PRIME is an economic think-tank that promotes understanding of the nature of credit, and its role in determining macroeconomic outcomes. Fundamental to our approach is an implicit and explicit restoration of ethics in relation to money and credit.
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By Jeremy Smith, 9th June 2013 It’s Bilderberg weekend in Watford, so it’s fair game to run a piece on how right-wing bankers and their political agents are working to rebuild our world in their own image and interest…. But like all the best conspiracy tales, this one has the merit of truth… they are! For some time, I’ve been following the ongoing process of promoting the “Creditors’ Constitution” for European countries. The Spanish government rushed through a Constitutional amendment in 2011 to give “absolute priority” to payments to their creditors, above all other interests (here’s the detail, but viewed from a pro-creditor perspective); and in early 2012, the Eurogroup of Finance Ministers pushed the Greek government into promising to do the same. The spate of “debt-brake” (and balanced budget) constitutional amendments in the last 2 years also tend in the same direction, prompted by the EU Stability etc. Treaty. And now here we are given a new keynote message, which comes from the very same outfit who brought us “The London Whale, a Study in Banking Probity and Responsibility”. Yes, JP Morgan. In summary, their new report tells us: Europeans, your national Constitutions, born out of victory over fascism, are today unfit for purpose. They show a strong socialist influence, including protection of labour rights and the right to protest if you’re unhappy. They must be changed. By Jeremy Smith, 6th June 2013 Another European Central Bank Governing Council meeting, another occasion for complacently doing nothing. No matter that the Eurozone unemployment rate has reached 12.2% in April 2013, compared to 11.2% in April 2012. No matter that unemployment is in double figures (as a %) in over half – 9 out of 17 – of the countries of the Eurozone, including three of the four largest countries (France, Italy, Spain). No matter that Eurozone GDP has fallen in each of the last 6 Quarters. The ECB washes its hands of the problem. Here is the ECB voice of complacency, from today: “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information has confirmed our assessment which led to the cut in interest rates in early May. The underlying price pressure in the euro area is expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Medium-term inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.” Remember, the 2% rate is not set out in the Treaties of the EU or Eurozone. It is a rate decided upon by the ECB’s Governing Council. It could decide to have, for a period, a rate of say 3%, and adapt monetary policy accordingly. It is a political choice not to do so. And what is the rate of inflation in the EU and Eurozone? According to Eurostat’s Flash Estimate of 31st May, it is 1.4%, compared to 1.2% in April. These rates should mean that deflation is a bigger risk than any significant inflation. Yet working people across Europe are to be sacrificed on the altar of ultra-low inflation. The ECB is failing. by Ann Pettifor, 30th May 2013 Readers will know that I played a role (as part of the Jubilee 2000 movement) in the cancellation of about $100bn (in nominal terms) of debt owed by dozens of low income countries in and around the year 2000. While advocating for debt cancellation (as opposed to ‘relief’) I became increasingly conscious of the imbalanced and unjust relationship between sovereign debtors and their international creditors. It was clear that one-off debt cancellations would not resolve that imbalance – indeed debt cancellation made sovereign debtors more creditworthy in the eyes of international markets, and so creditors (including official creditors) would quickly jump in and burden the sovereign with new debt. In other words, in the absence of an international ‘insolvency’ framework for the resolution of debt crises, neither sovereign debtors or creditors were disciplined for reckless lending/borrowing. Fortunately Prof Kunibert Raffer of the University of Vienna had already given this issue much thought, and had proposed a sound framework for resolving debt crises – the Raffer Proposal. By Jeremy Smith, 29th May 2013 In a recent article on the Guardian website, PRIME’s Ann Pettifor said: “The deficit and debt/GDP ratio fetishes that unite the UK government, UKIP, the European Central Bank and the European Commission are part of the economics of the poorhouse, where co-ordinated austerity is seen as a “solution”, even while unemployment reaches mass levels unknown in Europe’s modern history. Let’s remember why Keynes wrote his General Theory of Employment, Interest and Money: in sum, employment must come first, the rest follows.” We would like to draw attention to two very recent, positive items which reflect and take forward this point. The first is from Chairman Ben Bernanke, addressing the Congress Joint Economic Committee on 22nd May. The second is an article from yesterday’s Guardian (28th May), by EU Commissioner for Social Affairs, Laszlo Andor, together with four others who represent a formidable European political phalanx for a change in Eurozone economic policy. By Jeremy Smith, 18th May 2013 It’s time to return to the issue of overall “national labour productivity”. By this we mean, what is the level of productivity of the whole available labour force – not just those who happen to have employment? See here: Chart 1
Data: ONS Very recently, David Blanchflower and David Bell have published a new report which provides an index combining unemployment and underemployment, a welcome addition to labour market analysis. They conclude: “There appears to be significant slack in the economy. The primary argument made by the supporters of the government’s current macroeconomic stance is that what’s going on in the labour market shows that the UK economy is primarily supply not demand constrained, that the output gap is small, and crucially that the labour market statistics show that we are now quite close to full employment or the NAIRU. The paper [shows] that there is very substantial spare capacity in the labour market; the implication being that if demand were higher, output could easily be higher… without exerting any significant upward pressure on real wages.” This also reminds us of what J.M.Keynes wrote in a letter to The Times in 1935: “All our ideas about economics, instilled into us by education and atmosphere and tradition, are…soaked with theoretical presuppositions which are only properly applicable to a society which is in equilibrium, with all its productive resources already employed. Many people are trying to solve the problem of unemployment with a theory which is based on a theory that there is no unemployment.” And in Chapter 2 of the General Theory he also refers to “The question… of the volume of the available resources, in the sense of the size of the employable population”. The aim of this blog is not to offer a General Theory (phew) but to demonstrate graphically (sic) the impact of unused labour force human potential on UK productivity, in an age where demand is so far quite insufficient to enable a substantial part of the national labour force to find work or enough work – even though wages on average have been falling consistently in real terms and our labour market is one of the world’s most deregulated. In our report “Ailing economy, failing solutions” we put it like this: “Curiously, the one measure of our national economy’s productivity that seems to us by far the most apporpriate is one not even mentioned by the ONS, nor does it feature in most discussions around the ‘puzzle’ of the UK economy. That is, to measure national productivity not as “value of outputs divided by labour input (in its various forms)” but as “Value of outputs divided by the sum of the actual and potential labour inputs”, i.e. adding in the (wasted) potential of the unemployed.” (NB we received a comment saying we should also include those defined as inactive but wanting a job; good point but we have kept it simple for now.) We show – it is clear from Chart 1 above – that this failure to generate demand has had a severe negative impact on the UK’s economic performance and productivity, and that constant GDP per “economically active person” has fallen dramatically from its peak and is – in real terms – back to the level of 2003. Hence, the UK’s decayed decade. 8th May 2013
Ann Pettifor was invited to take part in a debate asking “The City and the Common Good: What kind of City do we want?” organised by St. Paul’s Institute and CCLA. Speakers included economic historian Lord Robert Skidelsky, Tarek El Diwany of Zest Advisory LLP and Paul Sharma of the Prudential Regulation Authority. The debate was chaired by BBC Economics Editor Stephanie Flanders and attended by over 900 people. By Ann Pettifor and Jeremy Smith, 21st April 2013 Originally published in the Financial Times (log in required). Sir, In “Why Reinhart and Rogoff are wrong about austerity” (April 18), Professors Robert Pollin and Michael Ash do a fine job of dissecting research errors with damaging real-world consequences. Our mini-research on the UK’s postwar experience, is a modest test of the debt-austerity “thesis”. Using International Monetary Fund and Office for National Statistics numbers for 1949-2011, we found that UK gross domestic product increased at its fastest average rate – by 3.19 per cent – during the 18-year period (1949-66) when the debt-to-GDP ratio was more than 90 per cent (and mostly way over 100 per cent). This compares with an average of 2.60 per cent for the 36 years when the ratio lies between 30 and 60 per cent. For the other nine years (60 to 90 per cent), the average is 1.93 per cent. What is more, during the 18 years when the debt-to-GDP ratio was more than 90 per cent, that ratio fell every year without exception. We do not, of course, seek to argue from this that a high debt-to-GDP ratio leads to, or is associated with, higher growth. We simply note that increased economic activity will tend to shrink the debt-to-GDP ratio, while falls in economic activity tend to increase it. Ann Pettifor and Jeremy Smith, Directors, Policy Research in Macroeconomics, London NW1, UK By Jeremy Smith, 20th April 2013 We’re sticking for the moment with this story because it exemplifies the perverse relationship between current UK and European political decision-makers and “mainstream” economists who have given intellectual succour and support to the now demonstrably failing austerity policies. That is why the unveiling of the manifold errors and wrong conclusions of Reinhart and Rogoff in their now infamous paper of January 2010 “Growth in a Time of Debt”, which we referred to in our previous post, is so important. To show how their “findings” have been used politically, here is an example from less than two weeks ago, when our old ‘friend’ Olli Rehn, EU Commissioner for Economic Affairs, addressed the International Labour Organisation on 9th April: “Yet, public debt in Europe is expected to stabilise only by 2014 and to do so at above 90% of GDP. Serious empirical research has shown that at such high levels, public debt acts as a permanent drag on growth. If it is not reduced, it will become an ever-heavier burden on our economies, eating resources that could otherwise be channelled into productive investment needed to support job creation.” (our emphasis). Thanks to the Political Economy Research Institute of the University of Massachusetts, Amherst, we now not only an explanation of the severe shortcomings of the R & R paper and conclusions, but also to the data used by R & R having finally agreed to open up access to them. The R & R study covers a fairly large range of countries and a very long (200+) year period, but we felt it would be good to re-look at the UK post-war experience for the period 1949 to 2011 and see how far the R & R conclusions – in effect those drawn by Mr Rehn in his speech – are supported or not by this period of over 60 years. The answer is – the UK data go in the absolute opposite direction from that which the Reinhart and Rogoff ‘thesis’ would lead us to expect. In our last post we came to the same conclusion, from instant research using IMF and ONS statistics. And we have now obtained very similar results using the same data (plus adding the latest figures up to 2011, which do not alter the position) as was available to Reinhart and Rogoff. What we find is this:
By Jeremy Smith, 16th April 2013 (with a hint of irony in his soul) Over the last few years, we have been told time and again that a public debt-to-GDP ratio that goes beyond 90% is dangerous, and leads to slower economic activity. The main source for this thesis, which has been accorded the status of fact, is a paper by Carmen Reinhart and Kenneth Rogoff entitled “Growth in a time of debt”, published in early 2010. By extraordinary coincidence, on the very day that blogger Rortybomb uncovered curious discrepancies in the data used by Reinhart and Rogoff, casting much doubt on the correctness of the thesis, PRIME are proud to announce the results of our own in-depth research (fieldwork took place this evening), covering the experience of the UK from 1949 to 2011. Our findings? A bit radical, really.. A period of public debt-to-GDP ratio of over 90% is associated, on average, with a higher level of annual increase of GDP than is the case for periods with a debt-to-GDP ratio under 90%. By Ann Pettifor, 15th April 2013 Originally published in Open Democracy The simple truth unpalatable to Eurozone authorities is that small peripheral EU economies and even big economies like Spain and Italy, are victims, not designers of the liberalised financial architecture that was built way back in 1992, repeating earlier twentieth century failed experiments that led to financial crisis, immiseration and war. |
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