Today I have been working on a new book and have been deeply emeshed in paradigmic debates. The practical relevance, other than the work gives me another day’s pay to maintain my part in keeping aggregate demand growth moving, is that two Nobel prize winners (Phelps and Krugman) have had a recent paradigmic dispute about similar themes. One attack was implicit (Phelps on Keynesians), the other very direct and personal (Krugman on Phelps). Neither understand modern monetary theory (MMT) although Krugman is closer than Phelps. Phelps’s work, in my view, has been used by neo-liberals for years to undermine the employment prospects of millions of workers. It is also a primary IMF tool for keep less developing countries poor. Sounds like a topic to be discussed.

A story in today’s media reminded me that the way we construct a problem significantly affects the way we seek to solve it. The story – Change or lose drought assistance, farmers told (and the related Editorial) – appeared in The Australian newspaper. They indicated that on-going drought assistance to farmers would have be accompanied by significant changes in farming practices. This is a major shift in our policy thinking but still begs the question of why we have such inconsistent ways of thinking about policy problems and their solutions.

Today’s meeting in Almaty will be discussing how the CAREC countries, that I are working with at present via the Asian Development Bank, can best achieve regional cooperation and integration. The region is very interesting and I will report more fully when things are more clear. But the challenges these countries face are exacerbated by the grip that market liberalism has on them. This is especially to be understood in the context of the Soviet heritage of most of these countries. There is a curious mix of past and present which makes market liberalism even more dangerous. So what? Well, I have been asked by many readers about Latvia, another former Soviet satelite. The deep crisis that economy is enduring is a good example of how market liberalism has failed. Yet, depressingly, the solutions proposed involve more of the same. Modern monetary theory (MMT) clearly offers an alternative and much more productive alternative recovery path.

In the Financial Times this morning there was a thought provoking article by Mort Zuckerman entitled The free market is not up to the job of creating work which is in stark contrast to another article – Goodbye, Macroeconomics, which appeared last week in the FT and was written by Eli Noam. The former seems to understand the depth of the problem and has the right priorities but doesn’t come up with the right policies. The latter raises some interesting points but just misunderstands the nature of macroeconomics.

Australia’s central bank governor is now appearing in the world press as something of a hero for putting interest rates up recently in defiance of world trends. Today he is featured in many finance home pages for his statement that the RBA cannot afford to be timid in putting rates up in the current months. This has raised expectations that we are in a race to get the target rate up towards their so-called neutral rate sometime soon. So almost rock star status for our central bank governor. Pity, the whole paradigm he is representing is destructive and helped get us into this mess in the first place. This blog explains why inflation targeting per se is not the issue. The problem is that fiscal policy becomes subjugated to the monetary policy dominance. This passivity manifests as the obsessive pursuit of budget surpluses which allegedly support the inflation-first stance. But this policy strategy is extremely damaging in real terms and will provoke another debt-bust cycle sometime in the future.

Today I read an interview with Richard Koo from the Nomura Research Institute in Japan who is the touring the world promoting his views of why the fiscal stimulus packages are so important. His views are drawn from his extensive experience of the Japanese malaise that began in the 1990s. The interview was published in the September 11 edition of welling@weeden which is a private bi-weekly emanating from the US. I cannot link to it because you have to pay to read. Anyway, much of what he says reinforces the fundamental principles of modern monetary (MMT) and is quite antagonistic to mainstream economic thinking. It is the latter which is now mounting political pressure to cut the stimulus packages. Koo thinks this would be madness, a view I concur with.

The New York Times Editorial on October 2 was bitter-sweet – Wanted: Leadership on Jobs. Bitter because of the topic. Sweet because a leading newspaper is finally focusing on real issues in this crisis. It followed a devastating month of labour force data in the US which should be the clarion call for immediate intervention and a ramping up of budget deficits. Although Australia has not deteriorated as much as the US, our labour market is in a parlous state and, in my view, justifies a third stimulus package.

The debate seems to be slowing down which means this might be my last response although we will see. But in general the debate has raised a lot of interesting perspectives and I hope it has stimulated interested parties to read more of our work. I also think that while (as in any debate) “battle lines” appear to be drawn, I repeat my initial point some days ago. Steve and I saw this as a chance to focus on the common enemy – the mainstream (neoclassical) macroeconomics. That (failed) paradigm has nothing to say about the world we live in. The work of Steve and the modern monetary theory I work on both have lots to say and should not be seen as being mutually exclusive. Indeed, Steve operates in what we call the horizontal dimension of modern money.

Today, I offer Part 2 of my responses to the comments raised in the debate so far. I am still about 40 comments shy of the total. In general, I thank Scott, JKH, Ramanan, Sean and others who have provided excellent interventions into this debate based on their knowledge of how the monetary system actually works rather than a stylised representation of it which leaves out the government sector and is liberal with the accounting conventions applied to account for asset and liability flows and flow to stock relations. But there still appears to be major confusions which I will try to address here.

Readers of my blog often ask me about how modern monetary theory sits with the views of the debt-deflationists (and specifically my academic colleague Steve Keen). Steve and I have collaborated in the last few days to foster some debate between us on a constructive level with the aim of demonstrating that the common enemy is mainstream macroeconomics and that progressive thinkers should target that school of thought rather than looking within.

This morning’s Sydney Morning Herald (September 27, 2009) carried the front-page story $82m ‘wasted’ in stimulus splurge. As it was written by a political correspondent you might expect little coherent economic analysis. Your expectation would be correct. But the article had the predictable response from the deficit-debt-hysteria club and the “shocking revelation” has been interpreted as a testimony against the use of fiscal policy to attenuate major cyclical downturns in aggregate demand. The under-current is that citizenship doesn’t matter and governments should only assist those who live within the geographic boundaries they are sovereign over. All these conclusions are of-course folderol.

Household saving ratios (saving as a percentage of disposable income) have risen significantly in most countries since the onset of the recession. In many countries this has come after a period of increasing indebtedness as national governments pursued budget surpluses. As a result, the macroeconomic concept of the paradox of thrift has been resurrected in the popular press as a discussion point. There are fears that the end of the “consumer boom” will lead to stagnancy. A recently published IMF paper addresses this point but just cannot let themselves address the elephant in the room. They present a new way version of deficit hysteria.

The OECD, the organisation that has spearheaded the abandonment of full employment in all its member countries since releasing the supply-side blueprint in 1994 – The Jobs Study, has now finally realised that things are very bleak in labour markets across the World and is saying more action is desperately needed. All their rhetoric in the last decade about making labour markets resilient and flexible through active labour market programs has not apparently stopped the major economies from going belly up.

Today I am travelling to Kioloa which is on the South Coast of NSW. I am to be part of a three-day “dialogue” on The Land Restoration Imperative in Australia. The immediate past Governor-General of Australia Major General Michael Jeffery has invited me to be part of a Task Force he is forming to pursue this issue. This is what it is about.

It is clear that next year’s federal election will be based on the deficit-debt-waste agenda, if the mounting calls for the federal government to cut back net spending now to avoid us drowning in a mountain of debt are any guide. However, the political rhetoric is at odds with the major forecasts (such as the OECD and IMF) which confirm that the stimulus packages must not be wound back. The fact that the IMF and OECD are saying that is some endorsement given their neo-liberal credentials. Today, I thought I would do some digging to construct some of my own scenarios. This is what I came up.

I saw the latest Government Finance Statistics released by the ABS today just after I read the Financial Times where there was an article by former Cambridge Professor of Modern History, Peter Clarke entitled This is no time to throw away the crutches. There was a symbiosis in time. Then I read all the geeing up that is going on about rising manufacturing output in China and Japan and the News Limited themes that we have to get interest rates up sooner rather than later or the inflation genie will escape and I remembered the real world.

As part of some research I am doing for a book that will come out next year on the dynamics of recessions I have been looking at asymmetries in the response of the labour market to changing economic activity. The analysis has produced some very interesting set of graphs that inform us, very starkly, how recessions damage the labour market. They also reveal why I am at present dubbing the current downturn the underemployment recession.