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Bird Brains: From Austerity to Prosperity

Bird Brains: From Austerity to Prosperity
Slides from Post Keynesian 2012 Conference presentation on Euro Problems

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Bird Brains: From Austerity to Prosperity

  1. 1. Bird Brains:From Austerity to Prosperity A Guided Tour Through the Deficit Aviary Avraham Baranes & Stephanie Kelton University of Missouri-Kansas City 11th International Post Keynesian Conference Kansas City, MO September 2012
  2. 2. EMU: The Founding Principles• Monetary policy is supreme• Fiscal policy is subordinate and constrained• Budget outcomes are exogenous – Budget outcome is a matter of choice – No reason governments cannot limit deficit to 3% of GDP• Bias toward “sound finance” – Goal is balanced budgets over the cycle• Adjustments to asymmetric shocks should occur endogenously (esp. via labor mobility)
  3. 3. Godley on the U.S.“Without an expansionary fiscal policy,real output cannot grow for long.”
  4. 4. Why?• Because the US runs persistent current account deficits• This has important implications for fiscal policy• Godley relied on the sector balance framework to undertake his analyses• Showed that countries with current account deficits would need to run budget deficits most of the time
  5. 5. Godley Was a Deficit OwlHe understood that thissector could only net save ifthese sectors (on balance)spent morethan theirincome
  6. 6. In Any Given Period• The sector balances show whether a particular part of the economy is: – Spending more than its income • Running a Deficit – Spending less than its income • Running a Surplus – Spending just equal to its income • Balancing its Budget
  7. 7. Rules of the Game• Three Sectors – Domestic Private – Domestic Public – Foreign (Rest of the World)• Two Rules – They can’t all be in surplus – They can’t all be in deficit
  8. 8. Accounting Fact €€€€€€ Non-Government Government Sector(Public) Sector €€€€€€ (Households, Firms, International Trade)Government Surplus = Non-government DeficitGovernment Deficit = Non-government Surplus
  9. 9. In Any Nation• At least one sector will be in deficit• Who should it be?• Godley understood that the private sector achieved a “habitual state of surplus” for a reason• Expansions driven by a decline in private net saving were inevitably “followed by a severe recession”
  10. 10. Beware Swings in Private Net SavingNotice how recessions (grey bars) are inevitably preceded by a rundown of private net savings.
  11. 11. The Private Sector Belongs in Surplus• “An increase in private debt relative to income can go on for a long time, but it cannot go on forever.” (Godley, 2000)• At some point lenders will run out of creditworthy borrowers who are willing to spend• “When that happens asset prices go sideways, sales soften, jobless claims trend higher, and economic activity falters” (Wray, 2012)
  12. 12. The Private Sector Cannot Create Its Own Net Financial Assets• Assets and liabilities cancel each other out – Loans create deposits• Net financial assets must come from outside the private sector• Private Sector = Public Sector + Current Account Surplus Deficit Surplus (S – I) (G – T) (X – M)• If the Public Sector is running a deficit and the current account is in surplus, the private sector will necessarily be in surplus
  13. 13. What if the CA is Not in Surplus?• Can the private sector still achieve a surplus?• Yes, but only if the government deficit is bigger than the current account deficit EX: 1% = 4% - 3%• This means that countries with current account deficits must run even bigger budget deficits (as % of GDP) in order to keep the private sector in surplus
  14. 14. Rest of World runs (+) balance against USGov’t runs (+) Priv. Sect. goes (-)
  15. 15. What Does this Mean for the EZ?CA Deficit (2012Q1, Millions of €) CA Surplus (2012Q1, Millions of €) Belgium -1,422 Estonia -86 Germany +41,068 Ireland -1,045 Netherlands +17,454 Greece -4,721 Austria +3,210 Spain -14,444 Slovakia +648 France -9,626 AVERAGE +12,659 Italy -13,067 Cyprus -718 14 of the EUR-17 run current Malta -54 account deficits Portugal -1,264 Slovenia -77 Finland -1,191 AVERAGE -3,976
  16. 16. How Germany Crushed the Competition• The rise of German “competitiveness” began under Chancellor Schroeder in the early 2000s• The Hartz Commission and then “Agenda 2010” – Curtailed the power of labor unions and craft guilds – Made it easier for employers to hire/fire at will – Cut unemployment benefits so that Germans now unemployment benefits for about half as long as an unemployed American
  17. 17. Current Account 1996 4.0% 3.0% 2.0% 1.0%Percent of GDP 0.0% Portugal Italy Ireland Greece Spain Germany France -1.0% -2.0% -3.0% -4.0%
  18. 18. Current Account 1997 4.0% 3.0% 2.0% 1.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0%
  19. 19. Current Account 1998 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -2.0% -4.0% -6.0% -8.0%
  20. 20. Current Account 1999 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -2.0%Percent of GDP -4.0% -6.0% -8.0% -10.0%
  21. 21. Current Account 2000 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -2.0%Percent of GDP -4.0% -6.0% -8.0% -10.0% -12.0%
  22. 22. Current Account 2001 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -2.0%Percent of GDP -4.0% -6.0% -8.0% -10.0% -12.0%
  23. 23. Current Account 2002 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -2.0%Percent of GDP -4.0% -6.0% -8.0% -10.0%
  24. 24. Current Account 2003 3.0% 2.0% 1.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -1.0%Percent of GDP -2.0% -3.0% -4.0% -5.0% -6.0% -7.0%
  25. 25. Current Account 2004 6.0% 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -2.0% -4.0% -6.0% -8.0% -10.0%
  26. 26. Current Account 2005 6.0% 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -2.0%Percent of GDP -4.0% -6.0% -8.0% -10.0% -12.0%
  27. 27. Current Account 2006 8.0% 6.0% 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0%
  28. 28. Current Account 2007 10.0% 5.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -5.0% -10.0% -15.0% -20.0%
  29. 29. Current Account 2008 10.0% 5.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -5.0% -10.0% -15.0% -20.0%
  30. 30. Current Account 2009 6.0% 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany France -2.0%Percent of GDP -4.0% -6.0% -8.0% -10.0% -12.0% -14.0%
  31. 31. Current Account 2010 8.0% 6.0% 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -2.0% -4.0% -6.0% -8.0% -10.0% -12.0%
  32. 32. Current Account 2011 8.0% 6.0% Who won? 4.0% 2.0% 0.0% Portugal Italy Ireland Greece Spain Germany FrancePercent of GDP -2.0% -4.0% -6.0% -8.0% -10.0% -12.0%
  33. 33. And There is No Easy Way Out “*T+he power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony.” ~Wynne Godley, 1992
  34. 34. Permissible Space for Sovereign Issuers Fiscal SurplusCurrent Account Current AccountDeficit Surplus PSB = 0 Fiscal Deficit
  35. 35. United States The Financial Balance Model Fiscal Surplus Current Account Current Account Deficit Surplus Domestic Private Sector Financial Balance = 0 Fiscal Deficit
  36. 36. Sustainable Space for Sovereign Issuers Fiscal SurplusCurrent Account Current AccountDeficit Surplus PSB = 0 Fiscal Deficit
  37. 37. Permissible Space Under Maastricht Fiscal Surplus Current Account Current Account Deficit Surplus -3% Fiscal Deficit
  38. 38. Possible Space for EMU Nations with CA Surpluses Fiscal SurplusCurrent Account Current Account Deficit Surplus -3% Fiscal Deficit
  39. 39. Sustainable Space for EMU Nations with CA Surplus Fiscal SurplusCurrent Account Current AccountDeficit Surplus -3% Fiscal Deficit
  40. 40. Possible Space for EMU Nations with CA Deficits Fiscal SurplusCurrent Account Current Account Deficit Surplus -3% Fiscal Deficit
  41. 41. Sustainable Space for EMU Nations with CA Deficits Fiscal SurplusCurrent Account Current AccountDeficit Surplus -3% Fiscal Deficit
  42. 42. The German Problem• Germany’s CA surpluses are increasingly viewed as problematic• Projected to exceed 6% of GDP this year• Soros insists that the EZ cannot hold together as long as countries are “divided into two classes”• The European Commission now issues a Macroeconomic Imbalance Scorecard – Includes a 6% threshold on surpluses – Threshold on deficits is 4% – Possible penalties for exceeding these targets
  43. 43. Permissible Space With Scorecard Rules Fiscal Surplus Current Account Current Account Deficit Surplus -3% -3% +6% Fiscal Deficit
  44. 44. Can the Eurozone Survive?• “If the Eurozone is to survive, it must become a transfer union. And rather soon.” (Alvarez, 2012)• Germany must help countries regain competitiveness (Soros, 2012)• “The only way out of this predicament is to shift to domestic demand-led development strategies” (Kregel, 2010)• “Allowing prices and wages to adjust downward will not restore employment and growth” (Terzi, 2010)
  45. 45. But the Wrong Bird Brains are In Charge• Spain just unveiled its 5th austerity package in a year• Includes €20bn in extra cuts• Goal is to reduce deficit-to-GDP to 4.5% next year• Precisely the wrong policy• Kalecki: “In a sense, the budget deficit can be considered an artificial surplus.”• As all deficit owls understand
  46. 46. END @deficitowl

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