Mainstream Economics cannot help the recovery and rehabilitation of the Coronavirus-hit Global Economy – The Alternative is a New-stream Economics to Revive and Redistribute Global Supply Chains
Mainstream Economics took more than a decade to recover from the global financial crisis 2007/09 in the developed world, despite the well-known literature on business cycles, asset bubbles and busts, financial stability and monetary and fiscal prescriptions for macroeconomic stabilization. Further, the Coronavirus hit the global economy in early 2020 at the tail-end the decade-long recovery from the global financial crisis whereas same economics, i.e., concepts and prescriptions, seems to have failed to recover economies across the globe, both developed and developing, during last 20 months.
Except in Malthusian Theory/Concept to deal with the population growth exceeding the food supply in the world/countries, Mainstream Economics does not cover pandemic risks and stabilization. Therefore, Mainstream Economic Prescriptions are not trust-worthy, given diverse market reactions that have been disrupting and disturbing global supply chains causing a severe loss of global economic welfare that has been produced by same supply chains evolved during the past half-century.
It covers concepts and hypotheses (assumptions based) that model the equilibrium and full employment of resources of the economy at the point where the demand is equal to the supply in aggregate which is built on microeconomic models and hypotheses on rational behaviours of participants in markets, i.e., commodity and factor markets. Any mismatch in aggregate demand and aggregate supply would cause macroeconomic instabilities or business cycles that are believed to be reflected in changes in inflation, GDP growth, employment/unemployment rate, savings and investment rates, etc., which are known as macroeconomic indicators or macroeconomic test results. Therefore, these indicators are frequently targeted and monitored by those economists and policymakers in order to assess the level and trend of business cycles and economic instabilities and impact of the mainstream policy prescriptions.
Policy prescriptions are mostly on adjustments of the
aggregate demand (or demand side of the economy) through the intervention of
fiscal policy and monetary policy to match the aggregate supply over time towards
achieving the key macroeconomic indicators such as GDP growth, inflation and
unemployment at targeted or favorable levels that are considered fit to keep
the economy stable, neither recessionary nor overheating. The monetary policy
and fiscal policy are carried out through a set of policy instruments based on
targets of the monetary growth, budget deficit and debt ratios to drive the
economy for stabilization as targeted (see the article in this blog on “Macroeconomic
Management by the State – How does it work in Principles of Economics”).
Accordingly, both fiscal policy and monetary policy target the changes in aggregate demand regardless of the nature of specific shocks or risks to the economy that have caused or are expected to cause the instability. The policy measures are in two categories, either to cause expansion or contraction of the aggregate demand, depending on the level and trend of the demand-supply mismatch in the economy as identified from the numbers primarily of inflation, GDP growth and unemployment rate.
While several schools operate in the Mainstream Economics, Keynesians vs Monetarists and Hawkish vs Dovish are the leading schools of thoughts that dominate the Mainstream. Keynesians believe the fiscal policy while Monetarist believe the monetary policy to influence the aggregate demand. Meantime, Hawkish stress the need for controlling inflation whereas Dovish stress the need for enhancement of the GDP growth as the driver for the stabilization of the economy.
The
Hawkish Monetarists suffer from an inflation ghost haunting frequently in the
economy and talk about anchoring inflation expectations of the public through
the monetary policy in order to stabilize the actual inflation around the preferred target in the monetary policy.
However, they do not have psychological tools in the monetary policy other than technical jargon used in policy communications. At the
end, they all struggle in hypotheses after hypotheses without paying much
attention to the general level of the living standards of the public which is
let to be determined by trickle-down effects or markets in response to policy
drivers.
Whatever said and done in Mainstream Economics and underlying policy prescriptions, the real-world economic norm has been the surprised ups and downs or swings in economies across the globe causing a lot of implications to the living standards and economic distribution among the general public. However, they continue to propose same policy prescriptions in new languages, despite the differences in causes and impacts of macroeconomic instabilities that hit the world/countries from time to time.
Why Mainstream Economics Fails to Revive the Global Economy from the Pandemic?
Its failure attributes mainly to the aggregate or centralized
approach to the macroeconomic management and stability. The fiscal policy
centers around the level of budget deficit and debt stock as determined by the
Treasury without much regard to wider sectoral developmental needs. The monetary
policy is geared to manage primarily the overnight interbank liquidity or short-term funding
banks through printing of money with targets for interbank interest rates and
growth of money stock as determined by the central bank without regard to wider
credit needs and bank credit delivery routes and risks across the economy. They all are happy
when the aggregate demand is moving towards targets of inflation, GDP growth
and unemployment rate regardless of the sectoral response and outcomes of the economy. Further,
the numbers on inflation, GDP growth and unemployment rate are questionable in
view of the estimation methodologies and data governance issues.
Therefore, Mainstream Economics has been applying same approach to deal with the Pandemic across the globe. As a result, historic expansion of both policy lines, i.e., budget deficit and debt on the fiscal front and excessive printing of money at interest rates close to zero or negative to directly facilitate budgetary finance on the monetary front (knowns as MP3). Further, the two policies are in historic coordination each other.
However, the recovery of the global economy as well as country economies across the globe has been shaky and sluggish with wide-spread supply side bottlenecks and signs of overshooting of inflation above the targets (2% in the developed world) first time in the past two decades. Mainstream Economists following their conventional hypotheses tend to predict stagflation condition in the world similar to what was experienced in early 1970s.
Therefore, Mainstream Economists in the Monetary Schools
insist on urgent tightening of the monetary policies to deal with rising
inflation in its first round itself now before letting it to subsequent rounds
through wage/cost-price spirals. They also express grave concerns over rising fiscal
deficits financed by bank credit that fuel further inflationary pressures. However,
many central banks led by the US Fed, Bank of England and European Central Bank believe present inflationary
pressures as largely the outcome of supply side bottlenecks and such pressures are
envisaged to disappear when supply chains recover gradually with gaining the control over the Pandemic.
However, several central banks have tended to consider such concerns over rising inflationary pressures and commenced expressing views in line with the policy tightening required sooner or later to arrest the inflationary pressures, regardless of widespread problems being confronted and anticipated in the recovery of supply chains. This has created wide speculations on market interest rates and financing conditions across the financial markets and significant volatilities as usual because inflation pressures or expectations move market interest rates in same direction to protect real interest rates. Therefore, subsequent policy tightening would only be a noise to the markets.
A few central banks have already commenced policy tightening, for example, Central Bank of Sri Lanka, Bank of Korea, Central Bank of Norway and Central Bank of Brazil, despite the pandemic related uncertainties still prevailing including the spread of Delta variant, lockdowns and travel restrictions. Some central banks even tend to push yields of government securities unofficially through their open market operations to influence market interest rates without an announced monetary policy tightening. Economists raising concerns over potential of future inflation due to present expansionary fiscal and monetary policies do not understand inflation dynamics in modern communication economies and the need for ultra-lose monetary policy in times of crises and slums until the surrounding uncertainties disappear. In fact, if inflationary pressures have risen unexpectedly so fast long before the recovery of the global economy, it is the fault and lapse of the Mainstream Economic Prescriptions too.
The failure of Mainstream Economics in general and in the Pandemic in special has been due to its aggregate approach. Although past economic instabilities and business cycles could have been reversed by markets supported by monetary and fiscal policies over time, same does not seem to hold relevant at present as the Coronavirus has disrupted economic structures and flows in all corners as reflected in disruptions in supply chains and markets.
Problems reported from various points at supply chains are reflective of grave instabilities and uncertainties prevailing in all corners of the markets. The sudden up rise in global energy and commodity prices, reduction in labour force and shortages of labor in the US, shortages of labour types such as Truck Drivers in the UK, energy crunch in China with rationing of electricity, the loss of certain categories of jobs in the world due to online and zoom-based services and the loss of jobs on supply chains connected to lost-tourism and trade networks are some examples. New problems or new signs of supply bottlenecks are reported on daily basis by adding to uncertainties across the globe. In fact, rising inflationary pressures are a result of such bottlenecks and uncertainties and not necessarily on account of monetary and fiscal expansion as the most part of new money remains in bank excess reserves.
Therefore, the aggregate approach of Mainstream Economics does not appear to support the recovery of the global economy from the Pandemic. In fact, it will worsen the supply bottlenecks and uncertainties which will delay the recovery for a decade or more. In the case of the recovery from the global financial crisis 2007/09 in the developed world, it took more than a decade of Mainstream Economic Policies.
The expansionary policies to deal with the global financial crisis 2007/09 involved in printing of new money around US$ 10 tln for a decade in the developed world and could not be reversed even by end of 2019. The increase in the budget deficit and debt from 2007 to 2009 was 7.7% of GDP (from 1.2% to 8.9%) and 14.6% of GDP (from 78.4% to 93%), respectively.
Meantime, the policy response to the present Pandemic during
the past 18 months alone involved in new money printing of nearly US$ 9 tln in the world so far (mainly
in developed countries) with the increase in the budget deficit and debt by 8.8%
of GDP (from 2.9% to 11.7%) and 16.3% of GDP (from 103.8% to 120.1%),
respectively, between 2019 and 2020 in the developed world. The increase in the
budget deficit and debt in the emerging market and middle-income countries in
this period was lower, i.e., 5.1% of GDP (from 4.7% to 9.8%) and 9.7% of GDP
(from 54.7% to 64.4%), respectively. This position in the low-income countries lags
far below (Source: IMF Fiscal Monitor).
While such fastened policy response has failed to revive the global supply chains, the tendency to slow or reverse the policy stance on the resistance by most Mainstream Economists on account of their concerns over possible future inflation will no doubt cripple the economies further. Any layman with common economic sense knows that a new flow of money is required through credit and fiscal supports to recover from business downturns and uncertainties.
What is the Alternative to Mainstream Economics? A New-stream
Economics - Risk-based Decentralized or Distributed Approach
Accordingly, fiscal policy and monetary policy must invent policy prescriptions widely of surgical nature across the economy. Old, lagged test results such as inflation, GDP growth and unemployment rate should be replaced by performance indicators of decentralized supply chains (or nuts and bolts) based on natural experiments carried on ongoing basis. Mainstream Economists do not have acceptable experiments on causes and effects of inflation, GDP growth and unemployment rate other than hypotheses that are taught to students in Economics. Further, if Mainstream Economics is realistic, there is no possibility of running the Monetary policy and Fiscal Policy by non-economists.
The concept of Modern Monetary Theory which has emerged recently challenging the Mainstream Economics could be used as the ideological platform to invent the New-stream. All economic policies are designed and implemented on ideological grounds without any scientific experiments and test results. Therefore, we need to use human brains and the knowledge to invent solutions to protect and foster living standards of the general public by respecting the humanity of both the present generation and future generations alike. The present Pandemic that was never expected or prepared provides immense opportunity for new thinking to invent a New-stream Economics for macroeconomic risk management.
Scientists, entrepreneurs, artisans and other social subject experts and activists have immensely contributed to the present level of human wellbeing and development. In that context, specific contribution of Economists appears to be unclear, given diverse views on economic activities and instabilities that limit the effective contribution of above parties as well, as they all have to work in the economic environment shaped by the views of Economists. Therefore, it is high time for the Economists to show their performance and contribution towards human development based on specific measurements.
(Next article will be on the design features of the proposed
New-stream Economics Concept)
P Samarasiri
Former Deputy Governor, Central Bank of Sri
Lanka
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