Bill Mitchell-en Britain is now free of the legal neoliberalism that has killed prosperity in Europe
(http://bilbo.economicoutlook.net/blog/?p=46654)
(i) Sarrera gisa
So Britain finally became free – sort of – from the European Union last week. I haven’t fully read the terms of the departure but the progress I have made so far in the text (several hundred pages) leads me to conclude that Britain has not gone completely free from the corporatist cabal that is the European Union. The agreement will see a Partnership Council established which locks Britain in to an on-going bureaucratic process dominated by technocrats – the sort of things the EU revels in and gets it nowhere. Overall, though, despite all the detail, Britain’s future policy settings will be guided by its polity and resolved within its own institutions. That means that the Labour Party has the chance to really push a progressive agenda. I doubt that it will but there are no excuses now. Which brings me to look at some data which shows how the fiscal rules imposed by the European Union, particularly in the 19 Member States who surrendered there currencies, have constrained prosperity and worked against everything that citizens were told.
(ii) Egonkortasun eta Hazkundearen Ituna
The relaxed Stability and Growth Pact
There are some progressive economists who claim that with the relaxation of the strict fiscal rules in the Eurozone coupled with the ECB’s massive PEPP program, there is little difference between being a formal currency issuer, like the US, Japan, or Australia and the 19 Member States of the EMU.
The data from the latest – IMF Fiscal Monitor – (published October 14, 2020) is revealing in this regard.
The first graph shows the Discretionary Fiscal Response to the COVID-19 Crisis in Selected Economies measured by the “Additional spending and foregone revenues”.
The second graph shows the fiscal response in terms of Equity, loans and guarantees – that is, so-called liquidity measures.
In general, the first class of stimulus measures are more direct and have higher multiplier effects than the liquidity measures.
I ranked the nations by size of stimulus and the smaller stimulus nations are predominantly Eurozone Member States (red bars).
The second graph shows that the EMU Member States are more engaged in liquidity measures – which are usually highly conditional and have to be paid back when growth returns (or does not return).
Liquidity measures tend to constrain flexible policy choice, which is why the European Commission favours them.
It could be argued that the stimulus need in the Eurozone was less than in the other nations shown in the first graph that injected considerable fiscal stimulus to support their nations through the pandemic.
Also remember that the fiscal outcome is endogenous and not controlled by the government’s discretionary choices.
Why? The final balance is partly determined by the level of activity (because tax revenue and welfare outlays are sensitive to activity). So nations that provided large fiscal support might have been responding to a massive collapse in output.
I am still working on the data at present and will report later on what I have found about the relationship between the additional spending and foregone revenue data and the real GDP growth.
But what appears to be the case is that while the Stability and Growth Pact rules have been temporarily relaxed, the Member States have not increased their deficits nearly as much as many other non-EMU nations, some of which appear in this IMF dataset.
I am guessing that the culture of austerity is now so embedded after twenty years of Eurozone membership that ambition has been quelled and governments are now prepared to oversee sub-standard outcomes.
The alternative hypothesis, which doesn’t necessarily contradict that conjecture, is that these nations know full well what will happen when Brussels decides to return to the Excess Deficit Mechanism and start demanding a renewed bout of austerity.
So, staying as close to the rules as possible eases future hardship.
(iii) Frogak
Then consider the evidence
In February 2019, the Centres for European Policy Network (cep) published a report – 20 Years of the Euro: Winners and Losers: An empirical study – which created a controversy.
Why?
Because the results demonstrated how badly countries had fared as a result of their membership of the Economic and Monetary Union.
The question the study sought to answer was:
How high would the per-capita GDP of a specific eurozone country be if that country had not introduced the euro?
The study used the so-called “synthetic control method”:
… to analyse which countries have gained from the euro and which ones have lost out.
The technique used by the cep-researchers is summarised as follows:
1. Create a ‘control’ group – with overtones to the authority that research in the physical sciences, which unlike social science, can conduct properly ‘controlled’ experiments.
This means “the actual trend in per-capita GDP of a eurozone country can be compared with the hypothetical trend assuming that this country had not introduced the euro (counterfactual scenario).”
The counterfactual is quantified by what happens in the ‘control group’:
… is generated by extrapolating the trend in per-capita GDP in other countries, which did not introduce the euro and which in previous years reported very similar economic trends to that of the eurozone country under consideration (control group).
2. The non-Eurozone nations that comprise the control group are then weighted – 0% to 100% – according to how each nation in the group “closely resembles the trend in per-capita GDP of the eurozone country before it introduced the euro.”
These weights are purely statistical and instrumental.
3. They create those statistical ‘fits’ for data between 1980 and 1996 (that is, before the convergence process started to kill growth in the Eurozone nations).
4. The highest weighted nations in the second part of the process (post Euro introduction) are those that match the growth trajectory of the Euro nations (pre-Euro).
5. A comparison is made post-euro between the growth predicted for the control group (according to the weightings) and the growth of each euro Member State, and the difference is attributed to the decision to join the EMU.
I have commented on this statistical technique previously in relation to British studies that tried to use it to say that Brexit would be disastrous.
See this blog post – How to distort the Brexit debate – exclude significant factors! (June 25, 2018)1.
You can learn about the technique from this page – Synth Package. I have worked with the software myself (R-version) and while it is rather speculative there are useful results that can be delivered as long as the ‘weightings’ are not distorted and recognising that exogenous factors (those not taken into account during the post-control period) could be influential.
My criticism of the use of this approach in the Brexit context was exactly because the researchers had ignored (probably deliberately) the conduct of fiscal policy (pre- and post-Referendum).
The researchers ask:
… how much higher or lower their per-capita GDP would have been, in 2017 … and overall … if they had not introduced the euro.
The results are summarised by the following Table:
They are self-explanatory and devastating.
They write:
In 2017, out of the examined eurozone countries, only Germany and the Netherlands gained from the euro. In Germany, GDP went up by € 280 billion and per-capita GDP by € 3,390. Italy lost out most. Without the euro, Italian GDP would have been higher by € 530 billion, which corresponds to € 8,756 per capita. In France, too, the euro has led to significant losses of prosperity of € 374 billion overall, which corresponds to € 5,570 per capita.
The situation will have worsened over the last three years since the dataset they used ended.
They also computed a cumulative gain/loss table “for the entire period since the year of introduction – 1999 in all countries except Greece, for Greece 2001 – until 2017.”
So if you live in France, each citizen (on average) was worse off by 55,996 euros by 2017. Italy even worse – minus 73,605 euros on average per person.
Definitely not convergence.
Definitely not prosperity.
Definitely not a short-term phenomena.
Definitely entrenched in the institutional and legal structure of the monetary system.
On March 1, 2019, cep.eu put out a rather extraordinary press release – Statement on reactions to the study 20 years of euro – to address what it said was a “highly political environment”, which had led to the study receiving a “large number of reactions”.
They sought to clarify some points.
They were obviously attacked for providing evidence to show the EMU had failed and the logical inference was that nations should leave.
The organisation responded in this way:
The results of the study do not show that it would be better for a euro state to withdraw from the euro. On the contrary, those euro states that have not yet benefited from the euro must carry out reforms, particularly to increase competitiveness, in order to benefit from the euro. This was pointed out several times in the study. Withdrawing from the euro would entail unmanageable risks and would not therefore result in an improvement in prosperity for any of the countries as compared to the statu quo. Reforms are therefore the only alternative.
Which I thought was an amazing demonstration of the Eurozone Groupthink that I highlighted my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).
Well, if you read the report carefully they say things like:
1. “In the decades prior to introduction of the euro, France regularly devalued its currency for this purpose. After the introduction of the euro, that was no longer possible. Instead, structural reforms were needed.”
2. “Italy has still not found a way of becoming competitive inside the eurozone. In the decades prior to introduction of the euro, Italy regularly devalued its currency for this purpose”.
In other words, cep.eu cannot conclude that nations will always be better off within the EMU as long as they introduce structural reforms.
These reforms involve cutting job protections, wage levels, pensions, increasing work hours, etc
All things that make PEOPLE worse off even if national income may or may not increase.
They redistribute whatever national income is produced increasingly towards to the top end of the distribution and away from the workers.
If a nation left the EMU and allowed its exchange rate to resolve productivity and cost differences, I believe it would be far better off than remaining in this neoliberal grinding system that so far has only destroyed prosperity for most of the Member States.
Ondorioak
(1) Britain has left the EU.
(2) That means it has left an organisational structure that has neoliberal ideology embedded in the very legal foundations of the system.
(3) It does not mean, clearly, that is has abandoned its own neoliberal leanings.
(4) But now that ideology is operating at the political dimension rather than at the foundation of the monetary system.
(5) That means, that a progressive Labour Party (or a reformed Tory Party) can move beyond this neoliberal period that has damaged prosperity and social cohesion to adopt much better policies towards sustainable growth, public infrastructure, public health and education and more.
(6) It is no longer bound by a ‘legal’ neoliberalism. It is all at the political level now.
(7) Sadly, the Labour Party doesn’t appear to be capable of taking up that challenge.
PS. Euskal Herrian are okerrago eta grabeagoa da egoera sasi ezkertiarrekin!
(a) Brexit dela eta:
Ikus Brexit-ez, hitz batzuk eta Brexit-ez, hitz batzuk (2)
Segida:
Brexit eta geroko politika ekonomikoa eta Covid-19
Brexit,…, beraz, zertan geratu da?
Brexit, Zorionak, Congratulations!
(b) Ezkerkeriak direla eta, ikus:
joseba says:
(https://twitter.com/tobararbulu/status/1345795492144422914)
@tobararbulu # mmt@tobararbulu
How Money is Created in the UK
Money is created in the UK by order of HM Treasury. Here’s how it works
com)
https://new-wayland.com/blog/how-uk-government-payments-are-made/
new-wayland.com
2021 urt. 3
joseba says:
Calling the British PAC, IFS – it is time we all moved on from the debt and deficit hysteria
(http://bilbo.economicoutlook.net/blog/?p=47966)
The BBC in Britain carried a story yesterday (July 25, 2021) – UK will be paying for Covid for decades, say MPs – that began with the assertion that “Taxpayers will bear the costs of Covid ‘for decades’”. I guess there is some truth in that statement – families will remember their loved ones that died from the virus and those who are stricken with Long COVID will probably endure the negative effects for the rest of their lives. In that sense, if they are also ‘taxpayers’ they will be ‘paying’ the ‘costs’ of the pandemic. But, of course, that is not what the BBC article was wanting its readers to absorb. The intent was to lie to British citizens that somehow their tax burdens would have to rise to offset the deficits that the British government has run dealing with the collapsing economy. I know the BBC was just reporting on a document released by the House of Commons Committee of Public Accounts – COVID 19: Cost Tracker Update (released July 25, 2021). But the role of the public broadcaster is not to act as a press releasing agency for such politicised organisations, which, given the absence of any alternative voice in the article, is exactly what it did. The demise of critical scrutiny in economics commentary by national broadcasters everywhere is a major problem and makes them indistinguishable from scandalous media organisations run by private sector owners.
The Public Accounts Committee’s Report began with this classic mainstream narrative:
… the government’s response to the pandemic has exposed the taxpayer to significant financial risk for the foreseeable future, with the estimated lifetime cost of the government’s measures reaching an eye-watering £372 billion in May 2021, with £172 billion reported spent. In making decisions and initiating measures at a much greater pace than during normal times, the Government took on a greater level of risk by relaxing some of the rules around spending decisions.
Exactly, what are these risks?
The PAC Report claimed that a “particular” case where the taxpayer was at ‘risk’ was:
… the case in the estimated £92 billion of loans guaranteed by government as of May 2021, £26 billion of which we were alarmed to learn are now expected to be lost as a result of bad loans to businesses although the exact scale of loss is not going to be known for some time.
Seriously.
These high-paid characters actually spend time thinking and discussing this sort of stuff.
Apaprently, the National Audit Office’s – COVID-19 cost tracker – has determined that these business loans (across a number of different schemes) will require a £25 billion write-off.
They are calling that a ‘cost’.
I call that a number in some account.
It is not a ‘cost’.
A cost is only sensibly measured in terms of real resources that are occupied or damaged in an event.
The situation is that the Government extended loans to keep firms functioning in the lockdown period.
Which may or may not have been an effective use of public funds but that is a separate issue.
Determining that question is a legitimate role of auditors to ensure there is accountability and minimal waste.
But that is not the point here.
The Treasury told the PAC that it was:
… the Bounce Back Loan Scheme, which accounts for £22.8 billion of the forecast total write-off costs of £26 billion.
They told the PAC that the Scheme was designed to fast track loans to struggling firms, because existing loan support was not moving fast enough to provide effective support.
Clearly, the repayment of these outstanding amounts will depend on the strength of the economy, and the terms of the loans (long repayment periods etc) mean that the chances of most of the cash coming back are high.
But that is beside the point also.
The fact that some of the firms have not been able to be sustained and have gone or will go broke just means that the number in the government accounts goes from X to zero.
In terms of the Government though, that doesn’t impinge on their capacity to do anything they want in terms of fiscal options.
The only worry I have is for the workers that lose their jobs and the disturbances to other firms through linkages in the supply chain as a result of these firms going broke.
Those impacts are the ‘costs’ of the bankruptcies not the fact that X has gone to zero in the public accounts.
Making decisions on the basis of that faulty logic then is likely to lead to further poor decisions, if the decisions to loan the funds to the struggling businesses was poor in the first place.
The damage from austerity type strategies designed to ‘save the taxpayer’ has been devastating and built on totally spurious grounds.
As yourself what would happen when the government auditor tells the accountants that the number is now zero rather than X.
Would anybody lose their job?
Would production cease?
Would exports fall?
Would the government declare that it too was bankrupt?
No, No, No, and No.
Nothing of importance would happen and there would be no bill sent to the taxpayers of Britain to stump up the £26 billion.
Would there be any concern if the loans were actually grants (never to be repaid)?
Governments hand out grants all the time and the only concern is whether they effectively advance the purpose of the intervention.
The Xs on the governments books are not the relevant focus here.
Effective, functional and purposeful are the categories that should be the focus.
The PAC claim that “taxpayers are liable for the £26 billion”.
No individual taxpayer is liable in that way at all.
No bill will be sent to any taxpayer demanding any portion of the £26 billion back.
The claim is, of course, that the £26 billion is manifesting as increased debt that has to be paid back and serviced during the maturation period.
That is true, given the British government unnecessarily issues debt to match its spending in excess of taxation.
But no taxpayer pays the debt back.
And, I thought it was salient that neither the PAC nor the next discussion below mentions the fact that the Bank of England has purchased a significant portion of the debt issued since the pandemic began.
The government buying its own debt, paying itself interest and then paying the debt back and then paying itself the benefits from holding its own debt.
Of the three major holders of outstanding British government gilts (insurance and pension funds, overseas investors and the central bank), the Bank of England is now the largest holder.
It now holds well in excess of 30 per cent of all outstanding debt.
It has “bought £895 billion worth of bonds through QE. Most of that sum (£875 billion) has been used to buy UK government bonds. A much smaller part (£20 billion) has been used to buy UK corporate bonds.” (Source)
So, it could just write off 0.03 per cent of its holdings today and the £26 billion disappears in an accounting sense.
Would anyone notice anything if that happened?
Not a soul!
I wrote about that in this recent blog post – British House of Lords having conniptions about QE – a sedative and a lie down is indicated (July , 2021).
It’s time we all moved on.
Same message from so-called independent think tanks
I have noted this point before but it bears repeating.
There is a host of private sector ‘think tanks’ who claim they are ‘independent’ from the political process, which is their badge to convince the public that their advice and statements can be trusted to be clear of any ideological or political slant.
The problem, of course, is that they are not independent at all, even if they are not funded by any lobby group or have direct connections to government.
The fact that all these organisations have accepted and propagate the mainstream macroeconomic fictions about the fiscal capacity of government and the consequences of fiscal deficits makes them all interdependent.
They really are propaganda agencies that perpetuate the fictional world created by the mainstream of my profession.
So when the Institute for Fiscal Studies releases its latest report – What does the changing economic outlook mean for the Spending Review? (July 21, 2021) – they are not releasing any new knowledge, but rather just updating their previous propaganda and the message should be disregarded.
We have short memories.
These ‘think tanks’ regularly repeat themselves and have done over a long period of time.
They have trigger events – a deficit or a public debt ratio rising – which then induces a range of emotive statments about “taxpayer risk” and the like and prophesise the ‘second coming’ disaster.
They are almost always wrong (when right it is a case of the stopped clock syndrome) yet they are never held accountable for their errors and our short memories do not lead us (the media, etc) to just ridicule them and dismiss their output as being irrelevant.
We ridicule QAnon types, yet give platforms to similar non-knowledge, when it is published by the likes of the Institute of Fiscal Studies.
The particular myth that the IFS update perpetuates is captured in this statement:
The near-term improvement and permanent cost will be reflected in the government’s fiscal position. The current budget deficit – the difference between what the government spends on day-to-day activities and what it raises in revenues – is, under our forecast, improved by £30 billion for 2021−22, relative to the forecast back in March. However, rising debt interest spending and the fading-out of the temporary boost to growth do not open up any additional headroom by the middle of the decade.
Points to note:
1. The use of terms “improvement” or ‘deterioration’ when applied to a commentary on the currency-issuing government’s fiscal position is like talking about a yellow logarithm.
In Chapter 48 of Volume III Capital, Karl Marx noted that the “‘price of labour’ is just as irrational as a yellow logarithm.” We don’t need to go into his argument.
The point is that using terms that have no correspondence with the concept is inapplicable and has no meaning.
Is a shift from a fiscal deficit of 4 per cent of GDP to 3 per cent of GDP an ‘improvement’?
How would you make that assessment?
You would have to go back to first principles and consider the purpose of fiscal policy.
That purpose is not to record any specific fiscal outcome (a number as a percent of GDP).
If unemployment had have risen, and sales dropped as you shifted from 4 to 3, then that would not be an ‘improvement’.
We would say that fiscal policy was creating a deteriorating situation given our focus should always be on the purpose and the reality relative to that purpose.
It might be a shift from 4 to 6 was an improvement because unemployment fell, household saving desires were better supported and national output and income was rising.
As I have said often – it is about CONTEXT.
And the raw number does not provide any unambigous signal about the context.
2. The idea that a particular fiscal position at any point in time conditions the capacity of a currency-issuing government to run a different fiscal position into the future is false at the most elemental level.
There is only one sense that there is path-dependence in fiscal positions.
If a strong position of fiscal support in the face of a non-government sector spending downturn restores growth in national income and output, and, provides the basis for a return of confidence in the non-government sector, then the need for fiscal support into the next period will clearly be less.
But to think that a high (relative) deficit now, undermines the capacity of the government to run an even larger deficit tomorrow is false.
The reason the mainstream make that assertion is because of a relatively high deficit now, means that public debt is likely to have risen.
They then extrapolate that outcome, which is just a reflection of the unnecessary practice of matching deficits with debt-issuance (a hangover from the gold standard era), to claims that rising debt ratios will cause the private bond markets to push yields up on future bond issues and render government spending ‘too expensive’.
They weaponise that falsehood with terminal claims that eventually the bond markets will turn their backs on future government debt issuance and the government will become insolvent.
These sorts of claims have been made repeatedly for decades and they have never come to fruition where the government was truly sovereign in its own currency.
They have been exposed quite starkly since the GFC as deficits have risen, bond yields have fallen into negative territory, and still, bid-to-cover ratios (the queue for government debt relative to supply) remain high.
A currency-issuing government is not dependent in any way on the private bond markets – the relationship is the reverse – and can choose whatever spending levels it considers appropriate irrespective of what those levels have been in the past.
The British government is not constrained in any intrinsic way but may succumb to its own idiocy by trying to reassert fiscal rules that defy the relevance of context.
Accordingly, the IFS spokesperson told the media:
The chancellor has almost no additional wiggle room for permanent spending giveaways if he is to remain on course to deliver budget balance
The ‘if’ is the relevant word.
Of course, if a government says it cannot spend if some goal that prohibits it from spending is maintained then it cannot spend.
But the point is whether that goal is relevant to the purpose.
My estimates of the current position in Britain tell me that it will be impossible for the British government to record a fiscal balance any time into the foreseeable future without causing massive damage to the living standards of the population.
It is not a relevant goal and trying to attain it, however difficult an adjustment that would be, would be the epitome of irresponsible government.
The goal of the Government should be to get as many firms through the crisis, strengthen the NHS, drive unemployment down, and fast track the decarbonisation of the economy, while supporting the exposed firms through the Brexit adjustment process.
All of that adds up to larger deficits probably into the future, which the Government is entirely capable of sustaining.
Conclusion
We are going to continue to make bad decisions while this sort of macroeconomic fiction remains dominant.