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Who Put The Thorazine In The Economist’s Ovaltine?

You’ve got to love MSM economics editors/experts/commentators. They all sing from the same depressing song sheet – ‘The Deficit Dirge’ or the ‘Surplus Serenade’.

The only thing missing in the lyrics is the refrain of ‘need ya baby, wantcha baby, lurv ya babeee…’

What they lack in vocal skills is usually made up of  through interpretive dance.

This is usually performed wearing a bespoke suit while clutching a pointer, and features a dazzling array of signs arrows and graphs – gotta have graphs, otherwise the audience may cotton on to the fact that what they’re peddling is a slightly more up market version of tea-leaf reading.

Without exception, they all state what is known in common parlance as the ‘bleeding obvious’.

The economy isn’t in too bad a shape, the first phase of the mining boom is over, climate change could be a problem in the future (no kidding???) and that the trade deficit is okay but could be better.

From ‘Kochie’ to Kohler, Greenwood to Gittins, the message rarely varies.

The depressing thing about listening to this flannel is the knowledge that every last one ’em studied economics at tertiary level and understand the premise of fiat currency and how it operates.

They know that government ‘deficit’ is not debt, that pursuing budget surplus is not beneficial to the economy but in fact is detrimental and most importantly, that creating unemployment to have a ‘buffer stock’ of surplus labour in order to suppress wage demands and control inflation is a recipe for disaster.

Nonetheless, like a drunk at a Karaoke night they keep slurring the refrain of ‘freeing up the economy and the job market’ ad nauseam.

In fairness to MSM economists, much of their research material is sourced from the Reserve Bank of Australia reports, and it would seem that at the RBA there’s been liberal doses of Thorazine in the boardroom Ovaltine.

This week, there have been tea-leaf readings from two of the eminence gris of this august institution, John Edwards, who served as an economic adviser during the Keating years (hardly something to boast about), and Chris Kent, an assistant governor at the RBA. Kent has made the amazing discovery that the buffer stock of available unemployed labour so treasured by supply side economics, is actually declining as available jobs disappear!Kent traces this shrinkage to many of the unemployed simply giving up looking for work as they become discouraged by an ever shrinking job market.

The notion that this is usually what happens when there are fewer and fewer jobs available doesn’t seem to have crossed the good assistant governor’s mind.It may also be argued that this is the end result of creating a permanent pool of unemployed when taken to its logical conclusion. Any downturn in the economy, a high dollar and weakening growth in government spending means that the private sector has to make up the shortfall, and the usual method is to reduce labour and cut wages in order to survive.

Nevertheless, under Hockey’s budget the ship of fools sails on toward disaster while the captain and crew are tranquillized to the eye-balls by the cloying miasma of supply side economics and ‘market forces’.

Rather than continue with the notion of a buffer stock of unemployed and underutilized to curb wage demands and inflation, the intelligent solution is to turn this ‘buffer stock’ into employed workers in a ‘Job Guarantee’ program which pays the minimum wage and thereby circumvents the worst social aspects of long term joblessness, while at the same time is able to control both wage demands and inflation via the fixed minimum wage.This buffer stock would expand during times of private sector downturn, and contract when the private sector recovers.

In a recession, the Job Guarantee would serve as a back-stop against rising unemployment and maintain a stimulus for aggregate demand.In times of economic expansion, participants could leave the Job Guarantee scheme for higher paid positions in the private sector.

A Job Guarantee scheme would also replace the current NAIRU (Non Accelerating Inflation Rate of Unemployment) with a NAIBER – Non Accelerating Inflation Buffer Employment Rate through control of the overall wage rate by allowing participants to transfer from an inflating sector to a fixed wage rate sector.

As the architect of the scheme Bill Mitchell argues, this would ultimately attenuate the inflation spiral. Mitchell’s scheme makes immanent sense. It provides not only a humane solution to unemployment, particularly long term unemployment and underutilization but also serves as both buffer zone and stimulant in times of private sector downturn.

In stark contrast, the continued application of supply side economics and ‘free market forces’ merely exacerbate a widening gap of social dislocation and unrest.

Similarly to Thorazine, Chicago School economics has had the long term effect of stultifying employment in Australia to the point of atrophy.

It is well past time that MSM economists, not to mention assistant governors of the Reserve Bank threw out the dregs of the Thorazine in the Ovaltine and embraced the truth of the need for a new economic strategy based on Keynesian economic theory.

As politicians such as Chris Bowen and Tony Burke are aware, nations which issue fiat currency have the means well within their grasp to create a system of full employment and that the commencement of schemes such as the Job Guarantee are only a key stroke away.

If they don’t know this, then they certainly should as should the Greens.

All that is really required to bring about change especially in the light of the current governments mendacious and draconian ideology – is the political will to do so.

If what is termed ‘The Left’ cannot find this will, then perhaps it’s well past time for the public to insist on replacing the Thorazine with Benzadrine and find a replacement brand for the Ovaltine.

Ovaltine

Also by Edward Eastwood:

Galileo, Modern Monetary Theory and The Job Guarantee

ABBOTT, ANZUS, AND THE DILEMMA OF THE MID-SIZED SUPER POWER ALLY

Conscription by stealth: is cordite the new fragrance for the unemployed?

20 comments

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  1. John Kelly

    Edward, can you nominate what countries currently use the MMT of economics?

  2. John Kelly

    Edward, who employs those on the ‘job guarantee’ and who pays them?

  3. David

    Then there is the concept of tying business taxes to unemployment. Across the board and on a per business basis-employ and get a lower rate. Employ a disabled person or long term unemployed and get a greater discount. This can be done formulaiclly, simple maths. Business taxes should pay the unemployment budget-why socialise welfare? @Deus_Abscondis

  4. GraemeF

    Gittens is better than a lot of the economic pundits but still can’t see that the rules of the game are not ‘fair’ if operated properly, they are a smokescreen. Mere words to try to justify their actions and to be ignored when they don’t suit the powers to be. Artificially creating a supply of workers by a large immigration policy and uncapped 457 visas is not allowing ‘the market’ to operate, it is gaming it. They are playing a game where they need to keep the unemployment rate high enough to put downward pressure on wages but low enough to avoid riots. All this rot about letting the ‘market’ sort things out is just another lie. Governments on the right intervene any time the ‘workers’ start to get the upper hand so there is no way they would accept a system where the worker always gets a fair go. So basically it doesn’t matter that ‘supply side’ economics doesn’t work as it was never meant to.

  5. sam

    “From ‘Kochie’ to Kohler, Greenwood to Gittins, the message rarely varies.”
    Bunch of fools. 😉

    John Kelly:
    No country uses enough of the tools to be classed as an MMT country. Even the ones that run external sector ‘surplus’ and have a highly equitable tax systems are not MMT. The main crux of MMT is the use of structural defecits with fiat currency and the tools it uses for job creation.
    On one hand historically many places could be considered ‘close’ to MMT except that currency was linked to a gold standard.

    As for second question:

    Norway is as close to the ‘job guarantee’ concept. Usual european system: if you loose your job you get unemployment benefits as a declining % of previous job. If that doesnt work they put you into job training/education system is underqualified. And after that its off to work for either private business or government. BUT government is a large contributor to ‘jobs’ and pays well. (this seems to be the extra factor) I know more than enough lazy norwegian friends who have been through this system. 😉

    http://bilbo.economicoutlook.net/blog/?p=1352

    “Further, by increasing the share of public employment in total employment, the Norwegian government has been able to use the public sector as a means to keep unemployment low and absorb the structural and cyclical shocks much better than us.”

    MMT in particular looks at what the private sector wants. Both in real terms and the psychology of employment. eg: firms hate hiring long term unemployed people. So in a way it does its best to address these areas.

    hope this helps

  6. Edward Eastwood

    @John Kelly; John, At present, no country uses the Job Guarantee as outlined by Bill Mitchell. Argentina, India, and South Africa however, all have systems which could be loosely described as conforming to the model.

  7. Kaye Lee

    I was awarded a teaching scholarship in the 70s and we were bonded which was a job guarantee. We had to agree to go wherever sent (though they did listen to requests where possible) and work for an equivalent time to the years we were paid on scholarship (3 or 4 years). If there were no jobs you were sent to a school as a reserve and worked there until a permanent position became available (there or elsewhere).

    The system worked well. The scholarship certainly wasn’t sufficient to live on but it eased the pressure a little. Uni was free of course so no debt at the end except promised service. If you didn’t fulfil this promise then you had to repay the scholarship. Regional positions could be filled this way.

  8. John Kelly

    Thanks for the answers to the above. Could someone explain the situation in Japan over the past 20 years and why it’s debt to GDP is currently around 200%. I recall being told that in the 70’s Japan had a form of job guarantee. Multiple replies welcome.

  9. John Armour

    The main crux of MMT is the use of structural defecits…

    The concept of the “structural deficit” is actually anathema to MMT, Sam.

    The “structural” bit is the ideological bias which when applied to the actual fiscal balance makes it look a lot “worse” (given we all understand just how evil deficits are). So even the last of Howard’s surpluses were turned into “structural deficits”.

    The term “structural” is neo-liberal code for “full employment” and it’s the foundation stone of the NAIRU concept.

    If unemployment is running at 5% there’s a good chance the NAIRU will also be 5%, that is, “full employment”. That means that even a small surplus will be turned into a “structural deficit” and deemed to be excessively stimulatory for the economy.

    The “structural” concept keeps governments disciplined to avoid deficits which, God forbid, could be used to eat into the buffer-stock of unemployment that neo-liberal ideology requires.

  10. Fred Martin

    Similar to Kay Lee, I was awarded a cadetship with the then Postmaster General’s department to study Electronic Engineering. I was obligated to work where ever they put me during the school holidays and then, after qualification, required to work for them for the same number of years that the cadetship ran for. ( in my case 4 years )

    Also, the old State Electricity Commission in Victoria, used to take on 200 apprentices in various trades every year. Only about 10%-20% of these actually got jobs with the SECV at the end of their 3 or 4 years of training, the rest formed a pool of highly qualified skilled trades persons available to private industry and were more likely to be employed than green kids straight out of school with no work experience. UNFORTUNATELY the SECV was sold off to private (read overseas) owners and this no longer happens and the Latrobe valley has gone from one of the lowest unemployment and highest paid regions in Australia to one of the exact opposite.

  11. John Armour

    The Western and South-Western suburbs of Sydney seem to be characterised in the media these days, and probably in reality, by large numbers of unemployed and alienated youth.

    Why are we surprised when a couple of these kids are drawn to the conflict in Syria for it surely gives their otherwise pointless existence some kind of meaning or purpose. They’re going where they feel they are wanted.

    A Job Guarantee would do the same thing and save us the anguish and expense and resources that dealing with the long term consequences of deliberately maintaining this buffer-stock of misery, and deliver positive benefits in the bottom line at the same time.

    We know that inequality and disadvantage have inter-generational impacts.

    Our lives are very much ‘path dependent’: where we finish up largely depends on where we’ve been.

    You’ve used the expression ‘immanent sense’ Edward to describe Bill Mitchell’s JG. If that means like a ‘no brainer’ then I would absolutely agree.

  12. John Armour

    Edward, can you nominate what countries currently use the MMT of economics?

    The short answer to your question John is “everyone”, or every government with a floating fiat currency, one that’s not pegged to another country’s currency or convertible on demand into some commodity like gold. That includes the US, UK, Japan, Australia, Canada etc.

    MMT basically just describes the monetary system we actually have.

    The problem we have is that there’s another version floating around that’s simply not true, but is very convenient for pushing an ideology, austerity, small government, NAIRU, and all the rest of it. Sadly, it’s the version that nearly everybody believes.

    A good example is the purpose of bond issuance. MMT understands (correctly) that bond issuance is all about maintaining the stability of the cash rate. The competing story (a lie) is that it’s all about funding government spending.

    If this simple fact was more widely known, our 220-odd politicians in Canberra would be looking for a job.

    Another reader here at AIMN posted a link to the following excellent essay on MMT, which also contains a further description of the Job Guarantee.

    What is Modern Monetary Theory

  13. John Kelly

    Thanks John. Good read and it all helps in cementing the concept in the mind.

  14. sam

    “””The concept of the “structural deficit” is actually anathema to MMT, Sam.”””
    Thanks for correction. Mitchell and Mosler explain well the bias even with the words used by the mainstream. As would be calling the ‘budget’ a budget’ instead of fiscal statement.
    Had to make decision about how to phrase the concept so that John Kelly would pick up on its use in mainstream to see the difference. But essentially i completely agree.

    some more MMT videos i had bookmarked:
    http://www.youtube.com/watch?v=bTZGU9s0idM

    http://www.youtube.com/watch?v=6zsXUDQXKuQ

  15. John Armour

    Sam,

    What an absolutely stunning video !

    Many thanks.

  16. corvus boreus

    Sam,
    ditto on John A’s comment.
    Accessible and logical video for a person whose economics is pure gut level.
    I wish they would institute Keynesian theory(demand driving supply seems less resource wasteful), do away with any governmental payments of interest to federal reserves(automatic and pointless drain there) and resurrect Glass Steagall type protections in banking for good measure(I don’t want to lose my pennies as a stake in a rich man’s poker game when I pay him to guard them).
    Quantified with a vast distance from expertise.

  17. Stephen Tardrew

    Been extremely busy just enough time to read not comment. Great posts and great article. Its good to se a foundational group of interested people getting the message on MMT.
    Thanks for the effort Edward and John. Kind regards to all. Love the Tube vid Sam.

  18. Stephen Tardrew

    Great to see the edit link Michael.

    May help Mr Dunderhead.

  19. Totaram

    Good to see more MMT. However, I worry about the word “theory” in MMT. I know it is perfectly correct but the average bloke tends to think of “theory” as being opposed to “practice”. Perhaps phrases such as “Modern Money Economics” might resonate better. I am sure we can come up with a number of alternatives, given the importance of “framing” and metaphors.

  20. sam

    Totaram – i agree the ‘name’ has implications to influence the concepts behind MMT but the components of said theory are quite well tested in my opinion.

    I commented in a previous article see comments section (avoid cluttering up this feed here is link).
    http://theaimn.com/galileo-job-guarantee/

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