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The macroeconomic narrative continues to (MMT) evolve but the games not over yet

Summary:
I think the general population are starting to get the message that my profession and the political class that uses it as an authority has been leading them down the garden path for decades now to cover up policies that have deliberately undermined our socio-economic prospects and allows a massive transfer of national income to the top-end-of-town. I am also watching, on a daily basis, the almost ludicrous way the mainstream economists and the politicians weave and duck as they change their story about fiscal deficits, public debt and unemployment. The paradigm shift that has been in play for a while now has accelerated in recent weeks, from a ‘6 in front of it’, to a ‘5 in front of it’, then last week a ‘4’ with some players urging a 3. That fancy talk the policy class use to talk about

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I think the general population are starting to get the message that my profession and the political class that uses it as an authority has been leading them down the garden path for decades now to cover up policies that have deliberately undermined our socio-economic prospects and allows a massive transfer of national income to the top-end-of-town. I am also watching, on a daily basis, the almost ludicrous way the mainstream economists and the politicians weave and duck as they change their story about fiscal deficits, public debt and unemployment. The paradigm shift that has been in play for a while now has accelerated in recent weeks, from a ‘6 in front of it’, to a ‘5 in front of it’, then last week a ‘4’ with some players urging a 3. That fancy talk the policy class use to talk about when the fiscal stimulus that has had capitalism on life support will start to be withdrawn and the numbers refer to the official unemployment rate that will tell the politicians the economy has recovered. Yes, I jest. And I shouldn’t because human tragedy is involved. But after years of being told I was crazy, it makes me laugh to watch the machinations unfold as the uncomfortable truth sets in that this lot had no authoritative model – it was hocus pocus all along designed to make us think they were on top of it and that TINA (prevails).

Last October, when the Australian Treasurer delivered the annual fiscal statement (aka ‘The Budget’), which had been delayed by some 5 months while the Government worked out what was happening with COVID-19, he said that they would start to deliberately cut the deficit to reduce the public debt ratio (debt to GDP), when:

Once the recovery has taken hold and the unemployment rate is on a clear path back to pre-crisis levels, comfortably below 6 per cent …

The benchmark for austerity to begin was set – an unemployment rate “comfortably below 6 per cent” – although it is not clear what comfortably actually meant.

The pre-pandemic unemployment rate was at 5.1 per cent in February 2020, but we should not see that as any reasonable benchmark on which to guage policy.

Prior to the GFC, for example, in February 2008, the unemployment rate was 4 per cent.

But then add in the fact that in February 2008, the underemployment rate was 5.9 per cent, meaning that the Australian Bureau of Statistics’ Broad Labour Underutilisation rate was 9.9 per cent (the sum of the unemployment rate and the underemployment rate).

So it was far-fetched even then to think the labour market was anywhere near full employment with nearly 10 per cent of all available and willing labour resources not working in one way or another.

Further the employment-population rate was at 62.8 per cent.

By February 2020, just before the pandemic forced the lockdowns and the rise in unemployment, the underemployment rate was 8.6 per cent and the Broad underutilisation rate was 13.7 per cent.

Hardly a benchmark to aspire to with some 1,896 thousand workers idle.

The employment-population ratio was just 62.6 per cent.

So while the Treasurer was talking about “pre-crisis levels” in terms of the pandemic, he should have, at least, been talking about pre-GFC as an aspiration for the Australian economy.

The difference between a 5.1 per cent unemployment rate and a 4 per cent unemployment rate (independently of the underemployment problem) is an extra 152 thousand jobs.

So “comfortably below 6 per cent” and “pre-crisis levels” would suggest the aspiration was in the low 5s rather than the high 5s.

The unemployment rate is now at 5.6 per cent (March 2021) but that will probably rise again as the impacts of the withdrawal of the wage subsidy (JobKeeper) at the end of March.

We will see the first impacts of that withdrawal in the April Labour Force data out in a few weeks.

So the Government has already started withdrawing its fiscal stimulus (which also included cutting the unemployment benefit back to impoverished levels).

The ‘pivot’ is now all the talk

It is no wonder that an ‘all announcement/not much action’ government would have snazzy terminology to mask its lack of doing much.

The Government has been dragged kicking and screaming to the position it now finds itself in – having to dramatically recast its rhetoric and speak an economic language that even 2 years ago it would not have even known the words to use.

Last week (April 29, 2021), the Treasurer gave a speech – Address to the Australian Chamber of Commerce and Industry – which carried the sub-title “Delivering more jobs and a stronger budget”.

The ACCI is one of those right-wing organisations that rarely support pay rises to workers and want all sorts of welfare cuts and regularly espouse the sort of deficit terrorism that has dominated the economic discussion over the last three or so decades.

The Treasurer told the audience that the Government needed “to stick to the Plan”, which meant that it wanted to “limit the damage to the labour market” that the pandemic would cause.

He said that “fiscal and monetary policy worked in tandem to support our economy”, referring to the “unprecedented levels of fiscal support” and the fact that the Reserve Bank has bought $A62 billion worth of government bonds (a significant proportion of those issued to match the rise in the fiscal deficit).

He reaffirmed that the Government would not withdraw the fiscal support “prematurely” while “businesses and sectors are still doing it tough”.

Then he dropped the bomb while referring to what the Government was planning in the upcoming fiscal statement.

He outlined a series of good economic signs but concluded that:

Despite the strength in our domestic economic recovery, the unemployment rate is not yet ‘comfortably below 6 per cent’.

So while the October 2020 fiscal statement had outlined two phases: (a) emergency support; then (b) fiscal consolidation, the Treasurer concluded that with external borders closed and interest rates at zero:

… we remain firmly in the first phase of our Economic and Fiscal strategy … [and] … We need to continue working hard to drive the unemployment rate lower.

So they are not going to “move to the second phase of our fiscal strategy” because:

1. Australia can support a lower unemployment rate.

2. Monetary policy cannot do it (“heavily constrained”) – finally buying the call by the central bank governor for the last several years to use discretionary fiscal policy as a primary policy tool.

3. The NAIRU is now estimated to be lower – meaning they think inflation is not a problem.

Which all means:

In effect, both the RBA and Treasury’s best estimate is that the unemployment rate will now need to have a four in front of it to deliver this outcome.

We want more people in jobs and in better paying jobs.

This is what our fiscal strategy is designed to achieve.

Functional finance!

And, of course, the RBA is now suggesting that to get wages growth up so that firms face scarce labour, the fiscal strategy will have to keep pushing the unemployment lower and lower until the labour markets tightens sufficient.

That should require unemployment rates well below 4 per cent and a significant reduction in underemployment.

There is some way to go.

But the point is that the narrative sounds very different to just a year ago.

Progress is being made.

The Sydney Morning Herald economics writer Ross Gittins latest column (April 30, 2021) – New economic rule: The budget’s the only game in town – seems to think what is going on is a rational response to changed rules of the game.

He seems to think there are exogenous (external) circumstances that are beyond the control of government and tie the hands of the government.

He wrote that:

What used to be the right thing to do becomes wrong, and now the right thing is something we’ve long believed was not the way to go.

Note the reference to “believed” = religion.

His claim is that the shift to a monetary policy dominance in the late 1970s was sensible because:

But by the late 1970s, the rich economies realised that high inflation – caused by the demand for goods and services running ahead of the economy’s ability to supply them – was the key problem, and the best instrument to control inflation was monetary policy. This would leave fiscal policy free to be used to keep budget deficits down and limit the build-up in government debt.

What a contrivance that is.

First, in the paragraphs before the quoted section he talks about “stagflation” which tells you that demand (overspending) was not the problem.

The inflation of the 1970s which persisted into the 1980s was not because there was excessive nominal demand coming up against finite productive capacity.

Rather it reflects the ‘battle of the markups’ as bosses and unions slugged it out (in the ‘distributional’ arena) as to who was going to bear the real income losses associated with the OPEC oil price hikes that cut national income for Australia as a whole.

I decided to refresh my memory and went back into my data archives for an old series on capacity utilisation that we used to use in our econometric modelling at the time.

This series is scaled at 1 to coincide with GDP peaks (so doesn’t have to be at a full capacity point) and shows the extent of departure from the most recent peak.

The movement in the 1970s up until the 1982 recession (a period of fiscal austerity) was definitely not a period where “demand for goods and services” outstripped productive capacity.

There was plenty of spare capacity.

Gittins is just reinventing history to suit his story.

The macroeconomic narrative continues to (MMT) evolve but the games not over yet

Second, the decision to jettison fiscal policy and adopt monetary policy was not scientific in any way. It was an ideological move driven by the growing Monetarist dislike for discretionary fiscal intervention.

It started with the introduction of monetary targetting following Friedman’s claim that inflation was the result of excessive monetary growth and when that failed they morphed the preference for non-accountable, non-elected policy makers into inflation targetting via interest rate management.

This was never very effective.

The only thing that wiped out the inflation that was introduced by the oil supply price hike was the 1991 recessions, which reset inflationary expectations.

There was never a scientific case made for reducing fiscal deficits or reducing public debt.

These narratives were always part of the fictional world that economists invented to justify privatisation, deregulation and welfare cuts – driven by their ideological preference for ‘small’ government.

Apparently now in Gittins speak, with inflation gone, this bias towards monetary policy is no longer needed and with:

… weak growth in the advanced economies since the global financial crisis means unemployment has remained high – well above anything that could be called full employment. It’s clear the basic problem we face has switched from excess demand relative to supply to insufficient demand relative to supply.

Which was not an accident that governments have to adjust to.

Governments created the weak growth because they pursued their obsession with fiscal surpluses at the expense of jobs, wages growth and other material benefits for citizens.

It was always the case that a reliance on monetary policy would lead to this malaise.

The external circumstances have not changed.

Since the mid-1970s, Australia has endured, like nearly every other nation, elevated levels of unemployment, and, in our case, shockingly high levels of underemployment.

The only thing that has driven growth has been a massive credit binge by Australian households and a once-in-a-century mining boom.

Neither sources of growth – inadequate though it has been – provide a sustainable basis for prosperity.

And with the anti-establishment revolt growing as citizens realise they have been dudded by this neoliberal fiction the governments around the world are shifting.

Conclusion

But let’s not get ahead of ourselves

I have already written enough today and I have been quite occupied on other commitments in Melbourne all day.

But one just has to read the latest stuff coming out from Janet Yellen in the US to know that the mainstream is not conceding defeat any time soon.

For those who think that MMT is ‘winning’ – they should think again.

The struggle will continue for some years yet.

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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