What We’re Writing
Fei Yuan and Kevin P. Gallagher, Repositioning Chinese Development Finance in Latin America: Opportunities for Green Finance.
Jomo Kwame Sundaram, Poverty Cut by Growth Despite Policy Failure.
What We’re Reading
Prabhat Patnaik, Globalization and the World’s Working People.
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President Dilma Rousseff was finally toppled down today. Yes, it’s a coup, different in nature to the previous ones (last in Brazil was in 1964), but with the same consequences. I have discussed the nature of the process here, here, here, and here (this last more on the economy, from last year) before. It is a coup that has received discrete support from the US government, by the way, as much as the elected neoliberal government of Macri in Argentina (Obama visited the latter, a government that basically tries to vindicate the last and genocidal dictatorship in Argentina).
A good summary of the mess is available here. Important things to remember: she is NOT implicated in corruption (contrary to Fernando Collor that was impeached in 1992, so that was NOT a coup), and even if one has qualms about the fiscal transfers (“pedaladas”) that are the formal cause for the impeachment (and one shouldn’t really, since these are not crimes of responsibility, or crimes at all), it’s not even clear that she violated the rules by which she was overthrown. Note that the worse that can actually be said, and it was repeated ad nauseam by the opposition, is that she lied during the campaign. And she did. She promised a government against bankers and for the people, with expansion of social expenditures, and did a u-turn, and delivered the neoliberal policies that the opposition was requesting.
What comes next is more of the same neoliberal policies that are spreading throughout the continent, support for free trade, privatization, including cuts to social security, lower real wages, fiscal adjustment, and more unemployment. The economic collapse of the last year and half is far from over.
Originally published at Naked Keynesianism.
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Philip Arestis and Malcolm Sawyer
Fiscal policy has not been taken seriously by policymakers since the Great Financial Crisis (GFC) of 2007-2008, with some exceptions over the period 2009-2010, notably after the G20 meeting in London (April 2009). The GFC prompted significant government and central bank interventions, both to restore confidence in the financial system and to contain the impact of the crisis on the real economy. Monetary and fiscal policy responses became very accommodative in many countries. Central banks responded by flooding the financial markets with liquidity, while fiscal authorities attempted to deal with the decline in the solvency of the banking sector. Those policies before 2010 had helped to avoid a complete collapse of the financial system and the real economy after the emergence of the GFC. Subsequently “unorthodox” monetary policies have been implemented, which have not been successful in terms of producing and maintaining healthy growth in the economy. Fiscal policy has increasingly been concerned with “balancing the budget” and “expansionary austerity” rather than being genuinely expansionary.
There are several reasons for such a change in terms of fiscal austerity going out of fashion. An important one being the failure of the austerity policies to bring about significant recovery despite the claims made for “expansionary fiscal consolidation.”
Jomo Kwame Sundaram
According to the World Bank, the MDG target of halving the share of the poor was achieved by 2008, well in advance of 2015, the target year. However, increased unemployment and lower incomes in recent times remind us that poverty is not an unchanging attribute of a shrinking group, but rather, a condition that billions of vulnerable persons risk experiencing.
Despite the various shortcomings of money measures of poverty, they nevertheless reflect the extent of vulnerability. For example, the estimated number of poor globally in 2012 more than doubles from 902 million to 2.1 billion when one raises the poverty line by 63% from $1.90/day to $3.10/day per person, suggesting that a very large number of those not deemed poor by the World Bank are very vulnerable to external economic shocks or changes in personal circumstances, such as income losses or food price increases.
Of the world’s poor, three-quarters live in rural areas where agricultural wage workers suffer the highest incidence of poverty, largely because of low productivity, seasonal unemployment and low wages paid by most rural employers. Vulnerability and economic insecurity have increased in recent decades with rising insecure, casual and precarious jobs involving part-time employment, self-employment, fixed-term work, temporary work, on-call work and home-working – often mainly involving women.
Such trends have grown with labour market liberalization, globalization, and declining union power. To make matters worse, macroeconomic policies in recent decades have focused on low inflation, rather than full employment, while limited social protection has exacerbated economic insecurity and vulnerability.
Additionally, lower economic growth rates, following the global financial crisis, would push 46 million more people into extreme poverty than expected before the crisis. This figure was later revised to 64 million, implying over 200 million people fell into extreme poverty due to food-fuel price hikes and the global financial crisis.
While some of these figures were subsequently revised downward, they suggest widespread vulnerability and economic insecurity, due to the inability of governments to respond with adequate counter-cyclical policies and in the absence of comprehensive universal social protection measures. During the East Asian financial crisis of 1997-1998, the official poverty rate in Indonesia shot up from 11% to 37% in just one year following the massive depreciation of the Indonesian rupiah.
Robert Pollin is professor of economics at the University of Massachusetts Amherst and co-director of the Political Economy Research Institute (PERI).
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Gerald Epstein and Juan Antonio Montecino
Gerald Epstein is a professor of economics and Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. Juan Antonio Montecino is a doctoral student in economics at the University of Massachusetts Amherst. This is an excerpt from a report Epstein and Montecino wrote for the Roosevelt Institute. The full report is available here.
A healthy financial system is one that channels finance to productive investment, helps families save for and finance big expenses such as higher education and retirement, provides products such as insurance to help reduce risk, creates sufficient amounts of useful liquidity, runs an efficient payments mechanism, and generates financial innovations to do all these useful things more cheaply and effectively. All of these functions are crucial to a stable and productive market economy. But after decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly at performing these critical tasks.
What has this flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities? In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from more productive activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.
First, we estimate the rents obtained by the financial sector. Through a variety of mechanisms including anticompetitive practices, the marketing of excessively complex and risky products, government subsidies such as financial bailouts, and even fraudulent activities, bankers receive excess pay and profits for the services they provide to customers. By overcharging for products and services, financial firms grab a bigger slice of the economic pie at the expense of their customers and taxpayers. We estimate that the total cost of financial rents amounted to $3.6 trillion–$4.2 trillion between 1990 and 2005.
Second are misallocation costs. Speculative finance does not just grab a bigger slice of the pie; its structure and activities are often destructive, meaning it also shrinks the size of the economic pie by reducing growth. This is most obvious in the case of the financial crisis, but speculative finance harms the economy on a daily basis. It does this by growing too large, utilizing too many skilled and productive workers, imposing short-term orientations on businesses, and starving some businesses and households of needed credit. We estimate that the cost of misallocating human and financial resources amounted to $2.6 trillion–$3.9 trillion between 1990 and 2005.
Adding rent and misallocation costs, we show that, even without taking into account the financial crisis, the financial system cost between $6.3 trillion and $8.2 trillion more than the benefits it provided during the period 1990–2005.
On top of this is the massive cost of the financial crisis itself, which most analysts agree was largely associated with the practices of speculative finance. If we add conservative Federal Reserve estimates of the cost of the crisis in terms of lost output ($6.5 trillion–$14.5 trillion), it brings the total amount of “overcharging” to somewhere between $12.9 trillion and $22.7 trillion. This amount represents between $40,000 and $70,000 for every man, woman, and child in the U.S., or between $105,000 and $184,000 for the typical American family. Without this loss, the typical American household would have doubled its wealth at retirement.
These excess costs of finance can be reduced and the financial sector can once again play a more productive role in society. To accomplish this, we need three complementary approaches: improved financial regulation, building on what Dodd-Frank has already accomplished; a restructuring of the financial system to better serve the needs of our communities, small businesses, households, and public entities; and public financial alternatives, such as cooperative banks and specialized public financial institutions , to level the playing field.
Alejandro Reuss is co-editor of Triple Crisis blog and Dollars & Sense magazine. He is a historian and economist. This is the second part of a two-part series. Part 1 is available here. His article “An Historical Perspective on Brexit: Capitalist Internationalism, Reactionary Nationalism, and Socialist Internationalism” is available here.
Not United Enough?
If one could argue that the eurozone was “too united,” in regard to monetary union, one could equally argue that it was not united enough, in terms of the lack of fiscal union. In a federal political structure, fiscal union means that households and firms in the member states pay their taxes (at least in part) into a common federal treasury, and expenditures are paid out from this treasury back to people across the member states. This is not an exotic idea: The United States is a fiscal union in precisely this sense.
During a business-cycle downturn, a standard “Keynesian” policy response is to increase government spending or reduce taxes (or both)—to boost demand, output, and employment. Governments may push through new spending and tax legislation (fiscal “stimulus” programs) for this purpose—as, indeed, the U.S. government did during the Great Recession. However, some existing government programs result in increased government spending and reduced tax collection during downturns without any need for deliberate policy changes. These are known as “automatic stabilizers.” As an economy goes into a downturn, some people lose their jobs. Some see their hours cut. This reduces their incomes—but since many taxes are dependent on incomes, tax collections are reduced automatically. This helps to blunt the impact of the downturn. (As a thought experiment, to see how things would be if this were not the case, imagine that incomes were falling but each person or household still had to pay a fixed monthly tax bill.) There are automatic stabilizers on the revenue side as well. Government expenditures on unemployment insurance, for example, rise as people start losing their jobs. So, too, do public expenditures on pensions (like Social Security in the United States), as some employers downsize by enticing older workers to take “early retirement.” These expenditures, too, slow the fall in demand, compared to what it would be otherwise.
C.P. Chandrasekhar and Jayati Ghosh
Across the world there is much gloom and doom about the impact of technological changes on jobs, as automation and other innovations are seen to threaten not just blue-collar jobs but also many forms of office work. It is true that the way that most of our economies are organised at present, heavily reliant on market mechanisms with less and less public intervention to alleviate the adverse effects, there could well be an increase in technology- driven unemployment.
But even so, some of the extreme pessimism may be misplaced because of the possible emergence of other forms of employment that are more based on human interaction. Particularly, some essential services that enhance the quality of life – which are often broadly clubbed into the composite term “the care economy” – are unlikely to be either as efficient or as socially useful if the element of human interaction is reduced.
Many care services necessarily require face to face relationships, and even if technologies can assist in these and make them more productive, the human element cannot be eliminated. Indeed, better quality care (whether in paid or unpaid forms) typically requires more intensive human input, so standard approaches based on puerile notions of labour productivity are simply irrelevant in such activities.
This in turn means that the care economy broadly defined will continue to be an important source of employment generation in the foreseeable future, and is likely to expand at a faster rate than many other economic activities. This is especially so in the many countries – certainly across the developing world – where care services are currently hugely underprovided by society and therefore forced to be delivered (often in extremely difficult
and haphazard ways) by unpaid family labour.
Anis Chowdhury and Jomo Kwame Sundaram
The debt crisis in Europe continues to drag on. Drastic measures to cut government debts and deficits, including by replacing democratically elected governments with ‘technocrats’, have only made things worse. The more recent drastic expenditure cuts in Europe to quickly reduce public finance deficits have not only adversely impacted the lives of millions as unemployment soared. The actions also seem to have killed the goose that lay the golden egg of economic growth, resulting in a ‘low growth’ debt trap.
Government debt in the Euro zone reached nearly 92 per cent of GDP at the end of 2014, the highest level since the single currency was introduced in 1999. It dropped marginally to 90.7 per cent at the end of 2015, but is still about 50 per cent higher than the maximum allowed level of 60 per cent set by the Stability and Growth Pact rules designed to make sure EU members “pursue sound public finances and coordinate their fiscal policies”. The debt-GDP ratio was 66 per cent in 2007 before the crisis.
High debt is, of course, of concern. But as the experiences of the Euro zone countries clearly demonstrate, countries cannot come out of debt through drastic cuts in spending, especially when the global economic growth remains tepid, and there is no scope for the rapid rise of export demand. Instead, drastic public expenditure cuts are jeopardizing growth, creating a vicious circle of low growth-high debt, as noted by the IMF in its October 2015 World Economic Outlook.
Alejandro Reuss
Alejandro Reuss is co-editor of Triple Crisis blog and Dollars & Sense magazine. He is a historian and economist. This is the first part of a two-part series. His article “An Historical Perspective on Brexit: Capitalist Internationalism, Reactionary Nationalism, and Socialist Internationalism” is available here.
In 2007–8, after the real estate bubble burst, the entire U.S. economy plunged into a deep recession, the worst since the 1930s. But the downturn hit some parts of the country harder than others. Overall, real gross domestic product shrank by just over 4% between the pre-recession peak and the trough. Meanwhile, Florida, for example, saw its state GDP decline by over 11%—so, more than 2½ times as much. The official unemployment rate for the United States as a whole more than doubled from a pre-recession low of 4.4% (May 2007) to a peak of 10.0% (October 2009). In Florida, it more than tripled, from 3.1% (March–April 2006) to 11.2% (November 2009–January 2010). Florida’s state and local tax revenues declined from nearly $37.5 billion in fiscal year 2006 to about $28.8 billion in fiscal year 2010.
Do you remember, then, how officials from Florida had to engage in protracted negotiations with the federal government—the Department of the Treasury, the Federal Reserve, etc.—to get federal assistance in dealing with the crisis? Do you remember the recriminations from the governors and legislators of other, less severely affected states, decrying Floridians for their profligate spending and lazy work habits? Federal authorities’ insistence on state tax hikes and deep spending cuts, as Florida’s just penance for a crisis of its own making? The mass marches in the streets of Miami, Tampa, and Tallahassee as Floridians resisted this painful austerity?
Me neither.