The Great Economic Malaise - the failure of austerity economics (Social Journal Europe)

The Great Malaise Drags On

06/01/2014 by Joseph Stiglitz 1 Comment

Joseph Stiglitz

There’s something dismal about writing year-end roundups in the half-decade since the eruption of the 2008 global financial crisis. Yes, we avoided a Great Depression II, but only to emerge into a Great Malaise, with barely increasing incomes for a large proportion of citizens in advanced economies. We can expect more of the same in 2014.

In the United States, median incomes have continued their seemingly relentless decline; for male workers, income has fallen to levels below those attained more than 40 years ago. Europe’s double-dip recession ended in 2013, but no one can responsibly claim that recovery has followed. More than 50% of young people in Spain and Greece remain unemployed. According to the International Monetary Fund, Spain can expect unemployment to be above 25% for years to come.

The real danger for Europe is that a sense of complacency may set in. As the year passed, one could feel the pace of vital institutional reforms in the eurozone slowing. For example, the monetary union needs a real banking union – including not just common supervision, but also common deposit insurance and a common resolution mechanism – and Eurobonds, or some similar vehicle for mutualizing debt. The eurozone is not much closer to implementing either measure than it was a year ago.

One could also sense a renewed commitment to the austerity policies that incited Europe’s double-dip recession. Europe’s continuing stagnation is bad enough; but there is still a significant risk of another crisis in yet another eurozone country, if not next year, in the not-too-distant future.

Matters are only slightly better in the US, where a growing economic divide – with more inequality than in any other advanced country – has been accompanied by severe political polarization. One can only hope that the lunatics in the Republican Party who forced a government shutdown and pushed the country to the brink of default will decide against a repeat performance.

But even if they do, the likely contraction from the next round of austerity – which already cost 1-2 percentage points of GDP growth in 2013 – means that growth will remain anemic, barely strong enough to generate jobs for new entrants into the labor force. A dynamic tax-avoiding Silicon Valley and a thriving hydrocarbon sector are not enough to offset austerity’s weight.

Thus, while there may be some reduction of the Federal Reserve’s purchases of long-term assets (so-called quantitative easing, or QE), a move away from rock-bottom interest rates is not expected until 2015 at the earliest.

Ending low-interest-rates now would not be sensible, though QE has probably benefited the US economy only slightly, and may have raised risks abroad. The tremors in global financial markets set off by discussions earlier in 2013 of tapering QE highlighted the extent of interdependence in the global economy.

Just as QE’s introduction fueled currency appreciation, announcing its eventual end triggered depreciation. The good news was that most major emerging countries had built up large foreign-exchange reserves and had sufficiently strong economies that they could withstand the shock.

Still, the growth slowdown in emerging economies was disappointing – all the more so because it is likely to continue through 2014. Each country produced its own story: India’s downturn, for example, was attributed to political problems in New Delhi and a central bank worried about price stability (though there was little reason to believe that raising interest rates would do much about the price of onions and the other items underlying Indian inflation).

Social unrest in Brazil made it clear that, despite remarkable progress in reducing poverty and inequality over the past decade, the country still has much to do to achieve broadly shared prosperity. At the same time, the wave of protest showed the growing political clout of the country’s expanding middle class.

China’s decelerating growth had a significant impact on commodity prices, and thus on commodity exporters around the world. But China’s slowdown needs to be put in perspective: even its lower growth rate is the envy of the rest of the world, and its move toward more sustainable growth, even if at a somewhat lower level, will serve it – and the world – well in the long run.

As in previous years, the fundamental problem haunting the global economy in 2013 remained a lack of global aggregate demand. This does not mean, of course, that there is an absence of real needs – for infrastructure, to take one example, or, more broadly, for retrofitting economies everywhere in response to the challenges of climate change. But the global private financial system seems incapable of recycling the world’s surpluses to meet these needs. And prevailing ideology prevents us from thinking about alternative arrangements.

We have a global market economy that is not working. We have unmet needs and underutilized resources. The system is not delivering benefits for large segments of our societies. And the prospect of significant improvement in 2014 – or in the foreseeable future – seems unrealistic. At both the national and global levels, political systems seem incapable of introducing the reforms that might create prospects for a brighter future.

Maybe the global economy will perform a little better in 2014 than it did in 2013, or maybe not. Seen in the broader context of the continuing Great Malaise, both years will come to be regarded as a time of wasted opportunities.

© Project Syndicate

Inequality and the Left- From Social Europe Journal. A view that resonates in New Zealand.

Inequality And The Left

16/12/2013 by Simon Wren-Lewis 2 Comments

Simon Wren-Lewis

In the debate over inequality and priorities set off by Ezra Klein’s article, Kathleen Geier writes (HT MT) “the policy fixes for economic inequality are fairly clear: in no particular order, they include a higher minimum wage, stronger labor unions, a more progressive tax system, a more generous social welfare state, macroeconomic policies that promote a full employment economy, and much more powerful government regulations, particularly in the banking and finance sector.” And part of me thought, do we really want to go back to the 1970s?
Maybe this is being unfair for two reasons. First, in terms of the strength of unions, or the progressivity of taxes, the 1970s in the UK was rather different from the 1970s in the US. Second, perhaps all we are talking about here is swinging the pendulum back a little way, and not all the way to where it was before Reagan and Thatcher. Yet perhaps my reaction explains why inequality is hardly discussed in public by the mainstream political parties – at least in the UK.
The 1997-2010 Labour government was very active in attempting to reduce poverty (with some success), but was “intensely relaxed about people getting filthy rich as long as they pay their taxes.” This was not a whim but a strategy. It wanted to distance itself from what it called ‘Old Labour’, which was associated in particular with the trade unions.  Policies that were explicitly aimed at greater equality were too close to Old Labour [1], but policies that tackled poverty commanded more widespread support. Another way of saying the same thing was that Thatcherism was defined by its hostility to the unions, and its reduction of the top rates of income tax, rather than its hostility to the welfare state.
I think these points are important if we want to address an apparent paradox.

As this video illustrates (here is the equivalent for the US), growing inequality is not popular. Fairness is up there with liberty as a universally agreed goal, and most people do not regard the current distribution of income as fair. In addition, evidence that inequality is associated with many other ills is becoming stronger by the day. Yet the UK opposition today retains the previous government’s reluctance to campaign on the subject.
This paradox appears all the more perplexing after the financial crisis, for two reasons. First the financial crisis exploded the idea that high pay was always justified in terms of the contribution those being paid were making to society. High paid bankers are one of the most unpopular groups in society right now, and it would be quite easy to argue that these bankers have encouraged other business leaders to pay themselves more than they deserve. Second, while Thatcherism did not attempt to roll back the welfare state, austerity has meant that the political right has chosen to paint poverty as laziness. As a result, reducing poverty is no longer an uncontroversial goal.[2]
What is the answer to this paradox? Why is tackling inequality not seen as a vote winner on the mainstream left? I can think of two possible answers, but I’m not confident about either. One, picking up from the historical experience I discussed above, is that reducing inequality is still connected in many minds with increasing the power of trade unions, and this is a turn-off for voters. A second is that it is not popular opinion that matters directly, but instead the opinion of sections of the media and business community that are not forever bound to the political right. Politicians on the left may believe that they need some support from both sectors if they are to win elections. Policies that reduce poverty, or reduce unemployment, do not directly threaten these groups, while policies that might reduce the incomes of the top 10% do.
This leads me to one last argument, which extends a point made by Paul Krugman. I agree with him that “we know how to fight unemployment — not perfectly, but good old basic macroeconomics has worked very well since 2008…. The causes of soaring inequality, on the other hand, are more mysterious; so are the channels through which we might reverse this trend. We know some things, but there is much more room for new knowledge here than in business cycle macro.” My extension would be as follows. The main reason why governments have failed to deal with unemployment are accidental rather than intrinsic: the best instrument available in a liquidity trap (additional government spending) conflicts with the desire of those on the right to see a smaller state. (Those who oppose all forms of stimulus are still a minority.) In contrast, reversing inequality directly threatens the interests of most of those who wield political influence, so it is much less clear how you overcome this political hurdle to reverse the growth in inequality.
[1] This association is of course encouraged by the political right, which is quick to brand any attempt at redistribution as ‘class war’.
[2] The financial crisis did allow the Labour government to create a new top rate of income tax equal to 50%, but this was justified on the basis that the rich were more able to shoulder the burden of reducing the budget deficit, rather than that they were earning too much in the first place.
This post was first published on Mainly Macro

Bennett's Benefit Brevity

It is reassuring to hear that the traditional NACT policies are succeeding in their usual manner - unemployment is increasing at 1100 a week and the number of people on benefits has reached 302000 - the highest since 2005, and that Social Welfare Minister Paula Bennett's solution is to simply let everything, from welfare through to the Family Commission fiasco that is Christine Rankin, go west as she looks to her weather vane leader to vacillate towards another off the cuff unresearched scheme that will resonate with emptiness in the Herald's PR pages.