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.
While a lot of focus is given to the necessary reform of the financial sector – like declaring all financial transactions that do not support the real economy (which is about 97 per cent of the total) illegal, there is also a need to make fundamental changes to the labour market to reverse the neo-liberal incursions that have casualised employment and systematically cut real wages. The labour market degradation over the last 2-3 decades have allowed for the massive redistribution of real national income in most nations away from workers towards profits. That redistributed surplus is, in part, the bounty that the financial markets have used to speculate with and further entrench their power as financial capital. It also is how the top 1 per cent (and the 0.01 per cent) of the income and wealth distributions have gained further at the expense of the rest. Yesterday (November 19, 2014), the British Office of National Statistics released two publications – Annual Survey of Hours and Earnings, 2014 and – Low Pay, 2014 – both of which demonstrated how these trends are alive and well in the British labour market. The British trends are representative.
We had news this week that the annual rate of real GDP growth in Greece is finally positive after two quarters of positive growth. The austerity merchants are out in force congratulating themselves on a victory. Some victory. What the official data doesn’t publish are the long-term implications of the Depression that Greece has been locked in for the last six years. I look at that question in this blog (a little). Further, despite the claims by the European Commission and the lackies that it relies on to spread its distorted economic news that Greece has achieved a primary fiscal surplus, nothing is further from the truth. The fact is that the Greek fiscal deficit expanded considerably last year and despite all the austerity is still pumping public euros into the Greek economy and therefore supporting growth. The slight return to growth is not a victory for fiscal austerity but a demonstration that if large deficits are maintained for long enough growth will eventually rear its head.
The financial press was ‘surprised’ that Japan had slipped back into recession, which just tells you that their sources don’t know much about how monetary economies operate. Clearly they have had their heads buried in IMF literature, which tells everyone that cutting net public spending will boost growth because the private sector is scared of deficits. This prediction has never worked out in the way the theory claims. It is pure free market ideology with no empirical basis. The other problem is that cutting net public spending when private spending is weak also pushed up the deficit. Back in the real world, Japan believes the IMF myths, hikes sales taxes to reduce its fiscal deficit, and goes back into recession – night follows day, sales tax hikes moderate spending, and spending cuts undermine economic growth. Kindergarten stuff really. Eventually this cult of neo-liberal economics will disappear but in the meantime while all and sundry are partaking in the kool aid, millions will be losing their jobs, poverty rates will rise and the top 10 per cent in the income and wealth distributions will continue to steal ever more real income from the workers.
The European Commission released its – European Economic Forecast – Autumn 2014 – which is its bi-annual statement of economic outlook. In his editorial to the outlook, Director General Marco Buti admits that “euro area is still projected to have spare capacity in 2016”, which means the Commission is overseeing economic policy choices that will deliberately impose a recessionary bias for the next two years (at least) and deliberately force millions of Europeans to endure joblessness, savings erosion and the march towards poverty and despair for the next two years. Its a statement of monumental policy failure and the Director General Marco Buti should resign immediately just after he sacks his policy advisers.
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.
Its my Friday no blog day yet a brief discussion of this week’s US mid-term elections cannot be resisted. In the spirit of the lay day, I will just have a little stretching and warm up type blog though. What the F*&#! The largest economy with the biggest weapons has just voted into majority positions in both houses of their parliament a bunch of crazies, who are only slightly crazier than the alternatives they might have chosen. Although in many cases, the crazies were voted in uncontested.
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.
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.
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.
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.
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.
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.
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.
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.
There was a UK Guardian article yesterday (October 15, 2014) – Evo Morales has proved that socialism doesn’t damage economies – that recounted the recent economic history of Bolivia. There has been growing awareness in the Western press of what has been happening there given that the President Evo Morales has been once again re-elected for a third time, against the opposition of the financial elites in the so-called ‘first world’. A New York Times article (February 16, 2014) – Turnabout in Bolivia as Economy Rises From Instability – also noted the way in which Bolivia resisted the GFC to become a growth powerhouse in Latin America. The experience of Bolivia is a classic case of what can be achieved if a nation defies the international elites (such as the IMF and Wall Street) and carves out a path using its fiscal capacity to increase social capital and public infrastructure. When a nation can increase the real minimum wage by 87 odd per cent in a span of 8 years and see unemployment fall and real per capita income head for the stars then you know the mainstream neo-liberal mantras are wrong. Bolivia defied them and has prospered.
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.
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.
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.
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.