By DANILO JORGE VIEIRA*
The most likely trend of current changes is the intensification of structural heterogeneities within the global system and the worsening of economic and social inequalities within and between countries
The beginning of Joe Biden's government has attracted great attention worldwide, mainly due to the changes that the democratic president has been making in American economic policy, especially with regard to fiscal policy. In his first 100 days at the head of the White House, Biden announced three government programs that, in addition to mobilizing a significant volume of resources of around US$ 6 trillion, reestablish comprehensive and incisive attributions of the State in several crucial sectors of the US socioeconomic reality.
The new national strategy being outlined in Washington clearly breaks with many dominant neoliberal conventions and resumes Keynesian-inspired postulates that had been rejected and discredited in the midst of the construction of the contemporary global order, reconsidering fiscal multipliers and, therefore, rehabilitating fiscal policy as an effective demand management instrument.
For this very reason, the new economic policy proposed by Joe Biden – based on massive budgetary expenditures, expansion of public debt and increased taxation on companies and higher income social strata – has been arousing enthusiasm in some segments of public opinion and, at the same time, , distrust (and opposition) in others. While the former interpret the democrat's movements as a "revolution" capable of engendering the end of neoliberalism, the others consider the measures exaggerated, tending to increase inflation and interest rates and, thus, may prematurely abort the US economic recovery. , with far-reaching effects on the world economy.
As will be argued in this text, the plans formulated by the Biden administration, which add to similar initiatives adopted by other advanced economies, modify and subvert, in fact, several elements of the dominant fiscal policy and, consequently, can transform the established macroeconomic conventions. Such changes, however, do not point to the abandonment, weakening or collapse of neoliberalism. On the contrary, they translate and are linked to adjustments that aim to re-update the neoliberal global order, reconfiguring several of its foundations, whose dysfunctionality for the central capitalist economies had been perceived and openly criticized from within the very stablishment, but which became even sharper – and, it seems, unsustainable – after the outbreak of the ongoing pandemic crisis.
Moreover, these adjustments in the neoliberal global order will be very adverse for underdeveloped nations, as they tend to accentuate the structural heterogeneities of the world economic system, deepening the bipolarization between the center and the periphery, which will result in the expansion of institutional asymmetries and the worsening of economic and social inequalities on an international scale – within and between countries. Following the text, the main aspects of these transformations will be briefly addressed, but in an intentionally restricted manner, having as reference only the changes observed in fiscal policy in the recent period.
World Market
An appropriate starting point for the analysis may be the discussion of the “homogenizing” character of globalization. In fact, as is widely recognized, the neoliberal project of contemporary globalization consisted in organizing the World-Market through the double process of unification and standardization of national capitalist economies that, although connected to each other, operated with a certain introspection and relative autonomy until at least the last quarter of the last century.
The world market functioned, to a large extent, as a sum of multiple relatively stagnant national markets, forming a fragmented articulation of economies organized on different institutional bases. This diversity increased unpredictability, risks and uncertainties, by creating discontinuities, frictions and instabilities, which made it difficult to allocate decisions of the growing net cash accumulated by economic agents participating in the transnational market, thus obstructing the power of generation and appropriation of financial surpluses of the system.
Although it did not suppress the national variety of political economy systems, globalization advanced a lot from the final decades of the XNUMXth century onwards, and neoliberal reforms created a more unified and institutionally more uniform “borderless” economic space, allowing the materialization of flows dense and unencumbered with money capital and commodities. Thus, the World Market was formed, which organizes the current processes of expanded reproduction and polarized appropriation of surpluses on a planetary scale.
financialized fiscal policy
This movement towards institutional convergence between nations was irregular and partial, but achieved notable advances in crucial areas for the globalization of the economic system, including the fiscal field. The implemented reforms, mainly from the 1990s onwards, managed to establish a reasonably homogeneous pattern of public finance management, creating a relatively common fiscal institutionality for a representative group of countries.
The IMF's monitoring of the legal norms established within countries to discipline fiscal policy provides information that makes it possible to verify the scope of this institutional convergence movement in the field of public finance. Available data indicate that, in 1990, only five countries had tax rules that were mandatory for government authorities. In 2015, two and a half decades later, this group had expanded significantly, reaching the number of 96 countries, whose budget management was subject to some type of rule of thumb. actions nationally and/or supranationally[I].
Fiscal rules consist of rigid and lasting restrictions imposed on a compulsory basis to the management of public finances, bearing in mind that they are established in the legal order of each country. By establishing quantitative limits for some selected parameters, such as expenses, debt and the fiscal result, they form an institutional framework committed to permanent budgetary and financial health guidelines, in line with the pre-Keynesian principle of sound finance. The main objective is to curb the discretionary action of those responsible for fiscal policy and, thus, ensure a trajectory for public debt that is considered predictable and, at the same time, sustainable in intertemporal terms by investors participating in the global financial market.
Thus, fiscal policy has its macroeconomic functions emptied, especially that of stabilization, which is now designated and exercised almost exclusively by monetary policy, due to at least five elements, established as true dogmas in the majority theoretical perspective, which can be listed briefly as follows[ii]:
(1) The belief that the expansion of public spending displaces private spending and puts pressure on interest rates, increasing the cost of financing and the public debt, so that expansionist fiscal policies, in addition to aggravating the budget imbalance, may result in the unfavorable effect desired effect of contraction of effective demand.
(2) The Ricardian-inspired belief that fiscal consolidations can induce the expansion of output and employment, contrary to what the simple Keynesian model prescribed, based on the premise that economic agents are capable of carrying out prospective rational calculations and, thus, tend to increase their spending on consumption and investment, as they expect positive effects from the budgetary contraction on the future trajectory of interest rates, inflation and public debt.
(3) The belief that the implementation and effects of fiscal stimuli are not immediate and take time to become effective, thus becoming ineffective, due to their delay in relation to the economic cycle.
(4) The belief that the suspension of fiscal stimuli is difficult to carry out after overcoming the crisis against which they were created, causing their expansionary effects to remain longer than necessary and creating a new vector of macroeconomic imbalances.
(5) The belief that government managers tend to manage public budgets with low and/or nonexistent fiscal buffers, establishing a chronic vector of fiscal imbalances and macroeconomic maladjustments.
In these terms, fiscal policy has its stabilizing function rejected, losing its attributes as a macroeconomic management instrument. Furthermore, fiscal policy is now managed under previously established restrictive norms and overdetermined by inescapable goals of budget balance and solvency of government liabilities, with the primary purpose of instilling confidence in globalized markets and guaranteeing full liquidity and expected profitability of the securities of the public debt, in order to qualify them as safe and profitable assets for the protection and enhancement of financial wealth.
Systemic Dysfunctionalities
This pattern of financialized fiscal policy has been increasingly revealing intrinsic dysfunctionalities for the reproduction of the system itself, due to its inability to deal not only with adverse shocks, but also for not providing the appropriate mechanisms to face more regular macroeconomic impasses, whether of a more routine nature or those of a chronic nature. Budgetary austerity and financial discipline guidelines introduce a very rigid pro-cyclical dynamic into public finances, susceptible to being attenuated to some extent and only to a limited extent by the episodic activation of more or less powerful automatic stabilizers. This marked shortening of the fiscal authorities' radius of maneuver has far-reaching implications, translating, for example, into the prolonged and persistent cycle of low dynamism of market economies, the weakening of the State's capacity to provide collective goods and services, the deterioration of the labor market and the consequent worsening of social inequalities.
The mediocre and contained trajectory of the central economies in the last three decades, which encompass the moment of apogee of neoliberal globalization, highlights the difficulties to which reference has been made. Between 1990 and 2019, the consolidated GDP of the most advanced capitalist economies in the world, which form the G-7, grew at a real average annual rate of 1,8%, below that recorded by Latin America and the Caribbean (2,7%) and also by the world economy (3,2%). The US had expansion slightly higher, reaching 2,4% on average per year. China, in turn, reached an average annual rate of 9,2%. With this, the Asian country increased its participation in the global GDP from 3,2% to 17,3% in the period in reference, emerging as the workshop of the world.
The pattern of financialized fiscal policy was not, obviously, the determining factor for the conformation of the lasting picture of low dynamism experienced by market economies, both central and peripheral. But it is undeniable that among the various factors that have a combined and cumulative impact on this phenomenon is the current fiscal policy matrix, which, by rejecting and seeking to neutralize fiscal multipliers in favor of defending financial wealth, contributes to shaping and the persistence of the dominant stagnationist bias in the global economy.
Global crisis and dissent
Due to its inherent limits and weaknesses, the financialized fiscal policy pattern has been recurrently criticized by economists and policy makers of the majority field itself. This dissent, initially punctual and restricted, has been accumulating forces and reached greater density and amplitude in the past decade, especially since the great international financial crisis of 2008. In view of the rapid and sharp deterioration of world market conditions, with the advanced economies as its epicenter , governments were forced to abandon the dominant paradigms and reactivate fiscal policy, through the adoption of massive budgetary and financial stimulus packages, aimed at mitigating the depressive effects of what was the biggest crisis since the 1929 collapse and which was configured as the first crisis of truly global proportions in the history of capitalism.
The US and European Union crisis coping plans make it possible to measure the degree of rupture that occurred in relation to the precepts of fiscal austerity in force until then. Considering only budgetary stimuli, the US federal government mobilized around US$ 1 trillion in the biennium 2008 and 2009 (Economic Stimulus Act – US$ 170 billion; American Recovery and Reinvestment Act – US$ 832 billion). The European Commission, for its part, adopted an economic recovery program of 200 billion euros – equivalent to 1,5% of the European Union's GDP in 2008.
No less important than this more conjunctural element derived from the global financial crisis, two other structural factors have equally determined changes in the course of the debate and in the conception of fiscal policy. One concerns the worsening of inequalities and social conditions observed in advanced economies since the end of the last century and another is the rise of China, which has been profoundly altering the economic geography of the world.
These two factors call into question and pose enormous challenges to the global neoliberal order. On the one hand, the increase in income concentration and the deterioration of the living conditions of a significant part of the populations in developed countries, configuring a process that can be called “peripheralization of the center”, reiterate the class nature of the reforms and institutions neoliberalism, which tends to increase tensions and undermine the basis of social legitimacy of the contemporary globalized order, which is increasingly fragile and narrow.
The concern of global governance institutions with this delicate and unstable situation of social dissatisfaction has been recurrent. Emblematic in this sense is the dossier entitled “Age of insecurity: rethinking the social contract”, published in the December 2018 edition of the IMF’s Finance and Development magazine, in which the formalization of a new “social contract” is proposed in order to stop the advance of “populism” and “nationalism”, which would be antagonistic to neoliberal globalization.
On the other hand, China's accelerated industrial, technological, financial and military progress threatens, as never before occurred, American hegemony and, thus, constitutes a vector of contestation of the global order itself organized by and around it. In the speech he made to Congress at the end of last April to mark the first 100 days of government and defend his three economic plans, President Joe Biden made clear the strategic objective of reinvigorating American hegemony, with the aim of facing the spectacular rise of China , when he stated: “America is moving, advancing, but we cannot stop now. We are competing with China and other countries to win the 21st century. We are at a great turning point in history”[iii].
In this complex and changing context, the understanding that is being established in the majority field is that the current fiscal policy matrix – and, more broadly, the current economic policy matrix – weakens the central capitalist economies in the face of these great challenges imposed on the contemporary global neoliberal order, determining changes in its theoretical and practical foundations.
The outbreak of the COVID-19 pandemic in early 2020 reinforced the need to change course, given that its large-scale health, humanitarian, social and economic effects accentuated the three previously listed factors that had been influencing the debate about the limits and the dysfunctionalities of fiscal policy, namely: the sharp contraction in economic activity, which surpassed that of 2008, making the pandemic crisis the most acute since the depression of the 1930s; the worsening of inequalities and social conditions, and the greater disarray of advanced economies, compared to China's quick reaction to the adverse global context.
Combined, these conjunctural and structural factors reiterated once again put the dominant fiscal arrangement in check, requiring the abandonment of its postulates and the execution of broad and massive budgetary and financial stimulus packages by national governments to face the pandemic crisis, the outcome of which still remains to be seen. it's not on the horizon. Such continuous and cumulative impasses have made clearer the delineation of what can be called a New Vision of fiscal policy, to use the term used by Jason Furman, chief economist at the White House during the administration of Barack Obama (2009-2017), to designate the changes that have been taking place in the conventions signed in the theoretical and empirical scope of public finance[iv].
Emerging “new vision”
Although it is premature to say that a new consensus around fiscal policy has been established, it is undeniable that a renewed vision, different from the previous one, is being formed – the massive economic rescue plans adopted or being elaborated by the governments of the central countries can be considered evidence and a harbinger of ongoing changes. But because it is in such a preliminary stage, subject to theoretical and empirical developments that remain open in the hegemonic field, as well as to the influence of intercurrences of a political nature, the reassessment of fiscal policy is still on very fluid bases, presenting several versions partial and incomplete and focusing now on certain aspects and now on others. That is, what is being defined from New Vision does not yet have an established coherent theoretical body.
A pertinent way to apprehend the main changes in the hegemonic conception of fiscal policy, seeking to verify some of the central elements of this new vision in outline, can have as reference the analytical formulations and the recommendations of governmental measures elaborated by the IMF, whose theoretical and technical production is admittedly representative of the dominant perspective in the field of macroeconomics.
Based on the Fiscal Monitor, a series of studies launched in 2009 by the IMF to monitor the trajectory of public finances in countries participating in the global economic system, it is possible to verify important changes in the understanding of the role that can be played by fiscal policy. Over the last decade, the dominant conception catalyzed by the multilateral institution's economist staff moved from a conventional orthodox position to a more flexible one, which starts to consider fiscal multipliers and, consequently, returns to envision the stabilizing, allocative and redistributive functions of fiscal policy, making room for it to be rehabilitated as an instrument of macroeconomic management.
More developed versions of this new vision of fiscal policy were presented in Fiscal Monitor editions after 2017, receiving empirical treatment in the report released last April. This new IMF approach is still on a very general basis, but it can be summarized in the proposed model of “Inclusive and growth-friendly fiscal adjustments” (Fiscal Monitor, April 2019, p. 6).
The IMF's new approach, which explicitly incorporates broader objectives into fiscal policy, notably economic growth and the reduction of social inequalities, basically contemplates four main initiatives: 1. Increased public investment; 2. Increase in government consumption expenditures (funding); 3. transfers to low-income social strata; 4. increase in taxation on high-income social strata[v].
This new fiscal policy matrix, according to the empirical simulations prepared by the team of economists at the IMF, would engender three simultaneous virtuous chains. At the same time that it would stimulate economic growth, due to increased public spending (funding and investment) and greater consumption by low-income groups, government debt would assume a downward trajectory, due to GDP expansion at a rate higher than that of debt. Additionally, the redistribution of income in favor of lower purchasing power strata, due to more progressive taxation and transfers, in addition to supporting economic growth, would favor the reduction of inequalities.
In the terms briefly exposed above, it is evident that the inclusive and pro-growth fiscal adjustment model contrasts very significantly with the current dominant fiscal policy matrix. First, the new approach recognizes fiscal multipliers and seeks to manage fiscal policy not only with the aim of smoothing the economic cycle, but also to influence its trend, stimulating medium and long-term growth. Second, and no less important, the objective of achieving a sustainable trajectory for the public debt – and for fiscal policy itself, more broadly – is now based not only on controlling expenditures and generating a primary surplus, but also through GDP growth. These two aspects, in particular, undeniably widen the scope for discretionary action by budgetary authorities.
A point of paramount importance for a better understanding of the new fiscal approach being designed concerns the range of changes it may bring about. In the theoretical and empirical debate that has been taking place, it is more or less evident that the transformations will not be broad and unrestricted, but, on the contrary, will have selective and very specific implications. As the IMF itself has been warning, the new inclusive and pro-growth fiscal adjustment model should not be considered as “general support for fiscal stimulus everywhere and under all circumstances” (Fiscal Monitor, April 2017, p. 15 and 16). Thus, it is worth asking in which economic circumstances and in which places the new vision of fiscal policy will be fully valid.
Fiscal space and public debt
The implementation of the inclusive and pro-growth fiscal adjustment model has at least two main basic premises that are inescapable, according to the conventional approach: the existence of fiscal space and a chronic context of low and/or negative interest rates, making the stabilization functions of monetary policy become more restricted or even lose effectiveness.
Regarding the first precondition, it should be noted that the concept of fiscal space is not just about the mere availability of current budgetary conditions to absorb higher expenditures. The term has a broader meaning and refers to a situation of a systemic and intertemporal character that allows the execution of a discretionary fiscal policy, without, therefore, affecting the government's financing capacity through the expansion of the public debt. This greater financing capacity, as is known, is practically restricted to countries that have convertible currencies and are located in the upper hierarchical levels of the international monetary system.
Regarding the interest rate, there are very different dynamics between countries and groups of countries. In general, interest rates are structurally higher and more rigid to decline in underdeveloped countries, since they incorporate a risk premium associated with their inherent weaknesses and financial dependence. In contrast, advanced economies have experienced a long-lasting and persistent cycle of low, if not negative, interest rates.
It is evident, therefore, that, in the light of the new approach being designed, practically only the advanced economies would present the necessary economic and institutional preconditions for the adoption of the new model of inclusive and pro-growth fiscal policy. In peripheral countries, on the other hand, the preconditions would not exist, so that a first procedure proposed by the conventional prescription to build them would consist of strengthening the fiscal rules, which means reiterating and reinforcing the current matrix of fiscal policy contrary to the action discretion of the budgetary authorities.
fiscal asymmetries
The asymmetry between central and peripheral economies in the fiscal field is, in reality, quite marked. The trajectory of fiscal policy in these two groups of countries in recent decades highlights the differences and suggests that orthodox conventions are less flexible and more widely accepted in underdeveloped nations, where the principles of financial health and budgetary discipline seem to be more deeply rooted among authorities. macroeconomic conditions, causing the public debate around alternative models of fiscal policy to remain prohibited.
Government actions to face the pandemic crisis made these asymmetries explicit, making them even more notorious. To face the health, social and economic effects arising from the COVID-19 pandemic, national governments implemented fiscal stimulus programs that mobilized resources of around US$ 16 trillion between March 2020 and March of this year, according to systematized information by the IMF.
The available data, however, suggest that the fiscal policies adopted by the central countries were much more expansionist than those implemented by the governments of the periphery, which, it seems, remained linked to the balanced budget parameters, despite the emergency situation and unparalleled in recent history created by the pandemic crisis. In consolidated terms proportional to GDP, while the central economies increased public spending by around 23%, the emerging middle-income countries (including Brazil) recorded an increase of just over 10%.
interim conclusions
The text sought to demonstrate that the current dominant matrix of fiscal policy is under review. The depth of the outlined changes is not yet clear, but it is already possible to foresee that many of the orthodox postulates that organized and have been guiding the management of public finances in the context of the neoliberal global order for at least three decades must be reformulated, made more flexible or, even , abandoned.
The reassessment of ongoing paradigms and conventions stems from the understanding that is gradually established within the scope of the mainstream regarding the shortcomings of the current fiscal policy matrix.
Emptied of its functions of stabilization, allocation and redistribution, fiscal policy lost its attributions as an effective demand management instrument, starting to be managed with the main – and almost sole – objective of ensuring a trajectory for the public debt that is considered sustainable in intertemporal terms by participating investors in the global financial market.
This fiscal policy matrix, overdetermined by the financial calculation of economic agents, has been considered increasingly dysfunctional, as it is incapable of dealing with the growing internal (increasing inequalities and poverty) and external (China's economic rise) risks to the social order. neoliberal world. The changes in design must be understood, therefore, as the reorganization of the neoliberal global order on renewed bases, and not its weakening.
Moreover, and this aspect is of paramount importance for any prospective analysis of the world economic system, the reformulation of the fiscal policy matrix will probably be quite restricted, reaching only the advanced market economies. In underdeveloped market economies, the current conventional postulates of fiscal austerity and financial discipline will have to be reiterated and reinvigorated.
As a consequence of this unequal and combined transformation still in the making, the underdeveloped countries must be reorganized as a field of even more coercive accumulation processes, being revitalized to allow the recycling of large masses of financial surpluses.
The most likely trend of changes in design therefore consists of the intensification of structural heterogeneities within the global system, with an increase in institutional divergence; the worsening of economic and social inequalities within and between countries, and a greater bipolarization between center and periphery.
*Danilo Jorge Vieira He holds a PhD in Applied Economics from the Institute of Economics at Unicamp..
Notes
[I] LLEDÓ, V., YOON, S., FANG, X., MBAYE, S. & KIM, Y. Fiscal rules at a glance. Washington: International Monetary Fund, 2017.
[ii] TAYLOR, J. Reassessing discretionary fiscal policy. Journal of Economic Perspectives, v. 1, no. 3, 2000.
[iii] BIDEN, J. Remarks by President Biden in address to a joint session of Congress. Available at: https://www.whitehouse.gov/briefing-room/
[iv] FURMAN, J. The new view of fiscal policy and its application. Conference in Global Implications of Europe's Redesign. New York, October 2016. Available at: https://obamawhitehouse.archives.gov/
[v] Online annex 1.1. Model simulations of fiscal support measures, available at: https://www.imf.org/en/Publications/FM/Issues/2021/03/29/fiscal-monitor-april-2021
