Lower British fiscal deficit gives the central government no more or no less capacity to net spend to reduce unemployment

It’s Wednesday and I am bound for London later today. We will see how that turns out having not travelled there since the beginning of the pandemic. I will take plenty of precautions to avoid Covid. But it will be good to catch up with friends in between several engagements, including my teaching responsibilities at the University of Helsinki, which I have been acquiting for the last few years via Zoom. Today, I reflect on the latest public finance data released by the British Office of National Statistics which shows the fiscal deficit is smaller than expected. Even progressive journalists have written this up as providing more scope for pre-election largesse to be provided. The fact that the fiscal balance is lower provides no more or no less scope for the government to net spend. The relevant questions that should be answered before such an assessment can be made are ignored by the journalists, including the fact that the unemployment rate is rising and the supply-driven inflation is falling fast. After some announcements of events in London and Europe, we have some violin music to end today’s post. There will be no blog post tomorrow as I will be in transit.

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Civil society is in jeopardy in the UK as funding cuts erode local government capacity

I keep hearing from friends who live in Britain that I will be shocked when I get there on Thursday of this week after a nearly four year absence. One friend, who has just returned said that the deterioration in the public infrastructure is now fairly evident. Despite my absence, I have been keeping a regular eye on the data and so these anecdotal reports and reflections come as no surprise. It is obvious that the Tory government has sought a depoliticisation strategy by cutting local government spending capacity as a way of diverting blame for the consequences of their austerity push. The problem now is that after 13 or so years of Tory rule, the cuts are eating into the very essence of civil society in Britain. Like all these neoliberal motivated cuts, the cuts to council grants will prove to be myopic. The dystopia they are creating will come back to haunt the whole nation.

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Australian labour market weakens – unemployment would be 4.5 per cent if not for the sharp fall in participation

Today (January 18, 2024), the Australian Bureau of Statistics released the latest – Labour Force, Australia – for December 2023, which tells us where things were at by year’s end. This looks likes the first real signs of a slowdown although the rather large swing in participation suggests there is some sampling variability and the incoming rotation group for December 2023 did have a lower participation rate than the outgoing group. Employment growth has been unusually strong in the previous few months but has now turned negative. Without the very sharp fall in participation, the official unemployment rate would have been 4.5 per cent rather than the official recorded rate of 3.9 per cent – a difference of 98.3 thousand workers. While we will see whether the data will be revised next month, a substantial number of workers who may have been or become unemployed have left the labour force in December as the demand-side weakened. There remains 10.4 per cent of the available and willing working age population who are being wasted in one way or another – either unemployed or underemployed. Australia is not near full employment despite the claims by the mainstream commentators and it is hard to characterise this as a ‘tight’ labour market.

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Japan inflation now falling fast – monetary and fiscal policy settings have been vindicated

The latest information from Japan suggests that in December 2023, its inflation fell sharply for the second consecutive month and that one might conclude the inflation episode is coming to an end. The Bank of Japan made the assumption that this supply-side inflation was temporary and would subside fairly quickly once those constraints eased. And they were right. All the other central banks somehow convinced themselves that the inflation was demand-driven and have been needlessly pushing up interest rates. The experiment is nearly over and I think it is clear that the Japanese path was the sound one. At that point, the New Keynesian academics and officials should resign. After that, as it is Wednesday, we have some music to soothe our souls.

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British Labour Party running scared of the usual shadows

This is an election year in the UK and unless something dramatically changes, the Labour Party will be in power for the next term of Parliament and will have to manage a poly crisis that they will inherit from 40 or more years of neoliberalism. Note, I don’t confine the antecedents to the Tory period of office since 2010 because the decline started with James Callaghan’s Labour government in the 1970s and then just got worse during successive periods of Labour and Tory rule. During that long period, there has been no shortage of economists and public officials predicting that the financial markets would soon reap chaos as a result of the public debt levels being ‘too high’ (whatever that means). The most significant chaos came in 1992 when Britain was forced out of the European exchange rate system, which it should never have joined in the first place. While all these economists are now pressuring the likely next British government to pull back on their promises to ‘assuage’ the financial markets, there is not even a scintilla of evidence to support their predictions of doom. And the Labour party leaders are too stupid to realise that.

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Australian inflation rate falls sharply as supply pressures ease

Today’s post is a complement to my post on earlier this week – So-called ‘Team Transitory’ declared victors (January 8, 2024). Yesterday (January 10, 2024), the Australian Bureau of Statistics published the latest – Monthly Consumer Price Index Indicator – for November 2023, which showed another sharp drop in inflation. The data are the closest we have to what is actually going on at the moment and it is clear that the falling inflation that began in September 2022 is continuing at a fairly brisk pace. The annual rate is now down to 4.3 per cent from 4.9 per cent in October 2023. The main driver of inflation over the last few years has been fuel prices and automotive fuel inflation has fallen from 19.7 per cent in September 2023 to 2.3 per cent in November 2023, due to global factors quite independent of domestic monetary policy. In fact, as the time passes we get a much clear reinforcement of the transitory narrative driven by supply factors rather than demand factors. This narrative has also been given weight by a recent research paper from the ECB – What drives core inflation? The role of supply shocks (published November 13, 2023). Overall, the data is now exposing the folly of the New Keynesian macroeconomic policy approach which prioritises monetary policy as the counter stabilising tool and has considered the inflationary episode to be due to excessive government spending.

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Whether real wages have stopped declining depends on how one measures it

For the time being I will continue my Wednesday format where I cover some things that crossed my mind in the last week but which I don’t provide detailed analysis. The items can be totally orthogonal. The latest inflation data for Australia continues to affirm the transitory narrative – dropping significantly over the last month. I will analyse that tomorrow in the context of a recent ECB paper that decomposes the different factors that drove the inflationary pressures across the globe. Today, I consider the basis of a claim by the Australian Treasurer that real wages are now growing. Like many things in statistics, the numbers can say almost anything that you want them to via different ways of measurement and combination. In one sense, the Treasurer is correct. But when we use a more careful method of calculating purchasing power loss, he is incorrect. If the Treasurer was wanting to be really honest with the Australian people he would admit that rather than try to score petty political points against an opposition that has no clue at all. I also consider the role of the US in the on-going massacre of innocent people in Gaza. The US could stop the conflict immediately and the fact that they don’t demonstrates the poverty of the capitalist system in terms of advancing humanity in general. And some old folk music to finish.

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Welcome to 2024 – the 20th year of my blog

Welcome to 2024. This marks the 20th year that my blog has been operating although there were a few years early on when I was experimenting with the technology etc and nothing much emerged. In continuous terms, the blog has been going for 15 uninterrupted years this year. Over that time, it has evolved from a 7-day a week commitment to a reduced offering. Here are my latest thoughts on how I will use the medium in the coming year.

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So-called ‘Team Transitory’ declared victors

On June 8, 2021, the UK Guardian published an Op Ed I wrote about inflation – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman. In that article, and in several other forums since – written, TV, radio, presentations at events – I articulated the narrative that the current inflationary pressures were transitory and would abate without the need for interest rate increases or cut backs in net government spending. In the subsequent months, I received a lot of flack from fellow economists and those out in the Twitter-verse etc who sent me quotes from the likes of Larry Summers and other prominent mainstreamers who claimed that interest rates would have to rise and government net spending cut to push up unemployment towards some conception they had of the NAIRU, where inflation would stabilise. I was also told that the emergence of the inflationary pressures signalled the death knell for Modern Monetary Theory (MMT) – the critics apparently had some idea that the pressures were caused by excessive government spending and slack monetary settings which demonstrated in their mind that this was proof that MMT policies were dangerous. Of course, they were just demonstrating their ignorance (deliberate or otherwise) of the fact that there are no MMT policies as such. MMT is an analytical framework not a policy regime. Anyway, in the last week, on mainstream economist seems to have recanted and has admitted that “Those who believed inflation would be transitory were proven right, and those who demanded the sacrifice of mass unemployment proven wrong”. For those E-mail warriors who think it is okay to send abusive messages to people you don’t know (or abusive messages in general) please do not send me apologies!

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