The International Labour Organization (ILO) released its latest – Global Employment Trends 2013 – yesterday (January 22, 2013), which carried the sub-title “Recovering from a second jobs dip”. The way things are going in policy circles next year’s ILO Trends report will be titled something like “Heading into a third jobs dip”. There has been a lot of focus in the last few days on how central banks are standing ready or are about to inject liquidity into their respective economies as a further attempt to boost jobs. The press reports I have read (about Japan, UK etc) never also mention that these monetary policy gymnastics (quantitative easing) do nothing as they stand for aggregate demand. Japan will pick up its growth rate in the coming year not because the BoJ is buying bonds but because the Ministry of Finance will be increasing the budget deficit via some large spending injections. Unfortunately, the UK is determined to ensure it has a quadruple(bypass!)-dip recession. The ILO reports highlights the results of the policy folly in very sharp terms but, unfortunately, still situates that organisation within the neo-liberal orthodoxy when it comes to macroeconomic policy. Their heart is at least in the right place, they just have to move their institutional brain – about 180 degrees.
In last year’s – Global Employment Trends 2012: Preventing a deeper jobs crisis – we read:
The ILO’s particular concern is that despite large stimulus packages, these measures have not managed to roll back the 27 million increase in unemployed since the initial impact of the crisis. Clearly, the policy measures have not been well targeted and need reassessment in terms of their effectiveness.
Which says nothing of magnitude. I agree that most of the stimulus packages for which I have had detail were poorly targetted. The most targetted approach would have been to introduce a universal and unconditional Job Guarantee.
I guarantee two things – that would have solved the mass unemployment problem within a quarter or two (probably quicker) and would have ended up leaving governments with lower deficits (to GDP) than most of them have now. Win for progressives; Win for conservatives.
By not discussing whether these “large stimulus packages” were large enough the ILO leads the reader to take a negative view of the fiscal intervention.
It is true that the fiscal stimulus packages did not “roll back the 27 million increase” in unemployment but that just tells me that the approach was too cautious and dominated by the spurious notions about fiscal solvency.
The ILO itself, reinforces those spurious notions.
Further on in the 2012 Report, and building on its stimulus reflection, the ILO claims:
… to be effective, additional stimulus packages must not put the sustainability of public finances at risk by further raising public debt. In this respect, public spending fully matched by revenue increases can still provide a stimulus to the real economy, thanks to the balanced budget multiplier. In times of faltering demand, expanding the role of government in aggregate demand helps stabilize the economy and sets forth a new stimulus, even if the spending increase is fully matched by simultaneous rises in tax revenues. As argued in this report, balanced-budget multipliers can be large, especially in the current environment of massively underutilized capacities and high unemployment rates. At the same time, balancing spending with higher revenues ensures that budgetary risk is kept low enough to satisfy capital markets.
Which tells you that the ILO have joined the IMF-OECD neo-liberal macroeconomics orthodoxy despite being an organisation that has had a very different history was set up to ensure workers rights were protected and that governments ensured their was full employment.
From an historical perspective, the concept of the balanced-budget multiplier entered the literature and the public policy debate, in the immediate post Second World War period. This was a period when economists were worried that the accumulated debt from the Great Depression and the prosecution of the Second World War might have been so large that it might constrain the capacity of governments to maintain high deficits.
The fear was that the withdrawal of the war-time stimulus might provoke a return to the recessed conditions prevailing before public spending ramped up during the war.
Remember, this was an era where national governments operated in a convertible currency system with fixed exchange rates and so were financially constrained.
So unlike now (since 1971) where a sovereign government is never revenue constrained because it is the monopoly issuer of the currency and floats that non-convertible currency on international markets, the 1940s governments had to “finance” their net spending by issuing debt.
After 1971, the act of debt-issuance to match deficit spending became totally unnecessary and voluntary for most nations. It is an artifact of a monetary system that most countries abandoned in 1971. The fact that the practice has remained is due to the conservative influence on governments, which have been pressured into establishing elaborate institutional structures to limit their short-run capacity to spend.
Only nations that surrendered or compromised their currency sovereignty in the modern period remain dependent on “capital markets”. However, even in the most notable case, the Eurozone, all member states could be free of the pressures placed on them by capital markets if the central bank (the ECB) was willing to fill the fiscal void that the flawed design of the Euro monetary system created.
The point is that the advocacy of the balanced budget multiplier is a vestige of a past monetary system, which is telling. All the fears we hear now (which were valid during the 1940s) are simply the echoes of ignorance or conservative ideologies and have no substance in economic/financial theory or practice. Inasmuch as they apply, say, to the Eurozone, the ECB could render the concerns irrelevant.
For most nations though, who maintain fully sovereign governments, their treasuries can spend what they like as long as their are real goods and services available for sale in the currency they issue. That capacity is regardless of the public debt ratio. The latter is irrelevant in a modern monetary system for determining (or influencing) in a technical sense – government spending.
The other point is that the “27 million increase in unemployed” required relatively massive fiscal interventions – budget deficits could easily have been 12-15 per cent of GDP in 2009 if the government has have attacked the problem appropriately.
It is dreaming to think that that scale of fiscal stimulus and aggregate demand support could have been provided with a “balanced budget” response.
Please read my blog – What is the balanced-budget multiplier? – for more discussion on this point.
The 2012 ILO report closed with the following:
At the same time, balancing spending with higher revenues ensures that budgetary risk is kept low to satisfy capital markets. Interest rates will therefore remain unaffected by such a policy choice, allowing the stimulus to develop its full effect on the economy.
And there you have the final statement for 2012 from the ILO’s major employment report – “27 million increase in unemployed” but capital markets have to be kept satisfied. The truth is that capital markets can be forced int mendicant status – begging for any public debt they can get. It is easy for the government and central banks to achieve that.
Governments should never worry about what “capital markets” (bond traders) want.
Please read my blog – Who is in charge? – for more discussion on this point.
In the 12 months since its last report, and the ILO tell us that:
1. “The global economic and jobs crisis has entered its fifth year, following a year of economic adversity and disappointing labour market trends”.
2. “Global unemployment rose to 197.3 million in 2012, an increase of 4.2 million over the previous year and 28.4 million above the level in 2007, the year preceding the crisis”.
3. The ILO predict a “a further increase in the number of unemployed around the world of 5.1 million” in 2013. That is, things are getting worse after five years.
4. There is “further evidence of rising distress in labour markets around the world”:
Labour force participation rates continued to decline in many countries and long-term unemployment rates remained high or kept rising in developed economies, signalling widespread discouragement, growing labour market detachment and increasing structural unemployment problems. This can have adverse long-term consequences for workers in terms of diminished skills, growing skills mismatches, and reduced employability, weighing on economies’ trend rates of output growth.
In other words, the hysteresis associated with the fiscal austerity is ensuring that people will continue to endure the costs for years to come. For many workers (millions), the costs will be borne for the rest of their lives and passed onto their children.
When faced with such an enduring disaster, it beggars belief that governments continue to avoid recognition that their policy stances have failed and it is time to try something different – like directly creating some employment and boosting income support..
Nothing much could be worse than what the world is facing now.
The ILO tell us that:
Unresolved financial sector issues and recession-induced public debt problems in developed economies continue to weigh on private consumption, investment and public expenditure, thereby raising uncertainty.
This is a typical sort of statement that ties things together that do not necessarily belong linked and makes what appear to be factual statements when there is no supportive evidence.
First, what exactly are the “recession-induced public debt problems in developed economies”?
Which auctions have failed?
Which bid-to-cover ratios have fallen below 1?
What yields have risen?
What bonds are trading at higher than low yields?
The only problems we have seen have been encountered by Eurozone member states and they have arisen because these nations use a foreign currency (the Euro). Cure? Abandon the monetary system – it cannot deliver long-term prosperity to the citizens and will always be prone to crisis when there are significant demand shocks encountered.
So these throwaway lines about “public debt problems” have no real basis. They are conditioning statements – designed to put the reader into a particular frame of mind – not to ask questions but just accept the orthodoxy and perhaps fiddle around the edges.
Second, in what way are the low public debt yields, high bid-to-cover ratios and repeatedly successful public bond auctions weighing on “private consumption … [and] … investment”?
Which consumers make a considered appraisal of the current state of the bond auction markets before deciding to spend? Millions of consumers are suffering from a lack of income as a result of being deliberately rendered jobless by failed government policy.
Many consumers are weighed down by the debt they built up during the credit binge – encouraged by governments who in many cases then boasted about the surpluses they achieved on the back of the credit-driven growth (booming tax revenue). None of these governments or international agencies told us that this growth strategy would blow up. They were too busy praising each other for rendering the “business cycle” dead.
In turn, why would firms ramp up investment in any significant way at present if consumers were bolted down trying to save and reduce debt? Which firms conduct a detailed appraisal of the bond market before they invest in new capacity to meet burgeoning consumer demand? Probably none!
But the ILO thinks that:
recession-induced widening of public deficits have both led to a sudden acceleration in public debt, creating concerns about fiscal sustainability and causing the costs of borrowing influenced by treasury yields to skyrocket in certain countries, notably in Europe.
Which countries? A few Eurozone countries and the ECB has that under control. Where is the wider public debt problem? The criminal and incompetent ratings agencies adopted the same logic as is being expressed by the ILO here and every time they downgrade a sovereign government the yields seem to fall (that is, there is greater demand for the bonds).
Japan has announced very large new fiscal stimulus program will commence in the coming weeks. What have yields done? You can answer that yourself. Has the yen collapsed? No, it has gone the other way as currency traders line up to get it.
The ILO report does recognise (Page 27) that “all regions have experienced a significant downturn in merchandise trade growth” as the macro environment deteriorates.
No-one should be surprised by that. It was totally predictable despite all the rubbish that conservative politicians, commentators and one-trick ponies like the IMF and the OECD used to convince us all that cutting spending would increase spending.
The IMF, in particular, has made the “exports-led” case for fiscal austerity its showpiece policy platform. But as is now clear – the IMF gets mostly everything wrong. They lost their purpose in 1971 when the fixed exchange rate system, which they were at the centre of collapsed.
They re-invented themselves but only managed to create a pernicious role for themselves – one that has impoverished millions and led to the death of countless young children in the poorer nations. The IMF should be disbanded without delay.
Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
The ILO talks about “incoherent fiscal and monetary policy” as contributing to the worsening conditions. Well, I agree but their version of this incoherence is as follows. You will see I would not agree with their interpretation:
… major central banks continue to support the real economy with an accommodative stance of monetary policy, having lowered interest rates to near their lower limit and expanding the monetary base through exceptional interventions. At the same time, however, the substantial increase in public debt, especially among advanced economies, has triggered un-coordinated policy action to restore fiscal sustainability through austerity measures. Such policy incoherence prevents a stronger recovery from taking hold. Such an approach is unsustainable in the long-term as public debt levels continue to rise despite these austerity measures. Loose monetary policy in the absence of a stronger reaction of the real economy has created concerns with regard to financial stability … thereby further increasing uncertainty to the outlook.
1. Lower interest rates do not necessarily lead to higher aggregate demand. Borrowers will only seek funds – at any price – if there are good prospects for the return. At present with contraction the norm, the prospects are poor.
2. The fact that the central banks have been “expanding the monetary base through exceptional interventions” does nothing for growth. These are portfolio swaps with virtually zero aggregate demand flow through.
3. The policy incoherence is not between the policies but rather a reflection of the fact that neither aggregate policy is stimulating aggregate demand. Monetary policy is an ineffective tool for accomplishing that goal and fiscal policy is deliberately undermining spending.
4. All the nonsense about “fiscal sustainability” is just straight out of the IMF Fiscal Monitor – the ILO even reproduces data from that publication.
5. What is unsustainable in the long-term is a host of nations with millions of people unemployed and becoming impoverished while at the same time governments attack the income support they provide to the unemployed. It is not sustainable to have 55 per cent of the 15-24 year old labour force unemployed and a fair percentage more unemployed.
The uncertainty in the private sector is being generated by the on-going labour market malaise rather than any of these irrelevant financial ratios. These ratios are the games that well-paid, securely employed graduates play around with at the IMF and in treasuries and the like. Their relevance for decision making in the real world is highly limited except in the sense that governments are bullied by the IMF and the like to introduce anti-social policies which create unemployment.
Apparently, there is a solution to the “policy incoherence”. The ILO are urgin more coordinately measures. They say that the “source of policy incoherence stems from the uncoordinated nature with which fiscal austerity measures are currently being implemented”.
Note, they are not saying that the fiscal austerity per se is the problem – it is just that it is not being coordinated. What does that mean?
Well the ILO offers this gem of misunderstanding:
Some countries that already had a weak fiscal position prior to the crisis were forced to implement substantial austerity packages, cutting down spending and finding new ways to raise government revenues. However, by implementing such austerity measures without regard to the broader global economic outlook, the strategy proved self-defeating as several major economies embarked on similar deflationary policies at the same time, thereby reducing aggregate demand both at Home and abroad
1. There is no such thing as a “weak fiscal position” for a sovereign, currency-issuing nation. What could it mean in a well-grounded monetary economics. Such governments can spend as much as they like (up to what is available for sale in that currency) irrespective of what their past budget position was.
Japan is about to embark on a massive fiscal injection and it has the highest public debt ratio. Are they saying they have a weak fiscal position? Definitely not. They are saying that spending is deficient in their economy and a fiscal stimulus will reduce the spending gap.
2. What does “forced to implement substantial austerity packages” mean? Answer: nothing. No sovereign government was forced to introduce austerity. They did it because the vested interests that provide them with political funding and support gained from it.
The Eurozone nations were “forced” by the Troika to do it because they had earlier made the monumentally bad decision to abandon their own currencies. But they still had a choice – they could (and should) have left the Euro and restored their own currency sovereignty. Greece would have been growing relatively strongly now had they done that in 2009. Unemployment would be much lower and they could have given jobs to their youth.
3. I agree the “strategy proved self-defeating” but who ever believed it would work. No-one who knows anything about real world macroeconomics agreed with the strategy in the first place.
The ILO then said:
The fact that monetary policy has already reached some limits in its capacity to support the economy … has further worsened the impact of such uncoordinated fiscal austerity measures on the real economy.
1. The faith in monetary policy being effective was always misguided. It is just a neo-liberal ploy to allow them to justify abandoning the sensible use of fiscal policy.
2. There it is again – what is uncoordinated fiscal austerity?
The ILO offer this:
Policy coherence cannot be restored by unilateral action on the fiscal side.
Yes it can! Any currency-issuing government could immediately offer an unconditional job at some reasonable fixed wage to any of its citizens who could not find work elsewhere. They require no external imprimatur to do that. They have all the capacity as the sovereign government.
Any such government could provide new funding for public education, health, environmental care, aged care, renewable energy projects, public investments in new infrastructure etc. They need nothing more than the political will to do that.
It is a lie that governments are interdependent in this way. It surely helps if all governments were doing the same thing because the trade linkages would be enhanced. But nations can grow and provide jobs without a positive net exports contribution. It is a lie to say otherwise.
The ILO then gets bogged down in discussions about bank reserves being loaned out (false) and some governments not being able to fiscally support their economies (false) and having to rely on expert-led growth (false) and it just got worse.
There is a game children play where you start off with a word and are allowed a certain number of moves whereby one letter at a time is substituted so that each iteration a new word is made with the final goal some target word.
This example is rather complex:
ILF (see http://www.internetslang.com/ILF-meaning-definition.asp and add “conservatives and neo-liberals off”)
The macroeconomic rhetoric coming out of the former demonstrates that it has morphed into the latter, which is a real pity given the exceptional social aims of the former.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.