Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Governments are starting to realise that the recovery is slowing and the previous estimates of growth are probably overly optimistic. The IMF and OECD have been pushing inflated forecasts throughout the crisis because they cannot face the fact that the policies they have advocated caused the crisis in the first place. So, in denial, they want to make it look as if things are better than they are so they can get back onto their mantra – cuts in deficits, etc. The austerity packages are being introduced into an environment where the probability of a global double dip recession is rising by the day. But worst, are the shameless sense of priorities being rehearsed by economists and policy makers as they carve into welfare and pension entitlements, privatise valuable public assets (handing them over the “markets”) and increase unemployment. But then the mantra comes back – the forced extra pain won’t be as bad as we expect. So the international agencies and mainstream economists inflate the good things and reduce the significance of the bad things as a way of covering their grubby tracks. And all the while, these estimates and prognostications are based on economic models that failed to explain the crisis or its remedy. It is back to ground zero – and the pain will mount for the most disadvantaged.
I overheard a conversation between a poet and his wife, a mainstream economist. The poet is interested in all things beautiful which means, among other things, he embraces the aesthetics of humanity. He writes sad verse when humans suffer and is inspired when there is love and connection.
The mainstream economist considers humanity in an inanimate way – as a factor of production, as a consumer, as an entrepreneur – always connected to the market in some way which means the relationships that are focused on always leave a trail of money or not as the case may be.
The two have intrinsically different views about the meaning of value and the purpose of action. I can tell you that this pair end up unhappy together but the economist, at the threat of losing poet’s love, undergoes a wholesale personal transformation and discovers the meaning of value and it has nothing to do with what transpires in the market.
Anyway, here is a snippet of the conversation that followed a news broadcast that the bond markets were demanding harsher austerity measures to be introduced by national governments …
“Who is calling for these measures?”, the Poet asked with a hint of disbelief. He had a vague notion that growth was good for employment.
“The bond markets”, she replied, in a dismissive way, as if everybody would know that.
“The bond markets … are they people?”, he said.
“Bond traders invest funds in public debt”, she noted, without looking up.
“You mean the characters who invest the funds that the workers have saved?”, he said.
“The same”, came the reply.
“And don’t they skim off huge profits, commissions and management fees in the process”, he said, recalling a story he had seen on TV.
“They demand a market return for their efforts”, she said.
“But when they fail they get government help, isn’t that is what just happened”, he said, “And then they demand the government sack workers who have saved the funds that the bond traders trade.”
“Yes, when the risk gets too high they stop buying”, she said not really getting where he was heading.
“But the bond traders make money using our wealth”, he said, sensing that he was finally getting to the nub of his quandary about all of this.
“The bond dealers are not the evil ones”, she said by rote, giving a sense that she didn’t even believe herself. “They are like the canaries in the mine.”
“But why does the government issue debt anyway?”, he said.
“Because they are like you and me, to buy things we cannot afford we have to borrow, and we have limits”, she said, rehearsing her memory of the her intermediate macroeconomics textbook.
“They are not like us, they are in charge of the money we use”, he concluded.
But it won’t be that bad …
And at that point, we consider the article in The Economist Magazine (June 10, 2010) – Budget cuts in the euro area – Nip and tuck – which argued that “Europe’s plans for fiscal austerity are not quite the threat to recovery they seem”.
The essence of the article was that the wholesale budget cutting that is being undertaken throughout the EMU nations has spooked the bond investors who “now to fear that crisis has spurred too much austerity”.
Judged by the claims of those who welcome the new fiscal austerity, as well as those who fear it, a gigantic fiscal blow is about to land. The true picture is not quite so dramatic.
Their argument is simple: The nations making the largest cuts in discretionary spending have the lowest weight in overall EMU GDP. So, as an example, Greece will cut the equivalent of 11 per cent of GDP over the next two years but accounts for only 2.6 per cent of Eurozone GDP. If you look at the graphic you can see that Ireland is cutting discretionary spending by 5 per cent of GDP over 2010 and 2011; Portugal 5.6 per cent; and Spain 5.4 per cent.
So for these nations, the austerity programs will have harsh impacts on their economies and their labour markets.
This is the graphic that the Economist provides to back up their argument. For the EMU as a whole the cuts are only 1.2 per cent of GDP spread over 2010 and 2011.
The Economist concludes that:
That is big but not excessive for a block that is forecast by the European Commission to have an average budget deficit of 6.6% of GDP in 2010.
They also try to argue that the multipliers attached to these cutbacks are closer to zero than unity because consumers may save less and firms may invest more because they realise the fiscal situation is being fixed.
They cite economic research (the article they refer to is Alesina and Perotti, 1996 – Fiscal Adjustments in OECD Countries – Composition and Macroeconomic Effects, IMF Working Paper 96/70 – which you can only get in hard copy) that claims that:
… budget adjustments that rely on cuts in welfare payments or the government’s wage bill are more likely to produce lasting benefits – lower public debt and faster GDP growth – than those based on tax increases or cuts in public investment. The least harmful taxes were on firms’ profits or on consumer spending.
If you have read this paper you will understand how qualified the results produced are. The models they work with are pre-disposed to considering that welfare benefits and taxes undermine growth. These results are assertions and fail to stack up in sound empirical research. As a result, the empirical work they do perform is already biased by the incredulous theoretical models and so their conclusions are highly dubious. One can easily conclude that their results are basically meaningless. But it is an often cited article because it delivers the sorts of results that suit the neo-liberal agenda.
The Economist also concedes that:
Examples of such “expansionary fiscal contractions” are much harder to replicate now. Countries that managed to grow strongly in the past while cutting budget deficits were often aided by a falling exchange rate or were rewarded by a big drop in borrowing costs. Most rich countries today already enjoy low bond yields. And not everyone can devalue their currencies.
In fact, the examples of successful austerity programs which have delivered an early return to robust growth without leaving a trail of havoc behind are difficult to find. Of the countries cited (for example, Denmark in the 1990s) other factors not connected to the austerity measures were responsible for the return to growth.
The Economist supports the “certain kinds of austerity … [which] … are less harmful to growth” and include cuts to wages and entitlements (particularly public servants); cuts to welfare and unemployment benefits; cuts to pension entitlements; and job cuts in the public sector.
The conclusion that “Europe’s austerity drive could have been a lot worse”. So no mention of the massive job losses and the fact that long-term unemployment and poverty will rise. No mention of the fact that the demographic cohorts that have already borne the brunt of the crisis will get further hammered as governments cut back welfare and pension entitlements.
No, it just could have been worse!
So what is the agenda?
This article in the Sunday’s UK The Observer (June 13, 2010) – The Conservatives call it ‘pain with a purpose’. What purpose, exactly? – started to ask the correct questions.
The journalist William Keegan (former Financial Times economics correspondent) asked:
Is a crisis brought about by deregulation just what the Tory doctor ordered to put “welfare recipients” in their place? I would like to think not. But I wonder
Keegan muses that while the mainstream are arguing for austerity to repair the ailing economies overburdened with public debt – exemplified by the new Tory PM’s slogan – “Purpose behind the Pain” – this sort plea has been “the rationalisation of sadistic masters throughout the ages”.
He gets a little lost when he concludes that the period during which the previous Labour government was frugal (when Gordon Brown was the chancellor) – “the long period of rectitude” … “meant that Britain was still better placed than many other industrial countries on the eve of the crisis – by the criterion, for instance, of net debt as a proportion of GDP”.
Britain is a sovereign nation that issues its own currency. It past “rectitude” gave the government no more or less capacity to defend the economy via expansionary fiscal policy when the crisis came. Past budget positions and debt ratios are irrelevant.
There might be a case made that is is easier politically to expand fiscal policy when the public debt ratio is low but that is not based on any intrinsic financial constraints. And one would have to wonder how Japan gets away with it year after year anyway.
Despite that misgiving, Keegan promotes the line that the deficit terrorists are dangerous:
Only last week, amid the chorus of deficit hysteria, Darling pointed out that, without economic growth, neither the borrowing nor the debt would come down, and “there is absolutely no sign that this government grasps that”.
On the contrary, we have a coalition of Thatcherite Conservatives – thinly disguised by a carapace of “care” – and Manchester Liberals. It is misleading and injudicious for Osborne to compare the UK’s position to that of Greece. Greece had to “roll over” its debt within months. The British government’s debt is longer term, with what is known as a healthier “maturity distribution” than the vast majority of industrial countries. Moreover, much of the debt is owed not to foreigners but to ourselves.
First, the message is that the austerity will be harsh.
Second, Keegan’s criteria for differentiating the UK from Greece are not the differentia specifica which sets the two nations apart. Greece is a non-sovereign nation that cannot set its own interest rate, issue its own currency or float its exchange rate. The UK is fully sovereign in that respect.
So the question then is if the austerity (“atmosphere of fiscal masochism”) is going to be damaging is there some broader purpose to it?
Keegan says that:
Is Pain for a Purpose what the right wing of the Tory party is traditionally suspected by the left of wanting? Is a crisis brought about by deregulated bankers just what the rightwing doctor ordered to put “welfare recipients” in their place?
So the neo-liberal attack on welfare and unions and the public sector over the last three decades (variously) was damaging but not emphatic. Public sectors survived and welfare states resisted widespread retrenchment. Now we have the situation that a major economic crisis brought about by the near-collapse of the financial system is being used to finish the agenda off.
If you think about it for any more than a nano second you will wonder why we are all being duped.
You have a period of vigorous promotion of the self-regulating capacities of the “market” and intense lobbying of governments to relax long-standing rules that protected the financial system from excess and meltdown. The lobbying was universally successful and the regulations tumbled.
Then the excesses started appearing and a few economists (including the Modern Monetary Theory (MMT) camp) started to ring the warning bells (like, back in the late-1990s!). But the lobbying continued and the bell-tollers were vilified in various ways by the arrogance of the mainstream economists.
They even coined terms to describe how the business cycle was dead – please read The Great Moderation myth – for further information.
The strutting arrogance of my profession was something to behold as the underlying conditions for the crisis were being created by their policies.
Then it crashed and the hands of those who had been the most vociferous opponents of government fiscal initiatives were quickly held out to receive their bailouts. Many of the large banks that are once again highly profitable would have gone under had not the governments provided the fiscal support.
A much deeper crisis that the one the world is already enduring was prevented by fiscal intervention – the type hated by the neo-liberals. Once the financial interests and their support clubs (Peter Peterson Foundation etc) realised they were safe they unleashed a massive and on-going campaign of deficit terrorism.
Virtually nothing has been done to reform the banking sector. We are still essentially operating with the regulative environment that brought us unstuck. There is a massive resistance in all nations to any changes which would stop the free-wheeling bankers from getting as much of the real output as they can.
This article in Sunday’s UK The Observer (June 13, 2010) – Banks are carrying on while the rest of us pay the price – picks up this theme that nothing has been done
The writer Ruth Sunderland says:
… the banks are quietly going back to business as usual, while customers and taxpayers suffer. Despite their disgrace, the banks’ well-oiled propaganda machines continue to spin their lines that the finance sector services the productive economy, is the major contributor of tax revenues to the Treasury, and that it is a significant engine of job creation.
She reports research from the University of Manchester that showed that only a small proportion of overall bank credit was extended to productive uses (manufacturing etc). Most credit extended went to speculative and housing.
Further, the research shows that “even in a finance-led boom the sector created no net new jobs. Direct employment in finance hovered around the 1 million mark, less than half that in a weakened manufacturing sector – and most of the jobs it does produce are concentrated in London and the south-east”.
Finally, “the finance sector … contributed just 6.8% of tax revenues between 2002 and 2008, just over half the amount paid by manufacturers”.
She notes that “banks are meant to serve a socially useful function by channelling savings into productive businesses but they lost sight of that. Radical restructuring is needed to separate their genuine utility functions need from their gambling activities”.
So it is no surprise that they are pushing austerity campaigns hard which will see real wages fall and more of the real output available for profits. The temporary dip in real GDP growth will be seen as tolerable because once growth resumes the new distributional shares will be entrenched and channel an increasing volume of real GDP to the financial sector for their (excess) consumption.
Keegan notes that the famous Lord Robbins who led the charge in the 1930s promoting what was then called the Treasury View (and which Keynes attacked in his General Theory and other writings) subsequently concluded that:
internal deflation was the only way to cope with a fall in demand” – but later regarded this as a “fundamental misconception”.
But it just got worse …
But it is getting worse. It is no surprise that the outlook for the UK is worse than expected. This report in the Sunday UK The Observer (June 13, 2010) – Office for Budget Responsibility likely to sound note of gloom – says that the Treasury estimates for growth in 2011 will be revised downwards.
The media has represented this story only in terms of “making reducing the deficit tougher”. In the stories I read about this I didn’t see one reference to rising unemployment; larger numbers moving into long-term unemployment or lost incomes arising from stagnant growth.
One representative commentator (bank economist) said that:
The OBR could forecast that borrowing by 2015 will be up to £20bn higher. This would clearly raise the pressure on the government to take some fairly drastic action in next week’s budget …
So the logic goes like this.
First, the budget deficit has risen because growth has been negative and worse than any period for years. The automatic stabilisers built in to fiscal policy have worked to attenuate the collapse in aggregate demand and save millions of jobs.
Second, given the governments are coerced by faux notions of fiscal discipline that the neo-liberals have promoted once the Bretton Woods system collapsed in 1981, they have developed elaborate institutions to handle public debt. So they issue debt $-for-$ to match their net spending (deficits) despite the fact that most governments are never revenue constrained because they issue their own currencies.
Third, the rising public debt ratios then become the focus of the deficit terrorists. A full-scale assault then ensues which creates the political environment where governments get elected if they promise to implement harsh austerity packages which turn fiscal policy into a weapon against all the economic parameters that we associate with improvement – growth in output, incomes and employment; reductions in unemployment and poverty.
Fourth, then it turns out that the fiscal contractions lead to worse real GDP growth outlooks that were initially expected (surprise surpise).
Fifth, the result? Even harsher public net spending cutbacks are demanded.
Meanwhile, none of the terrorists are arguing that the bankers should be held to account and new protections introducted to curtail the excesses of the banking sector.
And we briefly return to the conversation:
“But the government cuts will cause more workers to lose their jobs”, he said, trying to relate the issue back to his value of humanity, “and then they are calling to cut the protections that we give the unemployed”.
“It is necessary to realign the budget parameters”, she said.
“Will the bond traders lose their jobs and lose their protection”, he said, and added “I read that the bankers are now making record profits”.
“No-one likes anyone losing their jobs”, she replied, “but what do you mean by “their protection?”
“Well didn’t you say the bonds that the government issues give the bond traders a risk-free asset?”, he said, “that is protection”.
And, continuing, he said, “And the government provided plenty of spending to save the jobs of the bankers”.
She replied, showing signs of being a bit disoriented by the lateral thinking that wasn’t in the textbooks, “The government has to issue debt”.
“No they don’t, they issue the currency”, he said (having just read a MMT blog), “So the bond traders will continue making record profits, using the funds that the workers saved, but want the workers who saved the funds in the first place to be unemployed and their unemployment benefits cut”.
“The governments have run out of money”, she retorted, now thoroughly disoriented.
“No they haven’t, they control the money”, he said.
“They would just cause inflation”, she said.
“But the financial news said that we have problem of deflation. Isn’t that the opposite of inflation”, he said.
“The bond markets are just the canaries”, she said.
“Then they should be kept in cages”, he said, trying to be empathetic to the values his wife was displaying. Never for one moment would the poet want a free bird caged. He cared.
The agenda ahead is clear. The conservatives are pushing austerity for all they are worth because they see it as an effective vehicle to finish of their “program”.
For three decades, the neo-liberals have been trying to undermine the welfare state and reduce the size of the public sector. They have had considerable success in this “program”. But they were not fully successful and important social protections still remain.
Now they have the opportunity to exploit this major economic crisis which their market-oriented policies created in the first place to complete their demolition of their agenda.
We have to encourage more poetry!
That is enough for today!