Why we have to learn about the NAIRU (and reject it)

I have very little time today to write, first a very long flight and then preparation for a major release tomorrow of our latest Employment Vulnerability Index (EVI), which measures the risk of localised communities in Australia of unemployment as the economy slows. We have a very neat mapping tool and I will write about that tomorrow once the press launch occurs (first thing). But I am also working on various other papers and, as usual, have become immersed in the Phillips curve. I remember when I first started by PhD at the University of Manchester in the early 1980s, my then supervisor said to me on the first day that once I started modelling inflation and unemployment (the Phillips curve) I would never stop. Among other truths he uttered during my time in that dank part of the world that statement was spot on. Every now and then I return to the topic and update, revise, re-create and (sometimes) even innovate. So today’s blog is just a collection of snippets of the more accessible things I have been working on over the last few days. It starts with a graph that appeared in the IMF’s World Economic Outlook in April 2013. Then follow the graphs. Conclusion: The NAIRU as estimated is a very dangerous concept for the well-being of ordinary people.

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Nothing to sing about in Europe

The Euro crisis is over! The Euro crisis is over! I suppose if one says it loudly enough and often enough it might drown out what the data tells us. The most recent data – inflation slowing, real GDP growth slowing, no movement on unemployment – tells us that while the politicians have an incentive to talk up the situation and proclaim the crisis is over, the reality is different. The fact that the bureaucrats are now realising that Eurozone budgets in many nations are not going to come close to meeting the harsh (revised) Stability and Growth Pact requirements tells us that the policy structures in place are not delivering on their promise. When a 0.1 per cent growth rate is celebrated you know something is amiss – that is how far standards have dropped in a region that cannot deliver sustained prosperity to its citizens as long as it ties a massive anchor round its feet! The industrialists and elites talk continually of structural reform – which is code for cutting workers pay and rights and retrenching welfare systems for the disadvantaged, the major structural weakness stares them in the face – unnoticed. That structural weakness is the flawed design of the monetary union. Until that is addressed the situation will limp along, perhaps get a surge of growth here and there, until the next major negative demand shock hits from somewhere (like the US, or China) and then the whole drama begins again.

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Saturday Quiz – November 16, 2013 – 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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External economy considerations – Part 8

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime in 2013. Our (very incomplete) textbook homepage – Modern Monetary Theory and Practice – has draft chapters and contents etc in varying states of completion. Comments are always welcome. Note also that the text I post here is not intended to be a blog-style narrative but constitutes the drafting work I am doing – that is, the material posted will not represent the complete text. Further it will change as the drafting process evolves.

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Manufacturing employment trends in Australia

I have been looking at industry employment data today for Australia, in particular, the behaviour of the manufacturing industry, which has attracted considerable press attention in the recent period as a result of announcements of substantial job losses being linked to exchange rate movements and high interest rate spreads between Australia and the rest of the world. What follows is a discussion of various features of the change in manufacturing employment over the last few decades which is a precursor to some very detailed work I am doing on shifts in industry employment (reasons, implications etc). These shifts are not unrelated to the major macroeconomic policy settings (fiscal and monetary) which are currently stifling economic activity at present. These aggregate effects manifest in disaggregated ways through such things as the composition of employment by industry. That is what I am looking at today.

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Chained-CPI COLAs – another conservative smokescreen

The conservatives are always dreaming up new attacks on the most disadvantaged people in our societies. in the US, the front line of the war on the poor is the on-going attacks on the Social Security system. As I’ve noted in the past this entire debate is based upon the around the’s claim that the system can go broke. I dealt with that issue in these blogs – Social security insolvency 101 and The time has come to tell the American people the truth – among others, and I won’t repeat the points. They are clear – the US Social Security Trust Funds are just elaborate accounting smokescreens that ultimately mean nothing if one comprehends the financial capacity of the US government. They represent a case of a government creating a farcical structure to administer some program and then elevating the structure to a false level of importance that actually leads them to introduce policies which undermine the initial purpose of the program – and all without any basis. The determinants of future standards of living will be the availability of sufficient real goods and services of an acceptable quality. If they are available the US government will be able to purchase them with the stroke of a computer key. But because the conservatives have everyone thinking the funds will go broke, they can then force ridiculous time-wasting concepts into the public debate. One such attack is the proposal to use Chained-CPI measures as the Cost-of-Living-Adjustment (COLA) index in social security pensions.

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Japan will (yet) run out of money. Never!

A regular occurrence is the prediction of doom for Japan. Some minor upturn in Japanese government bond yields or a movement in some other irrelevant financial statistic relating to the Japanese public sector sends the financial press into apoplexy. The latest signal of impending bankruptcy being bandied about relates to the rising trend in foreign holdings of short- and longer-term Japanese government debt. This trend is explained by financial markets moving into less risky assets (in this case, Japanese government bonds) as uncertainty in other markets, for example the Eurozone, remains. However, the narrative then goes that eventually these purchasers will refrain from buying Japanese government debt and with the funding from the savings of the ageing domestic population drying up, the Japanese government will run out of money. Policy response? Cut fiscal deficits immediately through a combination of tax rises and spending cuts. All of which is nonsense and if the Japanese government follows the advice – there will be a 1997-style recession and public debt ratios will just rise faster than they are at present. It is better that we now all turn to the sport’s section of whatever news you read and relax.

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Saturday Quiz – November 9, 2013 – 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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External economy considerations – Part 7

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime in 2013. Our (very incomplete) textbook homepage – Modern Monetary Theory and Practice – has draft chapters and contents etc in varying states of completion. Comments are always welcome. Note also that the text I post here is not intended to be a blog-style narrative but constitutes the drafting work I am doing – that is, the material posted will not represent the complete text. Further it will change as the drafting process evolves.

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How to discuss Modern Monetary Theory

I have been travelling a lot today (nearly 6 hours starting early) and so haven’t much time for blog writing. I am working on a paper at present on the use of metaphors in economics and how Modern Monetary Theory (MMT) might usefully frame its offering to overcome some of the obvious prejudices that prevent, what are basic concepts, penetrating the public psyche. Here are some notes on that theme. The blog is just a rough sketch and will be refined over the coming weeks. There is a section at the end that encourages reader feedback – lets see what you think.

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Saturday Quiz – November 2, 2013 – 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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External economy considerations – Part 6

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime in 2013. Our (very incomplete) textbook homepage – Modern Monetary Theory and Practice – has draft chapters and contents etc in varying states of completion. Comments are always welcome. Note also that the text I post here is not intended to be a blog-style narrative but constitutes the drafting work I am doing – that is, the material posted will not represent the complete text. Further it will change as the drafting process evolves.

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Bonnie Scotland – ignorance or denial – either way it is fraught

There was an article in the UK Guardian (October 29, 2013) – Mainstream economics is in denial: the world has changed, which reported that the economics profession had been “stupidly cocky before the crash” and “had learned no lesson since”. It followed a – report – last week (October 25, 2013) that students at Manchester University had proposed an overhaul of orthodox teachings and economics. The latest Guardian article concludes that the economics profession is in “denial”, that is, “the high priests of economics refuse to recognise the world has changed”. I will come back to that in a moment, but evidence of this denial is swamping the debate about the upcoming Scottish decision on whether to break from Britain. So-called informed policy briefing papers have started to emerge, which will distort the choice available to the Scottish people by perpetuating basic myths about the way monetary systems operate and the choices particular currency arrangements provide government. As I’ve said before, if the medical profession offered the sort of analysis and professional opinion that my own profession offers, then they would be very few practising medics because they would have all been sent broke through malpractice lawsuits.

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Eurozone – what do they propose as an encore?

During the late 1980s and into the 90s when the Monetarists (mostly holed up in Britain) were boasting that the widespread privatisation and labour market deregulation strategies they had instigated were containing inflation and setting up their economies for sustained growth with reductions in unemployment my response was “what do they do they do for an encore”. It was obvious that if you scorched domestic demand and pushed up unemployment that the inflation rate would drop and the reduced imports would flatter the external balance. The question then was – what do you do next? Once growth returns in domestic demand rises on the back of increased income growth, imports start catching up and workers start demanding wage rises to make up for lost real income during the deflation and you end up with nothing much being achieved except for a extended period of lost real income, and rising inequality given the lower income groups carry the burden of the recession. The conservatives became slightly more astute in more recent years arguing that the recession provided the opportunity for nations to undergo radical restructuring so that growth could be driven by exports as a result of increased competitiveness. That’s the European model at the moment. Is it working? The IMF doesn’t think so.

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Saturday Quiz – October 26, 2013 – 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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External economy considerations – Part 5

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime in 2013. Our (very incomplete) textbook homepage – Modern Monetary Theory and Practice – has draft chapters and contents etc in varying states of completion. Comments are always welcome. Note also that the text I post here is not intended to be a blog-style narrative but constitutes the drafting work I am doing – that is, the material posted will not represent the complete text. Further it will change as the drafting process evolves.

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Currency sovereignty is what matters

There is a literature emerging that suggests that a Eurozone nation would be no better off with its own currency then and is within the monetary union. The claim is that these nations have not performed any worse than nations outside the Eurozone during the current crisis. A recent paper by an American economist (Andrew Rose) – Surprising Similarities: Recent Monetary Regimes of Small Economies – is being used as the authority to support this claim. The intent is clear – to deny that the Eurozone as a monetary system is inferior to systems where the nation issues its own currency and sets its own interest rates. However, these studies skate over the currency sovereignty issue and cast the differences between nations in terms of exchange rate arrangements or whether their central bank targets inflation or not. The real issue is whether the monetary system is characterised by the government facing a financial constraint or not in its spending – that is, whether it issues its own currency, sets its own interest rates and resists issuing debt in a foreign currency. Once you consider those basic aspects of the monetary system then it becomes obvious that the Eurozone nations as a whole have performed worse than other advanced Non-Eurozone nations which have enjoyed more fiscal flexibility.

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Saturday Quiz – October 19, 2013 – 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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How to fail a simple macroeconomics examination

In the opening sequence of the HBO series, Newsroom, the anchor is participating in a public forum at an East coast US university (in Boston). During the Q&A, he is asked by a student (“a sorority girl”) in the audience, who is suitably bright-eyed and full of American blather, “Is America the greatest country in the world?” He initially blusters but the convener of the forum pushes him for a “human moment” and what follows is 3 classic minutes of TV, starting with “its not the greatest country in the World, Professor, that’s my answer” and concluding with “So when you ask what makes us the greatest country in the World, I don’t know what the fuck you are talking about. Yosemite?”. He then said among other things that “We used to be …”, “we stood up for what was right”, “we waged wars on poverty, not poor people”, “we aspired to intelligence, we didn’t belittle it” and more. The latest shenanigans in the US Congress where the GOP representatives have become a mindless rabble is certainly testimony to the sort of things the mythical Newsroom anchor was talking about in the series. The Sydney Morning Herald article (October 16, 2013) – US shutdown stalemate enters realm of the absurd – reports on how the GOP reps do not “agree either on tactics or strategy” and Boehner announced to the press that there had been “no decisions about what exactly we will do”. This is one day before the lunatic right-fringe of their party is intent on causing mayhem. My prediction – some ridiculous deal will be done and the US government will not default. We will see. But today I am providing a little glimpse into examination processes by using what might have been a first-year answer to an examination question to highlight some important points. I hope you enjoy the little window into life at a university.

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Declining wage shares undermine growth

There was an interesting Working Paper issued by the ILO – Is aggregate demand wage-led or profit-led? – last year, which finally received some coverage in the mainstream economics press this week. The Financial Times article (October 13, 2013) – Capital gobbles labour’s share, but victory is empty – considered the ILO research in some detail. That lag is interesting in itself given that it was obvious many years ago that the trends reported in the ILO paper and the FT article were part of the larger story – that is, the preconditions – for the global financial crisis. If you look back through the Modern Monetary Theory (MMT) literature, dating back to the 1990s, you will see regular reference to the dangers in allowing real wages to lag behind productivity growth. It seems that the mainstream financial press is only now starting to understand the implications of one of the characteristic neo-liberal trends, which was engendered by a ruthless attack on trade unions by co-opted governments, persistent mass unemployment and underemployment, and increased opportunities by firms to off-shore production to low-wage nations. Better late than never I guess.

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