Its all weather today with severe winter storms giving grief to people (and some friends) in the US at present. Closer to home Northern Queensland, fresh from being flooded, will be hit later tonight by Tropical Cyclone Yasi which is now classified as a Category 5 and will have winds up to 300 kms per hour. My friends up in Townsville are staying calm though. Down here in Newcastle it has been around 40 degrees Celsius for the third day now with no real change coming. So weather extremes – and yes I think they are becoming more pronounced but I am an economist so that is just my uninformed (non climate change sceptic) opinion. But today I am writing about a speech the Australian Prime Minister gave to CEDA yesterday (February 1, 2011) that exposed her lack of understanding of how the macroeconomy works. The problem is that I suspect no-one else in the room who listened would have thought that her message was fundamentally inconsistent. The lesson is that cannot have more jobs by cutting spending despite what the Prime Minister thinks.

Today the Australian government demonstrated how poor their grasp of macroeconomics is and how badly they are managing our economy. In response to the very destructive floods that have ravaged the most populated states on the east coast (Queensland, NSW and Victoria) and wiped out billions in income-generating assets and businesses, they decided to increase taxes to “pay” for the reconstruction relief. This is at at time when the economy is slowing, inflation is moderating and the banks cannot get enough treasury debt to satisfy their prudential requirements. Further, it is at a time when there are 12.5 per cent of willing labour resources lying idle and long-term unemployment is rising. I noted in yesterday’s blog – Its grim on both sides of the Atlantic – that things are really bleak in the UK (now contracting again courtesy of its government policies) and in the US (about to contract courtesy of its government’s mismanagement). In both cases, the malaise is being caused by a dysfunctional ideology being imposed by policy makers onto very fragile economies. Well it seems that the madness along the coastlines of the Atlantic has crossed the Pacific. The imposition of a flood levy is a nonsensical and destructive policy act.

Today I have had several media requests for interviews about various topics including the flood reconstruction in the eastern states of Australia and their implications for the budget aims of the Federal government (to record a surplus in 2012-13). My position seems to be alone in the debate. In the conservative pro-business publication – Business Spectator article (January 19, 2011) – A flood levy would not break Labor – we read more about the alleged budget dilemma facing the Government as a result of the devastating floods that Australia is currently enduring. To put the article in context, the author was a former advisor to past Labor government ministers – which when you read it tells you how far to the right the political “centre” has gone. While I doubt that the floods alone will undermine economic growth over the next 12 months, I certainly consider that the Australian economy requires further fiscal stimulus to keep growth going and the response to the disaster is a politically acceptable way to inject that stimulus. It is certainly not the time to be trying to raise taxes or cut spending in other areas to “pay for” the reconstruction effort.

I am currently writing a piece for the US weekly The Nation which is focusing my mind on issues relating to what a social democratic narrative should look like and in what way does it have to change from that which dominated government policy and the relationship the state had with its citizens in the Post WWII period up until the neo-liberal resurgence in the mid-1970s. It is an interesting topic and my deadline looms. Serendipitously, while I was driving back from the airport the other day I was listening to a repeat of an ABC radio program Big Ideas (thank god for our public broadcaster) which was a repeat of a lecture – What is Living and What is Dead in Social Democracy? – given by the late Tony Judt as the 2009 Remarque Lecture at New York University on October 19, 2009. The lecture nicely dovetailed into my current thoughts and challenged the “left” to wake up to themselves and revive the collective narrative and to get angry about what we have lost over the last 30 years. There are many memorable lines in this speech and the title – imagine if we treated “humiliation itself as a cost” is just one of them (more about which later).

The title of today’s blog comes from a speech given on January 12, 2011 by Richard W. Fisher, boss of the Federal Reserve Bank of Dallas – The Limits of Monetary Policy – which carried the sub-title – Monetary Policy Responsibility Cannot Substitute for Government Irresponsibility. It is a speech littered with ideological assertions parading as sensible public commentary. It will resonate with the deficit terrorists and reinforce the policy agenda that will only make the situation in the US worse not better. The ideas were echoed elsewhere in the world in the last week. Japan is considering hiking tax rates “because they want more private growth and less public net spending”. The (un)truth brigade have thus been out in force in recent days – spreading a litany of lies and falsehoods which only aim to perpetuate their irrational obsession that government economic activity is bad. I only wish they would just speak the truth.

I am travelling and engaged with commitments today and so am fitting this blog into a shorter time-span than I usually make. The floods in Australia have now become tragic (loss of many lives) but the Prime Minister still is insisting that the Federal government “will bring the budget to surplus in 2012-13, and, yes, that will entail some tough choices” even though it is being predicted that the impact on real growth of the Queensland economy virtually shutting down at present might be of the order of 1 per cent (see this account). Given the tepid economic growth that was revealed in the September quarter this would suggest that we are going back into recession territory. My advice to PM Julia in relation to her surplus aspirations – “automatic stabilisers – learn about them”. You can see the negative impact of the excessive rain over the last few months on coal exports already – see ABS data release yesterday for International Trade in Goods and Services. Anyway, I was thinking about this early today before I started attending to my commitments here (in Melbourne) and it related to something that I read in the New York Times this week. The issue is that so-called progressives often let the team down by using inappropriate constructs in the public debate. I am never absolutely sure whether they use these constructs because they don’t know better or they want some point of intersection with the mainstream debate. I usually conclude the former and there are times when you realise you know they don’t quite get it.

In a speech in Maryland on January 7, 2011, one of the US Federal Reserve Governors, Elizabeth A. Duke spoke about current monetary trends in the US. It was hot on the heels of the testimony that the Federal Reserve boss Ben Bernanke made to the US Senate (January 7, 2011). They echoed similar messages. The reality is that the US economy is stagnating with very moderate growth and a very weak labour market. The overwhelming reliance on monetary policy as the saviour (low interest rates and quantitative easing) is misguided and will not provide the spending support that the private sector requires to regain their confidence again. But the interesting point to come from Duke’s speech was her observation that the US monetary system is not behaving according to how the mainstream macroeconomics textbooks (and thousands of orthodox teachers) depict it. That comes as no surprise when it is clear from the perspective of Modern Monetary Theory (MMT) that the textbooks are a joke. But given the monetary system is not “behaving itself” you can guess what all those mainstream professors are out there telling their students. Simple, the system is wrong!

As the days go by we begin to realise the huge scale of the problem that the floods in Northern Australia are presenting our country. Whole communities are being forced to leave their homes and major disruptions to economic activity (in very important regions) are being experienced. The floods are being labelled the worst in Australian history (well the white European occupation of indigenous land history) although that depends on the area – certainly the worst since the early 1950s. The areas that are affected are major sugar, coal, iron-ore and food production regions. So real GDP growth will be reduced and this will exacerbate the already slowing economy. What should be the correct federal government response? Answer: to expand the budget deficit (via discretionary spending increases) to ensure that essential public infrastructure is replaced and private economies are able to function again. What is the current federal government contemplating? Answer: spending cuts. My assessment of this: they have no credibility as fiscal managers.

Happy new year to everyone! It is starting out pretty poorly despite the nice weather and personal fun. On the last day of last year, the British Government released its Giving Green Paper, which apparently provides some detail about how it sees its Big Society concept working. As one commentator said it reads like it was written by a bunch of amateurs. But what it tells me is that the conservatives haven’t really evolved much since Maggie Thatcher declared there was no such thing as society. The Big Society is just a reprise of that concept with some mention of mobile phone apps and ATMs to match the historical period of technology that the latest attack on the welfare of the citizens is occurring. The Big Society is a blatant relinquishment of essential government roles and in that sense is a politically cynical attempt to cover up the impossibility of individual action relaxing systemic spending gaps. My training as a macroeconomists tells me that individuals cannot ease such macroeconomic constraints. Only the national government via appropriately sized budget deficits can do that. Which is exactly the responsibility the British government is recoiling from. The Big Society aka BS. More the fool anyone who believes in it.

It is a beautifully warm and sunny end to the 2010 which in general has been a pretty awful year. Yesterday, US Department of Labor released the latest Jobless Claims data. That was good news and suggested that not only has the fiscal expansion in the US been supporting growth but that the economy may be turning the corner – albeit very slowly. Earlier in the week the extremists – the unrelenting deficit terrorists who don’t understand what has been going on were at it again. Like an old gramophone record stuck in a worn out groove they chanted their mantras about record debt levels and how best to cut the deficit. They appear to be stuck in a pre-1971 monetary system as well and haven’t yet caught up with the fact that times have changed. We have CDs, DVDs, MP3s and a fiat monetary system. Anyway, I guess we know have an inkling as to their problem now – see this blog – We always knew it – their brains are thinner!. They do not seem capable of understanding that if you want deficits to fall then you need growth. Growth occurs because spending equals income – public or private the cash till operators don’t discriminate. When there is insufficient private spending to support robust growth, then you have to supplement it with public spending. End of story.

Research has shown conclusively in the past that those who undergo mainstream economics training are more selfish, less co-operative, less honest and less generous than other groups. These insidious qualities are reinforced and strengthen over the course of their undergraduate years. There has also been conjecture about the political role played by conservative economists – that is, that they provide authority for the industrial and financial elites to lobby politicians to introduce policy regimes that create the conditions whereby these groups can appropriate an ever increasing share of real income. They have been used to perpetuate the myth that the “business cycle” was dead and hence governments should have limited involvement in the “market economy” which was promoted as being self-regulating and capable of maximising wealth creation for the benefit of everyone. It was clear that this was always a sham and ideologically based rather than ground in any theoretical legitimacy or evidence-based standing. The fact that the mainstream failed to predict the crisis and have no tools in their models to provide a solution to the dramatic private spending collapse reinforced the notion that mainstream economists were ideological warriors. But new research has provided another clue – their brains are thinner!

Most of my blogs are about advanced nations. Many of these nations are being plunged back in time by misguided applications of fiscal austerity and even when growth returns they will take a decade or more to get back to the per capita income levels that prevailed prior to the crisis. Many children and teenagers in these nations will be denied essential education, training and workplace experience by the deliberate choice by their governments to entrench long-term unemployment and to starve their economies of jobs growth. But it remains that these nations are not poor in general and while people are losing houses and other items on credit only a small proportion will starve. Not so the poorer nations that I rarely write about. These are the nations where a high proportion of the citizens live below or around the poverty line. These are the nations that are at the behest of the IMF and suffer the most from their erroneous policy interventions. Today I reflect on how those nations have been going during this crisis. The bottom line is that the way the Fund reinvented itself and reimposed itself on the poorer nations after the collapse of Bretton Woods in 1971 has damaged their growth prospects and ensured that millions of people around the world have remained locked in poverty. Along the way … children have died or have failed to receive the levels of public education that any child anywhere deserves. There is no positive role for the IMF in its current guise.