Ideology and dogma ensure policy disaster

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR, Oct 04, 2022 (IPS) - Central banks (CBs) around the world – led by the US Fed, European Central Bank and Bank of England – are raising interest rates, ostensibly to check inflation. The ensuing race to the bottom is hastening world economic recession. 

Going for broke

New UK Prime Minister Liz Truss has already revived ‘supply side economics’, long thought to have been fatally discredited. Her huge tax cuts are supposed to kick-start Britain’s stagnant economy in time for the next general election. 

But studies of past tax cuts have not found any positive link between lower taxes and economic or employment growth. Oft-cited US examples of Reagan, Bush or Trump tax cuts have been shown to be little more than economic sophistry. 

Reagan’s Council of Economic Advisers chairman, Harvard professor Martin Feldstein found most Reagan era growth due to expansionary monetary policy. Volcker’s interest rate hikes to fight inflation were reversed. This enabled the US economy to bounce back from its severe 1982 monetary policy inflicted recession. 

George W Bush’s 2001 and 2003 tax cuts also failed to spur growth. Instead, deficits and debt ballooned. “The largest benefits from the Bush tax cuts flowed to high-income taxpayers”. Likewise, Trump tax cuts failed to lift the US economy, with billionaires now paying much less than workers. 

After Boris Johnson stepped down, UK Conservative Party leadership contenders started by promising more tax cuts. But The Economist was “sceptical that such cuts will lift Britain’s growth rate”. Instead, it worried tax cuts would compound inflationary pressures, triggering ever tighter monetary policy. 

The Economist concluded, “It is hard to spot a connection between the overall level of taxation and long-term prosperity”. Unsurprisingly, The Economist sees Truss’ “largest tax cuts in half a century” as “a reckless budget, fiscally and politically”. 

While such tax cuts mainly benefit the very rich, the costs of such monetary and fiscal policies are borne by workers and other consumers. Workers are harshly punished by austerity measures, losing both jobs and incomes to interest rate hikes.

Tax cuts usually make things worse. Typically, these require cutting social protection and essential public services, ostensibly to balance the budget. So, already greater wealth and income inequalities will worsen.

Governments have to cut public investments due to ballooning budget deficits. Higher interest rates and public spending cuts will also derail efforts needed to transition to more sustainable, greener futures.

Class war

Policy fights over inflation have many dimensions, including class. Instead of helping people cope with rising living costs, increasing interest rates only makes things worse, hastening economic slowdowns. Thus, workers not only lose jobs and incomes, but also are forced to pay more for mortgages and other debts.

Unemployment, lower incomes, deteriorating health and other pains hurt workers. As workers want higher incomes to cope with rising living expenses, such austere policies are deemed necessary to prevent ‘wage-price spirals’.

As usual, workers are being blamed for the resurgence of inflation. But research by the International Monetary Fund (IMF) and others has found no evidence of such wage-price spirals in recent decades. 

Experience and evidence suggest very low likelihood of such dialectics in current circumstances, although some nominal wages have risen. Since the 1980s, labour bargaining power and collective wage determination have declined.

Policymakers should address stagnant, even declining real wages in most economies in recent decades. These have hurt “low-paid workers much more than those at the top”. Even the Organization for Economic Cooperation and Development club of rich countries has “worryingly” noted these trends. 

The IMF Deputy Managing Director has explained why wages do not have to be suppressed to avoid inflation. Letting nominal wages rise will mitigate rising inequality, plus declining labour income shares (Figure 1) and real wages.

Source: IMF, World Economic Outlook, April 2017

Profit margins had already risen, even before the Ukraine war and sanctions. US trends prompted the Bloomberg headline, “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs”. Aggregate profits of the largest UK non-financial companies in 2021 rose 34% over pre-pandemic levels. 

Policymakers should therefore restrain profits, not wages. Recent price increases have been due to rising profits from mark-ups. Recent trends have made it “easier for firms to put their prices up” notes the Reserve Bank of Australia Governor. 

Addressing inequality

The IMF Managing Director (MD) recently warned, “People will be on the streets if we don’t fight inflation”. But people are even more likely to protest if they lose jobs and incomes. Worse, the burden of fighting inflation has been put on them while the elite continues to enrich itself.

Raising interest rates is a blunt means to fight inflation. It worsens living costs and job losses, while tax cuts mainly benefit the rich. Instead, the rich should be taxed more to enhance revenue to increase public provisioning of essential services, such as transport, health and education. 

The IMF MD noted raising taxes on the wealthy will help close the yawning gap between rich and poor without harming growth. Public provision of childcare and labour market programmes (e.g., retraining) will improve labour supply. Easing worker shortages can thus dampen price pressures. 

The current situation requires addressing growing inequality. Redistributive fiscal measures – taxing high earners to fund expanded social protection and public provisioning – are time-tested means to address disparities.

Increasing top tax rates and tax system progressivity are also socially progressive, checking growing inequality. Meanwhile, as consumer prices spiral, rising profits and high executive remuneration have to be checked.

Supply-side policies

The World Bank and Bank of International Settlements heads have urged reducing the current focus on demand management to counter inflation. They both insist on addressing long-term supply bottlenecks, but do not offer much practical guidance. 

Poorly coordinated ‘unconventional’ monetary policies since the 2008-09 global financial crisis have created property and stock market bubbles. These damage the real economy, worsen inequality and slow labour productivity growth, with the worst spill over effects in developing counties. 

Addressing supply bottlenecks can involve tax incentives and credit policies. But discredited supply-side mantras – e.g., labour market deregulation – must be discarded. Related fiscal and monetary policies – e.g., tax cuts for the rich and inappropriate interest rate hikes – should also be abandoned.

Governments are losing chances to boost productivity, achieve low carbon transformation and cut inequalities. Instead, policymakers should pro-actively push desired economic changes by favouring less carbon-intensive and more dynamic investments. 

This may also require checking CBs’ monetary policy independence to more effectively coordinate fiscal with monetary policies. But this should not undermine CBs’ ‘operational independence’ to foster “orderly economic growth with reasonable price stability”. 

Governments must rise to the extraordinary challenges of our times with pragmatic, appropriate and progressive policy initiatives. To do this well, they must boldly reject the ideologies and dogmas responsible for our current predicament.

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Inflation phobia hastens recessions, debt crises

Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR, Sep 27, 2022 (IPS) - Inflation phobia among central banks (CBs) is dragging economies into recession and debt crises. Their dogmatic beliefs prevent them from doing right. Instead, they take their cues from Washington: the US Fed, Treasury and Bretton Woods institutions (BWIs).

Costly recessions 

Both BWIs – the International Monetary Fund (IMF) and World Bank – have recently raised the alarm about the likely dire consequences of the ensuing contractionary ‘race to the bottom’. But their dogmas stop them from being pragmatic. Hence, their policy analyses and advice come across as incoherent, even contradictory. 

Ominously, the Bank has warned, “[t]he global economy is now in its steepest slowdown following a post-recession recovery since 1970”. As “central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023”. 

Warning “Increased interest rates will bite”, the IMF Managing Director has urged countries to “buckle up”, acknowledging anti-inflationary measures threaten recovery. “For hundreds of millions of people it will feel like a recession, even if the world economy avoids” two consecutive quarters of contracting output. 

She also noted US Fed rate hikes have strengthened the dollar, raising import costs and making it costlier to service dollar-denominated debt. But reciting the mantra, she claims if inflation “gets under control, then we can see a foundation for growth and recovery”. 

This contradicts all evidence that low inflation comes at the expense of robust growth. Per capita output growth and productivity growth both fell during three decades of low inflation. Also, low inflation has not prevented financial crises. 

Even if growth recovers, recessions’ scars remain. For example, an IMF study found, “the Great Recession of 2007–09 has left gaping wounds”. Over 200 million people are unemployed worldwide, over 30 million more than in 2007. 

A 2018 San Francisco Fed study assessed the Great Recession cost Americans about $70,000 each. The Harvard Business Review estimated, over 2008-10, it cost the US government “well over $2 trillion, more than twice the cost of the 17-year-long war in Afghanistan”. 

Counting the costs

“The human and social costs are more far-reaching than the immediate temporary loss of income.” Such effects are typically much greater for the most vulnerable, e.g., the youth and long-term unemployed. 

Studies have documented its harmful impacts on wellbeing, particularly mental health. Recessions in Europe and North America caused over 10,000 more suicides, greater drug abuse and other self-harming behaviour. Adverse socio-economic and health impacts are worse in developing countries with poor social protection. 

Interest rate hikes during 1979-82 triggered debt crises in over 40 developing countries. The 1982 world recession “coincided with the second-lowest growth rate in developing economies over the past five decades, second only to 2020”. A “decade of lost growth in many developing economies” followed. 

But Bank research shows interest rate hikes “may not be sufficient to bring global inflation back down”. The Bank even warns major CBs’ anti-inflationary measures may trigger “a string of financial crises in emerging market and developing economies”, which “would do them lasting harm”. 

Developing country governments’ external debt – increasingly commercial, costing more and repayable sooner – has ballooned since the 2008-09 global financial crisis. The pandemic has caused more debt to become unsustainable as rich countries oppose meaningful relief. 

No policy consensus

The Bank correctly notes, “A slowdown … typically calls for countercyclical policy to support activity”. It acknowledges, “the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply”.

It also suggests, “policymakers could shift their focus from reducing consumption to boosting production…to generate additional investment and improve productivity and capital allocation…critical for growth and poverty reduction.”

However, it does not offer much policy guidance besides the usual irrelevant platitudes, e.g., CBs “must communicate policy decisions clearly while safeguarding their independence”. 

It even blames “labor-market constraints”. For decades, the Bank promoted measures to promote labour market flexibility, ostensibly to increase participation rates, reduce prices, via wages, and re-employ displaced workers. 

Such policies since the 1980s have accelerated declining productivity growth and real incomes for most. They have reduced labour’s share of national income, increasing inequality. To make matters worse, the Bank misleadingly attributes many policy-induced economic woes to high inflation. 

In May, the IMF Deputy Managing Director argued wages did not have to be suppressed to avoid inflation. She called for CB vigilance and “forceful” actions against inflation, which “will remain significantly above central bank targets for a while”.

No more Washington Consensus

In June, a Fund policy note advised allowing “a full pass-through of higher international fuel prices to domestic users”. It advised recognizing the supply shock causes of contemporary inflation and protecting the most vulnerable. 

But more alarmist Fund staff urge otherwise. In July, its ‘chief economist’ urged, “bringing [inflation] back to central bank targets should be the top priority … Central banks that have started tightening should stay the course until inflation is tamed”. 

Although he acknowledged, “[t]ighter monetary policy will inevitably have real economic costs”, without any evidence, he insisted, “delaying it will only exacerbate the hardship”.

In August, the Bank of International Settlements (BIS) head urged shifting attention from managing demand to enabling supply. He warned central bankers had for too long assumed that supply adjusts automatically and smoothly to shifts in demand. 

He warned, “Continuing to rely primarily on aggregate demand tools [i.e., the interest rate] to boost growth in this environment could increase the danger, as higher and harder-to-control inflation could result”.

But the BIS ‘chief economist’ soon urged major economies to “forge ahead with forceful” interest rate hikes despite growing threats of recession. He did not seem to care that the rate hike gamble to fight inflation may not work and its costs could be astronomical. 

Inflation fear mongering

Influential economists at the US Fed, Bank of England, Fund and BIS fear “second-round” effects of mainly supply-shock inflation due to “wage-price spirals”. 

But Fund research acknowledged, “little empirical research …[on]… the effects of oil price shocks on wages and factors affecting their strength”. It found very low likelihood of such ‘pass-through’ effects due to significant labour market changes, including drastic declines in unionization and collective bargaining. 

It reported “almost zero pass-through for 1980-1999” and negligible effects during 2000-19, before concluding, “In a broad stroke, the pass-through has declined over time in Europe”. Similar findings have been reported by others.

Reserve Bank of Australia (RBA) research found “the current episode has many differences to the 1970s, when a wage-price spiral did emerge”. It concluded, “There are a number of factors that work against a wage-price spiral emerging, … implying that the overall risk in most advanced economies is probably quite low”. 

Australian professor Ross Garnaut has suggested, “the spectre of a virulent wage-price spiral comes from our memories and not current conditions”. Sadly, despite all the evidence, including their own, the Fund and RBA still urge firm CB actions against inflation! 

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Comment on “Social Justice and Affirmative Action in Malaysia: The New Economic Policy after 50 Year

Kwame Sundaram Jomo,

Asian Economic Policy Review Volume 18, Issue 1, January 2023, pp 120-121

https://doi.org/10.1111/aepr.12411.

First published: 26 September 2022.

Any meaningful assessment of Malaysia's New Economic Policy (NEP) (Lee, 2022) should be historical. One question which arises here is how one does historical political economy. After all, there are many different schools of political economy, even if few have addressed “affirmative action.”

A key question is how one treats normative issues that inevitably come up. How one understands notions such as “social justice” has long been contested. These are often understood and invoked very differently. And how is a term such as “affirmative action”, which arose in response to US civil rights struggles in the middle of the 20th century, to be understood in other contexts?

When first announced to the Malaysian nation in mid-1971, the NEP was presented as being needed for building “national unity” following the divisive events of May 1969. The NEP has often been presented officially and by others as responding to “race riots” following the young nation's third general elections in which the incumbent multi-ethnic Alliance coalition lost its electoral majority. This perspective implies inter-ethnic economic disparities were responsible for “May 1969”.

Anand's (1982) Theil decomposition suggests that less than a tenth of overall income inequality in 1970 (before the NEP) could not be explained by various non-ethnic factors such as education. Anand concludes that, at most, only a corresponding share of income inequality can be attributed to ethnicity. His analysis implies there is limited scope for reducing overall income inequality by reducing inter-ethnic disparities. The NEP's primarily ethnic focus for over half a century is hence unlikely to significantly lower economic inequality in Malaysia. Unsurprisingly, despite over half a century of the NEP, total income inequality remains high, even if underestimated.

Equating “social justice” with efforts to reduce inter-ethnic disparities is problematic. Supported by and responsive to the newly emerging Malay “middle class”, the new Malaysian regime defined “restructuring society” as one of the two NEP targets. This has been mainly understood as “positive discrimination”, or affirmative action, along ethnic lines, to eliminate the identification of “race” with “economic function”.

Defining social justice in terms of achieving affirmative action policy is problematic. Such a definition also effectively rejects other possible interpretations of “social justice”, for example, in terms of “abolishing class exploitation”, or achieving low income or wealth inequality, or reducing disparities among different regions.

Sabah and Sarawak state rights within the Malaysian federation did not preoccupy Prime Minister Razak during 1969–1971. However, this omission in the NEP's ostensible social justice agenda is probably not acceptable to East Malaysians who believe they have not gotten a fair deal from the demographic majority in Peninsular Malaysia. Others might insist that overcoming gender and other inequalities is fundamental to any social justice agenda.

How do we compare other affirmative action policies, such as contemporary Black Economic Empowerment (BEE) in South Africa? What about pro-Afrikaner apartheid policies which also claimed to catch up with the previously dominant “Anglo-white” minority? What are the implications of such policies when introduced and implemented by demographically and politically dominant cultural majorities, as in South Africa, Malaysia, and, arguably, Hindutva India?

And how do we analyze similar policies in different contexts? For example, BEE in South Africa is generally acknowledged as being inspired by Malaysia's NEP. Ironically, BEE has since been re-imported into Malaysia as “Bumiputera economic empowerment”, even using the same BEE acronym.

And how does a society decide on what is a legitimate and acceptable social justice agenda? Who decides and how? Invoking notions of “equality” and “fairness” hardly resolves the difficult issues to be resolved. Affirmative action seems to suggest the acceptability of otherwise unequal societies in which aggrieved groups are proportionately represented.

It also begs the question of affirmative action for other aggrieved groups which are minorities or not politically dominant. What does social justice in India imply, especially for its scheduled castes and tribes? Or for US ethnic minorities, including the descendants of Native Americans or African American slaves? And when does addressing a grievance support “social justice”? After all, apartheid was seen as a means for Afrikaner “ethno-populists” to achieve parity with Anglo-South Africans.

After eloquently exposing the policy cul de sac the NEP is in, it is curious that Lee still insists “Malaysia needs a systematic and comprehensive reset of the NEP's (restructuring) prong”. This precludes a broader, more progressive approach to accelerate development more equitably. After all, in 1971, Razak already envisaged a Malaysian nation with comprehensive and universal social security.

References

Anand S. (1982). Inequality and Poverty in Malaysia: Measurement and Decomposition. Oxford: Oxford University Press.

Lee H.A. (2023). Social justice and affirmative action in Malaysia: the new economic policy after 50 years. Asian Economic Policy Review, 18(1), 97– 119.

https://www.ksjomo.org/post/comment-on-social-justice-and-affirmative-action-in-malaysia-the-new-economic-policy-after-50-year