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Global economy: the week that austerity was officially buried

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This was the week we witnessed the funeral of austerity. Those who used to worship at its altar now urge countries to throw caution to the wind. Fiscal orthodoxy, practised over decades since the debt crises and inflation of the 1970s and 1980s, has been replaced with fiscal activism.

As the IMF and World Bank annual meetings wrap up in virtual form in Washington this weekend, many of the most senior figures at the top — and in the research departments — of these institutions have been singing a new tune on fiscal policy this week.

Carmen Reinhart, the eminent economic historian who is now chief economist at the World Bank, recommended countries should borrow heavily during the pandemic. “While the disease is raging, what else are you going to do?” she asks. “First you worry about fighting the war, then you figure out how to pay for it.”

Ms Reinhart was a leading advocate of austerity a decade ago after publishing a research paper which concluded that at a similar stage in the 2008-09 financial crisis — to where we are now — high levels of public debt undermined economic performance. It concluded that, “traditional debt management issues should be at the forefront of public policy concerns”.

Carmen Reinhart, pictured at the World Economic Forum in 2011, was a leading advocate of austerity after the 2008-09 financial crisis
Carmen Reinhart, pictured at the World Economic Forum in 2011, was a leading advocate of austerity after the 2008-09 financial crisis © Tomohiro Ohsumi/Bloomberg

The IMF itself warned after that global financial crisis that “many countries face large retrenchment needs going forward”, but now it tells all countries that have access to financial markets to issue debt and to spend without the prospect of austerity later. As she reached for inspiration from the Russian novelist Fyodor Dostoyevsky, Kristalina Georgieva, head of the IMF, said, “Only one thing matters — to be able to dare”.

Both advanced economies and many emerging ones have keenly taken the advice to heart as they have battled coronavirus. The IMF estimates that countries have increased spending or cut taxes by $11.7tn so far — 12 per cent of global gross domestic product in 2020. To put this in perspective, just over a decade ago and after months of bickering, the G20 nations finally agreed a stimulus worth 2 per cent of global GDP for two years after the financial crisis.

In terms of fiscal policy, this time really is different.

The fiscal consensus that prevailed until the past few years was built on the lessons learnt internationally after the boom decades of the 1950s and 1960s. The experience was that raising or lowering taxes and changing public expenditure was too slow in most political systems to be effective in taming the economic cycle and, instead, tended to amplify it. Monetary policy — set ideally by independent policymakers in central banks — took on that role.

The second part of this fiscal consensus accepted that the best policy would target longer-term stability in public finances, ensuring debt and deficits met broad rules of thumb that would almost always ensure that compliant countries would face no difficulties in financing themselves. This would allow them to concentrate on improving the efficiency of their tax systems and public spending.

Bar chart of Change in GDP (%) showing The world's leading economies will see historic contractions in 2020

That consensus was still dominant at the time of the 2008-09 financial crisis, culminating in the Toronto G20 summit declaration in 2010 that highlighted “the importance of sustainable public finances” and warned that “countries with serious fiscal challenges need to accelerate the pace of consolidation”. Greece, for example, had already lost the confidence of its lenders.

Fiscal over monetary policy

The question now is why has the thinking changed so radically. Answers cover three distinct categories: bitter experience of the past decade, changed circumstances and raw politics.

There is little doubt that the 2010s was a difficult decade for almost all economies around the world, with underlying growth considerably lower than hoped at the time of the Toronto summit. Most of this had more to do with a global fall in underlying productivity performance than with tax and public spending strategies, but even with the potential for growth lowered, economic performance disappointed, largely because monetary policy did not have the ammunition to stimulate economies sufficiently.

The world’s big economic blocs never achieved the conditions that would have induced rapidly rising wages and inflation, so interest rates could rise towards more normal levels, despite the drama of officials such as Mario Draghi at the European Central Bank doing “whatever it takes”. Monetary policy simply could not have provided the $11.7tn boost that fiscal policy managed this year.

An anti-austerity protester interrupts then European Central Bank president Mario Draghi at a 2015 press conference. Monetary policy then simply could not have provided the $11.7tn boost that fiscal policy managed this year
An anti-austerity protester interrupts then European Central Bank president Mario Draghi at a 2015 press conference. Monetary policy then simply could not have provided the $11.7tn boost that fiscal policy managed this year © Ralph Orlowski/Reuters

After the past decade, instead of jealously guarding their independence, leasing central bankers now talk of the need for fiscal policy to help keep inflation from falling. In recent weeks, Jay Powell, the Federal Reserve chairman, said “the recovery will go faster if we have both tools [fiscal and monetary] working together”, while Andrew Bailey, Bank of England governor, called for “a very close and sensible co-ordination” of the two economic policies.

Long gone is the notion, supported by former UK chancellor George Osborne, that it was imperative to have a credible plan to reduce deficits in the public finances because that would give households the confidence to spend rather than save.

There are also economic circumstances that did not apply until recently. The main change, most notably highlighted by Olivier Blanchard, former IMF chief economist, is that with government borrowing costs in advanced economies below or close to zero — at almost all durations — and likely to remain so, countries could afford to service considerably higher levels of debt without posing a greater long-term burden on their finances because economies were likely to grow faster than the interest on debt. “The issuance of debt without a later increase in taxes may well be feasible,” Prof Blanchard said in January 2019.

The example he gave was for a one-off increase in debt, which at the time was seen as an otherworldly scenario because few countries ever borrow a huge chunk of money for a strictly limited period in peacetime. But in 2020, the pandemic has arguably provided just this situation and the one-off nature of deficits has been used by the IMF as the justification for supporting the large-scale borrowing that countries are undertaking.

Jay Powell, the Federal Reserve chairman, said recently that ‘the recovery will go faster if we have both tools [fiscal and monetary] working together’
Jay Powell, the Federal Reserve chairman, said recently that ‘the recovery will go faster if we have both tools [fiscal and monetary] working together’ © Kevin Dietsch/Pppl/AFP via Getty

Finally, there is no longer any desire for austerity after the difficult 2010s, so the political and public mood fits with the new economics. Arguably, austerity sowed the seeds of its own destruction by raising support for populist politicians like Donald Trump and Boris Johnson who had no truck with difficult budgetary issues and rarely saw any problem with public spending largesse. 

After the financial crisis, President Barack Obama and Democratic politicians joined forces with Republican fiscal hawks in the difficult process of reducing the US deficit only to watch Donald Trump gain popularity with enormous tax cuts in 2017. There is no mood around Joe Biden, the Democratic presidential nominee, to play that game again if he wins on November 3.

Prominent economists and former Democratic party officials, Jason Furman and Larry Summers, have provided the intellectual underpinning of the shift in the party’s stance. They argued last year that there were still costs and benefits of lowering government borrowing, but “the benefits of a reduced probability of a fiscal crisis do not outweigh the costs of deficit reduction”.

In the UK, Boris Johnson’s Conservative government has ruled out austerity as the way to resolve the nation’s public finance difficulties and, even in Germany, the bastion of fiscal probity, politicians such as economy minister Peter Altmaier now boast about introducing “the biggest stimulus programme of all time” in response to coronavirus.

Kristalina Georgieva is head of the IMF, which is now telling all countries that have access to financial markets to issue debt and to spend without the prospect of austerity later
Kristalina Georgieva is head of the IMF, which is now telling all countries that have access to financial markets to issue debt and to spend without the prospect of austerity later © Eric Baradat/AFP

Too early to bury austerity

It would be wrong, however, to say that everyone has signed up to the new consensus that deficits and public debt do not matter any more. Even within the IMF, there are tensions. While its managing director urges countries to dare to do new things, officials still insist on austerity for countries that are forced to borrow from the fund.

Oxfam, the anti-poverty charity, complains that the IMF has pushed austerity measures on 80 per cent of countries forced into its lending programmes during the coronavirus pandemic. “This austerity drive will hurt the countries it claims to help and flies in the face of the fund’s own research findings, showing it worsens poverty and inequality,” says Ana Arendar, Oxfam’s head of inequality policy.

But it is not just lenders who worry that countries might in time need a more conservative approach to fiscal policy.

“Much will depend on whether the fiscal legacy of the virus is simply a step increase in the debt-to-GDP ratio — because of a huge but temporary burst of additional borrowing,” says Robert Chote, who has just stepped down as the head of the UK’s Office for Budget Responsibility. “Or whether we find ourselves confronting a big increase in the structural budget deficit as well.

Former UK chancellor George Osborne maintained it was imperative to have a credible plan to reduce deficits in the public finances because that would give households the confidence to spend rather than save
Former UK chancellor George Osborne maintained it was imperative to have a credible plan to reduce deficits in the public finances because that would give households the confidence to spend rather than save © Charlie Bibby/FT

“A rise in the structural deficit would strengthen the case for consolidation [austerity] measures, but you still wouldn’t want to go at it too quickly,” he adds.

In the UK, the Institute for Fiscal Studies warns that the crisis is likely to require higher health and social care spending in future, far in excess of any benefit from lower borrowing costs. It said this week the UK would ultimately need to find tax rises of probably around 2 per cent of GDP to limit a likely persistent rise in public debt.

With ageing populations across advanced economies, this is likely to become an ever more pressing issue in the decade ahead. Austerity might have been buried for now, but if governments’ luck does not hold on borrowing costs and when ageing hits, there is no guarantee it will not be resurrected.



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Analysis

Taiwan seizes chance to host foreign reporters kicked out of China

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Taiwan is courting journalists fleeing China, spotting an opportunity to boost its visibility and build international support as concerns mount that Beijing is flirting with the idea of invading the country.

Last year, more than 20 journalists made the journey across the Taiwan Strait from China. Many had published articles critical of human rights abuses against the Uyghur Muslim minority in Xinjiang and the government’s early handling of the coronavirus outbreak in Wuhan.

They came at the invitation of the Taiwanese government, a move that has infuriated China, which claims the island as part of its territory.

Jojje Olsson, a freelance journalist living in Taipei since being denied re-entry to Beijing in 2016, said that Beijing’s reaction to critical reporting carried risks for the regime.

“China is shooting itself in the foot by expelling lots of journalists,” he said. When reporters come to Taiwan, he argued, “they are exposed to views that don’t reflect well on China”.

Steven Butler, the Asian head at the New York-based Committee to Protect Journalists, said that “Beijing is surely very unhappy about journalists moving to Taiwan”.

China, he added, was sensitive to the foreign media being in Taiwan, citing a case two years ago involving a prominent newspaper that was warned against setting up a regional headquarters in Taipei. 

Beijing said the newspaper’s offices in the Chinese capital would be forced to close if it went ahead with its expansion plans.

Michael Smith of the Australian Financial Review, who was forced to leave China in September after being questioned by state security officials, said Taiwan’s consulate officials in Sydney “made it very clear that we [journalists] were welcome”.

He declined the invitation but many others accepted.

Last year, journalists from The New York Times, The Wall Street Journal and The Washington Post arrived in Taiwan after being expelled from China, which Beijing said was a response to Washington’s blacklisting of its state media reporters.

They were joined three weeks ago by RTÉ’s Yvonne Murray and her husband John Sudworth of the BBC following threats of legal actions over his reporting on Xinjiang. 

Taiwan’s Ministry of Foreign Affairs and China’s Ministry of Foreign Affairs did not respond to requests for comment from the Financial Times.

Hong Kong had been the city of choice for journalists covering the Chinese state from afar. Western journalists booted out of China after Mao Zedong came to power in 1949 decamped to the British colony, leaving behind reporters from the Soviet bloc.

Veteran BBC correspondent John Sudworth left China late last month after facing an ‘intensifying propaganda campaign’ targeting the broadcaster and him personally © BBC

Seventy years later, Olsson said Taiwan was assuming Hong Kong’s former role. The introduction of China’s sweeping national security law on Hong Kong last year meant that the territory no longer afforded protection from Beijing. 

“There is no other place in the world that follows developments in China as closely as Taiwan,” argued Olsson, adding that finding out what the Chinese Communist party was up to was a matter of existential concern for the Taiwanese.

Taipei’s early detection of the pandemic is a case in point. Taiwanese officials were alerted to the novel coronavirus circulating in Wuhan through close monitoring of Chinese social media and introduced containment measures before any other foreign government. 

Taiwan boasts expertise in China across its government and private sector, and shares a language and timezone. But reporting from across the Taiwan Strait has its limitations. Journalists have experienced difficulties securing interviews and personal stories that present a more nuanced picture of China.

Their jobs have been additionally complicated by the absence of news assistants — China-based journalists and researchers employed by international media — who face more severe legal consequences and lack the privileges of a foreign passport.

Reporters have also been forced to operate without the support of a bureau, as media executives are wary of provoking China by opening offices in Taiwan. Deutsche Welle, the German broadcaster, was the last foreign media outlet to do so in 2018. Tokyo and Seoul are viewed as alternative east Asian headquarters, industry insiders said. 

The size of Taiwan’s economy is another factor that has given foreign outlets pause. Despite being home to some of the world’s most important technology companies, only a handful of news organisations provide consistent coverage of the Taiwanese market, which is often overlooked by foreign investors.

But China’s escalating military posturing towards Taiwan has kept the island in global headlines, as the two sides battle to dominate the international narrative around its contested status.

Beijing has used its economic and political might to entice Taipei’s few remaining diplomatic allies to switch recognition, undermining Taiwan’s sovereignty with promises of investment deals.

But by welcoming foreign journalists, the Taiwanese government has also exposed itself to critical coverage of the marginalisation of its aboriginal communities and migrant workers as well as a sluggish vaccination rollout. Journalists, after all, as one Taiwanese politician joked to the FT, “are hard to control”.



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Defund the police: how a protest slogan triggered a policy debate

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Eleven months ago “Defund the police” was a slogan that appeared on placards at protests; now it is being debated by American city councils.

Polls show only a small portion of Americans support the idea of defunding the police, a flexible phrase that can mean redirecting funds to social services or outright elimination of the department. Yet as lawyers prepare to deliver closing arguments on Monday in the trial of the officer accused of murdering George Floyd in Minneapolis, and in the wake of yet more deaths at the hands of police, what was previously a fringe concept has become part of mainstream US political discussion.

Minneapolis has three proposals to diminish the police department’s power that supporters are attempting to place on the ballot in November. Two would replace the police department with a department of public safety, with the police as one division of it. The third would place the police department under the control of a 13-member civilian commission, with the power to hire the police chief and discipline officers for misconduct.

Austin, Texas cut its police budget in August by 35 per cent, with 5 per cent taking immediate effect. Seattle cut the police budget by 20 per cent in December. City councils have cut police budgets in nearly two dozen other cities, although mostly because the pandemic has battered municipal finances.

“People will look back at this year and say this was a real turning point,” said Alexander Weiss, a consultant who has advised police departments in Chicago and New Orleans, in reference to police accountability.

People march near the Colorado State Capitol to protest the deaths of Daunte Wright and Adam Toledo © Michael Ciaglo/Getty Images

Floyd’s death last May set off protests around the world at the disproportionate number of people of colour killed by police. A key demand for many activists was to abolish police departments entirely, or cut their funding and redirect it to social services. In Minneapolis, nine city council members stood on a stage and pledged to defund the police. When Washington, DC Mayor Muriel Bowser ordered that the words “Black Lives Matter” be painted on a city street blocks from the White House, demonstrators used the same yellow paint to add: “Defund the Police”.

With more people killed by police in the past three weeks, the demands to defund have escalated. Chicago community organiser Rey Wences told non-profit news outlet Democracy Now! that following the killing of 13-year-old Adam Toledo last month by a Chicago police officer: “What we’re asking for is the same thing we’ve been asking for years . . . Defund the police and invest in our communities.”

In 2017, state and local governments around the US spent $115bn on police — some 4 per cent of state and local direct general expenditures — according to the Urban Institute. That share has stayed constant for the past four decades, even as the rising cost of healthcare means other big-ticket items, such as elementary education, now constitute a smaller portion of municipal budgets.

Most of the money is used to pay salaries and benefits to police officers, so cutting more than 15 per cent of a department’s budget often means cutting the size of the force, Weiss said.

Police officer pay has increased as police unions have grown in power and unions are some of the defunding movement’s most dedicated opponents. After Austin City Council in August voted to cut the police budget by $150m, the Texas Municipal Police Association put up a billboard outside the city, saying, “Warning!!! Austin Police Defunded Enter at Your Own Risk”.

Critics have warned that crime will rise if police budgets are cut. The number of homicides did rise in most US cities last year. Although the reasons are unclear, that increase seems to be unrelated to police budget cuts, which in most cases had not yet taken effect.

Some Democrats have been critical too. President Joe Biden said in a meeting with civil rights leaders that talk of defunding the police was how Republicans “beat the living hell out of us across the country” in the November elections.

An Ipsos/USA Today poll released last month found that 18 per cent of Americans support defunding the police, and only 11 per cent support abolition. About 57 per cent support fully funding their own local police department, while 43 per cent support redirecting some of that money to social services.

Richard Auxier, a tax and budget expert at the Urban-Brookings Tax Policy Center, said that since police budgets were set by local governments: “there are literally thousands of them across the country, . . . and they all have their own politics”.

The politics have been particularly intense in Minneapolis. Three of the councillors who took the pledge in June backed away from it. The Minneapolis Charter Commission, a previously obscure body, killed an attempt last year by council members to place a proposal on the ballot that would replace the police department with a new public safety agency. The Minneapolis City Council launched a second attempt in January.

Activist Antonio Williams is a canvas director for the Yes 4 Minneapolis coalition, which is trying to land an initiative on the ballot that is similar to the city council’s. (A third group, Twin Cities Coalition for Justice 4 Jamar, also is pursuing a ballot initiative.) So far more than 20,000 residents have signed the Yes 4 Minneapolis petition.

A demonstrator holds Daunte Wright’s portrait during the seventh night of protests over his shooting by a police officer in Brooklyn Center, Minnesota on Saturday © Chandan Khanna/AFP/Getty Images

Williams said some of the residents he had spoken to thought the petition’s language went too far, while others thought it did too little. He sees all those conversations as a first step in the process of persuading someone to sign, then to show up at the polls in November to support the initiative.

For him and other activists, the killings of Daunte Wright by a Brooklyn Center police officer, or of Toledo in Chicago, add no urgency to their cause, because it has always been urgent. But perhaps for some, the fact that Wright’s death occurred while former police officer Derek Chauvin is being tried for Floyd’s death, when the world is watching Minneapolis, underlines “a dire need for some change”.

“It’s going to continue to happen all over the country until policing as we know it and see it is done away with,” said Williams.

Certainly Floyd’s death “galvanised” the city’s residents on the issue of police misconduct, Williams said. He doubts the signature drive could have succeeded 11 months ago. “The conversation could have been had for sure, but the next step, the commitment, the action part of it?” he said. “I don’t see it happening.”





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UK business groups call for mandatory reporting of ethnicity pay gap

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A duty for large companies to publish the pay gap between staff of different ethnicities would be a straightforward step to tackle racial inequality in the workplace, according to UK business groups and economists who accuse the government-commissioned race report of downplaying the extent of problems in the labour market.

A storm of criticism greeted the report by the Commission on Race and Ethnic Disparities (Cred), after it concluded last month that the UK was not “rigged” against minorities and that “very few” disparities were linked to racism. But the main complaint from business groups was its failure to recommend a statutory reporting obligation of the kind in place since 2017 for gender pay disclosure.

The report said there had been a “broadly positive story” on ethnic minorities’ place in the labour market over the past 25 years, with “a gradual convergence on the white average in employment, pay and entry into the middle class”.

But Jonathan Portes, professor at King’s College London, said Cred had relied on “crude sleight of hand” in presenting statistics to back up its narrative.

Ethnic pay gaps have not improved over time in the UK, gap in mean wages (%), 9-year rolling average*

A headline gap of 2.3 per cent between the hourly median pay of all minorities and white British employees hides a much bigger gap for certain groups — with those of Bangladeshi and Pakistani ethnicity at particular disadvantage, and black men suffering a far bigger shortfall than black women.

Alan Manning, a professor at the London School of Economics, said that after adjusting the data for personal characteristics such as age, qualifications and family status, there was “no evidence for pay gaps being smaller . . . than they were 25 years ago”, and that while the ethnic penalties for some groups had improved over time, “the overriding impression is of stasis”.

These persistent pay disparities partly reflect occupational segregation, with many ethnic minorities clustered in low-paid jobs with little chance of progression. Andrea Barry, an analyst at the Joseph Rowntree Foundation, notes Bangladeshi men are three times as likely as white British men to work as chefs and waiters, while Pakistani men are more than 10 times as likely to work as taxi drivers.

But they also reflect the barriers to career progression in professional life. Ethnicity pay gaps are largest in managerial, professional and skilled occupations — and when employers examine pay differentials within their organisations, they generally find ethnic minority employees are concentrated in frontline roles, and under-represented at senior level.

The new rise in youth unemployment has been much worse for those from black and Asian backgrounds,  unemployment rate for those aged 16-24 in the UK (%)

A growing number of employers — from law and accountancy firms to local authorities and large companies such as Sainsbury and Network Rail — now report ethnicity pay gaps on a voluntary basis.

Cred endorsed this voluntary approach, arguing that there were statistical “pitfalls” in trying to impose the framework used for gender pay to report outcomes for many ethnic groups.

However, business groups have repeatedly urged the government to introduce a mandatory reporting requirement, modelled on gender pay disclosure, arguing that practical difficulties can be overcome.

Matthew Fell, CBI chief UK policy director, said pay gap disclosure was “one of the most transformative steps a company can take to address race inequality at work”.

Peter Cheese, chief executive of the Chartered Institute of Personnel and Development, criticised Cred for a “missed opportunity” to press for mandatory disclosure, adding: “Racial equality at work is not just about participation in employment but also about progression into more senior roles. Pay reporting can highlight organisations and sectors where this is not happening.”

Sandra Kerr, of Business in the Community, campaigns for mandatory reporting © S Meddle/ITV/Shutterstock

Sandra Kerr, race director at the charity Business in the Community, which has campaigned for mandatory reporting, said that while disclosure was not a “silver bullet”, it prompted companies to examine where people were sitting in their organisation, and was a way of “ensuring that the conversation is had at the top table”.

BITC has found that barely one in 10 large companies reports on its ethnicity pay gap voluntarily, and points to a sharp drop-off in gender pay reporting last year, when the pandemic led to a suspension of the usual requirement to disclose the pay gap between male and female staff.

The government consulted in 2018 on options to introduce a mandatory requirement, and has tested possible approaches to reporting with various businesses, but it has not yet taken further action. The Department for Business, Energy and Industrial Strategy said that it would respond to the consultation “in due course”.

Ethnicity pay reporting is more complicated than for gender. One issue is disclosure: many companies hold only patchy data because employees do not have to disclose their ethnicity and some are reluctant to do so — or unable to find a box to tick that matches their heritage.

A bigger issue is sample sizes. Ideally, employers would give a detailed breakdown of outcomes for different ethnic groups, but it is not always possible to do this while preserving anonymity. Cred argued that many employers recruiting from predominantly white areas do not have enough ethnic minority staff for a median pay comparison to be meaningful.

But business groups say these issues are manageable, if companies also put the headline figures in context and explain how they plan to close pay gaps.

Network Rail has published figures showing the pay gap for black employees is much bigger than for Asian colleagues © Alamy Stock Photo

Network Rail, for example, has published figures showing the pay gap for black employees is much bigger than for Asian colleagues, based on disclosure by 90 per cent of staff. With more than 100 nationalities among its staff, it collects more granular data to inform internal policy but does not publish figures where the sample size is too small to be reliable.

Sainsbury, meanwhile, has published figures showing that median pay for black employees is higher than for white colleagues — explaining that more black staff work in London stores with a higher pay weighting. Mean pay for black employees, who are under-represented at senior level, still lags.

Without an accompanying narrative of this kind, a pay report is “not worth the paper it’s printed on”, Kerr said.

The complexity of reporting ethnicity pay data is no reason not to report it, as Andy Haldane, the Bank of England’s chief economist, has argued.

“Published pay gaps are a starting point for corporate and national accountability and explanation, not an end point,” he said in 2019. “No single metric can perfectly summarise all dimensions of diversity. But publication of a single metric can, and has, served as the catalyst for an explanation and action.”



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