’s rise of 3 per cent). The Federal Minimum Wage (FMW) is now $656.90 per week or $17.29 per hour. For the low-paid workers in the retail sector, personal care services, hospitality, cleaning services and unskilled labouring sectors there was no cause for celebration. They already earn a pittance and endure poor working conditions. The pay rise will at best maintain the current real minimum wage but denies this cohort access to the fairly robust national productivity growth that has occurred over the last two years. The decision also maintains the gap between the low paid workers and other wage and salary recipients, who themselves are suffering a major wages squeeze as corporate profits rise. The real story though is that today’s minimum wage outcome is another casualty of the fiscal austerity that the Federal Government has imposed on the nation which is destroying jobs and impacting disproportionately on low-paid workers.
There were three new data and analysis releases in the past week in advanced Western nations (the US, the UK and Australia) that indicate that the policy settings that are in place are not delivering prosperity and should be changed to allow governments more fiscal freedom to stimulate growth. But while these nations continue, variously, to endure the costs that the wrongful policy settings have wrought, a World Bank report issued last week (May 27, 2015) – Economic Monitoring Report to the Ad Hoc Liaison Committee – allows us to understand a little bit (in numbers and narrative) the terrible (“staggering”) cost of the blockade on the Gaza economy and living standards of the Palestinian people in that region. The plight of the advanced world is nothing by comparison, not that I want to get into a relativist defense of the situation in the advanced world.
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 am continually amazed at the arrogance of the Eurozone leaders who in the face of palpable professional failure hold a straight face and continue to advocate the same disastrous policies as if nothing had happened over the last 7 years. I don’t believe they suffer from – cognitive dissonance. I think they know full well what they are doing and they personally do very well out of the chaos their policies are causing. But it is almost certain that the Greek people are suffering from a cognitive disorder brought on by historical experience and, more recently, by the media onslaught that has erroneously claimed that there would be catastrophic consequences if Greece dared to leave the Eurozone and restore currency sovereignty. The stated aims of the Greek people are incommensurate and there doesn’t appear to be a broad debate going on in Greece, which might make that inconsistency transparent.
The ECB had another lavish annual talkfest in Portugal over the weekend just gone in the guise of their – Forum on Central Banking. Like all these EU-type gatherings there was plenty of fine food and wines. They even provided footage along those lines. The President of the ECB Mario Draghi gave the opening speech – href=”http://www.ecb.europa.eu/press/key/date/2015/html/sp150522.en.html”>Structural reforms, inflation and monetary policy – on May 22, 2015. There was also talk about how “structural and cyclical policies … are heavily interdependent” but then a denial of the same. The message from the President was like a record stuck on the turntable – “to accelerate structural reforms in Europe … even in a weak demand environment”. Well here is my message – similarly like a stuck record – structural imbalances occur because of weak demand and the best time to assess structural policy is when you have first attained full employment by appropriate setting of fiscal deficits, not before. It is madness to deliberately constrain fiscal balances to levels that ensure high and entrenched unemployment and rising underemployment and then expect citizens to support microeconomic policies that further undermine their welfare and damage what job security they have. But that is the EU way and that is why the Eurozone is a massive basket-case failure.
One of the on-going themes that emerges from the neo-liberal commentariat is that fiscal deficits undermine the future of our children and their children because of the alleged higher implied tax burdens. The theme is without foundation given that each generation can choose its own tax structure, deficits are never paid back, and public spending can build essential long-lived infrastructure, which provides benefits that span many generations. The provision of a first-class public education system feeding into stable, skilled job structures is the best thing that a government can do for the future generations. Sadly, government policy is undermining the future generations but not in the way the neo-liberals would have us believe. One of my on-going themes is the the impact of entrenched youth unemployment, precarious work and degraded public infrastructure on the well-being and future prospects of society as neo-liberal austerity becomes the norm. This theme was reflected (if unintentionally) in a new report, release last week by the OECD – In It Together: Why Less Inequality Benefits All. The Report brings together a number of research findings and empirical facts that we all knew about but are stark when presented in one document.
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.