Today’s economics blog is about some reactions I have to the many pieces of correspondence I get each week about my work via E-mails, letters, telephone calls. It seems that there is a lot of misinformation out there and a reluctance by many to engage in ideas that they find contrary to their current understandings (or more likely prejudices). It always puzzles me how vehement some people get about an idea. A different idea seems to be the most threatening thing … forget about rising unemployment and poverty – just kill the idea!. So here are a few thoughts on that sort of theme.
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!).
A regular reader sent me a recent financial market report written by Tokyo-based economist Richard Koo which raises some interesting issues about the association between prolonged recessions and democracy. Koo has achieved some notoriety in the last decade or more by coining the term “balance sheet recession” to describe what happened to Japan during its so-called “lost decade”. He also applies the analysis to the present global economic crisis. While he is not a modern monetary theorist, he recognises the need for considerable fiscal intervention and the futility of quantitative easing. So this blog is about all of that.
Well the conservatives are scrapping between themselves, which is just as well because it might derail their drivel campaign about the trillion (whatever!) dollar debt wave that we are about to drown under. Me, I will surf it out with my longboard and enjoy the experience! Anyway, seems Mike wants to end our little engagement which is fine because tomorrow I will be talking about “R we or R we not”. National Accounts are out at 11.30. So this blog summarises where I think we are at. Remember that it started with the blog – Neoliberals invade The Greens! and the space theme continued with Mike conjuring up the Mitchell Strikes Back and today The return of Mitchell. Whatever, it is more clear than ever that the conservative macroeconomics has The Greens in its grip – sadly.
Tonight is federal budget night – which presents the most comprehensive picture of where the Government is going with fiscal policy and the Treasury’s estimate of how the economy is travelling. So for a macroeconomist like me it is a biggest night in the annual calendar. But I am more interested in parrots and spotted owls at the moment. What? Yes, I guess it is escapism … to avoid the hysterical public debate that has surrounded this budget. The economic falsehoods, the outright lies, the duplicity and the all of that. But I cannot escape it because I have a newspaper opinion piece to write on the Budget by 20:00 tonight. So, given that, here is my take on the budget and then …. I can get back to the birds!
Today I am in Melbourne (my home town) presenting a workshop on skills development for the new green jobs economy which is a joint Victorian Government/Brotherhood of St Laurence show. But that is not what I am writing about here. Regular readers of billy blog will know that when I talk about budget deficits I typically stress two points: (a) that the Government is not financially constrained and therefore all the hoopla about debt and future tax burdens are just a waste of time. But just because the Government can buy whatever is for sale by crediting relevant bank accounts doesn’t mean they should not place limits on the size of the deficit; and so (b) given the federal deficit “finances” private saving, it should therefore be aim to “fill” the spending gap left by the private desire to save. If the Government does that then it can maintain full employment and price stability and move towards a more equitable society. So it is of importance that we have some idea of the size of this spending (or output) gap.
There was a story in The Australian newspaper today entitled RED schemes are good written by a former minister in the Whitlam government in the early 1970s. He was extolling the virtues of the old Regional Employment Development scheme, which was a public works direct job creation scheme. He was suggesting such schemes may again find favour as the recession deepens. The RED scheme was a less generous version of the Job Guarantee and suffered as a result of its modesty. It was never based on any fundamental understanding of a modern monetary economy as as such was always a “defensive” program. Defending itself continually from the conservative, soon-to-be, neo-liberal critics. That made me recall my favourite conservative “put down” term – boondoggling and raking – which is used whenever direct public job creation is mentioned as a possibility. Then I recalled a letter that was written by the previous Federal Employment Minister explaining in 2004 why my Job Guarantee proposal was a crock. One thing followed another …
Several readers have asked me to demystify the processes involved in issuing Australian government debt. They also sought an explanation for the sort of scare-mongering that various commentators have been engaging in about the increasing budget deficit causing higher future tax and interest rates because the “mountains of debt” will have to be paid back somehow. Well anyone who is worrying about saddling your kids (and their kids) with mountains of debt and punishing levels of taxation should “just take a Bex, have a good lie down” … and stay calm. All of these claims are of-course mythical and are designed to perpetuate the neo-liberal view that governments should refrain from interfering in the private market. So its time to arm yourselves with the weapons (arguments) that you can use when your mates start up with this nonsense. Yes, its time to debrief!