Abstract
This contribution focuses on the macroeconomic policies employed during the Global Financial Crisis and Covid-19, but most importantly on the future economic policies to achieve high levels of economic activity and employment, along with equal distribution of income and wealth. The relevant future economic policies proposed are fiscal, monetary and financial stability. Most importantly these policies need to be properly coordinated if successful economic activity is to be achieved. Such coordination should generate a path for resilient and sustainable growth, enhance productivity and reduce inequality. In terms of inequality, a relevant recent development has emerged. This is the strength of trade union membership, which since 1985 and across OECD countries has been reduced significantly. The problem with such reduction is recognized more recently. Governments and Central Banks around the world should move towards coordination of relevant policies to enhance the strength of trade unions. Fiscal and monetary authorities should introduce and employ safely and properly such coordination to achieve all the goals mentioned above.
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Notes
- 1.
- 2.
As Acocella et al. (2016) also suggest “Automatic stabilizers can fail either because they are too limited or because they are not powerful enough in oiling the market mechanism during large recessions, especially when restricted by fiscal rules designed to maintain sustainability” (p. 288).
- 3.
Acocella et al. (2016) provide a short review of fiscal multipliers to conclude that they exceed one in the downturn. Thereby, “austerity policies would be counterproductive in recessionary periods, making public deficits and debt worse rather than better” (p. 166).
- 4.
In the UK, however, household wealth has risen during the pandemic period. The Office for National Statistics reported that this increase emerged from a rise in house prices of 8.5% in 2020, and of government support (as reported in the Financial Times, 30 April 2021).
- 5.
In terms of the Brexit, an independent commission has been set up (April 2021) to closely examine, and improve, the UK’s deals with the EU. This commission includes members of Parliament and business leaders (Financial Times, 12 April 2021).
- 6.
Tenreyro (2021) suggests that “ In Europe, employment support schemes such as the UK government’s furlough scheme mean that governments temporarily take over wage bills to avoid mass unemployment” (p. 6).
- 7.
Savers in the UK are assumed to have accumulated £180bn in their bank accounts (10% of UK’s annual GDP). If all this were to be spent, it would increase consumption about 6% in both 2021 and 2022 (Financial Times, 12 April 2021).
- 8.
The Bank of England and the Treasury, and on 17 March 2020, established the Covid Corporate Financing Facility (CCFF), a lending facility. The aim of the CCFF is to provide lending to large non-financial firms. The Treasury decides which firms can take part in the CCFF.
- 9.
The ECB at its meeting on 21 January 2021 decided to leave its stimulus policies unchanged, and to check further whether bank lending rates, corporate credit conditions, and government bond yields “are favourable enough to boost demand and inflation” (reported in the Financial Times, 22 January 2021). However, further clarification and details of how ‘favourable financing conditions’ is defined are necessary. In any case, a further problem for the ECB is the recent sell-off in bond markets, which is spread to the Euro Area from the USA (where the expectation of higher inflation in view of the expected economic recovery has caused it). As a consequence of this sell-off, the ECB has increased its emergency bond-buying programme to avoid it. The Euro Area bond yields actually did fall.
- 10.
A further QE type, suggested by ecologists, is for Central Banks to provide free funds for green projects. Or finance at a zero interest rate, green bonds from firms engaged in ecological projects.
- 11.
More recently, however, middle of April 2021, Treasury bond prices have increased, in view of higher demand for Treasuries, since investors are uncertain about the impact of the $1.9tr impact on the economy; high inflation is expected. The 10-year Treasury bond rate of interest decreased to 1.55%. This, however, may change if the $1.9tr impact on the economy is successful. USA’s consumer-price index (PCI) was 2.0% in March 2021. It increased from the 1.7% in February 2021, the biggest increase since 2009. It is expected to increase to 3.5% by May 2021 (The Economist, 17 April 2021). Whether a similar increase of the Fed’s price index is consistent with the Fed’s change of its monetary policy framework, as in August 2020, is an interesting question, since no clarification by the Fed on this issue, implies further uncertainty. The April 2021 surge in inflation to 4.2% (the highest annual rate since 2008) produced selling of the 10-year government bonds, with the relevant interest rate increasing to 1.68% (Financial Times, 13 May 2021).
.
- 12.
In the EMU, the independent Central Bank and the lack of EMU fiscal policy does not allow proper coordination of fiscal and monetary policies. Proper fiscal union is required to allow such a proper coordination of fiscal and monetary policies in the EMU (see, also Arestis and Sawyer, 2011; Sawyer, 2013).
- 13.
As reported in the IMF Press Release No. 20/98 (23 March 2020).
- 14.
It should be noted that the Fed’s inflation targeting is different from other central banks’ (Central Banks follow the Taylor Rule, whereby they manipulate their interest rates to achieve their inflation targets, and also they respond to fluctuations to the output gap). The Fed has two objectives: ‘maximum employment’ and ‘stable prices’ (with 2% its inflation target). In terms of the ‘maximum employment’, which is interpreted as low unemployment, there is the question of the extent to which maximum employment is equivalent to ‘low unemployment’ (Tarullo, 2017, p. 3). Another difference is that the Fed has recently promised to tolerate higher inflation than its target (what is called, ‘average inflation target’, as stated in the Financial Times, 10 and 15 May 2021; with a number of the ECB’s governing council members supporting the Fed proposal for the ECB). This implies that the Fed is prepared to see the real rate of interest reduced, thereby increasing investment and aggregate demand. Whether such a policy can be successful depends heavily on expectations of healthy future economic activity, which are around now in view of the President’s $1.9tn economic stimulus. A relevant development is that in March 2021 the Fed upgraded to 6.5% the growth rate of the US economy, higher than the December 2020 relevant rate of 4.5%. It also stated that it expected to achieve its 2% inflation target, which however it should go back to the target. However, the Fed is expected to keep interest rates close to zero until 2024. By contrast, the Governor of the Bank of England told the House of Lords Economics Affair Committee that if inflation moved above the 2% inflation target of the Bank of England, the Monetary Policy Committee would raise interest rates – but there is not much evidence of this at present (reported in the Financial Times, 19 May 2021).
- 15.
The European Investment Bank has been transformed into a ‘climate bank’; a very interesting development.
- 16.
How much capital should financial institutions hold to make them resilient in the case of significant increase in borrower defaults is a relevant question. Mendicino et al. (2021) explore this question to conclude that a capital ratio of around 15% is in fact optimum.
- 17.
The USA Treasury Secretary, Janet Yellen, suggested in her speech to the Chicago Council on Global Affairs on 05 April 2021, the G20 and other countries should join the USA to set a global minimum corporate tax. This in her view would avoid profit shifting across countries to avoid taxes. Companies would pay taxes where their revenues are earned, not where their profits would be shifted—normally to tax heavens. In addition, this is needed to create a “stable tax system that raise sufficient revenue to invest in essential public goods and respond to crises” (as reported in the Financial Times, 06 April 2021). Janet Yellen also suggested on 07 April 2021 (as reported in the Financial Times on 08 April 2021) that the $2tn plan would produce 1.6% increase to GDP by 2024, alongside roughly $2.5tn in corporate tax increase. According to the Treasury Secretary, these are mutually beneficial policies. European countries have welcomed the suggestion of a global corporate tax, but they disagree over details of the proposal, especially over the minimum corporate tax (Financial Times, 15 April 2021); The UK’s Chancellor of the Exchequer is holding back support of the global corporate tax, arguing that it should be part of a broader package of a fairer system (reported in the Financial Times, 17 May 2021). Janet Yellen (on May 2021), urged Congress to accept higher taxes to pay for the President’s plan of spending. Janet Yellen also suggested that if inflation became an issue, tools are available to address it (reported in the Financial Times, 03 May 2021).
- 18.
The USA President has suggested recently (mid-April 2021) to reduce his infrastructure bill by 60bn in an attempt to get his infrastructure bill through the Congress.
- 19.
- 20.
In the case of the UK’s Financial Conduct Authority (FCA), it has been criticized for failing to regulate properly the sub-prime lending (as reported in the Observer, 04 April 2021).
- 21.
The LTV ratio is a policy tool that relates to the housing market. It is a lending risk assessment that financial institutions and other lenders consider before approving a mortgage. Higher LTV implies higher risk loans.
- 22.
In the UK, a new Infrastructure Bank is planned; the UK Treasury announced it, and confirmed by the Chancellor on his budget day (03 March 2021). This new bank is to be launched in spring 2021 to support private investment projects. The Chancellor on 03 March 2021 declared that the Bank of England should have another objective, namely environmental sustainability.
- 23.
A report published on 24 March 2021 (Network for Greening the Financial System; a group of 89 Central Banks and financial supervisors formed in relation to the Paris climate goals), advises central banks how to avoid climate change risks, and support their national governments, without influencing their monetary policies. The main proposal is for Central Banks to offer a lower rate when financing banks, which meet climate-related lending criteria (Financial Times, 25 March 2021). ‘Green Quantitative Easing’, and ‘Green Targeted Lending Operations’, are additional policies to enable energy transition. Clearly, Central Banks should not ignore climate changes, which affect economies profoundly. Indeed, central banks should be involved with climate change. They can, and should, accelerate reductions in carbon emissions, change the cost of capital, use stress tests, to address climate risks in the financial sector, and apply relevant macroeconomic policies to avoid financial instability. It should also be noted that the virtual climate summit meeting (with 40 world leaders) organized by the USA President on the 22nd and 23rd of April 2021, and dealt with carbon emissions, pledged, “to cut emissions by at least 50 percent by the end of this decade” (Financial Times, 24 April 2021). The UK pledged to catch its emissions by 78% and by 2035. The summit, though, ended with very few funding promises for the poor countries. However, the Bank of England, and other Central Banks, are examining how they can orderly contribute to the emergence of a carbon–neutral economy (Ramsden, 2021).
- 24.
As reported in The Economist (08 May 2021), in the USA the Fed is already considering the possibility of a CBDC. Also reported is that the CBDC is hoped to be introduced by 2025 by the ECB. Moreover, such conducive economic policies can significantly support progressive social, environmental, and economic development strategies and policies.
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Arestis, P., Karagiannis, N. (2022). Proper Future Economic Policies. In: Karagiannis, N., King, J.E. (eds) Visions and Strategies for a Sustainable Economy. Global Institute for Sustainable Prosperity. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-06493-7_4
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