Normative Narratives


2 Comments

Greece, Birthplace of Democracy, Needs A Democratic Lifeline

No More Blood From A Greek Stone:

It appears Greece’s government has come up with a list of reforms it and its creditors can agree upon in return for 4 months of bridge financing to restructure the conditions of a longer-term growth strategy.

By trading structural reforms for fiscal space, each major player (Greece and Germany) is making major concessions in the name of pragmatism. Germany is relaxing its dogmatic belief  in fiscal targets to provide the Greek government with the fiscal space needed to restructure its economy without exacerbating its “humanitarian crisis”. Greece, in return, must officially bring to an end the era of lax tax collection and over-rigidity in the labor market.

Both sides are making major concessions, neither side is 100% happy, and its appears as if middle ground has been found–all signs of a meaningful compromise. One can only hope that when Greece’s list of reforms comes in on Monday, both sides of this debate remain on the same page:

Greece’s list of reforms to be submitted to the euro zone on Monday comprises pledges on structural issues such as tax evasion and corruption over the next four months without specific targets, a government official said on Saturday.

The accord requires Greece to submit by Monday a letter to the Eurogroup listing all the policy measures it plans to take during the remainder of the bailout period.

If the European Commission, the European Central Bank and the International Monetary Fund are satisfied, the Eurogroup is likely to endorse the list in a teleconference without the need for a formal meeting. Then euro zone member states will need to ratify the extension, where necessary through their parliaments.

There will not be specific figures or targets to be achieved tied to the goals, the official said, adding that the two sides had not yet discussed how Greece would be evaluated on the reforms.

EU officials and euro zone ministers said they had no reason to think Greece would not come up with a satisfactory list of measures on Monday night. However, some hawkish countries have insisted that if there are doubts, the Eurogroup would have to reconvene in Brussels.

Structural reforms are inherently difficult to implement. In order to make the difficult task of taking on strong interest groups politically possible, an overwhelming popular mandate is needed. The need for strong public backing becomes even more important during times of high unemployment, when those lucky enough to remain employed are (quite rationally) more afraid of losing their jobs.

According to a recent opinion poll, 68% of Greeks want a “fair compromise” with the EU; even after years of economic suffering, the vast majority of Greeks remain steadfast in their believe in the E.U.. Such support must be seized upon, it will not last forever.

What Greece needs now is a pro-growth, structural reform based bailout plan, not a continuation of its failed blood-from-a-stone internal-devaluation based “recovery”. Reducing it’s primary surplus while collecting greater tax receipts would open up the fiscal space Greece needs to both deal with its humanitarian crisis and create a safety-net for those adversely affected by labor market reforms as the economy readjusts. 

The past 6 years have had a deep psycho-economic effect on the Greek people. With overall unemployment at 26% and youth unemployment at 50%, to go along with a 24% contraction in GDP, the Greek economy has been ravaged. Lack of control over monetary policy (as all members of the Eurozone face) has limited Greece’s policy space, it must be allowed to regain some control over fiscal policy.

Greeks have suffered enough and have learned their lessons–these next four months are an opportunity to prove it. In addition to any external monitoring imposed as part of this deal, the Greek people must prove they can be their own corruption watchdog and can pay their taxes.

Fighting wealthy tax evaders may be a popular political platform and merited on social justice grounds, but in order to pay-down Greek debt without compromising human development, a widespread cultural acceptance towards paying taxes is required. There is no doubt Greece has been too lax in collecting taxes in the past, but this does not need to be an irrevocable problem. Through legislative reform and social accountability, Greece can overcome it’s culture of tax evasion.

Locking in long-term labor market reforms, without driving more people into poverty and exacerbating the “lost generation” of young Greeks, should be the mutual goal between Greece and it’s creditors. In fact, this could be a potential blueprint for other economically depressed European countries to renegotiate their social contracts with the EU. Democratic governance derives its legitimacy from the will of the governed; if peoples basic needs are not met, democratic governance cannot be sustained.

Greece is not in the clear yet. But by finding this acceptable middle ground, the foundations of a sustainable solution for keeping the Eurozone intact may have been laid.

Reversing the Democratic Recession:

Neither side of this debate should have to pretend that keeping the Eurozone unified is an unimportant political, economic, foreign relations and security consideration. Greece staying in the E.U. is important for Greece, Germany, the E.U. and any country with aspirations of democratic governance:

[Stamford University democracy expert] Diamond adds, “perhaps the most worrisome dimension of the democratic recession has been the decline of democratic efficacy, energy, and self-confidence” in America and the West at large. After years of hyperpolarization, deadlock and corruption through campaign financing, the world’s leading democracy is increasingly dysfunctional, with government shutdowns and the inability to pass something as basic as a budget. “The world takes note of all this,” says Diamond. “Authoritarian state media gleefully publicize these travails of American democracy in order to discredit democracy in general and immunize authoritarian rule against U.S. pressure.”

If anything, the U.S. has been the poster-child for prosperity through democracy compared to the E.U.. Regardless, twin “democratic recessions” of varying degrees on both sides of the Atlantic have compromised the appeal of democratic governance abroad. Spreading Islamophobia, antisemitism, and xenophobia throughout Europe–side effects of Europe’s failed economic policies–compromise the appeal of Western values and galvanize authoritarian and extremist messages. 

ISIS finds itself at Italy’s back-door geographically in Libya. But ideologically, ISIS could not be further away from European ideals. Ultimately, reversing the democratic recession and countering authoritarian and extremist ideals requires. among other things, proving democracy remains a viable path to widespread freedom and prosperity.

“Western” countries cannot push Greece towards China / Russia for a bailout. We, like Greece, finds ourselves at an inflection point–we must  prove that democracy in a first world country can satisfy peoples basic needs. Failure to do so could lead to a long-term setback in promoting modernization, human rights, and democratic governance in the worlds least developed countries.

Advertisements


Leave a comment

Economic Outlook: Shortsighted Austerity

https://i2.wp.com/img375.imageshack.us/img375/6475/cartoondeficits.gif

In the aftermath of the global economic crisis, more than 70 per cent of the world population is without proper social protections, the United Nations labour agency today reported, urging governments to scale up investment in child and family benefits, pensions and other public expenditures.

“The global community agreed in 1948 that social security and health care for children, working age people who face unemployment or injury and older persons are a universal human right,” said Sandra Polaski, Deputy Director-General of the International Labour Organization (ILO).

“And yet in 2014 the promise of universal social protection remains unfilled for the large majority of the world’s population.”

As many as 122 governments are contracting public expenditures in 2014, of which 82 are developing countries, according to the findings of the World Social Protection Report 2014/15: Building economic recovery, inclusive development and social justice.

“The case for social protection is even more compelling in these times of economic uncertainty, low growth and increased inequality,” Ms. Polaski added, noting that it is also an issue that the international community should embrace prominently in the development agenda following the Millennium Development Goals deadline in 2015.

At the beginning of the 2008-2009 economic crisis, at least 48 high- and middle-income countries put in place stimulus packages totalling $2.4 trillion that devoted roughly a quarter to social protection measures.

But from 2010 onwards, many governments reversed course and embarked prematurely on fiscal consolidation, despite the urgent need to continue supporting vulnerable populations and stabilizing consumption.

In the European Union, cuts in social protection have already contributed to increases in poverty which now affect 123 million people or 24 per cent of the population, many of whom are children, women, older persons and persons with disabilities, the ILO reported.

The report also shows that about 39 per cent of the world population lacks any affiliation to a health system or scheme. The number reaches more than 90 per cent in low-income countries.

The report also highlights the cases of Thailand and South Africa, which have achieved universal health coverage in just a few years, showing that it can be done.

“It is now a matter of political will to make it a reality. Modern society can afford to provide social protection,” Ms. Polaski stated.

Macroeconomic Implications:

The Macroeconomic implications of premature austerity are fairly straightforward. Keynesian national income accounting tells us that insufficient private demand can be compensated for with increased public spending (Y = C + I + G + M-X). For the world as a whole, net exports (X-M) are, by definition, 0. Therefore, when global private demand (consumption, “C”) goes down, it can be compensated for by only be increasing stimulus spending (or cutting taxes, but the economic multiplier of tax cuts is lower than for stimulus spending, especially in a liquidity trap when even near zero interest rates are insufficient to stimulate private demand to full employment levels).

If C and G are both insufficiently low, we get dangerously close to deflation–something almost every modernized economy is aggressively trying to avoid at the moment. High levels of debt and deflation causes a vicious economic cycle, where government spending cuts results in a higher level of “real” debt (even though the gross number associated with debt is reduced, the real value of that debt–what it can buy–goes up). This is one of the things that made the Great Depression so painful for so many people; as the programs that would have helped them were cut, the countries fiscal position worsened, leading to further cuts.

Microeconomic Implications:

It is the effect on people, on human development, that we truly care about here at Normative Narratives. In the context of high unemployment, one could see how cutting welfare programs, government jobs, etc. could be particularly painful on already vulnerable groups. I would need to conduct more in depth analysis of specific cuts in specific countries to speak on exactly how these cuts have negatively impacted people. The report highlights high unemployment and lack of access to healthcare as specific impacts of premature austerity movements.

One human rights violation opens the way for others, often resulting in [extreme] poverty. For example, without access to safe drinking water or sanitation services, people become sick. Lack of access to healthcare can cause a person to lose their job. Lack of access to a quality job means a person is reliant on personal savings (which poor people tend not to have) and welfare programs (which, remember, are being cut). A shock or crisis that may result in a minor inconvenience for someone whose human rights are fulfilled can be catastrophic for those less fortunate. In Europe, the combination of high unemployment and austerity is resulting in a “lost generation” of potential, and that’s Europe! In places with extreme poverty, weak financial institutions, and unresponsive governance, the human costs of premature austerity are naturally greater.

While I think a basic income guarantee is probably fiscally unsustainable (and in a country like the U.S., politically impossible), I do strongly believe in government job guarantee programs. Anyone who is willing to work hard to make their community / city / state / country a better place should be able to make an honest living doing so (just as anybody who is willing to defend U.S. national security can get a job in the military). Of course this would require greater levels of taxation and public spending, not less.

The combination of corporate income tax minimization (from “inversion“, off-shore tax dodging, and government subsidies / tax breaks / and other loopholes in tax codes) and companies forgoing workers for capital is unsustainable–companies are reaping record after tax profits while people suffer without having their basic rights fulfilled. As a result, tax reform and guaranteed public employment must figure more prominently in future political economy debates and policies.


3 Comments

Economic Outlook: The G20, Austerity v. Stimulus, Growth and the Right to Development

Original article:

“The Group of 20 nations pledged on Saturday to put growth before austerity, seeking to revive a global economy that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.”

“Finance ministers and central bankers signed off on a communiqué that acknowledged the benefits of expansive policies in the United States and Japan but highlighted the recession in the euro zone and a slowdown in emerging markets.”

“Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders summit hosted by President Vladimir Putin in September.

 “Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington’s call to focus on growth.

With youth unemployment rates approaching 60 percent in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted – reflected in the fact that G20 finance and labor ministers held a joint session on Friday.”

“The G20 accounts for 90 percent of the world economy and two-thirds of its population – many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.

One thing we would like to emphasize is the importance of coordination,’ said Indonesian Finance Minister Chatib Basri, cautioning that scaling back policies of quantitative easing elsewhere “immediately affects” emerging markets.”

“The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world.

‘Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile,’ Managing Director Christine Lagarde told reporters. ‘So more work is needed to improve this situation.'”

Yesterday I discussed the coordinating role groups such as the G20 play in today’s globalized economy. That post focused specifically on coordinating efforts to curb corporate tax-evasion. Today’s article emphasizes that fiscal and monetary policies must also be coordinated in order to achieve sustainable human development on a global scale.

Fiscal stimulus efforts must be coordinated; if they are not, the benefits of an individual countries stimulus programs will not be fully realized. Consider a hypothetical jobs program in the U.S. If this program is enacted unilaterally, then depressed demand in export markets (ex E.U.) will cause increased production capacity in the U.S. to lead not to greater trade but surplus goods and lower prices–employment gains will not be sustained by the private sector and will likely be reversed once stimulus money runs out. However, if fiscal stimulus programs were coordinated, and both the U.S. and the E.U. increased productive capacity and income, then a basis for trade and self-sustaining growth could emerge, making fiscal stimulus a short-term “shot in the arm” (as it is intended to be) instead of a permanent program (which is not sustainable for governments and often leads to uncompetitive industries).

Monetary policy must also be coordinated. Quantitative Easing by the U.S. Federal Reserve and the Bank of Japan have injected cheap money into the global economy. Seeking higher returns, this cheap money is often channeled towards emerging markets (such as the “BRICS”). One fear is that once QE policies wind down, emerging markets will experience “capital flight” as higher returns become available in more stable markets. In order to temper this inevitable effect of monetary tightening, both monetary policy coordination and “forward guidance” are needed from major central banks. Bernanke recently reasserted that the Fed will continue bond-buying until U.S. unemployment drops to 6.5% or inflation rises to 2.5%. However, this forward guidance is slightly muddled by ideological differences within the Fed, and amplified by Bernanke’s presumed exit as chairman of the Fed early in 2014. Coordinated monetary policy can provide the clarity needed to assuage markets. In a surprise move a few weeks ago, ECB head Mario Draghi “promised rates will remain ‘at present or lower levels for an extended period of time.’” Indications that the ECB and BoJ are committed to providing liquidity to global markets will make the Feds (eventual and inevitable) retreat from QE less damaging to global markets.   

This G20 meeting has ushered in much welcome news, “in contrast to an ill-tempered G20 meeting in February colored by talk of currency wars.”

About a month ago, I discussed the impacts of austerity programs on states human rights obligations. This post focused a study Spanish austerity and healthcare. The G20 is more concerned with global issues (although Spain and Greece are still a poster children for youth unemployment and the social deterioration that austerity can cause during a recession, and are therefore common examples for pro-stimulus / anti-austerity proponents).

People often consider human rights as positive or negative rights; either the government has to directly provide a good / service or prevent another party from violating human rights. Another aspect of human rights is creating an enabling environment for sustainable human development. “The right to development, which embodies the human rights principles of equality, non-discrimination, participation, transparency and accountability as well as international cooperation, can guide our responses to a series of contemporary issues and challenges. The right to development is not about charity, but enablement and empowerment. High Commissioner for Human Rights Navi Pillay has called on governments and all concerned…to move beyond political debate and focus on practical steps to implement the Declaration. ‘States have the duty to cooperate with each other in ensuring development and eliminating obstacles to development,’ according to the Declaration (full text here).”

One essential element of the right to development is the international recognized “right to work”. Article 23 of the Universal Declaration of Human Rights states, “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.” This right is a particularly important aspect of the right to development, as work income provides a means of self-determination and the ability reduce dependence on welfare programs as people attempt to realize their personal goals and aspirations.

Sometimes people do not work because they are lazy, or suffer from physical or mental conditions which impede their ability to find or maintain work. However, when unemployment rates are above 20%, and youth unemployment is above 50%, this can hardly be attributed to laziness (unless you think the world’s lazy people are all collaborating and putting themselves through years of misery in order to remain lazy, but that argument is absurd hard to sell). Such high unemployment levels are due in large part to government inaction / inability to pass stimulus programs, and the negative effects of austerity programs in the face of inadequate private sector demand / personal consumption (this is not stipulation or a normative stance, but rather what textbook economics tells us).

Such high levels of unemployment represent a failure of states to uphold the universal human “right to work”, which undermines the internationally recognized “right to development”.  For years now, economic policy has been dominated by politics and vested interests. It is heartening to see national labor and finance ministers finally coming together to “eliminate obstacles to development”. More concrete programs will probably hopefully be hammered out when heads of state come together in Moscow in September for the G20 leaders summit.

I hope this is not “too little too late”, and that the years since the Great Recession took hold have not lead to “lost generations” of young people who are doomed to a lifetime of anti-social, unproductive, and sometimes criminal behavior (as some people have argued). While there will inevitably be some lifetime dependents resulting from the Great Recession (as there always are from traumatic experiences, be they economic downturns, natural disasters or violent conflicts), I am optimistic that as a whole young adults and the unemployed in general are eager to get back to work once the global policy coherence needed to create those jobs is established. G20 meetings this past week represent a meaningful step in that direction.