Resurrecting the world’s first economic policy idea

The Old Testament gives specific instructions to the Israelites as to how they should organise their society. One of the most intriguing from a modern-day economist’s perspective is that of the Jubilee. Every 50th year, all debts between Israelites were to be wiped clean, all land returned to the families that owned it 50 years previously and slaves freed. In today’s parlance, it was pushing the Reset button and starting afresh. There is little evidence that the Israelites followed this revolutionary idea, most probably because those who would benefit most were the poor and downtrodden and those who would benefit least were the rich and powerful!

Recently some economists such as Stephen Green have been proposing the idea of a Modern Debt Jubilee (http://moderndebtjubilee.blogspot.co.uk/p/modern-debt-jubilee.html) as having merit for solving today’s economic problems. The world is currently experiencing a balance-sheet recession rather than a standard cyclical recession. This is where individuals, governments and especially banks believe themselves to be over-indebted and seek to reduce their liabilities (debts) – there is a much reduced desire both to borrow and to lend. This inhibits overall demand in the economy, leading to slower growth which in turn holds back confidence in companies who defer investment.

The policy of Quantitative Easing (QE) is the printing of money to make banks balance sheets more liquid and thus encourage them to lend once more. An alternative Modern Debt Jubilee policy would be to print money and use it to repay some of the debt outstanding which is inhibiting economic growth – so returning to the concept of Jubilee. For example the government could decide to give every adult in the country £10,000 in a special account, which could at first only be used for the repayment of their debts. In this way, individuals could repay their most expensive debts (typically consumer credit), and banks would become both more liquid and have smaller balance sheets. For those who do not have debts use of the money could be restricted to paying for tertiary education, for buying a home for them to live in or providing a pension – all of which can be regarded as personal long term investment.

At the cost of a large amount of money, £450bn for the UK – (compared with the £375 billion of QE so far approved by the Bank of England) this Modern Debt Jubilee policy would significantly reduce consumer debts, provide better-funded pensions and boost the amount of equity in people’s homes. Though the use of this money would be restricted to “worthy” areas, there would certainly be a consumer wealth effect both from consumers just feeling less indebted and from the boost to disposable income from reduced interest payments. Demand in the economy would pick up and if the Bank of England feared inflation then they could easily reverse the QE as banks would not need the extra liquidity as consumers repaid debts. A little inflation, however, would be rather welcome as it would break the economy out of the deflationary mindset that it has fallen into currently.

If we do need to print more money to boost the economy, then this idea is a far more powerful way of ensuring it happens than replacing government bonds with cash in the banks’ balance sheets, the current QE policy.

Jubilee – the oldest and least used economic policy idea in history is definitely worth considering today in a modern form. For those at the bottom end of the income distribution, it would rid them of debts that burden their lives thereby pushing the Reset button on their personal finances. For the middle classes it is a way of either ridding themselves of expensive debt or encouraging long term savings.

Elections and political transitions in 2012 – January 2012

This year brings elections or organised transitions in political leadership in Russia, the US, China and France. Such periods can lead to unpredictability in economic policy ahead of these transitions as current leaders seek to avoid bad news in order either to win the election or to go out on a high. Similarly the period immediately after an election or leadership transition is usually one where the leader has most political capital and will generally seek to execute his or her most vital or most cherished policies. These may not necessarily be those policies which are most appropriate in an economic sense but are the most appropriate in a political sense. With so many transitions in such important nations this year, the scope for good politics to triumph over good economics is very large.

The US election is now underway with the Republican primaries firing the starting gun. The two parties are ideologically further apart than at any time in living memory (the phrase “class warfare” is being used a lot), and the Democrat President is unable to get the Republican Congress to agree to anything he wants to do. This year policy is in limbo, US politicians are unlikely to agree on doing anything  with regard to economic policy – this is understood and to some extent accepted by the markets, but action must be taken in 2013 to start reducing the fiscal deficit and the candidates are unlikely to reveal to the electorate just how bad things will need to be in terms of spending cuts or tax increases. In addition, upcoming elections require all candidates to stand up very strongly for American interests in any international dispute – in trade matters this can easily spill over into protectionist policies to “safeguard American jobs”.

In China, a new generation of leaders will come to power just before the US election – at the top level there will be no shocks but there is much manoeuvring still going on for the next level down, who will form the leadership team in five years time. Chinese officials will struggle to allow or tolerate “bad” economic news, and any further weakness of the type seen in recent months may well generate another dramatic stimulus response of the sort seen in early 2009. In foreign and trade policy also, it will be important for the Chinese to be seen to be stoutly defending their interests to safeguard Chinese jobs.

France is the most interesting story with its May Presidential elections. First it means that Sarkozy cannot allow anyone to leave the euro before the elections, because all his efforts over the last two years to “save the euro” would have visibly failed – therefore more summits and buying of time with new initiatives is very likely. However were he to remain President (unlikely from the current opinion polls), he would never have to face the French voters again – he could afford to try to be a European statesman and actually may be prepared to adopt a more German solution to the euro crisis, even at the expense of traditional French interests. By contrast markets might get a nasty shock were his main challenger Francois Hollande to win the Presidency. He is a fairly unreconstructed socialist, and would have few political soulmates in Europe, and has already declared that the current policies of austerity and institutional change to force countries into more restrictive fiscal policies are unacceptable to him. It is difficult to see Angela Merkel willing to give much of the ground that Hollande would require in order for France and Germany to continue to lead the efforts to save the euro. Either way the French election looks likely to be absolutely pivotal in determining which way the euro crisis gets resolved.

Amidst all this, the UK looks to be a rather stable place. The coalition looks set to soldier on – the Liberals cannot afford to leave since the ensuing election would see them almost wiped out, whilst Cameron benefits from pursuing the economic policies that he believes is necessary but seeing the blame laid on the Liberals. The economic policy of steady austerity has been set for the next few years and no change will be considered until much closer to the planned 2015 election. For Cameron, current economic policy is both economically and politically appropriate and he stands in a place that many of his fellow world leaders would wish to be.

Germany cheerfully leads the Eurozone towards misery – November 2011

At the previous G20 meeting, European leaders were sent away with the message to agree a solution to the debt problems of the Eurozone which were hitting the economies of the rest of the world. The Brussels agreement on the latest round of measures to be adopted by the Eurozone was a triumph for Mrs Merkel but does nothing to resolve Europe’s economic problems despite the initial positive reaction from markets. In the agreement, Germany commits no more money to the Eurozone bailout programme than it had previously agreed to, it has not given any guarantee of the debts of any other country, it has kept down the amount of recapitalisation required of the banking system to a level that its banks should be able to raise from the private sector alone and so avoid another unpopular state bailout of banks and it has blocked French attempts to get the ECB to intervene massively to support the Spanish and Italian bond markets. On top of that, all Eurozone countries are now committed to balanced budget constitutional amendments and Italy was forced to bring to the summit, in an almost schoolboy-like manner, a detailed plan as to how it would take further steps to reduce its spending. On Greece, the inevitable default is acknowledged but only for private sector lenders, and not public sector lenders such as the ECB, the IMF and the EU, who remain favoured creditors.

Unfortunately, what the Germans believe to be a good plan is terrible news for the near term health of the Eurozone economy. Greece will still owe a very high 120% of its GDP by 2020 (on optimistic assumptions) – this is double the old Maastricht Treaty maximum of 60% and leaves the capacity of the Greek economy to grow its way out of its problems severely hampered. For the other Eurozone countries the ability ever again to use fiscal policy as a tool to boost their economies in future times of trouble will disappear, leaving the ECB and monetary policy as the only route to stimulate economies. Germany is securing an economic straitjacket around its Eurozone partners, at the exact moment when their economies have become hugely uncompetitive compared with Germany.  Their only path back to economic growth is for prices and private sector wages to fall by about 25% and thus re-establish competitiveness – that path means several years of a real economic Depression.

The German misunderstanding is in taking what have been sound long term economic policies for a relatively small open economy (where exports and imports are high proportions of the economy), and which have delivered a strong and stable economy for Germany since the war and more particularly since the Euro started, and assuming that they must therefore be the best policies for the Eurozone as a whole. However the Eurozone is not a small, open economy – rather it is a large and relatively closed economy (once intra-Eurozone trade is stripped out), very similar to the US economy. If the entire Eurozone is cutting back on its spending, then domestic demand within the Eurozone will be anaemic and exports outside the Eurozone are not a significant enough force to lead the whole economy back towards growth.

It is ironic that the British Conservative Party, which has always sought to avoid being drawn into European attempts at greater integration, is now one of the loudest voices calling on the Eurozone to become more integrated and adopt a pan-Eurozone approach to its problems rather than the national approach that has been adopted by Germany and France today. Their economic analysis is right though, the sum of the individual Eurozone economies is very different from any one of them. Helmut Kohl and Jacques Delors had the truly European perspective in the 1990s that is now required of, but sadly lacking in, Angela Merkel and Nicolas Sarkozy.

Sadly this latest package will merely buy a little time before the next crisis (ignoring the mini-crisis generated by the on/off Greek referendum). Worryingly, each crisis in this saga is bigger and more serious. The next problem to occur will be in Italy, where despite buying of its bonds by the ECB, yields are already over 5% for 2 year bonds and over 6% for 10 year bonds. There is little scope for these to move higher before the market comes to the conclusion that they are unsustainable and will refuse to fund them, as they have with Greece, Ireland and Portugal already. Italy is too big to save.