Japan demonstrates the real limits on government spending

Last week, Reuters put out a story (October 30, 2014) – Special Report: Tsunami evacuees caught in $30 billion Japan money trap (thanks Scott Mc for the link) – which provides an excellent demonstration of the true limits of government spending in a currency-issuing nation. The underlying principles should be understood by all as part of their personal mission to expel all neo-liberal myths from their thinking and to help them see the nature of issues more clearly. Unfortunately, the application we will talk about is sad and has tragic human and environmental consequences, but that doesn’t reduce the relevance of the example for conceptual thinking. In a nutshell, the central Japanese government has transferred some $US50 billion worth of yen to the local government to combat the destruction caused by the tsunami in March 2011. Thirty billion is unspent despite people still living in temporary housing and suffering dramatic psychological trauma as a result. Why is this happening? Doesn’t Modern Monetary Theory (MMT) tell us that a currency-issuing government can spend what it likes? Well, not exactly. What MMT tells us is that a currency-issuing government can purchase whatever is for sale in its own currency and that propensity is limited by the availability of real resources. Here is a classic demonstration of the limits of government nominal spending.

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The secular stagnation hoax

Last year, the concept of secular stagnation was reintroduced into the economics lexicon as a way of explaining the lack of growth in advanced nations. Apparently, we were facing a long-term future of low growth and elevated levels of unemployment and there was not much we could do about it. Now it seems more and more commentators and economists are jumping on the bandwagon such that the concept is said to be “taking economics by storm” – see Secular Stagnation: the scary theory that’s taking economics by storm. The only problem is that it first entered the economics debate in the late 1930s when economies were still caught up in the stagnation of the Great Depression. Then like now the hypothesis is a dud. The problem in the 1930s was dramatically overcome by the onset of World War 2 as governments on both sides of the conflict increased their net spending (fiscal deficits) substantially. The commitment to full employment in the peacetime that followed maintained growth and prosperity for decades until the neo-liberal bean counters regained dominance and started to attack fiscal activism. The cure to the slow growth and high unemployment now is the same as it was then – government deficits are way to small.

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Saturday Quiz – November 1, 2014 – answers and discussion

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.

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Self-imposed corporate regulations control workers but choke productivity

Two new industries have emerged in this neo-liberal era. The first is what I call the ‘unemployment’ industry, which operates to case manage the unemployed that poorly crafted fiscal policy has deliberately created and entrenched into our modern societies. A whole parasitic array of private providers get paid by the government to coerce and threaten the unemployed under the guise of retraining them for jobs. I wrote about this scandal in this blog – Why we should close the ‘unemployment industry’. In the last few days, a new industry has been identified which employs over a million people in Australia, making it one of the largest sectors, although no official data is published on it. This sector has been labelled in the press this week – the ‘red tape’ industry or the ‘compliance sector’. It is growing faster than any other industry in Australia and probably elsewhere, although there is no data available that can tell us that. It is largely unproductive because it undermines the productivity of other workers. Red tape, compliance, must be the public sector once again imposing its heavy hand on private endeavour, right? Wrong, the neo-liberals not only created and expanded a moribund and dysfunctional financial sector but has also created the red tape industry as it seeks to control workers down to the smallest degree. Hilarious really if it wasn’t so wasteful and hypocritical.

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The case of the financial commentator who turned into a banana

Today, I am writing about the mysterious case of the financial commentator who turned into a banana. It happened around 4.5 years ago and has left a disturbing trail of comedic predictions. The person in question still looks a little like he used to although he has clearly become a piece of fruit. Anyway, some further analysis will help us track down the culprit. In simple terms, the perpetrator is that familiar neo-liberal groupthink that we know so well. The commentator was so imbued with it that he turned into a banana. Read on, it is a terrifying tale.

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Eurozone households still highly vulnerable to bankruptcy

The ECB recently released a Working Paper – Financial Fragilty of Euro Area Households – which attempts “to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household”. The paper uses survey data based on a sample of 51,000 households in 14 Euro nations. Taken at face value, the research provides some interesting and, perhaps, unexpected outcomes with respect to where the vulnerability lies. On the back of further damaging news about the economic prospects for Germany, the ECB research should, but won’t, motivate a major shift in German government policy towards stimulus. But then the head of the Bundesbank claims that stimulus is not required because Germany is travelling at normal capacity. The data would suggest otherwise and the ECB research would suggest that Germany is very vulnerable to a further recession.

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Eurozone battle lines being drawn again with Germany on the other side

The battlelines between the European Commission and France and Italy over the – Corrective arm – of the Stability and Growth Pact are firming up after the Italian Government publicly released a ‘strictly confidential’ letter from the Vice President of the European Commission – La lettera della Commissione Europea all’Italia – on the homePage of the Ministry of Economy and Finance late last week. The European Commission expressed hostility towards the Italian government hinting that there was a lack of trust involved. Nothing could be further from the truth. The fact is that the Commission wants to keep its dirty work away from the public eye because it knows that deliberately creating unemployment and poverty is not exactly an endorsement for its common currency model. But this little skirmish last week between the technocrats and the Italian government is just part of a war that is to come over the implementation of the Excessive Deficit Procedure in both France and soon, Italy. We have been here before – 2002-03 – but this time, Germany was in the trenches with France. Now it is playing the role of the enforcer. It all goes to show however, if we ever needed reminding what a sorry, failed enterprise the Eurozone actually is.

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Saturday Quiz – October 25, 2014 – answers and discussion

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.

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The UK recovery is a false dawn

A few weeks ago (October 1, 2014), I wrote in this blog – British economic growth shows that on-going deficits work – that the British Chancellor was overseeing an expanding fiscal deficit and public debt ratio, which despite the rhetoric to the contrary, was supporting growth and helping private households increase their saving ratio. The national accounts and public finance data could not support the claim that it was austerity in the UK that was promoting growth. But in drawing that conclusion, I certainly didn’t want to give the impression that the conduct of macroeconomic policy in the UK was appropriate. The point was that growth, albeit tepid, was occurring in the UK and it was not in an environment where the fiscal deficit was being cut. The fact is that the UK economy is in a parlous
state and such that the word recovery is a totally misleading descriptor for what is happening.

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The German ship is sinking under the weight of its own delusions

Eurostat’s recent publication (October 14, 2014) – Industrial production down by 1.8% in euro area – rightfully sends further alarm bells throughout policy makers in Europe, except I suppose Germany where denial seems to be rising as its industrial production levels fall to performance levels that the UK Guardian article (October 9, 2014) – Five charts that show Germany is heading into recession – described as being “shockingly poor”. The Eurostat data shows that industrial production fell by a 4.3 per cent – a very sharp dip in historical context for one month. Vladmimir Putin and ISIL are being blamed among other rather more oblique possible causes. But the reality is clear – the strongest economy in the Eurozone is now faltering under its own policy failures.

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MMT – lacks a political economy?

There was a ‘Guest Editorial’ published on the UK site Renewal last week – Modern money and the escape from austerity – by one Joe Guinan, who lists himself as a Senior Fellow at The Democracy Collaborative and Executive Director of the Next System Project. He is a journalist by background. Renewal is a “A quarterly journal of politics and ideas, committed to exploring and expanding the progressive potential of social democracy”, so it would seem to be wanting to head in the right direction, which reflects my values. The article’s central message is that “Modern monetary theory destroys the intellectual basis for austerity but needs a more robust political economy”. It is a serious embrace with our ideas and it is welcome that Modern Monetary Theory (MMT) is entering the progressive debate in a thoughtful manner and being advanced by others than the small core of original developers (including myself) who, in turn, built the ideas on the back of others long gone. The problem is that I don’t necessarily agree with many of the propositions advanced in the article. Here are a few reasons why.

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Rising long-term unemployment a sign of policy failure

While the Australian government ramps up its war on terror rhetoric and sending our armed forces to Iraq again, thus providing a major political diversion from their virtually complete policy failure on the socio-economic front, the data keeps coming which highlights the failure of successive federal governments in this regard, the current regime included. The latest – Poverty in Australia report, published by the Australian Council of Social Service (ACOSS) – shows that poverty is rising in Australia with 13.9 per cent of all people living below the poverty line (17.7 per cent of children). The poverty rate has risen by 0.9 per cent since 2010.

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Friday lay day – ABS funding should be appropriate and access free

Its my Friday lay day blog and my mini-topic today is a left-over from yesterday’s commentary on the latest Labour Force data from the Australian Bureau of Statistics. The last few months data has been very volatile and the ABS has finally admitted that their seasonal adjustment techniques have not delivered realistic estimates of employment (and hence unemployment). This matters because many sectors and people use the summary aggregate statistics produced by the ABS, such as the headline unemployment rate for all manner of purposes, some of which are more important than others. The Federal Treasurer’s response to the issue has been predictably asinine. This is a person who has cut the national statistical agency’s budget by more than $68 million in the last year. His solution – force a user-pays regime onto the ABS so that we will have to pay to access their data to work out what is going on in our nation. It has been done before by conservative Australian governments, in part to reduce the flow of information but also, more mindlessly, to ‘save’ money – in a currency that the government issues! That is how mindless neo-liberal bean counters get.

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Australian labour market – deteriorating

Today’s release of the – Labour Force data – for September 2014 by the Australian Bureau of Statistics provides a major revision to the data set, which corrects for the extraordinary (and unbelievable) rise in part-time employment and the decline in unemployment that was published in the August release. For more explanation see below. Today’s more realistic results confirm what we have known for some time – the labour market continues to be in a weak state. Total employment fell by 29,700 this month and unemployment rose by 11,000. The rise in unemployment would have been worse had not the participation rate fell by 0.2 percentage points, which just means that hidden unemployment has risen. To complete the story, total hours worked fell by nearly 1 per cent. The revisions to the data confirm that claims last month that the economy was improving and the that the Government’s strategy (what strategy you may ask!) is working are false. The sudden jump in employment published last month was a statistical artifact and has vanished into the reality of the situation.

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The myopia of neo-liberalism and the IMF is now evident to all

The IMF published its October – World Economic Outlook – yesterday (October 7, 2014) and the news isn’t good. And remember this is the IMF, which is prone to overestimating growth, especially in times of fiscal austerity. What we are now seeing in these publications is recognition that economies around the world have entered the next phase of the crisis, which undermines the capacity to grow as much as the actual current growth rate. The concept of ‘secular stagnation’ is now more frequently referred to in the context of the crisis. However, the neo-liberal bias towards the primacy of monetary policy over fiscal policy as the means to overcome massive spending shortages remains. Further, it is clear that nations are now reaping the longer-term damages of failing to restore high employment levels as the GFC ensued. The unwillingness to immediately redress the private spending collapse not only has caused massive income and job losses but is now working to ensure that the growth rates possible in the past are going to be more difficult to achieve in the future unless there is a major rethink of the way fiscal policy is used. The myopia of neo-liberalism is now being exposed for all its destructive qualities.

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The German experiment has failed

In the last week, several new data releases have shown that the Eurozone crisis is now consolidating in the core of Europe – France, Italy and … yes, Germany. The latter has forced nonsensical austerity on its trading partners in the monetary union. And, finally, the inevitable has happened. Germany’s factories are now in decline because the austerity-ravaged economies of Europe can no longer support the levels of imports from Germany that the latter relied on to maintain its growth and place it in a position to lecture and hector the other nations on wage and government spending cuts. The whole policy approach is a disaster and is exacerbating the flawed design of the euro monetary system. The leaders should find a way to dismantle the whole charade and allow nations to seek their own paths to prosperity with their own currencies. The German experiment has failed.

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Saturday Quiz – October 4, 2014 – answers and discussion

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.

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British economic growth shows that on-going deficits work

In Australia, the Federal Treasurer announced today that they would be making further spending cuts to the fiscal position of the government in the mid-year statement to pay for “an increase in funding for security agencies” and its onslaught against ISIL. So education, health spending, income support etc will get the chop so we can make the world an even more dangerous place than it is currently at a time when unemployment is rising and economic growth falling. Another case of austerity madness combined with the mindless approach to dealing with the external threats from extremist groups. He should take a note from the British Chancellor’s book who is overseeing an expanding fiscal deficit and public debt ratio, despite the rhetoric to the contrary, and that on-going deficit is supporting growth, helping private households increase their saving ratio and is generally a good thing to behold. Austerity in the UK?- not if you consider the current data!

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Another Eurozone plan or two that skate around the edges

There was an article in UK Guardian last week (September 26, 2014) – Debt forgiveness could ease eurozone woes – which was interesting and showed how far the debate has come. The outgoing European Commissioner for Employment, Social Affairs and Inclusion, László Andor also gave a speech in Vienna yesterday – Basic European unemployment insurance: Countering divergences within the Economic and Monetary Union – which continued the theme from a different angle. While all these proposals will be positive rather than negative they essentially are not sufficient to solve the major shortcoming of the Eurozone – its design will always lead it to fail as a monetary system because they have not accepted that all citizens in each country have equal rights to avoid economic vulnerability in the face of asymmetric aggregate spending changes. That lack of acceptance means the political leaders will never create an effective federal fiscal capacity and the member nations will always be vulnerable to major recessions and wage deflation, which undermine living standards.

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Strong public benefit from tertiary education in Australia

There was an interesting article this morning in the Fairfax press (September 29, 2014) – OECD figures show public benefits more than individuals from tertiary education – which used the recently released – Education at a Glance 2014 – to compare private and public (social) returns from tertiary education. The results are that private net returns outweigh social returns in the majority of nations but not for the UK, Australia, Japan and Korea. The results have implications for the debate about who should fund tertiary education – the private individuals (or families) of those undertaking it or the government. They also highlight that one should be somewhat protean in outlook and avoid falling into Groupthink.

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