Andrea Terzi: zorra, aurrezkiak eta hazkunderako politika fiskalaren beharra (1)

1 Ikus http://privatedebtproject.org/view-articles.php?Connecting-the-Dots-Debt-Savings-and-the-Need-for-a-Fiscal-Growth-Policy-21.

2 Ingelesez: “Twice in the second half of the twentieth century, in the midst of a robust economy, economists optimistically talked about the taming and even “the death of the business cycle” based on the belief that advances in macroeconomics had reached a point of perfection. Yet, both times, the economy underwent serious turbulence and the policies that seemed to have “solved the problem” proved inadequate to the challenges presented by unexpected realities. In the 1970s, the “neo-classical synthesis,” with its faith in forecasting and macroeconomic “fine tuning,” succumbed to stagflation and a new theory, the Monetarist paradigm, came to prominence.

By the 1990s, Monetarists and their descendants— the rational expectations and New Keynesian models—had convinced themselves, and policy makers, that they could stabilize the economy for good and that policy intervention beyond interest rate adjustments and inflation targeting was no longer necessary. The Financial Crisis of 2007-8 and the subsequent “Great Recession” should have been a wake-up call that, just as in the 1970s, instability was not gone and that a new paradigm for running the economy was needed.”

3 Ingelesez: “Yet, as of today, the orthodoxy continues to dominate the policy debate in the United States and in Europe shaping inadequate policy responses to the main problem of contemporary capitalism: the persistence of private debt overhangs and their impact on both short run and long run growth. However, rather than examining these issues, OECD countries—Europe in particular—and many emerging markets have continued to embrace a framework under which central banks setting the “price” of money, or setting the quantity of the “monetary base”, is the only game in town. Accordingly, the world’s central bankers have launched a series of ad hoc stabilization programs, driven by extensions of the Monetarist/New-Keynesian paradigm, which evidently do little to address the consequences of the financial crisis.”

4 Ingelesez: “An essential element for constructing a more effective policy framework for understanding our current private debt driven malaise is a greater appreciation of the macroeconomic consequences of debt. However, the dominant economic paradigm has ignored the importance of private debt levels for the long term growth and stability of the economy.  And it has propagated an inaccurate picture of the relationship of private debt to the fiscal stance of the state. Rather than understanding how public debt can validate private savings and spur private investment, the Monetarist/New-Keynesian framework has confused fiscal expansion with the expansion of the size of the public sector. This has limited the options of policy makers and put the OECD, and many emerging, economies on a path toward economic stagnation.”

5 Ingelesez: “In this piece, I will review the assumptions of policymakers in the United States and in Europe, spell out their policy shortcomings, and suggest steps toward achieving sounder policy options based on fiscal policy. The evidence for what needs to be done is staring us in the face and the economics profession must begin to connect the dots between public debt, private debt, and personal savings. A debt-driven perspective allows us to break the remnants of the Monetarist orthodoxy, including recent calls for direct monetary financing, or “helicopter money,” and construct an argument for the effective deployment of fiscal policy.“

6 Ingelesez: “Private Debt and the Limits of Central Bank Action

The Great Recession has offered a grand ‘natural experiment’ to test the theory that central bank action is the most effective tool for steering the economy along its long-term path. According to this majority view, the manipulation of interest rates is the most effective lever for optimizing macroeconomic outcomes. This occurs by setting policy rates in response to expected inflationary pressure, on the condition that central bankers act independently of ‘short-sighted’ government preferences.

This highly commended strategy did not prevent the financial, banking, and economic collapse of 2008, and yet, notwithstanding this failure, central banks have remained on the center stage of macroeconomic governance. When it became clear that they were coping with new conditions, central banks deployed a range of exceptional measures that nevertheless conform with the pre-crisis policy paradigm. Unconventional policies such as balance sheet expansion or negative interest rates have marked no fundamental break with the prevailing framework of monetary policy, as they continue to aim at traditional targets: lowering interest rates across the yield curve, raising inflation expectations, boosting the supply of credit, and triggering the private sector to borrow to spend.”

7 Ingelesez: “Far from offering a new approach, “unconventional” monetary actions are rooted in the assumption that the economy needs bigger doses of the same old medicine. If interest rates are not low enough, they can be set to zero, or even below zero; if low policy rates are not enough, central banks can buy assets and enlarge their balance sheets to issue more currency; if inflation is too low, central banks may even consider raising their inflation targets.

These policies are self-defeating. An increasing number of commentators have shown that the U.S. financial crisis was the result of the financial system having become highly vulnerable as a result of an increasing and eventually unsustainable increase in private leverage. And yet, subsequent monetary policy was ultimately aimed at restoring growth through a credit-induced expansion of more bank lending. By aiming to foster the growth of private debt at a time when private agents are deleveraging their balance sheets in an effort to lighten debt loads, central banks are “pushing on a string.”

8 Ingelesez: “Unsurprisingly, eight years of unprecedented low-interest rates and an unparalleled flood of liquidity engineered through central bank asset purchasing programs have yielded disappointingly weak growth in bank lending in the US and even more anemic outcomes in Europe. Yet, the belief that monetary policy should be the main driver of economic interventions has remained largely unchallenged, to the point that the differences in the economic performance of Europe and the US are often explained on the basis of differences in monetary policy implementation (choice of tools, timing, readiness to act), while ignoring the relevance of fiscal policy divergences between the two regions.”

9 Ingelesez.: ”Two Courses to Recovery: The Difference that Fiscal Policy Can Make

The importance of fiscal policy as a deciding factor in economic recovery from a debt-driven crisis is clearly visible in comparing the post-2008 experiences of the United States and Europe. While the US economy recovered slowly from the freefall of 2008-2009, its growth was considerably faster than that of the Euro Area’s (EA), as the latter soon entered a second, double-dip, recession. Between 2008 and 2014, the EA’s average annual growth was a negative 0.25 percent, compared to a positive 1.4 percent in the United States. Europe’s painfully low real incomes and high regional unemployment, especially among youth, have created a fertile breeding ground for resentment towards national governments and skepticism about the euro and European integration at large. A fact that has become obvious even to the most skeptical observer with Britain’s vote to leave the EU.

A number of commentators have attributed the US economy’s stronger growth performance to  the allegedly more aggressive approach of the Fed when compared to that of the ECB. Yet, these same commentators ignore the larger differences between the fiscal stances of the two regions. After 2008, the US general (federal, state, and local) government deficit reached 12.6 percent and remained above 8 percent for five straight years, while the overall fiscal deficit in the EA (all national governments combined) exceeded the 3-percent political threshold for only four years and was never above 6.3 percent.”

10 Ingelesez: “Charts 1 and 2 show the difference between American and the EA fiscal approaches.

While in the US, fiscal deficits were de facto permitted in order to accommodate the downturn, fiscal discipline became top priority in Europe in 2010, as the recession pushed the deficit/GDP ratios of all EA countries (except Luxembourg and Finland) above the 3-percent threshold. The ‘austerity’ measures that followed (consisting of spending cuts and tax hikes) began to act pro-cyclically, worsening the recession in the EA. While the absolute value of overall public deficit fell, joblessness rose dramatically.”

11 Ingelesez: “As Chart 3 demonstrates, the recession, and the austerity-driven deflation that followed, exacerbated differences between EA regions. The effect of austerity was exacerbated by an interpretation of treaty prohibitions against monetary financing that prevented the European Central Bank (ECB) from purchasing national debts. In the midst of the crisis, this practice seriously hampered the single currency, as the ECB was no longer able to maintain a common interest rate throughout the EA.”

12 Ingelesez: “In 2012, when it was clear that this approach was leading the EA to the brink of operational implosion, the ECB reformed its operational practices and became willing to be an unlimited buyer of government debts, on the condition that the governments complied with EU guidelines. While the monetary union was no longer in danger of undergoing an operational breakdown, a second phase of the EA crisis was on its way because the deflationary bias of EU fiscal rules were not relaxed. Rather they were made even stricter.”

13 Ingelesez: “The European Approach to Fiscal Discipline and the Ensuing Policy Muddle

Before moving on in our comparison, there is one important reason for pausing to discuss the conceptual and political backgrounds to the EA’s fiscal rules. Europe has become the sick man of the world economy, and its fragile polities are now under extraordinary pressures from migrant flows, populist movements, and a rising discontent with European institutions. If its fiscal rules are an important part of the problem, then a valuable solution must entail some form of revision of such rules.”

14 Ingelesez: “European institutions were built on the premise that expansionary fiscal policies have limited effects on the economy, and that these effects are likely to be more than offset by the consequence of rising public debts. This belief belongs to the policy consensus that reached its apogee during the “Great Moderation” of the 1990s. It remains relatively hegemonic and guides the policies of most major developed as well as many developing economies.”

15 Ingelesez: “The current EA consensus traces its origin to a branch of public choice theory. Public choice theorists argue that it is politically easier to increase spending on entitlement programs (such as social security and other compensations or benefits) than to raise taxes. Voters are inherently biased towards government deficit spending and governments are inherently biased towards enlarging their size well beyond what is economically sustainable. To solve the problem of the short-term horizon of voters in the democratic decision-making process, public choice theorists argue that an institutional structure that limits the ability of governments to meet voters’ preferences for more spending must be established.”

16 Ingelesez: “If we accept the notion that governments are incapable of responsibly exercising the ability to create money, then the power to spend should be divorced from the ability to spend. While governments maintain the power to create and allocate the wealth generated by its tax receipts to the private sector, the monopoly power of issuing the quantity of currency should be transferred to an independent central bank. This means that any government spending in excess of tax revenue must be funded by borrowing from private holders of the national currency rather than by compelling the central bank to fund it. To avoid any disguised political pressure on the central bank, the latter should be formally prohibited from funding deficits.”

17 Ingelesez: “This principle became a central organizing principle of the architecture of the EA. Members of the monetary union agreed to complying with fiscal rules and permanently losing access to central bank money as a price to be paid for EA membership. Governments could fund any spending in addition to tax revenue only by issuing credit-sensitive debt to the private market. Separating the power to spend euros from the power to issue euros was considered an opportunity to induce public sectors to lose their hefty weight.”

18 Ingelesez: “Things did not go this way, and when the crisis burst, it triggered a pro-cyclical reaction that made Europe the economic region with the slowest growth in the world since 2000. This unfortunate outcome is the result of the mistaken belief that fiscal discipline is the best tool to downsize the public sector and thus create the conditions for higher growth.”

19 Ingelesez: “Accordingly, the goal of moving Europe towards a new growth model based on the private sector also entailed that (biased) voters would not be asked to implement these changes. Rather, they would be compelled to face the ‘full cost’ of social programs. It was thought that once governments were forced to fully fund their spending with taxes, the consensus for social programs and big government would disappear. This entailed the assumption that communicating the benefits of a ‘culture of stability’ through government budgets would strengthen political support for the structural changes and that, in turn, the positive effects on growth would come fast.”

20 Ingelesez: “All of this has led to a muddle at the core of today’s policy debates which conflate two problems that should be treated separately. One is the question of whether or not a smaller-sized public sector can be a factor of growth. The other is whether or not smaller public debt can be a factor of growth. These are profoundly distinct issues.”

21 Ingelesez: “The question of the optimal size of the government sector is the question of the (direct and indirect) allocation of real resources to the public purpose. Evidently, if more people are hired to manage government programs, fewer people are potentially available to produce private goods, and the desirable balance is found on the basis of a political evaluation of the net benefits of government programs.”

22 Ingelesez. “The optimal size of public debt, and correspondingly the question of an optimal tax revenue for funding a government of a particular size, is a wholly different question. As observed in the European experience, when tax revenue is too high, the macroeconomic effects can be very harmful. Indeed, a ‘sustainable’ fiscal policy cannot be based on the premise that the budget should be balanced at any given time horizon. Rather, a ‘sustainable’ fiscal policy can only be defined in relation to the dynamics of savings, debt, and private spending, and to its ultimate effects on employment and economic prosperity.”