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06 апреля 2015, 18:55

New Institute Website: Beta Version

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Preview our new site for fresh blog posts, event coverage and more! Much of our older content is still being ported over while we test for kinks, but take a look and let us know what you think. 

30 марта 2015, 18:03

Sarah Quinn: Federal Credit Programs and the Birth of Lemon Socialism

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President John F. Kennedy once said that success had many fathers, whereas failure was an orphan.  One wonders what he would have made of today’s Federal credit programs, a vast network whose obscure political origins have finally been laid bare by sociologist Sarah Quinn of the University of Washington. As Professor Quinn, an Institute grantee, points out in the interview below, government-originated credit programs barely existed before the time of the Great Depression until, in 1934, the New Deal chartered the Federal Housing Administration to stimulate mortgage lending. It’s hard to believe that within a generation, the FHA spawned 74 separate programs to bolster credit through guarantees, insurance or outright loans. But that’s nothing compared to today. Uncovering securitization’s connection to the vast network of federal credit programs in the postwar era, Quinn’s research seeks to demonstrate how credit programs and securitization together distilled and then exacerbated core tensions running throughout U.S. history, tensions that emerged in the earliest days of the nation and then were crystallized in a fragmented federal government. The point, Quinn says, was nearly always the same:  to camouflage, hide, or understate the extent to which the U.S. government actually intervened in the economy. But the problems went well beyond that. As many of the government’s credit programs were partly privatized (with a view simply to getting them off the government’s balance sheet, if not government care), they were authorized to issue securitized bonds, while encouraged private companies to do the same. The legislation created a system that increasingly encouraged people to take on more risks, and to feel more comfortable holding risks that they did not fully understand. We all saw the rotten fruits of that process in 2008. For one thing, many of these quasi-public companies, such as Fannie and Freddie, have acted like pure private companies, obscuring the social goals that underlay their inception, whilst using their government heritage to exploit the perception of an implied government guarantee for any loan, no matter how bad. It is a type of securitization that Paul Krugman has called, “lemon socialism”, where profits are private and losses are socialized. Quinn sets all of this out in the interview and provides the historic context to explain how it happened. This is important because if we fail to understand the past, it’s hardly likely that we can construct a future set of policies which avoids these problems going forward. In this video:  Marshall Auerback

22 марта 2015, 20:01

Teresa Ghilarducci: The Retirement Crisis

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The retirement crisis is anything but imaginary.  According to research conducted by Professor Teresa Ghilarducci, head of the Department of Economics at the New School in New York City,  only 44% of workers in the United States have access to a retirement plan at work. Except for workers with defined benefit plans, most middle class U.S. workers will not have adequate retirement income -- 55% of near-retirees will only have Social Security income at age 65. A labor economist, Ghilarducci’s work focuses on the need to restore the promise of retirement for every American worker. Her research documents the many problems people now face in planning for retirement: decreasing coverage and contributions, increasing investment risk, portability, leakage, high fees, and the drawdown of benefits in retirement. This body of work led her to put forth a bold reform idea - the creation of Guaranteed Retirement Accounts (GRAs) – to provide a secure retirement to an additional 63 million people.  This of course goes against the prevailing trend in our government’s treatment of pensions, particularly public pensions, which governors have persistently raided to avoid the more politically unpalatable option of raising taxes to support the viability of these plans. As she discusses in the interview below, she issues a clarion call for policy makers and political leaders to find a way to save retirement, “a necessary-  if now threatened – feature of civilized societies.”  As Ghilarducci eloquently notes, all people – rich AND poor – deserve a decent retirement income after a long working life.  Are our leaders up to the challenge? In this video:  Marshall Auerback

18 марта 2015, 18:25

The Coming China Crisis

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Rapid private-debt growth threw Japan into crisis in 1991 and did the same to the United States and Europe in 2008. China may be next. Originally posted on Democracy Journal On the morning of September 8, 2016, the Wenzhou Credit Trust, one of the many trust companies in China, went into default. The firm discontinued all new lending and suspended redemption and interest payments on its trust certificates, the equivalent of deposits made by its customers. At the time, the failure didn’t seem all that unusual. A handful of trust companies—“shadow lenders” that make loans, often the riskiest ones, outside of China’s conventional banks—had done the same in recent years. But within a week, another trust company went into default, and the following week, so did seven more. Angry trust-certificate holders protested in Wenzhou and Chongqing but were quelled by police. Those protests hardly seemed noteworthy at first—for years, there had been hundreds of protests and disturbances across China—but it turned out they presaged something new. Within a month, more than 50 trust companies defaulted. The protests escalated and spread throughout the country. In the panic, new real-estate lending plummeted, putting more downward pressure on real-estate prices and hurting local economies. The Shanghai and Shenzhen stock markets plunged. The prices of iron, steel, coal, copper, aluminum, and other commodities—including oil—accelerated their downward spiral. The government of China, which in recent years had tolerated these failures as part of its attempt to introduce more risk into the system, dramatically reversed course and intervened, injecting funds into these lenders and assuring customers that it would stand behind these institutions. This calmed equity markets, but commodity prices continued to sag and the renminbi fell, bringing the specter of devaluation. By winter, the impact had shattered markets and companies throughout Asia and Australia, and markets were in retreat in Europe and the United States. The Great Panic of China was in full swing. The future, of course, doesn’t have to unfold this way. China, the world’s second-largest economy, could still act to prevent much of the above from happening. But what cannot be changed is this: China, fueled by runaway lending, has produced far more housing, steel, iron, and a host of other goods than it knows what to do with, amassing unprecedented levels of overcapacity and, by my estimate, making a staggering $2-$3 trillion in problem loans in the process. And since GDP growth is more a measure of capacity being created than capacity actually needed, even China’s high rate of GDP growth, fueled almost entirely by continued ultra-high levels of lending growth, compounds rather than solves China’s fundamental overcapacity problem. Which means that the global economic boost from China, the world’s only major growth engine since the crash of 2008 in the West, is rapidly diminishing and will soon largely end. The only question is how. China’s bad-debt problem is unprecedented in scale, but not in nature. In the United States in 2007 and 2008, we saw our own economy crumble under the weight of bad debt. And the system didn’t know what hit it: On the eve of our own collapse, even though more than $1 trillion of bad mortgages had already been made and major financial fallout was inevitable, banks’ loan-loss provisions—the amount they set aside to cover bad loans—were near an all-time low, while consumer net worth and the stock market were at all-time highs. Neither of the two dominant economic theories of our time forecast the coming storm. The doves—those more in favor of lower interest rates and government stimulus—were sanguine, unconcerned by rapid loan growth. The hawks—those more focused on curbing the money-supply expansion through higher interest rates—were sounding dire warnings of inflation. Both were wrong, but neither has since changed its theory. Our 2007-08 meltdown was entirely foreseeable, despite claims to the contrary. It was not a “black swan” event. Examining the historical record leads to the conclusion that major financial crises can be anticipated so long as you’re on the lookout for the red flag of rapidly rising levels of private debt. If we are to avoid repeating history, we would do well to observe the Chinese predicament, understand its implications for the global economy, and apply lessons to our own economy. Our Private-Debt Problem The ongoing debate in Washington over government debt misses the point. In the years leading up to the U.S. crisis, the remarkable fact was not an increase in the level of federal debt, but the explosion in the size of privatedebt relative to GDP, which rocketed from 120 percent of GDP in 1997 to 165 percent in 2007. By contrast, federal debt barely changed, declining from 63 percent of GDP to 62 percent during that same period. Private debt is the sum of consumer debt, including mortgages and business debt. In my view, a healthy private-debt ratio would be no more than 125 to 150 percent of GDP. While many observers missed the signs, some saw that private debt was somehow key to the American crisis, since the rapid increase in home mortgages was widely discussed as a culprit. And a closer look at the historical data shows that this relationship between private data and financial busts appears to be universal: When we examine financial crises in other countries, we see that—even when these crises were attributed to other causes—private debt was the fundamental factor. Private debt can be good when overall levels in a country are low or moderate, and when, for example, it is used to finance projects whose income can repay that debt. The problems come when private-debt growth is too rapid or reaches levels that are too high. That certainly was the case in Japan in the years before its 1991 financial crisis: The chart shows a familiar picture. In the years before the crisis, Japan saw a major spike in private debt. And that’s the same picture we see in crisis after crisis. As I’ve previously written, there is a formula to predicting these crises. A financial meltdown is probably on the horizon if the ratio of private debt to GDP rises by roughly 17 percent or more over the course of five years and exceeds 150 percent. That rise in private debt will likely fuel runaway growth before the crash (think the 1920s, or Japan’s boom in the 1980s). But those gains will be evanescent. Driven by private-debt growth, they’ll eventually give way to a financial crisis. In past crises—1929, Japan in 1991, the United States in 2008—high government debt was not the culprit, since in each case the ratio of government debt to GDP was generally flat or declining. Nor did they correlate with any of the long list of other widely cited causes, including current account deficits and interest rates. (Rapidly rising government debt generally becomes an issue after a crisis, as tax revenue plummets and deficits rise, government “safety net” programs get higher use, and governments counteract declining private spending with higher government spending.) Why does runaway growth in private debt lead to financial crisis? First, because it means that far too much of something has been built or produced. It was primarily housing in the United States in 2008; in Japan in 1991, it was primarily commercial real estate. And second, because it means far too many bad loans have been made in the process. By 2007, for example, the U.S. banking system had roughly $1.5 trillion in total capital, but an estimated $2.5 trillion in problem loans. If too much capacity and too many bad loans are the problems, the solutions are time and capital: time for organic growth to absorb the excess capacity, and capital to repair banks and borrowers. Monetary and fiscal policies might soften the blow, but since they do not address those two fundamental issues, they cannot solve the underlying problem. The Potential for Crisis in China The problem for China in 2015 is that it looks a lot like the United States in 2008 or Japan in 1991. The growth in the ratio of private debt to GDP over the last five years is an astonishing 60 percent, and that ratio now exceeds 200 percent. China’s runaway debt growth has primarily been in business loans, and now its total business loans are greater than in the United States, even though, based on exchange rate, U.S. GDP is 82 percent larger than China’s. (For China, we use the term “private debt” for the sum of business and consumer debt, though some analysts refer to it as “non-government debt.”) Quite simply, China has produced and built far too much capacity, through overinvestment in steel and cement firms and in accelerated housing development. In the process, it has amassed the largest buildup of bad debt in history. The cause of the accelerated rise in private debt starting in 2008 was the collapse of the export market that had fueled China’s growth to that point. From 1999 to 2006, China’s exports-to-GDP ratio had exploded by 95 percent. China’s net exports, as measured in dollars, were the highest in recorded history. But they were growing on the shaky foundation of the debt-fueled expansion of the West that led to the crash of 2008. When that demand evaporated, China’s exports evaporated too. Addicted to its rapid expansion, China built a lot of real estate and produced lots of goods—both unjustified by actual demand—to fill the export hole, all financed by an unprecedented rise in private debt that is almost certain never to be fully repaid. As a result, China is now sitting on top of the greatest accumulation of bad debt and overcapacity in history. According to the Survey and Research Center for China Household Finance, more than one in five homes in China’s urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold. Behind those vacant and unsold units is private debt, both loans to developers and mortgage debt. Housing values in China increased on the same perilous trajectory as in the United States before 2008 and Japan before 1991—and they have now started a similar decline. Meanwhile, real estate was 6 percent of U.S. GDP at the peak in 2005; today, it is as much as 20 percent of China’s GDP. There are other red flags. China produced 8 percent of the world’s furnace iron in 1980; it now produces 61 percent, even though the rest of the world still continues to produce every bit as much as it has in the past. As China’s iron production accelerated in the period from 2002 to 2011, iron prices increased twelvefold in response to debt-fueled demand. (Increases in debt cause increases in prices.) But now that iron capacity has piled up beyond need, prices have tumbled by over 50 percent, and the excess capacity is so great that even the demand generated by rapid credit growth can no longer prop prices up. Also, China used more cement in the period from 2011 to 2013 (6.6 gigatons) than the United States did in the entire twentieth century (4.5 gigatons). These are but a few of many examples. Researchers at a Chinese state planning agency said recently that China has “wasted” $6.8 trillion in investment. Overcapacity is so significant in many sectors that it will take years for it to be absorbed by organic demand. Ironically, this problem is compounded by China’s own continued high growth rates, since high GDP growth is a measure of the creation of additional capacity even if that capacity is not needed. Good and sound loans, by definition, result in commensurate GDP growth. So when private-loan growth outstrips GDP growth, much of that excess—from one-quarter to one-half, based on evidence from other crises—will be problem loans. Based on this formula, China today is likely to have an estimated $1.75 trillion to $3.5 trillion in problem loans—a figure well in excess of the $1.5 trillion of total capital in China’s banking system. Of course, China’s banks and shadow lenders are not reporting bad loans close to this amount. But neither did U.S. banks: On the eve of the U.S. crisis, banks were making loan-loss provisions at very low levels. Lending booms create the false appearance of prosperity, and fraud and corruption can make the picture even prettier. Some dismiss these warning signs, noting that many economic prophets wrongly made the same dire predictions for China during the late 1990s. But there’s a big difference: In 1999, China’s overall level of private debt was 111 percent of GDP; today, it’s almost double that, at 211 percent. In 1999, it had plenty of room to power growth through continued private-debt expansion, and the debt boom in the West fueled unprecedented export demand. The opposite is true today. China’s Future—and the World’s China’s slowdown is already underway. Nominal GDP growth has already slowed from over 15 percent in 2011 to around 7 percent in the last year—and some analysts believe it’s actually closer to 4 percent. The decline will continue to play out, perhaps dramatically, over the next three to four years. How well or badly it plays out, however, depends on the approach the government takes to simultaneously managing both the short-term problem (slowing growth) and the longer-term problem (the overhang of private debt). The trouble for China is that these two challenges summon conflicting responses. GDP growth in any economy is largely dependent on private-credit growth, yet the Chinese private sector is massively overleveraged. Ramping up credit might reverse the slowdown but will further increase bad debt and compound the ultimate problem; reining in debt, on the other hand, would help the debt problem but slow down growth. True, China’s economy is largely a closed system that can make—and suspend—its own rules, which means China’s leaders can prop up their lending system for a time. (Even Japan was able to prop up its banks for several years after its stock market collapse.) What they can likely no longer do, however, is effectively prop up real estate and commodity prices. Over time, because the decline in real estate and commodity prices is evidence of China’s overcapacity and those assets are collateral for so much debt, it will be China’s Achilles’ heel. The fundamental problem is that China has misused debt to grow far faster than income growth prudently allowed. While on the surface the choices look bad, China—with its vast assets and low central government debt—in fact has the tools to navigate this crisis yet. China’s impulse is to return to practices that have succeeded in the past, so it’s difficult to imagine it abandoning the three pillars of its past growth strategy: exports, business credit growth, and infrastructure spending. But there is now a diminishing return from each: exports are constrained by low global demand; businesses are already overleveraged; and China has already built too many roads to nowhere. Since these will not suffice, China will likely consider other growth channels: increasing consumer credit growth; ramping up other categories of government spending such as military spending; encouraging continued migration of rural populations to the cities; and perhaps even renewed devaluation. But these options, if employed, will still collectively fall short. China’s consumers reportedly do have low leverage, but household debt is already growing much more rapidly than is prudent, and is ultimately limited by household income. And consumer debt in China may be higher than indicated due to high levels of unreported, informal consumer lending. Further, China’s consumers have put a major portion of their savings in real estate—many own several apartments—so the ongoing decline in housing values will discourage consumers from taking on significant new debt. Increased government spending could help pick up the slack, especially if it is focused on areas where there is not already too much capacity, such as military spending. But even here, the scope and pace of additional spending are inherently limited by operational realities. China hopes to bring hundreds of millions more rural Chinese citizens to the cities, to increase both wages and housing demand. But these plans crucially depend on job growth to support these migrants, and job creation has been a leading casualty of slowing exports. Finally, devaluation works best when matched with high global demand, risks driving out badly needed foreign capital, and, in any event, would likely be matched by competitive devaluations from other nations. Both “rebalancing” and “reform” are cited as important parts of the solution. Rebalancing is needed—China’s growth has been far too dependent on investment by its businesses as compared to consumption by its households. But rebalancing is hard work that will take years, not quickly enough to reverse China’s decelerating growth. Reform of business practices is needed as well, but that too will be very difficult, and likely won’t happen fast enough. Some believe that through continued high productivity gains, China can sustain high growth without worsening its private-debt picture. But in recent years private-debt growth has almost equaled China’s increased productivity, calling into question the sustainability of those increases absent continued high private-debt growth. Panic and the Path of Contagion Because there are few good choices to adequately boost growth, the continued decline in commodity prices and real estate will make the problem loans in China’s banks worse, as a massive amount of the country’s private debt is secured by commodities and real estate. Based on its recent behavior, the Chinese government will likely address deteriorating bank loan quality with an overt and broad guarantee to consumers for deposits and possibly also wealth and trust certificates. It will also quietly fortify these lenders with capital. If China pursues these policy choices, it will indeed avoid an immediate financial crisis. But it ultimately cannot reverse the trend of decelerating growth over the next three to four years—perhaps to a level approaching zero—and China will be left facing a “lost” generation of very low growth similar to the last 20 years in Japan. The question facing the rest of the world is whether there will be a crisis in other countries because of China’s troubles. What will the path of financial contagion be? Financial contagion is not some mysterious force that overtakes the healthy and unsuspecting. Any impact on non-Chinese companies and countries will come from: 1) overlending to troubled Chinese banks and businesses; 2) an overconcentration of exports to China; 3) a dependence on high commodity prices; and 4) a currency devaluation necessitated in an export-oriented country because of a devaluation by China. Most countries in the Asia-Pacific region have significant export concentrations to China and will be adversely affected by China’s slowdown, as will many countries in Africa and South America. Europe has exposure too, especially in the area of high-end automobiles and luxury goods. The United States has more limited exposure, but some sectors such as high-tech and construction have significant sales in China. Although there are allegedly low levels of foreign debt in China, these levels may be underreported; banks that have lent to companies or banks in China face real risk as growth decelerates. Hong Kong, Singapore, and the UK are among those with the highest lending exposure to China. Countries dependent on high oil and other commodities prices are also at risk. If China devalues its currency, many of its export-oriented Asian neighbors would be forced to follow suit—and in fact may act to devalue ahead of China—bringing the specter of a banking crisis to these countries. Reckoning with Private Debt In the 1980s and early ’90s, my formative business years, the media regularly trumpeted the news that Japan was ascendant and would eclipse the United States as the world’s business leader. When Japanese firms purchased iconic properties such as Rockefeller Center in New York and Pebble Beach golf resort in California, it was confirmation of that trend. In the 1980s, Japan reached 18 percent of world GDP. Today its share of GDP has fallen to 7 percent. We now know that its seeming path to dominance was paved with runaway private debt. While China’s trajectory might not be the same as Japan’s, there are profound similarities. China has had years of runaway private-debt growth, and its GDP growth is now decelerating. There is no doubt that China, with a population over 1.3 billion, will be an increasingly important player in the world, economically and otherwise. But there has been a tendency to overestimate what China can achieve economically over the near term. America’s economy is almost twice the size of China’s, and our relative influence will continue to reflect that difference. Indeed, we should take a more balanced view of China. With its growth, China has had a significantly higher profile in a variety of policy areas. It has been more assertive in military matters. It has expressed a desire to have the renminbi take its place as one of the world’s reserve currencies—in essence competing with the U.S. dollar for a bigger role in the world’s economy. U.S. policy-makers have struggled with how to respond to this assertiveness. Much of it should be unsurprising, given China’s rise to its current position as the world’s second-largest economy. But even with its successes, China now presides over enormous and in some respects unprecedented internal problems, and we should understand the limitations they impose on what the country can achieve in the near term and resist making policy blunders by overestimating its relative strength. So what should China do? My recommended course is for the country to directly address not slowing growth, which is only a symptom, but the real problems: overcapacity and excessive private debt. In this scenario, China would prudently slow both lending and growth, allowing demand to begin to catch up with overcapacity. What’s more, China would also preemptively recapitalize its lenders. However, my recommendation goes well beyond China’s past cosmetic bank cleanups. It needs to take the further step of requiring lenders to broadly, quickly, and decisively restructure debt with overburdened corporate borrowers—to provide, in other words, real debt relief and restructuring that allows those corporations to resume productive investment, not simply accounting sleight of hand. Otherwise, high debt will linger for years as a long-term drag on China’s economic prospects. Large-scale corporate debt relief would be complex and difficult. But the lesson from Japan’s experience, where the private-debt-to-GDP ratio reached a staggering 221 percent, and timely and meaningful debt restructuring was not adopted, is that it’s necessary. A generation later, Japan’s private-debt-to-GDP ratio is still a stifling 170 percent and remains the neglected central issue in Japan’s lackluster growth. China may never undertake such systemic private-debt restructuring, but it is the surest path to revitalizing its beleaguered business sector, remedying overcapacity issues, stabilizing prices, and restoring reasonable growth. By alleviating rather than simply disguising China’s high private-debt-to-GDP problem, it would leave corporations in a much better position to lead renewed (and, hopefully this time, more measured) growth after the slowdown. Lessons for America Runaway private debt brought America to its economic knees in 2008. It did the same to Japan in 1991. And it is in the process of doing the same to China. Yet the schools of economic thought that dominate thinking and policy-making in Washington pay scant attention to private debt. And so our economists and politicians will continue to err in forecasting crises, and will also make inadequate repairs after the fact. Just as runaway private debt causes crisis, the overhang of private debt after the crisis constrains growth. Private debt has been underemphasized by economists in some measure because of the view that for every borrower there is a lender, and thus private debt “nets” to zero. This view neglects consideration of the distribution of debt: Lenders tend to be institutions, and borrowers tend to be those middle- and lower-income households most needed to sustain economic growth. Private debt has also been underemphasized because public debt seems more our public responsibility, and private debt seems more off-limits—the domain of the private sector and “the invisible hand.” Seven years after our own crisis, private debt in the United States stands at 143 percent of GDP—lower than its apex of 167 percent in 2008, but still high. The high level of private debt in the United States represents a drag on economic growth, most starkly evident in the almost nine million of the nation’s 53 million mortgages that remain underwater. In fact, private-debt levels across the globe remain sky-high—not that anybody’s paying attention. The piling up of private debt over decades smothers demand and dampens economic growth. China’s economic challenges offer the United States an opportunity to learn and recalibrate our economic thinking. Like China, we should now concentrate on scaling back private debt (which we did not do in the aftermath of the 2008 crisis). We need to act differently this time around if we are to avoid having our recovery swamped by the next slowdown (from China or anywhere else). Debt relief in the form of restructuring or partial debt forgiveness should be seriously considered as an option. What if we were to let lenders write down underwater mortgages over an extended time frame (30 years)? While less necessary today, if this had been done in 2008, it would have made an enormous difference in the trajectory of the recovery. Our policy-makers should move beyond the fixation with public debt and turn their attention to the true problem of private debt. They should recognize the inadequacy of the timeworn tools of monetary and fiscal policy and lead a discussion of strategies—especially restructuring—to address the key issue of historically high private-debt levels. Indeed, low private debt, combined with low capacity (the supply of housing, factories, etc.), was the precondition for the economic boom we experienced in the post-World War II decades. China’s downturn will only add to our challenges. The modern world has had four major economic engines—the United States, China, Europe, and Japan—which together constitute 60 percent of world GDP. While the United States moves toward respectable growth, both Europe and Japan—also hobbled with high private debt—are struggling to show any progress. But it is China we should be worried about. China is facing a generation of dramatically slower growth. Its slowdown will cause trouble for its trading partners and lenders across the globe. And while the economic impact in the United States will be softer than in any other major country, China is now so large that we too will feel it. The question is whether we will also learn from it. Link:  The Coming China Crisis

14 марта 2015, 18:10

Karl Aiginger: Europe and the Challenge of Re-Starting Growth

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The Eurozone is arguably the greatest economic casualty of the 2008 financial crisis.  Whilst both the US and China have managed to exceed 2008 GDP levels, Europe continues to languish and in many cases (notably, Greece, Spain and Portugal) is worse relative to the impact of the Great Depression.   If Europe in its current form is to survive, notes the economist Karl Aiginger, Director of the Austrian Institute for Economic Research (WIFO), then restarting growth is both necessary and (more importantly), feasible. But the new growth should not be more of the same, which is to say, attempted via a series of “beggar thy neighbor” internal devaluations (the economics of which are highly questionable). Rather Europe’s policy makers must embrace a new growth path that is more dynamic, socially inclusive and ecologically sustainable.  More importantly, it needs to go beyond metrics such as GDP growth, embracing a model which aims to lower carbon dioxide emissions, and also reduce unemployment and income differences.   In effect, Ainginger is calling for a new kind of social contract that measures “economic success” via different outcomes of a country’s socio-economic system (poverty risk, inequality, youth unemployment), as well as advocating an ecological pillar that evaluates environmental outcomes.  Gone is the “low road model” of fiscal prudence and low inflation to all other countries and wage cuts to sustain an unsustainable economic mercantilism.  Rather, Professor Ainginger urges Europe to embrace a more dynamic, more inclusive, more sustainable, and more stable European Union, one which serves the needs the real economy, rather than the narrow interest of the continents rentiers. In this video:  Marshall Auerback

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13 марта 2015, 19:58

Get a TAN, Yanis: A Timely Alternative Financing Instrument for Greece

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The recent election of an explicitly anti-austerity party in Greece has upset the prevailing policy consensus in the eurozone, and raised a number of issues that have remained ignored or suppressed in policy circles. Expansionary fiscal consolidations have proven largely elusive. The difficulty of achieving GDP growth while reaching primary fiscal surplus targets is very evident in Greece. Avoiding rapidly escalating government debt to GDP ratios has consequently proven very challenging. Even if the arithmetic of avoiding a debt trap can be made to work, the rise of opposition parties in the eurozone suggests there are indeed political limits to fiscal consolidation. The Ponzi like nature of requesting new loans in order to service prior debt obligations, especially while nominal incomes are falling, is a third issue that Syriza has raised, and it is one that informed their opening position of rejecting any extension of the current bailout program. The Troika has responded to these points by ignoring the substance of these direct challenges to their preferred approach, and by hardening their bargaining stance. Syriza’s opening request for debt reduction, based in part on recognition of the above points, has been summarily rejected. In addition, the ECB announced that in its estimation, Greece has failed to abide by the terms of the last bail out agreement, so the ECB will no longer accept Greek government debt as collateral for liquidity provided to Greek banks. This leaves the Greek banking system relying upon the ECB’s Emergency Liquidity Assistance (ELA) facility, which can be cut off with two weeks notice on the vote of a two-thirds majority. If the February 28th deadline for extending the existing bailout program is not met or somehow postponed, Greece is likely to face funding difficulties. Even if Syriza can find some sort of bridge loan, large debt payments loom this summer. The nuclear option of exiting the eurozone does exist, though Syriza did not campaign with this explicit threat, nor have polls of Greek citizens to date supported such an exit. Executing an exit would likely impose even harsher conditions on Greek citizens in the short run. The sharp decline in a newly introduced currency would be likely to significantly raise the cost of imported goods. In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, this is no trivial matter. The banking system could be hamstrung with deposit flight and insolvency. Debt contracts not under Greek law could not be redenominated in the new currency, and so either default, or a very heavy servicing cost would likely result. In any case, Greece would likely find external finance effectively shut off for some time after their departure. Exiting the euro is an option, but not one without significant upfront political and economic costs. The task for anti-austerity parties like Syriza then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. In the absence of a sufficient improvement in the current account, or a significant shift in household and business investment spending relative to their desired saving objectives, some degree of fiscal autonomy must be regained if income growth (and hence the ability to service debt) is to be accomplished. The following simple proposal introduces an alternative government financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle. To accomplish this return to growth through increased fiscal autonomy, an alternative public financing instrument could be unilaterally adopted.  Federal governments could issue tax anticipation notes (TANs) to government employees, government suppliers, and beneficiaries of government transfer payments. These tax anticipation notes, which are a well-known instrument of public finance used by many state governments across the US, could have the following characteristics: zero coupon: no interest payment is due to the holder of the TAN perpetual: meaning there is no maturity date requiring repayment of principal, meaning TANs would not increase the public debt to GDP ratios, just like the issuance of perpetual debt by banks counts as equity that helps them meet capital requirements transferable:  can be sold onto third parties in open markets, as are bearer bonds Accepted at 1 TAN = 1 euro by the federal government in settlement of private sector tax liabilities. As the government fulfills expenditure plans, TANs could be distributed electronically to the bank accounts of firms and households due to receive these payments using an encrypted and secure transaction system. Because there are large backlogs of payments due by the Greek government, and there are also backlogs of unpaid taxes, TANs should find ready acceptance. Essentially, the government would be securitizing the future tax liabilities of its citizens, and creating what amounts to a tax credit. This tax credit will not be counted as a liability on the government’s balance sheet (British consols were are a historical example of this), and will not require a stream of future interest payments - payment that could increase fiscal expenditures, and hence fiscal deficits, in future budgets. Governments issuing TANs could thereby pursue the expansionary fiscal plans that are required to return their economies to a full employment growth path. Questions have been raised as to whether TANs are a parallel currency in all but name, and whether TANs might “trade” at a discount to euros. As noted above, TANs are accepted by the government at 1 TAN = 1 euro. TANs are perpetual, zero coupon bearer bonds denominated in euros, not in new drachmas. Since even under the various treaties ruling the eurozone, governments retain the right to impose taxes on its citizens, and can define what they will accept for taxes, there is a “market maker” with fairly unrestricted “buying power” to insure the 1 TAN = 1 euro link is upheld. For example, should TANs begin to trade at a persistent discount between private citizens, demand by taxpayers for TANs would increase (since this would be the less costly way to meet tax obligations), pushing the TANs back to parity with the euro. Questions have also been raised as to whether TANs would trigger default clauses in existing government bonds. Recall that TANs were not designated for payment of interest or principal on existing debt. Citizens will also have full discretion over whether to use TANs or euros to pay taxes. There can be no argument that TANs represent a prior claim on tax revenues, thereby subordinating existing bonds. One explicit cost of the TAN approach could be the imposition of fines if the 3% fiscal deficit to GDP ratio of the Growth and Stability Pact is violated. However, Germany and France openly violated this threshold in 2004 with no fines imposed, possibly setting a precedent for contesting any such fines. Moreover, if expansionary fiscal plans are pursued with the use of TANs, and that fiscal stimulus is successful enough to revive income growth, tax revenues will be likely to rise, and realized fiscal balances may end up above the 3% deficit threshold. After all, the outcome of recent episodes of fiscal consolidation has been rising, not falling debt to GDP ratios. In addition, in countries with chronic current account deficits that are in excess of 3% of GDP, the simple analytics of double entry bookkeeping imply countries will need to violate the 3% fiscal deficit to GDP rule if their domestic private sectors are to be kept off of deficit spending paths. Otherwise, fiscal policy restrictions end up exacerbating household and business debt build-ups, thereby increasing financial fragility in the private sector. The authors of the fraudulently titled Stability and Growth Pact (SGP) appear to have ignored this accounting implication, and thereby introduced a different vector of financial risk into the eurozone, and one that has revealed it devastating consequence in the aftermath of the Global Financial Crisis (GFC) of 2007-8. The fiscal deficit floor rule of the SGP deserves to be challenged and reviewed, not only because it can introduce the unintended consequence of a private sector debt build up, as was witnessed in many eurozone peripheral nations heading into the GFC, but because it has failed so miserably in its stated purpose of reducing public debt to GDP ratios. It is true that TANs are unlikely to be accepted by trading partners of nations adopting TANs as an alternative financing instrument, unless those trading partners face tax or tariff liabilities in the countries adopting this alternative financing mechanism. However, TANs are likely to be used in domestic market transactions, which may also free up more euros to pay for imports of essential goods like food, fuel, and medicine. Of course, to make this alternative financing mechanism work, enforcement of tax collection will need to be improved. A more equal distribution of the tax burden across citizens would also assist in the wider acceptance of these notes in private transactions. While the onset of price deflation is more the concern in the eurozone of late, some may fear this alternative financing mechanism would offer a quick route to accelerating inflation, if not hyperinflation, since the constraints on government budgets would be reduced. To address this issue, it might be helpful for the central bank of each country to be held responsible for monitoring domestic inflation conditions, and for creating robust early warning systems. Both exercises could be overseen and validated by an independent third party – say IMF or ECB staff.  Rules could then be set in place requiring a reduction in the issuance of TANs should inflation accelerate through some predetermined ceiling over some specified duration.  A provision for ratcheting TAN issuance down further if inflation is not headed back down below the target could also be designed. In addition, specific supply bottlenecks that may be contributing to inflationary pressures could be identified and addressed through infrastructure spending, labor training, or tax incentives using TANs. TANs could also be used to implement an employer of last resort approach (ELR) to job generation, which could also have a stabilizing effect on inflation. Rania Antonopoulos, Deputy Minister of Labor and Social Solidarity in Greece, has already run a trial experiment of ELR in Greece, and is prepared to scale this up in her new post (see an outline and policy simulation of how this could be done here). It is not hard, in other words, to create the demand and supply side policy mechanisms that could reduce the odds of an ever-accelerating inflation.  It is the outright fear of such an outcome that appears to motivate the bias toward fiscal stringency by many eurozone policy makers. The Troika appears haunted by the hyperinflationary ghosts of the early Weimar Republic, while completely forgetting it was Bruning’s devastating fiscal austerity polices that ushered in the Third Reich. History reflects that damage was done both ways, so let’s chose to learn the full lessons of history, rather than repeat the same deadly mistakes. Austerity has proven to be a disaster on nearly all fronts. Firms have been bankrupted, households have dropped into abject poverty, banks have lost capital to loan losses, tax revenues have come up short or have been hijacked to service debt (debt that was ultimately issued to socialize bank loan losses), and government debt to GDP ratios have risen. Economies are evidently not drawn to full employment growth paths when instruments like fiscal policy, exchange rates, and monetary sovereignty are drastically circumscribed, ostensibly so that prices are free to adjust to market forces. We should have known this from the theories of John Maynard Keynes, Irving Fisher, and Hyman Minsky, and now we should know it from historical experience.  Yet this fatal neoliberal conceit in the self-adjusting properties of unfettered markets was the central premise, as well as the fundamental design flaw, behind the European Monetary Union. Countries may be able to exit austerity policies without having to take on the many challenges of exiting the euro. It may be possible to thread the policy needle in the eurozone. Through the alternative financing mechanism of TANs, countries like Greece may be able to counter the threat of a cut off of financing by the Troika. Policy simulations of the use of TANs by economists at the Levy Economics Institute look eminently plausible (see from p. 11 on in the Strategic Analysis from a year ago, which can be found here). After too many years of devastating austerity driven by misinformed and utterly misguided policy choices, countries may be able to regain some control over their fiscal policy, and finally forge a pathway back to full employment. With the ploys of the Troika revealed with the emergence of an anti-austerity party like Syriza to a position of governance, Greece has a chance to pave the way out of austerity without exiting the euro. Yanis, get a TAN.

08 марта 2015, 01:36

Why Understanding Money Matters in Greece

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By Robert W. Parenteau, CFA and Marshall Auerback As Greece staggers under the weight of a depression exceeding that of the 1930s in the US, it appears difficult to see a way forward from what is becoming increasingly a Ponzi financed, extend and pretend, “bailout” scheme. In fact, there are much more creative and effective ways to solve some of the macrofinancial dilemmas that Greece is facing, and without Greece having to exit the euro. But these solutions challenge many existing economic paradigms, including the concept of “money” itself. At the Levy Economics Institute conference held in Athens in November 2013, I proposed tax anticipation notes, or “TANs”, as a way for Greece to exit austerity without having to exit the euro (see “Get a TAN, Yanis!” published here last month, for an updated version of that policy proposal). This proposal is based on a deeper understanding of what money actually is, and the many roles that it plays in the economies we inhabit. In this regard, Abba Lerner captured the essence of modern fiat currencies, which are created out of thin air by modern states with sovereign currency arrangements. Lerner’s essential insight is contained in the following passage from over half a century ago (and, you will note, Lerner’s view informs much of the neo-chartalist view espoused by advocates of what is called Modern Monetary Theory): “The modern state can make anything it chooses generally acceptable as money…It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.” The modern state, then, imposes and enforces a tax liability on its citizens, and chooses that which is necessary to pay taxes. That means a state with a sovereign currency is never revenue constrained. In fact, the government has to first create the money before the private sector can find a way to get the money it requires to pay taxes and by government bonds. Taxes and bonds are therefore not really the source of government funding or finance. Wait, what? The government itself ultimately is the source of money required to pay for government expenditures. Taxes simply give value to money, as households and nonbank firms cannot create money – that is counterfeiting.  Instead, they have to sell an asset or a product or a service to the government to get money, or they need to be beneficiaries of government corporate subsidy or household transfer programs to get money. It is in this context that one has to look at the TAN proposal.  It is important to note that the tax anticipation note is by design a debt issued by the government, just like any other bond. It is a debt instrument that could be returned by the TAN bondholder to the Treasury to settle tax payments due on a 1 TAN = 1 euro basis. By imparting a value to these TANs (i.e. letting them be used to extinguish national tax) this will ensure a natural source of demand for TANs. In addition, it is very likely that consenting adults in the Greek economy would be willing to use TANs in settling private transactions as well, and this is an important element if the TAN approach is going to provide a way out of fiscal austerity without requiring an exit from the euro. Skeptical? Well, there are other historic examples of local currencies operating in parallel with national ones. As economist L. Randall Wray has noted, in Argentina as the financial crisis deepened after 2000, local governments began to issue “Patacones” (bonds with interest) as local currencies, paying workers and suppliers, and accepting them in tax payment. Utility companies began to accept them—knowing they could pay part of their taxes with them--and acceptance spread even to international corporations such as McDonald’s. There are other historic examples closer to home, some of which might underline the irony of adopting this kind of approach in a “what is good for the goose, may be good for the gander” fashion.  None other than the self proclaimed “Old Wizard” Hjalmar Horace Greely Schacht – who was the Currency Commissioner of the Weimar Republic after the 1922-3 hyperinflation bust,  a President of the Reichsbank from 1924-30, and then again from 1933-39,  a highly placed executive at both  Dresdner and Danatbank , and Minister of Economics under Hitler in the 1930s, all of which is not bad for a guy named after an American newspaper editor - himself introduced the MEFO bills, which TANs bear some resemblance to, though TANs are constructed much more along neo-chartalist lines, with their value deriving from their use as a tax credit, which was definitely not the case with Schacht’s MEFO bills. The Nuremburg trial transcripts described Schacht’s scheme as follows: “Transactions in MEFO bills worked as follows: MEFO bills were drawn by armament contractors and accepted by a limited liability company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). This company was merely a dummy organization; it had a nominal capital of only one million Reichsmarks. MEFO bills ran for six months, but provision was made for extensions running consecutively for three months each. The drawer could present his MEFO bills to any German bank for discount at any time, and these banks, in turn, could rediscount the bills at the Reichsbank at any time within the last three months of their earliest maturity.” German policymakers themselves, operating under financial constraints in the 1930’s, devised alternative government financing instruments, although Schacht’s MEFO scheme was clearly a shell game relying on the complicity of the central bank, and that is not how TANs work at all. For less extreme examples in the decade before Schacht, it is worth noting that the US had at least 5 forms of paper currency going at the same time in the 1920s – despite the concerns about hyperinflation generated by the horrifying Weimar experience in 1922-3.  These were used interchangeably and included: Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold) Silver Certificates (redeemable for coin or bullion) National Bank Notes (issued by US government chartered banks with equivalent face value of bonds deposited by bank at Treasury) United States Notes (issued directly by Treasury and also called Legal Tender Notes, but with no “backing”) Federal Reserve Notes (redeemable in gold on demand at Treasury or in gold or “lawful money” at any Federal Reserve Bank, until FDR’s prohibition, when it was just declared legal tender redeemable in lawful money at the Fed or Treasury). Indeed, experiments with alternative financing instruments that can help bring economies back on line during monetary and financial crises are frequently cited by Austrian School economists, especially the Hayekian splinter group/wing that favors privatizing money. For example, clearinghouse certificates were created and spread during the Panic of 1907 and the Great Depression (see http://mises.org/library/economics-depression-scrip). So this adaptability of financing and monetary systems is much wider than we are led to believe, and it is not always government driven, which presents something for neo-chartalists to ponder. Those who are not of a neo-chartalist persuasion might be skeptical of the claims that a 1 TAN for 1 euro exchange rate could be sustained.  Their argument centers on the fact that even if one imparted value to the tax anticipation notes by allowing them to be used to extinguish tax liabilities, TANs would still plummet in value relative to the euro and so wouldn’t do much in terms of boosting aggregate demand via their use in financing fiscal expenditures. Let’s consider that scenario in more detail for a moment. Say TANs plummet and start “trading” in private exchanges in Greece at 4 TANs to 1 euro or some such horrible disaster. Say you are a Greek citizen. You have tax arrears (as many do) and you hear Syriza has made tax compliance a high priority, and is required to do so by the Troika/Institutions if it is going to get any further loans from external official sources. Your tax arrears are equal to say one years’ worth of your salary. You will then use euros to buy discounted TANs and deliver them to the Treasury, who are obliged by law to accept tax payments in TANs at the prescribed 1 TAN= 1 euro. This gets you a huge effective tax deduction in the process - but one you had to earn by selling euros and buying TANs - thereby bidding up the price of TANs relative to euros.  If this is done over and over again by many citizens with tax arrears and tax payments forthcoming, whatever “depreciation” of TANs to euros has occurred will be essentially arbitraged out of the market. As any Wall Street investor would realize, the only reason why one would do not do that trade, all day, and every day, for oneself and all one’s relatives, would be if one believed that the “market maker”, the Treasury, would ever run out of its capacity or willingness to accept TANs as a means of settling tax payments, at 1 TAN= 1 euro. And recall that the market maker, in this case the Greek Treasury, has virtually unlimited authority to impose new taxes and raise existing tax rates, which directly influences the demand for TANs. Of course, there is a political constraint (recall tennis superstar Bjorn Borg threatening to emigrate from high tax Sweden in the 70s), and Greece has got to get its tax compliance dealt with properly before TANs can be implemented. But if that adjustment mechanism doesn’t do the trick, the Treasury can vary the proportion of government spending financed through TAN issuance, directly influencing the flow supply of TANs. In other words, by design, there is a self-correcting mechanism through arbitrage that should keep the 1 TAN to 1 euro “exchange rate” in a pretty tight band, as long as it is clear that tax liabilities can and will be settled with the Treasury at a 1 TAN =  1 euro exchange rate. Anybody who works on Wall Street or the City would understand this self-correcting process.  After all, “arbs” on Wall Street scalp minuscule basis point discrepancies in various financing instruments at the speed of light these days in automated arbitrage programs and in high frequency trading. TANs have a built in self-correcting mechanism that work precisely in that same fashion. As for the unusual hybrid structure of the TANs (as zero coupon, perpetual, bearer bonds) it is worth noting the following irony:  isn’t it peculiar how we marvel at, and handsomely reward, financial engineers on Wall Street when they create all kinds of debt instruments that get counted as equity (as an example, consider that perpetual bonds are ruled Tier 1 capital for banks under the Basel Accord rules), and all kinds of equity that look like debt? Or even better still, how we applaud the ingenuity of financial engineers when they stitch together such Frankenstein monsters as total return swaps, exchanging one set of returns on one asset for another set of returns, while never nominally changing the ownership of an asset (and remember, according to research by Jan Kregel, these types of instruments played a critical role in the 1997-8 Asian Crisis, as well as the more recent 2008 Financial Crisis). Yet for some odd, unspeakable reason, we simultaneously refuse to entertain even the possibility of a similar level of creativity and hybridization to the realm of government finance.  Or we hand wave it away, declaring it dead on arrival, simply impossible, fraught with all sorts of inconceivably difficult complications, and bound to eventually lead to fiscal irresponsibility, outright misallocation of resources, and ultimately, the dreaded source of much hyperventilation at the Bundesbank in particular, the eruption of hyperinflation…even despite the fact more and more eurozone nations are sinking into outright price deflation (and others, like Greece, have suffered outright income deflation). This appears to be the case even with things we should know nations have done successfully before (like no less than five different currency types running side by side in the US in the ‘20s), but no one seems to remember, or at least no one bothers to mention this “verboten” subject.  Money matters in Greece. Understanding the nature of money, and designing financing instruments informed by that understanding, matters if we are going to find a practical and effective solution to Greece’s conundrum of trying to exit austerity without having to exit the euro. Ignorance, both of these essential financial principles, and of economic history, is no excuse for sadistically demanding the deepening of a humanitarian crisis, and thereby potentially creating a failed nation state, all in the name of pursuing what is called sound finance or fiscal responsibility, but upon saner reflection, is far from either of these things.  It is high time to drop the charade, and it is well past high time to solve the problem.

06 марта 2015, 21:32

Rana Dasgupta: Can Democracy Survive Aggressive Global Capitalism?

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In the naughts, British-born novelist and author Rana Dasgupta was thrilled to call Delhi his home —a city still buzzing with possibility after India’s 1991 entry into the world of market-driven capitalism. Today, he raises concerns that India’s economic rise has come with massive inequality, environmental destruction, and potential social unrest. In Part 2 of an interview with the Institute for New Economic thinking, Dasgupta shares his view of the contradictions and tensions of India’s economic and political scenes. What does it mean that pro-business Hindu nationalist Narendra Modi was elected prime minister in 2014, while Arvind Kejriwal, a firebrand social activist who speaks for the poor, easily won a second term to lead the nation’s capital in Delhi? How does India’s warlike capitalism co-exist with its deeply democratic spirit? What are the biggest challenges for India going forward? Lynn Parramore: As the American middle class grows increasingly insecure, how is India’s new middle class faring? How do you view its economic status and political presence? Rana Dasgupta: India plugs into the global system at a later stage, so the wealth, security, and confidence the American middle class gained through the 1950s and 60s is probably never going to happen. A few decades ago, for instance, many college graduates in America and elsewhere worked in or even owned bookshops —small businesses that usually didn’t rise to big corporate levels. Then big chains came in and bought many of them up, and then Amazon replaced this entire system with new one in which there was a very highly paid, business-owning minority and lots of minimum wage work. Is globalizing India going to start with all those little bookshops and then go through the entire same process? No, it’s going to go straight to the end—with the book packing and delivery labor and the people at headquarters doing the marketing and financing. The form of capitalism that’s coming in India will never have the kind of promise that it had in 1950s America, even from the outset. America had to make various concessions to its working majorities for many reasons. The economy was growing so fast over the Second World War it was just better to settle disputes: give the workers what they want and get them carrying on producing. With the spread of global capitalism elsewhere, the business owners are more careful about giving way concessions because they’re starting off in a much less profitable kind of enterprise. They get the call center work and so on from the U.S. because of low costs, and have to be very careful about offering bargaining power to workers. They can’t start bargaining over the length of the working week or wages because the business will go under very quickly. They actually expect that India will become too expensive at some point and they’ll have to move to Bangladesh or wherever, but the costs of moving are high, so they want to put it off as long as possible. In America, at the end of the 19th century and the beginning of the 20th century workers were campaigning for security, to be looked after when they were sick and in their old age and so on. In India, and I suspect in lots of other places in the world, all these kinds of securities were associated with socialism. In capitalism, it’s assumed that no one is going to take care of you — and even in the Singaporean version of capitalism, the Asian values take care of all that social stuff. So it’s pure business. You take care of your sick parents, not the state. People don’t expect these securities, and the system has been set up to make sure that that kind of thing doesn’t happen. Wages are very seductive — people say, look, I can earn like a thousand dollars a month when my father earned maybe 200 dollars. Amazing! But I don’t have health insurance or old age insurance. People can buy themselves a mobile phone and that helps win certain political battles because middle class people can function very well at the everyday level and travel and do lots of things their parents couldn’t do. But this masks the fact that they’re very insecure. LP: In what ways has globalization impacted notions of democracy in India? RD: One shouldn’t imply that there’s no argument about these things, even among elites. There’s a lot of debate, and to some extent the election of Modi as prime minister and the election of Kejriwal, who just won a second term as Chief Minister of Delhi, are signs of this. What is democracy supposed to do for us? Is it just about making sure that big businesses continue making lots of money? The answer is not clear. Some people think that the best thing for India is lots of dynamic big business. It’s assumed that this creates lots of dynamism in the economy generally, and it also gives a sense of symbolic power to India, which is important to people who feel that the country has been historically marginalized and treated with contempt. We would like to have our Microsofts and so on. Modi makes a lot of his masculine power, the width of his chest and things like that.  He’s an authoritarian figure who is clearly anti-democratic in a lot of his instincts, and also very charismatic. He presents himself as vegetarian, frugal, and uncorrupt. He’s got this contemporary slant on Hinduism that is all about being personally hygienic in his habits, working very hard, and being devoted to development in business. Modi is actually married, but he’s always claimed to be a single man, because sex is one of those appetites he wishes to disavow. It’s like he wishes to say I don’t eat meat, I don’t have sex, I’m not interested in pleasures, women, and so on. I’m just working for the people. I don’t take money, I’m not corrupt. I started as a tea boy. I’m Hindu and I’m going to make India great. That combination of things is very attractive to some people. It’s about big business and a masculine, pure figure leading it. LP: What segments of the population are uneasy with his brand of politics? RD: Modi has been conspicuously unsympathetic to lots of people who are very uneasy for various reasons. He is uninterested in the environment, and that makes people uneasy – in Delhi for instance no one can breathe. The water’s polluted and the ground is polluted. A lot of Muslims are very uneasy because there is a quiet subtext of a Hindu purification of the nation. There’s also this very fascist undercurrent that Modi is too intelligent to actually state, but there’s a widespread feeling that he gives assent to it to some extent. A lot of women are uneasy about this very masculinist talk of India, coming at a time when women’s security is conspicuously under threat. There’s also labor —he has withdrawn or declared his lack of interest in a lot of the safety nets that were extended by the Congress Party to the poor. He basically has a neoliberal, trickle-down idea of how the economy works. With Modi’s huge election victory, a lot of people felt that India was supporting most the authoritarian capitalist way. But there’s another idea held in reserve which calls into question all of that — an idea of a much more radical democracy that comes closer to the people and makes the poor visible in its language. Kejriwal is part of that. The broom is the symbol of his party, the sweepers, the poorest people. He’s also interested in fighting corruption and reinventing democracy. For him, democracy is not about very remote people surrounded by enormous security and the kind of accoutrements of the most imperial British power. Kejriwal famously operated out of his tiny apartment in an unglamorous section of East Delhi. But he’s a guy who has been brought in to run Delhi just a few months after Modi’s victory, so this signals that both political currents are alive and well, that the jury is out on how politics and capitalism fit together in India. Modi can’t be too confident when in his own backyard in the capital, a tiny rival party won massively. He should be aware of putting up too many posters of himself and becoming too much of a one-party state kind of leader, because in the background there is this other, very different possibility. I think it’s to some extent Kejriwal’s victory is a backlash or a warning. India does have a deeply democratic spirit. That is the deepest thing about Indian culture. LP: Sounds like people in India don’t really like political extremism, but how do they feel about economic extremism? RD: I think that one of the things that happens in these kinds of countries is that people are a bit naïve about economic extremism. They take a long time to recognize it for what it is. Economic extremism could lead to political extremism because in the worst kinds of scenarios in India we could have enormous class warfare. We might have just so many people whose lives become unsustainable in the countryside arriving in the cities and realizing that they have nothing to do there and that they don’t have water to drink, and stuff like that. We might have big turbulence in the cities and then there would have to be some kind of political solution. LP: What do you hope for India’s future? Can the democratic spirit survive the continuation of the kind of war-like capitalism you’ve described? RD: I think and hope for more moderate solutions.  After all, this is a democracy. Poor people have more votes than rich people. The poor in India have an immense resilience, so things can get very bad before it has any political effects. They are incredibly networked. When people in the cities don’t have anything, the people in the countryside take care of them. So there’s a lot of slack in the system even when people are in very dire situations. But ultimately if, say, 500 million people can’t feed themselves or survive, or they just don’t have anywhere to go because the countryside is just full of factories and real estate, then they convert. Hopefully there will be political ideas that have enough quality that these situations can be resolved. There is the potential for immense wealth creation in India in the next 40 or 50 years, so there will be money and resources to redistribute and resources and as long as the tides of poverty and violence are not too catastrophic, then I think probably the system can readjust itself. Right now, within India, without anything else happening outside, there’s enough prospects for growth. In 40 to 50 years, economies of the West are going to be in dramatic decline, and in the longer term, I think the global system as a whole will face some sort of crisis and that will affect India, too. But in the medium term, India has pretty good growth prospects and hopefully there’s the quality of leadership and ideas that can redistribute some of that wealth and find livable solutions to some of these problems. But inequality and the environment are going to be massive in Indian politics. Really, no one is talking about water, but giving 1.3 billion people clean water to drink is becoming very difficult. And you can’t survive for very long without it, so if a city of 25 million people — and there are at least two Indian cities that have that kind of number — has no water, the effects are immediate. When there’s no housing the effects could be years away, but when there’s no water, there are water riots immediately. People who don’t have it will steal it because they have to. So water could be one of the triggering events in Indian cities for how a sort of mini-political revolution might happen and realization on the part of the middle classes that there is actually a wider world that is up against its limits.    

03 марта 2015, 22:03

Cecilia Nahon: Argentina vs the Vultures

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During the 1990s, Argentina had been the poster child for Neoliberal policies—they adopted virtually the whole of the so-called “Washington Consensus” agenda lock-stock-and-barrel. They even adopted a currency board. And unlike Euroland (which also adopted something like a currency board as each member adopted a foreign currency—the euro), Argentina would have consistently met the tight Maastricht criteria on budget deficits and debts over that period. The main purpose of the austere budgets and currency board constraints was to kill high inflation. It worked. But, over that period unemployment grew and GDP growth was moderate.  And because the peg was sold to the Argentinean public as “inviolable” it created great incentives to accumulate a lot of foreign debt, particularly dollar denominated.  By the late 1990s, however, growth slowed making it harder for Argentina to secure the dollars required to service its growing debt burden (it peaked at 180% of GDP) and the peg was ultimately abandoned.  One of the first policy initiatives taken by then President Duhalde was a massive job creation program that guaranteed employment for poor heads of households. Within four months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created jobs for 2 million participants which was around 13 per cent of the labour force.  But the country still had to deal with the legacy of its defaulted foreign debit, and this was the main challenge faced by the Kirchner Administration.   His government did reach agreement with 92.5% of its creditors for a restructured deal (interestingly enough, using the GDP-linked growth bonds, which was part of Greece’s recent proposal to the European Union).  The problem that has plagued the conclusion of this debt restructuring is a small group of funds, led by NML Limited, has rejected the settlement and secured judgment in the NY courts demanding full payment at par.  The court has supported this action, which means the vast majority of the so-called ‘exchange’ bond holders, who took settlements in 2005 and 2010 after Argentina defaulted on its public debt obligations, cannot be paid until NML, who has a small amount of so-called ‘hold out’ Argentine government debt, is paid in full. What can the Argentine government do in this situation, given it has been fully servicing the exchange liabilities but claims it cannot meet the original liabilities held by NML?  These are many of the issues touched on below by Ambassador Cecilia Nahon, Argentina’s Ambassador to Washington, DC. In this video:  Marshall Auerback

02 марта 2015, 18:33

Rana Dasgupta: How India’s Traumatic Capitalism is Reshaping the World

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A British national of Bengali origin, novelist Rana Dasgupta recently turned to nonfiction to explore the explosive social and economic changes in Delhi starting in 1991, when India launched a series of profoundly transformative economic reforms. In Capital: The Eruption of Delhi, he describes a city where the epic hopes of globalization have dimmed in the face of a sterner, more elitist world. In Part 1 of an interview with the Institute for New Economic Thinking, Dasgupta traces a turbulent time in which traditional ways of life are dissolving as a new class of entrepreneur-warriors wields unprecedented power. Delhi’s particular experience of capitalism, he argues, is a story that is changing the global landscape. Lynn Parramore: Why did you decide to move from New York to Delhi in 2000, and then to write a book about the city? Rana Dasgupta : I moved to be with my partner who lived in Delhi, and soon realized it was a great place to have landed. I was trying write a novel and there were a lot of people doing creative things. There was a fascinating intellectual climate, all linked to changes in society and the economy.  It was ten years since liberalization and a lot of the impact of that was just being felt and widely sensed. There was a sense of opportunity, not any more just on the part of business people, but everyone. People felt that things were really going to change in a deep way — in every part of the political spectrum and every class of society. Products and technology spread, affecting even very poor people. Coke made ads about the rickshaw drivers with their mobile phones —people who had never had access to a landline. A lot of people sensed a new possibility for their own lives. Amongst the artists and intellectuals that I found myself with, there were very big hopes for what kind of society Delhi could become and they were very interested in being part of creating that. They were setting up institutions, publications, publishing houses, and businesses. They were thinking new ideas. When I arrived, I felt: this is where stuff is happening. The scale of conversations, the philosophy of change was just amazing. LP: You’ve interviewed many of the young tycoons who emerged during Delhi’s transformation. How would you describe this new figure? How does he (and I say ‘he’ because this figure is nearly always male) do business? RD: Many of their fathers and grandfathers had run significant provincial businesses.  They were frugal in their habits and didn’t like to advertise themselves, and anyway their wealth remained local both in its magnitude and its reach. They had business and political associates that they drank with and whose weddings they went to, and so it was a tight-knit kind of wealth. But the sons, who would probably be now between 35 and 45, had an entirely different experience. Their adult life happened after globalization. Because their fathers often didn’t have the skills or qualifications to tap into the forces of globalization, the sons were sent abroad, probably to do an MBA, so they could walk into a meeting with a management consultancy firm or a bank and give a presentation. When they came back they operated not from the local hubs where their fathers ruled but from Delhi, where they could plug into federal politics and global capital. So you have these very powerful combinations of father/son businesses. The sons revere the fathers, these muscular, huge masculine figures who have often done much more risky and difficult work building their businesses and have cultivated relationships across the political spectrum. They are very savvy, charismatic people. They know who to give gifts to, how to do favors. The sons often don’t have that set of skills, but they have corporate skills. They can talk finance in a kind of international language. Neither skill set is enough on its own by early 2000’s: they need each other. And what’s interesting about this package is that it’s very powerful elsewhere, too. It’s kind of a world-beating combination. The son fits into an American style world of business and finance, but the thing about American-style business is that there are lots of things in the world that are closed to it. It’s very difficult for an American real estate company or food company to go to the president of an African country and do a deal. They don’t have the skills for it. But even if they did, they are legally prevented from all the kinds of practices involved, the bribes and everything. This Indian business combination can go into places like Africa and Central Asia and do all the things required. If they need to go to market and raise money, they can do that. But if they need to sit around and drink with some government guys and figure out who are the players that need to be kept happy, they can do that, too. They see a lot of the world open to themselves. LP: How do these figures compare to American tycoons during, say, the Gilded Age? RD: When American observers see these people they think, well, we had these guys between 1890 and 1920, but then they all kind of went under because there was a massive escalation of state power and state wealth and basically the state declared a kind of protracted war on them.  Americans think this is a stage of development that will pass. But I think it’s not going to pass in our case. The Indian state is never going to have the same power over private interests as the U.S. state because lots of things have to happen. The Depression and the Second World War were very important in creating a U.S. state that was that powerful and a rationale for defeating these private interests. I think those private interests saw much more benefit in consenting to, collaborating in, and producing a stronger U.S. state. Over time, American business allied itself with the government, which did a lot to open up other markets for it. In India, I think these private interests will not for many years see a benefit in operating differently, precisely because continents like Africa, with their particular set of attributes, have such a bright future. It’s not just about what India’s like, but what other places are like, and how there aren’t that many people in the world that can do what they can do. LP: What has been lost and gained in a place like Delhi under global capitalism? RD: Undeniably there has been immense material gain in the city since 1991, including the very poorest people, who are richer and have more access to information. What my book tracks is a kind of spiritual and moral crisis that affects rich and poor alike. One kind of malaise is political and economic. Even though the poorest are richer, they have less political influence. In a socialist system, everything is done in the name of the poor, for good or for bad, and the poor occupy center stage in political discourse. But since 1991 the poor have become much less prominent in political and economic ideology. As the proportion of wealth held by the richest few families of India has grown massively larger, the situation is very much like the break-up of the Soviet Union, which leads to a much more hierarchical economy where people closest to power have the best information, contacts, and access to capital. They can just expand massively. Suddenly there’s a state infrastructure that’s been built for 70 years or 60 years which is transferred to the private domain and that is hugely valuable. People gain access to telecommunication systems, mines, land, and forests for almost nothing. So ordinary people say, yes, we are richer, and we have all these products and things, but those making the decisions about our society are not elected and hugely wealthy. Imagine the upper-middle class guy who has been to Harvard, works for a management consultancy firm or for an ad agency, and enjoys a kind of international- style middle class life. He thinks he deserves to make decisions about how the country is run and how resources are used. He feels himself to be a significant figure in his society. Then he realizes that he’s not. There’s another, infinitely wealthier class of people who are involved in all kinds of backroom deals that dramatically alter the landscape of his life. New private highways and new private townships are being built all around him. They’re sucking the water out of the ground. There’s a very rapid and seemingly reckless transformation of the landscape that’s being wrought and he has no part in it. If he did have a say, he might ask, is this really the way that we want this landscape to look?  Isn’t there enormous ecological damage? Have we not just kicked 10,000 farmers off their land? All these conversations that democracies have are not being had. People think, this exactly what the socialists told us that capitalism was — it’s pillage and it creates a very wealthy elite exploiting the poor majority. To some extent, I think that explains a lot of why capitalism is so turbulent in places like India and China. No one ever expected capitalism to be tranquil. They had been told for the better part of a century that capitalism was the imperialist curse. So when it comes, and it’s very violent, and everyone thinks, well that’s what we expected. One of the reasons that it still has a lot of ideological consensus is that people are prepared for that. They go into it as an act of war, not as an act of peace, and all they know is that the rewards for the people at the top are very high, so you’d better be on the top. The other kind of malaise is one of culture. Basically, America and Britain invented capitalism and they also invented the philosophical and cultural furniture to make it acceptable. Places where capitalism is going in anew do not have 200 years of cultural readiness. It’s just a huge shock. Of course, Indians are prepared for some aspects of it because many of them are trading communities and they understand money and deals. But a lot of those trading communities are actually incredibly conservative about culture — about what kind of lifestyle their daughters will have, what kinds of careers their sons will have. They don’t think that their son goes to Brown to become a professor of literature, but to come back and run the family business. LP: What is changing between men and women? RD: A lot of the fallout is about families. Will women work? If so, will they still cook and be the kind of wife they’re supposed to be? Will they be out on the street with their boyfriends dressed in Western clothes and going to movies and clearly advertising the fact that they are economically independent, sexually independent, socially independent? How will we deal with the backlash of violent crimes that have everything to do with all these changes? This capitalist system has produced a new figure, which is the economically successful and independent middle-class woman. She’s extremely globalized in the sense of what she should be able to do in her life. It’s also created a set of lower middle-class men who had a much greater sense of stability both in their gender and professional situation 30 years ago, when they could rely on a family member or fellow caste member to keep them employed even if they didn’t have any marketable attributes. They had a wife who made sure that the culture of the family was intact — religion, cuisine, that kind of stuff. 30 years later, those guys are not going to get jobs because that whole caste value thing has no place in the very fast-moving market economy. Without a high school diploma, they just have nothing to offer. Those guys in the streets are thinking, I don’t have a claim on the economy, or on women anymore because I can’t earn anything. Women across the middle classes — and it’s not just across India, it’s across Asia —are trying to opt out of marriage for as long as they can because they see only a downside. Remaining single allows all kinds of benefits – social, romantic, professional. So those guys are pretty bitter and there’s a backlash that can become quite violent. We also have an upswing of Hindu fundamentalism as a way of trying to preserve things. It’s very appealing to people who think society is falling apart. LP: You’ve described India’s experience of global capitalism as traumatic. How is the trauma distinct in Delhi, and in what ways is it universal? RD: Delhi suffers specifically from the trauma of Partition, which has created a distinct society. When India became independent, it was divided into India and Pakistan. Pakistan was essentially a Muslim state, and Hindis and Sikhs left.  The border was about 400 kilometers from Delhi, which was a tiny, empty city, a British administrative town. Most of those Hindis and Sikhs settled in Delhi where they were allocated housing as refugees. Muslims went in the other direction to Pakistan, and as we know, something between 1 and 2 million were killed in that event. The people who arrived in Delhi arrived traumatized, having lost their businesses, properties, friends, and communities, and having seen their family members murdered, raped, and abducted. Like the Jewish holocaust, everyone can tell the stories and everyone has experienced loss. When they all arrive in Delhi, they have a fairly homogeneous reaction: they’re never going to let this happen to them again. They become fiercely concerned with security, physical and financial. They’re not interested in having nice neighbors and the lighter things of life. They say, it was our neighbors that killed us, so we’re going to trust only our blood and run businesses with our brother and our sons. We’re going to build high walls around our houses. When the grandchildren of these people grow up, it’s a problem because none of this has been exorcised. The families have not talked about it. The state has not dealt with it and wants to remember only that India became independent and that was a glorious moment. So the catastrophe actually becomes focused within families rather than the reverse. A lot of grandchildren are more fearful and hateful of Muslims than the grandparents, who remembered a time before when they actually had very deep friendships with Muslims. Parents of my generation grew up with immense silence in their households and they knew that in that silence was Islam — a terrifying thing. When you’re one year old, you don’t even know yet what Islam is, you just know that it’s something which is the greatest horror in the universe. The Punjabi businessman is a very distinct species. They have treated business as warfare, and they are still doing it like that 70 years later and they are very good at it. They enter the global economy at a time when it’s becoming much less civilized as well. In many cases they succeed not because they have a good idea, but because they know how to seize global assets and resources. Punjabi businessmen are not inventing Facebook. They are about mines and oil and water and food —things that everyone understands and needs. In this moment of globalization, the world will have to realize that events like the Partition of India are not local history anymore but global history. Especially in this moment when the West no longer controls the whole system, these traumas explode onto the world and affect all of us, like the Holocaust. They introduce levels of turbulence into businesses and practices that we didn’t expect necessarily. Then there’s the trauma of capitalism itself, and here I think it’s important for us to re-remember the West’s own history. Capitalism achieved a level of consensus in the second half of the 20th century very accidentally, and by a number of enormous forces, not all of which were intended. There’s no guarantee that such consensus will be achieved everywhere in the emerging world. India and China don’t have an empire to ship people off to as a safety valve when suffering become immense. They just have to absorb all that stuff. For a century or so, people in power in Paris and London and Washington felt that they had to save the capitalist system from socialist revolution, so they gave enormous concessions to their populations. Very quickly, people in the West forgot that there was that level of dissent. They thought that everyone loved capitalism. I think as we come into the next period where the kind of consensus has already been dealt a huge blow in the West, we’re going to have to deal with some of those forces again. LP: When you say that the consensus on capitalism has been dealt a blow, are you talking about the financial crisis? RD: Yes, the sense that the nation-state — I’m talking about the U.S. context — can no longer control global capital, global processes, or, indeed, it’s own financial elite. It’s a huge psychological dent in people’s faith in the system. I think what’s going to happen in the next few years is huge unemployment in the middle class in America because a lot of their jobs will be outsourced or automated. Then, if you have 30-40 percent unemployment in America, which has always been the ideological leader in capitalism, America will start to re-theorize capitalism very profoundly (and maybe the Institute of New Economic Thinking is part of that). Meanwhile, I think the middle class in India would not have these kinds of problems. It’s precisely because American technology and finance are so advanced that they’re going to hit a lot of those problems. I think in places like India there’s so much work to be done that no one needs to leap to the next stage of making the middle class obsolete. They’re still useful.      

27 февраля 2015, 01:07

Mario Seccareccia: Greece Shows the Limits of Austerity in the Eurozone. What Now?

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Featured: Huffington Post | AlterNet Mario Seccareccia, professor of economics at the University of Ottawa, has been outspoken in his warnings that austerity policies have the potential to smash economies and spread untold human misery. In his work supported by the Institute for New Economic Thinking and elsewhere, he has challenged deficit hawks and emphasized the need for strong government investment in things like jobs, education, health care, and infrastructure if economies are to prosper. In the following interview, he talks about why what happened to Greece was entirely predictable, why the Greeks were right to reject austerity in the recent election, and what challenges the country faces in forging a sustainable path forward with the left-wing Syriza party at the helm. Lynn Parramore: You have long been warning of problems in the Eurozone.  What do the Greek elections mean to the debate about austerity and how it impacts economies? Mario Seccareccia: I actually began warning about problems in the Eurozone even before they launched the Euro in 1999! A couple a years after the adoption, in 1992, of the Maastricht Treaty, which was the initial step in the creation the European Economic and Monetary Union or the Eurozone, I happened to be in Paris for the launch of a book that I had co-edited in French entitled Les Pièges de l’Austérité (The Austerity Traps) that had been published in November 1993. During the discussions, a number of us were already raising very serious questions about a treaty which prevented national governments from doing what they needed to do to stabilize their economies — namely engage in needed deficit spending, regardless of the magnitude, during times of recession for the purpose of stabilizing income and employment. Some of us at the book launch warned of problems that could arise from a European supranational currency and a central bank which was not accountable to any national authority and which would push countries merely to become hostages to the whims of the financial markets. Along with many others, I’ve also raised concerns over what economists call “deflationary bias” in the structure of the Eurozone — that is, the tendency for policies to focus on lower inflation instead of more jobs and growth and to prevent greater public spending as a means to achieve growth. I could see that Greece would be the country that would be hit first by these problems because it is financially the weakest link in the euro chain, and because of the high public debt ratio when it joined the Eurozone in 2002.  What is surprising is that it took until 2010 to reach such a crisis even though the warnings had been there for a long time.  Even at the start of the global financial crisis in 2008-2009, most European governments started stimulating their economies or bailing out their banks as we saw in Ireland and Spain. But no major cracks appeared until the end of 2009 when the financial markets got spooked because the Greek authorities were found hiding Greek sovereign debt with the aid of advisors of financial institutions. From 2010 onwards, Greece achieved notoriety because financial markets recognized that the country might decide not to comply with the terms of loan agreements with banks. Eventually in 2012, European leaders held a summit at the French resort of Deauville and agreed that if the private holders of sovereign debt wanted bailouts, they would be held responsible for the losses. Because of these developments since 2010, deficit hawks everywhere vilified Greece for all the supposed terrible consequences of government over-indebtedness, even though the structure of the Eurozone made it impossible for Greece to manage its economy effectively. Deficit hawks started preaching long-term austerity, and we’ve seen the awful consequences ever since. People have suffered terrible hardship and dislocation, with countries such as Greece and Spain reaching rates of unemployment worse that what happened in the United States in depth of the Great Depression. You’d be hard-pressed to find examples of such a severe collapse historically, with the possible exception of certain Latin American countries, such as Argentina in 2001. Those who predicted that that this austerity policy would eventually lead to an economic turnaround because of the belief in private sector rebound obviously got it wrong. After five years of negative economic growth, the Greek electorate — with incredible courage — told the so-called Troika that they had had enough, especially with these deep cuts in wages, employment, and pension transfers. LP: How have the news media and the pundits gotten the story of Greece’s economy wrong? MS: Ever since the end of 2009 when the story of Greece’s sovereign debt crisis began to unfold, austerity-pushing political leaders around the world have been saying that their country must not become the “next Greece.” Together with much of the international media, they have been perpetuating the view that government deficits are bad and that governments must seek balanced budgets, even if it means some necessary “temporary” hardship. Yet, the experience of the 1930s, which is being repeated with such vengeance in the Eurozone since 2010, is that pursuing austerity policies alone without some other outside stimulus, say, from increased net exports, can’t lead to balanced budgets. Instead, it leads to disaster. These policies destabilize the private sector to such an extent that they actually jeopardize chances of any future recovery. Many Greek citizens felt that they had reached this threshold and wanted a reversal of policy. LP: Tsipras has promised to reverse some tax hikes and cuts to social services, but Greece is still in the Eurozone. Because, as you mention, it doesn’t have control of its own currency, the Greeks will have to negotiate with the so-called Troika of the European Union, IMF, and the European Central Bank. Do you think there is a possibility for meaningful changes given this challenge? And how might internal Greek political problems, especially with Tsipras' possible coalition partners, affect the situation? MS: This is the “million euro” question: how can the Greek state invest in its economy while still remaining in the Eurozone?  Syriza faces a huge challenge politically since the pro-austerity parties in Greece, i.e. New Democracy, LAOS, PASOK, Democratic Left, KIDISO, and POTAMI, still constitute a fairly large block of the vote and the majority of the electorate would seemingly still prefer to remain in the Eurozone.  Since it doesn’t have a mandate to take Greece out of the Eurozone, what other options are available? We have seen already how Germany has warned the new Greek government that it must live up to commitments to its creditors, and with Greece's current bailout program ending in February it will have little breathing room. There may well be a willingness to give the Greek government more time to make its debt payments, but the present Troika seems rather uninterested in outright debt cancellation, even if there may be some desire to negotiate some smaller changes, like the creation of a distinct Eurozone-wide public investment fund which might do things like build and repair roads or support clean energy projects and generate sufficient overall growth, especially in the rest of Eurozone, to perhaps spill over into Greece and turn around its current account balance and also raise government revenues. All of this means negotiations with many partners that will take time for the present coalition government. On the other hand, the Greeks could get some short-term relief with the depreciating euro in terms of increased net exports for all countries of the Eurozone. Also in the short term, there is the European Central Bank’s commitment to do quantitative easing, or pumping new money into the economy. I have argued that quantitative easing doesn’t work to stimulate private sector spending, but it might help backstop what would have been an eventual financial collapse of a number of Eurozone countries. A lot depends on how big the European Central Bank is willing to go with its plans. If the action was bold enough, Greek banks could benefit indirectly and it could give the Greek government some breathing room and prevent a default, assuming its current creditors demand payment. In the medium term, Greece could create some form of parallel currency set at par with the euro, like Argentina did in the early 2000s. The government in Argentina used “patacones” to buy things and pay employees and they became quite acceptable because ultimately regular people could pay taxes with this currency. The Greeks could have a parallel national currency without altogether abandoning the euro. So these various short-to-medium-term measures may well be available to prevent default, but, at the end, if the Greek government cannot renegotiate its crushing debt burden — without some form of debt forgiveness in however form it will be disguised — you could see a Greek default happen. If it reaches that point, I don’t think there’s anything in the Eurozone treaties that would prevent Greece from retaining the euro. In this case, it will have to learn from the experiences of dollarized countries such as Ecuador that have been surviving under very severe constraints on fiscal policy but without the oil revenues that until recent times have served well to replenish Ecuador’s coffers. LP: Lots of countries, like Italy, Spain, Portugal, and maybe even France, are getting close to the distressed economic conditions of Greece. How will a Syriza government in Greece impact them? How do you think those governments will relate to Germany after the election? MS: I believe that this will give a huge boost to those anti-austerity parties, especially in southern Europe, that are in a similar situation to Greece. That’s going to put further pressure on Germany to accommodate. But it will also boost the support of the nationalist right-wing anti-euro parties, as in France. If all these parties manage to achieve power, it may well be either that the Eurozone countries establish ways for countries to have more latitude in taking action to stabilize their economies. If some of the right-wing parties come to power, such as the National Front in France, it will mean the end of the euro. The withdrawal of a core country such as France from the Eurozone could lead to currency realignments at the regional levels, without any chances for the survival of the entire Euro bloc. LP: Do you think there are lessons in what has happened in the Eurozone for students of economics and the way the subject is taught? MS: Yes, indeed. Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended. What the Eurozone crisis teaches is that this perception of how the monetary system works is quite wrong, because, in times of crisis, the democratic state must be able to spend money in order to meet its obligations to its citizens. The denationalization or “supra-nationalization” of money with the establishment that happened in the Eurozone took away from elected national governments the capacity to meaningfully manage their economies. Unless governments in the Eurozone are able to renegotiate a significant control and access money from their own central banks, the system will be continually plagued with crisis and will probably collapse in the longer term.

27 февраля 2015, 01:06

Lance Taylor: What Thomas Piketty and Larry Summers Don’t Tell You About Income Inequality

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Featured: Huffington Post In a new paper for the Institute For New Economic Thinking’s Working Group on the Political Economy of Distribution, economist Lance Taylor and his colleagues examine income inequality using new tools and models that give us a more nuanced — and frightening —picture than we’ve had before.  Their simulation models show how so-called “reasonable” modifications like modest tax increases on the wealthy and boosting low wages are not going to be enough to stem the disproportionate tide of income rushing toward the rich. Taylor’s research challenges the approaches of American policy makers, the assumptions of traditional economists, and some of the conclusions drawn by Thomas Piketty and Larry Summers. Bottom line: We’re not yet talking about the kinds of major changes needed to keep us from becoming a Downton Abbey society. Lynn Parramore: In America, the top 1 percent has steadily increased its income share while the rest are either treading water or sinking. Let’s talk first about how you’re measuring the problem of inequality.  Lance Taylor: I think we need some detail to really understand what’s going on. So I look at inequality across low, middle and top groups. How does the share of income of the richest group compare to the others? Where do these groups get their income and what do they do with it? Is the middle getting squeezed? What’s driving income towards the rich? In the U.S., if you are in the bottom 50-60 percent group of households, your main sources of income are wages and, especially for the very bottom, government transfers like Medicaid and Social Security. In the reported data, this group has a negative savings rate, meaning that people spend more than they receive. Their average wealth is close to zero. If you’re in the “middle class” — households between the 61st and 99th percentiles — wages are your main income source, though you may get some capital income from interest and dividends. In recent decades, people in this group have been getting squeezed as income flows shift toward profits for business owners rather than wages for employees. The variation in wages has been increasing among this group as well. The middle class has positive saving rates and visible net worth, largely concentrated in housing. If you’re in the top one percent group, you get income from wages, with a lot of variability among individuals. But bigger chunks come from interest and dividends along with proprietors' incomes, like lawyers’ fees and big farmers’ subsidies and sales. These people have high saving rates and substantial wealth, including equity. The top group holds one-third of total equity in the U.S. and receives large capital gains. Their share of total disposable income (not including capital gains) has jumped by around ten percentage points since the mid-1980s. This is an enormous change in shares, very unusual in historical terms. The top group’s income now exceeds three trillion dollars, one-fifth of the total. The picture we get from making these comparisons can be captured in a ratio named for Gabriel Palma of the University of Cambridge, the “Palma ratio” which draws a contrast between the rich and poor. It tells us that in the U.S., the income per household of the top one percent compared to the bottom 40 percent has more than doubled since the 1980s, while incomes at the bottom were virtually flat. Compared to other rich countries, the ratio here is very high. LP: Your research suggests that it’s not just some natural process that’s causing more wealth to flow towards the rich than the other two groups. How is it happening? LT: There are three things happening that seem especially important to me: stratospheric CEO and executive pay, shrinkage in the wage slice of the total income pie due to various social and political forces, and a trend of higher capital gains or rising asset prices which benefits the rich. None of these factors is inevitable. First, salaries at the very top shot up after 1980, as Thomas Piketty emphasizes. This was mostly among CEOs (along with other top executives) who get paid in eight figures with salaries and stock options. It’s hard to explain skyrocketing  executive pay on purely economic grounds. There is no reason to believe that top managers circa 2015 are more or less essential than, say, in 1975 when comparable pay was ten times lower. The best explanation I can come up with is that a social contract or unwritten law against exorbitant executive income has disappeared in the U.S. We’ll only get it back by social consensus and/or seriously progressive taxation. Second, people are working more productively, but they aren’t getting paid for it. Since World War II, there have been predictable cycles in America (in a pattern for rich capitalist economies noted by Karl Marx 150 years ago). When we come out of a recession, productivity rises as firms make more use of labor already on the payroll. Wages, on the other hand, are stable. So business owners end up with more profits, and business activity picks up. The labor market gets tighter and eventually wages begin to catch up, cutting into profits, capital investment, and eventually, the total demand for goods and services in the economy. In keeping with this cycle, real wages now may finally be creeping up after the Great Recession. But the bad news is that the overall wage share has been trending downward – another huge inequality jump. The reasons again are social and political. Three of the most obvious explanations of why real wage growth (adjusted for inflation) is failing to keep up with productivity are the impact of globalization,  repression of labor activism and a stagnant minimum wage.  Servaas Storm and C.W.M. Naastepad of the Delft University of Technology document how the U.S. ranks low on employment protection, expenditure on active labor market policy, and collective bargaining. Social attitudes and political decisions are the reasons why. The third factor has to do with capital gains, or rising asset prices,  a trend that mainly benefits people with high incomes.  Asset prices are rising for a lot of reasons, like corporate share buybacks, which tend to pump up the price of shares in a way that benefits executives and others who hold a lot of company stock, low interest rates pegged by the Federal Reserve, and speculation. Equity price increases reduce business net worth on paper or increase debt for buybacks.  But they are a visible income flow like interest and dividends for their recipients who also benefit because the U.S. tax rate on capital gains is low. LP: Let’s take a look at a couple of ideas that are popular right now, like raising the minimum wage and increasing taxes on the highest income brackets. How might these measures impact income inequality in America? LT: How much could the top one percent “reasonably” be taxed? If we wanted to tax them as much as rich European countries do, we’d have to double their tax burden. The Obama administration is now floating an increase of about one percent of the top group’s income. That’s not going to do a lot for income inequality given how much richer the rich have gotten since 1980. A marginal tax rate around 60 percent, the Scandinavian norm, could do the trick, but putting it into place here seems highly unlikely. The same observation applies to higher capital gains taxation and Piketty’s recommendation of a tax on wealth. It won’t be enough. Of course taxes could also be raised on less affluent households, but the prospects are not much better. Our models show that unless the U.S. tax/transfer system is made dramatically more progressive, adjustments around the edges will not have much impact on income inequality. On the wage front, we looked at what would happen if you raised the wages 10 percent for the poorest 20 percent, and 5 percent for the next 20 percent. That would sound like a pretty big proposal if an American politician floated it. But our models show that it hardly moves the Palma ratio. It does very little to change income inequality. Also, you have to keep in mind that the U.S. transfer system effectively “taxes” you at a steep rate if you’re low income and get a higher wage because your benefits, like Medicaid, will be reduced. When you factor in these kinds of mechanisms, you see that policy initiatives within the range now be being discussed will not strongly affect income inequality in the U.S. economy. LP: Thomas Piketty’s work on inequality has generated enormous interest.  How does your analysis of how the rich grow richer differ from his? LT: To judge from his writing, Piketty is well aware that social relations and power strongly influence income inequality. But there are problems with the way he thinks economies work in the long run. He’s using the standard supply-driven growth model, assuming that there is always full employment and investment is determined by saving. But there’s another way of looking at growth, with less than full employment and investment driving demand.  From this view, economies grow when people spend their money on goods and services. Luigi Pasinetti, a Cambridge economist, has looked at the economy in terms of two classes – “capitalists” who collect profits on the capital they own and “workers” who get the rest of income. Extending his work shows that when the wage share falls over time, workers will not only have less wealth, but economic growth will slow because people don’t have as much money to buy goods and services. In other words, wage repression (and excess capital gains, too) create stagnation in the long run.  You can think of the top one percent as Pasinetti’s capitalists and the middle class as his workers. (Poor households don’t figure into the story of wealth because they don’t have any, although they do have an impact on the economy when they spend money on goods and services). Our preliminary simulations show that the top one percent’s share of wealth might stabilize in the range of fifty percent (half the total pie), and the growth rate might settle down at less than two percent per year, which would be a less vibrant economy than we’re used to. One bit of good news for middle class families is that in the long run, they do retain the power to save from wages, which to an extent protects their wealth. Piketty does not take this linkage into account.  But overall, a falling wage share will hurt the entire economy and hold back everyone, even, eventually, those at the top. LP: Larry Summers, former Treasury Secretary and advisor to President Obama, is now co-chairing a commission on inequality sponsored by Center for American Progress (CAP). The commission has a new report that looks at how to increase wages and living standards for working families. Do you think their suggestions could work? LT: Summers is the bellwether of mainstream macroeconomics. When he changes his mind others follow, so his recognition of the problem of income inequality is all to the good. But the mainstream’s basic supply-driven growth model  is the same as Piketty’s, which is reflected in the CAP report.  The report does mention the problem of deficient demand — how the economy suffers when regular people don’t have enough money to spend on goods and services, and it advocates policies to boost income. But the basic analysis looks at potential  economic growth from the supply side. Its recommendations such as improved education (or more “human capital”), modest tax reform, and provision of public jobs, tailored to perceived political limitations, are mostly supply-oriented and of the same magnitude as the ones I’ve mentioned.  I doubt that they would much impact on American inequality. LP: In your view, is there anybody in the U.S. offering meaningful approaches to income inequality? LT: Not in the general political debate. LP: So what’s to stop us from becoming a Downton Abbey society? LT: We’ve got to have a real social consensus that the way things are going is dangerous and unacceptable, and an understanding that it will take seriously progressive taxation to make a dent in the problem. But I am not optimistic about the prospects. Through various channels ten percent of national income has been transferred to an über class. Without the political will, that sort of change is difficult to undo.