In 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.
On August 16, 2011, Eurostat released the Flash Estimates for second quarter 2011 GDP which presented a very bleak picture indeed.
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).
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.
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.
Japan can be excluded for now because of the impact of the Tsunami.
It is hard data to graph effectively, but for those who prefer pictures the following graph just reproduces the data in the Table.
The next Table summarises the IMF World Economic Outlook 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.
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.
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.
The early signs of growth are gone.
The IMF also seems to be flip-flopping a bit at present as their forecasts fall apart.
They were leading the charge in advocating fiscal consolidation (read cuts) as the early signs of growth appeared courtesy of the fiscal stimulus packages.
As David Blanchflower points out in his recent New Statement article (August 16, 2011) – Christine Lagarde’s attack on Osbornomics is damning – the British government used statements made by the IMF as being supportive of its fiscal austerity drive.
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.”
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.
Here is the IMF page access – Don’t let fiscal brakes stall global recovery. Lagarde is now saying categorically that:
After 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.
That is fiscal policy was effective! Just ask the IMF.
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”.
What follows tells me that this article is another ad hoc attempt by the IMF to distance itself from the damage that its prescriptive aggression has caused.
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.
She says that the policy interventions that saved the world have:
… left behind a legacy of public debt – about 30 percentage points of gross domestic product higher than before, on average, in advanced countries.
So there are no easy answers.
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.
Public debt is just private wealth. Public debt interest payments are private income. Both good (excluding considerations of equity – that is, who is benefitting).
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.
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.
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
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.
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.
Largarde knows though that cutting public spending is damaging. So now she claims that:
… 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.
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.
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.
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.
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.
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.
British unemployment rises
The UK Office of National Statistics released their August 2011 – Labour Market Statistics yesterday (August 17, 2011).
The data showed that:
- Unemployment jumped sharply and long-term unemployment rose – “The total number of unemployed people increased by 38,000 over the quarter to reach 2.49 million. The number of people unemployed for up to six months increased by 66,000 over the quarter to reach 1.23 million. This is the largest quarterly increase in this series since the three months to June 2009. “
- Underemployment rose to record levels – “The number of employees and self-employed people working part- time because they could not find a full-time job increased by 83,000 on the quarter to reach 1.26 million, the highest figure since comparable records began in 1992.”
- The unemployment rate rose – “to 7.9 per cent of the economically active population, up 0.1 on the quarter”
- Unemployment benefit claimants rose by 37,100 on June.
- Redundancies rose – “mainly among women”.
- Number of women out of work highest since 1988.
- Youth unemployment rises to nearly 1 million.
- Unfilled vacancies (a component of labour demand) plummeted – “The total number of vacancies is the lowest since the three months to November 2009.”
- There was no change in the employment rate. Employment failed to grow as fast as the labour force
The UK Guardian article (August 17, 2011) – UK unemployment jumps as economy falters – said
Britain’s lacklustre economic recovery is taking its toll on the labour market, with unemployment increasing by 38,000 over the three months to June – the largest jump since spring 2009, when the UK was in recession …
With GDP growth sliding to just 0.2% in the second quarter of the year, analysts had been warning for some time that weaker growth and fragile confidence could deter firms from hiring new workers and lead to a renewed rise in unemployment.
So expect the labour market data to deteriorate further in the coming months.
And if you were uncertain about what drives business investment and confidence then this comment from the chief economist at Markit (the industrial activity survey firm) will set you straight:
Business confidence clearly needs to rise before employment growth will pick up again, but at the moment the surveys suggest that companies remain worried about economic growth both at home and abroad and are generally erring towards cost-cutting rather than expansion.
No mention there of all those private sector spenders who have been waiting for the national government to hack into public spending before they spend.
It is a clear causality that is playing out – spending equals income – income drives output – output drive employment.
The national government now has been in power for more than 12 months and the data is getting worse each month. The latest labour market figures are in the terrible category.
Their fiscal strategy has already failed.
As Larry Elliot noted in the Guardian (August 16, 2011) – UK unemployment jumps as economy falters – the government
… inherited an economy that was growing quite strongly but activity came to an abrupt halt last autumn and has flatlined ever since … The recovery in manufacturing has petered out, denting hopes of a rebalancing of growth towards production and exports.
Other predictions that haven’t panned out
And then you read this sort of repetitive nonsense published in Murdoch’s News Limited – The Australian (August 18, 2011) – Stop Cairnsian spending and keep surplus promise.
This character is a professor of economics at an Australian university (Griffith, QLD). I advise no students to take a course with him. He is a former Commonwealth Treasury official.
I have written about this person’s analysis before – Lost in a macroeconomics textbook again. That was in 2009 when he was in the running for the “billy blog worst Op-Ed column of 2009 award”. He regularly contributes to The Australian and the message is always the same. He hates government spending and deficits even more so and thinks the recession is all down to too much wasteful fiscal stimulus.
In the the Op Ed I previously commented on he mindlessly applied the model presented in most intermediate mainstream macroeconomics textbook and made various predictions like Australia’s credit-rating would be downgraded and foreign investors would “take fright” and we would see spiralling interest rates. Nearly two years have passed and the nation is still intact.
He has repeated that theme often in the last two years.
So today he was at it again but in the theme of this blog – predictions that failed – I thought his Op Ed was demonstrative.
ALMOST a year ago on this page … I predicted the economy would suffer for some time afterwards from the effects of the increased government spending and borrowing between 2008 and 2010 in response to the North Atlantic banking crisis, a legacy that would manifest through higher interest rates, less investment, lower economic growth than anticipated and increased inflationary pressures.
By and large, these predictions have eventuated, though interest rate levels are admittedly lower than expected.
The rest of his article attempts to justify why the federal government should be in surplus, despite a current account deficit and a very cautious private sector – the household component carrying record levels of debt and clearly desiring to save to reduce the risk of that debt.
But the significant thing is that he does reflect at all on why interest rates “are admittedly lower than expected”. His beloved macroeconomics textbook model would have predicted that rising deficits would cause interest rates to rise via loanable funds pressures (public debt absorbing all available saving) and this would stifle private investment and growth.
However private investment has been relatively strong and concentrated in the mining sector where there is demand for output.
The crucial point is that the lynchpin of his theoretical approach which ties the links together is that interest rates and bond yields should have gone through the roof and domestically-sourced demand-pull inflation should be accelerating.
Neither of those events have occurred. The slight rise in inflation has largely been due to natural disasters – floods and cyclones – that have compromised food supply and energy prices reflecting decisions made by the OPEC cartel and unrelated to domestic events.
Even then inflation is not an issue in Australia at present.
Further interest rates have not risen for nearly a year and bond yields remain very low.
So wouldn’t that suggest to anyone that a model that predicted these things could not possibly be a correct representation of how the modern monetary economy works operates?
The world economy is slowing again and there is only one reason for it – policy makers are being seduced by an economics approach that fails to accord with the way the economic system works.
It fails basic tests – like an appreciation that spending creates income. We cannot expect real output to rise when a major component of the marginal growth in aggregate demand is reduced (public spending).
We cannot expect private investment to be strong when consumers are unwilling to return to pre-crisis (credit-driven) consumption levels.
We cannot expect consumers who are saddled with massive debts and/or are enduring entrenched unemployment to bounce back and drive economic growth.
We cannot expect all nations to suddenly experience an export boom which overwhelms the import side of the current account and adds more to aggregate demand than is lost from fiscal austerity.
For all those reasons, budget deficits should be larger at present and governments should be demonstrating up their commitment to full employment and renewed economic growth. The best place to start is to introduce a Job Guarantee – large-scale employment creation programs.
Such a scheme – putting solid income into the hands of the poor and unemployed – would stimulate aggregate demand in essential sectors – food, retail, housing, schooling, health etc and within two quarters the recession would be over and investors would start getting bright-eyed again.
British role models
Much is being made of the criminal youth in Britain and their personal responsibility in perpetuating the destructive riots last week. I suppose they were influenced by their role models.
1. Politicians on both sides of Parliament in the UK who rorted their expense allowances – the so-called United Kingdom parliamentary expenses scandal – provided an excellent demonstration to anyone wanting to get material wealth illegally.
2. The Fourth Estate – so far the Murdoch Empire. The established media institutions demonstrated how the only goal worth considering was private gain and matters of integrity, morality, the law were secondary to the main game – private profit.
3. The exemplars from the financial sector – remember the character who taunted the doctors and nurses in London who were demonstrating – waving a ten pound note and telling them to get a job. I know that individual was sacked by an embarrassed Deutsche Bank who apparently told all staff to lie low given how furious the public were over their bonuses. The head of the London-based Deutsche Bank was paid “more than £10million last year” (Source). How many of the bankers who in the pursuit of personal greed lied and cheated people into investing in bad assets which led to the crisis have been called to account? How many have been given custodial sentences, not to mention sentences that are much harsher than precedent would suggest (see article – Britain’s Harsh Riot Crackdown.
Their slogan – you’ve got it, we want it – anyway we can.
4. Ratings agencies – who admitted to the US Congress inquiry that they had faked AAA ratings in return for private profit – and whose ratings duped investors into buying toxic assets which led to the crash. How many of them are serving custodial sentences and being forced to pay back the millions who have lost their jobs, their income and their wealth? Their slogan – do anything for a buck.
Role models all of them.
This was a groundbreaking news report this week – S & P Downgrades Iowa’s IQ.
Apparently the “Straw Poll” alarmed the ratings agency.
Hysterical (thanks Jim).
That is enough for today!