The transitory view of the current inflation episode is getting more support from the evidence.…
The European Commission non-stimulus is a waiting game before new austerity is imposed
Things are a little odd when a Minister for Finance & Public Expenditure and Reform of a nation (Ireland) informs the press that if his government isn’t cautious in its fiscal response to the largest medical and economic crisis in a century then the “bond vigilantes” will turn on them. And this is in the context of governments around the world issuing long-term debt at negative interest rates and the relevant central bank is buying billions of government bonds with its currency-issuing capacity. But that is what the Irish Finance Minister did last week ((Source). Fear of God strategy Number 1. That still works in god-fearing places. He referred to the “the fiscal architecture we are anchored in within the euro area” which will ultimately impose Excessive Deficit Procedures as the medical crisis eases (see his April 23, 2020, Speech on Stability Programme Update). Code for a renewed bout of austerity once people have stopped dying. A wonderful prospect. And while currency-issuing governments around the world are introducing variously large direct fiscal stimulus packages (that is, spending going into the economy immediately), the European Union is once again demonstrating their inability to respond to crisis. Nothing has been learned from the GFC.
The IMF is currently keeping a – Policy Tracker – currently for 193 countries, which I think is a useful source of information – collating all the various ways in which governments are using fiscal and monetary policy to deal with the coronavirus crisis.
It is a fairly time-consuming task to go through all the responses but it is clear that the EU is lagging badly behind the non-EU nations in terms of direct stimulus.
When we consider fiscal policy actions, several criteria emerge that allow for assessment of effectiveness.
I will write a bit more about that later this week as I get close to releasing a 10-point plan (which might have more or less than 10 points).
When assessing the likely effectiveness of a fiscal policy initiative, we can consider the following dimensions:
- Implementation Speed – How quickly can the spending enter the economy? For example, an initiative that seeks to build a fast rail service down the East Coast of Australia to join, say, Brisbane and Melbourne, would take longer to get dollars in to the economy than an announcement that the government will offer a job to anyone who wants one (Job Guarantee). To arrest the severe fall in non-government spending and income generation, speed is essential. It doesn’t preclude medium-term projects, but the government has to be careful not to have large expenditure streams coming on tap after the economy is already recovering and no longer needs the temporary fiscal support.
- Labour Intensive – Does the intervention target activities that generate lots of employment? With employment growth slumping so dramatically, it is best to target activities that will arrest the employment contraction as substantially as possible.
- Multiplier – How much of the initial spending injection stimulate what economists call ‘multiplier effects’, that is further non-government spending. For example, giving low-wage workers cash payments or sustaining their wages, is likely to result in a high proportion of each dollar being spent on consumption goods and services. Conversely, giving loan guarantees to businesses at the time when the economy is entering a deep recession is unlikely to have strong multiplier effects because the latter rely on spending stimulating output and employment.
- Spatial – Does the option provide benefits to regions or the social settlement or is it biased to certain spatial locations, especially those that already have relatively deeper labour markets (more job opportunities).
- Green – Does the intervention help us move towards a carbon-zero world?
- Supply-chain – Is the intervention likely to run up against supply bottlenecks and introduce demand-pull inflationary pressures. This is particularly relevant in the current crisis, which is a combination of a supply and demand shock. Where factories are closed and/or operating on reduced activity levels, it is essential not to be pumping fiscal support into the economy indiscriminately. All spending initiatives will stimulate broad expenditure growth, including for imports. But a carefully designed package can reduce the supply-side strain. For example, in Australia at present there is likely to be some food supply issues as farmers struggle to get workers to harvest the crops (relying typically on ‘back-packers’) with international borders closed. So a stimulus to create temporary public sector jobs for workers locked out of their usual jobs (because of enforced closures) to help ease the supply chain issues would be desirable.
- Equity – this relates to fairness. Handing out billions to help shareholders withstand the losses to their companies is likely to be less equitable than ensuring low-paid workers are able to sustain their mortgage/rent and other contractual commitments.
- Corruptibility – this is what economists call ‘moral hazard’. How easy is the option able to be hijacked by those seeking to corrupt the intent. For example, a wage subsidy is highly susceptible to abuse from unscrupulous businesses (there is an extensive research literature on this) whereas paying the salary of a worker directly or offering then a public sector job is less likely to be corrupted.
The following graphic shows these options.
A position at 0 means the initiative meets none of the requirements or the relevant criterion, whereas 100 means the intervention is strongly meeting that need.
I have compared four options:
1. A wage subsidy.
2. A Job Guarantee.
3. Deferred charges for business (tax deferrals etc)
4. Business loan guarantees.
My weightings are approximate and open to debate.
But the superior option here is the Job Guarantee when assessed against the above criteria.
The European Union non-stimulus
Now how does Europe stand up in this regard?
Not very well is the short answer.
The President of the European Commission Ursula von der Leyen told the press after last week’s disastrous and divisive European Commission meeting that:
… we are not talking about billion, we are talking about trillion …
I know there are different ways to measure billions and trillions (depending which nation one lives in) but really!
If you do one of those replace letters one at a time to get a new word, it doesn’t take long to get von der Lying (sort of)!
The detail so far released doesn’t even equate to many billions and certainly not in terms of direct stimulus.
First, the Commission is to create a ‘recovery fund’, which appears to be a credit line – that is, loans to crisis torn nations which will have to be repaid.
The interminable debates within the Commission, which always constrain quick action, reflect the massive differences in viewpoints to Europe among the Member States.
While they talk of solidarity, the reality is anything but.
As the world sinks into the deepest crisis in more than 100 years, we have had a succession of demonstrations of what is wrong with the structure of the European Union.
A few weeks ago, we witnessed the ‘coronabonds’ saga, which countries like France leading the way with proposals to have EU-level debt instruments with joint responsibility, which would, in effect, result in permanent transfers to the weaker nations.
With a crazy system, this is effectively the only way forward for them.
But the Dutch put the brakes on with that proposal.
This debate has now morphed into the ‘grants versus loans’, ‘conditions versus no-strings’ and once again the Dutch and other Northern European nations have put the end to any notion that the southern states would be given significant grants to help them in this time of need.
The EC President told the media after the meeting that they were going to temporarily (few 2 or so years) increase the EU ‘budget’ to 2 per cent of union-wide Gross National Income – that is, hardly at all.
Less than 1 per cent of GDP (about 0.6 per cent).
What will this recovery fund provide?
France, Italy and Spain have demanded the Commission provide grants – cash transfers that do not need to be ‘paid back’ – to the weakest nations, that are in rapid decline.
The record of the meeting suggests that German Chancellor claims that handing out grants to beleaugured nations:
… do(es) not belong in the category of what I can agree …
And it appears that any ‘grants’ that were made (albeit miniscule) would come with ‘conditionality’ – the usual structural reform flim flam – cutting pensions, abandoning job security, cutting wages etc. The usual stuff that these characters dream up on a daily basis.
I also would not expect the Commission will be able to get an easy agreement between the Member States about the size and distribution of these grants.
For example, it would make sense to give the cash to Italy, Spain and countries in the worst shape both in terms of their economies and the scale of their health problems.
But, better off nations such as Germany is likely to demand grants.
Areas such as Saxony have high levels of child poverty and general poverty.
Last year, the Paritätische Wohlfahrtsverband released their – Der Paritätische Armutsbericht 2019 or ‘Poverty Report 2019’, which found that the “Ruhr region in the western state of North Rhine-Westphalia” was mired in poverty (poverty rate 21.1 per cent) and 95 regions surveyed demonstrated increases in poverty rates by 20 per cent over the last 10 years.
So while the German government blocks financial help (grants) to troubled European partners, they are also content to run large fiscal surpluses, which undermine the prosperity of their own citizens.
We expect that the German government, exhibiting their usual hypocrisy, will be out in force to get their ‘share’ of any grants that are handed out, therefore, largely defeating the need for substantial redistribution of financial resources between the Member States (from North to South basically).
The rest will come in the form of loans and guarantees as will the so-called “€540bn rescue package”. that the Finance Ministers were claiming a few weeks ago, was the practical expression of solidarity.
It was mostly credit lines administered via the European Stability Mechanism (ESM), which involve highly conditional loans – austerity-inducing conditions.
Only a small amount was allocated for direct interventions that might help fund workers’ wages if lockdown dictates prevented them from working. But even then this support was in the form of a “temporary loan-based instrument (SURE)” (Source).
The actual immediate fiscal spending intervention is close to zero.
Guarantees and loans for private investment projects in times of severe economic distress are poor fiscal options.
Firms who face collapsing sales are hardly going to want to become further indebted when they face insolvency.
The process of handing out loans is also cumbersome and money may not flow for some months or even into 2021 if any firms choose to draw on the credit lines.
The crisis is now.
Jobs are disappearing now.
A major fiscal intervention is needed now.
Other nations understood this.
The European Commission clearly has not.
It prioritises its ‘process’ and ‘bureaucrasy’, all designed to do very little but to look as if it is actually doing lots (‘trillions not billions’ sort of smokescreens) – over the urgency of the situation.
The European leaders know they cannot agree on important things that deliver prosperity to their citizens. So they play this charade – late night urgent talk fests, lots of coming and going, grand statements about solidarity, and then – a report is commissioned to come back in a few weeks or months – problem deferred. Everyone saves face. No-one admits the whole scam is a massive failure.
In effect, the Commission is looking the other way while the ECB funds the deficits of the Member States – they are all playing along with charade that this intervention is for ‘monetary policy’ purposes.
They know full well that the ECB is effectively funding Member States in violation of the Treaties, even though they have cooked up a European Court of Justice ruling sanctioning the activity.
And when the health crisis is over, the technocrats will be back in force with the Excessive Deficit Mechanisms – punishing the nations severely who had to go the hardest to stop their economies and nations from total collapse.
And as the inadequate GFC response by the European Commission that left millions wallowing in unemployment pushed a proportion of the population away from the ‘European dream’, the current response is accelerating that trend.
In March 2020, the Tecnè opinion poll on European Union membership approval published on April 12 shows that:
1. Remain – 51 per cent (down 20 points on November 14, 2020 poll)
2. Leave – 49 per cent (up 20 points)
3. 67 per cent of Italians questioned in the survey found “EU membership to be a disadvantage”.
Why is this happening?
Because all the weasel words about solidarity will not alter action and the European Union’s response has been pitiful and constrained by the historical and cultural conflicts that have created the flawed European governance models.
No end of late night summits will cover that failure.
There is limited solidarity in the European Union and the self-styled ‘Hanseatic’ nations, ultimately, will not budge to create a more effective fiscal sharing economy across the currency union.
That is why nations such as Italy should reintroduce their own currencies.
The point is that it should be obvious to all that the European Union has run its course and been exposed as a failure.
I think this Bloomberg analysis – Coronavirus Has Exposed the EU’s Creeping Irrelevance (April 25, 2020) – is on the right path.
The author writes:
The Holy Roman Empire also failed to resolve its internal rivalries, especially between Prussia and Austria. Similarly, the EU today is divided by bitter rifts between north and south, west and east. If anything, today’s divisions cut even deeper, because Europe also defines itself as a beacon of democracy, human rights and rule of law. If members become “illiberal,” the EU loses its raison d’etre.
Then cites Orban in Hungary, the refugee crisis in 2015-16 and while all the solidarity rhetoric is about ‘convergence’, the reality is that the EMU has:
… led to “divergence and polarization” between a core of export powerhouses like Germany and a periphery of debt-financed laggards like Italy. A full fiscal union with massive redistribution might fix this, but won’t ever happen, because the core countries reject it.
The Irish Finance Minister is correct in one thing – the European Commission will be champing at the bit to get those Excessive Deficit Mechanism procedures going as soon as they can.
That is the DNA of this operation.
Technocratic processes that lead to austerity and hardship for the citizens, while the ‘leaders’ (euphemism) and technocrats enjoy high pay within their golden cage in Brussels.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
This Post Has 16 Comments
I would add direct spending to areas with minimal leakage to imports.
> I will write a bit more about that later this week as I get close to releasing a 10-point plan
You’d better get a shift on. At this rate, we’ll be out of the crisis and into some version of Business As Usual before you are ready. Many countries are implementing or planning ‘Phase 2’, which will involve some optimal combination of increased death rates and permantently down-shifted growth curves, both of which will amply justify a further ratcheting of austerity policies.
“So a stimulus to create temporary public sector jobs for workers locked out of their usual jobs (because of enforced closures) to help ease the supply chain issues would be desirable.”
The British government did that because there are spring crops rotting in fields right now. There were, from memory, something like half a million people who indicated interest in the scheme. But when the jobs started to be handed out only a few hundred turned up and half of them only lasted a day. The government had to charter a plane to fly in workers from Romania.
“But when the jobs started to be handed out only a few hundred turned up and half of them only lasted a day. The government had to charter a plane to fly in workers from Romania.”
What actually happened is that the farmers adverts wanted people to commit for four months, and when that didn’t happen for obvious reasons they got the people they actually wanted – cheap East Europeans already organised under a Gangmaster.
As usual nobody forced the farmers to adapt, invest or train. Now if we’d put everybody on a guaranteed job and shipped them to the fields *and* told the farmers that’s all they were getting this year we might have seen a different outcome.
As usual nobody forced the farmers to adapt, invest or train.
Exactly, either they invest or forget about growing them. In the future We can import them. Let other countries do the picking in exchange we can give them blips on a spreadsheet or include them in the ways and means account balance.
“Code for a renewed bout of austerity once people have stopped dying.” An apt phrase that captures not only EU intentions but surely also the intentions of all neoliberal governments and institutions. Our challenge, in the face of seemingly-impossible odds, is not to “renew” austerity and ecocide in our respective nations and our entire global civilization but rather to receive the strange and unexpected “gift” of this pandemic, which has most painfully paused the spinning of the neoliberal gerbil wheel–to recognize this pause as an unprecedented, perhaps providential opening for that evolution/revolution of the human species we’ve dreamed of and longed for–and many have died for–since the days of ancient empires. Are we up to it? Only if we summon our wills, beyond all calculation, beyond the reduction of historical reasoning and its realpolitik, to believe that human moral and spiritual progress can and must happen. Yes, even with that existential move, the seizing of this opportunity is a long shot. But without that move, the opportunity has already been squandered. Inner work, my friends, inside each of us as things continue to fall apart, is what is first called for, called forth, in this hour. And rest assured I struggle with this day by day as much as anyone.
I look forward to the day when the business of macroeconomics becomes a detailed debate/discussion about the best forms of fiscal policy for public purpose (as Bill does above) rather than about the pros and cons of public debt to gdp ratios and the power of the bond vigilantes.
We don’t need 10 points programs. As reported by SMH, in NSW there is one point stimulus plan – spend $500 million on the house price guarantee. They (Land and Housing Corporation) want to buy unsold apartments. They also want to build 660 so-called social housing units in 2 stages. This will help maintaining tight control over house prices and rents by not allowing them to fall.
This is what Australian economy is about – blowing an ever bigger housing bubble, preventing a collapse in the underlying price of residential land which is one of the highest in the world, despite Australia being such a sparsely populated continent – by controlling the supply of residential land. We can loose manufacturing and high education sector but big and small “investors”, what includes all the baby bummers who vote for the Liberals, must have their so-called wealth maintained. Quite recently, before the corona crisis, renting a room far away from the centre would cost $200 per week. (I am not talking about the illegal rental market where people are crammed in small units, this sub-sector has a different pricing structure).
Who is going to “pay” for this? Recently, the RBA started setting yields on debt instruments issued by individual states. The residential land buyback schema is therefore going to be financed in the usual way by the consolidated government sector.
At the same time, the federal so-called government of Australia is doing whatever the mad bleach drinker has demanded – offending and upsetting the Chinese. What will happen with the exchange rate of the Australian dollar if the Chinese impose sanctions the Australian government is asking for? Well I would say the same what happened with the exchange rate of the Iranian currency when the Americans imposed their sanctions. Once the expectations sink in, there is a phenomenon called “capital flight” which is well known to people who used to live in Eastern Europe. Unless the mad bleach drinker instructs his independent Chairman of the Federal Reserve to set the price on Australian currency. Only a few keystrokes and the economy of the main ally in the region is rescued.
The end is not near. We need to wait in a state of austerity-driven, slowly progressing economic and social decay a few years or more, maybe a few decades, for the actual final global financial crisis. There is no reason in the long-run why a hour of simple labour in China should cost less than a hour of simple labour in the US, Australia or in Germany. We know how the current global system is maintained – by allowing virtually everyone in the world borrowing and saving in American dollar and other loosely linked Western currencies. This triggers and helps maintaining capital flows affecting the exchange rates, which are not affected directly by trade imbalances. But when the USD loses its global status, the US is just a large underdeveloped Latin American country with a huge stockpile of rusting and useless weapons of mass destruction, like the USSR in 1991.
Thinking about it again, spending $500mln on the residential land buy-back and construction schema is obviously not enough. They are currently wasting 2 billions on demolishing and rebuilding a stadium. But if they keep throwing a few billions here and there, house prices won’t collapse even if the unemployment is maintained in a double-digit range for a few years. They can always do this as long as the RBA plays its game.
People around here consider me to be ‘unpatriotic’. But my comments to this blog must read as though I am some kind of America first nutter. Which I am not. Adam K, the USA has a lot of problems and stupidities about it. But don’t exaggerate and imagine it is some underdeveloped country that lacks capability. Donald Trump is not the United States of America even if he is a symptom of some of our problems.
Dear Jerry Brown,
The US used to be highly developed and used to have an indisputable technological lead over other countries. But this was quite a long time ago. I dare to say that nowadays the quality of public infrastructure and the quality of living of the poorest 40% of the population is worse than in Central Europe despite still reporting much higher GDP per capita. I am not joking. I have visited both places in the last 5 years. Obviously the presence of the ultra-rich in the US makes up for the difference in the average GDP and the upper middle class enjoys much better living conditions and higher wealth level than in “less developed” countries. But this is precisely the Latin-American model, even if the US is still a magnet for skilled and unskilled migrants.
The capabilities used to be there but they are irreversibly lost every day, precisely because of the social inequalities damaging the social fabric. You cannot blame Donald Trump or the Ruskie / Chinese for the corona virus debacle and the 17% (or similar) unemployment rate. The whole social system is falling apart since the GFC, it is a crisis of social coordination and “social homeostasis”, similar but not identical to what happened in the USSR in the late 1980s (as the root causes are not on the supply side but on the demand side of the economy). The stimulus in the current form is like taking Viagra to cure the Alzheimer’s disease. The guys feels so good for 5 minutes… this figuratively could help one of the presidential candidates as the other one is most likely already taking LSD before tweeting his deep thoughts.
Come on, what is the death rate from the corona virus in Poland / Russia / China? So maybe America is no longer such a special place, the idea of the American liberal democracy is snake oil and American exceptionalism belongs to the dustbin of history. Theoretically the US still can bounce back but I doubt whether the 1% ever allow for the required redistribution of disposable income. In my view, running higher budget deficits only makes the filthy rich even more better off, while the impact on the bottom 50% is negligible. It is the same historical mechanism which finished off the Polish Commonwealth in the 18th century – too much wealth and power in the hands of a few magnates / oligarchs.
Please remember, the system has two not one fiscal degrees of freedom. Income redistribution achieved mainly through highly progressive taxation is in the long run a much more powerful tool than spending more money by the government, what is more suited for short-term interventions.
Adam, time will tell. I have been wrong many times before- you were right that Sanders wasn’t going to win. And I thank you for not throwing that at me since then.
It is a big, big country the United States. Lots of very talented, productive people still. Lot of land, lot of natural resources. Got a lot of problems no doubt. Argue about them all the time. We will make it through this eventually.
Some things are going to change for the better though. I wouldn’t count on the US turning into something like a failed state anytime soon.
“Technocratic processes that lead to austerity and hardship for the citizens, while the ‘leaders’ (euphemism) and technocrats enjoy high pay within their golden cage in Brussels.”
Indeed — it’s this disparity which gives them outsized power. They will not give it up.
Thanks for that useful update.
Ursula von Der Lyin’ felt she had to apologise to Italy a week after the EU declined to respond to pleading by Italy for help in the worst week of the hospital crunch. Such must have been the outcry beyond Italy. It was excruciating in every way to watch it. Like a bully being forced to make an apology before the class after being caught out. Reluctantly, and without conviction in the voice. From a cheat sheet, if I recall correctly.
Shouldn’t that be Incorruptability on the chart?