After the EU Referendum: What Next for Britain and Europe?

Rethinking IMF's role

Keynes concluded his General Theory with the famous sentence: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist". Economic ideas  are  often undervalued but they influence the life of  people  . This helps to understand the last three decades and maybe future ones.

The most important economic institution, the International Monetary Fund (IMF) is now struggling with itself and its intellectual legacy to design strategies for the global economy. Indeed, there is a 'fil rouge' linking the economic policies experimented in the 80sby Thatcher and Reagan, the resurgence of the right ideology and  the so-called 'Washington consensus'. The IMF was instrumental in imposing a package of  structural measures during the 1998 Asian crisis: liberalization, privatization, austerity, balanced budgets, export based competitiveness,  wage cuts, unregulated capital flows . This agenda is also applied, with some variations, in Europe, after the financial crisis, particularly in Greece, Portugal and Spain.

In recent years, the IMF has attempted to review its doctrinal positions, starting with the 'mea culpa' on fiscal multipliers in Greece - which led to unnecessarily harsh austerity measures and its softening stance on debt relief   in the Greek crisis management. 

The IMF has issued an article signed by three senior economists in one of its main journals " Finance and Development" with an appealing title ' Neoliberalism : Oversold" . Although the authors exclude to undertake a comprehensive review of the Washington Consensus, they question two main pillars of neo-liberalism.  

The first one is free movement of capital. Even without market confidence, direct investment is going fine while financial and speculative investments can be harmful, and should be strictly controlled.

Secondly, austerity has not reaped any benefit in terms of growth and have actually increased inequality and social costs which have jeopardized sustainable growth. Maybe austerity would be inevitable for countries with high debt levels but it cannot be the remedy for all. Trying to secure the benevolence of markets in reducing debt and deficits has higher costs relative to benefits. In general, it reduces gross output and increases unemployment on average of  0,6 percentage point. Spending is thus a better solution for those who can.

Germany has probably reacted strongly to this paper forcing the authors to take a more prudent view. But this is what the Greek experience has taught to any reasonable economist. For once, the IMF has behaved with common sense acknowledging its own responsibility in the management of the Greek crisis. But now it calls for responsibility on behalf of the creditors (EU and governments) to agree on cutting the Greek debt as a compensation for the cost of their errors.

Yet, the IMF should demonstrate the same coherence for its own credits vis a vis the Greek government. This would be the best way to reconcile with itself after all these mistakes on austerity policy.

The relevance of Okun’s "Equality and Efficiency: The Big Tradeoff"

Extract from his book still relevant today :

American society proclaims the worth of every human being. All citizens are guaranteed equal justice and equal political rights. Everyone has a pledge of speedy response from the fire department and access to national monuments. As American citizens, we are all members of the same club. Yet at the same time, our institutions say “find a job or go hungry,” “succeed or suffer.” They prod us to get ahead of our neighbors economically after telling us to stay in line socially. They award prizes that allow the big winners to feed their pets better than the losers can feed their children. Such is the double standard of a capitalist democracy, professing and pursuing an egalitarian political and social system and simultaneously generating gaping disparities in economic well-being. This mixture of equality and inequality sometimes smacks of inconsistency and even insincerity. Yet I believe that, in many cases, the institutional arrangements represent uneasy compromises rather than fundamental inconsistencies. The contrasts among American families in living standards and in material wealth reflect a system of rewards and penalties that is intended to encourage effort and channel it into socially productive activity. To the extent that the system succeeds, it generates an efficient economy. But that pursuit of efficiency necessarily creates inequalities. And hence society faces a tradeoff between equality and efficiency

Swiss initiative for a basic income

The idea of giving everyone in society a Universal Basic Income (Ubi) has been getting a lot of attention recently. The Finnish government is planning  a big experiment where up to 100,000 people could get about $1,100 a month. Four Dutch cities will also experiment this idea  this summer. And several other cities and states, from Canada to Spain, are interested.

Next 5th June,  Swiss citizens will vote for an unconditional basic income  equal to  2500 Swiss francs per month (about 2000 euros) that each adult would receive from the State each month as a financial safety net for the population.

This initiative has been launched a year ago by three committees, drawing inspiration from the French socialist Charles Fourier (1772-1837). This is a sign of growing public activism to combat pay inequality. The organizing committee collected more than the necessary 100 thousand signatures for the popular initiative - which under the Swiss law will be turned into political action if the initiative gets a majority of votes. The Committee B.I.E.N, at the origin of this initiative, considers that the basic income should replace the social security safety net  and the bureaucratic controls imposed to beneficiaries   

The initiative  is opposed by the government ( which fears that it would put in peril the national budget) , the  Swiss patronat which believe this would create a situation of rentier , discouraging people to go to work and trade unions which see the risk that workers will be paid less than their actual wages for 40 hours a week. Sergio Rossi, an economist from Freiburg, member of the referendum committee , argues that the basic income could be financed by social insurance system through a different redistribution system or a revenue tax.

As of today, more than 40% of the population is set to vote favourably to the referendum and it is rapidly growing which means that the initiative could go through and force the government to pass a bill on national basic income.

Philippe Van Parijs, of the Basic Income Earth Network  is promoting the idea worldwide based on academic studies and research. This debate shows that the idea of basic income is gaining momentum to tackle the inequality gap which has hit all major economies, with resulting absolute poverty. This mechanism would contribute to bridge the gap between high and low revenues and finance consumption. In current economic conditions, It is as much the general interest of society than the particular interests of the rich and the poor.

An EU migration compact

Europe is disintegrating rapidly as attempts to seek solutions fail on national egoisms .  Re-nationalization of Europe becomes more evident, with the return to national confines abolished by the Schengen Treaty.

Austria has accomplished the last violation of this pact , which for many is difficult to understand for a country far from the sea and being not a main destination for mass immigration to Europe.  The paradox is that this country is governed by a socialist party which is  adopting the same policy as the far right party. But this happens in other countries such as Hungary, Poland and Slovakia.

Italy has still an European agenda - it supports the creation of an EU Treasury minister and now calls for a  'migration compact' to transfer powers to the European Union to handle the crisis. The proposal foresees a set of actions and  special forces both in origin and transit countries of the migrants with refugee camps  in the southern Mediterranean coasts for migrants .

Such policy deserves wide consensus among EU countries but its effective application would require the creation of  special police forces  to protect the external borders and on the political level a much stronger coordination between the Interior ministries , and eventually the creation of an EU Interior minister. This would mean, in practice coordinating intelligence services and fight against terrorism.

The main issue of contention lies with the necessary funding to support the migration plan. The Italian proposal includes the issuance of eurobonds which is vigorously opposed by Germany which prefers an oil tax paid by citizens to the European coffers.

This plan will not be implemented readily and will require an agreement at the next European Council. But it is a positive step forward toward greater unity to halt the return of nationalism which is currently putting Europe in grave danger.    

Nick Hanauer: Beware, fellow plutocrats, the pitchforks are coming

We need a visionary hope

        One of the most famous quotes in economic theory to be read and re-read ...

           
          John Maynard Keynes (1936): The General Theory of Employment, Interest and Money:

…Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?

I do not attempt an answer in this place…. But if the ideas are correct… it would be a mistake, I predict, to dispute their potency over a period of time…. The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas….

There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.