As one dead-end traps the mainstream deficit terrorists’ relentless “hyperinflation is coming”, “the deficits are large and unsustainable” campaign another road is opened. New ways are found of pushing the same boring message. I read several papers and article today that all try to come up with a new tack – a new way of scaring the bjesus out of us and steer our minds towards what they assert is misguided government policy. They actually just don’t like any government claim on real resources because they think there is less for them then. Even when they don’t want to create jobs for the unemployed they resent government employing these people because it would just be a “waste of resources”. Its got worse as I read on. I tell you keeping up with all this stuff is surely going to be “a hard road till I die”.

Today I am travelling to the Baltic States of Estonia and Latvian, both of which are mired in a very deep recession bordering on depression. What you see in these economies is a demonstration of right-wing neo-liberal ideology at its crudest … and the damage it causes … at its magnified worst. Both economies are an indictment of the economics profession and the multi-lateral agencies like the IMF and the European governments. It is hard to come to terms with national governments who could easily enjoy currency sovereignty – voluntarily choosing to do otherwise for ideological reasons and then using what policy space they have left to inflict harsh pro-cyclical cutbacks on the economies they are meant to be nurturing. It is surreal at best and sometime in the future there will be retrospective consensus that this era we are living in was dominated by cruel and tyrannical policy makers.

In a sea of conservative media, two articles stood out this weekend which captures a debate that should be raging but will be quickly buried under the re-emerging neo-liberal hubris unless significant new alliances are formed. In recent weeks, as different economies are showing some signs of recovery, some key players within mainstream economics have been coming out in defence of the profession. They have been accusing critics of misunderstanding what economics is all about and saying that economists have actually saved the world. I covered some of this sort of positioning in Friday’s blog. In this blog I continue that theme but from a different angle. The conclusion is that if we want real change then “one should become more radical as one grows older”. We will see what that means as we go.

Welcome to 2010. Today, in the overcast summer that we are enduring here, in between other things I am finishing off, I was in my office reading about how mainstream economics actually saved us from a major depression over the last 2 years. Far from having to hang their heads in shame, the article indicated we had all embraced Keynes and glory be the day. I also read a counter to that which outlined what further needed to be done. I concluded neither writer really had grasped what has been going on and both would benefit from exposure to modern monetary theory. Not a lot has changed overnight. Happy new year!

In the past, when I have advocated setting the central bank policy rate to zero and leaving it there several readers have suggested that this would set off uncontrollable asset price bubbles particularly in the housing sector. Indeed, the view among mainstream economists is that lax monetary policy in the US caused the sub-prime housing crisis. It is an intuitively attractive view for those who do not really understand how the monetary system operates and the complex distributional impacts that varying interest rates have. Today’s blog considers a US Federal Reserve research paper that has just been released which rejects the notion that “loose” monetary policy was to blame. It is an interesting research exercise.

Several readers have E-mailed about the concept of a multiplier in macroeconomics particularly in light of comments I made yesterday about the current debate as to whether the deficits will be expansionary and whether it would be better to cut taxes rather than increase spending. There appears to be a lot of confusion about the most basic concepts involved so this blog seeks to address some of those issues. It is not a comprehensive literature review.

Tonight we consider the tale of two countries with some other snippets of good taste included for interest. In the last few days the Japanese government has announced the largest fiscal stimulus in its modern era (since records have been kept) while Ireland announced its 2010 budget which has been characterised as the harshest in the republic’s history. Both countries are mired in recession with only the most modest signs of any recovery. So on the face of it this is one hell of a juxtaposition. What gives?

It is interesting how one’s ideology screens out options and alters the way we examine a problem. I was reminded of this when I read two articles in the Times the other day (December 23, 2009) – Thrifty families accused of prolonging the recession and – No evidence Britons can save the day which both focused on movements in the savings ratio. The claim is that with UK households now saving more to reduce their exposure to debt, the UK economy is facing a double dip recession. The ideological screening arises because they seem to think it is inevitable that rising savings will lead to a deepening recession. In doing so they fail to realise that the moves by the British government to “reign in the deficit” are the what will make this inevitable. If their world view was less tainted both articles would have focused on the spurious nature of the deficit terrorism rather than the desirable trend towards rising saving ratios in Britain (and elsewhere).

Last week, the Federal Reserve chairman Ben Bernanke received endorsement for a further term from the US Senate Committee on Banking, Housing and Urban Affairs (popularly known as the US Senate Banking Committee). There is much controversy about this re-nomination along the lines that he was Chairman as the crisis unfolded and he did nothing about it until it was too late. There is also angst about his refusal to provide Congress with specific information about institutions that the Federal Reserve bailed out. These issues are not unimportant. But the strongest reason why he should be dispensed with is that his public statements leads any informed analyst to conclude that he doesn’t really understand the monetary system. From a modern monetary theory (MMT) perspective his comments on the monetary system are as sophisticated as the most flawed mainstream macroeconomics textbook.

Today’s Australian newspaper, sadly our national daily carries a story – Stimulating our way into trouble – by Griffith University professor (and ex-federal treasury official) Tony Makin. I pity the students who have to study with him. The article continues the News Limited campaign against the government stimulus package and demonstrates the extent that is prepared to use the services of so-called experts (that is, titled mainstream economists) who seem prepared to grossly mislead the readership to advance their ideological strategy. Whatever it takes seems to be the strategy. Anyway, once again the mainstream macroeconomics textbook is called upon to make policy statements.

In Sunday’s New York Times, the Room for Debate series focused on one of my favourite topics – Should Public-Sector Jobs Come First?. The debate turns out to be very disappointing because even the so-called progressive offerings fall short of advocating an effective solution to the jobs crisis. Only one implies an understanding that the policy design proposed should not be compromised by an errant understanding of the way the fiat monetary system operates. Proposals that assume there is a financial constraint on government will almost certainly be second-rate. The debate could have been energised had the NYT sought expert opinion from those that are developing and implementing large public sector employment programs.

Today I was in Sydney for some meetings and also I attended the first sessions of the Society of Heterodox Economists conference. I took some papers with me to read on the train coming back to Newcastle. Sitting on the train for 3 hours presents a good opportunity to catch up on back-reading. While I would have been better off reading the Phantom comic that I had in my bag, I chose, instead, to read the latest fiscal analysis provided by the IMF. The paper I discuss here is typical of the whole debate at present. It cannot provide any evidence to advance its scary “deficit and public debt” vision, but it doesn’t let the facts get in the way of presenting it anyway. My professional assessment. These guys should get a real job.