Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: August 2010

The IMF and Hungary

Understandably, our media has focused its economic reporting on the US and secondarily other advanced capitalist countries, like Germany and France.  Developments in the rest of the world have largely been ignored.  As a consequence we are missing a lot.

Studying the third world means confronting the International Monetary Fund (IMF).  The IMF has long been criticized for its heavy handed attempts to promote neoliberal restructuring.  Starting in the early 2000s, third world countries, flush with foreign exchange from rising commodity prices, began paying off their debts to the IMF.  Faced with a loss of leverage and also interest income, the IMF had little choice but to start cutting its own staff.

The global economic crisis changed everything.  Many third world countries are again desperate for funds, and the IMF is happy to supply them—although as always with conditions.

The IMF claims to have learned its lessons.  Its own internal review of past practices highlighted a number of past loan conditions that the IMF now agrees were counterproductive.  Thus, it claims that it is now willing to support capital controls, at least for a limited period.  It also claims that it now supports counter-cyclical policies—which means that it will no longer force governments to implement austerity policies during a period of deepening economic crisis.

Unfortunately, despite its claims, the IMF appears back to its old tricks.  Most importantly, at the same time that it supports counter-cyclical policies in the developed world—for example, encouraging the US and EU to fight the Great Recession with deficit spending and low interest rates—it continues to oppose them in the third world.   A Center for Economic and Policy Research study of 41 countries that had agreements with the IMF in 2009 found that “31 of these agreements involved tightening either fiscal or monetary policy, or both, during a downturn.”

For example, according to Mark Weisbrot, one of the authors of the study:

The Fund is currently squeezing Ukraine . . . to reduce its spending, and suspended its disbursement of funds to the government in order to force budget tightening. This despite the fact that Ukraine’s economy shrank by about 15 percent last year [2009], and its public debt was only 10.6 percent of GDP. A country in this situation should be able to borrow as needed to stimulate the economy, and reduce its deficit after it has accomplished a robust recovery. In nearby Latvia, the IMF and European Commission are lending with conditions that have already resulted in the worst cyclical downturn on record, and it is not clear when or how fast the economy will eventually recover.

The case of Hungry is perhaps the clearest example of the class-bias underlying IMF policies, a bias shared by European elites.  As Jayati Ghosh reported:

In November 2008, Hungary signed a Stand-By Arrangement with the IMF for SDR 10.5 billion, as part of a joint rescue package worked out with the European Union. Various IMF reviews found that Hungary complied with all the very severely procyclical conditions imposed, including a massive reduction of the fiscal deficit from more than 9 per cent of GDP in the last quarter of 2008 to around 3.8 per cent thereafter. At least partly as a result of this, real GDP declined by 6.2 per cent in 2009.

The collapse of the Hungarian economy produced incredible social pain—and not surprisingly, the social democratic party that implemented the IMF mandated policies was defeated in June elections by a center-right party that had campaigned on a promise of less austerity.  However, once in power, the new government found that the economic collapse had made the budget deficit worse and that more severe fiscal measures were required to meet IMF budget deficit targets.

The government proposed new cuts in public sector wages and pensions as well as tax cuts for the wealthy, and asked the IMF for more support.  One might think that this would be enough for the IMF.  But it wasn’t.  The IMF asked for additional privatization of state owned enterprises and further reductions in state spending.  Perhaps most surprising, the IMF also demanded that the Hungarian government cancel an action that would have actually help to cut the deficit—a proposed tax on the banking sector expected to raise nearly $1 billion.  The IMF determined that this tax was too “high” and likely to “adversely affect lending and growth.”

Faced with a popular revolt, the Hungarian government rejected IMF demands for further cuts in spending and also refused to cancel its planned tax increase on the banks.  The IMF responded by breaking off talks.

The government is now seeking to reverse course and promote expansion.  Among other things, it is trying to force the (largely independent) central bank to lower interest rates; the bank (in tune with the IMF) had kept rates high despite the economic collapse.   As a first step, the government has cut the salary of the head of the central bank by 75 percent.

What does all of this mean?  Mark Weisbrot explains as follows:

As the New York Times reported on [August 2], the fight in Hungary “reflects a larger struggle that is expected to play out over the next year or so as most European politicians . . . seek to impose fiscal discipline on their increasingly unruly citizens.”

We can only hope that they get more unruly. The governments of Spain and Greece, for example, have a lot more bargaining power and a lot more alternatives than they have been willing to use. It is ironic that a center-right government in Hungary has taken the lead here; but if the socialist governments of Spain and Greece were to stand up to the European authorities and the IMF, they could also rally popular support. And then we would see a new playing field in Europe that would allow for a more rapid recovery, and possibly end the current assault on the living standards of the majority.

It’s Time For Honesty

“We are all in it together” – at least, that is what we are encouraged to believe.  Well, a recent blog post by the economist Rick Wolff offers some amazing statistics that help put the lie to this claim.

Wolff notes that every year two major investment companies join together to publish a financial survey – World Wealth Report – of the world’s wealthiest people.  These people are divided into two groups: “High Net Worth Individuals (HNWIs) and Ultra-High Net Worth Individuals (Ultra-HNWIs).  The first group counts all individuals with at least $1 million of “investible assets” in addition to the values of their primary residence, art works, collectibles, etc.  The second group includes individuals with at least $30 million of such investible assets.”

According to the report, there were 10 million HNWIs in 2009, about 0.14 percent of the world’s population.  Approximately 3.1 million of these HNWIs live in North America, 3 million in Europe and 3 million in the Asia-Pacific region.

All together, these HNWIs own $39 trillion in “investible assets.”  Wolff offers the following comparison to put this number in perspective: “in 2009, the US GDP (total output of goods and services) was $14.6 trillion.  The combined GDPs of the world’s 9 richest countries (US, Japan, China, Germany, France, UK, Italy, Russia, and Spain) totaled less in 2009 than the investible assets of the world’s HNWIs.”  The Ultra-HNWI’s are really in a class by themselves – they own 35.5 percent of the $39 trillion owned by all 10 million HNWIs.

Significantly, in 2009, a year in which working people continued to suffer worsening living and working conditions, the number of HNWI’s rose by 17.1 percent and their combined wealth rose by 18.9 percent.  The number of HNWIs in the US grew by 16.6 percent, despite the fact that the GDP fell by 2.4 percent.

So, what should we make of this picture, in which the super rich-whose decisions were largely responsible for generating the Great Recession-are gaining wealth while advocating austerity for the rest of us?  Wolff’s own take is as follows:

Let’s now concentrate on the HNWIs in just the US (including its Ultra-HNWIs).  They numbered 2.9 million in 2009: well under 1 percent of US citizens.  Their investible assets totaled $12.09 trillion.  For 2009, the total US budgetary deficit was $1.7 trillion.  Had the US government levied an economics emergency tax of a modest 15 percent on only the HNWI’s investible assets, it could have erased its entire 2009 deficit.  Over 99 percent of US citizens would have been exempted from that tax.

The European, Japanese, and other governments could have treated the crisis likewise in their countries.  Then governments would not have had to borrow trillions. They would instead have taxed the super rich tiny minority a small portion of its immense wealth.  Those governments would not then have had to turn to lenders (often those same super rich).  There would be no current “sovereign debt crisis” in Greece, Portugal, Spain, Ireland, etc., and no need for the resulting austerities to satisfy those lenders.  Republicans would have no “deficit, deficit” drum to beat hoping for election-day gains.

Taxing the HNWIs and Ultra-HNWIs would be the policy of governments responsive to the needs of their working-class majorities instead of their rich and super-rich patrons.  Austerity is not the only policy.  Modestly taxing the wealth of HNWIs is the far better policy choice.  The two wealth management companies that cater to HNWIs have kindly provided us all with the facts and figures needed to support the better policy.

It is time for some honesty, at least among ourselves:  we are, like it or not, involved in a one-sided class war.  And, there is little reason to expect any meaningful improvement in economics conditions for the great majority as long as it stays that way.

Stagnation Ahead

“Things are going fine.  The economy is finally moving in the right direction and there is no need for any new government initiatives.” Don’t believe that?  How about: “Just wait, it will take a while, but if we can hold down government spending and let market forces regain their balance, things will really pick up.”  If you don’t believe that one as well, I don’t blame you.

As has been widely acknowledged, our recent economic growth was largely driven by debt supported consumer demand.  Beginning in the 1980s, government and corporate policies combined to drive down wages and working people turned to borrowing in order to sustain their standard of living.   The outcome has been generally weak growth–for example, the 2001-2007 expansion was one of the weakest on record in every way but profits–and an ever higher family debt load.

The chart below illustrates the steady rise in household debt as a percentage of disposable (after-tax) income.  Not surprisingly, this ratio has begun to fall as a result of the Great Recession.  As the New York Times explains: people “have deleveraged through a combination of paying down their debt (by spending less of their paychecks) and having some debts expunged.”  The resulting decline in consumption will not be easily reversed.  In fact, while no one knows how far the process will go it is pretty clear that deleveraging still has a ways to go.


Reinforcing this conclusion is the fact that unemployment remains high and businesses remain reluctant to hire.  The chart below highlights monthly changes in business payrolls (in thousands).  Ominously, non-farm payrolls continue to shrink.


Equally important, banks appear determined to sit on the money that they have received (most of which came from government subsidies and bailout programs).  As Robert Pollin notes:

In the US, the private banks, as of the most recent data, are sitting on $1 trillion in reserves….By comparison, before the crisis started in 2007, they were holding $20 billion of reserves.  So that’s a reversal of $980 billion that could be injected into the spending stream.

Well, if consumer spending is not going to drive growth, what about investment by non-financial corporations.  Unfortunately, there is little good news on that front either.  As Bob Herbert describes:

The recession officially started in December 2007. From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent…..

“They threw out far more workers and hours than they lost output,” said Professor Sum. “Here’s what happened: At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion.”…

In short, the corporations are making out like bandits. Now they’re sitting on mountains of cash and they still are not interested in hiring to any significant degree, or strengthening workers’ paychecks….

Having taken everything for themselves, the corporations are so awash in cash they don’t know what to do with it all. Citing a recent article from Bloomberg BusinessWeek, Professor Sum noted that in July cash at the nation’s nonfinancial corporations stood at $1.84 trillion, a 27 percent increase over early 2007. Moody’s has pointed out that as a percent of total company assets, cash has reached a level not seen in the past half-century.

The remaining sources of potential demand are exports and government spending.  Given the state of the world economy, there is little reason to expect much from exports.  So, that leaves government spending.  And that brings us to the claims that we should reject a new federal stimulus.  Tragically, the reality is that once the existing stimulus runs its course (which will be early 2011) we face a situation in which there are no obvious spurs to growth.  Stagnation may be the best we can hope for.

If we want to avoid this outcome, we need a new round of government spending and one significantly larger than the previous one.  There is no secret about where the money should go—state and local governments so that they can maintain employment and vital social programs; public employment programs directed at energy efficient investments and modernization of our infrastructure; a meaningful national health care program and so on.

Such spending, while necessary to keep things from getting worse, cannot solve our economic problems.  Creating an economy that can promote meaningful employment, community security and stability, well-financed and accountable social programs, environmentally responsive production, and solidaristic relations with other countries requires something much bigger, and something that elites will resist even more than a new stimulus: economic restructuring.  If we are going to truly create an economy that works for the great majority of us we have little choice but to to stop relying on market forces and the pursuit of private profit to direct our economic activity.

Developing new trade relations, new public controls over finance and investment decisions, a new foreign policy, and new labor and social policies will not be easy.  However, similar struggles are taking place in other countries and we should do what we can to learn about and from them (something made much harder by current media policy).  Most importantly, we must find ways to use our immediate fight for more public spending to initiate the wider public debate required to put real economic change onto the public agenda.

Skating Through The Great Recession

Cannonball is a clever five minute video that provides a unique perspective on the Great Recession and one popular response to it.  You can watch it at this link or below.

Billionaires Battle

Well, perhaps billionaires don’t really battle—but here is a case where the super-rich in the U.S. and Germany don’t see eye-to-eye.

Bill and Melinda Gates and Warren Buffett are leading a campaign to “persuade fellow billionaires to commit half of their wealth to good causes. In just a few short weeks, [they] have won over 38 of those listed on the Forbes 400 list of wealthiest Americans to make that pledge.

You can see who these givers are by going to the Giving Pledge website.

The Christian Science Monitor offers the following insights into the motivations of participants:

Included on the list of donors … are California hedge fund investor Thomas Steyer and his wife Kat Taylor, who were worth around $1.2 billion in 2008.

“Right now, when I look around, I think business people and financial people are pretty widely mistrusted and seen as overwhelmingly self interested,” Mr. Steyer said Wednesday. “But, I think that Warren and the Gates’ point is an emphatically different one. It is that business people are not just laboring for themselves or their families, but they have bigger responsibilities and belong to a bigger community.”

Mr. and Mrs. Gates and Mr. Buffett, first and second respectively on the Forbes 400 list, reached out to between 70 and 80 of the Forbes list’s members and around half agreed to pledge. The 40 families and individuals who have joined the Giving Pledge are worth a combined $251 billion, according to recent figures from Forbes….

Pledge signatories have each written letters explaining their commitments. The group does not pool money to support any particular organization or cause, instead list members are encouraged to “find their own unique ways to give that inspire them personally and benefit society.”

Well, it turns out that Germany’s super-rich have rejected overtures from Microsoft founder Bill Gates to participate in this campaign.  In fact, as Spiegel Online explains, German billionaires are quite critical of it.

The pledge has been criticized in Germany, with millionaires saying donations shouldn’t replace duties that would be better carried out by the state….

Peter Krämer, a Hamburg-based shipping magnate and multimillionaire, has emerged as one of the strongest critics of the “Giving Pledge.” Krämer, who donated millions of euros in 2005 to “Schools for Africa,” a program operated by UNICEF, explained his opposition to the Gates initiative in a SPIEGEL interview.

SPIEGEL: Forty super wealthy Americans have just announced that they would donate half of their assets, at the very latest after their deaths. As a person who often likes to say that rich people should be asked to contribute more to society, what were your first thoughts?

Krämer: I find the US initiative highly problematic. You can write donations off in your taxes to a large degree in the USA. So the rich make a choice: Would I rather donate or pay taxes? The donors are taking the place of the state. That’s unacceptable.

SPIEGEL: But doesn’t the money that is donated serve the common good?

Krämer: It is all just a bad transfer of power from the state to billionaires. So it’s not the state that determines what is good for the people, but rather the rich want to decide. That’s a development that I find really bad. What legitimacy do these people have to decide where massive sums of money will flow?

SPIEGEL: It is their money at the end of the day.

Krämer: In this case, 40 superwealthy people want to decide what their money will be used for. That runs counter to the democratically legitimate state. In the end the billionaires are indulging in hobbies that might be in the common good, but are very personal.

SPIEGEL: Do the donations also have to do with the fact that the idea of state and society is such different one in the United States?

Krämer: Yes, one cannot forget that the US has a desolate social system and that alone is reason enough that donations are already a part of everyday life there. But it would have been a greater deed on the part of Mr. Gates or Mr. Buffet if they had given the money to small communities in the US so that they can fulfill public duties.

SPIEGEL: Should wealthy Germans also give up some of their money?

Krämer: No, not in this form. It would make more sense, for example, to work with and donate to established organizations.

Gee, I wonder whether unity might be built around a different set of demands.  You know like for labor law reform, an end to free trade agreements, strong government regulation of finance . . .

Debunking Deficit Hysteria

Deficit hysteria is grounded in claims of a high and rising federal debt to GDP ratio.  The argument is that our “out-of-control” yearly national budget deficits will combine to produce a federal debt so high relative to GDP that it will threaten our future welfare.

According to the Congressional Budget Office, the threat is as follows:

  • Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.
  • Growing debt would also reduce lawmakers’ ability to respond to economic downturns and other challenges.
  • Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.

These are certainly possible problems—although at present it is certainly not true that our budget deficits are driving up interest rates or that our government is having difficulty attracting new funds.  But what about the future—might our federal debt level grow so large that it does become a threat to our economy?

There is in fact no agreed upon danger line, beyond which the size of the federal debt held by the public relative to GDP is considered to have crossed into crisis territory.  That said, many commentators appear to believe that the danger zone is when the federal debt held by the public reaches a level equal to the GDP (for a ratio of 100%).

The Congressional Budget Office is the agency that most economists look to for predictions of key key economic trends, such as this one.  It recently completed a detailed forecast for the next 25 years (taking us to 2035) as well as a longer run forecast that takes us to 2080.  So, what did it find?

At the end of 2008, the federal debt held by the public equaled 40% of GDP.  This was close to the previous 40 year average of 36%.  At the end of 2010, the federal debt held by the public had risen to 62% of GDP; this sharp rise was largely a consequence of the economic crisis, which lowered tax revenues and raised public expenditures.  According to the CBO, the ratio is projected to be 80% in 2035.  The ratio does not hit 100% until 2074.

In other words, government deficits are unlikely to become a serious problem (and that is assuming no major changes in policy) for some 54 years.  And yet the dangers of deficits are all we seem to read and hear about.

In fact, the CBO projections are themselves structured in ways that overstate the danger of deficit spending.  The problem comes from the underlying assumptions used by the CBO in its modeling of future trends.   Here is what Doug Henwood (the editor of the Left Business Observer) has to say about these assumptions:

[The CBO assumes] that starting about 10 years from now, the U.S. will settle into a period of profound economic stagnation. To put a number on it, they project that from around 2020 through 2084, GDP growth will average 2% a year. To underscore the point, that’s over a period of 64 years—enough for a person born at the beginning of that period to reach very close to today’s retirement age by the end. How weak is 2% growth? It’s only a little over half the 3.7% average that prevailed from 1870 through 2009. There have only been a few brief periods in U.S. history when trend growth was this low—the 1930s and around about now, in fact. And that’s about it.

For the full historical perspective, see the graphs below. The top graph shows yearly GDP growth from 1870 through 2009 and the CBO’s projections for 2010–2084. The heavy line shows the underlying trend using a statistical technique called a Hodrick–Prescott (HP) filter. It’s sort of a high-tech average. Note that the projected 2020–2084 trendline is lower than just about every period in the long sweep of history. The next graph does the same, but with per capita figures. The results are very similar: the projected average of 1.2% (using population assumptions detailed in a moment), vs. a long-term historical average of 2.1%. And the trend is lower than almost every bygone period. And the bottom graph isolates the HP trends to emphasize just how at odds with the historical record the CBO’s projections are.


If the CBO had plugged in historical averages for our future growth, then tax revenue would be much higher and expenditures much lower, and, by extension, the debt problem would largely disappear.  So, how did the CBO come up with such low growth estimates?  After asking lots of questions, here is Henwood’s best guess:

The CBO apparently assumes that the labor force will grow very slowly—around 0.3–0.4% a year. That’s less than half the current rate, and about half the rate that the Census Bureau projects the population will grow in the coming decades. If that’s true, the share of the adult population working will shrink to levels we haven’t seen since, well maybe forever, and certainly in modern times. At the same time, they’re assuming record-low growth in productivity, probably around 1.5%, which is something like a third below the long-term average, and well below the rate clocked in the much maligned 1970s.

In short, we are being manipulated into a fear of deficits and that fear is being used to press us to accept massive cuts in our public infrastructure and social programs.  We should hold our ground—”we have nothing to fear but fear itself,” and the great majority of economists.

That said—we do face a serious economic crisis right now.  Our economy is not generating enough jobs, and those that are created rarely pay enough or come with needed social benefits.  And production is all too often geared to the creation of goods (in ways that destroy our environment) that fail to satisfy our real needs.  While we should resist cuts in social spending and fight to increase federal support for state and local governments and their social programs, a national health system, and public works programs, as well as higher tax rates on the wealthy, that alone is not enough.  We need to begin building support for a bigger economic transformation, one that will give us real control over the economic decisions that shape our lives.