Remember what we were told a few months ago – that business and households were so terrified of higher future tax burdens associated with the budget deficits that they were not investing or spending and so governments were killing economic growth? This led to the deficit terrorists arguing (shouting) that the fiscal stimulus that governments had implemented to save their economies from the threat of a depression were actually undermining growth and that fiscal austerity was the key to growth. Accordingly, governments have increasingly been implementing or promising to implement so-called fiscal consolidation strategies because they have fallen prey to the austerity proponents. As the fiscal stimulus has waned across the world growth is slowing and there is now a real danger of a double-dip recession. In nations that have introduced formal austerity programs the evidence is now mounting … it damages growth and undermines business and household confidence. It has exactly the opposite effect to that predicted by the deficit terrorists which is no news to anyone who understands anything about how the economy works. The victims – the poor and disadvantaged …. AGAIN!

The US economy is showing signs of slowing as the fiscal stimulus is withdrawn and the spending contractions of the state and local government increasingly undermine the injections from the federal sphere. The recent US National Accounts demonstrate that things are looking very gloomy there at present. In the last week some notable former and current policy makers have come out in favour of austerity though. Some of these notables contributed to the problem in the first place through their criminal neglect of the economy. Others remain in positions of power and help design the policy response. A common thread can be found in their positions though. A blind faith in the market which links them intellectually to the erroneous views espoused by Milton Friedman. His influence remains a dominant presence in the policy debate. That is nothing short of a tragedy.

As governments around the world are setting about to scorch their economies with austerity programs very little opposition is coming from my profession. It is quite astounding to me that the more extreme elements (the Ricardian Equivalence theories) are holding sway at present. These notions have been discredited often (see my blog – Pushing the fantasy barrow for a discussion). Generally, the austerity push is not being supported by any credible economic theory which enjoys empirical support. I get the impression that policy makers are now altering settings in an ad hoc manner without any real understanding of how the economy works. It is a triumph of neo-liberal dogman. However, in terms of evidence-based critiques of the austerity push, Bloomberg Opinion published an interesting article (July 13, 2010) – U.K. Bust Needs Big Spender – written by UK academic Vicki Chick and author/debt activist Ann Pettifor (thanks BM). The Op Ed summarises a more detailed research paper which demonstrates that key assumptions of the austerity proponents do not hold over a long historical period. The short message is that things are going to get worse.

Today I have been working in the Australia’s national capital Canberra. I have been discussing the work I am doing to develop a new geography for Australia based around the concept of functional economic regions with the Australian Bureau of Statistics which is currently seeking to revise their own geography along similar lines. You can find out about this work if you are interested via the CoffEE Functional Regions homepage. It will provide you with quite a different perspective on my other research interests beyond macroeconomics. Anyway, on the plane I was reading some monetary analysis and recalling a blog from the weekend by our favourite (not!) macroeconomics textbook writer. I started humming Take the power back to myself as I considered the damage this sort of textbook is doing to the minds of our students and the future policy makers.

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.

GIGO … that process or mechanism that we are beguiled by what amounts to nothing. GIGO emerges out of highly specialised and technical structures that bright minds create. It occupies hours of time that might be spent finding a cure for cancer or making renewable energy instantly viable on a wide-scale. GIGO keeps our most disadvantaged citizens in states of joblessness and poverty for no reason other than we think it is something. GIGO ravages the developing world and leads to wars, terrorism and other pathologies. Something has to be done about it.

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.

In today’s Australian newspaper ex Federal Treasury official Tony Makin writes that We keep repeating Keynes’s mistakes. Do we now? The story is a litany of half-truths and basic conceptual errors. He is now a professor of economics. Bad luck for his students. The article, one of a regular contribution he makes to the increasingly squawking right-wing News Limited daily, is a classic example of how to deceive the public with spurious economic reasoning – that the author knows most of the public will just accept without question.

Its winter here in Newcastle! Today my shark-o’clock morning surf expedition was freezing! Full wetty and still cold! But for northern hemisphere readers pleased be warned that freezing means a water temperature of 19 degrees celsius and air temperature of 14 celsius. Anyway, the sudden sensation of cold reminded me of my mortal origins. One thing led to another and I was soon thinking of animal spirits! This is what JM Keynes said drives the business cycle up and down. And today (and yesterday) we have been reminded of the role that sentiment might play in economic life. The news is probably good and suggests that this downturn might be more moderate for Australia than the global experience would have indicated. But it might also be bad. Ahh, economics!