Courtesy of New Economic Perspectives
The balance between QE and Treasury supply will begin to shift in July. The underlying bid it has provided for stocks and Treasuries will begin to fade.
This report tells why, and what to look for in the data and the markets. GO TO THE POST
The International Labor Office (ILO) has just released a sobering report on the growing crisis in worldlabor markets. We began the year with 1.1billion people – one out of every three people in the global laborforce – either unemployed or among the 900 million working poor whoearn less than US$2 a day. On top of the existing glut of 200 millionunemployed, global labor markets will see an average of 40 million new entrantseach year. That means that an additional400 million jobs will need to be created over the next decade in order toprevent a further increase in unemployment. To employ everyone who wants to work, the world needs 600 million newjobs.
The concern, however, is that global growth is decelerating,which means it will be difficult for global labor markets to keep up with thegrowth of the labor force, much less make up any lost ground. In 2011, global growth slowed from 5.1percent to just 4 percent, and the IMF is warning of a further deceleration in2012. The ILO report warns that even amodest slowdown in 2012, say 0.2 percent points, would mean an additional 1.7million unemployed by 2013. The report alsohighlights the impact that overly tight fiscal policies have had on growth andemployment, beginning with the job-killing austerity programs that have becomeespecially common within the Eurozone. Elsewhere, in nations with ample policy space, governments have losttheir appetite for fiscal stimulus, even as heightened insecurity and depressedconsumer confidence keep private sector demand weak.
Analytically, the report begins on a high note, with an analysisthat employs the sectoral balance approach that is central to the MMT framework. Here, the report draws out the (negative)implications of declining public budgets on private net savings. Unfortunately, the authors of the report failto grasp enough MMT to develop a cogent analysis throughout, particularly whenit comes to distinguishing between currency issuers and currency users. As aresult, the report concludes with a weak-kneed policy prescription to address“the urgent challenge of creating 600 million productive jobs over the nextdecade.”
Below are some excerpts (my emphasis) to give you a sense of the study’smain conclusions:
Even though only a few countriesare facing serious and long-term economic and fiscal challenges, the global economy has weakened rapidlyas uncertainty spread beyond advanced economies. As a result, the world economy has moved evenfurther away from the pre-crisis trend path and, at the current juncture, evena double dip remains a distinct possibility.
There is growing evidence of anegative feedback loop between the labour market and the macro-economy, particularlyin developed economies: highunemployment and low wage growth are reducing demand for goods andservices, which further damages business confidence and leaves firms hesitantto invest and hire. Breaking thisnegative loop will be essential if a sustainable recovery is to take root. In much of the developing world, suchsustainable increases in productivity will require accelerated structuraltransformation – shifting to higher value added activities while movingaway from subsistence agriculture as a main source of employment and reducingreliance on volatile commodity markets for export earnings.
Further gains in education andskills development, adequate social protection schemes that ensure a basicstandard of living for the most vulnerable, and strengthened dialogue betweenworkers, employers and governments are needed to ensure broad-based developmentbuilt on a fair and just distribution ofeconomic gains.
Housing and other asset price bubbles prior to the crisis createdsubstantial sectoral misalignments that need to be fixed and which will requirelengthy and costly job shifts, both across the economy and across countries.
To address the protracted labourmarket recession and put the world economy on a more sustainable recovery path,several policy changes are necessary.
First, global policies needto be coordinated more firmly. Deficit-financed public spending andmonetary easing simultaneously implemented by many advanced and emergingeconomies at the beginning of the crisis is no longer a feasible option for allof them. Indeed, the large increase inpublic debt and ensuing concerns about the sustainability of public finances insome countries have forced those most exposed to rising sovereign debt riskpremiums to implement strict belt-tightening. However, cross-country spillover effects from fiscalspending and liquidity creation can be substantial and – if used in acoordinated way – could allow countries that still have room for maneuverto support both their own economies as well as the global economy. It is suchcoordinated public finance measures that are now necessary to support globalaggregate demand and stimulate job creation going forward.
Second, more substantial repairand regulation of the financial system would restore credibility and confidence…
Third, what is most needed now is to target the real economy tosupport job growth. The ILO’s particularconcern is that despite large stimulus packages, these measures have not managedto roll back the 27 million increase in unemployed since the initial impact ofthe crisis. Clearly, the policy measureshave not been well targeted and need reassessment in terms of their effectiveness. … policies that have proven very effective instimulating job creation and supporting incomes include: the extension ofunemployment benefits and work sharing programmes, there-evaluation of minimum wages and wage subsidies as well as enhancing publicemployment services, public worksprogrammes and entrepreneurship incentives – show impacts onemployment and incomes.
Fourth, additional public support measures alone will not be sufficientto foster a sustainable jobs recovery. Policy-makers must act decisively and ina coordinated fashion to reduce the fear and uncertainty that is hinderingprivate investment so that the private sector can restart the main engine ofglobal job creation. Incentives to businesses to invest in plantand equipment and to expand their payrolls will be essential to stimulate astrong and sustainable recovery in employment.
Fifth, to be effective, additionalstimulus packages must not put the sustainability of public finances at risk byfurther raising public debt. In thisrespect, public spending fully matched by revenue increases can still provide astimulus to the real economy, thanks to the balanced budget multiplier. Intimes of faltering demand, expanding the role of government in aggregate demandhelps stabilize the economy and sets forth a new stimulus, even if the spendingincrease is fully matched by simultaneous rises in tax revenues. As argued inthis report, balanced-budget multipliers can be large, especially in thecurrent environment of massively underutilized capacities and high unemploymentrates. At the same time, balancing spending with higher revenues ensures thatbudgetary risk is kept low enough to satisfy capital markets.
The report concludes with the following sentence:
At the same time, balancing spending with higher revenues ensures that budgetary risk is kept low tosatisfy capital markets. Interest rates will therefore remain unaffected bysuch a policy choice, allowing the stimulus to develop its full effect on the economy.
And this is my biggest problem with the report: there is noattempt to distinguish countries that must satisfy capital markets from thosethat need not. As MMT makes clear,governments that issue “modern money” (i.e. non-convertible fiat currencies)can help restore growth by permitting their deficits to expand to the point wherethe private sector is satisfied with its net saving position. Only governments that that operate with fixedexchange rates or other incarnations of a gold standard must cow-tow to capitalmarkets. A far bolder jobs program could be advanced if people understood the importance of monetary sovereignty.