Whatever – its either employment or unemployment buffer stocks

Since I published Wednesday’s blog – MMT is biased towards anti-crony – there seems to have been a fair bit of commentary on other sites some bordering on personal attacks (against me). I’ll steer clear of that level of discussion. I also note that John Carney over at CNBC responded with this article – Can the Government Guarantee Everyone a Job? – saying that if the notion of employment buffers is a central aspect of Modern Monetary Theory (MMT) then “it would mean that MMT is wrong”. I found his response interesting but essentially a rehearsal of the mainstream errors that arise when you haven’t really come to terms with what MMT is adding to macroeconomic theory. So today’s blog is a supplement to the Wednesday’s blog (and many others) and aims to provide some more context especially to those interested in the evolution of ideas and schools of thought. The point is that whatever else happens we are left with a choice – employment or unemployment buffer stocks. MMT provides the theoretical insights to show that employment buffers are superior whether you like them or not.

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Historically high budget deficits will be required for the next decade

Japanese economist Richard Koo recently published his latest paper – The world in balance sheet recession: causes, cure, and politics – which reminds us that patience is the virtue that is required right now and that the major political responses to the crisis are exactly the opposite to what is required to safely steer the World economy back into health. The insights he provides, mostly consistent with Modern Monetary Theory (MMT), demonstrate how the current political cycle (and the imperatives that are being imposed) is so far out of kilter with what responsible macroeconomic management requires. The world economy will require continuous and historically large budget deficits in most advanced nations for many years to come. The demands for fiscal consolidation talk about this year and next year and surpluses in a few years. The reality is that deficits will be required to support growth while the private sector reconstructs its unsustainable balance sheet for more than a decade. We have to get use to that or suffer the consequences. To repeat: Historically high budget deficits will be required for the next decade – at least.

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MMT is biased towards anti-crony

There has been a couple of interesting articles written by John Carney who is a Senior Editor at CNBC.com on Modern Monetary Theory (MMT) – starting with Monetary Theory, Crony Capitalism and the Tea Party (December 22, 2011) and followed up with Modern Monetary Theory and Austrian Economics (December 27, 2011). I am happy that our work is penetrating in to the mainstream business and economics commentary space. It is good that John Carney has spent some time coming to terms with MMT and its departure from the failed mainstream macroeconomics. But some problems remain with his analysis. The issues he raises relate to political matters rather than the economics of MMT. In that context, MMT is neither anti- or pro-crony. But if you delve deeper and really understand the MMT macroeconomic framework then you realise that MMT is biased toward anti-crony.

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Saturday quiz – December 24, 2011 – answers and discussion

Here are the answers with discussion for yesterday’s special Santa-edition of the 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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Some hard truths for 2012

Some new research has given me hope that the politicians will soon be in a position to use the fiscal tools at their disposable to solve the economic crisis. We might call it the pigeon recovery. The ABC News reports that Pigeons can count and so I propose we round up a bunch of them from some of those nice European buildings ship them (humanely) to Brussels and the Eurotower and let them count up the unemployment numbers (well they might have to go to Eurostat in Luxembourg). Then they could calculate the real GDP and income losses and by way of a new Google Pigeon-to-English translator convey to the politicians the urgency of the situation and that jobs are created when people or governments spend and that income is created as a consequence and people become more prosperous. Then some homing pigeons could fly some Modern Monetary Theory (MMT) material to the offices of the politicians to give them something to read instead of the latest nonsense from the IMF or some other institutions that have forgotten that unemployment matters and financial ratios are of limited relevance. Once the pigeons have done their work – the Euro leaders will sit down and realise that an orderly break-up of the monetary union is the best long-term strategy for all of them. Speaking of which here are some “hard truths” for 2012.

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Mainstream macroeconomics textbooks do not impart knowledge

I have spent most of today working on a Chapter for the upcoming macroeconomics textbook that I am writing with Randy Wray (UMKC). It is a difficult task getting the balance between the content and the pedagogy more or less correct. One has to be interesting but not simplify to the point of distraction. Moreover one has to seek to impart knowledge. Which then takes one down the epistemological path as to what constitutes knowledge. How much simplification is too much? How much abstract modelling is feasible? Questions like that. But an overriding objective is to ensure that students who are using the book receive an education which means they should expand their critical faculties based on an expansion of knowledge. One of the worst aspects of my profession is that the vast majority of textbooks that students are forced to learn from do not advance these objectives. Whatever else one might conclude about their presentation etc, they mostly can be reduced to being considered as propaganda instruments. Most of them tell outright lies about the way the monetary system operates. The current crisis and the unusual policy interventions (particularly those employed by the central banks) have brought these lies into stark relief. We can conclude that mainstream macroeconomics textbooks do not impart knowledge they are dogma.

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If a government won’t create jobs, it must provide income support

You can sense the fear in people’s lives at present as the economic crisis seems to be worsening and various so-called opinion leaders are telling us we are in danger of lapsing into a depression like the 1930s unless there is drastic action taken by governments. For example, the IMF’s latest salvo. Then you hear them say that the action necessary is more fiscal austerity. And you know it will definitely get worse. My own superannuation fund sent us letters last week suggesting that they are in danger of being unable to meet their liabilities and benefits – current and future – will likely be cut. How much? Fear tells us a lot. Action: all those retiring will take lump-sums and invest in cash – eliminating the risk but solidifying the cuts and – further undermining the viability of the fund. That what is happening everywhere. A moment’s reflection tells us that this fear is being deliberately created by the elites who are elected by us to advance our best interests. These elites are using fear – and deliberately perpetuating falsehoods to keep us ignorant – in order to usurp democracy and take control of the wealth creation processes so they can tilt the field further in their favour. This crisis could be over in a few weeks or months with appropriate policy interventions. It has now dragged on for years. That is because it is taking the elites that long to organise their on-going coup.

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How’s poor old Ireland, and how does she stand?

Last Friday (December 16, 2011), Ireland’s Central Statistics Office published their – National Accounts – for the September quarter 2011 and guess what? Things just became worse. Ireland is now nearly two years in the enforced austerity and all the deficit terrorists have been watching it closely for signs of life. The slightest upturn in GDP growth has brought a salvo of attacks on any one daring to oppose the harsh austerity. Well, I also watch it closely and the pattern that is unfolding is consistent with predictions. Things are getting worse not better. The only growth “engine” has been exports and with austerity spreading that market will not be strong enough to sustain growth when domestic demand is being ravaged by austerity.

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Australian industry employment trends and fiscal stimulus

I am continually distracted by the daily entertainment from Europe – who could have written such a script? – bumbling from one disastrous “solution” to another, accusing each other of various sins, trying to rope Britain into their incompetence (although the latter doesn’t need any help in that department) etc. But the comedy ends as soon as the human element is considered. How long the citizens will remain docile is the big question. I had an interesting meeting the other day about a joint research project I am becoming involved in which will encompass that sort of enquiry including what has happened to the “left”. Anyway, today’s blog is a bit more pedestrian. I have been asked a lot recently by journalists and radio interviewers about the flat employment growth in Australia at present in the context of our so-called “once-in-a-hundred-years” mining boom. The mining industry has been so successful at self-promotion that people forget it only accounts for 2.1 per cent of total employment (a minuscule proportion). Anyway, the ABS released the detailed quarterly employment data for November 2011 yesterday which contains industry breakdowns. So I went digging this morning to bring my analysis up to date. Lesson: fiscal stimulus works and the Australia labour market is changing.

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UK labour market – when “stabilising” means outright deterioration

The British Office of National Statistics released their Labour Market Statistics for December 2011 yesterday and it showed that employment continues to collapse in the UK and unemployment rises. I was at the airport this morning and heard a commentator invoke the words of Albert Einstein. They are very apt in this current economic climate – “The significant problems we face cannot be solved at the same level of thinking we were at when we created them”. The British Employment Minister gets empirical evidence that the Government’s economic strategy is causing massive damage to the economy (who would have thought) and told us that the collapse in employment and vacancies, the rise in unemployment and the record levels of youth unemployment are signs that the “labour market is stabilising”. The UK nor Europe nor anywhere will get out of this mess using the sort of thinking that created the crisis in the first place. Until we work that out and attack this political evil millions are heading for poverty.

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100 per cent forecast errors are acceptable to the IMF

Imagine you had a headache and some economist tells you that you can cure the headache by bashing your head against a wall. So you duly bash your head against the nearest brick wall and not only does it hurt (perhaps drawing blood depending on the severity of the blow) but you note the headache is now worse. The economist then concludes you didn’t bash your head hard enough and instructs you to stick to the “rule” and give it another try – only this time go harder. Blood is now flowing, the head is traumatised and the headache gets even more unbearable. Welcome to Greece which is being bullied by the Troika (EU, ECB and the IMF) in a similar way. The latest IMF medium-term forecasts for Greece reveal a staggering failure by that institution to understand causality and the impacts that their austerity programs have on real economies. Without a blush, the IMF presented the world yesterday with revised forecasts for Greece which reveal their previous forecasts will be around 100 per cent wrong over just over a 6-month horizon. That sort of error is beyond any accepted professional standards. The IMF’s response – bash your head even harder.

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When markets fail

A repeating narrative during this crisis is that fiscal austerity is required in order to satisfy the “markets”, that amorphous collective of bond traders, gamblers, speculators, crooks and whatever else. The regular threats coming from the ratings agencies (those crooks who lied to investors in order to make profits via cosy deals with the originators of the “assets”) reinforce the idea that markets are the “regulators” of good judgement. Economics students are taught that one of the imperatives of government is to deregulate in order to allow the market signals to be clear and strong so we can act in accordance with the “markets” judgement of prudence. It is a paradigm built on a myth. Markets fail and easily become corrupted and arenas where criminals dominate. The signals they send are also deeply flawed and should not be acted upon. One of the lessons of this crisis is that our agents – the governments we elect – have to make markets work for us not the other way around. When markets fail to establish benchmarks that we do not consider to be in our best interests then it is time to reform them.

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Saturday Quiz – December 10, 2011 – 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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I wonder what Kepler 22b thinks

I often wonder what outer space thinks of Earth. In recent days a new planet – named Kepler 22b – has been discovered which has Earth-like features and would probably support life. With the CofFEE conference over it was back to the Euro crisis today. Kepler 22b will be following the EU Summit as much as all of us. Laughing with us as the buffoons who parade as leaders work on the next can to kick down the road. The ECB boss gave a press conference yesterday which clarified things a bit – they won’t bail out governments but each week are bailing out governments. That sounds easy to understand. Like the rest of it. I wonder what Kepler 22b is thinking.

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Australian National Accounts – below trend growth continues

As Summer struggles to makes it appearance on the East Coast (coldest start for something like 40 odd years) the ABS released the Australian National Accounts – for the September 2011 quarter came out today and showed that the Australian economy grew by 1 per cent in the quarter down from the strong 1.2 per cent in June. In real terms, the economy grew 2.5 per cent over the last 12 months which is a good result considering that the March quarter contraction of 0.9 per cent. There are several competing forces contributing to this result. The growth is being driven by private capital formation and household consumption but being dragged down by net exports, harsh government austerity and the run down in inventories, the latter suggesting firms are losing confidence in the immediate outlook. If the private investment boom continues then growth for the foreseeable future should be maintained and approach trend. I would note that the recent (pre-crisis) trend growth was insufficient to mop up both the residual unemployment and the rising underemployment. The case for continued government support for higher growth remains especially with inflation now falling.

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Australia – external sector continues to drain growth

A lot of readers write in asking what about external balances – what they mean etc. They are also sometimes puzzled why I say that the external sector in Australia is currently (and typically) draining real growth in the economy when at the same time they read that the terms of trade are at record levels and that we are in the midst of a “once-in-a-hundred-years” mining boom which is reshaping our economy. So today’s release by the ABS of the latest (September quarter 2011) – Balance of Payments and International Investment Position, Australia – provides me with a platform for a brief (I promise) explanation of these concepts and how they might be interpreted from a Modern Monetary Theory (MMT) perspective. The bottom line is that for Australia, our external sector continues to drain growth.

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Tightening the SGP rules would deepen the crisis

This week, the European Union Summit should see the leadership take the monetary union further into the mire and further away from an effective solution to their woes. The German Chancellor has vowed to create a new fiscal union across the Eurozone. She announced this plan to the German Parliament and declared she would push for a change to the treaty that established the common currency. Let me state at the outset – the plan as the press are reporting it – will not work. It is just the latest in a long line of Euro “solutions” that has fallen on its face soon after being announced as the way forward for the EMU. It won’t work because it doesn’t address the problem and will make changes that will make the actual problem worse. Europe is suffering a lack of aggregate demand and needs to address that head on by increasing public spending. Further constraining the capacity of governments to spend will make the situation worse.

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Don’t tell the Germans – the ECB weekly deposit tender failed

Its summer! After reading this blog – The ECB is a major reason the Euro crisis is deepening – many readers have written to me asking to provide more explanation of the “sterilisation” operations that the ECB is engaged in. It is clear that an increasing number of people are becoming interested in arcane things like central bank operations which can only augur well for creating capacity for better public debate. A lot of readers overnight have reacted one way or another to the announcement by several central banks that the swap lines are open again albeit at a lower “cost” than previously. There was also considerable interest in understanding what the “failed” sterilisation yesterday means. The answer is not much but we had better not tell the Germans that the ECB weekly deposit tender failed.

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Autumn or Spring – the madness continues

It is the season of “mini-budgets” with the Australian Treasurer launching the Mid-year Economic and Fiscal Outlook 2011-12 yesterday (November 29, 2011) and his British counterpart – the Chancellor of the Exchequer – releasing his Autumn Statement. At least Australia has summer coming tomorrow to look forward to. Both documents outline strategies of failed governments. I am watching the Australian Treasurer on the news screen at the airport right now as he asserts over and over again that even though they are now forecasting a rise in the unemployment rate over the next year there is “growth in the pipeline” and so aiming to achieve the largest fiscal consolidation in history (of the world) in one year is still a sensible strategy. I described the strategy on national radio last night as madness! Worse applies to the British government’s fiscal strategy. I consider that to be venal rather than misguided.

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When you’ve got friends like this – Part 8

I noted a proposal overnight from so-called progressive American economist Dean Baker on Al Jazeera (November 28, 2011) – Time for the Fed to take over in Europe – which suggests that the US Federal Reserve Banks should insulate the US economy from the bumbling leadership crisis and “step in if the European Central Bank fails to deal with the debt crisis”. The proposal is that the US central bank should fund EMU nation deficits. This is another one of cases when friendly fire shoots the progressive movement in the foot. You can read the previous editions When you’ve got friends like this to see what the problem is. The simple point that far from protecting the US economy this proposal would likely cause a collapse in the currency and an inflationary surge that would divert attention of the US government away from creating employment, undermine the real standard of living of workers, and provide new ammunition for those who want to implement damaging austerity. For all that, the US government would only put the EMU nations into a holding pattern anyway.

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