Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
Writer of popular textbooks on macroeconomic myths, N. Gregory Mankiw has just put out a paper – Defending the One Percent – which is due for publication in the Journal of Economic Perspectives. The paper presents a narrative about the shift in the US personal income distribution (sharply towards higher inequality) since the 1970s in terms of rewards forthcoming to exceptionally skilled entrepreneurs who have exploited technological developments to provide commensurate added value (welfare) to all of us. As a result, rewards reflect contributions and so why is that a problem? In other words, the “left” (as he calls the critics of the rising inequality) are wrong and are in denial of reality. That view is unsustainable when the evidence is combined with a broad understanding of the research literature. Ability explains the tiniest proportion of the movements in income distribution. Social power and class, ignored by the mainstream economics approach, provides a more reliable starting point to understanding the rising inequality.
Today’s release by the Australian Bureau of Statistics (ABS) of the – Labour Force data – for May 2013 signals a deteriorating situation. Employment growth was about zero. The fall in the unemployment rate was due to a decline in the participation rate. Monthly hours worked fell as full-time employment contracted. The broad labour underutilisation rate rose sharply by 0.4 pts to 12.9 per cent with more than 908 thousand workers underemployed. This data signals an urgent need for fiscal stimulus to reverse the negative trend. Unfortunately, with both sides of politics locked into an austerity mindset the situation is likely to deteriorate further.
There was a column in today’s Australian Financial Review “When the money-go-round slows, everyone suffers” which bemoaned the fact that all the investment bankers, lawyers and accountants that have been making heaps off the massive growth in the financial services sector are now doing it tough. We read that household budgets are being stretched when some woebegone executive suddenly discovers “multiple sets of $20,000 a year private school fees plus family holidays in Aspen” (from Australia). We feel sorry for them don’t we. The parasites of neo-liberalism who in between crafting handsome consulting contracts for themselves fill their days performing largely unproductive functions to our society. The AFR is, of-course, the neo-liberal propaganda machine that feeds the business sector with arguments about how badly they are doing because workers are overpaid and lazy. Yes, there was also an article in today’s edition about excessive wages and labour market regulation. Meanwhile, the latest evidence from Britain is that workers have taken the equivalent of a 15 per cent real wage cut over the period 2007 and 2012. The cuts have undermined nominal wages of workers in jobs rather than being the result of workers shifting to lower paid jobs. That is unprecedented and confirms the suspicions that the austerity agenda is being driven by a desire to win the class war for capital once and for all.
I was sent a copy of a survey report – Grand Old Party for A Brand New Generation – which was produced by the so-called College Republican National Committee, which is a conservative university-based organisation in the US aiming to recruit people into the GOP. What emerges is that a lot of opinions are expressed but once you consider them in detail the only possible conclusion is that American college students (inasmuch as this is a representative sample) are hopelessly mis-educated on these matters – like the rest of the population. The level of internal inconsistency with respect to positions taken on macroeconomic policies that is demonstrated in the survey results is quite stunning. But don’t blame the students, their teachers and political leaders let them down too. The economic debate around the world is so infested with neo-liberal myths that it is hard for any alternative viewpoints to get oxygen. Yet the data keeps rejecting the mainstream views, which, it seems, only serves to solidify them further. We are all caught in a morass of mis-education – and our societies are drowning as a consequence. Nero fiddled. We do something else. Civilisations do not last forever.
Last week (June 7, 2013), the – US Bureau of Labor Statistics – released their latest – Employment Situation – May 2013 – which showed that in seasonally adjusted terms, total payroll employment increased by 175,000 in May while the Household Labour Force Survey data showed that employment rose by 319 thousand. The essence to be extracted from the data is that total employment in the US is not even keeping up with the underlying population growth. As a result the level of and the labour force shrunk by a further 496,00 persons. The twin evils – falling jobs growth and the unemployment rate edged up a little with participation constant. The question that needs to be asked is whether this is a turning point with slower growth and rising unemployment ahead. Certainly, the conservatives who claim that the budget cuts under the so-called sequestration have done no harm are way off the mark. The major part of those cuts will hit soon and already the employment situation is looking very fragile. The Gross Flows data also tells us that the probability of an employed person becoming unemployed is rising again and the probability of a new entrant getting a job is falling. Those transitions are signally a switch point. The budget deficit is currently large enough to just maintain activity. It should be significantly larger to keep the growth momentum in the right direction. The politics, however, militate against that despite the shaman on the Republican side losing their greatest authority – those Excel spreadsheet geniuses.
Imagine a patient that goes in for surgery to fix an in-grown toe-nail. She comes out in a wheelchair after the surgeon has trimmed a little more than expected from the toe. The result is she loses her whole leg in the operation. When challenged, the surgeon says that they underestimated how much damage would be caused when they starting trimming the toe-nail and realised too late that they had actually cut her leg off by mistake. The surgeon also admits that they had major differences of opinion with the other specialists involved in the assessment about the extent of the cutting required and the degree to which the surgery would deliver relief to the patient but chose not to disclose that to the patient before hand because they didn’t want to risk slowing down the rush to surgery. After all, surgeons know only one thing – cutting and stitching. The one-legged patient sues the surgeon under tort and the authorities prosecute under criminal law. The surgeon is found guilty of criminal malpractice and negligence, is ordered to pay out millions to the patient and is sent to prison. The reality of professional risk. While the analogy is not perfect it leads to this sort of question: Why should professional economists working for the IMF, the EC and the ECB be above the professional standards and accountability that apply throughout the professional world?
It seems like everything is getting smaller in Germany. I read today that Germany’s longest word (63 letters) has been abandoned. It also seems that their jobs are getting smaller and more people are being forced into them. The so-called “mini-jobs”. Meanwhile Europe’s crowning glory and austerity’s greatest achievement lies a little south of the mini-job kingdom. Eurostat’s latest – Regional labour force data – tells us that in some regions in Spain and Greece, the unemployment rates of the 15-24 year olds have topped 70 per cent and will continue to rise. There are now an increasing chorus in the media from politicians and financial market types who are trying to dress all this up as good news. Apparently, the Greek share market is booming. The agenda is clear – if they can somehow convince the world that the devastation of Greece is “good news” then it will reduce the growing resistance to austerity that is starting to broaden the debate. The elites don’t want any moderation. So they have to re-construct devastation to appear to be bringing good outcomes. The madness continues. Tell the 15-24 year olds in Dytiki Makedonia that things are going along swimmingly!
Here are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
We will start with a quiz question today. Its a very hard question so you will have to think long and hard to get the right answer. If you were the government and had the choice of spending $A114,975 per annum (or $A315 per day) to derive zero benefit and cause significant harm to both society and individuals or spending $A63,074 per annum (or $A173 per day) to derive significant benefit with virtually zero harm being caused which option would you take? While the dollar figures are calibrated for the Australian situation, neo-liberal governments around the world have been able to convince us that the first option is superior. There is no logic to it but reflects the extension of the logic that individuals are responsible for themselves and there is no such thing as a macroeconomic or systemic constraint on individual choice and behaviour. It is that folly that is causing all the strife at present and will ultimately bring the system down.
The fiscal austerity imposed on the southern European nations such as Greece and Spain has been imposed by the Troika with two justifications. First, that the private sectors in these nations would increase spending as the public sector cut spending because they would no longer fear the future tax hikes associates with rising deficits (the Ricardian argument). The evidence is clear – they haven’t. The second argument was that massive cost cutting (the so-called internal devaluation) would improve the competitiveness of the peripheral nations, close the gap with Germany and instigate an export bonanza. It was all about re-balancing we were told. The evidence for that argument is clear – it was a lie. The massive impoverishment of these nations and the millions of jobs that have been lost and the destruction of a future for around 60 per cent of their youth (who want to work) has all been for nothing much. As was obvious when they started.
Mr Barroso, European Commission President has a way with words. In January 2013, he declared “that the existential threat against the euro has essentially been overcome”. More recently (April 3, 2013) he pronounced “that the EU has come through the worst of the crisis”. Really? And, just yesterday he was at it again, lecturing France on the need to hack into welfare payments and worker protections. Meanwhile, Eurostat released the first-quarter 2013 National Accounts publication – Euro area GDP down by 0.2% and EU27 down by 0.1% – a few hours after Barroso was on French radio delivering his threats. The data is shocking which is a euphemistic way of saying _ _ _ _ _ _ _ (fill in your own expletive). There are now 10 Eurozone nations in recession. The overall monetary union has been contracting for six consecutive quarters (that is, 1.5 years). And the situation will deteriorate even further. When does someone conclude that the current policy framework is a total failure and causing massive permanent damage? When will these lug heads in Brussels realise they are not only destroying the fabric of prosperity but also jettisoning their political aspirations – for one Europe? Amazing.
Today’s release by the Australian Bureau of Statistics (ABS) of the – Labour Force data – for April 2013 shows reasonably strong employment growth. The data looks good – employment up, full-time employment up, participation up, monthly hours worked up. But the message you need to get is that the data is very volatile at present and hard to interpret. We have to go to the underlying trends to get a better impression. The fluctuating monthly fortunes are over what remains a fairly weak labour market. It is not collapsing but it is not growing strongly enough to really bring down the substantial stock of underutilised labour.
It is budget time in Australia this month. The federal government will release their Budget next Tuesday and the State and Territory governments all put them out around the same time. Yesterday, it was the turn of one of our larger states Victoria. I will come to that in a moment. The mania intensifies around May and every day and night on TV, radio and in the printed media there is a constant commentariat and an almost uniform message, which was summarised by one so-called expert last night – “the Budget is broken”. I remember this chap in the 1980s as a junior Treasury official aspiring to be important. I wondered about the analogy. There are lots of “black holes” (buckets) and “drunken sailors” (big spending) but “broken”. I guess the only thing is that broken is bad – using broken as an adjective. All the commentary is about how bad the deficit is given the terms of trade are slowing and undermining tax revenue. While the deficit is way to low, it is good that we have one. It is good that America and Japan and the UK have deficits. There is at least some net spending flowing each day to support the economy. Anyway, time to look into the glorious gouging of the public purse that only the neo-liberals can make look as though it is financial responsibility at its best.
It been quite a few weeks for the prophets of doom. R&R revealed they can’t handle a simple spreadsheet competently, and then try to claim a positive number is really a negative number. And who said they said there was a threshold of debt anyway? They now deny there is a threshold. History tells us this is a new denial. Then their Harvard colleague, the so-called historian throws himself off a cliff – again – with his remarks about JMK. Again? Joe Weisenthal has – Ferguson’s Horrible Track Record on display. He reports that Ferguson has “self-immolated a number of times trying to fight an ant-Keynesian battle”. What is it about Harvard? Has there been an internal inquiry set up to consider whether R&R committed academic fraud or were just incompetent? Why do they still continue to employ Ferguson after his homophobic remarks? It is not as if he displays any acumen when it comes to economic commentary. How much does he receive in appearance fees for telling all and sundry what is not going to happen, even though he says it will? I guess as an historian, Ferguson might know one thing. Fools have a habit of reappearing and repeating the nonsense that prior fools claimed was the truth.
I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.
Regular readers will know that I consider promotion of the humanities and social sciences in a university systems to be of paramount importance in preserving an informed citizenry, which is a precondition for democracy. These areas of our education system have been under constant attack by the neo-liberal bean counters in government education bureaucracies and management positions within universities. While I regularly write about the impacts of poor fiscal management, in particular, in the current context – fiscal austerity – on unemployment and low income workers, one of the other casualties of neo-liberalism has been a university systems. The damage to our university systems go well beyond the squeeze of funding and a user pays mentality that I’ve written about in the past. Last night, on our national broadcaster’s prime evening current affairs programme – 7.30 – we were confronted with a classic example of how compromised our universities have become in Australia. The – 14th Dalai Lama – was banned from visiting a campus. Why? Guess!
Remember, earlier this year, when the IMF admitted they had made errors in their modelling of expenditure multipliers. They had been tramping into countries with their jackboots telling all and sundry that fiscal austerity would promote growth because their multiplier estimates told them so. Millions of job losses later, they came clean. It turns out that when they revised their multiplier estimates exactly the opposite was the case. Now they acknowledge that spending multipliers are in range of 1.5 1.75, meaning that increasing government spending adds at least 150 cents in the dollar spent extra to the economy. Now, the darlings of the austerity cultists – Rogoff and Reinhart – has been exposed for poor research standards – to wit, errors in spreadsheet coding. Meanwhile, Cyprus is being driven into oblivion. Who is ever going to take responsibility for these travesties?
The Australian government announced its new agenda for public education yesterday. It announced that it would spend an addition $A14.5 billion, overwhelmingly in the public schooling system, over the next six years. A major Report released last year showed that the last few decades of neo-liberal cuts to public education have undermined the quality of outcomes. Australia now trails behind nearly every advanced nation in this respect. The Report called for a massive injection of funds into the public schooling system. So we should applaud the Government announcement. The problem is that it thinks it still has a major fiscal problem (deficit currently around 3.2 per cent of GDP). As a consequence it thinks it has to cut spending elsewhere to fund the public school initiative. This is a wrong logic for two reasons. First, real GDP growth is falling and unemployment is rising fast which indicates that we need more aggregate demand not less (or the same). Second, it has chosen to get the cash to help restore the credibility of the public schooling system from the higher education system. Destroy the future to save it sort of logic. Another mindless demonstration of its fiscal ignorance.
Today’s release by the Australian Bureau of Statistics (ABS) of the – Labour Force data – for March 2013 reveals a very weak and deteriorating labour market. All the main indicators were bad – employment fell, full-time employment fell, unemployment rose, participation fell and aggregate monthly hours worked fell. The unemployment rate would have risen to 5.9 per cent rather than the 0.2 point rise to 5.6 per cent had the participation rate not fallen by 0.2 points. There are now 686 thousand workers unemployed. The youth labour market remains in an appalling state. Overall, the data is consistent with the steady flow of information pointing to a contraction in the Australian economy, which is being deliberately exacerbated by the Federal Government’s insistence that it pursues a budget surplus. Private spending growth is insufficient to drive growth at present and the Government should be increasing the deficit and targetting job creation programs. Instead, it marches on to electoral oblivion and watches the labour market deteriorate and unemployment rise.