I read the headline in the UK Guardian from yesterday (September 15, 2010) – Unemployment claimant count rises unexpectedly which apparently confounded forecasts. The hopes for an export-led recovery as the expectations of the forthcoming public austerity damage private spending plans took a further hammering with the data release showing the “highest balance of trade deficit on record” in Britain and “surveys of the services and construction sectors showing employer sentiment deteriorating sharply”. Why is this surprising? The fact that the so-called analysts and the press are surprised only tells me that they do not understand the way the macroeconomic system works. When there are already severe aggregate demand constraints and the government announces that soon enough they will brutalise public spending what would you expect but a further decline in economic activity? When the rest of the world is easing the fiscal stimulus under the concerted attack by the deficit terrorists why would you expect the balance of payments to dramatically improve? None of this surprises me at all. It is exactly what an understanding of the monetary system would lead one to predict.The reality is that to lower unemployment you need to spend more. There are no surprises in that.

The Economist feature column Economics by invitation where they ask some commentators to share their thoughts on some topical issue is running with household debt this week (September 11, 2010). The topic – How far along the process of deleveraging are we? – is examining the extent to which the record levels of private indebtedness are being run down and household balance sheets reconstructed. I also noted in the discussions that have been on-going about trade and deficits on my blog that someone said that there is no evidence that budget surpluses have caused the “sky to fall in”. In this blog I explain how budget surpluses are intrinsically related to the rising indebtedness of the private sector and hence under most conditions are destabilising.

Yesterday, two public statements were made which caught my roving eye. First, the British Government claimed they were going to cut harder than planned to weed out the unemployed who took income support payments to support their “lifestyles”. That was the approach the previous conservative government took in Australia between 1996 and 2007 and so we have experience with it. It failed dismally to achieve anything remotely positive. Second, the OECD released their Interim Assessments to update the May Economic Outlook publication. It showed that the GDP growth forecasts for 2010 and beyond were being revised sharply downwards. The OECD now claims there are many negative indicators and that governments should not push ahead with their austerity plans if the world economy is really slowing. The British government has used the earlier May EO forecasts (which were overly optimistic) as authority to justify their proposed cutbacks. Well now that authority is gone. However, their proposal to further cut back public spending would seem to be in denial of what is now obvious to even the right-wing hacks at the OECD. It is time for George to admit his austerity push is purely ideological in motivation.

The denials continue. In the Wall Street Journal yesterday (August 30, 2010) we see the latest desperate attempt by Harvard (and Stanford) professor Robert Barro to redefine away the recession. The article – The Folly of Subsidizing Unemployment claims that if the US government had not have extended unemployment benefits to 99 weeks “the jobless rate could be as low as 6.8%, instead of 9.5% …” Barro has consistently claimed that the government fiscal intervention has largely caused the recession to persist. As we will argue his track record at predicting and/or explaining economic outcomes is very poor. Simple facts always contradict his fantasy world of Ricardian Equivalence and Natural Rates. I am also adding Stanford to my list of universities which sensible students should boycott if they want to learn some economics given Barro’s presence there. The list is getting longer.

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City. While not all of the papers and discussion are yet available for public scrutiny there were some notable presentations (that you can access in full) which suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession.

Yesterday, I indicated that I would provide some commentary on the latest Morgan Stanley briefing (August 25, 2010) – Sovereign Subjects – which received a lot of press coverage in the last few days and roused the interest of many of my readers. I cannot link to it as it is copyrighted. But the MS document is another example of how you can spread nonsense by ignoring the elephant that is sitting in the corner of the room. The MS briefing is essentially a self-aggrandising rant which perpetuates the standard neo-liberal myths and offers nothing new. I sincerely hope that the author’s company and all of their clients take his advice and lose significant amounts of their investment funds. The more losses are made in this respect the more quickly people will see through the cant that is served up by these clowns.

I often read articles that follow their own logic impeccably except they leave the main part of the story out. They ignore the elephant that is staring at them from the corner of the room. In doing so they avoid facing up to uncomfortable realities and just perpetuate the standard myths that characterise economic debate in this neo-liberal era. Some other articles build on this deception and just plain invent things to beguile their readers into thinking they have something important or valid to say. Tomorrow I will review the latest Morgan Stanley briefing (August 25, 2010) which is an example of the latter. But in general the conservative commentators exploit the fact that the general public do not what the debates are in economic theory and thus litter their proselytising with spurious claims while the elephant laughs away in the corner. It is almost comic book stuff except the standard of narrative in most comics is vastly superior to the trash is pumped out daily in the World’s press.

Remember what we were told a few months ago – that business and households were so terrified of higher future tax burdens associated with the budget deficits that they were not investing or spending and so governments were killing economic growth? This led to the deficit terrorists arguing (shouting) that the fiscal stimulus that governments had implemented to save their economies from the threat of a depression were actually undermining growth and that fiscal austerity was the key to growth. Accordingly, governments have increasingly been implementing or promising to implement so-called fiscal consolidation strategies because they have fallen prey to the austerity proponents. As the fiscal stimulus has waned across the world growth is slowing and there is now a real danger of a double-dip recession. In nations that have introduced formal austerity programs the evidence is now mounting … it damages growth and undermines business and household confidence. It has exactly the opposite effect to that predicted by the deficit terrorists which is no news to anyone who understands anything about how the economy works. The victims – the poor and disadvantaged …. AGAIN!

Today I am catching up on things I read last week. Each year, there are various publications provided to high school students telling them about all the programs that are on offer at Universities. The prospective students use these publications to help them decide which program they want to pursue after high school and at which university or other higher educational establishment they might want to pursue it at. There is a lot of lobbying by institutions to get favourable reviews. But there is never a catalogue published which advises students where not to study. So today I am noting three economics departments which should be on the blacklist of any student who is considering undertaking the studies in that discipline. They are on my blacklist because of the questionable competency of at least some of their staff members. I will expand this list over time!

I have been in Sydney today for meetings. I caught an early train and then back again in the afternoon. Trains journeys are great times to read and write and this blog has been written while crossing the countryside (Sydney is nearly 3 hours south of Newcastle by train). The trip is slower than car because the route is still largely based on the first path they devised through the mountains and waterways that lie between the two cities. The curves in places do not permit the train to go faster. The government is promising however a fast train with a much more direct path (up the F3 freeway I guess). Anyway, several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal Kalecki – The Political Aspects of Full Employment. The answer is that I am very familiar with the article and have written about it in my academic work in years past. So I thought I might write a blog about what I think of Kalecki’s argument given that it is often raised by progressives as a case against effective fiscal intervention.

Every day now as the Australian federal election day approaches (August 21) the calls for fiscal austerity increase and the justifications become further removed from reality. I note The Greens, who are held out as our only hope are still running their neo-liberal line that budgets should be balanced over the cycle (see Neo-liberals invade The Greens! for more discussion on that). But the US political scene is even more moribund than ours if that is possible. Even the progressives are claiming there is a fiscal crisis. The facts speak otherwise.

The Australian federal election campaign is in full swing and last night the federal opposition in Australia staged their policy launch for the federal election to be held on August 21, 2010. This is a campaign where both sides of politics are running on their respective claims to be better at implementing fiscal austerity measures. It has become a matter of who is promising the biggest budget cuts the earliest. It has made the parties barely distinguishable in terms of their overall policy appeal and has rendered both unfit to govern this country. It used to be said that procyclical fiscal policy was destabilising. This was typically in the context of neo-liberals claiming that expansionary policy always came too late and added to private spending that was already on the rebound and thus increased the inflation risk. But the reverse doesn’t appear to apply for the mainstreamers. Cutting public spending when private spending is weak is being held out as virtuous and the only way to engender growth. This inconsistency exposes the ideological nature of the austerity measures, which reflect as one UK commentator said recently – a desire to complete the neo-liberal demolition of the welfare state started 30 years ago but still incomplete or a reflection that the deficit hawks are total lunatics.

There is a long tradition of economists writing Open Letters to the media in support or in opposition to some government policy stance. The conservatives write them. The so-called progressives write them back. Usually around election times. Often the underlying economics supporting the arguments is difficult to differentiate given they both seek to comment on budgets and fiscal policy. In that context, the differences become matters of degree rather than substance. So the progressives usually take a deficit-dove position where they consider deficits are good sometimes but the budget needs to be balanced over some business cycle. In that sense, the progressives are not different to the more reasonable conservative economists. Neither position is correct and the continual repetition that deficits are only useful in times of recession demeans the public debate. The public ignorance about monetary matters and the role of deficits is continually being reinforced by these letters. Better to tell the truth I think – as long as you know what it is!

There were two very different Op Ed pieces in the New York Times on July 31, 2010. On the one hand, the “strategic deficits” man, David Stockman is trying to ramp up a bit of advance publicity for his upcoming book on the financial crisis which I hope goes out to the remainder desks shortly after being published. He is advocating balanced budgets and “sound money” – which is neo-liberal speak for austerity and rising unemployment. On the other hand, Robert Shiller is advocating a “just do it” approach to recovery where the “do it” is defined in terms of public sector job creation. I find the latter argument compelling when you look at the data and what it is telling us about the American lives that are being destroyed by the policy vacuum. I am also sympathetic to Shiller’s line because sound macroeconomic theory points to that solution. Stockman displays an on-going ignorance of macroeconomics although some of this views resonate with me in a positive way.

The US economy is showing signs of slowing as the fiscal stimulus is withdrawn and the spending contractions of the state and local government increasingly undermine the injections from the federal sphere. The recent US National Accounts demonstrate that things are looking very gloomy there at present. In the last week some notable former and current policy makers have come out in favour of austerity though. Some of these notables contributed to the problem in the first place through their criminal neglect of the economy. Others remain in positions of power and help design the policy response. A common thread can be found in their positions though. A blind faith in the market which links them intellectually to the erroneous views espoused by Milton Friedman. His influence remains a dominant presence in the policy debate. That is nothing short of a tragedy.

Today is actually the much promised shorter Friday blog. I had to write an Op Ed piece today for the Fairfax press on my recent evidence before a House of Representatives Committee of Inquiry into regional skills shortages. So I thought I would expand on that Op Ed a little for this blog. In April, my research centre – CofFEE – made a formal submission to this Inquiry. In June I gave formal evidence (see below) and some interesting things came up. A conservative MP on the Committee thought I was insane for suggesting that the public sector might consider creating employment given the high degree of labour underutilisation we have in this country. Some regions have 50 per cent of their workforces idle! Anyway, today I summarise our submission and provide some text from the official government hansard (record) of my evidence.