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