Tag Archives: IMF

Theresa May’s agenda as UK’s Prime Minister

I have no idea whether Theresa May really intends to ditch Osborneomics. George Osborne appears to have ditched it, so it seems quite likely. Hopefully she will have got the message that ‘the markets’ have capitulated over the perceived need to raise interest rates, as they are still piling into Britain’s gilts (government bonds), causing them to yield what are effectively negative rates. Which means they would be paying the government to borrow, as before, but now even more so. So now would be a really, really good time for the government to borrow to fund new infrastructure investment, as well as investment in education (including adult), health, housing, R&D, even military – anything which would be of long-term benefit to the country as well as employing people and receiving more taxes back. The kind of growth so engendered would eventually bring our Debt/GDP ratio right down again in good time.

Of course this would tend to suck in more immigrants to do the work Britons seem incapable of doing, for the moment – but that is another story, which will be somewhat difficult for her to deal with, as recently.

An article in the IMF’s Finance & Economics magazine (F&D) in June questioned the ‘Neoliberal Agenda’ with its emphasis on globalisation and particularly capital flows deregulation, indicating that the way it has actually worked has, to say the least, not been optimal. After doing some research, the authors stated:

  • The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.­
  • The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.
  • ­Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.­

This is a conclusion reached by a large number of economists. As is noted here, by Dani Rodrik, quoting from some of the more distinguished ones:

This backlash was predictable. Some economists, including me, did warn about the consequences of pushing economic globalization beyond the boundaries of institutions that regulate, stabilize, and legitimize markets. Hyper-globalization in trade and finance, intended to create seamlessly integrated world markets, tore domestic societies apart.

The increase  in inequality is all around us in the UK with its shrinking middle-income sector, and even more so in the USA, where middle and working-class incomes have hardly risen in the past 30 years. In the meanwhile the incomes and wealth of the richest 1% of our societies have risen exponentially. This is not just an issue of ‘fairness’. The super-rich have difficulty spending their money in a way that benefits the economy broadly via growth and tax receipts, compared with the less well off who spend more of their income and therefore do pay more in tax as their income rises.

There is significant middle- and working class disgruntlement and outright anger, which is clearly visible in the popularity of Trump and Sanders in the USA and the Brexit referendum result in the UK. This inequality is causing social unrest, as is now very clear, but started to become pretty obvious here during the widespread riots in 2011. The problem will not go away unless there is a significant change of government policies.

And that is what is so interesting about Theresa May’s latest pronouncements.  She, at least, has got at least some of the message – as, perhaps, only an ex-Home Secretary can, who certainly will not want more social unrest during her stint as Prime Minister. Especially as Brexit will almost certainly make matters worse in a shrinking economy where arguments about who gets most out of the remaining ‘cake’ are likely to become even more heated, as Tim Harford has pointed out.

Chris Dillow, a Marxist blogger whose day job is on Investors Chronicle makes some very interesting points about some of the details of her future agenda:

There’s something remarkable about Theresa May’s speech yesterday: large chunks of it could have come from a Labour politician.

For example, she spoke of the “injustices” of people from poorer backgrounds having less chance of going to university or getting top jobs or even living a long life. She complained that many people in politics don’t appreciate “how hard life is for the working class”; of workers being “exploited by unscrupulous bosses”; of “irresponsible behaviour in big business” and of an “irrational, unhealthy and growing gap” between workers’ and bosses’ pay.

She went onto demand a “proper industrial strategy” to raise productivity – one that might block hostile takeovers; of the need to “give people more control of their lives”; of the need for workers on company boards; a “crack down on individual and corporate tax avoidance and evasion”; and restraints upon CEO pay.

If we add to all this her renunciation of austerity and (I presume) acceptance of rises in the national living wage, May is to the left of the position many Labour MPs had in 2015 – and perhaps still have  … It’s no surprise that her words have been welcomed by the Equality Trust.

So, maybe she is also, unlike George Osborne, listening to the views of the vast majority of UK economists. George Osborne may or may not have got the message, but I suspect she may want someone else as Chancellor of The Exchequer.

EDIT 13-07-16 Evening

George Osborne is out of the Cabinet. Philip Hammond is the new Chancellor.

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What happened between 2010 and 2016. All about Austerity…

I came across something on Yves Smith’s excellent #NakedCapitalism blog, which I thought I’d share with my future self.

Before linking it, here’s my own version of the story so far…

I’ve kept banging on about the follies of #austerity ( aka ‘fiscal consolidation’) as introduced by the UK’s Chancellor George Osborne, much aided and abetted by the hapless Nick Clegg in the coalition government which came to power in 2010.

But it is important to be clear that fiscal consolidation is very appropriate under certain circumstances – namely, when an economy is judged to be growing strongly, and, for any reason you like, it is judged desirable to rein in public debt. After all, why burden your future self or future generations with debt which is unnecessary because you can easily afford to reduce it without harming your growth or harming your public services? All governments borrow by issuing debt in the form of government bonds and the UK government has nearly always been in debt. Think of it as a mortgage. No problem, as long as you can afford the interest payments. Even with a strongly growing economy a government may legitimately wish to borrow in order to raise large sums, beyond the scope of taxation, for state investment purposes – on infrastructure, hospitals, universities, schools, weapons, scientific research, and so on (war also comes to mind). But if it needs to borrow to pay for ongoing salaries, unemployment benefits, social services, road maintenance, etc., (etc.) – then clearly something is wrong. In that case it may mean taxation is just too low: as a growing economy may mainly be putting the proceeds of its growth into the pockets of a very few, with little ‘trickling down’ to the many. In which case the government’s coffers would be receiving too little tax to pay for current expenditure, because inequality is too high.

The current UK austerity policy was introduced by the Clegg-Cameron coalition shortly after the massive increase in debt incurred by the UK government of Gordon Brown: an increase which was necessitated by the bailout of the poorly-regulated financial sector (for which blame Bill Clinton and blame Blair-Brown) after the financial sector, especially the banks, brought much of the world economy to its knees. The same events occurred in the USA, where it all started, and in many other major economies.

Financial sector bailouts, the monetary policy of reducing central bank interest rates and fiscal stimulus by governments – ie extra government spending – were initially applied and sort-of saved the day. But the initial very appropriate fiscal stimulus was quickly followed by panicky fiscal retrenchment even as the previous policy was starting to work. The immediate result of the 2010 newly elected Conservative fiscal retrenchment was to immediately turn shaky recovery back into recession. In the UK George Osborne lifted his foot off the fiscal brake a little when it became obvious to the Treasury in 2011 that his austerity policy was damaging the economy, which had started to grow again in 2009-10. All the while Mr Osborne was claiming that there was no alternative to Plan A, and that he was still pursuing it. But he wasn’t. Much to the chagrin of some of the ‘Tory Press’.

However, by then the damage caused by Osborne’s ceasing all UK government investment, and his other austerity measures, had already been done; followed by knock-on (‘hysteresis’) effects on private investment as well as further state investment. Of course, the UK economy did eventually start to recover yet again – they always do…eventually. But this UK recovery, despite significant employment growth, has since been pretty anaemic and fragile in terms of GDP, with appallingly low productivity and an unsustainable ‘trade deficit’. not to be confused with the fiscal deficit, which was hardly shrinking at all, despite the cuts. Similar government behaviour elsewhere in the world produced similar results, though Britain’s productivity remains the worst among developed nations.

Of course, in the middle of all this, the euro area had its own special problems to add to the mix, largely due to irresponsible bank lending, most especially by German banks, to irresponsible  private borrowers – mainly property developers in other countries, especially Ireland and Spain. Greece was a special bad case with Greek government profligacy which was pretty obvious when it joined the euro and which should have stopped its joining, except nobody had the courage to call out the Greek govenment over its bogus data.

Basically, what was forgotten by the UK government and others, as they focused their attention on the higher than normal Debt/GDP ratio (obviously more important than the actual debt itself), was that while, if this ratio is considered too high to be sustainable, there are, on the surface, two ways to bring it down:

  1. to directly cut debt by cutting the government deficit (difference between tax take and expenditure), through severely curtailing government spending, or…
  2. a longer term strategy of raising GDP by means of additional government spending on capital investment and encouraging business to invest… (and there is always ‘helicopter money’ to consider, as well – giving money directly to consumers to spend)

… in most countries, especially the UK, the focus was wholly on response (1) from which the private sector bit of (2) was supposed to occur via… er…’confidence’.

The reason for choosing opton (1) was the alleged sheer urgency of ‘bringing down the debt’. This was supposed to mean the private sector would regain its confidence to spend and business, thereby, would invest more. It was hoped by the more full-blooded neocons that this would also have the benefit of shrinking the state, which, for many, was their main ideological and selfish motivation (lower taxes, y’see).

Of course it failed and continues failing, even in its anaemic form.

This is because businesspeople are not stupid and did not actually have confidence that the policy was going to work, whatever they may have been saying to the press. And so, instead, they pocketed their profits and tax cuts by proceeding to increase senior management salaries/bonuses while massaging up their share prices via buying their own shares, thus ‘justifying’ increased bonuses… etc., (etc.). British productivity, in particular, suffered from a lack of investment and cheap labour, some imported.

Neither were ‘the markets’ confident. Thus they went about increasing their purchase of government bonds in the secondary market, driving up bond prices and thereby decreasing bond yields, since the interest paid is monetarily fixed on the initial government issue price. This was, amazingly, widely reported by an ignorant press and others as ‘success’ in raising the confidence of the markets and, by inference, business generally. After all, if a country’s bond prices are high (interest rates therefore low) doesn’t that mean the country is a safe bet?

Bollocks it did.

In this case it meant that while ‘the markets’ understood that a country in charge of its own currency would have some difficulty actually going bankrupt, because if push comes to shove it can legally pay its debts in its devalued currency, government bonds were being bought instead of shares or investing in productivity-enhancing schemes because, in reality – as opposed to what was put in company reports – they had too little confidence in their sales and profitability being steadily sustained in the future. There was nowhere else really to invest with any confidence, squire.

In the euro zone, countries can easily go bankrupt, because they do not have their own currency and so debt must be repaid in euros. They are in a situation a bit like the old discredited ‘gold standard’.  This was why Britain could never ever have become ‘Greece’ despite the ignorant warnings from people who should have known better, or did know better but were just being mendacious.

Throughout, there was also the ‘monetary policy’ employed by central banks, namely reducing interst rates drastically and quantitative easing  – otherwise known as ‘unconventional’ monetary policy – employed to overcome the ‘zero lower bound’, when you cannot stimulate an economy via lower interest rates any more because they they have already been reduced to zero or near zero. That had relatively poor stimulative success – unless, maybe it worked to keep us out of recession once we had managed to get out of it. In fact, we mainly got out of it through consumer spending and increases in consumer debt, or at least consumer ‘dissaving’.

So, in the UK, here we still are, with an anaemic recovery (yes, yes, better than some, but still anaemic) which can easily be knocked off course by any old external shock – and any old self-inflicted internal shock like the Brexit vote and its rumbling longer term repercussions.

Quite early on in all this, the IMF had changed its mind about the desirability of fiscal consolidation as a way of reducing debt (murmurings and research from them in 2010 and later, as I posted in previous blogs). But the OECD seems only very recently to have come to its senses and started to call for governmental fiscal expansion policies. It says the need is urgent, urgent, I tell you! It has to be remembered that these august instutions are often run by politicians and bankers who have a major say in the official pronouncements, which may actually conflict what their economists are actually saying, until eventually the economic realities and the narrative of their economists successfuly break through.

Meanwhile, Germany is still stuck in its traumatic Weimar fear of inflation – forgetting Bruning deflation – and employs a version of macroeconomics allegedly invented by Schwaebian Housewives: debt=bad…always… and never ever print money. Their behaviour is also dictated by a belief that every country in the euro zone should be like them and export more than it imports: a logical impossibility… (except to German finance ministers, apparently).

Finally, here is the link I promised originally.

But now we are starting a new story. Post the Brexit referendum. Next blog.

 


A Critique of the NeoLiberal Agenda from the IMF (well…the bit of it that doesn’t mind offending finance ministers)

A paper from three IMF economists was recently published in the IMF’s Finance & Development online magazine (F&D) which is primarily aimed at non-economists. It examines neoliberalism in terms of success and failure.The paper defines neoliberalism as follows:

The neoliberal agenda—a label used more by critics than by the architects of the policies—rests on two main planks.

  • The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition.
  • The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.­

It’s marvellous stuff – and quite balanced in showing that there may be some benefits. But there are also severe risks, depending on how the agenda is carried out.

Free movement of ‘capital’ across borders, in the opening up of financial markets, for example, can carry very severe risks – depending on what capital and where (as Greece and Spain can well attest):

  • Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth.
  • But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners.
  • This suggests that the growth and risk-sharing benefits of capital flows depend on which type of flow is being considered; it may also depend on the nature of supporting institutions and policies [My emboldening]

It concludes that:

  • The benefits [of the neoliberal approach] in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries
  • The costs in terms of increased inequality are prominent.
  • Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.­
  • Increased inequality in turn hurts the level and sustainability of growth.
  • Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.­ [My emboldening]

In sum – shrinking the state is far from an unqualified good in itself, and where it leads to increased inequality, as it usually does, this is very bad – not only ethically, but also in terms of reducing national growth. And, as for financial deregulation, it can lead to… well, we’ve seen what it can lead to.

But don’t take my word for it. Here is the complete paper…

Oh, and by the way, I’ve been banging on for ages about the need for more government spending (housing, NHS, defence, education, wotevah). And now even the OECD has called for it as a matter of urgency (urgency, I tell you…)

Actually ‘Rick’ at flipchartfairytales gives a neat summary and analysis of the OECD call for action here…


Against Brexit

David Smith writes the ‘Economic Outlook’ column in The Sunday Times Business section. I don’t much like a lot of what he writes because he’s one of those columnists who has believed (and possibly still does) that the UK’s deficit must be eliminated and our debt must be cut now-now-now. Which is what George Osborne has been trying to do since 2010 – and singularly failed. But, in the meantime, Osborne has managed to cut capital expenditure significantly, while off-loading a load of costs that used to be borne by central government onto local authorities. Not to mention the damage he and his ilk of ‘small-staters’ have done to the NHS and social services. All for want of taxing a bit more and borrowing a bit more, when ‘the markets’ are actually paying governments to borrow. Nearly all mainstream academic economists believe this has been counterproductive, as do even some working for banks and newspapers, not to mention the IMF.

But I digress.

In today’s column (29-05-2016) David Smith tackles some of the Brexiters’ economic and ‘resources’ arguments. And he does it very well indeed.

Firstly, he quotes data from HMRC showing that ‘recently arrived’ immigrants paid £2.5b more in taxes in 2013-1014 than they received in tax credits and benefits. Presumably this surplus in tax revenue over expenditure from immigrants has been going on for some time – and is likely to continue. David Smith says ‘Part of this money has been used to cut the budget deficit. But it is also as available as anybody else’s taxes to pay for public services‘.

Well, wash your mouth out. He’s not seriously suggesting that, if we have a load of new immigrants increasing pressure on our housing and public services (NHS and education especially), we should be spending tax-payers’ money to boost spending on housing and public services, is he? I do believe he might be… Though it is almost as a throwaway, as if he doesn’t want people to notice he was kind-of suggesting it.

Which brings me to his second excellent point.  He looks at the alleged ‘job transfer machine’ – the allegation that all these immigrants are taking the jobs of stout British workers. David Smith points out that the number of UK-born workers in employment (I think he’s quoting ONS, but I can’t be sure) has increased by 1.1m to 26.25m since the low of Jan-March 2010. A record apparently. And, not only that, but in the 6 years to the end of first-quarter 2016 there was an increase from 70.7% to 74.6% in the UK-born employment rate. Just wow, eh? Still believe they are taking our jobs? Unemployment has been going down (fact) since all these immigrants have been ‘swamping’ in from the EU.

So, clearly, these new immigrants are taking jobs and starting businesses which truly needed to be filled and needed to be started. They are contributing in spades to the growth of the UK economy (our growth, while lacklustre, due to – ahem – austerity, has been better than that of most developed economies) and recent immigrants, as well as boosting growth, are, as we saw, substantial net contributors to our tax revenue.

So – that all being the case, we really should stop moaning about the immigrant pressure on resources and bloody, bloody (bloody) well spend the money, even if he have to borrow some, on training more doctors, other education-resources, housing, health-resources and social services that our increased population now requires. Surely that’s not difficult to see – unless of course one is determined to cut public expenditure, no matter what, as a matter of religious belief…

I’m not sure if David Smith would agree, but he does seem to sort-of agree. Doesn’t he?

And, while we are on the subject of Brexit – here is some really great stuff from ‘Rick’ at flipchartfairytales. He has done his homework…

 

 

 


Taming Government Debt via Austerity – Ignorance and Conspiracy

A very great deal has been written by economists and others recently about the wisdom of the UK government’s plunge into austerity mode in 2010. The consensus among economists, by far the most common view, is that during a recession, and especially when a country is sovereign in relation to its own currency (ie – it is not tied to gold, or the euro) a policy of government fiscal austerity is contractionary: it reduces GDP in the short-term, tending to prolong the recession.

One might be forgiven, however, having listened to the political and ‘corporate’ class, for believing otherwise. Why politicians and why many business people would wish to promote the opposite view can be argued. Certainly, text-book academic macroeconomics does not support this view. And what little published academic work there is which has been used to support the ‘austerian’ view has been discredited again and again. The reasoning of the ‘austerian’ politicians and business people seems therefore to be based either on ignorance (eg a belief that a whole economy must work like that of a firm or household) or else is based on the ideological view that ‘the state must be shrunk’ and any excuse for shrinking the state is good enough. The text-book macroeconomic academic consensus says that in a recession and when government debt is higher than it ‘should’ be, a sovereign government, like the UK’s, should definitely have a ‘credible’ proposal for getting the debt down in the medium to long term – but not aim to do so in the short term: because of the damage such a policy would cause and its hysteresis effect. One of many very recent blog posts covering this issue by a respected UK economist – Simon Wren-Lewis – is here.

In this post Simon Wren-Lewis politely and cogently argues with one of the few contrarian economists – Ken Rogoff – and takes him to task for forgetting the fact that the UK has its own currency and can thus ignore the risk of ‘market panic’ caused by high debt because it has the means to deal effectively with such a panic.

But more significantly a paper was recently published by the IMF which looks at how, and under what circumstances, government debt may be reduced by means of a policy of fiscal contraction. Basically, it shows that only 26% of fiscal consolidation efforts (defined as a large adjustment in fiscal balances ignoring interest rate payments) were successful when growth is below a country’s historical average. In contrast, when growth is above average, the success rate increases to 41%. I, personally, would not have said that even a 41% success rate was good – but that is another issue. Essentially, the paper says that in the relatively few instances where fiscal contraction worked when growth was below a country’s long term average a few very special conditions existed: a critical one of these conditions was ‘a lift from a depreciating exchange rate and solid export growth—channels that are largely blocked for many countries in the current environment of near-zero central bank interest rates and slow global trade’. The UK has certainly had a depreciating exchange rate – but there has been no ‘solid export growth’, nor could there have been, for pretty obvious reasons.

The fact that we now seem to be very slowly coming out of our recession in the UK is quite irrelevant. The point is that we still have a poor export performance, productivity is one of the lowest of the developed countries, and business investment has still not taken off. Indeed latest ONS data shows that UK business investment was 8.5% lower in the third quarter of this year than in the second quarter. No wonder productivity is low. But even if things were better than that, it would certainly not prove that the government’s policy has been successful. Eventually most recessions do end, no matter how badly managed – so the fact that it may have ended (or may not… if we are having a ‘dead cat bounce’) means nothing: the point is, it has been unnecessarily prolonged by ignorant mismanagement or, worse, a conspiracy to ‘shrink the state’. Being a lifelong believer in the cockup theory of history I do not use the word ‘conspiracy’ lightly.

No ideology in an advanced country should have been sneakily allowed to cause the misery of declining incomes (for the majority, natch), unemployment, under-employment and the cuts in social welfare for the least privileged that this one has. It will have long term effects which are very nasty – the polite term for this being hysteresis.

Edit 18 Nov 2013: Mr Carney says ‘glass half full’ – but with no increase of GDP *per capita* since 2010, still declining business investment and still no export growth, despite a heavily depreciated pound – this does not look like any kind of sustainable recovery to me… Just ordinary people digging into their savings and borrowing more. The game will be well up before the next election I think


The IMF Post Strauss-Kahn

Is this a straw in the wind? No sooner has DSK left the IMF, than the IMF (Article IV Consultation) praises the UK Government’s austerity measures, and says if they cause a further downturn, the UK Government should lower taxes. What next? Praise for Ireland’s austerity measures? A suggestion the Bank of England should raise interest rates to ward off inflation? Oh dear – IMF reverting to type, I guess.