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.

1 + 1 equals 2. The world is not flat. Night follows day (usually). You are born and then you die. Spending equals income. The mid-term elections in the US proved that religious zealots target positions of high office in our democracies. They are emboldened by a righteousness brought on by their faith. In the context of economic policy this religious fervour violates the most simple facts. The most simple story in macroeconomics that every student should have ingrained in them in the first two weeks of study is that spending equals income. It is as basic to macroeconomics as 1 + 1 equals 2 is to arithmetic. The mainstream economists know this but because it implies a role for net government spending that insults their religious passions they invent all sorts of elaborate lies and myths which purport to show that cutting spending increases it. These “proofs” are equivalent to those which try to show that 1 + 1 does not equal 2?. They are logical bereft and empirically vacant. The problem is that everyone citizen who forms the same view and votes accordingly increases the chance that their job will be next to go. Meanwhile the religious persecution of those without jobs continues.

I have been working on the macroeconomics textbook today that Randy Wray and I are hoping to publish sometime next year. We have a publisher and now just have to complete the text which is progressing well. Also today I have been wondering why UK business firms are not horrified at the latest damaging policy announcement by the new conservative British government. My thoughts generalise to any government at present in terms of the obvious need to expand fiscal policy. I brought those two things together today – the practical need for continued fiscal support for private sector activity and the development of our textbook – by considering the macroeconomic origins of profits. It is an interesting story that very few people really understand because they think micro all the time when it comes to the understanding the profits of business firms whereas you have to start thinking from a macroeconomics perspective to really understand this. It also helps you understand the relationship between the government and non-government sector more fully – a relationship which is at the heart of Modern Monetary Theory (MMT). So read on and see if you have thought about this before.

I have some good news that some of you may have already heard about but it is worth repeating. Harvard deficit terrorist Gregory Mankiw, who poisons the minds of millions of economics students with his preposterous textbook is going to work less because he has faces lower income as a result of the temporary Bush high marginal tax rates cuts being terminated. Apparently, he is getting a sudden preference for leisure. While there is a desperate need for more fiscal expansion in the US at present it seems that the US government could help all of us by mixing the net spending injection with some marginal tax rate adjustments targetted towards high income earners. By fine tuning the top marginal rates they should be able to get Gregory to give up work altogether and then the rest of us would be better off as a result. Meanwhile, the UK government also claiming to be against budget deficits thinks it will make its poorest citizens work more by ensuring they have less income. Notwithstanding the lack of jobs the inconsistency of the logic is something else. Go figure!

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.

Many readers have written to me asking me to explain the British Treasury view during the Great Depression. This view was really the product of several decades of literature which culminated in the political process during the 1929 British election where the number one issue of the day was mass unemployment. The Treasury View was thoroughly discredited in the immediate period after it was articulated and comprised one side of the famous Keynes versus the Classics debate. When propositions – such as the Earth was flat – are shown to be incorrect constructions of reality the ideas cease to be knowledge and instead become historical curiosities which allow us to benchmark how far our education systems have taken us. However, the same cannot be said for my profession.

Whenever unemployment rises substantially – that is, whenever there is a recession, the conservatives hide out for a while because the rapid rise in joblessness does not resonate with their models of voluntary choice (that is, workers choosing leisure although they can never explain why workers would suddenly get lazy?) or with their claims that structural factors push the unemployment rate up (although welfare policies etc rarely alter much). Of-course, they love it when some “structural” policy changes during a recession which is why they are cock-a-hoop about the decision of the US government to extend unemployment benefits. It has given them some latitude to get back into the debate even if all the data is working against them. But they always oppose the use of fiscal policy and so typically, towards the tail-end of a recession, they attempt to justify the deplorable unemployment levels by playing the “structural card”. We are now seeing that again and I expect the propaganda to spread and proliferate. It should be rejected like the rest of the cant.

The denials continue. In the Wall Street Journal yesterday (August 30, 2010) we see the latest desperate attempt by Harvard (and Stanford) professor Robert Barro to redefine away the recession. The article – The Folly of Subsidizing Unemployment claims that if the US government had not have extended unemployment benefits to 99 weeks “the jobless rate could be as low as 6.8%, instead of 9.5% …” Barro has consistently claimed that the government fiscal intervention has largely caused the recession to persist. As we will argue his track record at predicting and/or explaining economic outcomes is very poor. Simple facts always contradict his fantasy world of Ricardian Equivalence and Natural Rates. I am also adding Stanford to my list of universities which sensible students should boycott if they want to learn some economics given Barro’s presence there. The list is getting longer.

The central bankers have been meeting in Wyoming over the weekend as part of the annual Economic Symposium organised by the Federal Reserve Bank of Kansas City. While not all of the papers and discussion are yet available for public scrutiny there were some notable presentations (that you can access in full) which suggest that key central bankers are starting to realise that the economic crisis in not over and the fiscal-led recovery is slowing and that monetary policy alone cannot provide the solution. Moreover, one leading central banker indicated that monetary policy is not a suitable tool for controlling longer term problems such as price bubbles in specific asset classes. This view challenges the basis of the mainstream macroeconomics consensus that has dominated the policy debate for 30 odd years and culminated in the worst financial and economic crisis in 80 years. It is certanly a welcome trend in a debate which is typically flooded with ideological input from the mainstream macroeconomics profession.

Last year it was Reinhart and Rogoff being rammed down our throats as the deficit terrorists were claiming that governments in the advanced nations were on the cusp of defaulting on their sovereign debt. Their book was relentlessly misused by commentators and academics (like Niall Ferguson and others) and even the authors themselves left things ambiguous in interviews. The fact is that their research (if we dare call it that) is applicable to only a narrow set of situations none of them relevant in the contemporary setting. More recently, the deficit terrorists have been holding up a new effigy – a new hero. Another Harvard economist – Alberto Alesina. What is it about that place? Alesina has allegedly provided a solid theoretical case to support the absurd claims by the austerity proponents that cutting the very thing that is supporting growth at present will not damage that growth. He is now the new hero. Well it is another scam job! He chooses to use flawed orthodox textbook models to assert his case without mind to the situational context and other realities. He is no hero but just another mainstream economist seeking celebrity with zero substance to offer and very little else to sell other than a headline.

I am reserving Friday’s for no blog, short blog or normal blog depending on whether I can do other things and keep my weekend’s free of blog activity. In general I will use Friday’s to put a Quiz up for Saturday and prepare the Answers and Discussion for Sunday. If I have some “blog” time left and there is something interesting to write about then I will post it – like today. There was an interesting article in the UK Guardian (July 21, 2010) by Robert Skidelsky who was the biographer of John Maynard Keynes. The article – What do deficit slashers wear under their hair shirts? – probes the “assumptions made by the economists who demand rapid ‘fiscal consolidation'”. I thought that was interesting given that most of the published justifications for austerity rather vaguely invoke failed economic theories like Ricardian Equivalence and Rational Expectations. Skidelsky’s point is that these defunct macroeconomic doctrines which got us into this mess are now resurfacing as the dominant narrative. That spells disaster.

As governments around the world are setting about to scorch their economies with austerity programs very little opposition is coming from my profession. It is quite astounding to me that the more extreme elements (the Ricardian Equivalence theories) are holding sway at present. These notions have been discredited often (see my blog – Pushing the fantasy barrow for a discussion). Generally, the austerity push is not being supported by any credible economic theory which enjoys empirical support. I get the impression that policy makers are now altering settings in an ad hoc manner without any real understanding of how the economy works. It is a triumph of neo-liberal dogman. However, in terms of evidence-based critiques of the austerity push, Bloomberg Opinion published an interesting article (July 13, 2010) – U.K. Bust Needs Big Spender – written by UK academic Vicki Chick and author/debt activist Ann Pettifor (thanks BM). The Op Ed summarises a more detailed research paper which demonstrates that key assumptions of the austerity proponents do not hold over a long historical period. The short message is that things are going to get worse.

The daily rhetoric being used to promote fiscal austerity maybe couched in the urgency of the day but we have heard it all before. In this blog I just reflect on history a little to remind the reader that previous attempts to carve public net spending, based on the “expectations” belief government was not going to tax everybody out of existence, failed to deliver. The expected spontaneous upsurge in private activity has never happened in the way the mainstream macroeconomic supply-siders predicted. Further, the chief proponents usually let it out in some way that the chief motivation for their vehement pursuit of budget cuts was to advance their ideological agendas. Of-course, the arguments used to justify the cuts were never presented as political or class-based. The public is easily duped. They have been in the past and they are being conned again now. My role is to keep providing the material and the arguments for the demand-side activists to take into the public debate.

I have returned from the US after participating at the Fiscal Sustainability Teach-In and Counter Conference held in Washington D.C. last week. It was a good event and has stimulated a host of follow-up blogs from the activists who promoted the event. On the way home, I read the most recent report from Citi Group (who were saved from bankruptcy by public funds – they were among the first to have their hands out) which is predicting major sovereign defaults. It was clear that Citi Group was advocating very harsh fiscal austerity measures. How often have you heard the statement that the current economic crisis is evidence that “we are living beyond our means” and that the policy austerity that has to be introduced to “pay back the debt” is an inevitable consequence of our proliflacy – both individual and national?

Today’s blog is a little different to most, although don’t worry, I will get onto familiar themes soon enough. Today I am considering the latest broadside from controversial German philosopher Peter Sloterdijk, who Jurgen Habermas referred to as a fascist. Sloterdijk responded to that criticism by labelling Habermas, in turn, a fascist. That debate was about bi-genetics and Sloterdijk’s implicit support for a “master race”. It was an interesting debate in itself and goes to the fundamental discomfort that exists in Germany about their past. But today I am considering his views on freedom and governments who he labels fiscal thieves and suggests that modern democracies have conspired to allow ever increasing numbers to live of the toil of others courtesy of state intervention.

Tonight’s blog title L’horreur Economique is taken from one of my favourite (though depressing) books by a French writer (Viviane Forrester). I will discuss the book a bit at the end of the blog. But I was thinking about it (and re-reading it) today when I reflected on the US President’s most recent Radio address on the reining in budget deficits. We – collectively – have allowed the most grotesque set of lies, half-truths and irrelevancies to become the centrepiece of the public debate on the economy. The crisis exposed the lack of credibility that mainstream economics has and should have dispatched the ideas to the rubbish bin forever. Instead, as unemployment and poverty rates continues to rise the mainstream ideas are now taking centre-stage again. And the policies that result will be to our collective misfortune. It really is “L’horreur economique”.

It is interesting how one’s ideology screens out options and alters the way we examine a problem. I was reminded of this when I read two articles in the Times the other day (December 23, 2009) – Thrifty families accused of prolonging the recession and – No evidence Britons can save the day which both focused on movements in the savings ratio. The claim is that with UK households now saving more to reduce their exposure to debt, the UK economy is facing a double dip recession. The ideological screening arises because they seem to think it is inevitable that rising savings will lead to a deepening recession. In doing so they fail to realise that the moves by the British government to “reign in the deficit” are the what will make this inevitable. If their world view was less tainted both articles would have focused on the spurious nature of the deficit terrorism rather than the desirable trend towards rising saving ratios in Britain (and elsewhere).