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The Australian Bureau of Statistics released the latest data today – Labour Force, Australia, June 2019 – which reveals a stagnating labour market with only 500 net jobs created in the month. The only bright spot was that there were 21,100 full-time jobs created (net). But total employment lagged behind the growth in the working age population, which meant that unemployment rose by 6,600 to 711,500 persons with participation unchanged. Working hours fell for the third consecutive month. Underemployment fell slightly (0.4 points) to 8.2 per cent further, largely reflecting the shift away from part-time work in a weak overall situation. The total labour underutilisation rate (unemployment plus underemployment) fell as a consequence to 13.4 per cent but its persistence around these elevated levels of wastage makes a mockery of claims by commentators that Australia is close to full employment. My overall assessment is the current situation can best be characterised as remaining in a fairly weak state. Most of the dynamics over the last few months have been due to swings up and down in part-time employment.

The summary ABS Labour Force (seasonally adjusted) estimates for June 2019 are:

  • Employment increased 500 (0.004 per cent) – full-time employment increased 21,100 and part-time employment decreased 20,600.
  • Unemployment increased 6,600 to 711,500 persons.
  • The official unemployment rate remained steady at 5.2 per cent.
  • The participation rate remained steady at 66 per cent.
  • Aggregate monthly hours worked decreased 0.1 million hours (-0.01 per cent).
  • Underemployment fell by 0.4 points to 8.2 per cent (1,112.3 thousand) and the total labour underutilisation rate (unemployment plus underemployment) declined by 0.3 points to 13.4 per cent. There were a total of 1,823.8 thousand workers either unemployed or underemployed.
Employment flat in June 2019

Employment growth fell away in June 2019 with only 500 net jobs added.

Full-time employment increased 21,100 and part-time employment decreased 20,600.

The following graph shows the month by month growth in full-time (blue columns), part-time (grey columns) and total employment (green line) for the 24 months to June 2019 using seasonally adjusted data.

The zig-zag pattern where employment growth has regularly been around zero remains evident.

All the dynamics in the last few months have been marked by swings in part-time employment.

The following table provides an accounting summary of the labour market performance over the last six months. As the monthly data is highly variable, this Table provides a longer view which allows for a better assessment of the trends.


1. Total employment has lagged behind population growth which has resulted in the rise in unemployment.

2. Participation has been rising over the period further pushing unemployment up.

Given the variation in the labour force estimates, it is sometimes useful to examine the Employment-to-Population ratio (%) because the underlying population estimates (denominator) are less cyclical and subject to variation than the labour force estimates. This is an alternative measure of the robustness of activity to the unemployment rate, which is sensitive to those labour force swings.

The following graph shows the Employment-to-Population ratio, since February 2008 (the low-point unemployment rate of the last cycle).

It dived with the onset of the GFC, recovered under the boost provided by the fiscal stimulus packages but then went backwards again as the Federal government imposed fiscal austerity in a hare-brained attempt at achieving a fiscal surplus in 2012.

The ratio fell by 0.1 points in June 2019 to 62.5 per cent and remains below pre-GFC peak in April 2008 of 62.9 per cent.

To put the current monthly performance into perspective, the following graph shows the average monthly employment change for the calendar years from 2005 to 2019 (the current year having only 4 observations in the average so far – so caution in interpretation is necessary).

It is clear that after some lean years, 2017 was a much stronger year if total employment is the indicator.

It is also clear that the labour market weakened considerably over 2018.

So far 2019, has been only slightly stronger than 2018.

To provide a longer perspective, the following graphs shows the average monthly changes in Total employment (upper panel), and Full-time and Part-time employment (lower panel) in thousands since 1980.

The interesting result is that during recessions or slow-downs, it is full-time employment that takes the bulk of the adjustment. Even when full-time employment growth is negative, part-time employment usually continues to grow.

Unemployment increased 6,600 to 711,500 persons

The official unemployment rate rose from 5.192 per cent to 5.238 per cent – a nudge up.

The following graph shows the national unemployment rate from January 1980 to June 2019. The longer time-series helps frame some perspective to what is happening at present.


1. It is still 0.3 points above the level it fell to as a result of the fiscal stimulus (which was withdrawn too early) and 1.3 point above the level reached before the GFC began.

2. There is clearly still considerable slack in the labour market that could be absorbed with fiscal stimulus.

Broad labour underutilisation remained down 0.3 points to 13.4 per cent

The results based on the Monthly data for June 2019 are (seasonally adjusted):

1. Underemployment decreased by 0.4 points to 8.2 per cent (1,112.3 thousand).

2. The total labour underutilisation rate (unemployment plus underemployment) fell 0.3 points to 13.4 per cent.

3. There were a total of 1,823.8 thousand workers either unemployed or underemployed.

The following graph plots the seasonally-adjusted underemployment rate in Australia from January 1980 to the June 2019 (blue line) and the broad underutilisation rate over the same period (green line).

The difference between the two lines is the unemployment rate.

The three cyclical peaks correspond to the 1982, 1991 recessions and the more recent downturn.

The other difference between now and the two earlier cycles is that the recovery triggered by the fiscal stimulus in 2008-09 did not persist and as soon as the ‘fiscal surplus’ fetish kicked in in 2012, things went backwards very quickly.

The two earlier peaks were sharp but steadily declined. The last peak fell away on the back of the stimulus but turned again when the stimulus was withdrawn.

If hidden unemployment (given the depressed participation rate) is added to the broad ABS figure the best-case (conservative) scenario would see a underutilisation rate well above 14.5 per cent at present. Please read my blog post – Australian labour underutilisation rate is at least 13.4 per cent – for more discussion on this point.

Teenage labour market deteriorates further in June 2019

Total teenage net employment fell 2.3 thousand in June 2019 although this was confined to part-time work, which fell by 9.5 thousand.

Full-time teenage employment rose by 7.2 thousand – so some consolation.

The following graph shows the distribution of net employment creation in the last month by full-time/part-time status and age/gender category (15-19 year olds and the rest)

Over the last 12 months, teenagers have lost 27.6 thousand (net) jobs overall while the rest of the labour force have gained 323.9 thousand net jobs.

The following graph shows the change in aggregates over the last 12 months.

In terms of the current cycle, which began after the last low-point unemployment rate month (February 2008), the following results are relevant:

1. Since February 2008, there have been 2,220.7 thousand (net) jobs added to the Australian economy but teenagers have lost 68.2 thousand over the same period.

2. Since February 2008, teenagers have lost 97 thousand full-time jobs (net).

3. Even in the traditionally, concentrated teenage segment – part-time employment, teenagers have gained only 28.8 thousand jobs (net) even though 1068.9 thousand part-time jobs have been added overall.

To put the teenage employment situation in a scale context (relative to their size in the population) the following graph shows the Employment-Population ratios for males, females and total 15-19 year olds since February 2008.

You can interpret this graph as depicting the loss of employment relative to the underlying population of each cohort. We would expect (at least) that this ratio should be constant if not rising somewhat (depending on school participation rates).

The absolute loss of jobs reported above has impacted more on males than females.

The male ratio has fallen by 9 percentage points since February 2008, the female ratio has fallen by 4.4 percentage points and the overall teenage employment-population ratio has fallen by 6.8 percentage points.

The other statistic relating to the teenage labour market that is worth highlighting is the decline in the participation rate since the beginning of 2008 when it peaked in February at 61.4 per cent.

In June 2019, the participation rate was 55.3 per cent (up 5 points on the previous month). This is a very unreliable statistic overall – it fluctuates widely on a monthly basis.

However, the difference between the 2008 level, amounts to an additional 83.5 thousand teenagers who have dropped out of the labour force as a result of the weak conditions since the crisis.

If we added them back into the labour force the teenage unemployment rate would be 25.3 per cent rather than the official estimate for June 2019 of 17.7 per cent.

Some may have decided to return to full-time education and abandoned their plans to work. But the data suggests the official unemployment rate is significantly understating the actual situation that teenagers face in the Australian labour market.

Overall, the performance of the teenage labour market leaves a lot to be desired. The decline in full-time employment for teenagers was particularly worrying.

This situation doesn’t rate much priority in the policy debate, which is surprising given that this is our future workforce in an ageing population. Future productivity growth will determine whether the ageing population enjoys a higher standard of living than now or goes backwards.

I continue to recommend that the Australian government immediately announce a major public sector job creation program aimed at employing all the unemployed 15-19 year olds, who are not in full-time education or a credible apprenticeship program.

Hours worked decreased 0.1 million hours (-0.01 per cent) in June 2019

A weak result again – the third consecutive month that aggregate working hours have fallen.

The following graph shows the monthly growth (in per cent) over the last 24 months.

The dark linear line is a simple regression trend of the monthly change – which depicts a flat trend – distorted somewhat by the outliers.


My standard monthly warning: we always have to be careful interpreting month to month movements given the way the Labour Force Survey is constructed and implemented.

The June data reveals a stagnating labour market with only 500 net jobs created in the month.

The only bright spot was that there were 21,100 full-time jobs created (net).

But total employment lagged behind the growth in the working age population, which meant that unemployment rose by 6,600 to 711,500 persons with participation unchanged.

Working hours fell for the third consecutive month. Underemployment fell slightly (0.4 points) to 8.2 per cent further, largely reflecting the shift away from part-time work in a weak overall situation.

The total labour underutilisation rate (unemployment plus underemployment) fell as a consequence to 13.4 per cent but its persistence around these elevated levels of wastage makes a mockery of claims by commentators that Australia is close to full employment.

My overall assessment is:

1. The current situation can best be characterised as remaining in a fairly weak state.

2. Most of the dynamics over the last few months have been due to swings up and down in part-time employment.

3. The Australian labour market remains a considerable distance from full employment. There is clear room for some serious policy expansion at present

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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It is Wednesday and I have only a short blog post today as I have had a lot of commitments that stop me from writing. But I did read a recent Australian Treasury paper – Wage Growth in Australia: Lessons from Longitudinal Microdata (July 2019) – which purports to model the reasons why there is wage stagnation in Australia. The results were presented at the Australian Economists Conference earlier this week and set off a storm because it appeared, at first blush, to blame workers lassitude and excessive risk averse attitudes for the lack of wages growth. I read it slightly differently. It tells me that, first, the Treasury is reluctant to acknowledge the legislative attacks on unions’ capacities to gain wage increases that have been characteristic of the neoliberal era; and, second, that the unions might take the message as a call to arms – take the employers on more often through costly industrial action within the tight legal environment that is left to them.

Treasury thinks slow wages growth is the fault of workers

The Treasury paper initially finds (surprise surprise) that there has been a shift in the relationship between “growth in the aggregate wage price index” and the growth in productivity.

I have been writing about that for 2 decades.

Clearly, when the federal government started to create situations that suppressed real wages growth in line with productivity growth that would cause a redistribution of income and wage stagnation.

That started under the Hawke Labor government in the late 1980s and has been a characteristic of the neoliberal era.

Please see this blog post – The origins of the economic crisis (February 16, 2009).

The fact that the Treasury has only just started looking into it tells you where their heads have been.

They find that:

This corresponds to around one-third of the unexplained weakness in wages growth observed in recent years. The change in the relationship between workers’ wages and firm-level productivity thus provides a new mechanism to understand the meaningful but modest portion of the weakness in aggregate wage growth over recent years that cannot be explained by historical relationships.

I love their arrogance – “provides a new mechanism to understand”.

MMT economists have been pointing this out for many years now.

The Treasury claim this is only a “potentially transient, shift in the relationship between wages and firm-level productivity”. They are thus oblivious to the fact that the gap between productivity growth and real wages has been deliberately engineered by government industrial relations policy.

It is part of the neoliberal approach. There is nothing transient at all – unless we break this system by abandoning the neoliberalism that the Treasury is captured by.

They then seek to understand what the real factors driving wage stagnation – yes, for them the wage-productivity effect is a sideshow.

The Treasury authors write:

… the decline in labour market fluidity … implies fewer outside options for workers, lower labour market fluidity may have reduced workers’ confidence and power in negotiations, and thus lowered the scope for rent sharing. Equally, lower labour market fluidity could reflect decreased feelings of job security amongst workers due to globalisation and technological advancement

No mention, of course, of the role that fiscal austerity and the obsessive pursuit of fiscal surpluses has done to engender this risk averse behaviour.

Essentially, the Treasury paper suggests that a significant factor explaining the wages stagnation is the lack of job shifting by workers.

They claim that:

… higher job switching rates are associated with higher wage growth at the local labour market level in Australia, even after controlling for a range of cyclical and demographic factors. Moreover, even workers who remain with their incumbent employer appear to benefit from more fluid labour markets, which provides further evidence that the decline in job switching rates – to the extent it is structural – could be related to the shift in rent-sharing.

The unions, predictably, came out yesterday claiming shock and horror at these findings. The head of the ACTU said it was “obnoxious” to suggest that workers are to blame for the meanness of their bosses.

Rather than get all hot and bothered about the implied insult from the Treasury – I actually don’t think these officials have any empathy so would really know what an insult was anyway – I think a better response would be to challenge the robustness of the research.

They claim they controlled their regression analysis with “a range of cyclical and demographic factors” but failed to model:

1. The impact of fiscal austerity.

2. The impact of structural shifts in industrial relations due to legislative changes.

3. Categorically failed to model the impact of these shifts on working days lost through industrial disputes.

4. Categorically failed to model the impact of declining union coverage (density) precipitated by these industrial law changes and other structural shifts (increased proportion of service sector in total employment).

5. Failed to examine the shift in job structures – rise of precarious casualised employment etc.

For example, the following graph shows working days lost due to industrial disputation since the March-quarter 1985 to the March-quarter 2019. This period coincides with several direct legislative changes by both Labor and Conservative federal governments at various times, which outlawed many formerly accepted industrial strategies by workers to put pressure on bosses to hand over a fair share of the productivity growth.

One would expect in a research design seeking to isolate factors contributing to the stagnation in wages growth in Australia in the last decade or so that it would be essential to examine the impact of the dramatic change in working days lost due to industrial disputation.

One is not the Australian Treasury – which has been hollowed out over the neoliberal years of any significant capacity to act with a degree of independence. It is now a part of the neoliberal ‘sound finance’ team – highly politicised and damaging.

Finally, the paper tells me that the Treasury thinks that if workers adopt quit behaviour they increase the pressure on employers to pay higher wages or face the prospect of losing their skilled workers.

Whether that sort of mobility is possible depends on the macro conditions and at present workers are sensible to hunker down because there are declining hire rates.

But if the increased fluidity is the way to bully the bosses into paying fairer wages, why not take the more obvious route – threaten the existing employers with profit losses through industrial action.

Workers can still go on strike (just) in Australia.

If the Treasury are really suggesting that fluidity lessens the imbalance in bargaining power that the legislative environment has created, then so do the threat and execution of costly industrial action.

Unions should stop pussying around and go back to the days when they closed down trains and caused massive inconvenience to the public and related tactics.

That way workers do not have to engage in the uncertainty of job change and still enjoy better wages and conditions.

Radio interview touching on these questions

I did a radio interview for the National broadcaster that touches on some of these issues and more. We are fighting a fairly nasty local government in Newcastle at the present, which is dolling out millions to unprofitable motor car races and destroying the local area by conceding to the demands of greedy developers.

One of the impacts has been that we have lost our local rail line (truncated out of town) to make more land available for high rise apartments. The disruption has killed local businesses many of who are just small-time crafts people earning small incomes.

The interview is about those issues and more (very MMT orientated).

Your browser does not support the HTML5 Audio element.

Call for financial assistance to make the MMT University project a reality

The – Foundation for Monetary Studies Inc. – aka The MMT Foundation serves as a legal vehicle to raise funds and provide financial resources for educational projects as resources permit and the need arises.

The Foundation is a non-profit corporation registered in the State of Delaware as a Section 501(c)(3) company. I am the President of the company.

Its legal structure allows people can make donations without their identity being revealed publicly.

The first project it will support is – MMTed (aka MMT University) – which will provide formal courses to students in all nations to advance their understanding of Modern Monetary Theory.

At present this is the priority and we need some solid financial commitments to make this project possible and sustainable.

Some sponsors have already offered their generous assistance.

We need significantly more funds to get the operations off the ground.

In order for FMS to solicit tax-exempt donations while our application to the IRS is being processed, the Modern Money Network, Ltd. (“MMN”) has agreed to serve as a fiscal sponsor, and to receive funds on FMS’s behalf.

MMN is a non-profit corporation registered in the State of Delaware, and is a federal tax-exempt public charity under Section 501(c)(3) of the Internal Revenue Code.

Donations made to MMN on behalf of FMS are not disclosed to the public.

Furthermore, all donations made to MMN on behalf of FMS will be used exclusively for FMS projects.

Please help if you can.

We cannot make the MMTed project viable without funding support.

Music today

A close friend was updating me about an MMT event they participated at recently and wondered about the lack of youth in attendance, given the topic.

I sent her a link to this song by Adelaide singer/songwriter Paul Kelly and Kev Carmody – From little things, big things grow – which is a ‘protest song’ about the struggle for land rights recognition by Indigenous Australians.

This presentation was at the memorial service to former Prime Minister Gough Whitlam, who was the first Australian leader to show respect for the indigenous struggle.

"From little things, big things grow": Paul Kelly, Kev Carmody remember Gough in song - YouTube

The song is specifically bout this mammoth event in Australian history – Wave Hill walk off, 1966-75 and its aftermath.

The walk-off, ultimately led to the introduction of the Commonwealth Aboriginal Land Rights (Northern Territory) Act 1976 – on December 16, 1976.

In August 1966, a large group of Indigenous Australian workers walked off the cattle station owned by the British colonialist Lord Vestey at Wave Hill in the Northern Territory demanding better pay and conditions, and, most importantly, respect.

The walk off (strike) led to an organised movement throughout the remote pastoral lands. The strikers camped out at Wattie Creek and demanded not just better working conditions but ownership of their traditional lands.

It was labelled ‘black communism’ by the conservatives. Lord Vestey claimed that if the Aboriginals won the struggle then they would move in to take over all our land. Scaremongering was rife.

They stayed on strike for 8 years getting support from other Australians until the Federal Labor government handed the indigenous people their land back.

This led eventually to the general Land Rights Act, which reversed the status quo established by the British when they invaded the continent – that they were coming to ‘terra nullus’ and so could just take over despite the presence of the indigenous people for between 40,000 to 60,000 years.

An historic film is available at this site – The story behind an iconic Australian protest song – which is hosted by the National Film and Sound Archive of Australia.

It was a momentous strike and gave some return to the workers.

You can read the – Lyrics – to learn how the song relates to the events.

The message generalises – which is why I sent the song to my pal in the UK. Solidarity and small-scale struggles can build into outcomes far beyond what was expected at the outset.

MMT started with a few of us. Millions now know about. It is now the rival paradigm in macroeconomics. From little things big things grow.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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This morning, a former deputy governor of Australia’s central bank (RBA) published a short Op Ed in the Australian Financial Review (July 16, 2019) – Why there are no free lunches from the RBA – which served as a veiled critique of Modern Monetary Theory (MMT). The problem is that the substantive analysis supported the core of the MMT literature that we have developed over 25 years, refuted the standard macroeconomics textbook treatment of the link between the government and non-government sectors, and, incorrectly depicted what MMT is about – all in one short article. Not a bad effort I thought. But disappointing that a person with such experience and knowledge resorts to perpetuating such crude representations of ‘cost’ and myths about government finances.

The author, Stephen Grenville, now a consultant to the World Bank, IMF and other like institutions, seeks to caution against the “current vogue for asking the central bank to fund socially desirable expenditures”.

He is somewhat mistaken to source the start of this ‘vogue’ as “America’s quantitative easing (QE)” which started in 2008. Japan has been demonstrating what central banks can do in this regard when they adopted QE on March 19, 2001.

At that point, the Bank of Japan pushed large volumes of ‘excess reserves’ into the commercial banking system in return for purchases of government and by ensuring there were always excess reserves each day in the cash system they have been able to maintain short-term interest rates at zero ever since.

It is clear that in response to the GFC, other central banks – the Federal Reserve in the US, the Bank of England, Swiss National Bank, the Sveriges Riksbank, and the ECB – followed suit in varying proportions.

The motivations were expressed differently but the intent was to militate against the recessionary impacts of declines in non-government spending.

What was held out to the public was a policy approach to push more reserves into the system to enhance the ability of the commercial banks to make loans at times when credit was tight and economic activity was in decline.

Modern Monetary Theory (MMT) economists, at each phase, pointed out that this justification was based on the false mainstream notion that banks loan out reserves and that lending can become reserve constrained.

The reality is that banks only loan excess reserves among themselves as part of the payments system (cheque clearing) and that lending is not constrained by deposits (and hence, reserves).

MMT economists were the first to point out that loans create deposits not the other way around. You will never find that proposition in the standard macroeconomics textbooks.

What follows is that QE cannot influence bank lending in the way claimed by mainstream economists. The lack of lending behaviour during the GFC was the result of a shortage of credit-worthy borrowers.

People were simply reluctant to borrow given elevated and precarious debt levels and this constrained the loan books of the banks.

The only way QE might have been a stimulative measure was in its impact on interest rates at the ‘investment’ end of the yield curve. By purchasing the volumes of government debt that QE achieved, the central banks drove up bond prices (via higher demand) and pushed down yields.

Competition in the financial asset classes at the maturities of the bonds being bought then led to lower interest rates across the board.

But, as we learned, in times of heightened economic uncertainty, people will not borrow even as the cost of funds fall, if they lack confidence in the returns that the projects might deliver into the future.

Stephen Grenville claims that QE is “printing money” and that:

The revival of Modern Monetary Theory (MMT) promotes the same idea.

First, I am not sure the term “revival” is very descriptive. It suggests that MMT had a day in the sun, faded and now is shining again.

I think it is more accurate to think of MMT as a growing body of work which people are finding out about slowly but surely and realising that it helps them understand the dissonance between what mainstream economists are saying and predicting and what MMT says.

Second, to characterise MMT as advocating “printing money” is, of course, incorrect and demonstrates a rather superficial knowledge of the core literature.

The term is also loaded – and critics know that and use it intentionally. It invokes years of characterisations of out of control central bankers goaded by government officials running printing presses at ever increasing speeds and people wandering the streets carrying wheelbarrows full of bank notes to buy a loaf of bread.

Stephen Grenville adds some weight to his accusation, claiming that (MMT says):

It appears that budgets can be funded costlessly by printing money because money doesn’t pay interest. Sadly, this seemingly costless funding source isn’t, in fact, a “free lunch”.

I will come back to this claim after going through the logic of his argument.

That logic actually correctly depicts the way the central bank interacts with the commercial banks and the impacts of government deficits on the banking system.

In that sense, it captures what MMT economists have been writing about for over 25 years. It also exposes the lack of insights in the mainstream macroeconomics.

If you consult a mainstream macroeconomics textbook you will find

I believe our new MMT textbook – Macroeconomics – is the only one on the market that actually gets this all down correctly.

So Stephen Grenville is, in fact, while trying to critique MMT, unwittingly defending core components of our analysis.

And, unintentionally providing a sound critique of mainstream money and banking analysis.

He considers two scenarios.


Suppose the central bank funds infrastructure expenditures, receiving in return some kind of zero-interest government IOU.

Note, he thinks of the central bank as being separate from the government, when in fact, central banks are legal and politicial creatures of the government and have to work daily in close cooperation with the treasury arm of government in their liquidity management functions.

But lets play along with the story.

In other words, the government tells the central bank to pay some bills to, say, road building companies etc and offers them a bit of paper in return bearing no interest.

The central bank credits the bank accounts of the infrastructure providers or in Stephen Grenville’s words “creates central bank money”.

There is no money multiplier operative as in the mainstream textbooks. Stephen Grenville’s version of this is that “the banks are already lending to all the borrowers who are judged to be bankable”.

Which is another way of saying that loans create deposits not the other way around (the latter being required for the operations of the fictional money multiplier) and if banks are lending to all the credit worthy borrowers requesting credit then they will not create any further deposits.

So what fiscal deficits do in this case is expand excess reserves – after all the transactions are exhausted – the liquidity injection from the net public spending shows up as excess bank reserves – these are held in accounts the commercial banks have to hold with the central bank.

I detail that process in detail in this introductory suite of blog posts:

1. Deficit spending 101 – Part 1 (February 21, 2009).

2. Deficit spending 101 – Part 2 (February 23, 2009).

3. Deficit spending 101 – Part 3 (March 2, 2009).

In Stephen Grenville’s words:

… the bank deposits the excess funds with the central bank, in the form of bank reserves.

Pure MMT.

So what is his point?

Well because:

Central banks just about everywhere pay a market-related rate of interest on reserves … Thus the expenditure is funded by the banking system holding excess reserves, on which the central bank pays a market-related interest. No free lunch here – just a distortion of the banks’ balance sheets, holding more reserves than they need. It would be better if this expenditure were to be funded, in the conventional way, by the government issuing bonds to the public.

First, whether central banks pay a “market-related rate of interest on reserves” is a policy choice.

The RBA pays “an interest rate on ES balances that is 0.25 percentage points below the cash rate target” (Source).

ES balances are the ‘exchange settlement’ accounts (reserves) that banks are reequired to maintain with the central bank.

Since the GFC, the US Federal Reserve pays an IOER (interest on excess reserves) – currently set at 2.35 per cent (as at February 5, 2019). This is in line with the “the target range for the federal funds rate at 2-1/4 to 2-1/2 percent” (Source)

The Bank of Japan has a different policy approach to excess reserves. It deploys a three-tier approach – “to which a positive interest rate, a zero interest rate, and a negative interest rate are applied, respectively. The three-tier system encourages negative interest rate transactions in the money market” (Source).

This exempts some proportion of the excess reserves from the negative rate applied at the margin. I may write about tiered reserve systems separately, given that the ECB is toying with the introduction along the Japanese lines.

The point is that it is a policy decision whether to leave excess reserves in the system to drive the short-term interest rates down to zero (as banks compete to offload their excesses onto other banks).

As Stephen Grenfell acknowledges “The banks can swap these reserves among themselves, but the banking system as a whole can’t get rid of the excess central-bank money” (another pure MMT proposition that you won’t find articulated in mainstream textbooks).

And if there is no return offered, banks with excesses on a particular day will try to loan them to banks facing shortfalls. But if there is a system-wide surplus, this activity is fraught and only results in the yields dropping on the loans in the Interbank market to zero.

So if a central bank desires a non-zero policy rate then it has to either sell interest-bearing bonds to the banks to drain these reserves or just pay them a market rate for holding the excesses.

A policy choice.

Second, the concept of ‘cost’ that Stephen Grenville invokes lacks any sense. He seeks to exploit the concept of – There ain’t no such thing as a free lunch – which Milton Friedman’s 1975 book There is No Such Thing as a Free Lunch advanced as part of his attack on government activity.

But alleging that an interest payment from the central bank is somehow a ‘cost’ in the sense that Friedman and others use the term ‘no free lunch’ is invalid.

Friedman was talking about real resource scarcity and in an environment that sort of scarcity is a binding constraint there is an opportunity cost involved in making choices.

If we choose to use a resource in one way, then it cannot be used in another way. The choice thus influences the ‘net benefits’ that flow from that resource usage against the usage foregone.

Friedman and his clan always claimed that government usage of productive resources led to inferior outcomes because the ‘free market’ did not ‘discipline’ the choice.

So in economics, the ‘free lunch’ metaphor is about opportunity cost. At the heart of mainstream economics is the claim by, say, Gregory Mankiw that “To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another.”

Of course, the concept is difficult to sustain at a macro level if there are idle resources – that is, productive resources that are being wasted as a result of unemployment.

Then, for a time, the opportunity costs are low to zero and there is a ‘free lunch’.

Now ask yourself, what the ‘next best alternative’ use of an interest payment made by the currency issuer is when that payment is accomplished by the stroke of a computer key and comes from ‘nowhere’!

In his famous paper – Fifteen Fatal Fallacies of Financial Fundamentalism (October 5, 1996) – American economist William Vickrey discussed said that:

Much of the conventional economic wisdom prevailing in financial circles, largely subscribed to as a basis for governmental policy, and widely accepted by the media and the public, is based on incomplete analysis, contrafactual assumptions, and false analogy.

He noted that these fallacies lead to “the assumption that future economic output is almost entirely determined by inexorable economic forces independently of government policy so that devoting more resources to one use inevitably detracts from availability for another.”

He also accepted that “This might be justifiable in an economy at chock-full employment …”.

But when economic policy is “keeping us in the economic doldrums with overall unemployment rates stuck in the 5 to 6 percent range … the loss of 10 to 15 percent of our potential production … unemployment of 10, 20, and 40 percent among disadvantaged groups, the further damages in terms of poverty, family breakup, school truancy and dropout, illegitimacy, drug use, and crime become serious indeed.”

In these situations, claiming there is ‘no free lunch’ is simply absurd ideological nonsense.

His 15 fallacies document beautifully what remains problematic with mainstream macroeconomics and the type of reasoning Stephen Grenfell tries to invoke in the article under discussion.

They relate to the standard arguments of ‘sound finance’ – you should know them all by now. They are the core propositions that MMT undermines.

William Vickrey wrote that:

These fallacious notions, which seem to be widely held in various forms by those close to the seats of economic power, are leading to policies that are not only cruel but unnecessary and even self-defeating in terms of their professed objectives … We will not get out of the economic doldrums as long as we continue to be governed by fallacious notions that are based on false analogies, one-sided analysis, and an implicit underlying counterfactual assumption of an inevitable level of unemployment.

And in conclusion he wrote with considerable eloquence that:

To assure against such a disaster and start on the road to real prosperity it is necessary to relinquish our unreasoned ideological obsession with reducing government deficits, recognize that it is the economy and not the government budget that needs balancing in terms of the demand for and supply of assets, and proceed to recycle attempted savings into the income stream at an adequate rate, so that they will not simply vanish in reduced income, sales, output and employment. There is too a free lunch out there, indeed a very substantial one. But it will require getting free from the dogmas of the apostles of austerity, most of whom would not share in the sacrifices they recommend for others.

The point is that a core principle of MMT is a recognition that what constrains government spending are the available real resources that can be purchased and put into productive use or diverted from other uses.

Whether there is scarcity or not depends on the state of utilisation of the resources available to a nation. That assessment then determines what policy interventions might be appropriate.

But there are no ‘real’ constraints on the central bank paying interest on excess reserves should they decide to do so. From an MMT perspective, there is no reason for the central bank to do so, just as there is no reason to match fiscal deficits with debt issuance.

Stephen Grenfell’s second scenario is, in his words “closer to the “printing money” idea: that the government can pay with interest-free liabilities.”

So, instead of crediting the bank accounts of the infrastructure supplier, he posits that the central bank loads up some delivery vans with actual bank notes and pays the supplier accordingly.

What happens then?

Well in his words:

The contractors don’t want the cash, nor do they want to splurge it on bidding up prices, as Milton Friedman warned. Instead, they deposit it with their bank. The bank doesn’t want the cash either, so it gives it back to the central bank in return for bank reserves. We’re back at the same place.

Which is pure MMT operational intelligence. You won’t find this sort of logic in any mainstream macroeconomics textbook.

Students in mainstream programs are taught the Milton Friedman line – that inflation would ensue.

At least Stephen Grenfell is experienced enough to understand that the inflation risk is embedded in the spending decision not how that spending is made operational.

His next logical statement is that “the central bank money ends up as bank reserves on which the central bank has to pay interest.”

Again, note that whether the central bank pays interest on excess reserves is a policy choice. It clearly doesn’t have to do so.

And the next link in his logic train fails similarly:

This interest payment may not show up as a line item in the budget, but if the central bank has to pay additional interest on reserves, it makes a smaller operating surplus and hence pays a smaller dividend to the government. Bank reserves may not be included in the total of public debt, but this is an accounting omission: these are a clear liability of the central bank and should be included in any comprehensive enumeration of public debt.

This is the left-hand pocket transferring something to the right-hand pocket misnomer.

The fact that the accounting records of the central bank records a lower “operating surplus” because they have provided more income to the non-government sector (interest on reserves) does not reduce its capacity to credit bank accounts (or load up vans with cash).

It wouldn’t even matter if the central bank recorded a perpetual accounting loss and had negative capital. The currency issuer cannot go broke.

Further, the fact that the treasury then records a lower surplus or higher deficit because the accounting flows from the left-pocket don’t appear in the right-pocket is also largely irrelevant for assessing the capacity of the government to net spend in the next period.

Remember the public debt at any point in time is just the accounting record of past fiscal deficits that have not yet been taxed away.

It is true that if we want to consolidate the liabilities of the government sector overall then bank reserves would be added to outstanding public debt.

But what would that tell us that was interesting? Not much at all.

Please read the following blog posts (among others) for more discussion of these themes:

1. The ECB cannot go broke – get over it (May 11, 2012).

2. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).

3. Better off studying the mating habits of frogs (September 14, 2011).

4. Central bank independence – another faux agenda (May 26, 2010).

5. The consolidated government – treasury and central bank (August 20, 2010).


So you see that:

1. The public debate is indeed shifting and Op Ed contributions from otherwise mainstream commentators are starting to invoke the frames that MMT has introduced to the public sphere.

You will not find analysis such as offered by Stephen Grenfell in any conventional money and banking textbook.

So that is a positive trend. Part of getting people to reach an MMT understanding is to get them to use MMT frames and language.

2. The characterisation of MMT in the public debate by those intent on criticism remains facile and error ridden.

The interesting point about this article is that in trying to put MMT down, Stephen Grenfell basically rehearses key MMT concepts without even knowing it.

3. Tying those operational realities in with Milton Friedman’s free lunch arguments, however, fails badly.

When Stephen Grenfell closes his Op Ed article with “But Milton Friedman got this part right: “there is no free lunch” – he is demonstrating a wilful misunderstanding of what MMT is about and what the ‘free lunch’ concept was about.

Paying interest on excess reserves is not constrained by scarcity! His analogy fails at the most elemental level.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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Australia’s economic performance is not exactly flash at present. GDP growth has slumped and is well below (less than half) the longer-term trend rate. Unemployment and underemployment remain at elevated levels. The federal government has been pursuing an austerity phase in the mistaken belief that achieving a fiscal surplus, no matter, what is a sound and responsible strategy. While the household sector maintained consumption expenditure growth the government’s folly did not manifest. However, that strategy was built on a plunge in the household saving ratio and an ever increasing household debt to income ratio. For years, the central bank (RBA) and the Treasury denied there was a problem – claiming that the rising debt levels were covered by rising wealth. There was never any recognition that the trends in household debt were intrinsically related to the fiscal position of the government. With the external deficit fairly stable at around 3.5 per cent of GDP, the fiscal drag imposed by the government surpluses was only possible because the household sector accumulated debt. Under current institutional arrangements (federal government unnecessarily matching its deficits with debt issuance) the declining public debt ratio was really just an approximate mirror of the rising private debt ratio. But times are changing. The RBA has now released research that refutes core aspects of mainstream macroeconomic theory and finally acknowledges what Modern Monetary Theory (MMT) economists have been pointing out for more than two decades – that the accumulation of household debt ultimately becomes a brake on spending growth.

Declining household saving ratio

It is well documented that during the pre-GFC period, Australian households started dissaving.

The following graph shows the household saving ratio (% of disposable income) from the March-quarter 1960 to the March-quarter 2019.

The decline in the saving ratio coincided with the squeeze on households from federal government fiscal austerity as the neoliberal ideology became dominant in the 1980s.

It was the Hawke-Keating Labor government who pioneered the neoliberal policy shifts and then handed over power to the conservatives who refined the austerity mantra.

That Labor government of the 1980s deregulated the financial markets and we saw the rise of the financial engineers (the corrupt banks) pushing credit down the throats of anything that they could find (and dupe) that had a heartbeat.

The recent Royal Commission into the Financial Services sector highlighted how corrupt and criminal the big banks and financial companies have been this period in Australia.

By the late 1990s, with the Conservative government recording ever increasing fiscal surpluses, growth was only maintained by the massive private domestic sector credit binge and you can see that the household saving ratio went negative for several quarters.

The GFC brought that period to an end but is didn’t taken long for the banks to regroup and renew the credit push as government support for growth has waned as a result of the austerity obsession.

In the December-quarter 2008, the ratio was 10.9 per cent having risen sharply in the early days of the GFC as households tried to stabilise the record debt situation.

Once the GFC threat was contained by the massive fiscal stimulus, the saving ratio began to fall again, especially as the squeze on wages has intensified and the fiscal contraction resumed.

The following table shows the impact of the neoliberal era on household saving.

Decade Average Saving Ratio (%)
1960s 14.3
1970s 16.1
1980s 12.0
1990s 5.4
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Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

If the household saving ratio rises and there is an external deficit then Modern Monetary Theory tells us that the government must increase net spending to fill the private spending gap or else national output and income will fall.

The answer is False.

This question tests one’s basic understanding of the sectoral balances that can be derived from the National Accounts. The secret to getting the correct answer is to realise that the household saving ratio is not the overall sectoral balance for the private domestic sector.

In other words, if you just compared the household saving ratio with the external deficit and the fiscal balance you would be leaving an essential component of the private domestic balance out – private capital formation (investment).

To understand that, in macroeconomics we have a way of looking at the national accounts (the expenditure and income data) which allows us to highlight the various sectors – the government sector and the non-government sector (and the important sub-sectors within the non-government sector).

To refresh your memory the balances are derived as follows. The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

From the sources perspective we write:

(1) GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

Expression (1) tells us that total income in the economy per period will be exactly equal to total spending from all sources of expenditure.

We also have to acknowledge that financial balances of the sectors are impacted by net government taxes (T) which includes all tax revenue minus total transfer and interest payments (the latter are not counted independently in the expenditure Expression (1)).

Further, as noted above the trade account is only one aspect of the financial flows between the domestic economy and the external sector. we have to include net external income flows (FNI).

Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):

(2) GNP = C + I + G + (X – M) + FNI

To render this approach into the sectoral balances form, we subtract total net taxes (T) from both sides of Expression (3) to get:

(3) GNP – T = C + I + G + (X – M) + FNI – T

Now we can collect the terms by arranging them according to the three sectoral balances:

(4) (GNP – C – T) – I = (G – T) + (X – M + FNI)

The the terms in Expression (4) are relatively easy to understand now.

The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way). In other words, it represents private domestic saving.

The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

In other words, the left-hand side of Equation (4) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.

The term (G – T) is the government financial balance and is in deficit if government spending (G) is greater than government tax revenue minus transfers (T), and in surplus if the balance is negative.

Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAD). It is in surplus if positive and deficit if negative.

In English we could say that:

The private financial balance equals the sum of the government financial balance plus the current account balance.

We can re-write Expression (6) in this way to get the sectoral balances equation:

(5) (S – I) = (G – T) + CAB

which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAB > 0) generate national income and net financial assets for the private domestic sector.

Conversely, government surpluses (G – T < 0) and current account deficits (CAB < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.

Expression (5) can also be written as:

(6) [(S – I) – CAB] = (G – T)

where the term on the left-hand side [(S – I) – CAB] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.

All these relationships (equations) hold as a matter of accounting and not matters of opinion.

You can then manipulate these balances to tell stories about what is going on in a country.

For example, when an external deficit (X – M < 0) and a public surplus (G – T < 0) coincide, there must be a private domestic deficit. So if X = 10 and M = 20, X – M = -10 (a current account deficit). Also if G = 20 and T = 30, G – T = -10 (a fiscal surplus). So the right-hand side of the sectoral balances equation will equal (20 – 30) + (10 – 20) = -20.

As a matter of accounting then (S – I) = -20 which means that the private domestic sector is spending more than they are earning because I > S by 20 (whatever currency units we like). So the fiscal drag from the public sector is coinciding with an influx of net savings from the external sector. While private domestic spending can persist for a time under these conditions using the net savings of the external sector, the private domestic sector becomes increasingly indebted in the process. It is an unsustainable growth path.

So if a nation usually has a current account deficit (X – M < 0) then if the private domestic sector is to net save (S – I) > 0, then the fiscal deficit has to be large enough to offset the current account deficit.

Say, (X – M) = -20 (as above). Then a balanced fiscal position (G – T = 0) will force the private domestic sector to spend more than they are earning (S – I) = -20. But a government deficit of 25 (for example, G = 55 and T = 30) will give a right-hand solution of (55 – 30) + (10 – 20) = 15. The private domestic sector can net save.

Note households can still have positive savings with the private domestic sector net dissaving overall, if I > S.

So by only focusing on the household saving ratio in the question, I was only referring to one component of the private domestic balance. Clearly in the case of the question, if private investment is strong enough to offset the household desire to increase saving (and withdraw from consumption) then no spending gap arises.

Typicall, though, when households reduce the growth in consumption spending, private investment growth also tapers off.

As a consequence a major spending gap emerge that can only be filled in the short- to medium-term by government deficits if output growth is to remain intact.

The following blog posts may be of further interest to you:

Question 2:

Even though the money multiplier found in macroeconomics textbooks is a flawed description of the way the monetary system operates, having some positive minimum reserve requirements does constrain credit creation activities of the private banks more than if you have no requirements other than the rule that balances have to be non-zero.

The answer is False.

While many nations do not have minimum reserve requirements other than reserve account balances at the central bank have to remain non-zero, other nations do persist in these gold standard artefacts. The ability of banks to expand credit is unchanged across either type of country.

These sorts of “restrictions” were put in place to manage the liabilities side of the bank balance sheet in the belief that this would limit volume of credit issued.

It became apparent that in a fiat monetary system, the central bank cannot directly influence the growth of the money supply with or without positive reserve requirements and still ensure the financial system is stable.

The reality is that every central bank stands ready to provide reserves on demand to the commercial banking sector. Accordingly, the central bank effectively cannot control the reserves that are demanded but it can set the price.

However, given that monetary policy (mostly ignoring the current quantitative easing type initiatives) is conducted via the central bank setting a target overnight interest rate the central bank is really required to provide the reserves on demand at that target rate. If it doesn’t then it loses the ability to ensure that target rate is sustained each day.

Imagine the central bank tried to lend reserves to banks above the target rate. Immediately, banks with surplus reserves could lend above the target rate and below the rate the central bank was trying to lend at. This would lead to competitive pressures which would drive the overnight rate upwards and the central bank loses control of its monetary policy stance.

Every central bank conducts its liquidity management activities which allow it to maintain control of the target rate and therefore monetary policy with the knowledge of what the likely reserve demands of the banks will be each day. They take these factors into account when they employ repo lending or open market operations on a daily basis to manage the cash system and ensure they reach their desired target rate.

The details vary across countries (given different institutional arrangements relating to timing etc) but the operations are universal to central banking.

While admitting that the central bank will always provide reserves to the banks on demand, some will still try argue that by the capacity of the central bank to set the price of the reserves they provide ensures it can stifle bank lending by hiking the price it provides the reserves at.

The reality of central bank operations around the world is that this doesn’t happen. Central banks always provide the reserves at the target rate.

So as I have described often, commercial banks lend to credit-worthy customers and create deposits in the process. This is an on-going process throughout each day. A separate area in the bank manages its reserve position and deals with the central bank.

The two sections of the bank do not interact in any formal way so the reserve management section never tells the loan department to stop lending because they don’t have reserves. The banks know they can get the reserves from the central bank in whatever volume they need to satisfy any conditions imposed by the central bank at the overnight rate (allowing for small variations from day to day around this).

If the central bank didn’t do this then it would risk failure of the financial system.

The following blog posts may be of further interest to you:

Question 3:

With fiscal and monetary policy tied by the EMU arrangements, the only adjustment mechanism left for Eurozone Member States is to reduce wages and prices to restore external competitiveness. While harsh, eventually the competitive position improves, if wages and prices are successfully cut.

The answer is False.

The temptation is to accept the rhetoric after understanding the constraints that the EMU places on Member States and conclude that the only way that competitiveness can be restored is to cut wages and prices. That is what the dominant theme in the public debate tells us. It is the IMF’s main selling point for austerity in the Eurozone.

However, deflating an economy under these circumstance is only part of the story and does not guarantee that a nation’s competitiveness will be increased.

We have to differentiate several concepts: (a) the nominal exchange rate; (b) domestic price levels; (c) unit labour costs; and (d) the real or effective exchange rate.

It is the last of these concepts that determines the “competitiveness” of a nation.

Nominal exchange rate (e)

The nominal exchange rate (e) is the number of units of one currency that can be purchased with one unit of another currency. There are two ways in which we can quote a bi-lateral exchange rate.

Consider the relationship between the $A and the $US.

  • Option 1: the amount of Australian currency that is necessary to purchase one unit of the US currency ($US1). In this case, the $US is the (one unit) reference currency and the other currency is expressed in terms of how much of it is required to buy one unit of the reference currency. So $A1.60 = $US1 means that it takes $1.60 Australian to buy one $US.
  • Option 2: the amount of US dollars that one unit of Australian currency will buy ($A1). In this case, the $A is the reference currency. So, in the example above, this is written as $US0.625= $A1. Thus if it takes $1.60 Australian to buy one $US, then 62.5 cents US buys one $A. (i) is just the inverse of (ii), and vice-versa.

So to understand exchange rate quotations you must know which is the reference currency. In the remaining, I use the first convention so e is the amount of $A which is required to buy one unit of the foreign currency.

International competitiveness

Are Australian goods and services becoming more or less competitive with respect to goods and services produced overseas? To answer the question we need to know about:

  • movements in the exchange rate, ee; and
  • relative inflation rates (domestic and foreign).

Clearly within the EMU, the nominal exchange rate is fixed between nations so the changes in competitiveness all come down to the second source and here foreign means other nations within the EMU as well as nations beyond the EMU.

There are also non-price dimensions to competitiveness, including quality and reliability of supply, which are assumed to be constant.

We can define the ratio of domestic prices (P) to the rest of the world (Pw) as Pw/P.

For a nation running a flexible exchange rate, and domestic prices of goods, say in the USA and Australia remaining unchanged, a depreciation in Australia’s exchange means that our goods have become relatively cheaper than US goods. So our imports should fall and exports rise. An exchange rate appreciation has the opposite effect.

But this option is not available to an EMU nation so the only way goods in say Greece can become cheaper relative to goods in say, Germany is for the relative price ratio (Pw/P) to change:

  • If Pw is rising faster than P, then Greek goods are becoming relatively cheaper within the EMU; and
  • If Pw is rising slower than P, then Greek goods are becoming relatively more expensive within the EMU.

The inverse of the relative price ratio, namely (P/Pw) measures the ratio of export prices to import prices and is known as the terms of trade.

The real exchange rate

Movements in the nominal exchange rate and the relative price level (Pw/P) need to be combined to tell us about movements in relative competitiveness. The real exchange rate captures the overall impact of these variables and is used to measure our competitiveness in international trade.

The real exchange rate (R) is defined as:

R = (e.Pw/P) (2)

where P is the domestic price level specified in $A, and Pw is the foreign price level specified in foreign currency units, say $US.

The real exchange rate is the ratio of prices of goods abroad measured in $A (ePw) to the $A prices of goods at home (P). So the real exchange rate, R adjusts the nominal exchange rate, e for the relative price levels.

For example, assume P = $A10 and Pw = $US8, and e = 1.60. In this case R = (8×1.6)/10 = 1.28. The $US8 translates into $A12.80 and the US produced goods are more expensive than those in Australia by a ratio of 1.28, ie 28%.

A rise in the real exchange rate can occur if:

  • the nominal e depreciates; and/or
  • Pw rises more than P, other things equal.

A rise in the real exchange rate should increase our exports and reduce our imports.

A fall in the real exchange rate can occur if:

  • the nominal e appreciates; and/or
  • Pw rises less than P, other things equal.

A fall in the real exchange rate should reduce our exports and increase our imports.

In the case of the EMU nation we have to consider what factors will drive Pw/P up and increase the competitive of a particular nation.

If prices are set on unit labour costs, then the way to decrease the price level relative to the rest of the world is to reduce unit labour costs faster than everywhere else.

Unit labour costs are defined as cost per unit of output and are thus ratios of wage (and other costs) to output. If labour costs are dominant (we can ignore other costs for the moment) so total labour costs are the wage rate times total employment = w.L. Real output is Y.

So unit labour costs (ULC) = w.L/Y.

L/Y is the inverse of labour productivity(LP) so ULCs can be expressed as the w/(Y/L) = w/LP.

So if the rate of growth in wages is faster than labour productivity growth then ULCs rise and vice-versa. So one way of cutting ULCs is to cut wage levels which is what the austerity programs in the EMU nations (Ireland, Greece, Portugal etc) are attempting to do.

But LP is not constant. If morale falls, sabotage rises, absenteeism rises and overall investment falls in reaction to the extended period of recession and wage cuts then productivity is likely to fall as well. Thus there is no guarantee that ULCs will fall by any significant amount.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. If the household saving ratio rises and there is an external deficit then Modern Monetary Theory tells us that the government must increase net spending to fill the private spending gap or else national output and income will fall.

2. Even though the money multiplier found in macroeconomics textbooks is a flawed description of the way the monetary system operates, having some positive minimum reserve requirements does constrain credit creation activities of the private banks more than if you have no requirements other than the rule that balances have to be positive.

3. With fiscal and monetary policy tied by the EMU arrangements, the only adjustment mechanism left for Eurozone Member States is to reduce wages and prices to restore external competitiveness. While harsh, eventually the competitive position improves, if wages and prices are successfully cut.


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I thought the most interesting aspect of last weekend’s Greek election was the post election response of the European Commission. I had thought prior to the election, when it was obvious that Syriza would lose office to the New Democracy Party, that the European Commission would perhaps turn a blind eye for a time to the new Greek government and allow them to break some of the ridiculous fiscal shackles that the Greek colony is enduring. Just like the Commission ignored the rule breaking by the Spanish conservative government in the lead-up to the December 2015 general election to ensure the Government could stimulate the economy and restore growth and retain office. I was wrong. Spain is not yet a colony. Greece is. It is to be spared no quarter by the sociopaths. Within hours of gaining office, the New Democracy leaders were confronted with news from the Eurogroup President, Mario Centeno – “Commitments are commitments” – the fiscal surpluses will continue and the “strict budget targets that were agreed” will not be relaxed (Source). As you were Greece – remain in permanent depression.

The Dutch finance minister told the press on Monday (July 8, 2019) that:

… clear long-term agreements were made about setting its budgetary house in order and push through reforms. It is based on a whole package, and I assume that will stay intact.

Let’s just remind ourselves of what some of those fiscal commitments are – I outlined them in this blog post – Greece – the next bailout is just around the corner (January 23, 2019):

1. Syriza agreed to Eurogroup demands that it would generate a primary fiscal surplus of 3.5 per cent of GDP by 2022 and a permanent 2 per cent surplus by 2060, irrespective of what is going on in the non-government sector.

2. €50bn in public assets were forced into an independent trust based and when they were privatised the funds would overwhelmingly go to the creditors. The property assets are beyond the control of Greek politicians until 2114.

3. Privatisations have been extensive – ports, shorelines, utilities, airports, significant archaeological assets, public buildings and more – mostly for small returns.

4. Massive pension cuts, tax hikes, and spending cuts generally.

and much more.

I provided a recent update on conditions in Greece in this blog post – The Greek colony remains in depression (June 25, 2019).

The summary was that:

1. Real GDP has shrunk by 23.9 per cent since the crisis began and has been stuck around that mark since 2012. There has been virtually no growth at all since the trough was reached in the December-quarter 2013.

2. Private consumption spending is now by 24 per cent lower than it was when Greece entered the crisis. It remains below the level of the June-quarter 2012 and has been static for the best part of two years.

3. The decimation of Greece’s productive capacity is on-going.

4. In the September-quarter 2008 (the peak employment quarter before the crisis), the ratio was 49.2 per cent. In the March-quarter 2019, the ratio was at 41.8 per cent. Had the ratio remained at 49.2 per cent, total employment would be 669 thousand larger than it currently is – that is, 17.5 per cent higher.

5. Total employment has fallen by 825.6 thousand (17.8 per cent) since the September-quarter 2008 peak.

6. Greece’s working age population has declined over the period from the September-quarter 2008 to the March-quarter 2019 by some 314.4 thousand (or 3.4 per cent) – this includes the massive ‘brain drain’ where skilled workers have left for other nations.

7. Unemployment rate is still at 19.2 per cent.

8. This is a massive demand-side induced Depression that Greece has been dealing with – deliberately inflicted and persisted with by the Troika using the so-called socialist party, Syriza as its puppet.

9. There is no way that a unilateral exit would have been as costly as this catastrophe.

The 2019 Greek election

We have to see the Greek election in that context.

I saw a Tweet (July 7, 2019) from the Bloomberg Brussels-based journalist Nikos Chrysoloras:

Tsipras’s era in Greece, an obituary: political scientists in the future will be studying the Syriza phenomenon as one of the rare cases of an “empty signifier” party. Contrary to common misunderstandings, Tsipras isn’t partisan. In fact, ideological emptiness is his key trait …

The ’empty signifier’ or – Floating signifier – is a term introduced by the Belgiam anthropologist, Claude Lévi-Strauss to denote something that has “symbolic value zero”.

In semiotics, a signifier is something that is intended to convey some meaning independent of the sign itself.

The concept of a floating signifier evolved in the post modern era to be:

… a signifier with a vague, highly variable, unspecifiable or non-existent signified. Such signifiers mean different things to different people: they may stand for many or even any signifieds; they may mean whatever their interpreters want them to mean.

In other words a “complete disconnection of the signifier and the signified”.

(Reference: Chandler, D. (2007) Semiotics: The Basics, Routledge).

Before we get too far ahead of this though, an example often used to denote this concept is the American national flag – what does it signify? Good or bad? Positive or Negative? It is the eyes of the beholder.

I thought about this when I was listening to the radio on Monday and the commentator said that the Greek election result marked the end of Greece’s (and perhaps Europe’s) experiment with a “far left government”.

I had to laugh.

The revisionism had begun, even before the votes were fully counted.

I guess the commentator had fallen for the Greek Party name Syriza or in its full version “Συνασπισμός Ριζοσπαστικής Αριστεράς” – the Coalition of the Radical Left.

Eyes of the beholder.

Or perhaps he was color struck – the red of the Left, the green of the environment and purple (feminism and other social movements) – make up the official Syriza colours.

Another empty signifier.

Perhaps he might have thought a little more deeply about it before embarrassing himself with this sort of invention.

While all manner of justifications are being pumped out by leftists in Europe, social democrats and others to defend Syriza, the fact is obvious – it abandoned the people who voted for it, became a pawn for the neoliberals, and embraced that role with a zeal that even the previous conservative governments in Greece could never muster.

In the end, they stood for nothing more than wanting to hold onto power and be part of the EU political elite irrespective of what that meant for the Greek people.

The ‘socialist’, ‘radical’, ‘left’ designators were as empty as empty can be.

But, the signifiers were not floating at all – it was obvious that Tsipras and his rats inflicted neoliberal punishment on the people – damaged the lives of tens of thousands, destroyed public infrastructure, caused Greek citizens to take their own lives, killed off the future for many young Greeks, forced the highest skills to abandon their country in order to survive.

The signal was very clear!

Syriza became a neoliberal outfit of the worst type – gaining power on one promise to end austerity and then inflicting worse austerity once in power.

Attempts to explain away the European election disaster in May, where Syriza gained just 15.3 per cent of the vote (compared to 33.9 per cent for New Democracy), as being a response to concessions made to Macedonia, were pathetic distractions.

Syriza lost last Sunday because they lied to the people and then punished them. Syriza stood for nothing other than maintaining power and they demonstrated every day that they would do anything to achieve that aim.

They became agents of the European Commission and the IMF, rather than standing for the Greek people against these external agencies intent of causing damage to the living standards of the Greek citizens.

The pre-election analysis by political science academic Alexander Kazamias (July 5, 2019) – Syriza betrayed its principles – and the Greek people. Its days are numbered – concluded that:

The painful truth about Syriza is that it has ruled Greece for four years as a party suffering from identity loss and diminishing credibility. Its record in government has been so full of compromises and retreats that it now hovers across the political spectrum like an amorphous haze – a phantom of its old self, without much shape or substance. Tsipras’s cabinet includes ministers who have defected from almost every other party in parliament, even several hard-right populists from the Independent Greeks.

Anything to get their hands on power and keep them there!

It was never going to turn out well, when on July 5, 2015, after 61.31 per cent of Greek voters cast No ballots in the Referendum to scrap the Troika deal, Tsipras told the people via a TV address:

We proved that even under very difficult circumstances, democracy cannot be blackmailed.

Today, considering last week’s very difficult circumstances, you made a very brave choice.

However, I am fully aware that the mandate here is not one to break with Europe, but a mandate to strengthen our negotiating position to seek a viable solution.

The Greek people had been asked to vote on the following proposition (Source):

Should the agreement plan submitted by the European Commission, the European Central Bank and the International Monetary Fund to the Eurogroup of 25 June 2015, and comprised of two parts which make up their joint proposal, be accepted?

Two accompanying documents outlining the ‘bailout’ deal were provided to the people.

Just three days after the Oxi vote dominated, the Greek finance minister wrote to the European Stability Mechanism – (Source):

On behalf of the Hellenic Republic (“the Republic” or “Greece”), I hereby present a request for stability support within the meaning of Articles 12 and 16 of the ESM Treaty given the risk to the financial stability of Greece as a member state and of the euro area as a whole …

Consistent with the principles of this medium to long term Programme, the Republic is committed to a comprehensive set of reforms and measures to be implemented in the areas of fiscal sustainability, financial stability, and long-term economic growth. Within the framework of the Programme, we propose to immediately implement a set of measures as early as the beginning of next week including:

– Tax reform related measures

– Pension related measures

We will also include additional actions that the Republic will undertake to further strengthen and modernize its economy. The Greek government will on Thursday 9 July at the latest set out in detail its proposals for a comprehensive and specific reform agenda for assessment by the three Institutions to be presented to the Euro Group …

We reiterate the Greece’s commitment to remain a member of the Eurozone and to respect the rules and regulations as a member state.

It is interesting that the European Council’s own site – Greece: the third economic adjustment programme – still provides a link to this letter but the link no longer delivers the letter but takes one to a general site at the ESM.

So three days after the Oxi vote, Syriza betrayed their own people.

You cannot come back from that and Sunday’s result was never in doubt.

But it was no simple betrayal.

Tsipras and others in the government became enthusiastic about their role as Wolfgang Streeck wrote in his (excellent) recent article (May 30, 2019) – Four Reasons the European Left Lost.

He said that Tsipras “as Greek prime minister, he became Angela Merkel’s favorite disciple in the art of treason.”

Far from being a ‘populist’ government resisting the status quo, Syriza became an aggressive partner in the neoliberal assault on democracy and working class prosperity being pursued by the Troika.

Alexander Kazamios wrote that Syriza:

… chose a very particular path: not populism, but one with an equally well-known name in the history of ideas – opportunism. That is a nihilist politics of survival, based on short-term tactics and manoeuvres and an inexhaustible willingness to be all things to all people.

Once identity and mission is abandoned, it becomes easy then to wine-and-dine with the likes of “Donald Trump, Benjamin Netanyahu and Saudi Arabia” – as Syriza did.

The points I am making are not novel.

But my continued advocacy of Greek leaving the Eurozone is rather novel. Not many people are thinking that would deliver net benefits.

But when we put together scenarios for the future – the Greek colony will continue to wallow in a protracted depression – with little private investment, static production and appalling decline in standards of living.


When it came to Spain, the European Commission knew they had to relax the austerity in order to engender some growth in the lead up to the 2015 election to ensure that the conservatives remained in power.

But, Greece is a different matter altogether.

It is obvious that it has become a token – a whole nation is being forced to endure more or less permanent depression – as a token for other Eurozone nations.

The signal from that token is that if a Member States tries to defy the dictates and ‘rules’ of the Eurozone they will be severely punished and put into colony status.

Greece has become a signal itself rather than a nation.

It is an appalling demonstration of the ruthless neoliberalism of the European Union. How any progressive person can see anything good in the structures that administer this ruthlessness is beyond me.

The former president of the Hellenic parliament Zoe Konstantopoulou summarised it perfectly this time last year (Source):

Syriza is not the leftwing party it claims to be. It has become a political zombie, crushing every progressive value as it sleepwalks to its electoral demise. Its removal from power is the first step towards restoring democracy in Greece.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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My Wednesday blog post is designed to give me some more writing space. But in the last week, Syriza has lost the Greek election (about time) and the British Labour Party confirms it is more interested in satisfying the demands of the urban (London) middle classes and big business than keeping faith with its regional working class support base. That is a lot to consider. Tomorrow, I consider the Greek election. Today, I comment a little on the state of Brexit in the UK and the Labour Party surrender. And then I offer some great music (for those with similar tastes).

Representative Democracy

The UK system of government is based on the principle of – Representative Democracy – with a constitutional monarchy at the top, a relic of the past.

In the British House of Commons, members sit who are representatives of the people who elect them. In Australia, we make this link more explicit because our lower house is called the House of Representatives.

While these members typically belong to political parties, they are accountable back to their electorates, or, in the British parlance, their constituencies for the votes they cast.

They operate within a constitutional framework, which limits their powers.

There has been a long debate about whether these members should always represent the views of their consituencies or whether they can make their own judgements, even if they are in contradistinction to what the voters who put them into office desire.

On November 3, 1774, the conservative MP – Edmund Burke – who is a guiding light for modern conservatives (or so they say – rather than do), was elected the Member for Bristol and his ‘mandate’ was outlined in his famous – Speech to the Electors of Bristol at the Conclusion of the Poll – which is held out as the model where elected representatives do not have to reflect the wishes of the voters, but, rather to represent them using judgement.

He said in that Speech:

Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion.

The Speech went on to outline a view that was deeply suspicious of the concept of democracy.

Burke was against the to-and-fro that occurs in democracies. He considered that:

Factions in republics have been, and are, full as capable as monarchs of the most cruel oppression and injustice.

He considered that the process whereby factions have voice was a dangerous threat to the state, which conditioned the way he conceived of representative democracy.

Voters were prone to being impulsive and lacking in judgement.

This view influenced his conclusion on whether an elected member should be bound by the views of the voters:

… these are things utterly unknown to the laws of this land, and which arise from a fundamental mistake of the whole order and tenor of our constitution.

Yes, a legal system dominated by the interests of the gentry and landed classes.

The Parliament was not their to serve the wishes of the people but to serve the interests of the nation, as the representatives judged them to be.

A very paternalistic view, which has been wheeled out in the on-going Brexit debate to justify MPs voting against the wishes of their constituencies.

Gerard O’Brien wrote in his 1993 study that:

Despite the relative paucity of bureaucratic controls, the ruling élites of eighteenth-century Britain and Ireland maintained through traditional methods a firm grip on their societies. In fact the very absence of governing institutions was in itself a form of social control in that it circumscribed the modes of and opportunities for expression of popular views and directed them into narrow and manipulatory channels.

(Reference: O’Brien, G. (1993) ‘The Unimportance of Public Opinion in Eighteenth-Century Britain and Ireland ‘, Eighteenth-Century Ireland, Vol. 8, pp. 115-127)

He went on to show that while there was a semblance where voters (the “outsiders”) could “access … the ears and minds of the decision-makers”, the reality was quite different – the “political power-structure controlled” debates.

Even within this context, there was a fierce debate as to how much autonomy the elected member should have.

Moreoever, an understanding of the historical context is very important.

The context in which Burke made his speech is totally inapplicable to modern Britain, where the political system is dominated by parties who offer options to the electors and promise to deliver on those outcomes if elected.

Burke was railing against the ‘pledge’ system which interest groups has tried to force on any future representatives – such things as the Member would not try to undermine the government.

An historical study of the time by Lucy Sutherland – Edmund Burke and the Relations Between Members of Parliament and Their Constituents – published in Studies in Burke and His Time (1968) provides a detailed account of why Burke’s Speech is specific to its time.

So to wheel it out now as a way of justifying MPs in the House of Commons ignoring the will of their constituents is a violation of the historical record, convenient though it might be to have some Burkean authority to throw around the Brexit debate to justify the unjustifiable call for a second referendum.

See for example this attempt in the New Statesman – Sorry, the role of an MP is to be a representative, not a delegate (December 7, 2015).

The point is this. In the modern era of British democracy (and in the Anglo world generally (at least)), we think it is appropriate that an MP, once elected, will not violate the preferences of the voters in his or her constituency/electorate.

Why do I say this?

This blog post – Comparing the 2016 Referendum vote with the 2019 Withdrawal Act outcome (January 16, 2019) – is relevant to the discussion.

The 2016 Referendum was very clear. The question was also beyond complexity:

Should the United Kingdom remain a member of the European Union or leave the European Union?

And the instruction was equally simple – Answer by putting a single X:

Remain a member of the European Union

Leave the European Union

That binary choice is as simple as it gets. There was no conditionality (withdrawal agreements, etc) imposed to constrain this choice.

IN or OUT!

The government of the day promised in its supporting documentation handed out in May 2016 (the ’16-page guide’) that:

This is your decision. The government will implement what you decide.

No ambiguity there.

While the “voting areas” or “Counting areas” established by the 2015 Act setting up the Referendum were not not aligned with the 650 Consistituencies which elect MPs (they were mostly delineated by the local authority boundaries), subsequent research has been able to break down the Brexit vote by electoral constituency.

I detail all that in the blog post cited above.

The summary results (reported in more detail in that blog post) were:

1. 62.9 per cent of the Constituencies voted to Leave. That means that 409 Parliamentarians who that sat in the Commons were representing electorates that voted to leave.

2. The difference between the 52 per cent of votes for Leave and the 62.9 per cent of constituencies voting to Leave is mainly due to the clustering of Remain votes in the larger urban areas. Spatial breakdowns suggest the Leave vote was more evenly dispersed across the UK.

3. And this is the important point – 60.7 per cent of Labour constituencies most likely voted to Leave, 75.4 per cent of Conservative, 33 per cent of Liberal Democrat and 60 per cent of DUP.

This means that 159 of the 262 constituences that Labour won in the 2017 election (seats in the House of Commons) voted to Leave the EU in the June 2016 Referendum.

Overall, the conclusion is unambiguous – there are lot of MPs in both the major parties that are not representing the views of their constituencies in this regard.

The Labour Party is the worst offender.

Representative democracy demands these MPs represent their constituents, irrespective of their own personal views.

When I met with Labour MP for Derby North, Chris Williamson in London in May, he told me categorically that he had campaigned hard for the Remain position as a personal preference but 57.2 per cent of his constituents voted to leave. He thus felt duty bound to represent that view.

He followed up with an article in the Morning Star – Leaving the EU and entering a new economic paradigm (May 24, 2019) – which captured some of the issues we discussed a week or so earlier.

He wrote:

I vigorously campaigned to remain and reform the EU. I knocked on doors almost every night in the referendum campaign, and when I wasn’t, I was speaking at public meetings across the East Midlands urging people to vote remain. I organised weekend street stalls in Derby city centre to promote the remain campaign, and was up at the crack of dawn on the day before and the day of the referendum, to leaflet early morning commuters at Derby’s bus station and railway station respectively.

But despite my best endeavours, 57.2 per cent of those who voted in Derby opted to leave, a bigger margin than the country as a whole. That is why I believe we must uphold the wishes that were expressed in that democratic exercise.

Democracy isn’t a “take it or leave it” proposition. The voices demanding a so-called “people’s vote” in a confirmatory referendum and those calling for the repeal of Article 50 are playing a very dangerous game.

I have great respect for that position.

Labour Party surrenders to the middle class and big business

Pity the British Labour Party leadership has now surrendered its valuation of democracy in favour of some contrived view that they have to shift to Remain.

The decision (surrender) by the Labour leader yesterday to demand another referendum where the Labour Party will campaign for Remain is a disaster and is another example of so-called progressive Left political parties defying the wishes of the voters in favour of corporatist, neoliberal elites.

The London Cosmos all quote the fact that 70 odd per cent of people who voted for Labour in the 2017 election also voted to Remain. Apparently, this means the Labour Party is a Remain party.

But they ignore the fact that in the House of Commons, democracy plays out along the lines of One vote per Constituency (or MP).

The concentration of votes within constituencies is not the foundation of democratic organisation in Britain. The distribution of MPs is.

The relentless push for Labour to change their view on the Remain/Leave divide has finally cracked the leadership.

Tom Watson (Deputy Leader) was recently described by Dawn Foster (Source) – as “a lifelong professional wrecker, who has made it his official duty to complain weekly to the Sunday papers, without suggesting any concrete proposals for how to bring the party forward.”

He has been undermining Corbyn’s position on Brexit ever since.

Most recently, he claimed the Labour Party had to become (https://labourremain.org/”>Source):

… the party of remain …

And after gushing on about how “the European Union that it stands up for the weak against the strong” (excuse me while I consult the ‘bucket’), the declaration makes it clear what the motivation is:

As the party of Remain, we will not take every voter with us, but it’s the only way that Labour can win

Pure instrumentalism. Crude vote-seeking.

All the statements of ‘principle’ are lost in this haze of opportunism.

And remember, Watson voted to invade Iraq – Blair’s disgraceful, lying assault on that nation.

He opposed demonstrations against UK airstrikes against Syria.

He didn’t have the fortitude to vote in the October 2016 attempt by the Labour Party to force the Commons to withdraw UK support for the Saudi assaults on Yemen which has murdered thousands of civilians.

He also abstained on voting against the Tory welfare policy in July 2015, which cut payments to the poorest people in Britain, particularly impacting on children (Source)

It was this vote – Corbyn voted against the second reading – that according to Dawn Foster “sparked a huge surge of support for Corbyn”. This shift really marked the end of Ed Miliband’s “austerity-lite” hold over the Labour Party.

Dawn Foster’s analysis of Tom Watson concludes that his Remain narrative is about undermining “the party leadership” although she finds very little evidence that his right-wing views are proliferating.

She says:

The electoral failure of the Independent Group/Change UK (or whatever the handful of remaining ex-Labour and Tory MPs now call themselves) should be a warning to the Labour right, but their self-confidence is far greater than their analytical ability.

The point is that by abandoning (in most part – Fiscal Rule aside) the centre-right Blairite, Miliband ‘austerity-lite’ mantra, Labour went close to winning the 2017 election.

Dawn Foster concludes that this is:

… because it addressed so many of the problems faced by people and communities across the country. Labour won more seats, in spite of people like Tom Watson and his ideological bedfellows. Many centrist Labour MPs desperately wanted the party to lose heavily so they could depose Jeremy Corbyn. They still do. A Labour government with Corbyn in charge is less preferable to them than an indefinite Tory government.

She urges to have the “guts” and “quit the party and try to prove that his ideas have electoral traction.”


… the end result of Watson et al’s constant attacks will not be electoral success under another Labour leader, but a Tory victory. And the people who need a Labour government to change their lives and communities are unlikely to forgive people like him.

I couldn’t agree more.

I last considered these matters in this blog post – The Europhile dreamers are out in force (April 15, 2019).

I will write about the Greek election tomorrow.

The decision to surrender on the Brexit issue and give credence to the disgraceful views of the likes of Tom Watson will be another chapter in the way social democratic parties defy their voters and, in doing so, ultimately, walk the plank.

The Syriza experience is demonstrative.

The Party kicked its own voters in the teeth and fell into line with the neoliberal Europhiles and the Commission. As I will write tomorrow, there is a long tradition in the neoliberal era of turncoat social democrats.

Two examples in the Anglo world:

Hawke/Keating Australia 1983-1996

Lange/Douglas New Zealand 1984-1989

These governments were elected on progressive reform platforms and turned neoliberal immediately. By the end of their periods in office they were electoral poison but had paved the way for the conservatives – making it easier for them to do more damage.

British Labour have had two periods like this – the Callaghan-Healey years before Thatcher and then the Blair years.

Democracy has a habit of biting back when it is trodden on.

The decision to support a second referendum damages democracy. It overturns the 2016 choice which was hardly ambiguous.

I think it will also turn against Labour generally.

As Peter Ramsay (Professor of Law at LSE) wrote earlier this week (July 8, 2019) in his article – A second referendum would be Labour’s route to Syrizafication – the decision:

… will certainly make Tony Blair’s political divorce of the party from Labour’s working-class traditions irreversible.

What we have is obvious.

1. June 2016 – Leave wins the vote. Clear cut. A heavy working class Leave vote and a majority of Labour MPs represent Leave electorates.

2. The Remain gang – higher income etc – hated it. Immediately wanted to undermine it. The Leave voters were ignorant, racist, stupid etc.

3. The Remain gang had bombarded the population with spurious modelling about the economic disaster that would immediately follow. The predictions were never realised.

4. Since then – by hook or by crook – they have demanded a new vote – and will keep demanding votes until they get what they want.

5. That is not democracy. That is a bullying cosmopolitan elite thinking they have superior wisdom to the working class in regional areas.

As Peter Ramsay points out:

More than 85 per cent of MPs in this Parliament were elected on manifestos promising to implement the 2016 referendum. This was not some minor policy issue. It was a promise to implement a major constitutional change that the majority of the electorate voted for in a referendum Parliament itself enacted.

So reneging on the 2016 vote means these MPs are no longer representing the people. Democracy has failed and Labour are surrendering within that failure.

His analysis of the likely electoral results of abandoning the 2016 decision are worth considering.

The most sensible analysis of the 2016 result was that the:

… working-class and poorer voters were much more likely than middle-class voters to vote for Brexit, and for good reason. They voted against a political system that had ignored their interests for far too long.

Which means that:

For Labour to go over officially to the side of elite resistance to Brexit will send a clear message that the demands of working-class voters are less important than those of the middle class or of big business.

This is what Syriza did.

But, of course, the so-called progressive Cosmos will be happy.

They prosper whether it is the Tories or Labour that are in national government.

And if Brexit fails, they get to avoid the queue at the airport (non-EU lane) on their next ski holiday to the Alps and they will be able to keep writing their vacuous and arid reform proposals for the EU – and lecturing us on how the EU is the only thing keeping Britain (a currency-sovereign nation) from total collapse.

As before you lot!

It is almost as if one should hope that Boris Johnson gets up and pushes a No-deal through.

Music for today

I was listening to a great album from 1969 while I was working this morning. Bobby Womack was the artist – see below.

This song – I’m in Love – was on that album.

This version, however, is sang by one of my favourite artists – Wilson Pickett – with one of my favourite guitar players – Bobby Womack, who also wrote the song.

Wilson Pickett released the song in 1968. Apart from the magnificent Hammond organ, you get Bobby Womack on guitar.

Bobby Womack said he wrote the song when he married Sam Cooke’s wife three months after Cooke had been shot dead at the age of 33.

Womack said he wanted to let the world know how he felt. He must have felt really good. The marriage caused him a lot of trouble though.

This song came out during Pickett’s period at Atlantic Records when he teamed up with Bobby Womack, who played guitar (mostly a Telecaster) on the recordings produced.

For a guitarist, this song is notable. Written in E major, it is marked by a full fret board use of so-called – Double Stops – that beautiful sliding harmonic sound you can here throughout the song and which were an integral part of 1960s R&B.

Bobby Womack also wrote the early Rolling Stones hit record – It’s All Over Now – but his own band with family members – the Valentinos (aka. the Womack Brothers) – first recorded it with Sam Cooke as the producer in 1964. You can hear it – HERE.


They just don’t write and play songs like that very often.

Aretha Franklin’s 1974 cover version – the most popular version – is pretty hot too – HERE.

And this is the original version from Bobby Womack – and is my favourite. It is on his 1969 album (one of my favourites – in a long list) – Fly Me to the Moon. Well worth having on regular play cycle.

It features the dual contributions of Womack playing all the frills on guitar and the brilliant – Reggie Young (who died earlier this year) playing the chord ornamentations. A near perfect combination. Reggie Young played on a lot of Elvis Presley recordings out of Memphis.

BOBBY WOMACK-i'm in love - YouTube

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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Last week’s (July 5, 2019) release by the US Bureau of Labor Statistics (BLS) of their latest labour market data – Employment Situation Summary – June 2019 – reveals a steady labour market with month-to-month volatility. The US labour market is still adding jobs, albeit at a slower pace than last year. The unemployment rate remains low (at 3.67 per cent) and the participation rate has moved up a tick, which is a good sign. It is also clear that there is still a substantial jobs deficit remaining and considerable scope for increased participation.

Overview for June 2019
  • Payroll employment rose by 224,000.
  • Total labour force survey employment rose by 247 thousand net (0.16 per cent).
  • The seasonally adjusted labour force rose by 335 thousand (0.21 per cent).
  • Official unemployment rose by 87 thousand to 5.975 million.
  • The official unemployment rate was essentially unchanged at 3.67 per cent (+0.05 points).
  • The participation rate rose by 0.1 point to 62.9 per cent but remains well below the peak in December 2006 (66.4 per cent). Adjusting for age effects, the rise in those who have given up looking for work for one reason or another since December 2006 is around 2,247 thousand workers. The corresponding unemployment rate would be 5.2 per cent, far higher than the current official rate.
  • The broad labour underutilisation measure (U6) rose 0.1 point to 7.2 per cent.

Further, for those who are confused about the difference between the payroll (establishment) data and the household survey data you should read this blog – US labour market is in a deplorable state – where I explain the differences in detail.

Payroll employment trends

The BLS noted that:

Total nonfarm payroll employment increased by 224,000 in June. Employment growth has averaged 172,000 per month thus far this year, compared with an average monthly gain of 223,000 in 2018. In June, notable job gains occurred in professional and business services, in health care, and in transportation and warehousing.

The first graph shows the monthly change in payroll employment (in thousands, expressed as a 3-month moving average to take out the monthly noise).

This month was more robust than the last two but still under the average of the last several years.

The next graph shows the same data in a different way – in this case the graph shows the average net monthly change in payroll employment (actual) for the calendar years from 2005 to 2019 (the 2019 average being for the first six months at this stage).

The red diamond is the current month’s increase.

The slowdown that began in 2015 continued through 2017 was reversed last year. The 2018 average was 223 thousand compared to 179 thousand in 2017.

So far the average for 2019 is 172 thousand. But within that lower first six month average is considerable volatility on a month to month basis (in part due to statistical factors such as new bench-marking).

To put the current recovery into historical perspective the following graph shows the average annual growth in payroll employment since 1960 (blue columns) with the decade averages shown by the red line.

It reinforces the view that while payroll employment growth has been steady since the crisis ended, it is still well down on previous decades of growth.

Labour Force Survey – employment growth remains positive

Employment as measured by the household survey rose by 247 thousand net (0.16 per cent) while the labour force rose by 335 thousand (0.21 per cent).

As a result (in accounting terms), total unemployment rose by 87 thousand but the unemployment rate was largely unchanged at 3.67 per cent (up 0.05 points).

The next graph shows the monthly employment growth since January 2008. The red line is the average labour force growth over the period December 2001 to December 2006 (0.09 per cent per month).

Summary conclusion:

There is still no coherent positive and reinforcing trend in employment growth since the recovery began back in 2009. There are still many months where employment growth, while positive, remains relatively weak when compared to the average labour force growth prior to the crisis or is negative.

There are also months where employment growth is negative.

A good measure of the strength of the labour market is the Employment-Population ratio given that the movements are relatively unambiguous because the denominator population is not particularly sensitive to the cycle (unlike the labour force).

The following graph shows the US Employment-Population from January 1970 to June 2019. While the ratio fluctuates a little, the June 2019 ratio was steady on 60.6 per cent. It has held this value since March 2019.

This indicates a very steady situation – employment growing in proportion with the underlying population.

This time last year it was 60.4 per cent. So a larger proportion of the working age population are now in work of some kind.

Over the longer period though, we see that the ratio remains well down on pre-GFC levels (peak 63.4 per cent in December 2006), which is a further indication of how weak the recovery has been so far and the distance that the US labour market is from being at full capacity (assuming that the December 2006 level was closer to that state).

Unemployment and underutilisation trends

The first graph shows the official unemployment rate since January 1950 which is currently at 3.67 per cent.

It is clear that the US labour market is reaching unemployment rates not seen since the late 1960s (it is slightly lower than the most recent low-point in April 2000).

With inflation stable, the continued low unemployment rates make a mockery of official NAIRU estimates of full employment coinciding with an unemployment rate of 4.5 per cent.

The official unemployment rate is a narrow measure of labour wastage, which means that a strict comparison with the 1960s, for example, in terms of how tight the labour market, has to take into account broader measures of labour underutilisation.

The next graph shows the BLS measure U6, which is defined as:

Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.

It is thus the broadest measure of labour underutilisation that the BLS publish.

In December 2006, before the effects of the slowdown started to impact upon the labour market, the measure was estimated to be 7.9 per cent.

In June 2019 the U6 measure rose 0.1 point to 7.2 per cent.

It is 0.6 points lower than this time last year.

The U-6 measure is marginally below the pre-GFC level but remains above the trough of the early 2000s when it was 6.8 per cent.

While it is signalling improvement, there is still some scope to go before full capacity is reached.

Impact of ageing labour force on US participation rates

It is clear that during the recession, many workers opt to stop searching for work because there was a dearth of jobs available.

As a result, national statistics offices consider these workers to have stopped ‘participating’ and classify them as being ‘not in the labour force’, which had had the effect of attenuating the official estimates of unemployment and unemployment rates.

These discouraged workers are considered to be in hidden unemployment.

But the participation rates are also influenced by compositional shifts (changing shares) of the different demographic age groups in the working age population.

In most nations, the population is shifting towards older workers who have lower participation rates.

Thus, some of the decline in the total participation rate could simply be an averaging issue.

I considered this issue in these blog posts (among others):

1. Decomposing the decline in the US participation rate for ageing (July 22, 2014).

2. Democrats in glass houses – you know the rest! (February 22, 2016).

3. Updating the impact of ageing labour force on US participation rates (November 7, 2017).

Refer back to these blog posts for the detailed methodology that I develop to estimate these impacts.

It is time to update my estimates.

The following graph shows the aggregate participation rate from January 1950 to June 2019.

The US aggregate participation rate peaked at 67.3 per cent in April 2000 (seasonally adjusted). Thereafter it has declined on trend with some reversions in between.

In June 2019, it was stood at 62.9 per cent, a considerable fall since 2000.

The question is how much of the decline is due to ageing and how much is due to lack of opportunity for jobs (a residue of the GFC downturn).

The next graph breaks the aggregate participation rate down into four age groups. The prime age (25-54) and the 20-24 groups have seen a tapering of their participation rates since the late 1980s.

There have been sharp declines in the participation rates for teenagers (16-24) since the late 1980s and a steady rise in participation rates for the over 55s.

The aggregate participation rate is a weighted-average of the participation rates of the different demographic groups. It is thus influenced by the shifting weights of its component parts (in this case, the age-weights) in the working age population.

These shifts in demographic shares of the working age population tend to be slow moving (trends) rather then cyclical.

But they certainly mean that movements in the aggregate participation rate is influenced by the compositional shifts (changing shares) of the different demographic age groups in the working age population.

In most nations, the population is shifting towards older workers who have lower participation rates even if these older worker participation rates are rising.

Thus, some of the decline in the total participation rate could simply being an averaging issue – more workers in the working age population who on average who have a lower participation rate.

That is, the participation rate could change without any underlying change in the behaviour of the different demographic groups.

To calculate the ageing effect, we will use three broad groups – young workers 16-24 years old; prime-age workers 25-54 years old; and older workers 55 years and over.

The behaviour of the individual age cohorts within the prime-age category (25-34, 35-44, 45-54) is very similar and researchers often reduce the complexity of the problem by aggregating them together with little loss of information.

The next graph shows the changing weights of the three groups in the total Working Age Population (WAP) for the US from April 2000 (the peak participation rate month) to June 2019.

We note:

1. The Prime-age demographic (25-54 year olds) steadily declines as a share of the total WAP over the period shown.

2. The share of older workers (GT55) in the total WAP started to rise steadily as the Prime-age persons moved into that category.

3. The US Youth participation rates (16-24), shown on the right-hand axis has declined over the same period.

The change in weights since April 2000 (to June 2019) are:

  • 16-24: -1.5 percentage points
  • 25-54: -8.0 percentage points
  • Over 55: +9.5 percentage points

Since the GFC (from January 2008) the change in in weights has been:

  • 16-24: -1.5 percentage points
  • 25-54: -5.2 percentage points
  • Over 55: +6.7 percentage points

So all the decline in the youth weight has come since the GFC whereas the trends for the other cohorts were already well established prior to the GFC.

As an aside, this information allows you to see how scaling on a vertical axis can provide a very misleading impression. The youth decline is very small relative to the changes in the weights of the other two age groups.

The decline in the Prime-age weight has been less than the rise in the Older workers share because the Prime-age category is experiencing flows at both thresholds – the youth flow in and the older Prime-age workers flow out.

Now we are in a position to answer our question: How much of that falling LFPR is due to the cyclical shifts and how much of it is due to the ageing of the population?

To answer this question we have to establish a benchmark period in history and then analyse the shifts in relation to that benchmark.

Once that benchmark period is established, we can use the following formula to decompose the changes in the participation rate into cyclical (effects of recession and boom) and trend components (ageing etc).

January 2008 is our benchmark, which was the period when the last cycle finished. We can calculate the weighted average in the following way.

Instead of using the current weights to calculate the actual participation rate:

Actual LFPR(t) = (w16-24 x LFPR16-24) + (w25-54 x LFPR25-54) + (wGT55 x LFPRGT55)

We would use so-called fixed weights, where the relevant weights (proportions in the population) are fixed at their January 2008 values.

In other words, we are then considering the LFPR behaviour for each group weighted by the share of the WAP as at January 2008. T

The formula would be (in this case):

Fixed-weight LFPR(t) = (w16-24_January_2008 x LFPR16-24) + (w25-54_January_2008 x LFPR25-54) + (wGT55_January_2008 x LFPRGT55)

where the term (for example) w16-24_January_2008 is the share of 16-24 years olds in the WAP as at January 2008 and so on.

Then the difference between the two calculations – Actual LFPR(t) and Fixed-weight LFPR(t) – tells us the change in the participation rate that is due to changes in the age distribution of the Working Age Population since January 2008.

We can then isolate what the participation rate would be without any changes in the age distribution and thus see the impact of the cyclical changes.

Here are some numbers:

1. The actual participation rate in January 2008 was 66.2 per cent. In June 2019, it had fallen to 62.9 per cent.

2. The following weights applied in January 2008: 16-24 16.1 per cent of WAP; 25-54 53.9 per cent; and over 55s 30.3 per cent.

3. By June 2019, these weights were: 16-24 14.6 per cent of WAP; 25-54 48.7 per cent; and over 55s 36.7 per cent. So, quite a shift.

The following graph plots the two times series – the Actual LFPR(t) (using current weights) and Fixed-weight LFPR(t) (using January 2008 weights and thus denoting what the LFPR would be had the weights not changed).

The green line is just the participation rate at January 2008. The differences between the three lines provides the decomposition between ageing factors (shifting weights in the working age population) and other factors (which we presume to be cyclical given what has happened in this period).

The differences between the three lines are interpreted as follows:

1. A to C – is simply the total change in the actual participation rate since January 2008.

2. A to B – is the difference between the actual participation rate at January 2008 and what the participation rate would have been had there been no changes in the demographic weights – it is thus the cyclical effect.

2. B to C – is the difference between the actual participation rate and what the participation rate would have been had there been no changes in the demographic weights – it is thus the ageing effect.

What does this mean?

1. The difference A to C is equal to 3.3 percentage points – which, given the Working Age Population in June 2019, represents an absolute loss of 8,550 thousand workers from the labour force due to the participation rate decline since January 2008.

2. If the population weights had not changed (that is, were still at the January 2008 benchmark) then the June 2019 participation rate would be 65.3 per cent rather than the actual rate of 62.9 per cent. This is the distance B to C and is thus 2.4 percentage points. This means that some 6,303 workers have left the labour force due to ageing (shifting weights).

3. That means that 0.9 percentage points drop in the participation rate is due to the cycle – some 2,247 thousand workers leaving the labour force due to a lack of employment opportunities.

These workers could be reasonably classified as additions to ‘hidden unemployed’, which suggests that they would return to the employed workforce if there was sufficient employment growth forthcoming. They would almost certainly work if a Job Guarantee was introduced.

4. The ageing effect thus accounts for 73.7 per cent of the decline in the participation rate, and the other (cyclical) effect accounts for 26.3 per cent of the decline in the participation rate since January 2008.

5. If we add the cyclical effect back into the labour force, and call these workers..

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When the governments in the advanced nations abandoned full employment as an overarching macroeconomic objective, and instead, starting pursuing what I have called full employability, they stopped seeing unemployment as a policy target (to be minimised) and began using it as a policy tool to suppress inflation. As mass unemployment rose, the politics were massaged by the mainstream of my profession who claimed that the level of unemployment that constituted full employment had risen (this was the NAIRU era) and so there was really no problem. Governments adopted the neoliberal line that they ‘didn’t create jobs’ and had to target fiscal surpluses to ensure their position was ‘sustainable’. The costs in lost income and human suffering have been enormous – most people would not have any idea of the massive scale of these losses that accumulate day after day. Now, it seems, the ‘sound finance’ school is going a step further. We are probably facing an environmental emergency in the coming period (years, decades) but the question commentators keep asking is not what we can do about it but ‘how can we pay for it’? So ‘sound finance’ has already destroyed the lives of millions of people around the world as a result of mass unemployment and poverty, now it is turning its focus on the rest of us. Madness. Paradigm change has to come sooner rather than later.

The mass unemployment problem

I discussed the shift from full employment to full employability in this blog post among others – A new progressive agenda? (September 28, 2010).

We also discussed the shift in policy approach to unemployment under neoliberalism in our 2008 book – Full Employment abandoned.

I also discussed the costs of unemployment in these blog posts (among others):

1. The daily losses from unemployment (January 13, 2010).

2. The costs of unemployment – again (January 13, 2012).

As a reminder, sustained unemployment imposes significant economic, personal and social costs that include:

  • loss of current output;
  • social exclusion and the loss of freedom;
  • skill loss;
  • psychological harm;
  • ill health and reduced life expectancy;
  • loss of motivation;
  • the undermining of human relations and family life;
  • racial and gender inequality; and
  • loss of social values and responsibility.

These costs are enormous and dwarf the measures that various governments have come up with to estimate losses arising from so-called microeconomic inefficiencies (such as transport systems not running on time etc).

When I last did these estimates I found that in the September-quarter 2009, the daily GDP losses that the US economy was enduring, for example, as a result of the decline in economy activity below it previous peak stood at $US10.3 billion per day.

So over one month, they were losing $US310 billion approximately and that was just in lost GDP from the lack of jobs.

If one added in those other costs identified above, then the daily losses would be much more than this.

Even under conservative assumptions, the economic and social costs of sustained high unemployment are extremely high. The inability of unemployed individuals and their families to function in the market economy gives rise to many forms of social dysfunction, in addition to output loss.

The apparent failure of neo-liberal supply side policies to reduce unemployment prior to the crisis is now highlighted during the crisis. There is now an urgent need to address the large pools of unemployment in world economies.

There is never a financial reason why currency-issuing governments should allow mass unemployment to endure in the way they have over the last three decades.

The first response that governments can always introduce, as a base case defense against these losses is a – Job Guarantee.

However, spurious arguments about governments not having sufficient ‘fiscal space’ or ‘fiscal headroom’ or ‘how are they going to pay for it’ and all the rest of the nonsense, has condemned citizens to unnecessarily endure the massive costs of extended periods of unemployment.

Our social concern for their welfare has been diminished because we have bought the ‘sound finance’ narrative that governments are performing well if they run fiscal surpluses irrespective of the situation, and, further, by the relentless divide-and-conquer strategies deployed to make it look as though the unemployed have ‘choices’ but are lazy and desire to be supported by the rest of us.

Neither part of the story is correct.

If unemployment impacted on more of us then the situation would be different for sure. It would be less easy to demonise the victims of the deliberate choice by governments not to net spend at levels that are required to sustain full employment.

When we come to discussions of climate change, however, we are talking about an issue that can impact on all of us, even though it is clear that poorer communities tend to be hit the worst by environmental degradation.

This is especially the case in poorer nations where their real resource bases have been pillaged by richer nations under spurious export-led growth strategies under the aegis of the World Bank and the IMF.

But it still remains that climate change is a global threat that cannot be as easily dismissed as mass unemployment in the neoliberal rhetoric.

The problem is that while climate change denial is rampant an even more insidious problem is that the ‘how are we going to pay for it’ ruse is alive and well in this debate, even among progressives who are demanding immediate action.

Climate action solution – plant some trees

I read an article in the latest edition of the Science journal (published July 5, 2019) – The global tree restoration potential – which was a research report written by Jean-Francois Bastin, Yelena Finegold, Claude Garcia, Danilo Mollicone, Marcelo Rezende, Devin Routh, Constantin M. Zohner, and Thomas W. Crowther, all of whom are associated with various environmental, biological, agricultural and forestry research institutions across Europe.

The article requires library access but the summary points are clear enough.

The authors note at the outset that:

Photosynthetic carbon capture by trees is likely to be among our most effective strategies to limit the rise of CO2 concentrations across the globe.

Accordingly – “The restoration of trees remains among the most effective strategies for climate change mitigation.”

The authors note that the current estimates in this regard suggest that “an increase of 1 billion ha of forest will be necessary to limit global warming to 1.5°C by 2050”.

The research question then is:

… whether these restoration goals are achievable because we do not know how much tree cover might be possible under current or future climate conditions or where these trees could exist.

They then “build models using direct measurements of tree cover (independent of satellite-derived models) from protected areas, where vegetation cover has been relatively unaffected by human activity.”

And then they “interpolate these “natural tree cover” estimates across the globe to generate a predictive understanding of the potential tree cover in the absence of human activity.”

They used “78,774 direct photo-interpretation measurements …. of tree cover across all protected regions of the world.”

They found that “about two-thirds of terrestial land, 8.7 billion ha, could support forest” which is “3.2 billion ha more than the current forested area”.

Around “1.4 billion ha of this potential forest is located in croplands (>99%) and urban areas (

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