One of the small things I noticed (and enjoyed) in Europe in the last few weeks is the speed of the Internet connections available. Even if one takes the so-called ‘low speed’ option at the hotel (invariably free), the connectivity speeds were far superior to anything I have available in Australia. That matters when large datasets are involved. We often wait minutes for datasets to download here from say the Australian Bureau of Statistics. Watching streaming video is often a case of getting it started, pausing it, and waiting an hour or more for the download to occur so that you can watch it without interruption. Australia is very backward in this regard and the reasons that we are set to become even more disadvantaged are the same reasons that the economy are heading towards recession – a neo-liberal fetish against government spending and an ideological blindness to innovation.
Earlier this week, the US National Oceanic and Atmospheric Administration published its – Global Summary Information – June 2015 – which reported that in the period January to June 2015, the globally-averaged land and sea surface temperatures were the highest for those months since the data was first collected in 1880 (135 years). I am not a climate change expert but the array of data that I have looked at from a statistical perspective tells me that what the experts are saying with respect to global warming and climate change is probably correct – it is happening and it is happening relatively quickly. The conservative Australian government remains in denial of the global trends with respect to climate change. It is introduced various policies that have made us a national disgrace – such as, abandoning the mining and cut taxes introduced by the previous government, defunding a research institute set up to provide information about climate change, and instructing a public ‘Green Bank’ to not fund wind or solar projects. This week, the government has been castigated by a British Tory MP, who said that its approach to climate change was not that of a ‘conservative government’ and bordered on delusion. But the most important piece of data this week has been the latest figures from China that show that dramatic restructuring away from coal consumption is rapidly taking place which will undermine the viability of the Australian coal sector in the coming decade. So the ‘market’ is going to force change in Australia when it would be much better for government to plan an orderly transition away from coal.
The June quarter 2015 edition of the Reserve Bank of Australia Bulletin has an interesting article – Firms’ Investment Decisions and Interest Rates – which further erodes the mainstream economics claim that business investment is negatively related to interest rates in any continuous way. The implications of the RBA research are many. First, it further helps us understand why monetary policy (adjusting interest rates) is not a very effective way of managing aggregate spending. Second, the research undermines the validity of the mainstream claims that crowding out of private expenditure occurs when government spending rises. The paper finds that investment decisions by firms is not sensitive to interest rate variations within certain ranges. Third, it demonstrates that business investment is driven significantly by subjective sentiment rather than being an exact process driven by quantifiable metrics.
There was a most extraordinary Opinion piece in the British paper The Independent last weekend (June 13, 2015) – Labour should have managed the economy better when in power. It was written by the aspiring Labour spokesperson on business, innovation and skills, one Chuka Umunna, who in the days following their electoral loss advanced his name for leadership. His outlook, inasmuch at it represents where the British Labour Party is heading will render them irrelevant for years to to come (the Tories do this stuff better) and is almost indistinguishable from the growth strategy advanced by the Conservative Australian government in its most recent fiscal statement – more private debt driven by fiscal surpluses. We have been there before – it turned ugly as it always was going too. It is quite clear that comprehension of basic macroeconomics is light on the ground when it comes to Umunna and his ilk. A very sorry state.
Its my Friday lay day blog and today a brief discussion about property price bubbles and how the Reserve Bank of Australia (our central bank) has fallen out with the Australian government. This week, the simmering tension between the Governor of the RBA and the Conservative Australian government more or less came out into the open when the Governor told the nation that the fiscal strategy of the Government was failing and a higher deficit was required given the circumstances. The RBA Governor has also come clean on the issue of house prices in Australia which he said he was “acutely concerned” about and called them “crazy” again, a direct contradiction of the claims by the Government that there is no problem and people should just “get a better paying job” if they wanted to buy a home. It is rare for a central banker to be so pointed about the failure of Government policy.
When I was studying in the UK during the dark Thatcher years there was a rat plague in Manchester. The reason was traced to the public spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester. Later that year (December 1982), there were widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought hometo me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The latest focus in Britain is on rising waiting lists in hospitals and increasing violence in prisons. All these examples of austerity compound and reverberate throughout society in countless little ways that accumulate to one huge mess. The Thatcher years were highly destructive for the well being of the British people contrary to the myths that the conservatives pump out. The current period will be of a similar ilk. And spare a thought for the long-term damage in places like Greece! It is beyond belief.
There was an interesting if not ego-centric interchange last week involving the New Keynesian economist Paul Krugman and others about whether the sort of macroeconomic policy positions one takes is more motivated by ideological motives (about the desirable size of government) rather than being evidence-based. Apparently, if you support austerity it is because you really just want smaller government and vice versa. This is an oft-stated claim made by conservatives. That if you support fiscal stimulus and government regulation that you are automatically in favour of big (intrusive) government. The point is not valid. Whether one supports a larger proportional government or smaller is a separate matter to understanding how the monetary system functions and the capacities and options available to the government. Modern Monetary Theory (MMT) provides the basis for that understanding but not a prescription for a particular size of government.
The IMF has taken to advertising for the ratings agency Moody’s. It is a good pair really. Moody’s is a disgraced ratings agency and the IMF has blood on its hands for its role in less developed nations and for its incompetence in estimating the impacts of austerity in Europe. Neither has produced research or policy proposals that can be said to advance the well-being of nations. Moody’s has shown a proclivity to deceptive behaviour in pursuit of its own advancement (private largesse). The IMF struts around the world bullying nations and partnering with other institutions to wreak havoc on the prosperity of citizens. Its role in the Troika is demonstrative. Anyway, they are now back in the fiscal space game – announcing that various nations have no alternative but to impose harsh austerity because the private bond markets will no longer fund them. They include Japan in that category. Their models would have drawn the same conclusion about Japan two decades ago. It is amazing that any national government continues to fund the IMF. It should be disbanded.
Last night, the Australian Federal Treasurer brought down his second ‘fiscal statement’ (aka, the Federal ‘Budget’). I try to avoid the term ‘budget’ when discussing national government fiscal balances because it leads to a confusion between a the finances of a household, which uses the currency and is financially constrained and the finances of a sovereign government, which is never revenue constrained because it is the monopoly issuer of the currency. In last night’s fiscal statement, the Treasurer committed the Government to a policy path that will entrench mass unemployment (over 6 per cent for the next three years and not much below that in 2018-19). In each of the next four years, the fiscal shift is contractionary despite claims that it is a ‘big-spending budget’. It has nothing much to do with economics and all to do with the dramatic failure of last year’s fiscal strategy and the resulting plunge in electoral support. With an election next year, the Federal government has tried to run a fiscal policy with headline appeal but the reality is that the outcomes will continue to undermine the well-being of the disadvantaged. It will also fail to achieve its own fiscal targets because the in-built growth assumptions are too optimistic. Finally, it exposes the lie that the Government peddled in the lead up to the last election that on-going deficits would cripple the economy and send the nation bust. In that sense, the government is looking like the Tories in Britain in 2012 when they cut short the ridiculous austerity push which had sent the economy back into recession and instead allowed for an on-going deficit. The deficit wasn’t nearly large enough and so growth there has been pitiful. But it was large enough to support some growth. The same will be the case in Australia.
Today’s release of the – Labour Force data – for April 2015 by the Australian Bureau of Statistics shows that the Australian labour market has contracted again, repeating the pattern over the last 24 months or so where employment growth zig-zags around the zero line and is weak at best. Full-time employment growth was sharply negative this month. Unemployment rose as a result as did the unemployment rate, but the latter would have been higher than 6.2 per cent had not the participation rate fell by 0.1 percentage points. The teenage labour market went backwards again and remains in a parlous state and requires an urgent policy problem that the Federal government refuses to recognise or deal with. In general, there remains a need for more job creation stimulated by an increased federal government deficit. Next week’s fiscal statement, widely tipped to include further cuts in net government spending, will demonstrate how incompetent and out of touch the federal government in Australia is.
The ABC news report (May 4, 2015) – Budget figures likened to Stephen King novel as Deloitte predicts $14.1 billion blowout for 2015-2016 – is one of the worst pieces of journalism you will ever read. There is no critical scrutiny in this report at all. It clearly just takes the press release from the private consulting firm and summarises it for public consumption. That is not balanced reporting or good journalism. The ABC is our national broadcaster, funded from the public purse and reaches all the population. It is also a free resource so there are no barriers to entry to consumption. It therefore has a responsibility to provide balanced reporting and should never become partisan. The problem is that on economics matters it has become a neo-liberal mouthpiece and continually gives headline space to mainstream economics organisations who make money from selling spurious advice about the economy. The only reasonable thing that this ABC Report is that the headline likens the fiscal analysis of Deloitte Access Economics, a Canberra-based economic consultancy firm, to fictional prose, which I think is an accurate assessment.
A few weeks ago (April 8, 2015), I wrote a blog – Monetary policy is largely ineffective – which detailed why fiscal policy is a superior set of spending and taxation tools through which a national government can influence variations in activity in the real economy. In today’s blog I will consider two recent bits of evidence that reinforce that viewpoint. Today’s inflation data issued by the Australian Bureau of Statistics clearly indicates that there is plenty of scope for further interest rate cuts within the logic of the central bank’s inflation targetting strategy. But monetary policy is trapped in Australia at present between the need to expand the economy (for which it is largely ineffective) and the worry that further interest rates cuts will push housing prices up further. Second, economic activity is faltering and unemployment has risen because the Government refuses to take discretionary action to increase the fiscal deficit to support higher spending levels. They are firmly caught up in the neo-liberal obsession about the need for surpluses and where they are likely to make concessions is in tax cuts for high income earners – based on the so-called trickle down hypothesis. Some recent research from the US, however, demonstrates fairly categorically that tax changes at the top end of the income distribution have negligible effects on economic activity. This is in contradistinction to changes in disposable income at the bottom end. They are very powerful in terms of stimulating or undermining employment and output.
Australia is demonstrating at the moment the monumental bind that neo-liberal (Monetarist) thinking has reached with respect to macroeconomic policy. By extolling the virtues of monetary policy as the only viable counter-stabilisation tool and eschewing the use of fiscal policy (biasing it towards austerity and the falsely virtued goal of fiscal surpluses), the policy making environment has created an economy that is susceptible to asset price inflation (particularly housing) and stagnant growth with rising unemployment. This experience is common across other economies and to break out of the destructive malaise, there will have to be a major shift in policy awareness – away from the exclusive use of monetary policy to work against the private spending cycle and towards fiscal policy as the only effective counter-stabilisation tool the government has available. The global financial crisis was caused by the elevation of monetary policy and the stagnation that has followed continues the problem.
The British Chancellor George Osborne told the British people during his fiscal presentation yesterday that the “The sun is starting to shine – and we are fixing the roof”, which was code for the age of austerity is over. The problem with that narrative is that the sun over Britain is pretty weak, has been shining since 2012 when the British government deferred its austerity push when the nascent economic recovery it inherited tanked after its first fiscal exercise in June 2010. The strategy then was clear – they kept the fiscal deficit at relatively high levels (even if some of the shifting of expenditures etc cause inequities and undermines the prosperity of certain cohorts). Those deficits have supported growth over the last several years. But growth has also come from the stimulus the government gave to the housing sector (not the construction of houses but the churning of existing stock) in the 2012 and 2013 Fiscal Statements (aka the ‘Budget’). That growth strategy is ephemeral because the household sector can only absorb so much extra debt given its already highly indebted state. Overall, the fiscal narrative in Britain put out by the Conservatives is a lie. They have not created a nation of “Makers” and growth has not come from austerity. If you want to see what austerity does just look across the Channel to Italy, France, and, of course Greece. The UK has not demonstrated that austerity is a stimulus to growth.
Its sad when politicians lie just to get political points as they face declining popularity. We saw last week that the Australian Prime Minister started attacking indigenous Australians for living in areas that they have occupied, one way or another, for somewhere up to 80,000 years. He claimed these settlements were “lifestyle” choices and people could no longer expect government support if they wanted to indulge in such choices. 80,000 years for a culture that has a deep connection with the ‘land’ is quite story compared to the Anglo settlement in Australia of 226 years for a culture that connects via iPhones! The PM was playing into the hands of the racist Australians who think the indigenous population here are skivers and drunks and should get no state support. They ignore that this cohort is one of the most disadvantaged peoples of the World. In the last few days, the PM has been lying about the state of government finances and pledging to that “the government will have the budget back in balance within five years”. There was no mention of what this might imply for the real economy. I am surprised that the conservatives haven’t learned from the previous Labor Government who made continual promises of surpluses but failed each time – largely because they didn’t understand that they cannot control the fiscal outcomes no matter how hard they try. And when they do try and run against the spending desires of the non-government sector, they just cause havoc and damage and fail to achieve their goals anyway. Stupid is not the word for these sorts of promises.
I know I am an armchair commentator hiding out in my research environment and not really accountable to anybody other than the funding agencies I win grants from. I am certainly not a Finance Minister with a nation in crisis on my hands. But with that said I wonder how any Finance Minister who aims to create full employment and expand equity and undo years of deliberately imposed neo-liberal hardship can claim his nation will “Never, never, never!” record a primary fiscal deficit again. That comment has to be dismissed as political rhetoric rather than an expression of a serious evaluation of reality. What worries me about Greece at the moment is that we are seeing a trend around the world where politicians over promise (or lie straight out) about their intentions to apparently appease the multitude of vested interests then proceed to do what they like. I discussed how this is now backfiring in the recent blog – Time is running out for neo-liberalism. An understanding of macroeconomics will tell you (and I know the Finance Minister in question knows all this) that a government cannot guarantee to never run a primary fiscal deficit forever unless they are prepared to allow for large swings in unemployment, something I thought the new Greek government was averse to, and it is that aversion, which defines their popular appeal.
The UK Guardian article (January 20, 2015) – Davos 2015: sliding oil price makes chief executives less upbeat than last year – reported that the top-end-of-town are in “a less bullish mood than a year ago” and that “the boost from lower oil prices is being outweighed by a host of negative factors”. The increasing pessimism is being reflected in the growth downgrades by the IMF in its most recent forecasts. A significant proportion of the financial commentators and business interests are now putting their hopes on the ECB to save the world with quantitative easing (QE). That, in itself, is a testament to how lacking in comprehension the majority of people are about monetary economics. QE will not save the Eurozone. But I was interested in this pessimism in the context of falling oil prices given that with costs falling significantly for oil-using sectors (transport, plastics etc) and disposable income rising for consumers (less petrol costs), the falling oil prices should be a stimulating factor. I recall in the 1970s when the two OPEC oil price hikes were the cause of stagflation. So why should the opposite dynamic cause ‘stag-deflation’ (a word I just invented)? There is a common element – fiscal austerity – which explains both situations.
In September, I wrote of the 2nd-quarter national accounts data that the economy was weak and getting weaker. The – September-quarter 2014 data released by the Australian Bureau of Statistics today confirms that prognosis. Weak is an understatement. Real GDP growth grew by by a miserable 0.3 per cent a further drop on the 0.5 per cent in the June-quarter 2013. The annualised growth rate of 2.7 per cent is being held up by the strong in late 2013 but something around 1.2 to 1.8 per cent per annum looking forward is a more realistic assessment of where the economy is at present. Despite a substantial fall in the terms of trade, net exports contributed 0.8 percentage points to growth while consumption contributed 0.4 points. A major decline in private and public investment shaved off 0.7 percentage points. Fiscal austerity is set to worsen, which means that the data paints a fairly gloomy picture for the Australian economy for the next year at least.
We had news this week that the annual rate of real GDP growth in Greece is finally positive after two quarters of positive growth. The austerity merchants are out in force congratulating themselves on a victory. Some victory. What the official data doesn’t publish are the long-term implications of the Depression that Greece has been locked in for the last six years. I look at that question in this blog (a little). Further, despite the claims by the European Commission and the lackies that it relies on to spread its distorted economic news that Greece has achieved a primary fiscal surplus, nothing is further from the truth. The fact is that the Greek fiscal deficit expanded considerably last year and despite all the austerity is still pumping public euros into the Greek economy and therefore supporting growth. The slight return to growth is not a victory for fiscal austerity but a demonstration that if large deficits are maintained for long enough growth will eventually rear its head.
While the Australian government ramps up its war on terror rhetoric and sending our armed forces to Iraq again, thus providing a major political diversion from their virtually complete policy failure on the socio-economic front, the data keeps coming which highlights the failure of successive federal governments in this regard, the current regime included. The latest – Poverty in Australia report, published by the Australian Council of Social Service (ACOSS) – shows that poverty is rising in Australia with 13.9 per cent of all people living below the poverty line (17.7 per cent of children). The poverty rate has risen by 0.9 per cent since 2010.