Canadian Federal budget once again a progressive document

I haven‘t yet fully read and digested the latest Canadian  Federal budget but so far I find it to be a realistic and progressive assessment of the likely course of the Canadian economy over the next year. Unemployment although at its lowest point in four decades could still be lowered further and may well be, provided the trade disturbances on a global scale do not spread and undermine economic growth. This is equally true of the Bank of Canada. Given the low petroleum prices and overall inflation low at 1.9 % there is absolutely no reason for the Bank to raise interest rates and thereby prevent unemployment from falling lower.Currently unemployment is 5.8%.The private sector banks and financial houses project unemployment to rise to 6 % the budget projects 5.9 %. The federal  debt to GDP ratio, the only sensible measure of debt burden is low, stable at roughly 30.8 % and slowly falling over the next three years projected to fall to 29.3 % by 2022. The government proposes a. number of detailed progressive expenditures on seniors, millennials ,indigenous peoples, infrastructure and social policy generally and I will comment on these in further posts after I have finished reading the budget papers.

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Financial market shenanigans resurface

The New York Times has an excellent article by William D.Cohan warning about the reappearance in the financial markets of 2008 style financial practices which led to the collapse in 2008. Citing speeches by the Fed chairman Jerome Powell , a discussion of former Fed chair Janet Yellen about the dangers of these new instruments and practices with Paul Krugman the Nobel prize winning columnist with the NYT,  and a Fed Wall Street regulator as corroborating witnesses Cohan explains how new instruments called collateralized loan obligations are being bought and sold and speculated on by various financial companies . That disastrous instrument the credit default swap has resurfaced this time attached to these CLOs which often represent corporate debt. Hedge funds have bought small amounts of precarious CLOs and  then massive amounts of credit default insurance on the same vehicles.They then put pressure on the company to file for bankruptcy and  when they fail their credit default insurance far outweighs their losses. Like poison ivy these dangerous speculative vehicles are spreading throughout the industry. Hedge funds pension funds and mutual funds are particularly vulnerable.Regulators need to intervene before we have 2008 all over again.

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The United Kingdom at the crossroads

The British writers and historians Anthony Beevor and Artemis Cooper in 1994 co-authored a richly detailed history and narrative of Paris after the liberation 1944-1949 (London: Penguin Books revised edition, 2004) In the preface to the book they make a haunting statement applicable to the past but also to the immediate present and future. They argue that despite the heady growth of post war internationalism and globalist sensibility as well as the rise of great global institutions of governance and democratic order, nationalism is not yet and will not be banished. It is, according to Jean Monnet a founder of the European Union a ‘ recurring fever‘. Despite all the multilateral and internationalist institutions nationalist passions have not faded away. .‘‘ if anything , one finds in our increasingly fragmented world that many people terrified of drowning in anonymity, seize hold of tribal or national banners even more firmly.‘‘ (p.ix) Nowhere has this been truer in contemporary Europe and in particular in the United Kingdom, It is at the very centre of the debate over Brexit.

On Tuesday the UK parliament voted by a wide margin 391 to 242 votes to reject the Brexit deal that the Theresa May Conservative Government had negotiated with the EU to leave the European Union.75 conservatives and the DUP, the SNP and the Lib Dems voted with Labour to defeat the May government‘s proposed deal. So now parliament will vote on a no deal Brexit option and if that is rejected(which it was) there will have to be a deal which is premised on extending article 50 by provided the EU agrees (and that is somewhat uncertain) or calling off Brexit with possibly a new election.(Parliament has now passed by 413 to 202 votes the government‘s resolution calling for an extension of article 50 until June 30, assuming that the EU 27 agree .) The situation remains somewhat unclear until the EU responds.

But overall what this situation reveals is the damage that can arise out of poor decision making based on  inadequate study of the implications of a victory for the leave side and also the instabilities which xenophobia and nationalism born out of economic insecurity and austerity can create.Have a look at the excellent Tory politician Kenneth Clarke‘s contribution to the debate on no deal this Wednesday afternoon for an excellent analysis of the failure of the referendum to properly explore all the grave implications of the leave position and the appalling extent to which people were misled about the consequences of Brexit and the nature of contemporary international trade.There is also an excellent article by the British Canadian based writer Adam Foulds in the opinion section of the Saturday March 16 th Globe and Mail .

It is not just the UK which is plagued by the problem.  We can find evidence of similar pathologies in other modern western style societies like the U.S. , in past times in Canada, in Western and Eastern Europe as well as in parts of Asia ,Africa and Latin America. It is a complex reality that progressive policy theorists and government actors have now to deal with.The accelerated globalization of the past few decades created many winners but also many losers. It is the latter who can drive contemporary politics and development strategies in disturbing directions.

No democratic inclined politician or analyst can afford to ignore this fact.Where the UK ends up after the dust is cleared will be unclear for some time to come. The political and economic fallout is likely to be large and last for a number of years.

Earlier last week the UK House of Commons passed an amended motion to rule out leaving without a deal. The vote was decisively a rejection of the May government‘s strategy by 321 to 278 votes despite a three line whip pressuring their members to vote against the amended motion. The amendment which clearly stated that there would not be a no deal crashing out of the UK from the EU was sponsored by Yvette Cooper of the Labour Party.  The Government seems very divided as another cabinet minister has resigned and the group of dissenting Tory MPs has grown in number. The House then considered the resolution around asking for an extension to article 50 by which the UK had given notice of its determination to leave the EU by March 29, 2019. Some members who are mostly remainers have suggested that if the EU doesn’t‘ grant the extension which must be agreed to by all member states, the UK could and should revoke article 50 . Future debate will very interesting, indeed.

Today Monday March 18th the UK speaker of the House, John Bercow has thrown a major monkey wrench into the strategy of Theresa May by ruling that the Government cannot reintroduce for the third time after twice been rejected the same resolution involving the BREXIT deal that May has negotiated with the EU without significant changes in its substance. May had patently planned to reintroduce her negotiated and twice rejected deal a third time in the hope that the urgency of the hour would cause enough opponents to relent and pass the deal finally. This greatly increases the pressure on May to find the necessary concession from the EU or to ask for a longer extension of article 50 than she had planned thereby displeasing many of the more frantic Brexiteers.

Today Wednesday March 20th The UK Prime minister has requested a delay and an extension of article 50 until June 30th. But the EU has stated that it would only accept this if the UK parliament approves the existing withdrawal agreement that they have twice rejected. Otherwise the options are crashing out without a deal on March 29th -an option parliament had rejected by a vote of 321 to 278- or withdrawing article 50 altogether. So the choice for parliamentarians is quite stark a no deal crash out or accepting a withdrawal deal they have already rejected twice by a large margin. Perhaps the EU is bluffing and with a change in Prime Minister the UK can get a better deal or set of options but that is far from clear. No one except the radical Tory Brexiteers wants a no deal crash out . But that is now certainly a real possibility given the large margin by which the withdrawal agreement negotiated by May was rejected by Parliament.Its a sub optimal outcome but one whose probability has just increased.

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The technique of deficit finance

I am republishing below again. a post I wrote trying to explain the multiplier as an effective policy tool embedded in Keynesian deficit finance. It first appeared in my older blog on blogspot Harold Chorney political economist in the middle of the financial crisis.Alongside my post on my current blog on the multiplier it is I think a useful guide.It was posted here on haroldchorneyeconomist as Some notes on the multiplier, April 4, 2012.I feel the need to do this because despite all we have learned about the negative consequences of sound finance and austerity we still see many conservative politicians trumpet the virtues of balanced budgets even when unemployment is elevated and and expectations pessimistic.

The technique of deficit finance
January 17, 2008 11:30 pm originally published on during the financial crisis.

The stimulus package being discussed in Washington will temporarily increase the American federal government deficit in order to inject a positive fiscal impulse to the economy. There seems to be, perhaps understandably, a fair bit of confusion about how such a stimulus can work to counter the recessionary forces now underway in the American manufacturing, housing and financial sectors of the American economy. First one should understand the assumptions that lie behind the theory of deficit finance as well as some statistical facts about the history of deficits and surpluses and the business cycle in the US.
First of all, whenever the government spends on programs or transfer payments more than it takes in in revenues the government will run a deficit. This deficit can be measured and financed in a variety of ways and it can be spent on a variety of programs or tax reductions.In terms of measurement it seems sensible to view expenditures on infrastructure as long term investments and treat them accordingly in the public accounts.

In addition most economists who advocate deficit finance to counter an economic downturn assume that for every dollar spent directly there will be at least another dollar or possibly $.66 of additional spending that will be induced by the original expenditure. Some economists would suggest that the multiplier would be larger others that it would be smaller.

This multiplier is bound up with what is called the Keynesian or more accurately Kahnian multiplier(named after the brilliant British Jewish economist R.F.Kahn who was a very close colleague of Keynes at Cambridge , one of the first economists to develop the idea and who made a major contribution to the General Theory.)

The way that the multiplier works is derived from the mathematical formula for summing up the total of a geometric series. For example let us assume that the series is 1+ v + v(v) + v(v)(v) +….= 1/(1-v) if -1 is less than v and v is less than 1.
(see Robert Barro, Macroeconomics, p.508)

The formula for the multiplier is then 1/1-mpc where mpc is the marginal propensity to consume equivalent to v in the above geometric progression.

In other words the percentage of the last additional dollar you receive that you spend. It also matters where you spend the money. If you spend it on goods and services produced in the country the multiplier is much larger than on goods and services produced elsewhere but sold in the country by a local sales staff. These leakages plus monies received which are not spent but either saved or hoarded are subtractions from the overall multiplier impact.

So lets begin with some statistical facts. The current American deficit is about 1.7 % of the US GDP. The GDP is 13.97 trillion dollars( as of the end of the third quarter 2007) so the deficit is around 244 billion dollars. A 1 % stimulus package would increase the deficit by a further 140 billion, a 2 % package by 280 billion a 3 % package by 420 billion. During the war years 1943, 44 and 45 the deficit rose above 15% of the GDP peaking at over 31 % in 1943. A 3-5 % deficit is very modest indeed in comparison.

If we assumed a multiplier effect of secondary increases in expenditures traceable to the initial injection of 140 billion and a multiplier of 1.5(not all economists would agree that it would be that large, others might suggest it would be larger) the total impact of a one time injection would be $210 billion .

Total accumulated gross Federal debt of 9196.5 billion is currently(the net product of previous deficits and surpluses) 65.7 % of the GDP. During the war years 1942-45 this ratio reached 119 %of the GDP.

To finance this without raising interest rates the Fed Reserve can either buy bonds originally issued by the Treasury but currently held by individuals or financial houses for some of this additional amount thereby creating high powered money that partly offsets the sale of bonds by the Treasury which finances the deficit and then sell some of these bonds to the general community of investors or it can simply expand the money stock. If it does the former however and the financial markets resist the interest rate that the bonds are offered at, the Fed will have to purchase an equivalent further offsetting amount and or inject further high powered money into the system.Later as the economy recovers it can and should withdraw some of the stimulus by selling these bonds back to the investing markets.

(For a thorough discussion of these techniques and the operations of the Fed and the treasury see the work of Robert Eisner , a former president of the American Economics Association and late Professor of Economics at Northwestern University in Chicago where he taught macroeconomics. I had the pleasure of discussing these themes with Eisner in person in Montreal when I brought him to lecture to my students in 1988. Robert Eisner, How Real is the Federal Deficit, pp.131-135.New York;The Free Press, 1986. Eisner’s research and his book was supported by research grants from the National Science Foundation.)

The point is that true Keynesian stimulus involves the scissors effect of a fiscal stimulus financed by by a supportive monetary policy. This is why monetarists like Karl Brunner insist that Keynesianism would only work with the creation of high powered money. But that is a debate for another time.

In the current environment in the financial markets I would think that these bonds will be viewed as highly desirable investments. The more that the Fed purchases the bonds the greater the stimulus however. Strict monetarists will argue that this will also lead to higher inflation in the medium to long run.

Keynesians would not necessarily agree arguing that with a slowing economy and higher unemployment the stimulus will increase largely output rather than prices. Later as unemployment drops some of the stimulus will be transferred to the price side of (P.O i.e.average prices times units of output) at which time the Fed can sell more of the debt to the market.

Once the money is spent on tax rebates, infrastructure projects, food stamps and environmental projects it is received as income by both taxpayers and employees who are hired to work in these projects or who are hired by the private sector who because of the stimulus project have experienced a greater demand for their products or services and have changed their mood from pessimistic contraction to optimistic expansion.

The additional money injected circulates in the economy. Much of it depending on the average marginal propensity to consume will be spent again and recirculate throughout the economy changing expectations from pessimistic ones to optimistic ones.

Investments once postponed will be considered again and a number of them undertaken. As unemployment drops the economy moves from recession to steady growth again.The newly employed both spend their money on goods and service and pay taxes to government. Some of what was spent, but not all, returns to the Federal Government in new tax revenues. As the economy grows larger the debt to GDP ratio provided the interest rates are kept lower than the growth rate in the economy begins to fall.

A little later the actual deficit may well shrink as well.Excess savings that would have subtracted from total aggregate demand because they could not find suitable safe and attractive investment opportunities will now be effectively channelled into attractive investment opportunities.

The stock market beset by uncertainty and insecurity will also begin to experience bullish sentiments. The unemployment rates will drop perhaps by as much as 1 % point as over a million and a half new jobs
are added to the labour force. If the jobs pay on average 40-50,000 dollars the federal and state governments will reap substantial additional tax revenues to help reduce the cost of the stimulus package.

The stimulus package will have done its work.

What might go wrong ? Well the multiplier might be smaller because of leakages to foreign imports. Recipients of the tax rebates might decide not to spend their rebates trying to save them instead, less likely if the rebates disproportionately target moderate and low income people. The Fed may cause interest rates to rise by trying finance the deficit too quickly in the bond markets.

Financial journalist might write influential articles that convince people that the stimulus package won’t work and that interest rates will rise and inflation will result.

Here the collective wisdom of the public which is somewhat more Keynesian than the financial journalists will cancel out most of this kind of negative journalism.

Keynesian rational expectations rather than monetarist ones should prevail !

But for the moment if the members of Congress seize the day and the President co-operates and the package is large enough to do the job, the US can once again demonstrate western leadership in economic policy making that will have far reaching positive consequences.

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The Great Depression revisited:learning from history

(originally published on my blogspot blog site, February 20 , 2006)

The Great Depression which began after the stock market crash in the fall of 1929 and lasted in its extreme form until 1934 and its aftermath form until 1939 was an event that marked the last century. Indeed such major collapses seem to be possible only once or perhaps twice a century in keeping with the long term business cycle theories of Kondratieff and Schumpeter. 

The exact nature of the depression and its causes are still much debated. In exploring this debate one can learn a great deal about business cycles, central banking policies, exchange rate management, international flows of capital and trade and stock market speculation.  

A number of influential authors have weighed in on the depression from both a Keynesian and monetarist perspective. These include Charles Kindleberger, Milton Friedman and Ana Schwartz, Gotfried Haberler,Peter Temin, Abe Safarian, Clarence Barber, Donald Moggridge, John Maynard Keynes, Friedrich von Hayek, Robert Lucas and many others. The reason for so much interest is not surprising. 

First of all this was a very major event that presaged and in many ways contributed to the rise of fascism and the Second World War. In economic theory terms if one can explain the causes of the depression one can learn from this and develop policies to prevent another such occurence. Here of course the medical model is influential. One studies epidemics to discover how to prevent them in the future. Charles Kindleberger has written a very comprehensive and fascinating guide to the great depression.The World in Depression 1929 -1939 enlarged edition 1986 University of California Press, Berkely, Los Angeles& London.

Kindleberger starts off by explaining that as a young man in the late 1920s he worked in the stock exchange in New York as a runner for a New York brokerage house.Despite the collapse in share prices he and his family were not severely affected and he was able to continue his studies including European travels and graduate work at Columbia University beginning in the winter of 1933.

He became fascinated with international exchange depreciation and later worked on his dissertation and got a job in 1936 in the International Research Division under Harry White who later played a key role in establishing the World Bank and the IMF along with John Maynard Keynes at Bretton Woods.Kindleberger later went to work at the Federal Reserve Bank of New York and the International Bank of Settlements.

So in many ways Kindleberger was ideally placed to write a history of the Great Depression. His perspective is that of an insider to the events that he describes in such effective detail. Kindleberger eschews econometric techniques and instead relies upon narrative history and a profound understanding of economic theory and the events themselves. He is convinced that the international monetary mechanism played a very important role in the depression. In addition Kindleberger shows how countries like Japan anticipated much of the thrust of Keynesian deficit financing policy as early as 1932. 

Keynes first broached the subject of public works in a letter to the Times on Aug 7, 1929 as well as in earlier writings in 1928. Similar proposals were made by the German progressive economist W.S. Woytinsky in the International Labour Review in January, 1932.(p.171-172)Woytinsky drafted along with two other labour economists a plan for domestic public works for the German Federation of trade unions in December 1931. Arthur Gayer wrote about the strategy of using public works to stabilize the cycle for a study published in New York in 1935 by the National Bureau of Economic Research , Public works in Prosperity and Depression. 

The Swedish economists associated with the Stockholm School developed similar notions in 1932. See the work of Eric Lindhal,Offentligaarbeten i Depressionstider with commentaries by Bertil Ohlin, Gunnar Myrdal, G.Bagge and J. Akerman;( Nationelonomisaka Foreningen, Forhandlingar, 1932 Stockholm, 1933). As far back as 1857 public works such as street cleaning and stone quarrying had been urged by the Mayor of New York as a program to assist the unemployed during the then depression. In 1855 workers were sent to work on the Erie Canal when they applied for assistance.

What this analysis of Kindleberger shows is that along with our knowledge of Kalecki`s work in the early 1930s and the pathbreaking work of R.F. Kahn and several other lesser well know theorists Keynes was not alone in breaking with orthodoxy and developing the intellectual apparatus necessary to justify this new path. But on the whole the fiscal conservatives , the advocates of balanced budgets and deflation were more numerous and overall in charge of policy until well into the 1930s.The automatic deflationist bias of the gold standard and the stubborn insistance of so many countries in trying to cling to it was also to blame. 

In addition from a game theoretic point of view Kindleberger points out the necessity of one major power acting as the responsible underwriter of the international economic system. It was the inability of the British to continue in that role from the late 1920s on and the “reluctance of the United States to take it on until 1936 “ that caused so much damage. (p.11) (more to come)

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Federal Reserve very wisely puts interest rate rises on hold

The chairman of the Federal Reserve Jerome Powell has very sensibly reviewed the current economic climate including a potentially messy Brexit, slower growth in China and low inflation and low oil prices and decided not to continue its policy of interest rate rises and slow the sale of its acquired debt instruments to the market in order to  relieve the pressure on interest rates.

Its a decision  I supported in earlier posts and I continue to support it now.     Despite the solid growth in the global and American economy there.are still some fault lines present that are traceable back to the 2008 crash which could prove very damaging if the Fed engineered a slowdown now.  there is considerable evidence both in the data and the literature on the natural rate and the NAIRU of a wide range of possibilities regarding the effect of low unemployment on prices . As Robert  Solow and  John Taylor reported in 1999 quoting a paper by Douglas Staiger,James Stock and Mark Watson published in a collection by Christine and David Romer “the Nairu is imprecisely estimated” so prudence about raising rates is a sensible conclusion.  Other economists like Robert Eisner, John Hotson and myself  and others have made this argument in a number of papers over the years.( See Robert Solow and John Taylor , Inflation, Unemployment and Monetary Policy. The MIT Press Cambridge Mass., 1999 p 14, Harold Chorney , Restoring Full Employment, The Natural Rate of Inflation versus the Natural rate of unemployment paper presented at Adelphi university at the Conference on Social Policy as if People Matter, Garden City New York Nov.12 2004;published on this web site Sept.19,  2011.Robert Eisner, How Real is the Deficit ; and Robert Eisner, A New view of  the NAIRU in Paul Davidson and Jan Kregal, Improving the Global Economy: Keynesianism and Growth in Output and Employment. Cheltenham:Edward Elgar)

This may well change in the coming quarters but for the foreseeable future it is unlikely and Chairman Powell has made  good decision.

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Departure of eight Labour MPs and three Conservative MPs poses serious potential challenge to Labour party leadership in the UK

At a critical point in British politics because of the challenges and confusion surrounding Brexit eight Labour politicians have quit the Labour Party and decided to sit as independents with the intention of creating a new centrist party .They have now been joined by three centrist leaning Tory modernizer MPs  who have severed their Conservative party affiliation to sit as independent MPs with the former Labour MPs. This makes for a total caucus of 11 MPs and there may well be more to join them.

The gang of four who quit the Labour Party in 1981 David Owen, Roy Jenkins, Shirley Williams and Bill Rodgers  later formed a new Social Democratic Party that eventually was absorbed by the Liberal Democrats . They were   all prominent front benchers .

This is not so of the current group who while larger in number are mostly much less prominent. The departure of prominent Labour politicians in 1981 did some  lasting damage to the Labour party in the 1980s but ultimately did not work to the advantage of the departing politicians. Instead it benefited the Tories who were able to prolong their government under Margaret Thatcher and then John Major who succeeded her.  Labour did not return to government until Tony Blair won power in 1994.It was a long 15 years out of power for Labour. It will be worth watching carefully to see if something similar might happen again because of vote splitting benefiting the Conservatives more than Labour in marginal Labour seats. The other more unlikely possibility is that a new centrist party might emerge and capture enough seats in the next election to be a serious force in British politics. Unlikely but not impossible.

To avoid such  outcomes the Labour party leadership and rank and file will have to listen carefully to all sides in the debate that will now ensue and keep lines of communication open.

Party standings in UK parliament

Conservatives          314

Labour                       247

Lib Dems                     11

Independent group    11

DUP                                10

Independent.                  8

Sinn Fein                         7

Plaid Cymru.                   4

Green.                               1

Speaker.                            1

vacant.                              1

Total.                             615



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