Deficits should be cut in a recession. Not!

Several readers have written to me asking about the Ricardian equivalence theorem, which is increasingly getting mentioned in the media and public policy reports. As I will explain, the theorem is used by anti-government proponents to argue that fiscal deficits are counterproductive and that cutting deficits in the middle of a recession will actually be good for the economy. They never really give up, do they? The theorem is a good example of the general mainstream approach where stark policy conclusions are derived which capture the popular debate but the underlying assumptions that are required to generate those conclusions are rarely widely known or mentioned in the popular press. Of-course, if the public understood these underlying assumptions then they would not take the conclusions seriously.

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Structural deficits and automatic stabilisers

In the coming period and probably years you should expect to hear, read and be submerged with mainstream economists coming out and assessing the structural budget deficit. Across most economies, these so-called “experts” will be arguing that the structural deficit in the nation is too high and deep cuts are needed to bring it into surplus. The importance of this debate is that they use the structural deficit estimates as an indicator of the fiscal stance being taken by the government and thus separate out the effect of the automatic stabilisers. The problem is that it is an inexact science. The mainstream approach is highly dependent on the NAIRU concept (see below) and thus will err on the side of concluding that the deficit is “too big” and “likely to cause inflation”, whereas it is probable that the deficit will be too small to underpin private savings and high levels of employment.

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An unholy gathering is emerging

I mentioned in yesterday’s blog that there is a growing number of deficit-terrorists out there who are trying to appear reasonable to separate themselves from the more loony Austrian-school fringe. They are appearing reasonable by saying that “now we should have deficits” but soon (unspecified) “we will need surpluses” to “pay back the excesses”. That sort of spurious reasoning. Even some self-styled progressives who want us to think they are both reasonable people and knowledgeable commentators are starting to emerge within this broad camp. But in general their arguments reflect, at best, an ignorance of how the monetary system operates. This unholy gathering will prove to be very damaging to the need for a broader understanding of how these operations and how government fiscal interventions impact.

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The comeback of conservative ideology

Today I have been writing about the resurgence of the conservative ideology. Some are even saying the crisis is over. Others are more circumspect and try to appear reasonable – “it is not the time to cut back yet but we need a transparent plan for fiscal retrenchment outlined”. That sort of argument. But there is an increasing number of contributions from past players who were in various ways at the forefront of the neo-liberal putsch. The challenge for progressives is to assemble a united front to combat this growing and strident conservative comeback. I see modern monetary theory (MMT) as a vehicle for that defence. Unfortunately, the progressives are so divided about almost everything that there is little chance of a common front emerging. More the fools us. Anyway, in this blog I wander over the Tasman to New Zealand to remind myself and all of us what the zealots are capable of.

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We are in trouble – squirrels are falling down holes

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.

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Breaking up the banks

In the last recent period we have been told that Goldman’s is doing “god’s work”, that they are “sorry” for the “things” they have done wrong, and that their operations are essential to the well-being of the economy. Conversely, there have also been (influential) calls to “break up the banks” so that retail banking would be separated from the investment (risk-taking) activities. During the neo-liberal period, these two distinct roles became blurred and banks increasingly behaved as hedge funds. Legislation that supported the separation was abandoned under intense lobbying from vested financial market interests. The mess that these developments has created is now for all too see. Modern monetary theory (MMT) provides some simple rules for assessing whether the break-up plan is sensible and necessary. That is what this blog is about.

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I guess they didn’t want to win the war

Today in NSW it reached 41 degrees Celsius again. The bushfire season has started early and of-course we all conclude it is related to climate change. But I was thinking about other things – to wit – the difficulty new ideas that have relatively complex underpinnings face in gaining traction in the public debate which is saturated by single line mantras that the media loves to repeat over and over again. This thinking was, in part, motivated by two opinion polls I examined from the US. The second one indicated that a growing (and already dominant) proportion of US citizens want the US government to run balanced budgets. How I thought would they think that would work?

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Let’s just focus on inflation

It’s Friday and today has been very hot (nigh on 40 Celsius). One could also easily get hot (under the collar) just engaging in one’s daily reading given the amount of misinformation and sheer terrorist journalism and public commentary there is at present. The IMF released its latest Economic Outlook calling for a general return to surpluses. Why have we fallen prey to this insidious notion that government surpluses are normal and deficits are for fighting fires? In fact, the latter is more the truth. Surpluses are only required if the external sector is so strong that the economy will overheat if the government doesn’t drain private purchasing power. Anyway, I just stay calm through it all … like any good modern monetary theory (MMT) soldier. There is a war going on out there in ideas land and cool heads are needed.

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I have found an inflation threat

I read a news report today – 13,000 riot police, troops guard Obama. Hmm, I thought it might finally be the groundswell of people imbued with the logic of modern monetary theory (MMT) and anger over rising disadvantage, who had decided to take action. Especially after hearing the President’s latest foray into the media as an “expert” on matters fiscal. And only 13,000 troops … good odds I thought. But he was actually in South Korea and the report says that the assembled crowds were chanting “We love Obama”. Don’t they know anything … these people? Didn’t they hear or read his latest interview?

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Employment guarantees in vogue – well not really

Two related articles in The Economist last week (November 7, 2009) caught my attention. The first article – Battling joblessness – Has Europe got the answer – was about how the Continent may be a guide to all of us in tackling unemployment. The second article – Faring well – was extolling the virtues of India’s National Rural Employment Guarantee Act (NREGA). They provide a further basis for discussing employment guarantees.

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The enemies from within

A few years ago, a senior federal parliamentarian came to Newcastle one weekend to discuss macroeconomic policy with me. He might have saved the trip given his unwillingness to modify his neo-liberal views, which dominate all sides of politics here (including The Greens). But at one point I said that his party could not keep assuming that the left would remain loyal in the face of continued privatisation proposals and their obsession with achieving bigger budget surpluses than the conservatives. His response was “where else are they going to go” – the ultimate in disdain. The story has overtones on a daily basis when you realise that the so-called and often self-styled “progressive” side of the macroeconomic debate demonstrate their lack of understanding of how the monetary system operates and parade policy proposals that not only undermine any notion of full employment but also concede the main game to the conservatives.

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Japan grows along with the hysteria

Today, the Cabinet Office in Tokyo issued the third-quarter Japanese national accounts data which showed that the economy has posted positive growth for the second consecutive quarter and is now motoring along at an annualised rate of 4.8 per cent (1.2 per cent in the September quarter). In the June quarter growth resumed at 0.7 per cent (2.8 per cent annualised) and so the recovery is getting stronger. Given they did not allow labour underutilisation of labour to rise very much (a large increase by Japanese standards but relatively small compared to countries such as the UK and the US, they should be able to absorb the jobless fairly quickly. But this will only strengthen the growing call for the government to cut back net spending. It is a case of denying what is staring you the face.

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Australia’s response to climate change gets worse …

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.

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APEC summit – the heat must be getting to them

The US President is in Asia at present for the annual Asia- Pacific Economic Cooperation group summit visiting China today and with a cap-in-hand or some would have it. This is a talkfest where North Korea and Copenhagen are meant to be the official talking points. But the journalistic hysteria is all focusing on how the US banker (China) is the culprit for the World’s woes at present and how it should allow free market forces to work and rebalance world trade. The argument has reached the hysterical level in recent weeks and at its elemental level just reflects a failure to understand how a modern monetary system operates.

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Employment falls – better put interest rates up again

Here is today’s mystery question: when is it imperative that interest rates should rise? Answer according to most business economists in Australia: when official unemployment creeps up, underemployment rises; participation remains subdued, 88 per cent of the modest employment rise measured in persons is part-time, total employment in hours falls, and you have 26.4 per cent of your 15-24 year olds idle. The real answer: none of these commentators have the slightest sense of national priorities in terms of advancing public purpose and providing an adequate future for our youth. Talk about intergenerational burdens. All the focus is on the so-called debt overhang we are leaving our children. The biggest overhang we are leaving is our support for a government that refuses to provide enough jobs for them.

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Social entrepreneurship … another neo-liberal denial

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.

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Islands in the sun …

Late this afternoon I appeared on ABC Radio National Saturday Extra at a public forum on the future of coal that was held at Fort Scratchley which is near my favourite surf beach in Newcastle (Nobby’s). The site is near the mouth to the Newcastle Port which is the World’s largest coal export port. The program will be broadcast this coming Saturday (see link) but there was a public audience (to heckle the Minister!) present. They filmed the forum and it will be available via podcast sometime later. But that is not the topic of today’s blog. It is about another Nobel Prize winner.

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Futility, hedging and the Red Cross – its all in a day

Today, I have read a number of different reports from various organisations (IMF, Bank of England, US mortgage brokers, etc.) keeping up to date with what it going on. It all adds up to a bleak way to spend the day although that is the lot I bear (violins out!) as an economist. Imagine being a dentist though (apologies Martin!). Then you would be really working in confined spaces. My confined spaces are the claustrophobic world of mainstream economics. The economic crisis has really demonstrated how stupid (and evil) this body of theory (and policy) is. Anyway, today’s blog reports on what I have been reading and writing about today – all from a modern monetary theory (MMT) perspective – which is the free-range and sunny world that all economists should migrate too!

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Those bad Keynesians are to blame

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.

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An international currency? Hopefully not!

Today we consider the current debate about whether we need to return to fixed exchange rates and create a new reserve currency for the World – which might even be a supra-national currency. In general terms the calls for these sort of reforms reflect a misunderstanding of how a modern currency operates and also the opportunities the fiat monetary system presents to a national government which desires to advance public purpose (full employment and price stability). The claims for this type of currency reform also reflect serious misunderstandings about trade and the financial flows which accompany trade. More worrying is that the fixed exchange rate call is becoming a cause celebre for progressive economists who see flexible exchange rates as somehow a cornerstone of a neo-liberal free market plot against prosperity. Talk about being misguided. So this blog introduces these issues – and will probably be the first of several on the topic.

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