I am catching up on the mountains of things I have to read. It is a pointless task – the pile rises faster than my eyes can process it. But I try. There was an article in the June 25, 2009 edition of The Economist entitled A slow-burning fuse, which carried the by-line “Age is creeping up on the world, and any moment now it will begin to show. The consequences will be scary”. It definitely might be scary getting old but the discussion that needs to be had is nothing remotely like the discussion that dominates the current policy debate about the ageing society.

This blog is based on some research on Japan I have been doing as a precursor to a book contract I am working on which will be about developing a progressive macroeconomic narrative – a sort of cookbook for progressives to enable them to challenge the major myths that are perpetuated by neo-liberals. These myths lead to the imposition of voluntary constraints on the government capacity to achieve and sustain full employment. Some of the underlying dynamics of the system which expose these constraints for what they are – an ideological distaste for fiscal intervention – are still not well understood though. Here is some more on that theme.

Today I am a keynote speaker at the LHMU National Conference in Canberra. I am talking about the challenges of underemployment and low wages and the need for the union movement to broaden out their activism from narrow concerns about wages and conditions for their members to development and pursuit of a full-scale attack on neo-liberalism. In much the same way that the neo-liberal think tanks boosted the saturation of those ideas. I will report back when I get back – much later this evening.

On Friday, the RBA signalled that it wanted to start hiking interest rates early in the upturn (and be one of the first central banks to do so). The justification was that this recession was more like the shallow, short-lived downturn in 2000-2001. I disagree. The evidence doesn’t support that contention. Increasing interest rates now will have serious impacts on the solvency of households currently struggling to get anywhere near enough hours of work. The RBA once again will be choosing to use underutilisation as a tool rather than a policy target. Another disgraceful chapter in their history is looming.

Today I have been working on part of a new book I am writing on the pathology of recessions. I have written a lot about this in the past and my last book was about this topic. But you can never say it enough – recessions impose huge social costs on the most disadvantaged members of our society and it is the responsibility of national governments to do every they can to avoid them. The neo-liberal onslaught on public policy has seen governments all around the world abandon this responsibility with obvious (ugly) consequences. Anyway, here is a way of thinking about all of this. It is not a happy story.

There have been several related reports and articles in the last few days about adjustments that are going on as the economy goes into recession. New data is also available to shed light on movements in wage costs and labour productivity which can help us better understand what is going on at present and provide comparisons with the now perennial question – is this recession different to that experienced in 1991. Today I decided to write about these matters as an on-going investigation into what is happening out there in the labour market. This is sort of my other main interest in economics alongside the development and explication of modern monetary theory. Today we find that the neo-liberal dumbing down of our labour market may have saved a few jobs – but at what cost!

Today I have been examining bankruptcy data. The popular notion is that bankruptcy rises during a recession. Many are arguing that this recession will drive higher rates than ever because of the extent of household debt. These are all conjectures that form part of the popular folklore but rarely formally investigated. So this blog summarises some introductory work I have been doing to investigate this notion more fully. It will at least settle some issues.

Today among other things I have been examining the hours data more closely to further highlight the difference between the 1991 recession and our current woes. The comparison is interesting and reveals a lot about how labour markets adjust. It also provides some scope to develop further insights into total labour underutilisation. However, while the current labour market state requires an urgent further injection of net public spending the circumstances are different to what we faced in 1991.

Here is some twisted logic if you ever saw it. Sydney Morning Herald main economics writer Ross Gittins wrote yesterday that the Opposition leader’s scaremongering about the build-up of debt is a faux concern and amounts to hysteria. So he sets about soothing us with some explanation. But it is the explanation that leaves out some of the more important insights which if known would alter the way the reader understood the article and the issue being discussed.

I am often sent E-mails asking me to explain succinctly (what my other explanations are not!) how public deficits finance saving. What does it mean? How does it work in a macroeconomic system? What is the difference between automatic stabilisers and discretionary budget dynamics? What would have happened if the government had not have increased the growth in spending? All these sorts of questions. So this short blog – to make up for yesterday’s ridiculously long blog – will cover those issues. It should clear up any outstanding issues about why deficits are important to underwriting growth.

Yesterday, regular commentator JKH wrote a very long comment where he/she challenged some of the statements and logic that modern monetary theorists including myself have been making. While I don’t want to elevate one comment to any special status – all comments are good and add to the debate in some way – this particular comment does make statements that many readers will find themselves asking. In that sense it is illustrative of more general principles, points etc and so today’s blog provides a detailed answer to JKH and tries to make it clear where the differences lie. Some of these differences are at the level of nuance but others are more fundamental.

In November last year, during a visit to the LSE, the Queen of England (and Australia to our eternal shame) asked some pointy heads why “if these things were so large, how come everyone missed them?” in relation to the apparent inability of the mainstream economics profession to foresee the crisis. Apparently, the Royal Academy then called a special workshop to discuss this and came up with an answer which they then relayed post haste … as “Your Majesty’s most humble and obedient servants” to Liz. The whole affair represents the standard massive denial that defines mainstream macroeconomics. There are no saving graces. It would be useful if they just desisted for a while and went and played gin rummy.

The public debate is constantly distorted by claims that cannot be substantiated. One such claim is that the current period of budget deficits is building a stock of future claims on the well-being of the future generation – our kids. Accordingly, the neo-liberal deficit terrorists claim that the best thing we can do for the future generation is to avoid running deficits. My view is that we have been imposing a huge future burden on our children but this would be larger if we tried to run surpluses now. In fact, the years of surpluses exacted a huge toll on our children’s prospects that they will have to endure for years to come.

Why doesn’t this article get headlines in the newspapers? Today I read a recent article – Why Are Banks Holding So Many Excess Reserves? – from two researchers at the New York branch of the Federal Reserve Bank. It is obvious that the authors understand much more about the modern monetary system than most of the journalists, economists and politicians who make so-called informed commentary about such matters. Three messages emerge: (a) bank reserves play an important role in the conduct of interest rate policy and budget deficits put downward pressure on interest rates; (b) the money multiplier conception of economics is inapplicable to a modern monetary system; and (c) the current build-up of bank reserves will not be inflationary. I thought that it would be nice for you to read this stuff from someone other than billy blog (and my fellow modern money travellers!).

The Australian Prime Minister released his second essay over the weekend, in which he outlines his vision for a modern Australia steered towards new levels of prosperity and equity by his government. Well my reading of the 6098 words is that far from presenting an acceptable vision for the future, they rather, outline how his Federal Government has chosen to continue the abandonment of full employment and impose huge costs from the cyclical downturn on the most disadvantaged workers and their families in our communities for years to come.

News Limited is still (mis)leading the way on the deficit-debt attacks. In another appalling piece of misrepresentation and erroneous reasoning, The Australian ran a story from its economics chief, Michael Stutchbury today entitled Now comes time to pay the piper. This newspaper has really excelled in recent months in the lengths it has gone to mislead and lie to its readers on matters relating to the macroeconomy and the conduct of fiscal policy. There will be a piper to pay – that I agree – but it will be because the federal budget deficit is not large enough right now rather than because it is too high.