Tuesday, 22 May 2012

Repeating Old Myths

Leszek Balcerowicz appeared last night on the political chat show hosted by Tomasz Lis, where he repeated his long-held mantra that only further liberalisation and austerity could ensure Poland's long-term economic success.

In the interview Balcerowicz repeated two old myths, that are used to show that there really is no alternative to the policies of economic liberalism:

- Firstly he argued that one of the biggest threats to the Polish economy is its high level of public debt (presently around 54% of GDP) and budget deficit (over 7%). He explained that 'despite' Poland's positive economic growth over the past few years, its deficits and debt have continued to grow. 

Perhaps we could turn this around, and state that Poland has grown because it has allowed some expansion of its debts/deficits? These are still way below the European average, and the ticking of a debt time-bomb sounds loudest in the heads of those who are focused almost entirely on this one aspect of economic policy. During the past few years public investment has risen from 4.2% of GDP to 5.6% and the government has avoided an all out policy of austerity (much to the disgust of Balcerowicz) similar to that being pursued in other European countries. 

With Balcerowicz ruling out any return to more progressive taxation policies in Poland, his anti-deficit programme relies almost entirely upon cutting public and social spending. This policy would lead to social and economic regression, not development. 

- The second myth being spread by Balcerowicz is that if the country does not act fast and decisively, then the bond-markets will punish Poland and the cost of its borrowing and thus overall level of debt will rise. The assumption is that bond-markets reward public spending cuts and punish over-spending. However, when we move away from the text-books of dogma, we find that this is actually not the case. For example in France since the election of Francois Hollande, bond yields have actually fallen; as they have in Germany that itself has diverged from the policies of austerity. In contrast the GIPS economies (Greece, Ireland, Italy, Portugal and Spain) the bond markets have fallen (causing their interest rates to raise) after introducing harsh austerity programmes. 

A programme of austerity in Poland would most likely lead to an economic contraction that in turn would see the country's bond markets decline. 

For more on the bond markets in Europe, see this interesting article from Socialist Economic Bulletin.

3 comments:

  1. Interesting post. How do you think the widespread and persistent dominance of the austerity mantra fits within Michal Kalecki's theory on the political aspects of full employment?

    I am not sure if the effort is conscious and coordinated, but I sometimes do get the sense that capitalists are taking advantage of the Great Recession to weaken labor politically via austerity and other measures which tend to increase unemployment.

    I think we will see the fruits of this “strategy” (if I can call it that) when more and more onerous disciplinary measures are placed on hapless workers.

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  2. Thanks for posting. I think that proponents of austerity are using the crisis as an excuse to forward their own ideological agenda of shrinking the size of the state in the economy and shift resources to the wealthiest sections of society. Eventually, if successful, this may build profit levels enough that private businesses can begin new investments and instigate a new course of economic growth. However, this will both take time, will lead to a worsening of living conditions for the majority and erode a great deal of the rights that were gained over the previous century. It is for this reason that there is such opposition to austerity, particularly in places like Greece where they are most extreme.

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  3. You need to go further: if Poland had all its debt in its own currency, then the size wouldn't matter one bit. It can be too small, then you get uneployment, or too large, then you get inflation, but in any case any size of the debt that is deemed necessary to preserve employment and price stability is achieveable. It is a myth that your rates would skyrocket if the debt got too large. This is true only for USERS of foreign currency, like countries on the Euro. The mainstream economics discovers with incredulity that rates for sovereign issuers like US, Japan or UK are controlled by the government itself.

    The body of research behind this is well established actually, but by heterodox, not orthodox economists, and you don't see them in the media.

    If you are interested, please check out:
    http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory

    http://www.gurufocus.com/news_print.php?id=147269

    http://bilbo.economicoutlook.net/blog/?p=5199

    http://www.atimes.com/atimes/Global_Economy/MG27Dj02.html

    http://bilbo.economicoutlook.net/blog/?p=7864

    http://bilbo.economicoutlook.net/blog/?p=8013

    http://bilbo.economicoutlook.net/blog/?p=381

    http://wallstreetpit.com/21862-who-determines-rates

    http://wallstreetpit.com/12344-what-if-the-government-just-prints-money






    video:

    How soveriegn money works: https://www.youtube.com/watch?v=ba8XdDqZ-Jg

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Go for it - but if its abusive then it gets blocked