When a nation or region is experiencing the worst crisis the IMF always comes to the party and makes it worse. The latest evidence from those who study the detail of IMF interventions across the globe have found that the IMF has imposed harsh conditionalities (healthcare spending cuts, cuts to jobless assistance, cuts to public service wages and employment) in 76 out of the 91 loans it has extended to nations in peril as a result of the pandemic. On the other hand, data show that the wealth of billionaires has scaled new heights between April 2020 to July 2020 – a 42.4 per cent increase in their total wealth. If all that doesn’t tell us that the neoliberal system has overextended it indecency and rebellion is required then what else would? The point is that when disaster strikes the poorest nations, the IMF guarantees to make it worse. It should be dissolved immediately through defunding from national states and a new progressive, multilateral institution created that helps people not punishes them.
As governments grapple with the dissonance that the pandemic is causing them – realising that their old mainstream economics narratives are not going to cut it any more but still reluctant to admit that and pass onto a new phase of creative policy making – we are observing these contradictions in both statements about fiscal policy and monetary policy. The Australian government, for example, is convinced tax cuts are required but have observed that recent tax cuts, before the pandemic hardly stimulated any spending. Further research from the US is demonstrating that payments to households under the – Coronavirus Aid and Economic Security (CARES) Act – may not have resulting in the spending boost that was modelled as part of the policy design. And then on the monetary policy front, central bankers like Madame Lagarde are strutting around making grand statements about becoming flexible with their definition of price stability (that is, saying they will allow for higher inflation before they increase rates) despite not being able to remotely meet their current stability levels with deflation looming. I covered a statement along similar lines from the US Federal Reserve Bank boss recently – US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics (August 31, 2020). It all adds up to what happens when a paradigm is shifting and the old school are caught out – no longer able to really offer anything of use but hanging on to their status nonetheless. Pragmatism usually passes them by as it will in this case.
Last week, there were some rather significant shifts in the public discourse surrounding macroeconomic policy and challenges made to the orthodox economics taboos that have been used to prevent governments from acting in the best interest of the citizens. First, the Australian treasurer broke away from the government’s previous obsession with fiscal surplus pursuit to announce that for the foreseeable future it was only going to concentrate on jobs and growth. In his statement, he basically refuted all the mainstream macroeconomic claims about fiscal deficits – higher interest rates, lower private investment, lower growth, lower private sector confidence etc. There is really nothing left of the mainstream position now and any politician or economist that tries to resurrect the ‘debt and deficit’ narratives of the past will find it hard gaining the same politician traction that they were able to garner some years ago at the height of the neoliberal period. And, if that was not enough, a former Federal treasurer attacked the ‘high priests’ of the central bank, demanding they buy up government bonds and help the government run “Mountainous” deficits to achieve full employment. The flood gates opened just a bit more after those interventions along the way to jettisoning all the mainstream nonsense that should have been abandoned decades ago.
Many issues that become ‘hot topics’ in public debates are really non-questions despite the heat they raise. All sorts of experts advance views, television current affairs programs trawl over them with various of these experts making careers for themselves, politicians take up hours of their time and our time discussing them, yet, when you really break the issue down – there is nothing much to see. The seemingly very erudite debates, discussions, opinions are all based on false starting premises, which are assumed and rarely discussed. This sort of charade is all the legacy of living in the fictional world created by my profession, which has distorted public discourse so badly that we now have people saying old people should be allowed to die terrible deaths from COVID so the young people can have jobs. These are old people who worked all their lives to help build our nations, who fought in World Wars to defend our freedom from daunting enemies, old people who cared for us personally, and old people who mostly, probably, have the joy of life before them each day they open their eyes, just like any of us. The problem is that the whole construction is based on a false premise: being that there has to be widespread economic damage if we choose to protect the health of our peoples. That premise is based on the failure to understand that the currency-issuing government can attenuate any economic losses if it chooses to adopt appropriate economic policy interventions. The fact that real GDP and employment has fallen significantly this year is testament to a failure to use fiscal capacity. We should be better informed before we get into elaborate but flawed debates that essentially come down to turning one population cohort against another.
Japan has a new leader of the ruling Liberal Democratic Party, who, given the majority of the LDP in the Diet will become prime minister in the coming days. He was interviewed over the weekend about the current crisis and the role that the Japanese government can play to attenuate the costs. He stated clearly that there was no limit to government debt issuance. The meaning of this statement is clear. The Japanese government should ignore claims that its public debt ratio is too high or is facing impending insolvency or bond-market revolts or any of the other manic predictions that economists who do not know better keep making. Instead, as Yoshihide Suga noted, the challenge is jobs and incomes. The only limits are real resource constraints and when there is a pandemic and rising unemployment, those constraints ease and the fiscal space for more net spending increases. At least one world leader understands that.
The Australian Bureau of Statistics (ABS) published the June-quarter – Private New Capital Expenditure and Expected Expenditure, Australia – data today as part of the sequence of data releases relating to next Wednesday’s release of the second quarter National Accounts. Remember that this data is ‘backward’ looking, in that it tells us what has gone in the three months from April to the end of June. But it does provide the first signal of the impact of the first-stage lockdowns in April have had on capital formation. Today’s release confirms the worst with Total new capital expenditure falling by 5.9 per cent in the quarter and 11.5 per cent over the last 12 months. Investment in Building and structures fell by 4.4 per cent over the quarter and 9.4 per cent over the 12 month period, while investment in Equipment, plant and machinery fell by 7.6 per cent for the quarter and 13.8 per cent over the year. Crucially expected investment for 2020-21 has nose-dived (down 12.6 per cent on previous plans). By allowing the economy to go into recession and sustain mass unemployment and falling sales, the Australian government has made matters worse. Within the safe health constraints, it could have easily added another $A100 billion to its stimulus and seen unemployment drop to relatively low levels, major construction work undertaken in social housing to address the chronic shortfall, and invest in forward-looking green infrastructure. Instead, it has chosen to penny pinch and today’s figures are just the start of the damage this policy void is causing. This is another case of neo-liberal austerity white-anting the capacity of the economy to deliver prosperity for all.
The University of New South Wales Business School seems to be making headlines for all the wrong reasons. They have (at least) two attention-seeking academics that are not helping the reputation of the University. The first, thought he was being smart by trying to put Modern Monetary Theory (MMT) down and lie about my own work only to make a fool of himself. I note that someone at The Conversation, which damaged its credibility publishing the piece, has now edited the original piece (taken my name out of the text). The stupidity of the attack on MMT remains however. I dealt with that in this blog post – When mainstream economists jump the shark and lose it completely (January 23, 2017). Now, another academic who thinks somehow she is a wonderful communicator bringing economics to the public, is causing a national debate about freedom of speech and all the rest of it. She is arguing that the Australia should not have followed its lockdown strategy, and, instead should have allowed around up to 25,000 Australians to die in order to protect the economy. So far, only 155 have died. The controversy is being constructed as one of free speech and academic freedom. But academics should only be free to make statements using their university attribution if they are based on evidence that can be supported. I don’t dispute the academic’s right to be provocative. I do dispute her command of the evidence and her ignorance of matters macroeconomic. That is the problem here. Short recommendation: I would not study economics in this Department.
The Powell Manifesto aka the – Attack on American Free Enterprise System – was a memo sent on August 23, 1971 to the US Chamber of Commerce by lawyer, Lewis Powell, who had been hired by the Chamber to craft a strategy to restore the dominant position of corporate America, which had felt diminished by the gains made by workers and citizens from social democratic policies. The dominant narrative in the late 1960s was focused on the so-called ‘profit squeeze’, which related to the redistribution of national income towards wages as a result of various government policies which increased workers’ protection, used taxation and spending as a redistributive vehicle, grew public services and infrastructure. Powell produced a path to reverse these gains by workers and citizens, in general, and ensure that corporate interests were dominant in public decision making. Conservative forces are still using it as a blueprint for their agendas. The recent decision by the Australian government to divert university students out of humanities and social science courses is a classic application of the blueprint.
For various reasons, I am often in Melbourne and over the last few trips I have avoided public transport (trams) for obvious reasons. In my wanderings to various destinations in the inner city I have noticed that many shops that have been trading since I grew up in that city have now disappeared as a result of the coronavirus lockdowns and the shift away from store-based retail. They were struggling before the virus hit and have now gone. Whole retail shopping strips are in trouble (the famed Chapel Street, Bridge Road, and now Victoria Street, to name just a few retail areas in serious decline). When I arrive at the airport and move into the city I get this overwhelming feeling that all this infrastructure we have built is becoming redundant in a post-Corona world. It also reinforces my view that governments are going to have a major role in transforming these urban spaces to be better suited for the needs of whatever future there is to be. This view was strengthened when I read a recent report from a research group at Cambridge University in the UK – Townscapes: England’s health inequalities (released May 2020) – which found that health inequalities in England are rising as a result of the pattern of urban development over the period of austerity. In some of the “most deprived set of towns” residents are “much worse off than the least deprived on a number of key measures”. I suspect, similar outcomes would be found in Australia and elsewhere, should the research be done. With the virus fast-tracking major shifts in the way we relate to retailing and service delivery, now is the time to implement a new urban plan to green up our urban spaces, ensure there is viable employment bases in all cities, and maintain a close link between the social and economic settlements, a link that has been increasingly broken under neoliberalism.
Governments save economies. Never let a mainstream economist tell you that government intervention is undesirable and that the ‘market’ will sort things out. Never let them tell you that large-scale government bond purchases by central banks lead to inflation. Never let them tell you that the government, when properly run, can run out of money. There is unlimited amounts of public purchasing capacity. The art is when to apply it and how much to release. That can only be determined by the behaviour of the non-government spending and saving and the state of idle capacity. It can never be determined by some arbitrary public debt threshold or deficit size. And the central bank can always buy however much debt they choose. At present the ECB is buying heaps and keeping the Member States solvent. That is not its state role but given there is no other institution in the Eurozone that can serve the fiscal function effectively and ‘safely’, it has to do that. Otherwise, the monetary union would quickly dissolve. I would take their bond buying programs further and write off all the debt they purchase. Immediately. Go on. Just type some zeros where they have recorded large positive Member State debt holdings. That would be something good to do in a terrible situation.