The monetary and fiscal normality of Wolfgang Schäuble – stagnation and entrenched unemployment

I have been working on an article that will come out in the press soon on inflationary pressures. It is obvious that characters like Larry Summers and Olivier Blanchard are trying to stay at the centre of the debate by issuing various lurid threats about the likelihood of an inflation outbreak in the US and elsewhere. Last week, the Financial Times published an article (June 3, 2021) by the former German Finance Minister and now President of the Bundestag, Wolfgang Schäuble – Europe’s social peace requires a return to fiscal discipline. I was initially confronted with the juxtaposition of this author, who bullied all and sundry during to the GFC to ensure an austerity mindset was maintained at great cost to the millions who were deliberately forced to endure unemployment, with the photo of John Maynard Keynes under the title of the article. The title didn’t seem to match the picture. My first impressions were correct. Lessons have not been learned.

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Enforced poverty and torture for the victims of government policy failure – welcome to modern Australia

My Wednesday blog post with a few snippets. Don’t forget to enrol in our MOOC which begins next week. Also, some news from Britain that shows once again the British Labour Party has the gun aimed straight at its foot. And some comments on yesterday’s Australian government decision to increase the unemployment benefit by $25 per week and claiming this was appropriate – when it still means the recipients are $163 per week below the accepted poverty line. Enforced poverty by a government that refuses to create enough jobs and then punishes the victims of the policy failure. This all amounts to War and we can sing along to that after getting angry about the rest.

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How come the principles supported austerity one day but fiscal dominance the next?

As part of the paradigmic turmoil that is confronting mainstream economists, we are witnessing some very interesting strategies. Imagine you establish a set of principles that are seemingly inviolable. They are the bedrock of the belief system, even though it is not called that. These principles then offer all sorts of predictions about, yes, the real world. They are without nuance. The predictions are so worrying, that politicians, whether they are knowing or not, proceed with caution in some cases, and, in other cases, openly damage the well-being of citizens because they have been told that shock therapy is better than a long drawn out demise into ‘le marasme’. The authority for all the carnage that follows (unemployment, poverty, pension cuts, degraded public infrastructure and services, etc) is these ‘inviolable principles’. Economists swan around the world preaching them and bullying students and others into accepting them as gospel. The policy advice is hard and fast. Governments must stay credible. Except one day they completely change tack and all the policy advice that established certain actions to be totally taboo become the norm. We observe things are better as a result. Does this mean those ‘inviolable principles’ were bunk all along? Not according to the mainstream economists who are trying to position themselves on the right side of history. Apparently, their optimising New Keynesian models can totally justify fiscal dominance and central bank funding fiscal deficits when yesterday such actions were taboo. Which leg are they trying to pull?

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Further evidence undermining the mainstream case against fiscal deficits

Yesterday, I discussed the results of recent research that demonstrated the ‘trickle down’ hypothesis, which has been used to justify the sequence of tax cuts for high income recipients, was without any empirical foundation. While mainstream economists have been enchanted with that hypothesis, heterodox (including Modern Monetary Theory (MMT) economists have never considered it had any validity – neither theoretical nor empirical. But it is good that mainstream researchers are now ratifying that long-held view. Today, I am discussing another case of the mainstream catching up. When I say catching up, the implications of these new empirical studies are devastating for key propositions that the mainstream macroeconomists maintain. The ECB Working Paper series published an interesting paper (No. 2509) yesterday (December 21, 2020) by an Italian economist from the Bank of Italy – Losers amongst the losers: the welfare effects of the Great Recession across cohorts. In brief, the research found that younger people bear disproportionate burdens during recession in the short-run, but also, face diminished prospects over the longer-term. The paper bears on some of the major fictions that have been propagated to disabuse governments of using fiscal deficits to smooth out the economic cycle – namely, the alleged burden that is created by the current generation’s excesses (the deficit) for their children and grandchildren (who according to the narrative have to pay back the debt incurred by the excesses). This is another case of evidence being produced that ratify the analysis that MMT economists have been advancing for the last 25 years.

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US labour market deteriorating – health and economic policy failures

Last month, I noted that with the virus infections in the US increasing rapidly and renewed lockdowns almost inevitable combined with the lack of fiscal support from government, labour market conditions would probably deteriorate in November. I thought the US faced an uncertain and pessimistic future. The latest data reveals that assessment was accurate. On December 4, 2020, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – November 2020 – which reveals a deteriorating situation. Employment growth has slowed dramatically and participation fell by 0.2 points, which is the only reason that the unemployment rate fell by 0.2 points. Once we take into account the decline in the labour force, we realise that the fall in unemployment is illusory – it just means that workers who would normally be considered unemployed are now being classified as outside the labour force (that is, as hidden unemployed). The impasse at Congress on the the size and design of the next tranche of fiscal support is not helping. And then the data shows the lax health policy is allowing the virus to run out of control and how that plays out is anyone’s guess. I suspect a nation has to get the health problem sorted before they can really sort out the economic problem. The US appears to be going in the opposite direction to that. I doubt it will turn out well.

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Why improve policy when a government can pillory a low-paid, precarious worker instead

Last week we saw further evidence of the way in which class divisions create havoc for society although the way these events have been constructed in the media and popular perception are the antithesis of what was really going on. After having no coronavirus cases since April 16, 2020, suddenly we were informed on Sunday, November 15, 2020, that a dangerous virus cluster had emerged in South Australia (in particular the capital Adelaide) as a result of a breach in quarantine. The memories of Victoria’s second wave, which had started as a result of a similar breach came flooding back and the South Australian state government almost immediately imposed a very harsh 6-day lockdown (the most restrictive imaginable). The following day, amidst all the furore about the severity of the restrictions, the Government announced they were rescinding the orders (mostly). Why? Because some foreign worker had contracted the virus had lied to investigators about his status and was, in fact, working at both the quarantine hotel where the breach occurred and a pizza shop were additional cases had been detected. Apparently this ‘lie’ led to the severe lockdown because it created some uncertainty in transmission links. I doubt that was the case and I think the Government just overreacted and lacked confidence in their own systems. But now it is the ‘lie’ that everyone is focusing on and the Premier is threatening to ‘throw the book’ at the individual. Not many questions are being asked in the media about the poor systems that led to the breach in the first place nor the overreaction of the government. All attention is being focused on a casualised, precarious worker who was forced to work (at least) two jobs to survive. There lies the issue.

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Cutting wages in a deep recession is not a sensible policy

Victoria went the so-called ‘double doughnut’ again today with zero new infections and zero deaths – the fourth consecutive day. It now has the lowest number of people sick with the virus (known) since the start of the pandemic in Australia in February. Only 38 active cases remain in Victoria after its 12 week lockdown. There is no community transmission reported now in Victoria and the other day Australia recorded zero (community transmitted) cases overall. So things are less tense than they were. I still haven’t been able to travel to my office in Melbourne which I have been away from since the lockdowns started in June. But hope springs eternal that the NSW government will open the border and let us move freely between the States. At the same time, the NSW government is demonstrating its economic incompetence. The State Treasurer announced that in the midst of the worst crisis in 100 years, it is cutting the pay of its public servants when it brings down its fiscal statement. Clue: when in a deep recession with records levels of household debt dramatically constraining growth in household consumption expenditure, which in turn, is killing growth, then the sure fire way to make matters worse by cutting the very source of consumption expenditure – yes, you get it – workers’ wages.

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Australian labour market – recovery over and more fiscal stimulus is needed

The latest data from the Australian Bureau of Statistics – Labour Force, Australia, October 2020 – released today (October 15, 2020) shows that the recovery has stalled on the back of the Stage 4 restrictions in Victoria as that state dealt with the second virus wave. However, Tasmania and the Northern Territory also experienced employment losses in September 2020 and that is in part due to the locked internal borders that remain throughout Australia. Employment growth declined by 29.5 thousand but the rise in unemployment was only 11.3 thousand because the participation rate fell by 0.1 points. So, hidden unemployment rose (the slack sitting outside the official labour force). If we take a broader view of the labour underutilisation rate, underemployment rose by 0.1 points to 11.3 per cent and combined with the uneployment rate, the broad labour underutilisation rate rose by 0.2 points to 18.3 per cent. If we add in the rise in hidden unemployment then that figure rises to 20.3 per cent. Any government that oversees that sort of disaster has failed in their basic responsibilities to society. It must increase its fiscal stimulus and target it towards large-scale job creation.

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Governments should use their fiscal capacity to ensure our youth always can find a job

In my monthly labour market updates for Australia, I always examine the teenage labour market. Not much media coverage is given to that cohort in this context. But as our societies age and require our younger workers to be more productive than their parents to maintain material living standards (even though we should be reappraising what is an environmentally feasible benchmark to maintain), how we deal with school-to-work transitions, vocational training, university education is a major issue. The fact that governments all around the world have been prepared to impose massive costs on the younger generation as they obsessively pursue fiscal surpluses is one of the scandals of the period and will have long-term consequences for society. Recent Australian research evidence, which is consistent with outcomes from similar international studies, provides strong evidence to support the case that governments should always ensure there are enough jobs for our young population and that fiscal austerity undermines that requirement. Running fiscal deficits doesn’t undermine our children’s futures. Starving them of job opportunities at crucial transition points in their lives definitely undermines their future. We should understand that and stop listening to economists who say otherwise.

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Australia – Treasurer’s fiscal statement 2020-21 – abandons nation building

Here is some analysis of Tuesday’s Fiscal Statement from the Australian Treasurer. It was touted as the most important fiscal statement in 100 years (or something like that). What we got was a supply-side statement about markets creating jobs, massive tax cuts for high income earners and virtually nothing for the lowest paid. There was very little about the climate crisis. There was a lot of talk about jobs, jobs, jobs but no direct job creation. And the Government’s own estimates suggest that unemployment will remain at elevated levels through 2023 which means that the scale of the fiscal intervention is grossly inadequate. I see very little good in this fiscal strategy and a lot of bad. There are many commentaries available in the mainstream media which cover specifics and so I am just concentrating on things that I find important.

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Australian labour market – improving modestly but much more fiscal stimulus is required

The latest data from the Australian Bureau of Statistics – Labour Force, Australia, August 2020 – released today (September 17, 2020) shows that employment rose by 0.9 per cent as the economy struggled to shift back into growth mode. In part, the moderate result was due to the impact of the Stage 4 restrictions in Victoria as that state dealt with the second virus wave. Victoria was the only state or territory to endure negative employment growth in August. As the virus situation is coming under control and the lockdowns are easing, Victoria will rebound fairly quickly – how far depends on the damage done during the closures. The lack of external migration is also seeing the labour force growth moderate significantly, which allowed unemployment to decline by 86.5 thousand on the back of the modest employment boost. Participation also rose. The reality is that if we take a broader view of the labour underutilisation rate (adding in the hidden unemployment who have left the labour force since March) to the official unemployed and underemployed, we find around 19.5 per cent of the available labour supply is not working in one way or another. Any government that oversees that sort of disaster has failed in their basic responsibilities to society. It must increase its fiscal stimulus and target it towards large-scale job creation. My overall assessment is: (a) The current situation can best still be described as near catastrophic; (b) The Australian labour market needs massive fiscal policy intervention targetted at direct job creation; (c) The pre-pandemic need for a fiscal stimulus of around 2 per cent has changed to a fiscal stimulus requirement of several times that; (d) The Federal government’s attempts to date have been seriously under-whelming and we will soon see the results of their withdrawal of the unemployment benefit supplement (a ridiculous decision); and (e) Any government that oversees that sort of disaster has failed in their basic responsibilities to society.

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Payroll employment falling again as second-wave and inadequate policy response bites

Last week, the Australian Bureau of Statistics released the latest data – Retail Trade, Australia, Preliminary , July 2020 – which showed that retail turnover in July 2020 had risen by 3.3 per cent, the second month of improvement since it fell off a cliff in the two months from March. The exception was for Victoria, which is now in Stage 4 lockdown, which caused retail sales to fall by 2 per cent. Today, the ABS released the latest data for – Weekly Payroll Jobs and Wages in Australia, Week ending 8 August 2020 – which gives us the most up-to-date picture of how the labour market is coping with the on-going restrictions and the reimposed of harsh Stage 4 restrictions in Victoria. Unsurprisingly, payroll employment fell in the fortnight ending August 8, 2020 in Victoria by 1.6 per cent. But what was also surprising was that employment fell in every other state or territory bar Tasmania and ACT. The Victorian case is about lockdown. The other declines are about failed macroeconomic policy, which goes to the performance of the federal government. Regular readers will know that I have routinely analysed this dataset ever since it first became available in March this year. It uniqueness is that it provides the most recent data upon which an assessment of where the labour market is heading. The data shows that after a partial recovery from the downturn, payroll employment is declining again. The fact that the first recovery period failed to regain the jobs lost was an indicator that the policy intervention was insufficient. The second-wave job losses tell us clearly that that more needs to be done by the Federal government. I am not holding my breath.

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Worst is over for Australian workers but a long tail of woe is likely due to policy failure

Today (June 16, 2020), the Australian Bureau of Statistics released their latest weekly employment data taken from Australian Tax Office data. They have slowed the release cycle on this data (for reasons they have not disclosed), so it is a month since I have analysed it. The latest edition came out today – Weekly Payroll Jobs and Wages in Australia, Week ending 30 May 2020 – which covers the new data from May 2, 2020 to May 30, 2020. The monthly labour force data to be released on Thursday covers a period that ends around May 12, 2020, so today’s data provides a more recent snapshot of the state of affairs. At the beginning of May, the data was suggesting that the worst of the job losses were over. The severity of the lockdown has eased a little since then, although the pattern of easing has been quite different across the states and territories. So we might have expected some variations to arise from that. And today’s data shows just that. In the Accommodation and food services sector, where some easing has occurred, jobs are returning, albeit at a slow rate. But in the Arts and recreation services sector, where little change in lockdown restrictions has occurred to date, there has been very little employment growth. The question is how many businesses will go to the wall before we get a more usual scale of operation and interaction. My prediction is that many will disappear and so the recovery in employment will be protracted given how many jobs have been lost to date. A much larger fiscal intervention is required and it has to be directed at workers rather than firms and support direct job creation. The problem now is that the Government is starting to reassert its neoliberal ideology and withdrawing the inadequate stimulus far too early. The future is not looking good. We might be virus free but there will be massive unemployment remaining into the distant future.

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Policy failure – Australian unemployment rate probably already around 10.9 per cent

The Australian Bureau of Statistics has started publishing weekly employment data – Weekly Payroll Jobs and Wages in Australia, Week ending 4 April 2020 – which is drawn from a new series made available as a result of the Single Touch Payroll data provided by the Australian Tax Office. For the first time, researchers like me can have up to date information as the economy cycles. Usually we get the labour force data some 5-6 weeks behind time and although a lot doesn’t necessarily happen in a month, this crisis is the exception – the whole box-and-dice is collapsing so quickly that we need weekly data, like is provided in the US through the Department of Employment’s unemployment claimants data to stay in touch with how things are tracking. But for now I estimate that the unemployment rate rose to around 10.9 per cent in the 3 weeks to April 4, 2020 (up from 5.2 per cent for the March data – which was surveyed in the early part of the month). In that time, unemployment has more than doubled and is around 1.5 million and rising. The conclusion from my analysis of the latest available data (released April 21, 2020) – is that some sectors in the Australian labour market have experienced a sudden and catastrophic contraction – like nothing we have ever seen in the data. Both employment losses and major wage cuts are underway and the policy response is totally inadequate for the task. A much larger fiscal intervention is required and it has to be directed at workers rather than firms. I will say more about those issues next week. But I am guessing that the Government’s response so far is less than half of what it should have been – it needs at least another $A200 billion.

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A 10 per cent unemployment rate is not a “tremendous achievement” – it is a sign of total policy failure

It’s Wednesday, and a quiet day for writing blog posts for me. But I want to comment briefly on the latest economic news that sees the IMF claiming the Australian economy will contract by 6.7 per cent in 2020 and the Treasury estimates that the unemployment rate will rise to 10 per cent (double) by June this year. While this all sounds shocking, the emerging narrative in the media and among politicians is that this is sort of inevitable given the health crisis and the Government’s Job Keeper wage subsidy, which the Treasury claims will constrain the unemployment rate rise to 10 per cent rather than 15 per cent without it is a jolly decent thing for the politicians to have done and keeping the unemployment rate down to 10 per cent is a “tremendous achievement”. Well, apart from the wage subsidy leaving a million workers outside of any benefit and cutting wages for thousands who will receive the support, I fail to see why the unemployment rate should rise at all. The government has options: (a) wax lyrical about achieving a disaster – 10 per cent unemployment; or (b) create jobs via a Job Guarantee and see the unemployment rate fall to 2 per cent or so. For the neoliberals who run the place and their media supporters, a 10 per cent as a “remarkable achievement” and that is the TINA narrative they are pumping out to assuage the population. For the likes of yours truly, a 10 per cent unemployment rate is not a “tremendous achievement” – it is a sign of total policy failure. The government can always intervene and create sufficient jobs that will be of benefit to the society, can be designed to be safe in the current health context, and maintain the connection for most of us with paid work? Even if some of them would require the workers stay at home while being paid. For me that is a no-brainer.

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Some lessons from history for the design of a coronavirus fiscal intervention

This post continues my thinking and analysis of the issues relating to the design of a fiscal intervention by the Australian government to ameliorate the damaging consequences of the coronavirus dislocation. Today, I delve a little bit back in history to provide some perspective on the current fiscal considerations. Further, I consider some of the problems already emerging in the policy response. And finally, I consider the lessons of history provide an important guide to the sort of interventions that the Australian government might usefully deploy. While the analysis is focused on Australia at present, the principles developed are portable across national boundaries. And the underlying Modern Monetary Theory (MMT) understanding is applicable everywhere there is a monetary system. This series of blog posts are building up to the production of my 10-point or something plan to address the crisis.

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Fiscal stimulus disappears into saving – solution – bigger stimulus was needed in the first place

On February 7, 2020, the Reserve Bank of Australia’s Governor, Philip Lowe appeared before the Federal House of Representatives Standing Committee on Economics to discuss the – Reserve Bank of Australia Annual Report 2019 – which is a bi-annual event where the Parliament scrutinises the activities of the unelected and largely unaccountable central bank. The – Transcript – of the session makes interesting reading. The discussion highlighted how mainstream economists fail to understand the nature of the monetary system. Last year, the Federal government introduced a fiscal stimulus (tax cut) as a bribe in the May election campaign. But economic growth continued to slow, in the face of flat real wages growth and an overall fiscal contraction (despite the tax cuts). The tax cuts didn’t stimulate private spending growth and mainstream economists then claim this proves that fiscal policy is ineffective, and by implication, that Modern Monetary Theory (MMT) is a load of nonsense. The problem is that the tax cuts were used by households to reduce the precarious debt levels that have been building up as they try to maintain spending growth in the face of fiscal drag and flat real wages growth. All that this episode tells us is that the government really should have introduced a much larger fiscal stimulus in the first place to help the balance sheet restructuring effort and provide net growth stimulus.

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Australia – wages growth continue at record low levels – further evidence of policy failure

Last Wednesday (November 13, 2019), the Australian Bureau of Statistics (ABS) released the latest- Wage Price Index, Australia – (September-quarter 2019). Both private and public sector wages growth was just 0.5 per cent in the September-quarter – keeping growth at record lows. Over the year to September 2019, overall wages growth was 2.2 per cent and in decline. With the annual inflation rate running at 1.7 per cent, workers were able to enjoy some real wages growth. However, over the longer period, real wages growth is still running well behind the growth in GDP per hour (productivity), which has allowed profits to secure a substantially increased share of national income. And, as the federal government continues to sabotage the economy as a consequence of its obsession with recording a fiscal surplus, the moderating wages growth will likely undermine it planning targets. In the last fiscal statement, the government was forecasting annual wages growth would be 2.75 per cent rising to 3.25 per cent. At the current rate, nominal wages will be lucky to top 2 per cent in 2019-20, which means the tax revenue estimates in the fiscal plans are likely to be over-stated. And, if the mainstream narrative was remotely correct, why is employment growth flatlining when wages growth is at record lows?

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Australia labour market deteriorating – symbolises massive Federal government policy failure

After yesterday’s disastrous wages growth data release, today’s Australian Bureau of Statistics release of its latest data – Labour Force, Australia, October 2019 – confirms, as if we need confirmation, that the Australian economy is weakening and the labour market is is poor shape. The culprit – the Australian government which is starving spending by its obsessive pursuit of a fiscal surplus. It is likely that the economy will thwart that ambition anyway – in the wrong way – by reducing tax revenue below that projected. Meanwhile the well-being of millions of Australian workers is being abused by our elected officials. Employment growth was negative. Full-time employment fell sharply. The participation rate fell. Unemployment rose even though the participation rate fell. Hidden unemployment is up. Underemployment is up. The broad labour underutilisation is at 13.8 per cent with an upwards bias. The unemployment rate is 0.8 percentage points above what even the central bank considers to the level where inflationary pressures might be sourced from the labour market. My overall assessment is The current situation can best be characterised as deteriorating from an already weak state. The Australian labour market remains a considerable distance from full employment and the gap is widening. This persistence in labour wastage indicates that the policy settings are to tight (biased to austerity) and deliberately reducing growth and income generation. There is clear room for some serious fiscal policy expansion at present. The Federal government is willfully undermining our economy with its irresponsible policy position.

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When the idea of a fiscal surplus becomes a talisman

It is Wednesday and I am travelling a lot today with limited opportunity to write. I am reading a lot though. Highly significant political debates with far reaching effects on the well-being of citizens once policies are implemented are conducted on a daily basis in our national Parliaments and in the media with little correspondence to reality. This is the norm for debates on macroeconomics, which dominate political news every day. There is this fictional world that has been created to keep citizens in check. When the painful policies the neoliberals haul out inflict pain, the solution is to blame something erroneous, attack it, which then just causes more pain. This is the norm these days when it comes to macroeconomic policy. And for the rest of us we suffer in the real world but reason in this fictional world, which is why it persists.

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