A new Reinhart & Rogoff paper: “Write down those debts! Now!”
Reinhart and Rogoff have written a new paper on financial crises. They are repeating their mantra and I’m very happy to join their chorus: our monetary economies are not inherently stable – because of their monetary nature. In their words:
The analysis summarized here adds another dimension to an observation we have been emphasizing on the basis of our earlier work—namely, that the subprime crisis is not an anomaly in the context of the pre-WWII era.
And their desperate conclusion is clear too, “Write down those debts”:
Concluding Observations
Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging-market counterparts. The current phase of the official policy approach is predicated on the assumption that growth, financial stability and debt sustainability can be achieved through a mix of austerity and forbearance (and some reform). The claim is that advanced countries do not need to resort to the more eclectic policies of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. Now entering the sixth or seventh year (depending on the country) of crisis, output remains well below its pre-crisis peak in ten of the twelve crisis countries. The gap with potential output is even greater. Delays in accepting that desperate times call for desperate measures keeps raising the odds that, as documented here, this crisis may in the end surpass in severity the depression of the 1930s in a large number of countries.
One little oopsie: “The Netherlands, 1939″ in table 1 should be: “The Netherlands, 1929″.
The south-americanization of Europe. Not incomes for the many but wealth for a few.
According to a recent paper of Carlos Vegh and Guillermo Vulentin, counter cyclical policies in Europe and South America did and do work:
This paper studies the social implications of fiscal policy responses to crises in Latin America over the last 40 years and in the Eurozone during the aftermath of the global financial crisis. We focus on the behavior of four social indicators: the poverty rate, income inequality, unemployment rate, and domestic conflict. We find a causal link from counteryclical (procyclical) fiscal policy responses to reductions (increases) in all four social indicators. These results call into question recent claims on “expansionary fiscal austerity.
Alas, they mess up their graphs, so we have to be quite cautious. But, with this caveat in mind, the paper shows an amazing development:
In South-America there was a regime shift from consistent pro-cyclical policies in boom times and in bust times to counter cyclical policies, while the introduction of the Euro led to an opposite regime change in Europe. And lo and behold – dramatic macro economic outcomes (i.e. ridiculous swings in GDP, extreme unemployment and increasing inequality and poverty) also crossed the Atlantic…
Recently, the ILO published its Global Employment Trends 2014 report
From the press release
GENEVA (ILO News) – Worldwide working poverty dropped drastically over a decade but progress stalled in 2013, the ILO said in its Global Employment Trends 2014 report.
In 2013, an estimated 375 million workers lived on less than US$1.25 a day, compared to 600 million in the early 2000s – a 12 per cent drop per year, on average. But progress has stalled, and in 2013 the number of workers in extreme povertydeclined by only 2.7 per cent globally.
This trend reflects a peak in vulnerable employment, which the ILO defines as the sum of own account workers and contributing family workers. The number of people in vulnerable employment expanded by around 1 per cent in 2013, well above the 0.2 per cent growth rates during the years prior to the financial crisis.
Where are the good jobs?
For many people in the developing world, vulnerable and informal jobs remain the only work available. In most cases, those jobs entail low pay, limited job security, poor working conditions and little or no social protection.“Bringing more workers out of informality remains crucial in order to improve working conditions and generate tax revenues that governments need to strengthen social welfare systems. In this regard, further reductions in working poverty will be tightly linked to declining rates of informality,” the report, produced by the ILO’s Research Department says.
Informal employment remains widespread in most developing countries even though regional variations are sizeable. Informality rates are particularly high in South and South-East Asia, where they reach up to 90 per cent of total employment in some countries. Even though progress in reducing poverty has been strongest in these regions, a high incidence of informal employment is likely to constitute a barrier to a sustainable reduction in poverty.
“This clearly shows that the creation of decent jobs is the most pressing global development priority. It should be at the heart of the development agenda when the international community adopts new Development Goals for the post-2015 period … Overcoming employment vulnerability and informality are key to overcoming poverty in a sustainable way.”