The 10 Worst Economic Ideas of 2011

Jeff Madrick

I was at an Occupy Wall Street demonstration this weekend and many clergy addressed the group. One nun told the crowd it was Christmas season and that it was time for something new to be born in America.

It was a nice thought, and I hope that the “something new” is good sense, because it has been a year in which some of the worst economic ideas ever have gained support and are being applied around the world. So here’s my list of the 10 worst economic ideas of 2011:

1. Taxes should be more regressive.

At the top of the list for sheer scandalous insensitivity are Herman Cain’s and New Gingrich’s tax plans for America. Cain and Gingrich are both flat tax advocates. Cain proposes “9-9-9” — a 9 percent sales tax, 9 percent income tax, and 9 percent corporate tax. He would also eliminate most deductions. Would this raise more or less money? The romantic conservatives claim the lower income tax rate would mean more growth. Never mind that the evidence to support that claim has been found profoundly lacking time and again.

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Capital controls offer growth from more stable world

Kevin P. Gallagher

Gillian Tett (“Fears of worse to come fuel debate over capital controls”, December 16) highlights the new and important Bank of England paper on capital flows and financial crises that argues how cross-border capital flows continue to plague the world economy and will continue to do so in alarming ways to 2050. The Bank rightly argues for cross-border regulation and co-ordination on capital flows – traditionally referred to as capital controls.

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What Goes Around, Comes Around: the eurozone crisis, the BRICS and the IMF

Ilene Grabel

From 1980s through the early 2000s developing countries faced repeated demands to get their financial houses in order as a condition of financial assistance from the international financial institutions (IFIs) and the world’s leading economies. The Washington Consensus codified the standard conditionality. It tied financial rescue on all manner of draconian policies that were designed to ensure that developing country governments could meet obligations to their international creditors. In pursuit of solvency, few public sector expenditures were exempt from the neoliberal axe. Social welfare spending was slashed, taxes on all but the wealthy and large firms were raised, markets were liberalized, enterprises were sold off to the presumably more efficient private sector (though often the “private sector” were domestic elites with privileged access to the assets at bargain prices), and barriers to international trade and financial flows were rescinded. All of this was done with the expressed goal (among others) of demonstrating worthiness for continued lending by IFIs.

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Miracles for Christmas

Jeff Madrick

It’s the Christmas season, so why not indulge ourselves? Let’s ask for a few miracles. In fact, we in America have had a miracle and everyone has noticed it, Occupy Wall Street. There was another even bigger one in the Mideast. Not only an Arab spring in Egypt and Libya, but peaceful voting in Tunisa. There may even be a Slovak spring.

So here is my wish list for miracles—ASAP. More or less in order of importance.

  • Self-awareness in Germany

I wish that Germans would realize their economic dominance is dependent on their indebted neighbors. An economic model that emphasize net exports as a major source of growth is, internationally, a debt led model. It will require buyers of those exports to borrow. Imbalances in the eurozone are not sustainable.

It gets worse. Germany also believes it has the moral right to demand that others suppress wages and government borrowing, ensuring slow growth among their European partners. So I also wish Germany a modicum of rationality in their public discourse. Even right wing columnists recognize that if Germany were on its own due to a break up of the eurozone, the value of the Deutsche Mark would have been driven up, undermining its export advantage. Now Germany is imposing recession in Europe. The flight to German debt, which is keeping their interest rates low, may soon end.

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Eurozone crisis shows that regulations on cross-border finance are urgently needed

Peter Chowla, guest blogger

The storm brewing in Europe makes it all the more important that all countries prepare themselves for dangerous economic shocks. For developing countries, as we learned in 2008, shocks are transmitted through multiple channels, a key one of which is capital flows.

The exit of some countries from the euro, or even its break-up, is now a high probability. There are two big implications: capital flight within the EU and the risk aversion by global investors. Imagine the accelerated flight from Greek banks towards German ones if Greece no longer participates in the euro project. The most recent example would be the Icelandic banking collapse of 2008, at which the Icelandic authorities resorted to strong foreign exchange and capital outflow controls, controls that were even endorsed by the IMF. However, as the report explains, within the EU there are deeply entrenched policy hurdles, not least of which is the Lisbon Treaty, which would prevent the Greek authorities from trying to stem a run on their banks in the same way the Icelandic authorities did.

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The EU Fiscal Compact

Philip Arestis and Malcolm Sawyer, guest bloggers

The European Leaders agreed in principle at their meeting in Brussels on the 8th/9th of December 2011 to adopt tougher sanctions on the euro area countries that break the ‘new’ rules of what used to be the Stability and Growth Pact (SGP), what is now called the ‘fiscal compact’ (FC). The FC requires that tax and spending plans be checked by European officials before national governments intervene. There will be automatic actions against those countries that are deemed to have budget deficits that are too large. In effect the new agreement tightens the rules of the old SGP, but with no apparent improvement, as the FC retains the principles of the previous SGP but with the one addition that breaking the deficit rules may actually be punished in some way.

The limits of the fiscal compact (as in the SGP) are in effect to balance overall budget over the cycle and limit the national budget deficit in any year to a maximum of 3 per cent of GDP. Under the fiscal compact the 3 per cent limit is retained, and the balanced overall budget is formulated as ‘structural budget’ to not exceed 0.5 per cent of GDP, and this is to be written into national constitutions or equivalent. In place of the previous threat of a 0.2 per cent of GDP ‘fine’ for exceeding the 3 per cent limit (though never implemented even though there were 40 cases where the 3 per cent limit was breached), there will be automatic consequences, including possible sanctions, unless a qualified majority of euro area countries is opposed.

It is readily apparent that the ’fiscal compact’ does nothing to address the perceived problems of national governments with large budget deficits, which cannot be funded through capital markets, except insofar as it somehow changes the European Central Bank’s attitudes to directly or indirectly funding those deficits. More seriously it does nothing to address the major problem of the Economic and Monetary Union, namely the large current account imbalances – ranging from a surplus of 7 per cent in the case of Germany to deficit of 10 per cent in the case of Greece (figures for 2010).

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Why Only Germany Can Fix the Euro

Mark Blyth and Matthias Matthijs

“Never did a ship founder with a captain and a crew more ignorant of the reasons for its misfortune or more impotent to do anything about it.” This was Eric Hobsbawm’s damning judgment of the policy elite’s response to the Great Depression. As these leaders reached for the old truisms of balancing budgets, lowering tariffs, and restoring the gold standard, they merely worsened the crisis. The same judgment may soon be passed on Germany for its role in the ongoing European sovereign debt saga.

After watching the economies of Greece, Ireland, and Portugal founder, the world has now turned its attention to Italy, home to the world’s eighth-largest national economy and third-largest sovereign bond market. The diagnosis is sadly redolent: Europe should deflate its way to growth by sticking with a gold standard of sorts: the hard-money German-dominated euro. Meanwhile, under enormous international pressure, the Greeks replaced socialist Prime Minister George Papandreou with Lucas Papademos, a former official of the European Central Bank, and the Italians placed economist and former European Commissioner Mario Monti, hailed “super Mario,” in the stead of Silvio Berlusconi. Yet despite the EU’s coup d’état, the yield on ten year Italian debt went back above seven percent within twenty-four hours of Monti showing up for work.

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Growth bonds a win-win for troubled eurozone

Stephany Griffith-Jones, Robert Akerlof and Marcus Miller

The eurozone is in serious trouble. Panic has grown as creditors search desperately for a safe haven, and corrosive contagion risks spreading unchecked. Rating agencies act pro-cyclically as usual, helping to deepen the crisis.

The outline of a deal by the 17 eurozone governments to be agreed this week is emerging. It would include fiscal commitments and a European Stability Mechanism; and the new agreement would not imply future debt reduction. This could be a basis for stopping the crisis.

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