Too excited to get my blog going, I finished my first post midway.
Sectoral Imbalances are of many kinds. The US private sector ran deficits for a long time and this lead to the financial crisis and the Great Recession. Frequently, you hear about the shift in the distribution of income and this can also be studied with the Sectoral Balances Approach. Central bankers and policy makers have also realized that global imbalances are unsustainable.
This blog is about how to achieve sustainable growth in the short, medium and the long run and in the author’s opinion can come about only if international policies are coordinated. Policy coordination is not a new concept but for many years before the crisis, imbalances were allowed to continue even though many policy makers took notice of this. In my opinion, these were allowed to continue because the implicit assumption was that “market forces” will work toward resolving the imbalances.
When the world entered a period of catastrophe, governments took action and turned Keynesians overnight. So the G-20 made this statement in the Summit on Financial Markets and the World Economy in 2008:
Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
to prevent a bigger implosion and later in the 2011 summit
Our aim is to promote external sustainability and ensure that G20 members pursue the full range of policies required to reduce excessive imbalances and maintain current account imbalances at sustainable levels.
However, the G-20 summit participants and the IMF seem to bring about the reversal of imbalances via fiscal contraction – as if there is no negative effect of the latter on domestic and world demand!
Wynne Godley and Francis Cripps  described confusions in the policy makers’ minds wonderfully in the Introduction of their 1983 book Macroeconomics
Our objective is most emphatically a practical one. To put it crudely, economics has got into an infernal muddle. This would be deplorable enough if the disorder was simply an academic matter. Unfortunately the confusion extends into the formation of economic policy itself. It has become pretty obvious that the governments of many countries, whatever their moral or political priorities, have no valid scientific rationale for their policies. Despite emphatic rhetoric they do not know what the consequences of their actions are going to be. Moreover, in a highly interdependent world system this confusion extends to the dealings of governments with one another who now have no rational basis for negotiation.
To conclude, the muddle in describing how economies work in Economics has been terrible for world demand (except periods of expansion through unsustainable private sector deficits which end in crises). My blog aims to bring forward ideas in Monetary Economics and how it can be used to achieve active management of economies rather than leaving the task to “market forces”.
- Wynne Godley and Francis Cripps, p13, Macroeconomics, Oxford University Press, 1983.