Читать книгу TOO MUCH MONEY - Gregory J. McKenzie - Страница 4

"Cry havoc and let loose the dogs of war...”

William Shakespeare Julius Caesar Act 3; Scene 1: Line 273

The advantages of free trade deals have been touted for a long time. By following David Ricardo's principle of comparative advantage, Britain became the wealthiest country in the world. Other countries copied what was being done in Britain and also became wealthier. The Industrial Revolution changed many nations. They exported their industrial surpluses and imported food for their new urban workforce. Free trade became a path to economic dominance. It was used by France, Germany and the USA to challenge Britain's status as the world economic superpower. But by 1913 Britain was still number one. It was said that a British gentleman, in the summer before the start of World War 1, could buy anything he wanted without leaving London.

It took the Great Depression to destroy this confidence in free trade. Since that time, some form of protectionism has existed in most trading deals between countries. This includes any so-called bi-lateral free trade deal of the Twenty-First Century. Yet free trade deals always contain some protectionism exemptions. Most of then m are activated under the excuse of antidumping measures. During 2020, Australia experienced this dark side of their free trade agreement with Communist China, largely due to political prejudices on both sides.

Economic growth is dependent on domestic private consumption expenditure not free trade. When the US consumers stopped their heavy purchases of imported goods in both 2009 and 2020, global economic growth fell. Yet before 2008, factories inside the USA had already been shut down. Their owners reinvesting profits made in the USA in cheap labour countries. They made their wealth in the US domestic economy, but were still keen on relocating their fixed capital assets overseas.

When the GFC shut down a lot of financial businesses, many consumers lost their job. Some large Australian businesses needed to be bailed out. Unemployed workers became redundant job seekers. The scaring left by unemployment still seen, after 2008, in deserted towns and city suburbs across the USA.

From about March of 2010, a new group of long term unemployed was identified inside the USA. Called “99ers”, these unemployed people had come to the end of their ninety-nine months of unemployment insurance benefits. As their number rose above one million job seekers, these long-term unemployed people became the social “cost” of the ‘Great Recession’ in the USA. The social scaring was then very noticeable after 2012.

Then in 2020 the primacy of domestic final consumption expenditure (for job creation) was reaffirmed. After the pandemic sent twenty-two million Americans out looking for a new job, the US Congress rushed through its first trillion dollar stimulus package. But these Washington politicians still had to depend on US domestic consumers to increase their domestic consumption expenditure. By the end of October 2020, eleven million Americans had either, found a new job, or, used up all their unemployment insurance. A new round of scaring had begun. Then, in just one month, almost one million Americans applied for unemployment insurance. The Christmas season, that finished off 2020, was the second month of falling monthly retail sales.

Households in the USA first responded by driving their savings rate up to a historic high of twenty-five percent. But by October there had been a recovery of household spending. so much so that the household savings rate had fallen to sixteen percent. In a replay of the 2008 “cash for clunkers” burst of spending on consumer durables, households that could not travel overseas in 2020, spent that money on cars and other expensive durable consumer goods. This was good for retailers particular all the car dealerships across America. But by offering holiday deals early in fall, retailers spread out the traditional holiday season. This tactic misfired when it seemed to dampen sales closer to Christmas.

Across the Pacific Ocean, the economy of China kept growing both during the Great Recession and after the internal lock downs of 2020. Still this was at a time when globalization was at a very low ebb. Centrally planned economies can continue to grow when international trade is suspended by external shocks. Once again the difference in 2020 was the response of domestic consumers inside China. In 2008 it was government domestic infrastructure spending that restored economic growth in China. But in 2020 the Chinese households were the ones who spent their savings on consumer goods. This rise in private domestic consumption expenditure had the Chinese economy growing by the second half of 2020. It was the only economy to “snap back” so quickly.

Monetarist always explain growth from the supply side. They argue that supply creates demand. And so, these money centric economists argue that the investment spending in China led to its impressive economic growth figures in 2008 and 2009. Recent data from China’s statistical agencies tends to suggest a different reality for 2020. Private domestic consumption expenditure, driven by government stimulus initiatives, seems to have got China on its growth path for 2020-21.

In June of 2020, the People’s Bank of China warned debt holders in China that they had to withdraw their emergency financial support at some stage. The Chinese Central bank governor Yi Gang reiterated that economic fundamentals remained sound, financial markets were mainly stable and financing costs were low. The economy was said to be making a gradual and steady recovery from a decline in the first quarter of 2020. But he said also that new loans could easily reach a new record with social financing credit soaring.

By 2010, China realized that it had to mobilize its own consumers to protect future economic growth. The experience of Japan was there for all to see. As the Japanese economy entered a recession in the 1990s, the government tried supply side solutions to restore growth. They did not work. The Japanese household responded by saving more and investing overseas in greater numbers. This caused the Japanese economy to experience periods of disinflation and stagnation.

This savings habit was also observed among many global businesses during the Great Recession. As the cash reserves of these businesses rose, the lack of job creation became a major problem. It is a tenant of economics that if aggregate savings rises faster than final net investment spending then economic stability is in danger. By March of 2010, long term unemployment was recognised as a serious problem across all capitalist countries. Globalization had failed to deliver new job growth paths.

Billions of dollars of lost GDP is the only way economists could quantify such an economic disaster. In Europe, during the Great Recession, only the actions of the European Bank kept the Euro zone from following the USA down the path of long term unemployment. Globalization made the plight of redundant job seekers even worse. Dumping of at first heavy industrial output like finished steel rods from China, followed by other instances of dumping into global markets, made long term unemployment worse.

Redundant job seekers were thrown onto charity support. Their job skills were lost to the economy and this led to a fall in their domestic consumption spending. Similar dis-economies were occurring in the PIIGS countries of the Euro zone. For example, sovereign debt problems were so bad in Greece that public servants were being sacked to ensure fiscal consolidation.

John Maynard Keynes warned that if deflation is ever allowed to remain unchecked, then any recession would become a depression. Even today, despite widespread research by economists, there is no quick remedy for an economy in a depression. The best answer is to avoid depression at any cost. It may have seemed reckless for governments to spend trillions of dollars in the first half of 2020. But there was little choice in the matter. Once in a depression there is no quick way out.

Today some economists and politicians, still talking seriously about tax cuts even after COVID-19 had devastated government revenue, do not really know how dangerously this would damage their economy. As Keynes explained it, income tax increases would reduce household savings because people pay taxes from these savings. Instead of lying idle in a bank account, this money would be paid to long-term unemployed persons and to working families. Such people would spend this new money and stimulate economic activity. This would increase the velocity of circulation of money. The more money circulates around an economy the better it is for everyone.

Long-term unemployed persons usually become part of the working poor if they get no assistance. The scaring caused by long periods of unemployment can adversely affect labour productivity in the long run. Without increased labour productivity the chances for economic growth being sustainable diminishes over time. Working families these days need help with day care and utility bills. If they get government assistance they can increase their productivity. Low productivity usually means low economic growth. This is may also be due to the low wage growth caused by the pandemic lockdowns. Underemployment always rises in a recessionary cycle. And underemployment reduces overtime and bonuses.

If a deep recession forces highly educated people into low skilled, or even unskilled, work they will lose private wealth. Some may lose their homes. Such a waste of skilled labour can only also result in an economy sliding into a period of economic stagnation that may become protracted. This will not encourage young people to enter higher education loan schemes. In fact, many of the highly educated unemployed may find that they are seen to be overqualified for many jobs.

The notion that increasing unemployment benefits discourages people from applying for a new job is too simplistic. A lot of times the unemployed person cannot find a new job because many businesses stop hiring any new workers. Other businesses try to lower wages and conditions by forcing workers onto casual job contracts. Without job security few workers would risk trying to up-skill. Few employed persons would even risk leaving whatever employment they currently held. And all these workers would be much less likely to increase their private domestic consumption spending.

As yet there is no evidence that tax cuts actually increase private domestic consumption expenditure in capitalist economies. The claim is made that permanently increasing income via tax cuts will lead to increased private domestic consumption expenditure. But this claim is not backed by convincingly transparent empirical evidence.

Also the use of tax incentives to increase net final investment spending needs careful management. If tax incentives my only increase replacement investment. This then may mean that the multiplier effect will be small as only replacement of new for old machines is attempted by cautious businesses.

Just relying on the solutions used in the Great Recession is not going to work. Large spending on “shovel ready” infrastructure projects may not lead to enough job creation quickly enough in times of underemployment. Targeted government spending on things like welfare housing could be a lot more effective and efficient.

END NOTES:

1 David Ricardo On the Principles of Political Economy and TaxationPublished by John Murray of London England April 19, 1817

2 Michael Luo “Down and out in America”The Australian Financial ReviewAugust 5, 2010 (page 60).

3 Michael Corkery "US recovery stalling as retail sales drop for third straight month"The Australian Financial ReviewJanuary 18, 2020 (page 18)

4 Winni Zhou and Andrew Galbraith“Stimulus, but PBoC warns of hangover”The Australian Financial Review June 19, 2020

5 Larry Elliott "Revealed: How the wealth gap holds back economic growth"THE GUARDIANDecember 9, 2014www.theguardian.com/

6 Matt Wade “Basic income of $18, 500 will cut poverty: study”THE SYDNEY MORNING HERALDOctober 26, 2020 (page 5)

7 Thomas Palley “What’s wrong with Modern Monetary Theory: macro and political economic constraints on deficit-financed fiscal policy”Review of Keynesian Economics Volume:8 Issue:4October 2020 (pages 472-493)www.elgaronline.com/

8 Kenneth Rogoff "Infrastructure is no silver bullet, unless it's carefully aimed"The Australian Financial ReviewDecember 10, 2020 (page 39)