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.

The Australian government is digging a hole for itself at present. In the May Budget it talked (neo-liberal) tough to demonstrate what it claimed was “Responsible Economic Management” – and this meant it entered a battle with the Opposition about who would deliver the biggest budget surplus. This became one of the comical (in a tragic way) features of the August federal election campaign. The respective treasury boof-heads from the Government and Opposition boasting about the size of their future budget surpluses. They also tried to win the battle of who would get there the quickest. The whole discussion was definitely mindless. Now with the Australian dollar appreciating fairly strongly the Government has realised the reduced economic activity that seems to be occurring is reducing its tax revenue prospects and therefore undermining its surplus projections. So what do they do next? Answer: announce they will cut spending by even more than originally planned. They are going to deliberately undermine employment growth and force even more people to lose their jobs at a time that labour underutilisation sits at the obscene level of 12.5 per cent and inflation is moderating. It is sadly a case of the fiscal vandals chasing a dream. The dream however is a nightmare.

I happened to re-read an article from the 1960s today – The paranoid style in American politics – written by Richard Hofstadter which was published in the November 1964 edition of Harper’s Magazine. It is one of those articles you should re-read from time to time to remind yourself that not a lot changes. What we call the deficit terrorists now were alive and well then and predicted that anything government amounted to a descent into communism with accompanying mayhem. The facts are clear. The US and most of the world enjoyed positive contribution from government net spending (budget deficits) for most of the post Second World War period and managed to avoid becoming communist (although they might have been better off if they had!). Today, the same paranoia is evident in the interventions into the policy debate from the deficit terrorists. They are so anxious. But underlying their alleged anxiety is a visceral hatred of anything government (except when the handouts are in their favour). None of the calls for fiscal consolidation are based on any firm understanding of how the monetary system works.

Today I provide some alternative insights to to recent (not so) Nobel prize awards in Economics. It is claimed that the work of the three winners has “conferred the greatest benefit on mankind” (being the criteria for the award). The reality is that the major insights to be drawn from this trio is that mass unemployment does not exist and that unemployment is largely voluntary or a function of over-generous income support policies by “misguided” governments. The policy recommendations to be drawn from their work focus on cutting the meagre benefits that governments provide to the unemployed in times of strife. The winners’ work tells us that they think workers are lazy and do not search effectively enough, in part, because they have it too good in their jobless state. I rank their work among the most distressing and obscene of all the disgraceful con jobs that the mainstream of my profession has deliberately foisted on the public policy process.

I am sick of reading or hearing how brilliant such and such economist is and how they should be regarded as oracles because of this “brilliance”. In all these cases, the reality is usually that these characters have left a trail of destruction as a result of applying their brilliant minds. The terminology is always invoked by financial commentators and the like to elicit some authority in the ideas of the person. Apparently, if someone is deemed brilliant we should take heed of their words and judgements. How could we ever question them? In this neo-liberal era, many such “brilliant” minds have been placed in positions of authority and their influence has shaped the lives of millions of people. The financial and then economic crisis has shown categorically that their mainstream macroeconomic insights are not knowledge at all but religious beliefs that bear no relation to real world monetary systems. But still these characters strut the policy stages – shameless – and, in doing so, continue to destroy the prospects for many. It would be good it they were truly brilliant and could see the destructive consequences of their religious zealotry. Oh to be truly brilliant.

Today I am heading into the lands of austerity – those scorched, barren places where people with increasingly hollowed out faces are being forced by their misguided polities to forego wages and conditions and pensions and their happiness because some neo-liberal told them that government deficits were bad and all that. I am off to London this afternoon (I am typing this on the train to Sydney) and then to Maastricht University where visit each year and my colleague Joan Muysken is located. I have been thinking about various efforts that have emerged in the recent period suggesting that a new progressive agenda (narrative) is required to reverse the onslaught of neo-liberalism. This is clearly a topic close to my own heart. I have been thinking about the development of an alternative economic paradigm for my whole academic career. So whenever I see some progressive efforts I am always interested. This blog considers that question. So now a long flight then I will report on how hollow those faces are becoming.

The article by Fairfax economics editor Ross Gittins today (September 27, 2010) – How to limit the looming interest rate rises – is a testament to how ingrained the neo-liberal thinking is when it comes to discussing sensible economic policy. He argues that the Australian government needs to get back into budget surplus as quickly as possible and then continue to generate bigger and bigger surpluses and pay down all the outstanding public debt. Evidently this is because we are experiencing strong export conditions and face a dramatic inflationary threat. However, even if that is true (the boom and inflation threat) there are better ways to manage the adjustment process so that inflation remains stable especially when the private sector is still so heavily indebted (as a result of the last credit binge). The other policy options available to the Australian government clearly warrant continued budget deficits. The sticking point: Gittins and most other commentators think that when you have 13 per cent of your willing labour resources idle you are approaching full capacity. I consider that the fact that that proposition has currency is the ultimate evidence of the success of neo-liberalism in poisoning our judgement and distorting the policy debate and policy choices.

I read the headline in the UK Guardian from yesterday (September 15, 2010) – Unemployment claimant count rises unexpectedly which apparently confounded forecasts. The hopes for an export-led recovery as the expectations of the forthcoming public austerity damage private spending plans took a further hammering with the data release showing the “highest balance of trade deficit on record” in Britain and “surveys of the services and construction sectors showing employer sentiment deteriorating sharply”. Why is this surprising? The fact that the so-called analysts and the press are surprised only tells me that they do not understand the way the macroeconomic system works. When there are already severe aggregate demand constraints and the government announces that soon enough they will brutalise public spending what would you expect but a further decline in economic activity? When the rest of the world is easing the fiscal stimulus under the concerted attack by the deficit terrorists why would you expect the balance of payments to dramatically improve? None of this surprises me at all. It is exactly what an understanding of the monetary system would lead one to predict.The reality is that to lower unemployment you need to spend more. There are no surprises in that.