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cman concludes in his address to the g20 ministers such an agreement would be in the interest of all economic actors even the taxpayers involved because what is at stake is not only the dynamic of global inequality it is the very social sustainability of globalization from which the wealthy benefit so much the conservative revolutions of the early 1980s ushered in an era in which the watchword was simply get as rich as you can and think only of yourself exemplified by gordon gekko s praise of greed in oliver stone s masterful wall street that era did not bring us the promised prosperity or stability on the contrary we now live in sick democracies unstable economies characterized by intolerable levels of rent seeking and inequality in the 1930s one of keynes s goals in pleading for an active role of the government was to save capitalism in crisis and threatened by the rise of the soviet union the many who are in love with the supposed great moderation of the 1980s and 1990s stubbornly opposing all attempts to correct excessive inequality should think twice instead they should endorse wholeheartedly attempts such as that of the g20 brazilian presidency to save capitalism above all from its internal enemies far more dangerous than the external ones categories global economy inequality tags beps biden brazil fiscal cooperation fiscal dumping g20 g20brazil income distribution income inequality keynes lula minimum tax multinationals oecd public goods rents super rich tax justice trump wealth wealth tax welfare state zucman austerity the past that doesn t pass march 2 2024 leave a comment as usual lately this is a slightly edited ai translation of a piece written for the italian daily domani the european commission recently revised downwards its forecasts for both growth and inflation which continues to fall faster than expected in contrast to the united states there is no soft landing here as argued by many monetary tightening has not played a major role in bringing inflation under control even as of today price dynamics are mainly determined by energy and transportation costs instead according to what the literature tells us on the subject it is starting 18 months after the beginning of the rate hike cycle to bite on the cost of credit therefore on consumption investment and growth this slowdown in the economy is taking place in a different context from that of the pandemic back then central bankers and finance ministers all agreed that business should be supported by any means a fiscal whatever it takes today the climate is very different and public discourse is dominated by an obsession with reducing public debt as evidenced by the recent positions taken by german finance minister lindner and the disappointing reform of the stability pact the risk for europe of repeating the mistakes of the past in particular the calamitous austerity season of 2010 2014 is therefore particularly high in this context we can only look with concern at what is happening in france where the government also announced a downward revision of the growth forecast for 2024 from 1 4 to 1 at the same time the finance minister bruno le maire announced a cut in public spending of ten billion euros about 0 4 of gdp to maintain the previously announced deficit and debt targets this choice is wicked for at least two reasons the first is that it the government plans making the correction exclusively by cutting public expenditure focusing in particular on spending for the future 2 billion will be taken from the budget for the ecological transition 1 1 billion for work and employment 900 million for research and higher education and so on in short it has been chosen once again not to increase taxes on the wealthier classes but to cut investment in future capital tangible or intangible but regardless of the composition the choice to pursue public finance objectives by reducing spending at a time when the economy slows down goes against what economic theory teaches us even more problematic for a political class at the helm of a large economy it goes against recent lessons from european history the ratio of public debt to gdp is usually taken an indicator actually a very imperfect one but we can overlook this here of the sustainability of public finances when the denominator of the ration gdp falls or grows less than expected it would seem at first glance logical to bring the ratio back to the desired value by reducing the debt that is in the numerator i e by raising taxes or reducing government spending but things are not so simple because in fact the two variables gdp and debt are linked to each other the reduction of government expenditure or the increase of taxes and the ensuing reduction of the disposable income for households and businesses will negatively affect aggregate demand for goods and services and therefore growth let s leave aside here a rather outlandish theory which nevertheless periodically re emerges according to which austerity could be expansionary if the reduction in public spending triggers the expectation of future reductions in the tax burden thus pushing up private consumption and investment the data do not support this fairy tale guess what austerity turns out to be contractionary in short a decline in the nominator the debt brings with it a decline in the denominator gdp whether the ratio between the two decreases or increases therefore ends up depending on how much the former influences the latter what economists call the multiplier if austerity has a limited impact on growth then debt reduction will be greater than gdp reduction and the ratio will shrink albeit at the price of an economic slowdown austerity can bring public finances back under control the recovery plans imposed by the troika on the eurozone countries in the early 2010s were based on this assumption and all international institutions projected a limited impact of austerity on growth history has shown that this assumption was wrong and that the multiplier is very high especially during a recession a public mea culpa from the international monetary fund caused a sensation at the time economists are not known for admitting mistakes explaining how a correct calculation gave multipliers up to four times higher than previously believed in the name of discipline fiscal policy in those years was pro cyclical holding back the economy when it should have pushed it forward the many assistance packages conditioning the troika support to fiscal consolidation did not secure public finances on the contrary by plunging those countries into recession they made them more fragile not only was austerity not expansive but it was self defeating it is no coincidence that in those years speculative attacks against countries that adopted austerity multiplied and that had it not been for the intervention of the ecb with draghi s whatever it takes in 2012 italy and spain would have had to default and the euro would probably not have survived since then empirical work has multiplied with very interesting results for example multipliers are higher for public investment especially for green investment and social expenditure has an important impact on long term growth and these are precisely the items of expenditure most cut by the french government in reaction to deteriorating economic conditions while president roosevelt in 1937 prematurely sought to reduce the government deficit by plunging the american economy into recession john maynard keynes famously stated that the boom not the recession is the right time for austerity the eurozone crisis was a colossal and very painful greece has not yet recovered to 2008 gdp levels a natural experiment that proved keynes right bruno le maire and the many standard bearers of fiscal discipline can perhaps be forgiven for their ignorance of the academic literature on multipliers in good and bad times perhaps they can also be forgiven for their lack of knowledge of economic history and of the debates that inflamed the twentieth century but the compulsion to repeat mistakes that only ten years ago triggered a financial crisis and threatened to derail the single currency is unforgivable even for a political class without culture and without memory categories emu governance fiscal policy france tags austerity draghi ecb eurozone expansionary austerity fiscal policies fiscal policy france growth inflation interest rates keynes le maire lindner multipliers public spending stability pact taxation whatever it takes fiscal rules a return to the past that condemns europe to irrelevance january 18 2024 leave a comment as usual lately this is an english ai translation of a piece written in italian updated to take into account yesterday s european parliament vote after three years of near inaction and a few months of frantic negotiations european finance ministers have finally reached an agreement on the reform of the stability and growth pact that is now being discussed with the european parliament at first glance one might think looking at the ballet of percentages safeguard clauses classifications that this is a technical issue for insiders nothing could be further from the truth what was at stake in the discussion that ended with the december last minute agreement was the framework within which european countries will have to operate in the coming years to face the challenges that await them few things are more relevant today and that s why it was a bad agreement a return to the past that condemns the already battered europe to irrelevance the old pact now relegated to the attic faced widespread criticism for its baroque complexity and reliance on numerous at times arbitrary indicators for its emphasis on one size fits all yearly limits fostering short term discipline that in effect often turned pro cyclical for its bias against public investment most importantly the old pact was consistent with a worldview where the state s role in the economy had to be limited among other things by imposing restrictive rules on fiscal policies that world no longer exists and this explains the opening in 2020 of the reform process of the stability pact the 2008 global financial crisis the calamitous management of the euro crisis the pandemic and finally inflation have shown that there can be no stability and growth without stabilisation policies without adequate levels of public goods such as health and education without industrial policies and public investment for the ecological and digital transitions in short without an active role of the state in the economy for this reason the discussion among academics and policy makers largely ignored by governments which woke up at the last minute centered around the necessity for a philosophical shift the new rule it was widely believed had to change this and put the protection of fiscal space for public policies a the centre of the stage ensuring of course sustainability of public finances a change in philosophy that was to be found in the reform proposal put forward in 2022 by the european commission albeit imperfect the proposal abandoned the one size fits all annual targets in favor of medium term plans designed by countries in agreement with the commission in a framework that would guarantee debt sustainability and try to achieve an excessively moderate protection of public investment that framework is still there but it has been transformed in an empty shell on paper multi annual plans and investment protection still exist but germany reverting to its old obsession with austerity has imposed a plethora of complex and as baroque as those of the old pact safeguard clauses that will be triggered in the event of excessive debt or deficits i e almost always for almost everyone and which overruling the plans agreed with the commission go back to imposing one size fits all annual numerical constraints sometimes even more restrictive than the old rule like in the widely criticized old stability pact debt reduction is still the alpha and omega and it is no coincidence that all frugal countries rejoice that the new rule will be more effective in forcing fiscal discipline than the old one the italian and french governments the only ones that could have turned the board over settled for a bare minimum some short term flexibility in order to arrive at their respective elections with some money to spend a short sighted and depressing strategy the elections and these governments will pass but the rule will remain and tie our hands while china and the united states make colossal investments in the future it s all right as long that those celebrating victory today do not to come and tear their clothes in a few years time when europe will have become even more irrelevant than it is today categories emu reform fiscal policy tags austerity emu european governance fiscal austerity fiscal governance germany industrial policy rethinking macroeconomics stability and growth pact stability pact wolfgang schäuble s ideas are alive and kicking december 29 2023 leave a comment as usual lately this is an english ai translation of a piece written for the italian daily domani wolfgang schäuble was a central figure in the german political landscape a member of parliament for the centre right christian democrats party from 1972 until his death on tuesday evening at the age of 81 he was very close to chancellor helmut kohl and as a lawyer one of the negotiators of the treaty that brought about the reunification with east germany but it was with angela merkel as chancellor that schäuble became known beyond national borders for a few years minister of the interior he was appointed minister of finance in 2009 a few weeks before the revelations about the state of greek public finances that triggered the sovereign debt crisis since then he has been one of the central figures in the calamitous management of the crisis a staunch pro european he has nevertheless always been convinced in homage to the ordoliberal doctrine that integration could only be achieved by harnessing the european economy in a dense network of rules that would guarantee the public and private thrift necessary to make the eu competitive on world markets schäuble was the main standard bearer of the berlin view or brussels or frankfurt being adopted by the heads of the european commission and the ecb of the time which attributed the debt crisis to the fiscal profligacy and lack of reforms of the so called peripheral emu countries a narrative about the crisis that forced homework austerity and structural reforms on the countries in crisis we owe to schäuble s intransigence backed by angela merkel the commission and the ecb and sometimes against the imf which often had a more pragmatic approach the draconian conditions imposed on greek governments in exchange for financial assistance from the so called troika in those years he and the then president of the ecb jean claude trichet argued against all...
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