Straight Talk about Quantitative Easing in the Face of Fiscal Austerity

Gerald Epstein

In Tokyo, during the recent IMF Annual Meetings, Federal Reserve Chair Ben Bernanke defended the Fed’s expansionary monetary policy – so-called QE1, 2, and 3 – against its critics. And critics there are – truckloads of them – from left, right and center. Some US right wing critics like Rick Perry, Governor of Texas and ex-presidential aspirant, threatened to “treat” Ben “pretty ugly,” in order to head-off at the pass any macroeconomic policy that could promote economic growth and jeopardize Republican victories in the election. This is all part of the Republican “political business cycle” strategy – strictly in reverse, of course. Others, like Ron Paul and his supporters, are conveniently delusional – seeing inflation lurking behind every sign-post of stagnation.

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Is the IMF going through a paradigm shift in fiscal policy?

Cornel Ban

The Great Recession and especially the European crisis saved the IMF from its growing pre-crisis marginality. Yet things have been more awkward for the pride of its economists. Against a gloomy economic background, they bit the bullet in the Fund’s recent World Economic Outlook (WEO) report[1] and openly admitted that they have been wrong about some essential virtues of austerity. Three findings stood out: the size of the fiscal multipliers used for growth projections have been woefully underestimated, countries that engaged in more austerity had less growth than countries that did not and austerity failed to reduce public debt within a reasonable time span. Staff research that strays from the Fund’s policy line is tolerated but seldom makes it into the press conferences of the managing director. This time, however, it did. Christine Lagarde publicly upheld the self-criticism and demanded a recalibration of fiscal consolidation.

Prior to the crisis, in some quarters of the economic profession the research on multipliers settled around the consensus that fiscal multipliers should be around or slightly above 1.[2] During the recession, more papers found that fiscal multipliers are in fact even larger because of monetary policy stuck in the zero lower bound and the occurrence of a deep recession.[3] However, the chorus of voices demanding fiscal consolidation grew, silencing these insights.[4] The IMF lent legitimacy to this chorus when its staff used forecasting models using multipliers of 0.5 to measure the impacts of fiscal consolidation on growth prospects. That means that each 1 euro of cuts and tax increases shaves 50 cents off GDP growth.

In contrast, the October 2012 WEO found that in fact they ranged between .9 to 1.7 (the Eurozone periphery is closer to the higher end of the range), an error that explained the IMF’s extremely optimistic growth projections for countries who frontloaded fiscal consolidation.  Assuming the multiplier was 1.5, a fiscal adjustment of 3 percent of GDP-as much as Spain has to do next year- would lead to a GDP contraction of 4.5 percent. It was momentous finding and those who had been skeptical of the virtues of austerity felt vindicated.[5]

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Is South-South economic interaction any better for poor countries?

Jayati Ghosh

It used to be believed that that economic interaction between developing countries (South-South integration) would necessarily be more beneficial than North-South links. The latter were seen as reproducing the global division of labour that emerged by the mid 20thcentury, whereby much of the developing world essentially specialized in primary commodities and labour-intensive (and therefore lower productivity) manufactured goods, while the North kept the monopoly of high value added production. By contrast, trade and investment links between countries in the Global South were supposed to allow for more diversification because of their more similar stages of development, thus creating more synergies.

In the past decade, these perceptions have changed drastically. First, the emergence of East Asian countries (especially China) as giant manufacturing hubs has been driven to a significant extent by North-South trade and investment. Second, the relations between China, India, Brazil and other “emerging” countries with less developed countries has not always followed the predicted lines.

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New UN Hunger Numbers No Reason For Complacency

Jennifer Clapp

It turns out that the number of hungry people on the planet was not as high as the Food and Agriculture Organization of the United Nations originally thought it was. We were told in 2009 that the number of hungry people had surpassed 1 billion. But last week, the organization revised its numbers downward.

Armed with new and more accurate data and assessment methods, the new figures, published in the new State of Food Insecurity in the World report, show a slow decline in world hunger from around 1 billion hungry people in 1990-91 to around 867 million in 2007-09. And in 2010-12, the number inched a bit higher to 868 million. In other words, the food crisis of 2007-09 halted progress in fighting world hunger. The numbers also show that the vast majority of the people facing hunger live in developing countries.

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Triple Crisis Roundup: Walmart on strike

Eli Epstein-Deutsch, Assistant Editor

The giant retail chain Walmart, long the bete noir of labor activists, has been cited frequently not merely for discouraging unionization, but for systematically quashing it. Managers are given handbooks for union-prevention, anti-union presentations are often mandatory for employees, and reports of illegal firings for union activity are endemic though poorly prosecuted. Union busting coexists with other forms of workplace repression at Walmart, including public shaming, denial of breaks, sexual discrimination, and their notorious night lock-ins. Because Walmart is a vertically-integrated near-monopsony, its practices affect every component of the distribution chain, and allow it to undercut other wholesalers. Indeed Walmart’s strikingly effective anti-labor ethos is integral to its business model. It never faced a major action or strike on the part of its “associates”—until now.

It began not with Walmart’s ever-visible retail outlets, but with warehouse workers in California’s Inland Empire. They walked off the job despite a non-union status that could subject them to dismissal, in order to protest what they said were dangerous working conditions and a climate of retaliation against anyone who complained. Recently, at least some workers in 28 stores across 12 states walked off the job in solidarity, and organizers have threatened a nationwide strike on Black Friday unless management meets demands to stop punitive anti-union measures. These first sparks of resistance inside a historically implacable corporation, which accounts for roughly 2.3% of US GDP, may signal a spirit of renewal within American labor after decades of decline.

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US corn ethanol fuels food crisis in developing countries

The US ethanol programme pushed up corn prices by up to 21 per cent as it expanded to consume 40 per cent of the harvest.

Timothy Wise

Tomorrow, on Global Food Day, key G20 ministers meet in Rome to assess the food-security impacts of the third food price spike in the last five years. Timothy A. Wise argues in this Al Jazeera article – and in the new report “Fueling the Food Crisis” – that Northern biofuels policies must stop putting upward pressure on food prices by diverting food and land into biofuel production.

Record drought in the US farm belt this summer withered corn fields and parched hopes for a record US corn harvest, but US farmers may not be the ones most severely affected by the disaster. Most have insurance against crop failure. Not so the world’s import-dependent developing countries, nor their poorest consumers. They are hurting.

This is the third food price spike in the last five years, and this time the finger is being pointed squarely at biofuels. More specifically, the loss of a quarter or more of the projected US corn harvest has prompted urgent calls for reform in that country’s corn ethanol programme.

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How to Boost the Credibility of the International Monetary Fund

Robert H. Wade and Jakob Vestergaard, Guest Bloggers

The International Monetary Fund staff and delegates gathered in Tokyo for the Annual Meetings of the Fund and the World Bank have the Eurozone crisis as their biggest headache. But they also have to decide how to proceed with another equally obstinate issue that is even more important for the future of the Fund: the organization’s governance model. In April 2012 Brazil, China, India, Russia and South Africa (BRICS) agreed to commit another $75 bn of extra resources for the Fund, via a channel which did not increase their share of the votes. But in return they made it clear that they want substantial changes in Fund governance, including a larger share of votes on the executive board.

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Public-Private Prank

Sunita Narain

Growth is back on the agenda, says the Indian government. It is hoping that with pushy announcements foreign and Indian investment will miraculously start pouring in and infrastructure will be the name of the game once again. But this assumption ignores one crucial detail: currently, public-private partnerships (PPPs) in infrastructure are on the cusp of disaster. The country needs a different strategy to build public services infrastructure.

This is because in India, which has a large population of poor and relatively poor middle-class, public infrastructure has to be affordable to build and to run. But since we do not think about the nature of the asset we need to build, we make standard, capital-intensive infrastructure plans in the hope that someone will cough up funds to build. This then justifies the need for private investment. But in reality little private money comes. Worse, the private player is unable to run the public asset—be it water supply, public transport or a swanky airport—without substantial recurring funds. So the private sector’s interest is to make profit by building the infrastructure and then stay clear of the responsibility of making the system work. In this way PPP stands for public investment and private profit.

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Mexico: Always Promising

Kevin P. Gallagher

For more than a quarter century now, most emerging market and developing nations have been integrating themselves with the world economy. Some of these globalizers have done fairly well in terms of per capita income, but not Mexico. All of a sudden, Mexico is seen as one of the most promising destinations for emerging market trade and investment. Has Mexico learned the lessons of the past or will this spurt of attention be squandered like so many times in the recent past?

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