Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
The title of the blog is a little misleading but was too good not to use. I get to that five-year forecast (2010-2015) later in the blog but the first part is material that sets the scene. Yes, I am writing about deficits and debts … again! But new nuances come out in the public debate which need to be addressed. The conservative assault on government support for their economies at present is multi-dimensioned and is being pushed along by two main journalistic approaches. The manic Fox new-type approach which I realise is influential but is so patent and ridiculous that I don’t care to comment on it often. Then we have the approach adopted by journalists in so-called credible media outlets such as the UK Guardian. They dress their deficit terrorism up in arguments that the middle classes, who think they are far above Fox new rabble intellectually, will find convincing. But when you bring both approaches down to basics – rubbish = rubbish.
The UK Guardian seems to be going more to the right. I guess it is because Murdoch bought the Times and it moved even further to the right than it already was. Anyway, its major commentary pieces of late confirm my suspicions that the Guardian is buying into the whole deficit hysteria agenda – on the side of the terrorists but in an “oh-so middle class and aren’t we being reasonable” manner.
Yesterday (March 16, 2010), there was an article – My fiscal nightmares by one Paul Collier which carried the sub-title – “Our political choices are unpalatable, but unless they are honestly faced we could end up like Greece”.
Collier propositions his readers as if he is an expert on fiscal policy and macroeconomics in general. The reality – by what he chooses to embarrass himself by writing – is that that he is neither – he is just another mouthpiece for the conservative lobby.
The conservatives are out of their comfort zone at present and based on their almost non-existence understanding of what is actually going on and what brought us to this point they seek to return to their comfortable ways by continually chanting one phrase statements about the evils of deficits and the national debt explosion and you know the rest.
That is the benign interpretation. A more realistic interpretation is that the power elites fear that their party is over if governments return to supporting higher levels of employment and more equitable transfers of national income including a sensible (and necessary) realignment of real wages and productivity growth. They also fear that a new regulative environment might force them to work a bit harder for their living and stay within the law more often. This elite controls much of media and has its lobbying tentacles right into all major governments. They are not shy to spend big money bribing officials and cheating the “markets” – which they hold up as the pure form of freedom and entrepreneurship.
If if wasn’t so dire it would just be a joke.
The British government could do its citizens a favour by assuming absolute power and suspending the national election for three years. Then the need to match budget surplus aspirations with the Tories (sort of like the macho contests young boys play with their d#$#@) would vanish and they could actually do what they were elected to do and that is ensure employment growth is strong so people can actually earn an income and take care of their families.
Anway, back to Collier. His article is a response to the “leaked warning from the European commission on Britain’s debt” which he claims has:
… has returned fiscal prudence to the forefront of political debate. Grim arithmetic guarantees that it will stay so through the coming decade. Yet so far the debate has demonstrated that the key concepts are not even understood, let alone properly measured.
Reuters apparently got a copy of the memo yesterday that is circulating around the EU in Brussels. I tried to get a copy of it overnight (from my spies in Brussels) but they were all asleep! It will be released today apparently.
But Reuters quotes the EU as saying:
The overall conclusion is that the fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced … A credible time-frame for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned …
The achievement of the consolidation forecast by the UK authorities, is further clouded by the likelihood that the macroeconomic context could be less favourable than envisaged by the authorities, as well as the uncertainties relating to the banking sector loans and investments insured by the government.
First of all the EU, dominated by the EMU nations, cannot even run their own region properly. They have established a system which cannot deliver prosperity to its nations and which allows the bullying Germans to run the show in favour of the welfare of their own privileged classes.
Last time I looked the unemployment rate was averaging around 9.5 per cent across the EU (Source) and was even higher in the EMU segment of the EU. Even Britain has a lower unemployment rate than that. So who are the EU to be casting judgement on anyone?
But the content of their warning … that Collier is taking so seriously … is without any substance or applicability to a sovereign nation such as the UK.
What is a “credible time-frame”? What is a sustainable fiscal position? Why would you tighten fiscal policy when there is very flat private demand and youth unemployment is still rising?
And as you see, they have the facts staring them in the face – “the macroeconomic context could be less favourable than envisaged by the authorities” – which is referring to the inflated forecasts for economic growth that the British government has been putting out. But given that and given that inflation is falling, interest rates are near zero, why would anyone of any sound mind and who understood how macroeconomic systems function – tell the fiscal authority that they need to contract their support – the only support that is keeping some lid on unemployment.
It doesn’t bear thinking about how maliciously stupid these fxxxwits are.
But our Guardian expert Collier is running scared. The EU have spoken.
He writes(just mouthing EU mantra):
Fiscal prudence has conventionally been measured by the ratio of debt to gross domestic product and the fiscal deficit. Famously, the commission set the threshold for prudent debt at 60% of GDP, and for a prudent fiscal deficit at 3%. In normal circumstances these are reasonable benchmarks: nominal GDP should increase by about 5% a year, so for a country with a debt ratio of 60%, a 3% deficit is sustainable.
I would have used the term infamously to depict an appropriate level of opprobrium. The rules that the EU made up and then imposed on the EMU via the Maastricht Treaty’s Stability and Growth Pact were not based on any coherent models of fiscal sustainability or variations that might be encountered in these aggregates during a swing in the business cycle.
The rules are biased towards high unemployment and stagnant growth of the sort that has bedevilled Europe for years.
At least Collier recognises that these rules may not be applicable because “we are not in normal times” and that:
For Britain, Greece and some others, the fiscal numbers are mesmerisingly far from these thresholds. They measure the wrong things in terms of economic fundamentals, and in terms of political superficials they will divert attention from the important choices.
Barring the invalid conflation of Britain and Greece, at this stage, I was thinking he would launch into a full-blown account of the need for governments to pursue public purpose and ensure people have jobs and incomes and access to first-class education and health care in an environment where the social and natural systems are being nurtured.
Was that expecting too much?
It was! He then clarifies what fiscal prudence means:
The fundamentals are not complicated: prudence is about the balance between assets and debts. A prudent government increases assets by more than debts. Neither the level of debt relative to GDP nor the fiscal deficit need have much bearing on this balance. Britain would surely have functioned better had we adopted the higher, French, level of debt relative to GDP, using the resources to improve our transport infrastructure to French standards.
To which I said “bloody hell” which is a lie because the bloody was actually a word starting with F with the g on the end truncated (in Australian fashion).
First, there is some truth in what he is saying. I interpret this as a statement about “good” and “bad” deficits which is a central concept in Modern Monetary Theory (MMT).
A bad deficit is what happens when the automatic stabilisers drive the budget into deficit because unemployment is rising and tax revenue is falling as private demand falters. Then we have very little to show for the deficit position. A good deficit is when the government uses discretionary fiscal policy to ensure that demand is sufficient to support high levels of employment and private saving. They spent on first-class education and health care and other infrastructure which supports private social and economic activity.
So in that sense, the trend to fiscal austerity over the last 20 years (although not always practised as carefully as the rhetoric would suggest) has starved economies of high quality public infrastructure and undermined private employment.
Given the government issue debt to match their net spending, then this implies high public debt ratios although growth would have been a lot higher throughtout the advanced world and so it is questionable that public debt ratios would be higher.
Second, I would not have held out the French as exemplars in fiscal prudence. After all they signed their fiscal sovereignty away and have had persistently high unemployment as a result and decaying standards of living in their cities.
Please read my blog – Debt is not debt – for more discussion on this point.
But a prudent government would not even issue debt. While public spending should be carefully executed to ensure that public purpose is being increased which means the quality of assets is as important as the volume that are created by net spending, the idea that the government is somehow constrained by some balancing act between assets and liabilities is mainstream nonsense.
The liabilities that a sovereign government such as the UK have are not at all like the liabilities that a private company or a household carries. The latter have to service their liabilities by sacrificing consumption (or investment) because they are revenue constrained.
The former – the sovereign government is not revenue constrained and so we have to conceptualise their “liabilities” differently. Yes they have to repay the debt they issue and service it along the way (according to whatever arrangements are in place in that regard). But that does not compromise their capacity to spend elsewhere except where the economy is at full capacity. And even then the government can just reduce private purchasing capacity (via taxation) if the interest servicing payments plus its desired primary net spending would push nominal demand beyond the real capacity of the economy to absorb it via real output increases for a given level of private spending.
So this implicit representation of an asset-liability offset is inapplicable and plays into the hands of the mainstream.
Collier says he has “two fiscal nightmares”: (a) the deficit terrorists force the government into “slashing capital spending” which would erode public assets; and (b) “the government concocts spurious measures of changes in liabilities and assets that permit it to duck politically costly spending cuts”.
The first nightmare is one we all should be having. It is happening – it will result in real damage to long-term growth rates and the living standards of most citizens (but not the elite and the high income earners) and it will backfire in a financial sense because ultimately the fiscal stabilisers will drive those financial ratios that are such the focus of the debate (erroneously) towards the sky.
Only growth will reduce the financial ratios and growth requires fiscal support now in large volumes and later in smaller but positive volumes assuming the nation is not Norway and the non-government sector desires to save in the currency of issue.
But on the second nightmare, Collier cites the work of God (Goldman Sachs) which “helped the Greek government to mislead its citizens by earmarking existing revenues to new debt which did not count as a liability” etc. Yes, they did and so Britain should outlaw hedge funds – which I note Brown is reluctant to even buy into limiting their scope at present.
But really the second nightmare is just an extension of the first and reflect the skewed debate that exists at present. The British government should just show leadership and reject all these nonsensical claims about debts and deficits and seek to educate the public about the true nature of these financial aggregates inasmuch as they apply to a sovereign government.
I know the political constraints. But they have grown over time and are not immutable. During the Post-War period when governments supported full employment with continuous (and relatively small budget deficits) the political debate was quite different. The same attacks that occur every day now would have been laughed at. They would not have front-page headlines day in and day out.
So the point is that politicians themselves have a choice – allow the policy debate to be ruled by opinion polls and the ruthless uninformed media riff-raff or to actually take some leadership positions and influence the agenda through education and action.
Why hasn’t Gordon Brown highlighted the fact that interest rates are not going through the roof (even long rates are low and influenced by the short-rates anyway). Why doesn’t he go on TV and tell the electorate that anyway, even if the bond markets tried to push long rates up that the Bank of England can control any segment of the maturity (yield) curve that it wants – any time that it wants.
Why doesn’t he explain to the British people that inflation is pointing south yet the mainstream economics position is that it should be going out of control right now given the growth in the monetary aggregates? Why doesn’t he educate them that the monetary aggregates are irrelevant?
Why doesn’t he explain that he doesn’t even need to issue debt to the private markets? But as he does, why not explain that this is private wealth and provides the private sector with a risk-free interest bearing asset?
And all the rest of it. Why lie down and let the agenda be run by a gathering of clowns and vested interests?
They are the questions that Collier as an influential journalist should be asking.
All he can say – as if he is being reasonable – is to claim that the British government has to be prudent while running “a large fiscal deficit” … “by drastically changing the composition of public spending”. How might that manifest? Well according to Collier it requires that the government only “commit spending far into the future” (to match the benefits with the alleged debt-burden).
And this means, that the government should:
… reduce entitlement spending: benefits and pensions … [because] … all our options are unattractive. But a strategy that rebuilds Britain’s economy is preferable to those that would further undermine it.
So at the end you realise he doesn’t get it at all. He is actually worried about the financial ratios and not the people. With recession causing havoc for the living standards of the most disadvantaged the government should be increasing entitlements and pensions to redress some of this disadvantage and ensuring the unemployment doesn’t render a person impoverished. A better alternative would be to introduce a Job Guarantee but that would be a wider credibility tightrope to walk.
The point is that recession requires attention to various temporal dimensions. The short-term focus should be on the people who bear the brunt. So you would never want to cut entitlements. The longer-term focus should be on ensuring capital spending is focused on productive outcomes which will deliver benefits for years to come.
The latter concern though has nothing to do with matching the benefits with the alleged debt-burden on future generations. There is no burden on future generations. As long as deficits deliver growth and employment now and future productive public infrastructure each generation wins out.
In all of Collier’s focus on assets etc he didn’t mention the British people once. His recommendation that the British government cut entitlements was a subtle reference but an implication that people do not matter that much – that bringing down debt ratios is more important.
But an economic system should be about enhancing the prospects for the people. What other reason would there be to organise production and work in the way we do? That is actually the nub of all this ideological debate. The mainstream is not about people – the people are just “factors of production” (as they are referred to in the mainstream microeconomics textbooks) and are there to create profits.
Until we get a public debate about how economies have to be tailored to the people and that means all of us – the poorest up – then we are not going to get very far.
In this context, the last thing a government should be doing to “fix the deficit” is to start cutting back on education which is the only durable investment into the future.
Today I read that in Britain between “at least 50,000 more sixth-formers with good grades will fail” to get into university this year compared to last as competition increases (yes, always in a recession) in the face of the number of places being cut by 6,000 due to fiscal austerity.
The British government is clearly keen to reduce productivity growth over the next twenty years!
Meanwhile, Bank of England Deputy Governor Charles Bean (one of the LSE neo-liberal mafia) has also claimed in a speech he gave at Cambridge that:
The fiscal deficit is unsustainable in the medium term and creates a difficult balancing act. Cutting spending and/or raising taxes is likely to result in lower domestic demand, though a failure to do so may lead long-term interest rates to rise, also hitting demand.
He also claimed that the depreciating sterling “appears to owe something to heightened fears about the UK’s fiscal prospects”.
But in the same talk he said the road to recovery also required an improvement in the trade position (I disagree) which makes the sterling weakening a benefit!
Of-course, none of these discussion papers or speeches or memos or whatever actually articulate in detail what the “medium-term” or what “unsustainable” actually is. They just toss these terms out there without defining them and knowing that the audiences have no clue at all about what the concepts might mean much less the system dynamics that underpin deficits and public debt.
If you want a full account of what fiscal sustainability means please read the following blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3.
Which brings me to the next point.
2010-2015 – hyperdeflation, followed by rampant inflation
That is the forecast from Societe Generale’s so-called strategist Albert Edwards. I often wonder why they call these characters strategists which implies a modicum of sense.
In the right wing Australian corporate rag Business Spectator, the columnist decided to devote her whole column – Beware the deflation quicksand – to these loony ideas today (March 17, 2010).
Apparently, Edwards reports that “total credit in the US economy is collapsing, despite the central bank’s money printing efforts”. And who in their right mind would have thought that the US central banks policies to increase commercial bank reserves would stimulate lending anyway? Just the use of the terminology “printing money efforts” gives the game away and tells you that the “strategist” is locked into erroneous mainstream thinking. Or should I say lack of thinking!
But it is true that credit is not growing in the US at present and why should it … the place is in a mess.
Edwards is quoted as saying:
Most shockingly … the household sector shrank its borrowing for the seventh quarter in a row – the minimal signs of any abatement to the process. Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row.
Well what else would you expect. There is a severe deflation going on in the US – it is called 10 per cent unemployment (17 per cent if you count those who have given up looking) and that has come on top of a long period of suppressed (almost non-existent real wages growth) and a huge build-up in private indebtedness.
They then think it is useful to write blogs about the debt clocks and encourage others to use up their scarce free time starting at their computer screens watching the counter while they also get more angry as each precious minute passes about the so-called move towards socialism. Then they all go and watch Fox television and read the Washington Post.
The public debt is increasing because of the nonsensical voluntary restrictions governments put on themselves – such that they have to match $-for-$ their net spending with debt issuance, as if the latter is “financing” the former. The truth is that the former funds the latter – a sovereign currency-issuing government just borrows back what is has spent!
But the public debt is rising because deficits have increased. They have increased because private spending has collapsed. Note Edwards uses the term collapsed to describe the return by the household sector to safer debt levels. As if this behaviour is something odd. The fact is that the debt binge was the outlier – normally (over long historical periods) the household sector is a positive saver – for many sound reasons not the least being to maintain some personal risk management capacity with scope to cope with the downside.
So all Edwards is reporting is the necessary process of household deleveraging … which is a good thing given how far out of whack the aggregates have become over the neo-liberal years.
All the usual historical aggregates have been skewed during this period – real wages growth virtually zero but still solid productivity growth; a massive redistribution of national income to the profit sector; huge corporate salary increases; massive build-up in household debt ratios (to income etc) and governments prone to running surpluses.
All of the these recent movements in the aggregates have to be unwound and that is why the fiscal and monetary response has also “overshot” the normal swings in these aggregates.
If we had truly learned our lesson then everything would settle down in a few years as growth returns to the Global economy and governments settle into the task of supporting aggregate demand and hence non-government saving. The problem is that all the signs are there that there is a retreat back to the recent orthodoxy … although that retreat itself is somewhat confused.
This confusion is showing up in the public commentary of characters like Edwards, who a few years ago was fiscal conservative and all for the deregulated financial market environment that his company presumably prospered from.
But now things are not so clear because they are seeing deflation before there very eyes as public net spending positions have swung very signficantly into deficit and monetary policy has gone where none of us have ever been before.
So Edwards realises that with little credit growth and “an unprecedented plunge in labour costs” inflation is heading south not north. And this is causing households to reassess their debt positions … and together all this adds up to a deflationary environment that will need sustained and increased fiscal support.
The confusion for these commentators then is that their knee-jerk reaction is to provide fuel for the deficit-terrorists who just trade in single phrase statements that they put together in no particular order and with no particular consistency of logic. So we constantly get barrages of “the private sector has to save” and “governments need to run surpluses” when they are referring to economies that structurally do not and will not run (any time soon) external surpluses.
Both statements appeal to the terrorists sense of warmth – the saving sounds right for citizens (evils of debt etc) and the government is a hated entity and “should get out of our lives” (except when there are specific handouts that we eagerly privatise!). Getting out of our lives by running budget surpluses is a curious concept in itself – because it means that these characters are endorsing a systematic eroding of private purchasing power (and wealth).
But the commentators like Edwards have to know that these emotional responses are inconsistent because they are seeing it on their trading screens as credit dries up and inflation rates fall and unemployment rises. They have to realise that the only thing keeping the show vaguely on the tracks is the fiscal support.
Their predilection is to think that monetary policy saved the day because as good neo-liberals they have been seduced into the inflation-targeting primacy of monetary policy and the ineffectiveness of fiscal policy. But even then they have noticed that with interest rates at zero and huge reserve adds going on – nothing is happening from that quarter.
Anyway, these commentators cannot seem to let go of their ill-informed prejudices that they probably learned from studying macroeconomics using Mankiw or some other similar book of lies and half-truths.
So even though the facts are staring them in the face and the expected inflation spike and spiralling interest rates (given the fiscal and monetary policy shifts) have not eventuated, they just cannot help themselves.
Edwards is no exception. In this deflationary environment, he “predicts that governments will respond to their own massive debt burdens by printing massive amounts of money and that will push inflation rates into double digits”.
But in “the near term … he expects developed economies to be sucked into a deflationary quicksand” and over the “next five years” the developed economies will experience:
… hyperdeflation, followed by rampant inflation, with a smattering of stagflation thrown in for good measure.
You can see that it is too troubling for him to let go off the nonsensical textbook charades even though the reality which points to the contrary is staring him in the face. He needs help to get him through this problem. Please provide it to him if you are near to him.
I sent Edwards an E-mail today asking him whether he would resign in 2015 if this prognosis was incorrect. No reply as yet but some of the World is still asleep.
A kernel of an austerity plan for Greece
I have been working on my austerity plan for the Greek Government and I have some ideas mapped out already. Given that German politicians and their sycophantic economic commentators have been criticising Greece for spending too much in recent years I thought we should take a look at some of that spending.
At present, Greece runs a huge trade deficit with Germany. Prior to the crisis (2008) Germany exported around EUR 8.3 billion worth of goods and services to Greece. In return it purchased Greek goods and services to the value of EUR 1.9 billion. Germany is Greece’s largest trading partner and has been for some years.
Greece is also one of the main places Germans go for holidays.
Then if you delve a little further you realise the Germans have been flogging old Leopard tanks to the Greek government for millions of Euro (playing on the Greek fears about Turkey). See also An “Economic Guernica” for Greece
So the Greek government should start by cancelling all contracts of this type with Germany. They should also stop procuring any German-manufactured goods for public purposes. I would also sent E-mails to all tourist operators instructing them to levy extra charges on all Germans and not tell the WTO about it!
I wonder what the Germans would say about that.
One hopes that the moves by BMW to further penetrate the Greek market will also come unstuck in my austerity plan. With far fewer sales going into Greece, it would also mean that BMW would not have to get embroiled in scandals over its advertising campaigns in Greece. A few years ago, its used car division put out its controversial You know you’re not the first advertising campaign aimed at Greek men looking to purchase in the premium car market. As an aside: the age of consent in Greece is 15 years). So my policy might also ease the pressure placed on young teenage girls in Greece from sleazy BMW-driving Greek males on the prowl. Win-win!
Any other ideas welcome … we need to get something to the Greek government before the bond markets close it down!
Time to go and play in my band. That will refocus my head again into a better space.
Note also I have added another category called Hyperinflation which will make it easier for people to find my Zimbabwe and Weimar blog which should head off some queries.
That is enough for today!