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.
The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the June-2013 quarter today. The quarterly inflation rate was 0.4 per cent and this translated into an annual rate of 2.4 per cent, down on 2.5 per cent in the March-quarter 2013. However, if we acknowledge the inflation spike in the September-quarter 2012, and consider the annual trend, the annual inflation rate is more like 1.6 per cent, which puts it well below the lower-bound of the RBA’s inflation targetting range (2 to 3 per cent). The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now well within the inflation targetting range and are probably trending down. This suggests that the RBA will probably consider the inflation outlook to be benign or “too low” and will instead have to shift their focus to the failing labour market, which in the last month showed signs of considerable deterioration after a flat 18months.The evidence is suggesting that the economy is slowing under the weight of the federal government’s obsessive pursuit of a budget surplus. The benign inflation outlook provides plenty of room for further fiscal stimulus.
In Australia, 84 per cent of jobs created in the last 6 months have been part-time and underemployment has risen since February 2008 (the low-point in the last cycle) from 666.3 thousand (5.9 per cent) to 908.6 thousand (7.4 per cent). And this is a period that the spin doctors in government and the media told us was our once-in-a-hundred year mining boom bringing rich bountiful futures to all. The only problem is that the future workers (our 15-19 year olds) have endured an absolute contraction in employment in the 5 years since early 2008. The Government hasn’t embraced the full-on austerity that is failing Britain but has still overseen a contraction in fiscal policy which is now damaging growth and creating an increasing pool of low-paid, insecure jobs as full-time employment vanishes. In Britain, the situation is even more dire with a Government hell-bent undermining the prosperity of it citizens. The British Trades Union Congress (TUC) released an interesting report last week (July 12, 2013) – The UK’s Low Pay Recovery – which shows that “eighty per cent of net job creation since June 2010 has taken place in industries where the average wage is less than £7.95 an hour”. The British Chancellor is looking increasingly cocky lately declaring that Britain is “out of intensive care”. From the data I examine most days, nothing could be further from the truth.
This is a background blog which will support the release of my Fantasy Budget 2013-14, which will be part of Crikey’s Budget coverage leading up to the delivery of the Federal Budget on May 14, 2013. The topic of this blog is the concept of employment guarantees as the base-level public policy supporting a return to full employment in Australia. We introduce the specific proposal – the Job Guarantee. In the next background blog we will see how much the Australian government needs to invest to make this policy improvement possible.
This is a short background blog which will support the release of my Fantasy Budget 2013-14, which will be part of Crikey’s Budget coverage leading up to the delivery of the Federal Budget on May 14, 2013. The topic of this blog is the estimated losses arising from persistent unemployment. Most people fail to associate on a daily basis how much the economy (and hence individuals and their families) forgoes in terms of lost output and income as a result of the government refusing to use its non-inflationary fiscal capacity to create employment.
The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the March 2013 quarter today and while the inflation rate rose a little, this was mainly due to the fact that the base March-quarter 2012 was unusually low, thus distorting the annualised figure. When we continue the most plausible recent trends the annual inflation rate is below 2 per cent and falling. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now well within the inflation targetting range and are probably trending down. This suggests that the RBA will probably consider the inflation outlook to be benign or “too low” and will instead have to shift their focus to the failing labour market, which in the last month showed signs of considerable deterioration after a flat 12-15 months. The inflation trend clearly contradicts the commentators who have been predicting the opposite on the basis of the (modest) rise in the budget deficit over the last few years as the downturn hit Australia. Their standing in the predictions stakes continues to be dented by the data. The evidence is suggesting that the economy is slowing under the weight of the federal government’s obsessive pursuit of a budget surplus. The benign inflation outlook provides plenty of room for further fiscal stimulus.
Regular readers will know that I consider promotion of the humanities and social sciences in a university systems to be of paramount importance in preserving an informed citizenry, which is a precondition for democracy. These areas of our education system have been under constant attack by the neo-liberal bean counters in government education bureaucracies and management positions within universities. While I regularly write about the impacts of poor fiscal management, in particular, in the current context – fiscal austerity – on unemployment and low income workers, one of the other casualties of neo-liberalism has been a university systems. The damage to our university systems go well beyond the squeeze of funding and a user pays mentality that I’ve written about in the past. Last night, on our national broadcaster’s prime evening current affairs programme – 7.30 – we were confronted with a classic example of how compromised our universities have become in Australia. The – 14th Dalai Lama – was banned from visiting a campus. Why? Guess!
Remember, earlier this year, when the IMF admitted they had made errors in their modelling of expenditure multipliers. They had been tramping into countries with their jackboots telling all and sundry that fiscal austerity would promote growth because their multiplier estimates told them so. Millions of job losses later, they came clean. It turns out that when they revised their multiplier estimates exactly the opposite was the case. Now they acknowledge that spending multipliers are in range of 1.5 1.75, meaning that increasing government spending adds at least 150 cents in the dollar spent extra to the economy. Now, the darlings of the austerity cultists – Rogoff and Reinhart – has been exposed for poor research standards – to wit, errors in spreadsheet coding. Meanwhile, Cyprus is being driven into oblivion. Who is ever going to take responsibility for these travesties?
I am still reeling from the incompetence of the EU, the German’s who pushed the deal, the ECB and the IMF who thought they could get away with stealing ordinary deposits when they had made such a big deal early on in the crisis that guaranteeing deposits below 100k Euros was an essential part of their financial stability reforms. The mind boggles as to how stupid those decision makers are. They are so blinded by ideology that they have lost a grip on their own narrative and certainly on reality. I notice the Troika rats are pointing the blame at each other for the disastrous judgement that was exercised in the package design. And, not one Cypriot politician voted in favour of the package. The bird on both hands (stereo effect) to the Troika. And you will note I haven’t said a word about Russian oligarchs and money laundering. That is a side-show in all of this. Anyway, I needed a rest from that so turned my attention to the US labour market as I was updating the latest February 2013 labour force data and examining where things are at. I did this as I thought about the debates in the US about the budget. I think many of the politicians might have been drinking the same Kool Aid as the Troika. They have also lost a grip on reality.
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.
This blog extends the discussion in yesterday’s blog – Exploring pro-cyclical budget positions – which is why I am running them on consecutive days. Not that I think any of my readers (Austrian schoolers and other conservatives aside) have memory issues! The discussion that follows focuses on ways in which we can interpret the fiscal stance of a government and hopefully clears up some of the confusion that I read in E-mails I receive from readers. I say that not to put anyone down but rather to recognise that the decompositions of budget outcomes and analysing the direction of fiscal policy on a period-to-period basis is not something that the financial press usually focuses on. In avoid detailed analysis, the press leaves lots of misperceptions unchallenged and often the wrong conclusions are drawn. I am not talking about policy preferences here. Just coming to terms with the facts is sometimes difficult for many commentators to achieve. But, of-course, the “facts” are also sometimes difficult to discover given that the methods used to produce them are often ideologically biased (I am talking here about the decomposition of the actual deficit into structural and cyclical components requires a full employment benchmark, which is where the fun starts.
A few weeks ago the Federal government admitted that its obsessive pursuit of a budget surplus in the coming year at a time when private spending is still relatively weak was doomed. The slowing Australian economy had undermined its tax base as was always going to happen. The problem is that in trying to impose fiscal austerity the economy has suffered and the labour market is not producing enough jobs to even match the underlying population growth. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for December 2012 reveals that all the evils on the demand and supply side of the labour were aligned – total employment fell, full-time employment fell, unemployment rose, participation eased and working hours fell. It is certain that underemployment rose given the drop in working hours. In other words, the data is unambiguously bad. The unemployment rate rose to 5.4 per cent. The data is not consistent with any notions that the Australian labour market is booming or close to full employment. The most continuing feature that should warrant immediate policy concern is the appalling state of the youth labour market. My assessment of today’s results – a failing economy with further weakness to come. The Government should wake up to itself and even if only motivated by the federal election later this year it should reverse the direction of fiscal policy and introduce some direct job creation by way of employment-targetted stimulus.
The Australian version of the “fiscal cliff” is about poor people living on income support waking up on New Year’s Day when everyone is full of bonhomie for their fellow Australian and finding out that recent legislative changes made by the supposed pro-disadvantaged government, which have now become active, will leave them, in some cases, $A120 worse of a week. That is, they are losing a considerable proportion of their income. The way I judge public policy is not by how rich it makes the highest earners and asset holders in our midst but how rich it makes the poorest members of society. A policy framework that deliberately targets the most disadvantaged and makes them poorer is a sign of a failed state. The recent legislative changes reinforce the Australian government’s refusal to provide sufficient income support for the unemployment despite it being widely accepted that they are being forced to live well below the poverty line. The Government’s justification is that they need to pursue a budget surplus and have deliberately undermined the capacity of the economy to generate enough work as a result. The relentless attacks on the poor in this country violate my pubic policy assessment rule and indicate we are indeed a failed state.
Over the next few days I will be involved in transferring some of the major IT infrastructure for my research centre from our Newcastle office to our Melbourne office. This is the first stage of our plan to virtualise our server capacity – reducing costs, making it easier to manage, and giving us more independence in our new multi-campus structure. Sounds like fun doesn’t it. Not! It also wasn’t much fun reading the documents published by the UK Financial Services Authority (FSA) and the US Department of Justice last week concerning their investigations into the UBS LIBOR manipulation scandal. We read of widespread criminality and a total disregard for ethics and values. The authorities have, however, seen fit to go soft on the bank and will prosecute only a few it seems when many were involved. The point is that this is not the isolated act of a rogue trader or two. Criminality and greed is embedded in the culture of the financial sector and only major reform will get rid of it. That reform should start with the withdrawal of the license of USB to operate and then progressively the outlawing of the derivatives market and the scaling back of what banks can legally be involved in. Such major reform will not happen but until we get close to it the bad boys will continue to run loose.
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.
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.
The progressive side of politics is at the best of times, fragmented. The conservatives are much more organised and fund various “think tanks” very generously. These think tanks then provide the arguments upon which the conservative attack on government intervention is justified. Various multilateral agencies – such as the IMF and the OECD – are co-opted into this conservative putsch. But occasionally there is some major piece of work that is hailed as the progressive manifesto. A 2011 offering – Crisis, Slump, Superstition and Recovery: Thinking and acting beyond vulgar Keynesianism – is now being held out as a model for British Labour to follow. However on closer examination it becomes obvious that this offering is another one of cases when friendly fire shoots the progressive movement in the foot. You can read the previous editions of this theme – When you’ve got friends like this – to see what the problem is. The simple point is that a truly progressive social agenda has to be grounded in solid macroeconomic principles. Trying to carve out a progressive agenda within a mainstream macroeconomic framework undermines the credibility of the former and plays straight into the hands of the conservatives.
There was a report – Poverty in Australia – released over the weekend by the Australian Council of Social Service, which brought the reality of our lying federal government home- 1 in 6 Australian’s are living below the poverty line (which itself is a very low hurdle for an advanced nation to have to clear). I will dedicate a separate blog to that in the coming weeks. But the Federal government needs to face facts and stop adding to the despair of millions of Australia as part of its ideological and political obsession with budget surpluses. This brazen disregard for the most disadvantaged citizens probably qualifies the Government for a Nobel Peace prize, although I was thinking of nominating the IMF and the OECD to be joint recipients for 2013. They would join the current recipients, the EU and a host of other “deserving” winners over the last several years. I guess in awarding this year’s Peace Prize to the EU, the Nobel Prize Committee is trying to bring their main prizes into line with the rogue Economics Prize in terms of quality and deservedness of the winners.
There was an article in this morning’s Melbourne Age (September 26, 2012) by former Australian Federal Finance Minister Lindsay Tanner, which talked about the structural decline of social democratic parties around the world. Recently I was in the Netherlands for the Dutch national election and the Labor Party could not gain office and is likely to go into coalition with the Conservatives (what?) – the common bond – their support for the Euro and fiscal austerity. What set of circumstances would see what should be polar opposite political forces in coalition? And then there are the LDP and the Tories in the UK. And the debate in the US is not about a deficit versus a surplus but how quickly to get into surplus. The same goes in Australia. The policy debate is marked by claims from both major parties that they will generate bigger budget surpluses quicker than their opponents. The social democratic political tradition is fading because the parties have become indistinguishable from the conservatives in economic policy. They are all neo-liberals now and that is an ugly option for those with a progressive bent who have traditionally supported the social democratic parties.
Last Thursday (September 6, 2012), the ECB released details of its new program the Outright Monetary Transactions (OMT) which will replace the Securities Markets Programme (SMP). The latter saw the ECB buying Eurozone government debt in the secondary markets. In the OMT Announcement – the ECB declared it would set “No ex ante quantitative limits are set on the size of Outright Monetary Transactions”. The ECB decision to purchase unlimited volumes of government debt means that any private bond trader that tries to take a counter-position against any Eurozone government will lose. It means that the central bank can set yields at wherever it wants including zero. It means that all the mainstream economists are wrong if they claim that deficits drive up interest rates to the point that governments become insolvent because the private bond markets will refuse to purchase their debt. But once you understand the significance of that you also soon realise that the ECB rescue plan will fail. Why? Because it doesn’t address the core problem – that southern Europe is in depression and the only way out is for budget deficits to expand. The ECB will buy unlimited government bonds – but only if they have succumbed to a fiscal austerity package that ensures their growth prospects deteriorate even further.