SYDNEY and KUALA LUMPUR, October 4 (IPS) – Central banks (CBs) around the world – led by the US Fed, European Central Bank and Bank of England – are raising interest rates, surface other than to check for inflation. The race to the next bottom is accelerating the world economic downturn.
Go to break
New UK Prime Minister Liz Truss has revived ‘supply-side economics’, long thought to have been severely discredited. Her massive tax cuts are expected to kick-start Britain’s sluggish economy in time for the next general election.
President of Reagan’s Council of Economic Advisers, Harvard professor Martin Feldstein found that most of Reagan’s growth was due to expansionary monetary policy. Volcker’s rate hike to combat inflation has been reversed. This allowed the US economy to bounce back from the severe recession of the 1982 monetary policy.
George W Bush in 2001 and 2003 also cut taxes cannot promote growth. Instead, deficits and debt grew. “The biggest benefit from the Bush-era tax cuts goes to high-income taxpayers.” Similarly, Trump cuts taxes failed to prop up the US economywith Billionaires now pay much less than workers.
After Boris Johnson stepped down, the UK’s Conservative Party leadership candidates began by promising more tax cuts. But The Economist “is skeptical that such a cut will enhance UK growth”. Instead, they fear tax cuts will increase inflationary pressures, leading to tighter monetary policy.
The Economist concludes, “It is difficult to see the link between overall tax rates and long-term prosperity”. Not surprisingly, The Economist considers Truss’ “biggest tax cut in half a century” as “a reckless budget, financially and politically”.
Tax cuts often make things worse. Often, these require cuts to social protection and essential public services, ostensibly to balance the budget. So wealth has grown, and income inequality will worsen.
Governments had to cut public investment due to high budget deficits. Higher interest rates and cuts in public spending will also derail the efforts needed to transition to a greener, more sustainable future.
Class War
The policy war against inflation has many facets, including class. Instead of helping people cope with the rising cost of living, raising interest rates only made things worse, accelerating the economic downturn. As such, workers not only lose their jobs and income, but are also forced to pay more for mortgages and other debts.
Unemployment, lower incomes, declining health and other pains hurt workers. As workers want higher incomes to cope with rising living costs, such austerity policies are said to be needed to prevent a ‘wage price spiral’.
As usual, workers are being blamed for the resurgence of inflation. But research by the International Monetary Fund (IMF) and other found no evidence of such a wage price spiral in recent decades.
Experience and evidence suggest that the likelihood of such a dialectic is very low under current circumstances, although some nominal wages have increased. Since the 1980s, collective bargaining power and wage determination have declined.
Policymakers should tackle stagnation, even Real wages have fallen in most economies in recent decades. These have hurt “workers who are paid much less than those at the top”. Even the rich countries’ Organization for Economic Co-operation and Development club is “anxious” noting these trends.
The Deputy Managing Director of the IMF explained why wages do not have to be constrained to avoid inflation. Allowing nominal wages to rise will reduce rising inequality, plus the share of labor income falling (Figure 1) and real wages.
Profit margins were up, even before the Ukraine war and sanctions. US trend remind Bloomberg headline, “Highest Profit Since 1950 Debunk CEO Wage Inflation Story”. The UK’s largest non-financial firms gross profits in 2021 up 34% pre-pandemic levels.
Therefore, policymakers should limit profits, not wages. The recent price increase has been due to increased profits are from tick. Recent trends have made it “easier for companies to raise prices,” notes the Reserve Bank of Australia Governor.
Solving Inequality
Recent IMF (MD) Managing Director warning“People will take to the streets if we don’t fight inflation”. But people are even more likely to protest if they lose their jobs and income. Worse still, the burden of fighting inflation has been placed on their shoulders while the elite continue to enrich themselves.
Raising interest rates is a blunt measure to combat inflation. It exacerbates the cost of living and job losses, while the tax cuts mostly benefit the rich. Instead, the rich should be taxed more to raise revenue to increase public provision for essential services, such as transport, health and education.
IMF MD note Raising taxes on the rich would help narrow the gap between rich and poor without hurting growth. Public provision of childcare and labor market programs (eg, retraining) will improve labor supply. Thus, alleviating worker shortages could reduce price pressures.
The current situation calls for addressing growing inequality. Redistributive fiscal measures—taxing high earners to finance expansion of social protection and public provisioning—are time-tested means of addressing disparities. deviated.
The highest tax rate hikes and progressiveness of the tax system are also socially progressive, examining growing inequality. Meanwhile, as consumer prices rise, rising profits and high executive remuneration must be examined.
Supply-side policies
The World Bank and Bank for International Settlements Leaders have urged a reduction in the current focus on demand management to combat inflation. Both emphasize solving long-term supply bottlenecks, but don’t offer much practical guidance.
The poorly coordinated ‘unconventional’ monetary policies since the 2008-09 global financial crisis have created asset bubble and stock market. These take a toll on the real economy, exacerbate inequality and slow increase in labor productivitywith the worst spillover effect in developing counties.
Addressing supply bottlenecks can involve tax and credit incentives. But discredited supply-side mantras – labor market deregulation, for example – must be dropped. Related fiscal and monetary policies – for example, tax cuts for the rich and inappropriate interest rate hikes – should also be dropped.
Governments are losing the opportunity to increase productivity, achieve a low carbon transition and cut inequality. Instead, policymakers should proactively promote desirable economic changes by prioritizing investments that are less carbon-intensive and more dynamic.
This may also require a check on CB . monetary policy Independence to more effectively coordinate fiscal and monetary policy. But this should not weaken CB. ”independent operation‘ to promote “orderly economic growth, reasonable price stability“.
Governments must meet the extraordinary challenges of our time with pragmatic, relevant, and progressive policy initiatives. To do this well, they must boldly reject the ideologies and dogmas that underlie our present predicament.
IPS UN Office
By @IPSNewsUNBureau
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© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service
