On June 24, 2018, the Bank of International Settlements (BIS) released their – Annual Economic Report 2018 – which contains their latest analysis of the global economy including the risks they think the current growth process faces. It is full of myth and like previous statements from the BIS it only serves to perpetuate the policy mentalities that caused the global financial crisis. These multilateral organisations (including the BIS, IMF, World Bank, OECD etc) have become the harbingers of the neoliberal ideology. In doing so, they have breached their original charter. They should be dissolved and replaced with new institutions within a revised international framework. We sketched that framework in our current book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
The 134-page document has many interesting graphs and a few informative tables, which, while informative, reflect the way in which the BIS constructs its fictional world.
I don’t intend on reviewing the document as a whole.
I prefer (especially as I have limited time today before travel commitments) to highlight why this is a fictional world the BIS constructs.
The narrative begins by noting that the GFC was accompanied by “an unparalleled build-up of leverage among households and financial institutions” which put “the world’s financial system was on the brink of collapse”.
They conclude in this regard:
Thanks to central banks’ concerted efforts and their accommodative stance, a repeat of the Great Depression was avoided.
That assessment is contestable of course.
Was it monetary policy rather than the huge fiscal stimuli that allowed economies to turn the corner?
Think about Britain and the US.
Britain imposed austerity when the Tories were elected in May 2010 and its nascent expansion on the back of the fiscal stimulus came to an abrupt halt.
The US government largely maintained their fiscal stimulus and growth continued unabated once the turning point was passed.
At the height of the crisis, both central banks adopted highly accommodative monetary policies settings including large-scale quantitative easing programs of the sort that the BIS think saved the world.
Further, it was only after George Osborne abandoned his obsession with fiscal austerity in 2012 as Britain was facing a return to major recession that the British economy started growing again, albeit at a slow pace, given that the fiscal brakes were only eased.
Then think about the Eurozone. It was mired in recession for years on the back of the pro-cyclical fiscal austerity even though the ECB adopted what might be considered to be the ‘mother’ of accommodative stances.
It is true that the ECB saved the euro – its bond-buying was cast as a liquidity operation to smooth markets but was in reality funding fiscal deficits.
So it was, in my view in breach of the Lisbon Treaty (and hence EU law), but saved many governments from insolvency. But in that context, it was a fiscal action from a central bank within a system that deliberately left a fiscal capacity out of its design.
The BIS then introduce the other nonsense that pervades these commentaries from the multilateral institutions (including World Bank, OECD, the IMF):
Still, central banks were largely left to bear the burden of the recovery, with other policies, not least supply side structural ones, failing to take the baton.
Ask yourself, how can “supply side structural” policies – including productivity enhancement through innovation and the more dark, cost cutting through cuts to wages, pensions and user pays pricing for water, power, transport etc help growth.
In many of those cases, the cuts to real wages and incomes undermines growth.
Productivity growth can only expand overall growth if there is commensurate increases in spending to absorb the increased output potential.
This increase can come from rising exports but for a nation to be generating a net export surplus (and hence contributing to overall growth in the economy) it must be draining demand from another country or countries.
This has been particularly the case in the Eurozone context. Germany’s ridiculous trade surpluses come at the expense of its common currency partners.
The reason that nations emerged from recession at differential rates and timings was not due to a reluctance or willingness to engage in ‘structural reforms’.
Rather it is almost directly related to their willingness to maintain fiscal support to the non-government sector to allow confidence in that sector to return so that private spending growth would resume.
If ‘structural reforms’ were the trick then Greece should have been leading the world some years ago given how much has been hacked out of that economy on the supply side.
The next myth the BIS introduce relates to its desire to abstract from the massive entrenched labour underutilisation that still persists even as growth has returned.
They just assert:
As the global economy reaches or even exceeds potential, it is time to take advantage of the favourable conditions to put in place a more balanced policy mix to promote a sustainable expansion.
In other words, they want the reader to believe that economies are at or past full employment and so there is no danger in hacking into wages and pension or withdrawing fiscal support.
One wonders how they explain the millions who remain underutilised in one way or another in the Eurozone, in Africa, in the US, in almost everywhere.
Yes, unemployment rates have fallen but in many cases are still well above the pre-GFC levels. For example, Australia avoided recession but its unemployment rate is still 35 per cent above the level in February 2008.
In the Eurozone, the unemployment rate is 25 per cent above its pre-GFC level. And so on.
Spain’s unemployment rate is 93 per cent above its pre-GFC level, Italy 82 per cent above, Greece 155 per cent above, and so on.
Participation rates in many nations have slumped, meaning that there has been an increase in hidden unemployment as job opportunities dry up.
And underemployment has become a spreading phenomenon.
In 2008, there were 814 thousand workers (3.5 per cent of labour force) who were part-time and wanted more hours of work. By 2017, this figure had risen to thousand workers (6 per cent of the labour force).
Over the same period, underemployment has risen in Italy from 1.6 per cent to 2.6 per cent; Greece from 2 per cent to 6 per cent; Netherlands from 1 per cent to 7 per cent; and Portugal from 1.8 per cent to 3.9 per cent, to name a few nations.
Add these figures to the elevated unemployment numbers and then try to run the line that these economies are nearing or exceeding potential.
Australia has 13.8 per cent of its willing and available labour resources either unemployed or underemployed.
But this ‘we are at or past full employment’ narrative is a common ruse from the neoliberal technocrats who use it as an additional excuse to hack into fiscal support.
Even at the height of the crisis, there was analysis coming out from the European Commission claiming that Spain’s full employment level had risen to be equated with an unemployment rate well over 20 per cent. It was nonsensical but also indecent.
And, of course, if the ‘we are at or past full employment’ narrative is too ridiculous to run in support of hacking into wages and income support schemes, etc, then the technocrats run the other argument, that there is no fiscal room and so the only way to get out of a deep recession-cum-depression is to increase exports and that requires internal devaluation.
That is the line they used on Greece.
Then we get onto its analysis of fiscal policy and the options ahead.
The context is their claim that while growth has been robust there are major risks ahead including an “excessive reliance on monetary policy”, “financial vulnerabilities”, “overstretched” financial markets, “a build-up of financial imbalances”, and the like.
The correctly point out that “private sector deleveraging” has been absent in many nations and the private debt problem has worsened as a result of “strong increases in private sector credit, often alongside similar increases in property prices”.
There is clearly a continuing problem in this regard and it is being exacerbated by governments that are relying, in part, on private spending funded by credit expansion, for growth as they hack into their own contributions to growth.
For example, the UK strategy over the last several years has exactly required households to incur more debt as the government ran its austerity policy program.
I could isolate many nations that are in this category.
That was the approach that led to the GFC. The private balance sheets cannot expand forever. A central bank can absorb whatever balance sheet expansion it chooses even if all the assets it buys were to default and leave them with massive negative capital.
A private sector entity, which is financially constrained, cannot and eventually the risk levels get beyond that which is sustainable and a contraction in spending occurs.
As we saw in the early days of the GFC, the turning point when the balance sheet restructuring begins can be sharp, substantial and savage.
But where the BIS then fails is when they examine the other side of the story – the government sector – and what policy can do to attenuate these risks.
We read a series of fictional statements:
1. “since both monetary and fiscal expansions work to a considerable extent by borrowing demand from the future. And when the future becomes today, there is inevitably a price to be paid”.
What does that mean?
In relation to private spending, obviously if interest rates are low and borrowing rises then the loans have to be paid back. That insight is passé really. So what.
But what they really want the reader to believe is that fiscal deficits undermines the future capacity of the government to run deficits.
So if the government is in deficit today to boost overall spending (demand) then the nation has to accept that in the future the government will have to reduce its overall spending (to pay back the deficits).
That is a monstrous lie. One of the most basic lies the neoliberal perpetuate.
A currency-issuing government has the following characteristics:
1. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
2. It can always purchase whatever is for sale in the currency it issues, including all idle labour resources.
3. It has the same capacity to do that today, as it has tomorrow.
4. Running a deficit today and hence supporting growth does not reduce its capacity to run a deficit tomorrow (even larger) to continue to support growth.
5. The only reason a deficit today might have implications for the scale of deficits tomorrow is because by stimulating the economy now, private spending may rise and less cyclical support would be needed from government in the next period. This has nothing to do with its financial capacity though.
6. There is no financial price to pay tomorrow by a government if it chooses to spending today.
What about debt issuance?
For a currency-issuing government whether it issues debt to match its net spending is a matter of choice not necessity. Prudent governments would not issue any debt.
But even if they do, the debt servicing is not a ‘price it has to pay’ (meaning a ‘cost’ – a diminished capacity). It funds debt servicing the same way it funds any ‘spending’ – through its infinite financial capacity as the currency issuer.
Moreover, extending the concept of ‘price to pay’ to the non-government sector – when the government chooses to issue debt the non-government sector is receiving a risk-free, interest-bearing asset in return for cash (non-interest bearing) and an income stream which flows for the duration of the asset.
After touting the familiar line of ‘structural reforms’ – more product and labour market deregulation, free trade agreements, etc, the BIS claim that:
The third line of action is to ensure the sustainability of public sector finances and to avoid procyclical fiscal expansions. The importance of this issue cannot be emphasised enough. Public debt has risen to new peacetime highs in both advanced and emerging market economies. And, as history indicates, fiscal space is likely to be overestimated in countries where financial imbalances have been building up. With due regard for country-specific circumstances, fiscal consolidation is a priority.
First, the BIS didn’t mind procyclical fiscal contractions when they were in league with all the rest of the neoliberals preaching austerity.
Second, pro-cyclicality is one of those misused concepts when it comes to understanding fiscal policy. Pro-cyclicality means that something is moving in the same direction as the economic cycle.
So it is rising when economic growth is occurring and falling when there is a slump.
Unemployment is typically (once all the participation adjustments occur) counter-cyclical. Consumption spending is typically pro-cyclical.
Fiscal policy should play a strong counter-stabilisation role, which is tied in with the term ‘pro’ or ‘counter’-cyclical.
Responsible fiscal practice requires a government to fill spending gaps left by fluctuations in non-government spending patterns. In that way, the government takes responsibility for maintaining full employment.
So in that sense, fiscal policy has to be counter-cyclical. Deficits should rise when non-government spending growth tapers or falls.
That is why it was irresponsible to impose fiscal austerity at the same time that non-government spending was weak or collapsing. That imposition was a pro-cyclical act.
What the Troika did in Greece was the exemplar of irresponsible fiscal practice.
Third, the situation is not as clear as that though.
If the non-government sector has a desire to withdraw some of its income flow each period in the form of saving then by construction that will mean that the spending to support the output levels that generated that income flow will be deficient.
That is why governments must fill the spending gap. That allows the output and income flows to be maintained and the saving desires of the non-government sector to be realised and supported.
A non-government surplus has to be accompanied by a government deficit as a matter of national accounting.
So if the non-government sector is intent on running a surplus and behaves consistently with that intent, then the government must run an offsetting deficit or else the economy will fall into recession.
As an aside, the slide into recession will likely push the government sector into deficit anyway, whether it likes it or not.
So think about all that.
A growth strategy built on the non-government sector desiring to save overall can only be sustained if the government is running deficits – thus discretionary public net spending must be pro-cyclical.
This means that fiscal policy can be seen as having two elements:
1. A discretionary component that supports the non-government saving desires through fiscal deficits on a sustained basis which means that continuous deficits support economic growth. This might be considered a pro-cyclical component.
2. A component that maintains a counter-stabilisation role to ensure that swings in non-government spending do not compromise the goal of keeping nominal spending growing in line with the available productive capacity of the economy to supply goods and services. This might be considered a counter-cyclical component.
The second component can have both discretionary and automatic stabiliser drivers. So if there is a sharp decline in non-government spending then a discretionary stimulus beyond the normal fiscal support might be warranted.
Further, the in-built automatic stabilisers (changing tax revenue and welfare spending) are always working across the cycle in a counter-cyclical manner.
Thus, what we don’t want to see is the second component working in a pro-cyclical manner.
Finally, the idea that “fiscal space” is dependent on the public debt ratio is not applicable to a currency-issuing government.
Such a government can always run higher deficits, no matter what its public debt ratio is.
If the bond markets don’t want to take the extra debt that would be matching the rising deficits then the government can simply instruct the central bank to take it.
Of course, that would be ridiculous in a fiat currency system. The easier and preferred solution is for the government to just stop issuing debt.
The debt does not provide the funds for governments to spend so should be seen as provision of corporate welfare and thus unnecessary.
The idea that the bond markets control bond yields (the interest to be paid on the public debt) is similarly flawed. That is true if and only if the government chooses for that to be the case.
A currency-issuing government can always control yields on any debt it issues should it wishes to do so.
To better understanding the concept of fiscal sustainability and disabuse yourself of the false claim that it is somehow related to deficit history or public debt ratios, please read the following introductory suite of blog posts:
1. Fiscal sustainability 101 – Part 1 (June 15, 2009).
2. Fiscal sustainability 101 – Part 2 (June 16, 2009).
3, Fiscal sustainability 101 – Part 3 (June 17, 2009).
The blog posts explain how Modern Monetary Theory (MMT) constructs the concept of fiscal sustainability.
These multilateral organisations have become the harbingers of the neoliberal ideology. In doing so, they have breached their original charter.
They should be dissolved and replaced with new institutions within a revised international framework. We sketched that framework in our current book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.