Jobs crisis needs macroeconomic tool kit
SA’s elite representing government, business, labour and community constituencies came out in full force at the jobs summit in Midrand last week.
They emerged with an 84page document that served only to show that they have run out of ideas on how to get the country out of its crisis of increasing unemployment, poverty and inequality.
Nowhere does the framework agreement explain how it will create 275,000 jobs a year. You can’t create jobs out of thin air. Sustainable job creation is the outcome of higher rates of economic growth. There is nothing in the agreement that will increase economic growth.
The reason for the confusion is that unemployment is a macroeconomic phenomenon that cannot be solved with microeconomic reforms or jobcreation projects, as an Institute for Economic Justice (IEJ) policy brief released last week said.
However, macroeconomic policy has been a no-go area within Nedlac over the past two decades. This has undermined Nedlac and the concept of social-partner engagement, the IEJ says. Trying to eradicate unemployment without using macroeconomic policy tools, including expansionary monetary and fiscal policies, is like trying to play a game of tennis without arms.
The global financial crisis forced policymakers to significantly expand their macroeconomic policy tool kits. Olivier Blanchard, the former IMF chief economist, wrote: “Before the crisis, mainstream economists and policymakers had converged on a beautiful construction of monetary policy. To caricature just a bit: we had convinced ourselves that there was one target, inflation. There was one instrument, the policy rate. If there is one lesson to be drawn from the crisis, it is that this construction was not right, that beauty is unfortunately not always synonymous with the truth. The fact is that there are many targets and there are many instruments.”
The challenge was to develop new frameworks to deploy these new monetary policy instruments, which had actually been previously used extensively by central banks for most of the 20th century. As interest rates reached the socalled lower zero bound, central banks implemented unconventional monetary policies such as quantitative easing (QE). The distinction between monetary and fiscal policies disappeared.
By 2017, the six central banks that implemented QE owned 20% of government debt, according to the Financial Times. However, QE involved the purchase of government bonds after they had been issued, and it did not affect government spending.
In simple terms, according to a paper by Positive Money, QE works by flooding financial markets with billions of euros and hoping some of it trickles to the real economy.
As policymakers discovered the limits of QE, the discussion turned to other policy tools such as direct or overt monetary financing of state expenditure, also known as sovereign monetary creation.
Monetary financing targets the real economy. It can involve a mix of tax cuts and increased state spending on infrastructure, financed by a transfer of money from a country’s central bank to a fiscal authority.
Positive Money says the process can be designed to ensure that the central bank does not gain influence over fiscal policy and that the government has no say over how much money is created.
Inflation can be limited if the bulk of monetary financing is used to invest in productive assets. Within the SA context, a developmental central bank can partially finance a fiscal stimulus. It can also create developmental windows where it provides funds to banks and developmental finance institutions at very low interest rates for lending on national priority projects such as lowcost housing and student accommodation.
● Gqubule is founding director at the Centre for Economic Development and Transformation.