Andrea Terzi: zorra, aurrezkiak eta hazkunderako politika fiskalaren beharra (eta 3)

1 Ikus https://www.unibertsitatea.net/blogak/heterodoxia/2016/07/16/andrea-terzi-zorra-aurrezkiak-eta-hazkunderako-politika-fiskalaren-beharra-1/.

2 Ikus https://www.unibertsitatea.net/blogak/heterodoxia/2016/07/17/andrea-terzi-zorra-aurrezkiak-eta-hazkunderako-politika-fiskalaren-beharra-2/.

3 Ingelesez: “The Relationship Between Fiscal Policy and Growth

The Great Financial Crisis was the outcome of private debt having outrun income growth to the point of creating the conditions for a systemic collapse. This is said to have caused private debt to be ‘absorbed’ by public debt, thus shifting the ‘burden’ on to public finances. In Europe, this indeed threatened the sustainability of member countries’ finances. Under existing fiscal rules, letting public debt rise in response to the crisis was not an option, and this impediment made deleveraging in Europe comparatively more painful than it was in the United States. While EA governments were compelled to retrench, thus exacerbating the recession, the rise of public debt in the U.S. partly attenuated the effects of the decline in private-sector spending.”

4 Ingelesez: “With no fiscal support, the pro-cyclical effect of the decline in income in Europe was brutal (albeit unevenly distributed across the EU). EU policy-makers seemed totally unaware that forcing fiscal retrenchment during a time of debt deleveraging meant giving up one key source of debt that could support a rising demand for private savings. When an increase in public debt is not an option in offsetting a fall of credit expansion, macroeconomic policy runs out of ammunition. Public debt restructuring or cancellation only causes further losses to its holders pushing down demand even more. In this situation, only a positive external balance can offer a temporary solution.”

5 Ingelesez: “My argument, that sustainable economic growth structurally needs fiscal support may appear preposterous in the context of the last 20-25 years of ‘Great Moderation’ prior the global crisis, when discretionary anti-cyclical fiscal policy played a very marginal, if any, role. The fact that non-inflationary growth was obtained without discretionary fiscal policies was considered proof that a market economy is fundamentally self-adjusting and that all is needed is a central bank aimed at price stability. This same belief is the basis for the view that the crisis must have been caused by central banks setting the ‘wrong’ interest rates, thus sending the wrong incentives to private agents. This also implies that the solution is not to restore obsolete (and potentially destabilizing) fiscal policies but to let deleveraging unfold and implement structural changes and reforms as needed.”

6 Ingelesez: “However, the story of the Great Moderation is quite different. As a number of critics argued at the time, the Great Moderation was largely supported by a massive private credit expansion. This was the outcome of a broader political-economic architecture that combined a fast-growing financial sector, a booming portfolio management industry supported by savings incentives, the downsizing of the welfare state, and an increased tolerance for a more uneven income distribution. The effects of this were, sadly, only revealed during the financial crisis and subsequent “Great Recession.”

7 Ingelesez: “Through the 1990s, the increased demand for savings was supported by an extraordinary rise in private debt, complemented by a big wave of new public offerings. Average income growth continued, but became increasingly vulnerable to disruptions as household debt burdens increased. When the crisis hit, governments were forced to rescue big, systemically important financial institutions fueling resentment against “big government” and the rise of powerful populist, anti-establishment political movements.

Instead of providing a stable fiscal support to growth, states in the developed world found themselves fighting brush fires by rescuing the financial sector. Yet the cause of the conflagration was not an unpredictable accident such as a random exogenous shocks, or a random accident that could have been prevented with more careful supervision. It was because of grossly mistaken economic assumptions, based on a flawed model.”

8 Ingelesez: “Connecting the Dots: Policy Choices for an Economic Recovery

In economics, as in any social science discipline, theories that become well established and ‘orthodox’ are not always ‘the best-known answers’ available. The analysis above is at variance with a number of beliefs in mainstream economic thinking. Yet, the essence of this analysis draws from a number of past and current contributions, providing a better account of the policy failures before and after the Great Recession. We only need to connect the dots.”

9 Ingelesez: “In summary, there are a number of lessons that we should have learned from the global crisis with regard to the macroeconomics of private and public debt, including:

• The flow of private spending ultimately depends on the relationship between the desire to accumulate financial savings and the growth of (private and public) debt that validates and offsets those savings.

• When private credit expansion is the main factor supporting growth, the economy becomes increasingly vulnerable.

• At high levels of leverage, a slowdown of income growth can trigger a violent downward adjustment of the imbalance between saving desires and sustainable indebtedness.

• When an imbalance between saving desires and sustainable indebtedness develops, a timely fiscal adjustment acts as a stabilizing factor and prevents  a financial crisis from spilling  over into the real economy.

• Public debt can and should be kept sustainable by the central bank acting as a potential buyer of public debt and letting the currency float.

• Setting monetary financing limits to the government can be highly harmful, as the near implosion of the euro in 2012 proves.

• Setting limits to public deficits and debt curbs the ammunitions needed to prevent a downturn.”

10 Ingelesez: “Predictably, this makes a powerful case for reclaiming the fiscal tool as an active policy instrument to prevent financial instability from spilling over into the real economy. This, however, does not necessarily entail restoring the 1960s, neo-Keynesian fine tuning approach. Supporters of discretionary fiscal policy have always acknowledged implementation problems. Indeed, history offers a number of examples of the two very contradictory kinds of risk: unrestrained issues of public debt (often including massive purchase of foreign currency) often ends in hyperinflation; and fixed limits to public debt (often justified by a buoyant economy driven by private debt) ends in financial and economic collapse. A better design of fiscal policy should include an independent institution’s (perhaps a central bank) assessment of the consequences of the current mix of private and public debt and an independent policy-making institution’s assessment of the right level of taxes for the current level of discretionary government spending. A job guarantee program could automatically generate fiscal deficits in response to fluctuations in the business cycle.”

11 Ingelesez: “These tools can close the output gap without requiring the now popular “helicopter money” approach. This proposal, advocated by commentators left and right, would have the central bank directly finance a portion of net government spending. Its logic draws from the Monetarist model where spending depends on the quantity of money rather than financial savings in the economy, Yet, as demonstrated in this piece, the form in which public debt is owned by the private sector has no direct impact on savings and debt and should be irrelevant to spending decisions. Indeed, one could argue that the massive purchase of government debts by central banks during the financial crisis was already a form of “outright monetary financing,” with no visible consequences for economic growth.”

12 Ingelesez: “The ‘helicopter money’ approach seems most concerned with promoting a fiscal expansion that does not create more public debt in the hands of the private sector. Yet, the best policy response to the inherently cyclical tendencies of the private sector is to construct a policy framework that, while meeting the concerns of limiting spending abuses by governments, fully and efficiently addresses the question of the financial function of public debt as a key stabilizing factor in a monetary economy. The longer we avoid addressing this problem, the longer we will be doomed to using ineffective policies to the most pressing economic problem of our times.”

13 Ikus http://www.zerohedge.com/news/2016-07-15/what-helicopter-money-goldman-explains.