For some years now we have been reading about how the UK has benefitted from the Thatcher reforms which involved extensive deregulation of the labour market and retrenchment of significant sections of the state. The falling unemployment rate and strong employment growth prior to the crisis were cited as evidence of the claims. Even at the height of the crisis, mainstream (neo-liberal) commentators have asserted that the UK would bounce back quickly on the back of its labour market flexibility. It turns out that new evidence released recently provides a different view of the employment creation and provides an even stronger case for avoiding cut backs in net public spending than was already obvious to those who understand how the monetary system operates. Sadly, the politics in the UK will likely blind the policy makers to the realities.

Three happenings in the last 24 hours confirm to me that neo-liberalism is alive and well in the US and the rest of the World. The first of those happenings is the almost grotesque statements coming out of the EMU about Greece. The second is the 70/30 vote supporting the re-appointment of Ben Bernanke as the US central bank boss; and the third is the US President’s State of the Union speech. I wonder how the millions of unemployed around the World would feel about any of those happenings?

In yesterday’s blog, I discussed one of the more novel ways that the conservative lobby against government spending is mobilising to present their case. In that paper, it was argued that spending “funded” by taxation is always captive to political lobby groups who ensure the government will waste spending and undermine the productivity of the economy. Alternatively, the author claimed that government spending should be disciplined by financial markets who would reduce the waste that is inherent in public outlays. While there were several flaws in the argument the one that we deal with today focuses on the assumption that financial markets allocated resources optimally.

Last weekend, the senior economics writer for the Sydney Morning Herald became a salesman. He has been seemingly recruited voluntarily into the marketing campaign for Mankiw’s economics textbooks which dominate the world supply. In his textbook the Principles of Economics, which is just palpable indoctrination, students are introduced at the outset to the 10 Principles of Economics. These principles resemble the hard sell you get from a salesperson who knows their product will not stand scrutiny but wants the commission nonetheless. But Gittins, knowing his power to influence the economic thinking among his readership, presents the principles as if they are all you need to know to understand economics. What a total con that is.

Tonight we consider the tale of two countries with some other snippets of good taste included for interest. In the last few days the Japanese government has announced the largest fiscal stimulus in its modern era (since records have been kept) while Ireland announced its 2010 budget which has been characterised as the harshest in the republic’s history. Both countries are mired in recession with only the most modest signs of any recovery. So on the face of it this is one hell of a juxtaposition. What gives?

Today I have been reflecting on minimum wages and employment. As the Australian economy slides slowly along the bottom (close to zero growth), the conservative forces are mobilising to attack the changes that the current federal government made to the industrial relations laws when they won the last election. Ex-liberal party hack (advisor) and now Director of the conservative Sydney Institute and regular Sydney Morning Herald columnist Gerard Henderson is one person who is leading the charge. While the first of the changes will not come into effect until next month, employers who have revelled in the massive redistribution of national income that the deregulation the labour market delivered to them are already enraged and looking to commentators such as Henderson for succour. The problem is that there is no argument they can make that is defensible. This will become a new battlefront for unions who seek to defend the interests of the most disadvantaged workers in the land.

Last week, the Federal Reserve chairman Ben Bernanke received endorsement for a further term from the US Senate Committee on Banking, Housing and Urban Affairs (popularly known as the US Senate Banking Committee). There is much controversy about this re-nomination along the lines that he was Chairman as the crisis unfolded and he did nothing about it until it was too late. There is also angst about his refusal to provide Congress with specific information about institutions that the Federal Reserve bailed out. These issues are not unimportant. But the strongest reason why he should be dispensed with is that his public statements leads any informed analyst to conclude that he doesn’t really understand the monetary system. From a modern monetary theory (MMT) perspective his comments on the monetary system are as sophisticated as the most flawed mainstream macroeconomics textbook.

What do you get when a bunch of former politicians who have an inflated sense of self-importance and cannot stay out of the public glare? Well one answer is nonsense. The related answer is the so-called Pew-Peterson Commission report Red Ink Rising, which was released in December 2009 with the by-line “A Call to Action to Stem the Mounting Federal Debt”. And with the Copenhagen climate change talks being the big public interest story of the week it was only a matter of time before soon goon started mapping the public debt-hysteria debate into the climate change debate to bring home the message to all of us that we are doomed unless we do something drastic. Its been quite a day down here!

In Sunday’s New York Times, the Room for Debate series focused on one of my favourite topics – Should Public-Sector Jobs Come First?. The debate turns out to be very disappointing because even the so-called progressive offerings fall short of advocating an effective solution to the jobs crisis. Only one implies an understanding that the policy design proposed should not be compromised by an errant understanding of the way the fiat monetary system operates. Proposals that assume there is a financial constraint on government will almost certainly be second-rate. The debate could have been energised had the NYT sought expert opinion from those that are developing and implementing large public sector employment programs.

Several readers have written to me asking about the Ricardian equivalence theorem, which is increasingly getting mentioned in the media and public policy reports. As I will explain, the theorem is used by anti-government proponents to argue that fiscal deficits are counterproductive and that cutting deficits in the middle of a recession will actually be good for the economy. They never really give up, do they? The theorem is a good example of the general mainstream approach where stark policy conclusions are derived which capture the popular debate but the underlying assumptions that are required to generate those conclusions are rarely widely known or mentioned in the popular press. Of-course, if the public understood these underlying assumptions then they would not take the conclusions seriously.

It’s Friday and today has been very hot (nigh on 40 Celsius). One could also easily get hot (under the collar) just engaging in one’s daily reading given the amount of misinformation and sheer terrorist journalism and public commentary there is at present. The IMF released its latest Economic Outlook calling for a general return to surpluses. Why have we fallen prey to this insidious notion that government surpluses are normal and deficits are for fighting fires? In fact, the latter is more the truth. Surpluses are only required if the external sector is so strong that the economy will overheat if the government doesn’t drain private purchasing power. Anyway, I just stay calm through it all … like any good modern monetary theory (MMT) soldier. There is a war going on out there in ideas land and cool heads are needed.

Late this afternoon I appeared on ABC Radio National Saturday Extra at a public forum on the future of coal that was held at Fort Scratchley which is near my favourite surf beach in Newcastle (Nobby’s). The site is near the mouth to the Newcastle Port which is the World’s largest coal export port. The program will be broadcast this coming Saturday (see link) but there was a public audience (to heckle the Minister!) present. They filmed the forum and it will be available via podcast sometime later. But that is not the topic of today’s blog. It is about another Nobel Prize winner.

Today we consider the current debate about whether we need to return to fixed exchange rates and create a new reserve currency for the World – which might even be a supra-national currency. In general terms the calls for these sort of reforms reflect a misunderstanding of how a modern currency operates and also the opportunities the fiat monetary system presents to a national government which desires to advance public purpose (full employment and price stability). The claims for this type of currency reform also reflect serious misunderstandings about trade and the financial flows which accompany trade. More worrying is that the fixed exchange rate call is becoming a cause celebre for progressive economists who see flexible exchange rates as somehow a cornerstone of a neo-liberal free market plot against prosperity. Talk about being misguided. So this blog introduces these issues – and will probably be the first of several on the topic.

Today’s meeting in Almaty will be discussing how the CAREC countries, that I are working with at present via the Asian Development Bank, can best achieve regional cooperation and integration. The region is very interesting and I will report more fully when things are more clear. But the challenges these countries face are exacerbated by the grip that market liberalism has on them. This is especially to be understood in the context of the Soviet heritage of most of these countries. There is a curious mix of past and present which makes market liberalism even more dangerous. So what? Well, I have been asked by many readers about Latvia, another former Soviet satelite. The deep crisis that economy is enduring is a good example of how market liberalism has failed. Yet, depressingly, the solutions proposed involve more of the same. Modern monetary theory (MMT) clearly offers an alternative and much more productive alternative recovery path.