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.
This is the Q&A (Part 4) blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that. I plan to make this a regular Friday exercise.
The British government brought down their 2012 Budget yesterday. I haven’t had time to fully digest all the detail yet and I am not yet fully conversant with all the discussion papers that underpinned the official budget documents. My experience tells me that one usually finds some really interesting points that are hidden in the fine print of some of the less obvious government documents. Sometimes these points are “game makers”, which really expose the ideological slant of the budget. Not that you have to do much digging in this budget to determine what agenda the British government is now pursuing. The “bond markets are about to close us down” rhetoric is giving way now to Thatcherite “trickle down” stories. This budget is trying to sell the “puppy” that if more real income is transferred to the rich then they will ensure, through their enhanced enterprise, that the poor (which cedes real income) will eventually be better off. That is a variant on the “fiscal contraction expansion” myth.
I get a lot of queries about the difference between fixed and flexible exchange rates in terms of the options that each present a sovereign, currency-issuing government. I considered this question several times in the past. Many of those questions are pitched in terms of the basic macroeconomic framework for an open economy that appears in most mainstream macroeconomics textbooks, particularly those written in the 1970s, 1980s and 1990s. I am referring here to the Mundell-Fleming model which has been the mainstream staple for many years. The modern textbooks still teach these models but the exposition has evolved although remains deeply flawed. It seems that this conceptual framework is still used to make public comments along the lines that the US government is facing insolvency and that the euro remains the best monetary organisation for Europe. Those conclusions are as flawed as the model that spawns them. Flawed macroeconomic models lead to erroneous conclusions.
I keep reading news reports that claim that Apple (the company) has more cash to spend than the US government. For example, this ABC News report today (March 20, 2012) – Apple goes on massive spending spree – perpetuates this myth. I noticed a similar report was spread throughout the Internet overnight. Apple might have 90 odd billion US dollars in cash reserves at present which it could draw on at its leisure. But once its reserves were gone that would be it. Notwithstanding, the labyrinthine accounting arrangements, which obfuscate its true capacity, the US government could spend 90 billion tomorrow, 90 the next day, and 90 the day after that if it wanted to. I am not advocating that just noting the capacity. This example highlights how poorly we are served by the financial press which reinforces the ideologically-motivated lies the government’s and the corporate elites use to maintain their hegemony. Inflexible governments undermine our standards of living.
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.
This is the third Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.
The NSW Bureau of Crime Statistics and Research (BOCSAR) released an interesting study yesterday (March 13, 2012) – The effect of arrest and imprisonment on crime – which might be a strange topic for a Modern Monetary Theory blog to highlight. On the contrary, this type of research provides an invaluable reality check against those who think that entrenched unemployment during a recession is more efficient than fiscal initiatives that aim to directly generate public sector employment. We already know that that the daily real GDP losses that arise from an economy operating at less than full employment are massive. The BOSCAR report adds another loss in the form of higher crime rates. It confirms long-standing research findings that shows that unemployment causes higher property and violent crime rates.
I haven’t much time to write a blog today (travel and other commitments). But I have been examining tax revenue data for the EU in the last day or so as part of another project and thought the following might be of interest. The analysis is still unfinished (by a long way). But to the news – I laughed when I read the story from Der Spiegel (March 12, 2012) – Germany Fails To Meet Its Own Austerity Goals – which listed Germany as a serial offender in the hypocrisy stakes. I also laughed when I read that the German Finance Minister, in between games of Sudoku, told a gathering in Berlin yesterday that (as reported in a Bloomberg video) “deficit spending is the wrong way to bolster economic growth” and that “People who believe you can generate growth without pursuing budget consolidation have “learned nothing from the experience of the crisis.” The combination of staggering hypocrisy and manifest arrogance (thinking that the world is so stupid that they actually believe austerity will deliver growth) seems to have reached new heights.
Today the ABS released the Australian National Accounts – for the December 2011 quarter which shows that the quarterly real GDP growth rate was 0.4 per cent, down from 0.8 per cent in the September quarter. For the year, the Australian economy grew by 2.3 per cent down which when compared to trend (around 3.25 per cent) reveals how sluggish our recovery after the crisis has been. The worrying sign is that private business investment contracted and offset the growth coming from household consumption, net exports and inventory building. Growth is also being held back by the Government’s obsessive pursuit of a budget surplus in the coming fiscal year. The fiscal drag is damaging output and employment prospects and dampening expectations in the private sector. The growth rate is not strong enough to make a dent in the unemployment and underemployment ranks. The case for continued government support for higher growth remains especially with inflation now falling.
There was a Wall Street Journal article (March 5, 2012) – The High Cost of the Fed’s Cheap Money – which is full of statements like “could eventually lead to an economic calamity” etc. The WSJ article basically rehearses a confused form the old supply-side tradition of the pre-Great Depression era where the claim was that “supply creates its own demand” (so-called Say’s Law) which was shorthand for the proposition that flexible prices and interest rates would ensure that whatever was supplied would be purchased. The same sort of arguments were used in a recent lecture to Harvard EC10 students by the Director of the US Congressional Budget Office. It is extraordinary that these myths, which were part of the body of economic theory that led the world into the current crisis, still have currency. They should start by understanding what Keynes meant when he said “Look after the unemployment, and the budget will look after itself”.
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.
In January 2011, 44 per cent of Spanish working people below the age of 25 were unemployed. A year later Eurostat report (in its March 1, 2012 publication) – Euro Indicators – that the rate has climbed to 49.9. For the overall labour force in Spain, the unemployment rate rose from 21.7 per cent to 23.3 per cent over the same period. That is Great Depression-type magnitudes. At the other end of the unemployment spectrum, currently, is The Netherlands. Their overall unemployment rate has risen from 4.3 per cent in January 2011 to 5 per cent in January 2012. Notwithstanding the massive underemployment in The Netherlands (almost 50 per cent of the working age population work part-time – average is less than 20 per cent for EU) and the large proportion of workers hidden from unemployment by disability support pensions – this is a low unemployment rate. And therein lies the rub. The Dutch Centraal Planning Bureau released its latest – Short-term forecast yesterday (March 1, 2012) which showed that over the next 4 years it will violate the current Stability and Growth Pact (SGP) and face fines under the Excessive Deficit Procedure. And to put a finer point on this – the Dutch government has been one of the more rabid proponents of fiscal austerity and one of the first to heel-click in line to sign Germany’s … sorry the EU’s fiscal compact. All of that should tell you that the current leadership in Europe has no viable solution to its crisis. Some French economists have come up with a solution. This blog considers their work and concludes they are on the right track but haven’t penetrated all the neo-liberal myths that they seek to highlight.
I haven’t much time to write today – I’m off to Sydney later where I will be a speaker at the following event – Open Forum: Young and old-age discrimination and the economy. I will be sharing the podium was the Age Discrimination Commissioner of the Australian Human Rights Commission, a Federal government agency. The topic is how can Australian businesses and government make better use of our youth and senior citizens. As regular readers will know I regularly try to push the parlous state of the teenage labour market into the policy arena, with varying degrees of success. But today’s event is high-profile and provides a good platform for advancing these issues. This blog covers some of the issues that I will raise.
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.
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.
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.
It has been interesting to watch how various members of my profession are dealing with the on-going crisis over the last 4 years. Clearly, imbued with the notion that the “business cycle” is dead, which the mainstream macro economists had been attempting to establish as a given in the public debate, most economists were in denial at the outset of the crisis. That denial moved into the manic deficit terrorism that has sought to reconstruct the private debt crisis into a sovereign debt crisis – which allowed them to vent on their pet topic – dislike of government fiscal policy when used to increase employment. They have no problems with active fiscal policy when it is aimed at contraction. They just hate the public sector supporting growth even when the private sector is incapable of doing so. But as the empirical reality has increasingly rejected the predictions of the mainstream macroeconomic models – there has been no inflation breakout or rising interest rates or sovereign government insolvency – there has been a shift going on. Some of those that were advocating austerity now seem to be advocating growth. But when you dig a little deeper there is no fundamental catharsis in my profession going on. The only motivation for those now saying Europe needs growth not austerity is that they are trying to distance themselves from the train wreck that the political leaders are creating there. As the title suggests – yesterday austerity, today growth – but leopards don’t change their spots.
The UK Guardian reported (February 6, 2012) – Disbelief as Greek politicians delay deal on €130bn rescue package – that the German Ma’am is becoming “exasperated”. Such discomfort. Apparently, the fact that the Greek government has to engage in some discussions with other interests in Greece before signing up to further extremely damaging cuts is upsetting the German leader. She claimed that “Time is of the essence. A lot is at stake for the entire eurozone”. She is probably right. The quicker Greece cuts further the faster its exit from the Eurozone will be. But Merkel’s discomfort is nothing compared to what the Greek population is feeling at present. The Hellenic Statistical Authority or EL.STAT reported that the October 2011 unemployment rate in Greece was 18.2 per cent compared to 13.5 per cent in October 2010 and 17.5 per cent in September 2011. It will continue to rise as long as the government buys the Troika-line and imposes worse austerity. But it seems that the Greek government has become totally obsessed with fiscal ratios – that is, totally neo-liberal-centric – and is losing focus on a human tragedy that they are causing. The Greek government should tell the Troika it is prioritising a fall in its unemployment rate – like it or lump it!
The IMF released a working paper recently (January 2012) – Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances – which purports to estimate the losses that the US economy will incur if the US government delays a major fiscal consolidation. The paper attracted a Bloomberg news headline (February 3, 2012) – How Reducing the Deficit Can Make Us Richer: The Ticker – which, in its own way provides an example of a dishonest piece of reporting. What has the IMF paper have to say about real world issues like real GDP growth, unemployment, underemployment etc? Answer: virtually nothing. It is an example of GIGO (Garbage In, Garbage Out) and confirms that my profession has learned very little (if anything) from its total failure to see the crisis coming or offer valid solutions. It also confirms that while the IMF leadership might be going around lately trying to sound reasonable (warning against austerity) the engine room of the IMF hasn’t changed direction at all. It is still pumping out indefensible rubbish, which then garner headlines and influence the policy debate to the detriment of the unemployed everywhere. The IMF consider humans to be a “continuum of infinitely lived agents normalized to one”. Which means this paper becomes Part 3 of my GIGO series.