The ECB could stand on its head and not have much impact

As the Bank of Japan began its hopeless quest to stimulate growth with negative interest rates (see my blog yesterday – The folly of negative interest rates on bank reserves), the latest data from the ECB came out on lending to households and non-financial institutions. It tells an interesting story. The story has to be framed within the knowledge that oil prices have now fallen by some 77 per cent. But the major factor that is not usually mentioned when commentators talk about ECB policy changes and the likely impacts is the on-going and manic fiscal austerity in the Eurozone, which puts the whole region in a recession-type straitjacket, where monetary policy changes, weak in impact at best, have little hope of achieving anything positive. The logic of the reliance on monetary policy for counter-stabilisation is also built on a failure to understand what drives the economic cycle. The belief that banks will suddenly lend just because the central bank imposes a tax on their reserve deposits (negative interest rates) or offers them cheap loans to on-lend to households and firms is misplaced. Banks do not loan out their reserves and firms will not borrow from banks no matter how cheap the money is if there are no profitable opportunities to pursue. It is time the authorities abandoned their neo-liberal myths and got real. The Eurozone needs a massive fiscal expansion and it needed it 7 or 8 years ago. The ECB is the only institution in the flawed system that can provide the financial resources to make that happen and it could, with Brussels approval, bypass the ‘no bailout’ clauses in the Treaty to make that happen. It won’t, and the Eurozone will muddle on with increased poverty rates and rising social instability. What folly!

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European-wide unemployment insurance schemes will not solve the problem

On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.

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The government really is instrumental in creating growth

Sometimes one reads a press article that is so obviously misleading that it is hard to know where to start with it. But perhaps the conclusion is the best place to start sometimes. Such is the case of a Bloomberg article (January 15, 2016) – What #ResistCapitalism Gets Wrong – written by American academic Noah Smith. Basically, the article attempts to attribute all of the post-Second World War prosperity to the “free market economy”, which he says is “a term many use synonymously with ‘capitalism'”. By the end of the article we learn that in fact that prosperity does not come from ‘free market’ liberalisation and that strong governments are essential for growth and reductions in inequality. The “boring old mixed economy” where, in Noah Smith’s words “government really is instrumental in creating growth”. Start with the conclusion and read backwards is my advice in this case.

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Europe’s future is bleak with an ageing population and policy failure

I read an interesting article that was published on December 18, 2015 by the Center for Global Development, which is one those centrist-type research and advocacy organisations that lean moderately to the right on economic matters. The article – Europe’s Refugee Crisis Hides a Bigger Problem – discusses what it considers to be “three population related crises”, two of which at the forefront of public attention (because they are moving fast) – the “refugee crisis” and the “terrorism crisis”. The third is “Europe’s slow moving and in inexorable ageing crisis”, which is largely being ignored in the public debate. The article provides a basis to link the three crises together – in the sense that “Europe actually needs millions of migrants a year to mitigate its ageing crisis”. While I have some sympathy with the article, there are many omissions that reflect the bias of the author. Two major issues – mass unemployment and productivity growth are ignored completely. The emphasis in the article is on whether the public sector can afford not to bring in more people to offset the ageing of the EU28 population. That emphasis discloses the bias of the author and diminishes the strength of the article.

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Currency-issuing governments have unlimited financial resources to fight recession

The elites are gathering for another junket aka the World Economic Forum, in the frosty, but salubrious surrounds of Davos this week (January 20-23, 2016). The Monday morning temperature there is forecast to be -22°C. According to the Forum’s homePage – Searching for the 21st century dream at Davos – the delegates are going to be reimagining life under the theme “Mastering the Fourth Industrial Revolution”, which is spin for eating a lot of gourmet food, drinking a lot of expensive wine, and, denying the presence of the very large elephant in the conference venue. I suppose it is easy for them to live in denial when the sort of policy regimes they have influenced have categorically failed and will continue to do so with the result that millions remain unemployed and poverty rates are rising. Apparently, the elites have to “‘defetish’ … dialogues about future technologies” and the “onset of a new era of ‘limits’ is a chance we must not miss to imagine and engineer the futures we want”. Here is some gratuitous advice to the elites – forget the robots; forget worrying about the so-called “inflection point … where social, economic and political crises meet rapid technological change, where progress feels like disruption, not promise”; and, instead, more fully understand why this obsession with “a new era of ‘limits'” (by which they mean fiscal limits on governments) has sidetracked any hope of progress and deliberately disrupted people’s lives in a way that dwarf the impacts of technological change.

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The co-option of government by transnational organisations

Today, some more analysis of the debate about globalisation and the capacities of the nation-state. We consider the debates in the early 1970s about the power of transnational corporations and the claims that they undermined the capacity of the nation-state to further the interests of the population. On the one hand, the free-market liberals claimed that the emergence of the transnational corporation was a move towards increased global efficiency and the nation-state, which served narrower interests, would be swept aside, along with its regulative structures, by this trend. Global welfare (and solutions to international poverty) would be maximised by the demolition of national borders by transnational capitalism. This view considered the nation-state to be ‘dispensable’ – that it only served narrow interests and the global organisation of production no longer required national governments to operate in this way. The Marxist position was, understandably, at odds with this view. It considered the nation-state to be indispensable to the growing needs of international capital. This was in the sense that governments could provide essential stability to reduce the risk of transnational operations. My position is more in line with the latter view although it clearly recognises the relevance (and power) of the national governments in which they choose to operate. Further, these transnational corporations are typically very large firms within the nations they operate. it is hard to differentiate the political clout that being large exerted from the influence of being global. Certainly, the early literature was not clear on that issue.

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The mass consumption era and the rise of neo-liberalism

I was having a talk with a friend in San Francisco last Monday about globalisation and the capacity of the state, which is the topic of the upcoming book I am working on (manuscript due around May 2015). He made the comment that globalisation had meant that the state can now only do bad and can no longer do good. I asked him whether he was talking about globalisation (the international nature of finance and supply chains) or neo-liberalism (free market economics) and he said “neo-liberalism is a disease – that is the problem and since the 1970s it has meant the state is restricted to doing bad”. The point I was digging at was that progressives often conflates the two concepts which then leads to flawed conclusions about what the state can and cannot do. Further, when he talked about the state doing bad he was really talking about the impact on the average person and those who are disadvantaged. He wasn’t talking about the so-called top-end-of-town, which have without any question done very well since the 1970s. And that is my next point – the state hasn’t gone way or been rendered impotent by neo-liberalism as many on the Left believe and angst over. As the currency issuer it is still very powerful. It just serves the interests of a different cohort now relative to the cohort it served during the full employment period that followed the Second World War. In doing so, it has shifted from being a mediator of class conflict to serving the interests of capital in its battle to appropriate ever increasing shares of real income from labour. That is a wholly different narrative to the one that emerges when globalisation is conflated with neo-liberalism – as if they are parts of the same process.

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Spain in limbo but has not rejected austerity

On the Sunday before last (December 20, 2015), Spain conducted a general election, which has left the nation in limbo. Alex Tsipris, the Greek Prime Minister, still trying to hang on to the image that he is a progressive leader in some way, tweeted once the results were known that “Austerity has now been politically defeated in #Spain, as well. Parties seeking to serve society made a strong showing #20D”. I wonder who he is trying to kid … “as well” – as well as where? Certainly not in Greece, which was the implication of his tweet. And, to be clear, certainly not in Spain. While the conservative Popular Party (PP), which has overseen the most recent imposition of austerity and is firmly pro-EU and pro-euro, did not gain an absolute majority, they did win the most seats (123 in the Spanish parliament) and were well ahead of the other major austerity party, yes, the Spanish Socialist Party (PSOE), which won 90 seats). Even the left-wing We Can party (Podemos), who won 69 seats is not planning to exit the common currency. There is no hope of an anti-austerity coalition forming.

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German Ministry of Finance’s anti-Europe proposal

Recently, I wrote a blog – Who is responsible for the Eurozone crisis? The simple answer: It is not Germany! – where I contended that Germany was not to blame for the Eurozone crisis. I also wrote that while Germany was not responsible, single-handedly, for the creation of the dysfunctional monetary union, its politicians were surely complicit in making the crisis deeper and longer than it otherwise could have been given the circumstances. A few weeks ago, I read an article in the Italian news (December 15, 2015) – Il piano tedesco su debito e aiuti Ue (The German plan for debt and EU aid) – which I intended to comment on when time permitted. I note that the author, one Carlo Bastasin, is also associated with the American Brookings institution, and that organisation published in English-language version of the article – Mr. Schäuble’s ultimate weapon: The restructuring of European public debts – on the same day, which makes it easier for more people to read. With Germany now the dominant economic and political force in Europe, bullying other nations to support pernicious policies in southern Europe, their latest plan demonstrates clearly that their conception of European integration bears no resemblance to a structure that might allow the common currency to function effectively in the interests of European citizens.

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Ireland demonstrates that fiscal deficits promote growth

On December 10, 2015, the Irish Central Statistics Office (CSO) released the – National Accounts, Quarter 3, 2015 – data, which showed that real GDP had increased by 1.4 per cent over the last quarter while real GNP had declined by 0.8 per cent. On an annual basis, real GDP increased by 6.8 per cent in the September-quarter 2015 and real GN increased by 3.2 per cent over the same period. I’ll discuss the difference between GDP in GNP later but is clear that Ireland is in terms of real economic growth leading the Eurozone at present. In narrow terms, it is also clear that over the last two years the nation has recorded consistent growth. A question that is often asked is whether Ireland defies those who claim that austerity is flawed strategy. I get various E-mails along those lines, some polite, some rude. My answer to the polite ones is that it is difficult to hold out Ireland as an example of austerity-led growth. Ireland is, in fact, a rather strange Eurozone Member State, and is more firmly plugged in to the Anglo world than other Eurozone nations. It just happens, that while the Irish government was suppressing domestic demand through austerity from as early as 2009, significant trading partners (such as, Britain, the US and China) were maintaining expansionary fiscal positions, which allowed Ireland to resume growth. Further, a narrow focus on the growth cycle misses significant aspects of national prosperity. Even with two years of economic growth, real earnings growth is flat to negative, the rate of enforced deprivation remains around 30 per cent, and there is a rising proportion of people at risk of poverty. On top of that, net emigration of skilled workers continues, which means that the official unemployment rate is much lower than it would have been if these workers had not left the country.

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Finland should exit the euro

I think the progressive side of politics has a real problem when it is increasingly gazumped in policy insights by politicians and/or commentators from the populist, xenophobic, racist, homophobic, far right-wing. Whether Finland’s Foreign Minister Timo Soini is all of those things or just nationalistic and far right (one of the members of his Finns party wants homosexuals and some foreigners rounded up and sent to some remote Baltic Sea island), he is certainly correct when he told the press yesterday that “Finland should never have signed up to the single currency union” and “could have resorted to devaluations had it not been for its Euro membership” (Source). Earlier this month (December 4, 2015), Statistics Finland published the latest National Accounts data for the third-quarter 2015, which showed that real GDP declined by 0.5 per cent in that quarter and by 0.2 per cent over the previous 12 months. In the past 12 months, both exports and imports declined by 3.4 per cent, the former signalling declining markets and the latter declining domestic income – both bad. Investment spending fell by 3.9 per cent in the year to September, which will further undermine the nation’s potential growth. It is now becoming the basket case of advanced Europe.

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Benefit tourism – another neo-liberal fallacy

One of the tools that right-wing elements use to control the public debate about government spending and to justify their attack on public deficits is migration. There are many aspects to this public manipulation that invokes raw fear, ignorance and prejudice among the population. One of the elements, which plays on job insecurity and the range of fiscal myths that characterise the neoliberal era, is the claim that so-called ‘benefit tourism’ is rife and if left unchecked will bankrupt national governments and lead to higher burdens on ‘taxpayers’. So we are often told that migrants from poorer nations move to access welfare benefits that are superior to those offered by their own nations and that these movements are parasitic in nature and do not advance the interests of the host country citizens. Last week (December 10, 2015), the Irish-based EU organisation, the European Foundation for the Improvement of Living and Working Conditions (Eurofound) released a report – Social dimension of intra-EU mobility: Impact on public services – which examines “the extent to which mobile citizens from central and eastern European Member States … take up benefits and services in nine host countries” by “mobile citizens from 10 central and eastern European Member States” (the so-called EU10 mobile citizens). The Report should be read by all those who wish to contribute to this debate or understand what the facts are. Essentially, the Report finds that mobile citizens from poorer nations have lower take-up rates of welfare support in host countries than natives. That really should be the end of the ‘benefit tourist’ assertions. But then most of these public debates are not based on evidence or logic.

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Friday Lay Day – ruminations on MMT and the JG

It’s my Friday Lay Day blog and today I’m spending some time travelling and some time thinking about the Modern Monetary Theory (MMT) textbook that I’ve been promising to finish for some time. I can confidently say now that we are on track to finish the first edition by March 2016. Randy Wray and I have taken on a third author (Martin Watts) and have agreed on a completion plan. More information on availability will be available in the new year as we get closer to completion. This week I noted a lot of comments (particularly with respect to my Job Guarantee post) that suggested many readers still do not exactly know what MMT is. Further, there was a heterodox conference in Sydney this week, where MMT proponents were accused of being neo-liberals and politically naive. Unfortunately, other commitments prevented me from attending the conference this year but I read the paper in question and wondered why salaried academics would bother writing it. So a few reflections on both those matters today.

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The Job Guarantee and contributory unemployment benefits systems

The unemployment rate in Finland is climbing steadily and in October 2015 was 9.6 per cent (seasonally adjusted) and the employment to population ratio stood at 60.1 per cent and was trending down. Finland is fast becoming the next basket case of the Eurozone. What was once a highly supportive society is steadily being turned into a austerity-ridden backwater. The latest news, however, that the Finnish government is due to debate a proposal to provide every citizen with a basic income of €800 a month has excited the progressives – unfortunately. The proposal currently being prepared by the national agency that administers the Finnish welfare system (KELA) would offer this basic allowance in lieu of all other existing benefit payments. It would be paid regardless of whether the person received income from any other source. I have been considering the Finnish welfare system over the last month or so since my visit there in October. This is in relation to a series of queries I had from activists there who were keen on the Modern Monetary Theory (MMT) Job Guarantee proposal but were wondering how it would situate itself within the existing system of unemployment benefits in Finland. This blog captures my thoughts on both of those topics.

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On the trail of inflation and the fears of the same …

Today I’ve been following a document trail concerning the French government decision to adopt the so-called Barre Plan in 1976. This is part of the research on doing for my next book on why the Left abandoned progressive economic strategies and became what we now think of as austerity-lite merchants. I am hoping the manuscript will be finished by April 2016 and the book will emerge a bit later in the year. while the approach that will be taking is emerging, the strategy is to pinpoint key events in history where significant economic policy changes occurred and to analyse the rationale that was used to defend those policy shifts and to assess whether the circumstances that applied at those points in time provide any guidance to current day challenges. One of the big events that lead to deep uncertainty among Social Democratic politicians and their advisers, which arguably, was a key driver in the shift of these parties to the Right, was the Stagflation of the 1970s. The phenomenon of the simultaneous coincidence of accelerating inflation and rising unemployment had not previously been witnessed in the period following the Second World War. It needs a careful analysis because much of the popular understanding of this period and the claims that it demonstrated a failure of Keynesian policy approaches are incorrect and provide no basis for rejecting fiscal intervention to maintain full employment.

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IMF continues with its wage-cutting line

In November 2015, the IMF released an IMF Staff Discussion Note (SDN/15/22) – Wage Moderation in Crises: Policy Considerations and Applications to the Euro Area – which purports to measure “the short-run economic impact of wage moderation and the implications for policy in the context of the euro area crisis”. It juxtaposes the impacts of the so-called internal devaluation approach with the impacts of Eurozone monetary policy. It recognises that the euro zone countries cannot use exchange rate depreciation to boost domestic demand but argues that instead, “lower nominal wage growth … and lower inflation or higher productivity growth relative to trading partners is needed”. The paper presents the standard mainstream arguments that: 1) wage cuts improve employment through increased competitiveness; 2) interest rate cuts stimulate overall spending; 3) quantitative easing stimulates overall spending. There is very little empirical evidence to support any of these statements, especially when fiscal austerity is accompanying these policy measures. The discussion does acknowledge wage cuts may be deflationary and “work in the opposite direction of the competitiveness affect”, in other words, domestic demand and overall growth declines. The unstated message is that internal devaluation doesn’t really improve competitiveness when it is imposed across the currency bloc and undermines domestic spending, which further impedes any export growth (because domestic income drives import demand).

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The demise of French greatness and the European Left

The GFC clearly, in my view, demonstrated that the political positions held by both the left- and right-wing governments in the West with respect to economic policy were untenable. Both sides of politics in each major and country adopted versions of market liberalism where the overlap was more dominant than the differences. While the left maintained some emphasis on social policy and the right maintained an emphasis on individual freedom (which was more about corporate freedom than anything), the fact remains that these differences were blurred by the dominance of the free market approach in each of their platforms. It is ironic, that as a consequence of the GFC, the bureaucratic state is more dominant now than it was, especially in the European Union where the political and technical elite interacts with the so-called market to create what has been called the democratic deficit. We now have technocrats in the European bureaucracy, in the IMF, in the World Bank and other multilateral organisations who contrive to implement policies which have allowed the benefits of economic activity to be increasingly diverted to beneficiaries who are at the top end of the income and wealth distribution. Today’s blog continues reporting some of the research I’ve been doing for my next book on the demise of the Left and the subjugation of public purpose in the name of austerity. It seems that we have concentrated on fiscal austerity but the general notion of austerity, which is now the centrepiece of political positions in most advanced countries, goes well beyond just fiscal policy. The response to the recent events in Paris demonstrate how far the state is willing to centralise authoritative controls on the rights of their citizens.

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Friday lay day – The Stability Pact didn’t mean much anyway, did it?

It’s my Friday lay day blog and I am spending most of today reading French documents from the 1960s. The French theme is appropriate given recent statements by the ‘new Napoleon’ a.k.a. François Hollande this week about his intentions to ignore the rigid fiscal rules imposed on Eurozone Member States and expand the fiscal deficit to allow him to employ a significant number of extra workers in various areas of policing and security. While abandoning the “Stability Treaty” to use Hollande’s own words, by which he means the Stability and Growth Pact and its associated and pernicious fiscal rules and oversight, is an admirable display of leadership, the fact that he can only see to do this by engaging in more machinery to entrench the ‘war on terror’ more deeply is disturbing. It would have been much better if he just admitted that fiscal rules governing the Eurozone Member States are unworkable and prevent a government from fulfilling its responsibilities to advance the well-being of its citizens. He is now open to debate in France was the Conservatives who clearly favour more state police, security and military expenditure, such is their xenophobia, but are now demanding that such expenditure is done within the narrow limits of the fiscal rules and are therefore calling for reductions in spending on health and public services. I doubt that even this new Napoleon will be able to sale free of the fiscal straitjacket that is the Eurozone, major security threats notwithstanding.

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Australia – wages growth at record low as redistribution to profits continues

The Australian Bureau of Statistics published the latest – Wage Price Index, Australia – for the September-quarter yesterday and annual private sector wages growth fell to 2.1 per cent (0.5 per cent for the quarter). This is the third consecutive month that the annual growth in wages has recorded its lowest level since the data series began in the December-quarter 1997. In the 2015-16 fiscal statement, the Government assumed wages growth for 2014-15 would be 2.5 per cent rising to 2.75 by 2017. On current trends, that is highly unlikely to occur, which means the forward estimates for taxation revenue are already falling short and the fiscal deficit will be larger than assumed. Depending on how we measure inflation, the annual wages growth translates into a small real wage rise or fall. Either way, real wages are growing well below trend productivity growth and Real Unit Labour Costs (RULC) continue to fall. This means that the gap between real wages growth and productivity growth continues to widen as the wage share in national income falls (and the profit share rises). The flat wages trend is intensifying the pre-crisis dynamics, which saw private sector credit rather than real wages drive growth in consumption spending. The lessons have not been learned.

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Overt Monetary Financing – again

Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The New Yorker columnist John Cassidy decided to weigh into this topic in his recent article (November 23, 2015) – Printing Money. The topic is, of course, what we now call Overt Monetary Financing (OMF), which simply means that all of the unnecessary hoopla of governments matching their deficit spending with bond-issuance to the private bond markets, as if the latter are funding the former, is dispensed with. That artefact from the fixed exchange rate Bretton Woods system is maintained as a voluntary procedure by fiat-currency issuing governments but only provides financial assets to the non-government sector in the form of ‘corporate welfare’. The debt issuance of debt has nothing to do with funding the spending and is used by all and sundry to attack such spending for creating so-called ‘debt mountains’. OMF brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.

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