Earlier this week my professional association (which I decline to join) – the Economics Society (ACT Branch) awarded its inaugural Enemy of the State/Friend of the People award to a microeconomist for advocacy in defence of economics and its application to public policy. The stunt reflects the major historical revisionism that is now a daily occurrence and appears worse than anything that occurred in the communist states. Those who think they have an entitlement to make huge profits (helped by government guarantees) yet return to behaviour that brought the world economy unstuck are now in attack mode. There is denial, outright deception, constant hectoring. To redress this issue, I am now calling for nominations for the Modern Monetary Theory’s (MMT) Friend of the state, Friend of the people award. It will be awarded to all persons (we believe in collectives) who understand how our monetary system operates and how it can be managed via fiscal policy to serve public purpose and advance the welfare of the most disadvantaged.

Australia’s central bank governor is now appearing in the world press as something of a hero for putting interest rates up recently in defiance of world trends. Today he is featured in many finance home pages for his statement that the RBA cannot afford to be timid in putting rates up in the current months. This has raised expectations that we are in a race to get the target rate up towards their so-called neutral rate sometime soon. So almost rock star status for our central bank governor. Pity, the whole paradigm he is representing is destructive and helped get us into this mess in the first place. This blog explains why inflation targeting per se is not the issue. The problem is that fiscal policy becomes subjugated to the monetary policy dominance. This passivity manifests as the obsessive pursuit of budget surpluses which allegedly support the inflation-first stance. But this policy strategy is extremely damaging in real terms and will provoke another debt-bust cycle sometime in the future.

GIGO … that process or mechanism that we are beguiled by what amounts to nothing. GIGO emerges out of highly specialised and technical structures that bright minds create. It occupies hours of time that might be spent finding a cure for cancer or making renewable energy instantly viable on a wide-scale. GIGO keeps our most disadvantaged citizens in states of joblessness and poverty for no reason other than we think it is something. GIGO ravages the developing world and leads to wars, terrorism and other pathologies. Something has to be done about it.

It is on days like today that you see how far away from the mainstream economic opinion my macroeconomic thinking is. Why today? For overseas readers, the central bank (RBA) started hiking its official cash rate target by 0.25 basis points to 3.25 per cent. What is wrong with this? There is around 14 per cent of available labour resources currently underutilised and rising. Last month full-time employment continued its collapse. The only signs of activity in the labour market are some casualised, low-skill, low-paid jobs being created. My conclusion: neo-liberal paradigm remains intact. Stay tuned for the next crisis.

The debate seems to be slowing down which means this might be my last response although we will see. But in general the debate has raised a lot of interesting perspectives and I hope it has stimulated interested parties to read more of our work. I also think that while (as in any debate) “battle lines” appear to be drawn, I repeat my initial point some days ago. Steve and I saw this as a chance to focus on the common enemy – the mainstream (neoclassical) macroeconomics. That (failed) paradigm has nothing to say about the world we live in. The work of Steve and the modern monetary theory I work on both have lots to say and should not be seen as being mutually exclusive. Indeed, Steve operates in what we call the horizontal dimension of modern money.

Today, I offer Part 2 of my responses to the comments raised in the debate so far. I am still about 40 comments shy of the total. In general, I thank Scott, JKH, Ramanan, Sean and others who have provided excellent interventions into this debate based on their knowledge of how the monetary system actually works rather than a stylised representation of it which leaves out the government sector and is liberal with the accounting conventions applied to account for asset and liability flows and flow to stock relations. But there still appears to be major confusions which I will try to address here.

The mainstream economics profession is not saying much during the crisis apart from some of the notable interventions from conservatives and a few not-so conservative economists. In general, what can they say? Not much at all. The frameworks they use to reason with are deeply flawed and bear no relation at the macroeconomic level to the operational realities of modern monetary economies. Even the debt-deleveraging (progressives) use such stylised models which negate stock-flow consistency that their ability to capture sensible policy options are limited. This blog discusses New Keynesian theory which is a current fad among mainstream economists and which has been defended strongly by one of its adherents in a recent attack on Paul Krugman. The blog is a bit pointy.

On Friday, the RBA signalled that it wanted to start hiking interest rates early in the upturn (and be one of the first central banks to do so). The justification was that this recession was more like the shallow, short-lived downturn in 2000-2001. I disagree. The evidence doesn’t support that contention. Increasing interest rates now will have serious impacts on the solvency of households currently struggling to get anywhere near enough hours of work. The RBA once again will be choosing to use underutilisation as a tool rather than a policy target. Another disgraceful chapter in their history is looming.

Well the conservatives are scrapping between themselves, which is just as well because it might derail their drivel campaign about the trillion (whatever!) dollar debt wave that we are about to drown under. Me, I will surf it out with my longboard and enjoy the experience! Anyway, seems Mike wants to end our little engagement which is fine because tomorrow I will be talking about “R we or R we not”. National Accounts are out at 11.30. So this blog summarises where I think we are at. Remember that it started with the blog – Neoliberals invade The Greens! and the space theme continued with Mike conjuring up the Mitchell Strikes Back and today The return of Mitchell. Whatever, it is more clear than ever that the conservative macroeconomics has The Greens in its grip – sadly.

The Social Inclusion Research Paper series are slowly emerging. Professor Tony Vinson (Sydney University) was commissioned to write six papers on the topic and they are available HERE. In the paper on Jobless Families in Australia, he considers a range of strategies which have been advanced to reduce chronic joblessness which has wrecked families across Australia since the neo-liberal attack on full employment began in the mid-1970s. I was pleased to see him mention the Job Guarantee. This is what he said.

Today the ABS published its Average Weekly Earnings, Australia data which gives us some information about how workers are faring in the recession from the perspective of their wage returns. It also allows us to compare the trajectory of wage movements over this downturn (so far) against the 1991 downturn. Some interesting results emerge from that comparison.

Yesterday we had the rather unusual situation of the Treasury Head presenting a robust defence of his Department’s work after various commentators have suggested the forward estimates were flaky to say the least. Overall, it is an amazing exercise given that the issue is about how quickly the federal budget balance will return to surplus. So instead of a robust debate about why the Government is allowing unemployment to blow out and long-term unemployment to become entrenched again, all the hot air is about how quickly the federal government can start trashing the saving capacity of the private sector again. You get some feel for how low brow the debate actually is out there in expert media commentary and interview land by reading the ABC 7.30 Report transcript from last night when the presenter tried to question the Opposition Treasury spokesperson. It was as bad as it gets.

In the 1980s, as high unemployment persisted following the 1975 OPEC oil shock and the stagflation that accompanied it and then the 1982 recession and its aftermath, neo-liberals started to seek new ways of justifying the lack of government action in restoring full employment. Being very clever, they came up with an ingenious solution – redefine what full employment means. So as the unemployment rate rose they claimed that the so-called “equilibrium unemployment rate” had also risen which meant that attempts to reduce it by expansionary policy would be inflationary. They claimed the only way the government could act was to initiate “structural reforms” aka privatisation, labour market deregulation, anti-union legislation and harsh welfare measures. Why should we be so surprised that they are at it again? The truth is that recessions cause structural imbalances which are corrected again if economic growth is strong enough in the post recession phase.

The unemployed cannot find jobs that are not there! I have written about that topic extensively. So today I have been examining what vacancy data is telling us about the labour market. The relationship between unfilled job vacancies and unemployment (the so-called UV ratio) is well entrenched in economics. The UV ratio is a good indicator of the state of the labour market because it tells us (approximately) how many people there are for each unfilled job. Of-course, it understates the degree of slack because it fails to include underemployment. Anyway, you can also determine whether there are significant supply-side issues going on which would require supply-side policies. As you will see in the following graphs – it is all demand side! Which tells us, yet again, that job creation is required.