Policy Research in Macroeconomics

Employment must come first, the rest follows – helpful points from Chairman Bernanke & Commissioner Andor

In a recent article on the Guardian website, PRIME’s Ann Pettifor said:

 “The deficit and debt/GDP ratio fetishes that unite the UK government, UKIP, the European Central Bank and the European Commission are part of the economics of the poorhouse, where co-ordinated austerity is seen as a “solution”, even while unemployment reaches mass levels unknown in Europe’s modern history. Let’s remember why Keynes wrote his General Theory of Employment, Interest and Money: in sum, employment must come first, the rest follows.”

 We would like to draw attention to two very recent, positive items which reflect and take forward this point.  The first is from Chairman Ben Bernanke, addressing the Congress Joint Economic Committee on 22nd May.  The second is an article from yesterday’s Guardian (28th May), by EU Commissioner for Social Affairs, Laszlo Andor, together with four others who represent a formidable European political phalanx for a change in Eurozone economic policy.

The terrible economic impact of unemployment

First, Ben Bernanke’s speech. This extract sums up what we have argued since 2010, not least in PRIME’s “The Economic Consequences of Mr Osborne” (available as Pdf from this website), that what reduced deficits is economic activity, not the imposition of co-ordinated austerity.  This is what Mr Bernanke said:

  “High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers’ skills and – particularly relevant during this commencement season – by preventing many young people from gaining workplace skills and experience in the first place.

 The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.”

 Or in Ann’s phrase, “in sum, employment must come first, the rest follows.”

The urgent need for a new European economic and monetary policy

I cannot recall an EU Commissioner going so far in criticism of existing policies as Laszlo Andor has in his Guardian article.  He is in good company however: Yves Leterme, now a Deputy Secretary–General of the OECD (and the article is also pretty radical by OECD standards), Pervenche Berès (Chair of the European Parliament Committee on Employment), Joan Burton (Irish Minister of Social Protection) and Henri Malosse (President of the EU Economic and Social Committee).

We may not agree with every single point, but it is really refreshing to find a call from such sources to “rethink the ECB’s role and powers” and go for a “different inflation outlook”;  for once the “problem” is not defined as public debt, but as a banking crisis and a result of bad design of monetary union.  Moreover, in calling for “symmetrical rebalancing”, the authors are tackling head-on the Bundesbank dogma oft repeated by its President, Jens Weidmann, that the whole burden of rebalancing must fall on the deficit countries.

Here is their diagnosis:

 “The crisis has lasted longer in Europe than in the US or the rest of the world mainly because of poorly designed monetary union, without an appropriate framework of rules for banks and other financial institutions or sufficiently robust budgetary instruments.

 The reality of today’s eurozone is far too many people out of work, falling internal demand, increasing polarisation within societies – and a yawning chasm dividing relatively prosperous core countries from a periphery destined for depression.”

 And here are extracts from their proposals:

 “First, we must urgently set up an EU-level banking union to restructure or close down failed banks. Companies need access to more credit, under better conditions, to invest and grow. Europe’s financial sector must cut its debts faster, including through greater debt write-offs and shaking up banking structures.

 Second, consolidation in weaker member states needs to be balanced by higher consumption in stronger EU countries. The monetary union cannot rely solely on squeezing troubled countries, which depresses overall demand. “Symmetrical rebalancing” requires structural measures in stronger countries, such as allowing wages to catch up with productivity and adequate minimum wages to prevent in-work poverty.

 Third, if weaker member states are to regain competitiveness while keeping the euro, they need investment in the real economy…

 Fourth, Europe’s monetary policy must become more expansionary….It is becoming increasingly clear that Europe’s financial crisis cannot be overcome in a deflationary environment, so a different inflation outlook is necessary. We must rethink the ECB’s role and powers.

 Europe should convene a Bretton Woods-type conference to put in place an economic and monetary arrangement for the coming decades.

 For such a lasting arrangement, a grand bargain between surplus and deficit countries is needed… Some pooling of government debt, and cross-country automatic stabilisers (where, for example, the costs of cyclical unemployment are shared between the member states by using common European funds) should be seriously considered for Europe’s monetary union.”

 And their conclusion:

“Rebalancing through aggressive reduction of government spending and similar measures in deficit countries (under the euphemism “internal devaluation”) is, without higher domestic demand in the surplus countries, a recipe for long-lasting recession and disintegration. There is no solution to the crisis without reconstructing Europe’s economic and monetary union, and without shifting the focus on to people’s needs and potential.”

Opening up political debating space on Europe

Perhaps most important of all is that, thanks to the scope of their critique, the authors open up political debating space for those who (like your author) are passionately opposed to current EU/Eurozone economic and monetary policies, consider it immoral to promote policies that cause and maintain high unemployment, and believe that people must be able democratically to decide on economic policies without having Hayekian dogma entrenched in laws and treaties…and who remain staunch Europeans.

The beleaguered set of politicians, technocrats, academics and bankers who have imposed their brand of EU economic policy for too long, and with disastrous consequences, are quick to depict opposition to their policies as “anti-European.”  They are wrong.  As Commissioner Andor and his co-authors rightly argue, it is current policies that are a recipe for the dis-integration of Europe.

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