{"id":15727,"date":"2011-08-18T17:09:42","date_gmt":"2011-08-18T07:09:42","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=15727"},"modified":"2011-08-18T17:09:42","modified_gmt":"2011-08-18T07:09:42","slug":"self-inflicted-catastrophe","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=15727","title":{"rendered":"Self-inflicted catastrophe"},"content":{"rendered":"

\t\t\t\tIn the last few days, while MMT has been debating with Paul Krugman, several key data releases have come out which confirm that the underlying assumptions that have been driving the imposition of fiscal austerity do not hold. Ireland led the way in early 2009 cheered on by the majority of my profession who tried to sell the world the idea of the “fiscal contraction expansion”. Apparently, there were millions of private sector spenders (firms and consumers) out there poised to resurrect their spending patterns once the government started to reduce its discretionary net spending. Apparently, these spenders were on strike – and saving like mad – because they feared the public deficits would have to be paid back via higher future taxes and so the savings were to ensure they could pay these higher taxes. It is the stuff that would make a sensible child laugh at and think you were kidding them. Now, the disease has spread and the data is telling us what we already knew. The economists lied to everyone. None of them will be losing their jobs but millions of other will. And the worse part is that the political support seems to be coming from those who will be damaged the most. Talk about working class tories! This is a self-inflicted catastrophe.
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\nOn August 16, 2011, Eurostat released the Flash Estimates for second quarter 2011 GDP<\/a> which presented a very bleak picture indeed.<\/p>\n

I assembled the following Table to summarise the trends over the last year. Some nations were not reported (as the flash estimates are not available – for example, Ireland, Greece etc).<\/p>\n

The first data column shows the actual flash estimate for real GDP growth in the 12 months to June quarter 2011. The next column is the annualised equivalent of the average growth over the last three quarters, then the annualised equivalent of the average growth over the last two quarters and finally, the annualised equivalent of the growth in the June 2011 quarter. This sort of data can help you understand the movement in the economies in question.<\/p>\n

If we compare where the economies were at the beginning of the year in terms of real GDP growth and where they are now, most nations are slowing. The few exceptions are Italy, Latvia, Austria, Finland, Sweden, and the US. But Austria, Sweden and the US are in decline compared to where they were a year ago.<\/p>\n

Japan can be excluded for now because of the impact of the Tsunami.<\/p>\n

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It is hard data to graph effectively, but for those who prefer pictures the following graph just reproduces the data in the Table.<\/p>\n

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The next Table summarises the IMF World Economic Outlook<\/a> estimates for selected countries as at their July 2010 update. I averaged their 2010 and 2011 forecasts. The other columns are derived from the previous Table.<\/p>\n

Their estimates for the US, the UK (and Japan – but they cannot be held responsible here) are very poor. While their estimates for the actual European data for the year to June 2011 were reasonable it is clear that the earlier growth in 2010-11 which was driven by the prior fiscal stimulus packages has come to an end.<\/p>\n

The IMF has been constantly calling for “fiscal consolidation” and now governments are imposing fiscal austerity regimes onto their economies the results are clear – there is a major slowing of growth and if we assessed the annualised June 2011 equivalent against the IMF forecast for 2010-11 the IMF estimates were very poor even for Europe.<\/p>\n

The early signs of growth are gone.<\/p>\n

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The IMF also seems to be flip-flopping a bit at present as their forecasts fall apart.<\/p>\n

They were leading the charge in advocating fiscal consolidation (read cuts) as the early signs of growth appeared courtesy of the fiscal stimulus packages.<\/p>\n

As David Blanchflower points out in his recent New Statement article (August 16, 2011) – Christine Lagarde’s attack on Osbornomics is damning<\/a> – the British government used statements made by the IMF as being supportive of its fiscal austerity drive.<\/p>\n

Blanchflower points out that even as late as June 6, 2011 “George Osborne said he had been “vindicated” in a debate over spending cuts after the International Monetary Fund backed his austerity measures.”<\/p>\n

But the latest offering from the new boss of the IMF – fresh from having blood on her hands as the French finance minister wrote an extraordinary piece in the Financial Times (August 15, 2011) could not be construed as being supportive of the British government’s demolition of its economy nor for that matter the conduct of the American polity.<\/p>\n

Here is the IMF page access – Don’t let fiscal brakes stall global recovery<\/a>. Lagarde is now saying categorically that:<\/p>\n

\nAfter the crisis unfolded in late 2008, global policymakers came together to act with common purpose. Their efforts saved us from a second Great Depression, by supporting growth, attacking sclerosis of the financial arteries, rejecting protectionism and providing resources to the International Monetary Fund. It is time to rekindle that, not only to avoid the risk of a double-dip recession, but also to put the world on the path of solid, sustained and balanced growth.\n<\/p><\/blockquote>\n

That is fiscal policy was effective! Just ask the IMF.<\/p>\n

She now claims that crisis has moved from the “poor health of financial institutions” to the “doubts about the health of sovereigns and the tricky feedback loop to banks”.<\/p>\n

What follows tells me that this article is another ad hoc<\/em> attempt by the IMF to distance itself from the damage that its prescriptive aggression has caused.<\/p>\n

I say that because while she is now expressing worry about the falling growth rates and attempting to claim leadership in a more reasoned approach (hence the claim by Blanchflower that she is basically attacking the Osborne-approach), the underlying narrative and understandings are still the same old – public debt is bad and introduces a solvency problem.<\/p>\n

She says that the policy interventions that saved the world have:<\/p>\n

\n… left behind a legacy of public debt – about 30 percentage points of gross domestic product higher than before, on average, in advanced countries.
\nSo there are no easy answers.\n<\/p><\/blockquote>\n

Yes, if she could get beyond her ideological blindness she would realise that non-government wealth rose by those 30 percentage points of GDP courtesy of the fiscal interventions and provided the private sector with some room to save and reduce their very risky debt exposures.<\/p>\n

Public debt is just private wealth. Public debt interest payments are private income. Both good (excluding considerations of equity – that is, who is benefitting).<\/p>\n

It is true that the public debt (and deficits) in the EMU are problematic given the ridiculous nature of the monetary system. But Lagarde is as implicated in that as anyone. They introduced a system that could never withstand a serious negative aggregate demand shock and are now reaping the costs of that poor design – which was imposed on member nations by neo-liberal zealots on large, secure salaries.<\/p>\n

The problems in the EMU should not cause major macroeconomic issues in the rest of the advanced world though. Nations like the UK, the US, Japan etc are not dependent on bond markets for their welfare. But in thinking they are, their respective governments are plunging their economies and the rest of us into the same recession-mired bog that is clearly the European experience.<\/p>\n

Lagarde also repeated the mantra that “(f)or the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans”. Given that the national governments do not control the budget outcome and given they cannot accurately forecast their external and private domestic sector spending decisions very well it is nonsensical to expect governments to announce budget trajectories <\/p>\n

The best fiscal “consolidation” plan is to stimulate growth with on-going and larger (if needed) fiscal support. Then let the automatic stabilisers take care of the cyclical component of the budget outcome as economies move closer to full capacity utilisation and then make assessments about the public\/private balance in the output mix.<\/p>\n

Following that strategy – which means ignoring public debt ratios and all the other irrelevant financial ratios – will improve the things that matter – real things – output, employment, incomes, welfare.<\/p>\n

Largarde knows though that cutting public spending is damaging. So now she claims that:<\/p>\n

\n… we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow. Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs.\n<\/p><\/blockquote>\n

It is contradictory. If private businesses think that there will be a sharp fiscal contraction in some defined future period that will impact on their investment decisions. Households will also be negatively impacted.<\/p>\n

The government should always focus on the real economy and educate the citizens to disregard the “budget outcome”. As a stand-alone number the budget outcome each period has no meaning at all.<\/p>\n

But the real GDP growth data, and employment growth and unemployment rates carry intrinsic meaning about our lives and our well-being. That is the only role for government.<\/p>\n

So while the IMF is now implicitly arguing for fiscal expansion – a total rejection of the UK fiscal strategy and the mad republicans in the US to name a few – it still doesn’t understand that governments rule not bond markets.<\/p>\n

By tying in the EMU with other advanced nations they are also falling into the “conflation of non-comparable monetary systems” error – a fatal mistake that reveals among other things a deep-seated ignorance and should disqualify the speaker from further input into the policy debate.<\/p>\n

British unemployment rises<\/strong><\/p>\n

The UK Office of National Statistics released their August 2011 – Labour Market Statistics<\/a> yesterday (August 17, 2011).<\/p>\n

The data showed that:<\/p>\n