A few weeks ago in this blog – So who is going to answer for their culpability? – I wrote about the IMFs latest “discovery” that their policy advice, which has caused millions to become unemployed and nations to shed income and wealth in great proportions and all the rest of the austerity detritus, was based on errors in estimating the value of the multiplier. They now admit the expenditure multipliers may be up to around 1.7, which means that for every dollar of government spending, the economy produces $1.70 of national income. Under their previous estimates of the multiplier, a dollar of government spending would translate into only 50 cents national income (a bad outcome). The renewed awareness from the arch-austerity merchants that they were wrong and that fiscal policy is, in fact, highly effective, has to be seen in the light of the continued obsession not only with fiscal austerity but also with discussions surrounding monetary policy. There have been many articles over the last few years expressing surprise that the vast monetary policy changes have had little effect. But as soon as the writers note this they launch into the standard arguments about inflation risk and the rest of the narratives that accompany discussions about central banks. Soon we will have to accept the fact that monetary policy is not a suitable tool to stabilise aggregate demand at appropriate levels. We will also have to acknowledge that the only way out of the crisis is via renewed fiscal stimulus.

Somehow research gets published which contradicts the basic propositions of mainstream monetary theory yet it just gets buried and the commentariat continue on as before sprouting the myths that now occupy us on a daily basis. In February 2010, the Bank of International Settlements (BIS) published a working paper (No. 297)- The Bank Lending Channel Revisited – which falls into this category. It argues categorically that the mainstream propositions about money and banking are incorrect and uninformative. Its essential insights confirm the fundamental propositions of Modern Monetary Theory (MMT) – which when translated into the policy space – would suggest that monetary policy is not the ideal tool to resolve a major collapse in private aggregate spending and that fiscal policy will not drive up interest rates and crowd out private spending. Why these papers are suppressed in the public domain by the commentators makes for interesting speculation – all of which impugns the motives of those who hold themselves out as experts but, in fact, just peddle lies. The problem for all of us – but more so the unemployed and poor – is that they are influential lies.

I was reading several older papers from the 1990s today as part of a project I am working on where I track predictions that leading mainstream economists were making at the time about the evolution of national and global economies. It is a very interesting exercise to build the narratives that were popular at an earlier time and then consider how far the economists got things right. I have noted that there has been some debate out in blog-land about who predicted the failure of the Euro. I am less interested in documenting which person was the first or the second – there were many who saw the design flaws from the inception and could extrapolate what they would mean if a negative shock occurred. Modern Monetary Theory (MMT) economists were among them. I am more interested in groupthink (at the paradigm level) and how the failed predictions can be used to demonstrate the inapplicability of a certain body of theory. That is, what can we learn from the failure of mainstream economists in general to see the crisis coming (and being in denial now of what the solution is). In this blog I consider a part of the thinking that explains why my profession proved to be unreliable in this regard. I renamed this blog – appending it with the term redux because on March 23rd, 2009 – I wrote a blog – Budget surpluses are not national saving.

As more people become aware of Modern Monetary Theory (MMT), extreme reactions emerge to basic concepts that, in any reasonable sense, should evade such reactions. For example, when the concept of the Job Guarantee (JG) is explained the reactions include hysterical comments such as “This is Socialism”; “MMT advocates the government employing everyone – they are stealth Communists”; “MMT is Communism in disguise”; and the rest. I get several E-mails along these lines per week – all which go into the trash immediately – so why bother sending them! I also get many (polite) E-mails suggesting that we (MMTers) should adopt a compromise line and embrace the ideas of those, who while clearly holding ideas that are inconsistent with MMT, do advocate government-led stimulus in the present context. Apparently we should also use terminology that is consistent with the mainstream to minimise the chasm that has to be be crossed to jettison that orthodoxy and accept MMT. These tactical suggestions have resonated once again in the current little dispute about whether various economists, who operate in the New Keynesian paradigm are channeling Minskian ideas. The suggestion is that, while they might not have foreseen the crisis and hold to various theoretical concepts that are inconsistent with MMT development, we should, as a matter of strategy, form alliances with these economists because they are now advocating policy more or less similar to that proposed by MMTers. So our common purpose should be prioritised over our theoretical differences. I disagree. History shows us that it is very dangerous to develop a new approach by minimising the differences between it and the dominant, but erroneous paradigm just to make it easier for adherents of the latter to embrace the former.

I was going to write about the so-called fiscal cliff today and would have shown that the only thing that might fall of the said cliff would be real GDP growth should the US Congress actually not extend the tax cuts and impose the spending cuts. The US economy would follow the lead from the British economy and double-dip in 2013 as sure as day follows night (or is it the other way round). The most elementary exposition of what we might call – ECO101 Macroeconomics – would tell us that. One person’s spending is another person’s income and so on. I note that some economists are arguing that ECO101 Macroeconomics is alive and well because it has had a an impeccable record in the current crisis. In my recent blogs – Fiscal austerity damages real growth and prolongs the financial downturn and Neo-liberalism has failed but we still don’t get it – I have argued that the mainstream of my profession has failed – both in anticipating the emerging crisis and providing credible solutions to remedy it. So have I overstated that claim, given that ECO101 Macroeconomics is the go-to approach at present? The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.

Yes, and more. There was an article in the EU Observer this week (April 3, 2012) – EU ‘surprised’ by Portugal’s unemployment rate – which I had to re-read a few times to check that I was actually reading the words correctly. The dialogue presented was so shocking that it raises fundamental questions about how one is interact with the economics debate. Then I read some more articles this week which investigated why mainstream economics retains its dominance in the face of its catastrophic failure to explain anything of importance to humanity. Closed minds are very resistant to change especially when socio-pathological dimensions are present. Which led me to investigate Mayan cosmology after being accused of being a practitioner of the art! Overall, another week in the life of a Modern Monetary Theorist (MMTist) – par for the course really.