Tag Archives: nicholas kaldor

Dean Baker On Economists’ Contradictions On Productivity

Dean Baker has been writing some of the best articles about the U.S. economy in the past few weeks. I have already linked to his articles on this blog. If you have missed them, follow the tag with his name at the end of this post.

His analysis has been about economists’ incorrect narrative about productivity and U.S. trade. This narrative simply is that workers are losing jobs because of automation and not because of U.S. trade and globalization. Dean Baker shows that it’s quite the opposite.

In his latest post, he points out the inconsistency of economists stands. One on the one hand, economists seem to be saying that productivity rises will be large because of automation and on the other hand saying that productivity won’t rise much.

This is the stand of Paul Krugman whom Baker cites. In his column On Economic Arrogance for The New York Times, Krugman argues that it’s impossible for the U.S. to grow at 3-3.5% in the next decade. Krugman says:

The only way we could have a growth miracle now would be a huge takeoff in productivity — output per worker-hour. This could, of course, happen: maybe driverless flying cars will arrive en masse. But it’s hardly something one should assume for a baseline projection.

Now, it’s quite possible that Donald Trump, being the erratic person he is, can mess thinks up. You can’t be sure what he is up to. He may come up with a large fiscal expansion or not. But the more important question is about the possibility. Would Hillary Clinton or Bernie Sanders been able to achieve the growth rate of 3-3.5% had they been the President? According to Krugman it’s simply unlikely because he thinks productivity growth will be low.

The same kind of argument was given by Krugman when Bernie Sanders released his economic plan. See John Cassidy’s article Bernie Sanders And The Case For A New Economic Stimulus Package in The New Yorker from for a good analysis, written February 2016. In the article Cassidy reminds us of the Kaldor-Verdoorn Law according to which faster GDP growth leads to faster productivity rises.

To break out of this low-growth trap, the economy needs policies designed to boost demand and push it onto a higher growth path: one in which rising investment, higher levels of productivity, rising rates of participation in the labor force, and higher wages all reinforce each other. With these conditions in place, companies would have more of an incentive to make capital investments, and as the price of labor rises they would also have an incentive to innovate and move up the value chain. Realistically, we can’t expect 5.3-per-cent G.D.P. growth and 3.3-per-cent productivity growth to persist for a decade. But we don’t necessarily have to settle for the 2.1-per-cent G.D.P. growth we’ve become accustomed to, or even the 2.3-per-cent rate that the Council of Economic Advisers has identified as its long-term potential. The U.S. economy has the resources and the ingenuity to do better than that.

As [Gerald] Friedman points out, the idea that faster G.D.P. growth generates higher productivity growth (and higher wages) has historical support. Back when I was an undergraduate, it was associated with Nicholas Kaldor, the British Keynesian, and with P. J. Verdoorn, a Dutch economist. (In a footnote, Friedman cites both of them.) More recently, in the late nineteen-nineties we saw rapid rates of G.D.P. growth and productivity growth appear in tandem. Some analysts would claim that the latter generated the former, rather than vice versa, but that argument isn’t convincing. In a Kaldorian virtuous cycle, G.D.P. growth spurs productivity growth, which, in turn, spurs G.D.P. growth. Causation goes both ways.

So the U.S. economy has a lot of scope for growth in the next decade. There are ways:

  • The U.S. GDP can grow without productivity rising simply because there’s huge unemployment. The U-6 unemployment rate is currently 10.1%. Because of Okun’s law which says that a growth of 1.65% will reduce unemployment by 1% (see estimation of this parameter for the U.S. by Matias Vernengo here.)
  • Rise in the workforce. Over time, work force also rises, (depending on demographics), this adds to the capacity of the economy. A notable thing during the crisis is the fall in the workforce in the U.S. Am not sure about details around this. Seems this is not captured in U-6. One would have expected the labour force to have not dropped and unemployed being captured in U-6. In other words, it’s possible that there’s more potential labour available.
  • As above, because of Kaldor-Verdoorn law, higher production leads to higher productivity. The Verdoon coefficient is 0.63 as per the paper cited above. So a growth of 1% will lead to a rise in productivity by 0.65%. Higher productivity implies that it takes less labour to produce the same amount of things. This in turn implies that the labour can be employed elsewhere or to produce more of the same stuff. So rise in productivity increases production capacity.

So these three points are enough to prevent the U.S. economy from hitting full capacity for a long time. Scarcity is a thought which needs to go from economics.

At any rate, the main purpose of this post was to point out the contradictory things economists say. Economists seem to be saying that automation will rise, which translates to rise in productivity. At the same time they are also saying that productivity will be low. Further Dean Baker has also pointed out how the Federal Reserve is on the path to raise interest rates. If they are worried about automation killing jobs, why aren’t they worried about the Federal Reserve’s rate hikes destroying jobs?

Why NAIRU is “zOMG HYPERINFLATION”

Does employment and inflation have a relationship? Yes of course. Can a wage-price spiral happen? Yes it can. A lot of economists exploit this possibility to incorrectly argue for NAIRU.

This post is a continuation of a recent post Simon Wren-Lewis, NAIRU And TINA in which I argued that NAIRU is not a useful concept and is counterproductive.

That wage-price spirals can happen isn’t a proof for NAIRU itself. NAIRU is defined as the unemployment rate Ubelow which prices start accelerating (or inflation starts to rise indefinitely). But the NAIRU hypothesis is a hypothesis of certainty. Economies are complex dynamical systems and just because wage-price spirals may have happened in the past doesn’t imply that it will always happen.

In the last mentioned how stock-flow consistent models, full employment can be achieved with no rising inflation, just higher inflation when parameters about wage-bargaining aren’t changing or if intervals between settlements shorten.

As I said in my previous post, NAIRU advocates think that a fraction of the workforce should be kept unemployed to keep inflation under control. By claiming that there exists a NAIRU or an unemployment rate below which prices necessarily start accelerating, they do a huge disservice to not just Economics but also to the welfare state. Any politician reading about NAIRU is likely to take away the incorrect notion that if unemployment is pushed too low, hyperinflation can happen. Hence the politician responsible for taking decisions is likely to postpone or abandon the pursuit for full employment.

So one can cogently believe all three of the following:

  • there is a relationship between employment and inflation
  • wage-price spiral can occur
  • NAIRU is wrong.

In other words, NAIRU proponents exploit the possibility to claiming a certainty. Wage-price spirals happened in the 70s and Joan Robinson even saw it coming. But wage-spiral is not NAIRU. Conflating the two is vile.

What are the solutions if a wage-price happens? There is a lot of literature for an “incomes policy” from economists such as Nicholas Kaldor. For the purposes of this post, it’s not necessary to go in that direction as it’s not needed in current times at least in the advanced economies.

Dani Rodrik On Free Trade

In a recent article for Foreign Policy, Dani Rodrik makes this claim:

Meanwhile, economists rightly point out that trade is only weakly implicated in the major economic problems of the day — deindustrialization and income inequality. They are correct that the distributional consequences of trade are better addressed with safety net programs and nontrade remedies. But they have systematically downplayed these consequences — especially when the requisite compensatory programs have remained on paper. And they seem unable to grasp the valid core of the public’s concern about social dumping.

It’s a bit disappointing that Dani Rodrik who presents himself as a dissenter is towing the line of the New Consensus. The new trade theory, which is a part of the new consensus says that free trade is fine as long as losers are compensated. In this article Rodrik states the same but just takes issue on the latter part, i.e., compensation.

This line of argument is deeply flawed. An individual country’s growth has a deflationary bias because free trade puts a rein on fiscal policy to achieve full employment. So who is there to compensate? Moreover, it’s not comparative advantage which governs economic dynamics but absolute advantage via Gunnar Myrdal’s principle of circular and cumulative advantage . As Nicholas Kaldor says, “success breeds further success and failure begets more failure.”

Moreover it’s the the whole world economy which has a deflationary bias because of free trade as pointed out by Nicholas Kaldor in his 1980 article Foundations And Implications Of Free Trade Theory

In a recent article on the ‘Causes of Growth and Recession in World Trade’,1 T. F. Cripps has demonstrated that a country is not ‘balance of payments constrained’ if its full employment imports, M*, are less that its import capacity M̅ (as determined by its earning from exports). Such a country is free to choose the level of domestic demand which it considers optimal for its own circumstances,2 whereas the other countries from whom M* > M̅, must, under conditions of free trade, reduce their output and employment below the full employment level, and import only what they can afford to finance. He then shows that the sum of imports of the ‘unconstrained’ countries determine the attainable level of production and employment of the ‘constrained’ countries, and the remedy for this situation requires measures that increase the level of ‘full-employment’ imports or else reduce the export share of the ‘unconstrained countries’. The ‘rules of the game’ which would be capable of securing growth and stability in international trade, and of restoring the production of the ‘constrained’ countries to full employment levels, may require discriminatory measure of import control, of the type envisaged in the famous ‘scarce currency clause’ of the Bretton Woods agreement.

In the absence of such measures all countries may suffer a slower rate of growth and a lower level of output and employment, and not only the group of countries whose economic activity is ‘balance-of-payments constrained’. This is because the ‘surplus’ countries’ own exports will be lower with the shrinkage of world trade, and they may not offset this (or not adequately) by domestic reflationary measures so that their imports will also be lower. Provided that the import regulations introduced relate to import propensities (i.e. to the relation of imports to domestic output) and not to the absolute level of imports as such, the very fact that such measures will raise the trade, production and employment of the ‘constrained’ countries will mean that the volume of exports and domestic income of the ‘unconstrained’ countries will also be greater, despite the downward change in their share of world exports.3

Footnotes:

1Cambridge Economic Policy Review (March 1978), pp, 37-43.

2Owing to the widespread view according to which a given increase in effective demand is more ‘inflationary’ in its consequences if brought about by budgetary measure than if it is the result of additional investment or exports (irrespective of any limitations of import capacity) the inequality or potential inequality in its payments balance may cause a surplus country to regard a lower level of domestic demand as ‘optimal’ in the first case than in the second case.

3In other words, if countries whose ‘full employment’ balance of payments shows a surplus because M* < α W (where M* is the level of full employment imports, α is the share of a particular country’s exports of in world trade W) after a reduction of α to α̂ (α̂ < α) through the imposition of discriminatory measures, the country will still be better off if α̂ W* > α W where W* is the volume of world trade generated under full employment conditions.

Of course, the solution is hard and in my opinion, international agreements to reach balanced trade is the correct way. Free trade is the most sacred tenet in all of macroeconomics and it’s not going to be easy to get rid of it.

Paul Krugman Flip-Flops

In two recent posts, I had mentioned how economists are shifting their positions because of politics:

  1. Opposing Principles Of Political Economy Just Because Donald Trump Supports It,
  2. The Soon-To-Be Conventional Wisdom: “Fiscal Policy Is Not So Good”.

Thanks to Kevin Glass on Twitter, I came across two headlines highlighting this.

Headline 1, post-election (click for the link)

Headline 2, pre-election (click for the link)

I am sure an apologist would go, “Can you read beyond the headline?”. Well, yes and the two articles mean precisely what the headlines imply.

Krugman says,

This diagnosis — shared by most professional economists — didn’t come out of thin air; it was based on well-established macroeconomic principles. Furthermore, the predictions that came out of those principles held up very well. In the depressed economy that prevailed for years after the financial crisis, government borrowing didn’t drive up interest rates, money creation by the Fed didn’t cause inflation, and nations that tried to slash budget deficits experienced severe recessions.

What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment.

There are several things wrong with this:

  1. Krugman is trying to argue that fiscal expansion makes sense only in limited scenarios
  2. We are not really close to full employment. There are enough people unemployed, and underemployed. Even if the US economy were close to full employment, a fiscal expansion will raise production and hence productivity via the Kaldor-Verdoorn mechanism. So it’s not like supply-side constraints are exogenously given.
  3. “limited amount of money” is Monetarism. Paul Krugman claims that he is no longer a follower of Milton Friedman but that’s not really the case.
  4. “Crowd out” is just like “patriotism is the last refuge of the scoundrel”. Krugman himself debunked it:

    There is, however, a somewhat related doctrine — call it the doctrine of immaculate crowding out — which has now, I’d argued, achieved true zombiehood. That is, it keeps coming back no matter how many times you kill it.

But Krugman is not the only one. Simon Wren-Lewis is echoing him and so is Ben Bernanke.

Bernanke says:

There is still a case for fiscal policy action today, but to increase output without unduly increasing inflation the focus should be on improving productivity and aggregate supply—for example, through improved public infrastructure that makes our economy more efficient or tax reforms that promote private capital investment.

ignoring the fact that rise in production can lead to a rise in productivity.

It’s sad that all this happened. Orthodoxy needs to be fought harder.

The Trouble With The Recent Consensus

In a speech The Specture Of Monetarism, at Liverpool John Moores University, the Governor of the Bank of England, Mark Carney talked about globalization and inequality.

The central theme of Carney’s speech and also the new/recent consensus of the economics profession is this:

III. The Way Forward

Given these developments, the challenge is how to manage and moderate the forces of innovation and integration which breed aggregate prosperity for the economy as a whole but which also foster isolation and detachment for substantial proportions of the population. In the balance of my remarks, I will focus on three priorities for doing so.

First, economists must clearly acknowledge the challenges we face, including the realities of uneven gains from trade and technology.

Second, we must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.

Third, we need to move towards more inclusive growth where everyone has a stake in globalisation.

[bold in original]

click the picture for the video and the text

While this acknowledges the trouble with globalization—under the current rules—it is still flawed. Carney continues to say:

Consider the disconnect between economists and workers. The former have not been sufficiently upfront about the distributional consequences of rapid changes in technology and globalisation. Amongst economists, a belief in free trade is totemic.xiv But, while trade makes countries better off, it does not raise all boats; in the clinical words of the economist, trade is not Pareto optimal.xv

(endnotes)

xiv E.g. Bhagwati, J. (2011), “Why free trade matters”, Project Syndicate, June 23.

xv In neoclassical models, free trade is Pareto Optimal in principle – in that the aggregate gains are sufficient to compensate those that lose out while preserving gains for the winners. This typically means some form of redistribution of the gains from trade is needed to achieve this outcome. This is the Kaldor-Hicks compensation principle. It is an open question, however, whether redistribution of this kind actually takes place in practice and, indeed, whether it is itself costless, as the Kaldor-Hicks principle assumes.

So Carney’s point is more about “Pareto optimality”, than on globalization under the current system.

The trouble with this view—as can be inferred from the quotes above—is that it’s based on the assumption of convergence of nations’ fortunes via globalization and free trade under the current system, instead of divergence and polarization. In other words, not only does globalization and free trade contribute to grievances for some economic actors, but also to nations and hence the world as a whole. Under a different set of rules, each nation would be better off and might avoid polarization.

As Nicholas Kaldor himself said (quoted above!) in 1980 in Foundations And Implications Of Free Trade Theory, written in 📚 Unemployment In Western Countries:

Owing to increasing returns in processing activities (in manufactures) success breeds further success and failure begets more failure. Another Swedish economist, Gunnar Myrdal called this’the principle of circular and cumulative causation’.

It is as a result of this that free trade in the field of manfactured goods led to the concentration of manufacturing production in certain areas – to a ‘polarization process’ which inhibits the growth of such activities in some areas and concentrates them on others.

You can preview Kaldor’s article on Google Books. It’s his finest.

“In The Long Run”

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.

–  John Maynard Keynes, A Tract on Monetary Reform (1923), Ch. 3, p. 80.

As you might know, the Indian government cancelled the legal tender nature of majority of bank notes in circulation, earlier this month and asked Indians to deposit them at banks or exchange them for new. The aim according to the government was to curb counterfeiting and what’s called black money here. This is damaging as a large amount of transaction is in bank notes and the implementation has been a failure. People have been standing in queues for the whole day and some even reach banks at 2 am to get a good position in the queue. For many, standing in queues means that the day’s labour is lost. For others, there are delays in wage payments since their employers have problems getting hold of new bank notes. More than 50 people have died. Even 11 bank managers have died due to stress and work overload.

Despite this we keep hearing from the government and the ruling political party’s defenders that the benefits will be long term.

The previous Indian Prime Minister (who was the nation’s leader during mid 2004-mid 2014), Manmohan Singh gave a scathing speech in the Indian Parliament yesterday in which he quotes Keynes on the long run. Manmohan Singh was a student at Cambridge and his heroes are Nicholas Kaldor and Joan Robinson and presumably John Maynard Keynes as well. In this era where politicians are promoting neoliberal ideas, it’s good to see the master being quoted in a Parliament.

The seven-minute video is linked below.

manmohan-singh-quoting-keynes

click the picture to see the video on YouTube. 

This question about the long-term reminds me of super-hysteresis which was referred by Marc Lavoie recently in an article for INET. It’s closely related to the Kaldor-Verdoorn law in which demand affects supply.  The damage done to the demand side because of slowdown in production caused by the Indian government’s poor implementation of its decision to replace majority of bank notes by value affects the supply side as well. Almost nobody who talks about the long-term benefits talks about this issue.

Let’s Say, “China”

Trade has always been a subject close to non-orthodox economics. Post-Keynesians emphasize the principle of circular and cumulative causation, which in the words of Nicholas Kaldor means, “success creates further success and failure begets more failure”. The importance of trade for the prospects of the US economy was emphasized the most by Wynne Godley in his series of papers for the Levy Institute from the mid-90s to late 2000s. In his paper Seven Unsustainable Processes, Godley said,

The logic of this analysis is that, over the coming five to ten years, it will be necessary not only to bring about a substantial relaxation in the fiscal stance but also to ensure, by one means or another, that there is a structural improvement in the United States’s balance of payments. It is not legitimate to assume that the external deficit will at some stage automatically correct itself; too many countries in the past have found themselves trapped by exploding overseas indebtedness that had eventually to be corrected by force majeure for this to be tenable.

There are, in principle, four ways in which the net export demand can be increased: (1) by depreciating the currency, (2) by deflating the economy to the point at which imports are reduced to the level of exports, (3) by getting other countries to expand their economies by fiscal or other means, and (4) by adopting “Article 12 control” of imports, so called after Article 12 of the GATT (General Agreement on Tariffs and Trade), which was creatively adjusted when the World Trade Organization came into existence specifically to allow nondiscriminatory import controls to protect a country’s foreign exchange reserves. This list of remedies for the external deficit does not include protection as commonly understood, namely, the selective use of tariffs or other discriminatory measures to assist particular industries and firms that are suffering from relative decline. This kind of protectionism is not included because, apart from other fundamental objections, it would not do the trick. Of the four alternatives, we rule out the second–progressive deflation and resulting high unemployment–on moral grounds. Serious difficulties attend the adoption of any of the remaining three remedies, but none of them can be ruled out categorically.

In his 2008 paperProspects For The United States And The Rest Of The World: A Crisis That Conventional Remedies Cannot Resolve, he said:

At the moment, the recovery plans under consideration by the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies.

But, however well coordinated, this approach will not be sufficient.

What must come to pass, perhaps obviously, is a worldwide recovery of output, combined with sustainable balances in international trade. Since this series of reports began in 1999, we have emphasized that, in the United States, sustained growth with full employment would eventually require both fiscal expansion and a rapid acceleration in net export demand. Part of the needed fiscal stimulus has already occurred, and much more (it seems) is immediately in prospect. But the U.S. balance of payments languishes, and a substantial and spontaneous recovery is now highly unlikely in view of the developing severe downturn in world trade and output. Nine years ago, it seemed possible that a dollar devaluation of 25 percent would do the trick. But a significantly larger adjustment is needed now. By our reckoning (which is put forward with great diffidence), if the United States were to attempt to restore full employment by fiscal and monetary means alone, the balance of payments deficit would rise over the next, say, three to four years, to 6 percent of GDP or more—that is, to a level that could not possibly be sustained for a long period, let alone indefinitely. Yet, for trade to begin expanding sufficiently would require exports to grow faster than we are at present expecting, implying that in three to four years the level of exports would be 25 percent higher than it would have been with no adjustments.

It is inconceivable that such a large rebalancing could occur without a drastic change in the institutions responsible for running the world economy—a change that would involve placing far less than total reliance on market forces.

So there was a voice for the Post-Keynesian community talking about US trade.

Dean Baker has an article saying the TPP gave us Trump and I agree. Although Donald Trump is a disaster socially, he is less dogmatic about trade and has promised to put tariffs on China (and has even promised fiscal expansion!). Since the Democrats (except Bernie Sanders) didn’t say anything about it and guarded orthodoxies, I believe this was decisive for Trump’s victory.

For the sake of quotes, here’s from The New York Times, July 31, 2016:

Mr. Trump himself said in a telephone interview last week that he believed more borrowing and spending would help lift economic growth, a departure from traditional Republican economics.

“It’s called priming the pump,” Mr. Trump said. “Sometimes you have to do that a little bit to get things going. We have no choice — otherwise, we are going to die on the vine.”

He added: “The economy would be crushed under Hillary. But no matter who it is, the debt is going up.”

Here’s a fun video of Donald Trump saying China in loop

donald-trump-says-china

click the picture to see the video on YouTube.

Since today morning the BBC has been saying how immoral Trump’s policies are: that fiscal expansion invariably burdens future generations and that thinking of the Chinese government using unfair trade policies is orthodoxy.

That’s not all, Paul Krugman even claimed that equity prices aren’t going to ever rise to pre-Trump level, a position which he flipped within hours after financial markets recovered.

So it’s not difficult to conclude that purely for the sake of defending one’s favourite party or ideology, people are going to make the case against fiscal policy and for free trade. We might hear a lot of pre-Keynesian orthodoxies from smart people more and more. I won’t even be surprised if Paul Krugman becomes a fiscal hawk again.

This has already been the case in discussions around wars. George Bush started the Iraq war and faced a lot of opposition from the so-called progressives. But then Barack Obama is the record holder for the most number of days as being in office as the President of the United States while the nation was at war but hardly gets any opposition from those who opposed him. I have also noticed that the same people who opposed Bush are now war apologizers.

So economic orthodoxy lies ahead. What will be sad is that it will come from people to the left of Republicans in the political spectrum.

The New View Of Fiscal Policy?

Jason Furman, Chairman of the Council of Economic Advisers to the President of the United States, has an articleThe New View Of Fiscal Policy And Its Application for Vox. In this, he admits how wrong economists have been about fiscal policy. I’ve quoted his paper on which the article is based before here on this blog.

Furman says:

A decade ago, the prevalent view about fiscal policy among academic economists could be summarised in four admittedly stylised principles:

  • Discretionary fiscal policy is dominated by monetary policy as a stabilisation tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
  • Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
  • Moreover, fiscal stabilisation needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
  • Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimising harmful side effects and long-run fiscal harm.

Furman then goes on to highlight how wrong each of the “principles” is.

He also says,

In the immediate postwar decades, economists broadly supported fiscal stimulus (e.g. Blinder and Solow 1973). But much of modern academic macroeconomics has ranged from dismissive of any effect of fiscal policy on the macroeconomy …

While that’s good, the main issue with the article is that it fails to mention that Post-Keynesians have argued about the strong effects of fiscal policy since long. Not only that, Furman advocates fiscal policy coordination across countries:

Finally, there may be larger benefits to undertaking coordinated fiscal action across countries.

Again, this is not “new” in any sense, just non-orthodox. Here is what Nicholas Kaldor said in 1984 in his lectures Causes Of Growth And Stagnation In The World Economy:

I should like to end this series of lectures by suggesting the outline of a world-wide agreement on the necessary policies for recovery. The programme could be summed up under four main heads:

  1. The first is coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets.If this does not prove to be politically feasible, it is inevitable that the growth of unemployment will sooner or later force governments to take measures that would make it necessary for them to expand demand without being frustrated by the inevitable balance of payments consequence of expanding their economies relative to their trading partners. This means that there needs to be some form of restriction that would limit the increase in “competitive” imports to some target ratio in relation to exports. Trade liberalisation, which played such an important part in the rapid economic progress during the years of expansion, becomes a serious obstacle to economic recovery in the case of prolonged stagnation due to the inability of countries to achieve a coordinated set of policies. But, given a proper recognition of the problem, that under conditions of unrestricted free trade the actual volume of production and trade may in fact be considerably less than under some system of regulated trade – a system which relates the volume of imports in manufactures from a particular group of countries, such as the members of the EEC, to some mutually agreed ratio to the exports of individual members to the rest of the group – there is no reason why full employment should not be restored through policies of expansion, preferably directed by the expansion of State investment. This coordinated action by all countries, instead of isolated actions by each country, is the first and most important requirement of recovery.

At present all countries have fairly large deficits in the general government budget, but these are largely the consequence of the low level of activity. On a “full employment” basis they would show a highly restrictive picture – they would show surpluses and not deficits. Contrary to appearances, the requirement of stability is for expansionary budgets with lower taxes and higher expenditure, and not further fiscal restriction (as is advocated, for example, by M. de Larosiere of the International Monetary Fund).

But finally some sense prevails in the economics community. Jason Furman’s article should be used to argue against anyone who says: “we always knew” even though his/her position has shifted. So there’s nothing new about the “new view”. Just that economists from the mid-70s till now have been orthodox.

Remarkable Admission On Fiscal Policy

There’s a paper by Jason Furman who is the Chairman of the Council of Economic Advisers which concedes how wrong economists were on fiscal policy. The link is a file hosted at the White House’s website! The paper starts off with a remarkable admission on fiscal policy (h/t and words borrowed from Jo Michell)

A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:

  1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
  2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
  3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
  4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points. This shift is partly the result of the prolonged aftermath of the global financial crisis and the increased realization that equilibrium interest rates have been declining for decades. It is also partly due to a better understanding of economic policy from the experience of the last eight years, including new empirical research on the impact of fiscal policy as well as observations of the reaction of sovereign debt markets to the large increases in debt as a share of GDP in the wake of the global financial crisis. In the first part of my remarks, I will discuss the theory and evidence underlying this “New View” of fiscal policy (with, admittedly, the core of this theory being an “Old Old View” that dates back to John Maynard Keynes and the liquidity trap).

Compare that to the Post-Keynesian view, which according to Wynne Godley and Marc Lavoie in their book Monetary Economics written before the crisis (from chapter 1, Introduction):

The alternative paradigm, which has come to be called ‘post-Keynesian’ or ‘structuralist’, derives originally from those economists who were more or less closely associated personally with Keynes such as Joan Robinson, Richard Kahn, Nicholas Kaldor, and James Meade, as well as Michal Kalecki who derived most of his ideas independently.

… According to post-Keynesian ideas, there is no natural tendency for economies to generate full employment, and for this and other reasons growth and stability require the active participation of governments in the form of fiscal, monetary and incomes policy.

 

UNCTAD’s Annual Report

The United Nations Conference On Trade and Development’s annual report for 2016 is out and it’s worth reading as always. It’s generally written by non-orthodox authors.

Ambrose Evans-Pritchard of The Telegraph already has a good summary of it in his article UN Fears Third Leg Of The Global Financial Crisis – With Prospect Of Epic Debt Defaults.

There’s reference to Myrdal and Kaldor’s work on circular and cumulative causation: specifically the importance of manufacturing. See page 58 onward (page 92 of the pdf file).

Another thing which caught my attention is the share of wages in the national income.

global-wage-share