The Geopolitics Of Normative Economic Shocks

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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In my earlier article on the prospects of a depression in the United States and elsewhere around the world, I had analyzed the risks to the global economy which can potentially lead to a worldwide depression.

United States faces important economic policy choices in a global economy where all the world’s major economies want to maintain levels of unemployment and inflation that are not socially destabilizing.

During the Reagan years, after the Ford and Carter malaise of the 1970s, annual growth rate was 9.3% at its peak in 1983, while both inflation and unemployment steadily fell, with a lag, to about the same level between 1981 and 1988. The reason was change in the economic structure: alleviation of budgetary angst about social insurance liabilities, increase in Cold War government expenditures on defense, and regulatory and tax changes for the private markets by 1986. “Morning in America” was delivered.

Time tested heuristics, no matter the economic structure, suggest that unemployment ceilings are typically double the historical averages or about 11% for US (and around 16-18% for the Economic and Monetary Union, EMU) only when buttressed by a social safety net to hold up consumption – the major part of any country’s gross domestic product (GDP) or output – sufficiently so as not to cause a downward spiral in prices (or deflation). Annual inflation (or upward spiral in prices), in any major economy, should not exceed 10% as long as unemployment is within its long term average behavior. Annual unemployment income equal to per capita independent of family size but conditioned on employability and national economic circumstances – measured as the return to steady state growth rate at any nominal central bank interest rate, average long term rate of unemployment and 5% inflation.

The present-time composite picture is, however, approaching a skewed steady state annual growth rate, slowing again after a similar first quarter drop in 2011, at near-zero federal funds rate, around 2% annual inflation and 8.1% unemployment rate (or about 11-13 million of the 145 million tax payers), with the overall economy projected to continue to grow at an annual rate of about 2% in 2012 – about the same as in 2011.

The detail of the current economic indicators in the United States is mixed. The Institute of Supply Management (ISM)’s Purchasing Manager’s manufacturing index (PMI) for April increased by 1.4 percentage points and its non-manufacturing index (NMI) for the same month decreased by 2.5%. Leading and lagging economic indicators show a growing US economy, in its 9th consecutive quarter of a recovery which began in 2010.

Now the Cold War is over. No country wants war, including Iran, unless America wants to create enemies – among the BRIC (Brazil, Russia, India and China) group of countries or in MENA (Middle East and North Africa) – it does not really have.

Government expenditures on national defense and intelligence, after Iraq and Afghanistan, cease to be sources of economic recovery. Defense modernization is truly about working within the budgetary constraint to change to defense technologies which do not include any weapons of mass destruction, including nuclear. War is no longer a positive short-run economic shock.

The remaining policy levers in the hands of the government are money, taxes, trade and regulations targeted to changing the economic structure at home and to produce economic growth and development abroad. The sledgehammers of pumping money (as the Fed is doing now), cutting taxes or shredding regulations do not work. Policy scalpels are necessary.

To achieve structural change it is clear that taxation (including payroll taxes) needs comprehensive reform once again after 1986, and money supply – in alignment with the new tax structure – must direct/regulate domestic real investment to bring unemployment down to at least the historical average of 5.5% while maintaining annual inflation at a ceiling no higher than 5%.

For the United States, trade policy is one of several foreign policy tools and, especially after World War II and the Cold War, must be consistent with the American values of 1776 and country adaptations to the ensuing constitutional political structure put into place by our founders between 1787 and 1791. The primary objective of US foreign policy and trade is not net exports but democratic societies and social orders of de jure secular faith. American socio-economic integration must reflect these social and political values.

Power-sharing in the highest elective offices of President, Vice President, Secretary of State, Speaker of the House of Representatives and the appointed offices of the Justices of the Supreme Court must be guided by these values and the socio-economic history of America. Accordingly, the current world order puts men whose heritage hails from European de jure secular democratic republics at the top of the Anglo-American (English speaking in government) social heap, followed by: African-American men of heritage from de jure democratic republican African nations, women of similar heritage as the European and African-American men, Japanese, Asian-Indians, and all others, in the constitutional order of evolution to equal rights in America from 1787 to 1965. Other Americans will share power in these highest elective and appointed offices when their countries of immigrant origin become de jure secular democratic republics as a consequence of our foreign (including trade) and defense policies.

In the above framework of analysis of American society and power, the European financial crisis must be understood.

At issue, therefore, is what can come of what is transpiring across the Atlantic? For the moment, respecting the heritage of most constitutional/parliamentary European monarchies/republics and the attendant state religions, the foremost foreign policy priority for America becomes democracy and, hence, the preservation of the European (political) Union in Brussels.

The renowned British economic commentator Martin Wolf, in a recent National Economists Club (NEC) talk in Washington which I attended, brought to relief conflicting tensions in the European political-economy: the Franco-English fear of the rise of a quasi-imperial Germany from the crisis on the one hand and the German fear of hyperinflation on the other, as observed by Wolf from his perch in the United Kingdom waiting for the crisis to be over to decide whether to integrate monetarily into the Economic and Monetary Union (EMU) also known as the eurozone – the 17 countries which use the common currency, the euro.

Fears of both are just as reasonable given the context of European history since World War I. The rise of right-wing conservatives in the electoral politics of continental Europe riding the coattails of German conservatives under the guise of the fear of hyperinflation at Bundesbank and the European Central Bank (ECB) is indeed a political risk, the longer the crisis across the EU drags on.

The eurozone crisis, contrary to Wolf’s arguments, was, in fact, caused by national debt levels in defiance of the Maastricht Treaty and in conformance with American economic policies of monetary and fiscal easing and export growth, not to forget sledgehammer monetary easing which has disconcertingly enlarged income disparity both in the United States and the European Union, largely out of social concerns in the very long run. Domestic fiscal expansion is yet to bear economic fruit because of the fact that the EU and EMU are, as Wolf correctly argues, heterogenous political entities unlike the United States.

Germany wants a fiscal compact to bind the EMU members to the Treaty obligations which created the European Central Bank (ECB). The ECB, without the need for a separate Brussels-based EU fiscal compact, can enforce the Treaty obligations conditioned on inter-temporal commitments, adapted to individual member country circumstances, to return to the Treaty constraints of the EMU. The by-country agreements with ECB will determine how much debt ECB will allow on a per-country basis and in what time frame any debt burden and inflation in contravention of the Treaty criteria will return to within legally acceptable bounds. Further, the ECB should work with the country fiscal authorities to monitor debt and inflation-levels with an eye on any attempts by country governments to circumvent Treaty criteria as had occurred in the case of Greece and Goldman Sachs.

Realpolitiche since Otto von Bismarck requires that the non-eurozone countries – UK, Denmark, Norway, Sweden and Switzerland – must accede to the EMU now, not later after the crisis.

Timely sensibility – doing the right thing at the right time – on both sides of the pond can avoid a global depression and a possible consequential change of world order.


About Chandrashekar (Chandra) Tamirisa
This entry was posted in Constitutional Law, Economics, European Union, Monetary Policy, North America and Caribbean, Politics, Sociology, Supreme Court, Trade Policy, Transformations LLC, World and tagged , , , , . Bookmark the permalink.

One Response to The Geopolitics Of Normative Economic Shocks

  1. 8h European Commission ‏@EU_Commission
    What do you think about Europe’s single market? Sign up to submit your thoughts in October #smw20
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    3h 1776 @1_776
    @EU_Commission It is yours to keep or lose. Europe, I presume, is not a child.
    Hide conversation Reply Delete Favorite
    11:40 AM – 15 Sep 12 · Details

    6s 1776 @1_776
    @EU_Commission No common currency but a ECM? If you can’t maintain a common currency how can you maintain a common market?
    Hide conversation Reply Delete Favorite
    1:44 PM – 15 Sep 12 · Details

    18s 1776 @1_776
    @EU_Commission @officeGSBrown … ,
    Hide conversation Reply Delete Favorite
    2:49 PM – 15 Sep 12 · Details

    2m 1776 @1_776
    @EU_Commission @officeGSbrown Back to the ERM crises of the 1990s @davos and Soros with EU and no EMU. Use @britishmonarchy pound @carlbildt
    Hide conversation Reply Delete Favorite
    2:47 PM – 15 Sep 12 · Details

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