Bill Mitchell-en European Union is destroying the future for its citizens
(http://bilbo.economicoutlook.net/blog/?p=47066)
(i) Sarrera gisa
One of the problems of neoliberalism is that it is anti-people. This makes it hard for governments to actually impose austerity and so they work out ways to lessen the visibility of their pernicious policy choices, except if you are in Greece that is. The ways they deflect the political fall out are many and include use the depoliticisation strategy – like appealing to TINA demands from external bodies such as the IMF (circa British Labour Party 1976), claiming central banks are independent, and hacking into expenditure items that delay recognition in the public eye that damage is being done. This blog post focuses on the latter. I have been studying the shifts in government spending in the European Union since the GFC and it is apparent that final consumption expenditure and outlays on social benefits have not been the focus of the austerity to the same extent as government spending on capital formation (public infrastructure). It is much harder politically for governments to cut recurrent spending because it usually impacts on people straight away. Cut a pension and the hurt is visible. Cut lots of pensions and there is a political problem. But cutting back on public infrastructure is less visible and the damage takes time to manifest as the depreciation process sets in, maintenance delayed and additional new capacity is lagging. But make no mistake – cutting capital spending undermines the future productivity of the nation and paves the way for a diminished future for our grandkids, the very ones, mainstream economists claim they are protecting by advocating austerity.
You can access the European Commission’s annual macro-economic database (AMECO) – HERE.
We don’t have to say much about the way the European Union handled the Global Financial Crisis.
The writing was on the wall back in the 1970s and 1980s, when Monetarism became the economic thinking of choice.
When Jacques Delors headed up his Committee which reported in 1989 and deliberately excluded the Finance Ministers, because he knew they would bring political concerns as well as ideology into the process.
He wanted ideology to rule – Monetarist, neoliberal ideology.
And it has been downhill for Europe ever since despite how many characters are wheeled out to say what a success the euro has been and how well the European Commission brings convergence across its geographical spread.
It doesn’t. It has fostered divergence – quite marked divergence.
(ii) Austeritatea
The austerity started during the convergence process in the second-half of the 1990s.
There was a lull after the euro was introduced until the GFC hit. Then the Brussels gang worked with the IMF to wreak havoc.
They claimed the austerity would not be very damaging and would quickly get the economies across the zone back into growth. Remember all the claims of ‘growth friendly austerity’, ‘fiscal contraction expansion’ and similar buzz words and phrases that well-paid IMF and Commission officials would blithely mouth as they went from one summit to the next.
Plenty of food and good wine was served up at these events but no intellectual substance was present.
Please read these blog posts for more information:
1. The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 1 (November 267, 2018)
2. The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 2 (November 27, 2018)
The classic faux was the IMF use of multipliers.
As Willi Semmler wrote in his 2013 article in Social Research (p. 883):
MULTIPLIERS MATTER … is. Besides the size of the multiplier, policymakers also need to understand that the size and impact of the multiplier changes depending on how stressed the financial sector is and whether the economy is in recession or expansion. These gaps in the understanding of the multiplier appear to be a principal, if not the major reason that policymakers have dramatically underestimated the devastating effects of austerity policies in the European Union …
policymakers wildly underestimated the negative effects of austerity because the fiscal multiplier’s effect is asymmetric; it is larger in recessions and weaker in expansions …
Austerity in the form of government spending cuts, output, and income causes unemployment to increase, tax revenues to fall, and sovereign deficits and debt to rise, triggering more financial stress, and so on in a downward spiral. Instead of simply downsizing government spending, the entire economy shrinks as a result of government spending cuts. If governments respond to economic decline with further spending cuts, the negative spiral accelerates.
(Reference: Semmler, W. (2013) ‘The Macroeconomics of Austerity in the European Union’, Social Research, Vol. 80, No. 4, pp.883-914. )
We all know that the IMF, which provided significant modelling and justification for the harsh cuts associated with the Greek bailout in 2012 was forced later in the year, when the economy fell off the cliff, to admit they had seriously underestimated the value of the expenditure multiplier.
While they had assumed a low value, well below unity, which would have meant very large government spending cuts would only lead to relatively small losses in GDP, the reality was the multiplier was actually around 1.7.
That meant that every euro cut from public spending would multiply out to a 1.7 euros loss in GDP and all the real losses that accompany that – drop in employment, public services, rising unemployment, rising poverty, rising suicide rates, etc.
I wrote about that in this blog post – The culpability lies elsewhere … always! (January 5, 2013).
The austerity that was inflicted has not achieved its aims.
There has been no ‘debt stabilisation’ and the only reason bond yields have remained relatively low is because the ECB has been purchasing massive quantities of Member State government bonds. The financial markets would have revolted years ago had that not been the case.
We got a taste of that sort of revolt tendency in 2010 and again in 2012. The ECB’s bond buying program was the difference between several Member States becoming insolvent.
That’s the risk that besets a nation that does not have its own currency.
Willi Semmler also notes that the austerity inflicted “damages on social cohesion, living standards, and the EU social model
I have been examining the data to see where the cuts actually were concentrated as part of my (one of them) upcoming book releases.
(ii) Gastu errepikakorra
Recurrent spending
As noted in the Introduction, it is politically much harder for governments to savagely cut recurrent spending because it impacts rather directly and people are immediately affected.
The following graph shows the percentage shifts in government final consumption expenditure between 2009 and 2020 across the EU (blue bars) and between 2009 and 2019 (red diamonds).
I left our Malta, Hungary and Romania because the data is clearly showing outlier qualities and needs further inspection.
But for the rest, the pandemic brought an increase in government final consumption expenditure but in some nations the shift has been minimal, which just confirms how poorly the European Union is handling the economic disaster that COVID-19 has presented.
But look at Greece, Italy Portugal – virtually no growth in final consumption expenditure in the decade since 2009 (and a dramatic decline in Greece’s case) and virtally no shift to deal with the pandemic.
It is a wonder there are not riots in those nations.
The next graph shows the outlays on social benefits.
Apart from the way Greece has been destroyed, the data reveals the political issue. Governments find it very hard cutting these benefits because they represent the difference between having a roof over one’s head or not, or, starving, or, dying from the cold in Winter.
The political fall out of that sort of problem is harder to manage.
(iv) Kapital gastua
Capital spending
The final graph shows the percentage change in government capital expenditure over the same period.
This is where the damage has been inflicted. You can find exact numbers in the Table that follows.
But in the decade to 2019, Greece cut its government infrastructure spending by 66.9 per cent (unthinkable), Spain by 53.1 per cent, Italy by 28.7 per cent, Cyprus by 37.5 per cent, Portugal by 44.4 per cent.
The overall growth in the EU was just 4.2 per cent for the decade – virtually nothing.
The Eurozone actually recorded a cut of 2.6 per cent overall over the decade to 2019.
Vandalism is the correct word.
Undermining future prosperity for short-run ideology.
Starving public capital expenditure not only reduces current spending and employment but also reduces the opportunities for private business investment. The crowding-in effect that comes from high quality public infrastructure is lost when it is not maintained, replaced and expanded.
In turn, the cost structures in the private sector rise. Think about the ridiculous situation in Germany where freight trucks are diverted along lengthy (and time-consuming) deviations because bridges across main rivers have become dangerous due to a lack of government upkeep.
There are countless examples now of decaying infrastructure in Europe and those examples are the direct result of these cutbacks in government capital expenditure.
The costs might take a while to show up but they eventually do. And Europeans are starting to see the consequences of this policy folly.
(v) Irudi osoa
Complete picture
The following Table provides the numbers behind the graphs for those who prefer the data presented in this way.
Ondorioak
And then came the pandemic – and things just go worse.
Vaccine chaos.
Vaccine nationalism.
And so it is – just a day in the European Union.
Etengabeko Distopia!
joseba says:
Bill Mitchell: Massive wastage of labour in the European Union
(http://bilbo.economicoutlook.net/blog/?p=47745)
I have been updating my databases in the last few days and getting up to speed on the latest trends. In the past, I developed a set of broad labour market indicators for Australia with colleagues at the – Centre of Full Employment and Equity (CofFEE). Our quarterly measures of underemployment were precursors to the Australian Bureau of Statistics measures which are now published on a monthly basis. I was doing some calculations this morning using Eurostat data as part of some research I am doing to assess the inflationary potential that exists in various labour markets. As regular readers will know, my assessment of inflation risk starts in the labour market. Rarely do we encounter a situation where nominal spending outstrips the productive capacity of the economy (a demand-pull inflationary environment). That can occur is specific product segments but rarely overall. History tells us that there has to be some distributional struggle between labour and capital to drive an inflationary spiral. I am out there looking for any evidence of such a struggle. I am not having much success!
Concepts – unemployment and underutilisation
The labour force framework is the foundation for cross-country comparisons of labour market data and is made operational through the International Labour Organization (ILO) and its International Conference of Labour Statisticians (ICLS).
These conferences and expert meetings develop guidelines or norms for implementing the framework and generating national labour force data.
The rules contained within the framework generally have the following features:
an activity principle, which is used to classify the population into one of the three basic categories in the labour force framework.
a set of priority rules, which ensure that each person is classified into only one of the three basic categories in the labour force framework.
a short reference period to reflect the labour supply situation at some point in time.
The system of priority rules ensure that labour force activities take precedence over non-labour force activities and working or having a job (employment) takes precedence over looking for work (unemployment).
As with most statistical measurements of activity, employment in informal sectors lies outside the scope of measurement.
Paid activities take precedence over unpaid activities.
A person is typically considered to be employed if they work 1 or more hours per week, which means the threshold between being unemployed and employed is marginally to say the least.
In terms of those out of the labour force, but marginally attached to it, the ILO states that persons marginally attached to the labour force are those not economically active under standard definitions of employment and unemployment, but who, following a change in one of the standard definitions of employment or unemployment, would be reclassified as economically active.
For example, changes in criteria used to define availability for work (whether defined as this week, in the next 4 weeks etc.) will change the numbers of people classified to each group.
Underutilisation is a general term describing wastage of willing labour resources.
It arises from a number of different reasons that can be subdivided into two broad functional categories:
a category involving unemployment or its near equivalent – In this group, we include the official unemployed under ILO criteria and those classified as being not in the labour force on search criteria (discouraged workers), availability criteria (other marginal workers), and more broad still, those who take disability and other pensions as an alternative to unemployment (forced pension recipients). These workers share the characteristic that they are jobless and desire work if there were available vacancies. They are however separated by the statistician on other grounds
a category that involves sub-optimal employment relations – Workers in this category satisfy the ILO criteria for being classified as employed but suffer ‘time related underemployment’ – for example, full-time workers who are currently working less than 35 hours for economic reasons or part-time workers who prefer to work longer hours but are constrained by the demand-side. Sub-optimal employment can also arise from ‘inadequate employment situations’ – where skills are wasted, income opportunities denied and/or where workers are forced to work longer than they desire.
The following diagram summarises the main sources of labour underutilisation and trace them back to their labour force status.
We consider a person to be unemployed if they are over a particular age, they do not have work, but they are currently available for work and actively seeking work.
Unemployment is defined as the difference between the economically active population (civilian labour force) and employment.
The inference is that the economy is wasting resources and sacrificing income by not having the unemployed involved in productive activity.
The diagram above shows that there are other avenues of labour resource wastage that are not captured by the unemployment rate as defined in this manner.
The persons represented in these other avenues of resource wastage may be either in or out of the labour force.
Time based and other types of underemployment
Underemployment may be time-related, referring to employed workers who are constrained by labour demand to work fewer hours than they desire, or to workers in inadequate employment situations, including skill mismatch.
Time-related underemployment is defined in terms of an individual who is willing to work additional hours, is available to work additional hours, but is unable to find the desired extra hours.
An economy with rising underemployment is less efficient than an economy which meets the labour preferences for working hours.
In this regard, involuntary part-time workers share characteristics with the unemployed.
A part of an underemployed worker is employed and a part is unemployed, even though they are wholly classified among the employed.
Marginally attached workers and others outside the labour force
From a statistical consideration, discouraged workers (also called hidden unemployed) are classified as being not in the labour force.
The international guidelines suggest, however, that for persons not in the labour force, the relative strength of attachment to the labour market be measured.
From the perspective of underutilisation, the issue is whether those classified as being out of the labour force have characteristics similar to those who are classified as being in the labour force but unemployed.
They want to work and are available for work (under the same terms as the unemployed) but believe that search activity is futile given the depressed labour market.
The discouraged worker is thus more like the unemployed worker than they are, for example, like a retired person or a child in full-time education.
In the mid-1990s, the US Bureau of Labor Statistics developed six indicators to measure labour underutilisation.
The measures are arranged from very narrow indicator (short-term unemployment) to the broadest conception of labour wastage.
CofFEE adapted this technique to different data definitions and availability in Australia and the following Table describes the Measures of labour underutilisation and underemployment that we developed for Australia.
This morning, I calculated a version of those measures for the European Union 27 (again tailored to the way Eurostat presents its data).
As I noted in the Introduction, I am researching the possible inflationary environment in various countries and my starting place, as you would guess, is the state of the labour market.
It is very hard to precipitate an inflationary spiral if the labour market is flat.
The European Union labour market reality
The first graph shows the evolution of total employment and hours worked for the EU27 since the March-quarter 2008 to the December-quarter 2020 (the latest available data).
The series were indexed at 100 in the March-quarter 2008 (so just before the onset of the GFC).
The time series are interesting because they tell a story about how the European labour markets (in aggregate) adjusted to the GFC and the Pandemic.
During the GFC, both hours worked and employed persons were shed.
In the recovery, which was incredibly slow to emerge – it took until the March-quarter 2013 for employment to reach the trough (the downturn) as a result of the ridiculous austerity that was imposed across the Member States.
And employment did not return to its pre-GFC level until the December-quarter 2016.
Hours worked also fell for many years, reaching the trough in the June-quarter 2013 and in the lead-up to the pandemic had still not reached the pre-GFC level.
That should be emphasised – the European Union 27 Member States in total were still working less hours in the December-quarter 2019 than they were working in the March-quarter 2008 and that is not because of enlightened employment practices.
The experience of the pandemic is different with employment taking a smaller hit – dropping by 1.4 points between the peak in the December-quarter 2019 and the December-quarter 2020.
However, hours worked collapsed by 5.1 points over the same period.
This pattern is the result of the policies that were implemented by various nations during the Pandemic which aimed to protect the employee-employer relation while shutting down workplaces.
Just looking at that data indicates to me that there is little likelihood of any strong wage pressures emerging within the European Union.
The next graph shows the official unemployment rate (U3) and the broadest measure of labour underutilisation (U6) for the EU27.
You can see that during the GFC, the European Commission through its obsessive austerity mindset allowed labour wastage to rise above 20 per cent and only slowly retreat.
Just before the pandemic, the broadest rate had only fallen marginally below the pre-GFC level.
That is just deliberate human wastage leading to massive daily losses of national income.
By the December-quarter 2020, the official unemployment rate was 7.5 per cent which was 0.7 points above the pre-pandemic level.
The unemployment rate was 3.1 per cent, effectively unchanged over the pandemic.
The U4 rate – Total unemployed, plus discouraged workers, as a percent of the civilian labour force plus discouraged workers – was 11 per cent up from 9.7 per cent (pre-pandemic).
The U5 rate – Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labour force plus all marginally attached workers – was 11.69 per cent up from 10.4 per cent.
And the U6 rate – U6 – Total unemployed, plus all marginally attached workers, plus total employed part time who preferred to work more hours and who looked for full-time work, as a percent of the civilian labour force plus all marginally attached workers – was 14.8 per cent up from 13.4
You can draw two broad conclusions.
1. Quoting the unemployment rate as the indicator of the state of the EU27 labour market is likely to grossly underestimate the extent of labour wastage.
2. With 14.8 per cent of the willing labour resources underutilised in one way or another, it is hard to see any wage pressures emerging from that depressed labour market.