Back in warm and sunny Newcastle. It is quite amazing how strident the attack on government deficits has become. There is very little recognition of the scale of the economic disaster that still plagues our economies. Even relatively unscathed economies like Australia is carrying 12.5 per cent labour underutilisation rates. That is bad enough. The majority of nations are in much worse shape. The scale of this disaster is so great that you might wonder who is going to be made to pay – given that the crisis was brought on by human folly. Why are those responsible being brought to account? The reality is that the criminals who led us into this disaster have done very well out of the bailout packages that they now oppose. You would have to indict the majority of my profession to achieve justice. So we might want a “national reconciliation” process to allow us to move on and forgive those that caused this. The problem is that the perpetrators are not humble in their failing. Far from it – they are now leading the charge attacking budget deficits using the same economic theories that caused the crisis. How the hell does anyone think these characters have anything to say any more? They were wrong before … so what’s changed?
The French have taken over the G20 administration – and hosted their first meeting last week in Paris (February 18-19, 2011). The results of that weekend were summarised in the Official Communique.
All I can say is what did the world do to deserve this sort of leadership. Anarchy would be preferable. I suppose at least the “leaders” get a nice city to spend their expense accounts in while on “official duty”.
The Communiqué noted that:
We reaffirm our willingness to ensure a consistent and coordinated response to the challenges we face, address the root causes of the crisis and restore global economic growth on a sounder basis.
So given that austerity is the direction the big economies are taking “a consistent and coordinated response” means the G20 is an institution preaching and enforcing austerity.
But they have gone one step further at this meeting – they are now proposing a (watered down):
… set of indicators that will allow us to focus, through an integrated two-step process, on those persistently large imbalances which require policy actions.
I say watered down because the overwhelming sentiment is anti-Chinese yet they declined to tackle that question (which is a non-issue anyway) head-on.
What are these indicators? My preferred indicators which address the “persistently large imbalances” across and within nations would include:
1. Gap between full employment and the current official rate of unemployment (where I would measure full employment to be around 2 per cent but only include frictional unemployment – that is, people moving between jobs). These should be available at regional, national and international levels. There are “persistently large imbalances” in this area across nations.
2. Extent of underemployment – many nations are now also enduring rising underemployment as demand-deficient economies fail to produce enough hours of work to match the preferences for hours by the willing labour force. Underemployment means loss of income and loss of potential output. There are “persistently large imbalances” in this area across nations.
3. Broader forms of labour market exclusion including the discouraged worker effect (so participation rate falling during recession) as workers give up looking for work that is not there. Then we know there are many marginal workers that could be productive in given circumstances. We need to measure that group and articulate the reasons so that if they are amenable to policy relief, such interventions can be designed. There are “persistently large imbalances” in this area across nations.
4. Extent of disability in the labour market so that policies can be designed which enhance the workplace design to allow those who are willing to work and can achieve some active role in the workplace. There are “persistently large imbalances” in this area across nations.
5. Extent of corporate welfare built into budgets – so there is no reason for the private firms to receive any government support (whether it be risk free income flows from bond issuance or other tax lurks and subsidies etc. These need to be flushed out entirely because they largely are drains on the expenditure system. There are “persistently large imbalances” in this area across nations.
6. Extent to which private firms obey regulations. These indicators would allow the government to prosecute more freely the corrupt private corporate behaviour. There are “persistently large imbalances” in this area across nations.
7. Extent to which real GDP growth is consistent with environmental sustainability. Companies that go into poorer nations and pollute would be identified (for example, the mining companies in Papua-New Guinea). Advanced nations would be judged in terms of “green-consistent” growth and firms/industries that failed to meet green growth principles would be first of all fined then rendered illegal. There are “persistently large imbalances” in this area across nations.
8. Extent to which trade between nations is fair rather than free. These indicators could drill down to the firm level to weed out companies that exploit child labour and kill unionists. Major US companies like Apple could be heavily fined for breaches of a “fair trade” doctrine. There are “persistently large imbalances” in this area across nations.
9. Extent of poverty alleviation at poverty levels that actually mean something rather than the puerile $US1 a day or $US2 a day benchmarks used by the World Bank and other international institutions. Relative and absolute poverty indicators should be publicly available and updated regularly.There are “persistently large imbalances” in this area across nations.
10. Extensive information about which public officials are being paid by private firms for favours etc. There are “persistently large imbalances” in this indicator across nations.
So in terms of resolving the “persistently large imbalances” within nations and between nations these are just a few of the new indicators the G20 might usefully develop to guide them in serving the best interests of the people.
I welcome other suggestions from readers.
So what did the G20 decide to focus on? One guess! They say in the Communiqué:
While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.
If they really cared about private debt accumulation they might have acted differently in the lead up to the crisis. The major finance ministers, central bankers, and virtually the entire (lackey) economics academics extolled the virtues of the credit binge – we were all going to become wealthy.
Remember all the nonsense about that the endless nature of the “long boom” now that central banks were inflation targetting and treasuries were holding deficits down and governments, in general, were deregulating at the whim of the corporate (particularly the banking) sector?
I looked back into my archives today and here is an example of the arrogant hubris that was common during the growth period. This was an interview with Stanford economic John B Taylor (who is now a trenchant critic of deficits and claims they don’t work) published by the Federal Reserve Bank of Minneapolis’s internal Magazine “The Region” in June 2006. In the following quote Taylor was talking about the way the IMF has matured to be a more “rule driven” organisation:
And I think that’s one of the reasons people are saying, “What’s the IMF doing? Are they going into obscurity?” Well, they don’t have to do much now because, fortunately, these crises have diminished. As a result, we are moving into a period where people are wondering what the IMF is for.
He then got onto the idea of that the world institutions had finally been able to contain “contagion” when a local crisis occurred. He said the Asian crisis had “caused a lot of damage” but:
But look at what happened after Argentina defaulted in 2001, and you see there’s no similar jump in spreads anywhere around the world. So it’s a huge difference.
The question is whether it is a lasting phenomenon. I’ve thought a lot about it and written about it. And I think it is a lasting difference. One reason is the more predictable response of the IMF. Second, country policies are better … better monetary policy and fiscal policy. So the policies in a lot of countries are better, and that’s the surest way to stop the contagion. And then finally, I think investors are discriminating more between countries. They don’t automatically think there’s a problem in one country when they see another having a problem.
Then on the long boom:
As for the “Long Boom,” I think I first defined it in the April 1998 Homer Jones lecture that I gave at the St. Louis Fed called “Monetary Policy and the Long Boom.” In that lecture, the empirical phenomenon that I focused on was that the size of fluctuations in the economy has diminished substantially. If you looked back to 1982 from at that time—1997 was the last completed year—you saw what looked like a long boom. You had just one historically very small and short recession—in 1991. So the 15 years from 1982 to 1997 were like a long boom. I asked the question, What was the long boom due to? And I gave the answer that it was monetary policy. I documented how monetary policy had changed since the bad old days of frequent recessions. As long as monetary policy stayed on track, I argued, the long boom would continue.
And the long boom has continued … And now maybe we’re in one that will be even longer, but that will depend on keeping with the good policies. So this phenomenon of long, strong expansions and short, small recessions was how I defined the long boom. The same phenomenon is now called the Great Moderation, and there is continuing debate about its causes. I continue to point to the role of monetary policy in making the Long Boom, or the Great Moderation, happen. I think there really is something to that.
I could have accessed similar quotes from countless economists who during that period extolled the virtues of self-regulated markets, passive fiscal policy and inflation-targetting monetary policy.
Why didn’t they see the crash coming? One year after Taylor was claiming that as long as governments held to their policy stances the long boom would continue the GFC hit? It was easy to see the crash coming but Taylor and his fellow clowns were obsessed with their own self-aggrandisement.
The point is that they didn’t see the crisis coming because their economic theories did not allow them to see the way the sectoral balances were emerging and the rising private sector indebtedness and increased financial risk. Any commentator that was blowing the whistle was vilified by these characters such was their self-confidence and position.
But the likes of Taylor and Co are now leading the charge to cut back public deficits to restore stability and wealth. Why should we believe them now when they were so wrong in the past?
Why should we consider their theories are an adequate guide to the future when they failed to predict and understand the biggest economic event in most of our lives?
Answer: they should be disregarded totally.
Can I also just say that I am sick to death of Dominique Strauss-Kahn and he could also usefully piss off and leave the world alone.
In this article (February 19, 2011) – More Action Needed for “Right Kind of Recovery” – he praises the “compromise agreement at the Group of Twenty (G-20) meeting in Paris” and claimed that “there is an increasing need for a multilateral institution like the IMF.”
The IMF helped cause the crisis. It has no credibility in lecturing us on what we should do to resolve it. Its notions of fiscal sustainability are based on meaningless financial ratios. It talks about being worried about jobs and poverty but then forces agreements on nations which unambiguously cause a loss of jobs and increasing poverty.
They should be scrapped and a new world bank-type organisation set up to help vulnerable sovereign nations get enough food to eat!
In parting, I liked Dean Baker’s column this week in the UK Guardian – Further Fiscal Folly. I have my differences with Dean centred on his misunderstanding of macroeconomics but I think he gets it absolutely right when he talks about the hypocrisy and the incompetence of those who are now lecturing us all on the need to tighten our belts but:
… (b)efore anyone prepares to surrender, it is worth remembering, once again, how we got into the current situation. Before the downturn, the budget deficits were relatively modest … Then, the economy ran off the track. The reason was the collapse of an $8tn housing bubble. This bubble was easy to see for people who knew basic economics and third-grade arithmetic. It was also easy to see that the collapse of this bubble would derail the economy and lead to serious downturn. That is why some of us were warning about the bubble as early as 2002.
But where were the current group of anti-deficit crusaders back in 2002-2006, when it might still have been possible to do something to stem the growth of the housing bubble before it reached such dangerous levels? Well, they were crusading against the budget deficit, of course …
The deficit hawks somehow think that their case is more compelling because of the damage done by their incompetence.
It should not work this way. In most lines of work, incompetence is not a credential; it should not be one in designing economic policy either. Anyone who cares to tell us about the urgent need to deal with the deficit should first be expected to tell us how they managed to overlook the growth of an $8tn housing bubble. They should also be expected to tell us why they have a better understanding of the economy now than they did before the collapse of the housing bubble.
Yesterday I predicted that it wouldn’t be long before the deficit terrorists were starting to worry about how they could continue to cut the NZ government deficit but provide a credible reconstruction response to the devastation in Christchurch.
Well today you can read – Earthquake strikes large blow to NZ economy – where bankers etc, presumably sitting in comfortable, air-conditioned offices are starting to wax lyrical about the issue.
People are still trapped and some are having limbs amputated to free them and the economists think it is appropriate to start speculating on whether higher taxes are going to be required (when the NZ economy is already stagnant and unemployment is high).
That sort of speculation will get worse – which is a sad testimony on how warped our perceptions of values have become under neo-liberalism.
I remind everyone of the fact that the NZ government is fully sovereign in the Kiwi dollar, the exchange rate floats and private spending is weak. The NZ government can “afford” to reconstruct Christchurch by expanding it already too low budget deficit as long as there are adequate real resources to be brought into the task.
It is a common theme with my blog that those who are most vocal now about deficit retrenchment were the most culpable in the lead up to the crisis. They are also typically very well-paid and wealthy individuals who will bear no burden from the fiscal retrenchment. In some cases, they were also recipients of the fiscal bailouts that were thrown at the financial sector in 2007 and early 2008.
I think we should be constantly asking – what qualifications do these creeps have to be lecturing us in this way? A PhD in Economics (I have one) is not sufficient. The majority of these degrees are awarded to people for rote-learning and applying the nonsensical economic propositions that helped cause the crisis.
Further, having made millions in the financial markets is not enough to allow one to parade themselves as an authority on policy.
Moreover, the economic theories that were used to justify the deregulation and lack of oversight of the financial sector are still being used in the public arena as authority to justify austerity. These theories are bereft. They should never guide policy.
That is enough for today!