\t\t\t\tI am now back in my normal office after a few days experimenting with a mobile office by the sea. Back in Newcastle I am still only a couple of minutes from the beach but somehow it was different being holed up in a little cabin. Anyway, on the way back down the coast this morning I was bemoaning the idiocy of the human race … again. Or rather cursing the vicarious way the elites exploit the lack of understanding in the community about economic matters to further their own ends. That is a better way of constructing the dilemma. Even some good intentioned souls are proposing “solutions” to non-problems which will worsen the actual problem. Other devious characters are continuing to reinvent themselves in the public sphere – presumably to get access to more personal largesse. Then whole blocks of nations are imposing penury on their citizens to make the “markets” happy while another national government has actually forgotten it is a currency-issuing government. All in a day’s work!
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\nTo start things off today, here is a little mid-week (Thursday) quiz. Answer nothing to all questions for a perfect score.<\/p>\n
1. Now that we are nearly 3 years into the economic crisis what have policy-makers and the majority of commentators understood about is causes? <\/p>\n
2. What have policy-makers and the majority of commentators understood about the fiscal interventions?<\/p>\n
3. What have policy-makers and the majority of commentators understood about the likely scenario had these fiscal interventions not been forthcoming?<\/p>\n
5. What have policy-makers and the majority of commentators understood about the role that monetary policy played in the current rescue? They think that it was monetary policy that saved the day!<\/p>\n
6. What have policy-makers and the majority of commentators understood about the capacities of fiat-issuing governments to deal with major economic crises that manifest as massive collapses in aggregate demand?<\/p>\n
7. What do policy-makers and the majority of commentators understand will happen if those capacities are reduced by law?<\/p>\n
Several reports over the last 24 hours tell me that the answer to those questions is broadly nothing, in some cases, very little, and in other case sfa. But I will reward the 7 nothing answers with a perfect score anyway!<\/p>\n
Further, the failure is not concentrated among conservative ranks. Even so-called progressives are leading the charge to neuter government of their capacities to respond to a major event such as the current crisis. What do they think will happen next time? Answer: they haven’t a clue.<\/p>\n
First … US Congressman Chaka Fattah<\/strong><\/p>\n If you read his proposal for a Debt Free America Act<\/a> you would think he was a extreme right Republican. Yet, for he parades as a progressive and is a black democrat representing a district in Pennsylvania.<\/p>\n His introduction to the proposal says:<\/p>\n \nCongressman Fattah has introduced legislation that proposes a bold new approach to eliminating our National Debt. H.R. 4646, the Debt Free America Act outlines how this can be done over the next seven years. The legislation is a dramatic plan that cuts across the usual partisan lines in Congress. It calls for a penny on every dollar on transactions in the United States economy to be directed to eliminating the escalating $12 trillion national debt.\n<\/p><\/blockquote>\n Now I plan to be polite and not just conclude the guy is a loony. His heart is definitely in the right place and he is very concerned about educational opportunities for poor Americans and other noble causes. But what he understands about money systems and the operations of the government he is a part of is limited in the extreme – virtually non-existent would be the accurate summation.<\/p>\n His proposal is prefaced with a litany of humbug statements – all of which are erroneous.<\/p>\n He claims the motivation of the Bill is that the US federal budget deficit is unsustainable. Why? Because China and Greece are going to stop “funding” it. Why? Because they will for the view that the solvency risk on US Treasury debt will become too high.<\/p>\n In turn, this will prompt a “financial crisis of epic proportions” – the dimensions of which are unspecified – and “long-term fiscal stability” has to be implemented – the dimensions of which are specified in The Debt Free America Act.<\/p>\n The plan is to “implement a 1 percent fee on all financial transactions, except for transactions involving stock, as well as retail transactions, which will immediately reduce the size of the national debt.”<\/p>\n The tax would be “charged on all transactions including cash, checks, credit cards, processed through the Federal Reserve Bank, and collected at the point of sale”. The “revenue” would “pay off the nation’s debt within 10 years”.<\/p>\n Apparently, polls show that 87 percent of the American people” want to pay “off the debt” and reduce “the deficit”. <\/p>\n In his Press Release<\/a> he said:<\/p>\n \nInterest on the national debt is an extraordinary burden that will crowd out investments on our critical national priorities such as economic development and education … When enacted, the transaction fee I am proposing will generate sufficient revenue to maintain a fiscally responsible budget and allow the federal government to meet its financial obligations while paying down and ultimately eliminating the oversized national debt … The Task Force will, at the same time, change the way we do business in Washington by forcing more responsible fiscal action on our lawmakers and executive branch …\n<\/p><\/blockquote>\n Here are some questions for the concerned Congressman to answer:<\/p>\n 1. Exactly, how is the national debt in the US “crowding out investments on our critical national priorities such as economic development and education”? Are the interest payments using up real resources that might otherwise be utilised elsewhere? Are there no real resources idle in the US? Last time I looked that the BLS site they told me there were around 17 per cent of workers without work. <\/p>\n 2. What is a “fiscally responsible budget”? Balanced – that is, covered by tax revenue? Is the current US deficit too large or too small relative to the state of aggregate demand in the America? If it is too large then please explain why 17 per cent of US workers are without work and businesses have massive excess capacity not being utilised.<\/p>\n 3. What is your understanding of how the US government “meets its financial obligations”? How does that work? And how will collecting a 1 per cent tax change anything with respect to the way the US government spends? Will it increase its capacity to spend? Please explain how a currency-issuing government such as exists in the US needs any revenue in order to spend?<\/p>\n 4. Given that aggregate demand has collapsed in the US and the consequences of the recession are going to drag out for some years yet, how is depriving the macroeconomy of trillions of dollars in private spending capacity (via the tax) going to improve things? Please explain how reducing aggregate demand will reduce the budget deficit (and hence reduce national debt)? Please explain how an economy that is starving for spending will grow fast enough to increase employment signficantly if you plan to cut spending?<\/p>\n 5. Please provide an analytical explanation of what the term “oversized national debt” means? In relation to what? Please explain how you think restricting fiscal policy with a deflationary tax (at the macro level) will actually reduce national debt fast enough to cope with the rise as the automatic stabilisers drive up the deficit even further?<\/p>\n Someone should ask him those questions in the Congress. Unfortunately, American politics is dominated by deficit terrorists and so no-one will demand such scrutiny.<\/p>\n To see why things will get even worse, not to be outdone, other Democrats (for example, the House Majority Leader Steny Hoyer) has weighed in saying that there also has to be spending cuts to bring down the deficit. And the so-called Blue Dog Coalition (conservative Democrats) have introduced a bill which would require budgets to be balanced.<\/p>\n Please read my blog – Fiscal rules going mad …<\/a> – for more discussion on why such approaches are self-defeating and dangerous.<\/p>\n Americans seem to have a penchant for quoting historical figures – often inappropriately. Congressman Fattah is no exception it seems: <\/p>\n \nIn my hometown of Philadelphia Benjamin Franklin wisely declared that a penny saved is a penny earned. With the Debt Free America Act, a penny paid will earn massive savings for our nation and families so that our children and grandchildren won’t be saddled tomorrow with yesterday’s debt.\n<\/p><\/blockquote>\n For each individual a penny save is a penny earned. If all individuals increase their saving then the income adjustments downwards will thwart their intentions.<\/p>\n When the private sector increases its saving rate, aggregate demand (spending) falls, inventories accumulate, and firms reduce production levels and employment. If uncertainty increases as the employment growth falters and unemployment starts to rise, then people may try to save even more to increase their security. The problem is that this makes the situation worse – the so-called “paradox of thrift”.<\/p>\n Further, the concept of a nation “saving” when public debt is reduced is nonsensical. The children of the future won’t have to send real goods and services back in time to pay for anything.<\/p>\n Second … Former Clinton hack and Wall Street mogul self-serving to the end<\/strong><\/p>\n There was an event in New York City on Tuesday, March 2 billed as Robert E. Rubin with Sebastian Mallaby: The Global Economy<\/a>. It was held at the 92nd Street Y cultural center.<\/p>\n As background you might like to read my blog – Being shamed and disgraced is not enough<\/a> – on the role that Rubin played in the deregulation of the financial markets in the 1990s and beyond.<\/p>\n Rubin was a senior member (then Chairman) of Citigroup after his political career ended. He left just before its near collapse amidst criticism of his performance. He had pushed Citigroup into increasingly riskier positions (into the sub-prime market) and the bank lost heaps on that debacle.<\/p>\n In 2001, he used a mate in the US Treasury Department to try to put pressure on the bond-rating agencies to avoid downgrading Enron’s debt which was a debtor of Citigroup.<\/p>\n In January 2009, he was named by Marketwatch as one of the “10 most unethical people in business”.<\/p>\n Rubin in cahoots with Greenspan and Rubin’s gofer Larry Summers in undermining attempts by the Commodity Futures Trading Commission in 1998 to regulate the derivatives trade.<\/p>\n This New York Times article from last year – Taking Hard New Look at a Greenspan Legacy<\/a> – provides a good summary of the events. It documents the fierce opposition that Greenspan, Rubin and Summers put up against any notion of regulation of the financial markets.<\/p>\n Here<\/a> is a veru good collection of media coverage about Rubin’s latest re-invention of history and his role in it.<\/p>\n This US report – Robert Rubin: ‘Virtually Nobody’ Saw Crisis Coming, Bush Deserves Much Of The Blame<\/a> – provides a perspective on last Tuesday’s incredible event.<\/p>\n Rubin did not enter into discussion at all about “financial reform or the deregulatory agenda of the 1990s” which he drove.<\/p>\n He claimed that:<\/p>\n \nMuch of the blame for the current crisis falls on the shoulders of the fiscal policy decisions of the Bush administration, Rubin said, under which “we lost a decade to some extent.” The country faces “tremendous headwinds,” Rubin added, including mounting foreclosures, a “paucity of credit” for small- and medium-size enterprises, a jobs crisis, income inequality and declining infrastructure.\n<\/p><\/blockquote>\n First, the die was cast during the Clinton surplus years which Bush inherited by way of a recession in 2001.<\/p>\n Second, the Clinton deregulation agenda and the failure of that Administration to listen to those who were noting the increasing risk exposure in financial markets is a primary reason for the crisis.<\/p>\n Third, the Clinton years also accelerated the gap between US real wages and labour productivity and was the starting point for the rising indebtedness of the household sector.<\/p>\n Rubin and his Wall Street mates helped the process along by financially engineering the indebtedness with a wide array of “new” debt products. They pursued the poor into the sub-prime markets and lied and cheated to ensure that people who were unlikely to be able to pay received funding. They then off-loaded a lot of the exposure onto other funds and investors who were not in a position to know what they were buying.<\/p>\n As it turns out they created and on-sold a time-bomb. Rubin was in the thick of it.<\/p>\n Rubin was also reported as saying that:<\/p>\n \nPresident Obama’s failed proposal for a deficit commission was the right idea … the government needs a way to both expand its stimulus program and simultaneously outline a credible long-term plan to reduce the deficit.\n<\/p><\/blockquote>\n As a reminder, the deficit commission was to be an independent body – that is, unelected and therefore not representative – which would have the power to force the US government to introduce major deficit reductions steps after the mid-term elections.<\/p>\n The Senate rejected the Bill in late January, but not because they were enlightened enough to know that it would be a destructive initiative and would undermine the capacity of the US government to reduce its deficit – by stifling economic growth and preventing the automatic stabilisers from reversing over the cycle.<\/p>\n The sensible way forward for the US Government is to introduce large-scale public sector job creation measures which will put purchasing power back into the hands of the unemployed. Unemployment is a highly deflationary state.<\/p>\n The deficit will scale back to an “appropriate level” as economic growth resumes and persists. Anything that endangers economic growth will undermine that process.<\/p>\n The only credible long-term plan to reduce the deficit is one that drives growth now. Discussing fiscal austerity measures and deficit commissions and fiscal rules and all the rest of the misguided hoopla is the anathema of credibility. <\/p>\n For a three-part discussion of fiscal sustainability and what an “appropriate level” deficit is – you might like to read – Fiscal sustainability 101 – Part 1<\/a> – Fiscal sustainability 101 – Part 2<\/a> – Fiscal sustainability 101 – Part 3<\/a>.<\/p>\n For the modern monetary theory (MMT) researchers it was clear that this crisis was going to happen. Rubin was part of the problem that caused it. Perhaps he was blind to it and didn’t see it coming as he is now claiming. That just tells me he has no real understanding of the way the monetary system operates and his views should be completely ignored.<\/p>\n Third … Europe wants to lie down and die<\/strong><\/p>\n The latest news from Europe tells me that the cold winter is getting to them and they want a quick end for all their citizens. They must be in a state of absolute despair.<\/p>\n Yesterday (March 3, 2010) in the Financial Times I read the headline – Markets pleased by Greek plans<\/a>.<\/p>\n This of-course is one of the the ultimate perversities of modern human existence. The amorphous “markets” have emotions. And they are pleased when the material standard of living of a nation’s citizens is being decimated by unnecessary policy actions imposed by a cartel of high-wage bureaucrats who face no jobless prospects.<\/p>\n To me – that summarises how our modern existence – dominated by neo-liberal economists – has entered the “failed civilisation” state. <\/p>\n These are the sort of situations that sparked the rise of marxism in the C19th and national socialism in the 1930s. Europe doesn’t seem to learn anything despite its antiquity.<\/p>\n The FT article said that:<\/p>\n \nThe deep retrenchment in public finances, equivalent to 2 per cent of gross domestic product, impressed economists, who saw Athens as having capitulated to pressure from the European Commission and the European Central Bank. Greek bond markets rallied for a fourth consecutive day and the country’s funding costs fell to the lowest levels in a month.\n<\/p><\/blockquote>\n The only economists who would have been impressed by this act of stupidity are those (the majority) who haven’t a clue about how the monetary system operates and fail to realise the real problem in Greece is its membership of the EMU.<\/p>\n The FT article then … as almost an aside … said “(c)oncerns … switched to the effect that the measures were likely to have in deepening Greece’s recession – which, in turn, will make it harder to hit targets for public deficit and debt as a share of GDP.”<\/p>\n Exactly correct. So why impose the obvious on the citizens of Greece? Why set the process up to fail – at which time the bureaucrats and smug economists will demand even more swingeing cuts?<\/p>\n The Greek austerity package plans to cut the “equivalent to almost 10 per cent of GDP over two years” which given the state of the World economy is lunacy.<\/p>\n If the US or Australia did that right now unemployment would go up to beyond 30 or 40 per cent in quick speed.<\/p>\n One “market” commentator, seemingly unable to suppress his joy told the FT that:<\/p>\n \nThe latest budget measures would “dramatically enhance” Greece’s credibility … They would also reinforce “the credibility of the whole European Union framework, for which the Greek case is probably the first significant test”.\n<\/p><\/blockquote>\n Again the perverse idea that amorphous markets are the benchmark by which a nation’s credibility is properly assessed. The only purpose of government is to advance public purpose not the bash the population around with income cuts, unemployment, pension cuts and the rest of it. The fact the Greek government is imposing such austerity on its own people means it has lost all credibility.<\/p>\n Please read my blog – A Greek tragedy …<\/a> – for more discussion on this point.<\/p>\n And … of-course, Moody’s … was happy. Voila!<\/p>\n But it doesn’t end there.<\/p>\n The bully bosses of the EMU announced<\/a> yesterday (March 4, 2010) that they were pursuing “a new economic strategy for the next decade” which would see budget rules further tightened.<\/p>\n This apparently is to “reassure Germany’s all-powerful chancellor”. So who won the war?<\/p>\n The news report said that:<\/p>\n \nThe head of the European Commission, the executive that runs the 27-nation European Union bloc on a day-to-day basis, said agreed rules limiting national overspending should be “reinforced and not weakened” on the day Athens announced radical new austerity measures to put its fiscal house in order.\n<\/p><\/blockquote>\n Apparently the German chancellor wrote a letter to the EC which “expressed concern that an emphasis on structural economic reform may lessen the focus on the bloc’s Stability Pact which enshrines fiscal discipline, limiting budget or public deficits to three percent of gross domestic product.”<\/p>\n The response from the EC was that the Stability and Growth Pact (SGP) would not be weakened but made even more stringent. Please read my blog – Fiscal rules going mad …<\/a> – for more discussion on the SGP.<\/p>\n In my recent book with Joan Muysken – Full Employment abandoned<\/a> – we said the SGP provides neither stability nor growth.<\/p>\n You can examine EU budget data HERE<\/a>. The point that emerges is that often the EMU countries (including Germany and France) have violated the EMU rules specified under the SGP.<\/p>\n Rules of this type make no sense at all in isolation of a consideration of movements in other aggregates – such as the external position of each nation and the private saving desires.<\/p>\n But in a crisis of the magnitude the region is enduring now, the rules are meaningless in an operational sense – that is, they cannot possibly be “obeyed” because the movements in the automatic stabilisers alone will swamp them.<\/p>\n So then you get into the current situation – that while the automatic stabilisers are driving the nations into rule violation – which just means the collapse in domestic demand in the economies is very severe and bordering on catastrophic – the bureaucrats (aided and abetted by the “markets”) are forcing pro-cyclical discretionary policy changes onto the suffering nations.<\/p>\n That is absolute madness.<\/p>\n To see how bad things are in the EMU region you can see the latest Key Indicators<\/a>. Check out the collapse in private spending and the labour market summary. The data is shocking from a macroeconomic perspective.<\/p>\n Yesterday’s news report<\/a> also said that the new European 2020 strategy would see an:<\/p>\n \n… embryonic form of “economic government” for Europe …\n<\/p><\/blockquote>\n I perked up and immediately thought that perhaps they were going to introduce a fiscal redistribution capacity to match the single monetary policy unit (the ECB).<\/p>\n But no such luck. Apparently the new “commission” will act as the:<\/p>\n \n… EU’s legal enforcer … [and] … would acquire powers to issue “recommendations” and “warnings” over countries’ targets in the broad sphere of economic policy, coordinating them with the ultimate goal of shaping Europe-wide results.\n<\/p><\/blockquote>\n They never learn.<\/p>\n Please read my blog – Euro zone’s self-imposed meltdown<\/a> – for more discussion on this point.<\/p>\n Fourth … the Australian Government forgets it is the government<\/strong><\/p>\n The Australian Government’s success in intervening early into the recession with a significant fiscal package also was probably a fluke. They clearly do not understand the monetary system they are in charge of. How so?<\/p>\n In the last days, the Government has announced a major policy proposal in the area federal-state relationships with respect to the provision of hospital services and primary health care.<\/p>\n At present, this is largely the responsibility of the states and the standards vary considerably with respect to effective outcomes between states.<\/p>\n The Prime Minister said yesterday that it proposed to revamp the arrangements so that it would take over the responsibility for these services within a unified national hospital and health network plan. It would be funded federally and operated locally – which is a sound principle for any fiat currency system seeking to avoid the inefficiencies of centralisation but gain the benefits of the fiscal power of the currency-issuing government.<\/p>\n As a general principle, MMT would indicate that all public services and programs should be funded centrally and implemented at the spatial scale appropriate to the specific service. For example, someone asked a while back who would be responsible for determining which jobs in a Job Guarantee<\/a> scheme would be offered. The answer is the communities within which the workers live – they best know what the local needs are.<\/p>\n