IMF

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).

Tunisia is a classic example of the failed IMF/World Bank development model

Published by Anonymous (not verified) on Wed, 04/08/2021 - 6:38pm in

Tags 

Economics, IMF, Music

It is Wednesday and I have been quite busy today on non-writing things, including a very long lunch (yep), which may lead to progressing the development of the – MMTed – project. I also was thinking about Tunisia today. And, of course, I listened to some great jazz. So only a few snippets today as usual but hopefully something of interest.

The UK Guardian and Tunisia

There was an Op Ed in the UK Guardian last weekend (August 1, 2021) – Tunisia shows that democracy will struggle if it can’t deliver prosperity – by Simon Tisdall, who is a long-standing writer and now assistant editor of the newspaper.

The last time I looked into his writing was in 2018, when he sought to write an obituary on Angela Merkel’s political career (October 28, 2018) – As Angela Merkel’s star dims, Europe is facing perhaps its biggest challenge since 1930s.

He praised Merkel’s contribution based on her “clear political principles” and the way she united Europe through her “steadiness, safety and continuity.”

Yes, I wonder what the Greeks think about that.

I wonder what all those who have been unemployed for years think about that.

I wonder what the Mini-Job holders in Germany think about that.

Anyway, it was obvious the article was really expressing Tisdall’s pro-EU, anti-Brexit stance.

So I was prepared for the worst when I started reading the article on Tunisia.

I wasn’t disappointed.

Or was it that I was?

As part of work I have been doing on the African nations that are still weathering the dysfunctions derived from their colonial past, I have followed the situation in Tunisia rather closely.

I last wrote in-depth about Tunisia in this blog post – The IMF and the Germans wreaking havoc in Northern Africa (February 5, 2018).

Based upon my past research, there is no way I would not have written the Tisdall article.

I recalled what I knew about Tunisia.

Tunisia has been a demonstration case of the failed development model championed by the IMF and the World Bank.

Had that model been applied to the now advanced nations in the early stages of their development they would have never reached that status.

But Tunisia’s ‘free market’ reforms following the overthrow of the last dictatorship was held out by the IMF as a model development process.

On June 17, 2013 – IMF Survey : IMF Loan Aims to Help Tunisia Boost Growth, Protect Poor – told us that the reform process aimed “at restoring fiscal space, rebuilding foreign reserves, reducing banking sector vulnerabilities and fostering more inclusive growth.”

The usual mantra.

In response to the question: “Youth unemployment in Tunisia stands at 30 percent. What should the country do to boost job creation?”, the IMF Mission Chief for Tunisia replied:

The authorities’ economic program includes reforms that encourage private sector development, especially reforms of the investment code and the business environment. The government has also launched a number of training programs that could help reduce skill mismatches in the labor market and, hence, lessen unemployment among college graduates.

Not a job in sight.

The following graph shows the overall and youth unemployment rates since 1990.

And the regional disparities are profound – the urban youth unemployed is bad enough, but the rate in the less prosperous interior regions and cities is very high.

That sort of economic reality signifies a failed state.

So the IMF response was just the usual guff where the IMF wants public resources transferred into private largesse in the hope that the latter sector will suddenly create high quality, well-paid jobs.

Tunisia was in the classic trap.

The nation depletes its local productive resources (crude petroleum, wire, cheap textiles, olive oil) to feed an export-led growth mania and import refined petroleum, gas, motor vehicles, etc.

Overall, the trade deficit is composed of low value-added exports and high value-added imports.

Add a substantial foreign debt denominated in … courtesy of the poor policy choices from the previous dictatorship and the quest for foreign exchange becomes paramount.

Add the idea that global tourism is the answer to obtaining foreign exchange – which involves forcing local wages down while having to import high value-added commodities to service the luxury hotels and feed the tourists and things get worse.

The Korean economist Ha-Joon Chang (2007) wrote in his 2007 book – The Myth of Free Trade and the Secret History of Capitalism (Bloomsbury Press) – that (xx-xxi):

This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy …

The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business—credit

… The Korean government also had absolute control over scarce foreign ex- change (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list of priorities in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan …

… The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period – things like simple garments and cheap electronics—were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.

The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction.

The Tunisian development model, loved by the IMF and the World Bank, was never anything like that.

So when we wax lyrical about the demise of democracy in Tunisia, the relevant question is why did the multinational institutions and foreign interests create a ‘democratic’ model that really did little to change the fundamental structural dysfunctions that the previous dictatorship had created.

If anything they exacerbated them.

After I had reflected on the Tisdall article, I saw a Tweet from my MMT colleague Dr Fadhel Kaboub who wrote:

How convenient to grab my NYT quote without asking me or other independent Tunisian scholars about #Tunisia’s struggles in the last 10 years. Like many Western “experts”, Simon Tisdall suffers from a chronic orientalist condition. The Guardian can do better than this.

Orientalism – “is the imitation or depiction of aspects in the Eastern world. These depictions are usually done by writers, designers, and artists from the West.”

Fortunately, I have learned that Fadhel will be providing an expert reply to the UK Guardian article.

So, it seems the UK Guardian will do better.

Good.

Second to none!

The Australian Broadcasting Commission this week ran a program examining the Netflix documentary – ‘The Last Dance’ – about the Chicago Bulls that documented that team’s most successful era.

It seems that the only problem was that the Netflix documentary seemed to find a way to ignore the contribution that Australian basketballer – Luc Longley – made to that team’s success.

He was the first Australian to play in the US NBA.

He was an essential part of the Chicago Teams playing alongside Michael Jordan.

The two-part ABC series records Luc Longley’s memories and his response to being excised from the Netflix documentary.

You can watch the first of two parts – Luc Longley: One Giant Leap | Part 1.

Michael Jordan admits in the second part (to be broadcast next week) that “I can understand why Australia would say, well, why wouldn’t we include Luc and we probably should have.”

I am no basketball fan but the example is demonstrative of what is wrong with so-called ‘American exceptionalism’ which consistently creates problems in the world.

In my sphere I keep reading that Modern Monetary Theory (MMT) only applies to the US or is an American phenomenon.

But I was reminded of an lovely (funny) story from World War 2 that demonstrates how non-US people respond to shameless US self-promotion.

In this article (December 9, 2017) – John Clarke and the New Zealand sense of humour we learn about the liberation of Trieste in 1945.

The New Zealand army “fought a costly street-by-street battle against the retreating German army to take the city of Trieste in northern Italy”.

To celebrate, the US Marines who “had arrived after the battle had finished and that the fighting had been done by the New Zealanders” organised a victory parade and they led the parade through the streets.

The carried a large banner – “US Marines. Second to None”.

The NZ troops came next and upon a large sheet they had written “None”.

Beautiful.

Music – Yusef Lateef

This is what I have been listening to while working today.

I guess I have listened to a lot of jazz in my life to date and explored lots of the fusion experiments that jazz players have created.

This song is from the incomparable – Yusef Lateef – who was an American tenor sax specialist (but also a great flautist, oboist and bassoon player) – is still one of my tracks from one of my favourite albums and it regularly sits on my iPhone when I travel.

I first bought this album – The Blue Yusef Lateef – in the early 1970s (it was released in 1968 on Atlantic).

The track – Like It is – features Yusef Lateef on sax and bamboo flute and reveals what happens when jazz and world music collide.

It is 7 minutes 35 seconds of pure mastery and is music to meditate to while thinking about Modern Monetary Theory (MMT).

It is quite clear from his playing how he was influenced as a young musician by the great Dexter Gordon.

The track features:

1. Kenny Burrell – guitar.

2. Cecil McBee – bass.

3. Blue Mitchell – trumpet.

4. Roy Brooks – drums.

among others.

This UK Guardian – Yusef Lateef Obituary (December 31, 2013) – talks about how he melded world music sounds and motifs into conventional jazz.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

US Cannibals in Haiti... and other tales of Voodoo Economics in the Triste Tropiques

Published by Anonymous (not verified) on Tue, 20/07/2021 - 2:53am in

Tags 

articles, IMF, Haiti

In 2004, a group of murderous gangsters who called themselves The Cannibals led an insurrection against Haiti’s first democratically elected President, Jean-Bertrand Aristide. US President George W. Bush immediately, swiftly sided with... READ MORE

Haiti: The Trail of Blood That Leads Back to The U.S.

Published by Anonymous (not verified) on Thu, 15/07/2021 - 4:41am in

Critical Hour hosts Garland Nixon and Wilmer Leon talk to Palast about the recent assassination of Haiti’s president, Jovenel Moïse, and the trail of blood that leads back to the United States. The trio also discuss the socioeconomic background against which this murder occurred, and how the economy of this mineral and agriculturally rich Caribbean nation has been systematically... READ MORE

Is the new progressive IMF just an illusion?

Published by Anonymous (not verified) on Wed, 23/06/2021 - 11:36pm in

Tags 

Debt, IMF

“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 

Modern Money Consensus

by Carlos García Hernández (originally published in Spanish in El Común)

 

Caution tape in front of the Capitol building in Washington DCPhoto by Andy Feliciotti on Unsplash

I was prompted to write this article by yet another sad fatality, the death of British economist John Williamson at the age of 83. As Max Planck used to say, sometimes science seems to advance one funeral at a time.

Williamson became famous for coining the term Washington consensus in 1989, a compendium of 10 points in which he set out the common position defended by the US government, the International Monetary Fund and the World Bank on economic policy. Over time, these 10 points became fundamental pillars of neoliberalism and mainstream economics.

Below, I confront the ten points of the Washington consensus with what I call the Modern Money Consensus. In my view, these alternatives are the most advanced refutation that economics offers to the Washington Consensus.

 

Washington Consensus
Modern Money Consensus

1
Any fiscal deficit is counterproductive
The right fiscal deficit is the one that allows full employment of resources and price stability

2
Reduction of public spending and the tax burden
If there is unemployment or idle resources, public spending should not be reduced. Increasing the tax burden is justified if there are inflationary pressures

3
Broadening of tax bases and moderation of marginal tax rates
Reduction of taxes on productive activities and on labour income. The tax burden should fall mainly on speculative activities

4
Substitution of public deficits by positive interest rate policies
Permanent 0% interest rates

5
Exchange rate policies aimed at controlling inflation and increasing exports
Floating exchange rates

6
Opening of domestic markets to imports
Ability of states to pursue import substitution policies if they deem it necessary

7
Foreign capital intervention in strategic economic sectors through foreign direct investment
The maintenance of strategic economic sectors should not depend on investment by foreign companies

8
Privatisation of public enterprises
The size of the public sector should be decided by the government as a means to achieve its social objectives

9
Deregulation of markets
Strong public regulation of the labour market, essential services, the financial sector, and banking

10
Protection of property rights
Ability of governments to regain public control of any national resource

 

A fundamental point on which there is consensus within modern monetary theory is that states should only get into debt in their own currency. In this way, public debt is always sustainable and states avoid involuntary insolvency. In this context, as the Australian economist Steve Keen says, and contrary to the Washington consensus, it is not public debt but private debt that threatens the prosperity and sustainability of nations. Thus, the backbone of the modern money consensus is the fact that countries that are monetarily sovereign choose their level of unemployment, since thanks to their monetary sovereignty, they can always spend enough to hire the entire unemployed labour force through a job guarantee based on an employment buffer stock. This scheme allows full employment to be achieved without inflation. Therefore, the correct level of government deficit according to modern monetary theory is the one that allows for full employment without inflation.

In this way, modern monetary theory redefines the role of taxes and public debt. Modern monetary theory argues that taxes do not finance public spending, but have a triple function: they give value to money, they modulate inflationary pressures and they stimulate economic activities.

On one hand, the Washington consensus connects public spending to tax collection and debt issuance, and on the other it connects the reduction of public deficits to lower public spending rather than higher taxes. This resulted in the abandonment of a practice that until the implementation of the Washington consensus had been in common use, namely overt monetary financing. Through this financing, governments spent without issuing any debt securities, but through transfers from the central bank to the Treasury and to the bank accounts of individuals. The Washington consensus put an end to this, and since then governments spend by buying debt securities from private banks subject to interest, because this supposedly induces governments to spend responsibly. What modern monetary theory proposes is to recover the use of overt monetary financing.

The fiscal policy proposal of modern monetary theory is not aimed at reducing public deficits, but at modulating inflationary pressures. This means that tax collection could be done through a single property tax on land and real estate as proposed by Warren Mosler in his book “Soft Currency Economics”. Taxes would thus fulfil the three tasks outlined above, they would not interfere with productive processes, indirect taxes would be largely eliminated and property speculation would be prevented.

This means that the consensus within the field of modern monetary theory is that public policy should emphasise fiscal policy because it is much more effective than the monetary policy advocated by the Washington consensus. Modern monetary theory poses economic policy as a trilemma, since, in the words of Randall Wray in his work “Modern Money Theory”, “a country can choose only two of three policies: maintain an exchange rate peg, maintain an interest rate peg, and allow capital mobility”. The consensus among the ranks of modern monetary theory is that governments should not opt for fixed exchange rates, but rather let them fluctuate, and at the same time maintain a fixed interest rate of 0% and impose capital controls if foreign currency speculation and capital flight become destabilising factors.

Contrary to the Washington consensus, interest rates are decided by the Central Bank. As we have already said, as states do not need to issue any debt to finance public spending, interest rates should be set at 0% on a permanent basis. Attempts to control inflation by means of high interest rates have proved to be an inefficient and counterproductive method that only benefits the rentier classes.

The Washington consensus also advocates export-led growth strategies. In doing so, it confuses the national interest with the interests of export elites. The truth is that for national economies, exports are a drain of resources and imports are an income of resources. Therefore, the only reason why exports are desirable is because they allow an increase in imports, but they should not become the growth strategy of countries. The aim of governments should be that domestic production is consumed as much as possible at home, not that foreign countries enjoy domestic production. This also means that import substitution policies such as those advocated by Mexican economist Arturo Huerta are a perfectly legitimate tool to avoid dependence on foreign investment and to reinforce national sovereignty.

This is compatible with the existence of large public sectors made up of organisations that can guarantee their efficiency and proper functioning through external efficiency and quality controls if so desired. There is no justification that privatisation of public enterprises is an end in itself, nor that deregulation of markets implies greater social welfare. On the contrary, the consensus of modern monetary theory holds that the labour market should be regulated by public job guarantees based on employment buffer stocks, that it is the responsibility of governments to guarantee essential services, and that financial sectors should be very small in size and subject to strong regulation to prevent speculative practices.

The last point of the Washington consensus, according to which public sectors should not be protected and private sectors should, is therefore also unjustified. According to the Washington consensus, public bodies, once privatised, should become untouchable. Nothing justifies this position, and according to the modern money consensus, it is perfectly reasonable to opt for the renationalisation of companies if this is required for the better defence of national interests.

 

Tweet by Stuart Medina MiltimTweet by Stuart Medina Miltim which translates as: “The European Union has advanced to the extreme right of the USA: extreme right congressmen of the Tea Party want a constitutional amendment that forces the budget balance. The EU Treaties and the Spanish Constitution have already achieved this.”

 

After more than 30 years of the prevalence of the Washington consensus, the world has seen how its prescriptions have progressively undermined the living and working standards of workers around the world. This impoverishment of the majority has been accompanied by major economic crises and unprecedented enrichment of the financial elites. Despite this, the most extreme interpretation of the Washington consensus is more alive than ever in the EU treaties. They contain policies that only the American extreme right defends and has not yet been able to impose in its own country. Therefore, reactionary organisms governed by the Washington consensus such as the European Union must be abandoned.

Euro delendus est

 

Share

Tweet

Whatsapp

Messenger

Share

Email

reddit

Pinterest

tumblr

Viber icon
Viber

The post Modern Money Consensus appeared first on The Gower Initiative for Modern Money Studies.

The IMF is all at sea, stuck in its ways, and sending conflicting signals

Published by Anonymous (not verified) on Mon, 26/04/2021 - 9:23am in

Tags 

IMF

Last week, I wrote about how the IMF is presenting a somewhat nuanced view these days. See – IMF now claiming continued inequality risks opening a “social and political seismic crack” (April 21, 2021). But, there was a warning for those who might think this suggests the institution is leaving its mainstream macroeconomics past behind them though. Rather, I think what is going on is a series of ad hoc responses to the growing anomalies that the institution faces between the observed reality and the sort of predictions it has been making based on its core paradigmatic approach. We are observing a specific form of dissonance in many of the current contributions coming out of mainstream economics. This takes two forms: (a) an incomplete response to the current situation (pandemic, GFC aftermath, climate change) where there are conflicting signals being sent; and (b) a tortured attempt to absorb pragmatic narratives within a theoretical structure that cannot consistently accept that absorption. The IMF’s latest blog post (April 20, 2021) – A Future with High Public Debt: Low-for-Long Is Not Low Forever – is a good example of both forms of this dissonance.

The reality that the IMF blog authors observe is now obvious to all:

1. Rising and in some cases relatively large fiscal deficits with capitalism on government life support.

2. Given the institutional practice of issuing public debt to match the fiscal deficits, which most people still, erroneously believe is a funding operation, the rising fiscal deficits have meant rising public debt levels.

3. Interest rates and government bond yields are near zero or negative in most nations. We have seen negative bond yields for long-term debt.

The other reality, that the IMF refrains from recognising, helps us understand why this agreed reality tells us that the mainstream macroeconomics is incapable of explaining these trends and their causal associations.

4. Central banks around the world are buying government debt in massive volumes using their unlimited currency issuing capacity. This has had two consequences: (a) it has demonstrated that the government (via its central bank) can set the yields on its debt at whatever level they chose and they can sustain those levels indefinitely; (b) there are no evident inflationary consequences arising from doing that.

Which has a third consequence of breaking the taboo that mainstream economists have placed on such behaviour.

Taken together we now know that rising fiscal deficits do not drive up interest rates, a proposition that every student enrolled in mainstream macroeconomics courses is forced to rote learn under the ‘crowding out’ fallacy.

Students are also forced to rote learn that such bond-buying by central banks will accelerate the inflation rate. There is no evidence of that happening despite central banks in some nations funding most of the increases in deficits since the pandemic began.

Of course, Japan provides a three decade case study negating the mainstream predictions. Now many of the leading central banks are repeating the lesson.

Why the IMF would ignore the role of the central banks in its analysis is pretty clear. It would interrupt (undermine) their convenient narrative.

The basic argument advanced by the IMF blog post is that eventually the higher public debt exposure of governments will cause them grief.

The part of the pragmatic narrative that the IMF has embraced (the reality) is that:

… countries … [should] … spend as much as they can to protect the vulnerable and limit long-lasting damage to economies … countries should not run larger budget surpluses to bring down the debt, but should instead allow growth to bring down debt-to-GDP ratios organically.

So there is more or less a consensus organising around those propositions now.

It would be unthinkable for any economist to be advocating anything less than this fiscal activism in this period of our history.

That ‘consensus’ is also leading to a rejection of the rigid fiscal rules that economists have imposed on policy makers in various ways, formal or informal, over the last several decades.

The IMF now says that:

More recently, the IMF has stressed the need to rethink fiscal anchors—rules and frameworks—to take account of historically low interest rates. Some have suggested that borrowing costs—even if they move up—will do so only gradually, leaving time to contend with any fallout.

You will note that this ‘rethink’ is highly conditional (on low interest rates).

It is thus based on a misunderstanding of why the fiscal rules, that are based on a premise that a government can become insolvent if private bond investors stop buying the government’s debt or force yields up so high that the situation becomes impossible for the government to proceed, are flawed.

The fiscal rules are not inappropriate because governments have more “fiscal space” as a result of low interest rates.

The fiscal rules are irrelevant because they assume that government is financially constrained in its spending.

The only fiscal rules that make sense must be based on a recognition of real resource limits (such as full employment of labour).

Please read my blog post – The full employment fiscal deficit condition (April 13, 2011) – for more discussion on this point.

Which highlights the central point – that mainstream economists are trying to walk the pragmatic walk at present (because the reality is staring them in the face) but they cannot put all the pieces together into a coherent whole (story) because their underlying framework is incapable of doing that.

So you get this sort of piecemeal approach which is they then try to render comprehensible by absorbing insights back into a flawed theoretical framework.

And in doing so, they miss the point and end up sending conflicting signals.

So to motivate their ‘fiscal space/low interest rates’ narrative but still bring the story back to an austerity bias they have to claim that interest rates (yields) will rise at some point – and by force of their own logic – bring the mainstream story about deficits, debt and austerity – back into the main frame.

The authors ask:

… will borrowing remain cheap for the entire horizon relevant for fiscal planning? Since that horizon seems to be the indefinite future, our answer here would be “no.” … History gives numerous episodes of abrupt upticks in borrowing costs once market expectations shift … Limits to how much can be borrowed have not disappeared, and the need to stay well clear of them is even sharper in a world where interest rates and growth are uncertain.

First, the narrative is conflicting. Deficits are necessary for the “indefinite future” but then they will be unsustainable of this time frame because of the possibility of “abrupt upticks in borrowing costs”.

Second, you can now see why they had to leave the central bank role out of the picture.

The point is that central banks can keep rates and yields low or at whatever level they choose.

Shifts in “market expectations” cannot alter that reality. The participants in the primary bond auctions can seek higher yields if they choose but, ultimately, the central bank has infinite fire power to override those aspirations, even if the bank stays out of the primary issue, which is not guaranteed.

That means that the treasury can always just allow the central bank to buy up all the auction issue, which would render higher yield bids from the priviate bond market investors irrelevant.

But, even if the central bank just limits its activity to the secondary markets, after the auction is completed and the public debt is freely tradable, its purchasing power would soon snuff out high yield auction bids as private investors appreciate the rising demand for public debt would deliver them capital gains anyway.

The IMF blog post continues the Armageddon story:

Theory and history suggest that, when investors begin to worry that fiscal space may run out, they penalize countries quickly. Market-driven adjustments are not necessarily gradual, nor do markets only ratchet up the cost of borrowing once healthy growth returns—indeed, just the opposite seems plausible.

There can be no market-driven adjustments if the government chooses to take the yield dynamics out of the hands of the private investors.

The theory that suggests otherwise is incorrect as history has shown.

The IMF is also still rehearsing the ‘dangerous debt threshold’ argument.

They claim that:

… debt is getting closer to levels that were previously considered dangerous …

And we are confronted with a graph entitled “Dwindling fiscal space”.

I won’t reproduce this piece of propaganda but suffice to say on the horizontal axis is Canada, Germany, France, Great Britain, Italy and the USA.

My edX MOOC students would immediately score a fail for the IMF in this regard.

Regular readers here would immediately score a fail for the IMF in this regard.

Anytime you read an economics article that conflates currency-using governments with currency-issuing governments, you can conclude the content is not worth the time taken to read it.

Germany, France and Italy use a foreign currency – the euro. They are beholden to taxpayers and bond investors to get the euros that they then can spend.

Canada, Great Britain and the USA are currency issuers and are not beholden on anyone for their spending capacity.

Moreoever, you can again see why the central bank activity was not mentioned in the blog post.

Even in the case of the Eurozone Member States mentioned, the massive government bond buying programs run by the ECB, which accelerated last week, are making the private bond markets irrelevant.

The 19 Member States have unlimited spending capacity at present because the currency-issuer in their system, the ECB, is actively funding their deficits, at least to the point, that keeps yields at low and zero levels.

So any analysis of “fiscal space” in this regard that assumes the bond investors call the shots is deeply flawed.

The real politik is clear.

The ECB knows, as well as I know, that if it stops funding the deficits then insolvency issues will arise rather quickly – Italy would probably lead the way.

I cannot construct any situation where the ECB will allow that to happen, now or over the indefinite future.

That is a consequence of the poor choices they made in the 1990s about the fiscal architecture of the monetary union.

As for Canada, the USA, the UK or most nearly all the currency-issuing nations, insolvency or dangerous debt considerations are totally inapplicable.

Conclusion

It is quite interesting to see the machinations of mainstream economists at present.

They are really caught on the hop.

Major parts of their framework have been obliterated by the policy responses of governments around the world, first, during the GFC, but then, definitely, during the pandemic

They cannot deny what is happening.

But they also do not seem to be able to jettison the framework they use to ‘understand’ the world (being kind) or mislead the public so the government can serve vested interests (more likely).

I understand why they cannot do that, which just makes their interventions look pale and inconsistent.

More people are starting to get it.

And then their own ambitions – aspirations, goals, missions etc – will start to receive more airplay.

And it is the Right that is moving faster in this direction while the Left continues to be the Left.

It is time they woke up.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

IMF now claiming continued inequality risks opening a “social and political seismic crack”

Published by Anonymous (not verified) on Wed, 21/04/2021 - 6:00pm in

Tags 

IMF, Music

It is Wednesday and I have had lots of unscheduled commitments (that just come out of the blue) to attend to today. So not much writing. I did have time to read the latest IMF – Fiscal Monitor, April 2021 : A Fair Shot – which was published on April 7, 2021. The schizoid nature of this institution continues to evolve and it will be hard for the austerity mavens to unambiguously use it as a cover for their arguments when they resume their call for public sector spending cuts etc. Music follows.

IMF Update

I don’t have time today for a full review of the Fiscal Monitor publication.

But suffice to say, the tone coming out of the IMF has shifted significantly from when it was leading the charge in destroying nations and increasing income and wealth inequalities.

Don’t think for one minute, however, that the institution has abandoned mainstream macroeconomic thinking.

It hasn’t.

But it has opened a sort of schizoid image – talking about, on the one hand, a global innoculation program “paying for itself” (that is, still framing things in terms of making fiscal cuts), while, on the other hand, imploring governments to maintain fiscal support and target policies that “aim at giving everyone a fair shot at lifetime oppor- tunities by reducing gaps in access to quality public services.”

The Chapter in question:

1. “documents how large preexisting inequalities have worsened the effect of the COVID-19 pandemic, while the crisis, in turn, has escalated those inequalities”.

2. Shows that “Countries with higher relative poverty have had more reported infections, especially where urbanization is more extensive.”

3. “Policy responses should recognize that various aspects of inequality (income, wealth, opportunity) are mutually reinforcing and create a vicious circle.”

Far from advocating its infamous structural adjustment packages (SAPs) that decimated public education and health systems in the poorer nations from the 1970s onwards, the IMF is now wanting governments to be:

Investing more and investing better in education, health, and early childhood development ….

Strengthening social safety nets by expanding coverage of benefits …

Supporting lower-income countries that face especially daunting challenges …

Yes, it does talk about the need to be “Mustering the necessary revenues”. But the shift in narrative towards a recognition that austerity has worsened inequality and that inequality, in turn, damages economic growth as well as delivering other undesirable outcomes, is notable.

In the Foreword, the IMF Director of the Fiscal Affairs Department wrote:

… it is crucial to give everyone a fair shot at life success. Preexisting inequalities have amplified the adverse impact of the pandemic. And, in turn, COVID-19 has aggravated inequalities. A vicious cycle of inequality could morph into a social and political seismic crack. To reduce that risk … [we call] … for tackling inequalities in access to basic public services—health care, education, social safety — and for strengthening redistributive policies.

Not what you would have read from the IMF in 2010, for example.

So the next time, some conservative politician or a self-styled progressive politician start talking austerity or austerity-light in the latter case and try invoking the IMF as an authority, they will find their task less straightforward than in the past.

A good initiative for the Arts sector

A regular reader of my blog and sometime commentator, Mark Russell, who lives in the North of England, wrote to me this week about his new venture. I don’t often promote these type of things but I thought that this project was worth giving credit to.

His initiative is spelt out in this article – On the road to a music recovery (April 19, 2021).

The arts (particularly live music) sector has been ravaged by the pandemic.

My own band – Pressure Drop – has not played live since March 2020 and our first live gig is now on Thursday, May 6, 2021. It would great to see Melbourne readers of my blog turn up to help the venue on that night.

I can even talk about MMT in the breaks!

So any initiative that provides some boost to musicians in this rather bleak period is to be welcomed.

Mark Russell has converted an – Airstream – caravan to overcome the fact that the “the idea of tightly-packed 2,000-strong venues is over for a long time”.

The caravan conversion allows a small stage in the mobile, ‘pop up’ venue to be created with great lighting, sound, and capacity to live stream the event to larger audiences.

You can also read about Amber Sinclair’s ‘Rock School Bus’ in the same article. Another great initiative with significant equity benefits.

MMTed Update

Following the development of our edX MOOC = Modern Monetary Theory: Economics for the 21st Century – we are now working on the next MMTed project, which will be run within our own auspices.

The upcoming courses will be:

1. A re-run of the introductory MOOC – MMT 101.

2. An advanced topics course building on the MOOC.

I cannot give a precise date for when these courses will come on-line.

We have to reengineer the MOOC to free it from edX type formats but we are working on that project at present.

We have also started filming the second (advanced) course.

Our experience now in putting these courses together – it is a rather time-intensive and complex exercise – is that a new course takes about 6 months to get off the ground, once the all the filming, writing, design, production etc is done.

The re-engineered MOOC will not take that long as we just have to edit the video content.

So I expect the MOOC to return on the MMTed platform within 3-4 months and the advanced course to be available around October 2021.

We now need more funds to keep the project going.

If you are able to help on an ongoing basis that would be great. But we will also appreciate of once-off and small donations as your circumstances permit.

You can contribute in one of two ways:

1. Direct to MMTed’s Bank Account.

Please write to me to request account details.

Via PayPal – the PayPal donation button is available via the MMTed Home Page or via the – Donation button – on the right-hand menu of this page (below the calendar).

Please help if you can.

Music – Africa from Rico Rodriguez

This is what I have been listening to today while working.

It is one of my favourite trombone players – Rico Rodriguez – who sadly died in September 2015 at the age of 80.

He was born in Cuba but made his name in Jamaica after being taught by none other than Donald Drummond, one of the all-time best brass players from Kingston.

The undoubted best jazz, reggae trombone player of all time.

He played devotional music (rasta) with Jamaican hand drummer – Count Ossie in the 1950s and later with Winston Rodney aka Burning Spear.

He then moved to the UK and started playing jazz reggae before joining The Specials and playing ska.

His best album was in 1976 – Man from Wareika – from which this track – Africa – is taken. It is a really hot album.

One other track – Lumumba – is his tribute to – Patrice Lumumba – who was executed in a coup in February 1961 at the age of 35, while he was president of the Democratic Republic of the Congo. He was a major driver of the independence move and the break from the oppressive colonialism of Belgium.

His death was shocking in that he called on the UN to intervene against political instability promoted by the Belgians and the foreign mining companies, aided and abetted by the UK and the US.

The UN Security Council was petitioned by the Soviet Union to demand that Lumumba be released from prison after the military take over and to call on the Belgians to exit the Congo and to cease supporting the insurgency against the elected President.

The vote went 8-2 against the petition. That was on December 14, 1960. A month or so later he was executed and the announcement was withheld for a further three weeks.

Lumumba was a supporter of Pan Africanism and was thus despised by the Belgians and the US. The CIA had already tried to kill him but failed. It was a very sordid affair.

Anyway, Africa … I hope you enjoy it as much as I have for the last 35 years or so. I still keep putting the record on my turntable.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Advanced nations must increase their foreign aid

Published by Anonymous (not verified) on Wed, 07/04/2021 - 6:08pm in

Its Wednesday and only a short blog post day. I have been following the disaster unfolding in Timor-Leste over the last few days as I continue to compile research material as part of the development of a plan to increase the resilience of the Island state. We know that accumulating new public infrastructure is a key to the growth process. It crowds-in private investment, which leverages off the capacity provided by such infrastructure. A lack of essential public infrastructure is a major aspect of poverty and exclusion. While natural disasters impact on all nations when afflicted, the problem for Small Island Developing States (SIDS) like Timor-Leste is that they regularly face major capital destruction as a result of natural disasters and do not have the capacity to defend themselves and reduce the consequences of the events. Climate change is rendering this problem more severe. This is where the creation of a new multilateral agency to replace the corrupt IMF is necessary.

Timor-Leste – the development challenge

Like most nations, Timor-Leste is now fighting the coronavirus.

The last thing that it needed was for a natural disaster to necessitate the crowding in of people in emergency shelters where any sense of social distancing was near impossible.

But as we know, that is exactly what happened.

The pictures coming out of the nation have been devastating.

While flooding is not uncommon during the wet season in the region, what happened in the last week has been of another scale.

The floods and mud torrents have wiped out houses, bridges and roads in the island state. And the accumulation of rubble has meant assessing the full-scale of the crisis has been difficult, including gaining access to survivors, especially, in the regional areas outside of Dili.

With so much water around, the next problem is the waterborne diseases such as typhoid, cholera, etc.

There are economists who think that natural disasters have a beneficial effect on less advanced nations – the so-called ‘blessings in disguise’ idea.

The notion draws on Joseph Schumpeter’s concept of – Creative Destruction – which posits that out of industrial turmoil, the economic structure of a nation is revolutionised with the strong squeezing out the weak firms.

As a result, the conjecture is that the economy becomes more efficient (lower cost of production) and grows more strongly.

Schumpeter, got the idea from Marx and Engels, who in – The Communist Manifest – of 1848, wrote that (p.17):

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

I have always loved that characterisation of economic crises driven by a shortfall in overall spending. Marx knew about macroeconomics long before Keynes articulated the same idea about effective demand.

Marx refined this idea of the destructive characteristics of economic crises in Chapter 17, Volume II of the epic – Theories of Surplus Value – published in 1863 where he wrote (p.496):

the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use-values. What one loses, the other gains. Values used as capital are prevented from acting again as capital in the hands of the same person. The old capitalists go bankrupt. If the value of the commodities from whose sale a capitalist reproduces his capital was equal to £ 12,000, of which say £ 2,000 were profit, and their price falls to £ 6,000, then the capitalist can neither meet his contracted obligations nor, even if he had none, could he, with the £ 6,000 restart his business on the former scale, for the commodity prices have risen once more to the level of their cost-prices. In this way, £ 6,000 has been destroyed, although the buyer of these commodities, because he has acquired them at half their cost-price, can go ahead very well once business livens up again, and may even have made a profit. A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction. This is also the period during which moneyed interest enriches itself at the cost of industrial interest.

Marx did not fully anticipate the rise of monopoly capitalism, where concentrated sectors dominated by large firms, have greater capacity to withstand crises and maintain their nominal capital intact.

Schumpeter built on Marx’s views but instead of seeing crises as the manifestation of the inherent contradictory, self-destruction of Capitalism (Marx), he rather saw the process of capital being destroyed and recreated as a creative, beneficial process.

Development economists who call on this idea of creative destruction – claiming that such crises provide opportunities to purge inefficient sectors and to add resilience and efficiency – however somewhat miss the boat when it comes to the type of disasters that less-advanced nations in the Pacific region face on a regular basis.

The ‘blessings in disguise’ approach is inherent in mainstream neoclassical growth theory, which posits that natural disasters do not impact negatively on the rate of technological progressin the long-run.

Marx and Engels were talking about the capital that owners of the material means of production hold. The aim of Capitalism is to convert nominal capital (money) into productive capital (machinery etc) to produce surplus value, which can be realised as profits and return a larger stock of money capital the so-called M-C-M’ cycle that typifies Marx’s approach to capital accumulation.

But the problem facing these island nations goes beyond the damage that natural disasters cause to the profitability and the private capital accumulation process.

The process of growth for any nation requires the accumulation of both productive and social capital, such as public infrastructure (roads, bridges, transport systems, telecommunications, water supply, power, etc).

Usually, it is the latter that crowds in the former as private sector investors take advantage of the growing stock of public capital and leverate profit-seeking opportunities.

For advanced nations with large capital stocks – both private and public – a natural disaster can interrupt the accumulation process but usually not derail it.

In the last 2 years, Australia, for example, has had widespread bushfire trauma and then the recent floods (which are still abating).

These events are disruptive but the capacity of the nation to quickly restore opportunities is large and the disruption is short-lived, which is not to say, the problems do not cause considerable trauma for those impacted the most.

But less-advanced nations lack this capacity to defend themselves against natural disasters and minimise the negative consequence of them

There is nothing creative or a ‘blessing’ about having a large proportion of a nation’s public infrastructure wiped out regularly by major weather events.

In ordinary times, the so-called Small Island Developing States (SIDS) face the prospect of losing a considerable proportion of their capital stock when a major weather event occurs.

The SIDS face multiple developmental challenges at the best of times – isolation, fragmented islands making up the nation, remoteness from major shipping routes (which increases the difficulty of creating export opportunities), dependence on imports for food, energy etc.

But then to have to regularly deal with the destruction of essential infrastructure makes the challenge that much harder.

And now, climate change has meant that these events are no longer just ordinary capital depletion disasters.

The intensity and frequency of these events are increasing and the capacity of the nations to rebuild their capital to get the process of development restarted is now reduced.

When Hurricane Irma struct the Caribbean in September 2017, 1.7 million people were displaced and Barbuda lost 90 per cent of its infrastructure (Source).

50 per cent of its population became homeless.

The current chaos and destruction in Timor-Leste will be similarly detrimental.

What the advanced nations need to do is recognise that they have currency sovereignty which means their foreign aid allocations can increase dramatically to help the SIDS deal with the regularity of capital destruction and to provide buffers to deal with climate change.

The IMF needs to be dissolved and a new multilateral body created to funnel capital into these vulnerable nations from the advanced nations without the sort of neoliberal conditionality that essentially makes it impossible for these nations to develop in any coherent way.

I am working on a plan for Timor-Leste which requires it to spend more of its oil revenue immediately and abandon the dollarisation.

More on that another day.

And I hope all my friends in TL are safe at present.

Music – My latest album

This is what I have been listening to while working this morning.

I often feature albums I have had for years (decades) but sometimes a fabulous new release takes my breath away.

Such is the latest release on Blue Note records – Breathe (no pun intended) – which became available on March 26, 2021. I am an early adopter!

It is from master organ player – Dr Lonnie Smith – who is now 78 years of age and has been a Blue Note staple.

Here is a – Review.

Lonnie Smith is one of the reasons I love Hammond B3 organs.

He played a lot with George Benson and Lou Donaldson.

If you are wanting some chill out today then this is it.

The track is World Weeps – one of Dr Lonnie’s own tracks.

It was recorded live in 2017 at New York’s Jazz Standard to celebrate his 75th birthday.

The other players are:

1. Jonathan Kreisberg – guitar.

2. Johnathan Black – drums.

3. Richard Bravo – percussion.

The Dr bit has nothing to do with medical training or a PhD in another discipline.

It is because he loves to “’doctor up’ their music” (Source)

Very cool record.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Governments must restore the capacity to allow them to run large infrastructure projects effectively

Published by Anonymous (not verified) on Thu, 01/04/2021 - 5:12pm in

Tags 

IMF

One of the major complaints that Milton Friedman and his ilk made about the use of discretionary fiscal policy was that time lags made it ineffective and even dangerously inflationary. By the time the policy makers have worked out there is a problem and ground out the policy intervention, the problem has passed and the intervention then becomes unpredictable in consequence (and unnecessary anyway). The Financial Times article (March 29, 2021) – To compare the EU and US pandemic packages misses the point – written by Ireland’s finance minister reminded me of the Friedman debate in the 1960s. Apart from the fact that the article is highly misleading (aka spreading falsehoods), it actually exposes a major problem with the way the European Commission operates. If Friedman’s claim ever had any credibility, then, they would fairly accurately describe how the European Union deals with economic crises. Always too little, too late … and never particularly targetted at the problem. The debate remains relevant though as governments move away a strict reliance on monetary policy and realise that fiscal policy interventions are the only way forward. Most governments around the world are talking big on public infrastructure projects. However, the design of such interventions must be carefully considered because they can easily be dysfunctional. Further, thinking these projects are a replacement for short-term cash injections is also not advised. I consider these issues in this blog post.

On the FT article – it is just typical Europhile spin. Even at the depths of gloom, the officials are out there telling the world what a success the monetary union has been.

Their spin reminds me of this – Life of Brian – segment, where the EC is the Black Knight:

The point is that the European Union stimulus is yet to be fully implemented some 16 months after the crisis began. The bickering between Member States and the underlying resistance to allowing fiscal deficits to expand to the levels required has meant that when the spending finally flows, it will be too little and too late.

Needless suffering will be the legacy.

I cannot understand how any progressive thinker can continue to support this dysfunctional mess that is leaving millions of people unnecessarily in dire circumstances.

Big infrastructure spending plans

The new US President is trying to get a $US2 trillion infrastructure package – The American Jobs Plan – through the Congress at the moment.

It recognises that “The United States of America is the wealthiest country in the world, yet we rank 13th when it comes to the overall quality of our infrastructure.”

The consequences of that neglect are clear – “roads, bridges, and water systems are crumbling. Our electric grid is vulnerable to catastrophic outages. Too many lack access to affordable, high-speed Internet and to quality housing.”

The Plan aims to do typical large-scale infrastructure things:

– Roads, bridges, ports, airports, transport

– Fix water utilities, renew electricity grids, develop high-speed broadband

– Addressing housing shortages and quality, school rehab, child care expansion etc.

And more.

I haven’t yet done the analysis to see whether this plan would require offsetting tax hikes or other spending diversions to avoid hitting an inflationary ceiling.

At first, I am thinking about whether it addresses the variety of problems that the US faces in a temporal sense.

Which is why I have been thinking about policy design and lags.

There is also a debate going on in Australia about similar infrastructure issues after years of fiscal-surplus-obsessed neglect of public investment.

The UK Guardian article (April 1, 2021) – Public investment in infrastructure would be a much needed boon to the Australian economy – by Greg Jericho, shows that most of the jobs growth in Australia over the last year has been in public administration (particularly dealing with the pandemic), which shows how false the claim by conservatives that governments don’t create employment is.

He argues that there is a crying need for new projects covering “road, rail, bridges, telecommunication and sewerage” in Australia:

… while private investment remains down, the public sector needs to fill the hole …

He ties the need for public infrastructure spending to the need for a short-term boost to work.

Once again this gets us thinking about lags and whether public infrastructure projects are the best way to deal with a sudden collapse in employment.

Friedman on fiscal policy

On May 2, 2000, John B. Taylor from Stanford University conducted an – Interview with Milton Friedman – which was subsequently published in the journal, Macroeconomic Dynamics Vol. 5, No. 1, pp. 101-131.

As an aside, he tells Taylor about his younger days and said:

I probably would have described myself as a socialist …

He apparently wrote an essay at the end of university which he stored away which described these views. Later in life, he tried to find it but couldn’t.

He said:

I’m pretty sure I did not have the views I later developed.

But the purpose of citing that Interview here is that Friedman was asked to reflect on his “two early articles on stabilization policy, the first one is on fiscal policy rules … and the second one focussed more on money growth rules …”

His first article (1948) outlined what was almost the orthodoxy at the time and is still professed by progressives who do not understand macroeconomics.

He said:

Rules for taxes and spending that would give budget balance on average but have deficits and surpluses over the cycle could automatically impart the right movement to the quantity of money.

By the time he wrote the second article (1968), he had shifted his position:

… you really didn’t need to worry too much about what was happening on the fiscal end, that you should concentrate on just keeping the money supply rising at a constant rate.

He claimed he now knew that “the link from fiscal policy to the economy was of no use.”

Taylor asked him to comment on the debate between Keynesians and the emerging Monetarists and he replied:

It’s over, everybody agrees fundamentally.

The academy shifted sharply in the late 1960s towards Friedman’s view.

The debate over ‘rules versus discretion’, which meant, on the one hand, that monetary policy rules were more reliable than relying on the discretion of the policy maker.

Friedman and Co. pointed to the so-called lags in policy that rendered interventions ineffective or dangerous.

They identified an overarching implementation lag – something bad happens but it takes time to recognise the issue and then administrative constraints delay the intervention.

By the time, the initiative, say an increase in government spending, is flowing, the issue has been resolved by the ‘market’ (private spending recovers) and the extra public spending becomes pro-cyclical and inflationary.

This lag is made up of two lags:

1. Recognition lag – detecting the problem.

2. Response lag – actually doing something about the problem.

So Friedman believed it was much better to have automatic rules that were beyond the daily discretion of policy makers that would sustain stable prices.

Of course, as soon as central banks started applying his fixed money supply growth rules (Bank of England first in the early 1970s) they found that they were actually not able to control the money supply as the mainstream textbooks claimed (and still do)

Lags in Infrastructure projects

In October 2020, the IMF published its – Fiscal Monitor – and – Chapter 2 Public Investment for the Recovery – contains some relevant analysis.

It notes that the immediate challenge of the pandemic was to “address the health emergency and provide lifelines for vulnerable households and businesses.”

That is, speedy and targetted cash injections were required.

But government should not abandon its responsibility, just because it has outlaid such amounts on temporary cash support, on facilitating:

… transformation to a post-pandemic economy that, with the right policies, can be more resilient, more inclusive, and greener.

In other words, fiscal policy design has to have temporal considerations – some tools are good for short-run, emergency stimulus, while other tools are better for achieving longer-term objectives.

Trying to mix these temporal characteristics runs the danger of falling into Friedman trap.

The IMF narratives about now is the time to engage in large-scale infrastructure spending by governments because interest rates are low is to be ignored.

These large-scale projects should be undertaken if there is a functional need identified which will deliver socio-economic benefits over a long period of time and transform economies towards the green future.

The idea that they are ‘cheaper’ for government when interest rates are low misconstrues what the ‘cost’ of the project actually is. It is the real resources that are used to complete the project, including those diverted and not available for other uses, that has to be considered.

The financial outlays are largely irrelevant.

The IMF is obsessed about “worsening debt dynamics” etc and “sovereign spreads” – which just goes to show they haven’t really made a transition across the line yet.

What they do get right though is recognising that:

With ample underused resources, public investment can also have a more powerful impact than in normal times.

The IMF try the ‘crowding out’ story which is another one of those myths.

But, clearly, as an economy approaches full capacity, the impact of increased spending on real output will decline and price adjustments will become the norm.

That is the constraint that has to be taken into account.

The Fiscal Monitor Chapter contains an interesting graphic – Figure 2.5 Duration of Infrastructure Projects – which I repeat here:

Why is that important?

It is important because it tells us:

1. These projects have long gestation periods.

2. They require government departments be forward thinking rather than reactive.

3. Years of eschewing ‘planning’, outsourcing out critical public functions to consultants, and privatisations, has undermined the capacity of governments to implement these type of projects in an effective manner.

4. A progressive agenda has to be to restore those capacities to the public sector as a matter of urgency.

The IMF note that:

… governments often hope to rely on “shovel-ready” projects that can be kick-started within a few months. Yet countries may find they have few such projects and thus may not be able to increase public investment in time to fight the current recession

And the reason for that is that under neoliberalism the capacity to plan and implement complex public policy interventions has been hollowed out by the move to convert public policy departments delivering services and infrastructure development into contract brokerage and management agencies.

The myopia of neoliberalism again on show.

The IMF lists four steps that:

… should be taken immediately: (1) focus on maintenance of existing infrastructure, (2) review and reprioritize active projects, (3) create and maintain a pipeline of projects that can be delivered within a couple of years, and (4) start planning for the new development priorities stemming from the crisis.

It is a bit rich of the IMF to now be telling governments this when they have been leading the charge in destroying these capacities in governments over the last several decades, particularly in less advanced nations.

There is a need for “smaller, shorter-duration projects” like maintenance, which can “be deployed quickly and has major economic benefits”.

Once again, it is a bit rich of the IMF to now admit that government spending can have “major economic benefits” after decades of demanding austerity and a run-down of capital spending by governments.

But, better late than never.

The crucial need for governments now and into the future is to restore their planning capacity – to take longer term positions so they can create a “pipeline of projects”.

The IMF say:

Governments should prepare a pipeline of carefully appraised projects that can be selected …

They talk about a 24 months time horizon, whereas I would be talking about a 20-year time outlook or longer.

It is clear that nations require long-lived public infrastructure – which means capacity which endures for decades rather than a few years.

Government planning can define this need, design appropriate scaled modules which sum to an entire nation-wide project and then accelerate or decelerate the spending and project implementation according to the state of the cycle.

That is the art of policy planning. To have projects that are conceived, designed, all the planning permits sorted out etc, which are then ‘shovel ready’ for relatively quick operationalisation.

Only then can we avoid the time lags that render these projects less suitable for rapid, counter-cyclical response.

While the infrastructure projects can be rendered jobs rich, they should not be relied on to create substantial employment in a time of crisis.

This also depends on the nature of the nation. When I was working in South Africa on the Expanded Public Works Program, I supported large-scale, labour intensive road building projects that would use ‘old’ technology because it was the best way to maximise employment per km of tar laid.

Engineers who had studied this assured me that the quality of the tarmac was not determined by whether a capital-intensive or labour-intensive approach was deployed.

In other nations, where the need for job creation might be less, the projects can use best-practice technology, which will create less jobs.

There are many short-term projects that can be implemented quickly that can provide large numbers of jobs if needed in a sharp downturn.

Conclusion

The point is that Friedman’s observations about time lags was overstated when governments maintained internal planning capacity and took a forward-looking approach to nation-building.

As neoliberalism took its ugly grip on governments and destroyed a lot of that capacity, then it was valid to think about policy lags. Simply because the capacity to avoid them was decimated.

That doesn’t mean Friedman’s claims that discretionary fiscal policy should be avoided.

It just means we have to ‘Reclaim the State’ and reinstate the capacity that is necessary to make fiscal policy interventions work in an effective manner.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.