An update on some developments on the fiscal-trap front: After a Levy brief on fiscal traps was issued in November, events continue to bear out the fears expressed therein that budget cuts and tax increases being implemented in Europe and the US would lead to disaster. For example, recent news coverage of events surrounding the announcement of the UK budget confirm that the trap can hit nations that possess their own currencies, particularly in a region such as Europe where recessionary forces are dominating at the moment. Martin Wolf notes that owing to disappointing growth figures, the UK deficit surprised again on the high side. As the fiscal-trap theory asserts, governments implementing austerity policies have run into unexpectedly low growth in their attempts to reduce government debt.
Meanwhile, despite the warnings of macroeconomists, including those here, the austerity measures that together make up the fiscal cliff in the US were only partly averted. Among these policy changes are the loss of the 2-percent partial payroll-tax holiday and the sequester cuts to discretionary spending. The latter unfortunately went into effect at the beginning of this month, following a two-month Congressional reprieve. Based on unofficial data from the Bipartisan Policy Council in this New York Times article, which are similar to those in a recent and more detailed CBPP report, the cuts for the remainder of the fiscal year are large as a percentage of planned spending, as seen in Table 1:
How much fiscal stimulus would the government need to inject into the economy over the next two years in order to get the unemployment rate into the 5.5–5.9 percent range? In their newest strategic analysis, Dimitri Papadimitriou, Greg Hannsgen, and Michalis Nikiforos provide us with some harrowing answers.
The authors lay out a scenario (“scenario 3” in the analysis) featuring some favorable macroeconomic tailwinds in the form of higher private sector borrowing and increased exports. As they explain, such developments are not entirely unlikely (and policy changes could help contribute to such an export boost). Nevertheless, even in these relatively rosy circumstances the government would need to pitch in a spending increase of 6.8 percent* (after inflation) in each of 2013 and 2014 to bring the unemployment rate below 6 percent by the end of 2014. That would amount to a stimulus program worth around $600 billion over the next two years. Without these tailwinds from private sector borrowing and exports (“scenario 2”), spending would need to increase by 11 percent per year — or roughly over a trillion dollars of stimulus over two years — in order to bring unemployment down to around 5.5 percent.
As the authors note, Washington is not in the mood for a trillion-plus-dollar stimulus program, or a program half that size. Congress has consistently rejected a mere $50 billion for infrastructure repair. If anything, the policy challenge of the moment is to temper the zeal for cutting spending. Moreover, 5.5 percent unemployment is arguably still shy of what we ought to consider “good enough.” This level is around a full percentage point above where we were before the recession hit in 2007. In other words, even if this Congress were to approve a stimulus package larger than the 2009 Recovery Act (ARRA) — which is unimaginable at this point — we would still not be back to pre-recession unemployment levels after two years (or even four years, as the strategic analysis demonstrates).
While we’ve been focused on phantom budget menaces derived from assumptions about the state of medical technology in 2080, the jobs crisis has continued to ruin real lives. Without a dramatic turnaround in our fiscal priorities, it will continue to do so for years to come. It’s become pretty clear that the actual needs of this economy far outstrip what the political system is willing to deliver. (The authors actually favor direct job creation, in the form of an employer-of-last-resort policy, but they suggest that this is currently even further outside the realm of the politically possible as compared to traditional fiscal stimulus.)
Assuming no further stimulus is possible, the “best case” scenario over the next four years might be to merely hold off any new attempts at grand bargains or further budget cuts; to maintain the miserable status quo on the budget. In that case, as the figure below illustrates (the authors’ “Baseline” forecast represented by the black line), unemployment would still be above 7 percent in two years, and above 6.5 percent by the end of President Obama’s term in office (which, as the authors point out, is still in excess of the threshold at which the Fed would consider tightening monetary policy).
Earlier this month the Athens Development and Governance Institute and the Levy Economics Institute held a forum on the eurozone crisis: “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap.” Below are the remarks delivered by senior scholars Jan Kregel and James Galbraith.
In a new, wide-ranging policy note, C. J. Polychroniou traces the roots and evolution of the present “era of global neoliberalism”; an era he portrays as mired in perpetual crisis and dysfunction, and ripe for change.
[N]eoliberalism itself is more of an ideological construct than a solidly grounded theoretical approach or an empirically-derived methodology. In fact, the intellectual foundations of neoliberal discourse are couched in profusely vague claims and ahistorical terms. Notions such as “free markets,” “economic efficiency,” and “perfect competition” are so devoid of any empirical reference that they belong to a discourse on metaphysics, not economics.
Polychroniou attempts to outline the central principles of a progressive, post-Keynesian economic policy alternative. His primary target: changing the relationship between the state and the financial sector.
Yesterday, Dimitri Papadimitriou joined Ian Masters to discuss the response to the banking crisis in Cyprus. The plan on the table, in which Cypriot banks would impose a deposit tax (9.9 percent on deposits above €100,000, and 6.75 on deposits below that) in order to gain access to a €10 billion bailout from the troika, unconscionably makes small depositors pay for someone else’s regulatory blunders — and is likely to be ineffective anyway, said Papadimitriou.
The entire episode once again points to the fundamentally unworkable setup of the eurozone, in which each member-nation is (ostensibly) responsible for its own banking system. For more on these deeper structural problems, see this policy note: “Euroland’s Original Sin.”
Victoria Chick, a student of Hyman Minsky’s, elaborates on an issue that often strikes non-economists as somewhere between scandalous and baffling: the absence of any substantive acknowledgment of money in much of contemporary economics and economic modelling.
(Particularly interesting around the 12:10 mark, where Chick argues that faulty or outdated language in relation to banking helps reinforce misunderstandings about deposits, lending, and the relationship between the two.)
The evident failure of the ongoing austerity and “structural adjustment” experiments in Greece and the rest of the eurozone might have prompted some reconsideration of the intellectual foundations of those policies. Instead, as C. J. Polychroniou observes in his latest policy note, one notable reaction seems to have been to blame the test subjects:
In drafting the document for the so-called “Second Economic Adjustment Programme for Greece,” the EU’s neoliberal lackeys contended that “Greece made mixed progress towards the ambitious objectives of the first adjustment program.” On the positive side, it is noted, the general government deficit was reduced “from 15.75 percent of GDP in 2009 to 9.25 percent in 2011.” On the negative side, the recession “was much deeper than previously projected” because, it is claimed, factors such as “social unrest” and “administrative incapacity” (including a lack of effectiveness in combating tax evasion) “hampered implementation.”
The antigrowth “fiscal and structural adjustment” program was perfectly designed and would have produced all the anticipated results if the government were better fit to carry out the policies … and if the citizenry did not on occasion make some fuss about them by staging demonstrations here and there or by occupying the square outside the Greek parliament building. In essence, this is what the above statement says.
The puny excuses of the EU bureaucrats for the fiscal consolidation program’s causing a much sharper economic decline than “previously projected” fly in the face of the recent partial concessions made by the IMF: that the policies carried out in Greece ended up having much more adverse effects on the economy because the Fund miscalculated the impact of the fiscal multiplier. Indeed, the executive summary of the “Second Economic Adjustment Programme for Greece” goes on to state unequivocally that, insofar as the prospects of the success of the second adjustment program are concerned, “the implementation risks . . . remain very high” but the success of the program “depends chiefly on Greece.”
The neoliberal economics applied to Greece by Germany, the EU, and the IMF did not simply cause a greater decline in Greek GDP than “originally projected” or make the debt grow substantially bigger in the course of the last two years (from 126.8 percent in 2010 to 180 percent in 2012). It also produced an economic and social catastrophe of proportions unparalleled in peacetime Europe.
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