A voice from the past – budget deficits are neither good nor bad

The International Labour Organization (ILO) released its Global Employment Trends for Youth 2012 report today (May 22, 2012). It is harrowing reading and I will consider it later in the week. It tells us that youth unemployment is rising and will be unlikely to see any improvement until at least 2016. The ILO recommend a raft of government initiatives which would require budget deficits to expand. But, of-course, the dominant political narrative is to cut deficits in the false belief that this will engender growth. Exactly the opposite is happening and for good reason. I came across an article from 1982 today which tells us why austerity is dangerous and damaging. It also conditions us to understand that budget deficits are neither good nor bad but policy choices can be.

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Failed forecasts reflect flawed economic understanding – nothing else

How bad is it going to get? That was the question that the UK Guardian asked the head of the UK Office for Budget Responsibility in an interview last week. It was in relation to the likely fallout if Greece defaults and leaves the Eurozone. He replied that the UK would be irreparably damaged. The fact is that Greece has already defaulted. The other fact is that if they do leave the EMU (which would be the best strategy) the impact on currency-issuing nations such as Britain can be managed away by sensible fiscal policy. For those who are predicting deep gloom the culprit is not the possible actions of Greece or any Eurozone nation but rather the irresponsible pursuit of austerity among sovereign nations. The reason Britain has a double-dip recession is all down to the decisions its own government have made. Organisations like the OBR support the flawed decisions with poor forecasting. Taken together this malaise reflects a mainstream macroeconomic framework that is incapable of providing policy advice which will deliver sustained prosperity to the population. The same flawed theoretical framework spawns the ever-growing hysteria about what will happen if Greece exits. The mania is reaching proportions similar to those a few years ago when rising budget deficits were predicted to cause huge hikes in interest rates and/or hyperinflation. All these forecasts fail because they are made by those who do not understand how the system works.

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The myths that abound in Federal Budget Papers

Last night’s Federal Budget in Australia proved once again how dominant the macroeconomic myths are in policy development. You can read my pre-Budget comments – Budget 2012: a recipe for disaster – and apart from the 2011-12 deficit being larger than the Government planned as a result of the slowing economy undermining its estimated tax revenue (in other words, the Government was overly optimistic in its forecasts last year) I would not have written much different after seeing all the Budget documents. It remains the largest fiscal consolidation attempted in one fiscal year (equivalent to 3 per cent of GDP) at a time that GDP is growing around 2.5 per cent.and I cannot see private spending growth picking up to fill the gap. Outcome – a movement towards recession. Conclusion – poor fiscal management. But the Budget Papers that the Government releases are always interesting reading and one day I plan to trace the evolution of the shifts in macroeconomic ideology through the way the papers are presented (format, tables, and narratives). There you learn what the economists in Treasury think and the ideas espoused are generally applicable to the international debate given that the tentacles of the dominant paradigm of the day spread widely. In Budget Paper No 1, Statement 4 – Building Resilience Through National Saving we are provided with a demonstration lesson of how a fiat monetary system does not work and a classic depiction of the way the mainstream narrative deceives the citizens.

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Saturday quiz – May 5, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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Are the Euro bosses going all growth on us?

I am still in Darwin today and have limited time to write. It seems, however, that the Euro bosses have gone all growth on us. For non-English speakers – going all growth on us – is terrible slang meaning are they becoming enamoured with the idea that growth is important. Apparently, austerity is “so yesterday”, if not “last week” and the mantra is now about “growth compacts”. Forget the fiscal compact which most of the EU states have signed up for which if realised will drive their economies into the ground so harsh are the proposed rules on budgets and public debt. Now there is a growth compact proposal – which Mario has suggested Europe follows. Angie is right in behind him – has Madame Austerity – has gone all growth on us too?. It has been a bad week for the Troika (IMF, ECB, EU) – what with the UK now officially in a double-dip due to the deliberate strategy of its government (emulating the EMU) and across the Channel, the impending success of François Hollande is now becoming obvious. Merkoz will now have to morph into Mollande. And while on “olland”, the Dutch government also collapsed as a direct result of the backlash over the fiscal austerity. Apparently, the likely new French president is not particularly keen to join the fiscal austerity conga line although all his public statements to date would suggest he is committed to the SGP principles. So what is this all about? Are the Euro bosses going “all growth on us”? Answer: there will be no “growth compact” other than in the title of some EU Summit paper. The growth spin is mounting but the EU elites remain firmly wedded to doing everything they can to undermine growth.

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Australian PM should take up frisbee

The ABC News today reported that – Newcastle hosts frisbee championships – which means the national frisbee championships will be in my town this week and I will be around. Apparently the championships involve “flinging a frisbee between players on a pitch similar to a football or soccer field” and then “catching the disc in the endzone”. I suggest the Australian Prime Minister take up the sport. It seems an innocuous pastime and she surely couldn’t be any less skilled at it than she is at managing the economy. Her speech yesterday in Perth certainly established she has no understanding of macroeconomics or if she does, then she is deliberately misleading us. Her Finance Minister was also fully engaged in the misinformation exercise about the state of the budget. But then she is in solid company. The German Bundesbank has made public statements telling nations crippled by self-imposed fiscal austerity to forget about growth and balance their budgets. The ugly German stereotype is unfortunately reinforced by these sort of public interventions. And, finally, we have the genius who yesterday was advocating widespread cuts in welfare entitlements today out in the Op Ed pages suggesting that countries who exert their sovereign rights over multinationals are committing suicide despite the particular country in focus having real GDP growth rates that most other nations envy. Its all in a day of neo-liberal madness.

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IMF struggling with facts that confront its ideology

I haven’t a lot of time today (travel) but I thought the latest offering of the IMF was interesting. In their latest World Economic Outlook (April 2012 – which will be released in full next week) they provided two advance chapters – one – Chapter 3 – Dealing with Household Debt – demonstrates just how schizoid this organisation has become. They are clearly realising that their economic model is deeply flawed and has failed to predict or explain what has been going on over the last five years. That tension has led to research which starts to get to the nub of the problem – in this case that large build-ups of debt in the private domestic sector (especially households) is unsustainable and leads to “significantly larger contractions in economic activity” when the bust comes. They also acknowledge that sustained fiscal support is required to allow the process of private deleveraging to occur in a growth environment. But then their ideological blinkers prevent them from seeing the obvious – that sustained fiscal deficits are typically required and that in fiat monetary systems this is entirely appropriate when . Which then leads to the next conclusion that they cannot bring themselves to make – the Eurozone is a deeply flawed monetary system that prevents such fiscal support and should not be considered an example of what happens in fiat monetary systems. Some progress though!

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A seriously reckless act

I read this morning that there were riots in Spain overnight – Arrests, clashes amid general strike in Spain. I thought that, ultimately, this may be the only way that the neo-liberal economic madness that has beset the world, amidst the worst economic crisis in 80 odd years, will be curtailed. By people power. It is a pity that we have allowed the political class to move so far beyond what is required to introduce policies that enhance the well-being of the citizens. How that happened is a separate question which I hope the political scientists and other experts shed some light on soon. It seems totally bizarre that popular support is given to political parties that introduce policies which undermine the prosperity of the supporters. In Australia, the Treasurer delivered a speech yesterday that confirms that even though we are a long way from the European maelstrom, our intellectual underpinnings are the same. Our Government is currently about to walk the plank because it is engaging in a “seriously reckless” act – trying to cut public spending by around 2.6 per cent of GDP when the economy is already in decline.

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Saturday quiz – March 17, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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Questions and Answers 3

This is the third Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about Modern Monetary Theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the blogs under this category (Q&A) because it is likely it will be addressed in some form here. It is virtually impossible to reply to all the E-mails I get although I try to. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.

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Saturday quiz – February 11, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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Yesterday austerity, today growth – but leopards don’t change their spots

It has been interesting to watch how various members of my profession are dealing with the on-going crisis over the last 4 years. Clearly, imbued with the notion that the “business cycle” is dead, which the mainstream macro economists had been attempting to establish as a given in the public debate, most economists were in denial at the outset of the crisis. That denial moved into the manic deficit terrorism that has sought to reconstruct the private debt crisis into a sovereign debt crisis – which allowed them to vent on their pet topic – dislike of government fiscal policy when used to increase employment. They have no problems with active fiscal policy when it is aimed at contraction. They just hate the public sector supporting growth even when the private sector is incapable of doing so. But as the empirical reality has increasingly rejected the predictions of the mainstream macroeconomic models – there has been no inflation breakout or rising interest rates or sovereign government insolvency – there has been a shift going on. Some of those that were advocating austerity now seem to be advocating growth. But when you dig a little deeper there is no fundamental catharsis in my profession going on. The only motivation for those now saying Europe needs growth not austerity is that they are trying to distance themselves from the train wreck that the political leaders are creating there. As the title suggests – yesterday austerity, today growth – but leopards don’t change their spots.

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Saturday quiz – February 4, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. 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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The German model is not workable for the Eurozone

I had an interesting meeting in Melbourne yesterday and the topic of the discussion, among other things, was the propensity of the current economic malaise in Europe to invoke associations with its historical past – in particular, the rise of the ugly German. In my blog earlier this week (January 30, 2012) – Greece to leave the Eurozone and become a German colony – one might have been tempted to conclude that I was invoking memories of the Germany’s annexation of Austria (the Anschluss). I even used the word Teutonic – a rather old-fashioned term for Germanic peoples (broadly) – in the phrase “My how audacious our Teutonic friends have become!”. This was in a discussion about the leaked German document which urged the EU Summit on Monday to effectively put Greece into receivership. But in fact, what I have been at pains to bring to the public debate is not an urging that we construct the current nasty statements from German politicians and its press about lazy Greeks etc in terms of these historical enmities but rather see them for what they really are – deeply flawed macroeconomic reasoning. A thorough understanding of macroeconomics would lead to the conclusion that the German model is not workable for the Eurozone. It will not help Germany nor anyone else. It is a deeply flawed economic doctrine that reflects the same neo-liberal ideology that led to the the original design of the European Monetary Union. Whether the “ugly German” is also implicated is another question altogether.

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Greece to leave the Eurozone and become a German colony

The Euro leaders are having another Summit in Brussels today – another one – the 17th in two years. I think they are getting used to the nice wine and sumptuous food that is served up. Little ever comes from these summits that is of any productive import. This time they plan to set in concrete balanced budget rules to be embedded into the national legislation of EU member states yet at the same time propose job creation and growth strategy. The job creation strategy is allegedly going to focus on the youth of Europe who are becoming unemployed and excluded in increasing numbers as time goes by. The lunacy is that Europe’s youth started losing their jobs some years ago yet the leaders are now expressing concern. Also over the weekend, there was a leaked German proposal for today’s summit detailing how Greece should leave the Eurozone and become a German colony. My how audacious our Teutonic friends have become!

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Saturday Quiz – December 17, 2011 – 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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When markets fail

A repeating narrative during this crisis is that fiscal austerity is required in order to satisfy the “markets”, that amorphous collective of bond traders, gamblers, speculators, crooks and whatever else. The regular threats coming from the ratings agencies (those crooks who lied to investors in order to make profits via cosy deals with the originators of the “assets”) reinforce the idea that markets are the “regulators” of good judgement. Economics students are taught that one of the imperatives of government is to deregulate in order to allow the market signals to be clear and strong so we can act in accordance with the “markets” judgement of prudence. It is a paradigm built on a myth. Markets fail and easily become corrupted and arenas where criminals dominate. The signals they send are also deeply flawed and should not be acted upon. One of the lessons of this crisis is that our agents – the governments we elect – have to make markets work for us not the other way around. When markets fail to establish benchmarks that we do not consider to be in our best interests then it is time to reform them.

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Saturday Quiz – November 19, 2011 – 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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The ECB is a major reason the Euro crisis is deepening

I notice that a speech made yesterday (November 8, 2011) in Berlin – Managing macroprudential and monetary policy – a challenge for central banks – by the President of the Deutsche Bundesbank, Jens Weidmann has excited the conservatives and revved them back into hyperinflationary mode. The problem is that the content that excited them the most is the familiar mainstream textbook obsession with budget deficits and inflation (through the even more obsessed German-lens). That means it is buttressed with misinformation about how monetary operations that accompany deficits actually work. It tells me that the European Central Bank which is the only institution in Europe that has the capacity to end the crisis is in fact a major reason the crisis is deepening.

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Economy faltering – Australia’s wind-up Treasurer “We will cut harder”

On May 10, 2011, the Australian Treasurer delivered his Budget Speech 2011-12. At the time I wrote these blogs – Australian Federal Budget – more is not less and Time to end the deficits are bad/surpluses are good narrative. Some 6 months later the Australian government received news (November 07, 2011) – Swan warned on surplus timeline – that indicated the economy was slowing and tax revenue was going to be much lower than estimated. It is becoming obvious to most people now (what was clear months ago) that the Government’s obsession with achieving a budget surplus is undermining the growth prospects of the economy. They should never had withdrawn the fiscal support in the first place but now they should definitely abandon this surplus obsession. The Australian Treasurer was like a wind-up doll yesterday when told the economy was faltering. All he could say was “We will cut harder”. Moronic.

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