G20 – we should all be worried

Put People First group are running a grass roots campaign for all of us to send a message to the G20 about their priorities. The campaign symbol is the megaphone logo appearing below. Their campaign will culminate in a march in central London on March 28, 2009 to push a case for jobs, justice and climate. I am not associated with this group but I share their priorities, even if I might see them in different terms. Anyway, this is the first of my messages to the G20. In summary: they need to learn how the economy actually operates and then they would use their fiscal policy capacity to ensure everyone has a job in a sustainable economy.


But there are worrying signs already (aren’t you surprised!). The finance ministers and central bank chiefs have been meeting as a warm-up in London over the weekend and the first news coming out is not sounding like much progress is going to be made in the right direction. Australia are also on record as backing “a fresh plan by the world’s biggest economies to tackle the credit crunch” although the European countries seem to not be exactly on the “same page”.

Press reports of statements made by some of the finance ministers confirms my worries. For example, the big Eurozone economies are not happy. Germany, for example, thinks tightening regulation is a higher priority now than fiscal stimulus. They fear that the fiscal stimulii in place are already “blowing government debt out” and any further stimulus will “blow it out even further”.

The ABC news reports that the German finance minister is worried that future taxpayers will be burdened by the stimulus efforts. He reportedly said: “Public debt is a heavy burden for our children and grandchildren and there will have to be an exit strategy …”

What do you make of that nonsense? Please read all my blogs under the Debriefing 101 series I am running to help people combat this insane reasoning. For sovereign governments, there are no necessary future tax implications of a stimulus applied now. The problem for Germany and its Eurozone partners is that they voluntary gave up their currency sovereignty and have limited their capacities to deal with the crisis and thus represent their citizens appropriately.

But an arrangement that is voluntarily entered can easily be changed. The issue is the separation of Euro currency monopoly (held by the ECB) and the fiscal responsibility held by the individual member governments. The latter is then tightly constrained by the voluntarily agreed Stability and Growth Pact. The latter should be abandoned immediately. Then the fiscal authority should be centralised (perhaps given to the The European Parliament but maybe the ECB) with membership drawn from all member countries. Then the fiscal and currency capacities would be aligned and the fiscal authority would have no financial constraints on spending. The Eurozone could then introduce a Job Guarantee right across its space to ensure full employment was maintained at all times. All of this would probably reduce the future tax burdens on citizens across the Eurozone rather than increase them.

Australia’s Finance Minister Wayne Swan was reported as saying that the Australian government (including the central bank) will “do everything we possibly can to cushion the Australian economy from the impacts of this very savage global recession.” See my reaction to Point 1 of the official communique below.

Here are my reactions to the joint communique of the so-called Horsham meeting which outlined an eight-point plan to revive growth. The quotes are the exact points published in the communique.

1. We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored. We commit to fight all forms of protectionism and maintain open trade and investment.

Whatever action? The most simple thing that all sovereign governments should do for a start – sort of like making sure the wound stops bleeding – would be to immmediately announce an unconditional job offer to anyone who is unable to find work elsewhere and pay any workers that accepted the offer the minimum wage rate (plus the standard entitlements – holiday and sick pay, superannuation etc). We have witnessed governments introducing bank guarantees and bailing out huge corporates who just didn’t run their businesses properly, but there has been no talk about guaranteeing the most economic activity that gives the vast majority of us our basic access to security – a job! That should be the first priority.

If every government with currency sovereignty introduced a Job Guarantee and the minimum wage was set to be a fair living wage in the context of the social system in each country then the crisis would have far less impact on the viabilities of families. Some people might have to work in public works or community development when before they were working in some high-paying job. But it would be better than them not working at all, and when growth resumed their skills would see them through anyway.

Recession impacts mostly on the poorest, most disadvantaged workers and a Job Guarantee would minimise the damage to them.

2. Our key priority now is to restore lending by tackling, where needed, problems in the financial system head on, through continued liquidity support, bank recapitalisation and dealing with impaired assets, through a common framework (attached). We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions.

The key priority should be to ensure the job loss is minimised by direct public sector job creation schemes.

The systemically important institutions are the central bank and its member banks. The other financial institutions that have grown like topsy in the credit binge period are peripheral to the operations of the modern monetary economy and should receive no government protection. Unfortunately, this has not been the case up until now.

It is important to get the banks lending again. A good place to start would be for the central banks to reduce the short-term interest rate to zero and, in addition, not require existing collateral for discount window transactions (that is, loans from the central bank to the member banks to provide reserves). The discount window lending could be offered for a longer periods than is the customary practice which would effectively wipe out the interbank market. The latter is not working well at present and isn’t particularly necessary anyway.

But the overwhelming reason why there is little lending is because there is fear that aggregate demand will fall even further across the World. Fiscal stimulus to generate some confidence is the highest priority. Banks are not reserve contrained and their is no shortage of “liquidity”. The banks are just taking a pessimistic view of what represents a credit-worthy customer.

No government support should be given to the financial institutions which are not members of the relevant central bank. All their intermediation etc can easily be done by the existing (and regulated) banks. Any insurance company that is now insolvent should be nationalised and run according to socially efficient principles by statutory corporations.

3. Fiscal expansion is providing vital support for growth and jobs. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. We are committed to deliver the scale of sustained effort necessary to restore growth, and call on the International Monetary Fund (IMF) to assess the actions taken and the actions required. We will ensure the restoration of growth and long-run fiscal sustainability.

At present, the basic fiscal policy initiative to support jobs is not being pursued. See point 1 about employment guarantees. Relying on the private market to generate jobs when it is in meltdown is a doomed strategy. It is much better for the government to create a buffer stock of public jobs and then let the private employers bid workers out of that buffer once the economy resumes growth.

There are no inflationary implications if the government buys a resource which currently has no market bid (price) – that is, the unemployed. If they hire at a fixed wage (the minimum wage) which is at the bottom of the wage structure there is no upward pressure on wages in the wider economy. It should then be a simple matter for private employers to offer a better wage to attract workers out of the Job Guarantee pool.

The IMF should not be involved in any coordinated action until it undergoes serious internal reforms and hires senior economists who actually understand the way the modern monetary economy operates. The damage that the IMF has wreaked on disadvantaged nations through its structural reform programs is enormous and stands testimony as to why the IMF is part of the problem not part of the solution. I will write a special blog in coming weeks on the IMF. In the northern winter of 2008 I did some preliminary scoping of the IMF in Washington to see how we might shut it down completely! Here is my preliminary assessment!! (it was pretty cold that day!).

4. Interest rates have been cut aggressively in most countries, and G20 central banks will maintain expansionary policies as long as needed, using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability.

The concentration on interest rates and now the dreaded quantitative easing as the primary counter-stabilisation weapons employed by governments is symptomatic of the neo-liberal bias that got us into this problem in the first place.

Monetary policy, whether it be expressed through manipulation of the target interest rate (overnight rates) or quantitative easing (see all my earlier Debriefing 101 blogs), is a blunt policy instrument that has unclear outcomes. It takes some time for the distributional effects (which are driven by the asset portfolio compositions that are held in the private sector to take effect and then translate into the spending system. The net result of, say, a monetary expansion (lowering rates) is uncertain and could actually reduce overall spending.

Monetary policy also cannot target regional or spatial disparities in performance and social outcomes. It impacts across the board with little attention to where the unemployment is actually occuring.

Conversely, fiscal policy can directly increase spending ($-for-$) and can be targetted across regional space to best fit the distribution of job loss arising from the spending gap. The stimulus is also immediate and relatively predictable (can be modelled more easily than monetary policy changes).

Fiscal policy for a sovereign government operating in a flexible exchange rate is the most powerful and effective tool it has available.

So, in addition to introducing a Job Guarantee, major public works programs should be pursued to develop public infrastructure and restore the primacy of public spaces.

Further, major public investment in renewable energy should be accelerated to combat climate change and to create a new set of sustainable employment options for the workers who will be displaced when the old industries such as coal are forced by environmental necessity to close.

And major investment in our early childhood education, primary schools, secondary schools and higher educational institutions should be a priority. The most enduring investment an economy can ever make is in its people. Massive injections into research should be made now – we might have discovered a cure to cancer or HIV if we had have spent those budget surpluses on medical research!

5. We are committed to helping emerging and developing economies to cope with the reversal in international capital flows. We recognise the urgent need to pursue all options for mobilising International Financial Institution (IFI) resources and liquidity to finance countercyclical spending, bank recapitalisation, infrastructure, trade finance, rollover risk and social support. We agreed on the urgent need to increase IMF resources very substantially. This could include further bilateral support, a significantly expanded and increased New Arrangements to Borrow (NAB), and an accelerated quota review. We should also ensure that all Multilateral Development Banks have the capital they need, beginning with a substantial capital increase for the Asian Development Bank, and put it to best use to help the world’s poorest. We welcomed the progress by the IMF and World Bank in introducing new and enhanced instruments, including the development of a new high-access, quick-disbursing precautionary facility.

Putting the IMF and the World Bank at the centre of policy initiatives to help the emerging and developing economies is fraught to say the least. I will write a separate blog some day soon about this.

All governments of developing countries should default on any debts they hold in foreign currency if they are unable to simultaneously service the debts and maintain full employment and reasonable standards of living for their citizens. They can easily offer the creditors new terms in the sovereign currency. Argentina successfully defaulted on its huge foreign currency exposure and resumed growth soon afterwards. Foreign direct investment returned within a few years of the default.

6. To further strengthen the global financial system we have completed the immediate steps in the Washington Action Plan and we welcome the Financial Stability Forum’s (FSF) expansion to all G20 members. We remain focused on the medium term actions, and make recommendations to
the London Summit to ensure:
• all systemically important financial institutions, markets and instruments are subject to an appropriate degree of regulation and oversight, and that hedge funds or their managers are registered and disclose appropriate information to assess the risks they pose;
• stronger regulation is reinforced by strengthened macro-prudential oversight to prevent the build-up of systemic risk;
• financial regulations dampen rather than amplify economic cycles, including by building buffers of resources during the good times and measures to constrain leverage; but it is vital that capital requirements remain unchanged until recovery is assured; and,
• strengthened international cooperation to prevent and resolve crises, including through supervisory colleges, institutional reinforcement of the FSF, and the launch of an IMF/FSF Early Warning Exercise.

It is clear that the regulatory framework up until now has not been efficient and effective. The next growth phase that will emerge out of this wreckage will have to see strong government oversight in financial markets. It will require governments, however, to abandon their neo-liberal leanings and strengthen the oversight of the BIS.

7. We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organisation of Securities Commissions (IOSCO) code; full transparency of exposures to offbalance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardisation and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measures.

As in Point 6.

8. To strengthen the effectiveness and legitimacy of the IFIs we must enhance their governance and ensure they fully reflect changes in the world economy. Emerging and developing economies, including the poorest, should have greater voice and representation and the next review of IMF quotas should be concluded by January 2011. The package of quota and voice measures decided in April 2008 should be swiftly implemented. World Bank reforms should be completed by the Spring Meetings 2010. The heads of the IFIs should be appointed through open, merit based
selection processes.

As in Point 5 and 3. The IMF needs serious reform.

Conclusion: We should all be worried if this group is in charge of the recovery process.

This Post Has 2 Comments

  1. Hi Bill.

    Congratulations on an excellent blog. As a person who has had no economic training whatsoever (aside from books and blogs) and has no formal education beyond high school, I find your “Debriefing 101” very helpfull in expanding my understanding of the subject.

    I find your argument that government spending need not be constrained by revenue, fascinating. Why don’t our leaders engage in this course of action? Are that so beholden to the neo-liberal ideaology that they cannot concieve any alternative?

  2. Dear Lefty

    Thanks for your comments – I appreciate them. I am going to expand the Debriefing 101 series as I go. If you have any 101 Debriefing topics in my area of research that you are interested in me analysing please let me know.

    The governments of the day are still being held in check by the neo-liberal vested interests that think they are better off having huge buffer stocks of underutilised labour. They think this will allow them to continue raking in the expanded profit share and live the good life. They haven’t worked out yet that the last decade or more did not provide a template for a sustainable growth strategy. To get back on track there will have to be major redistributions of income towards wages and much higher rates of labour utilisation.

    My role as a professor of economics is to just keep reminding people of evidence-based analysis and solutions. The political process though, is something all of us have to seek to influence.

    best wishes

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top