Today’s Australian newspaper, sadly our national daily carries a story – Stimulating our way into trouble – by Griffith University professor (and ex-federal treasury official) Tony Makin. I pity the students who have to study with him. The article continues the News Limited campaign against the government stimulus package and demonstrates the extent that is prepared to use the services of so-called experts (that is, titled mainstream economists) who seem prepared to grossly mislead the readership to advance their ideological strategy. Whatever it takes seems to be the strategy. Anyway, once again the mainstream macroeconomics textbook is called upon to make policy statements.
Today I am working in Dubbo, which is in the western region of NSW and getting into the remote parts of the state. There is a great beauty to enjoy in remote Australia which often passes people by. My field trip is in relation to continuing work I am doing with indigenous communities in this region. I will report on this work in due course. But today’s blog continues the theme I developed yesterday on bank reserves. In yesterday’s blog – Building bank reserves will not expand credit – I examined the dynamics of bank reserves but left a few issues on hold because I ran out of time. One issue is the possible impact of expanding bank reserves on inflation. This is in part central to the mainstream hysteria at present about the likely legacies of the monetary policy response to the crisis. The conclusion is that everyone can relax – the only problem with the monetary policy response is that it will be ineffective and more fiscal policy effort is required.
In his latest New York Times article (December 10, 2009) – Bernanke’s Unfinished Mission – Paul Krugman reveals that he doesn’t really understand much about macroeconomics. Sometimes you read a columnist and try to find extra meaning that is not in the words to give them the benefit of the doubt. At times, Krugman like other columnists sounds positively reasonable and advances arguments that are consistent with modern monetary theory (MMT). But then there is always a give-away article that appears eventually that makes it clear – this analyst really doesn’t get it. In Krugman’s case, he doesn’t seem to have learned from his disastrous foray into Japan’s “lost decade” policy debate.
The political debate in Australia is never very inspiring. But in the last few days it has reached new heights … that is, lows. The Federal Opposition has now decided to address its rock-bottom political support by changing its shadow front-bench significantly and installing some of the most conservative members they could drag out. The strategy is clearly to “talk tough” and “take the fight up to the government” and all that sort of thing. The only problem is that it is already turning the public debate into a comedy show. I predict this conservative configuration will talk their way into oblivion much faster than the previous shadow cabinet. In the process, we will have plenty to laugh about.
Today I have a wind in my sails and I am heading for Greece. I am wondering if any modern day Ulysses will find much of their homeland left given current trends. The current situation in Greece exposes the stupidity of the Euro monetary system. The Greek government is running a rising budget deficit in response to the economic crisis that it faces. Much of the budget change is being driven by the automatic stabilisers. Meanwhile the financial markets are playing their usual (unproductive) tricks and making matters worse. Sitting in the middle is the undemocratic ECB which is insisting on fiscal consolidation. Pity the poor Greeks who are increasingly without work. The solution is not straightforward but I would abandon the Euro and restore currency sovereignty.
Today I was in Sydney for some meetings and also I attended the first sessions of the Society of Heterodox Economists conference. I took some papers with me to read on the train coming back to Newcastle. Sitting on the train for 3 hours presents a good opportunity to catch up on back-reading. While I would have been better off reading the Phantom comic that I had in my bag, I chose, instead, to read the latest fiscal analysis provided by the IMF. The paper I discuss here is typical of the whole debate at present. It cannot provide any evidence to advance its scary “deficit and public debt” vision, but it doesn’t let the facts get in the way of presenting it anyway. My professional assessment. These guys should get a real job.
There is a mystery phenomenon and it appears to be spreading. The dangerous phenomenon is well understood by experts but the contagion is proving difficult to contain. Fortunately there are built-in checks and balances that will arrest the contagion … the only question is will the inflicted show any signs of life once the arrest is made. On Friday, we learned that the US government was running out of money. Overnight, the nasty syndrome has jumped across the Atlantic and the sovereign UK government is signalling that they are short. I suspect the contagion will spread more widely and inflict most sovereign governments before too long. Anyway, all I could do about it was to break into song …
Today is the first day of the 11th Path to Full Employment Conference/16th National Unemployment Conference in Newcastle, hosted by my research centre. As host I am of-course tied up in the event but I thought it would be of interest to visitors to my blog to provide some feel for what has transpired today. I only focus on the plenary talks. The other presentations in the parallel sessions have all been very interesting.
Over the course of this economic crisis, I have seen a lot of erroneous analysis based on the conflation of things that are not commensurate. It is getting worse as the debt hysteria mounts. These conflations are examples of category errors, which are common in monetary and macroeconomic analysis. Most of the theoretical development in macroeconomics text books used by universities fall foul of this type of error. The one thing that follows is that when you detect this type of error you should be deeply suspicious of the arguments being presented.
In the last few days I have seen more calls from commentators for policy makers to take new initiatives to generate jobs and growth. Some of these calls have come from commentators and research centres that sit on the “progressive” side of the macroeconomic debate. Unfortunately, their proposals are always compromised by their demonstrated lack of understanding of how the monetary system operates. In my view these proposals actually undermine the need to advance an understanding that sovereign governments can create true full employment and should do so as a matter of urgency. By playing ball with the conservatives and choosing to focus on deficit outcomes these progressives divert the policy focus away from the real issues. In short, the federal budget deficit outcome should never be the focus of policy.
The Australian financial press today pushed the message “Dubai shook investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001”. Last time I knew, Dubai was an emirate and Argentina a sovereign nation. While the current crisis in Dubai is clearly an issue it is not an instance of sovereign default. Some research is required.
Today we explore the problem of squirrels falling down holes. The exact number and size of the holes is to be determined – there is some disagreement. Who the squirrels are is also somewhat confused. But some thorough analysis should get us through this difficult task. Suffice to say, I have been reading the World financial press again … as I do against my own better judgement on a daily basis … and have done for the last too many years.
Just when you thought that the Australian Government’s response to climate change – the proposed emissions trading scheme (ETS) which promises to generously exempt or compensate the heavy polluters – was bad enough, it was announced today that it will also now indefinitely exclude agriculture from the ETS. The decision is purely political as was the earlier decision to exempt agriculture until 2015. All the Government is doing is appeasing the Opposition so that it can get the legislation through the Senate. The Opposition recently revealed that the majority of their parliamentarians deny there is a climate change problem. Why would you want to trade concessions with them? But the fundamental problem lies in the fact that the neo-liberal market-based paradigm is a totally unsuitable framework for dealing with climate change.
UK Tory leader David Cameron is back in print in the Guardian (November 10, 2009) with his claim that Big society can fight poverty. Big government just fuels it. In the same edition of the Guardian, regular commentator Polly Toynbee provided a critical analysis to the Cameron line in her article – David Cameron, social policy butterfly. However, sadly, neither writer understands the principles of modern monetary theory (MMT) which means that neither has the slightest inkling of how the monetary system that they live in works. If they did understand that system and the opportunities that it provides a sensible national government then they would probably not write what they did.
Today there were two feature articles in the Australian press which attracted attention. The first article was an interview with the former Australian prime minister (Howard), who (by the way) was called a “lying rodent” by one of his own colleagues during his time in office. The second article was by the Sydney Morning Herald’s political editor who claims the Time has come for Rudd to face the big test. Both articles carry the same messages which are relevant to the macroeconomic debate in all nations (so this is not a parochial Australian discussion). They also nonsensical pieces of fiction when you consider them from the perspective of modern monetary theory (MMT). They show the power of the mainstream macroeconomics “textbook straitjacket” which has the world debate in a vice-like grip.
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.
There was an almost euphoric outlook for the Australian economy by Australia’s central bank yesterday as they raised interest rates once again. And earlier this week, the Federal Treasurer released the Mid-year Economic and Fiscal Outlook 2008-09 saying that “Australia is the strongest-performing advanced economy in the world …” Strongest is a superlative – the best. So you wonder what he is talking about when you consider that we have more than 14 per cent of our labour resources underutilised in one way or another. Then some bad news comes in today and you realise the government (both arms – central bank and treasury) are spinning away …
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.
Australia is already heading the charge back into the neo-liberal macroeconomic policy orthodoxy, which caused the financial crisis that has seen millions of jobs shed and poverty rates sky-rocket around the world. Next Tuesday, the central bank will surely increase its target rate of interest again because it is worried about the inflation genie escaping again. When actually did we last have an inflation problem anyway? The problem with this strategy is two-fold. First, it is highly unlikely that monetary policy does effectively operate as a counter-stabilising force. It has distributional effects clearly which punish low income earners but they not the cohort driving the housing prices, for example. Second, it forces fiscal policy to play a passive role so there will be even greater pressure on the government to start winding back the fiscal stimulus. More pain ahead on both fronts.
Today’s blog is short. I returned home today to a mountain of things to do and missing luggage. In this day of computer networks and claimed security I fail to see how airlines cannot match every person who has a seat with a bag in the hold. They claim they take bags off when there is a no show so why do they lose bags? Anyway, all my papers from last week’s meetings are in the bag and my favourite coat so I am hoping it turns up. On the blog front, several readers have written to me in the last few days asking me about the rising risk of sovereign defaults that financial markets are apparently “pricing in”. In particular, so-called influential traders are now claiming that the US and Japan are approaching situations reminiscent of “countries on the verge of a sovereign debt default”. Sounds dire. We better investigate – but only for a short bit because I am tired from my journeys.