Macroeconomic imbalances presented at 14th FMM-Conference Berlin, October 2010 by. Jesper Jespersen Roskilde University

Transcription

1 Macroeconomic imbalances presented at 14th FMM-Conference Berlin, October 2010 by Jesper Jespersen Roskilde University

2 What is meant by macroeconomic imbalance? Indicators pretend to be grounded in pure theory and modelled without specific references, which more often than not is: The general equilibrium model Much too seldomly it is discussed, whether this analytical model is: 1. Economic realistic, hence does it mirror the real world? And 2. Unveils the underlying political preferences

3 Macroeconomic Methodology In my recent book, Jespersen, 2009) I have challenged the proposition, that a perfect competitive market economy (even with fully flexible prices and wages) can generate a general equilibrium solution in the real world If so, using the general equilibrium model as the bench mark model is misleading (also for policy recommendation).

4 Ideology and Reality should be kept separate-at least in economics It may well be that the classical theory represent the way in which we would like our Economy to behave. But to assume that it actually does so is to assume our difficulties away (Keynes, 1936: 34). A realistic model, for a realistic indicator!

5 Keynes realistic position was, that due to microeconomic uncertainty and macroeconomic unknown conditions a general equilibrium model (in the sense of all markets clearing) is without serious empirical support. Therefore, Keynes challenged the general equilibrium model as a mis-leading guide to the real world, where uncertainty is dominant in the short and in the long run!

6 An example of misleading indicators of macroeconomic imbalances: The requirements within the EU Stability Pact : Public sector budget balance (or surplus) (medium term) Public sector debt below 60 percent (are in the Treaty) European Central Bank: Focusing on price stability, in the sense of average inflation between 0 and 2 percent independently of real sector considerations (is in the Treaty)

7 These propositions can only make sense twith regard to macroeconomic (im)balances within a General Equilibrium model not for the real EMU-area! Why has the EMU been established on these principles? Either ideology or incompetence, Because, as we shall see, the real EU-world does not conform to this model Hence, indicators related to an unrealistic model gives perverse outcomes

8 In search of a relevant (and realistic?) theory Post-Keynesian economics might be helpful, because: The economy is considered as a whole Imbalances are interrelated. It does not make sense to separate between: 1. The real economy and the financial sector 2. The private sector investment/savings balance and (un)employment 3. (Un)employment and public sector deficit 4. Private, public partnership Growth in GDP and environmental and distributional considerations cannot be separated But, it gives much less clear-cut policy recommendations!

9 The real imbalance! All countries except Nederlands Unemployment Spain FRA: France DEU: Germany percent of labour force Greece GRC: Greece ITA: Italy NLD: Netherlands POL: Poland ESP: Spain SWE: Sw eden GBR: United Kingdom USA: United States Germany 5 Nederlands Source: OECD, economic Outlook

10 Important to get the causality right! Unemployment and Budget Budget, Serie1 Lineær (Serie1) y = -0,5013x - 4,8102 R 2 = 0, Unemployment,

11 More true than ever! Public sector Budget deficit percent of GDP Sweden German y Spain FRA: France DEU: Germany GRC: Greece ITA: Italy NLD: Netherlands POL: Poland ESP: Spain SWE: Sw eden GBR: United Kingdom USA: United States -12 UK Source: OECD Economic Outlook June 2010

12 Causality matters in the real world Budget = - 0,50* Unemployment 4,81 R2=0,42 Within the General Equilibrium model you don t care about causality, makes policy easier: Unemployment = -2,0 * Budget Just, listen to the actual political economic debate: The private sector will create the jobs, which the public sector no longer can afford.

13 Look at the past a possible guide to the present British National Debt as percent of GDP: pct pct pct pct. Look after unemployment, and the budget will after itself (Keynes, 1933) pct pct pct. Victoria Chick & Ann Pettifor (2010): Fiscal consolidation: Lessons from a century of UK macroeconomic statistics - The Economic Consequences of Mr Osborn & Peter Clarke: Keynes (2009), p. 176

14 Ex post budget reductions depends on effective demand Budget deficit reduction = reduced private excess savings + improved balance of payments deficit (foreign excess savings) Because, of excess savings has to be 0 That s pure accounting and cannot be disputed. Hence, once again causality takes the lead, aggregate demand and profitability (Relative unit labour costs), which determine employment in the private sector and by that the budget improvement.

15 Germany:Public sector deficit 4 pct.(of GDP) B-of-P surplus + 6 pct. Private sector surplus 10 pct. + Unemployment 8 pct. 18 pct. No wonder, that the German government have no difficulties financing its deficit even with falling rates of interest, because the private sector has such a huge financial surplus

16 Greece:Public sector deficit 12 pct.(of GDP) B-of-P surplus -15 pct. Private sector surplus - 3 pct. + Unemployment.. 12 pct. Nominal imbalance 15 pct. No wonder, that the Greek government has difficulties of financing its deficit, because it has to borrow abroad with rising rate of interest (although the currency is )

17 One thing is to detect an imbalance, quite another is to cure it! 1.What happens to private sector savings and real investment? 2. What happens to balance of payments import and export: competitiveness, relative growth rates and 3. Economic policies

18 Germany has the largest imbalance! Private sector surplus (Savings-real investment) 15 Germany 10 UK Percent of GDP Greece -5 France Germany Greece Italy Netherlands Poland Spain Sw eden UK US -10 Spain -15 Source: OECD, Economic Outlook, June 2010

19 Balance-of-payments surplus is also an imbalance within a Monetary Union balance-of-payments, current account Germany percent of GDP Netherland s Spain FRA: France DEU: Germany GRC: Greece ITA: Italy NLD: Netherlands POL: Poland ESP: Spain SWE: Sw eden GBR: United Kingdom -10 Greece Source: OECD. Economic Outlook, June 2010

20 US UK Change in relative unit labour cost, & Greece Italy Netherlands Poland Spain Sweden Source: OECD, Economic Outlook Germany France percent

21 Source: Philip Whyte, Why is Germany not a model for the euro-zone, CESanalysis,

22 Are financial markets trustworthy? Long Term rate of Interest FRA: France percent p.a DEU: Germany GRC: Greece ITA: Italy NLD: Netherlands POL: Poland ESP: Spain SWE: Sw eden GBR: United Kingdom USA: United States Source:OECD, Economic Outlook, June 2010

23 The larger the deficit, the tougher the spending cuts

24 Despite, the severe imbalances the economies growing in reversed order Source: Eurostat. Note: US has only grown 30 percent within the same period; but average GDP per head is app. 40 percent higher than the EMU-countries

25 Hence, my question to you is - also this year - how can it be, that the General Equilibrium model is still taught as the guiding principle in macroeconomics?

26 Macroeconomic imbalances Spain 30 Greece Poland USA UK France Italy 10 Germany 5 Ne the rland Sweden Source: OECD, Economic Outlook, June 2010 FRA: France DEU: Germany GRC: Greece ITA: Italy NLD: Netherlands POL: Poland ESP: Spain SWE: Sw eden GBR: United Kingdom USA: United States

27 United States United Kingdom Change in Imbalances, Italy Netherlands Poland Spain Sweden Source: OECD, economic outlook, june 2010 Greece Germany France index: