{"id":10472,"date":"2010-06-30T13:49:27","date_gmt":"2010-06-30T03:49:27","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=10472"},"modified":"2010-06-30T13:49:27","modified_gmt":"2010-06-30T03:49:27","slug":"a-total-lack-of-leadership","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=10472","title":{"rendered":"A total lack of leadership"},"content":{"rendered":"

\t\t\t\tTonight (Tuesday Boston time as I write) my very kind and gracious host took me to an early evening Ringo Starr and his All Starrs concert down on the waterfront. I never knew so many Beatles fans from the 1960s had survived the boredom. They were out in force tonight as he sang Yellow Submarine and other pop relics. The highlight of the evening was Edgar Winter (who is one of his all starrs) featuring on Frankenstein<\/a> which he made a hit in 1972. But where do all these Beatles fans go during the day! Scary. And by the way, Rick Derringer who was in the original Edgar Winter Band was also in Ringo’s band tonight playing some nice guitar (if you like Gibson-motivated pop – I don’t). My host decided to call it an early night and I left with him – while Warren and his partner bopped on. A neat exit you might say! But Ringo at least provided some leadership – poppy and pretty soppy at that. But much better than our leaders of government are providing if the recent G20 declaration is anything to go by. They have just ceded leadership to the IMF – that unelected rabble. Stay tuned for things to get worse.
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\nAnother G20 talkfest has ended in Toronto and the final communique suggests that the IMF is now back in charge. If you read the IMF Briefing<\/a> and the World Bank Briefing<\/a> to the G20 Summit you will get a sense of deja vu. The line now being pushed is, as always, structural reform of product and labour markets – which you read as deregulation and erosion of worker entitlements. <\/p>\n

The IMF is selling the line that:<\/p>\n

\nCredible consolidation plans-designed to be “growth friendly”-would mitigate the dampening effect on domestic demand. Monetary policy accommodation could be maintained for a more extended period to help support activity, since inflation would remain contained as fiscal balances are strengthened.\n<\/p><\/blockquote>\n

Their hope is that export surplus nations will rebalance their growth strategies via exchange rate adjustments to stimulate export sectors of the stagnant nations with low interest rates encouraging investment. They also claim that changing tax mixes (from payroll to consumption) will help growth while increasing revenue.<\/p>\n

First, monetary policy is an ineffective expansionary tool. Rates are low and have been for some time. Japan failed to grow fast with zero interest rates for years. It was only when fiscal policy reached an adequate level that it started to show signs of life again.<\/p>\n

Second, relying on exchange rate adjustments to lead to a major revitalisation of world growth via trade is to seriously underestimate the extent of the demand crisis facing the global economy. The IMF has been pushing export-led growth on to poor nations for decades with little overall shift in the poverty rates at the lowest levels.<\/p>\n

All the IMF simulations are based on their GIMF model which is highly flawed. Basically, these models can give whatever result satisfies your ideological disposition. All that needs to be done is ensure the elasticities (the numerical relationships) on key variables – linking policy changes to output and monetary aggregates – are calibrated accordingly. So the GIMF model will always give large real gains when you deregulate the labour market even though there is no credible research literature that would support that conclusion.<\/p>\n

In technical terms, the substitution effects are typically much larger than income effects – which means in English, taking a specific example, that the benefits of cutting wages have huge cost effects but the income losses are downplayed. So the supply expands while there are no real demand effects and the world is judged a better place. The empirical research literature by and large does not support the faith in these sorts of models. Please read my blog – GIGO …<\/a> – for more discussion on this point.<\/p>\n

The papers clearly influenced the final decisions taken by the G20 leaders, which culminated in the G20 <\/a>Declaration<\/a>. The G20 Declaration says that:<\/p>\n

\n… Building on our achievements in addressing the global economic crisis, we have agreed on the next steps we should take to ensure a full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced global growth … <\/p>\n

But serious challenges remain. While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt. Strengthening the recovery is key. To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand. At the same time, recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. This should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path.\n<\/p><\/blockquote>\n

This quote is virtually word-for-word from the IMF briefing which says a lot for the independence of our world leaders. They buy, without question the notion that “(s)ound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt.”<\/p>\n

But what constitutes “sound fiscal finances” is not spelt out. It is all fudged around what the bond markets will tolerate. But what the bond traders think is a reasonable outcome for their narrow vested interests is unlikely to be remotely what is in the best interests of the overall populace. So what the bond markets will tolerate should not be a gauge by which we judge sound fiscal finance. After all, for most governments the involvement of the bond markets in the decisions to net public spend is voluntary anyway.<\/p>\n

A sovereign government is never revenue constrained because it is the monopoly issuer of the currency and so the bond markets are really superfluous to its fiscal operations. What the bond markets think should never be considered. They are after all the recipients of corporate welfare on a large scale and should stand in line as the handouts are being considered. They are mendicants. It is far more important that government get people back into jobs as quickly as possible and when they have achieved high employment levels then they might want to conclude the fiscal position is “sound”.<\/p>\n

My summary checklist for determining whether fiscal policy is sustainable is:<\/p>\n