The next few days are very tight for me – travel and meetings. So the blogs might be shorter (cheers I hear!). The thing about blogs which I find interesting is that I normally have to write in a very tight fashion (for academic publication) and editorial discrimination becomes paramount. Whereas the blog is a flowing environment and the only limit I place is the time I spend per day. Within that time span I just type and what comes out comes out with only spelling corrections. The grammar is sometimes not as correct and hyperbole and colloquialisms are rife. But that is a liberating offset to my usual literary output each day. Anyway, I thought the quote of the day (actually December 10, 2010) was – The Eurozone in bad need of a psychiatrist. Well perhaps it is the leaders and their hangers-on who need this help. And when the shrinks have finished with Brussels and Frankfurt they can stop in at London on route to Washington. Canberra can follow sometime soon after. The problem is that we have a person-made mess that is relatively easy to address and yet the ideological straitjacket that has been imposed on the solution amounts to cutting the wound wider and deeper so the blood loss is even greater. Madness! And the rest of us go along with it and elect politicians who say they will whip us even harder. Bring in the men and women with the white coats! For everybody …
As a qualification to the title – I note that a 2004 Survey found that while “most Most patients want doctors to wear white coats … medics do not share their enthusiasm” and “Psychiatrists and paediatricians were the least likely to feel that white coats should be worn”. Well, the stereotype endures! My title remains.
Talking of white coats, I was at the dentist first thing this morning and he always asks me about the economy. When you explain to non-economists how economies are collapsing – pension funds going broke – cities turning lights off and laying off police only to see rape incidence rise – schools closing – and how it is totally unnecessary and could be reversed with some simple fiscal stimulus – they look as if you are mad.
The population has been so trained to believe that there are financial constraints on government and that the crisis is something that is beyond the scope of governments to deal with in a positive manner and the only solution is to cut budget deficits. They intrinsically think that public debt is a time bomb waiting to explode and don’t really understand how it is nothing more than an account at the central bank which stores private wealth and provides a guaranteed income flow.
And they cannot really understand that this is all a voluntary disaster – that is, we are tying our hands behind our backs and letting the crisis whip us relentlessly when all we need to do is untie our hands and spend (spending equals income). If the non-government sector doesn’t want to spend then there is only one sector left. No mysteries there.
This mass indoctrination is why the crisis is persisting.
Stefano Micossi, who is the Director General of ASSONIME, a business association and think tank in Rome argues that the Eurozone leaders have effectively lost the plot. He says that:
Nightmares of the Eurozone are back to haunt policymakers. This column senses something surreal. The leaders scramble to prevent disaster at the last minute, only to be seen the next minute reverting back to the behaviour that brought them to the edge of despair in the first place. It argues that the Eurozone may be more in need of a psychiatrist than a financial guru.
I thought this was a very apt assessment of what is happening all around the world.
Micossi says that the Euro “leaders grudgingly do what is needed to prevent disaster in the last minute before it is too late, and the next minute they go back to the behaviour that brought them against the wall in the first place”.
He also notes that while the strategy that the Euro leaders are following (calling it a strategy is too kind) to reduce fiscal deficits the reality is that they will only increase them.
There was an interesting article in the New York Times (November 30, 2010) – Economic Policy? More Listen to Conservatives – which argued that:
The Republican takeover of the House has energized scholars and researchers whose views on taxes, regulation and the proper scope of government fell out of favor after Democrats swept control of Congress in 2006 and took the White House two years later.
The article reported that recent conservative economics conferences are back in vogue and focusing on “scaling back the health care overhaul, cutting spending and reducing the size of government.”
The conservatives are ramping up there attacks on discretionary government policy stimulus and penetrating the US political system more vigorously now.
How short our memories are. The reality is that the mainstream economics profession – it is all there in their literature in case you don’t believe me – did not have any models or frameworks that allowed them to predict the crisis even though it was a long time in the making. Their models triumphantly predicted that the business cycle was dead.
Their models claimed that macroeconomics was uninteresting and that fiscal policy was dead. The only game left was to work out ways to further deregulate and allow “markets” to work better and to further retrench welfare systems and decent pay and working conditions in favour of market outcomes. That was the mainstream agenda over the last few decades.
Please read my blog – The Great Moderation myth – for more discussion on this point.
They denied that the persistent unemployment and the rising underemployment was a problem. They called it voluntary, optimising behaviour. It was too easy – students were taught that the unemployed were either enjoying leisure or wallowing in laziness and being subsidised by errant government welfare. Pity that poverty rates were rising. People always choose poverty en masse! At least that is what the mainstream profession wanted us to believe.
The political leaders came on board with this nonsense. Remember Bertie Ahern’s classic the “boom just got boomier” and the rest of arrogant, self-congratulatory rhetoric that came from the political classes. I laughed when I heard the retort to Ahern as the Irish crisis deepened – “the bust just got bustier”.
Once the crisis emerged the mainstream economists (with a few exceptions – Taylor etc) went underground. The crisis demonstrated beyond doubt that the mainstream narratives were just plain wrong – pure fantasy. They had nothing to offer us by way of explanation or solution. As governments scuttled to adopt pragmatic responses and the fiscal interventions demonstrated that the neo-liberal assertions that fiscal policy was totally ineffective were just ideological myths – the conservatives went silent.
But somehow and it is a topic of a book I plan to write – the private debt crisis was reconstructed in the media (aided and abetted by my shameful profession) as a public debt crisis. As economies bled the rhetoric increasingly became that governments were too blame and that the only solution was to cut the government net spending.
To overcome the obvious reality that cutting public spending when private spending was so flat would damage economic growth and worsen unemployment – the mainstream wheeled back in notions that were discredited many times in the past. So it was even denied that government spending adds to aggregate demand. The Ricardian agent story was hammered in the financial press – such that all of us are so fearful of the deficits and the fact that we have to pay them back – that we are saving up for our future tax burdens.
There is no empirical support for this idea. The analytical results are so dependent on assumptions anyway that are never realised in the real world that the models also have no theoretical traction.
Further, we never have to pay a deficit back! They are flows! But the argument is that we have to pay the debt back. But governments rarely pay back their debt – and I don’t mean they don’t honour specific debt paper that reach maturity. I am talking overall – governments rarely reduce the stock of outstanding debt.
And what we are now seeing is policy actions that will give more latitude to the “private markets” to just repeat the dynamics that led to the crisis in the first place.
The reality that has escaped us is that the world the mainstream economists want to create is inherently unstable and will always lead to the financial crises that we are still enduring. They also want to create a system where the returns (as long as they are being produced) are privatised but the ultimate risk is not – so the losses (when they come – not if, when) are socialised. It is the ultimate con job.
So do they need psychiatrists or jailers?
Micossi notes that a “comparison with the situation in the US, UK, and Japan is illuminating”. He says:
Like the Eurozone, those countries issue debt in their own currency – currently in much larger amounts relative to GDP – but unlike the Eurozone, there is no question there that debt rollover may encounter difficulty, or that the availability of dollars, pounds, or yens for their redemption may be rationed by the central bank. While in the Eurozone, disagreements between national leaders make such an event conceivable – and even possible.
The problem is that the fiscal problem in Europe is at the national level not at the monetary union level. People live in countries not zones. They receive pensions from states and pay taxes to states. They are educated and enjoy public infrastructure and services within national borders.
The Euro leaders deliberately chose to exclude any notion of a union-level fiscal authority or capacity although as an ad hoc response the ECB is clearly filling that function for the time being and that is why there have not been any public debt defaults at the member country level yet.
The fiscal rules being imposed are at the member state level and they become a problem because the member states do not issue debt in their own currency. The Euro is not the currency of the Irish government or the Greek government (or the German government). The Euro is the currency of the ECB. Member states within the EMU issue debt in what is effectively a foreign currency.
And because they have signed up to what is effectively a “fixed exchange rate system” they are forced to run their domestic economies in recessed states to address external trade imbalances.
The whole EMU set up is pro-German (export-oriented) and anti-people.
The comparison with the situation in the US, UK, and Japan is illuminating because these countries are sovereign in their own currency and can always make political choices to support aggregate demand.
Finally, Micossi notes that the ECB is providing the only stability in the EMU. He said:
This is where the Eurozone may be more in need of a psychiatrist than a financial guru. Our paramount problem is to reassure unsettled financial markets that sufficient finance will be available to manage the sovereign debts of all Eurozone members. If we succeed, the money will actually not be used. But our Eurozone leaders keep talking about bailouts and defaults, and ride on domestic fears that taxpayers will shoulder the debts incurred by others. After each intervention, their visible disagreements on what to do next already invites the next crisis. Like mountain climbers suffering from vertigo, they seem irresistibly attracted to a precipice brought ever closer by their uncertain steps.
He suggests that this “brilliant strategy” will only result in Germany assuming responsibility for all member state debts or that the “euro will collapse in many separate currencies, causing horrendous economic dislocations”.
He wants a guarantee that “all sovereign debts within the Eurozone will be rolled over in an orderly way” which is contrary to the rhetoric that is currently being heard from Euro leaders who are now talking of orderly defaults.
I agree that the Eurozone has the capacity to resolve this crisis. A central fiscal response would be enough to resolve the “bond market” problems but the currency union is so fundamentally flawed that this central fiscal authority would be continually stretched politically. The reality is that Europe is not one region with shared culture. There are deep-seated antagonisms and fundamentally different economic structures across the member nations. A currency union is not indicated.
As an aside, don’t think that Micossi is a progressive of any persuasion. Just three days before (December 7, 2010) he was a joint signatory to an – An open letter to the President of the European Council – A new political deal for Eurozone sustainable growth.
In that document the authors argued that “debt sustainability can only be founded on the sustained growth of our economies” and an “exclusive emphasis on restoring sound public finances will not suffice”.
They argued that a “broader political deal” across the monetary union was required which must include among other things “better-designed measures for fiscal discipline” – that is, tighter Stability and Growth Pact rules. Their central argument demands “permanently lower growth of current public expenditure”; “reforms to public pensions and entitlements” (that is, cuts); tightening of income support for the unemployed.
They want more punitive, legally binding measures to be used against member states who breach the tighter fiscal rules and independent fiscal authority which monitors each nation.
They also want “growth enhancing structural reform” which means more wage flexibility, privatisation of public service delivery
Finally, they want “infrastructure investment for the internal market” which I consider to be a sound short-run demand stimulus and adding to productive capacity (and potential growth) in the long-run. They want projects vetted by central agencies(European Investment Bank and the European Bank for Reconstruction and Development), which would also take the implementation of projects out of the hands of national governments.
While I agree with that approach they authors then put their foot in it by claiming that the “financing” of such projects would have to be achieved via Public Private partnerships.
This is another neo-liberal ploy to transfer public funds to inefficient and costly private construction companies yet maintain the risk within the public sector. Please read my blog – Public infrastructure 101 – Part 1 – for more discussion on this point.
This brings me to the OECD’s latest putsch! Yesterday I noted a new OECD working paper – Improving fiscal performance through fiscal councils – which rings all the mainstream bells that the neo-liberals use to attack discretionary government fiscal intervention. None of the assertions have any underlying basis in reality. They are all constructions
The OECD paper says:
At its most basic level, a fiscal council is a publicly funded entity staffed by non-elected professionals mandated to provide non-partisan oversight of fiscal performance and/or advice and guidance – from either a positive or normative perspective – on key aspects of fiscal policy.
I think the appeal to being non-partisan is irrelevant given how captured the major political parties around the world have become. The major parties have all shifted to the neo-liberal right and it is often hard to differentiate them. In Australia, both parties want large budget surpluses.
The more important point is that the councils are comprised on “non-elected professionals”. Partisanship can also refer to the dominance of an ideology. Given the normal membership of key government policy making boards etc is dominated by the mainstream economics profession there is no chance that these “councils” will offer any more than a reiteration of the conservative economics position. The “independence” is a chimera.
Further, any body that has policy influence which is unelected or not directly accountable to the elected officials is an abrogation of democracy.
The paper notes that fiscal councils are spreading and:
As countries begin to grapple with the delicate challenge of consolidating the seriously deteriorated fiscal positions stemming from the recent crisis, their search for institutional reforms that can deliver fiscal results and provide political cover may well lead to the establishment of yet more fiscal councils.
You see that basis of this move to expanding the use of fiscal councils is a basic falsehood – that sovereign governments face deteriorating fiscal situations. Once you get into that mindset then pro-cyclical fiscal policy is one step away.
The myth is ingrained. A rising budget deficit is constructed as a problem. However, epithets like “deterioration” and the such have no applicability to the budget outcome. The budget outcome is an ex post statement of the health of the economy but even then it is an ambiguous indicator. A rising budget deficit could signal a healthy economy but then it could also signal a poorly performing economy.
But in either case that assessment has no basis in just quoting some deficit to GDP ratio or its stock analogue – the public debt to GDP ratio. As stand-alone indicators they tell us nothing that is very interesting.
The “seriously deteriorated fiscal positions” are just indications of how much real slack that governments have allowed to accumulate in their economies. The problem is the collapse in private spending and the resulting unemployment. The rising budget outcomes per se are not a problem.
So in Modern Monetary Theory you will not here about “deteriorating fiscal outcomes”. You will hear a lot about deteriorating labour markets – about real problems.
The logic for fiscal councils then follows from this erroneous beginning.
The OECD paper states the purpose of fiscal councils as such:
By depoliticising various aspects of fiscal policy, whether related to formulation or monitoring, fiscal councils can better inform voters on the actual state of fiscal policy and raise the political costs of fiscal indiscipline.
But at the same it admits the empirical evidence that such institutions actually “discipline” fiscal policy (which is a loaded term in itself) is thin and causality is also unclear (so a “disciplined” government may set up fiscal councils to reinforce credibility).
The point is that these institutions aim to drive a wedge between the elected officials who are ultimately accountable to the electorate and should be judged at regular intervals via the ballot box for how faithfully and effectively they have fulfilled their mandate and the voters (us). They don’t actually serve to “better inform” us – because their judgements are depend on their ideological persuasion which is uniformly neo-liberal in flavour. So effectively we just get a high profile organisation providing regular commentary on how deviant the government is in terms of the neo-liberal parameters which are anti-government at the outset.
What happens is that the entire policy debate becomes enclosed in these fiscal rules – even if the fiscal council only has monitoring powers. It clearly gets worse if they are given a role in the formulation of policy. The public debate then doesn’t question the meaning or validity of these fiscal rules. They become givens and then judgement is served.
It becomes more ludicrous when, as in Europe at present, the automatic stabilisers drive the budget outcome outside of the enforceable rules. The logic then, is that the government is guilty of fiscal ill-discipline (despite, for example, Spain which was a model of EMU-defined discipline). The fiscal councils would then promote this judgement in the public policy space and the political pressure mounts on the government to implement discretionary fiscal austerity which become pro-cyclical and causes more damage.
The relevant question is never asked – what is the role of fiscal policy and how can governments use this unique capacity (when they are fully sovereign) to improve the lives and outcomes of the citizens. That sort of debate is circumvented by the logic of the fiscal councils and the rules it is charged with enforcing directly or via moral suasion. It results in the sort of austerity madness that we are now seeing.
Countries that impose fiscal rules and reinforce them via fiscal councils just deliberately introduce deflationary biases in to their economies – and the disadvantaged and unemployed are the ones who bear the burdens.
Please read my blog – Fiscal rules going mad … – for more discussion on this point.
The OECD paper reveals its lack of understanding of monetary economics when it defines a “prudent fiscal stance” as one that:
… would also allow for the build-up of fiscal cushions to enable governments to respond to unexpected shocks over the medium term and anticipated pressures over the long term, such as implied by population ageing
This perpetuates the myth that a national government is financially constrained and that budget surpluses somehow represent “savings” that the government can use later on to meet new spending demands. Nothing could be further from the truth. Budget surpluses actually reduce overall saving because they impart fiscal drag into the real income generating system.
It makes no sense at all to say a government is “saving” in the currency that it issues under monopoly conditions. Such a government can always spend as long as there are real goods and services available for sale in that currency. That isn’t to say it should not have spending limits and that it should not be careful in determining how much spending competititon it will engage in with the private sector. Saving is an act whereby households who are financially constrained can shift consumption possibilities across time.
So by foregoing consumption spending now (that is, saving) the private household can have greater consumption possibilities in the future. But for a sovereign government that constraints doesn’t exist and running budget surpluses provides no greater capacity to spend in the future than if they run deficits.
Interestingly, by running budget surpluses the government increases the possibility that there will be less available for sale in the future. Budget surpluses typically undermine the growth of the economy which, in turn, restricts private capital formation (investment). Slower private investment means that potential growth in the future is reduced. Only nations with very strong external sectors (pushing demand) can safely run budget surpluses which means that such a fiscal rule can never be general.
The whole concept of a “fiscal cushion” is without application to a fiat currency issuing government. It is a purely ideological statement which expresses a distaste for government intervention.
The OECD paper also claims that:
The persistence of deficits over so long a period in so many countries suggests that factors other than economic conditions are at play …
This is the introduction to their argument that governments get politically captured by special interest groups and as such fiscal policy becomes detached from the economic fundamentals.
One of the extraordinary things about the paper is that it conducts a discusion about fiscal policy with no reference to the conditions in the real economies that they use as examples. The first thing I would do when considering the public policy stance is to ask what the capacity utilisation rate is and what the broad labour underutilisation rate is. The extent to which an economy is utilising the real productive resources that are available to it tells me whether the fiscal position – at a first blush – is appropriate.
If I see persistent unemployment – that is, wasted labour resources – then I know that the budget deficit is too small. It may be that the public-private balance is out of whack – usually not enough public. But to determine that requires a more thorough investigation.
My understanding of the sort of nations the OECD paper is accusing of running persistent “political” deficits is that they were not in a state of persistent full employment. They were struggling to maintain adequate levels of aggregate demand. The persistent deficits were very much driven by the economic conditions at play.
Overall, I found it stunning that a discussion of appropriate fiscal positions was conducted in the OECD paper without reference to unemployment. The paper presents an array of graphs about fiscal trajectories – praising some nations and castigating other – purely on the basis of these financial ratios.
But you will not see a juxtaposition of the labour market conditions that the government is facing (or may have created) nor discussions about rates of private spending growth.
Once you realise this is just another paper about “abominable” financial ratios it becomes easy to put it down and reject its status as a serious intervention into the public policy debate. There is virtually no knowledge quotient contained in this paper. Lots of hubris and ideology. But that is a dime a dozen and you can get a fill of that watching TV these days.
The OECD has definitely lost its way relative to its original charter and the world would be better off if it closed its doors.
So overall I consider the public policy debate has been hijacked by those who created the mess in the first place. The politicians who are buckling under the pressure to restore the “status quo” even though it will return us to the dynamics that will destruct once more in the coming years are either mad, criminal or incompetent (or all three).
In his UK Telegraph article (December 14, 2010) – Bond of debt could end the union – Ambrose Evans-Pritchard questioned the need for psychiatric intervention:
Perhaps, but is today’s crisis really a failure of leadership? Was the EMU not dysfunctional from day one? Did it not inflict negative real interest rates on Club Med and Ireland in the boom years, and lock in chronic imbalances? Has it not left victim states trapped in slumps from which there is no escape on terms acceptable to Germany? If the project itself is rotten, what the euro zone needs most is an undertaker.
So my recommendation is first provide psychiatric to my economist colleagues to help them through their crisis of irrelevance.
Second, send legal authorities (police) around to the leaders who have implemented policies which amount to crimes against humanity (and the environment) and the think tank bosses who perpetuate lies that give succour to the political leaders in their criminal pursuits.
Third, send the undertaker around to mop up what remains of the neo-liberal paradigm and all the institutional vestiges that it created which include the European Monetary Union; sovereign debt issuance to match net public spending; and all the right-wing think tanks. The office blocks occupied by the latter should be resumed and turned into public housing.
I must catch a plane now. Tomorrow I am going to track down where the employment growth is coming from in Australia – given that the ABS release detailed industry labour force data at 11.30 Thursday.
That is enough for today!