Thomas Piketty: The age of green money [feedly]

The age of green money
https://www.lemonde.fr/blog/piketty/2020/05/12/the-age-of-green-money/

Could the Covid-19 crisis accelerate the adoption of a new, more equitable and more sustainable development model? The answer is yes, but under certain conditions. There must be a clear change in priorities and a certain number of taboos in the monetary and fiscal sphere must be challenged. This sector must work to the benefit of the real economy and used to serve social and ecological goals.

In the first instance, we must use this forced shutdown to re-start on a different footing. After a recession of this type, the public authorities are going to have to play a pivotal role to restore growth and employment. But this has to be done by investing in new sectors (health, innovation, the environment) and by deciding on a gradual and lasting reduction in the most carbon-creating activities. In material terms, millions of jobs have to be created and salaries raised in hospitals, schools and universities, thermal renovation of buildings, community services.

In the immediate future, this can only be financed by debt and with the active support of the central banks. Since 2008, central banks have created massive amounts of money to save private banks from the financial crisis which they had themselves provoked. The Eurosystem balance sheet (the network of European central banks, guided by the ECB) rose from 1150 billion Euros at the beginning of 2007 to 4675 billions Euros at the end of 2018, that is, from barely 10% to almost 40% of the Euro Zone GDP (12 000 billion Euros). This policy probably enabled the avoidance of the series of bankruptcies which led the world into the Great Depression in 1929. But this monetary creation, decided behind closed doors, and outwith any adequate democratic embeddedness, has also contributed to boosting the stock market and property prices, and to making the richest even richer, without resolving the structural problems of the real economy (lack of investment, rise in inequality, environmental crisis).

Now there is a real risk that we will simply continue in the same direction. To address the Covid-19 crisis, the ECB launched a new asset purchasing programme. The Eurosystem's balance sheet shot up, rising from 4692 billion Euros on 28 February to 5395 billion on 1^st May 2020 (according to the data published by the ECB on 5^th May). Despite the amount, this massive monetary injection (700 billion in two months) is not going to be sufficient: the spread of interest rates to the detriment of Italy, which had fallen in mid-March following the ECB's announcements, rose again very rapidly.

What should be done? In the first instance, realise that the Euro zone will remain fragile as long as it chooses to continue to submit its 19 interest rates to market speculation. Adopting the means to issue a joint debt with one and the same interest rate is a matter of urgency. Contrary to what one sometimes hears, the aim is primarily to mutualise the interest rate and not to force some countries to repay the debt of others. The countries who consider to be the most advanced on this question (France, Italy, Spain) must formulate a precise and operational proposal and, concomitantly, the creation of a parliamentary Assembly enabling the democratic supervision of the system (along the lines of the Franco-German Assembly created last year but with real powers and open to all those countries who wish to join). Germany, which is being urged by its constitutional judges to clarify its relation with Europe will probably choose to participate once a solid proposal is on the table and her main partners are ready to go forward. In any event, the urgency is such that we cannot sit back with folded arms waiting for a unanimous decision which will never come.

Then, and more importantly, we must make clear that the new money creation must  be used to finance the relaunch of a green and social economy and not to boost the stock market. The Spanish government proposed the issue of between 1000 and 1500 billion Euros of joint debt (approximately 10% of the Euro zone GDP) and that this interest-free debt be included in the ECB balance sheet on a perpetual basis (or on a very long term basis).  In this connection, we should bear in mind that the German external debt was frozen in 1953 (and definitively waived in 1991) and that the remainder of the huge post-war public debt was extinguished by a special levy on the highest financial wealth holdings (which will also be necessary this time again). The Spanish proposal must be supported, and repeated if necessary, for as long as inflation remains moderate. I would like to point out that the European treaties do not give any definition of the price stability objective (it is the ECB which fixed the target at 2%: it could equally be 3% or 4%). These same treaties indicate that the ECB must work towards the implementation of the general aims of the Union, which include full employment, social progress and the protection of the environment (Article 3 of the Treaty on European Union).

What is certain is that it is impossible to raise amounts of this sort without resorting to loans. The people in Brussels who talk in terms of enormous numbers in relation to the Green Deal without proposing any financing do nothing for the reputation of politics. By definition, this means that they are recycling sums of money already earmarked for something else (for example, by taking back resources from the meagre budget of the EU which is barely 150 billion Euros per annum or 1% of the European GDP); perhaps they are counting the same expenditure several times, or else adding together public and private expenditure (with a leverage effect which would turn all the speculators on the planet pale with envy), and in most instances, all at the same time. These practices must stop. Europe is in mortal danger if it does not demonstrate to these citizens that she is capable of mobilising in the face of Covid, at least to the same extent as it did for the banks.

 

Sources on Eurosystem balance sheet (see also Capital and ideology, chapter 13):

Eurosystem Balance sheet May 1st 2020 : 5395 billions https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst200505.en.html

Eurosystem Balance sheet February 28 2020 : 4692 billions https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst200303.en.html

This is due both to the new asset purchasing programme (PEPP, Pandemic emergency purchase programme) and to the increased use of previous programmes (especially PSPP, Public sector purchase programme). See below for the breakdown by country (always with as target the ECB capital keys based upon country GDP) : https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

GDP 2019 Eurozone (12 000 billions euros) EU 27 (14 000 billions euros) (market prices): https://ec.europa.eu/eurostat/databrowser/view/tec00001/default/table

 -- via my feedly newsfeed

COVID-19 Surveys Show Rapidly Rising Food Needs [feedly]

COVID-19 Surveys Show Rapidly Rising Food Needs
https://www.cbpp.org/blog/covid-19-surveys-show-rapidly-rising-food-needs

Early data on rising food insecurity during the pandemic and deep economic crisis reveal how widespread the hardship is becoming, underscoring the need for a robust policy response — including raising maximum SNAP (food stamp) benefits and fixing SNAP limitations in the relief measures enacted thus far.

 -- via my feedly newsfeed

As economic forecasts worsen, up to $1 trillion in federal aid to state and local governments could be needed by the end of 2021 [feedly]

As economic forecasts worsen, up to $1 trillion in federal aid to state and local governments could be needed by the end of 2021
https://www.epi.org/blog/as-economic-forecasts-worsen-up-to-1-trillion-in-federal-aid-to-state-and-local-governments-could-be-needed-by-the-end-of-2021key-takeaways/

Key takeaways:

• Congress should prioritize federal aid to state and local governments in the next relief and recovery legislation.
• New estimates show that the economic shock of the coronavirus could lead to a revenue shortfall of nearly $1 trillion by 2021 for state and local governments.
• Unemployment is forecast to be quite elevated even by the end of 2021, and so federal aid should continue so long as economic conditions warrant, and not be set by arbitrary timelines.

As the next round of legislative relief and recovery packages are debated, federal aid to state and local governments has emerged as a high priority. This aid is absolutely crucial for avoiding a deep and prolonged recession.

The revenue shortfall facing state and local governments stemming from the collapse in economic activity —driven by the shock of the coronavirus —could reach nearly $1 trillion by the end of 2021. And even at the end of 2021, recent economic projections indicate that unless more relief and recovery is passed, the unemployment rate could still sit at just under 10%In short, all facets of relief and recovery —including substantial aid to state and local governments —could well be needed for a long time, and their continuation should be tied explicitly to economic conditions and not to arbitrary timelines.

Tim Bartik at the Upjohn Institute has released updated projections of the revenue shortfall facing state and local governments. His projections are transparent and are largely based on estimated parameters from publicly available academic research. Bartik finds that if the recent projections for the path of the unemployment rate estimated by the Congressional Budget Office (CBO) come to pass, that state and local governments will be facing a revenue shortfall of nearly $1 trillion by the end of 2021. *

$1 trillion by the end of 2021 is a big number, even by the standards of federal budgeting. But, it's not a number plucked from the air, it is well-grounded in transparent, high-quality research. And in fact, it might actually be a bit too conservative in some ways. In what follows we will quickly describe the reasoning and evidence behind Bartik's estimate, and note two ways that is even being slightly conservative.

Bartik's estimates for the responsiveness of state revenue to higher unemployment are based in part on work by Fiedler, Furman, and Powell. This work finds that every 1 percentage point increase in unemployment is associated with a 3.7% fall in state revenues. To adjust for potential local revenue shortfalls, he accounts for the fact that local revenues are smaller than state revenues, and assumes that they are less sensitive to current economic conditions than state revenues. This assumption is based on the fact that local revenues are dominated by property taxes, and property taxes have traditionally been seen as largely insensitive to the business cycle. All of the parameters and assumptions driving his findings are transparent and well-documented.

It's worth noting a couple of things about these estimates. First, the Fiedler, Furman, and Powell findings are based on data from 1985–2018. But there is evidence that the sensitivity of state revenue to changes in unemployment has increased steadily over time. The figure below shows estimated coefficients from a regression of annual changes in all state and local taxes excluding property taxes on the annual change in unemployment and a time-trend. The measure of state and local taxes minus property taxes is not a terrible estimate of state revenue alone, as property taxes are mostly collected at the local level. The data run from 1959 to 2019. The coefficient on this measure, showing the decline in taxes associated with each 1 percentage point increase in unemployment is more than twice as high in the last two decades (4.8%) than in the decades before (2%) , and since 2000 it is significantly higher than the Fiedler, Furman and Powell estimate of 3.7% (we should note that when restricting the data to 1985-2018 to mirror the Fiedler, Furman, and Powell estimate, we get a coefficient exactly matching theirs, even with a slightly different dataset).

Figure A

Second, the common claim that property taxes are largely invariant to the business cycle also seems to change once one focuses on more recent data and allows for lagged effects. Property taxes change more slowly as the economy weakens than other taxes, such as sales or income taxes. Property taxes rely in part on assessments of value that are sometimes adjusted only in multi-year increments. Given this, it can take a while for a weaker economy to translate into lower property tax collections. The figure below shows the coefficient for a regression showing the annual change in property tax revenues associated with a 1 percentage point change in unemployment lagged two years. Before 2000, this coefficient was effectively zero, validating the presumption that property taxes were largely insensitive to the business cycle. But since 2000, this coefficient has become statistically significant and economically meaningful, with property taxes falling as unemployment rises. The post-2000 estimates would, for example, indicate that the average 9.5 percentage points of excess unemployment between the second quarter of 2020 and the first quarter of 2021 would by itself translate into a roughly $60 billion decline in property tax revenues alone within a few years, once lagged effects kick in.

Figure B

Given these considerations, the finding that state and local governments may face a revenue shortfall of up to $1 trillion by the end of 2021 seems entirely plausible, and federal aid should be on this scale in order to avoid forced cutbacks in state and local government spending from becoming a large drag on economic recovery. Further, unemployment is forecast to be quite elevated even by the end of 2021, and so federal aid should continue so long as economic conditions warrant, and not be set by arbitrary timelines.

*In an earlier post, we found that rising unemployment and reduced economic activity could depress state and local revenues by $500 billion or more by the end of 2021. We now think the number is even higher than this for a few reasons. First, our first estimate was based on a forecast for unemployment (from Goldman Sachs) that was more optimistic than that projected by the more recent CBO estimate. Just the longer and larger rise in unemployment forecast by CBO would push up our estimates. Second, in the earlier post, we used a slightly-smaller number for how responsive local government revenue might be to rising unemployment than that used by Bartik. But our findings on the growing sensitivity of property tax revenue to rising unemployment over time highlighted above makes us think his estimate makes more sense. Finally, we based our estimates on the assumption that only state and local revenue shortfalls associated with unemployment rates above 6% would trigger federal aid. But there's no reason in the current moment to ration federal assistance. The fiscal stress of state and local governments today and for the next two years is entirely the fault of the coronavirus —as a group these governments were in strong fiscal shape before this shock. Given the huge capacity of the federal government right now to take on debt (as evidenced by historically low interest rates), there is really no reason to not hold state and local governments fully harmless against the fiscal shock of the coronavirus, and this shock can be measured as simply the entire increase in unemployment since the first quarter of this year.

 -- via my feedly newsfeed

Guaranteeing Employment during the Pandemic and Beyond [feedly]

The employer of last resort approach may be the only resort.

Guaranteeing Employment during the Pandemic and Beyond
http://www.levyinstitute.org/publications/guaranteeing-employment-during-the-pandemic-and-beyond

 -- via my feedly newsfeed

State-Owned Enterprises in the Time of COVID-19 [feedly]

Interesting take on the role of state owned enterprises .... from the IMF.

State-Owned Enterprises in the Time of COVID-19
https://blogs.imf.org/2020/05/07/state-owned-enterprises-in-the-time-of-covid-19/

Vitor Gaspar, Paulo Medas, and John Ralyea

عربي, 中文, Español, Français, 日本語, Português

The pandemic has highlighted the role of the public sector in saving lives and livelihoods. State-owned enterprises are part of that effort. They can be public utilities that provide essential services. Or public banks that provide loans to small businesses. But some are also struggling and adding to the burden on government finances. These range from national oil companies that are dealing with a large fall in oil prices, to national airlines without enough passengers traveling.

Most people encounter state-owned enterprises every day. They are likely to provide the water you drink, the electricity you use, and the bus or metro you ride to work or school. They come in all shapes and sizes. Some are fully owned by the government and some are jointly owned with private investors.

State-owned enterprises' assets are worth $45 trillion, equivalent to half of global GDP.

Our new Fiscal Monitor delves into this other government. How have state-owned enterprises evolved in recent decades? How can countries get the most out of them? At their best, they can help countries achieve economic and social goals. At their worst, they need large bailouts from taxpayers and hinder economic growth. Which version you get boils down to good governance and accountability.

Big and complicated

State-owned enterprises are present in all countries. In some, like China, Germany, India, and Russia, they number in the thousands.

They are major players in many economies. For example, state-owned enterprises undertake 55 percent of total infrastructure investment in emerging and developing economies.

Some are also multinationals, operating around the world. The share of state-owned enterprises among the world's 2000 largest firms doubled to 20 percent over the last two decades, driven by state-owned enterprises in emerging markets—their assets are worth $45 trillion, equivalent to half of global GDP.

The relationship between governments and state-owned enterprises is not always straightforward. Governments create the enterprises to meet specific goals and mandates, such as the provision of water, electricity, or transportation routes that the private sector would not find profitable. However, these mandates are often not appropriately funded, with consequences for people's lives. State-owned enterprises are falling short in many developing countries, where more than 2 billion people remain without access to safe water and more than 0.8 billion lack reliable electricity.  

Public banks are another example. Governments, such as in Brazil, Canada, Germany, and India have asked their public banks to help alleviate the impact of the current pandemic. However, many public banks have a poor record in promoting economic development (their main goal) and may take excessive risks, which leaves economies and people more vulnerable to crises.

Governments also struggle to effectively monitor state-owned enterprises. Many lack the capacity to do so. Poor transparency in public banks' and enterprises' activities remains an obstacle to accountability and oversight. This can lead to a buildup of large and hidden debts with governments having to bail them out, sometimes costing taxpayers more than 10 percent of GDP.

In these cases, the enterprises tend to underperform relative to their private sector peers. Drawing from a sample of about 1 million firms in 109 countries, we find that state-owned enterprises are less productive than private firms by one-third, on average. This weak performance is partially due to poor governance: productivity of these enterprises in countries with perceived lower corruption is more than three times higher than those in countries where corruption is seen as severe.

The internationalization of state-owned enterprises has also intensified concerns that they have an unfair advantage over private firms because of government support including cheap loans or tax benefits. This worry has long been present in domestic markets, but it has recently spilled across national borders and could fuel protectionist measures.

Bang for the taxpayer's buck

In a time when governments are facing increasing demands and struggle with high debt, a core principle for state-owned enterprises is not to waste public resources. We make four main recommendations for how countries can improve the performance of state-owned enterprises:

1. Governments should regularly review if an enterprise is still necessary and whether it delivers value for taxpayers' money. For example,  Germany conducts biennial reviews. The case for having a state-owned enterprise in competitive sectors, such as manufacturing, is weaker because private firms usually provide goods and services more efficiently.
2. Countries need to create the right incentives for managers to perform and government agencies to properly oversee each enterprise. Full transparency in the activities of the enterprises is paramount to improve accountability and reduce corruption. Including state-owned enterprises in the budget and debt targets would also create greater incentives for fiscal discipline. Many aspects of these practices are in place, for example, in New Zealand.
3. Governments also need to ensure state-owned enterprises are properly funded to achieve their economic and social mandates, such as in This is critical in responding to crises—so that public banks and utilities have enough resources to provide subsidized loans, water, and electricity during this pandemic—and in promoting development goals.
4. Ensuring a fair playing field for both state-owned enterprises and private firms would have positive effects by fostering greater productivity and avoiding protectionism. Some countries already limit preferential treatment of state-owned enterprises, like Australia and the European Union. Globally, a potential way forward is to agree on principles to guide state-owned enterprises' international behavior.

The stakes are high. Well-governed and financially healthy state-owned enterprises can help combat crises such as the pandemic and promote development goals. However, to deliver on these, many need further reforms. Otherwise, the costs to society and the economy can be large.

Related links:
Fiscal Policies for the Recovery from COVID-19
Fiscal Policies to Contain the Damage from COVID-19

 -- via my feedly newsfeed

Richard Wolfe: Economic Update - Unemployment: Cruel, Wasteful, Unnecessary [feedly]

Richard Wolfe: Economic Update - Unemployment: Cruel, Wasteful, Unnecessary
https://economicupdate.podbean.com

 -- via my feedly newsfeed

Weekend reading: How minority communities are disproportionately affected by the coronavirus and its recession edition [feedly]

Weekend reading: How minority communities are disproportionately affected by the coronavirus and its recession edition
https://equitablegrowth.org/weekend-reading-how-minority-communities-are-disproportionately-affected-by-the-coronavirus-and-its-recession-edition/

his is a post we publish each Friday with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is relevant and interesting articles we're highlighting from elsewhere. We won't be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Two congressional reports released this week confirm what the media has already been reporting: Communities of color, and especially African Americans, are disproportionately being exposed to the coronavirus, dying from the disease it causes, COVID-19, and losing their livelihoods amid the recession that the pandemic caused. The two reports also make clear that entrenched economic and racial inequalities in our society are behind these disparities. Liz Hipple looks at the effects on communities of color of in terms of occupational segregation, which disproportionately leads minorities into lower-wage jobs; residential segregation, which disproportionately forces minorities to live in overcrowded and poor conditions; and disproportionately high rates among black Americans of pre-existing health conditions, which increase the chances of fatal complications from COVID-19. Hipple explains how these inequalities put minorities at a disproportionate disadvantage during the coronavirus health and economic crises, and shows why solutions to these underlying issues will be key to preventing racial gaps from widening further.

The U.S. Bureau of Labor Statistics released employment data for the month of April today, showing the highest unemployment rate since the Great Depression: 14.7 percent. While workers across the economy are feeling the effects of the coronavirus recession, Heather Boushey and Carmen Sanchez Cumming write that workers of color, workers in low-wage industries, and less educated workers, and women are being hit particularly hard. Boushey and Sanchez Cumming analyze the newly released data and trends arising from the economic downturn, concluding with several ideas policymakers can enact in order to support the most vulnerable workers and ensure the economic recovery will be swift.

One of the sectors most severely hit by shelter-in-place orders and other quarantine and social distancing measures is the U.S. restaurant industry, which was one of the fastest-growing areas of the U.S. economy prior to the pandemic. Estimates from the National Restaurant Association say that around two-thirds of the sector's almost 12 million-person workforce has been laid off as a result of the coronavirus pandemic. And while the CARES Act and subsequent refunding of the Paycheck Protection Program provided hundreds of billions of dollars for small businesses—of which the restaurant industry is mostly comprised—food-service borrowers received only the fifth-highest amount of stimulus money. T. William Lester explains the underlying inequalities and structures existed within the industry before the pandemic and why this funding was not nearly sufficient to help restaurants weather the coronavirus recession. Lester then offers three proposals that policymakers can take up to bolster the restaurant industry specifically, as this sector will be incredibly important for a swift and sustainable economic recovery.

How has the pandemic affected global trade, specifically trade in medical equipment and supplies, and pharmaceuticals? Kimberly A. Clausing makes the case for preparation rather than isolationism to solve the trade challenges surrounding the global pandemic. Considering that the United States depends heavily on global medical supply chains—we both import and export large quantities of medical equipment, supplies, and pharmaceuticals—cutting off trade is not a viable policy option. Clausing disproves three fallacies that have arisen in the face of the pandemic about international trade, self-sufficiency, globalization, and immigration, and highlights three important lessons we can learn from this crisis.

This week, a group of 12 of the most highly regarded antitrust minds in the country submitted comments to the House Judiciary Committee on the state of U.S. antitrust laws and enforcement. The signatories included Michael Kades, Equitable Growth director of markets and competition policy, who wrote that the group's conclusions about digital market concentration were blunt and its prognosis bleak. Kades shared a detailed explanation of what's wrong with antitrust law as it currently stands, as well as four policy recommendations to Congress that can better protect competition, particularly in digital markets.

Links from around the web

New polling shows that Hispanic workers are almost twice as likely as their white counterparts to have lost their jobs amid the coronavirus recession. Black workers are also more likely to have lost their jobs, though the disparities between black and white workers is smaller than that of Hispanic and white workers. In The Washington Post this week, Tracy Jan and Scott Clement review the results of the poll, which was done prior to today's release of unemployment data from the U.S. Bureau of Labor Statistics. The poll also showed that while half of those interviewed who had lost their jobs had applied for Unemployment Insurance benefits, only 28 percent had received UI benefits.

In addition to racial disparities in job losses from the coronavirus pandemic, minority-owned businesses have also been largely deprived of access to federal stimulus funds provided in the CARES Act and subsequent small business funding. Marcus Baram reports for FastCompany that some surveys show at least 90 percent of businesses owned by people of color either have been or will be shut out of the Paycheck Protection Program. This could be attributed to minority communities tending to rely on smaller community banks and credit unions, which had access to less of the stimulus funding than their larger banking counterparts, and because communities of color tend to be underbanked to begin with. Though the second round of PPP funding set aside $60 billion for small banks and community lenders, Baram writes, the program is still not effective in getting badly needed funds to minority-owned banks to disburse among minority-owned businesses.

This disproportionate economic toll on communities of color is not unique to the coronavirus recession. During the Great Depression and the Great Recession, black unemployment was higher than national unemployment rates, and, writes Aaron Ross Coleman for Vox, who says "over the past 30 years, you can't find a recession that hasn't been more severe for black workers than for whites." The wealth gap between black and white families compounds this crisis because black households have less of a financial cushion to fall back on and because the coronavirus recession is particularly damaging to wealth-creating black entrepreneurship, which was already in a precarious position before the downturn began. Economic recovery also takes much longer for communities of color than for their white counterparts, and, Coleman explains, black Americans were not able to fully recover from the Great Recession before the coronavirus recession hit. These and other factors together mean that black communities will not only experience the economic and public health crises more sharply now, but also that, without needed policy reforms, the negative effects will continue much longer into black Americans' future.

Modern disaster relief, from Hurricane Katrina to the coronavirus pandemic, has utterly failed black communities across the United States, writes Kimberlé Williams Crenshaw for The New Republic. And while the pandemic is impacting all races and ethnicities, it is impossible to ignore the disproportionate effects on communities of color and the structural disparities that put them at an extreme disadvantage compared to white communities. Enacting a colorblind response to coronavirus pandemic would be misguided, Crenshaw opines, because ignoring the structures that disproportionately put communities of color in harm's way will only ensure they are further harmed in the next crisis. Crenshaw looks at how past actions to combat previous crises have done just that, from the New Deal to the GI Bill, and how each one has weakened communities of color and their ability to recover fully from the next crisis.

Friday figure

Figure is from Equitable Growth's "Coronavirus recession deepens U.S. job losses in April especially among low-wage and less-educated workers and women" by Heather Boushey and Carmen Sanchez Cumming.

The post Weekend reading: How minority communities are disproportionately affected by the coronavirus and its recession editionappeared first on Equitable Growth.

 -- via my feedly newsfeed