A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Friday, April 12, 2013

Transcript: Pollin, Kalecki, Keynes on Employment and Investment

Today on the podcast, Robert Pollin, Michal Kalecki and John Maynard Keynes on investing and employment, and why the objections to policies which would work.

First, from Pollin's blog, Back to Full Employment:

The U.S. Department of Labor today reported that the official unemployment rate had nudged down from 7.7 percent in February to 7.6 percent in March. But this slight improvement in the unemployment rate was due entirely to the fact that nearly 500,000 people dropped out of the labor force in March. Think of a mid-sized city like Indianapolis. Now image if all of the people in the labor force in Indianapolis in February dropped out in March. That’s effectively what happened last month to bring down the official unemployment rate to 7.6 percent. If those nearly 500,000 people (from Indianapolis and everywhere else) had been included among the unemployed, the official rate today would instead be 7.9 percent. On top of this, if we also take into account people who wanted full-time work but had to accept a part-time job, plus people who didn’t look for work this month but haven’t fully stopped looking, the unemployment rate rises to 13.8 percent, or 21.3 million people.

These figures provide still more evidence—as if more evidence were needed—that the austerity agenda, and its obsession with closing the fiscal deficit before we reach a healthy recovery path, is only making conditions worse for almost everybody and needs to be abandoned.

Unfortunately, the other news from the past two days tells us that the Obama administration is not abandoning the austerity agenda at all, but rather is only embracing it more fervently. Thus, according to today’s news reports, President Obama is now ready to go public in his acquiescence to the austerity hawks, by agreeing to cut Social Security and Medicare.

On top of that, the New York Times reported yesterday that—on the grounds of helping to get people back to work—Obama is leaning toward approval of the Keystone XL pipeline, which would carry heavy oil from tar sands in Alberta, Canada through the U.S. Midwest to refineries in the Gulf Coast. The Times reported that Obama “acknowledged that it is difficult to sell aggressive environmental action to Americans who are still struggling in a difficult economy to pay bills, buy gas, and save for retirement.”

Now, here from a talk on his new book, back to full employment:

POLLIN

The full talk will be run later in the month as April's Relay.


But let's turn to perhaps a more sophisticated analysis, this from Michal Kalecki, the great Polish economist, who arguably anticipated the work of John Maynard Keynes. So much so that at one time the Keynes model was taught at Cambridge as the Keynes-Kalecki model. Here we address the question of why capitalists would oppose full employment policies, since these would be better for everybody, the capitalists as well. After Kalecki, we will put Keynes in context, that is, the full context of the burying notes in bottles enterprise often attributed as something Keynes' advocated.

But first Kalecki, writing in 1943, seventy years ago.

In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called 'economic experts' closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.

There are, however, even more direct indications that a first-class political issue is at stake here. In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.

The reasons for the opposition of the 'industrial leaders' to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. We shall examine each of these three categories of objections to the government expansion policy in detail.

2. We shall deal first with the reluctance of the 'captains of industry' to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence.

3. The dislike of business leaders for a government spending policy grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidizing mass consumption.

The economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business (e.g. hospitals, schools, highways). Otherwise the profitability of private investment might be impaired, and the positive effect of public investment upon employment offset, by the negative effect of the decline in private investment. This conception suits the businessmen very well. But the scope for public investment of this type is rather narrow, and there is a danger that the government, in pursuing this policy, may eventually be tempted to nationalize transport or public utilities so as to gain a new sphere for investment.

One might therefore expect business leaders and their experts to be more in favor of subsidizing mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, etc.) than of public investment; for by subsidizing consumption the government would not be embarking on any sort of enterprise. In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that 'you shall earn your bread in sweat' -- unless you happen to have private means.

4. We have considered the political reasons for the opposition to the policy of creating employment by government spending. But even if this opposition were overcome -- as it may well be under the pressure of the masses -- the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the 'sack' would cease to play its role as a 'disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.

Michal Kalecki. And since we'll be on the road over the next two weeks, we're going to continue this look back at two of the great economists, Keynes and Kalecki, in our next episodes.

But now to John Maynard Keynes. One quote is often cited by advocates and detractors of the Keynesian prescription:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment, and with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater.

Sounds like an advocate for "wasteful spending?"

What is the complete context? [And we've edited this for the modern ear.]


It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labor, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilization. just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better. To mention a detail, the tendency in slumps for the price of gold to rise in terms of labor and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable.

In addition to the probable effect of increased supplies of gold on the rate of interest, gold-mining is for two reasons a highly practical form of investment, if we are precluded from increasing employment by means which at the same time increase our stock of useful wealth. In the first place, owing to the gambling attractions which it offers it is carried on without too close a regard to the ruling rate of interest. In the second place the result, namely, the increased stock of gold, does not, as in other cases, have the effect of diminishing its marginal utility. Since the value of a house depends on its utility, every house which is built serves to diminish the prospective rents obtainable from further house-building and therefore lessens the attraction of further similar investment.... But the fruits of gold-mining do not suffer from this disadvantage, and a check can only come through a rise of the wage-unit in terms of gold, which is not likely to occur unless and until employment is substantially better. ...

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the “financial” burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to “enrich” an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.





Employment Conditions Worsen while Obama Capitulates to Austerity and Fossil Fuel Hawks
April 5, 2013 by Robert Pollin
http://backtofullemployment.org/2013/04/05/employment-conditions-worsen-while-obama-capitulates-to-austerity-and-fossil-fuel-hawks/#more-1478

The U.S. Department of Labor today reported that the official unemployment rate had nudged down from 7.7 percent in February to 7.6 percent in March. But this slight improvement in the unemployment rate was due entirely to the fact that nearly 500,000 people dropped out of the labor force in March. Think of a mid-sized city like Indianapolis. Now image if all of the people in the labor force in Indianapolis in February dropped out in March. That’s effectively what happened last month to bring down the official unemployment rate to 7.6 percent. If those nearly 500,000 people (from Indianapolis and everywhere else) had been included among the unemployed, the official rate today would instead be 7.9 percent. On top of this, if we also take into account people who wanted full-time work but had to accept a part-time job, plus people who didn’t look for work this month but haven’t fully stopped looking, the unemployment rate rises to 13.8 percent, or 21.3 million people.


These figures provide still more evidence—as if more evidence were needed—that the austerity agenda, and its obsession with closing the fiscal deficit before we reach a healthy recovery path, is only making conditions worse for almost everybody and needs to be abandoned.

Unfortunately, the other news from the past two days tells us that the Obama administration is not abandoning the austerity agenda at all, but rather is only embracing it more fervently. Thus, according to today’s news reports, President Obama is now ready to go public in his acquiescence to the austerity hawks, by agreeing to cut Social Security and Medicare.

On top of that, the New York Times reported yesterday that—on the grounds of helping to get people back to work—Obama is leaning toward approval of the Keystone XL pipeline, which would carry heavy oil from tar sands in Alberta, Canada through the U.S. Midwest to refineries in the Gulf Coast. The Times reported that Obama “acknowledged that it is difficult to sell aggressive environmental action to Americans who are still struggling in a difficult economy to pay bills, buy gas, and save for retirement.”

The weak recovery has been great for the rich

There is so much that is off here that it’s hard to know where to begin. Probably the best place to focus is to think more broadly about what is really going on. That is, the austerity hawks are prevailing, not because their analytic arguments are sound—which they are not—but because the austerity agenda is exactly what elites in this country (and Europe) want to see. A wide swath of elites in both the U.S. and Europe view this historical moment as an opportunity to eviscerate the public sector, labor unions, social insurance, and other basic social protections. They want this even if it means that unemployment remains high. They are not about to relent, even though their claims that high government deficits will cause high inflation, high interest rates, and a fiscal crisis have all been proven wrong by events over the past four years. I discuss these points in depth in a new working paper here, “Austerity Economics and the Struggle for the Soul of U.S. Capitalism.”

The hard truth is that for these elites, bringing the unemployment rate down has never been their priority. As Malcolm Sawyer explained in his recent blog here, rather, they support high unemployment as long as such conditions are favorable to their own maintaining and increasing their power and income. In fact, the weak recovery from the Great Recession has been very generous to them. Thus, Emmanuel Saez of UC Berkeley reports here that over the years of 2009-2011, i.e. the three first years of official recovery, the richest one percent of U.S. households captured an astounding 121 percent of the economy’s total income growth. The bottom 99 percent of U.S. households experienced -0.4 percent income growth over 2009-2011. This was after the bottom 99 percent experienced an average income decline of 11.6 percent during the official recession years 2007-2009. It is precisely due to such patterns that the U.S. stock market could begin booming in early 2013, even while GDP growth for the last three months of 2012 was at a paltry 0.4 percent.

The Keystone pipeline is bad for jobs

Obama himself knows better than to claim the Keystone project will be a significant source of job creation. His own State Department estimated that the project would create perhaps 5,000 – 6,000 jobs. That is, if the State Department is right, the total number of jobs created by the project would be approximately 1/100th as large as the number of people who dropped out of the U.S. labor market just last month. This is not to say that the State Department figures are correct. As someone who works on making exactly these kind of job estimates all the time—though I haven’t yet tried my own estimate for the Keystone project—my guess is that the State Department figures could actually be a bit high.

More generally, Obama knows that building the green economy can be a major new engine of job creation. He just won’t fight for this fundamental fact to be the basis for his Administration’s policies. As I have discussed on this blog here and elsewhere many times before, investing in the U.S. green economy will create about 17 jobs per $1 million of spending, as opposed to maintaining the current fossil fuel economy, which produces about 5 jobs per $1 million in spending. That is, if we ever get serious about building the green economy as we should, we will create about 3 times more jobs in the U.S. than would be created by spending the same money on the Keystone pipeline and other projects to maintain the fossil fuel economy.

These are the facts that need to stay in focus if we care about fighting for jobs and for environmental sanity, and for defeating the program of the austerity hawks.

This is an actual quote today from the German Finance Minister Wolfgang Schauble:
"Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,” Schauble said. “We have a growth-friendly process of consolidation, and we have sustainable growth, however you want to word it.”
Obviously there is a contradiction between "fiscal policy consolidation and growth". And not everyone is blind to the obvious - some people in Europe see the obvious contradiction (just look at the data).

And a "growth friendly process"? "Sustainable growth"? Nonsense. Maybe Schauble should look at the data (here is the eurostat data on GDP and unemployment.

Comment: Obviously Schauble is the worst kind of policymaker. He believes in "austerity ├╝ber alles" and can't be swayed by the results. Very sad.


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