OECD predicts that pigs will fly

Its an amazing world where the neo-liberals go from one ridiculous economic policy failure (plan) to another as if we are totally without any understanding of what they are up to. The latest examples include the German talk about how growth oriented they are and their sudden concern for the youth unemployment emergency that they now say needs immediate attention. Of-course, this “emergency” has been staring them in the face for nigh on five years and is the creation of their policies. Now they cry crocodile tears and promise a few measly billion in structural assistance, which won’t even scratch the surface of the problem they created. And they have the audacity to think they have credibility. Another example, is the decision by the ruling elites in Brussels to give France, Spain, Poland and Slovenia a further two years to kill their economy and this is being constructed as lenience. So bash your economy to hell slighly more slowly than before and everyone is meant to think that is credible. Why do we tolerate these morons? Then we have the OECD who waste trees by producing their Economic Outlook, which came out yesterday.

I spent this morning giving a presentation and then a workshop for the public sector union in Sydney. It was interesting hearing the concerns of unionists who are under constant attack from job cuts and so-called “efficiency dividends” imposed on them by a misguided neo-liberal government yet feel a responsibility to keep trying to deliver the volume and quality of public service at a time when the demand for these services are rising as the economy falters.

The upshot is that I don’t have much time spare today after attending to other commitments this afternoon. But a few comments on the OECD’s latest – Economic Outlook will not go astray.

There is clearly a race between the OECD and the IMF as to which organisation can produce the most inaccurate forecasts. There is one rule of thumb that you might remember – when the OECD says something you can generally conclude it is wrong and probably the opposite is the correct position.

Both these organisations – the IMF and the OECD – were created to serve roles that are no longer relevant. The IMF was at the heart of the convertible currency system which was abandoned in 1971. So they had no relevance after that and the reincarnation has seen them become a neo-liberal heartland. It is now a pernicious, regularly wrong, highly damaging institution.

The OECD roots lie in the post World War II Marshall Plan to reconstruct Europe. The Organisation for European Economic Cooperation (OEEC) was established in 1948 to supervise the implementation of that Plan. It was considered important to form a co-operative European-wide agency that would ensure employment was high and living standards were increasing. The OECD emerged out of the OEEC and was formally established in 1961 with swathes of funding from the advanced nations. It was a Keynesian organisation.

Now its policy positions leads to the destruction of jobs, the degradation of working conditions for those who keep their jobs, and the reduction in living standards and the rise in poverty. In that sense, it has gone from being a highly progressive and important institution in rebuilding economies to an incompetent bastion of neo-liberalism.

As I have noted in the past, if there were any areas that governments can cut spending with little harm then it is in the support they give to the IMF and the OECD. I would withdraw all funding to these agencies and let them die in their own hubris and incompetence.

The UK Guardian article (May 29, 2013) – The OECD’s deficit fetishism will stunt growth – when all we need is houses – noted that the OECD advocates:

… nothing that would disturb the markets or the orthodox economic thinking that has characterised its response to the banking crisis.

Tied in a straitjacket of its own making, it only whispers how some of its 34 member countries might implement a series of technical measures, which it meekly says may provide support for jobs and growth “at the margins”. The recovery is what it is, live with it, seems to be the message.

That is of-course an understatement.

First, the OECD has been a major proponent of fiscal austerity and cannot resile from that.

They are now being more cautious in their language trying to fool us with statements like:

… the automatic across-the-board budget spending cuts should be made less harmful to growth …

I went looking in the document for how the OECD thought that cutting spending at a time when private spending cannot (and will not) support growth but found the proverbial – nought.

Dogma – two years ago they were telling us that there would be a fiscal contraction expansion. Not it is keep up the austerity but make it less harmful to growth.

What happened to all those private households and business firms that were poised to spend their heads off once they knew the government wasn’t going to slug them with massive tax rises to pay back the deficits? As you by realise, that (Ricardian) logic was just the stuff that comes from fertile imaginations from economists who spend their days (being handsomely paid) noodling out ever new ways to justifying cutting the net spending positions of government.

That is, when the spending is not going into the pockets of the corporate sector or into their own pockets via lucrative consulting contracts.

In my presentation to the unions today in Sydney, I recounted a conversation that came up at a meeting in Melbourne last week. I was confronted with the notion that the problem is the Welfare State. Oh, that!

My reply was that there was indeed a problem with the Welfare State – the problem is that there are two of them. One does what a sophisticated society should do and that is provide some semblance on income security to the most disadvantaged citizens and helps them achieve some sense of inclusion in a society besotted with material aspiration.

The other is the corporate welfare system – the bond markets, the subsidies and handouts, the socialisation of private losses, the consulting contracts and the rest of it. That Welfare State is the problem and should be eliminated immediately.

In the latest Economic Outlook, dot-point 6 in the Summary says this:

Countries should proceed with their structural fiscal consolidation commitments whilst allowing the automatic stabilisers to operate fully. In the United States, the automatic across-the-board budget spending cuts should be made less harmful to growth and a credible long-term fiscal plan needs to be put in place; in Japan, fiscal consolidation should commence in 2014, as planned, and a credible medium-term fiscal plan is necessary to maintain market confidence in the face of challenging debt dynamics; and in the euro area, structural consolidation should proceed at the slower pace planned and should by 2014 have reached a level that would lead to declining debt ratios in the longer term in the area as a whole and in most member countries.

So, the US is delicately situated right now with the worst of the sequestered budget cuts to come. The leading indicators are not very positive there at present. There is no certainty that private-led growth will continue or if it does be strong enough to significantly eat into the unemployment pool.

The US budget deficit should be a few percentage points of GDP larger.

The OECD acknowledge that the “the automatic and poorly targeted expenditure cuts in the sequestration that has now come into effect could have strong negative multiplier effects on demand, since they are concentrated on public consumption and investment which typically have stronger activity effects than other consolidation instruments”.

Surely, but any budget cuts will undermine growth and push unemployment up.

So the OECD gets itself caught in a mire of their own ideological making. On the one hand, they make out they want to promote growth but on the other hand, they cannot let go off their ideological obsession with budget surpluses.

In the case of Japan, the later discussion to this Summary Point is no more elucidating. The assertion is that “the unsustainable fiscal position will eventually affect financial markets and provoke a crisis of confidence.”

To which I say “blah blah” – we have been reading this assessment from the OECD (and the rest of them) for 20 years. The “eventually” keeps invoking fear but never comes.

There will not be a “crisis of confidence” in Japanese bond markets. The bond investors know a good thing when they see it. And if perchance the investors became saturated with public debt holdings, the government can simply instruct the Bank of Japan to up their purchases of government debt or just alter the law and stop issuing debt.

We read statements like “If market concern about very high debt levels starts to rise, yields on government bonds could increase, worsening debt dynamics considerably.”

Note IF.

Then “Delays in fiscal consolidation and the failure to establish a credible medium-term consolidation plan would risk provoking a change in investor sentiment and a run-up in borrowing costs.”

Note IF.

Then “Over the longer term, lower private saving and a shrinking external surplus due to population ageing could also force more external financing of deficits, with foreign investors demanding higher risk premia.”

Note COULD.

To which I say if the ageing population starts to liquidate its saving balances then it will consume more and the deficit will fall anyway.

And there will never be a reason for the Japanese government to issue debt in foreign currency. Foreign buyers might queue up to buy yen-denominated debt but the Bank of Japan has all the capacity it needs to control yields should that ever become an issue.

I discussed that capacity recently in this blog – The last eruption of Mount Fuji was 305 years ago. The bond markets are supplicants not drivers.

And what of the Australian assessment?

From Page 103, we learn that real GDP will slow to 2.5 per cent in 2013. As I have noted recently that means there will be a 4 to 4.5 per cent gap from trend output worth more than $A60 billion.

In this context, the OECD insists that:

The authorities need to gradually balance the public budget so as to restore fiscal leeway.

The governemnt should be expanding the budget deficit if its goal is to ensure people who want to work can find it.

If they take the advice of the OECD then they are deliberately creating even higher unemployment and underemployment. Why don’t they come out and say that?

The OECD claim that at present, the:

… still fragile confidence …. [is] … inhibiting the emergence of new drivers of growth.

That is true. But who would be confident when the government’s own budget is forecasting unemployment to rise and data such as today’s investment results show that private investment is falling sharply?

Once again you see the binds the OECD gets itself in. It cannot tell a consistent story because they cannot tell the truth. The truth is that if they want a balanced budget in the foreseeable future then they must think that higher unemployment that is already the case is desirable.

They know they lose all credibility if they admit to that. So they engage in this tortured logic. Who is responsible for that logic?

The Melbourne Age economics column today (from Peter Martin) – Do not fear a big deficit, says OECD – speculated how the OECD reports are significantly influenced by the Commonwealth Treasury.

We read:

The pronouncements of the Organisation for Economic Co-operation and Development are widely thought to reflect the views of the Australian Treasury. The Treasury stations an officer in Paris to work with the OECD full-time and consults closely with OECD staff when they visit Australia.

As an ex-Treasury official, Peter Martin knows that the OECD take direction from the local treasury and their country-specific outlooks never would contradict what the specific government wants us to hear.

And what we are confronted with is a Government mouthing its policy failure via the OECD’s words of caution.

Remember the – Mid-Year Economic and Fiscal Outlook 2012-13 – which was published by the Federal government last year (October 22, 2012).

In the Introduction to the MYEFO the Government said:

The Government is returning the budget to surplus in 2012‑13, notwithstanding a weaker global economy that has weighed heavily on tax receipts. Returning to surplus is appropriate given current economic conditions, with the economy forecast to grow around trend, the unemployment rate forecast to remain low and commodity prices remaining high by historical standards.

For example, in the national ABC Current Affairs 7.30 segment, the night the MYEFO was released – Federal Treasurer outlines economic outlook – the Federal Treasurer Wayne Swan was asked whether it was the Government’s intention to “return a budget surplus next year at any costs” said that pursuing a surplus was a sound fiscal strategy for Australia:

Because we think that’s the appropriate setting when your growth is around trend, when you’ve got low unemployment, when you’ve got a strong investment pipeline and when you’ve got contained inflation.

The Government was continually claiming that the economy is growing around trend and that there is low unemployment. Those claims have also clearly framed the federal budgetary process over the last two to three fiscal years. It has been the Treasurer’s regular mantra, sometimes augmented with the claim that Australia is operating at around full employment.

None of that assessment was remotely accurate. The fiscal austerity that the Government has been pursuing has undermined the growth process. Now the mining investment is going backwards – as was predictable two or more years ago and these public statements are changing.

First in the 2013-14 Budget. Now in the OECD Economic Outlook report. But as noted above – the source is the same.

Peter Martin also highlighted the OECD’s assessment that:

If activity worsens significantly, the authorities should not hesitate to ease fiscal policy so as to bolster demand.

But of-course they are still claiming that real output growth will bounce back to 3.5 per cent (it is currently approaching 2.2 to 2.4 per cent) in 2014 once all these private drivers of growth rebound.

We read that “Activity is likely to pick up to over 3% and close to potential in 2014”. That is a very curious projection given that the Government has forecast unemployment will rise to 5.75 percent over 2013-2014.

With rising unemployment, we will also see higher underemployment and hidden unemployment. The sum of those sources of labour underutilisation (unemployment, underemployment and hidden unemployment) is currently around 13.9 per cent.

That will rise before the June 2014. So to get back “close to potential in 2014” there would have to be a dramatic improvement in the labour market.

And pigs might fly!

Conclusion

As I noted at the outset. If the OECD says it – it won’t happen.

Modern Monetary Theory Event in Sydney, May 31, 2013

The Sydney University Political Economy Society in collaboration with the Columbia University Law School’s Modern Money and Public Purpose group is staging a special seminar – Macroeconomic policymaking for small, open economies: an Australian perspective – Friday May 31st, 2013 at the Lecture Theatre 123, School of IT, Sydney University.

This is tomorrow.

For full details consult the – Event homePage.

I am one of three featured speakers and my confreres will be Dr Sean Carmody and Assoc Prof Peter Kriesler.

If you are in Sydney on Friday and have some time around lunchtime then you would be most welcome. See the link above for details of registration (free) etc.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.