More austerity, more debt

How is that austerity working for you? According to a recent policy brief by UN-DESA, not so well. The authors (Oliver Paddison and Rob Vos) say that:

"Available evidence suggests that fi scal austerity is not helping restore economic growth or debt sustainability; countries that made the biggest spending cuts to reduce fiscal deficits have seen their debt-to-GDP ratios rise even further (see figure)."

The graph shows that higher primary surpluses (difference between revenue and spending, excluding financial payments) are correlated with higher level of public debt. The reason is that austerity reduces the level of activity and depresses revenues as you would expect according to Keynesian principles.

I think increasingly we have an analogy with evolution and creationism in the debate about the effects of austerity. Logic and evidence are clearly on one side, but belief, well that goes in any direction. The problem is that beliefs, ideology, and vested interests have an impact on policy.

Reagan was a pro-corporations Keynesian

Krugman notes today that Reagan was a Keynesian. And in a sense he is correct. The fact is that Republicans, at least since Ford, have been the Keynesians, or the party of Big Government if you prefer, while Dems since Carter have been the small government party. The problem is that Republicans are Big Government for the wealthy and corporations, and nobody wants government for the unions and the poor. See this debate between Barbara Bergmann, Jeff Frankel, Bill Niskanen, and Larry Seidman from 2004 (with a longish intro by Berglund and Vernengo) where the issue is raised. So if Obama wins you get sort of almost anti-Keynesian policies, between the Democratic timidity (let's call it that), and the Republican obstructionism (yeah, that's also a nice euphemism). And if you get Romney, you'll get conservative Keynesianism, tax cuts for the wealthy and spending benefiting certain corporations.

A few Galbraith talks you might have missed

Also, two more recent ones on C-Span Book TV taped his talk at MIT on May 7, and his appearance on Bloomberg talking about why need more than stimulus.

Phrase of the week: The Age of Lack of Innocence

"In this age of Leontief and Sraffa there is no excuse for mystery or partisan polemics in dealing with the purely logical aspects of the problem."

Paul Samuelson in "Understanding the Marxian Notion of Exploitation"

How bad is the unemployment rate?

Labor market numbers reported today by the Bureau of Labor Statistics are pretty bad. Only 69,000 jobs created last month, when we would need something more like 400,000 to be in a healthy recovery. But they are actually worse than it looks like, if that is possible. The key to understand why numbers are too rosy is the so-called participation rate. The labor force participation rate is the percentage of working-age persons in an economy who are employed or are unemployed but looking for a job, shown in the graph below. At the peak, from 1997 to 2000 the participation rate was 67.1%, but fell to 63.8% now.

If the number of employed and unemployed people that are looking for a job drops the participation rate drops too. If a few of the employed workers become unemployed, but  are still looking for a job, the participation rate does not change. But if the unemployed stop searching for a job they drop out of the labor force and the participation rate falls. So you see what is going on. More people are, since the prick of the dot-com bubble in 2000, leaving the labor force. The graph below shows the rate of unemployment and the adjusted rate of unemployment if the labor force participation rate had remained constant at 67.1%.

Instead of the current 8.2% rate of unemployment, the adjusted level would be 12.7%. It is also worth noticing that even with the housing bubble the labor market was not very strong during the Bush years, with the unemployment rate  never going below 6%.

Obama is not Carter

Interesting post by Nate Silver at Five Thirty Eight on Obama and Carter comparisons. The important point Carter went up for re-election in the middle of a worsening economy, and Obama is up in the middle of a very poor recovery. I add my 2 cents with the graph below.

The graph shows private employment growth in the four years of the Carter administration, and for Obama the three first years and the average of the first four months of 2012. Note that by 1980 private employment fell 0.2%, and is invisible in the graph. In the case of Obama the trend is up, but slowing down. Obama could increase public employment to help the lackluster private demand, but that is another story.

Parasites, vultures and other economic agents

The decision by Facebook cofounder, Eduardo Saverin, to relinquish his US citizenship led to a huge outcry, and to new bi-partiscan (a very rare event indeed) to tax him in advance and prohibit him from re-entering the country (the Ex-Patriot Act).  This is not a new phenomenon by the way. Kenneth Dart, inheritor to a styrofoam cup company and a few millions (billions?), renounced his US citizenship and became a citizen of Belize, a flight capital haven, in the 1990s for the same reason.

William McNeill differentiates between the micro-parasites and the macro-parasites, and Saverin and Dart are clearly in latter category. Macro-parasites also benefit from the host, and harm it in the process. And they evolve too. Dart is the owner of a Vulture Fund that made millions (700 or so) out of the Argentinean default back in the early 2000s.

Now, even though it has not received much attention, his Vulture fund has cashed US$ 400 millions out of the Greek payments after the last debt restructuring deal. Yep, there is where the money of Greek tax payers squeezed by the austerity programs of the EU and the IMF goes. Parasites and vultures exist, and will continue to thrive in capitalism, but there is no reason that governments should allow that to happen.

The impunite of parasites, vultures and other types of economic agents results from the lack of regulation with which corporations can act, and that has been the backbone of the neoliberal agenda. But I'll let the discussion of corporations for another post.

PS: Somebody reminded me that what Bain Capital and other private equity firms do is not very different from the parasitical behavior described above.

How big was the stimulus?

The figure shows the rates of growth of total federal government spending in three periods 1930-36, 1941-45 and during the last recession and after, that is 2008-11.

The longest series is 7 years, and you see that spending growth peaked in the third year, but is visible even in the last year. World War II saw a massive increase in government spending. By the standards of those previous stimuli the last one has been moderate in size, and even worse, not sustained in time. In the third year the rate of growth of government spending was negative. That is, after the 2009 stimulus government spending fell in comparison to the previous year.

And yes the comparison with the Great Depression and the War is okay, since the size of the shock was by almost any measure as big as the one  back then.

De Grauwe moment: an impressively prescient prediction of the Eurozone balance of payments crisis

Sergio Cesaratto (Guest blogger)

In an article in the Financial Times written one year before the onset of the European currency union, Paul De Grauwe presented a farsighted conjecture of what could follow, something most economists have only recently realised.[i] Indeed, with the benefit of hindsight, the European crisis appears now as the nth ‘this time is different’ episode of the financial liberalisation sequence cum fixed exchange rates, capital flows from the centre to the periphery, housing bubble, current account (CA) deficit and indebtedness, default. Although I find Reinhart and Rogoff (2009) to be a poorly organised account of the history and nature of defaults, their title really conveys the sense of a recurring pattern of unfortunate events. The title of a seminal paper ‘Good-bye financial repression, hello financial crash?’ (Diaz-Alejandro, C. 1985) also sums up the essence of those events. In order to better appreciate prof. De Grauwe’s insight I introduce his article with some notes from a just published WP of mine “Controversial and novel features of the Eurozone crisis as a balance of payment crisis”.

Popularized by Martin Wolf (2012), the interpretation of the European crisis as a balance of payment (BoP) crisis is becoming dominant. Accordingly, the cause of the crisis must be found in the easier access for a number of peripheral EMU countries to the European financial markets at low nominal interest rates. Financial liberalisation and the removal of the exchange rate risk encouraged massive capital flows from core to periphery countries in the ‘periphery’ (e.g. Merler and Pisani-Ferry 2012). Credit-financed autonomous consumption determined a growth both of domestic demand and of nominal wages higher than in core-EZ. Higher inflation rates in the periphery determined low real interest rates, a further support to domestic demand. The growth of domestic demand was associated to a housing bubble in Spain and Ireland, and to the growth of public spending in Greece. This sequel of events, and its consequences, foreign indebtedness and ‘sudden capital stops’ are basically not so different from those that typically took place in developing countries and ended in sovereign defaults (Frenkel, Rapetti 2009: 688-89; Reinhart 2011: 27-9).

A traditional objection to the interpretation of the EZ crisis as a typical ‘this time is different’ crisis is that there cannot be a BoP crisis in a currency union. The question is that the EZ is a hybrid between a full currency union (which also implies a fiscal union) and a traditional fixed exchange agreement. One main difference with the latter is that in a currency union capital flights are automatically compensated by the CB, in the EZ by TARGET 2 (T2) (Febrero et al. 2012). As everybody knows, assuming zero variation of foreign currency reserves, the BoP sheet would read: CA + KA = 0, where KA is the capital account. Normally, in a two countries world, if country A has (all magnitudes are balances) a negative CAA-, country B symmetrically shows CAB+, then KAA + and KAB- (country B is lending to country A). Suppose country B does not lend to country A (so the CA flow imbalance is not financed), and even worse that there are capital outflows from country A (so the stock of debt acquired by B in the past is not rolled-over as it expires). Then both CAA- and KAA-, so that CAA + KAA < 0. What happens in a currency union is that through T2: CAA + KAA + T = 0, where T > 0 means that country A is overdrawing from its CB account. It is as if the ECB were creating foreign currency reserves in a fixed exchange rate system (Leppanen 2012); or as if the deficit countries were creating the international reserves, like the U.S. in Bretton Woods (I or II) (Kohler 2012); or better still, it is as if the EMU worked in an ultra-Keynesian fashion as an International Clearing Union (ICU), with even less prudence than Keynes envisaged (I suppose I am the first to note this similarity).[ii] With T2, the EZ country A has indeed an infinite overdraft possibility (Milbrandt 2012 CESifo). What has happened in the periphery from 2007/8 is that CAA- and KAA -, T+ and symmetrically in the core: CA +, KA +, T- (core-banks receiving hot money from the periphery and reducing their overdraft at their NCB).

Not so paradoxically, given the hybrid nature of the EMU: ‘If, in the framework of a political union, the euro central banks were integrated as dependent branches of the ECB, the consolidation of the branches would dissolve the Target balances in thin air.’ (Neumann 2012; also Ulbrich & Lipponer 2012 CESifo Forum). This makes clear that through T2 the ECB is acting as a regular CB: normally banks rely on the interbank market to finance their imbalances (when they fall short of reserves); if, in exceptional circumstances, this does not work the ECB just fills the gap. As Eladio Febrero wrote to me: ‘If you move your savings from a deposit in Banca Intesa to Unicredit, and the former has no reserves deposited in the Banca d’Italia, the latter would create money and then credit the reserve account of Unicredit so your money would be there now. Then Banca d’Italia would acquire a claim on Banca Intesa. …It should be noted that if Banca d’Italia in the example just above, or the European System of Central Banks (in this discussion on T2) does not provide the banking system with liquidity, the latter would collapse: there would be a bank run and the whole economic system would have very serious problems.’ So, in this respect EMU is not like, say, the EMS. If the ECB interrupts T2 (i.e. it stops acting as a CB with the peripheral banks) this is the end of the EMU. Of course, T2 is not the cause of the problems, but it prevents the EMU from exploding as the EMS did in 1992.

In this regard one might think that if the EZ was a real Federal State, the financial crisis would be a ‘normal’ domestic crisis: if some local banks and some local governments (deprived of monetary sovereignty) are not solvent, nobody would talk of a BoP crisis. Even considering the grand scale of the EZ crisis, a ‘normal’ state would intervene by socializing part of the local government and banks’ debt, imposing austerity and balanced budgets on them; saved banks would be nationalised, restructured or shut down. The CB would cooperate by sustaining the sovereign/federal debt. At the same time the Federal administration would use fiscal transfers to attenuate the crisis. Fine, but this is not Europe! If it were, it would manage to solve the situation without too much hardship.

The question is that the EZ is a hybrid, in between a fixed exchange rate system among independent countries and a fully integrated economy, sharing the possibility of a BoP crisis with the former and national banking principles with the latter. In this spurious set up the ECB has acted somewhat similarly to the FED: through T2 and LTRO it is injecting liquidity and absorbing toxic assets as collateral, letting insolvent local banks and governments survive (although the lack of direct ECB intervention to sustain sovereign debts is putting the solvency of the Spanish and Italian governments in jeopardy by letting the sovereign spreads to explode affecting the in turn the solvency of domestic banks that carry plenty of their bonds).[iii] A fiscal pact has been imposed, but there is no Federal government assisted by a SCB on hand to heal the local states and banks. To sum up, the EZ crisis is not a classical fixed exchange rate crisis (as De Grauwe foresaw) ; it is not a domestic financial crisis; it is what it is: a BoP crisis in an imperfect currency union. If the union were perfected, the crisis could be solved in the same way as a traditional domestic crisis. If it is not perfected, it is an unedited BoP crisis with a still unwritten final.

References

CESifo (2012), Forum Volume 13, Special Issue January.

De Grauwe Paul (1998), The Euro and the Financial Crises, Financial Times, February.

Diaz-Alejandro, C. (1985)Good-bye financial repression, hello financial crash, Journal of Development Economics 19, 1-24.

Febrero E., Uxó J., Bermejo F. (2012), El funcionamiento del sistema TARGET2 desde la Gran Recesión. Una aproximación desde la óptica del circuito monetario, XIII JORNADAS DE ECONOMÍA CRÍTICA, Sevilla, February.

Frenkel R. and Rapetti M. (2009) A developing country view of the current global crisis: what should not be forgotten and what should be done, Cambridge. Journal of. Economics. (2009) 33 (4): 685-702.

Keynes, J.M. 1980. Activities 1940–1944. Shaping the Post-War World: The Clearing Union, Collected Writings of John Maynard Keynes, A. Robinson and D. Moggridge (eds), volume 25. London: Macmillan.

Kohler K. (2012) The Eurosystem in Times of Crises: Greece in the Role of a Reserve Currency Country?, in CESifo (2012) 14-22

Leppänen O. (2012) Eurosystem TARGET balance deviations call for cautious changing of the EU banking landscape, http://www.voxeu.org/index.php?q=node/7884
Merler S., Pisani-Ferry J. (2012), Sudden stops in the euro area, Bruegel Policy Contribution, March.

Milbradt G. (2012) The Derailed Policies of the ECB, iun CESifo (2012), 43-49.

Reinhart C.M., and Rogoff K.S. (2009) This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton.

Reinhart C.M., (2011) A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crises, Rivista di Politica Economica, Vol 100 Nopp. 11-36

Ulbrich J. and Lipponer A. (2012) Balances in the Target2 Payments System – A Problem?, in CESifo (2012): 73-76.

Wolf M. (2012), Why the Bundesbank is wrong , Financial Times 10 April.

Notes:

[i] Hat tip Paolo Borioni and Ronny Mazzocchi.

[ii] Indeed Keynes regarded the ICU as an extension of the principles that govern a national banking system, the same principle that informs T2. In 1941 he even called it ‘Currency Union’. In famous passages, he wrote: ‘In short, the analogy with a national banking system is complete. No depositor in a local bank suffers because the balances, which he leaves idle, are employed to finance the business of someone else. Just as the development of national banking systems served to offset a deflationary pressure which would have prevented otherwise the development of modern industry, so by extending the same principle into the international field we may hope to offset the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of the modern world. The substitution of a credit mechanism in place of hoarding would have repeated in the international field the same miracle, already performed in the domestic field, of turning a stone into bread’ (CW 1940-44: 75). But he was also very cautious: ‘In only one important respect must an International Bank differ from the model suitable to a national bank within a closed system, namely that much more must be settled by rules and by general principles agreed beforehand and much less by day-to-day discretion. To give confidence in, and understanding of, what is afoot, it is necessary to prescribe beforehand certain definite principles of policy, particularly in regard to the maximum limits of permitted overdraft and the provisions proposed to keep the scale of individual credits and debits within a reasonable amount, so that the system is in stable equilibrium with proper and sufficient measures taken in good time’ (CW 1940-44: 45).

[iii] The Greek, Irish and Portuguese governments are already insolvent. Note also that the solvability of Spanish banks is anyway precarious after the burst of the housing bubble.

A leader for the ILO

Vijay Prashad writes on the very important election for the head of the International Labour Organization, and the need to support Jomo K.S. a progressive economist, in particular in the middle of the current global crisis. He says:

On May 28, a select group of delegates will enter a room in the International Labour Organization (ILO) in Geneva to elect the body's next Director-General. Nine candidates are in line for the post. The ILO's byzantine process revolves around a tripartite structure, with the employers (the International Organisation of Employers), the workers (largely the International Trade Union Confederation, ITUC) and the governments sharing the task of selecting the next Director.

Read the rest here.

Newspeak, Europe and economics

The German representative on the board of the European Central Bank (ECB), Jörg Asmussen, says that the debate on growth versus austerity is the "wrong debate" since "we [who?] need both." Of course what he means by growth measures is labor market reforms, meaning more flexibility to fire workers (yes with more than 20% of unemployment in Greece and Spain, and double digits for the eurozone it seems that firing workers is really hard in the old continent). That would supposedly reduce the cost of workers, i.e. lower wages, and, as a result firms will hire more workers, even if nobody is buying their goods. And you wonder why things are the way they are in Europe?

PS: For a debunking of the idea that labor market flexibility is necessary for full employment, or that labor market protections cause unemployment, read this paper.

A time to reap

Conceição Tavares worked hard and now is time to reap the benefits. From Marx21 (hat tip Tomas Rotta).

Renowned professor and economist Maria da Conceição Tavares received yesterday, May 17th 2012, the highest scientific prize granted by the Brazilian government. The national foundation for scientific research (CNPq) awarded Conceição Tavares for her lifetime theoretical and practical achievements. Tavares has influenced generations of students, scholars, and state officials. The significance of the award is that it goes to a female Marxist economist. Dilma Rousseff, Brazil’s first female president and herself a former student of Conceição Tavares, personally handed the prize. During the official ceremony Dilma made clear in her brief speech that “Conceição Tavares treated economics as it should be treated, as political economy.”

Read the rest here.

PS: By the way, while it's true that Conceição was certainly influenced by Marx, it's far from clear that one could call her Marxist rather than say Structuralist. Her famous 1978 full professor dissertation (you had to write one to get a chair at a public university then) is basically Kaleckian, and was clearly influenced by Keynes. And as any Brazilian economist she was heavily influenced by Marxist historian Caio Prado and by the quintessential Brazilian structuralist Celso Furtado, beyond several structuralists at ECLAC, like Prebisch and Anibal Pinto. A more detailed story here.

Central Bank Independence not so well intentioned failure

Chris Giles, the economics editor of the Financial Times, thinks, rather surprisingly, that central bank independence (CBI) has been a failure, in England at least. In his own words: "with the benefit of hindsight, the first 15 years of BoE [Bank of England] independence should be seen as a well-intentioned failure."

His views hinge on the question of public control of central bank behavior. For Giles a well informed public could have pushed the BoE to act more boldly after the 2007 financial crisis, and to be more prepared for the global crisis that started with the Lehman collapse in 2008.

While I agree that CBI has been a failure -- and not just in England (yep ECB is what I'm thinking) -- and also agree that there is no reason why fiscal policy is more directly scrutinized, than monetary policy, by the people's representatives in parliaments in most countries, I would disagree that the mistakes have all been well intentioned [that might also explain why the BoE is fighting reforms, something that puzzles Mr. Giles].

The problem actually lies in the fact that a CBI is by definition not coordinating with the Treasury on fiscal policy, and in some cases might be forbidden to do basic things like buying government debt. The justification is the fear of inflationary pressures, while the truth might be closer to Kalecki's view that fiscal and monetary policy are used to maintain a significant level of unemployment to keep workers in line. The intentions behind CBI are not so pure as Mr. Giles assumes.

CBI means that the objectives of monetary policy are not to be discussed by the public. In the case of England, as well as Europe (and even the US), the problem is that more fiscal policy is needed, and more support from their central banks should follow.