Stiglitz and Job Creation

Nat O'Connor: Joseph Stiglitz has an interesting three-page article in Vanity Fair where he reassesses the causes of, and therefore necessary solutions to, the current "Long Slump" in the USA, comparing it with the Great Depression.

In addition to the massive damage caused by the banking system and financial speculation, there were social and technological changes underpinning the Great Depression and (Stiglitz argues) similar changes in employment patterns underpin the current Long Slump.

Before the Great Depression, one in five Americans worked on a farm. Today, it is one in fifty. Before the Great Depression took hold, agriculture in the USA was already in difficulty. Technological improvements in machines, seeds, etc had lead to much higher production. While this might seem good for one farmer, when all farmers have higher production, prices fall due to the surplus supply. Part of the long-term solution, Stiglitz argues, was the painful move of many Americans away from farming to working in manufacturing. The main driver of this was World War 2, which led to massive Government spending on war industry, which laid the basis for a massive shift towards industrial production post-war. Combined with the GI Bill, which gave veterns access to university education, the nature of employment was transformed.

Obviously, Ireland had a quite different history of development. Movement away from the land was slower and we have maintained small farms, whereas the US has moved to large-scale industrial agriculture. Alhough Ireland had some earlier industrialisation (Lemass/Whitaker), only in the 1980s and 1990s did Ireland see employment rise in newer industries like IT, pharmaceuticals, etc. Nevertheless, Ireland experienced the same technological shifts in agriculture that have resulted in far less people working in farming now than was the case in the 1930s. Unlike the USA, mass emigration out of Ireland disguises the extent to which there was an exodus from the land to other areas of employment.

Stiglitz then goes on to argue that similar improvements in production (largely) combined with global competition from low wage countries (but perhaps to a lesser extent) mean that machinisation is now dominant in US manufacturing, rather than mass employment. Hence, there is a need to shift the expectations (and skills) of a great number of people from industry to services.

Sitlitz has two conclusions about how to bring about the transformation from manufacturing to service industries. His second conclusion is that banking reform is still necessary and that little has been done to date in the USA. We need to put much more regulation on the banking system to ensure that it serves society and lends money to the job creating small and medium enterprises in the real economy. (This point seems equally relevant to the Irish case.)

His first conclusion is more challenging. Stiglitz argues that the only way to resolve the crisis in jobs is for the State to engage in a massive programme of productive investment; preferably without another war. We know what the long-term drivers of economic development are: education, technological innovation and infrastructure. The State needs to borrow to invest heavily in these - reversing decades of declining investment - in order to do no less than transform employment patterns.

It's a big challenge to the failed strategy of austerity, which has seen cutbacks and job losses combined with an unreformed banking sector that continues to pay bonuses and engage in financial speculation, with public money.

It is obviously more difficult for the State to engage in major productive investment in Ireland because of the difficulty in borrowing money. Nevertheless, there needs to be much more discussion of the development path we are on. What is the future for jobs in Ireland? We know we can't go back to 12 per cent of the work force employed in construction. Half of that level would be a long-term norm. So just where are the jobs going to come from in 2016 and 2021? Even if resources for investment are limited, we still need to focus on education, technological development and the hundreds of different supports needed to retrain workers and build the capacity of Ireland's businesses to create jobs. And it seems likely that the State needs to lead the way towards increasing productive investment in every way it can.

Revisiting Keynes

Slí Eile: Good piece from Ed Balls in the Observer this morning here. No doubt it will be said Keynes applies everywhere in the world (the folks who buy our exports) but not here in Ireland (Small Open Economy, import leakage, not much leeway on cash holdings and of course the bogey man of the Troika who would never allow for a fiscal-led stimulation of the economy - so we are told). Mind you that was exactly the same argument used here in the 1950s to justify completely balanced budgets. And at that time we scarcely had much economic sovereignty (which was one of the arguments for joining the 'Common Market' in 1973. With balanced budgets in the 1950s came prolonged stagnation from 1950 to about 1958. Keynes was no socialist but he understood better than most the dynamics of markets and economies. He also understood the politics that might emerge from post-war Europe and the need for effective global institutions.

Deflation is no way to reduce debt

Slí Eile: The IIEA held an interesting seminar recently on sovereign debt. Here is the link.
Ann Pettifor quoted Henry Liu: ‘“The young, the working poor and the elderly to pay for the careless profligacy and corruption of governments, the propertied rich, and financiers.” She heavily criticised the deflationary tide across Europe
The other two speakers were Lee Buchheit US legal expert on sovereign debt issues (also chair of the Icelandic government’s negotiating committee in the Icesave dispute …) and Dietmar Hornung of Moody’s .
Ann Pettifor’s presentation is available online here. And you can hear her speak by podcast here.
She drew on ‘Fiscal consolidation: A history from a century of UK macroeconomic statistics’. Victoria Chick and Ann Pettifor June 2010
The key conclusion was that
“The economic policies of ‘synchronised austerity’ will not only increase EU unemployment and social dislocation - they will also increase the public debt….
Sooner or later, governments, financial markets and international authorities will be forced to recognise the validity of Keynes’s analysis, ........just as they were forced to do in the 1930s”
Far from being over, as the Moody's speaker claimed, the debate has hardly begun. Events, events, events as the saying goes.

Earth goes around the sun - shock

Michael Burke: One of the reasons why economists are often held in low esteem by the general public is that they claim the mantle of science while frequently producing arguments that are unscientific in the extreme.

To take one example, a giant of the natural sciences; Galileo. One of the reasons that Galileo was certain the Earth moves around the Sun was because he approximately calculated some of the distances within the Solar system, and reasoned that such huge bodies could not be hurtling at such great speeds through the Universe. Instead, we now know that the speeds Galileo calculated are actually a tiny fraction of their real speeds, given that the galaxies too and the Universe as whole are also in (extremely fast) motion. But no modern scientist spends any time deriding Galileo for his incorrect assumption, but marvels at his insight, ingenuity and worldliness.

Contrast this with Jeffrey Sachs in today's FT, who has come to bury Keynes, not praise him. Readers are left in no doubt that one of the architects of 'shock therapy' in Eastern Europe is not a fan. Never has been.

But look more closely at what he does argue for. This includes:

- Counter-cyclical spending
- Greening the economy
- Government investment
- Tax rises- big ones for the rich
- Promoting post-secondary education
- Income support for the poor
- Universal access to healthcare and education
- Promotion of exports, clean energy and transport infrastructure

And he argues specifically against:

- Car scrappage schemes
- Tax cuts
- Misplaced cuts in public spending

In fact, the Keynes that Sachs wants to consign to history could have written that policy menu himself (but would no doubt have included lots of measures designed to lower long-term interest rates too). Maybe Sachs' ire is really directed at large budget deficits. But the phrase 'budget deficit' never appears in Keynes' General Theory and they were never advocated by him, so perhaps Prof. Sachs' anger is misdirected. For some reason, Western governments' running large deficits in the 60s and 70s was Keynes' fault. Yet no-one accused Ronald Reagan of Keynesianism when he did it in the 80s.

No matter, no harm done. Two cheers for Jeffrey Sachs, who has discovered for himself that the Earth goes round the Sun.

Now, who's going to break it to Mr Lenihan?

'O make me a Keynesian (but not yet)' ?

Slí Eile: The entry by UK economist David Blanchflower into the domestic economic debate (re-flation versus deflation) created a stir last week. For a moment, it took us away from the narrow, Irish insular debate of ‘public sector versus private sector’, ‘job cuts versus pay cuts’, ‘public spending cuts versus tax hikes’, ‘your grandmother versus your job’ and ‘your left arm versus your right hand’ – all false dichotomies and enforced choices thrown on a public already anxious and dispirited. When you hear the Prime Minister of a country saying that he has a vision for the future and that vision is a smaller public service then you know we have a vision-crisis as well as a values-crises. Blanchflower’s message is simply that we cannot afford to condemn a generation of young people to long-term unemployment with all the devastating consequences that this entrails.

Blanchflower’s talk can be podcasted here.

and his talk can be downloaded here.

(as can all the papers for the Dublin Economics Workshop here)

Blanchflower’s main policy conclusion is
“The time to act is now. The young must be the priority.” (his words)
He also warns that Recovery may not be V-shaped but W-shaped. (IMF and other bodies are cautioning against a premature withdrawal of stimulus measures).
Before considering his menu of policy options, some of the key points he makes at the outset are that:
* The costs of unemployment will vary across countries and between groups within populations. * The young will be hit hard.
* The duration of the slump may be much more prolonged than most people are expecting and … * Much will be changed both in our ideas and in our methods before we emerge.
* During a long period of unemployment, workers can lose their skills.
* Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression and in a few cases suicide.
* The long-term unemployed are at a particular disadvantage trying to find work. People's morale sinks as duration rises.
* As unemployment rates increase, crime rates tend to rise, especially property crime.
* Increases in the unemployment rate, lowers the happiness of the population, not just the unemployed. The fear of becoming unemployed in the future lowers a person’s subjective wellbeing
* Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes. He cites solid UK longitudinal evidence to back this up.

His policy prescription is decidedly Keynesian:
1) Maintain or even increase aggregate demand through stimulative fiscal policy
2) Target assistance on the young through active labour market programs and continuing training and expansion of education, wage and employment subsidies for the young, incentives for hiring the young in public sector organisations such as in education and health and ‘lowering the minimum wage for the young’

Blanchflower argues that ‘moves to cut public expenditure or public sector wages or employment’ in the depths of a recession are ‘a mistake and may turn a recession into depression’

Little wonder that there was such a lively and adverse reaction from the economics mainstream here

In that thread Michael Burke asks:

A challenge to all the slash and burn advocates: Name another advanced economy which intends to pursue a course of slashing public spending currently in the way that Ireland intends.

One detects a severe case of Augustinian Keynesianism among the Irish economics confraternity (while we would love to stimulate fiscally we will not because.....):

O Lord make me a counter-cyclical Keynesian - but not yet.

Middle ground of Keynesianism

In today's Irish Times, Paul Sweeney wonders whether "a return to middle ground of Keynesian economics" might be the answer be the answer to our economic woes. You can read the full article here.

Play the game

Hat-tip to Notes on the Front for this link to the Keynes Game - a simulation exercise from Dreamscape which will allow you to play around with a range of economic variables, the ultimate aim being to get re-elected on the back of your economic performance.

Hutton on Koo and Super-Keynesianism

Michael Taft: Writing in today's Observer, Will Hutton describes the prescriptions of Richard Koo, chief economist of Japan's Nomura Research Institute, to address the global economic and financial crisis. Simply put, Governments worldwide must engage in even more radical spending and borrowing programmes, to bring the international economy out of recession. While, obviously, this super-Keynesian model has its limitations in a small, open economy, it nonetheless provides an alternative perspective on the Government’s current deflationary policies.

Krugman on macroeconomics and the 'Great Ignorance'

"Doing what I think of as real macroeconomics — the tradition that runs through Keynes and Hicks — actually involves thinking about interdependent markets, in a way many economists never learn to do. At minimum you have to keep straight the relationships among the markets for goods, bonds, and money; if you try to think about either interest rates or the price level in terms of just a single market — interest rates determined by supply and demand for lending, price level by quantity of money, full stop — you get it all wrong, especially in times like the present."

You can read the rest of Paul Krugman's post here.

Back to the future

Sli Eile: John Maynard Keynes, speaking in UCD in 1933, praised the self-sufficiency policies of various countries including, at the time, ‘Italy, Ireland, Germany’ (what a trilogy!). This was not flattering company, especially as Keynes observed that these countries ‘have cast their eyes or are casting them towards new modes of political economy’. The rest is history. A key development since 1933 has been the collapse in many world models including:

• Self-sufficiency, which for Ireland ended in the tragic failure of national economic policy in the 1950s;

• Communism, which could not give the people the peace, bread and land it promised and came down with the Berlin Wall without a shot being fired (almost); and

• Neo-Liberalism, which dominated thinking and policy practice in that other trilogy of the USA, UK and Ireland for the past decades.

And now the demise of neo-liberalism is signalled by a monumental failure to give the people the peace, bread, land (and housing in the case of Ireland) it promised. It was an illusion based on lies about real values, prices and debts. It came crashing down in 2008 as quickly as the Berlin Wall fell in November 1989 and, like Humpty Dumpty, all the kings’ horses and all the kings’ economists couldn’t put Humpty together again - not even with another dose of recapitalisation.

So, what is next? Hard to say. One thing is sure: the world will never be the same again, and you know this when 20 eminent economists of various ideological hues write an article in the Irish Times desperately calling on the Irish Government to nationalise the banks (or what the left used to call 'parts of the commanding heights of the economy'). A few salient points are in order:

1. If the old models of self-sufficiency, communism and neo-liberalism failed abysmally, the new models – if there are any around to emerge in the coming years – may not work so well either;

2. Change is possible and hope is vital, precisely because power is everywhere and that power is vested in democracies where citizens are sovereign and Governments can take ownership of assets where the need is apparent and the common good demands it;

3. The notion that Ireland is finished and can only wait for an international recovery (see Paul Krugman:

Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back)

is fundamentally flawed because a member of the European Union can choose to spend, tax, not regulate and guarantee in particular ways. There are options, and many of these are reflected - among other sources - in the ten-point plan issued by the Irish Congress of Trade Unions.

Would a Keynesian-type domestic stimulus work in Ireland? It all depends. Specifically, it depends on four great unknowns:

• The impact of the US-led Keynesian stimulus;

• The length, depth and geographical distribution of the Great Recession

• The way public expenditure is distributed in Ireland and its differential impacts on investment and domestic consumption; and

• Events – political, social and cultural – that are impossible to tell or predict in this world of uncertainty.

The irony of Keynes' remarks in 1933 is that the Great Depression of 1929 was, ultimately, resolved by a mixture of policy responses - some of which turned out to be extremely bad (like public work programmes in fascist dictatorships) - and then a World War which solved the unemployment problem for a time. Keynes could not have fully foreseen this. But, when it happened, he worked behind the scenes to help put in place the post-War architecture of global financial institutions which reigned for almost 30 years until 1973. The legacy of social democratic Governments in that period – and more recently ‘New Labour/Third Way’ - is mixed, especially the latter. Looking to the future, Obamesque tinkering with the existing social and economic order is unlikely to deliver unless it is surpassed by fundamental change driven by the grass-roots and led from the top by a new political generation.

A fair bet is that a domestic stimulus in Ireland, alone, will not work especially if it is not accompanied by fundamental change in Irish social and economic policy – whatever happens or does not happen internationally. Part of that change must concern shifts in political power (and not just personalities, office holders and parties in power), in the way in which markets are regulated and in the balance of public, private and voluntary engagement in the provision of goods and services.

Peter Bacon was not right to say that it does not matter which nameplate appears over a bank’s door (to argue against nationalisation, in his case). But he would have been right to apply the nameplate analogy to political power, if a change of Government represents a change of persons and parties without a fundamental change in the direction of economic and social policy away from neo-liberalism to a new social order.

At the end of this sorrowful tale it will not be the Government, the banks, the EU or capital markets that will save us. We can only save ourselves by reinventing democracy and effecting social change through democracy.