Today is the first blog I have written that is exclusively done on an iMac running OS X. It is a nice environment but for a long-time linux and windows user it takes a little getting used to. I have been thinking of writing a Modern Monetary Theory (MMT) guide to debt restructuring for non-sovereign nations such as those in the Eurozone who are now essentially insolvent if we exclude ECB assistance. Several readers have asked me to tease out what the implications of a major debt default in say Greece would be for aggregate demand and private wealth. I will write about that more fully another time but one thing that is certain. MMT does not consider it feasible to run a national economy in a way that advances public purpose at all times if the national government has surrendered currency sovereignty in any way. The point is that default has to accompany EMU exit (in the case of the Eurozone nations). In thinking about that I focused my attention on some interesting data from Ireland that I have been looking at for the last week. What is clear is that Ireland has no real future while remaining in the Eurozone. It might stagger along and grow again some day. But it will be so severely damaged from dragging out the recession for its fourth year now and will similarly collapse when the next negative demand shocks hits the zone that it would be better defaulting now and restoring its currency sovereignty. The best option for Ireland is to default and exit.
In thinking about a restructuring scenario for the Eurozone nations it would not be consistent with an understanding of MMT to advocate default without exit. The EMU nations have to exit as they default and the restructuring of loans has to be in terms of their newly established local (national) currencies.
In that way, the newly sovereign national government can ensure the banking system remains liquid (in the new currency) and that workers do not lose their bank deposits etc.
Anyway, the Economist Magazine provoked me into action today. It ran a story this week (May 26, 2011) – Ireland’s chances of recovery – which carried the sub-heading “A return to decent growth is essential”.
Well you don’t have a recovery without a return to growth so I thought the title etc was somewhat twee! (not the Dutch 2).
I have written about the Irish disaster before – in this blog The Celtic Tiger is not a good example and this blog – The sick Celtic Tiger getting sicker – which both document the steady decline in the Irish economy that is being stage managed (that is, caused) by the irresponsible macroeconomic policies being pursued by the Irish national government.
The Economist writes:
According to a report from the IMF on May 20th, Ireland’s public debt, which was just 25% of GDP in 2007, is already 96% and is due to reach 111% this year … A seemingly model fiscal pupil is now at the back of the euro-area class because of the cost of rescuing Irish banks, which has reached 42% of GDP, and a collapse in national output and property-dependent tax revenues.
Thereafter followed “horrific” IMF debt projections which were described as “dismal”. There was no mention of the horrific unemployment rates in Ireland that are getting worse by the month and are now edging 15 per cent.
The following table is taken from the Irish Central Statistics Office and shows the monthly seasonally adjusted unemployment rate from January 2006 to April 2011.
For a government of an advanced nation (well any level of development really) to willingly impose this level of unemployment on its citizens is the headline story. All the scary headlines about public debt are sideshows.
It is clear that the Irish government faces insolvency because it is using a foreign currency and requires bond markets to lend to it to fund its deficits.
All the problems that have arisen since the property market collapsed can be attributed to it not having currency sovereignty. I realise there are many people who consider the Euro to be an inconsequential part of the story. But if the Irish government was using the “punt” then it could have restored the capital of the ailing banks (by nationalising them) without the need to impose a harsh domestic deflation.
It could have offered all the unemployed a job at a living minimum wage and kept many workers solvent and allowed them to maintain their debts in good standing.
I am not suggesting a major property crash is without consequence. But once it happened, the Euro became the story.
The Economist doesn’t agree. It says:
Even more wrenching fiscal austerity is needed to bring the budget deficit down from the 10.6% of GDP forecast by the IMF this year towards more manageable levels. That in itself will hold a recovery back, unless Ireland’s exporters can overcome the downward pull from a beaten-up domestic economy. This is not impossible.
But highly improbable especially with one of its major trading partners mired in a self-produced downturn again (Britain). Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
The last thing the Irish economy needs is “more wrenching fiscal austerity”.
The Irish labour market is self-destructing because there is not enough aggregate spending and the fiscal austerity is making matters much worse.
The mainstream commentators seem to ignore path dependency. In the real world, booms in activity stimulates on-the-job training opportunities and raises potential output above the level that would have persisted had the economy remained at low levels of activity. Alternatively, as activity falls due to demand failure, both training opportunities decline and actual skills are lost, as workers lie idle. The potential capacity level falls as a result.
The longer the Irish economy is stranded in its policy-induced recession the worse will be the longer-term consequences. Potential growth rates are now being damaged. So even when growth resumes at some future time, the losses will still be evident in lower than otherwise growth.
Further, the damage to skill development will be severe. Unemployment stifles skill development and denies younger workers the opportunity to gain training and experience which sets them up for the future. The negative consquences of this policy folly on the 15 year olds in Ireland will be profound and that alone warrants the people overthrowing their elected officials and demanding policy action that immediately provides jobs.
The point that most people do not understand and certainly the neo-liberals do not advertise is that the national government with its own currency can always employ any workers who are without work.
In this respect the article in the New York Times (May, 29, 2011) – Against Learned Helplessness – by Paul Krugman is excellent. He says that:
Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. Some European countries have it even worse: 21 percent of Spanish workers are unemployed.
Yet a strange thing has happened to policy discussion: on both sides of the Atlantic, a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead of a determination to do something about the ongoing suffering and economic waste, one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility.
So someone needs to say the obvious: inventing reasons not to put the unemployed back to work is neither wise nor responsible. It is, instead, a grotesque abdication of responsibility.
That is it in a nutshell.
There is never a shortage of jobs available – just a shortage of funding to make them operational. Any national government with its own currency can introduce a Job Guarantee to ensure anyone who wants to work can find it.
Krugman says that:
The core of our economic problem is, instead, the debt — mainly mortgage debt — that households ran up during the bubble years of the last decade … [and] … there are a number of things that could be done about it.
For example, we could have W.P.A.-type programs putting the unemployed to work doing useful things like repairing roads — which would also, by raising incomes, make it easier for households to pay down debt.
That should be the policy priority in all nations. For EMU nations they first have to exit the Eurozone or vote for a supra-national fiscal authority to subvert their national rights and deficit spend up to the point that the last worker who wants a job has one.
All the faux issues about public insolvency have sidetracked us from that reality – the national government chooses the unemployment rate. If that choice involves a decision to surrender currency sovereignty then it is harder to undo. But never tell me that a national government intent on advancing public purpose cannot do so.
The bond markets cannot stop such a government.
The ECB cannot stop such a government.
The IMF and OECD cannot stop such a government.
All that is stopping national governments is their own mis-guided perception of macroeconomics aided and abetted by entrenched vested interests who are profiting from the malaiase.
I read yesterday (link has evaded me today) that corporate profits in the US are now soaring and well beyond the pre-crisis levels whereas the real wages of workers in the US are going backwards. That tells me that there is something fundamentally wrong with the policy mix in that nation (and all nations).
The Economist magazine is still hanging out the “export-led” recovery hat. But with forecasters (other than the IMF which is always optimistic and always wrong) are predicting Ireland will stay mired in recession – the “fourth year of contraction”. My understanding of the Irish data tells me that exports are not going to be strong enough to offset the on-going contraction in consumer spending, private investment and a retrenched public sector.
There is no other way to achieve growth – spending creates income.
Now is the time for the Irish government to abandon its ideological torture of its own people and exit the Eurozone and restore its policy choices. It will be relatively smoother sailing once it makes that very monumental decision.
Some data that might scare you
Here is some analysis that is not often reported or considered in all the furore about sovereign debt and bank bailouts. It is about the real economy – where people’s lives are played out.
The Irish Central Statistics Office has a special unit which investigates “job churn” and provides several experimental data sets that shed light on the dynamics of the Irish labour market in ways not normally presented in the mainstream media.
As background, I had a large Australian Research Council grant a few years ago to investigate labour market dynamics. Very few people pursue this sort of research yet the results are always very revealing.
Several studies reveal that labour markets in countries like Australia are in a constant state of flux which means that specific jobs are continually created and destroyed as firms expand, adjust to changing labour force characteristics, restructure, contract or close.
This process of job creation and destruction (JC&D) is mirrored by movements of workers between labour force states. When we consider employment dynamics using macroeconomic data we typically focus on measures of net employment changes over time.
For example, say total employment in April is 8000 thousand and in May it is 8020 thousand. Then we would conclude that total employment rose by 20 thousand jobs in the month of May. You will constantly hear commentators saying that 20 thousand jobs were created in May. That is likely to be a false statement because in all likelihood many multiples of that were created at the same time as thousands were also destroyed leaving a net change of 20 thousand.
In other words, a net focus at the aggregate focus prevents an understanding of flows noted above (numbers of jobs created and destroyed and movements of workers across labour force categories).
A net figure showing an increase in employment of 20 thousand can be describe totally different underlying dynamics. For example, imagine that 100 thousand jobs were created and 80 thousand were destroyed in the month – which would suggest a highly fluid labour market. Compare that to just 20 thousand jobs being created and none destroyed – a much less vibrant situation.
Research in this area thus analyses the flows of workers between states usually at a disaggregated industry level to gauge the extent to which the labour market is in flux.
There are several technical issues involved in calculating the job creation and job destruction rates and the derivative time series but I will ignore them here. I have several academic papers out on this topic if anyone is interested in pursuing the matter more formally.
We initially define the rate of employment growth in sector i (that is, a sub-sector of some industry) at some time (t) as the percentage change in employment between two periods in relation to the average size of sector i over the period in question.
We then define the job creation rate for a sector as a sub-sector-weighted average of these growth rates when growth is positive. We also define the job destruction rate as a sub-sector-weighted average of these growth rates (in absolute value) when growth is negative.
Aggregate gross job flow measures are then computed by summing over all sectors in an industry (or over industries).
We also compute the total churn (or job reallocation rate) as the sum of the job creation and job destruction rates. Net employment growth is simply the difference between job creation and job destruction rates.
You can read a Background Notes on compilation of Job Churn statistics at CSO, Ireland which describes the data set.
As they note, the total change in employment in a particular industry over any one period is the difference between job creation and job destruction which is also equivalent to the difference between hires and separations.
The following graph is taken from the Job Churn Background notes and shows real GDP (and real GNP) and the unemployment rate for Ireland in the period preceding the crisis and the early part of the crisis. It is self-explanatory and describes an economy in a state of collapse. The decline in the size of the economy (as shown by the real GDP decline) is staggering.
But the situation has worsened considerably since that time and now unemployment is over 15 per cent notwithstanding the considerable out-migration of workers seeking employment elsewhere (many are coming to Australia to seek a job).
To give you something to compare the Irish gross flows data against, the following graph shows the All Industries job creation and job destruction rates in Australia between 1983 and 2002 with the shaded area corresponding the major recession that the economy endured during this period. The graph shows starkly what happens to job flows over a business cycle. As you can see during the recession (which was Australia’s worst downturn since the Great Depression) the job destruction rate soared (peaking at around 0.06) and job creation rate plunged (to around 0.01). there was considerable turmoil in the period following the recession with job creation taking a long time to establish a new dominance.
Now how does Ireland stack up in the recent period? The Central Statistics Office in Ireland has experimental data for 2006 to 2009. I will be waiting to see the 2010 data with special interest.
The following graph is taken from the data provided by the Central Statistics Office in Ireland and shows the numbers of jobs created and destroyed for the years 2006 to 2009. The data isn’t available for 2010 and beyond but the developments since 2009, driven by the harsh austerity program that the Irish government unwisely inflicted on its citizens will have caused job destruction to rise even higher and job creation to fall further.
Noting my new iMac colours (this is the first blog researched, produced and written using OS X), the job destruction is running at around 3 times the job creation (in numbers). I have seen this type of data for many nations now and the scale of the Irish collapse and its persistence since is without precedence.
The next graph shows the job creation and job destruction rates in Ireland between 2006 and 2009. The horizontal blue line (at around 0.07) shows the worst job destruction rate that Australia had to endure in the 1991 recession aftermath to give you some impression of scale. The Australian downturn was very severe. The Irish downturn and government-sponsored perpetuation of it is a human disaster.
Public debt ratios do not scare me. Rising budget deficits do not scare me.
But the job destruction rates in Ireland really scared me when I started to dig into the data. They tell me that the labour market is being severely damaged and the path-dependency will be profound and long-lived. The destruction of jobs at the rates that the Central Statistics Office has calculated are without exception. Given what has happened since this data was compiled – as Ireland endures its fourth year of economic contraction I can only conclude that the costs of this destructive policy choices are so great and so permanent that the costs involved in exiting the Eurozone would be dwarfed.
I challenge all the neo-liberal, pro-Euro types to actually outline what the costs of exit would be. But they should make sure they understand that the majority of their costs would be inapplicable once currency sovereignty was restored.
It is easy for an outsider like me to wax lyrical about the plight of another country and its people. I recognise that. But I have no doubt that the best option for Ireland is to default and exit as soon as possible. Greece should follow its lead (or give it a lead).
And remember when considering Ireland and Greece etc do not forget that one of the most vehement proponents of fiscal austerity including cutting wages and conditions, cutting welfare support and privatising public assets was none other than Christine Lagarde, who is now trying to worm her way into the IMF as boss. She would be a disastrous choice for that position.
Tomorrow is the Australian National Accounts data for the March 2011 quarter. Our so-called booming economy will likely show a sharp contraction (probably negative growth) with net exports draining demand and public spending propping up activity. Private domestic spending will be flat. Just the right environment to impose fiscal austerity! NOT!
That is enough for today.