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Governments should not ‘cool’ an economy or cut deficits when there are millions unemployed still

Summary:
It’s Wednesday and only a few items today. It seems that the mainstream economists are emerging again and making all sorts of claims that fiscal policy has to target lower deficits and monetary policy needs to tighten (interest rates rise) to stop our governments going broke and inflation going wild. It really is like a tired broken record, isn’t it. They have sort of gone underground during the crisis and more are thinking it is time to reassert the nonsense of the past. And so it goes. But at least Wednesday brings music to this blog – and what a treat we have today. The demand for higher interest rates ruse The New York Times carried a guest essay (November 22, 2021) – Powell Needs to Cool the Economy Now to Avoid Recession Later – which was written by one of those ‘free market’

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It’s Wednesday and only a few items today. It seems that the mainstream economists are emerging again and making all sorts of claims that fiscal policy has to target lower deficits and monetary policy needs to tighten (interest rates rise) to stop our governments going broke and inflation going wild. It really is like a tired broken record, isn’t it. They have sort of gone underground during the crisis and more are thinking it is time to reassert the nonsense of the past. And so it goes. But at least Wednesday brings music to this blog – and what a treat we have today.

The demand for higher interest rates ruse

The New York Times carried a guest essay (November 22, 2021) – Powell Needs to Cool the Economy Now to Avoid Recession Later – which was written by one of those ‘free market’ economist types from the American Enterprise Institute.

He must have been having conniptions over the last few years as fiscal policy took over and deficits rose.

He was commenting on Biden’s decision to reappoint Jerome Powell for another four years as boss of the Federal Reserve Bank.

Apparently, “Mr. Powell has his work cut out for him”.

Why?

Oh, simply because there is “inflation rising to alarming levels” and “the Fed should be making moves to cool the economy.”

Excuse me.

“Alarming levels”?

Some temporary spikes during a pandemic is nothing to be alarmed about.

And why would the US government desire to “cool the economy” when the US labour market is still around 4,204 thousand jobs short from where it was at the end of February 2020 and there are no fundamental wage pressures emerging?

And why would the US government want to stop the recovery in its tracks (more in a moment on whether monetary policy would do that) when it is clear that the lower paid occupations have not participated proportionally in the jobs recovery to date and many groups have endured real earning cuts over the course of the pandemic?

We get to the nub fairly quickly in the article:

At present, the Fed is erring too much on the side of maximum employment. Instead, Mr. Powell must tip the scales back in favor of price stability.

So, just a rehearsal of the last thirty years, which, thankfully, the current Federal Reserve boss, to his credit, has abandoned because he knew that concentrating on price stability alone was maintaining elevated unemployment rates and massive losses in income via the constrained GDP growth.

Further, in general, I don’t think that increasing interest rates does much for inflation containment anyway, unless the rates go so high that the economy comes to a screeching halt, and by then so much damage is done that it doesn’t matter.

Rising interest rates increase business costs and if they have market power to set prices and mark-up unit costs then you know what happens next.

Moreover, the current price pressures are mostly being driven by the supply side of the economy – bottlenecks.

I discussed that most recently in this blog post – The current inflation trajectory still looks to be transitory (November 22, 2021).

Increasing borrowing costs will do nothing to ease those bottlenecks.

It is just a case of seeing the supply side sort itself out – containers have to move to where they are required, ships have to go to the right places, etc etc.

Which we then get to why all the financial market economists are screaming for higher interest rates.

I have written about this before – they are waving the inflation flag as a ruse to get the rates up because their companies have bet millions that rates will rise.

All their short selling will come to grief if interest rates are not pushed up.

That says nothing about the well-being of the citizens.

The financial markets don’t care about that objective.

They just want their short trades to make big profits and hang the rest.

The fiscal repair ruse

The bank economists were at it again in Australia when they were interviewed and demanded the Australian government ‘repair the budget’.

The Sydney Morning Herald published an article yesterday (November 23, 2021) – Politically fraught, but budget repair needs to start soon: economists – which sought the views of Australian economists.

A selective view that is.

The authors Shane Wright and Jennifer Duke conduct the regular forecasting panel (of which I am a member), which draws opinion from a wide group of economists – academics, those working for unions, not-for-profits, and the financial market economists working for banks.

They get a diversity of opinion although their articles following the survey usually struggle to portray that diversity.

They know, at least, that I am vehemently opposed to all this talk of ‘fiscal repair’.

So I was disappointed they chose to run an uncontested line in this article just rehearsing the views of mainstream economists.

Apparently, various events – including falling terms of trade – will mean that the:

… nation’s finances may take a further hit …

What could that mean?

Well it means in an accounting sense that tax revenue falls below what the Federal government predicted because they relied on iron ore, coal and LPG prices being higher than they are likely to be when the accounting is done (over the next year).

So what you ask?

Exactly, so the fiscal deficit will be higher than they predicted.

Does this matter?

Not in the slightest.

One economist they interviewed set the tone – “it was definitely time to start budget repair”.

Apparently, she wanted a switch in the expenditure mix, which might be sensible, given the waste on pet projects that is currently evident.

But, she also wants the switch to be a level cut.

And, that requires an answer to a different question (to those relating to waste and pork barreling).

The relevant question then is what is the state of the labour market?

Last time I looked in detail – Australian labour market – more than 2 million workers without work – 14.7 per cent (November 11, 2021) – and – Wages growth in Australia goes from terrible to bad as real wage cuts continue (November 17, 2021) – the labour market was in a parlous state still.

The economy was nowhere near full employment and there was no wage pressure at all.

So, what is the purpose of fiscal policy?

In this ‘budget repair’ narrative, there is some numbers or thresholds that seem to matter.

Even the existence of a fiscal deficit is problematic in that narrative.

But in the real world, the purpose of fiscal policy is to advance well-being and when there are 14.7 per cent of the available workforce not working in one way or another (underemployed or unemployed) and thousands of workers hidden in unemployment outside the official workforce, it is nonsensical to talk about cutting the deficit.

At present, with the pandemic still causing damage and the urgency of climate change calling, the direction of fiscal policy should be to increase the discretionary deficit not cut it.

Further, the whole nomenclature reveals a misunderstanding of what the purpose of fiscal policy is.

When I have a tooth problem, I go to the dentist for a repair job.

When my bike needs a new chain, I go to the shop to get a repair.

When a piano key gets stuck due to a worn out spring or lever, I call in the repair expert.

We repair things that are broken because that is the only way we can get restore their purpose – to bite, to convey or make sounds.

Repair in that context is an appropriate term.

But the concept has no application in discussing fiscal policy because our assessment can only be made in relation to the purpose and context.

If there is 14.7 per cent of workers not working at present, that is the context.

It means that fiscal policy is too tight relative to the current non-government spending growth and the productive capacity of the economy.

For these economists, ‘repair’ means cut to restore some level.

One of the interviewees claimed that ‘repair’ could be delayed because “the debt position is considered sustainable

Which is another furphy.

The “debt position” just defines the non-government sector wealth that is stored in the form of government bonds.

What does sustainable mean when the debt is risk-free and the federal government can always meet any liabilities it incurs in its own currency?

And how does the fact that the Reserve Bank has bought most of the debt issued since the pandemic affect the analysis?

Government lending to itself and paying itself back!

That is what has been happening.

Music – Move on Up

This is what I have been listening to while working this morning.

The early 1970s, after the disaster at Altamont in December 1969, which, arguably, sort of burned the hippies out, was a period of hope.

Curtis Mayfield – was one of the prominent hope providers and his debut album in 1970 – Curtis – contained one of my favourites songs of all time – Move on Up.

We were moving beyond 25 minute guitar solos and even longer drum solos as our heads cleared from the 1960s and Curtis Mayfield got us moving again.

For Curtis Mayfield, the album was a break from his previous pop band (The Impressions) and he started to embrace the funk fusion, which still had the influences of the psychedelic era that preceded it.

He also was seeing his music in political terms – embracing the struggles of the black movements of the time.

His band was very large and featured some of the great R&B and funk players of the time.

This song has 4 chords throughout – beautiful, flowing chords – and a great refrain. It is a great song to play in a band.

The album track went for 8:49 minutes. When they released the single they cut it to 2:53 and was gone in a blink.

No wonder it didn’t do very well initially as a single – all us hippies were still just getting warmed up after 2:53!

Curtis Mayfield died prematurely after a nasty accident while playing in 1990 and one of the great artists was gone.

The only downside of the song is that Joe Biden used it during his 2020 Presidential campaign.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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