The IMF recently released an interesting Working Paper – Okun’s Law: Fit at 50? – which considers the relationship between the unemployment rate and real GDP growth. I mentioned Arthur Okun in yesterday’s blog. The paper is useful because it debunks a lot of recent research from mainstream economists which claimed that real GDP growth did not bring unemployment down (or not by much). The arguments were then part of the general attack on fiscal activism. The IMF paper finds that the output gaps created by the GFC in the US were so large, that the recovery had to be stronger than usual to eat into the massive buildup in unemployment. The fact that the output gaps have persisted well into the recovery means that fiscal policy has not been aggressive enough in the US. The large output gap that the GFC created needed a very large fiscal response.The bottom line is that shifts in the unemployment is driven by changes output (with the other cyclical adjustments noted above which mediate this relationship). Not a lot has changed – spending equals income which drives employment growth and leads to reductions in unemployment. The neo-liberals can deny that until the cows come homebut those of us who read understand the evidence know they are lying. The message just needs to spread.

I am taking the easy way out today. I have a number of meetings today and also several deadlines coming up for work that I am doing. As a result, I decided to re-cycle some work I did on Friday (early), which was written for the Fairfax press daily newspaper – The Age – as a commissioned Op Ed contribution. Friday was ridiculous when I think back – I had to squeeze more than Archimedes would recommend if I was dealing with liquid into the time available. So today, what comes around goes around – to my favour. The Op Ed was 800 odd words on a complex topic so today, by way of reference, I thought I would add a few sentences to the 800 words to provide more explanation of the points. The background was that a few high profile firms announced fairly large job cuts last week in Australia which lead to a stream of media headlines and calls for government assistance, both short-run in the form of cash bailouts and longer-term, more protection (tariffs etc). The macroeconomics of the situation, however, has not been seized upon by the media, which goes to the heart of the problem. The debate tends to focus on aspects of an issue, which are less important, and, ironically, in this case, are changes which are largely beneficial (structural change), but, ignoring the issues which cause the most damage (those relating to output gaps).

Regular readers will know that I place the shifts in the distribution of national income (at the sectoral level) as one of the keys to understanding the current economic crisis and the what needs to be done to get out of it. I covered this early on in this blog – The origins of the economic crisis. The mainstream press is now finally latching on to this issue, which is good but sadly the media is still allowing itself to be captured by mainstream economists who have a particular and wrong view of what has been happening, why it has occurred and what the implications of it are for public policy. The fundamental changes that are needed to policy frameworks and societal narratives before the crisis is full resolved are still so far off the radar though. Until we start promoting discussions such as that which follows there will be only limited progress to a sustainable solution.

Two papers have come out in the first week of January that provide further evidential support for the argument that the majority of macroeconomics that is taught in standard university programs is worthless. The first (published January 3, 2013) – Growth Forecast Errors and Fiscal Multipliers – from the IMF attempts to explain why the planned fiscal austerity measures in advanced economies have been more damaging than mainstream economists predicted. It is an excruciating attempt at regaining credibility for the seriously wayward IMF. The problem is that its credibility is so far in deficit that it has a lot of consolidation to do before anyone should believe them again. The second paper (published January 2013) – A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts – from researchers at the Federal Reserve Bank of New York “presents new survey evidences on workers’ response to the 2011 payroll tax cuts”. The results of the survey? Much higher estimates of the consumption propensities than were predicated from mainstream economic theory. Implication? The standard theory taught to students is wrong and should be disregarded.

Today (December 19, 2012), the economics editor for the Sydney Morning Herald (Ross Gittins) wrote an Op Ed piece – It’s the weak recovery that worries, not surplus – which urged his readers to reorient their thinking about the Federal government’s obsession with achieving a budget surplus in the coming year. In that sense, it was welcome article from an influential journalist. But closer reading demonstrates that the writer is straddling the line between comprehension and myth-perpetuation. Many readers have asked me to pin-point the strengths and weaknesses of the article for their own edification. So lets proceed. The key point is that the budgets of currency-issuing national governments bear no relation to household budgets. If we do not jettison that myth then very little progress can be made on the more complex parts of the narrative that leads to the conclusion that such a government can never run out of money and all the negative consequences that are alleged to necessarily follow the use of budget deficits (higher interest rates, inflation, eventual insolvency) are lies, which aim to perpetuate a dominant paradigm rather than advance the welfare of all of us.

I am researching a project at the moment on the role of humanities (and social sciences) in enhancing standards of living and rendering societies open, empathetic (to the disadvantaged) and dynamic. It is in the face of trends within Universities to concentrate funding and attention on the so-called STEM disciplines (Science, Technology, Engineering and Mathematics) and contract funding for the humanities (and social science). The funding cuts undermine the viability of these areas and whole departments have been closed – having been declared by the bean counters – as being uneconomic. This is reinforced by conservative neo-liberal political diatribes which seek to construct the humanities/social sciences as bastions of “left-wing” radicalism and post-modernist degradation (for example, eschewing studies in sexuality, gender, ethnicity etc). There is strong evidence available to show that studying the humanities is a socially transformative endeavour (for example, the Clemente program). But like all “individual” initiatives, there is a danger that the reasoning used to justify them will fall foul of compositional fallacies. We have to defend the humanities to enrich individuals. But we also have to use that empowerment to challenge the elites on the macroeconomics battleground. The two motivations are self-reinforcing. The former is not a sufficient condition for social transformation.

Last week the former RBA governor, Bernie Fraser said that Australia was suffering from the “stupidity of government” by pursuing a budget surplus in present circumstances. He described our fiscal policy approach as being “just plain dumb”. It seems that the politicians are reflecting the standards that are now apparent in our educational system. The nation was shocked today with the news that we are not as smart as we like to make out. This Sydney Morning Herald story (December 12, 2012) – Australia’s disaster in education – is representative of many articles and discussions across today’s media offerings. The reports said that our children achieved “disastrous results in the latest international reading, maths and science tests”. The shock that the nation is experiencing is large today, about as large as the collective indifference to the damage that two decades or more of poor fiscal policy practice has been. We have allowed our governments to run down public infrastructure in pursuit of budget surpluses. We have let them deliberately reduce the capacity of our schooling system so that we can no longer keep pace with international standards. We have believed that this strategy exemplified responsible fiscal policy. It just shows how dumb our society has become. It also reveals, once again, the failure of the neo-liberal policy regime that dominates.

When recessions become prolonged and long-term unemployment rises, the conservative denial machinery always scapegoats the most disadvantaged by recommending cuts to welfare to make people more desperate. This is dressed up in terms that attempt to make this sort of policy sound reasonable – like we should all be adventurous and entrepreneurial. The facts are that mass unemployment represents a macroeconomic failure that can be addressed by expansionary fiscal and/or monetary policy. It has nothing to do with the provision of the miserly amounts that are given to the unemployed via income support arrangements. Cutting those benefits will not cure involuntary unemployment. In all likelihood, cutting benefits will make the aggregate demand shortfall that caused the unemployment to worsen. The result is that the cuts will only make the lives of the unemployed more desperate than they already are. It is time that the conservatives learned about macroeconomic constraints.

Australia is in the grip of a group of mining oligarchs, who are spending enormous amounts of monety to shape the economic debate to suit their own very narrow interests. They are opposed to the mining tax (a resource rent tax) and have in the past denied the state (on behalf of all of us) owns the resources that they plunder for private profit. They have also sponsored national tours of leading climate-change deniers (such as Lord Monckton) who are known to trade on distortions of the truth. Overall, there personal resources guarantee them access to the daily media and they use it relentlessly. They also write books which get national coverage and have a record of suing peope who criticise their views. The result is that there is very little critical scrutiny of the propositions they advance to justify their claims. Some of the propositions are pure fantasy yet they have gained traction with the public who have been too easily duped by the promotional onslaught. Here is a little sojourn into the fantasy world on one such oligarch.

In his – Introductory Statement – at the Press Conference last week (November 8, 2012) announcing the decision of the ECB Governing Council, ECB Boss Mario Draghi provided us with all the evidence we need that the conduct of macroeconomic policy is being based on false premises, which makes it unsurprising that the world economy is enduring slow to negative growth and millions are unemployed. The ECB decision was to keep interest rates unchanged. But that isn’t the point of this blog. We all look to monetary policy to solve the crisis when it is ill-equipped to do so. The reliance on monetary policy and the hostility towards fiscal policy is all part of the same ideological baggage that caused the crisis in the first place. Dr Draghi’s promise that the ECB would buy unlimited quantities of government bonds was held out as part of the solution but in fact only confines the central bank to maintaining solvency, which is intrinsic to any currency-issuing government anyway. But the main Eurozone problem is a lack of aggregate demand. The ECBs action do nothing to resolve that problem. Similarly, the Federal Reserve, the Bank of England, the Bank of Japan and all the rest of the central banks do not have the tools to ensure that the main problem is addressed. The crisis has confirmed that yet so deep has been the indoctrination that we (the collective) still hang on to the idea that fiscal policy is bad and monetary policy has to carry the counter-cyclical weight. The fact is that it cannot.

With the natural disaster in the US now in its clean up stage the discussions have turned, in a predictable way, to “how will the US pay for this especially when it has huge deficits and debts and has to fall off a fiscal cliff anyway to stop the sky from falling in” – and narratives like that. Remember when Hurricane Irene struck in 2011? The resurgent Republicans tried to push through bills, which would have required matching cuts in other federal spending. The other Sandy reminder is that when the chips are down who do we all turn to? Government. What do you think would have been the current state, if the Republican contender was President and followed through on his promise to scrap FEMA and put emergency relief in the hands of the private sector, which apparently does things better? Chaos at best is the answer. The fact is that the federal government will be able to provide whatever financial assistance is required beyond private insurance payments. The only constraint that might hamper the recovery is the availability of real resources, which can be brought to bear. Further, it seems that the whole fiscal crisis beat up, even with the terms of the mainstream paradigm, is a beat-up, courtesy of some spurious work done by the Congressional Budget Office, that much-quoted, but seemingly, errant organisation.

Economists like to tell students about efficiency. The concept – which really distils down to – zero waste (even though that term is loaded) – is drilled into undergraduates and graduates alike as a dogma that should not be violated. Most of the attacks on government intervention by the mainstream economists are couched in terms of efficiency – or the alleged lack of it. The seemingly objective framework that defines the orthodox approach to efficiency allows all the ideological indisposition towards government involvement in the economy to be discreetly hidden. But even then the mainstream do not consistently apply their own constructs. And when the empirical world violates the utopian vision (for example, when there is mass unemployment), the response is to either blame the government some more or redefine the violation away and continue on as if nothing was amiss. This sort of intellectual dishonesty has never been more apparent than in the current period as nations struggle with a deep and enduring crisis. This blog is about two examples of that – health care and youth unemployment.