I was pleasantly surprised this week when I received a telephone call from a reader wanting to chat about the current state of policy in Australia and the available options. We discussed a range of options and agreed that it didn’t make much sense to cruel the emerging economic growth in Australia while there were 12.1 per cent of available labour resources currently idle (either unemployed or underemployed). With world demand for our exports strong it seemed a perfect opportunity to really eliminate the pool of idle labour and return to full employment – a state that Australia has not been close to since the mid-1970s. The period since that time has been dominated by neo-liberal policy makers who have abandoned the responsibility that was previously vested in our macroeconomic policy arms (RBA and Treasury) to achieve and maintain full employment. We agreed that deliberately restricting growth just as it was gathering pace was a very restricted vision of national potential. The upshot of our discussion was that we agreed that fiscal policy could be targeted to redistribute the growth (to avoid specific sectors from overheating yet maintaining a growth stimulus to other sectors) and that monetary policy was too blunt an instrument to manage this process. But with growth emerging it is a case that policy makers should recite a daily mantra – when you are on a good thing, stick to it – rather than cutting it off at its knees before the benefits have spread widely throughout our nation and its people.

It is a fact that the Australian economy escaped recording a technical recession (2 consecutive quarters of negative real GDP growth), having recorded only one negative real GDP quarter (December quarter 2008 = -0.7 per cent). In that quarter, the first of large fiscal stimulus measures began and growth accelerated after that. The downturn, however, did push up official unemployment and underemployment and the legacy of the rationed employment and hours growth is that Australia currently has a broad labour underutilisation rate of 12.5 per cent. Aggregate policy (fiscal and monetary) is now tightening and is being justified by official statements that the economy is about to explode on the back of a very strong commodity boom (mining) and that we are close to full employment anyway. We are being told that unless policy tightens now inflation will break out. The problem with the official rhetoric is that a sequence of data releases is telling a different story. In the past few weeks we have seen exports falling, a weakening construction sector, flat credit demand, and yesterday, a very weak investment outlook. The outlook for next week’s September quarter National Accounts data is becoming increasingly pessimistic. In the meantime, unemployment rose in October. The justifications for the policy tightening are vanishing although I would argue they never were credible in the first place. The miracle Australian economy is a little less shiny at present.

Yesterday, parachute gangs from the ECB and the IMF were being dropped into various EMU nations whose only problem is that they are members of an unworkable monetary system and happened to get hit by a major demand shock. Today the IMF cavalry are apparently heading to Dublin for a “short, focused consultation”. Conclusion: Ireland is being invaded by hostile forces. I also read rumours overnight that Germans are refusing Euro notes not printed in the Bundesland. It is probably an outright lie of a similar quality to the many being spread by the deficit terrorists seeking to regain their “credibility” (an impossible mission) any way they can. In this context I get many E-mails from people each week telling me that I do not understand that the latest decision by the US Federal Reserve Bank “to flood the world with printed money” is putting it on the brink of insolvency! I also read that in a Bloomberg Business Week feature article today. And people believe this stuff. It is as much a lie as the fallacious stories recently about the US President’s Asian travel costs which the right-wing in the US (Beck, Limbaugh, Savage etc) perpetuated without scrutiny (see this analysis to see how this lie began). Anyway, rest easy … the US Federal Reserve cannot go broke!

I often get asked by people I have consulted for to write justifications for their existence (that is, the organisation and its charter). Sometimes it is a trade union, another times a government department and on. In each case you have to think out what the essential interactions are between the organisation in question and the rest of the world and articulate some sense of value to those interactions. These calibrations may not necessarily be quantitative but often it is useful if they are because bean-counting economists around the place who read the analysis I provide in this part of my professional life rarely think more broadly and spare the thought – can probably not even spell “social benefit” much less conceive of it. In the current economic crisis the only problems that should be receiving daily scrutiny in the debate are unemployment, real income loss, and the resulting poverty. We rarely see those items headlined. Instead, we are barraged with a virulent confection of bile about things that do not matter – public deficit to GDP ratios etc. And this anti-government campaign is succeeding in part because people believe the rhetoric that government is wasteful and doesn’t do anything. Well I am here to tell you ….

I keep reading that the inflationary expectations genie is about to jump out of the bottle and far from being benign and supportive will wreak havoc on real wealth. I also keep reading that the gold price is rising because of these increasingly robust fears of future inflation. It is one of those themes that get trotted out to alert us to the dangers of government intervention in the economy. It takes about one sentence to get to Zimbabwe and usually Weimar then gets dropped in. I know the characters that perpetuate this sort of stuff have had their minds poisoned by their undergraduate macroeconomics indoctrination but we do become adults eventually and should be able to question everything. If I am doubt I work out the logic of a problem and then confront the logic with some real world data to see if the logic at least is consistent with what actually happens. I am no empiricist but I don’t buy the idea that if the facts refute the theory then the facts must be wrong. Today I went off looking for those pesky inflationary expectations. I found them … looking forlorn. Just another ruse!

1 + 1 equals 2. The world is not flat. Night follows day (usually). You are born and then you die. Spending equals income. The mid-term elections in the US proved that religious zealots target positions of high office in our democracies. They are emboldened by a righteousness brought on by their faith. In the context of economic policy this religious fervour violates the most simple facts. The most simple story in macroeconomics that every student should have ingrained in them in the first two weeks of study is that spending equals income. It is as basic to macroeconomics as 1 + 1 equals 2 is to arithmetic. The mainstream economists know this but because it implies a role for net government spending that insults their religious passions they invent all sorts of elaborate lies and myths which purport to show that cutting spending increases it. These “proofs” are equivalent to those which try to show that 1 + 1 does not equal 2?. They are logical bereft and empirically vacant. The problem is that everyone citizen who forms the same view and votes accordingly increases the chance that their job will be next to go. Meanwhile the religious persecution of those without jobs continues.