Wednesday, September 22, 2010
Inflation rate only 1.7 % in Canada
There is further evidence that the Bank of Canada has probably acted unwisely when it raised interest rates recently. the official overall inflation rate has risen only 1.7 % as of August. this is less than expected and below the Bank of Canada's target rate of 2 %.Once we deduct energy and foodstuffs out of the calculation the rate is even less.
Sunday, September 19, 2010
Lets drop the NAIRU
Jan. 29, 2006
The central bank's continuing obsession with interest rate rises is a consequence of their dogmatic attachment to a theory associated with the concept of the NAIRU, the non accelerating inflation rate of unemployment which argues that any attempt to lower inflation below the natural rate or the NAIRU rate will generate expectations of accelerating inflation in the future.
The origins of this theory go back to Milton Friedman's paper presented at the American Economic Association's annual meeting in 1968. Friedman borrowing the concept of the natural rate from the Swedish economist Knut Wicksell who as early as the end of the nineteeenth and the beginning of the twentieth century had argued for the existence of the natural rate of interest below which one would get inflation argued that in the long run any rate of inflation was compatible with the natural rate of unemployment.(See the discussion of Wicksell`s doctrine in David Laidler`s excellent work, Fabricating the Keynesian Revolution:Studies in the inter-war Literature on Money, the Cycle and Unemployment,Cambridge university Press, 1999 pp.27-34)
(For a thorough discussion of the history of the concept and an alternative approach which I call the natural rate of inflation see Harold Chorney, "Restoring Full Employment:The natural rate of inflation versus the natural rate of unemployment", a paper presented to the Adelphi University Conference on Social Policy as if People Matter, Garden City , New York available on line at www.adelphi.edu/peoplematter/schedule2.php or simply google Harold Chorney and click on the Adelphi entry)
Friedman argued that whatever short run trade offs that might exist with the Phillips curve would be eliminated in the long run when workers realised the illusory benefits of wage increases in an inflationary environment. In other words money illusion would disappear. Because workers initially overestimated the value of their wage they sacrificed leisure time for work and ended up working for lower real wages than they would truly accept if there were no money illusion.
Once money illusion disappeared they would refuse to work for these lower real wages and would demand ever accelerating wage increases to compensate for inflation.Hence, in order to keep the unemployment rate below the natural rate the cost would be accelerating inflation.
This doctrine which is based on a number of heroic assumptions also ignores the fact that when the central bank preempts inflation by diagnosing inflationary expectations it almost always guarantees an accelerating rate of unemployment and a serious recession as a consequence.
In fact, what Friedman and his followers at our central banks have done is re-invent Marx's concept of the reserve army of the unemployed whose role it is to keep inflation low at the cost of unnecessary high unemployment, greater poverty and greater homelessness . (See the excellent discussion of the NAIRU in Dean Baker, The Nairu:Is it a real constraint? , in Dean Baker, Gerald Epstein and Robert Pollin, Globalization and Progressive Economic Policy ,Cambridge university press, 1998 pp369-388. See also Robert Eisner's comment on Baker in Baker et al, pp.388-390.)
An actual econometric study of the NAIRU for 17 OECD countries by Baker and one by Eisner for the US shows that there is little evidence for the existence of the NAIRU as a real as opposed to theoretical constraint. What is real of course, however, is the behaviour of the central banks and their attachment to the concept.
Baker's study analyses data from 1950 to 1995 and Eisner from 1956 to 1995. Both of them do so on a quarterly basis.When Eisner analysed the data on an assymetrical basis separating observations above the NAIRU rate from those below the rate he found that the NAIRU hypothesis was not confirmed."The sums of past inflation co-efficients summed to less than unity,and/or for low unemployment the sums of unemployment co-efficients were close to zero; for regressions with the consumer price index they were even slightly positive. This indicated...that at worst, unemployment below the hypothesized NAIRU would generate a slightly higher equilibrium but not accelerating inflation, and that it might even lower inflation."( P.389 in Baker et al) Eisner goes on to suggest that optimal unemployment rates for the US from the point of view of low inflation and low unemployment are in the 4-5 % range. Only below 4 % does inflation appear to be a significant threat. My view of the Canadian case is that we could achieve unemployment as low as 4.5 to 5 % before having any sort of threat of rapidly rising inflation. This a great deal lower unemployment than what David Dodge and the Bank of Canada are working with when they trigger their increased interest rates.
Unemployment bottomed out at 6.4 % and in fact had only dipped below 7 % when Dodge began increasing the rates.
Its time to drop the NAIRU and get up to date on the virtuous circle of low unemployment and low inflation.A single percentage point reduction in the unemployment rate generates over 100,000 additional jobs for the economy and considerably more GDP.
It really is time to bring monetary policy at the central bank up to date and discard old discredited theories that have cost us unnecessary unemployment, poverty and homelessness.
The central bank's continuing obsession with interest rate rises is a consequence of their dogmatic attachment to a theory associated with the concept of the NAIRU, the non accelerating inflation rate of unemployment which argues that any attempt to lower inflation below the natural rate or the NAIRU rate will generate expectations of accelerating inflation in the future.
The origins of this theory go back to Milton Friedman's paper presented at the American Economic Association's annual meeting in 1968. Friedman borrowing the concept of the natural rate from the Swedish economist Knut Wicksell who as early as the end of the nineteeenth and the beginning of the twentieth century had argued for the existence of the natural rate of interest below which one would get inflation argued that in the long run any rate of inflation was compatible with the natural rate of unemployment.(See the discussion of Wicksell`s doctrine in David Laidler`s excellent work, Fabricating the Keynesian Revolution:Studies in the inter-war Literature on Money, the Cycle and Unemployment,Cambridge university Press, 1999 pp.27-34)
(For a thorough discussion of the history of the concept and an alternative approach which I call the natural rate of inflation see Harold Chorney, "Restoring Full Employment:The natural rate of inflation versus the natural rate of unemployment", a paper presented to the Adelphi University Conference on Social Policy as if People Matter, Garden City , New York available on line at www.adelphi.edu/peoplematter/schedule2.php or simply google Harold Chorney and click on the Adelphi entry)
Friedman argued that whatever short run trade offs that might exist with the Phillips curve would be eliminated in the long run when workers realised the illusory benefits of wage increases in an inflationary environment. In other words money illusion would disappear. Because workers initially overestimated the value of their wage they sacrificed leisure time for work and ended up working for lower real wages than they would truly accept if there were no money illusion.
Once money illusion disappeared they would refuse to work for these lower real wages and would demand ever accelerating wage increases to compensate for inflation.Hence, in order to keep the unemployment rate below the natural rate the cost would be accelerating inflation.
This doctrine which is based on a number of heroic assumptions also ignores the fact that when the central bank preempts inflation by diagnosing inflationary expectations it almost always guarantees an accelerating rate of unemployment and a serious recession as a consequence.
In fact, what Friedman and his followers at our central banks have done is re-invent Marx's concept of the reserve army of the unemployed whose role it is to keep inflation low at the cost of unnecessary high unemployment, greater poverty and greater homelessness . (See the excellent discussion of the NAIRU in Dean Baker, The Nairu:Is it a real constraint? , in Dean Baker, Gerald Epstein and Robert Pollin, Globalization and Progressive Economic Policy ,Cambridge university press, 1998 pp369-388. See also Robert Eisner's comment on Baker in Baker et al, pp.388-390.)
An actual econometric study of the NAIRU for 17 OECD countries by Baker and one by Eisner for the US shows that there is little evidence for the existence of the NAIRU as a real as opposed to theoretical constraint. What is real of course, however, is the behaviour of the central banks and their attachment to the concept.
Baker's study analyses data from 1950 to 1995 and Eisner from 1956 to 1995. Both of them do so on a quarterly basis.When Eisner analysed the data on an assymetrical basis separating observations above the NAIRU rate from those below the rate he found that the NAIRU hypothesis was not confirmed."The sums of past inflation co-efficients summed to less than unity,and/or for low unemployment the sums of unemployment co-efficients were close to zero; for regressions with the consumer price index they were even slightly positive. This indicated...that at worst, unemployment below the hypothesized NAIRU would generate a slightly higher equilibrium but not accelerating inflation, and that it might even lower inflation."( P.389 in Baker et al) Eisner goes on to suggest that optimal unemployment rates for the US from the point of view of low inflation and low unemployment are in the 4-5 % range. Only below 4 % does inflation appear to be a significant threat. My view of the Canadian case is that we could achieve unemployment as low as 4.5 to 5 % before having any sort of threat of rapidly rising inflation. This a great deal lower unemployment than what David Dodge and the Bank of Canada are working with when they trigger their increased interest rates.
Unemployment bottomed out at 6.4 % and in fact had only dipped below 7 % when Dodge began increasing the rates.
Its time to drop the NAIRU and get up to date on the virtuous circle of low unemployment and low inflation.A single percentage point reduction in the unemployment rate generates over 100,000 additional jobs for the economy and considerably more GDP.
It really is time to bring monetary policy at the central bank up to date and discard old discredited theories that have cost us unnecessary unemployment, poverty and homelessness.
The British national debt 1690 to 1910
Over the years that I have researched the question of the national debt and its impact upon an economy I have always been astonished at how boldly politicians, journalists and others ignore the lessons of historical experience.
For example, during the great depression of the 1930s one of the principal barriers to the relaunching of the British and North American economies was the obsession in balancing the budget despite the hardship that this act imposed and despite the negative consequences for the economy and the unemployed.In my writings I have drawn upon historical statistics to show that debt to GDP ratios were much higher than the levels reached in recent years and yet despite this the economies recovered and prosperity was restored and the debt ratio eventually dropped.
This was brought about through rapid economic growth and a sharp decline in the rates of unemployment. The notion that economic growth, wealth creation and prosperity are not incompatible with high debt to GDP ratios is crystal clear from the British case. The economic historian James Macdonald in his excellent work A free nation deep in debt makes exactly this point on pages 354-355.
He displays a chart which runs debt as a percentage of the GDP for Great Britain from 1690 to 1910. The ratio begins at 0% in 1690 runs higher and higher in a lurching manner until it peaks at about 300 % of the GDP in the late 1820s and then consistently declines with several brief upticks until it closes at around 20 % in 1910.As Macdonald states the debt was never lower than 100 % of the GDP for the century between 1760 and 1860 and averaged above 150 % from 1780 to 1845. "simplistic notions that national power and national debt are mutually incompatible are disproved by this single historical fact." (p.355)
For it was during this period that Britain became the leading industrial power in the West.Similarly in the twentieth century the British debt to GDP ratio rose to above 200 % and despite this Britain remained an important industrial power with a very high standard of living.
For example, during the great depression of the 1930s one of the principal barriers to the relaunching of the British and North American economies was the obsession in balancing the budget despite the hardship that this act imposed and despite the negative consequences for the economy and the unemployed.In my writings I have drawn upon historical statistics to show that debt to GDP ratios were much higher than the levels reached in recent years and yet despite this the economies recovered and prosperity was restored and the debt ratio eventually dropped.
This was brought about through rapid economic growth and a sharp decline in the rates of unemployment. The notion that economic growth, wealth creation and prosperity are not incompatible with high debt to GDP ratios is crystal clear from the British case. The economic historian James Macdonald in his excellent work A free nation deep in debt makes exactly this point on pages 354-355.
He displays a chart which runs debt as a percentage of the GDP for Great Britain from 1690 to 1910. The ratio begins at 0% in 1690 runs higher and higher in a lurching manner until it peaks at about 300 % of the GDP in the late 1820s and then consistently declines with several brief upticks until it closes at around 20 % in 1910.As Macdonald states the debt was never lower than 100 % of the GDP for the century between 1760 and 1860 and averaged above 150 % from 1780 to 1845. "simplistic notions that national power and national debt are mutually incompatible are disproved by this single historical fact." (p.355)
For it was during this period that Britain became the leading industrial power in the West.Similarly in the twentieth century the British debt to GDP ratio rose to above 200 % and despite this Britain remained an important industrial power with a very high standard of living.
A theory of inflation
Throughout the history of monetary theory the subject of inflation and the role of the money stock has loomed large. One can go back to Copernicus and discover rudiments of the quantity theory of money .
The doctrine that there was a direct relationship between money stock, its speed of circulation and prices at which goods and services sold in the economy is a very old doctrine. The problem with it and the problem that writers and financial market actors had with the doctrine from John Law in the 18th century to Keynes in the twentieth century was that it developed into a dogma that aserted that any increase in money stock automatically led to price rise or inflation. The original classical statement of the theory that MV=PT argued that since both velocity was so stable so as to be a constant and T (transactions a proxy for output) was because of Say's law and Walras's law also a constant at full employment. Hence there was a direct relationship between money and prices.
The problem was, as Keynes and others pointed out, Say's law that supply always created its own demand was false and Walras's invisible auctioneer who cleared temporary gluts through the process of tâtonnement was not always operational and velocity also varied in unpredictable ways. The consequence then of moving from a barter economy to a money economy was therefore that money was not neutral, could be held for its own sake, markets would not always clear and thus the direct relationship between changes in the money stock and inflation did not always hold.
Instead it is more insightful to consider that money is a vector in the economy that operates along side other vectors to influence economic activity. Sometimes its force acts largely upon output other times largely upon prices but often affects both output and prices. Since the economy is measured by P*O increases in the money stock can act largely to increase O but also to affect P somewhat. But as the supply of unemployed factors drops, more of the impulses can affect prices.The neoclassicals argue that when this occurs in an accelerating fashion you have reached the point just beyond the NAIRU rate.But my argument is that they have set this rate far too high.
Hence , it is possible to have simultaneously both some unemployment and some price rise without experiencing accelerating inflation or inflationary expectations.In fact, some of this price rise is a necessary lubricant for the operation of the economy and the forward investment planning of the private sector. It ought not to be misdiagnosed as accelerating inflation.
The real economy,as opposed to the black box economy that the quantity theory operates with, is composed of many industries and sectors. In some, strong trade unions and powerful oligopolies dominate. In others, there are many very small firms and entrepreneurs and little opportunity for price rise until full capacity is reached. In the more oligopolized unionized industries the inflationary process can begin at much lower rates of capacity utilization.
Hence, to get the overall picture we have to aggregate all the industries and sectors with the appropriate weights given to each in order to see whether or not we are likely to experience price rises that can be called inflationary. We can think of the money stock as a wave of water that washes across the variegated economy , in some place simply lubricating investments and activity in other places facilitating inflationary price rise. Supply bottlenecks, wage push, profit push and elasticity of demand as well as the decisions to save and the decisions to invest will affect the overall outcome.
Any modern theory of inflation must also take into account internet technology, just in time production, globalization and free trade all of which act as anti-inflationary forces. The problem with our central banks is that they appear to be taking decisions based on a much more restrictive theory of the inflationary process. One that places excessive weight on inflationary expectations and a narrow conception of the quantity theory.
The doctrine that there was a direct relationship between money stock, its speed of circulation and prices at which goods and services sold in the economy is a very old doctrine. The problem with it and the problem that writers and financial market actors had with the doctrine from John Law in the 18th century to Keynes in the twentieth century was that it developed into a dogma that aserted that any increase in money stock automatically led to price rise or inflation. The original classical statement of the theory that MV=PT argued that since both velocity was so stable so as to be a constant and T (transactions a proxy for output) was because of Say's law and Walras's law also a constant at full employment. Hence there was a direct relationship between money and prices.
The problem was, as Keynes and others pointed out, Say's law that supply always created its own demand was false and Walras's invisible auctioneer who cleared temporary gluts through the process of tâtonnement was not always operational and velocity also varied in unpredictable ways. The consequence then of moving from a barter economy to a money economy was therefore that money was not neutral, could be held for its own sake, markets would not always clear and thus the direct relationship between changes in the money stock and inflation did not always hold.
Instead it is more insightful to consider that money is a vector in the economy that operates along side other vectors to influence economic activity. Sometimes its force acts largely upon output other times largely upon prices but often affects both output and prices. Since the economy is measured by P*O increases in the money stock can act largely to increase O but also to affect P somewhat. But as the supply of unemployed factors drops, more of the impulses can affect prices.The neoclassicals argue that when this occurs in an accelerating fashion you have reached the point just beyond the NAIRU rate.But my argument is that they have set this rate far too high.
Hence , it is possible to have simultaneously both some unemployment and some price rise without experiencing accelerating inflation or inflationary expectations.In fact, some of this price rise is a necessary lubricant for the operation of the economy and the forward investment planning of the private sector. It ought not to be misdiagnosed as accelerating inflation.
The real economy,as opposed to the black box economy that the quantity theory operates with, is composed of many industries and sectors. In some, strong trade unions and powerful oligopolies dominate. In others, there are many very small firms and entrepreneurs and little opportunity for price rise until full capacity is reached. In the more oligopolized unionized industries the inflationary process can begin at much lower rates of capacity utilization.
Hence, to get the overall picture we have to aggregate all the industries and sectors with the appropriate weights given to each in order to see whether or not we are likely to experience price rises that can be called inflationary. We can think of the money stock as a wave of water that washes across the variegated economy , in some place simply lubricating investments and activity in other places facilitating inflationary price rise. Supply bottlenecks, wage push, profit push and elasticity of demand as well as the decisions to save and the decisions to invest will affect the overall outcome.
Any modern theory of inflation must also take into account internet technology, just in time production, globalization and free trade all of which act as anti-inflationary forces. The problem with our central banks is that they appear to be taking decisions based on a much more restrictive theory of the inflationary process. One that places excessive weight on inflationary expectations and a narrow conception of the quantity theory.
On exports, economic growth and monetary and fiscal policy
Nov. 30, 2005
The current strategy of Canada and most G7 countries appears to focus on trade as the engine of growth of the domestic economy.
This can be analysed by using the conventional Keynesian and neo-classical macro-economic equation of
C+ I + G-T + X-M = GDP. where C is consumption, I is investment, G is government expenditures, T is tax revenures and X is exports and M imports. Currently the Government of Canada is running a budgetary surplus. This means that G-T is negative.
To offset this the Government is counting on exports X to exceed M imports and for investment I to be larger because they believe that a surplus guarantees low interest rates because they believe in the theory of loanable funds. Lower rates means higher I investment and therefore the combination of higher I and a booming export industry translates into faster economic growth and lower unemployment.
But what if the Bank of Canada does not co-operate and raises interest rates?
Look what happens. A rate rise leads to less investment, that is I declines and higher rates mean a stronger Canadian dollar. A stronger Canadian dollar in the absence of offsetting gains in productivity through increased use of technology or lower wages means less competitive exports and the gap between X and M diminishing. All of this adds up to slower growth and not as big a rise in the GDP.
Now if the surplus is used to retire outstanding debt the return of funds to bondholders may offset some of the pressure of rate rise but it also complicates the problem of translating these returned savings no longer in asset form but in cash form into investments. At the same time taxes which exceed spending subtracts purchasing power from the economy. So the strategy of putting too many eggs into the export led growth strategy without at the same time ensuring a supportive fiscal and monetary policy could backfire. That is why the tax cuts and the new program expenditures are so important. More on this in future blogs.
The current strategy of Canada and most G7 countries appears to focus on trade as the engine of growth of the domestic economy.
This can be analysed by using the conventional Keynesian and neo-classical macro-economic equation of
C+ I + G-T + X-M = GDP. where C is consumption, I is investment, G is government expenditures, T is tax revenures and X is exports and M imports. Currently the Government of Canada is running a budgetary surplus. This means that G-T is negative.
To offset this the Government is counting on exports X to exceed M imports and for investment I to be larger because they believe that a surplus guarantees low interest rates because they believe in the theory of loanable funds. Lower rates means higher I investment and therefore the combination of higher I and a booming export industry translates into faster economic growth and lower unemployment.
But what if the Bank of Canada does not co-operate and raises interest rates?
Look what happens. A rate rise leads to less investment, that is I declines and higher rates mean a stronger Canadian dollar. A stronger Canadian dollar in the absence of offsetting gains in productivity through increased use of technology or lower wages means less competitive exports and the gap between X and M diminishing. All of this adds up to slower growth and not as big a rise in the GDP.
Now if the surplus is used to retire outstanding debt the return of funds to bondholders may offset some of the pressure of rate rise but it also complicates the problem of translating these returned savings no longer in asset form but in cash form into investments. At the same time taxes which exceed spending subtracts purchasing power from the economy. So the strategy of putting too many eggs into the export led growth strategy without at the same time ensuring a supportive fiscal and monetary policy could backfire. That is why the tax cuts and the new program expenditures are so important. More on this in future blogs.
The German economic dilemma
Nov. 23, 2005
The recently formed grand coalition between the SDP and Mrs.Merkel's Christian Democrats faces a major dilemma. The Merkel Conservatives would like to impose neo-con style reforms of the labour market practices and the welfare state in Germany.
Most of these are wisely resisted by the SDP. But the SDP has agreed to significant tax increases. Tax increases when the unemployment rate is above 11% are not a smart idea. Coupled with the dogmatic monetarism and tight money policies of the European central bank the result is likely to be higher not lower unemployment.
The European central bank needs a major overhaul and rethink of its strict monetary targeting. The rigid anti-deficit rule that prevails in the European Union also needs to be reformed. Its not possible to fight dangerously high unemployment with both the fiscal and the monetary hand tied behind your back.I wonder how long it will be before either the Christian Democrats or their SDP partners wake up to this reality?
Labour market clearing strategies that rely upon the neo-Keynesian doctrine of rigidities explaining why general equilibrium does not always hold sometimes are useful. But this time in Germany they are too close to the classical laissez-faire economic doctrine of the 1930s that insisted despite enormous evidence to the contrary that unemployment was due to rigidities rather than inadequate aggregate demand.
The European central bank and the resistance to using budget deficits to stimulate are the true culprits. Lets hope the political leadership in Germany comes to realize this soon.
The recently formed grand coalition between the SDP and Mrs.Merkel's Christian Democrats faces a major dilemma. The Merkel Conservatives would like to impose neo-con style reforms of the labour market practices and the welfare state in Germany.
Most of these are wisely resisted by the SDP. But the SDP has agreed to significant tax increases. Tax increases when the unemployment rate is above 11% are not a smart idea. Coupled with the dogmatic monetarism and tight money policies of the European central bank the result is likely to be higher not lower unemployment.
The European central bank needs a major overhaul and rethink of its strict monetary targeting. The rigid anti-deficit rule that prevails in the European Union also needs to be reformed. Its not possible to fight dangerously high unemployment with both the fiscal and the monetary hand tied behind your back.I wonder how long it will be before either the Christian Democrats or their SDP partners wake up to this reality?
Labour market clearing strategies that rely upon the neo-Keynesian doctrine of rigidities explaining why general equilibrium does not always hold sometimes are useful. But this time in Germany they are too close to the classical laissez-faire economic doctrine of the 1930s that insisted despite enormous evidence to the contrary that unemployment was due to rigidities rather than inadequate aggregate demand.
The European central bank and the resistance to using budget deficits to stimulate are the true culprits. Lets hope the political leadership in Germany comes to realize this soon.
On deficit finance and President George Bush
Nov.19,2005
Two years ago I wrote an op ed in The Globe and Mail Canada's leading newspaper that defended President George Bush's policy of running a deficit to stimulate the American economy through a combination of tax cuts and increased spending in certain areas.
This was a very politically incorrect thing to do and offended some of my friends on the left who resented Bush because of his foreign policies and in particular the War in Iraq. But as I pointed out in the op ed one did not have to agree with Bush on his foreign policy or even aspects of his domestic policy to appreciate the willingness of the Bush administration to make use of appropriate deficits to stimulate the economy. As I said at the time it would have been far more preferable for the President to cut the taxes of the poor far more than the taxes of the rich.
And of course increased civilian spending is usually better than increased military spending. Nevertheless because the Democrats and their ideological allies in Canada had become so dogmatically fiscally conservative it was a welcome breath of fresh air that this compassionate conservative Republican appeared to understand that sometimes deficts were an appropriate policy.
What have been the results? Unemployment has dropped significantly in the US in the past two years and economic growth continues to surprise analysts. Furthermore despite the trade deficit and the public sector deficit the US dollar continues to be a strong currency.
Maybe its time that people re-evaluated their approach to deficits and rediscovered the wisdom of Keynes. Public sector deficits that are targeted on investments in infrastructure, tax cuts for the poor and middle classes and social investments are an excellent response to a business cycle downturn.
Rather than crowding out private investment they crowd it in by changing pessimistic expectations to more optimistic ones among investors and by injecting much needed aggregate demand to combat the downturn in the cycle.
What is extraordinary is that the fiscal conservatives are now located among liberals, social democrats and in the US centrist Democrats, while conservative Republicans appear at least in part to be Keynesians, even if only military Keynesians.
The next deep business cycle downturn will pose some serious challenges to the fiscally orthodox.
Two years ago I wrote an op ed in The Globe and Mail Canada's leading newspaper that defended President George Bush's policy of running a deficit to stimulate the American economy through a combination of tax cuts and increased spending in certain areas.
This was a very politically incorrect thing to do and offended some of my friends on the left who resented Bush because of his foreign policies and in particular the War in Iraq. But as I pointed out in the op ed one did not have to agree with Bush on his foreign policy or even aspects of his domestic policy to appreciate the willingness of the Bush administration to make use of appropriate deficits to stimulate the economy. As I said at the time it would have been far more preferable for the President to cut the taxes of the poor far more than the taxes of the rich.
And of course increased civilian spending is usually better than increased military spending. Nevertheless because the Democrats and their ideological allies in Canada had become so dogmatically fiscally conservative it was a welcome breath of fresh air that this compassionate conservative Republican appeared to understand that sometimes deficts were an appropriate policy.
What have been the results? Unemployment has dropped significantly in the US in the past two years and economic growth continues to surprise analysts. Furthermore despite the trade deficit and the public sector deficit the US dollar continues to be a strong currency.
Maybe its time that people re-evaluated their approach to deficits and rediscovered the wisdom of Keynes. Public sector deficits that are targeted on investments in infrastructure, tax cuts for the poor and middle classes and social investments are an excellent response to a business cycle downturn.
Rather than crowding out private investment they crowd it in by changing pessimistic expectations to more optimistic ones among investors and by injecting much needed aggregate demand to combat the downturn in the cycle.
What is extraordinary is that the fiscal conservatives are now located among liberals, social democrats and in the US centrist Democrats, while conservative Republicans appear at least in part to be Keynesians, even if only military Keynesians.
The next deep business cycle downturn will pose some serious challenges to the fiscally orthodox.
Keynes versus monetarists 2
Some additional distinctions : Keynes&monetarists
Keynes' theory of investment depends upon what he calls the marginal efficiency of capital. He defines the mec as follows: that rate of discount from a future stream of earnings that equates the current supply price of capital. All of this takes place under conditions of uncertainty.
For Keynes uncertainty is not strictly reducible to a quantitative calculable probability.(See His Treatise on Probability and Ana Carabelli's interpretation of it.) Because of these factors investment is unstable and strongly affected by the bank rate. Should the bank rate rise this will eliminate investment projects that have a lower rate of return. Obviously it is increasingly difficult to assess risk the further into the future one goes. In addition the stock market is highly risky because of the tendency toward speculative selling of shares and the tendency to operate on short term time horizons . Inherent values matter less than whether one can sell at a higher price than one has bought. Accurate judgement in the market is premised upon being able to judge the likely judgments of others about value and price. Therefore the markets are an unstable source of investment in capital projects.
The monetarists do not seem to have a unified theory of the investment process. Like Friedman's theory of inflation money in - prices out, what I and others call a black box theory they seem to argue that investment happens more or less naturally because the animal spirits are strong(Keynes' phrase) or the entrepreneurial knights of creative destruction(Schumpeter) or the waves of technological innovation bring it about. They also argue that statist intervention is antithetical to investment. Some of them, but not Friedman also argue that deficits raise interest rates and thereby crowd out investment. Keynesians would say au contraire deficits in recessions crowd in investment.
The classical quanity theory equation was MV=PT and then MV=PO where M was money stock, V velocity, P prices, T transactions and O output. Since V was regarded as highly stable and predictable and T and O fixed at the full employment level by Say's law then there was held to be a direct relationship between M and P.
Keynes used the Cambridge variant of the equation M= 1/k (PO) where k is the demand for money balances or the tendency to hold money rather than to part with it. He also elaborated the equation by distinguishing between money stocks, M1, M2 and M3 where M1 was income deposits, M2 business deposits and M3 savings deposits the precursors to his transactions demand, precautionary demand and speculative demand for money. Then P= V1(M-M2-M3)/O where M = M1+M2+M3 .(See his Treatise vol.1 The pure Theory of money p.150London: Macmillan, 1930 and Tract, CW)
Friedman alters the classical model by writing it in Keynesian form as the demand for equities, financial assets, real capital assets, and cash. Md = P.f(y,w;R*m,R*b,R*e;u) where Md = the demand for money and P is the price index,y income of a single wealth holder, w fraction of wealth in non human form ; R*m expected nominal return on money; R*b expected nominal rate of return on securities; R*e expected nominal rate of return on phsyical assets, u all other variables that affect the utility attached to the services of money. (See his Quantity Theory of Money in the new Palgrave Money edited by John Eatwell, M.Milgate and P.Newman, eds.London: Macmillan, 1989.p.13; also see Phillip Cagan, Persistant Inflation:Historical and Policy Essays for an interesting'' monetarist'' approach to what became inflation orthodoxy during the 1970s and 1980s.)
Key Words: "Keynes"; "monetarists"; "Milton Friedman"; "quantity theory"; and from previous entry
"Say's law" ;involuntary unemployment" "labour market clearing"
Keynes' theory of investment depends upon what he calls the marginal efficiency of capital. He defines the mec as follows: that rate of discount from a future stream of earnings that equates the current supply price of capital. All of this takes place under conditions of uncertainty.
For Keynes uncertainty is not strictly reducible to a quantitative calculable probability.(See His Treatise on Probability and Ana Carabelli's interpretation of it.) Because of these factors investment is unstable and strongly affected by the bank rate. Should the bank rate rise this will eliminate investment projects that have a lower rate of return. Obviously it is increasingly difficult to assess risk the further into the future one goes. In addition the stock market is highly risky because of the tendency toward speculative selling of shares and the tendency to operate on short term time horizons . Inherent values matter less than whether one can sell at a higher price than one has bought. Accurate judgement in the market is premised upon being able to judge the likely judgments of others about value and price. Therefore the markets are an unstable source of investment in capital projects.
The monetarists do not seem to have a unified theory of the investment process. Like Friedman's theory of inflation money in - prices out, what I and others call a black box theory they seem to argue that investment happens more or less naturally because the animal spirits are strong(Keynes' phrase) or the entrepreneurial knights of creative destruction(Schumpeter) or the waves of technological innovation bring it about. They also argue that statist intervention is antithetical to investment. Some of them, but not Friedman also argue that deficits raise interest rates and thereby crowd out investment. Keynesians would say au contraire deficits in recessions crowd in investment.
The classical quanity theory equation was MV=PT and then MV=PO where M was money stock, V velocity, P prices, T transactions and O output. Since V was regarded as highly stable and predictable and T and O fixed at the full employment level by Say's law then there was held to be a direct relationship between M and P.
Keynes used the Cambridge variant of the equation M= 1/k (PO) where k is the demand for money balances or the tendency to hold money rather than to part with it. He also elaborated the equation by distinguishing between money stocks, M1, M2 and M3 where M1 was income deposits, M2 business deposits and M3 savings deposits the precursors to his transactions demand, precautionary demand and speculative demand for money. Then P= V1(M-M2-M3)/O where M = M1+M2+M3 .(See his Treatise vol.1 The pure Theory of money p.150London: Macmillan, 1930 and Tract, CW)
Friedman alters the classical model by writing it in Keynesian form as the demand for equities, financial assets, real capital assets, and cash. Md = P.f(y,w;R*m,R*b,R*e;u) where Md = the demand for money and P is the price index,y income of a single wealth holder, w fraction of wealth in non human form ; R*m expected nominal return on money; R*b expected nominal rate of return on securities; R*e expected nominal rate of return on phsyical assets, u all other variables that affect the utility attached to the services of money. (See his Quantity Theory of Money in the new Palgrave Money edited by John Eatwell, M.Milgate and P.Newman, eds.London: Macmillan, 1989.p.13; also see Phillip Cagan, Persistant Inflation:Historical and Policy Essays for an interesting'' monetarist'' approach to what became inflation orthodoxy during the 1970s and 1980s.)
Key Words: "Keynes"; "monetarists"; "Milton Friedman"; "quantity theory"; and from previous entry
"Say's law" ;involuntary unemployment" "labour market clearing"
Keynes versus the monetarists 1
A Quick Guide to Keynes and the monetarists Dec 2, 2005
Keynes:
1. Rejects Say's law of markets that supply creates its own demand; he also doesn't accept Walras's law that says non zero supplies are matched precisely by non zero demands for goods and services.he doesn't believe that the invisible auctioneer eventually clears the market place of gluts.
2. Believes that money is not neutral. In other words once we introduce money into a barter system something significant changes and gluts become possible.
3. Labour markets do not always clear because of uncertainty, disproportionalities; non-homogeous supplies of labour and the importance of aggregate effective demand for clearing the market.
4. Persistant unemployment is possible despite flexible labour markets.Keynes rejects the second classical postulate that the wage is equal to the marginal disutility of labour. Involuntary unemployment is possible.
5. Keynes rejects the quantity theory of money.
6. Interest rates are not determined by the demand and supply of loanable funds. Rather liquidity preference plays a major role . The central bank's behaviour is also very important in establishing short and medium term rates.
7.Keynes has a sophisticated theory of inflation prior to full employment based on profit push, wage push and savings investment disproportionalities.He elaborates this theory in the Treatise on Money (1930) but refines it and includes it in the Chapter on prices in the General Theory (1936)
8. The decision to invest and the decision to save are separate decisions often taken by very different people. Savings are not automatically and frictionlessly translated into investments.
9. Believes that both monetary and fiscal policy are important. THe scissors effect is operational. One needs an accomodating monetary policy for a stimulative fiscal policy.
10. Deficits are a useful and appropriate tool of fiscal policy to help push an economy out of a slump.There is a multiplier effect on increments in investment. Leakages may exist but their impact is not large enough to overwhelm the multiplier.
11. When one stimulates most of the vector forces are on output but some is on prices. As one approaches lower unemployment more of the vector forces transfer from output to prices.GDP consists of PxO. Hence dI leads to dP as well as dO.
The monetarists:
1.They accept Say's law. They accept Walras's law.(For a more subtle and somewhat dissenting view of this description of the classical school as a caricature see David Laidler Fabricating the Keynesian Revolution. But also see the work of John Hotson, Paul Davidson,Alan Meltzer,R.Clower, Joe Stiglitz,Joan Robinson, , Axel Leijonhufvud, J.A.Trevithick,Harold Chorney and a number of other writers on these questions.)
2. They believe in the loanable funds doctrine for interest rate determination.
3. They privilege monetary policy above fiscal policy. A stable predictable steady growth in the money stock is desirable.
4. Savings are extremely important and automatically beget investment.
5. The quantity theory of money is sound.
6. Labour markets like other markets will clear so long as there are no frictions preventing this. Typical frictions are labour unions, the excessive social wages of the welfare state, inadequate or inefficient job search. Unemployment is therefore voluntary.
7. Laissez-faire is best. Intervention should be minimal. Allow the natural forces of the market to operate and all will be well.
8. Deficits are bad because they facilitate the growth of government which is bad.
9. Uncertainty is not a problem.
10. Inflation is the problem. Unemployment is taken care of by the natural rate approach. It is almost always voluntary.
Keynes:
1. Rejects Say's law of markets that supply creates its own demand; he also doesn't accept Walras's law that says non zero supplies are matched precisely by non zero demands for goods and services.he doesn't believe that the invisible auctioneer eventually clears the market place of gluts.
2. Believes that money is not neutral. In other words once we introduce money into a barter system something significant changes and gluts become possible.
3. Labour markets do not always clear because of uncertainty, disproportionalities; non-homogeous supplies of labour and the importance of aggregate effective demand for clearing the market.
4. Persistant unemployment is possible despite flexible labour markets.Keynes rejects the second classical postulate that the wage is equal to the marginal disutility of labour. Involuntary unemployment is possible.
5. Keynes rejects the quantity theory of money.
6. Interest rates are not determined by the demand and supply of loanable funds. Rather liquidity preference plays a major role . The central bank's behaviour is also very important in establishing short and medium term rates.
7.Keynes has a sophisticated theory of inflation prior to full employment based on profit push, wage push and savings investment disproportionalities.He elaborates this theory in the Treatise on Money (1930) but refines it and includes it in the Chapter on prices in the General Theory (1936)
8. The decision to invest and the decision to save are separate decisions often taken by very different people. Savings are not automatically and frictionlessly translated into investments.
9. Believes that both monetary and fiscal policy are important. THe scissors effect is operational. One needs an accomodating monetary policy for a stimulative fiscal policy.
10. Deficits are a useful and appropriate tool of fiscal policy to help push an economy out of a slump.There is a multiplier effect on increments in investment. Leakages may exist but their impact is not large enough to overwhelm the multiplier.
11. When one stimulates most of the vector forces are on output but some is on prices. As one approaches lower unemployment more of the vector forces transfer from output to prices.GDP consists of PxO. Hence dI leads to dP as well as dO.
The monetarists:
1.They accept Say's law. They accept Walras's law.(For a more subtle and somewhat dissenting view of this description of the classical school as a caricature see David Laidler Fabricating the Keynesian Revolution. But also see the work of John Hotson, Paul Davidson,Alan Meltzer,R.Clower, Joe Stiglitz,Joan Robinson, , Axel Leijonhufvud, J.A.Trevithick,Harold Chorney and a number of other writers on these questions.)
2. They believe in the loanable funds doctrine for interest rate determination.
3. They privilege monetary policy above fiscal policy. A stable predictable steady growth in the money stock is desirable.
4. Savings are extremely important and automatically beget investment.
5. The quantity theory of money is sound.
6. Labour markets like other markets will clear so long as there are no frictions preventing this. Typical frictions are labour unions, the excessive social wages of the welfare state, inadequate or inefficient job search. Unemployment is therefore voluntary.
7. Laissez-faire is best. Intervention should be minimal. Allow the natural forces of the market to operate and all will be well.
8. Deficits are bad because they facilitate the growth of government which is bad.
9. Uncertainty is not a problem.
10. Inflation is the problem. Unemployment is taken care of by the natural rate approach. It is almost always voluntary.
Stimulus works
Stimulus works
May 26, 2010
The independent non partisan Congressional Budget Office has released an excellent detailed analysis of the American stimulus which shows that through the first quarter of this year the stimulus has created and saved more jobs than it was expected to and also increased the GDP by more than was expected. The multiplier for the stimulus turns out to be as much as 2.5 if one takes the best assumptions. Using very pessimistic assumptions about possible leakages and crowding out the multiplier is still one.The highest multiplier appears to occur when the program monies were spent directly by the Federal government on infrastructure.
Total employment was boosted by between 1.3 and 2.8 million additional jobs which would not have existed without the stimulus. This amounts to 1/4 to 1/2 as many jobs as were expected. The GDP was between 1.7 and 4.1 percentage points higher than it would have been in the absence of the stimulus.So contrary to conservative claims the stimulus was effective but clearly not large enough to dramatically lower unemployment except in a slow and gradual fashion. It needs to be supplemented and the sooner this happens the better because stimulus works. With proper central banking and appropriate monetary policy crowding out is a myth.
May 26, 2010
The independent non partisan Congressional Budget Office has released an excellent detailed analysis of the American stimulus which shows that through the first quarter of this year the stimulus has created and saved more jobs than it was expected to and also increased the GDP by more than was expected. The multiplier for the stimulus turns out to be as much as 2.5 if one takes the best assumptions. Using very pessimistic assumptions about possible leakages and crowding out the multiplier is still one.The highest multiplier appears to occur when the program monies were spent directly by the Federal government on infrastructure.
Total employment was boosted by between 1.3 and 2.8 million additional jobs which would not have existed without the stimulus. This amounts to 1/4 to 1/2 as many jobs as were expected. The GDP was between 1.7 and 4.1 percentage points higher than it would have been in the absence of the stimulus.So contrary to conservative claims the stimulus was effective but clearly not large enough to dramatically lower unemployment except in a slow and gradual fashion. It needs to be supplemented and the sooner this happens the better because stimulus works. With proper central banking and appropriate monetary policy crowding out is a myth.
The myth of a British structural deficit
July 27, 2010
The hot summer weather continues in Montréal. The economic news is mixed. Most people, at least those who are employed, are probably focused on the summer holidays and their family vacation plans.The unemployed have no such opportunity.
But there are some interesting recent developments. American growth remains disappointing and the data slightly below expectations. It is clear from my recent expedition to buy a new fridge that manufacturers continue to undersupply inventories preferring to delay deliveries rather than employ more people and produce more product despite rising demand.
On the public finance front the Financial Times has run an excellent series of articles on austerity versus stimulus with contributions from Larry Summers,Brad DeLong, Jean Claude Trichet the head of the European Central Bank, Martin Wolf of the FT,Martin Feldstein,,Jeffrey Sachs, David Miliband,Andy Xie,Montek Singh, Robert Skidelsky, Michael Kennedy among others with comments from a large number of readers including myself , most of which are worth reading and thinking about.I urge you to have a look at the series. Simply go to their site and search for it under the heading ''austerity versus stimulus".
It comes as no surprise to me but even after the debacle of the 2008 collapse and the clear role which deficit spending played in preventing a total disaster, the Treasury fiscal conservative view remains strongly held by a number of economists and central bankers.
It remains in my view a dysfunctional and damaging approach to fiscal policy but it is tenaciously defended by some.
On the central banking front the Bank of Canada has raised the bank rate another 25 basis points. So long as this does not indicate a return to a policy of jacking rates up substantially over the next year the damage that it will do to the recovery is probably minimal. But Canadian growth and employment gains while superior to those in the U.S. still remains questionable for the next 2 quarters.There is no threat of inflation and still plenty of underutilization of capacity. The Bank should avoid becoming trigger happy on rates. Mark Carney should take a walk on the golf course and relax at the lake and forget about raising rates for some time.
The hot summer weather continues in Montréal. The economic news is mixed. Most people, at least those who are employed, are probably focused on the summer holidays and their family vacation plans.The unemployed have no such opportunity.
But there are some interesting recent developments. American growth remains disappointing and the data slightly below expectations. It is clear from my recent expedition to buy a new fridge that manufacturers continue to undersupply inventories preferring to delay deliveries rather than employ more people and produce more product despite rising demand.
On the public finance front the Financial Times has run an excellent series of articles on austerity versus stimulus with contributions from Larry Summers,Brad DeLong, Jean Claude Trichet the head of the European Central Bank, Martin Wolf of the FT,Martin Feldstein,,Jeffrey Sachs, David Miliband,Andy Xie,Montek Singh, Robert Skidelsky, Michael Kennedy among others with comments from a large number of readers including myself , most of which are worth reading and thinking about.I urge you to have a look at the series. Simply go to their site and search for it under the heading ''austerity versus stimulus".
It comes as no surprise to me but even after the debacle of the 2008 collapse and the clear role which deficit spending played in preventing a total disaster, the Treasury fiscal conservative view remains strongly held by a number of economists and central bankers.
It remains in my view a dysfunctional and damaging approach to fiscal policy but it is tenaciously defended by some.
On the central banking front the Bank of Canada has raised the bank rate another 25 basis points. So long as this does not indicate a return to a policy of jacking rates up substantially over the next year the damage that it will do to the recovery is probably minimal. But Canadian growth and employment gains while superior to those in the U.S. still remains questionable for the next 2 quarters.There is no threat of inflation and still plenty of underutilization of capacity. The Bank should avoid becoming trigger happy on rates. Mark Carney should take a walk on the golf course and relax at the lake and forget about raising rates for some time.
Austerity versus Stimulus FT forum
July 27, 2010
The hot summer weather continues in Montréal. The economic news is mixed. Most people, at least those who are employed, are probably focused on the summer holidays and their family vacation plans.The unemployed have no such opportunity.
But there are some interesting recent developments. American growth remains disappointing and the data slightly below expectations. It is clear from my recent expedition to buy a new fridge that manufacturers continue to undersupply inventories preferring to delay deliveries rather than employ more people and produce more product despite rising demand.
On the public finance front the Financial Times has run an excellent series of articles on austerity versus stimulus with contributions from Larry Summers,Brad DeLong, Jean Claude Trichet the head of the European Central Bank, Martin Wolf of the FT,Martin Feldstein,,Jeffrey Sachs, David Miliband,Andy Xie,Montek Singh, Robert Skidelsky, Michael Kennedy among others with comments from a large number of readers including myself , most of which are worth reading and thinking about.I urge you to have a look at the series. Simply go to their site and search for it under the heading ''austerity versus stimulus".
It comes as no surprise to me but even after the debacle of the 2008 collapse and the clear role which deficit spending played in preventing a total disaster, the Treasury fiscal conservative view remains strongly held by a number of economists and central bankers.
It remains in my view a dysfunctional and damaging approach to fiscal policy but it is tenaciously defended by some.
On the central banking front the Bank of Canada has raised the bank rate another 25 basis points. So long as this does not indicate a return to a policy of jacking rates up substantially over the next year the damage that it will do to the recovery is probably minimal. But Canadian growth and employment gains while superior to those in the U.S. still remains questionable for the next 2 quarters.There is no threat of inflation and still plenty of underutilization of capacity. The Bank should avoid becoming trigger happy on rates. Mark Carney should take a walk on the golf course and relax at the lake and forget about raising rates for some time.
The hot summer weather continues in Montréal. The economic news is mixed. Most people, at least those who are employed, are probably focused on the summer holidays and their family vacation plans.The unemployed have no such opportunity.
But there are some interesting recent developments. American growth remains disappointing and the data slightly below expectations. It is clear from my recent expedition to buy a new fridge that manufacturers continue to undersupply inventories preferring to delay deliveries rather than employ more people and produce more product despite rising demand.
On the public finance front the Financial Times has run an excellent series of articles on austerity versus stimulus with contributions from Larry Summers,Brad DeLong, Jean Claude Trichet the head of the European Central Bank, Martin Wolf of the FT,Martin Feldstein,,Jeffrey Sachs, David Miliband,Andy Xie,Montek Singh, Robert Skidelsky, Michael Kennedy among others with comments from a large number of readers including myself , most of which are worth reading and thinking about.I urge you to have a look at the series. Simply go to their site and search for it under the heading ''austerity versus stimulus".
It comes as no surprise to me but even after the debacle of the 2008 collapse and the clear role which deficit spending played in preventing a total disaster, the Treasury fiscal conservative view remains strongly held by a number of economists and central bankers.
It remains in my view a dysfunctional and damaging approach to fiscal policy but it is tenaciously defended by some.
On the central banking front the Bank of Canada has raised the bank rate another 25 basis points. So long as this does not indicate a return to a policy of jacking rates up substantially over the next year the damage that it will do to the recovery is probably minimal. But Canadian growth and employment gains while superior to those in the U.S. still remains questionable for the next 2 quarters.There is no threat of inflation and still plenty of underutilization of capacity. The Bank should avoid becoming trigger happy on rates. Mark Carney should take a walk on the golf course and relax at the lake and forget about raising rates for some time.
Irving Fisher, Henry Ford, the thirties and now
August 4, 2010
Irving Fisher, Henry Ford the thirties & now
Irving Fisher the great Yale economist and monetary theorist wrote a number of books in his career. In 1930 after the great crash Macmillan published The Stock Market Crash and After in which Fisher analyzed the crash, the events leading to it and his prognosis for the future. He ended the book with the unfortunate sentence ''For the immediate future, at least, the outlook is bright.'' I have an original 1930 edition in my library and I have been re-reading the book this past summer week, a refuge from the thunderstorms and sultry heat.
Fisher lost a fortune in the crash and he was very wrong about the following years. But despite this, his book is full of interesting insights about the state of opinion and economic theory in the 1920s and in the months immediately following the crash. For example, he points out and has the quotes to back it up that President Hoover acted promptly to rally business to the side of accelerating business investment and avoiding unnecessary layoffs.He also called on the Fed to dramatically lower interest rates by flooding the country with liquidity.He also lobbied leading employers not to reduce wages in order to protect purchasing power. He was also in favour of ''prudent expansion" in public works investments. Much like President Obama he called a conference of the leading bankers and business men to discuss co-ordinating their programs of investments in order to ''assure employment and to remove the fear of unemployment."
Alas, despite these sensible efforts the actual investments were insufficient and fear, layoffs and falling wages came to dominate the economy.
The industrialist Henry Ford who had some very reactionary impulses and apparently anti-semitic beliefs nevertheless believed that workers' wages should not be cut. Instead he called for them to increase. He believed he said in ''increasing the purchasing power of our principle customers- the American people...this may be done in two ways; first by putting additional value into goods or reducing prices to the level of actual values, and second starting a movement to increase the general wage level.
Nearly everything in this country is too high priced. the only thing that should be high priced in this country is the man who works. wages must not come down, they must not even stay on their present level; they must go up." "
It is impossible to read Fisher's work and not draw comparisons between then and now. In the current circumstances where globalization is still dominant how many employers would stand with Ford in favour of higher wages? Everywhere the mantra is lower costs and outsource labour to achieve lower costs. At the same time, informed by history President Obama courageously backed and the Congress wisely passed a major stimulus bill. But it might not have been large enough. Like the 1930s the price trend is downwards. Herbert Hoover meant well and was generally progressive but his reputation was ruined by the depression. I am sure that President Obama
is going to be viewed far more positively.
Nevertheless, it is time for new investments,a second substantial stimulus, a critical re-examination of globalization and a push for a global minimum wage .My recent explorations of the retail markets in search of a new fridge has made clear that employers, both retail and manufacturing, are holding back on hiring when they should be doing the opposite. This needs to be changed in order to permit a better recovery from an employment point of view.
Irving Fisher, Henry Ford the thirties & now
Irving Fisher the great Yale economist and monetary theorist wrote a number of books in his career. In 1930 after the great crash Macmillan published The Stock Market Crash and After in which Fisher analyzed the crash, the events leading to it and his prognosis for the future. He ended the book with the unfortunate sentence ''For the immediate future, at least, the outlook is bright.'' I have an original 1930 edition in my library and I have been re-reading the book this past summer week, a refuge from the thunderstorms and sultry heat.
Fisher lost a fortune in the crash and he was very wrong about the following years. But despite this, his book is full of interesting insights about the state of opinion and economic theory in the 1920s and in the months immediately following the crash. For example, he points out and has the quotes to back it up that President Hoover acted promptly to rally business to the side of accelerating business investment and avoiding unnecessary layoffs.He also called on the Fed to dramatically lower interest rates by flooding the country with liquidity.He also lobbied leading employers not to reduce wages in order to protect purchasing power. He was also in favour of ''prudent expansion" in public works investments. Much like President Obama he called a conference of the leading bankers and business men to discuss co-ordinating their programs of investments in order to ''assure employment and to remove the fear of unemployment."
Alas, despite these sensible efforts the actual investments were insufficient and fear, layoffs and falling wages came to dominate the economy.
The industrialist Henry Ford who had some very reactionary impulses and apparently anti-semitic beliefs nevertheless believed that workers' wages should not be cut. Instead he called for them to increase. He believed he said in ''increasing the purchasing power of our principle customers- the American people...this may be done in two ways; first by putting additional value into goods or reducing prices to the level of actual values, and second starting a movement to increase the general wage level.
Nearly everything in this country is too high priced. the only thing that should be high priced in this country is the man who works. wages must not come down, they must not even stay on their present level; they must go up." "
It is impossible to read Fisher's work and not draw comparisons between then and now. In the current circumstances where globalization is still dominant how many employers would stand with Ford in favour of higher wages? Everywhere the mantra is lower costs and outsource labour to achieve lower costs. At the same time, informed by history President Obama courageously backed and the Congress wisely passed a major stimulus bill. But it might not have been large enough. Like the 1930s the price trend is downwards. Herbert Hoover meant well and was generally progressive but his reputation was ruined by the depression. I am sure that President Obama
is going to be viewed far more positively.
Nevertheless, it is time for new investments,a second substantial stimulus, a critical re-examination of globalization and a push for a global minimum wage .My recent explorations of the retail markets in search of a new fridge has made clear that employers, both retail and manufacturing, are holding back on hiring when they should be doing the opposite. This needs to be changed in order to permit a better recovery from an employment point of view.
Bank of Canada ups rate
Bank of Canada ups rate 25 bp.
The Bank of Canada has probably blundered by prematurely raising its overnight interest rate to 1 %. Although the rate hike is only 25 basis points, it is the third straight rate hike and has already put upward pressure on the Canadian dollar thereby making exports more difficult to sell in an already difficult environment. It will also undermine a very soft recovery somewhat further. Amost every time the central bank has dogmatically hopped on its hobby horse of fighting phantom inflation it has instead engineered an unnecessary recession.There were two such very damaging recessions in the past three decades. We have still not emerged properly from the last one which was caused not so much by the Bank but by the financial bubble's collapse. This rate hike was a decision that needed some rethinking. Regrettably it appears that the bank has not done it.
The Bank of Canada has probably blundered by prematurely raising its overnight interest rate to 1 %. Although the rate hike is only 25 basis points, it is the third straight rate hike and has already put upward pressure on the Canadian dollar thereby making exports more difficult to sell in an already difficult environment. It will also undermine a very soft recovery somewhat further. Amost every time the central bank has dogmatically hopped on its hobby horse of fighting phantom inflation it has instead engineered an unnecessary recession.There were two such very damaging recessions in the past three decades. We have still not emerged properly from the last one which was caused not so much by the Bank but by the financial bubble's collapse. This rate hike was a decision that needed some rethinking. Regrettably it appears that the bank has not done it.
Some International sovereign debt data
Some international debt data
Aug.18, 2010
I have been busy working on my book and blogging less which will likely continue for the next few weeks but here is some excellent data on sovereign debt which appeared in an FT graphic recently. I have added to it the most recent rate of unemployment and rates of inflation for the country concerned and the whole table makes for very interesting reading in light of the deficit hysteria that broke out internationally around the time of the G20 meetings in Toronto.
The overall picture is clear. We are not anywhere near the crisis point in terms of indebtedness based on historical data and experience. The most heavily indebted country remains Japan where unemployment is just over 5 % but the public sector debt is 184 % of the GDP; US indebtedness although elevated is still well below 100 % of the GDP. The U.K is at 67 %; Canada at a mere 32 %; France at 62 %; Germany at 44 %; Spain at 53 %; Portugal at 81 %; Italy 116 % and Greece 126 % of the GDP. The debt data is drawn from the OECD , and reported in the FT The unemployment and inflation data is from eurostat and OECD, statistics Canada, and the U.S. bureau of Labour statistics.. All debt reported in billions of U.S. dollars.Unemployment rate latest available either June or July 2010 or Q1 2010 or Q2 2010
Country total Debt Debt to GDP ratio
central govt. debt marketable debt
U.S. cg $12,311.95 b. 86 % 51 %
md 7272.496
unemployment 9.7% July; CPI rate of inflation 2.0% ,all items except food and energy 0.9 %(*)
U.K. cg. 1472.3 67% 57%
md.1244.3
unemployment 7.7% April 2010;CPI inflation 3.4, * 2.9 %
Canada cg 427.4 32% 31%
md 416.7
unemployment rate 8.0% July; CPI 1.4, *0.9
Japan cg 9325.161 184% 148%
md 6479.108
unemployment rate 5.2% June 2010; CPI -0.9, *-1.4
France cg 1656.724 62% 60%
mg1600.53
unemployment rate 9.7 % Q1 2010; CPI 1.6, *0.6
Germany cg 1469.038 44% 42%
mg1418.867
unemployment rate 8.0%; CPI 1.2,* 0.7
Italy cg 2454.841 116% 95 %
md2016.184
unemployment rate 9.1 % Q1 2010; CPI 1.4, *1.4
Australia md 80.23 8%
unemployment rate 5.0% June 2010; CPI 2.9, * 2.7
Greece cg 416.199 126% 119%
md394.557
unemployment rate 12.0 % May 2010; CPI 5.4,* 4.0
Ireland cg 104.776 65% 46%
unemployment rate 12.9%; CPI -1.1,* -1.7
Portugal cg 185.75 81% 68%
md 156.161
unemployment rate 10.6 % Q1 2010;CPI 2.1,* 1.7
Spain cg 780.258 53% 455
md 657.401
unemployment rate 20.1 % Q2 2010.; CPI 1.8,* 0.1
Aug.18, 2010
I have been busy working on my book and blogging less which will likely continue for the next few weeks but here is some excellent data on sovereign debt which appeared in an FT graphic recently. I have added to it the most recent rate of unemployment and rates of inflation for the country concerned and the whole table makes for very interesting reading in light of the deficit hysteria that broke out internationally around the time of the G20 meetings in Toronto.
The overall picture is clear. We are not anywhere near the crisis point in terms of indebtedness based on historical data and experience. The most heavily indebted country remains Japan where unemployment is just over 5 % but the public sector debt is 184 % of the GDP; US indebtedness although elevated is still well below 100 % of the GDP. The U.K is at 67 %; Canada at a mere 32 %; France at 62 %; Germany at 44 %; Spain at 53 %; Portugal at 81 %; Italy 116 % and Greece 126 % of the GDP. The debt data is drawn from the OECD , and reported in the FT The unemployment and inflation data is from eurostat and OECD, statistics Canada, and the U.S. bureau of Labour statistics.. All debt reported in billions of U.S. dollars.Unemployment rate latest available either June or July 2010 or Q1 2010 or Q2 2010
Country total Debt Debt to GDP ratio
central govt. debt marketable debt
U.S. cg $12,311.95 b. 86 % 51 %
md 7272.496
unemployment 9.7% July; CPI rate of inflation 2.0% ,all items except food and energy 0.9 %(*)
U.K. cg. 1472.3 67% 57%
md.1244.3
unemployment 7.7% April 2010;CPI inflation 3.4, * 2.9 %
Canada cg 427.4 32% 31%
md 416.7
unemployment rate 8.0% July; CPI 1.4, *0.9
Japan cg 9325.161 184% 148%
md 6479.108
unemployment rate 5.2% June 2010; CPI -0.9, *-1.4
France cg 1656.724 62% 60%
mg1600.53
unemployment rate 9.7 % Q1 2010; CPI 1.6, *0.6
Germany cg 1469.038 44% 42%
mg1418.867
unemployment rate 8.0%; CPI 1.2,* 0.7
Italy cg 2454.841 116% 95 %
md2016.184
unemployment rate 9.1 % Q1 2010; CPI 1.4, *1.4
Australia md 80.23 8%
unemployment rate 5.0% June 2010; CPI 2.9, * 2.7
Greece cg 416.199 126% 119%
md394.557
unemployment rate 12.0 % May 2010; CPI 5.4,* 4.0
Ireland cg 104.776 65% 46%
unemployment rate 12.9%; CPI -1.1,* -1.7
Portugal cg 185.75 81% 68%
md 156.161
unemployment rate 10.6 % Q1 2010;CPI 2.1,* 1.7
Spain cg 780.258 53% 455
md 657.401
unemployment rate 20.1 % Q2 2010.; CPI 1.8,* 0.1
On Manias, panics and bailouts further thoughts on the financial crisis
( Jan.14, 2009, This is a paper that I submitted to The Economists' Voice early last fall .The original version was e mailed there on October 3rd,2008.It reflects developments as of then. At the time when I was suggesting a 500 billion dollar stimulus might be necessary as far as I am aware virtually no analyst other than perhaps Nouriel Roubini was speaking or writing of the need for such a large stimulus package.
The electronic journal chose not to publish it but I think it deserves to be read because of the analysis it contains and when it was written.Obviously we have now moved beyond this essay particularly with respect to TARP and its failure so far to successfully unlock the US financial markets and to transparently account for the monies transferred to the banks and Wall street firms. Now that Obama is installed I hope that this will change.His close to 800 billion stimulus package passed into law by congress is a major step in the right direction.
The current economic environment continues to signal widespread bearishness, falling prices in producer goods and commodities including energy and rising unemployment.The US producer price index fell 1.9 % in December, 08 the fifth consecutive monthly drop.The price of finished goods fell 0.9 % compared to rising 6.7 % in 2007.energy prices also fell 9.3 %. U.S. unemployment has now risen to 8.1 % and looks like it will peak over 10 % in the coming months. There are emerging financial crises in Europe because of the Western banks' exposure to what are now bad Eastern European loans, the Russian oligarchs are in big trouble and will require bailing out by the Kremlin and the Chinese economy is undergoing dramtic job losses.[See the New York Times March 7, 2009 Andrew Kramer, `"The Last Days of the Russian Oligarchs" and Laquat Ahamed, "Subprime Europe"]
The Dow Jones this past week fell below 6700 which is a huge greater than 52 % drop from its original high point of over 14,164 less than two years ago.Additional Ponzi schemes have been uncovered to add to the misery.Growth in the last quarter of 2008 fell by 3.4 % in Canada, over 6 % in the U.S. 5.9 % in Europe and over 12 % in Japan. )
On manias, mass panics and bailouts: further thoughts on the Financial crisis.
by Harold Chorney
Joseph Stiglitz ,the Nobel prize winning economist who teaches at Columbia university, along with millions of his fellow Americans, has been sharply critical of the original form of US Treasury Secretary Paulson’s bailout plan. Undoubtedly his critique contributed to changes in the Bill which improved it considerably although I am sure he is still somewhat critical of what has now been signed into law. He was quite correct to insist that taxpayers’ interests needed to be better protected in a process which involved transferring toxic assets from private to public liabilities.
One of the ways that the final version of the Bill attempted to accomplish this was by approving in principle the notion of reverse auctions of the assets to be bought by the Treasury and provision for the Government to receive warrants exchangeable for equity in the firms that participate in selling assets to the Treasury. Hence, if the firm profits from the improvement in its balance sheet the taxpayer will as well. Some critics argued that these reverse auctions would be extremely difficult to conduct because of the heterogeneity of the assets involved and the difficulty in establishing their value. But so long as there was no collusion among the sellers of the assets the reverse auction process should have resulted in appropriate prices for the assets given the distressed state of the sellers.(Klemperer)
One of the risks in the Bill, however , was the provision for the alternative of firms purchasing Government sponsored insurance for their assets at rates that would cover the actuarial cost involved. To the extent that it was actually taken up it would have increased the average toxicity of the assets that were left over and instead sold to the Treasury.
Slough off the really bad stuff to the Government and insure the rest for a profit. Hence the provision for receiving equity was critical to protecting the public interest. The provision in the Bill for the Government and Congress to assess the program’s implementation after five years of operation and then to levy taxes on the financial services industry to cover shortfalls in the full recovery of costs should also go some way to further protect the taxpayers’ interests (see section 134 `Recoupment`` Emergency Economic stabilization Act 2008).
Recent events however have overtaken the Bill.
Over the three weeks (October 2- October 25)the collapse in stock markets became a frightening global phenomenon. On Friday October 24 th the markets dropped world wide by over 316 points in the US Dow Jones, by 9.6 % in the Nikkei index in Japan and by 4-5 % in Europe and substantially in China as well. The Dow Jones had fallen from its peak of 14,164 a year ago this October 10th to just over 8300, a fall of over 40 %-- one of the larger drops in its history. Only the drops in 1919-1921, 1929-1932, 1937-38, 1939-1942, 1973-1974 are greater. The S and P 500 index in fact has suffered the second biggest slide in its history also falling by more than 42 %. The NASDAQ has fallen by 44.7 % over the past year and the Russell 2000 by 42.6 %.
Indices all over the world are down by between 33 and 71 %. These include Canada -32.8 %; Brazil-50.7; Mexico -42.5; Euro zone - 48.3; Switzerland -33.1; U.K. -39.9; Russia –71.1; Australia -39.0; China -65.8 Hong Kong -54.6; Japan -50.0 ; Singapore -53.8; South Korea -50.5; Taiwan -46.2. From October 26 to November 13th the market has fluctuated wildly culminating on November 13 th with a swing of 900 points in one day from a new bottom of about 7800 on the DOW to a close of just over 8800.The very next day however the market opened with a downturn suggesting that volatility and a sense of no clear direction remained the key characteristic as more bad economic news was released with deepening recessions in the U.K., Germany and the U.S. leading the way.
Oil has also fallen from its year ago cash spot price of 91.87 to a low of about $54 for West Texas Intermediate on the cash spot market. On the futures market it had peaked at $147 but it has now fallen to $56 on NYMEX.( Its January 2009 price so far is as low as $37.)
OPEC has cut its production quota once and it may do so again but it is quite possible oil will breach the $50 barrier despite this. Almost all of the other leading commodities have also fallen in price including copper, aluminum, platimum, lead, steel, tin , zinc coffee, wheat, corn , sugar, cheese , milk, corn oil and soybean oil.
Over the past 118 years there have been 100 episodes in which the Dow lost 10 % or more over the highest previous close in the previous 30 days. Of these, in 45 cases the Dow was higher three months later. In a number of cases there were longish bear markets that followed and in three cases 1907, 1929 and 1973 these depressed markets lasted several years . The August 1929 peak was only regained in November 1954.(Niederhoffer, pp.42-43)The 1973 peak in 1979 and the 1907 peak in 1910.
Markets world wide have experienced similar dramatic losses and the paralysis of the banking sector had worsened despite passage of the Bill. To combat this the Treasury has now implemented the provisions of the Bill which permit taking share ownership in return for injecting new capital. In this respect they have been influenced by the approach of the British Labour government led by George Brown which announced it was injecting 37 billion pounds into RBS, Lloyds and HBOS in return for equity in order to prevent their collapse.(New York Times , October 8, Guardian October 13,2008). In return the Banks have agreed to help prevent foreclosures and executives have agreed to limitations on bonuses and compensation packages. The British government will end up owning 43.5 % of the Lloyds HBOS group and 60 % of the RBS. It also is making 6.5 billion pounds available to Barclays should they decide to take it up.
George Soros also had suggested a variant of the British plan in an article in the Financial Times(October 12, 2008) which involved injecting both public and private capital into the banks in return for preferred shares. These measures will, of course, dilute the current shareholders’ common stock and entail further losses but in the longer run will help rescue the banks from collapse. At the same time European leaders announced that were going to guarantee inter bank lending in what should eventually be a successful effort to unlock the credit markets. Germany has set aside 80 billion euros to recapitalise its banks and France 40 billion euros. In addition the European central bank, the Bank of England and the Swiss central bank have offered their commercial banks unlimited swap loans of varying maturities and large quantities denominated in dollars in exchange for appropriate assets. All of these measures introduce substantial new liquidity into the financial system. If one totals up the European programs the total money involved is close to 2 trillion US dollars.
The US under the TARP is injecting up to $ 250 billion into American banks with the largest 8 banks receiving a total of $ 125 billion. The banks will receive the capital and the Government will take preferred shares in exchange and will guarantee senior debt for 3 years. The FDIC will insure all non interest bearing accounts which are primarily used by business. The biggest banks will apparently receive the money as follows: Bank of America $25 billion; Citigroup 25 billion; JP Morgan Chase 25 billion; Wells Fargo 25 billion; Goldman Sachs 10 billion; Morgan Stanley 10 billion; Bank of New York 2-3 billion; and State Street 2-3 billion.
The American and British action would in fact represent a partial temporary nationalization of banks and it would make it easier to unlock the credit markets and restore the proper functioning of the banking system . None of the governments is willing to say that their actions constitute nationalization but in fact that is what they are doing, albeit temporarily in an emergency. The British government has stated it has no intention of hanging on to the Banks for long but time will tell. It also reveals just how serious the crisis has become. The American action will also be time limited with the clear intention of returning the banks to private ownership as soon as conditions have stabilized and the Government can recover its investments.
The problem for the moment appears to still be despite these massive infusions of cash that no one trusts anyone else as to their counter party risk exposure. As a consequence the banks appear to be using the infusions not to unblock the credit and loan system but rather hoarding the cash possibly for takeover acquisitions while tightening credit to reflect the current head for the hills market sentiment. This is not good news and will require further intervention by the American Government and governments in other countries facing similar problems to insist that the banks use the money for the purposes intended.
In effect we have the outcome that Keynes foresaw in the Treatise on Money in his chapter on fluctuations in the rate of investment and his earlier discussion of the role of liquid capital (pp.116 ff vol2 &pp.59ff) in which he argued that disproportionalities in the savings and investment functions would lead to co-ordination problems in the economy and that excessive liquidity preference by the banks themselves could lead to inadequate investment and too high a rate of interest prevailing in inter-bank lending during a slump. (Keynes, Treatise, p.182 vol.2; See also the discussion of this in A.Leijonhufvud, 2008)This is precisely the situation we now face and the great challenge will be to get the banks to lend again at reasonable rates of interest.
In fact, as of November 13th the Treasury Secretary Henry Paulson announced that he was abandoning his plan to acquire toxic assets from the banks and instead was shifting his focus to use TARP funds to inject capital into the asset backed commercial paper markets that are linked to car loans, student loans and credit card debt. The government also announced on November 9th that it was increasing its injection of funds into AIG insurance by some $ 40 billion in order to reduce the burden of interest on previous loans to the company. The government has now injected some $152 billion into AIG through a combination of low interest loans, purchase of preferred shares and the establishment of a funded entity to offload and resell bad debt.
Great Britain has already ordered that its banks use the funds advanced to them to unlock their credit markets. It would be sensible for the US to do so as well. Paulson’s decision to refocus his attention on the non bank consumer oriented financial markets is a way of putting pressure on the banks to do so. By having refused to do so despite the advances made to them the banks will now have to accept lower prices for their toxic debt than what they would have been able to wring from the Treasury and their bargaining power is now reduced.(New York Times, October 25, 2008 When will the banks start making loans? ) Despite all these measures the indicators still point to falling prices, failing firms and increasing job layoffs.
It is of course one of the structural weaknesses of monetary policy pointed out by Keynes and admitted to by D.H.Robertson that `the banking system may be hard put to make the money supply large enough, and keep it moving fast enough , to check the fall in prices ” in a crash or depression. (D.H.Robertson, Money, p.177) That is why in addition to these financial infusions there is a need for additional fiscal stimulus.
Nationalizing banks, even partially and temporarily still takes us back to the days of FDR. It is a long way from rational markets theory and the philosophy of laissez-faire. There is no going back in the near future or even medium term to the economics of deregulation and laissez-faire capitalism after this. No less a free markets advocate than Alan Greenspan has admitted that his deregulation ideology was flawed and that he was shocked and in a state of disbelief by the failure of banks and financial institutions to properly self regulate the derivatives market and protect shareholders’ interests. (House testimony) No one for many years to come will be able to credibly argue for deregulation of the financial markets and laissez-faire knows best after these cataclysmic and paradigm shifting events.
Instead of rational markets we were confronted with a global market crash and a financial system that was perilously close to complete paralysis and failure. One of my colleagues has suggested that the markets did behave rationally by panicking and seeking to sell off equities that it viewed as horribly overvalued because of their exposure to the derivatives fiasco.
But this is disingenuous because of the origins of the derivatives crisis itself in the absence of market regulation. Laissez-faire obsession accompanied by excessive greed played a major role in unleashing this crisis.
But whatever its origins it has developed very swiftly into a once or twice in a century financial panic along the lines of the 1873 banking panic that was also based on a housing bubble, the 1907 collapse that was rescued by the joint intervention of the Government and J.P.Morgan and the collapse of the markets in 1929 and 1930 which ushered in the Great Depression. Some analysts on the left, such as, for example, Dean Baker(see the Guardian, October 3, 2008) as well as some on the right had insisted that President Bush, Hank Paulson and Ben Bernanke the Chairman of the Federal Reserve, who have warned of the risk of this crisis being as grave, were exaggerating the problem in order to advance their own special interests or agenda .
Current events in the markets suggest otherwise. Prominent market analysts like George Soros, Robert Schiller and Warren Buffett have been suggesting the possibility of an event of this magnitude long before President Bush spoke of it. Hyman Minsky suggested that it was a possibility two decades ago. The freezing up of the inter-bank loan market and the withdrawal of funds from the stock markets was already underway before President Bush warned of dire consequences .
Anyone who has studied or carefully observed the behaviour of mass society in the post-modern age knows that panics, crashes and irrational manias are an integral part of contemporary culture. Kindleberger, Minsky and Galbraith have shown in their own work just how powerful these kinds of destructive forces were in the past. There is not much of a leap from tulip bulbs, the South Sea bubble John Law and Mississippi swamp land to grossly inflated land values and overpriced cottages and houses and arcane derivatives that exploit lack of transparency to mask fraudulent overleveraged pricing. The irrational aspect of human nature and tendency to panic is a constant.
This aspect of human nature has been magnified and accelerated in the contemporary world. As John Koning a Toronto economist and investment dealer who writes from an Austrian perspective has pointed out the panics of the past are incorporated into the collective memory and they hence make it more likely for mass psychology to follow a familiar pattern.(See also Niederhoffer,McKay and Kindleberger) In the post modern world of click and blackberry culture and fleeting attention spans that typifies our world it is not a surprise to witness a financial panic that accelerates at a fearsome pace. An updated and effective regulatory framework will need to keep this in mind.
It will take time and considerable effort on a broad range of fronts to re-establish some stability and the absence of panic.
The immediate priority of the new Obama Government in Washington next January will have to be a reassessment of the legislation to fix whatever gaps still exist in it; a restructuring of the American auto industry; a massive fiscal stimulus perhaps as much as $500 billion that targets neglected infrastructure and creating jobs for low and moderate income people; programs to aid the poor, the homeless and those who are facing unemployment; repair and reform of the health care system to bring it up to a modern standard for an advanced capitalist country; and aid along the line that Stiglitz proposes for those who are facing foreclosure. The last is partly mandated by the Bill that has just been passed but undoubtedly will need improvement.
Here one can use a housing stabilization fund (HSF)or relevant portions of the TARP that relieves burdened homeowners of part of the mortgage and renegotiates the terms so that the liability for the relieved portion is shared between the original mortgagee and the HSF. In return for this aid the homeowner assigns an appropriate portion of any future capital gain to the HSF. I first developed a scheme like this more than thirty years ago when I was a government housing economist in Manitoba and was tasked with developing a scheme to prevent the benefits of a government land assembly from being totally captured by the first buyer of the property as opposed to being passed on to future buyers in perpetuity.(see my blog haroldchorneypoliticaleconomist.piczo.com April 7, 2008)Soros and others have proposed variants of this scheme in recent articles.
Although the deficit is being increased by these measures it is important to keep things in historical perspective. A one trillion dollar increase in the deficit adds about seven percentage points to the deficit to GDP ratio. So if a $500 billion fiscal stimulus were added to, say, a $500 billion dollar capital injection and the rescue of some toxic assets over the next two years(I am assuming that some assets will be insured rather than bought by TARP. Some will also be bought by private market actors. Some will also turn profitable over time) on top of about $300 billion for Freddie Mac, Fannie Mae and Bear Stearns and AIG the resulting deficit to GDP ratio would be significant , above 10 % of the GDP. During the Second World War the deficit soared to as high as 30 % of the GDP in 1943. It was above 20 % in 1944 and 1945.
At the moment financing costs are very low because of the enormous demand for quality government debt. The proportion of the debt held by the Fed is low, about 6 % as a proportion of the GDP as compared to 10.7 % in 1946.With careful management by the Federal Reserve including its intervening to keep the financing costs minimal through the purchase and resale of these assets there is no reason for the increase in the debt to cause any sort of alarm.
In 2006 the net debt (that is gross debt minus debt held by Federal Government accounts) to GDP ratio for the US was quite manageable, under 38 % of the GDP. (See Table 7.1 in The budget for fiscal year 2008, pp126-127.)
Even after expanding it to accomplish these goals it will still be very manageable, close to 50 % of the GDP.
As calm gradually returns to American and global financial markets which will take some time, the harrowing events of this past year will enter the history books as another powerful example of the limits of laissez faire and the necessity of countervailing regulation and a progressive state that uses Keynes style technique in order to bring humanist reason to bear on the extraordinary destructive but also potentially extraordinary creative power of advanced capitalism in the age of globalization.
References and Further Reading
New York Times, September, October and November 2008 daily issues.
Wall Street Journal, September, October ,and November 2008 daily issues.
Financial Times, September, October, and November daily issues.
HR1424 Emergency Economic Stabilization Act 2008
Dean Baker, “A crisis made in the Oval Office: A financial panic provoked by President Bush was designed to stampede the Congress into passing the bailout for Wall Street , ”October 3, 2008 www.guardianco.uk/commentisfree/cifamerica/2008/oct/03US.bush.financialcrisis/
Ron Chernow, The House of Morgan: An American Banking dynasty and the Rise of modern finance
Harold Chorney, www.piczo.com. haroldchorneypoliticaleconomist
Harold Chorney, “Debts, Deficits and Full Employment ” in R.Boyer&D.Drache, States against Markets:The Limits of Globalization, N.Y. Routledge, 1996
Simon &Schuster, N.Y.1990
Robert Bruner&Sean Carr, The Panic of 1907, N.Y. John Wiley, 2007.
John Kenneth Galbraith, The Great Crash, N.Y. Houghton Mifflin, 1954,
John Maynard Keynes, The Treatise on Money, vol.2 London: Macmillan vol.6 of Collected Works, 1930.
Paul Klemperer, Auction Theory: A guide to the Literature Journal of Economic Surveys vol. 13(3) www.nuff.ox.ac.uk/users/Klemperer/survey.pdf
Charles Kindleberger, Manias, Panics and crashes, N.Y. Harper, 1978.
Axel Leijonhufvud, Keynes and the Crisis Policy Insights, May 2008, Vol.23.
Axel Leijonhufvud & Brian Snowdon Snowdon interviews Leijonhufvud, www-ceel.economica.unitd.it/staffleijonhufvud/interview.pdf 2002.
Charles Mackay, Extraordinary Popular delusions and the Madness of Crowds, N.Y. Harmony Books, 1841, 1980.
Hyman Minsky, Stabilizing an Unstable Economy, New Haven, Yale University press, 1986
Victor Niederhoffer, The Education of a Speculator, N.Y. John Wiley, 1997.
Historical Tables: Budget of the US government, fiscal Year 2008
Kevin Phillips Bad Money: reckless finance, Failed Politics and the Global Crisis of American Capitalism
D.H.Robertson, Money, Cambridge, Cambridge University Press, 1946.
George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means
Harold Chorney
Professor
Political Economy and Public Policy
Concordia University, Montréal
The electronic journal chose not to publish it but I think it deserves to be read because of the analysis it contains and when it was written.Obviously we have now moved beyond this essay particularly with respect to TARP and its failure so far to successfully unlock the US financial markets and to transparently account for the monies transferred to the banks and Wall street firms. Now that Obama is installed I hope that this will change.His close to 800 billion stimulus package passed into law by congress is a major step in the right direction.
The current economic environment continues to signal widespread bearishness, falling prices in producer goods and commodities including energy and rising unemployment.The US producer price index fell 1.9 % in December, 08 the fifth consecutive monthly drop.The price of finished goods fell 0.9 % compared to rising 6.7 % in 2007.energy prices also fell 9.3 %. U.S. unemployment has now risen to 8.1 % and looks like it will peak over 10 % in the coming months. There are emerging financial crises in Europe because of the Western banks' exposure to what are now bad Eastern European loans, the Russian oligarchs are in big trouble and will require bailing out by the Kremlin and the Chinese economy is undergoing dramtic job losses.[See the New York Times March 7, 2009 Andrew Kramer, `"The Last Days of the Russian Oligarchs" and Laquat Ahamed, "Subprime Europe"]
The Dow Jones this past week fell below 6700 which is a huge greater than 52 % drop from its original high point of over 14,164 less than two years ago.Additional Ponzi schemes have been uncovered to add to the misery.Growth in the last quarter of 2008 fell by 3.4 % in Canada, over 6 % in the U.S. 5.9 % in Europe and over 12 % in Japan. )
On manias, mass panics and bailouts: further thoughts on the Financial crisis.
by Harold Chorney
Joseph Stiglitz ,the Nobel prize winning economist who teaches at Columbia university, along with millions of his fellow Americans, has been sharply critical of the original form of US Treasury Secretary Paulson’s bailout plan. Undoubtedly his critique contributed to changes in the Bill which improved it considerably although I am sure he is still somewhat critical of what has now been signed into law. He was quite correct to insist that taxpayers’ interests needed to be better protected in a process which involved transferring toxic assets from private to public liabilities.
One of the ways that the final version of the Bill attempted to accomplish this was by approving in principle the notion of reverse auctions of the assets to be bought by the Treasury and provision for the Government to receive warrants exchangeable for equity in the firms that participate in selling assets to the Treasury. Hence, if the firm profits from the improvement in its balance sheet the taxpayer will as well. Some critics argued that these reverse auctions would be extremely difficult to conduct because of the heterogeneity of the assets involved and the difficulty in establishing their value. But so long as there was no collusion among the sellers of the assets the reverse auction process should have resulted in appropriate prices for the assets given the distressed state of the sellers.(Klemperer)
One of the risks in the Bill, however , was the provision for the alternative of firms purchasing Government sponsored insurance for their assets at rates that would cover the actuarial cost involved. To the extent that it was actually taken up it would have increased the average toxicity of the assets that were left over and instead sold to the Treasury.
Slough off the really bad stuff to the Government and insure the rest for a profit. Hence the provision for receiving equity was critical to protecting the public interest. The provision in the Bill for the Government and Congress to assess the program’s implementation after five years of operation and then to levy taxes on the financial services industry to cover shortfalls in the full recovery of costs should also go some way to further protect the taxpayers’ interests (see section 134 `Recoupment`` Emergency Economic stabilization Act 2008).
Recent events however have overtaken the Bill.
Over the three weeks (October 2- October 25)the collapse in stock markets became a frightening global phenomenon. On Friday October 24 th the markets dropped world wide by over 316 points in the US Dow Jones, by 9.6 % in the Nikkei index in Japan and by 4-5 % in Europe and substantially in China as well. The Dow Jones had fallen from its peak of 14,164 a year ago this October 10th to just over 8300, a fall of over 40 %-- one of the larger drops in its history. Only the drops in 1919-1921, 1929-1932, 1937-38, 1939-1942, 1973-1974 are greater. The S and P 500 index in fact has suffered the second biggest slide in its history also falling by more than 42 %. The NASDAQ has fallen by 44.7 % over the past year and the Russell 2000 by 42.6 %.
Indices all over the world are down by between 33 and 71 %. These include Canada -32.8 %; Brazil-50.7; Mexico -42.5; Euro zone - 48.3; Switzerland -33.1; U.K. -39.9; Russia –71.1; Australia -39.0; China -65.8 Hong Kong -54.6; Japan -50.0 ; Singapore -53.8; South Korea -50.5; Taiwan -46.2. From October 26 to November 13th the market has fluctuated wildly culminating on November 13 th with a swing of 900 points in one day from a new bottom of about 7800 on the DOW to a close of just over 8800.The very next day however the market opened with a downturn suggesting that volatility and a sense of no clear direction remained the key characteristic as more bad economic news was released with deepening recessions in the U.K., Germany and the U.S. leading the way.
Oil has also fallen from its year ago cash spot price of 91.87 to a low of about $54 for West Texas Intermediate on the cash spot market. On the futures market it had peaked at $147 but it has now fallen to $56 on NYMEX.( Its January 2009 price so far is as low as $37.)
OPEC has cut its production quota once and it may do so again but it is quite possible oil will breach the $50 barrier despite this. Almost all of the other leading commodities have also fallen in price including copper, aluminum, platimum, lead, steel, tin , zinc coffee, wheat, corn , sugar, cheese , milk, corn oil and soybean oil.
Over the past 118 years there have been 100 episodes in which the Dow lost 10 % or more over the highest previous close in the previous 30 days. Of these, in 45 cases the Dow was higher three months later. In a number of cases there were longish bear markets that followed and in three cases 1907, 1929 and 1973 these depressed markets lasted several years . The August 1929 peak was only regained in November 1954.(Niederhoffer, pp.42-43)The 1973 peak in 1979 and the 1907 peak in 1910.
Markets world wide have experienced similar dramatic losses and the paralysis of the banking sector had worsened despite passage of the Bill. To combat this the Treasury has now implemented the provisions of the Bill which permit taking share ownership in return for injecting new capital. In this respect they have been influenced by the approach of the British Labour government led by George Brown which announced it was injecting 37 billion pounds into RBS, Lloyds and HBOS in return for equity in order to prevent their collapse.(New York Times , October 8, Guardian October 13,2008). In return the Banks have agreed to help prevent foreclosures and executives have agreed to limitations on bonuses and compensation packages. The British government will end up owning 43.5 % of the Lloyds HBOS group and 60 % of the RBS. It also is making 6.5 billion pounds available to Barclays should they decide to take it up.
George Soros also had suggested a variant of the British plan in an article in the Financial Times(October 12, 2008) which involved injecting both public and private capital into the banks in return for preferred shares. These measures will, of course, dilute the current shareholders’ common stock and entail further losses but in the longer run will help rescue the banks from collapse. At the same time European leaders announced that were going to guarantee inter bank lending in what should eventually be a successful effort to unlock the credit markets. Germany has set aside 80 billion euros to recapitalise its banks and France 40 billion euros. In addition the European central bank, the Bank of England and the Swiss central bank have offered their commercial banks unlimited swap loans of varying maturities and large quantities denominated in dollars in exchange for appropriate assets. All of these measures introduce substantial new liquidity into the financial system. If one totals up the European programs the total money involved is close to 2 trillion US dollars.
The US under the TARP is injecting up to $ 250 billion into American banks with the largest 8 banks receiving a total of $ 125 billion. The banks will receive the capital and the Government will take preferred shares in exchange and will guarantee senior debt for 3 years. The FDIC will insure all non interest bearing accounts which are primarily used by business. The biggest banks will apparently receive the money as follows: Bank of America $25 billion; Citigroup 25 billion; JP Morgan Chase 25 billion; Wells Fargo 25 billion; Goldman Sachs 10 billion; Morgan Stanley 10 billion; Bank of New York 2-3 billion; and State Street 2-3 billion.
The American and British action would in fact represent a partial temporary nationalization of banks and it would make it easier to unlock the credit markets and restore the proper functioning of the banking system . None of the governments is willing to say that their actions constitute nationalization but in fact that is what they are doing, albeit temporarily in an emergency. The British government has stated it has no intention of hanging on to the Banks for long but time will tell. It also reveals just how serious the crisis has become. The American action will also be time limited with the clear intention of returning the banks to private ownership as soon as conditions have stabilized and the Government can recover its investments.
The problem for the moment appears to still be despite these massive infusions of cash that no one trusts anyone else as to their counter party risk exposure. As a consequence the banks appear to be using the infusions not to unblock the credit and loan system but rather hoarding the cash possibly for takeover acquisitions while tightening credit to reflect the current head for the hills market sentiment. This is not good news and will require further intervention by the American Government and governments in other countries facing similar problems to insist that the banks use the money for the purposes intended.
In effect we have the outcome that Keynes foresaw in the Treatise on Money in his chapter on fluctuations in the rate of investment and his earlier discussion of the role of liquid capital (pp.116 ff vol2 &pp.59ff) in which he argued that disproportionalities in the savings and investment functions would lead to co-ordination problems in the economy and that excessive liquidity preference by the banks themselves could lead to inadequate investment and too high a rate of interest prevailing in inter-bank lending during a slump. (Keynes, Treatise, p.182 vol.2; See also the discussion of this in A.Leijonhufvud, 2008)This is precisely the situation we now face and the great challenge will be to get the banks to lend again at reasonable rates of interest.
In fact, as of November 13th the Treasury Secretary Henry Paulson announced that he was abandoning his plan to acquire toxic assets from the banks and instead was shifting his focus to use TARP funds to inject capital into the asset backed commercial paper markets that are linked to car loans, student loans and credit card debt. The government also announced on November 9th that it was increasing its injection of funds into AIG insurance by some $ 40 billion in order to reduce the burden of interest on previous loans to the company. The government has now injected some $152 billion into AIG through a combination of low interest loans, purchase of preferred shares and the establishment of a funded entity to offload and resell bad debt.
Great Britain has already ordered that its banks use the funds advanced to them to unlock their credit markets. It would be sensible for the US to do so as well. Paulson’s decision to refocus his attention on the non bank consumer oriented financial markets is a way of putting pressure on the banks to do so. By having refused to do so despite the advances made to them the banks will now have to accept lower prices for their toxic debt than what they would have been able to wring from the Treasury and their bargaining power is now reduced.(New York Times, October 25, 2008 When will the banks start making loans? ) Despite all these measures the indicators still point to falling prices, failing firms and increasing job layoffs.
It is of course one of the structural weaknesses of monetary policy pointed out by Keynes and admitted to by D.H.Robertson that `the banking system may be hard put to make the money supply large enough, and keep it moving fast enough , to check the fall in prices ” in a crash or depression. (D.H.Robertson, Money, p.177) That is why in addition to these financial infusions there is a need for additional fiscal stimulus.
Nationalizing banks, even partially and temporarily still takes us back to the days of FDR. It is a long way from rational markets theory and the philosophy of laissez-faire. There is no going back in the near future or even medium term to the economics of deregulation and laissez-faire capitalism after this. No less a free markets advocate than Alan Greenspan has admitted that his deregulation ideology was flawed and that he was shocked and in a state of disbelief by the failure of banks and financial institutions to properly self regulate the derivatives market and protect shareholders’ interests. (House testimony) No one for many years to come will be able to credibly argue for deregulation of the financial markets and laissez-faire knows best after these cataclysmic and paradigm shifting events.
Instead of rational markets we were confronted with a global market crash and a financial system that was perilously close to complete paralysis and failure. One of my colleagues has suggested that the markets did behave rationally by panicking and seeking to sell off equities that it viewed as horribly overvalued because of their exposure to the derivatives fiasco.
But this is disingenuous because of the origins of the derivatives crisis itself in the absence of market regulation. Laissez-faire obsession accompanied by excessive greed played a major role in unleashing this crisis.
But whatever its origins it has developed very swiftly into a once or twice in a century financial panic along the lines of the 1873 banking panic that was also based on a housing bubble, the 1907 collapse that was rescued by the joint intervention of the Government and J.P.Morgan and the collapse of the markets in 1929 and 1930 which ushered in the Great Depression. Some analysts on the left, such as, for example, Dean Baker(see the Guardian, October 3, 2008) as well as some on the right had insisted that President Bush, Hank Paulson and Ben Bernanke the Chairman of the Federal Reserve, who have warned of the risk of this crisis being as grave, were exaggerating the problem in order to advance their own special interests or agenda .
Current events in the markets suggest otherwise. Prominent market analysts like George Soros, Robert Schiller and Warren Buffett have been suggesting the possibility of an event of this magnitude long before President Bush spoke of it. Hyman Minsky suggested that it was a possibility two decades ago. The freezing up of the inter-bank loan market and the withdrawal of funds from the stock markets was already underway before President Bush warned of dire consequences .
Anyone who has studied or carefully observed the behaviour of mass society in the post-modern age knows that panics, crashes and irrational manias are an integral part of contemporary culture. Kindleberger, Minsky and Galbraith have shown in their own work just how powerful these kinds of destructive forces were in the past. There is not much of a leap from tulip bulbs, the South Sea bubble John Law and Mississippi swamp land to grossly inflated land values and overpriced cottages and houses and arcane derivatives that exploit lack of transparency to mask fraudulent overleveraged pricing. The irrational aspect of human nature and tendency to panic is a constant.
This aspect of human nature has been magnified and accelerated in the contemporary world. As John Koning a Toronto economist and investment dealer who writes from an Austrian perspective has pointed out the panics of the past are incorporated into the collective memory and they hence make it more likely for mass psychology to follow a familiar pattern.(See also Niederhoffer,McKay and Kindleberger) In the post modern world of click and blackberry culture and fleeting attention spans that typifies our world it is not a surprise to witness a financial panic that accelerates at a fearsome pace. An updated and effective regulatory framework will need to keep this in mind.
It will take time and considerable effort on a broad range of fronts to re-establish some stability and the absence of panic.
The immediate priority of the new Obama Government in Washington next January will have to be a reassessment of the legislation to fix whatever gaps still exist in it; a restructuring of the American auto industry; a massive fiscal stimulus perhaps as much as $500 billion that targets neglected infrastructure and creating jobs for low and moderate income people; programs to aid the poor, the homeless and those who are facing unemployment; repair and reform of the health care system to bring it up to a modern standard for an advanced capitalist country; and aid along the line that Stiglitz proposes for those who are facing foreclosure. The last is partly mandated by the Bill that has just been passed but undoubtedly will need improvement.
Here one can use a housing stabilization fund (HSF)or relevant portions of the TARP that relieves burdened homeowners of part of the mortgage and renegotiates the terms so that the liability for the relieved portion is shared between the original mortgagee and the HSF. In return for this aid the homeowner assigns an appropriate portion of any future capital gain to the HSF. I first developed a scheme like this more than thirty years ago when I was a government housing economist in Manitoba and was tasked with developing a scheme to prevent the benefits of a government land assembly from being totally captured by the first buyer of the property as opposed to being passed on to future buyers in perpetuity.(see my blog haroldchorneypoliticaleconomist.piczo.com April 7, 2008)Soros and others have proposed variants of this scheme in recent articles.
Although the deficit is being increased by these measures it is important to keep things in historical perspective. A one trillion dollar increase in the deficit adds about seven percentage points to the deficit to GDP ratio. So if a $500 billion fiscal stimulus were added to, say, a $500 billion dollar capital injection and the rescue of some toxic assets over the next two years(I am assuming that some assets will be insured rather than bought by TARP. Some will also be bought by private market actors. Some will also turn profitable over time) on top of about $300 billion for Freddie Mac, Fannie Mae and Bear Stearns and AIG the resulting deficit to GDP ratio would be significant , above 10 % of the GDP. During the Second World War the deficit soared to as high as 30 % of the GDP in 1943. It was above 20 % in 1944 and 1945.
At the moment financing costs are very low because of the enormous demand for quality government debt. The proportion of the debt held by the Fed is low, about 6 % as a proportion of the GDP as compared to 10.7 % in 1946.With careful management by the Federal Reserve including its intervening to keep the financing costs minimal through the purchase and resale of these assets there is no reason for the increase in the debt to cause any sort of alarm.
In 2006 the net debt (that is gross debt minus debt held by Federal Government accounts) to GDP ratio for the US was quite manageable, under 38 % of the GDP. (See Table 7.1 in The budget for fiscal year 2008, pp126-127.)
Even after expanding it to accomplish these goals it will still be very manageable, close to 50 % of the GDP.
As calm gradually returns to American and global financial markets which will take some time, the harrowing events of this past year will enter the history books as another powerful example of the limits of laissez faire and the necessity of countervailing regulation and a progressive state that uses Keynes style technique in order to bring humanist reason to bear on the extraordinary destructive but also potentially extraordinary creative power of advanced capitalism in the age of globalization.
References and Further Reading
New York Times, September, October and November 2008 daily issues.
Wall Street Journal, September, October ,and November 2008 daily issues.
Financial Times, September, October, and November daily issues.
HR1424 Emergency Economic Stabilization Act 2008
Dean Baker, “A crisis made in the Oval Office: A financial panic provoked by President Bush was designed to stampede the Congress into passing the bailout for Wall Street , ”October 3, 2008 www.guardianco.uk/commentisfree/cifamerica/2008/oct/03US.bush.financialcrisis/
Ron Chernow, The House of Morgan: An American Banking dynasty and the Rise of modern finance
Harold Chorney, www.piczo.com. haroldchorneypoliticaleconomist
Harold Chorney, “Debts, Deficits and Full Employment ” in R.Boyer&D.Drache, States against Markets:The Limits of Globalization, N.Y. Routledge, 1996
Simon &Schuster, N.Y.1990
Robert Bruner&Sean Carr, The Panic of 1907, N.Y. John Wiley, 2007.
John Kenneth Galbraith, The Great Crash, N.Y. Houghton Mifflin, 1954,
John Maynard Keynes, The Treatise on Money, vol.2 London: Macmillan vol.6 of Collected Works, 1930.
Paul Klemperer, Auction Theory: A guide to the Literature Journal of Economic Surveys vol. 13(3) www.nuff.ox.ac.uk/users/Klemperer/survey.pdf
Charles Kindleberger, Manias, Panics and crashes, N.Y. Harper, 1978.
Axel Leijonhufvud, Keynes and the Crisis Policy Insights, May 2008, Vol.23.
Axel Leijonhufvud & Brian Snowdon Snowdon interviews Leijonhufvud, www-ceel.economica.unitd.it/staffleijonhufvud/interview.pdf 2002.
Charles Mackay, Extraordinary Popular delusions and the Madness of Crowds, N.Y. Harmony Books, 1841, 1980.
Hyman Minsky, Stabilizing an Unstable Economy, New Haven, Yale University press, 1986
Victor Niederhoffer, The Education of a Speculator, N.Y. John Wiley, 1997.
Historical Tables: Budget of the US government, fiscal Year 2008
Kevin Phillips Bad Money: reckless finance, Failed Politics and the Global Crisis of American Capitalism
D.H.Robertson, Money, Cambridge, Cambridge University Press, 1946.
George Soros, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means
Harold Chorney
Professor
Political Economy and Public Policy
Concordia University, Montréal
Interest rates and unemployment Nov.2005
Interest rates and unemployment Nov.2005
In reviewing my blog which began in early November 2005 I have discovered that several of my original blog entries have somehow been deleted and tampered with. Fortunately I have hard copy of them and since what I said at the time almost five years ago turned out to be quite accurate and relevant I am going to reproduce it here again for the record.
My first blog entry in early November of 2005 read as follows except for the material in brackets which I have added now to avoid confusing readers):
Don't raise the rate of interest and let's target 5 % unemployment.
The news that Canada's unemployment rate has dropped to 6.6 % is welcome news.( that was the rate in the fall of 2005) But there is a dark cloud that may spoil the picture. The Bank of Canada continues to be stubbornly tied to the discredited notion that inflationary expectations get underway whenever unemployment falls below the natural rate of say 7 %. So even though once we factor the OPEC oil cartel out of the picture inflation remains very low and well under control the Bank stubbornly clings to the idea that interest rates should be raised to nip the falling unemployment rate in the bud. this pernicious doctrine ignores the reality that manufacturing employment in Ontario is being damaged by too high an exchange rate on the Canadian dollar vis a vis the American which is clear when we examine the details of the unemployment numbers. Whenever the Bank pushes up interest rates this has the effect of pushing up the value of the dollar and thereby killing jobs in the export industries. While unemployment is nicely falling in the energy rich West it is still too high in Ontario and Québec.
It would be a smart move for Prime Minister Paul Martin (the Liberal P.M. before conservative Stephen Harper) and Finance Minister Ralph Goodale to send word to David Dodge over at the Bank of Canada to revise his thinking and not raise rates. (David Dodge was the central bank Governor prior to Mark Carney)If he did not unemployment might well drop to 6 % and perhaps below. This would inject a major increase in income, help reduce poverty, and swell the tax revenues of the Federal government enabling further debt reduction, program investment in health care, infrastructure and education and a welcome tax cut as well.
Instead of basing policy on the discredited doctrine of the natural rate of unemployment how about basing it on the natural rate of inflation. If you try and push inflation below too low a level you generate rising and chronic unemployment. the consequence of this is that once unemployment begins to fall the economy can tolerate a much lower rate of unemployment before there is a problem with inflation. Globalization has had an anti-inflationary impact because of all the cheap imports and the use of internet technology to source just in time production.(See my paper RESTORING FULL EMPLOYMENT:THE NATURAL RATE OF INFLATION
VERSUS THE NATURAL RATE OF UNEMPLOYMENT
Paper presented to the Conference on Social Policy as if People Matter, Adelphi
University , Garden City , New York, Nov.12, 2004.reproduced on the net by the Conference organizers.)
In addition to targeting low unemployment once you accept that the oil cartel is the only source of inflationary price pressure this strategy off demand stimulation is actually capable of generating anti-inflationary increases in output that remove bottlenecks, weaken cartels and positively stimulate the economy. Its time for some fresh thinking in public policy economics. How about starting now.(end of the original Nov. 2005 entry)
Well a great deal of water , indeed torrents of it has flowed under the bridge since then. But I stand behind what I wrote then. Most of the central banks have improved their thinking and are less dogmatically wedded now to the natural rate of unemployment doctrine. This is particularly true of the American Fed under Ben Bernanke. But they have not totally seen the light and certainly the Bank of Canada still lags behind in its thinking. The recent resurgence of sound finance doctrine and dogma particularly at the European central bank is evidence of how much further we have to go. The crash and its aftermath coupled with the policies then in place have pushed global unemployment sharply up from what it was in 2005. It will take further bold fiscal measures and a continuance of the policy of monetary accommodation to get the results that are needed on the employment front.
In reviewing my blog which began in early November 2005 I have discovered that several of my original blog entries have somehow been deleted and tampered with. Fortunately I have hard copy of them and since what I said at the time almost five years ago turned out to be quite accurate and relevant I am going to reproduce it here again for the record.
My first blog entry in early November of 2005 read as follows except for the material in brackets which I have added now to avoid confusing readers):
Don't raise the rate of interest and let's target 5 % unemployment.
The news that Canada's unemployment rate has dropped to 6.6 % is welcome news.( that was the rate in the fall of 2005) But there is a dark cloud that may spoil the picture. The Bank of Canada continues to be stubbornly tied to the discredited notion that inflationary expectations get underway whenever unemployment falls below the natural rate of say 7 %. So even though once we factor the OPEC oil cartel out of the picture inflation remains very low and well under control the Bank stubbornly clings to the idea that interest rates should be raised to nip the falling unemployment rate in the bud. this pernicious doctrine ignores the reality that manufacturing employment in Ontario is being damaged by too high an exchange rate on the Canadian dollar vis a vis the American which is clear when we examine the details of the unemployment numbers. Whenever the Bank pushes up interest rates this has the effect of pushing up the value of the dollar and thereby killing jobs in the export industries. While unemployment is nicely falling in the energy rich West it is still too high in Ontario and Québec.
It would be a smart move for Prime Minister Paul Martin (the Liberal P.M. before conservative Stephen Harper) and Finance Minister Ralph Goodale to send word to David Dodge over at the Bank of Canada to revise his thinking and not raise rates. (David Dodge was the central bank Governor prior to Mark Carney)If he did not unemployment might well drop to 6 % and perhaps below. This would inject a major increase in income, help reduce poverty, and swell the tax revenues of the Federal government enabling further debt reduction, program investment in health care, infrastructure and education and a welcome tax cut as well.
Instead of basing policy on the discredited doctrine of the natural rate of unemployment how about basing it on the natural rate of inflation. If you try and push inflation below too low a level you generate rising and chronic unemployment. the consequence of this is that once unemployment begins to fall the economy can tolerate a much lower rate of unemployment before there is a problem with inflation. Globalization has had an anti-inflationary impact because of all the cheap imports and the use of internet technology to source just in time production.(See my paper RESTORING FULL EMPLOYMENT:THE NATURAL RATE OF INFLATION
VERSUS THE NATURAL RATE OF UNEMPLOYMENT
Paper presented to the Conference on Social Policy as if People Matter, Adelphi
University , Garden City , New York, Nov.12, 2004.reproduced on the net by the Conference organizers.)
In addition to targeting low unemployment once you accept that the oil cartel is the only source of inflationary price pressure this strategy off demand stimulation is actually capable of generating anti-inflationary increases in output that remove bottlenecks, weaken cartels and positively stimulate the economy. Its time for some fresh thinking in public policy economics. How about starting now.(end of the original Nov. 2005 entry)
Well a great deal of water , indeed torrents of it has flowed under the bridge since then. But I stand behind what I wrote then. Most of the central banks have improved their thinking and are less dogmatically wedded now to the natural rate of unemployment doctrine. This is particularly true of the American Fed under Ben Bernanke. But they have not totally seen the light and certainly the Bank of Canada still lags behind in its thinking. The recent resurgence of sound finance doctrine and dogma particularly at the European central bank is evidence of how much further we have to go. The crash and its aftermath coupled with the policies then in place have pushed global unemployment sharply up from what it was in 2005. It will take further bold fiscal measures and a continuance of the policy of monetary accommodation to get the results that are needed on the employment front.
My paper at World Congress of Social Economics :The global financial crisis, the re-emergence of Keynes and the role of quantitative easing.
My paper at World Congress of Social Economics
July 3, 2010
This past week I participated in an excellent academic congress which gathered together about 100 economists, economic historians, political economists, and development specialists at Concordia University in Montreal for the thirteenth world congress of this association. People attended from Europe, Japan, China, India, the Middle East, North and South America, New Zealand and Africa. The association founded in 1941 is committed to encouraging research and publication in economics and policy which links ethics, society and social concerns to economic analysis.There were many excellent papers and keynote presentations by Pierre Fortin of UQAM in Montréal, Sakiko Fukuda -Parr of the New School in New York and Mihaly Simai of the institute for World Economics, Corvinus University in Budapest. the conference program is available on the net at the association's web site,www.socialeconomics.org
Here is an excerpt from the paper I presented on ''The Global Financial Crisis, the Re-emergence of Keynes and the Role of Quantitative Easing
The global financial crisis, the re-emergence of Keynes and the role of quantitative easing.
By Harold R.Chorney Professor of Political economy, Concordia university
Paper presented to the thirteenth World Congress of Social Economics, Concordia University, Montréal, June 30,2010.
Introduction:
More than twenty five years ago I began to write about problems of public finance.( Chorney, 1984) At the time that I began to do so, I never would have believed that I would still need to be writing a critique of fiscal conservative dogma almost twenty five years later !
The staying power of previously discredited bad ideas was much greater than I surmised at the time. The staying power of herd behaviour based on shallow derivative analysis was stronger than I understood. 1 It was not for nothing that John Maynard Keynes once stated that if his revolution in economic thought were ever to be reversed it would be extraordinarily difficult to reinstate it. Not because he believed he was wrong, but because he knew that the forces of reaction and stubborn resistance to progressive economic thought were so deeply entrenched.
Sadly, he and Michal Kalecki who predicted that the Keynes breakthrough would be reversed once business became ‘’boom tired’’and there would be no shortage of economists to justify business’s anti-deficit spending prejudice were both very right about this.(See, M. Kalecki, Essays in Economic dynamics, The politics of the trade cycle; Kalecki was the Polish Jewish economist who ought to be considered the co-discoverer of Keynesian economics because of his essays on the investment process, unemployment and economic dynamics that he published in the early 1930s before Keynes’ General Theory which contained the essence of Keynes’ own argument. He was eclipsed by Keynes , in part because he published his work in Polish, but also, of course, because Keynes was already a world famous economist because of being at Cambridge and having authored the Economic Consequences of the Peace which had made him world famous in 1920.Keynes to a small extent and certainly Joan Robinson later acknowledged the significance of Kalecki’s work.(See in particular,A.Asimakopulos, ‘’Kalecki and Robinson’’ in Mario Sebastiani, Kalecki’s Relevance Today, London: the Macmillan Press, 1989.See also Michael Kalecki, ''Political Aspects of Full employment, Political quarterly,Vol. 14, 1943, pp.322-331 reprinted in E.K.Hunt & Jesse Schwartz, eds. A Critique of Economic Theory, Harmondsworth:Penguin , 1972, pp.420-30.)
The cataclysmic near total destruction of Wall street in the great crash of derivatives and the fraud ridden sub prime housing market in the 2008 slaughter on Wall street has thoroughly frightened the world .Although as I write in the spring and early summer of 2010 ,circumstances are significantly improved and much but not all of the fears of another great depression have dissipated.In many respects we have not seen something as dramatic since 1929. Alan Meltzer in the Wall Street Journal(‘’What Happened to the ‘Depression’’’ Wall Street Journal Aug.31, 2009 )disputes this comparison of the crash and the subsequent deep slump as the worst crisis since the depression of 1929 ,but I don’t find Meltzer completely convincing, although I am an admirer of his outstanding History of the Federal Reserve(Allan Meltzer,A History of the Federal Reserve, Vol.1:1919-1951 , Chicago: University of Chicago Press, 2003, 800 pages; see also,Barry Eichengreen and Kevin O’Rourke , A tale of two depressions :What do the new data tell us ?: http://www.voxeu.org/index.php?q=node )
It is true that almost two years later we find that unemployment is just below 10 % as compared to 20 % in the great depression; the slump in U.S. GDP is 3.5 % versus the over 20 % fall in 1930; and the technical end of the recession in terms of the resumption of positive growth this time is 18 months in the U.S. versus over 3.5 years in 1929-1933.
But these results are after the most massive and co-ordinated monetary and fiscal stimulus since world war two. Furthermore, no other recession since the thirties involved a more widespread and systemic crisis in the financial sector which was of a global nature.
When we add up these factors it does seem persuasive that the crisis as it appeared in the fall of 2008 was the worst since the great depression. (On the financial crisis and its roots in the sub prime housing market, Ponzi finance and the derivatives created on this market see among others: Henry M.Paulson,Jr. On The Brink, Inside the Race to Stop the Collapse of the Global Financial System, N.Y. :Business plus, 2010; Scott Patterson, The Quants:How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, N.Y.: Crown Business, 2010; Joseph Stiglitz, Freefall:Free Markets and the Sinking of the Global Economy , N.Y.,Allen Lane, 2010; William Cohan; House of Cards:A Tale of Wretched Excess on Wall Street,N.Y.:Random House Doubleday, 2009; Benoit Mandelbrot & Richard Hudson, The Misbehaviour of Markets:A Fractal View of Financial turbulence, N.Y.:Basic Books, 2004; Kevin Phillips, Bad Money:Reckless Finance, failed politics, and the Global Crisis of American Capitalism, N.Y.:Viking, 2008; Haroldchorneypoliticaleconomist.piczo.com; Nouriel Roubini & Stephen Mihm, Crisis Economics:A crash course in the future of finance, N.Y.&London: the Penguin Press, 2010; Paul Jorion, La Crise:Des subprimes au seisime financier planétaire,Paris, France: Fayard, 2008; Richard Posner, A failure of Capitalism:The crisis of 08 and the descent into depression, Cambridge, Mass. and London U.K., 2009; Bill Bamber & Andrew Spencer,Bear Trap: The Fall of Bear Stearns and the Panic of 2008, New York :Brick Tower Press, 2008; Richard Bookstaber,A Demon of Our Own Design: Markets, Hedge funds and the Perils of Financial Innovation,Hoboken N.J., John Wiley & sons, 2007 )
The mood in the world’s financial capitals has been uniformly cautious but slightly upbeat as the stock market has boomed since its nadir in March of 2009. At that point, the Dow had fallen to the 6600 range from its August 2007 high of 14147.
In April, 2010 as I wrote this it had a value of over 10,800.(July 3, now 9686. it has fallen over 1100 points since April)) Some investment analysts, including my personal broker are becoming nervous about another major fall in values since price to earnings ratios have steadily risen above accepted norms, but others remain bullish. Robert Schiller has shown that before the crash, price to earnings ratios were at the highest they had been in more than fifty years and hence he correctly anticipated a crash once the bubble burst. (See the Yale University You tube video, A panel discussion on the national financial crisis, April 14, 2009 with Robert Shiller,Jean Geanakoplos, Frederick Beinecke and Richard Levin.April 14, 2008. http://www.youtube.com/watch?v=ilApxQjhs_s) In late May the stock market jitters had driven the Dow once again below 10,000 but it quickly rallied to 10,130 on May 26, 2010. Currently, June 28, 2010 it sits at Dow 10,138.
It is impossible to predict accurately with complete confidence what will happen in the coming months. Canada, for one, has been experiencing robust growth of 6.1 % in its first quarter 2010 GDP and a strong dollar in recent months. The dollar had reached parity and above but then slipped back to 94-95 cents U.S. It is now June 22, 2010 at 96.43 U.S.(94.1 as of July 3, 2010)
But unemployment in Canada is still high at 8.1 %.(7.9 % as of June, 2010 )In Montréal, for example unemployment is above 9 % and in certain categories, like 16- 25 years of age it stands at over 20 %. If growth continues at the current rate, however, unemployment slowly should begin to fall substantially. Unfortunately, the Bank of Canada chose to raise interest rates by 25 basis points on June 1, 2010. This then was followed by small but significant rises in mortgage and line of credit rates which will slow the recovery. It is too soon to say that the bank is headed off on a premature line of interest rate rises as it made clear in its announcement that further rate rises might not occur depending upon conditions. But it would have been better not to have raised the rate at this point when there is still so much slack in the economy and no threat of inflation.
But growth is much slower in both Europe and the U.S. Growth in China is still strong at 11.9 % in the first quarter of 2010 but slowing and Japan is still experiencing slow growth and deflation.(See tables 1 & 2 below)
Nervous behaviour will continue and unfortunately the decision of the OECD in May of this year to urge governments to cut their deficits and begin to raise interest rates based on faulty monetarist logic is bound to have a negative effect upon growth thereby feeding back into a volatile market. This IMF OECD policy thrust has been confirmed by the G20 meeting in Toronto. Anti-Keynesian deficit hysteria has reappeared after its temporary banishment immediately following the crash in 2008.
This pessimism is because the market correctly assumes using Keynesian logic that cutbacks in government spending in search of illusory premature budget balance will contract aggregate demand and slow the economy. The recent emergency conservative-Liberal Democrat budget released by the new Chancellor Gordon Osborne is an excellent case in point. This budget projects British unemployment as increasing on account of the austerity budget yet it proposes substantial and even draconian cuts and damaging tax increases. The budget is resolutely anti-Keynesian but at least the former Labour government now in opposition is strongly attacking the budget on Keynesian grounds. Canadian Prime Minister Stephen Harper unfortunately has praised the budget as setting Britain on the right track.
Unfortunately, the recent G20 meeting in Toronto opted to endorse a statement which committed countries to reduce their deficits by 50 % by 2013 and stabilize or reduce their debt to GDP ratios by 2016. The statement is fairly open ended, has no penalties for non compliance and permits countries to vary their policies to fit their circumstances but the fact that it was raised on the agenda by Canada and backed by many European countries and eventually once modified agreed to by the Obama administration is a sign of the tenacity of the fiscal conservatives and the lobbying power of the bond market traders.So far the markets have reacted by lowering their expectations of growth and profits and selling stock and bidding up the price of bonds.
On Wall Street all of the leading major investment banks in 2008 have either failed, like Lehman brothers, been bailed out by the government with TARP money like Goldman Sachs or by major competitors with the help of government money, like Bear Stearns by J.P.Morgan ; Morgan Stanley by Mitsubishi UFI or Merrill Lynch by Bank of America.(See Paulson for details) The Federal Reserve has pumped several trillions of dollars into the economy.
Similar events have taken place in Great Britain, Germany, Spain, Belgium, Netherlands, Iceland, Dubai and France. Two of the world’s largest automotive companies G.M. and Chrysler have gone bankrupt and been restructured with government money. A number of others are undergoing restructuring. The AIG insurance company, the largest insurance company in the world has been taken over by the U.S.government and bailed out of bankruptcy with loans that totalled more than 100 billion dollars. The two U.S.Government enterprises tasked with provided mortgage funds to the banks and homeowners, Fannie Mae and Freddie Mac were also both taken over by the government. (Paulson)A number of the companies have received government aid in order to keep them operating. The laissez-faire myth of totally private enterprise operating without state aid lies shattered by recent events. As well, as Ormerod , Stiglitz,Krugman,Galbraith, myself and other Keynesians, post-Keynesians and progressive economists have pointed out these events have shattered the claims of the rational agents rational expectations theorists (RARE macrotheorists) and real business cycle theorists about the inherent rationality of markets. Ormerod shows how an even more extreme idealization of these models appeared as late as 2008 called dynamic stochastic general equilibrium models which macrotheorists believed contained the cutting edge of insight into the general equilibrium nature of the macroeconomy. Only months later, the collapse of Bear Stearns followed and the collapse of the Wall street investment banks was underway. Hegel’s owl took flight at dusk !
Many small and large banks have failed, and millions of people have lost their jobs. There are as of April 2010, 46 million unemployed in thirty OECD countries. The unemployment rate stands at 8.7 % for these countries with youth unemployment above 19 %.
Table 1.1
Unemployment rates in selected OECD countries and trade and currency associations as of April 2010 (except where noted)
Spain 19.7 %
Slovakia 14.1
Ireland 13.2
Portugal 10.8
France 10.1
U.S. 9.7 (9.5 June)
Sweden 9.1
Italy 8.9
Canada 8.1
Germany 7.1
G7 8.4
EU 9.7
Eurozone 10.1
Japan 5.2(May, 2010)
Netherlands 4.1
Norway 3.5
South Korea 3.2 (May, 2010)
Source: OECD, all data except where noted as of April, 2010.
The deep recession has been a global phenomenon stretching from Russia to China to Japan to North America to Europe . Africa and Latin America have been affected. The European union has been going through a crisis over the levels of debt taken on by its member states, even though a rise in state indebtedness to finance stimulus is a sound Keynesian policy. Furthermore, in a number of countries the level of debt to the GDP is well below historical maxima and in the case of the U.K even below levels reached during the early 1970s.( Haroldchorneypoliticaleconomist, ‘’U.K. National Debt to GDP, 1916 to 1998, ‘’April 21, 2010; and ‘’ Spain, Debt and the Chicken Little squad, May 29, 2010 ; and OECD cited in Rudiger Dornbusch, Dollars, Debts and deficits, p.172, Table lll.2)Greece , Portugal , Ireland and Spain, the so called PIGS have been at the centre of this crisis.
Austerity has been imposed upon Greece in return for it obtaining the support of the European Central Bank (ECB), the European Union and the IMF. Again this is a very unfortunate tendency since unemployment is elevated in each of these countries with Spain in the worst shape suffering from close to 20 % unemployment, up from 10 % in 2006.( Eurostat; FT)
The new Conservative /Liberal coalition government of Great Britain has foolishly declared war on its deficit, despite its net debt to GDP ratio being a bit less than 60 %, a fifth of what it was at the end of the second world war. Indeed, the significant deficit which Gordon Brown the Labour P.M. had undertaken in response to the crisis was a factor in his defeat in the election. The new government intends to slash government expenditures by as much as 6 billion pounds in 2010 and by as much as 40 million pounds over the next four years. ( The U.K. budget, June 22, 2010;F.T.various issues May 2010;See also my letter to the F.T. April 26 , 2010 on British debt in historical perspective and the British office for national statistics) Global trade has been negatively affected.
If one scans publications like the Wall Street Journal, the Financial Times, The New York Times, The Guardian, Le Monde and The Globe and Mail there is a growing sense of the enormous size of the crisis that we are passing through and the widespread shock about the level of destruction of financial assets and the wiping out of stockholder value that occurred. It appears that we have saved ourselves from another great depression,but only just and that prospect was widely being discussed over the past 12 months. Now the topic of discussion is a double dip recession. See the pessimistic analysis of Nouriel Roubini in his RGE monitor for this perspective.
Growth has resumed in the U.S. which has now had three consecutive quarters of growth since the summer of 2009. Unemployment however remains above 9 % in the U.S. Growth in Canada has also been positive, but unemployment is still above 8 %.
TABLE 2
First quarter growth rates in GDP 2010; annual rates of 2009 growth; 2008; 2007;
Q1/10 09 08 07
Canada 6.1 %* 0.4 2.7 2.7
U.S. 3.0 * -2.4 0.4 2.7
China 11.9 %* 9.1 12.75
Japan 0.8 % -5.2 -1.2 2.4
Taiwan 13.27 % *
India 8.6 % * 7.4 9.0 9.2
Germany 0.2 % -4.9 1.3 2.5
France 0.1 % -2.6 0.2 2.4
Italy 0.5 % -5.0 -1.3 1.5
U.K 0.3 -4.9 0.5 2.6
Spain 0.1 -3.6 0.9 3.6
Greece -0.8 -2.0 2.0 4.5
Belgium 0.3f -3.0 1.0 2.9
Denmark 0.4f -4.9 -0.9 1.7
Ireland -0.3f -7.1 -3.0 6.0
Czech 0.4f -4.1 2.5 6.1
Austria 0.3f -3.5 2.0 3.5
Finland 0.4f -7.8 1.2 4.9
Sweden 0.3f -5.1 0.4 3.3
Norway 0.4f -1.6 1.8 2.7
Switz. 0.4 -1.6 1.9 3.6
Euro zone 0.2 -4.1 0.6 2.8
EU 27 0.2 -4.2 0.7 2.9
Source: Eurostat; OECD.
f forecast for Q1,
* annualized basis
Monetarist economists like Alan Meltzer writing in the Wall Street journal (August 31, 2009 ‘’What Happened to the Depression ‘’)insisted as the recovery began to make its appearance that the data shows that this recession is more like that of 1973-75, rather than the great depression.
That may well turn out to be true in terms of duration and maximum unemployment rate, but not in terms of the scope of the financial collapse and subsequent panic. Also remember that is only after a massive intervention by governments around the world and the expenditure of several trillion dollars in stimulus funds and dramatically lowered interest rates for a prolonged period.(U.S. 787 billion$ plus Troubled assets relief program(TARP) 700 billion and Troubled assets loan facility(TALF) funds in the form of loans of 500 billion,UK 80 billion $,Germany 80 b $, France 60 b $. Japan 81 billion, China 586 billion) that the economy has partially recovered. Not all of the TARP and TALF funds were utilized but the initial enormous commitments were necessary to restore relative calm to the markets.
Over time much of these monies advanced as loans have been repaid with interest so that the final cost of the bailout will be much less than the headline figures initially announced. For example G.M. and many of the investment banks have repaid billions of dollars of loans with interest as of spring 2010. Critics like Joseph Stiglitz have pointed out that the repayments were smaller than they should have been given the risks that the government took on and that private market loans would have demanded and received a higher rate of return.
The degree of widespread financial panic, bank failure, scandal and Ponzi finance, and stock market collapse, the spike in oil prices, as well the pressure of the collapse in investment and consumption all have to be taken into account. All of this far exceeded the events of 1973-75, a period with which I am personally very familiar .
The fact that the recession has now technically ended is much more the consequence of the policies implemented to treat it, rather than as Meltzer argues , the self recuperative power of market forces. For it was the unregulated forces of the market that led to this mess in the first place.
It is useful to remember that the value of shares in the Dow Jones index fell by 47 % from September 1929 to November 1929.They ended the year at 65 % of their September value. They did not regain their 1929 value until the early 1950s.(Kindleberger, p.105) The S&P index fell to just 25% of its 1929 peak by 1932(Kindleberger, fig.8 p.120 )The prices of primary products fell by a third world wide. The GDP in the US fell from its 1929 high by 29 % from 1929 to 1932/33.The number of unemployed rose from 1.6 million in 1929 to 12.8 million by 1932/33.(R.A.Gordon , Business cycles,p.429) The slump in Britain and Canada was just as severe. For example, disposable income fell to 51 % of the 1929 level by 1933 in Canada. By 1933, 20 % of the work force was unemployed in Canada. (A.E.Safarian, The Canadian Economy in the Great Depression, p.86 &p75)
This time the slump in the stock market was initially even greater than in the first part of 1929. From their peak in August of 2007 until their low point in March of 2009 stocks fell from Dow 14141 to Dow 6600 a fall of about 53 %. But since the low point of last March they recovered to Dow 10800,in April 2010, a fall of about 23.6 % from their peak. Their current level as of June 28 is Dow 10,138.
So talking about the possibility of a depression along these lines is a very serious proposition and given what governments know about how to avoid these problems it is still possible but unlikely. A serious prolonged period of high unemployment is however much more likely. This is particularly so because governments the world over are still obsessed with deficit hysteria. Growth has resumed but the unemployment rate is dropping very slowly. This is often the case after a major downturn. Paul Krugman in the New York Times has been very pessimistic about the prospects for a depression, particularly since the G20 countries have rather foolishly adopted a commitment to cut deficits in half by 2013 and stabilize or reduce debt to GDP ratios by 2016.
I sympathize with Krugman’s frustration over the widespread ignorance among politicians of economic history and their apparent rush to repeat the errors of history. But given the rather open ended language of the commitment and the recognition that each country will have to deal with their own circumstances it is possible we will be lucky and deficit reduction approaching these targets will take place largely because of the resumption of growth. Nevertheless, the risk of depression is in fact strengthened by austerity policies at such a critical point in a fragile limited recovery. It is a very bad reality that the U.S.congress is now apparently opposed to further stimulus measures and that fiscal conservatives dominate governments throughout most of the G20.
Typically it takes two or more years after the end of a recession for the unemployment rate to drop substantially. Sometimes a full 4 or 5 years after the end of the recession the rate is still higher than what it was just prior to the recession. For example, in the U.S. after unemployment rose in 1990 from its low of 5.2 % it took more than five years for the rate to drop to this level again.( See the U.S. Bureau of Economic analysis historical statistics)
This past summer, 2009, the first signs of the beginning of an economic recovery made their appearance. Positive growth appeared in both the U.S. and Canadian economy in the third and fourth quarter of 2009.This means that the recession in Canada was technically 10 months long while the one in the US was 18 months in duration. The European recession appears to have begun in the 2nd quarter of 2008 and may have ended in the third quarter of 2009. Although the formal recession in terms of positive GDP growth may have ended, unemployment continued to rise in both Canada and the U.S. and in Europe. The rate for August 2009 rose to 8.7 % in Canada and to 9.7 % in the U.S. The U.S. rate then peaked at 10 % in the U.S. and has now declined to 9.7 % while the Canadian rate peaked at 8.7 % and is now 8.1 %
The rate in the fall of 2009 in France was 9.8 % , Germany 7.7 %,the U.K. 7.7 %,7.0 % in Belgium, 18.5 %in Spain, 9.2 % in Sweden, 5.7 % in Japan. )
By November 2009 the rates were 7.5 % in Germany, 10 % in France, 8.1% in Belgium, 19.4 % in Spain, 9.7 % in Greece, 8.7 % in Sweden, 13.5% in Ireland. The rate in Greece has since risen to 10.3 %.
By January 2010 the rate had worsened in a many countries and improved slightly in several ,the overall rate for the euro area in January 2010 was 9.9 % and for the European union 9.7 %. In January 2010 the rate was: Belgium 8.0%,; France 10.1 %; Germany 7.5 %; U.K. 7.8 %; Spain 18.8 %; Sweden 9.1 %; Italy 8.6 %; Ireland 13.8 %; Greece 9.7 % (Sept.2009) now Feb 2010 10.3 %;Luxembourg 5.9 %; Norway 3.3 %; Netherlands 4.2 %; Denmark 7.3 %; Japan 4.9 %; Poland 8.9 %; Czech republic 8.2 %; Slovakia 13.7 % ; Canada 8.2 %(Feb.2010) and the U.S. 9.7 %(Feb.2010)
Net job losses continued in the U.S. during the summer with August showing a net loss of over 200,000 jobs, the lowest number in many months but still a large number. In Canada in August largely because of part time employment rises there were net job gains even as the rate rose because of discouraged workers rejoining the labour force. The broader measure of unemployment that includes all marginally attached and discouraged workers and those working part-time when they would rather be working full time rose to 16.8 % in the U.S. in August up from 10.7 % in August 2008. Since the start of the recession the U.S. has lost over 7.1 million jobs. (U.S. Bureau of Labour Statistics, statistics Canada, labour force survey)
This has improved in both Canada and the U.S. with the latest data showing that in February the U.S. lost only 22,000 jobs.
At present however there are close to 15 million people unemployed in the U.S. and another 21 million unemployed in Europe.(U.S. Bureau of labour statistics; Eurostat)
The origins of quantitative easing
In September 2008 I wrote in my internet blog(Haroldchorneypoliticaleconomist.piczo.com) and in comments posted in The Wall Street Journal, the Financial Times, The New York Times and in The Globe and Mail that the crash in the financial markets and the accompanying paralysis of the financial system was grave enough to warrant drastic action. I called for large deficit spending and zero interest rates as well as central bank intervention through quantitative easing to keep the rates as low as possible. The governments and central banks did exactly that. Many economists urged what I urged on the fiscal policy front and also on the conventional monetary policy front. But very few also urged quantitative easing.
This notion of quantitative easing which is essentially temporary greater monetization of a portion of the government’ debt than is normally the case, is facilitated by the central bank purchasing treasuries directly in the money markets to prevent any crowding out from occurring. It is a policy idea that I first presented in Canada back in the 1980s and 1990s in a series of published works in edited collections, monographs and journals. As far as I know I was one of the first, if not the first economist in the modern era to advocate this policy. (Harold Chorney, The Deficit:Hysteria and the Current Crisis, Ottawa: The Canadian Centre for Policy Alternatives, 1984 reprinted with a new preface in Harold Chorney& Phillip Hansen,Toward a Humanist Political Economy.
Harold Chorney, The Economic and Political Consequences of Canadian Monetarism, paper presented to the British Association of Canadian Studies, University of Nottingham, April 12, 1991 forthcoming in On stimulus, deficits and surpluses.
Harold Chorney, The Deficit and Debt Management: an Alternative to Monetarism, Ottawa: The Canadian Centre for Policy Alternatives, 1989.
Harold Chorney, ‘’A Regional Approach to Monetary and Fiscal Policy’’ in J. McCrorie and M.Macdonald, The Constitutional Future of the Prairie and Atlantic Regions of Canada, Regina; Canadian Plains Research Centre, University of Regina, 1992.
Harold Chorney, Debts, Deficits and Full Employment in Robert Boyer and Daniel Drache, States Against Markets:The Limits of Globalization, New York& London: 1996.)
Like all good ideas it had been discussed in history before. The early 1930s Japanese finance minister Korekiyo Takahashi introduced it in Japan. There was also a foreshadowing of it in the Glass Steagall act of Feb.27, 1932. The act on an emergency basis permitted the U.S.Fed ‘’to count government securities together with eligible commercial paper as reserves against the system’s liabilities.’’
As Friedman and Schwartz point out this meant that government debt could now be counted as part of the 60 % collateral other than gold required against federal Reserve notes.(Milton Friedman& Anna Jacobson Schwartz, A Monetary History of the United States, 1857-1960 , p.191. and Charles Kindleberger, The World in Depression, 1929-1939, p.183) This then led to a very large open market purchase of government issued debt by the Fed , despite substantial internal opposition on the grounds that the action would be inflationary.
Allan Meltzer points out that in 1932 there was heated debate about the Fed buying U.S. treasuries as part of its effort to rescue the economy from the depression. Previous to this debate and the decision to actually acquire treasury debt as part of a strategy of quantitative easing the Fed largely restricted itself to the real bills doctrine about which debt instruments the Fed should acquire in conducting monetary policy.
Meltzer shows that this debate also occurred in Great Britain in the nineteenth century when there was a need for the Bank of England to purchase treasuries in the open market. (Meltzer, A History, p.37) To a certain extent the debate between the currency school and the banking school turned on these issues of which debt instruments it would be legitimate for the central bank to purchase and hold. (Meltzer, p.43)
In the twentieth century the issue of the central bank buying treasuries re-emerged during the financing of the first world war and there was a clear bias in favour of the real bills doctrine. But Meltzer points out that ‘’Most commentators point out(correctly) that it is no more inflationary for the Federal Reserve to buy the bonds directly(or in the open market) than to lend the money to the banks at below market rates so that banks can either purchase the bonds or finance the public’s purchases. The increase in the monetary base is the same. (p.87) Nevertheless, during the 1920s right up until the crash of 1929, monetary policy was dominated by a doctrine called the Riefler-Burgess doctrine which was compatible with the conservative real bills doctrine and was very restrictive in terms of what it regarded as legitimate central bank purchases.. Winfield Riefler and W. Randolph Burgess were the two banking economists who developed the doctrine and Meltzer draws upon his research with Karl Brunner in describing the significance of their work. (p.161)
It was not until the passage of the Glass Steagall act in 1932 that more flexibility was introduced which permitted the Fed to substitute government paper for commercial paper or real bills . (Meltzer, p.357) During the spring of that year the Fed acquired over 654 million dollars of government securities. The rate of purchase was over 100 million a week. But this first use of quantitative easing was a very limited experiment which ended by August of 1932.(p.358 ff) At the time there was no obvious immediate positive response in the economy and the general conservatism of central bankers, economists and business people was enough to halt the program. Once Roosevelt replaced Herbert Hoover and Mariner Eccles became the chairman of the Fed and Lauchlin Currie one of Roosevelt’s principal economic advisers other possibilities developed. Harry Hopkins also played a major role.
Initially, of course, Roosevelt had campaigned on balancing the books. But once he was in office he gradually realized how a bad a policy that would be. Under the influence of Eccles and Currie and the real circumstances of the depression he came to support deficit spending and work creation relief programs. Meltzer draws extensively on Currie’s and Eccles’ writings and speeches . He also uses a work by R. Sandilands on Currie’s life and political economy and develops a very important profile of these extraordinary people. ‘’Eccles and Currie, separately, developed the idea of countercyclical fiscal policy that later became identified with Keynes’ General theory.
Eccles like Keynes wanted not just spending but government investment to replace private investment during recessions.’’ (p.420) Just to be clear, private investment declines during a recession. Indeed that is its hallmark and that is what causes the slump.
Eccles believed that mal-distribution of income was responsible for the depression because first it promoted a speculative bubble and a productive capacity that far exceeded the effective demand that was possible given the distribution of income and wealth. He was a strong advocate of budgetary deficit spending and an accommodating monetary policy. But Meltzer points out that Eccles believed simply increasing the money supply and lowering rates would not work unless it was accompanied by major fiscal actions promoting investments through deficit finance. Meltzer traces the origins of the famous expression pushing on a string and the notion of the liquidity trap to both Eccles and one his supporters, congressman Alan Goldsborough in an exchange during Eccle’s testimony before the House committee on banking and finance in 1935.
Most critics of this policy of Keynesian stimulus and an accommodating monetary policy make dire warnings about the risk of inflation.
In fact, of course, the U.S. was experiencing exactly the opposite, deflation at the time. This was a definite change in central banking that was in fact a form of quantitative easing. In the past the fetish of the gold standard and the doctrine of real bills had dominated central bank thinking. (Real bills were notes, drafts and bills of exchange issued by banks on the basis of commercial transactions.)One would have had to go back to the civil war issuance of greenbacks, a purely fiat currency which largely financed the war to find non gold nor silver nor real bills backed currency. A number of otherwise conservative economists backed the decision of the central bank, pointing out the deflationary circumstances. Milton Friedman later complained that the Fed had not been expansionary enough.(see his discussion of the Glass –Steagall act of 1932., p.191 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States. But given the climate of opinion it is understandable. Just as today we have ferocious opposition to quantitative easing and deficits despite the clear necessity of these policies if we are to avoid the disaster of the 1930s.
The purchase of treasury debt to forestall interest rate rises thus became a normal part of monetary policy. It was strongly exercised during the 1940s and fifties in the U.K. (See R.Sayers Modern Banking, fifth edition, Oxford: Clarendon Press, 1960, p.136 ff and his discussion of the Chancellor of the Exchequer Hugh Dalton’s drive to lower interest rates in 1946-47. See also ch.8 on Commercial Bank liquidity and lending policy. Pp.157ff)
There has been a long history of debate with respect to the central bank and its power to exert influence over the whole range of interest rates from the short term where it clearly has absolute power, to longer portions of the yield curve where its powers are more ambiguous.
Abba Lerner had discussed important aspects of central bank authority in the 1940s in his work on functional finance. In Japan the Minister of Finance had resorted to this policy of quantitative easing in the 1930s. But for the most part this critical policy innovation had been forgotten by the high point of monetarism in the 1980s and the decades which followed.
When I first discussed it in the early 1980s I was ridiculed by Bank of Canada economists and called foolish for proposing such an ” inflationary” idea. Other critics claimed it was simply social credit theory, an idea associated with the funny money movement of the 1930s and the ideas of a British engineer Major Douglas. Indeed, when Abba Lerner first wrote his classic work on functional finance , a senior Canadian Dept. of Finance official A.N.McLeod claimed that it bordered on social credit or at least would be interpreted by them as supporting their argument and would cause inflation..( Memorandum for Mr. Bryce Re:My comments on Lerner’s ‘’Functional finance’’ RG File 04747-251 Finance Central files, Ottawa, April 24, 1944 ) Even my current editor, an historian by training has claimed that it was social credit.
It is in fact neither social credit nor automatically inflationary. Rather it represents a sophisticated approach to using both monetary and fiscal policy in fighting a slump and a collapse in confidence of which Keynes himself privately approved .(See David Colander,‘’Was Keynes a Keynesian or a Lernerian,’’ Journal of Economic Literature, Dec.1984, pp1572-1575 )
I explained then and am glad to see it has now been accepted that it need not be inflationary when the threat is deflation and depression. Rather, it becomes a very useful tool to ward off deflation and prolonged depression. I was , of course, pleased to see it embraced by most if not all of the central banks and the I.M.F. during 2009. The Japanese resorted to this policy when they sought recovery from the bursting of their real estate bubble. The Fed, the Bank of England and the Bank of Japan have all resorted to it during this period of crisis. Inflation , in the sense of price increases beyond three percent, for the time being is nowhere to be seen. In the U.S. core inflation is still below 2 %.Even the ultra conservative Bank of Canada considered using it. The European Central Bank initially refused to use it but during the Greek sovereign debt crisis they relented somewhat and unfortunately belatedly.
In response to the banking and credit panic and the severe slump that followed, liquidity needed to be injected by the central banks. Interest rates needed to be cut. Large budget deficits needed to be undertaken to finance infrastructure and investments that are labour intensive in education, health care, social policy, the military and the environment. The 787 billion dollar bailout rescue package passed by the American Congress in early October, 2008 ,the Economic Emergency Stabilization Act., was intended to stimulate the economy and create employment. To a certain extent it has succeeded but its success has been limited by the failure to spend the funds expeditiously and by bureaucratic problems with its administration. Only by the end of 2010 will the majority of the monies actually be expensed. It has also been undermined by simultaneous cutbacks by state and local governments.
July 3, 2010
This past week I participated in an excellent academic congress which gathered together about 100 economists, economic historians, political economists, and development specialists at Concordia University in Montreal for the thirteenth world congress of this association. People attended from Europe, Japan, China, India, the Middle East, North and South America, New Zealand and Africa. The association founded in 1941 is committed to encouraging research and publication in economics and policy which links ethics, society and social concerns to economic analysis.There were many excellent papers and keynote presentations by Pierre Fortin of UQAM in Montréal, Sakiko Fukuda -Parr of the New School in New York and Mihaly Simai of the institute for World Economics, Corvinus University in Budapest. the conference program is available on the net at the association's web site,www.socialeconomics.org
Here is an excerpt from the paper I presented on ''The Global Financial Crisis, the Re-emergence of Keynes and the Role of Quantitative Easing
The global financial crisis, the re-emergence of Keynes and the role of quantitative easing.
By Harold R.Chorney Professor of Political economy, Concordia university
Paper presented to the thirteenth World Congress of Social Economics, Concordia University, Montréal, June 30,2010.
Introduction:
More than twenty five years ago I began to write about problems of public finance.( Chorney, 1984) At the time that I began to do so, I never would have believed that I would still need to be writing a critique of fiscal conservative dogma almost twenty five years later !
The staying power of previously discredited bad ideas was much greater than I surmised at the time. The staying power of herd behaviour based on shallow derivative analysis was stronger than I understood. 1 It was not for nothing that John Maynard Keynes once stated that if his revolution in economic thought were ever to be reversed it would be extraordinarily difficult to reinstate it. Not because he believed he was wrong, but because he knew that the forces of reaction and stubborn resistance to progressive economic thought were so deeply entrenched.
Sadly, he and Michal Kalecki who predicted that the Keynes breakthrough would be reversed once business became ‘’boom tired’’and there would be no shortage of economists to justify business’s anti-deficit spending prejudice were both very right about this.(See, M. Kalecki, Essays in Economic dynamics, The politics of the trade cycle; Kalecki was the Polish Jewish economist who ought to be considered the co-discoverer of Keynesian economics because of his essays on the investment process, unemployment and economic dynamics that he published in the early 1930s before Keynes’ General Theory which contained the essence of Keynes’ own argument. He was eclipsed by Keynes , in part because he published his work in Polish, but also, of course, because Keynes was already a world famous economist because of being at Cambridge and having authored the Economic Consequences of the Peace which had made him world famous in 1920.Keynes to a small extent and certainly Joan Robinson later acknowledged the significance of Kalecki’s work.(See in particular,A.Asimakopulos, ‘’Kalecki and Robinson’’ in Mario Sebastiani, Kalecki’s Relevance Today, London: the Macmillan Press, 1989.See also Michael Kalecki, ''Political Aspects of Full employment, Political quarterly,Vol. 14, 1943, pp.322-331 reprinted in E.K.Hunt & Jesse Schwartz, eds. A Critique of Economic Theory, Harmondsworth:Penguin , 1972, pp.420-30.)
The cataclysmic near total destruction of Wall street in the great crash of derivatives and the fraud ridden sub prime housing market in the 2008 slaughter on Wall street has thoroughly frightened the world .Although as I write in the spring and early summer of 2010 ,circumstances are significantly improved and much but not all of the fears of another great depression have dissipated.In many respects we have not seen something as dramatic since 1929. Alan Meltzer in the Wall Street Journal(‘’What Happened to the ‘Depression’’’ Wall Street Journal Aug.31, 2009 )disputes this comparison of the crash and the subsequent deep slump as the worst crisis since the depression of 1929 ,but I don’t find Meltzer completely convincing, although I am an admirer of his outstanding History of the Federal Reserve(Allan Meltzer,A History of the Federal Reserve, Vol.1:1919-1951 , Chicago: University of Chicago Press, 2003, 800 pages; see also,Barry Eichengreen and Kevin O’Rourke , A tale of two depressions :What do the new data tell us ?: http://www.voxeu.org/index.php?q=node )
It is true that almost two years later we find that unemployment is just below 10 % as compared to 20 % in the great depression; the slump in U.S. GDP is 3.5 % versus the over 20 % fall in 1930; and the technical end of the recession in terms of the resumption of positive growth this time is 18 months in the U.S. versus over 3.5 years in 1929-1933.
But these results are after the most massive and co-ordinated monetary and fiscal stimulus since world war two. Furthermore, no other recession since the thirties involved a more widespread and systemic crisis in the financial sector which was of a global nature.
When we add up these factors it does seem persuasive that the crisis as it appeared in the fall of 2008 was the worst since the great depression. (On the financial crisis and its roots in the sub prime housing market, Ponzi finance and the derivatives created on this market see among others: Henry M.Paulson,Jr. On The Brink, Inside the Race to Stop the Collapse of the Global Financial System, N.Y. :Business plus, 2010; Scott Patterson, The Quants:How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, N.Y.: Crown Business, 2010; Joseph Stiglitz, Freefall:Free Markets and the Sinking of the Global Economy , N.Y.,Allen Lane, 2010; William Cohan; House of Cards:A Tale of Wretched Excess on Wall Street,N.Y.:Random House Doubleday, 2009; Benoit Mandelbrot & Richard Hudson, The Misbehaviour of Markets:A Fractal View of Financial turbulence, N.Y.:Basic Books, 2004; Kevin Phillips, Bad Money:Reckless Finance, failed politics, and the Global Crisis of American Capitalism, N.Y.:Viking, 2008; Haroldchorneypoliticaleconomist.piczo.com; Nouriel Roubini & Stephen Mihm, Crisis Economics:A crash course in the future of finance, N.Y.&London: the Penguin Press, 2010; Paul Jorion, La Crise:Des subprimes au seisime financier planétaire,Paris, France: Fayard, 2008; Richard Posner, A failure of Capitalism:The crisis of 08 and the descent into depression, Cambridge, Mass. and London U.K., 2009; Bill Bamber & Andrew Spencer,Bear Trap: The Fall of Bear Stearns and the Panic of 2008, New York :Brick Tower Press, 2008; Richard Bookstaber,A Demon of Our Own Design: Markets, Hedge funds and the Perils of Financial Innovation,Hoboken N.J., John Wiley & sons, 2007 )
The mood in the world’s financial capitals has been uniformly cautious but slightly upbeat as the stock market has boomed since its nadir in March of 2009. At that point, the Dow had fallen to the 6600 range from its August 2007 high of 14147.
In April, 2010 as I wrote this it had a value of over 10,800.(July 3, now 9686. it has fallen over 1100 points since April)) Some investment analysts, including my personal broker are becoming nervous about another major fall in values since price to earnings ratios have steadily risen above accepted norms, but others remain bullish. Robert Schiller has shown that before the crash, price to earnings ratios were at the highest they had been in more than fifty years and hence he correctly anticipated a crash once the bubble burst. (See the Yale University You tube video, A panel discussion on the national financial crisis, April 14, 2009 with Robert Shiller,Jean Geanakoplos, Frederick Beinecke and Richard Levin.April 14, 2008. http://www.youtube.com/watch?v=ilApxQjhs_s) In late May the stock market jitters had driven the Dow once again below 10,000 but it quickly rallied to 10,130 on May 26, 2010. Currently, June 28, 2010 it sits at Dow 10,138.
It is impossible to predict accurately with complete confidence what will happen in the coming months. Canada, for one, has been experiencing robust growth of 6.1 % in its first quarter 2010 GDP and a strong dollar in recent months. The dollar had reached parity and above but then slipped back to 94-95 cents U.S. It is now June 22, 2010 at 96.43 U.S.(94.1 as of July 3, 2010)
But unemployment in Canada is still high at 8.1 %.(7.9 % as of June, 2010 )In Montréal, for example unemployment is above 9 % and in certain categories, like 16- 25 years of age it stands at over 20 %. If growth continues at the current rate, however, unemployment slowly should begin to fall substantially. Unfortunately, the Bank of Canada chose to raise interest rates by 25 basis points on June 1, 2010. This then was followed by small but significant rises in mortgage and line of credit rates which will slow the recovery. It is too soon to say that the bank is headed off on a premature line of interest rate rises as it made clear in its announcement that further rate rises might not occur depending upon conditions. But it would have been better not to have raised the rate at this point when there is still so much slack in the economy and no threat of inflation.
But growth is much slower in both Europe and the U.S. Growth in China is still strong at 11.9 % in the first quarter of 2010 but slowing and Japan is still experiencing slow growth and deflation.(See tables 1 & 2 below)
Nervous behaviour will continue and unfortunately the decision of the OECD in May of this year to urge governments to cut their deficits and begin to raise interest rates based on faulty monetarist logic is bound to have a negative effect upon growth thereby feeding back into a volatile market. This IMF OECD policy thrust has been confirmed by the G20 meeting in Toronto. Anti-Keynesian deficit hysteria has reappeared after its temporary banishment immediately following the crash in 2008.
This pessimism is because the market correctly assumes using Keynesian logic that cutbacks in government spending in search of illusory premature budget balance will contract aggregate demand and slow the economy. The recent emergency conservative-Liberal Democrat budget released by the new Chancellor Gordon Osborne is an excellent case in point. This budget projects British unemployment as increasing on account of the austerity budget yet it proposes substantial and even draconian cuts and damaging tax increases. The budget is resolutely anti-Keynesian but at least the former Labour government now in opposition is strongly attacking the budget on Keynesian grounds. Canadian Prime Minister Stephen Harper unfortunately has praised the budget as setting Britain on the right track.
Unfortunately, the recent G20 meeting in Toronto opted to endorse a statement which committed countries to reduce their deficits by 50 % by 2013 and stabilize or reduce their debt to GDP ratios by 2016. The statement is fairly open ended, has no penalties for non compliance and permits countries to vary their policies to fit their circumstances but the fact that it was raised on the agenda by Canada and backed by many European countries and eventually once modified agreed to by the Obama administration is a sign of the tenacity of the fiscal conservatives and the lobbying power of the bond market traders.So far the markets have reacted by lowering their expectations of growth and profits and selling stock and bidding up the price of bonds.
On Wall Street all of the leading major investment banks in 2008 have either failed, like Lehman brothers, been bailed out by the government with TARP money like Goldman Sachs or by major competitors with the help of government money, like Bear Stearns by J.P.Morgan ; Morgan Stanley by Mitsubishi UFI or Merrill Lynch by Bank of America.(See Paulson for details) The Federal Reserve has pumped several trillions of dollars into the economy.
Similar events have taken place in Great Britain, Germany, Spain, Belgium, Netherlands, Iceland, Dubai and France. Two of the world’s largest automotive companies G.M. and Chrysler have gone bankrupt and been restructured with government money. A number of others are undergoing restructuring. The AIG insurance company, the largest insurance company in the world has been taken over by the U.S.government and bailed out of bankruptcy with loans that totalled more than 100 billion dollars. The two U.S.Government enterprises tasked with provided mortgage funds to the banks and homeowners, Fannie Mae and Freddie Mac were also both taken over by the government. (Paulson)A number of the companies have received government aid in order to keep them operating. The laissez-faire myth of totally private enterprise operating without state aid lies shattered by recent events. As well, as Ormerod , Stiglitz,Krugman,Galbraith, myself and other Keynesians, post-Keynesians and progressive economists have pointed out these events have shattered the claims of the rational agents rational expectations theorists (RARE macrotheorists) and real business cycle theorists about the inherent rationality of markets. Ormerod shows how an even more extreme idealization of these models appeared as late as 2008 called dynamic stochastic general equilibrium models which macrotheorists believed contained the cutting edge of insight into the general equilibrium nature of the macroeconomy. Only months later, the collapse of Bear Stearns followed and the collapse of the Wall street investment banks was underway. Hegel’s owl took flight at dusk !
Many small and large banks have failed, and millions of people have lost their jobs. There are as of April 2010, 46 million unemployed in thirty OECD countries. The unemployment rate stands at 8.7 % for these countries with youth unemployment above 19 %.
Table 1.1
Unemployment rates in selected OECD countries and trade and currency associations as of April 2010 (except where noted)
Spain 19.7 %
Slovakia 14.1
Ireland 13.2
Portugal 10.8
France 10.1
U.S. 9.7 (9.5 June)
Sweden 9.1
Italy 8.9
Canada 8.1
Germany 7.1
G7 8.4
EU 9.7
Eurozone 10.1
Japan 5.2(May, 2010)
Netherlands 4.1
Norway 3.5
South Korea 3.2 (May, 2010)
Source: OECD, all data except where noted as of April, 2010.
The deep recession has been a global phenomenon stretching from Russia to China to Japan to North America to Europe . Africa and Latin America have been affected. The European union has been going through a crisis over the levels of debt taken on by its member states, even though a rise in state indebtedness to finance stimulus is a sound Keynesian policy. Furthermore, in a number of countries the level of debt to the GDP is well below historical maxima and in the case of the U.K even below levels reached during the early 1970s.( Haroldchorneypoliticaleconomist, ‘’U.K. National Debt to GDP, 1916 to 1998, ‘’April 21, 2010; and ‘’ Spain, Debt and the Chicken Little squad, May 29, 2010 ; and OECD cited in Rudiger Dornbusch, Dollars, Debts and deficits, p.172, Table lll.2)Greece , Portugal , Ireland and Spain, the so called PIGS have been at the centre of this crisis.
Austerity has been imposed upon Greece in return for it obtaining the support of the European Central Bank (ECB), the European Union and the IMF. Again this is a very unfortunate tendency since unemployment is elevated in each of these countries with Spain in the worst shape suffering from close to 20 % unemployment, up from 10 % in 2006.( Eurostat; FT)
The new Conservative /Liberal coalition government of Great Britain has foolishly declared war on its deficit, despite its net debt to GDP ratio being a bit less than 60 %, a fifth of what it was at the end of the second world war. Indeed, the significant deficit which Gordon Brown the Labour P.M. had undertaken in response to the crisis was a factor in his defeat in the election. The new government intends to slash government expenditures by as much as 6 billion pounds in 2010 and by as much as 40 million pounds over the next four years. ( The U.K. budget, June 22, 2010;F.T.various issues May 2010;See also my letter to the F.T. April 26 , 2010 on British debt in historical perspective and the British office for national statistics) Global trade has been negatively affected.
If one scans publications like the Wall Street Journal, the Financial Times, The New York Times, The Guardian, Le Monde and The Globe and Mail there is a growing sense of the enormous size of the crisis that we are passing through and the widespread shock about the level of destruction of financial assets and the wiping out of stockholder value that occurred. It appears that we have saved ourselves from another great depression,but only just and that prospect was widely being discussed over the past 12 months. Now the topic of discussion is a double dip recession. See the pessimistic analysis of Nouriel Roubini in his RGE monitor for this perspective.
Growth has resumed in the U.S. which has now had three consecutive quarters of growth since the summer of 2009. Unemployment however remains above 9 % in the U.S. Growth in Canada has also been positive, but unemployment is still above 8 %.
TABLE 2
First quarter growth rates in GDP 2010; annual rates of 2009 growth; 2008; 2007;
Q1/10 09 08 07
Canada 6.1 %* 0.4 2.7 2.7
U.S. 3.0 * -2.4 0.4 2.7
China 11.9 %* 9.1 12.75
Japan 0.8 % -5.2 -1.2 2.4
Taiwan 13.27 % *
India 8.6 % * 7.4 9.0 9.2
Germany 0.2 % -4.9 1.3 2.5
France 0.1 % -2.6 0.2 2.4
Italy 0.5 % -5.0 -1.3 1.5
U.K 0.3 -4.9 0.5 2.6
Spain 0.1 -3.6 0.9 3.6
Greece -0.8 -2.0 2.0 4.5
Belgium 0.3f -3.0 1.0 2.9
Denmark 0.4f -4.9 -0.9 1.7
Ireland -0.3f -7.1 -3.0 6.0
Czech 0.4f -4.1 2.5 6.1
Austria 0.3f -3.5 2.0 3.5
Finland 0.4f -7.8 1.2 4.9
Sweden 0.3f -5.1 0.4 3.3
Norway 0.4f -1.6 1.8 2.7
Switz. 0.4 -1.6 1.9 3.6
Euro zone 0.2 -4.1 0.6 2.8
EU 27 0.2 -4.2 0.7 2.9
Source: Eurostat; OECD.
f forecast for Q1,
* annualized basis
Monetarist economists like Alan Meltzer writing in the Wall Street journal (August 31, 2009 ‘’What Happened to the Depression ‘’)insisted as the recovery began to make its appearance that the data shows that this recession is more like that of 1973-75, rather than the great depression.
That may well turn out to be true in terms of duration and maximum unemployment rate, but not in terms of the scope of the financial collapse and subsequent panic. Also remember that is only after a massive intervention by governments around the world and the expenditure of several trillion dollars in stimulus funds and dramatically lowered interest rates for a prolonged period.(U.S. 787 billion$ plus Troubled assets relief program(TARP) 700 billion and Troubled assets loan facility(TALF) funds in the form of loans of 500 billion,UK 80 billion $,Germany 80 b $, France 60 b $. Japan 81 billion, China 586 billion) that the economy has partially recovered. Not all of the TARP and TALF funds were utilized but the initial enormous commitments were necessary to restore relative calm to the markets.
Over time much of these monies advanced as loans have been repaid with interest so that the final cost of the bailout will be much less than the headline figures initially announced. For example G.M. and many of the investment banks have repaid billions of dollars of loans with interest as of spring 2010. Critics like Joseph Stiglitz have pointed out that the repayments were smaller than they should have been given the risks that the government took on and that private market loans would have demanded and received a higher rate of return.
The degree of widespread financial panic, bank failure, scandal and Ponzi finance, and stock market collapse, the spike in oil prices, as well the pressure of the collapse in investment and consumption all have to be taken into account. All of this far exceeded the events of 1973-75, a period with which I am personally very familiar .
The fact that the recession has now technically ended is much more the consequence of the policies implemented to treat it, rather than as Meltzer argues , the self recuperative power of market forces. For it was the unregulated forces of the market that led to this mess in the first place.
It is useful to remember that the value of shares in the Dow Jones index fell by 47 % from September 1929 to November 1929.They ended the year at 65 % of their September value. They did not regain their 1929 value until the early 1950s.(Kindleberger, p.105) The S&P index fell to just 25% of its 1929 peak by 1932(Kindleberger, fig.8 p.120 )The prices of primary products fell by a third world wide. The GDP in the US fell from its 1929 high by 29 % from 1929 to 1932/33.The number of unemployed rose from 1.6 million in 1929 to 12.8 million by 1932/33.(R.A.Gordon , Business cycles,p.429) The slump in Britain and Canada was just as severe. For example, disposable income fell to 51 % of the 1929 level by 1933 in Canada. By 1933, 20 % of the work force was unemployed in Canada. (A.E.Safarian, The Canadian Economy in the Great Depression, p.86 &p75)
This time the slump in the stock market was initially even greater than in the first part of 1929. From their peak in August of 2007 until their low point in March of 2009 stocks fell from Dow 14141 to Dow 6600 a fall of about 53 %. But since the low point of last March they recovered to Dow 10800,in April 2010, a fall of about 23.6 % from their peak. Their current level as of June 28 is Dow 10,138.
So talking about the possibility of a depression along these lines is a very serious proposition and given what governments know about how to avoid these problems it is still possible but unlikely. A serious prolonged period of high unemployment is however much more likely. This is particularly so because governments the world over are still obsessed with deficit hysteria. Growth has resumed but the unemployment rate is dropping very slowly. This is often the case after a major downturn. Paul Krugman in the New York Times has been very pessimistic about the prospects for a depression, particularly since the G20 countries have rather foolishly adopted a commitment to cut deficits in half by 2013 and stabilize or reduce debt to GDP ratios by 2016.
I sympathize with Krugman’s frustration over the widespread ignorance among politicians of economic history and their apparent rush to repeat the errors of history. But given the rather open ended language of the commitment and the recognition that each country will have to deal with their own circumstances it is possible we will be lucky and deficit reduction approaching these targets will take place largely because of the resumption of growth. Nevertheless, the risk of depression is in fact strengthened by austerity policies at such a critical point in a fragile limited recovery. It is a very bad reality that the U.S.congress is now apparently opposed to further stimulus measures and that fiscal conservatives dominate governments throughout most of the G20.
Typically it takes two or more years after the end of a recession for the unemployment rate to drop substantially. Sometimes a full 4 or 5 years after the end of the recession the rate is still higher than what it was just prior to the recession. For example, in the U.S. after unemployment rose in 1990 from its low of 5.2 % it took more than five years for the rate to drop to this level again.( See the U.S. Bureau of Economic analysis historical statistics)
This past summer, 2009, the first signs of the beginning of an economic recovery made their appearance. Positive growth appeared in both the U.S. and Canadian economy in the third and fourth quarter of 2009.This means that the recession in Canada was technically 10 months long while the one in the US was 18 months in duration. The European recession appears to have begun in the 2nd quarter of 2008 and may have ended in the third quarter of 2009. Although the formal recession in terms of positive GDP growth may have ended, unemployment continued to rise in both Canada and the U.S. and in Europe. The rate for August 2009 rose to 8.7 % in Canada and to 9.7 % in the U.S. The U.S. rate then peaked at 10 % in the U.S. and has now declined to 9.7 % while the Canadian rate peaked at 8.7 % and is now 8.1 %
The rate in the fall of 2009 in France was 9.8 % , Germany 7.7 %,the U.K. 7.7 %,7.0 % in Belgium, 18.5 %in Spain, 9.2 % in Sweden, 5.7 % in Japan. )
By November 2009 the rates were 7.5 % in Germany, 10 % in France, 8.1% in Belgium, 19.4 % in Spain, 9.7 % in Greece, 8.7 % in Sweden, 13.5% in Ireland. The rate in Greece has since risen to 10.3 %.
By January 2010 the rate had worsened in a many countries and improved slightly in several ,the overall rate for the euro area in January 2010 was 9.9 % and for the European union 9.7 %. In January 2010 the rate was: Belgium 8.0%,; France 10.1 %; Germany 7.5 %; U.K. 7.8 %; Spain 18.8 %; Sweden 9.1 %; Italy 8.6 %; Ireland 13.8 %; Greece 9.7 % (Sept.2009) now Feb 2010 10.3 %;Luxembourg 5.9 %; Norway 3.3 %; Netherlands 4.2 %; Denmark 7.3 %; Japan 4.9 %; Poland 8.9 %; Czech republic 8.2 %; Slovakia 13.7 % ; Canada 8.2 %(Feb.2010) and the U.S. 9.7 %(Feb.2010)
Net job losses continued in the U.S. during the summer with August showing a net loss of over 200,000 jobs, the lowest number in many months but still a large number. In Canada in August largely because of part time employment rises there were net job gains even as the rate rose because of discouraged workers rejoining the labour force. The broader measure of unemployment that includes all marginally attached and discouraged workers and those working part-time when they would rather be working full time rose to 16.8 % in the U.S. in August up from 10.7 % in August 2008. Since the start of the recession the U.S. has lost over 7.1 million jobs. (U.S. Bureau of Labour Statistics, statistics Canada, labour force survey)
This has improved in both Canada and the U.S. with the latest data showing that in February the U.S. lost only 22,000 jobs.
At present however there are close to 15 million people unemployed in the U.S. and another 21 million unemployed in Europe.(U.S. Bureau of labour statistics; Eurostat)
The origins of quantitative easing
In September 2008 I wrote in my internet blog(Haroldchorneypoliticaleconomist.piczo.com) and in comments posted in The Wall Street Journal, the Financial Times, The New York Times and in The Globe and Mail that the crash in the financial markets and the accompanying paralysis of the financial system was grave enough to warrant drastic action. I called for large deficit spending and zero interest rates as well as central bank intervention through quantitative easing to keep the rates as low as possible. The governments and central banks did exactly that. Many economists urged what I urged on the fiscal policy front and also on the conventional monetary policy front. But very few also urged quantitative easing.
This notion of quantitative easing which is essentially temporary greater monetization of a portion of the government’ debt than is normally the case, is facilitated by the central bank purchasing treasuries directly in the money markets to prevent any crowding out from occurring. It is a policy idea that I first presented in Canada back in the 1980s and 1990s in a series of published works in edited collections, monographs and journals. As far as I know I was one of the first, if not the first economist in the modern era to advocate this policy. (Harold Chorney, The Deficit:Hysteria and the Current Crisis, Ottawa: The Canadian Centre for Policy Alternatives, 1984 reprinted with a new preface in Harold Chorney& Phillip Hansen,Toward a Humanist Political Economy.
Harold Chorney, The Economic and Political Consequences of Canadian Monetarism, paper presented to the British Association of Canadian Studies, University of Nottingham, April 12, 1991 forthcoming in On stimulus, deficits and surpluses.
Harold Chorney, The Deficit and Debt Management: an Alternative to Monetarism, Ottawa: The Canadian Centre for Policy Alternatives, 1989.
Harold Chorney, ‘’A Regional Approach to Monetary and Fiscal Policy’’ in J. McCrorie and M.Macdonald, The Constitutional Future of the Prairie and Atlantic Regions of Canada, Regina; Canadian Plains Research Centre, University of Regina, 1992.
Harold Chorney, Debts, Deficits and Full Employment in Robert Boyer and Daniel Drache, States Against Markets:The Limits of Globalization, New York& London: 1996.)
Like all good ideas it had been discussed in history before. The early 1930s Japanese finance minister Korekiyo Takahashi introduced it in Japan. There was also a foreshadowing of it in the Glass Steagall act of Feb.27, 1932. The act on an emergency basis permitted the U.S.Fed ‘’to count government securities together with eligible commercial paper as reserves against the system’s liabilities.’’
(In addition it is useful to know that Keynes himself approved of this approach. In March of 1930 before the Macmillan Committee in the U.K. of which Keynes was both a member and also a major witness he argued in favour of this policy as follows.
''My remedy in the event of the obstinate persistence of a slump would consist, therefore, in the purchase of securities by the Central Bank until the long term market-rate of interest has been brought down to the limiting point....(with respect to the 1930s slump) the Bank of England and the Federal Reserve Board (should) put pressure on their member banks...to reduce the rate of interest which they allow to depositors to a very low figure, say 1/2 per cent...(and) these two central institutions should pursue bank-rate policy and open market operations à outrance.''
/See Report of the Committee on Finance and Industry (Macmillan report), 1931 Vol II, p.386. cited in Benjamin Higgins,'' Keynesian Economics and Public Investment policy'' in Seymour Harris,ed. The New Economics, Keynes' Influence on theory and public policy, N.Y.:Alfred A.Knopf, 1948, p.470 note 9.See also Peter Clarke, The Keynesian revolution in the making 1924 - 1936, Oxford:the Claredon Press, 1988.pp.150ff /
Later in the General Theory he developed his ideas of fiscal stimulus further and appeared to give more emphasis to fiscal policy in the context of a multiplier enhanced stimulus. But accomodating monetary policy was always part of his tool kit additional material added Nov.6, 2010)
As Friedman and Schwartz point out this meant that government debt could now be counted as part of the 60 % collateral other than gold required against federal Reserve notes.(Milton Friedman& Anna Jacobson Schwartz, A Monetary History of the United States, 1857-1960 , p.191. and Charles Kindleberger, The World in Depression, 1929-1939, p.183) This then led to a very large open market purchase of government issued debt by the Fed , despite substantial internal opposition on the grounds that the action would be inflationary.
Allan Meltzer points out that in 1932 there was heated debate about the Fed buying U.S. treasuries as part of its effort to rescue the economy from the depression. Previous to this debate and the decision to actually acquire treasury debt as part of a strategy of quantitative easing the Fed largely restricted itself to the real bills doctrine about which debt instruments the Fed should acquire in conducting monetary policy.
Meltzer shows that this debate also occurred in Great Britain in the nineteenth century when there was a need for the Bank of England to purchase treasuries in the open market. (Meltzer, A History, p.37) To a certain extent the debate between the currency school and the banking school turned on these issues of which debt instruments it would be legitimate for the central bank to purchase and hold. (Meltzer, p.43)
In the twentieth century the issue of the central bank buying treasuries re-emerged during the financing of the first world war and there was a clear bias in favour of the real bills doctrine. But Meltzer points out that ‘’Most commentators point out(correctly) that it is no more inflationary for the Federal Reserve to buy the bonds directly(or in the open market) than to lend the money to the banks at below market rates so that banks can either purchase the bonds or finance the public’s purchases. The increase in the monetary base is the same. (p.87) Nevertheless, during the 1920s right up until the crash of 1929, monetary policy was dominated by a doctrine called the Riefler-Burgess doctrine which was compatible with the conservative real bills doctrine and was very restrictive in terms of what it regarded as legitimate central bank purchases.. Winfield Riefler and W. Randolph Burgess were the two banking economists who developed the doctrine and Meltzer draws upon his research with Karl Brunner in describing the significance of their work. (p.161)
It was not until the passage of the Glass Steagall act in 1932 that more flexibility was introduced which permitted the Fed to substitute government paper for commercial paper or real bills . (Meltzer, p.357) During the spring of that year the Fed acquired over 654 million dollars of government securities. The rate of purchase was over 100 million a week. But this first use of quantitative easing was a very limited experiment which ended by August of 1932.(p.358 ff) At the time there was no obvious immediate positive response in the economy and the general conservatism of central bankers, economists and business people was enough to halt the program. Once Roosevelt replaced Herbert Hoover and Mariner Eccles became the chairman of the Fed and Lauchlin Currie one of Roosevelt’s principal economic advisers other possibilities developed. Harry Hopkins also played a major role.
Initially, of course, Roosevelt had campaigned on balancing the books. But once he was in office he gradually realized how a bad a policy that would be. Under the influence of Eccles and Currie and the real circumstances of the depression he came to support deficit spending and work creation relief programs. Meltzer draws extensively on Currie’s and Eccles’ writings and speeches . He also uses a work by R. Sandilands on Currie’s life and political economy and develops a very important profile of these extraordinary people. ‘’Eccles and Currie, separately, developed the idea of countercyclical fiscal policy that later became identified with Keynes’ General theory.
Eccles like Keynes wanted not just spending but government investment to replace private investment during recessions.’’ (p.420) Just to be clear, private investment declines during a recession. Indeed that is its hallmark and that is what causes the slump.
Eccles believed that mal-distribution of income was responsible for the depression because first it promoted a speculative bubble and a productive capacity that far exceeded the effective demand that was possible given the distribution of income and wealth. He was a strong advocate of budgetary deficit spending and an accommodating monetary policy. But Meltzer points out that Eccles believed simply increasing the money supply and lowering rates would not work unless it was accompanied by major fiscal actions promoting investments through deficit finance. Meltzer traces the origins of the famous expression pushing on a string and the notion of the liquidity trap to both Eccles and one his supporters, congressman Alan Goldsborough in an exchange during Eccle’s testimony before the House committee on banking and finance in 1935.
Most critics of this policy of Keynesian stimulus and an accommodating monetary policy make dire warnings about the risk of inflation.
In fact, of course, the U.S. was experiencing exactly the opposite, deflation at the time. This was a definite change in central banking that was in fact a form of quantitative easing. In the past the fetish of the gold standard and the doctrine of real bills had dominated central bank thinking. (Real bills were notes, drafts and bills of exchange issued by banks on the basis of commercial transactions.)One would have had to go back to the civil war issuance of greenbacks, a purely fiat currency which largely financed the war to find non gold nor silver nor real bills backed currency. A number of otherwise conservative economists backed the decision of the central bank, pointing out the deflationary circumstances. Milton Friedman later complained that the Fed had not been expansionary enough.(see his discussion of the Glass –Steagall act of 1932., p.191 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States. But given the climate of opinion it is understandable. Just as today we have ferocious opposition to quantitative easing and deficits despite the clear necessity of these policies if we are to avoid the disaster of the 1930s.
The purchase of treasury debt to forestall interest rate rises thus became a normal part of monetary policy. It was strongly exercised during the 1940s and fifties in the U.K. (See R.Sayers Modern Banking, fifth edition, Oxford: Clarendon Press, 1960, p.136 ff and his discussion of the Chancellor of the Exchequer Hugh Dalton’s drive to lower interest rates in 1946-47. See also ch.8 on Commercial Bank liquidity and lending policy. Pp.157ff)
There has been a long history of debate with respect to the central bank and its power to exert influence over the whole range of interest rates from the short term where it clearly has absolute power, to longer portions of the yield curve where its powers are more ambiguous.
Abba Lerner had discussed important aspects of central bank authority in the 1940s in his work on functional finance. In Japan the Minister of Finance had resorted to this policy of quantitative easing in the 1930s. But for the most part this critical policy innovation had been forgotten by the high point of monetarism in the 1980s and the decades which followed.
When I first discussed it in the early 1980s I was ridiculed by Bank of Canada economists and called foolish for proposing such an ” inflationary” idea. Other critics claimed it was simply social credit theory, an idea associated with the funny money movement of the 1930s and the ideas of a British engineer Major Douglas. Indeed, when Abba Lerner first wrote his classic work on functional finance , a senior Canadian Dept. of Finance official A.N.McLeod claimed that it bordered on social credit or at least would be interpreted by them as supporting their argument and would cause inflation..( Memorandum for Mr. Bryce Re:My comments on Lerner’s ‘’Functional finance’’ RG File 04747-251 Finance Central files, Ottawa, April 24, 1944 ) Even my current editor, an historian by training has claimed that it was social credit.
It is in fact neither social credit nor automatically inflationary. Rather it represents a sophisticated approach to using both monetary and fiscal policy in fighting a slump and a collapse in confidence of which Keynes himself privately approved .(See David Colander,‘’Was Keynes a Keynesian or a Lernerian,’’ Journal of Economic Literature, Dec.1984, pp1572-1575 )
I explained then and am glad to see it has now been accepted that it need not be inflationary when the threat is deflation and depression. Rather, it becomes a very useful tool to ward off deflation and prolonged depression. I was , of course, pleased to see it embraced by most if not all of the central banks and the I.M.F. during 2009. The Japanese resorted to this policy when they sought recovery from the bursting of their real estate bubble. The Fed, the Bank of England and the Bank of Japan have all resorted to it during this period of crisis. Inflation , in the sense of price increases beyond three percent, for the time being is nowhere to be seen. In the U.S. core inflation is still below 2 %.Even the ultra conservative Bank of Canada considered using it. The European Central Bank initially refused to use it but during the Greek sovereign debt crisis they relented somewhat and unfortunately belatedly.
In response to the banking and credit panic and the severe slump that followed, liquidity needed to be injected by the central banks. Interest rates needed to be cut. Large budget deficits needed to be undertaken to finance infrastructure and investments that are labour intensive in education, health care, social policy, the military and the environment. The 787 billion dollar bailout rescue package passed by the American Congress in early October, 2008 ,the Economic Emergency Stabilization Act., was intended to stimulate the economy and create employment. To a certain extent it has succeeded but its success has been limited by the failure to spend the funds expeditiously and by bureaucratic problems with its administration. Only by the end of 2010 will the majority of the monies actually be expensed. It has also been undermined by simultaneous cutbacks by state and local governments.
Subscribe to:
Posts (Atom)