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

In recent days there has been some discussion about the way different Modern Monetary Theory (MMT) thinkers might see the development of the paradigm. There has be some remarks that MMT should be explained in little steps and only then presented as a menu of policy choices so that all ideological persuasions might embrace it. There have also been statements that my US-based colleagues have agreed to that strategy and are now discounting any advocacy of full employment because the US population en masse (allegedly) find such notions repugnant. I disagree with all of those propositions. I consider that a sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed. If they don’t take that responsibility and use the fiscal capacities that they have courtesy of their sovereignty, then there will typically be mass unemployment. An understanding of MMT makes that clear. The discussion also has raised questions about the purpose of my blog and I reflect on that in what follows.

It is now 2.15 am in Boston on a Thursday morning (16:15 Thursday afternoon in Australia East Coast). I always try to stay on Australian time when I make these short trips. It is hard while you are away but easier to adjust back when you get home. No real jet lag. Yesterday (Wednesday) I gave a Teach-In on the concept of fiscal sustainability to an interesting group of participants ranging from those with an active role in the financial markets to those with more general business interests. The participants came from all around as far as I can gather – many from New York which is a fair hike for a single day workshop. The discussion that followed my presentation was very interesting and while the concerns reflected the usual issues – solvency, exchange rates, intergenerational issues – the standard of debate was civilised. I don’t know how many Warren and I convinced to probe deeper but I hope we planted some seeds of doubt in the minds of the audience that the mainstream macroeconomics position is wrong and therefore untenable. After the Teach-In I read the BIS Annual Report 2009/10 – which signalled to me that they are now firmly part of the problem that we face when dealing with the task outlining fiscally sustainable policy positions.

Tonight (Tuesday Boston time as I write) my very kind and gracious host took me to an early evening Ringo Starr and his All Starrs concert down on the waterfront. I never knew so many Beatles fans from the 1960s had survived the boredom. They were out in force tonight as he sang Yellow Submarine and other pop relics. The highlight of the evening was Edgar Winter (who is one of his all starrs) featuring on Frankenstein which he made a hit in 1972. But where do all these Beatles fans go during the day! Scary. And by the way, Rick Derringer who was in the original Edgar Winter Band was also in Ringo’s band tonight playing some nice guitar (if you like Gibson-motivated pop – I don’t). My host decided to call it an early night and I left with him – while Warren and his partner bopped on. A neat exit you might say! But Ringo at least provided some leadership – poppy and pretty soppy at that. But much better than our leaders of government are providing if the recent G20 declaration is anything to go by. They have just ceded leadership to the IMF – that unelected rabble. Stay tuned for things to get worse.

Today (and yesterday – being Tuesday in Australia now) I have been travelling. If you grow up and live in Australia everywhere except the local beach is a long way away. Sometimes it would be very convenient to just to be able to buzz up to San Francisco from LA or from New York to Washington or from Brussel to Paris. Australians never enjoy that sort of proximity. So travel is part of our growing up. I am used to it but hate it. Anyway, it always allows me to catch up on reading (especially fiction), listen to a lot of music and write a lot. Today’s blog focuses on recent events in Australia but the truth is that the principles raised are universal. You hear the same debates and responses all across the globe. The theme today is how ignorance leads to bad policy – my usual theme. But I am a persistent type and I am observing (via my blog statistics) that as I pursue this repetitive strategy – grinding it out every day – more and more people are coming to the site and many (most) are probably staying (IP address analysis). I have managed to keep the gold bugs at bay – they target easier victories – and the standard of debate is generally high. So my role is to keep offering it up and watching the numbers grow. I am in Boston now and will be talking about fiscal sustainability to hedge fund managers and bankers. Penetrating their world is a good thing. And then on Thursday, I board the jet and retrace my tracks – but then I will be close to the beach again. You mostly can’t have it both ways.

The Toronto G-20 leaders’ meeting is being held this weekend (June 26-27, 2010) and one expects it will endorse the position taken at the recent G-20 annual Finance Ministers and Central Bank Governors Meeting in South Korea. The communiqué released from that meeting illustrates how influential the deficit terrorists have become. At the Pittsburgh meeting of the G-20 leaders in September 2009 the communiqué talked about the sufficiency and quality of jobs. Six months later they had abandoned that call and are now preaching higher unemployment and increased poverty via austerity packages imposed on fragile communities. This is in the context of dramatic increases in global poverty rates in 2009 due to income losses associated with entrenched unemployment. Then I note that the recently released 2010 World Wealth Report shows that the world’s rich got richer during the 2009 recession. The only reasonable conclusion is that something is seriously wrong in the world we have constructed.

I am increasingly reading analysis from the mainstream economists that attempts to reconstruct the current crisis as a fiscal crisis. The claim is that the crisis is about lax fiscal policy and that the solution to the on-going sluggish (if not continued negative) growth is to quickly withdraw all fiscal stimulus. The conservatives are thus in total denial as to the real causes of the crisis and the role that fiscal policy interventions have played in attenuating the damage invoked by the crisis. For a time they were silent because it was clear that the neo-liberal macroeconomics paradigm that is forced down the throats of students around the world was incapable of providing any coherent explanation for the crisis. But they are now re-appearing, larger than life itself, and have resumed their arrogant hectoring of the policy makers and the electorate. They are once again trying to impose the same policies on governments that led to the crisis in the first place. They are doing this by reconstructing history and relying on our lack of memory recall and incomplete comprehension of things economic.

I have noticed a few commentators expressing concern about the dangers that might arise if a nation runs a persistent current account deficit. There have been suggestions that this area of analysis is the Achilles heel of Modern Monetary Theory (MMT). I beg to differ. A foundation principle of MMT is that to be able to freely focus on the domestic economy, the national government has to be freed from targetting any external goals – such as a particular exchange rate parity. The only effective way for this to happen is if the exchange rate floats freely. In this sense, the exchange rate is the adjustment mechanism for external imbalances.

The coming period will be an interesting test. I say interesting in the sense of an intellectual curiosity rather than anything that my sense of humanity might find to be acceptable. I am referring to the widespread acceptance by politicians around the world that fiscal austerity is good for growth. Governments are increasingly getting bullied into adopting austerity measures apparently thinking they will help their economies grow. My bet is that the austerity measures will undermine growth and when growth finally returns it will be tepid and as a result of other factors not related to the austerity. In the meantime there will be massive casualties among the poor and disadvantaged. So if the Flat Earth Theorists (FETs) are correct in a few months we should be seeing rapid growth and reductions in the deficits. Of the countries that have led the charge (for example, Ireland) things don’t look good for the FETs. So we will see. If they are wrong you can be sure that various ad hoc responses to anomaly will be forthcoming. For example, I lost my briefcase on the way to work which had a key to growth in it! Excuses like that. The mainstream have never and will never admit they are wrong. The task will be to show the people that this rabble of economists should be ignored.

Last year (May 2009) I wrote that Flat Earth theory returns – budget aftermath. In that blog, I asked the reader to imagine the time when it was the mainstream view that the Earth was flat, representing an infinite plane. The view largely died at around 3 BC but there are still some characters out there who worry about falling off the South Pole. After all the Nile River runs for thousands of kilometres and drops barely a few feet over that distance which doesn’t fit well with convexity does it? We have been referring to the hysterical commentators and lobby groups who are seeking to undermine the use of fiscal policy as deficit terrorists. However, when I think about term it actually gives these characters too much credit. Terrorists are probably smart and possess skill notwithstanding that they are usually misguided. So we have decided to resurrect the term I used in that blog last year – flat earth theorists (FETs) – because that association more adequately captures how mindless they are.

Governments are starting to realise that the recovery is slowing and the previous estimates of growth are probably overly optimistic. The IMF and OECD have been pushing inflated forecasts throughout the crisis because they cannot face the fact that the policies they have advocated caused the crisis in the first place. So, in denial, they want to make it look as if things are better than they are so they can get back onto their mantra – cuts in deficits, etc. The austerity packages are being introduced into an environment where the probability of a global double dip recession is rising by the day. But worst, are the shameless sense of priorities being rehearsed by economists and policy makers as they carve into welfare and pension entitlements, privatise valuable public assets (handing them over the “markets”) and increase unemployment. But then the mantra comes back – the forced extra pain won’t be as bad as we expect. So the international agencies and mainstream economists inflate the good things and reduce the significance of the bad things as a way of covering their grubby tracks. And all the while, these estimates and prognostications are based on economic models that failed to explain the crisis or its remedy. It is back to ground zero – and the pain will mount for the most disadvantaged.