With the new British Prime Minister now indicating that she will push ahead with Brexit and free the nation from the undemocratic imposts of the increasingly dysfunctional European Union, a view that is apparently ‘poisonous’ to some so-called progressive writers, several pro-Remain economists or economic commentators have realised that the game is up for neo-liberalism in Britain. There have been several articles recently arguing (after bitching about the loss of the Remain vote and repeating the catastrophe mantra) that a new economic paradigm is now called for in Britain, based on its new found sovereignty (after it finally exits). It could, by the way, exit through an Act of Parliament without all the Article 50 palaver if it wanted to. That is just a smokescreen. This idea of a new paradigm being required is exactly what Thomas Fazi and I are working on as part of our current book project which is nearing completion. Today, I consider briefly our view that nationalisation has to return as a key industry policy plank for any aspiring progressive political party.
I am in the final stages of completing the manuscript for my next book (this one with co-author, Italian journalist Thomas Fazi) which traces the way the Left fell prey to what we call the globalisation myth and started to believe that the state had withered and was powerless in the face of the transnational movements of goods and services and capital flows. Accordingly, social democratic politicians frequently opine that national economic policy must be acceptable to the global financial markets and compromise the well-being of their citizens as a result. In Part 3 of the book, which we are now working on, we aim to present a ‘Progressive Manifesto’ to guide policy design and policy choices for progressive governments. We also hope that the ‘Manifesto’ will empower community groups by demonstrating that the TINA mantra, where these alleged goals of the amorphous global financial markets are prioritised over real goals like full employment, renewable energy and revitalised manufacturing sectors is bereft and a range of policy options, now taboo in this neo-liberal world, are available. Today, I discuss capital controls.
Last week, I reported on some claims by Australian private sector economists that the Australian government was deplete of policy tools (“run out of ammunition” was the cute term used among these self-serving characters) and would not be able to handle the Brexit fallout – see When journalists allow dangerous economic myths to pervade. It was obvious that the statements were nonsensical and only reflected the dangerous neo-liberal ideology that discretionary fiscal policy should be constrained to the point of being not used! In the last week, some major central bankers around the world have given speeches which suggest they also understand that fiscal policy has come to the fore and provide some certainty to the world economy. The latest estimates from the ECB of the Eurozone output gap certainly provide the evidence base to justify a major expansion of fiscal deficits across the Eurozone. The research is suggesting that there is a significant output gap which is evidence of insufficient aggregate spending rather than any structural shifts in potential GDP. I guess they are warming the Member States for more expansionary action although the message is very clear – the European Commission has to abandon its austerity mindset and provide some old-fashioned deficit stimulus – quick smart!
In the last month or so, we have seen the IMF publish material that is critical of what they call neo-liberalism. They now claim that the sort of policies that the IMF and the OECD have championed for several decades have damaged the well-being of people and societies. They now advocate policy positions that are diametrically opposite their past recommendations (for example, in relation to capital controls). In the most recent OECD Economic Outlook we now read that their is an “urgent need” for fiscal expansion – for large-scale expenditure on public infrastructure and education – despite this organisation advocating the opposite policies at the height of the crisis. It is too early to say whether these ‘swallows’ constitute a break-down of the neo-liberal Groupthink that has dominated these institutions over the last several decades. But for now, we should welcome the change of position, albeit from elements within these institutions. They are now advocating policies that Modern Monetary Theory (MMT) proponents have consistently proposed throughout the crisis. If only! The damage caused by the interventions of the IMF and the OECD in advancing austerity would have been avoided had these new positions been taken early on in the crisis. The other question is who within these organisations is going to pay for their previous incompetence?
This blog continues the discussion of the British currency crisis in 1976. Today we discuss the rejection of the 1976 Public Expenditure White Paper by the British Parliamentary Left who wanted an expansion of the fiscal deficit given that unemployment was well in excess of 1 million people in early 1976. Soon after Harold Wilson resigned as Prime Minister and James Callaghan, took over. He was by then ‘anti-union’ and was, increasingly, making statements about trade union power that played into the hands of the conservative push for an increased share of national income. After the rejection of the fiscal strategy, the sterling sell-off intensified. It was no coincidence.
I am off to Spain in a few weeks to undertake a lecture tour associated with the publication of a Spanish translation of my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (see details below if you are interested). I noted by way of passing in a blog last week that a recent article in Spain’s highest-circulation newspaper El País (March 31, 2016) – Public deficit for 2015 comes in at 5.2%, exceeding gloomiest forecasts. The latest data shows that the Spanish government is in breach of Eurozone fiscal rules and is growing strongly as a result. Those who claim that Spain demonstrates how fiscal austerity can promote growth should examine the data more closely. The reality is that as growth has returned (albeit now moderating again), the discretionary fiscal deficit (that component of the final deficit that reflects the policy choices of government) has increased. Government consumption and investment spending has supported the return to growth, which had collapsed under the burdens of fiscal austerity between 2010 and 2013. Spain demonstrates how responsible counter-cyclical fiscal policy works.
Last week (March 25, 2016), the US Bureau of Economic Analysis released their ‘Third Estimate’ of – Gross Domestic Product, 4th quarter 2015 – which showed that the US economy slowed rather appreciably in the last three months of 2015. The BEA said that real GDP growth was “increased at an annual rate of 1.4 percent” after having increased by 2 per cent in the third-quarter of 2015. Two things stand out from the data: (a) Private consumption expenditure, while still relatively strong continues to slow. The main drivers of consumption expenditure are recreation and health care services and durable goods; (b) Capital formation (investment) declined for the second consecutive quarter, signalling a lack of confidence in the medium-term outlook by business firms. However, residential investment was relatively strong as was federal government spending. The BEA also reported that corporate “profits decreased by 7.8 per cent at a quarterly rate”. The data release provides no succour to those who think the Federal Reserve Bank should continue to hike interest rates. Inflation is still well below the implicit central bank target rate (2 per cent) and growth is faltering.
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.
Yesterday, as I was going about my business in San Francisco, I passed a man lying in the gutter outside the Westfield Centre on Market Street (the swish multilevel shopping complex with some expensive label stores), who was poorly dressed, given the weather (cold) and was clearly having some sort of episodic fit. The street was packed with Sunday shoppers most of whom were well-heeled. I asked the person I was with whether we should ring 000 to get some sort of professional help for the man and he told me that it would be futile because they wouldn’t come out anyway. It was not an isolated incident. Throughout the city the extent of homelessness and the public nature of mental illness is stark. There are choruses of shouts, anguished cries, megaphoned self-dialogues emanating from almost every street corner, doorway, alleyway, train station and whatever. People who should be in care, suffering and crying out. For the richest country in the world to tolerate this degree of human rights violation is almost unimaginable. While the Australian health system is far from perfect, our mentally ill citizens are much better cared for in state facilities and are not left on the street, homeless, suffering from a variety of obvious physical and mental maladies – and basically abandoned by the system. There are some who escape the net and wander the streets of our cities, but, in general, we do not accept that the mentally ill should be left to their own devices. It tells me that any American claim to greatness is a pitiful, self deceit. This is a heartless society where citizens who are most in need of state support are the least able to access it.
Last year (June 10, 2015), I wrote a blog – The myopia of fiscal austerity – which in part recalled my experiences as a PhD student at the University of Manchester during the Thatcher years. I noted that during my period in the city there were two major failures of public infrastructure – first, a rat plague due to spending cuts that had led to the reduction in rat catchers/baiters who had worked on the canals that go through Manchester; and, second, widespread collapses in the Manchester underground sewers which caused effluent in the streets, traffic chaos and long-term street closures. Major inner city roads were closed for a good 6 months while repairs were rendered. The reason – cut backs in maintenance budgets. The repairs ended up costing much more than the on-going maintenance bills. That experience brought hometo me the myopia of austerity. While the austerity causes massive short-term damage, it is clear that it also generates a need for higher public outlays in the future as a response to repairing or attending to the short-run costs. The problem wasn’t confined to Manchester. Margaret Thatcher’s destructive reign undermined public infrastructure throughout Britain. It seems that the Conservative British government is repeating history, this time the impacts are significantly more severe in human and property loss. In early December, the North-West of England experienced devastating floods. Areas south of Carlisle down through Lancaster were inundated with floodwater, which destroyed houses washed away bridges and claimed human life. On November 5, 2014, the British National Audit Office released a report – Strategic flood risk management – which warned the British government that “current spending is insufficient to meet many flood defence maintenance needs”. Now the repair bill will be many times the claimed expenditure that was cut in the name of fiscal austerity.
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.
Australia has been caught up in a almost national hysteria the last few days as the Federal government’s Mid-Year Economics and Fiscal Outlook (MYEFO) release approached. The MYEFO was released yesterday (December 15, 2015) and the sky is still firmly above us, albeit slightly overcast today with storms approaching. I can assure everyone the storms are meteorological events associated with the early summer rather than any moves by international credit rating agencies to detonate their heavy artillery and sink the continent into the Pacific and Indian oceans. The mainstream media coverage of the buildup to the MYEFO has been nothing short of extraordinary and demonstrates that no matter how wealthy a nation’s per capita, how educated it’s people appear to be, public debate is conducted at levels of ignorance that the cavemen and women would laugh at. I have spoken to several journalists in the last few days who by their questioning expose a basic lack of understanding of the macroeconomic implications of the data that has been released in the MYEFO. Basically, the Outlook shows that the federal fiscal deficit is larger than previously estimated (in the May 2015 Fiscal Statement aka ‘The Budget’) and this demonstrates the automatic stabilisers in operation to put a floor under the slowing economy. This counter-cyclical movement is something that we should be comforted by because as private spending contracts and the economy slows the expansion of the deficit limits, to some extent, the job losses and the number of businesses that might become insolvent. However, the mainstream reaction has been hysterical (as in hysteria) with all sorts of predictions about national insolvency, credit rating agencies downgrading us, and “deficits for as long as you can see”. The problem is that the so-called average Australian believes all this nonsense and doesn’t understand that the rising deficit is a good thing in the context of poor developments in private spending.
I read an interesting paper this week from the US Federal Reserve Bank – The Corporate Saving Glut in the Aftermath of the Global Financial Crisis – written by Joseph Gruber and Steven Kamin. It was published in October 2015 as part of their International Finance Discussion Papers (Number 1150). Essentially, the paper documents a rather substantial “increase in the net lending … of non-financial corporations in the years preceding and especially following the Global Financial Crisis”. Their results cast doubt on the notion that the decline in productive investment over the last 15 years or so reflects a desire by firms to “strengthen their balance sheets”. These trends have significant implications for how we view fiscal positions and the normality or otherwise of particular deficit or surplus outcomes. The authors do not tease out those implications so I thought I would.
In Greece, the national unemployment rate has been around (or higher) than 25 per cent since 2013 so it is little surprise that mortgage defaults has spiralled and people are selling of family heirlooms to wealth antique dealers in Switzerland to cover daily costs. A Geneva-based dealer told the Financial Times in June (Source) that “For buyers there are opportunities that only come along when there’s a real economic upheaval . . . in Greece it hasn’t happened since the second world war”. So the vultures are enriching themselves as a result of peoples’ misery. Its the market! No it isn’t. Its an incompetent government looking after themselves and allowing their citizens to go down the drain. Just yesterday, the Greeks have agreed to tougher foreclosure measures (as part of the bailouts) which will see impoverished Greeks lose their last vestige of dignity – their homes. And the latest European Commission – Autumn Economic Forecasts – (released November 5, 2015) portend a very sorry future for Greece and the Eurozone generally.
The fiscal position of a government that issues its own currency should never be a focus of attention other than to understand why it have evolved to its current level – whether it is reflecting mainly discretionary policy choices or cyclical effects (automatic stabilisers). If there was accelerating inflation and high GDP growth then one might be tempted to conclude the fiscal deficit is to expansionary and needs to be cut back. One might equally conclude that private spending is too strong and needs to be cut back. But when there is declining growth and very high and persistent labour underutilisation rates, it is hard to argue that the fiscal deficit needs to be cut. It is, in fact, lunacy!
The British Office of National Statistics published the – Gross Domestic Product Preliminary Estimate, Quarter 3 2015 – yesterday (October 27, 2015) which showed, unsurprisingly, that the British economy is slowing and heading back into recession under current policy settings. The annual real GDP growth rate declined for the third successive quarter as the impacts of the world slowdown and domestic policy austerity start to take their toll. The British government really has to reflect back on 2012 and realise that with non-government spending weak and a household sector carrying very high levels of indebtedness, now is not the time to be trying to cut discretionary net public spending. There is a need for a public spending injection to restore growth while the world works out which way it is going to go.
Today’s release of the – Labour Force data – for September 2015 by the Australian Bureau of Statistics shows that the Australian labour market went backwards this month after stalling last month. Employment growth was negative (drop of 5,100 thousand) and the participation rate fell by 0.2 points. The net result was that the labour force fell faster than employment and so unemployment fell by 8,100 thousand. The unemployment rate remained unchanged at 6.2 per cent. This is one of those times when falling unemployment is not a good signal. The unemployment rate would have risen to 6.3 per cent had not the participation declined. The teenage labour market went backwards again in September and their situation remains parlous. We are still waiting to see how much damage the the forecasted decline in private investment will bring. But with a weakening labour market and the Federal government intent on cutting its net spending over the next 12 months, the outlook looks rather depressing.
I read two articles (among others) on the flight over to Europe yesterday that are worth commenting on. The two articles discussed the role of monetary policy and, in particular, whether the policy changes to address the crisis had achieved their aims. I read these articles as I was doing some computations which would suggest that the main game in town remains fiscal policy. The first article was in the Wall Street Journal (October 4, 2015) – How the Fed Saved the Economy – written by former US Federal Reserve Chairman Ben Bernanke. He claims that the US is approaching full employment because of the ‘extraordinary’ policy innovations that the US Federal Reserve Bank introduced during his period as Chairman. The second article was in the New York Times and argued that monetary policy authorities do not have the necessary policy tools to combat the next crisis. The NYTs article captures the ideological bias that entered policy discussions since the emergence of Monetarism in the 1970s. It makes out that policy is powerless, which is largely only a statement about monetary policy. It is a reflection of how perceptions of what we think monetary policy can achieve are way out of line with reality. But that is core Modern Monetary Theory (MMT). But that doesn’t mean that policy overall is powerless. Governments can always prevent a financial crisis and a recession from occurring if they are willing to use their fiscal capacities. Of course, that capacity is the anathema to the neo-liberals which is really the problem. There is no policy powerlessness. Just an ideological bias against using the available tools properly and responsibly.
The December 2014 – Financial System Review – published by the Bank of Canada presents some chilling data, which tells me that the Canadian government’s embrace of neo-liberal orthodoxy is taking the nation down a dangerous path. The Review was obviously written before the latest global growth trends became apparent to the likes of the IMF who have now finally worked out that the policy structures in place which emphasise internal devaluation and fiscal austerity in most places are killing off growth. Canada is now very exposed because of its policy failures. The problem is that the political class in Canada is obsessed with recording fiscal surpluses and seem unable to understand that the only reason it has been able to reduce the fiscal deficit in the post-GFC period is because the economy has experienced a resources boom which is now over and the household sector incurred unsustainable levels of debt. Both sources of spending growth are now unlikely to continue and business investment is now contracting as the opportunities in the resources sector diminish. The Government and the main opposition party are heading into the national election boasting that each will achieve a fiscal surplus in the coming year. That is now unlikely because the downturn in the economic cycle (Canada is now in recession) will work against the aspirations of the politicians. They will end up with a fiscal deficit whether they like it or not. If they take the (stupid) neo-liberal path and fight against the private spending cycle, Canada will end up with what I call a ‘bad’ deficit driven by the automatic stabilisers – a rising deficit with rising unemployment and declining growth. Alternatively, it can take the sensible path and introduce new discretionary spending programs to allow a ‘good’ deficit to emerge where the public spending supports the moderation in private spending and unemployment does not rise. That is the preferred path but I doubt that either major party in Canada is mature enough and educated enough to take that action.
One cannot but be very happy that Jeremy Corbyn has assumed leadership of the British Labour Party if you sit on the progressive side of politics. His elevation to the top job has all but closed the door on the compromised years of New Labour. The so-called Blair-ites have been declared yesterday’s new and not before time. Their embrace of neo-liberalism and the ‘light touch’ approach to the financial sector allowed the destructive period set in place by Margaret Thatcher in the 1980s to become more intense (for example, the decline of manufacturing and the increasing dominance of the unproductive financial sector). But as I have indicated before, some of the language and promises coming out of the Corbyn camp appear to be within the neo-liberal paradigm and, in many ways, not an advance on the New Labour shemozzle. I know that the claim will be that they have to be cautious for political reasons not to open themselves to attacks from the conservatives given the public fear of fiscal deficits, after years of indoctrination. But then their claims to be heralding in a ‘new politics’ would seem to be rather lame if they are prepared to lie or obfuscate about the role and meaning of fiscal deficits just to get some political advantage. Further, at some point they will have to take this issue on if they want to forge a truly progressive new political agenda. Otherwise, they will wallow in the confused space where they cannot break out of the neo-liberal mould while banging on about how fair they will be. They have five years before the next election – and that is plenty of time to reeducate the public. That process of messaging and re-framing should start now. Accordingly, they should take the political flack now and trust in their messaging and re-framing.