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 and I am trying to finish one paper that is due and also prepare the presentations that I will be giving in Finland next week. But I was reading a Briefing Paper (No 406) from the US Economic Policy Institute (published September 2, 2015) – Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay – that resonated with me today. One of the defining characteristics of the neo-liberal era has been the divergence between real wages growth and productivity growth. It has been a deliberately engineered divergence as policy makers have shifted from mediating the distributional struggle between labour and capital to being ‘pro-business’ and introducing a range of initiatives that have allowed capital to gain greater shares of national income and build a booty that has then been pumped into the increasingly deregulated financial markets. Oh, and to allow the bosses and their managers to take out obscenely high salaries and swan around in private jets. The dynamics unleashed by these distributional shifts helped cause the Global Financial Crisis. A sustainable recovery with progressive outcomes (reductions in income inequality etc) will only be possible if Governments abandon the ‘pro-business’ bias and instead introduce policies that ensure real wages grow in line with productivity (along with other changes).
In Part 1 of this two-part blog I laid out a general analytical framework for considering fiscal rules that might allow governments to borrow for infrastructure as long as all current expenditure is at least matched by taxation and other current receipts. This is more or less the rule that the British ‘Charter of Budget Responsibility’ imposes and the approach that the new (previously called radical left) British Labour Party leadership aspires to obey. I use previously called ‘radical left’ advisedly because as the days pass the utterances of the economic leadership make it difficult to differentiate between Labour and the Tories. The main difference appears to be the worn out “we will tax the rich and the crafty tax dodgers to balance the budget”. A nonsensical stance for a progressive political force and verges on Game Over syndrome. John McDonnell’s presentation to the National Labour Conference yesterday was a further walk into obscurity. By claiming they are not “deficit deniers” and will close the deficit as a priority they have walked right through the Tory framing door. Not lingered on the doorstep and then sought more salubrious premises. But they are right inside – trapped into the same mantra – yes, they will cut the deficit but it will be a fairer cutting. The rich will pay. And pigs might fly.
In the UK Guardian article (September 26, 2015) – John McDonnell: Labour will match Osborne and live within our means – analysis of the position being taken by the new Shadow Chancellor in Britain, John McDonnell was provided. I have to say it seems to have caused some serious conniptions among those disposed to Modern Monetary Theory (MMT) if I am to judge by the E-mails I have received in the last 36 hours and the tweeting activity that followed the publication. But if we consider what he said carefully, it may not be as bad as the Guardian headlines suggest. However, his statement discloses a deep insecurity in the Corbyn camp that leaves them adopting fiscal rules that are the hallmark of the neo-liberals. It retains focus on the fiscal balance, however, decomposed into current and capital, whereas the focus should be on creating full employment and prosperity. The adoption of the Tory fiscal rule – the so-called – Charter of Budget Responsibility – still provides some flexibility for government to avoid harsh austerity. However, it can easily become a source of unnecessary rigidity, which prevents the government from fulfilling its responsibilities to advance welfare. Overall, the insecurity it betrays is the worrying part of this statement. This blog is in two parts – today is more conceptual (and longer). Tomorrow – will be more empirical (and much shorter). We will conclude that the British Labour Party is mad to sign up to the ‘Charter of Budget Responsibility’, which is a chimera – it is not a responsible framework at all.
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 and I have several deadlines on other projects coming up like today even! But I am sick of the Economist Magazine being held out as a voice of moderation and sound analysis. It has always been a merchant of so-called free market myths and adopting the conservative, anti-government intervention line. It claims that it “offers authoritative insight and opinion on international news, politics, business, finance, science and technology”. It frothed lovingly when Margaret Thatcher was running her wrecking ball through the UK under the guise of ‘reform’. It didn’t say a word when the financial market deregulation that her government and its successors, including Tony Blair’s New Labour, set in place and fostered, started to turn ugly well before the crash that started the GFC. It is not moderate at all. It has come to the Attack Corbyn Campaign somewhat later in the piece but better late than never I suppose. It article (September 24, 2015) – Murphy’s law unto himself – is a disgrace. Its reveals that the Econmomist is a tawdry little rag that feigns understanding but reveals ignorance. This article is really just a spewing out of some poor undergraduate mainstream macroeconomics textbook chapter or two without any guile or deeper comprehension.
Last weekend, the Greece people (or a declining proportion of them) elected a new national government. It was a farce. There was no competing electoral mandates sought. The population know what is in store for them. The policy mandate in force wasn’t even supported by popular vote. It comes from the Troika, which now effectively governs the Colony of Greece. The new Prime Minister, who sold the people out prior to the election, is now talking about making changes. Yeh, right! He is now just a tool for the Troika. National elections where the people do not vote for anything much don’t look like a healthy democracy to anyone who isn’t in denial as to what has been going on. Democracy is about the people being able to change governments that do them harm. In the Eurozone that is an old-fashioned idea. National elections have become a sop, a pretense. And the people knew it and stayed away in droves. The Greek election was a total farce – democracy died.
Last week (September 17, 2015), the US Federal Reserve Bank took the sensible decision to leave the US policy interest rate unchanged. Nine of the ten Federal Open Market Committee (FOMC) voted accordingly. One dissenter wanted rates to rise by 25 basis points. The central bank made the correct decision, even if you might like to question their reasoning. The decision has not pleased the financial markets who have been baying under the moon for months if not years for interest rates to return to higher and more stable levels. There is no surprise in that. They make more profits under those conditions and when there are low rates and higher uncertainty about their direction (and adjustment speed), profits come less easily. Further, they long for what they call “normal levels” of interest rates despite the fact that reality changed with the GFC and we now know that monetary policy is relatively ineffective as a policy tool for controlling or influencing aggregate spending. And it is typical that they ignore the millions of people who remain idle in one way or another and are enduring flat real wages and rising poverty rates. There is no old “normal’ now. Things have changed.
It has been an interesting period watching the various ruses that conservatives are bringing to bear to attack Jeremy Corbyn and, somewhat unrelated, try to justify why the US Federal Reserve Bank should be raising interest rates. I will deal with the latter issue another day. Apparently, the grass roots rise of Jeremy Corbyn to leadership of the British Labour Party is actually a demonstration of the “rise of groupthink” in British politics and “threatens Britain’s membership of the EU – and the United Kingdom itself”. Indeed, more Corbynsteria as the terminology goes. This quietly-spoken British man seems to have a lot to answer for after having the audacity to intervene in the cosy little neo-liberal world of British party politics (Tory and New Labour). But the part that interested me was that the author – who is employed by the lofty sounding but usually disappointing, British-based Centre for European Reform (which gets funding because it is a mouthpiece for pro-European integration) – considers Corbyn has been the beneficiary of a new found groupthink. It beggars belief really.
Last week (September 17, 2015), the European Commission announced – Long-term unemployment: Europe takes action to help 12 million long-term unemployed get back to work. The press release summarised the latest proposal from the European Commission – On the integration of the long-term unemployed into the labour market – which outlines a series of initiatives that aim to “to better help long-term unemployed return to work”. I studied the proposal in detail and came to a stark conclusion – there is nary a job in sight!
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.
One cannot but be very happy that Jeremy Corbyn has assumed leadership of the British Labour Party if you sit on the progressive side of politics. His elevation to the top job has all but closed the door on the compromised years of New Labour. The so-called Blair-ites have been declared yesterday’s new and not before time. Their embrace of neo-liberalism and the ‘light touch’ approach to the financial sector allowed the destructive period set in place by Margaret Thatcher in the 1980s to become more intense (for example, the decline of manufacturing and the increasing dominance of the unproductive financial sector). But as I have indicated before, some of the language and promises coming out of the Corbyn camp appear to be within the neo-liberal paradigm and, in many ways, not an advance on the New Labour shemozzle. I know that the claim will be that they have to be cautious for political reasons not to open themselves to attacks from the conservatives given the public fear of fiscal deficits, after years of indoctrination. But then their claims to be heralding in a ‘new politics’ would seem to be rather lame if they are prepared to lie or obfuscate about the role and meaning of fiscal deficits just to get some political advantage. Further, at some point they will have to take this issue on if they want to forge a truly progressive new political agenda. Otherwise, they will wallow in the confused space where they cannot break out of the neo-liberal mould while banging on about how fair they will be. They have five years before the next election – and that is plenty of time to reeducate the public. That process of messaging and re-framing should start now. Accordingly, they should take the political flack now and trust in their messaging and re-framing.
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.
It is my Friday lay day and I am quite distracted with other commitments. But at the London presentation a few weeks ago, I mentioned that I would scrap central banks and consolidate their functions within a division of what we now think of as Treasury departments (or Finance Ministries). Whenever you say that there is a ridiculous response from those who claim to know something about banking along the lines of either, it would cause hyperinflation or that the politicians cannot be trusted. Both arguments are as I say – ridiculous. There are some things that central banks do that are necessary, for example, maintain financial stability through the integrity of the payments system. They also, depending on the nation, manage foreign reserves although that function is unnecessary if exchange rates float. Yes (flame suit on) I know less developed countries face exchange rate volatility and have to import food to survive. Which brings me to the point. The first part of scrapping central banks is to eliminate their ideological/political function. They are bastions of conservative mythology – pick whichever one you like – expanding the money supply is inflationary, ‘printing money’ is inflationary, politician meddling in monetary policy is inflationary, financial markets will desert a country that does not have an independent central bank, etc ad nausea. Politicians also use the so-called independence of the central banks as a way of deflecting policy responsibility for mass unemployment. Modern Monetary Theory (MMT) does not advocated doing away with the functions that are legitimately performed within the current central banks. It would stream-line some and make other functions redundant, but what it would do away with is this incessant cycle of ideology that emanates from these institutions.
There is no detailed blog today as I am travelling from Brussels to Sydney. I will resurface again on Tuesday after the long flight. When I wrote my blog on Friday documenting the austerity tour around Porto I forgot to mention a few things. This blog adds some more observations I have made of conditions in this part of the world at present.
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.
At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF). Surprisingly there was some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.
Today, is the official launch of my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in Maastricht, which is an appropriate geographic location given the book proposes to dismantle the Eurozone. It just happens to be the place (Maastricht University), where we established CofFEE-Europe (a sister centre to my research centre in Australia). There are two excellent guest speakers (see below) and I am very grateful that they agreed to accept the invitations. The upshot is that I haven’t all that much time today. Over the next few days I will address some points that were raised in question time or at the reception (aka cup of tea and cakes) after the event in London last Thursday evening. There is still work to be done if the progressive side of politics is to fully understand Modern Monetary Theory (MMT) and the implications of it for policy development and choice.
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.
Greetings from London in the early morning! If we went back a few years and dug out all the predictions and scare campaigns that were being issued by mainstream economists and their conservative ‘think tank’ conduits about the impending disaster that would accompany the near zero interest rate regimes that the US Federal Reserve Bank had implemented it would make a great comedy sketch. There should be no surprise with the massive predictive failures of the mainstream economists in this regard. They clearly did not understand the underlying dynamics that govern the way the central bank interacts with the commercial banks. The problem is that these conservative forces are so dumb they don’t have adaptive learning mechanisms and so even in the fact of evidence contrary to their Groupthink they keep pumping out the same nonsense. The other problem is that they tend to be well funded by the right-wing establishment that they exhibit disproportionate influence on the public policy debate. That influence has turned to demands that the US Federal Reserve Bank (the central bank) increase interest rates and reverse its quantitative easing – apparently because hyperinflation is just around the corner. Nothing could be further from the truth. At present the US economy is some way into a very slow and relatively tepid recovery. But it has still some way to go and while interest rate changes have a relatively weak impact on overall growth any anti-growth noise is undesirable. It is also not justifiable given the central bank’s own logic.