Policy Matters Archives

Is the new progressive IMF just an illusion?

“The Funeral of Austerity”– that’s how the FT referred to the IMF’s last round of annual meetings. In a radical departure from past approaches, the fund’s glossy publications encouraged countries to increase spending during the pandemic. Managing Director Kristalina Georgieva even talked about the need to ramp up public investment in service of greener and more inclusive economies. It was a big shift in rhetoric, and it earned the IMF stellar press coverage. But was it just rhetoric, or have things actually changed? To know whether austerity really died, we have to look at what the IMF said to its members states, not to the press.

To give credit where credit is due, the IMF did step up to offer emergency loans during the pandemic. Unlike usual IMF lending, they did not carry conditions; countries were not forced to adopt any particular economic policies to get access. By the end of 2020, over 70 countries had taken out such loans, and they provided a lifeline. As uncertainty around the pandemic triggered a massive capital outflow from the developing world, these loans helped alleviate some of the most immediate needs.

But although conditionality was absent, the emergency loans did come with advice. And despite the novel rhetoric at the IMF annual meetings, the advice was business as usual: regressive taxation, “structural reforms” (deregulation, liberalization, and privatizations), and fiscal consolidation. These are the same policies that the IMF has imposed for decades and that have had disastrous results for borrowing countries. Does the Fund really believe they can be relied upon to provide the inclusive and sustainable growth they’ve come to emphasize?

Answering this question required me to better understand the way the IMF justifies its recommendations. In a report for the ITUC, I was able to unpack just that.

This recent IMF research paper gives some clues by tracing the evolution of the Fund’s growth narratives over time. What becomes apparent is that IMF’s narratives have changed response to politics more so than in response to results. The paper asserts that industrialization, manufacturing, and innovation were considered as drivers of growth by the IMF, until the 1980s. The shift in narrative coincides with a push from the Reagan administration to adopt trickle-down economics and make neoliberal ideology go global.

It was then that the IMF’s narrative on what are the main drivers of growth morphed into the “Washington Consensus”, blaming poor economic performance on government intervention and encouraging states to get out of the way. From that premise, privatizing, deregulating, and liberalizing seem like the path to growth. And the now ubiquitous Dynamic Stochastic General Equilibrium (DSGE) models have helped the cause along. With market superiority built into the assumptions of the model, a lot of mathematics can “demonstrate” the justifiability of the policies proposed.

The Washington Consensus policies are what the IMF refers to as structural reforms. The 1980s marked the start of “Structural Adjustment Programs” that had disastrous consequences for the developing world, while the benefits never materialized. Over the last decades, none of the countries that followed the IMF’s advice were able to industrialize and move up the income ladder. The countries that did move up (such as the Asian Tigers) relied on industrial policy.

After a series of high profile failures and a loss of credibility, the IMF officially discontinued Structural Adjustment Programs. However, while additional language was added to its advice, terms such as inequality, inclusive growth, corruption, and human capital started to appear alongside elements of the Washington Consensus. The structural reforms at the core of those programs are still prevalent.

Those shaping IMF policy advice continue to tell a different story, one where structural reforms work, even if they are unpopular. Their work continues to find creative ways to group countries together to claim that its approach works and blame abysmal growth performance in some of their top “reformers” on their own failures.

For example, a 2019 publication that aimed to defend the benefits of such reforms scored countries based on their adoption of structural reforms. While the paper groups countries in a way that allows reporting better growth from more reforms, a look at the entire sample paints a different picture. The best per capita growth in the sample is from China, which is not a top reformer and certainly not a follower of IMF advice, while top scorers such as Ukraine, Russia, and Egypt have amongst the worse growth performances in the sample.

In general, it is well documented, including in the IMF’s own internal review of programs, that the IMF in its programs and projections continues to underestimate the negative impacts of austerity, while overestimating the growth grains from the reforms it pushes.

While those designing policy advice at the IMF might not be fully ready to admit their approach does not deliver on growth, the institution’s own research department published a series of papers on the negative social consequences of many of these policies. There is IMF research that links policies the IMF has imposed for decades to increasing inequality, and higher inequality to lower growth. Furthermore, Argentina and Greece are just two recent examples of huge spikes in poverty caused by the economic collapse that followed IMF-imposed policy approaches.

If the IMF truly means what it says about wanting to support a green and inclusive recovery, it needs to fully revamp its policy toolkit, and reassess all the advice it gives countries. Even if the IMF were to incorporate concerns about inequality and the environment in its current models, they would still be underpinned by the market fundamentalism baked into the DSGE models it uses. The limitations of adding variables to the same old paradigm are already showing when it comes to climate policies. The IMF is suggesting, all based on carbon pricing and the idea that nudging markets can solve the existential climate crisis in a timely manner, an overoptimistic assumption this time with devastating consequences for the entire planet.

As long as trickle-down, supply-side economics continues to shape the core of its advice, the new IMF will be just like the old IMF, now with more gentle rhetoric.

Lara Merling is a policy advisor at the International Trade Union Confederation, which represents over 200 million workers in 163 countries, and is a Senior Research Fellow at the Center for Economic and Policy Research in Washington DC. You can find her on Twitter @LaraMerling

Basic Income’s Politics Problem

The rising interest in Basic Income, and its being put on the political agenda in countries ranging from Canada to South Africa to to Finland, is driven by a number of economic and political factors. There remain the old concerns about the administrative costs and paternalism of welfare bureaucracies, and these have been joined by observations about the increasing precariousness of the labor market, caused in part by increased automation, the growth of the informal labor sector in both the Global North and Global South and the sense that, at least at a global level, the old problem of economic scarcity may have been overcome.

Basic Income, from this perspective, represent a potential way of dealing with the fallout of massive changes within the economic structure of countries whilst also allowing individuals to retain autonomy and acting in contrast to the often-homogenizing biopolitical structures of the post-World War II Western welfare states. It is also argued that its very simplicity imbues the program with a flexibility which would allow it to work in a wider variety of economic and political contexts. Recently, both the province of Ontario in Canada and the nation of Finland have experimented with welfare delivery reforms in the direction of basic income, whilst in South Africa there is wide-ranging social push for implementation of a basic income grant program.

This rising interest has, however, led to a number of questions from both skeptics of basic income and those open to it. A number of such concerns could be classified as practical matters which are particular to the political and bureaucratic systems of each particular government concerned with implementation. There is also another set of questions which concern the basic income project at a more general level, which could be classed as pertaining to the philosophical and ontological underpinnings of such a policy.

The Subject Complication:

To begin with, there is the problem of exactly whom the basic income will apply to; in other words, what is the subject for claims to social justice in the world of basic income. In most formulations, from Thomas Paine forward, a basic income is conceived of as having a condition of citizenship attached to it. Though this would be a relatively straightforward in a world of limited interstate migration, the reality is that individuals and families currently exist in a wide variety of positionalities vis-à-vis the state in which they physically inhabit. In addition to citizens, there are permanent residents, refugees, students on visas, temporary foreign workers and more. The danger with a citizenship-conditional basic income, as it is unlikely that every country would implement such a policy at the same time, and certainly not at the same monetary level, is that it would further deepen the divide between citizen and non-citizen inhabitants of particular countries.

There is, of course, a counter-proposal, of opening basic income to all living within a country, regardless of status. However, given the already fraught nature of immigration and integration policy, this would most likely prove politically damning of both the government who implemented the policy and Basic Income itself.

The Scarcity Complication:

This points to another potential issue with basic income, namely, that of scarcity. The compulsion to work in order to receive income, either within the market in a capitalist society or in some other arrangement, such as a communal obligation or kinship system in a non-capitalist one, has traditionally been justified on grounds of resource scarcity. In essence, the idea that one must contribute one’s labor or resources, adding to the overall “pie” of the society, in order to make a claim on taking resources out later on.

However, in practice, societies tend to exempt certain classes of people from the labor compulsion, such as the elderly and children, if sufficient resources exist to allow these populations to exist as “free riders” of a sort. The argument for basic income, in relation to the scarcity question, is that, at least at the global level, scarcity has been overcome by technological advances, productivity gains and automation, such that a labor compulsion is no longer strictly necessary.

At the national level, however, even setting aside questions of effective governance and level of citizen trust in government which affect many states, governments may be capable of deploying resources, but not all governments have the same level of resources to deploy. Given the citizenship-focused nature of most basic income projects, the scarcity question will continue to trouble such proposals absent a mass nation-to-nation wealth redistribution or the establishment of a level of transnational government capable of effectively taking on the task of administering such a program.

The Sustainability Complication:

Finally, there is the question of whether or not a basic income program would be sustainable in the political sense in the manner in which the growth of the social democratic welfare state was in the 20th century. The key to this growth of the welfare state, and the notion of decommodified consumption (via free-at-point-of-use services such as health care) was the mobilization of working-class political power resources, primarily trade unions and left-wing parliamentary political parties usually associated with them. By contrast, until very recently, basic income tended to be a subject of interest to academics and policymakers rather than a concrete demand made by a mobilized political power grouping, either in the traditional sense of trade unions and political parties, or in more modern social movements.

To some degree, this may be legacy of libertarian strands of support for basic income which were explicitly aimed at taking down aspects of the welfare state that such movements viewed as their major achievements. With the exception of South Africa, where there was a broad social push for the BIG, that even those social justice movements which exist outside of the traditional social democratic framework have not yet made basic income into a clearly articulated demand. Organizations explicitly concerned with labor issues, such as Fight for 15, have placed emphasis more on rights-at-work and raising wages, rather than a right-to-not-work implicit in at least the progressive, as opposed to libertarian, interpretation of basic income. In a way, this indicates that such organizations may still be stuck, to greater or lesser degrees, in the old social democratic model, with its emphasis on labor rights, albeit with some new elements.

A Way Forward:

With that said, the notion of basic income continues to express a certain truth about the collective stake in the commons and the ability to demand a just share of social wealth, free of restrictions or paternalistic impediments, and without the, increasingly unnecessary, compulsion to engage in the formal labor market. With both the increasing interconnectedness of global economic production, and the increasing precarity of many forms of work, the case for basic income on both moral and practical grounds has rarely been more compelling than it is now.

However, in order for basic income to be implemented in a progressive fashion, a recognition and a concrete convergence of action (as opposed to a notional convergence of interest) must be had between basic income advocates and political movements both of the precariat and the traditional working class. Just as the welfare state of the 20th century was largely built on the political muscle of the workers of its time, if basic income is to be the welfare cornerstone of the 21st, it will need a similarly strong mobilization behind it.

By Carter Vance

Carter Vance has a Masters of Arts from the Political Economy program at Carleton University in Ottawa, Canada. He has also published his work for Jacobin on water rights protests and has written on a variety of topics for publications such as Truthout and Inquires Journal.

Why Left Economics is Marginalized

After the 2009 recession, Nobel Prize winner Paul Krugman wrote a New York Times article entitled “How did economists get it so wrong?” wondering why economics has such a blind spot for failure and crisis. Krugman correctly pointed out that “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” However, by lumping the whole economics profession into one group, Krugman perpetuates the fallacy that economics is one uniform bloc and that some economists whose work is largely ignored had indeed predicted the financial crisis. These economists were largely dismissed for not falling into what Krugman calls the “economics profession.”

So let’s acknowledge there are many types of economics, and seek to understand and apply them, before there’s another crisis.

Left economics understands power

Let’s take labor as an example. Many leftist economic thinkers view production as a social relation. The ability to gain employment is an outcome of societal structures like racism and sexism, and the distribution of earnings from production is inherently a question of power, not merely the product of a benign and objective “market” process. Labor markets are deeply intertwined with broader institutions (like the prison system), social norms (such as the gendered distribution of domestic care) and other systems (such as racist ideology) that affect employment and compensation. There is increasing evidence that the left’s view of labor is closer to reality, with research showing that many labor markets have monopsonistic qualities, which in simple terms means employees have difficulty leaving their jobs due to geography, non-compete agreements and other factors.

In contrast, mainstream economics positions labor as an input in the production process, which can be quantified and optimized, eg. maximized for productivity or minimized for cost. Wages, in widely taught models, are equal to the value of a worker’s labor. These unrealistic assumptions don’t reflect what we actually observe in the world, and this theoretical schism has important political and policy implications. For some, a job and a good wage are rights, for others, businesses should do what’s best for profits and investors. Combative policy debates like the need for stronger unions vs. anti-union right-to-work laws are rooted in this divide.

The role of government

The left believes the government has a role to play in the economy beyond simply correcting “market failures.” Prominent leftist economists like Stephanie Kelton and Mariana Mazzucato, argue for a government role in economic equity and shared prosperity through policies like guaranteed public employment and investment in innovation. The government shouldn’t merely mitigate product market failures but should use its power to end poverty.

On the other hand, mainstream economics teaches that government crowds out private investment (research shows this isn’t true), raising the wage would reduce employment (wrong) and that putting money in the hands of capital leads to more economic growth (also no). As we have seen post-Trump-cuts, tax cuts lead to the further enrichment of the already deeply unequal, equilibrium.

Limitations to left economics: public awareness and lack of resources

History and historically entrenched power determine both final outcomes but also the range of outcomes that are deemed acceptable. Structural inequalities have been ushered in by policies ranging from predatory international development (“free trade”) to domestic financial deregulation, meanwhile poverty caused by these policies is blamed on the poor.

Policy is masked by theory or beliefs (eg. about free trade), but the theory seems to be created to support opportunistic outcomes for those who hold power to decide them. The purely rational agent-based theories that undergird deregulation have been strongly advocated for by particular (mostly conservative) groups such as the Koch Network which have spent loads of money to have specific theoretical foundations taught in schools, preached in churches and legitimized by think tanks.

There have been others who question the centrality of the rational agent, the holy grail of the free market, believe in public rather than corporate welfare, and the need for government to not only regulate but to make markets and provide opportunity. This “alternative” history exists but is less present – it’s alternative-ness defined by sheer public awareness, lack of which, perhaps, stems from a lack of capital.

Financial capital is an important factor in what becomes mainstream. I went through a whole undergraduate economics program at a top university without hearing the words “union” or “redistribution,” which now feels ludicrous. Then I went to The New School for Social Research for graduate school, which has been called the University in Exile, for exiled scholars of critical theory and classical economics. In the New School economics department, we study Marxist economics, Keynesian and post-Keynesian economics, Bayesian statistics, ecological and feminist economics, among others topics. There are only a few other economics programs in the US that teach that there are different schools of thought in economics. But after finishing at the New School and thinking about doing a PhD there, I understood this problem on a personal level.

There’s barely any funding for PhDs and most have to pay their tuition, which is pretty unheard of for an economics doctorate. Why? Two reasons – 1. Because while those who treat economics like science go on to be bankers and consultants, those who study economics as a social science might not make the kind of money to fund an endowment. And 2. Perhaps because of this lack of future payout, The New School is just one of many institutions that doesn’t deem heterodox economics valuable enough to warrant the funding that goes to other programs, in this case, like Parsons.

Unfortunately, a combination of these factors leaves mainstream economics schools well funded by opportunistic benefactors, whether they’re alumni or a lobbying group, while heterodox programs struggle or fail to support their students and their research.

The horizon for economics of the left

Using elements of different schools of thought, and defining the left of the economics world, is difficult. Race, class, and power, elements that define the left, are sticky, ugly, and stressful, and don’t provide easily quantifiable building blocks like mainstream economics does. Without unifying building blocks, we’re prone to continuing to produce graduates from fancy schools who go into the world believing that economics is a hard science and that the world can be understood with existing models in which human behavior can be easily predicted.

Ultimately the mainstream and the left in economics are not so different from the mainstream and the left politically, and there is room for a stronger consensus on non-mainstream economics that would bolster the left politically. It’s worth exploring and strengthening these connections because at the heart of our economic and political divides is a fundamental difference in opinion regarding how society at large should be organized. And whether we continue to promote wealth creation within a capitalistic system, or a distributive system that holds justice as a pinnacle, will determine the extent to which we can achieve a healthy, civilized society.

Fortunately, the political left in many ways is upholding, if not the theory and empirics, the traditions and values of non-mainstream economics. Calls from the left to confront a half-century of neoliberal economic policy are more sustained and perhaps successful than other times in recent history, with some policies like the federal job guarantee making it to the mainstream. After 2008 the 99 percent, supported by mainstreamed research about inequality, began to organize.

There’s hope for change stemming from a new generation of economists, in particular, the thousands of young and aspiring economists researching and writing for groups like Rethinking Economics, the Young Scholars Initiative (YSI), Developing Economics, the Minskys (now Economic Questions), the Modern Money Network, and more. But ideas and policies are path dependent, and it will take a real progressive movement, supplemented by demands by students in schools, to bring left economics to the forefront.

By Amanda Novello.

A version of this post originally appeared on Data for Progress’ Econo-missed Q+A column, in response to a question about the marginalization of leftist voices in economics.

Amanda Novello (@NovelloAmanda) is a policy associate with the Bernard L. Schwartz Rediscovering Government Initiative at The Century Foundation. She was previously a researcher and Assistant Director at the Schwartz Center for Economic Policy Analysis at The New School for Social Research.

Austerity in the UK: Senseless and Cruel

As the UK recorded its first current budget surplus in 16 years, the IMF was quick to use this development as sufficient proof to declare the austerity measures, imposed by the UK government in the aftermath of the financial crisis, a success. To the IMF, the UK case of eliminating its budget deficit, while avoiding a prolonged recession, and faring better than other European countries, supports the case for further austerity.

However, this overly simplistic interpretation disregards the long-term structural problems that the UK economy is facing, does not acknowledge the active role played by the Bank of England (BoE) in mitigating the crisis, nor does it attempt to understand what is behind the growing voter discontent that led to the Brexit vote. Furthermore, given that the austerity measures have been linked to 120,000 deaths, it seems rather odd to celebrate this approach.

While at a first glance, one might think the UK economy is in pretty good shape, with low unemployment levels and continuous growth for the last 8 and a half years, a closer look at the data reveals a less optimistic picture. As outlined in this report from the Center for Economic and Policy Research (CEPR) that I co-authored with Mark Weisbrot, the UK economy is facing some serious challenges.

The last decade has failed to deliver any improvement in living standards to most households, with real median incomes of working-age households barely returning to their pre-recession levels this year. Retired household have fared somewhat better, yet are under threat as a target for further spending cuts. While increased employment has meant household incomes reached their precession levels, real hourly wages have not. To make matters worse, a widely cited decline in the gender pay gap is due to a larger drop in male wages, rather than female wages increasing.

One of the most striking and unusual aspects of the recovery is that poverty, by some measures, has actually increased for people of working age. After accounting for housing costs, the percentage of people aged 16–64 with income below the poverty threshold has risen to 21 percent in 2015/16, from 20 percent in 2006/07.

In terms of productivity growth, which is the engine of rising living standards, the past decade has been the worst for the UK since the 18th century. The slowdown in productivity growth means that GDP per person is about 20 percent lower than it would have been if the prior growth trend continued. The problem of slow productivity growth is directly linked to low investment levels in the UK, which has the lowest rate of gross capital formation amongst G7 countries.

The UK currently finds itself in an economy where demand is lagging, and the prospects of Brexit bring significant uncertainty over the future. This is an environment that is unlikely to attract major private investment, especially in the areas it is most needed. There is a clear need for public investment and spending that can grow the economy and improve living standards. More austerity might seem to reduce the government’s deficit now but its price will ultimately be paid through lost output and slower growth.

The negative feedback from the fiscal tightening was undoubtedly mitigated by the expansionary monetary policy conducted by the BoE, which also explains why the UK was able to withstand austerity without deepening its recession and fared better than countries in the eurozone. The BoE started lowering its Bank Rate in October 2008 until it reached 0.5 percent. The rate was further decreased in the aftermath of Brexit to 0.25 percent, only to be raised again to 0.5 percent at the end of 2017.

The most important step taken by the BoE was its Quantitative Easing program, launched in August 2008, to buy bonds and ensure long-term interest rates for the UK remain low. The European Central Bank (ECB) only took similar steps for euro denominated sovereign bonds in July 2012.

While the IMF portrays the UK net public debt-to-GDP ratio as unsustainable high (it was 80.5 percent in 2017), this assessment is mostly arbitrary, especially given the UK’s specific circumstances. The burden on the public debt is best measured by the interest payments on the debt, relative to the size of the economy since the principal is generally simply rolled over. At present, the net interest payments on the debt are about 1.8 percent of GDP, a number significantly lower than in the 1980s when interest payments on the debt were generally above 3 percent of GDP annually, and in the 1990s when they were between 2 and 3 percent per year.

It is essential to note that financial markets recognize there is little risk to holding UK bonds, and the UK government can currently borrow at negative real interest rates. Given that the UK issues bonds in its own currency, investors understand there is no risk of default.

There are many public investments that have a positive real rate of return by increasing the productivity of the economy. Thus, given the current circumstances, it seems rather absurd to focus on reducing the debt rather than growing the economy.

There is no doubt that Brexit is one of the major challenges that the UK faces. However, particularly in this context of uncertainty, macroeconomic policies play an essential role. Unnecessary fiscal and monetary tightening pose an immediate threat to economic progress and the UK’s ability to improve living standards of its residents.

Imposing austerity on an economy where incomes have not recovered from the last recession, there is a large slowdown in productivity growth, an overall lack of investment, and the government can finance its spending at negative real interest rates is senseless and cruel.

For more details, graphs, and complete sources check out the full report.

Let’s face it: Monetary Policy is Failing

By Nikolaos Bourtzis.

Monetary policy has become the first line of defense against economic slowdowns — it’s especially taken the driver’s seat in combating the crisis that began in 2007. Headlines everywhere comment on central bank’s (CB) decision-making processes and reinforce the idea that central bankers are non-political economic experts that we can rely on during downturns. They rarely address, however, that central banks’ monetary policies have failed repeatedly and continue to operate on flawed logic. This piece reviews recent monetary policy efforts and explains why central bank operations deserve our skepticism–not our blind faith.

What central banks try to do

To set monetary policy central banks usually target the interbank rate, the interest rate at which commercial banks borrow (or lend) reserves from one another. They do this by managing the level of reserves in the banking system to keep the interbank rate close to the target. By targeting how cheaply banks can borrow reserves, the central bank tries to persuade lending institutions to follow and adjust their interest rates, too. In times of economic struggle, the central bank attempts to push rates down, such that lending (and investing) becomes cheaper to do.

This operation is based on the theory that lower interest rates discourage savings and promote investment, even during a downturn. That’s the old “loanable funds” story. According to the neoclassical economists in charge at most central banks, due to rigidities in the short run, interest rates sometimes fail to respond to exogenous shocks. For example, if the private sector suddenly decides to save more, interest rates might not fall in response. This produces mismatches between savings and investment; too much saving and too little investment. As a result, unemployment arises since aggregate demand is lower than aggregate supply. In the long run, though, these mismatches will disappear and the loanable funds market will clear at the “natural” interest rate which guarantees full employment and a stable price level. But to speed things up, the CB tries to bring the market rate of interest towards that “natural” rate through its interventions.

Recent Attempts in Monetary Policy

However, interest rate cuts miserably failed to kick-start the recovery during the Great Recession. That prompted the use of unconventional tools. First came Quantitative Easing (QE). Under this policy, central banks buy long-term government bonds and/or other financial instruments (such as corporate bonds) from banks, financial institutions, and investors, which floods banks with reserves to lend out and financial markets with cash. The cash is then expected to eventually filter down to the real economy. But this did not work either. The US (the first country to implement QE in response to the Crash) is experiencing its longest and weakest recovery in years. And Japan has been stagnating for almost two decades, even though it started QE in the early 2000s.

Second came “the ‘natural rate’ is in negative territory” argument; Larry Summers’ secular stagnation hypothesis. The logic is that if QE is unable to increase inflation enough, negative nominal rates have to be imposed so real rates can drop to negative territory. Since markets cannot do that on their own, central banks will have to do the job. First came Sweden and Denmark, then Switzerland and the Eurozone, and last but not least, Japan.

Not surprisingly, the policy had the opposite effect of what was intended. Savings rates went up, instead of down, and businesses did not start borrowing more; they actually hoarded more cash. Some savers are taking their money out of bank accounts to put them in safe deposits or under their mattresses! The graph below shows how savings rate went up in countries that implemented negative rates, with companies also following suit by holding more cash.

Central bankers seem to be doing the same thing over and over again, while expecting a different outcome. That’s the definition of insanity! Of course, they cannot admit they failed. That would most definitely bring chaos to financial markets, which are addicted to monetary easing. Almost every time central bankers providea weaker response than expected, the stock market falls.

There is too much private debt.

So how did we get here? To understand why monetary policy has failed to lift economies out of crises, we have to talk about private debt.

Private debt levels are sky high in almost every developed country. As more and more debt is piled up, it becomes more costly to service it. Interest payments start taking up more and more out of disposable income, hurting consumption. Moreover, you cannot convince consumers and businesses to borrow money if they are up to their eyeballs in debt, even if rates are essentially zero. What’s more, some banks are drowning in non-performing loans so why would they lend out more money, if there is no one creditworthy enough to borrow? Even if private debt levels were not sky high, firms only borrow if capacity needs to expand. During recessions, low consumer spending means low capacity utilization, so investing in more capacity does not make sense for firms.

How to move forward

So, now what? Should we abolish central banks? God no! Central banks do play an important role. They are needed as a lender of last resort for banks and the government. But they should not try to fight the business cycle. Tinkering with interest rates and buying up financial instruments encourages speculation and accumulation of debt, which further increases the likelihood of financial crises. The recent pick-up in economic activity is again driven by private debt and even the Bank of England is worried that this is unsustainable and might be the trigger of the next financial crisis.

The success of monetary policy depends on market mechanisms. Since this is an unreliable channel that promotes economic activity through excessive private debt growth, governments should be in charge of dealing with the business cycle. The government is the only institution that can pump money into the economy effectively to boost demand when it is needed. But due to the current misguided fears of large deficits, governments have not provided the necessary fiscal response. Investment requires as little uncertainty as possible to take place and only fiscal policy can reduce uncertainty. Admittedly in previous decades, monetary responses might have been responsible for restoring some business confidence as shown in the figure below.

This effect, though, cannot always be relied upon during severe slumps. And no doubt, more attention needs to be given to private debt, which has reached unprecedented levels.

Monetary policy has obviously failed to produce a robust recovery in most countries. It might have even contributed in bringing about the financial crisis of 2008. But central bankers refuse to learn their lesson and keep doing the same thing again and again. They don’t understand that their policies have failed to kick-start our economies because the private sector is drowning in debt. It’s time to put governments back in charge of economic stabilization and let them open their spending spigots. A large fiscal stimulus is needed if our economies are to recover. Even a Debt Jubilee should not be ruled out!

About the Author
Nikos Bourtzis is from Greece, and recently graduated with a Bachelor in Economics from Tilburg University in the Netherlands. He will be pursuing a Master in Economics and Economic analysis at Groningen University. Research interests are heterodox macroeconomics, anti-cyclical policies, income inequality, and financial instability.

USA 2017 Q1 Sectoral Balances Update

Sectoral analysis provides a key framework for understanding the macroeconomy. GDP is a flow representing the value of all goods and services produced in a specific time period. This flow can be tracked in two different ways, on the spending side and on the income side. On the spending side the GDP components are: consumption (C), investment (I), government spending (G), and the difference between exports (X) and imports (M)–or just net exports (X-M). On the other hand, the income that makes up GDP, is consumption (C), savings (S), and taxation (T). These two ways of measuring GDP are two sides of the same coin, a product of double-entry accounting, and must always be equal.

Thus sectoral analysis comes from equating and simplifying the spending and income views on GDP. You can follow the math on the wikipedia page here, but after equating these two different views and simplifying we end up with the equation (S – I) = (G – T) + (X – M). These are our three sectors of analysis. The private sector surplus/deficit is defined by the difference between savings and investment (S – I). The government surplus/deficit is its spending minus the amount it takes back in taxes (G – T). And finally, the foreign sector surplus/deficit is the amount of exports by the country less the amount it imports (X-M). We can see this identity visually in the following graph. You can hover your mouse over specific bars to see specific values and dates.

The graph setup this way shows how government fiscal deficits (orange bars) make their way towards the rest of the world or into the private sector. Why have we had a persistent current account deficit (green bars) since at least 2000? Well, the rest of the world wants US dollars. We want to import their goods and services. Since the US is a net importer of goods and services, we are a net exporter of US dollars. Thus some of the deficit each quarter makes its way out of the country. The rest of the deficit makes its way into the domestic private sector (blue bars). The private sector is composed of households and businesses. The great recession was caused due to poor household balance sheets, among other things. If you were following the sectoral balances graph closely in 2000-2008, you could see how the private sector was continuously indebted, both households and businesses. This was unsustainable.

The government deficit expanded post recession due to automatic stabilizers, repairing poor household balance sheets. This muddling on continues today. The past few years have seen domestic business go into debt, although the last two quarters have shown a slight surplus. Households and institutions have maintained a surplus since 2008. From a purely sectoral balances perspective, as long as we maintain our government deficit and the rest of the world continues to want US goods and services, the US private sector seems poised to continue muddling along. Splitting households into top 10% and bottom 90% would be an interesting exercise to see how these modest surpluses have been distributed. I will keep an updated quarterly graph here on The Minsky’s as FRED releases data. I hope you found these graphs useful and insightful.

Greece has a Private Debt Crisis and We Can Blame the Troika

The Greek public debt debacle and the bailout received by the government from the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF) – referred to collectively as the “troika” – has been making headlines for years. However, very little attention has been paid to the debt crisis in the Greek private sector. An alarmingly high portion of private sector borrowers is behind on their debt payments, and the Greek banking system currently has one of the highest ratios of delinquent loans in the European Union.

This collapse of debt prepayments is a direct result the policies imposed by the Troika and threatens the future of Greek economic growth. After the Greek government required financial assistance from international creditors, it was forced to introduce draconic austerity measures to repay its debt. Cutbacks to state services, collapses in incomes, and an increasingly unstable economic environment contracted spending, therefore, eliminating future cash flows that private entities expected to use to repay their debt. The result has been a spiral of collapsing demand and shrinking growth.

Greece’s accession to the Eurozone was followed by a largely ignored, rapid, and unsustainable build-up in private sector debt. Once the Greek government was forced to impose severe austerity measures and the economy collapsed, the private debt crisis followed. Now, the large ratio of delinquent loans held by Greek banks is adding to the factors hampering economic growth. For Greece to recover, its private debt problems need to urgently be addressed with an approach that offers relief to both borrowers and lenders.

This article was originally published by the Private Debt Project. Read the entire article here.

The full article highlights how the mismanagement of the Greek sovereign debt problems triggered the current private debt crisis. We show the rapid growth in private debt, document the macroeconomic context that pushed to Greece into a depression, and explain how these factors created a private debt crisis. Then, we discuss some of the existing proposals for addressing a large number of loan delinquencies and their limitations, and finally, propose other approaches to tackle this pressing problem.

Denouncing the Flaws of the EU is not Extremist, it’s Necessary

The main takeaway from the French presidential election is that criticism of the European Union (EU), including the eurozone, is not well received regardless of its validity. While Europe might currently be breathing a sigh of relief, the strategy of silencing and ridiculing those who express dissatisfaction with EU policies is dangerous for its future.

Presidential campaigns in France

During the campaign for the first round of the French presidential election, two candidates touted the possibility of leaving the euro: Jean-Luc Mélenchon, representing the leftist France Insoumise party, and Marine Le Pen from the extreme right-wing Front National. Most outlets considered their attacks on the euro to be a political liability with the mainstream electorate. The media slotted both candidates as “anti-European” extremists that should be feared. However, a closer look at the platforms of these two reveals that their critiques of the EU and their desired outcomes bear very few similarities.

Marine Le Pen promised a “France-first” approach and pledged to pull France out of the eurozone and close the country’s borders. Her platform plays on racism and xenophobia, and blames France’s woes on immigrants. It is important to note that she did propose strengthening the welfare state and extending benefits, but only for French people and not foreigners.

Mélenchon’s take on the EU was very different. His platform’s “Plan A” was to push for EU-wide reforms that aimed at bringing growth and strengthening mutual support amongst member states. He criticized the EU for becoming a place ruled by banks and finance, and his goal was to leverage France’s influence within the bloc to end austerity policies in all member states. If these negotiations with other EU members failed, then there was a “Plan B” that called for France to leave the euro and the EU in order to pursue a stimulus plan, which is not permitted under the deficit limits imposed by current EU regulation.

A large part of the media coverage received by Mélenchon centered on personal attacks, rather than on providing an accurate overview of his policies. He was accused of being a communist, both an admirer of Fidel Castro and Hugo Chavez, and a Russia sympathizer. With a significant social media following and energizing campaign, Mélenchon was able to surge in the polls late in the race. However, he did not manage to garner sufficient support to qualify for the second round of the election.

Plagued by scandals and voters’ discontent with the current administration, the candidates backed by the two traditionally mainstream parties in France, the Republicans and Socialists, did not make it past the first round. The run-off election will take place on May 7th between Le Pen and Emmanuel Macron.

Dubbed the establishment’s anti-establishment candidate, Macron describes himself as a staunchly pro-EU, pro-immigration, and pro-globalization centrist. Macron is backed by the party he created in 2016, “En Marche!,” and is successfully managing to brand himself as an outsider candidate. However, it should not be forgotten that as an economy minister in Francois Hollande’s government, who did not seek re-election due to extremely low approval rates, Macron was the architect of labor market reforms that weakened protections for workers and favored businesses. A close look at his program reveals his policies are strikingly similar to those of Hollande, just with different branding and rhetoric.

Macron’s platform consists of neoliberal platitudes that espouse values such as tolerance and acceptance of immigrants, while advocating for austerity and dismantling of social protections under the guise of increasing efficiency and “modernizing” the French economy. Macron pledged to reduce France’s deficit below 3 percent, as mandated by the EU, while also cutting taxes. To achieve both goals, Macron would undoubtedly have to slash government spending, which would most likely have a negative impact on the economy overall.

Macron’s uncritical embrace of the EU has gained him the praise and endorsement of other European leaders. Global financial markets that are reassured by his pro-EU stance are also celebrating the prospect of his victory. While his commitment to structural reforms and budget cuts is likely to please Germany and the European Commission, the question is if he can also satisfy the people of France.

Polls suggest that Macron will now win the run-off against Le Pen. However, concerns are mounting that if his government fails to deliver, the far right will be strengthened by the following election. Given how similar Macron and Hollande’s programs are (despite the different packaging) they are unlikely to deliver a different result.

The failed economic policies of the EU

The French economy struggles with high unemployment rates, particularly for young people, and is facing a decade of economic stagnation. Under increased pressure from the EU for France to abide by its deficit rules and reduce spending, previous governments have implemented harsh pension and labor reforms. These measures have failed to jumpstart the economy, and it seems intuitive that France should pursue different policies that could actually provide the much needed stimulus to its economy.

It’s not just France that is stagnating. Since the 2008 crisis, the entire Eurozone has seen a slow and uneven recovery. Particularly, the worst hit countries such as Greece, Italy, and Spain, are still dealing with the consequences of shrinking incomes and high unemployment. Nobel laureate Joseph Stiglitz showed how the structure and design of the euro were a key factors in holding back the recovery of the EU.

The structure of the euro was established by the Maastricht Treaty which laid down the groundwork for how the EU and the euro area ought to be set-up institutionally. The treaty arbitrarily established yearly deficit limits for countries at 3 percent of GDP. After the crisis, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union expanded the influence of the European Commission, an unelected body, to impose policies on member states. EU institutions have used the deficit limit as justification to dictate a neoliberal agenda, characterized by imposing austerity measures and pro-business structural reforms on member states, with very little consideration on the worsening of unemployment, poverty, and other social indicators.

Considering the shortcomings of neoliberal policies imposed by the EU, perhaps Melélnchon’s “Plan A,” to push for EU-wide reform is not that “extremist” after all. Rather than crucifying him, he should have been given the chance to advocate for reform. The current direction taken by the EU is one that through austerity measures is slowly dismantling the European Social Model, which has traditionally been characterized by a strong safety net.

What the future holds

As long as the EU imposes and encourages a platform that hurts people, far right politicians like Marine Le Pen will continue to tap into those anxieties and gain popularity. The success of the Brexit campaign should serve as impetus for the EU to reevaluate its policies.

Politicians like Macron, who chose to ignore the flaws of the eurozone and advocate for more of the same unsuccessful policies may win popularity now, but set themselves up for failure in the long run. Macron’s unconditional praise of the EU’s virtues is somewhat similar to Hillary Clinton, who under a backdrop of suffering and social crisis, responded to Trump’s slogan “Make America Great Again,” by stating “America is already great!” This strategy failed and Clinton lost, with areas where jobs were under the most severe threats swinging towards Trump.

For the European project to succeed and continue bringing peace and unity to Europe, economic policy reform is necessary and austerity needs to end. Ignoring the economic struggles of the bloc and refusing to recognize the role of EU policy in exacerbating them will continue to fuel the rise of extremist right wing politicians. Calling those who advocate for socially inclusive reforms “extremists” is a strategy bound to backfire.