ECB: The Ultimate Enforcer of the European Neoliberal Project?

C. J. Polychroniou | January 28, 2015

If one were asked to describe the formal economic and political processes that have shaped the condition of the eurozone since the eruption of the euro crisis in late 2009 in a terse and peremptory way, he or she might boldly and truly say this: “German Chancellor Angela Merkel’s policies spearhead the unraveling of the European project while European Central Bank (ECB) President Mario Draghi seeks to keep the (neoliberal) game going.”

Indeed, there is little doubt that Germany’s neo-mercantilism is the driving force leading a sizable segment of the eurozone’s economy on the path to stagnation and decline, while the ECB has been trying hard to carry out the role of a traditional central bank by fulfilling its duty as a lender of last resort in order to save the euro and preserve the eurozone.

The ECB intervened in the euro crisis in May 2010 by buying up government bonds from Greece (even when a 110 billion euros bailout package had been approved for Greece), Spain, Portugal, and Ireland under its Securities Market Program. By 2011, the ECB was buying up Spanish and Italian bonds by the bucketload in order to force a drop in the bond yields of the two largest peripheral economies of the eurozone. With the end of the crisis in the periphery nowhere in sight, but Mario Draghi having already pledged in July 2012 to do “whatever it takes” to preserve the euro, in early September of that year the ECB introduced a new government bond purchasing program, known as the Outright Monetary Transactions (OTM) program.

Leaving aside the question as to whether or not ECB’s OTM program is legal (Advocate General Pedro Cruz Villalón opined in mid-January 2015 that while “the OTM programme is an unconventional monetary policy measure . . . it is compatible with the TFEU [Treaty on the Functioning of the European Union]”), the condition was that OTM would be attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) macroeconomic adjustment program. In other words, the imposition of austerity, privatization, and market liberalization was a conditionality in the event of the implementation of the OTM program, which raises an important question: Is the ECB seeking to enforce an economic policy measure rather than just a monetary policy measure? continue reading…

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Jobs for Greeks

L. Randall Wray |

With Syriza in the driver’s seat, Greece now has some hope for the end to austerity imposed by Germany and the troika.

Here’s a good short piece in the New York Times by C. J. Polychroniou, a research associate and policy fellow at the Levy Economics Institute. As he explains, what Syriza wants is no more—and no less—radical than what the USA did in the 1930s to deal with its Great Depression: “the bulk of Syriza’s economic program for addressing the catastrophic crisis in Greece, which has evolved into a humanitarian crisis, is inspired by President Franklin D. Roosevelt’s New Deal programs.”

The official press is reacting in horror! Oh the horror of bringing Democracy and Pinko policies into the Officially Neoliberal EMU regime! C.J. continues:

“Interestingly, the task for the implementation of the employment program has been assigned to a colleague of mine at the Levy Institute, Rania Antonopoulos, who has been appointed deputy minister of Labor and Social Solidarity under a Syriza-led government.”

Yes, Senior Scholar Rania Antonopoulos is director of the Gender Equality and the Economy program at the Levy Institute, specializing in macro-micro linkages of gender and economics, international competition, and globalization; job guarantee policies and their macroeconomic and employment impacts; social protection and poverty reduction; and the implications of paid and unpaid work on poverty indicators. She was one of the founders of “Economists for Full Employment” and has been a long-time supporter of the job guarantee.

And so, two Levy scholars have moved into government this month—Rania in Greece and Stephanie Kelton in Washington. What will the world come to?

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What an Interest Payment Moratorium Could Do for Greece

Michael Stephens | January 23, 2015

After a record-setting 23 straight quarters of shrinking GDP, the Greek economy was less awful in 2014, and an economic recovery of sorts might finally be under way. However, the Levy Institute’s latest projections (which are generated using a stock-flow consistent macroeconomic model tailored to Greece) indicate that Greece still faces years of anemic growth if it continues its current policies. Given the severity of the economic wounds inflicted on that country, a recovery led by market forces alone — that is, without any fiscal stimulus — likely means another decade or more before Greece climbs back to its precrisis levels of output and employment.

In their latest report, Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza observe that median income in Greece fell by 30 percent between 2010 and 2013, real GDP is now down to where it was in 2001, and the largest share of the unemployed have been out of work for a year or more. Carrying on with the status quo is no longer tenable — and looks very likely to be overturned in the next election.

Using their stock-flow model for Greece, Papadimitriou, Nikiforos, and Zezza put together projections for three alternative policy scenarios: (1) a “New Deal” program of public investment and direct job creation funded by EU transfers; (2) a suspension of interest payments on debt held by public sector institutions (debt held by the private sector would continue to be serviced), with the amount of the suspended payments redirected to targeted public investments or direct job creation; (3) a combination of (1) and (2). Here’s what those alternative policy routes would do for real GDP growth in the next few years, compared to the baseline (status quo):

Real GDP Greece_Three Scenarios

(A more detailed breakdown of the results can be found below the fold.)

As the authors point out, these ideas aren’t exactly without precedent (as the leaders of one particular country with loud objections should know very well):

These policies are not new. They are identical to those implemented in Germany after Word War II, which included a Marshall Plan loan that was never repaid, the suspension of interest payments on the country’s enormous sovereign debt, and, finally, a significant write-down of public debt.

Read the rest here: “Is Greece Heading for a Recovery?” (pdf)

continue reading…

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Now that the QE Dream Has Come True, What Next?

Jörg Bibow |

The ECB is to be congratulated on finally defying its German masters, who have long kept the euro’s guardian of stability in captivity. For a number of years, Germany’s unholy triangle of power over the land of the euro – Berlin, Frankfurt, Karlsruhe – has enforced a diktat that undermined both the euro economy and democracy, causing a deep socioeconomic crisis, the rise of nationalism, and anti-EU sentiments across the continent. At last, the ECB has liberated itself from the scourge of hyperinflation scaremongering that is the self-serving conviction – and declaration of intellectual bankruptcy – of the Germany political elite. It is fitting that the chance for a revival of democratic values and European solidarity is knocking on Athens’ door this weekend.

In the markets’ perception, Mario Draghi over-delivered yesterday on his famous “whatever-it-takes” promise made at the height of the euro crisis in the summer of 2012. The euro and bond yields are down, stocks are up, party time is here. Things are going according to plan and everyone financial is in high spirits.

The question is what Mario’s QE bazooka will really do beyond the markets – for the real economy, that is. The markets are not worried about that issue at this point. Or perhaps some are thinking ahead like this: if growth stays weak, there will be even more QE coming, so all is good in any case. In case you didn’t follow the Q&A carefully yesterday, there was another important course change – or return to hardcore German dogma – on exhibit in what Mario Draghi had to say. continue reading…

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Looking Beyond the Tax System to Fight Inequality

Michael Stephens | January 22, 2015

In the context of last Tuesday’s State of the Union, Pavlina Tcherneva was interviewed by Wall Street Journal Live‘s Sara Murray on the issue of the effectiveness of policies to combat widening income inequality.

 

In the interview, Tcherneva comments that while some of the progressive taxation policies outlined by the President may be part of the solution, we ought to be focusing more on raising wages at the bottom and middle of the income distribution through the promotion of tight full employment — with direct job creation policies playing a key role. She notes that the President’s proposal to create more infrastructure jobs would help on that front, but that we are still well short of full employment.*

Tcherneva memorably captured the increasing severity of the problem — economic expansions that have left the bottom 90 percent further and further behind — with the chart below. She lays out a brief summary of her alternative, “bottom-up” approach to fiscal policy in this one-pager: “Growth for Whom?

Tcherneva_Distribution of Income Growth_Levy OP 47

*(Note that Tcherneva’s concept of tight full employment would ultimately bring the unemployment rate below what is conventionally understood as “full employment.” With a maximal job guarantee policy, anyone ready and willing to work would have access to a paid job in the public, nonprofit, or social entrepreneurial sectors.)

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It Seems QE Is Finally Coming to Euroland—Will It Matter at All?

Jörg Bibow | January 21, 2015

When French president François Hollande pre-announced the ECB Governing Council’s long-awaited adoption of “quantitative easing” at its meeting tomorrow, German chancellor Angela Merkel was quick to respond by pointing out that this was still the independent ECB’s decision alone. It was good of her to do so. For in recent times one could not help getting the impression that the German political elite had forgotten all about that precious centerpiece of German monetary orthodoxy: that the independence of the central bank was the most important safeguard of solidity in the world.

Against the background of an ill-informed German public and an ideology-stricken German media landscape that excels in nothing more than keeping alive hyperinflation phobia even as the land of the euro is at acute risk of sinking ever deeper into the morass of deflation, Germany’s body politic got carried away with their self-righteous assumption that it was in everyone’s best interest to accept the reality of German hegemony over Euroland in all matters of economic policy, including monetary policy. Yesterday’s Financial Times quoted the former ECB governing council member Athanasios Orphanides on what would appear to be a rather intolerable (since illegal) state of affairs: “It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany, and for the ECB to constrain its actions to what is best for Germany … This is inconsistent with and violates the [EU] treaty.”

So if the ECB finally goes ahead tomorrow with some kind of QE, ignoring German resistance, what will QE actually do for Euroland? continue reading…

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Much Excitement—and Lots of Confusion—about “Helicopter Money” of Late

Jörg Bibow | January 16, 2015

Wolfgang Münchau is one of those rare sensible voices in the international media reporting on the euro crisis. He has been consistently right in his gloomy assessments of euro crisis management in recent years. He is also correct in pointing out that the observed deflationary trend in the eurozone is not primarily due to any recent oil price shock but mainly driven by the chosen deflationary intra-area “rebalancing” path: with German wage-price inflation well below the 2-percent stability norm, everybody else is forced into deflation to restore their competitiveness. (See here: “Beware what you wish for when it comes to ECB measures”)

But Münchau got it pretty wrong in his FT column this week suggesting that so-called helicopter drops of money would constitute monetary policy. Milton Friedman famously used the helicopter analogy in pushing his monetarist mantra, but he forgot to mention that central banks are not in the business of running money-dropping helicopters. Friedman’s story went like this:

“In our hypothetical world in which paper money is the only medium of circulation, consider first a stationary situation in which the quantity of money has been constant for a long time, and so have other conditions. Individual members of the community are subject to enough uncertainty that they find cash balances useful to cope with unanticipated discrepancies between receipts and expenditures. … Under those circumstances, it is clear that the price level is determined by how much money there is—how many pieces of paper of various denominations. If the quantity of money had settled at half the assumed level, every dollar price would be halved; at double the assumed level, every price would be doubled. … Let us suppose, then, that one day a helicopter flies over our hypothetical long- stationary community and drops additional money from the sky equal to the amount already in circulation. … The money will, of course, be hastily collected by members of the community. … If everyone simply decided to hold on to the extra cash, nothing more would happen. … But people do not behave in that way. … It is easy to see what the final position will be. People‘s attempts to spend more than they receive will be frustrated, but in the process these attempts will bid up the nominal value of goods and services. The additional pieces of paper do not alter the basic conditions of the community. They make no additional productive capacity available. … Hence, the final equilibrium will be a nominal income [that has doubled] … with precisely the same flow of real goods and services as before” (Friedman 1969, p. 4).

However, as Keynes acutely observed, a central bank is a “dealer in money and debts.” A central bank issues its monetary liabilities by buying debts and/or making loans. Handing out banknotes or making transfers into deposits to the public for free constitutes not monetary policy, not even unconventional monetary policy, but plain and simple fiscal policy. And who would want unelected central bankers to be in charge of taking such a decision; even if it may well be the right one?

Of course, the eurozone fiscal authorities may in principle agree on a fiscal expansion – if they somehow manage to overcome both the legal hurdles they have set themselves and, probably more important, successfully crawl out of the intellectual hole they have dug for themselves. Similarly, under today’s outright deflationary conditions, it has, at last, become conceivable that even the ECB might embark on a “largish”-scale purchase of government debts purely with its monetary policy mandate of maintaining price stability in view; which is crucial for legal reasons, as Wednesday’s preliminary ruling by the European Court of Justice reminded us.

Fiscal expansion paired with QE may seem equivalent to a helicopter drop. But it is not. continue reading…

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Odds and Sods: Some Good Reads for a Cold Winter Friday

L. Randall Wray | January 15, 2015

If you, too, are living in one of the sub-zero climes right now, you might want some stimulating reading:

1) Here’s one of the best and fairest summaries of MMT that I’ve seen, by Joe Guinan.

As Joe says:

“Few matters of economic importance are as woefully misunderstood as modern money. It can seem a fiendishly complicated subject, even to economists. Schumpeter confessed to never having understood money to his own satisfaction, while Keynes claimed to know of only three people who really grasped it: ‘A Professor at another university; one of my students; and a rather junior clerk at the Bank of England’.”

Reminds me of the time Robert Heilbroner called me up after reading my draft 1998 book, Understanding Modern Money, apologizing because he could not write a blurb for the jacket. Money is, he said, the scariest topic there is, and your book is going to scare the hell out of everybody. And by Jove he was right.

Anyway, Joe goes on to argue that MMT seems to have the theory, description of real world operations, and policy right, but needs some better political economy. I agree. Geoff Ingham has done some pretty spectacular work on that, but we need more.

2) As you probably know, something like 90 percent of Americans do not have passports. Presumably, few have been to any rich, developed country. I’m including the USA in that, since we long ago gave up any pretense at striving toward such.

Well, maybe a few have been to Canada, which almost qualifies.

As a result, Americans live in their own little hermetically sealed bubble. They have no idea how the others live. They probably believe that all of Europe—say—also has to contend with incomprehensible health insurance bills (and declaring bankruptcy because they cannot pay them), outrageously expensive colleges (and bankrupting student debt), crumbling infrastructure (and JFK airport, which would embarrass any developing nation), and heavily armed and unbalanced neighbors (that would scare the bejeebers out of most of Africa’s child armies).

Well, Ann Jones tells us what the rest of the developed world thinks of Americans. I’ve lived in Italy for extended periods, and I can confirm that this is no exaggeration. Yep, they think we are crazy loons.

3) However, the real threat to our national prestige comes not from Europe (which, thanks to the euro, will rapidly bring most of Europe down to our level!) but from China. They are eating us for lunch.

To be sure, this article is woefully confused on finance. It worries that the Chinese governments are undertaking infrastructure projects that will not generate enough revenue to pay for themselves! “’People should be concerned because very few of these big projects generate cash,’ said Victor Shih, a China specialist who teaches political economy at the University of California, San Diego.” Oh, yes, China will run out of RMB. Scarcity of keystrokes.

There are, however, two problems faced by China that have to be resolved. The article picks up on one of them (by far the most difficult): “Many experts say such projects also exact a heavy toll on local communities and the environment, as builders displace people, clear forests, reroute rivers and erect dams.” Agreed.

The other is that the national government does not supply enough funds to local governments, which need the development projects to generate their revenues. That leads to excessive development without regard to communities and the environment. You can see my co-authored solution to that problem here.

The NYT story about taking the tops off mountains is true; I saw it in another beautiful little city in a narrow river canyon—not quite the Grand Canyon, but a rival to the Grand Canyon of the Gunnison. No room to expand. Solution? Level the surrounding mountains. Why? Because the developers pay good prices for the land (which goes to the local government), borrow lots of money to build, and then default on the loans. But don’t worry, the creditors get bailed out. Only the community and the environment suffer.

I do not want to make too much of that because the solution is rather simple. Tricky Dick Nixon actually implemented it, calling it “revenue sharing.” That is a misnomer because all you need is national government keystrokes into local government budgets.

4) The top one-thousandth of Americans now owns a fifth of everything. Isn’t that sweet?

See this article by Scott Bixby. Now, if you think they will be happy with that, you do not understand the way the truly filthy rich think. They want it all.

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Some Quick Takeaways from the ECJ Opinion of Advocate General Cruz Villalón on the ECB’s OMT

Jörg Bibow | January 14, 2015

The Advocate General (AG) has spoken on the ECB’s OMT program today. Apparently the markets were more concerned about the latest U.S. retail sales numbers than delighted about the “okay in principle provided that” signal sent from Luxembourg to the German triangle of euro power (Frankfurt, Berlin, and Karlsruhe).

First of all, in the AG’s view, OMT constitutes monetary policy but not economic policy. That was one of the critical issues. The German Constitutional Court (GCC) had preliminarily concluded that the ECB may be stepping outside the monetary policy domain, for which it enjoys exclusive competence. In its previous judgment on the Pringle case the ECJ found that the ESM constitutes economic policy, which remains primarily a national responsibility in Europe’s Economic and Monetary Union, and does not encroach on the ECB’s territory. On OMT the opposite verdict was reached, based on the following evaluation:

“in order for a measure of the ECB actually to form part of monetary policy, it must specifically serve the primary objective of maintaining price stability and it must also take the form of one of the monetary policy instruments expressly provided for in the Treaties and not be contrary to the requirement for fiscal discipline and the principle that there is no shared financial liability. If there are isolated economic-policy aspects to the measure at issue, the latter will be compatible with the ECB’s mandate only as long as it serves to ‘support’ economic policy measures and is subordinate to the ECB’s overriding objective” (AG 2015, No. 132).

In other words, the AG sides with the ECB’s argument that OMT is about “unblocking” the monetary transmission mechanism, and hence monetary policy, rather than a measure designed to facilitate the funding of certain member states, which would make it economic policy instead. OMT is judged to be an unconventional monetary policy instrument designed to meet the exceptional challenges of the day.

“Despite the efforts of the European Union (‘the Union’) and the Member States, the risk premia for bonds of various euro-area States rose sharply in the summer of 2012. In the face of investors’ doubts about the survival of monetary union, the representatives of the Union and of the States of the euro area repeatedly stressed that the single currency was irreversible. It was at that time that the President of the ECB, in words that were subsequently repeated over and over again, stated that he would, within his mandate, do whatever it took to preserve the euro” (AG 2015, No. 20).

While the objective of “preserving the euro” would seem to go well beyond the supposedly narrow monetary mandate of maintaining price stability, the ECB, in a way, merely promised to back up with money what the political leaders had declared to be their ultimate economic policy objective: the irreversibility of the common currency. This would seem to also make it an incident of ECB “support” of the union’s general economic policy: supportive words on words of support. A less generous observer might be tempted to say that failure on the part of the political authorities to establish sound institutions and policies that would foster area-wide prosperity and the sustainability of the common currency gets temporarily plastered over by the threat of meeting speculative attacks by throwing central bank money at it.

The AG has interesting things to say on market speculation. continue reading…

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Replacing the Budget Constraint with an Inflation Constraint

Michael Stephens | January 13, 2015

by Scott Fullwiler

Tim Worstall has a post decrying the dangers of MMT ever being used in the real world—even as he recognizes or at least suggests that it might be the correct description of how the monetary system works—and is particularly concerned about Stephanie Kelton’s new appointment as Chief Economist on the Senate Budget Committee. (Note: Randy Wray also posted a critique of Mr. Worstall’s post.)

Mr. Worstall’s main issue is one we’ve heard hundreds of times before—because MMT explains that currency-issuing governments operating under flexible exchange rates and without debt in a foreign currency do not actually have budget constraints, this opens the door to all sorts of problems if put into practice. We can’t trust our government with this information, in other words—it must be required to match spending with revenues over some period (whether each year, over the business cycle, etc.) or at least plan over some period of time to not allow the debt ratio to rise beyond a modest level.**

Mr. Worstall notes the frequently heard MMT argument that the point of taxes is to regulate the economy—and takes particular issue with the view that taxes can be increased/decreased in real time. Note, though, that this is simply a metaphorical or simplified explanation—it blends the Chartalist argument that “taxes drive money” with the functional finance view of using the outcomes of the government budget position as the criterion by which to judge it (rather than the state of the budget position itself). It is not intended as a literal point—no MMTer has ever made a specific proposal for raising/lowering income tax rates in real time to manage the economy. (Though Ray Fair does offer a sales tax proposal and shows that it would be stabilizing here—I simulated it along with the Job Guarantee and another transfer payment rule here.)

As argued bazillions of times, the real point MMT is making is that the government’s budget constraint is the wrong constraint—the correct constraint is whether or not a particular budget position will raise inflation beyond an official target rate (say, 2%, which seems to be the choice of most central bankers).

Let me explain to Mr. Worstall and others how this could work rather easily—just as the CBO and OMB now evaluate government budget proposals regarding their effects on the budget stance, the CBO and OMB could instead shift focus on evaluating these proposals against the inflation target (I argued the same thing here, printable version here). Much like how policy makers supposedly take estimates of effects on the budget position rather seriously in making budget conditions, they could replace these with projections of inflationary effects. An inflation constraint provides more fiscal space than a budget constraint, but in no way does it provide unlimited fiscal space (again, as we’ve always argued).

We could add quite a bit of detail here if we want, but I’ll just say a few more things. First, it’s quite clear that economists don’t have much expertise modeling how to use the government’s budget stance to manage the macroeconomy via a functional finance rule—but this is largely because they have come to view monetary policy as the main macroeconomic policy tool, not because it’s not possible.

Note, though, that functional finance isn’t less specific than, say, the Taylor Rule—Taylor’s Rule says to adjust the interest rate to manage the macroeconomy; functional finance says to manage the budget position to do this. Consider the never ending debate among policy makers at the Fed, Fed watchers, and economists on what the Fed should do next, when it should do it, how it should communicate what it’s going to do, and so on. If Taylor’s Rule were really that useful, we wouldn’t need most of this debate and there wouldn’t be so much disagreement among the various parties.

Second, concerns that government policymaking is necessarily less “efficient” than monetary policy are unpersuasive to me (even aside from my view that monetary policy traditionally understood as manipulations of the overnight rate isn’t a good idea). What if some of the thousands of economists currently working on understanding monetary policy started to try and understand how to build automatic stabilizers? They might help us understand which taxes (or tweaks to them, like indexing marginal tax rates to the inflation target rather than inflation) or spending priorities (or tweaks, like indexing spending to the target rate) are most consistent with functional finance—we don’t need to adjust tax rates in real time as much as build in a significant amount of stabilization automatically (i.e., more than we already have). MMT has its own proposal—the Job Guarantee—which we have argued in dozens if not hundreds of publications possesses macroeconomically significant stabilization properties if well designed.

For sure, times like the last several years may call for more than just automatic stabilizers (or it may instead call for better financial regulation to avoid a speculative bubble and then a deep recession in the first place). However, while I am under no illusions that we could ever get totally rid of some of the messy politics of fiscally-driven stabilization, it’s not as if monetary policy even when set by a small group of “experts” (like the FOMC) has been apolitical (and, as noted above, it’s been highly contentious among even the true believers in monetary policy which strategy is/was the appropriate one).

In sum, let’s stop pretending that replacing a budget constraint with an inflation constraint is so hard. It involves a change in perspective, nothing more and nothing less. It doesn’t give license to policy makers to do whatever they want. It does mean CBO will finally be doing something useful with its deficit projections—namely, building models to understand how deficits will affect the macroeconomy (while its current practice is to assume an economy at full employment and warn of impending financial ruin as a result of deficits). Stephanie’s appointment gives reason to hope at least a little that this change might actually one day be possible, for the benefit of all of us (including Mr. Worstall).

**The latter is actually what neoclassical economics argues—contrary to popular understanding, there are no economic theories that require the government to ever balance its budget. What they argue is that the government must eventually keep its debt ratio at a modest level, which does allow modest deficits on average forever. What this does require is primary surpluses (i.e., budget position before accounting for debt service) to offset primary deficits if the interest on the national debt is above the economy’s growth rate. In fact, though, this condition hasn’t been met on average in the post WWII period; only the 1979-2000 period saw average interest on the national debt rise above the economy’s growth rate.

(cross-posted from New Economic Perspectives)

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