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Overt Monetary Financing would flush out the ideological disdain for fiscal policy

There was an article (May 24, 2016) – Helicopter money: The illusion of a free lunch – written by three institutional bank economists (two from the BIS, the other from the central bank of Thailand), which concluded that Overt Monetary Financing (OMF), where the bank provides the monetary capacity to support much larger fiscal deficits with no further debt being issued to the non-government sector, was “too good to be true”, in the sense that it “comes with a heavy price” – summarised as “giving up on monetary policy forever“. The argument they make is very consistent with the work that Modern Monetary Theory (MMT) proponents have published for more 20 years now, which is now starting to penetrate the mainstream banking analysis. However, the conclusion they draw is not supported by the original MMT proponents who would characterise OMF as a highly desirable policy development, more closely representative of the intrinsic monetary capacity of the government. The article also raises questions of what we mean by a “free lunch”, a term which was popularised (but not invented) by Monetarist Milton Friedman. Its use in economics is always loaded towards the mainstream view that government interventions are costly. But if we really appraise what the term “no such thing as a free lunch” really means then, once again, we are more closely operating in the MMT realm which stresses real resource constraints and exposes the fallacies of financial constraints that are meant to apply to currency-issuing governments.

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There is no secular stagnation – just irresponsible fiscal policy

I am in Barcelona today until later then I am off to Valencia for two days. More on the Spanish tour later. The latest edition of the ECB’s Economic Bulletin released on May 5, 2016 carried and – Update on economic and monetary developments – provides more evidence, as if any was needed, that the current reliance on monetary policy – standard or otherwise – to reboot the stagnant economies of Europe has failed and will continue to fail. Why? It is the wrong policy tool. Journalists are increasingly writing that policy options are exhausted because central bankers ‘have fired all their shots’ and the “more shots they fire, the less effective they become”. The implication is that the world is locked into a future of secular stagnation with elevated levels of unemployment and low productivity growth. They seem to have forgotten that fiscal policy remains effective if it is used properly. There is no secular stagnation – just irresponsible fiscal policy use.

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Fiscal policy is a potent instrument for productivity growth

Sometimes we have to take a longer look at things to see the present in perspective. Greece has been a living experiment for the neo-liberal Groupthink machine that is the Troika. We rarely experiment on humans on any sort of large-scale if there is the likelihood of adverse result. That would breach any notion of human ethics. It is a pity that we relax those standards when dealing with other animals, but that is another story again, which I will leave silent here. The Nazis certainly conducted large-scale experiments on humans and we vilified them for it. The Troika is conducting different types of experiments on the citizens of Greece, which defy reason, and which also have had devastating effects. But still the mantra continues from the babbling mouths of the political leadership in Europe and its technocratic squawk squad (SS) embedded in the European Commission bureaucracy, the ECB, the IMF and various so-called ‘think tanks’ that continually pump out pro-Euro propaganda disguised as research – more structural reform, more fiscal austerity. Apparently, this scorched earth approach is the only alternative and will deliver higher productivity, increased international competitiveness and underpin a return to prosperity. Greece is on the front line of this approach. I never believed it would work because it defies economic reason. Economic reason that is not blighted by the neo-liberal Groupthink. It hasn’t worked. And now, the IMF, or at least segments within the IMF, are admitting that and producing research that supports the opposite case – the Modern Monetary Theory (MMT) case – that expansive “fiscal policy is a potent instrument for productivity growth through innovation”. Correct!

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Fiscal policy rules

The World’s financial system would have collapsed in 2008 and early 2009 if the governments of the day (including their central banks) had have maintained the dominant belief held by most mainstream economists that fiscal policy is not capable of an effective stimulus to real economic activity and that building central bank reserves to historically massive levels would cause accelerating inflation. Within a short time, all that orthodox posturing that had been shared by politicians, their advisors, and the mainstream financial and economics media was abandoned and pragmatism reigned supreme. Well sort of! The system was saved because governments largely ignored the dominant mainstream economics view. At the time, I thought that this shift in policy practice was the beginning of a paradigm shift in macroeconomics. The crisis clearly demonstrated the poverty of the orthodox theoretical framework and the policy prescriptions that flowed from it. The dominant theoretical models didn’t even have banking sectors included such was the arrogant ignorance of the profession. However, I was wrong or perhaps a bit hasty in thinking that the defences built up by the orthodox economics Groupthink would fall so quickly in the face of this amazing failure. There was a period of quietness within the profession, save for the manic interventions of some of the more extreme Monetarist elements who called on the governments to do nothing other than continue deregulation and target even bigger fiscal surpluses. But the conservative voices progressively gathered volume as the crisis moved from the probability of collapse to a deep (balance-sheet) recession and the attacks on the fiscal and monetary policy shift that occurred in 2008 and 2009 began to reach fever pitch. Governments retreated somewhat and the recoveries were then stalled and we are where we are now as a consequence – still bearing the residual damage of the GFC with many of the trigger points still unresolved and facing a new calamity. Maybe the paradigm shift is still coming. Let’s hope so.

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Monetary liquidity operations and fiscal policy interventions

Today, is the official launch of my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in Maastricht, which is an appropriate geographic location given the book proposes to dismantle the Eurozone. It just happens to be the place (Maastricht University), where we established CofFEE-Europe (a sister centre to my research centre in Australia). There are two excellent guest speakers (see below) and I am very grateful that they agreed to accept the invitations. The upshot is that I haven’t all that much time today. Over the next few days I will address some points that were raised in question time or at the reception (aka cup of tea and cakes) after the event in London last Thursday evening. There is still work to be done if the progressive side of politics is to fully understand Modern Monetary Theory (MMT) and the implications of it for policy development and choice.

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Friday lay day – RBA acknowledges failure of government fiscal policy

Its the Friday lay day blog – and I promise it will be short. Today, we celebrate what would have been the 70th birthday of – Robert Nesta Marley. I wish he was still making music. There is an excellent retrospective on Bob Marley in the UK Guardian (February 6, 2015) – Bob Marley at 70: legend and legacy – from Vivien Goldman, who was his Press Agent at Island Records in 1975 and knew him well. It is well worth reading. Today also marked the release of the quarterly Statement of Monetary Policy by the Reserve Bank of Australia (RBA). They have further downgraded their real GDP growth forecast and consider it will remain below trend for at least another year or so. They also estimate that the unemployment rate will continue to rise and still be above 6 per cent by June 2017. In other words, they are acknowledging the failure of fiscal policy settings in Australia. For a national government obsessed with fiscal austerity, this Statement should lead to an immediate policy reversal and the announcement of a major fiscal stimulus to increase economic growth and reduce unemployment. Unfortunately, that won’t happen and the government will get its comeuppance in the 2016 federal election. It cannot come soon enough.

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Australia – fiscal policy outcomes signal a failed government

The deranged individual who held the people hostage in Sydney over the last 24 hours wasn’t an Islamic State terrorist despite what the commercial news frenzy tried to tell us. He was a deranged individual. But while the news frenzy was as deplorable as his act (see this more sober account), it did one other thing – it kept Joseph Pinstripe Bulgington Hockey off the front page. Who is JPB Hockey? The Australian Treasurer and yesterday he released the Federal Government’s – Mid-Year Economic and Fiscal Outlook – which was comedic, hypocritical and demonstrates that we haven’t come very far since the days we believed the world was flat. The hostage drama in Sydney meant JPB had to take back stage and the 16 ridiculous pages that the News Limited rag the Daily Telegraph in Sydney devoted to what they called an “attack by the Islamic State”, effectively choked the coverage of the MYEFO. Some saving grace.

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The inexact science of calibrating fiscal policy

In the showdown between France and the European Commission last week, France clearly is the winner on points, which is not surprising given the impossibility of the task the Commission had set it in meeting the Excessive Deficit Procedure (EDP) rules and the danger to the latter if France was to openly defy it. We have a sort of stand-off between the surrender monkeys – France is going along with the rules sort of and the Commission is bending the rules to save face. It is 2003 all over again. The public might actually think this EDP process is based on a fairly definite science with respect to measuring fiscal policy positions which provide unambiguous statements of deficits. The public would be very wrong if they did adopt that conclusion. In general, the applied work associated with informing the EDP process is very inexact. But, moreover, it is ideologically tainted which makes the process very damaging for any notion of prosperity. All applied work has measurement and other technical issues, which means it is always just an approximation. But when those errors are overlaid by a systematic bias against government net spending and therefore full employment, then the exercise becomes a scandal.

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When fiscal policy is misrepresented

On Tuesday, Australians woke to headlines – Treasurer Joe Hockey faces $51 billion deterioration in finances between budget and MYEFO, economists say – and a story of “black holes”. The so-called director of budget and forecasting at a consulting firm in Australia (inaptly named Macroeconomics) claimed that the May fiscal statement (aka The Budget) was “economically sound”, which just tells you that the director is not worth listening to on matters macroeconomic. Then along came the US-China so-called ‘historic’ climate deal to muddy the waters further. And nothing I have read in the news since Tuesday about either issue makes any sense from a macroeconomic perspective.

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Fiscal policy saved the world

There was an article in the Melbourne Age this morning (August 12, 2014) – As jobless numbers climb, RBA is perilously close to a rare mistake – that is running a theme that is increasingly being played out by the financial commentators. Basically, that monetary policy saved the world from the GFC but that central bankers may lose their resolve and hike interest rates too quickly. While I certainly do not advocate interest rates going up anywhere (that I am familiar with), what seems to be forgotten is that monetary policy is relatively useless at encouraging growth. It was fiscal policy that saved the world.

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Exploring directions in fiscal policy

This blog extends the discussion in yesterday’s blog – Exploring pro-cyclical budget positions – which is why I am running them on consecutive days. Not that I think any of my readers (Austrian schoolers and other conservatives aside) have memory issues! The discussion that follows focuses on ways in which we can interpret the fiscal stance of a government and hopefully clears up some of the confusion that I read in E-mails I receive from readers. I say that not to put anyone down but rather to recognise that the decompositions of budget outcomes and analysing the direction of fiscal policy on a period-to-period basis is not something that the financial press usually focuses on. In avoid detailed analysis, the press leaves lots of misperceptions unchallenged and often the wrong conclusions are drawn. I am not talking about policy preferences here. Just coming to terms with the facts is sometimes difficult for many commentators to achieve. But, of-course, the “facts” are also sometimes difficult to discover given that the methods used to produce them are often ideologically biased (I am talking here about the decomposition of the actual deficit into structural and cyclical components requires a full employment benchmark, which is where the fun starts.

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Australian Labour Force data – the fiscal policy sabotage continues

Yesterday, the third-quarter National Accounts data revealed that real GDP growth is trailing behind the underlying population growth which means that per capita incomes have been falling. Today’s release by the Australian Bureau of Statistics (ABS) of the Labour Force data for November 2012 reveals that employment growth is also failing to keep pace with the underlying population growth and the only reason unemployment is not skyrocketing is that more workers are dropping out of the labour force as a result of the lack of job opportunities being created. The data is unambiguously bad. The unemployment rate fell to 5.2 per cent but only because the participation rate fell. The fact that workers are giving up looking for jobs is a portent of a very sluggish labour market. So unemployment fell but hidden unemployment rose. The trend performance of the labour market is flat and these monthly shifts are merely fluctuating around that flat trend. The data is not consistent with any notions that the Australian labour market is booming or close to full employment. The most continuing feature that should warrant immediate policy concern is the appalling state of the youth labour market. My assessment of today’s results – worrying with further weakness to come. The government has in the past few weeks insisted it will pursue its budget surplus obsession and announced further cuts in discretionary net spending. Not only will that act of fiscal vandalism fail but in doing so it will further undermine a very weak labour market.

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Fiscal policy should sustain full employment and reduce inequality

Sometimes there is serendipity in a researcher’s life. Usually not. But sometimes. The last few months I have been investigating the question of how to effectively design fiscal policy interventions. It is an important issue because there are multiple goals that need to be satisfied. Two clear goals can be identified to simplify matters. First, fiscal policy has to be designed and implemented in a way that ensures there is sufficient aggregate demand in the economy relative to its real productive capacity so that full employment is achieved and sustained. Second, it should be designed and implement so as to reduce inequality. The two goals are interdependent despite the myths that economics students learn about the trade-off between efficiency and equity. It is now clear that rising inequality harms the prospects for sustainable economic growth. The evidence is now starting to come in that during the neo-liberal era, fiscal policy was actively used to reduce its redistributive capacity and its capacity to reduce market-generated inequality was severely compromised. Not eliminated but substantially reduced. That is what this blog is about.

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Japan grows – expansionary fiscal policy works!

I have been noticing that a new narrative is coming out of the financial journalists acting as mouthpieces for various politicians and neo-liberal think-tanks around the place – along the lines that we have got it wrong – the debate now is not about austerity versus growth – but, rather, it is about structural reform and freeing up markets. The austerity is just a re-alignment of the public-private mix. I find that offensive but also odd – given that private businesses are being undermined at a rate of knots by the austerity and capital formation is stagnant (thereby undermining future prosperity). But amidst all this reinvention you still read the same scaremongering and mis-information along the traditional lines – austerity is good and the hope that increased spending can help is a pipe dream.

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Fiscal policy is the best counter-stabilisation tool available to any government

In yesterday’s blog – A nation cannot grow without spending – I challenged a view that dominates the European debate which says that fiscal austerity (choking discretionary net public spending) supplemented with vigorous so-called “structural reforms” (aka ransacking wages and working conditions) will promote growth. The corollary of this view is that fiscal austerity alone will fail and the reason Europe is going backwards is not because of the austerity but rather, because the structural reforms process has not been implemented quickly or deeply enough. In all of this there is a basic denial of the fundamental macroeconomic insight – spending equals output which equals income. An economy can only growth if there is spending (aggregate demand) growth. That requires a demand-side solution irrespective of the state of the supply side. Supply improvements might reduce the danger of inflation or improve the quality of output but people still have to purchase the output for growth and innovation to persist. A related argument is that fiscal stimulus aimed at fostering growth will cause inflation and be self-defeating. This view prevails in mainstream macroeconomics as taught in the universities of the world. Some mainstream economists do qualify this view and give conditional support to the fiscal stimulus solution by appealing to what they term the “liquidity trap”. This blog is about that argument.

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Should fiscal policy always be counter-cyclical?

I am sitting at Melbourne airport today reading IMF working papers and typing this blog. You might speculate on what sort of life that is. Par for the course. The IMF recently released a new working paper – Is Fiscal Policy Procyclical in Developing Oil-Producing Countries? – which though reasonable in the context of the paradigm that the IMF works within (that is, that governments are revenue-constrained and bond markets are crucial to their functioning) – provides a classic example of why most of mainstream macroeconomics needs to be abandoned and replaced by an understanding of Modern Monetary Theory (MMT). The errors of logic and assumption that the paper makes permeates through the entire public debate and if the public only knew the real story the politics would change instantly and dramatically.

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Income distribution matters for effective fiscal policy

I read a brief report from the US Tax Policy Center – The Debate over Expiring Tax Cuts: What about the Deficit? – last week which raises broader questions than those it was addressing. I also note that Paul Krugman references them in his current New York Times column (published August 22, 2010) – Now That’s Rich. The point of my interest in these narratives is that I have been researching the distributional impacts of recession for a book I am writing. The issue also bears on the design of fiscal policy and how to maximise the benefits of a stimulus package.

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The absurdity of procylical fiscal policy

The Australian federal election campaign is in full swing and last night the federal opposition in Australia staged their policy launch for the federal election to be held on August 21, 2010. This is a campaign where both sides of politics are running on their respective claims to be better at implementing fiscal austerity measures. It has become a matter of who is promising the biggest budget cuts the earliest. It has made the parties barely distinguishable in terms of their overall policy appeal and has rendered both unfit to govern this country. It used to be said that procyclical fiscal policy was destabilising. This was typically in the context of neo-liberals claiming that expansionary policy always came too late and added to private spending that was already on the rebound and thus increased the inflation risk. But the reverse doesn’t appear to apply for the mainstreamers. Cutting public spending when private spending is weak is being held out as virtuous and the only way to engender growth. This inconsistency exposes the ideological nature of the austerity measures, which reflect as one UK commentator said recently – a desire to complete the neo-liberal demolition of the welfare state started 30 years ago but still incomplete or a reflection that the deficit hawks are total lunatics.

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The OECDs perverted view of fiscal policy

It is interesting how the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks.

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Fiscal policy worked – evidence

At the end of 2008 and into 2009, as the real sectors in our economies were starting to experience the aggregate demand collapses instigated by the banking crisis, most governments took steps to stop the meltdown from becoming the next Depression. At times, the unwinding private spending looked to be pushing the world to those depths. So after years of eschewing active fiscal policies, governments suddenly rediscovered the fiscal keyboard key and in varying magnitudes pushed fairly large expenditure injections into their economies. Most of the mainstream economists who had been teaching their students for years that this would be futile were silent because they had to hide out in shame given their textbook models could neither explain how we got into the mess nor how to get out of it. But there were some notable exceptions from Harvard and Chicago who came out attacking governments for being profligate. They claimed their models would demonstrate that the fiscal interventions would come to nothing (Barro, Becker, Taylor all were leading this charge). Lesser lights, then emboldened, joined the throng screaming that proponents of the stimulus strategy should provide evidence. Well the evidence has been mounting and the conservatives should just lock their office doors and go home to their families in shame.

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