Yves here. While this post addresses a critically important topic, I still find it frustrating that it uses the term “structural reform,” which sadly has gone mainstream. It is yet another example of success by the right in depicting initiatives to shred social safety nets and crush labor as “reform,” as if they were positive in intent. While there are no doubt ways in which programs can be improved, wrapping these austerity projects in a mantle of virtue is yet another neoliberal con.
By Philip Arestis, Professor of Economics at the University of the Basque Country, Spain and Malcolm Sawyer, Professor of Economics, University of Leeds. Originally published at Triple Crisis
The recovery from the global financial crisis has been a slow and protracted one, with output levels in many industrialised countries having only recently regained the pre-global financial crisis levels of 2007. Unemployment, and particularly youth unemployment, remains high in many countries and the prospects for growth remain sluggish. The prospects for growth, particularly among the BRICS countries (Brazil, Russia, India, China, and South Africa), are not looking rosy, with a slowdown in growth in China and Brazil into decline.
The central banks’ responses to the global financial crisis and the great recession were to sharply reduce interest rates, and maintain them at very low levels by historic standards, and have tended to move lower and in some cases into negative territory in the past years (the Fed rate rise in December 2015 being an exception). “Unconventional monetary policy” and quantitative easing became widely used, and its intensification in the past few years has pushed actual interest rates even lower. It is now clear that quantitative easing has been ineffectual and has now largely run its course.
Many have spoken of a “savings glut.” Others talk of secular stagnation in terms of the “natural rate of interest” having moved into very low or negative range which in their theoretical framework means the tendency to save falls short of the tendencies to invest. The obvious response to an excess of savings over investment is to run a corresponding budget deficit which enables the savings to be realised and supports aggregate demand. Some, such as Germany and the Netherlands are able to combine high savings with low investment through a current account surplus, but others need a budget deficit.
In the early days of the great recession there was some mild stimulus and the automatic stabilisers were allowed to operate. But for the past five years the obsession has been on “fiscal consolidation.” Constraints have been placed on fiscal policy, notably in Europe’s Economic and Monetary Union (EMU) but elsewhere, with rules on balanced budget playing a key role in the “fiscal compact” signed by almost all EU countries (and the UK has adopted a similar rule). In practice, and in part because of the lack of growth, balanced budgets have not been achieved. For example, the UK government promised in 2010 the elimination of budget deficit by 2016, but the deficit remains at around 4 per cent of GDP. Most countries of EMU continue to have substantial budget deficits despite the “fiscal compact.” Any notions of “expansionary fiscal consolidation” should now be firmly dismissed.
The IMF (2016) in their World Economic Outlook 2016 notes that the “growth rate of potential output … has declined in major advanced economies” (p. 1). But then argue that “the continued weakness of growth and shrinking macroeconomic policy space, especially in several euro area countries and in Japan, have led policymakers to emphasize structural reforms. The hope is that such reforms will lift potential output over the medium term while also strengthening aggregate demand in the near term by raising consumer and business confidence” (p. 1). The structural reforms that are then listed include deregulating of retail trade, professional services and parts of network industries, “increasing the ability of and incentives for the non-employed to find jobs” (which are in short supply!), lowering the costs of hiring and firing, improve collective bargaining frameworks in instances in which they have struggled to deliver high and stable employment, boost labour market participation and cut the “tax wedge” between labour costs and take-home pay.
These claims echo those used at the time by the EMU, the “fiscal compact,” along with structural reforms, which are those of deregulation and so-called liberalisation; these are supposed to somehow stimulate demand as well as supply potential. In a previous blog post (January 2014), we argued that the evidence does not support any proposition that deregulated labour markets are good for employment and productivity. It is interesting to note that these structural reforms are supposed to raise the growth rate of potential output, but without any mention of research and development, innovation and the use of technical progress—and no mention of ensuring a highly skilled and committed labour force.
The “confidence fairy” is invoked to stimulate aggregate demand, though how making it easier to fire workers is intended to raise consumer confidence is puzzling. A more straightforward way to raise consumer confidence and expenditure would be to raise wages, minimum and low wages in particular, and to avoid depressing aggregate demand by reduction in pensions. There is little reason to think that deregulation will raise aggregate demand, and reasons to think that as it tends to depress wages and to reduce incentives to invest it will have the opposite effects.
A time when interest rates are close to zero and when there is preciously little sign of revival of bank lending and of investment is surely precisely the time for fiscal expansion. Fiscal consolidation and quantitative easing have been tried and have not worked. Public investment has a central role to play here reversing the tendencies to cut back on investment in infrastructure which is showing up now in the poor state of infrastructure in many industrialised countries. Public investment also serves to provide a stimulus for private investment – and to bring a revival of “animal spirits” (and perhaps the “confidence fairy”!). A case of a win-win situation where public investment can be used to address environmental and climate change concerns, and provide employment.
See original post for references
45 comments
Comments are closed.
There is never a lack of competitors for the elite and the middle classes to serve it. There are way too many laborers, most of whom don’t want to be there and do a puss poor job, and without labor, the system can only discharge. A quality laborer never suffers from a lack of jobs, and is paid quite well, in whatever form you want, creating the flux. But you have to learn timing, to thread the shelves and employ the counterweight, such as it is, not what you want it to be.
Public education promotes passive aggressive monsters, leading peer pressure automatons, which you should have learned in school, and their current mercenary of choice is the dc computer, controlling robots, which have merely replaced the puss poor laborers and are making their way up the middle class food chain. Most of the affluent boomers are going to wake up from all the subsidies and find no one to care for them. Because the chameleons temporarily jump on the Bernie and Trump bandwagon changes nothing.
Corporate behavior hasn’t changed in thousands of years, it just changes dresses, and America is threadbare, leaving Hillary.
Marvin the Martian has no idea where to drop that money, which should be obvious by now. Rethink democracy, until you see it.
So, there it is.
‘the evidence does not support any proposition that deregulated labour markets are good for employment and productivity.’
Okay, here’s some. This article appeared in June 2015:
Et le dénouement, hier soir:
Anecdotal, you say? For decades, both France and Europe have suffered chronically higher unemployment than the U.S.
Eurosclerosis is a deeply embedded symptom of lack of structural reform. Throw fiscal stimulus at the malaise without fixing the structural problems, and pretty soon you find yourself on Planet Japan.
Proportionality AND context as opposed to disproportionality without context. Parsing between opinion and fact followed by parsing relevant facts from irrelevant facts…also may be worth considering that the French were no longer buying the “consent” being “manufactured”…
Of course the first mover will gain by any beggar thy neighbour policy, at the expense of others.
I know a sure fire way to rapidly decrease unemployment: exile anyone who has been unemployed for more than a year.
That’s America.
Exile them ? Come on ! Kill them !
“For decades, both France and Europe have suffered chronically higher unemployment than the U.S.”
Isn’t employment during prime working age actually higher/equal to the US in many Euro countries? I seem to remember some economist (Krugman maybe?) pointing that out. Most of the high unemployement comes from older people who don’t have to settle for shitty jobs.
“Throw fiscal stimulus at the malaise without fixing the structural problems, and pretty soon you find yourself on Planet Japan.”
Is Planet Japan that bad? They have more labor force participation than the US, people live longer, etc.
They bash Japan because it has no inflation.
For some completely mysterious reason, economists and sugar mommy think unless inflation is there humanity will end soon.
“For decades, both France and Europe have suffered chronically higher unemployment than the U.S.”
First, I don’t think ‘unemployment’ is defined in the same way in both regions.
Second, Americans went on a credit binge for decades, until what had to happen happened in 2008. Since then, France is trapped in the Euro and in austerity.
So your argument is rather superficial.
Haven’t most of us here come to realize that enhanced competition under the wrong conditions = race to the bottom, whether we’re talking about international wage competition or industry tax breaks, etc? Even at a gestural, “gee, it would be nice in the future” sort of way, the idea of a floor above the bottom must be kept in view. The Free Trade Forever types, e.g. Krugman, have come to realize that the sloshing around of adjustments from lower prices and retraining of labor can take far too long >>> leaving broken lives and pissed off populist/socialists. The article is a good restatement of the failure market failure, but it needs to talk more extensively about coordinated and guaranteed interventions, i.e. those that government(s) can be good at, to limit the effects of competition and make possible coordinated projects that competitive frameworks alone simply cannot manage to address.
“There is more labour flexibility in London compared with Paris,”
I believe this is called the race to the bottom. Great for the 1%, not so much otherwise.
If Europe is so unproductive why do you think it has the largest trade surplus in the world, while USA has the largest trade deficit in the world?
Is a lack of demand, what causes unemployment, and the reason USA has such large trade deficits and less unemployment (although comparing both regions is apples to oranges, as both account unemployment, even intra-EU, in different ways; ie. basically U3 is cheating while unemployment measurement in say Italy or Spain is much more comprehensive). is because it remains supportive with larger spending flows compared to the deflationary bias of the eurozone.
Stop buying into crappola neoliberalism arguments. You can’t say you are unproductive when you have deflation, idle capacity and a large output gap; put people to work and then maybe we can see if people is or not unproductive, if inflation skyrockets.
Isn’t a large part of the US problem the chronically strong dollar? No way the US can have a strong dollar AND a trade surplus yet the government system tries to keep the dollar strong(est) AND flaps their arms helplessly trying to get exports to even get close to imports.
Cannot be done. Something has to give.
Tho is the crux. Programmers today are the millwrights of yesterday, who disassembled the plants in America and reassembled them in China, with the few remaining as supervisors in American plants. There is no easy fix, but keep trying. I hope you prove me wrong.
One problem, particularly in the US (I’m not sure about Europe), is that the fiscal multiplier has been compressed by government corruption. IOW, in designing fiscal stimulus policies, elected officials’ priority is not maximizing the the stimulus’s effectiveness (bang for the buck) but enriching their benefactors/cronies.
The problem is the “stimulus” is always directed at banks for lending to business. The strongest possible stimulus that would actually work is “helicoptor money”. Instead of handing money to banks to lend to those who are flush with cash they aren’t spending already, send it to every citizen instead. Boom! Instant and massive economic gains.
In MMT all that matters is the flow, the circulation, and the minor quibble that resources are finite is ignored. MMT is a beautiful, shiny engine that can get all sorts of limitless work down. It really is amazing and it works! Talk to an MMTer and you’ll hear, accurately, about how beautiful their engine is. About how much power it can put out. About how much better our lives will be if we all just hitch our ropes to the engine and allow it to pull us forward. Just ignore the small problem that it’s a gas hog to operate and we’re running out of gas. Also, we’re borrowing the gas we have left from loan sharks (climate change, resource depletion, ecological collapse etc).
MMT is a wonderful system in theory, and it truly does work excellently well when limits on resources haven’t been hit yet. But with MMT suddenly every interest group finds it possible to grab swag from the society with no limit and no accounting. Everyone gets bloated on the program and no one ever has to be told “no”. MMT is like feeding donuts and coke to a group of diabetics constantly and then proclaiming success because everyone has enough to eat. Well yeah but–give it a year or two.
Look, I’m not saying that the austerity/structural reforms are good or even fair. But somehow there has to be some kind of hard discipline in the system somewhere. It’s like the idea that discipline and limits are suddenly taboo in economics lately, and that’s dangerous.
Bill Mitchell, among others, discuss this.
ResourceConstraints
“”The ultimate constraint on prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.””
“”The problem in this neo-liberal era is that currency-issuing governments use the myth that they are financially constrained to avoid fulfilling the responsibility to achieve full employment no matter how resource rich the nation might be.””
But somehow there has to be some kind of hard discipline in the system somewhere.
True. It’s called Income Tax and Death Duties.
When an economist finally gets Mmt he says, keep it quiet, don’t let the unwashed hear about it, dangerous of course because inflation.
But inflation has always initiated with shortages of critical goods, usually of food but sometimes in the modern economy of fuel, not excess money printing. ‘Prices vary with supply and demand’, not friedman’s ‘inflation is ever and always a monetary phenomenom’. Excessive money printing, when it has occurred, came after a critical shortage.
Government can cause the shortage, as when it hugely boosted the demand for engineers in the moon race even as it shipped fresh grads to Vietnam. The current shortage of demand (sales) means too much
Money is leaking out of an over-indebted private sector at a time banks see too little demand for loans. So the economy has no money to spend and cannot borrow… In fact many need to delever from too much debt. Such delevering can only come about by gov either injecting money into the economy or taking less out of it… And taxing the rich less is ineffective because they don’t spend all of their after tax income now. Injections must be spent to be effective. (QE is a perfective example of injections that are not spent on real goods and services… Great little real world experiment on what not to do the neo-libs are performing on us.)
Mmt anyway explains inflation is no problem provided you cut back spending when we reach full employment… Of course, we currently ignore those that give up, so first get back to the formula used under Reagan.
The danger today is not inflation but that the poverty and lack of opportunity facing the bottom half will lead to a revolution of the electorate, witness Bernie/trump. The dems, terrified by Bernie’s version of a revolution, managed to shut him down with a news blackout, but the reps couldn’t do the same with celebrity trump because ratings. you just never know what might happen when you plug up a relief valve.
I assure you, and I am a bona-fide member of the Great Unwashed, that I ‘get’ MMT. My great fear is that politicians and the elites figure it out.
It’s as true, and as dangerous, as E=mc2.
The elites figured it out since 1716 at least, since John Law created Banque Generale in France, under the Duke of Orleans and Louis XV. See https://en.wikipedia.org/wiki/John_Law_(economist)
I keep wondering about the politicians, but they are only executing orders anyway. :)
Breaking news: the elites have already figured it out. The elites made the current monetary regime possible with all the changes since early XX century (out of necessity, I shall say).
And you are worried, exactly why? They are already using misusing fiat to wage stupid wars, check the last 15 years. That wouldn’t have happened otherwise.
The fairy tales are that if the people knew the truth… the world would be over. So therein is right for elites to use MMT principles for corporate welfare and power grabbing agenda, but is not right for the public to find out , because they would behave irresponsible…
All of it are strawman arguments, little faith in a democracy (and hence, moving further and further to the oligarchic spectrum of the system), and a poor excuse similar to that of the Enlightment intellectuals (“all for the people, without the people”, which ends ups in corrupt regimes).
The truth is that the foxes are eating the chickens, and are selling to the chickens it’s for their own good. And then in truth the chickens, buying into all the moralist crap, will swallow; when in practice the chickens would be far more responsible than the foxes give them credit (but ofc, it’s not in the own interest of the foxes to give them credit…).
In MMT the government creates its own money and spends it into the economy debt free. The only problem with MMT is the threat of uncontrollable inflation and the supposed ‘need’ to increase interest rates to ‘fight’ inflation. Corporate anti MMT economists will cry ‘inflation!’, ‘inflation equals higher interest rates to take money out of the economy!’ Higher interest rates simply removes money from middle class working families and gives it to very wealthy families; it is ‘taken out of the economy’ by transferring it from workers to bankers (you may have noticed bankers almost completely serve and are owned by the wealthiest 1% who end up with the ‘inflation fighting’ higher interest rate swag.) What no one is mentioning is the elephant in the room – taxation. Taxation can be aimed at the wealthiest, their corporations and working individuals and the ‘swag’ is returned to the sovereign government and destroyed (As a sovereign can create and spend any amount of its own money it has no need for a bank account in its own currency). Only private/corporate interests need to borrow to spend. A sovereign government is economically nothing like a family as the anti MMTers would have us believe. A sovereign can create as much money as it needs to spend into the economy debt free – a family can’t. To create metaphors between families and national sovereign governments to illustrate economic alternatives is simply misleading the gullible economically ignorant vast majority. The supposed ‘problem’ with MMT is too much money in the economy equaling higher interest rates; which is a straw man argument and which works against the vast majority who are kept economically ignorant by 1% owned corporate (that is to say 98% or so of all) media, and very well paid minions in academia as well as the media. Any excess inflationary money supply can easily be taxed out of the economy – no need to fatten the already incredibly wealthy 1% at the expense of working families to beat the boogie straw-man.
“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”- The Rothschild brothers of London writing to associates in New York, 1863
You are literally arguing that poor people need to die so there are enough resources left for everyone else.
Maybe that’s true, but if it is, we could do it more efficiently than we are now.
Oh, I think it’s pretty efficient as it is. After all, there is money to be made in our slow demise, and They will want to wring every last penny out of our sorry deaths.
“…suddenly every interest group finds it possible to grab swag from the society with no limit and no accounting…But somehow there has to be some kind of hard discipline in the system somewhere. It’s like the idea that discipline and limits are suddenly taboo in economics lately, and that’s dangerous.”
-Are you referring to the discipline and limits that a responsible socio economic system would place on off exchange derivative markets, limits on extreme wealth concentration towards 1 percent of the population, insider trading, tax avoidance, endless spending on endless wars and war machines, the quasi legal book cooking under the now passe GAAP (see the G. Morgenson link from two days ago) or only deficit spending on societal infrastructure and safety nets?
Derivatives are a weapon of mass economic destruction which unless strictly controlled (never in America or anywhere else does a publicly responsible institution exercise extreme, visible and publicly transparent oversight and control over current weapons of mass economic destruction other wise known as the derivative markets ) transfer risk from criminally fraudulent corporate run complex financial schemes onto innocent middle class taxpayers whose families and pension plans are destroyed while their jobs are being shipped overseas by minion bankers facilitated by corrupted politicians and political systems. Simple laws with serious consequences and expeditious court proceedings that are vigorously enforced will eliminate the criminal corporate manipulation of national debt levels to beggar governments to the point that they are incapable of restraining and preventing the financial and economic disembowelment of the middle class and the death of democracy which will usher in a time of world wide fascism.
“Sigh”. No, there are plenty of derivatives, such as options on public stocks and futures on commodities exchanges, and foreign exchange futures, which are not financial WMD and serve an important and legitimate purpose for real economy players, namely hedging price risk. It’s the high priced over the counter ones that are prone to abuse and also pose more financial system risk.
Rants like yours just allow experts to discredit critics (correctly) as throwing the baby out with the bath water.
> In MMT all that matters is the flow, the circulation, and the minor quibble that resources are finite is ignored.
Burn that strawman, jg.
Discipline and limits are only for the “puss poor laborers…” Or so some would have us think.
Big Pharma and its products are self selecting, surprise.
The same critters arguing against genetically modified food and Big Pharma are arguing for Big Pharma vaccines, and would be horrified if you placed your healthy children in a room with one that contracted chicken pox.
Anything coming out of corporate is foreign; prepare your immune system accordingly. I have chosen the boomer I am going to care for, but I suspect many of you are going to let the rest rot.
Sexual reproduction is about genetic event horizon precision inside a recursive RNA algorithm. DNA is just efficient memory. You might want to think about that, as a means of reducing make work variability. The geneticists, psychologists and economists can’t save themselves.
Funny, my wife wanted to take a look at the homeless shelter system in San Fran, and a transsexual was our bunkmate on both sides of the facility.
As an Anti-GMO activist, environmentalist and PharmaProbe, I take umbrage at your suggestion that “we” are pro-vaccination.
Something like a third of the homeless in San Francisco are self identified homosexuals. Lest you think that in a city of 760,000 inhabitants, there are not enough public housing units,
“There were 12,691 people living in 6,054 units of public housing and 19,110 people living in 8,954 privately owned units subsidized by Section 8 vouchers, a 2013 audit found.” The number of units is larger now.
Dup
The only expansion going on is in debt(s) – There has been no deleveraging at all sans a short period of corporate (finance), but they too are levering up…again.
https://research.stlouisfed.org/fred2/graph/?g=3Y7i
Thanks for this post.
Massive long-term public policy failure by those who have chosen to rely exclusively on central bankers’ QE-NIRP monetary and markets policies, pushed up both private and public sector debts, encouraged speculation over productive investment in capital assets, suppressed incomes under the banner of “structural reforms”, ignored the rule of law, and imposed general austerity on the People that have so advantaged a small subset of the population and concentrated extreme wealth in the hands of a few.
Increased domestic non-militay fiscal spending needs to be part of a broader policy set IMO. Otherwise, only one leg of a four-legged stool. Wisdom of legislation like the Glass-Steagall Act of 1932 and the Banking Act of 1933, the Securities Acts of the 1930s, the Pecora Commission, and the WPA-CCC-Federal Project Number One initiatives of the 1930s is again self evident.
Yep
“Middle Class Structural deform”
“Middle Class Destructural Norm”,
“Neoform Feudalism”
could be appropriate terms.
The single answer to ALL that ailes us economically is, and always shall be: Basic Income Guarantee. Everyone should start receiving the LIVABLE income when they reach 21. The only people working min wage jobs should be those below 21. This fixes everything. EVERYONE has money to spend, that spending drives the economy. That living basic income also forces wages to go up because why work for shitty pay at a shitty job for pay that is equal to, or only slightly better than, basic income? Force companies to make it worth your while to go off basic income. Add to this universal singlepayer healthcare and the bases are covered. You work because you WANT to, not because you need to in order to eat or have a place to live. Companies pay well because they HAVE to in order to get employees. The elderly don’t have to go back into the job market to compete with younger people unless they WANT to. In fact, their basic income plus any additional retirement benefits (provided by employers to entice in workers) allows them to volunteer or travel and enjoy retirement, making it no longer a benefit only allowed for the looter class 1%.
No, I don’t agree. The last time a basic income guarantee was attempted, it resulted in subsidizing employers, and when the system was abandoned two generations later, the backlash was the Victorian Poor Laws, one of the most vicious regimes implemented against people who could not find enough work to pay for them to live. Poor people were forced into workhouses, where families were broken up and the labor was harsh and degrading.
See here for details:
http://www.nakedcapitalism.com/2015/01/the-failure-of-a-past-basic-income-guarantee-the-speenhamland-system.html
Interesting that you made no mention of the Canadian Minicome basic income project in your article.
This isn’t seen as definitive. This was announced as an experiment, which meant it was not expected to be sustained. Moreover, the only concern was hours worked, not whether businesses lowered their pay, making this largely a subsidy to business.
I think this is why it is important to have a well functioning job guarantee program in place before considering a BIG.
The standard needs to be the availability of a living wage paying job with medical and pension benefits, otherwise I think employers can use the BIG to continue to pay low wages using the BIG as the standard rather than using a living wage job as the standard.
Guy Standing in ‘The Precariat’ discusses how the opposite of a job guarantee is what is actually happening with increased pressures for labor ‘flexibility’ and privatization. “”The final frontier for the precariat is the public sector, long the trailblazer for labour standards and stable employment.””