Major developments across the globe in monetary and fiscal policy keep happening on a daily basis at present. We are now hearing conservatives, who previously made careers out of claims that government deficits would send nations broke and more, appearing in the media now claiming “We need the state to bail out the entire nation”. Not too many economists are pushing the line that the market will deal with this crisis. They all the want the state to be front and centre as their own personal empires (income etc) becomes vulnerable. In a normal downturn there is not much sympathy for the most disadvantaged workers who bear the brunt of the unemployment. Now it is different. This crisis has the potential to wipe out the middle classes and the professional classes. And suddenly, who would have thought – the nation state is apparently back, all powerful and being begged to intervene. It is wake up time. Now no-one can be unclear about the fiscal capacity of the state. They now know that politicians who claim they don’t have enough money to do things were lying all along. They just didn’t want to do them. And when this health crisis was over we have to demand that the governments continue to lead the way financially and work out solutions to the socio-ecological climate crisis. No-one can say there is not enough funds to do whatever it takes. We all know now there are unlimited funds. The question must turn to the best way to use them. I also provide in this post some further estimates of the labour market disaster that Australia is facing as part of the development of my 10-point or something plan. It is all pretty confronting.
In our book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – we traced the way in which the progressive political forces were duped by the conservatives into believing that the power of global financial capital had rendered the nation state virtually powerless.
The Left narrative for several decades has been that the nation state has to design policy interventions that ensure the financial markets are appeased for fear that the latter will stop funding the government and trash the currency.
As part of this surrender, the Left steadily adopted the mainstream macroeconomics story line and when in government have executed harsh austerity causing untold misery.
At present, the rundown of our health systems via privatisation, cost-cutting, under-resourcing, user-pays, etc is starting to pay all of us back in quite stark terms.
The Left politicians rehearse the familiar mainstream macro myths:
1. Fiscal deficits push up interest rates and crowd out private investment.
2. Deficits run up unsustainable public debt which mortgages our childrens’ futures.
3. Deficits cause inflation.
4. Central banks cannot fund government deficits or else hyperinflation results.
5. Governments cannot promote growth and create employment.
6. Income support provided by the government undermines private incentives and subsidises unemployment.
7. Essential infrastructure should be provided by the private sector.
8. The banking system should be deregulated because financial markets are efficient (always put funds into best value use).
9. The private market (price system) will always deliver outcomes that generate the most wealth for all.
10. Rising inequality does not undermine growth and prosperity.
I could go on.
The Right has actively promoted these myths through think tanks, the production of regular ‘reports’ coming out predicting all sorts of doom, the outlays of billions by lobbying companies aimed at influencing political choice, the manipulation of the media, etc.
The daily cacophony promoting this sort of narrative that comes out of organisation such as Fox News and its counterparts is beyond belief.
I wrote about the roots of this strategy in this blog post (among others) – The right-wing counter attack – 1971 (March 24, 2016).
And along the way, the Right have been merrily reconfiguring the nation state in its own vision – using the legislative and regulative capacities that only the nation state possesses and only the nation state can implement.
As we show in the book, all the major shifts that we associated with neoliberalism have been engineered through the state – with the state as a means – willing or otherwise.
The neoliberal report card reads like a horror story. I presented this assessment during presentations in early January 2020:
- Income and wealth inequality rising.
- Precarious work with flat wages growth.
- Elevated unemployment and underemployment.
- Private debt levels unsustainable.
- Education and training systems degraded.
- Public services and infrastructure degraded.
- Regions and communities are being left behind.
- Indigenous poverty is unresolved.
- Governments with ’surplus’ obsessions.
- Social and environmental failure.
And now we can add a massive global health crisis interacting with ill-equipped health systems, sabotaged because for years policy makers have been taking advice from my profession and transferring billions of public funds from health care for all to private health providers who are among the most profitable corporations around.
It is wake up time.
This morning while I was listening to the news (and stretching after exercise) and American commentator who had previously worked for a leading Republican presidential candidate said:
We need the state to bail out the entire nation …
Can you imagine any person, much less a conservative hawk, saying this two months ago?
And overnight, the Financial Times published an Op Ed from former ECB boss, Mario Draghi (March 25, 2020) – We face a war against coronavirus and must mobilise accordingly – where he said:
The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression, made deeper by a plethora of defaults leaving irreversible damage. It is already clear that the answer must involve a significant increase in public debt. The loss of income incurred by the private sector — and any debt raised to fill the gap — must eventually be absorbed, wholly or in part, on to government balance sheets. Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.
And, also overnight, the current management of the ECB received a legal ruling (dated March 24, 2020) – DECISION (EU) 2020/440 OF THE EUROPEAN CENTRAL BANK – that said:
1. The “pandemic emergency purchase programme (PEPP) … will be separate from, and in addition to, purchases carried out under the APP …”
2. “For purchases under the PEPP of eligible marketable debt securities issued by central, regional or local governments and recognised agencies, the benchmark allocation across jurisdictions of the euro area will be guided by the key for subscription of the ECB’s capital as referred to in Article 29 of the Statute of the ESCB.”
3. “the Governing Council also decided that to the extent some self-imposed limits might hamper action that the Eurosystem is required to take” and “the consolidated holdings under Article 5 of Decision (EU) 2020/188 of the European Central Bank (ECB/2020/9) (1) should not apply to PEPP holdings.”
This is legal speak for abandoning the 33 per cent issuer limit rule. It no longer applies. There are no longer any financial limits on the volume of Member State debt instruments the ECB can buy.
4. “public sector marketable debt securities with maturities shorter than those purchased under the PSPP will also be purchased under the PEPP.”
So the ECB can now target shorter debt maturities than previously.
5. “the Governing Council decided that marketable debt securities issued by the central government of the Hellenic Republic will be eligible for purchases under the PEPP.”
Under the previous bond-buying schemes, the ECB did not purchase Greek government debt.
It can now buy unlimited quantities of it. Now it is over the Greek government to issue the debt at low yields (which the ECB decision now guarantees) and help its ailing nation, sacrificed for a decade by the European Commission insistence on austerity.
So while Mario Draghi is saying that there will have to be “a significant increase in public debt” what the ECB decision means is that the debt will be held by the ECB (after buying it in secondary markets after the primary issue).
And has I point out to financial market commentators and journalists who express fear that central banks will just (in their words) be out there monetising the government debt (or, again, in their words, “printing money”), the reality is that since the GFC, and, for Japan, since the 1990s, central banks have been funding government deficits without none of the consequences that the mainstream macroeconomics teachers claim would follow.
The balance sheets of several central banks reflect this.
And, the financial markets cannot get enough government debt and are not about to kill off the ‘goose’ (golden egg).
I said in an interview yesterday that I would rather see this process made more transparent by eliminating the ‘middle person’ (the bond markets), who are reaping profits via the capital gains arising from the QE programs.
In other words, the central banks should dispense with the secondary bond market purchases and dispense currency on behalf of the government where instructed.
If you want some accounting trail then the central bank could record a ‘debt entry’ on its balance sheet. And then they could go through the routine of transferring funds from the right pocket of government to the left pocket and pretend it is independent.
The interesting thing for Europe now is how it deals with the obvious fiscal demands.
Articles 121 (multilateral surveillance) and 126 ( excessive deficit procedure) of the Treaty on the Functioning of the European Union (TFEU) lay down the “legal basis of the stability and growth pack (SGP)”.
Protocol No. 12 of the Treaty of the European Union covers the Stability and Growth Pact rules.
More detail appears in Article 136 – it “provides for specific provisions to be adopted for the euro area. It is the basis for a sanctions regulation for euro area countries (included in the so-called six pack) and the so-called two pack regulation, which includes enhanced monitoring and surveillance in the euro area.”
However, the – Resolution of the European Council on the Stability and Growth Pact – adopted on June 17, 1997 at its meeting in Amsterdam allows for deviations from the rules where:
… there are special circumstances …
The European Council Regulation (EC) No 1466/97 (published July 7, 1997) – outlined the “strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies”.
In Section 3(b), we read:
Similarly, the deviation may be left out of consideration when it results from an unusual event outside the control of the Member State concerned and which has a major impact on the financial position of the general government or in case of severe economic downturn for the euro area or the Union as a whole, provided that this does not endanger fiscal sustainability in the medium-term.
So the European Commission should immediately follow the ECB’s lead and instruct Member States to ‘do whatever it takes’ in terms of fiscal policy and ignore all the rules that have stifled prosperity since the Eurozone was formed.
They can safely allow Member States deficits to substantially increase knowing that the ECB will be able to buy all the debt released to the bond markets.
Some nations will require deficits of more than 20 per cent of GDP, given that they entered this crisis with substantial residual effects of the GFC and the subsequent austerity and are experiencing a disastrous health calamity – Spain, Italy and other nations.
What this means for the “medium-term” will be interesting.
The mentality of the European Commission will start making excessive deficit mechanism noises to early in any recovery cycle.
The scale of this crisis is beyond our historical imagination. Deficits will remain high for years to come and governments will have to improve health systems, depleted by the years of austerity.
Many businesses will never return and so it will take time for new employers to enter.
As Mario Draghi wrote in the FT article:
The priority must not only be providing basic income for those who lose their jobs. We must protect people from losing their jobs in the first place. If we do not, we will emerge from this crisis with permanently lower employment and capacity, as families and companies struggle to repair their balance sheets and rebuild net assets.
This will require more than some cheap loans or postponing tax obligations, which is where the European governments have been heading so far.
It needs a huge and immediate liquidity injection.
It needs rent and mortgage protection.
Cheap loans will not be effective because firms are unlikely to draw on them in the face of a massive drop in their sales volumes.
Clearly, though, the governments should underwrite all outstanding debt at present.
Whether all this sinks the EMU remains to be seen. It should.
Some thoughts about Australian unemployment
On Monday, I will expand on this analysis.
I just did an ABC News Radio interview where I was asked to speculate on the likely impacts on unemployment in the coming period.
I have been running some econometric equations (Okun-type models, which I published a lot about some years ago) and forming some rules of thumb to guide my thinking about the scale of the unemployment crisis.
If you go back to the last serious recessions Australia endured (1981-83 and 1990-91) you get a feel for what happened in the labour market.
The following graphs shows the evolution of real GDP from peak out 5 years (20 quarters) in each episode.
They were roughly similar events although the trough in 1982 was much deeper.
The next graph shows the evolution of the unemployment rate over the same period (indexed to 100 at the low-point before the downturn). The rise in unemployment rates continues after the trough in real GDP has been reached.
Firms do not immediately rehire workers as they make do until the recovery gains sufficient strength.
In the 1982 recession, the unemployment rate kept rising for one quarter after the GDP trough, whereas in the 1991 recession, it kept rising for a further 6 quarters (1.5 years) after the real GDP trough.
The following table summarises these shifts:
|Period||GDP contraction (peak to trough) %||Increase in UR to peak (points)|
|September 1981 to June 1983||-3.71||4.69|
|June 1990 to June 1991||-1.43||4.71|
If you average the percentage point responses of the unemployment rate for each percentage point contraction in GDP (including the period after the trough when unemployment rates keep rising) you get a rough rule of thumb that:
For every 1 per cent that GDP contracts, the unemployment rate rises by 2.5 percentage points, which given the current labour force would add 304 thousand workers to the unemployment queue.
There are cyclical effects on participation etc that are not included in these types of estimates.
The following Table, which I will elaborate on next Monday summarises the impacts. We started this crisis with 720 thousand unemployed and an unemployment rate of 5.2 per cent (that is, in a much worse state than the period leading into the GFC).
We also have much higher underemployment now than we had then.
|Fall in GDP (per cent)||Rise in UR (points)||Estimated UR (per cent)||Unemployment (000s)||Change in Unemployment (000s)|
I will leave these figures for today so that the journalists who have been calling me over the last few days have something concrete to go on.
If the downturn is as bad as the 1982 recession then 1.2 million extra unemployed workers will be added.
However, one current estimate (not mine) is that GDP will contract by 8 per cent. Then you are talking an extra 2.5 million workers becoming unemployed.
As I have been telling journalists the last few days, the current stimulus offered by the Federal government is probably to small by a factor of 3!
They can certainly minimise the rise in unemployment if they offer adequate income support and engage in large-scale job creation.
There is a massive need for job creation interventions and income support.
The government should announce it will pay the wages of all workers displaced, provide a guaranteed income to those who are unable to work but have nominal commitments such as rent, mortgage payments etc so there is no housing dislocation.
And more …
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.