Friday, May 21, 2010

IMF and the Global Economic Outlook.

This is an article on the IMF and the global economic outlook by JulioHuato from his blog. He argues that wealth distribution may actually help the economic recovery. However the opposite seems to be happening. The IMF recipe is to promote austerity to save creditor banks. The onus will be mostly on the creditors. There is certainly no sign of the idea suggested here of repudiation of debt and spending that is in the interest of creditors. The Greek bailout is premised on cutting pensions, wages etc. It is all on the backs of the working class. For the workers to win the class struggle they would need to work towards appropriating the means of production distribution and exchange. As long as the means of production is owned by private capital and economic growth based upon profit and attempt to redistribute in favor of the working class will face barriers that are part of the capitalist system. For a time the developed countries were able to buy off their working people with a welfare state and much higher wages but with the globalization of capital this is becoming increasing impossible and the standard of living of many developed capitalist countries is probably unsustainable under the existing system. Entitlements are being cut back and even more cutbacks are coming to try and manage ballooning debt. In countries such as the U.S. labor seems to be weak and even the few powerful unions that exist are under attack and some union leaders such as Stern---now departed-- see selling out as the way to growth.
However, there does seem to be a contradiction between austerity measures and entitlement cutbacks and economic growth. Growth that is necessary to increase revenues and thus ability to pay debts. The IMF measures may often cause GDP to decrease and make the situation worse rather than better.

IMF Outlook and Public Debt
In Uncategorized on May 19, 2010 at 12:15 pm

In its latest World Economic Outlook, the IMF reports that the global economy is bouncing back. The poorer economies are leading the recovery. Conditions in the rich economies are much iffier, slowed down as they are by “lastingly damaged” financial sectors and household balance sheets; meaning that the banks are still financially weak and households — especially the households of working people — have a lot of debt (mortgage, car, consumer, student, etc.) compared to their perceived ability to repay it.
In the longer term, the rich countries need to reform their financial sectors (and the finances of working people need to improve significantly). In the short term, their recovery hinges on their maintaining easy money and aggressive public spending. Yet a recovery of this kind is “subject to downside risks as fiscal fragilities have come to the fore.” Rich countries — the IMF suggests — are between the rock of holding easy money and aggressive public spending and the hard place of showing creditors public debt is under control and, hence, repayable.

Or are they?

Paul Krugman has noted that part of the problem lies in the chicken-and-egg nature of public solvency. The public debt of rich countries looks scarier to the financial markets, because the recession threatens to permanently reduce the long-term potential of the economy (and, consequently, the public finances). Now, to avoid this permanent damage, aggressive fiscal policy is called for.

Historically, to a varying extent in different contexts, serious bouts of indebtedness (public or private) have been resolved by further economic growth, which has usually required substantial public spending. This is, for example, again to some extent, the experience of the U.S. in the postwar period.

Another illustrative case I’m most familiar with is Mexico, after six or seven years of depression as a result of the 1980s debt crisis. In spite of the enormous sacrifices imposed on Mexican working people to service the debt (made onerous by Paul Volcker’s monetary brutality after taking over the Fed in 1979), public debt in the late 1980s remained above 50% of GDP (which, at the time, was very scary). It wasn’t until serious public and private spending boosted by the prospects of the North American Free Trade Agreement in the early 1990s that the debt shrunk to 25% of GDP (later on, the Tequila Crisis of 1994-1995 reversed this trend temporarily).

But we should not stop here. A key issue for working people trying to understand the scope of possibilities for political action is being glossed over (or not fully spelled out) both by the IMF and Krugman. And that is the fact that, historically, there has been another decisive mechanism slashing the debt to “manageable” size — namely the redistribution of public (and private) debt holdings from creditors to debtors!

Again, historically, this redistribution has been carried out via outright expropriation, debt repudiation, ”renegotiation,” taxation, inflation, etc. In other words, it’s resulted from (1) direct deals between debtors and creditors benefiting the former at the expense of the latter, (2) taxing the debt holders and spending in ways that benefit the debtors (e.g. public investment, job creation, unemployment insurance, etc.), (3) pumping money into the economy, or some combination thereof.

In the case of Mexico’s 1980s debt crisis, gangster president Carlos Salinas managed to get the debt reduced by 20% after threatening the banks with default. In the case of postwar U.S., my impression is that inflation accomplished this to some extent. Again, Krugman has often alluded to this process on his blog, although without exploring its implications.

Furthermore, it has been amply demostrated by empirical study after empirical study that inequality, both international and domestic, is a persistent source of economic instability. Clearly, the still ongoing global financial and economic crisis owes much to the tremendous increase in domestic inequality (in the U.S., Europe, China, etc.) that preceded it. Hence, wealth redistribution accomplishes two positive goals: (1) it resolves the debt issue in the short run and (2) it creates conditions that stabilize the economy in the long run.

Some qualifications are required. The rich and the debt holders are not necessarily one and the same class of people. There are large institutional investors, with seizable debt portfolios, that manage the pooled pensions and retirement funds of working people. There are also highly exposed sovereign wealth funds that manage the public foreign-exchange reserves of entire nations such as China. Leaving aside the extent to which these funds are managed for the benefit of working people, a redistribution of debt securities would have to take these issues into consideration. We don’t want the remedy to backfire on working people, in the U.S. or abroad.

Is there a downside to wealth redistribution? Potentially, yes. Rich people will freak out. They always do when their supposedly sacred ownership rights are violated — although, as I’ve noted before, the existence of ownership rights is inevitably self contradictory, because ownership rights are unthinkable without governments to enforce them, and the existence of governments necessarily implies the allocation of resources outside of markets (taxation and public spending). The question, then, is not whether but to what degree.

So, the “markets” (or rather, the big players in the markets) are likely to threaten governments with a higher cost of public borrowing. But with enough popular support, governments can call the bluff and credibly threaten an escalation. It is, after all, a conflict between an overwhelming majority of people (like 99.5%) and a tiny percentage of the population (the extremely rich, i.e. like 0.5% of people): “You hike the yields (which is to say, you depreciate public-debt securities) and we will have no choice but to ratchet up your taxes or expropriate the hell out of you.”

Is this a likely course of action? I do not know. The answer — I guess — is, “It depends.” How likely is in each particular context for a government to take action under sufficiently strong popular pressure? But my point here is not to forecast the course of political events, but to show working people interested in educating themselves on these matters that the public debt issue is not a natural phenomenon, but an entirely social construct that working people acting in concert can alter or even dismantle.

To repeat myself: It is a class struggle and, for a change, working people can win it this time around!

[Note: With time, I'll try and update this post with relevant links backing up some of my factual assertions (e.g. regarding the effects of inequality on economic performance), which I believe are rather uncontroversial. Although I'm afraid that the main obstacles to grasping my argument are not facts or logic, but ideology -- including the tendency of people to unduly restrict the range of what they view as politically feasible. In times of economic and political turbulence, real possibilities expand.]