Sometimes ex-IMF officials shed the burden of having been associated with that institution and make a creative contribution to the public debate. More often they do not and continue to perpetuate the errors that underpin almost all of the IMF’s output. If there was ever an institution that has passed its use-by date it is the IMF. Today, ex-IMF Chief Economist Simon Johnson (now at MIT) claimed that the way to assess fiscal sustainability is “whether a country has the political will to raise taxes or cut spending when under pressure from the financial markets”. You can imagine what I thought of that criterion! Not much but it is too late in the year to get really flustered and I have been listening to some pretty good music this afternoon. So for all those readers who have written in saying “doesn’t Johnson have credibility” and “therefore is what he is saying sensible” I have three words – No and No.

You know something is wrong when the unemployment rate in major holiday destinations persist at high levels. Typically, these areas have what economists refer to as seasonal unemployment – so that during the off-season (when the holiday makers are back home) there is very little labour market activity but once the vacation period begins there are many jobs and people. I have lived in various surf locations for many years and one such location had a steady-state population of 1000 or so residents and on Boxing Day this swelled to 25,000 and that new population endured for the ensuing holiday period (until the Australia Day weekend – January 26). Many of the surf crew and musicians would take jobs during this period and work very long hours (the surf was typically bad during the summer anyway) and use the savings to eke out an existence for the rest of the year – sometimes also accessing unemployment benefits sometimes not. The US Bureau of Labor Statistics published a bulletin (September 7, 2010) for the Cape Cod area which is one such major holiday region in the US. The situation there is dire and requires an immediate policy response from the US government. Unfortunately, this issue appears to be off the policy agenda. Well, until this week at least. A Democrat from Ohio has introduced a “full employment bill” which aims to eliminate the US central bank (good) and restore the US government’s currency sovereignty for keeps. The problem is that it goes down some dead-ends and avoids facing up to the real issues. So it is a well-motivated full employment bill – sort of!

I imagine a doctor when confronted with a set of symptoms being presented by a patient carefully goes through each one and draws on his/her bank of knowledge, understanding and experience to arrive at an interpretation. A patient that has been sick for some time and is in the early stages of recovery may still exhibit signs of stress and the doctor appreciates that and doesn’t ring any alarm bells. It seems that the same doesn’t apply to my profession. Members of my profession seem to jump on any bandwagon that arrives and which triggers their favourite narratives about excessive government spending and borrowing and all that sort of public misinformation. The most recent example of this came yesterday (December 21, 2010) when the UK Office of National Statistics released the latest data for Public Sector Finances (as at November 2010) which showed that British government spending continues to grow and tax revenue is still lagging. The press reaction and that of my colleagues was expected and as is typically the case way off beam. We can summarise the problem by stating that there is no such thing as a “weak” budget outcome. An economy can be weak but it makes no sense to say a budget outcome is weak unless you have an ideological bias towards some particular outcome.

Today I was reading the latest labour force data released by the UK Office of National Statistics which shows that the British labour market is now contracting as the public sector job cuts begin. The British government continues to claim that to reduce unemployment you have to deliberately create unemployment. They believe that by reducing public involvement in the economy (which means in a macroeconomic sense – withdrawing spending which generates both public and private employment) the private sector will spontaneously erupt in a surge of growth. They are in total denial of the obvious fact that spending equals income and public servants spend in exactly the same way as private employees – by handing over dollars to shopkeepers around the land. When have anyone of you been asked by a cashier whether you are working in a government or private sector job before they accept your cash? Never! As the public jobs are scrapped in the hundreds of thousands, the loss of spending will damage the private sector who will react by reducing their demand for labour and postponing their investment plans. The only hope is that exports will save them but that is highly unlikely. When do the people rise up against these ideological zealots? But the fact that when spending is cut unemployment rises – is no surprise to me. It is a basic macroeconomic reality. The problem is the neo-liberals never let basic facts get in the road of their religious convictions (or bald-faced power grabs).

There was an interesting conference in Tokyo last week which featured academic Eisuke Sakakibara, the former Japanese government vice minister of finance who is characteristically known as “Mr Yen” given his knowledge of banking and world financial markets. Sakakibara predicted a prolonged recession lasting until 2015 because fiscal deficits are being deliberately withdrawn by misguided governments. The neo-liberals are claiming that public debt ratios have to be cut to reduce the “future tax burden on our children”. The reality is that intergenerational burdens work in exactly the opposite way in a fiat monetary system to what the mainstream neo-liberal claim. The misguided fiscal policy direction the neo-liberals are pushing will impose real burdens on our children. They will be less educated, less skilled, less experienced, and have lower income as a whole as a result of the fiscal austerity. Their future possibilities will be reduced as a consequence. In fact, the whole anti-budget deficit argument is just a ploy to seek ways whereby the elites can get more real income now and more real income later for their own enjoyment. Spreading the real output more widely through fiscal interventions frustrates that aspiration. Significantly, our children never hand real output back in time to pay for the public debt incurred at a previous time.

I was pleasantly surprised this week when I received a telephone call from a reader wanting to chat about the current state of policy in Australia and the available options. We discussed a range of options and agreed that it didn’t make much sense to cruel the emerging economic growth in Australia while there were 12.1 per cent of available labour resources currently idle (either unemployed or underemployed). With world demand for our exports strong it seemed a perfect opportunity to really eliminate the pool of idle labour and return to full employment – a state that Australia has not been close to since the mid-1970s. The period since that time has been dominated by neo-liberal policy makers who have abandoned the responsibility that was previously vested in our macroeconomic policy arms (RBA and Treasury) to achieve and maintain full employment. We agreed that deliberately restricting growth just as it was gathering pace was a very restricted vision of national potential. The upshot of our discussion was that we agreed that fiscal policy could be targeted to redistribute the growth (to avoid specific sectors from overheating yet maintaining a growth stimulus to other sectors) and that monetary policy was too blunt an instrument to manage this process. But with growth emerging it is a case that policy makers should recite a daily mantra – when you are on a good thing, stick to it – rather than cutting it off at its knees before the benefits have spread widely throughout our nation and its people.

It was the last day of the 12th Path to Full Employment Conference/17th National Unemployment Conference in Newcastle, which I host. The papers were interesting all day and I will report on some of them another day. But overnight, the big news was that the US Senate has finally succeeded in forcing the US Federal Reserve Bank to release details of more than 21,000 transactions it made as a reaction to the rapidly escalating global financial crisis. The lending rose to $US3.3 trillion at its peak and dwarfs the volumes involved in QE1 and QE2 amounts. This is relevant to a debate in the banking literature about the separation of monetary policy functions (setting interest rates) and the broader monetary interventions we have been witnessing in this crisis, which bear close similarity to fiscal policy functions. The question is which macroeconomic policy functions should be accountable to the ballot box. My view is all of them!

The UK is still in the grip of a serious slowdown and the British government has begun its fiscal austerity program which will savage net public spending and cause wide spread job losses. But the Chancellor is still boasting that Plan A – scorch the economy – will be maintained and he has sought legitimacy for his position in the release by the UK Office for Budget Responsibility (OBR) of its Economic and Fiscal Outlook November 2010 yesterday (November 29, 2010). When one examines the OBR document in detail one could be excused for thinking it was a “colouring-in” exercise with a difference – you know, draw nice colourful bar charts to tell the story that you want based on assumptions that will not survive empirical scrutiny in coming months and years. The problem for Britain is that there does not appear to be a Plan B. It is all or nothing and while the “lab rat” nature of the policy experiment is intellectually interesting for researchers such as myself I don’t want to glean enjoyment from what will be the increased suffering of millions. Plan A will fail because the assumptions and projections are unrealistic. When you haven’t got a Plan B then that failure will be very costly.