The public sector and free information are essential for collective well-being

I have been in Sydney today for Day 1 of the Australian Society of Heterodox Economists’ (SHE) Conference. I always go down as a solidaristic gesture but I admit to not being fully engaged in some of the topics given there is an underlying hostility among many heterodox economist to getting the macroeconomics right before you delve into various microeconomics topics. I do not find it appealing to analysing demographic cohorts distinguished by sexuality, gender, race as if they are “independent” and can be understood without recourse to acknowledging their relationship to capital and without understanding the macroeconomic constraints that bear upon their decision-making environment. But during the day I was thinking about why societies voluntarily go along with state imposed restrictions on their freedoms which clearly entrench the disadvantage of individual members within these societies. I was thinking of this within the context of the choice nations have to exit the euro and the pressure being put on such nations to remain within the zone even though the status quo is devastating private well-being. I was also thinking about the forces that are working within the US to misrepresent the true nature of the financial crisis and allow government support for the elites who have committed gross fraud to override basic job creation support for the unemployed. I was also thinking about this in the context of the debate about the morality of WikiLeaks and the growing government attacks on that organisation.

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Saturday Quiz – December 4, 2010 – answers and discussion

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.

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All macroeconomic policy should be accountable through the ballot box

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!

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The Australian economy loses to the snail

Three months ago, I wrote that Australia continues to grow but the signs are not all good in response to the moderating National Accounts data for the June quarter and associated data releases. My position in the national debate was lambasted as heretical and my competence was questioned because as all the bank economists, politicians, and related officials know Australia is close to full capacity and full employment and is about to burst at the seams courtesy of the “once-in-a-hundred” years commodities prices boom. My response, if only that was true! Sure enough, unemployment rose last month and there have been many signs that my judgement that the fiscal withdrawal and rising interest rates were cruelling growth was sound. Today’s Australian Bureau of Statistics release of the National Accounts data for the September quarter should shut those who are talking things up continually up. The Australian Bureau Statistics shows the Australian economy is growing barely faster than the zero line of no growth. And our so-called mining boom is not sufficient to generate a positive net exports contribution. The reality does not match the direction of policy or the rhetoric that is being used to justify the withdrawal of fiscal support. Bad luck if you are unemployed, underemployed or one of those that will certainly lose their jobs as employment growth stalls, again!

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When you haven’t got a Plan B

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.

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When miracles lose some shine

It is a fact that the Australian economy escaped recording a technical recession (2 consecutive quarters of negative real GDP growth), having recorded only one negative real GDP quarter (December quarter 2008 = -0.7 per cent). In that quarter, the first of large fiscal stimulus measures began and growth accelerated after that. The downturn, however, did push up official unemployment and underemployment and the legacy of the rationed employment and hours growth is that Australia currently has a broad labour underutilisation rate of 12.5 per cent. Aggregate policy (fiscal and monetary) is now tightening and is being justified by official statements that the economy is about to explode on the back of a very strong commodity boom (mining) and that we are close to full employment anyway. We are being told that unless policy tightens now inflation will break out. The problem with the official rhetoric is that a sequence of data releases is telling a different story. In the past few weeks we have seen exports falling, a weakening construction sector, flat credit demand, and yesterday, a very weak investment outlook. The outlook for next week’s September quarter National Accounts data is becoming increasingly pessimistic. In the meantime, unemployment rose in October. The justifications for the policy tightening are vanishing although I would argue they never were credible in the first place. The miracle Australian economy is a little less shiny at present.

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A rising public share in output is indicated

I have been thinking about changing industrial/sectoral shares today and how it bears on the way we construct macroeconomic policy (spending and taxation). At present, a major debate in Australia is how we are going to deal with the strong growth in the mining sector and the negative consequences this growth is having on other sectors that are not enjoying buoyant demand conditions. The mainstream response – to impose fiscal consolidation and tight monetary policy – is exactly the opposite response to what is required. But the discussion about sectoral change has further application in terms of the long-run movements in demography and shifting demand for health care and other age-related services. It generalises even further if we consider the growing need for environment care services. The upshot is that trends which will require a rising public share of total resource usage should not be seen as financial crises. Rather we should see them as part of the long process of structural transformation in our economies. Once we see it from that perspective, then the ideological nature of the ageing society debate is exposed. But first, Ireland …

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Advocating full employment

Today I am travelling all day and have no time to write anything. So I asked our guest blogger Victor Quirk who has just completed a PhD on the political constraints to full employment to fill the gap. As usual, he more than fills it. In this blog he shares some of his doctoral research which I had the pleasure of being the supervisor. The depth of documentary enquiry that Victor engaged in was something else. And the final product was an incisive and very challenging critique of the mainstream orthodoxy that erects artificial barriers to the achievement of human potential (in the form of unemployment) to advance its ideology urgency which ultimately is about extracting an ever greater share of real national income. I will be back tomorrow.

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Education – a vehicle for class division

Yesterday I wrote, in part, about the way in which the term long-run is mis-used by the mainstream economists to assert “natural rate” theories, which essentially deny a role for government macroeconomic policy in stabilising the business cycle and reducing mass unemployment. I also get asked by readers (several times now) to provide some discussion of what were known as the Cambridge capital controversies in the 1960s and 1970s. They are related in fact to the notion of the long-run. These were rather esoteric debates which are now largely ignored by the mainstream despite the fact that the results of the debate showed, beyond any shadow of doubt, that the whole body of neo-classical distribution theory (that is, marginal productivity theory) is plain wrong. MPT was developed to justify the claim that capitalism delivers “fair” income distributions because everybody gets back what they put in. The Cambridge debates killed the legitimacy of those claims. But my profession continued oblivious because the results would have meant that a major part of the mainstream apology to capitalism would have to be jettisoned. Who understood the debates anyway? It was easy to just sweep the results under the carpet. I still plan to provide some commentary in this regard as I used to teach a course in capital theory covering these debates. But in thinking about them I started thinking of prior questions which also feed into a policy debate in Australia at present. It relates to educational outcomes and class.

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Money neutrality – another ideological contrivance by the conservatives

I have noted in recent weeks a periodic reference to long-run neutrality of money. Several readers have written to me to explain this evidently jargon-laden concept that has pervaded mainstream economics for two centuries and has been used throughout that history, in different ways, to justify the case against policy-activism by government in the face of mass unemployment. It is once again being invoked by the deficit terrorists to justify fiscal austerity despite the millions of productive workers who remain unemployed. I have been working on a new book over the last few days which includes some of the theoretical debates that accompany the notion of neutrality. There will also be a chapter in the macroeconomics text book that Randy Wray and I are working on at present on this topic. Essentially, it involves an understanding of what has been called the “classical dichotomy”. It is a highly technical literature and that makes it easy to follow if you are good at mathematical reasoning. It is harder to explain it in words but here goes. I have tried to write this as technically low-brow as I can. The bottom line takeaway – the assertion that money is neutral in the long-run is a nonsensical contrivance that the mainstream invoke to advance their ideological agenda against government intervention. It is theoretically bereft and empirical irrelevant. That conclusion should interest you! But be warned – this is just an introduction to a very complex literature that spans 200 years or so.

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NAIRU mantra prevents good macroeconomic policy

Today I have been working with various datasets (labour costs, long-term unemployment) and this blog provides some interesting aspects of what is going on at present. The blog should also be seen in the context of a speech made yesterday by the Deputy Governor of the Reserve Bank of Australia (RBA), Ric Battellino (a NAIRU devotee) to the Committee for Economic Development of Australia in Perth. His presentation was intending to justify the interest rate hikes that the RBA has been pursuing this year. He continued to assert the RBA line that the Australian economy is running out of spare capacity and so interest rate hikes are necessary. This is in the context of a sharp rise in the exchange rate which is deflationary, actual falls in the inflation rate (and well within their “target band”), more than 12.5 per cent of available labour resources remaining idle and long-term unemployment rising because employment growth can barely keep pace with labour force growth. Macroeconomic policy in Australia is severely distorted at the moment because of the dominance of monetary policy and the obsessions about budget surpluses. In summary, the NAIRU mantra is preventing good macroeconomic policy and the growing pool of long-term unemployed are carrying the burden more than most.

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The US Federal Reserve is on the brink of insolvency (not!)

Yesterday, parachute gangs from the ECB and the IMF were being dropped into various EMU nations whose only problem is that they are members of an unworkable monetary system and happened to get hit by a major demand shock. Today the IMF cavalry are apparently heading to Dublin for a “short, focused consultation”. Conclusion: Ireland is being invaded by hostile forces. I also read rumours overnight that Germans are refusing Euro notes not printed in the Bundesland. It is probably an outright lie of a similar quality to the many being spread by the deficit terrorists seeking to regain their “credibility” (an impossible mission) any way they can. In this context I get many E-mails from people each week telling me that I do not understand that the latest decision by the US Federal Reserve Bank “to flood the world with printed money” is putting it on the brink of insolvency! I also read that in a Bloomberg Business Week feature article today. And people believe this stuff. It is as much a lie as the fallacious stories recently about the US President’s Asian travel costs which the right-wing in the US (Beck, Limbaugh, Savage etc) perpetuated without scrutiny (see this analysis to see how this lie began). Anyway, rest easy … the US Federal Reserve cannot go broke!

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Live coverage now on

It has become like a sporting event. We now have the live coverage with commentators and up to the minute news updates and scores. The only problem is that we are actually viewing the dynamics of a monetary system – in this case, a system so poorly conceived and blinded by ideology and cultural prejudices that it is was certain to collapse. But only 3 or maybe 4 years ago the same ideologues who constructed this failure were telling us that some nations within this monetary system should be the role models for all of us to follow. Now the live coverage is of the crisis that these “role” models are in. It is no surprise though – I disagreed with the entreaties to “believe” in this model when the hype was at its maximum. I wrote several years ago “when this crisis comes it will be very big” in relation to the growing private sector indebtedness and the move to fiscal austerity as the neo-liberal madness climaxed. It was only ever a matter of time. Anyway, live coverage is now on …

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The plight of the unemployed – under growth and decay

The Australian economy is growing and adding jobs and the unemployment rate is 5.4 per cent (having risen 0.3 points in the last month). But we avoided the recession courtesy of a timely and sizeable fiscal intervention followed up by strong growth in China (also courtesy of their significantly larger fiscal intervention (as a % of GDP)). But the treatment of the unemployed by our government is appalling. Across the Pacific, the US economy is starting to grow but only just adding jobs and not in sufficient quantities to reduce the unemployment rate and it is persisting at around 9.6 per cent. They didn’t avoid the recession and have laboured for nearly 3 years with the devastating consequences of it. The treatment of the unemployed by the US government is more than appalling. So it doesn’t matter if things are brighter or not, we still vilify the victims of the macroeconomic policy failure. That is what this blog is about. It is a depressing message!

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Martians are (probably) better than this

I have given some further consideration to the Co-Chairs Draft Proposal from the US National Commission on Fiscal Responsibility and Reform, which was released on Wednesday (November 11, 2010). This was in the context of reading an article over the weekend that said the the co-chairs’ report reads like a document from Mars. I can’t say I know much about Mars but I thought this description was a bit unkind to any life forms that might exist there. Does the author of that comment have any insights about Mars that we do not have? Given my propensity to be hopeful rather than assume the worst I prefer to think of the unknown Mars as being occupied by nice, thoughtful, smart, considered and above all realistic people. They would never produce such a silly document as the co-chairs have had the audacity to inflict on the public policy debate. Martians are (probably) better than this.

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Saturday Quiz – November 13, 2010 – answers and discussion

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.

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The value of government

I often get asked by people I have consulted for to write justifications for their existence (that is, the organisation and its charter). Sometimes it is a trade union, another times a government department and on. In each case you have to think out what the essential interactions are between the organisation in question and the rest of the world and articulate some sense of value to those interactions. These calibrations may not necessarily be quantitative but often it is useful if they are because bean-counting economists around the place who read the analysis I provide in this part of my professional life rarely think more broadly and spare the thought – can probably not even spell “social benefit” much less conceive of it. In the current economic crisis the only problems that should be receiving daily scrutiny in the debate are unemployment, real income loss, and the resulting poverty. We rarely see those items headlined. Instead, we are barraged with a virulent confection of bile about things that do not matter – public deficit to GDP ratios etc. And this anti-government campaign is succeeding in part because people believe the rhetoric that government is wasteful and doesn’t do anything. Well I am here to tell you ….

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Australian labour market slack rises sharply

The Australian Bureau of Statistics (ABS) released the Labour Force data for October 2010. As usual the bank economists got it wrong predicting the unemployment rate would drop to 5 per cent. In fact it rose from 5.1 per cent to 5.4 per cent because employment growth was too weak to match the expansion of the labour force. Further, employment growth fell this month and full-time employment declined. The only reason there was any employment growth was courtesy of the expansion of part-time employment. Finally, some of the bank economists recognised today (in their comments) that business conditions are easing. The previous rhetoric about an economy exploding at the seams now seems very wan indeed. There is no jobs boom going on at present. The mining states are showing deteriorating labour conditions (falling participation and rising unemployment). The data definitely doesn’t support the claims by the Government and the RBA that there is an inflation threat building. There is still plenty of slack in the Australian labour market and last month the degree of slack rose sharply.

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When does no evidence mean no evidence?

I keep reading that the inflationary expectations genie is about to jump out of the bottle and far from being benign and supportive will wreak havoc on real wealth. I also keep reading that the gold price is rising because of these increasingly robust fears of future inflation. It is one of those themes that get trotted out to alert us to the dangers of government intervention in the economy. It takes about one sentence to get to Zimbabwe and usually Weimar then gets dropped in. I know the characters that perpetuate this sort of stuff have had their minds poisoned by their undergraduate macroeconomics indoctrination but we do become adults eventually and should be able to question everything. If I am doubt I work out the logic of a problem and then confront the logic with some real world data to see if the logic at least is consistent with what actually happens. I am no empiricist but I don’t buy the idea that if the facts refute the theory then the facts must be wrong. Today I went off looking for those pesky inflationary expectations. I found them … looking forlorn. Just another ruse!

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World Bank boss has a brain attack

The World Bank boss Robert Zoellick claims that we should all return to the Gold Standard to restore economic stability in the World economy. He is crazy. Sorry! The G-20 meeting in Seoul this week will obviously be concentrating on side issues such as the impact of the latest US quantitative easing plans on world inflation and the international currency system which many commentators are now claiming is in turmoil. Zoellick’s proposal will be added to the agenda which will reinforce what a waste of time these meetings are turning out to be. Zoellick’s call for a gold standard is just another one of these conservative smokescreens that attempt to solve the problem by denying it. They are all just expressions of obsessive and moribund fear of fiscal policy and the erroneous allegation that budget deficits cause inflation. So we will get a G-20 communiqué in a few days calling for more international cooperation in trade and currency settings and more fiscal consolidation and the need for on-going discussions about the creation of a new international reserve currency (perhaps a gold standard). But all these words will be in spite of the real policy agenda that is required – more public spending. What will they come up with next?

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