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.

A few weeks ago in this blog – So who is going to answer for their culpability? – I wrote about the IMFs latest “discovery” that their policy advice, which has caused millions to become unemployed and nations to shed income and wealth in great proportions and all the rest of the austerity detritus, was based on errors in estimating the value of the multiplier. They now admit the expenditure multipliers may be up to around 1.7, which means that for every dollar of government spending, the economy produces $1.70 of national income. Under their previous estimates of the multiplier, a dollar of government spending would translate into only 50 cents national income (a bad outcome). The renewed awareness from the arch-austerity merchants that they were wrong and that fiscal policy is, in fact, highly effective, has to be seen in the light of the continued obsession not only with fiscal austerity but also with discussions surrounding monetary policy. There have been many articles over the last few years expressing surprise that the vast monetary policy changes have had little effect. But as soon as the writers note this they launch into the standard arguments about inflation risk and the rest of the narratives that accompany discussions about central banks. Soon we will have to accept the fact that monetary policy is not a suitable tool to stabilise aggregate demand at appropriate levels. We will also have to acknowledge that the only way out of the crisis is via renewed fiscal stimulus.

Yesterday, the Australian Bureau of Statistics published the August 2012 data for – International Trade in Goods and Services, Australia – which provided further evidence that the so-called once-in-a-hundred years mining boom that was meant to bring employment security and strong growth for years to come is waning – and quickly. Today’s retail sales figures are also in this vein. The Treasurer continued his bluster that they had to go for a surplus. And a prominent (former) banker came out and claimed the surpluses should be bigger – even though the economy is going backwards and non-government spending is incapable of supporting strong growth. He thinks were are on the path to Athens. He thought we could easily become Greece. When you think about it the transition from Australia to Greece is within the limits of human idiocy.

There was an article in this morning’s Melbourne Age (September 26, 2012) by former Australian Federal Finance Minister Lindsay Tanner, which talked about the structural decline of social democratic parties around the world. Recently I was in the Netherlands for the Dutch national election and the Labor Party could not gain office and is likely to go into coalition with the Conservatives (what?) – the common bond – their support for the Euro and fiscal austerity. What set of circumstances would see what should be polar opposite political forces in coalition? And then there are the LDP and the Tories in the UK. And the debate in the US is not about a deficit versus a surplus but how quickly to get into surplus. The same goes in Australia. The policy debate is marked by claims from both major parties that they will generate bigger budget surpluses quicker than their opponents. The social democratic political tradition is fading because the parties have become indistinguishable from the conservatives in economic policy. They are all neo-liberals now and that is an ugly option for those with a progressive bent who have traditionally supported the social democratic parties.