There is no positive role for the IMF in its current guise

Most of my blogs are about advanced nations. Many of these nations are being plunged back in time by misguided applications of fiscal austerity and even when growth returns they will take a decade or more to get back to the per capita income levels that prevailed prior to the crisis. Many children and teenagers in these nations will be denied essential education, training and workplace experience by the deliberate choice by their governments to entrench long-term unemployment and to starve their economies of jobs growth. But it remains that these nations are not poor in general and while people are losing houses and other items on credit only a small proportion will starve. Not so the poorer nations that I rarely write about. These are the nations where a high proportion of the citizens live below or around the poverty line. These are the nations that are at the behest of the IMF and suffer the most from their erroneous policy interventions. Today I reflect on how those nations have been going during this crisis. The bottom line is that the way the Fund reinvented itself and reimposed itself on the poorer nations after the collapse of Bretton Woods in 1971 has damaged their growth prospects and ensured that millions of people around the world have remained locked in poverty. Along the way … children have died or have failed to receive the levels of public education that any child anywhere deserves. There is no positive role for the IMF in its current guise.

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The dead cat bounce – Latvian style

It is a holiday week in Australia – the cricket is on (not interested); the weather is good and it is virtually impossible to get a tradesperson to fix a new electricity connection. But who am I to complain when our fortunes are compared to the costs being endured in other nations where governments have deliberately followed policy trajectories which are designed to inflict damage on their real economies – in the mistaken belief that TINA rules. TINA (There Is No Alternative) is one of those neo-liberal ploys which hoodwinks citizens into believing that gross damage is better than really gross damage but which is really an agenda for retrenching the welfare state and freeing markets up for further private sector rape. There are alternatives to what is going on at present and it requires much stronger public sector intervention. I was thinking about this today when I was reviewing the latest data from Latvia which is now being held out as the “model” for the rest of Europe to follow. It is clear that eventually growth does return to these ravaged economies but that doesn’t validate the policy approach. It just says that business cycles cycle. The real way of assessing the alternatives is to compare how deep the policy-induced damage becomes and how long it lasts. The neo-liberal austerity line does not look good in that regard.

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Ex-IMF official still lost in the incredulous void

Sometimes ex-IMF officials shed the burden of having been associated with that institution and make a creative contribution to the public debate. More often they do not and continue to perpetuate the errors that underpin almost all of the IMF’s output. If there was ever an institution that has passed its use-by date it is the IMF. Today, ex-IMF Chief Economist Simon Johnson (now at MIT) claimed that the way to assess fiscal sustainability is “whether a country has the political will to raise taxes or cut spending when under pressure from the financial markets”. You can imagine what I thought of that criterion! Not much but it is too late in the year to get really flustered and I have been listening to some pretty good music this afternoon. So for all those readers who have written in saying “doesn’t Johnson have credibility” and “therefore is what he is saying sensible” I have three words – No and No.

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A full employment bill – sort of!

You know something is wrong when the unemployment rate in major holiday destinations persist at high levels. Typically, these areas have what economists refer to as seasonal unemployment – so that during the off-season (when the holiday makers are back home) there is very little labour market activity but once the vacation period begins there are many jobs and people. I have lived in various surf locations for many years and one such location had a steady-state population of 1000 or so residents and on Boxing Day this swelled to 25,000 and that new population endured for the ensuing holiday period (until the Australia Day weekend – January 26). Many of the surf crew and musicians would take jobs during this period and work very long hours (the surf was typically bad during the summer anyway) and use the savings to eke out an existence for the rest of the year – sometimes also accessing unemployment benefits sometimes not. The US Bureau of Labor Statistics published a bulletin (September 7, 2010) for the Cape Cod area which is one such major holiday region in the US. The situation there is dire and requires an immediate policy response from the US government. Unfortunately, this issue appears to be off the policy agenda. Well, until this week at least. A Democrat from Ohio has introduced a “full employment bill” which aims to eliminate the US central bank (good) and restore the US government’s currency sovereignty for keeps. The problem is that it goes down some dead-ends and avoids facing up to the real issues. So it is a well-motivated full employment bill – sort of!

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There is no such thing as a “weak” budget outcome

I imagine a doctor when confronted with a set of symptoms being presented by a patient carefully goes through each one and draws on his/her bank of knowledge, understanding and experience to arrive at an interpretation. A patient that has been sick for some time and is in the early stages of recovery may still exhibit signs of stress and the doctor appreciates that and doesn’t ring any alarm bells. It seems that the same doesn’t apply to my profession. Members of my profession seem to jump on any bandwagon that arrives and which triggers their favourite narratives about excessive government spending and borrowing and all that sort of public misinformation. The most recent example of this came yesterday (December 21, 2010) when the UK Office of National Statistics released the latest data for Public Sector Finances (as at November 2010) which showed that British government spending continues to grow and tax revenue is still lagging. The press reaction and that of my colleagues was expected and as is typically the case way off beam. We can summarise the problem by stating that there is no such thing as a “weak” budget outcome. An economy can be weak but it makes no sense to say a budget outcome is weak unless you have an ideological bias towards some particular outcome.

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The bankruptcy machine

The so-called architect of the euro monetary system – died recently in Rome. I guess architects like to leave behind objects of style and beauty that also function well. There is a huge debate among architects about form and function and whether ornamentation is functional. Form follows function has been the catch cry of modernists in architecture and I am most familiar with the debate when it is applied to software development (and its architectural characteristics). Anyway, the euro architect has left behind a monetary system that neither has form or function. It is an ugly creation that is increasingly revealing its dysfunction. But try telling that to the EU leadership who have just finished another summit in Brussels, where I suppose the cuisine and setting was sumptuous and the wine was top class. And like all previous summits all that was forthcoming was further political rhetoric about the irreversibility of the euro and the political commitment to defend it. In real terms this translates into imposing a state of more or less permanent unemployment and austerity on millions of Europeans. Eventually the gap between the leader’s rhetoric and the underlying reality will become so wide the system will crumble. But in the meantime the EMU is a bankruptcy machine.

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Public infrastructure does not have to earn commercial returns

The Australian government released the business plan for NBN Co today which outlines the “cost-benefit” case for creating a monopoly wholesaler of fibre-based broadband services in Australia and investing some $A27 billion in public funds to create the network. The business case has been the focus of much political debate over the last year or so and as usual most of the debate has been conducted on a spurious basis – that is, the assumption is that the budget outlays proposed represent a “cost” to government and that by committing funds to this project the government is less able to “afford” other projects – presumably because there is some “budget balance outcome” that it cannot deviate from. Neither proposition is valid. While this blog has an Australian flavour the general economic principles apply to all national governments contemplating large-scale public infrastructure developments. The general point is that the provision of public infrastructure does not have to earn commercial returns.

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Falling unemployment is not necessarily good

I have been travelling for most of today and unable to write very much. But there were are few things I penned which might be of interest. I was sent a news report today which appeared in the local Fairfax press and related to yesterday’s ABS release of the detailed labour force estimates by region. This usually garners a lot of regional interest and the estimates are used by politicians, business groups etc to further their own vested interests. Rarely do any of the public statements that are made about this detailed data actually tell an accurate story. The news report in question was a classic case of this. What we should always understand is that the labour force framework is complicated and falling unemployment is not necessarily a good outcome.

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Cut spending and unemployment rises – surprised?

Today I was reading the latest labour force data released by the UK Office of National Statistics which shows that the British labour market is now contracting as the public sector job cuts begin. The British government continues to claim that to reduce unemployment you have to deliberately create unemployment. They believe that by reducing public involvement in the economy (which means in a macroeconomic sense – withdrawing spending which generates both public and private employment) the private sector will spontaneously erupt in a surge of growth. They are in total denial of the obvious fact that spending equals income and public servants spend in exactly the same way as private employees – by handing over dollars to shopkeepers around the land. When have anyone of you been asked by a cashier whether you are working in a government or private sector job before they accept your cash? Never! As the public jobs are scrapped in the hundreds of thousands, the loss of spending will damage the private sector who will react by reducing their demand for labour and postponing their investment plans. The only hope is that exports will save them but that is highly unlikely. When do the people rise up against these ideological zealots? But the fact that when spending is cut unemployment rises – is no surprise to me. It is a basic macroeconomic reality. The problem is the neo-liberals never let basic facts get in the road of their religious convictions (or bald-faced power grabs).

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Men and women with white coats needed

The next few days are very tight for me – travel and meetings. So the blogs might be shorter (cheers I hear!). The thing about blogs which I find interesting is that I normally have to write in a very tight fashion (for academic publication) and editorial discrimination becomes paramount. Whereas the blog is a flowing environment and the only limit I place is the time I spend per day. Within that time span I just type and what comes out comes out with only spelling corrections. The grammar is sometimes not as correct and hyperbole and colloquialisms are rife. But that is a liberating offset to my usual literary output each day. Anyway, I thought the quote of the day (actually December 10, 2010) was – The Eurozone in bad need of a psychiatrist. Well perhaps it is the leaders and their hangers-on who need this help. And when the shrinks have finished with Brussels and Frankfurt they can stop in at London on route to Washington. Canberra can follow sometime soon after. The problem is that we have a person-made mess that is relatively easy to address and yet the ideological straitjacket that has been imposed on the solution amounts to cutting the wound wider and deeper so the blood loss is even greater. Madness! And the rest of us go along with it and elect politicians who say they will whip us even harder. Bring in the men and women with the white coats! For everybody …

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