Seccareccia1We put some questions to Professor. Mario Seccareccia* on the following topics: jobs act; fiscal policy in Europe; Panama Papers; concept of currency; market equilibrium; inability of central banks to go into default.

1)The latest data branched Istat certify a worsening of the employed and an increase in unemployment. So far fhe jobs act has not produced significant effects (or very small) in regards to the resolution of unemployment problem, as widely expected by many economists (heterodox and not, consider, for example at the same Blanchard or the IMF).  Decimal few recovered point, more than the jobs act in itself, depended actually from distributed monetary incentives to businesses (see the latest study by the Bank of Italy). The jobs act involves a path of "reforms" concerning the labor market which, in particular, started in the 80s. In your opinion,It may be that the jobs act represents a sort of final showdown towards the world of work?


1) The recent Rienzi Jobs Act to promote job creation is based on an old view of the unemployment problem in Europe that goes back to the 1980s. At the time, mainstream economists, especially of the OECD, used to argue that Europe was suffering from supply-side problems relating to the bargaining power of workers and “rigidities” in the labour market, once described as problems of “eurosclerosis” supposedly because of the supportive labour-market regulatory structure that, we were told repeatedly, was stacked too much in favour of workers. Even though this explanation of unemployment has largely been abandoned by OECD economists, we continue to see the same combination of policies being implemented recently in France by François Hollande in reforming even the French labour code. It is truly ironic that the Italian and other European governments are focusing on presumed supply-side problems in the labour market, when many European economies are actually in a state of deflation, because of the effects of harsh austerity that have been shrinking labour market demand and generating Great Depression rates of unemployment. Indeed, such deflationary environment accompanying the current state of mass unemployment is a phenomenon that we had not witnessed since the 1930s and it is hard to fathom how falling wages, which will do nothing but reduce consumption spending, supposedly will generate more jobs within a domestic economy. After three decades of trying repeatedly to combat unemployment through such supply-side measures, this is now akin to beating a dead horse in order to get more work from it.
The only possibility to get more employment with such supply-side labour market policies of wage deflation is to seek salvation via foreign trade by competing with countries whose wages are even lower than those of Europe, such as China. But the problem with pursuing this neo-mercantilist competitive race to the bottom with the rest of the world is that it does nothing eventually but export the problem of unemployment elsewhere. What we learned from the experience of the 1930s is that a retaliatory cut in wages from other countries would merely make matters worse internationally by collectively reducing world demand. Hence, an attack on labour cost by means of wage deflation is wrong-headed and paradoxically bad for profits as well since it will shrink overall consumption demand that is the key engine of overall economic growth. Hence, in response to your question, this “showdown” with labour by seeking to reduce labour costs will ultimately be bad for growth and for profits. As we have shown in a recent working paper available at the Institute for New Economic Thinking, far from being a problem, the viscosity of wages is actually important as a macroeconomic stabilizer. It is wage deflation that makes matters worse for reasons that such great economists as Keynes and Kalecki had well understood long ago. See: http://ineteconomics.org/uploads/papers/WP37-Secc-Lavoie.pdf .

 

2) Where is the Europe going? The ECB has increased the volume of QE, is exploring the territory of negative returns and is basically keeping afloat the European Monetary Union. All these monetary policy moves have very weak effects on production and employment (as widely expected). Without an active fiscal policy Europe will continue to vegetate in this stagnant situation, seeing increase the chances of an uncontrolled break-up in the event of new shocks. What are the reasons why no action is taken with these tax policies? Might it depend on ignorance, ideology, or by an inner 'conflict' within the society?


2) I was at the annual Minsky conference on the 12-13 of April at the Levy Economics Institute in the US and one of the speakers was the current vice-president of the ECB, Vitor Costâncio. As much as he put a brave face to what the ECB is doing, the current policies of QE and the policy of charging interest on inter-bank positive clearing balances is a desperate attempt to convince the public that the ECB is equipped with all the “non-conventional” monetary policy tools to get the Eurozone out of its long-term stagnation. However, this is not true. What they say about their capacity to combat the current crisis is tantamount to a situation (as described in the famous tale by Hans Christian Andersen) in which the emperor (the ECB) has no clothes. As the experience of QE in the US between 2009 and 2014 shows, the current ECB policy of QE does nothing in stimulating bank lending except with the possible effect of flattening the yield curve in the various countries of the Eurozone by reducing also long-term interest rates. There is hope from the ECB that, by cutting long-term interest rate, the latter will eventually stimulate investment. But, in a world of uncertainty and lack of aggregate demand, investment tends to be highly interest inelastic. The only possible other potential positive effect of QE in Europe is that, by purchasing government securities currently held by commercial banks, this may induce the latter to hold other freshly issued government bonds because of greater bank liquidity resulting from QE. In a sense, this is also being reinforced with the policy of charging banks interest on their excess reserves. But, outside of that, these desperate monetary policy measures will have little effect on private lending since, as heterodox economists have always argued, banks are not reserved constrained. Indeed, as is well known, bank lending is not constrained by a lack of reserves but only by a lack of demand from creditworthy private borrowers, and the demand for loans from the public is not determined by QE operations.
As most central bankers, including Mario Draghi, would probably admit, central banks are being asked to do a lot more than what the latter can possibly deliver. What is needed is an activist fiscal policy, in which the central bank can play a supportive role. Tragically, as is well known, in the Eurozone national governments are constrained by the institutional structure imposed by the Maastricht Treaty, the Stability and Growth Pact, and the Fiscal Compact that makes governments hostages of the financial markets, as we saw with Greece. But these constraining institutions can be changed. What is needed is the political will. Unfortunately the European political elites, not only in Germany but also in the countries that are suffering the most, are willing to live with this constraint that condemns their population to impoverishment through wage deflation and mass unemployment. Such anti-democratic structures that tie completely the hands of national governments in pursuing activist fiscal policy are the real obstacles to counter-cyclical macroeconomic policy. Unless the necessary institutional changes come about, these societies can very well revive some of those beastly political creatures that still lurk in Europe from its past, as we see with the rise of ultra-right-wing political movements in much of Europe.


3) In refer to the recent case of "Panama Papers". Given the fact that the banking / financial system is absolutely regulated, what kind of value has a capital flight towards tax havens in the real economy?


3) We have already seen how deregulation of the financial system since the 1970s ultimately led to the international financial crisis of 2008. We have also seen, since the 1970s, how governments have moved away from taxing corporations in favour of taxing personal income and domestic consumption, all in the name of attracting foreign investment by liberalizing financial capital flows. The Panama papers just reveal another facet of this where the wealthy 1% of the population can avoid paying income and wealth taxes. While none of this type of tax avoidance is new, the Panama papers show the extent to which this has prevailed. What is most ironic is that some of these involved in this illicit activity are none other than the same politicians internationally who preached the need for austerity by raising taxes at home and cutting spending and transfers to the poor in the name of sound finance and balanced budgets. Obviously, the Panama paper revelations cry out for the need to reregulate finance. But it will hardly arise from the current crop of neoliberal political leaders who seem to celebrate the deregulated “free” market and austerity; as long as the austerity policies don’t apply to them.

 

4) Macroeconomic debates still "clashing" on the concept of "money" and the role it plays in a capitalist economy, then monetary. What therefore does "money" mean and what is its role in social relations?


4) It is the fundamental differences in the conception of money that define primarily on which side of the macroeconomic debates various economists find themselves. Those who situate themselves in the debate in favour of austerity start with the conception of money as if it is a scarce commodity as, for example, gold in more ancient times. This view is represented by the monetarist tradition championed by Milton Friedman of the 1970s and 1980s. Indeed, it was those same monetarist economists of the 1980s who advised how the Eurozone should be put in place based on this archaic tradition of money. It is for this reason that they set up all these restrictive rules, which prevented governments from accessing money from a supranational central bank, and which led to a formal separation of money from the state.
On the other side of the theoretical divide, there are heterodox economists who associate money as the result of a third-party balance sheet operation, whether it is balance sheet operations conducted by a central bank, in accordance with Chartalist theory, or from private commercial banks as with circuitist theory. But money can never be scarce. Human and natural resources can be scarce but money can never be.
From these competing visions of money, there ensue different conceptions of fiscal policy. The mainstream neoclassical view sees fiscal policy as a source of instability either in leading to “crowding out” of private investment, or, if accompanied by monetary creation, as a source of price level instabilities. For these reasons, they promote policies of “sound finance” that prohibit deficit spending. Standing this view somewhat on its head, the heterodox position sees fiscal policy as a potential instrument of macroeconomic stabilization by promoting a policy of “functional finance”, with the latter perspective seeing budget deficits or surplus, not as ends in themselves, but as means to achieve socially desirable objectives as full employment. These differences in policy perspectives originate directly from their view of money. It is this erroneous conception of money that is embodied in the institutional structure of the Eurozone with its strict separation of money and the State, with this separation being the source of the profound problems plaguing the Eurozone. It is this institutional separation that is destroying the very fabric of European society that so many struggled to build during the early post-WWII era.


5) In your last article written together with Lavoie you put in light, in a problematic way, the concept of balance. This concept is one of the so-called paradoxes of dominant economy. Comparing theories with the real world, what might be saved from the concept of balance? Above all, there is really equilibrium price that makes the economic system free from fluctuations and shocks?


5) What Marc Lavoie and I wrote in the previously-referred to INET paper is that the dominant mainstream macroeconomic reasoning that rests on so-called “microeconomic foundations” is incapable of both understanding and offering meaningful policies to get economies out of their current state of stagnation. This is because they start from the view that what may be meaningfully applied at the micro level can be generalized to the macro level. Hence, these mainstream economists start from the premise that if there is a disequilibrium in a market, price adjustment will eventually lead to market clearance. Hence, in the labour market, if there is unemployment, real wages need just to fall sufficiently to eliminate the excess supply of labour. Similarly, if the there is an excess supply of loanable funds (reflected in high savings relative to investment) real interest rates ought to fall. And, if there is a persistent disequilibrium, it must be because of the rigidity of interest rates resulting from the nominal and real interest rate lower bound.
Within this mainstream framework of analysis, we could see their policy objectives. For instance, the goal of all these labour market policies, such as the Rienzi Job Act in Italy, is to get real wages to be more flexible downward so as to “clear” the labour market. Similarly, the attempt to push interest rates into negative territory by the ECB is an attempt to lower further the lower bound in interest rates in order to clear the market for loanable funds. In our paper, not only do we show that these equilibrating mechanisms do not work and are theoretically unsound, but the few private sector stabilizers that did exist during the previous Great Depression of the 1930s were not working as well during the recent Great Recession. Indeed, if it wasn’t for some quick initial coordinated G-20 government actions of stimulating the world economy in 2008-2009, we could have faced an even more devastating scenario than we actually did face. Unfortunately, while the international slump was milder in 2008-2009, the long-term consequences could be that we shall remain stuck in a state of stagnation for a very long time, because we need both monetary and fiscal policy working in tandem. Currently, the job of combatting stagnation in the world economy has relied almost exclusively on monetary policy. But, as Keynes made it very clear during the 1930s, what is need is strong and continued fiscal activism.

 

6) In a recent published paper "Profit distribution and loss coverage rules for central banks" (the ECB), (p. 14, footnote no. 7), in referring to central banks, the authors say: "Central banks are protected from bankruptcy because of their ability to create money and can therefore operate with negative equità”: in other words, they acknowledge that central banks do not can fail. and therefore It is finally admitted to the public what heterodox economists, especially post-Keynesians, have been arguing for years. Hence, the statement "there is no money needed requirements to do ..." uttered by politicians, economists, as well as mainstream journalists, and so on, has no empirical foundation. In your view, what does imply such a statement?


6) The implications are obvious and speak for themselves. While national governments in the Eurozone can become insolvent, the central bank can never be so, unless all governments constituting the Eurozone decide to leave it and go back to their national currency. As I had argued in a paper that was published just after the Greek crisis last summer (see: http://www.economiaepolitica.it/…/la-bce-e-il-tradimento-d…/), it was ironic that the ECB was demanding of Greece (a country that was insolvent) to meet its payment of €3.5 billion to the ECB in July 2015 but the ECB had been already spending literally trillions of QE euros by purchasing securities in the rest of the Eurozone since January 2015. The policy of QE shows more than anything else that money is not scarce, but, at the same time, it does raise questions of sovereign debt defaults if some of the debt is held by the ECB. As you say, it can potentially find itself in a negative equity position because it could, in theory, hold government securities upon which a government in the Eurozone can default. But there must always be at least one government that will stand by the ECB to back it, even in an absurd scenario in which most other Eurozone members default. However, such a scenario would truly be inconceivable, since at that point the whole existence of the Eurozone would be in question. All of these concerns of “default” of a central bank arise because there is no central government that stands behind the ECB as is the case in most other countries where there exist national central banks. But the story of what can eventually happen is yet to be written!


(*) Economics Lecturer at Department of Economics, University of Ottawa.
Author - CSEPI