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

Thursday, April 25, 2013

Transcript: Rogoff, Reinhardt, Keynes, Savings, Investing, Debt, Growth

Correlation is not Causation

Rogoff and Reinhardt Scandal

John Maynard Keynes on Saving and Investing

Lead with Fiction is not Fact
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An Excel spreadsheet proved too much for the authors of "This Time is Different," the definitive study which purported to prove the connection between high government debt and poor economic performance.

Carmen Reinhardt and Kenneth Rogoff rode their data set to the conclusion that when a country's debt to GDP ratio reaches 90%, growth goes negative.  Researchers at the University of Massachusetts Amherst and its Political Economy Research Institute (including Bob Pollin who has appeared here several times) demonstrated the study and its conclusions were fallacious.  Debt to GDP above 90% does not lead to a collapse in growth, by Rogoff and Reinhardt's own data.  That data is of questionable application, but so-called coding errors, inappropriate weightings and selective inclusion of data skewed the results to the wrong side.  Wrong as in erroneous, mistaken, incorrect.

The most cited study in the austerity debate, the source for the book, "This Time Is different," a snarky title for a book which suggested that fiscal prudence by government was to cut back in a downturn, shrink your way to growth.  False.  Not True.

Economies with debt to GDP above 90% do not experience statistical significant slowing.

For a long time people have objected vigorously to the Reinhardt-Rogoff studies on other grounds: (1) Correlation is not causation -- declining economies can create high debt to GDP at least as well as high debt to GDP can create declining economies, or (2) Comparing 17th century monarchies on the gold standard with Twentieth Century industrial democracies with sovereign fiat currencies is nonsense.

DEMAND SIDE'S IDIOT.

Now those objectors can add to the criticism number (3) The data show no correlation, association or causation that is statistically significant.  Economies over 90% do not shrink by 0.9%.  They grow by 2.2 percent.  Other numbers are off, too.

This is the evidence of weapons of mass destruction for the austerity hawks.  This is the aerial surveillance with which Colin Powell went before the UN to demonstrate unequivocal evidence of WMD.  The media ran with it. Then it was the Iraq War.  Rogoff and Reinhardt were on every talk show in the nation with their proof of the problem of high debt.  The media ran with it. Obama ran with it.  Austerity advocates ran with it.  Millions have been crushed.

MEDIA matters MONTAGE

This is humiliating for economists, not only Rogoff and Reinhardt, Harvard and xxxx.  The talk shows and the austerity pundits and politicians are likely not humiliated.  They have option A, pretend it is not significant and  ignore it.  They have option B, blame Rogoff and Reinhardt and ignore it.  They have option C, blame all economics and draw in their cadre of insiders who know so much better than those pointy-headed academics.

FACT:  We need direct investment in people and infrastructure, not tax give-aways and cutbacks.

FICTON:  We can shrink our way to growth.

Hard to overstate the damage done.


Where else is there near complete misunderstanding?  Correlation but no causation?  But better, less sloppy research.

John Maynard Keynes

Savings and Investment.

Decades of students, tens of millions of business news consumers know that the nation has to save in order to invest, to put away the money needed for investment.

Wrong.  The nation has to invest in order to have the money for savings.

Invest first?  This is so out of line with conventional thinking that people tend to STOP thinking and reject it as soon as they hear it.  But is it really?  Or is the misunderstanding simply another manifestation of the wrong metaphor?

First the definitions.  Savings equals Income minus Consumption.  Savings is the amount not spent.  You get an income, you buy your necessities and discretionaries.  The amount you don't buy is your savings.  You put that amount in the bank or under your couch.  In money.

No fair saving it in the form of housing, old paintings, or cans of tuna fish?  That is investing already, and by doing so, we haven't got to which comes first.

Guess what?  Investment is also, by definition, the amount not consumed.  You have consumption and you have investment.  And it doesn't make any difference to the conversation how you define investment.  Cars and houses can be investment, and dishwashers and cans of tuna fish for that matter.  Business inventory, for example, is considered investment even when the business had no intention or desire to pile up unsold stock.  Durables used over a long term by households may be investment to them, but not to the national income and product accounts.

So it is by definition that savings must equal investment.

Our question is which causes which?

Let's look at the metaphor again, which is the big conceptual or intuitive obstacle preventing us from seeing what is really there.

The economy as a household goes out and earns money, comes back and saves -- that is, doesn't spend -- some of that money.  Ooops. that amount not spent was the neighbor's income.  He sells his second car to meet the mortgage payment. Your saving had to be his dissaving.

Because there is no "out there" out there for the economy as a whole.  The economy is a family farm, a closed system -- with caveats, big caveats, that we're not getting into today.  If everybody can work and produce and trade with everybody else, the economy operates at full effectiveness.  Barns are constructed in exchange for food or shelter or musical performances.  But when somebody decides NOT to exchange his output for anther's, there is a shortfall in somebody's income.  If everybody has more or less the same inclination, the system goes down to where everyone is so poor they cannot afford NOT to spend everything to survive.  That is your prudent saving equilibrium.  Penury.

Ride to the rescue the manager of the farm who says we need a better road or a new cellar and finances it by promises of the benefit from that road or cellar.  If the amount he finances, the income that is put back into the system, exactly corresponds to the amount the individuals keep out -- save -- fail to consume-- the economy operates at optimum capacity.  If it is not enough, the economy sags.  If it is too much, the price of everything goes up.

Now look back.  that investment -- the road or armaments against the neighbor's farm or the education of the kids -- allowed the full employment, AND allowed the not-consuming by individuals to be kept in a form which could be exchanged at a later date.  (And beware, the society will have to continue to invest over time in order to ratify those savings.)  Without that investment, incomes fall to the point that not-consuming is wiped out by necessity.

Footnote:  And see that the selling of the second car makes no difference to either saving or investment on net.  One person is selling.  Another is buying.  Investing, disinvesting.  A wash.

Thus, when you hear that the government should be like me and my business.  We're prudent.  We don't operate in the red. When you hear that (well, first realize that a company without debt financing is not a common animal.) but realize that SOMEBODY has to be investing, operating in the red, or nobody can operate in the black.  Incomes drop.  The not-consuming sends those incomes down again.

This is not a one-time, pump-priming thing when you get an advanced economy.  It is a big amount, this need for investment, because the prudence of not-consuming, or the wealth of some individuals, tends to become a bigger problem.  Obviously, if you are financing a livable planet by not consuming, it IS prudent.  If you are simply reducing the incomes of the least powerful, it is not so prudent.

It CAN be done by the Private sector.  Entrepreneurs will see opportunity in a stable, expanding economy and will invest, creating incomes and savings.  This is not to be trusted, as we have seen over the past 30 to 40 years.  It is cyclical.  The monetary authority's attempts to get the private sector back in the game, even after a big government bailout, have been frustrated by overcapacity -- what to invest in -- and by confidence problems.

There is no practical obstacle to the government's doing it.  Political used to mean the art of the practical.  Now it means how to obstruct the practical.  The government can finance by borrowing, they can finance by taxing away the wealth of the non-participating idle rich, they can finance it by general taxation, they can finance it by simply printing the money.  The purchase of treasuries by the Fed is pretty much a case in point.

But nobody is going to finance expansion by not consuming.  Because it doesn't matter how you define investment -- as above -- cans of tuna, whatever.

The best thing, by far for investment-savings-incomes-survival would be to radically phase out the old, a grand creative destruction, of the fossil fuel economy.  Open up a redesign of the whole system for people and business to work on, from cars to communities, energy to education.

Ah, we ran away with it.

What does Keynes say?

p. 63


Whilst, therefore, the amount of saving is an outcome of the collective behaviour of individual consumers and the amount of investment of the collective behaviour of individual entrepreneurs, these two amounts are necessarily equal, since each of them is equal to the excess of income over consumption. Moreover, this conclusion in no way depends on any subtleties or peculiarities in the definition of income given above.

Provided it is agreed that income is equal to the value of current output, that current investment is equal to the value of that part of current output which is not consumed, and that saving is equal to the excess of income over consumption — all of which is conformable both to common sense and to the traditional usage of the great majority of economists — the equality of saving and investment necessarily follows. In short—

Income = value of output = consumption + investment.
Saving = income - consumption.
Therefore saving = investment.

p.83

...

The error lies in proceeding to the plausible inference that, when an individual saves, he will increase aggregate investment by an equal amount. It is true, that, when an individual saves he increases his own wealth. But the conclusion that he also increases aggregate wealth fails to allow for the possibility that an act of individual saving may react on someone else’s savings and hence on someone else’s wealth.

The reconciliation of the identity between saving and investment with the apparent “free-will” of the individual to save what he chooses irrespective of what he or others may be investing, essentially depends on saving being, like spending, a two-sided affair. For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

The above is closely analogous with the proposition which harmonises the liberty, which every individual possesses, to change, whenever he chooses, the amount of money he holds, with the necessity for the total amount of money, which individual balances add up to, to be exactly equal to the amount of cash which the banking system has created. In this latter case the equality is brought about by the fact that the amount of money which people choose to hold is not independent of their incomes or of the prices of the things (primarily securities), the purchase of which is the natural alternative to holding money. Thus incomes and such prices necessarily change until the aggregate of the amounts of money which individuals choose to hold at the new level of incomes and prices thus brought about has come to equality with the amount of money created by the banking system. This, indeed, is the fundamental proposition of monetary theory.
...
CH 8

p. 94

(5) Changes in fiscal policy. — In so far as the inducement to the individual to save depends on the future return which he expects, it clearly depends not only on the rate of interest but on the fiscal policy of the Government. Income taxes, especially when they discriminate against “unearned” income, taxes on capital-profits, death-duties and the like are as relevant as the rate of interest; whilst the range of possible changes in fiscal policy may be greater, in expectation at least, than for the rate of interest itself. If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater.[2]

We must also take account of the effect on the aggregate propensity to consume of Government sinking funds for the discharge of debt paid for out of ordinary taxation. For these represent a species of corporate saving, so that a policy of substantial sinking funds must be regarded in given circumstances as reducing the propensity to consume. It is for this reason that a change-over from a policy of Government borrowing to the opposite policy of providing sinking funds (or vice versa) is capable of causing a severe contraction (or marked expansion) of effective demand.





Friday, April 19, 2013

Transcript: Michal Kalecki on the Political Constraints of Full Employment

Today, Michal Kalecki (kah-lets-key)

Political Aspects of Full Employment
by Michal Kalecki

[This article corresponds roughly to a lecture given to the Marshall Society in Cambridge in the spring of 1942. Kalecki, from Poland, worked in the U.K. and U.S. for many years before returning to Poland. Arguably anticipated Keynes in many aspects, was part of the Cambridge community at one time. Well grounded in the practical economics.]
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I

1. A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending program, provided there is in existence adequate plan to employ all existing labor power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.

2. It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is 'financed' by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.

What happens, however, if the public is unwilling to absorb all the increase in government securities? It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.

3. It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labor, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services. (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.) It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.2

II

2. The above is a very crude and incomplete statement of the economic doctrine of full employment. But it is, I think, sufficient to acquaint the reader with the essence of the doctrine and so enable him to follow the subsequent discussion of the political problems involved in the achievement of full employment.

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.3

One might therefore expect business leaders and their experts to be more in favour of subsidising 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.

III

1. One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

2. The fact that armaments are the backbone of the policy of fascist full employment has a profound influence upon that policy's economic character. Large-scale armaments are inseparable from the expansion of the armed forces and the preparation of plans for a war of conquest. They also induce competitive rearmament of other countries. This causes the main aim of spending to shift gradually from full employment to securing the maximum effect of rearmament. As a result, employment becomes 'over-full'. Not only is unemployment abolished, but an acute scarcity of labour prevails. Bottlenecks arise in every sphere, and these must be dealt with by the creation of a number of controls. Such an economy has many features of a planned economy, and is sometimes compared, rather ignorantly, with socialism. However, this type of planning is bound to appear whenever an economy sets itself a certain high target of production in a particular sphere, when it becomes a target economy of which the armament economy is a special case. An armament economy involves in particular the curtailment of consumption as compared with that which it could have been under full employment.

The fascist system starts from the overcoming of unemployment, develops into an armament economy of scarcity, and ends inevitably in war.

IV

1. What will be the practical outcome of the opposition to a policy of full employment by government spending in a capitalist democracy? We shall try to answer this question on the basis of the analysis of the reasons for this opposition given in section II. We argued there that we may expect the opposition of the leaders of industry on three planes: (i) opposition on principle to government spending based on a budget deficit; (ii) opposition to this spending being directed either towards public investment -- which may foreshadow the intrusion of the state into the new spheres of economic activity -- or towards subsidizing mass consumption; (iii) opposition to maintaining full employment and not merely preventing deep and prolonged slumps.

Now it must be recognized that the stage at which 'business leaders' could afford to be opposed to any kind of government intervention to alleviate a slump is more or less past. Three factors have contributed to this: (i) very full employment during the present war; (ii) development of the economic doctrine of full employment; (iii) partly as a result of these two factors, the slogan 'Unemployment never again' is now deeply rooted in the consciousness of the masses. This position is reflected in the recent pronouncements of the 'captains of industry' and their experts. The necessity that 'something must be done in the slump' is agreed; but the fight continues, firstly, as to what should be done in the slump (i.e. what should be the direction of government intervention) and secondly, that it should be done only in the slump (i.e. merely to alleviate slumps rather than to secure permanent full employment).

2. In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in 'playing with' (public) investment or 'wasting money' on subsidizing consumption.

It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.4

In addition to this fundamental weakness of combating unemployment by stimulating private investment, there is a practical difficulty. The reaction of the entrepreneurs to the measures described is uncertain. If the downswing is sharp, they may take a very pessimistic view of the future, and the reduction of the rate of interest or income tax may then for a long time have little or no effect upon investment, and thus upon the level of output and employment.

3. Even those who advocate stimulating private investment to counteract the slump frequently do not rely on it exclusively, but envisage that it should be associated with public investment. It looks at present as if business leaders and their experts (at least some of them) would tend to accept as a pis aller public investment financed by borrowing as a means of alleviating slumps. They seem, however, still to be consistently opposed to creating employment by subsidizing consumption and to maintaining full employment.

This state of affairs is perhaps symptomatic of the future economic regime of capitalist democracies. In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment. But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by business leaders is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would 'get out of hand' and the 'captains of industry' would be anxious to 'teach them a lesson. Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them 'boom-tired.'

In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business -- as a rule influential in government departments -- would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.

This pattern of a political business cycle is not entirely conjectural; something very similar happened in the USA in 1937-8. The breakdown of the boom in the second half of 1937 was actually due to the drastic reduction of the budget deficit. On the other hand, in the acute slump that followed the government promptly reverted to a spending policy.

The regime of the political business cycle would be an artificial restoration of the position as it existed in nineteenth-century capitalism. Full employment would be reached only at the top of the boom, but slumps would be relatively mild and short-lived.

V

1. Should a progressive be satisfied with a regime of the political business cycle as described in the preceding section? I think he should oppose it on two grounds: (i) that it does not assure lasting full employment; (ii) that government intervention is tied to public investment and does not embrace subsidizing consumption. What the masses now ask for is not the mitigation of slumps but their total abolition. Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work. The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?

2. 'Full employment capitalism' will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.

But perhaps the fight for full employment may lead to fascism? Perhaps capitalism will adjust itself to full employment in this way? This seems extremely unlikely. Fascism sprang up in Germany against a background of tremendous unemployment, and maintained itself in power through securing full employment while capitalist democracy failed to do so. The fight of the progressive forces for all employment is at the same time a way of preventing the recurrence of fascism.



1 This article corresponds roughly to a lecture given to the Marshall Society in Cambridge in the spring of 1942.

2 Another problem of a more technical nature is that of the national debt. If full employment is maintained by government spending financed by borrowing, the national debt will continuously increase. This need not, however, involve any disturbances in output and employment, if interest on the debt is financed by an annual capital tax. The current income, after payment of capital tax, of some capitalists will be lower and of some higher than if the national debt had not increased, but their aggregate income will remain unaltered and their aggregate consumption will not be likely to change significantly. Further, the inducement to invest in fixed capital is not affected by a capital tax because it is paid on any type of wealth. Whether an amount is held in cash or government securities or invested in building a factory, the same capital tax is paid on it and thus the comparative advantage is unchanged. And if investment is financed by loans it is clearly not affected by a capital tax because if does not mean an increase in wealth of the investing entrepreneur. Thus neither capitalist consumption nor investment is affected by the rise in the national debt if interest on it is financed by an annual capital tax. [See 'A Theory of Commodity, Income, and Capital Taxation']

3 It should be noted here that investment in a nationalized industry can contribute to the solution of the problem of unemployment only if it is undertaken on principles different return than private enterprise, or it must deliberately time its investment so as to mitigate from those of private enterprise. The government must be satisfied with a lower net rate of slumps.

4 A rigorous demonstration of this is given in my article to be published in Oxford Economic Papers. [See 'Full Employment by Stimulating Private Investment?']

Michal Kalecki (22 June 1899 - 18 April 1970) was a Polish Marxist economist. This essay was first published in Political Quarterly in 1943; it is reproduced here for non-profit educational purposes. A shorter version of this essay was published in The Last Phase in the Transformation of Capitalism (Monthly Review Press, 1972).


General Theory of Employment, Intrest and Money
John Maynard Keynes
p. 129

VI

...

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 spending rather than for partly wasteful forms, which being wholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by borrowing 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 labour -- 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. It would 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. 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.

If we are precluded from increasing employment by means which at the same time increase our stock of useful wealth, and 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. First, owing to the gambling attractions which it offers, it is often undertaken without regard to close financial inspection as to likely profit. Second, 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 ... But the fruits of gold-mining do not suffer from this disadvantage, and a check can only come through a rise in wages in terms of gold, which is not likely 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: pyramid-building AND the search for the precious metals. The fruits of these could not serve the needs of man by being consumed, andso 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 our stagnation as an inevitable result of applying to the conduct of the State the maxims which are best calculated to “enrich” an individual, and we enforce a saving that is never used.




VI

When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of the marginal product. Indeed it may be much less. For a man who has been long unemployed some measure of labour, instead of involving disutility, may have a positive utility. If this is accepted, the above reasoning shows how “wasteful” loan expenditure[8] may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

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 labour, 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 civilisation. 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 labour 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 unless the rate of interest is falling part passu. 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. Moreover, there is no subsequent reverse effect on account of provision for user and supplementary costs, as in the case of less durable forms of wealth.

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.

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.


Saturday, April 6, 2013

Transcript:Theory of Employment edited


Listening to David Stockman last week was welcome diversion, the Tasmanian devil at the Chamber of Commerce ball.

Some of the things I let go by without too much annoyance. Like his hysteria about money printing. True the Fed has ballooned its balance sheet in order to create investment that is not occurring and to bid up stock prices and give the casino players cheap chips and inflate the next bubble. Well, maybe I do get annoyed. But that is not money you and I ever see. As Stockman says, the money is dumped into the canyons of Wall Street and not coming out, setting up another bubble for us to clean up, for the benefit of the well-to-do, because we need them. As we know from our Minsky, real money is produced and destroyed by the lending process. That is lending to real people, who pay wages, not to the trading floors where they lever up trades and inflate the value of financial assets. Anyway, there is something pleasant about a David Stockman shaking his fist under Ben Bernanke's nose. Maybe a little spittle sticks to his beard.
Listen to this episode
But one thing we could not let pass, as Stockman called everything that had to with government deficits and tax give-aways and targeted concessions Keynesian. David Stockman has never read Keynes. He does not understand Keynes. He should be banned from using the man's name. This is completely evident when he dubs Lawrence Summers as the vicar of Keynesianism. Give-aways to corporations and tax cuts for the wealthy are results of government capture and exploitation by those social forces, not the policy preference of any Keynesian who has read Keynes.

Now I sound like every other self-assured pundit who has the goods from the on high. But it bugs me.

So, today, we will let Lord Keynes speak for himself, or nearly so, as we have edited a bit of the General Theory for the more modern ear. Not distorted, a bit abridged, edited.

The complete General Theory of Employment in four minutes, with an afterward on the cluelessness of the orthodoxy, applicable as much today as it was in 1936. Embedded in the same chapter.

This is from Chapter 3: The Principle of Effective Demand
II

...

The outline of our theory can be expressed as follows. When employment increases, aggregate real income increases. When aggregate real income increases, aggregate consumption also increases, but not by so much as income. Some is saved. Hence, employers would make a loss if the whole of the increased employment were to be devoted to consumption goods. To justify any given amount of employment there must be an amount of current investment sufficient to absorb the excess of total output over what the consumption spending is. Unless there is this amount of investment, the entrepreneurs will not offer the given amount of employment. It follows that, given what we shall call the community’s propensity to consume, the equilibrium level of employment (i.e., the level at which there is no inducement for employers either to expand or to contract employment) will depend on the amount of current investment. The amount of current investment will depend, in turn, on the inducement to invest. The inducement to invest will depend on the relation between the projected output of the capital versus the complex of rates of interest on loans of various maturities and risks.

Thus, given the propensity to consume and the rate of new investment, there will be only one level of employment consistent with equilibrium; since any other level will lead to inequality between the aggregate supply price of output and its aggregate demand price. ... there is no reason in general to expect this level to be equal to full employment. The effective demand associated with full employment is a special case, arrived at when the propensity to consume and the inducement to invest stand in balance. ... when, by accident or design, current investment provides an amount of demand just equal to the excess of what the community will choose to spend on consumption when it is fully employed.

...

This is an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will constrict production in spite of the fact that the marginal product of labor still exceeds in value the marginal disutility of employment. [That is, people will want to work at the prevailing wage, but cannot find work.]

Moreover, the richer the community, the wider the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. A poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment to balance the saving of its wealthier members with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then it will reduce its actual output, until, in spite of its potential wealth, it has become so poor that the surplus over its consumption has shrunk to correspond to the weaker inducement to invest.

But worse still. Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls sufficiently ...

...



[The Ricardian cluelessness with regard to aggregate demand... The same as today]

The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics;... and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world, but controversy ceased. The other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to the suitability of the doctrine to the environment into which it was projected. It reached conclusions quite different from what the ordinary uninstructed person would expect, it is true, but I suppose this simply added to its intellectual prestige. Translated into practice, its teaching was austere and often unpalatable, and this may have lent it virtue. It was adapted to carry a vast and consistent logical superstructure; this gave it beauty. It was commended to authority because it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, thus any attempts to change such things were likely to do more harm than good. And finally, it justified the free activities of the individual capitalist, and so attracted to it the support of the dominant social forces behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists, its signal failure for purposes of scientific prediction greatly impaired the prestige of its practitioners. Professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation -- a discrepancy which the ordinary man has not failed to observe. The result was a growing unwillingness to accord to economists that measure of respect given to other groups of scientists whose theoretical results are confirmed by observation.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, having left this world to cultivate their gardens, suggest the best of all possible worlds will arrive if we will let well enough alone. There would obviously be a natural movement toward optimum employment of labor and resources in a Society which functioned in the manner of the Ricardian classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave, but to assume that it actually does so is to assume our difficulties away.


And so it is today. With the primary economic theory, the one that has carried the day, saying, just get the government out of the way and the private markets will produce the optimal outcome. Very easy to say from the chairs of the elite. Much harder, for being more aware of the actual outcomes, from the position of the fractured middle class.

But let's go back.

This is an edited, but complete, rendition of Keynes' summary of the General Theory of Employment, Chapter 3, parts II and III.

If I may point out the centrality of investment and then the description of how wealthy societies may find profitable investment less and less available, partly because the capital stock has built up and partly because the wealthier the society, the less out of each additional dollar of income is consumed, so the less is used to employ people in consumption goods and the greater is the need for investment.

requote:

....

Moreover, the richer the community, the wider the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system. A poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment to balance the saving of its wealthier members with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then it will reduce its actual output, until, in spite of its potential wealth, it has become so poor that the surplus over its consumption has shrunk to correspond to the weaker inducement to invest.

But worse still. Not only is the marginal propensity to consume weaker in a wealthy community, but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls sufficiently,

....

This may be another seed in the growing of Minsky's financing structures, from hedge to speculation to Ponzi. As I recall, Minsky described the impetus of the reach for yield as the bankers' confidence or competition in the era of financial stability. But it may as well be as Keynes says here, the available investment is less attractive. Then we have the push to make it ever more attractive, with low interest rates and tax concessions.

But imagine for a moment that it also leads to the bifurcation of the society, and the savings of the wealthy do not deteriorate with the impoverishment of the rest, until at last, the divergence becomes overwhelming and the economy collapses.

Also imagine for a moment that there is government, which does not need inducement to invest as profit, but may invest just as a function of serving the society and by the way full employment. This investment may simply be taxed away from the wealthy, or it may be borrowed away, but so long as there is the covering of the gap, full employment will result. From this analysis, one can speculate that indeed, taxation would be better, as it would reduce the savings gap among the wealthy. As people are employed, the higher multipliers of the middle class create a virtuous feedback.

BUT, of course, consumer goods are likely to be bid up in value and the dreaded INFLATION monster loosed for the reactionaries to rally behind.

That aside, Keynes was patently aware that government could also save, invest and spend. He later advocated the socialization of investment, so that the race to the lowest possible interest rate or biggest possible tax cut for investment could be dispensed with, targeted investment done, and full employment accomplished.

The fact that government invests in public goods -- aside from the occasional Big League ballpark -- should not be such an obstacle to understanding. These investments, after all, pay off on a grand scale. The private sector would love to have them if they could only charge everybody who benefited. But tolling every road, collecting a fee from every employer, employee, community and family that benefits from eduction; reaching into the future to collect the benefits of a livable planet. These are beyond the capacity of even the most sophisticated entrepreneur. The fact that we can tax -- a universal fee collected from all -- is an advantage when all benefit. It is too bad taxes have become not ways we finance things we need, but an embarrassment, the fangs of a vampire government.

Next time, we'll hear from Robert Pollin, 2013, and Michal Kalecki, 1943, about why it may be that getting the economy going for the benefit of all does not get support from the capitalists.

Even though they would do better, too.



Friday, April 5, 2013

Transcript: Forecast Friday with Abbey Joseph Cohen and David Stockman

DAVID STOCKMAN 1

ABBEY JOSEPH COHEN

...

PLANS in the days AHEAD.  Right.

But first to David Stockman.  His new book is getting a lot of push-back from Wall Street.  The book The Great Deformation:  Corruption of Capitalism in America.  Stockton is the former budget director under Ronald Reagan.  Detractors, of course, do not pick on what we just played.  They find the weak spots, like Stockman's proposal to abolish deposit insurance for the big banks and let the markets discipline them.  Demand Side has made the point that markets are controlled by the big players even with government regulation, and even by government regulation.  No reason to expect market discipline to arise from the ashes.  But the points he makes here we agree with.
Listen to this episode
Abbey Joseph Cohen is the perma-bull, or nearly so.  The points here we agree with because they are true.  Corporate profitability is high, corporations are fat with cash (re-fi'd at low rates, but levered up at lower rates, too.) What Cohen is wrong about is the poised to take off piece.  This is a great lesson of the Great Recession.  Corporate profitability does not equal economic health.  Quite the opposite in the current case.  Trickle down should have also been put to rest, as the rich do better and the rest of us are looking at a very uncertain future.  Particularly when the way out seems to be cut social security and constrict the returns to our pension plans.

Poised to take off?  No.  Without demand, corporations have nothing to invest in that will turn a profit. They don't invest because they have cash.  They don't invest because interest rates are low.  They invest because they intend to produce a profit.   Keynes 101.  If you pay them to invest, as we have for thirty years with tax cuts up the wazoo, they'll make their calculation, if they can save labor, they'll invest.  Now overcapacity and over-tech'd plants.

But there IS demand, you say.  Demand for gadgets. Demand for high-end merchandise and homes and durables.  This is not going to carry an economy that is cutting back, whose median income is stagnant or falling, who is underwater on its mortgage.  While the enormous effort to create a new bubble IS getting credit growing, it is a new bubble.  We agree with Stockman.

No.  The investment is all on the public side.  Infrastructure, education, new green energy, a DC transmission grid, direct hiring.  It's all there in the Congressional Progressive Caucus budget.  Instead of embracing it, of course, Obama has come out for public investment lite.  Not a bad idea, America bonds, or whatever.  But not learning from the ARRA, the last stimulus.  Too little, too much sugar for the business and finance side, not enough building and working and getting money into the real economy.  In this case, the good is the enemy of the adequate.


This week, we're back at the forecast spot in the order at ReMacro.  Our call was recession in December -- last December -- on the heels of the election.  Hasn't happened so far.  Are we close to pulling the plug on that call?  Close is a relative term.  Whatever the call in the short run, we'll be sticking with the long-term bouncing along the bottom with downside risks, see Cyprus and Eurozone austerity, austerity here at home, and so on.

Our problem with this Depression is the PR.  The advertising.

In the first Great Depression, as soon as the radical fixes came into play ... heck, it was just action by FDR ... the economy improved, growing at, what?  7+ percent per year, adding millions of jobs a year, 1933-1937.  Nobody said it was over until it was over.

This time, Obama gets into office.  Things bottomed, all right.  But on Main Street, that's where we are today.  We're just dealing with it.  On Wall Street, things are groovy, setting new highs every week.  Inside the Beltway, the conversation is not about jobs, recovery, or infrastructure.  It's about deficits and debt, and the austerity that is certain to make the deficits and debt worse, in spite of the PR.

Well, here's Stockman on the Ryan budget:

STOCKMAN 2

They didn't have good PR back in the First Depression.  They didn't have good economics then either, to start with, much the same as it is today.  But the PR and propaganda got a lot better.  The economics, not so much.  In economics, we still haven't caught on that corporations can move the demand curve with PR.  In PR, they have the idea very well, they can move the economics, they can move the government, they can tell us what to think.  Economics pretends we're still selling and buying in media-light 1930.  Today, that car, that's who you are.    Or that bag or beer or whatever.

So PR control of demand is under-understood by economists.  But how do you interact when you're a small person with no advertising budget.  Join with other small persons with no budget and do your own media?  I don't know.  It's one way.  I think Occupy had it going on for awhile.  May happen again.

Another alternative is to make an enemy  But everybody loves their MacDonalds and their Wal-Mart and their Exxon and their Ford.  Not good enough.  Wait! you say.  Maybe Exxon.  But people need an enemy they can see, and the counter girl at the Exxon register is not as easy to hate as the dark-skinned guy in the back of the store, or the white-haired woman in the BMW or the plethora of bad guys on TV.

So. PR for this Depression.  Much better. You'd think we were in recovery.  It helps when the floor of demand is there from unemployment insurance, food stamps, medicare and medicaid and good old social security.

PLUS the Fed keeping Wall Street happy, filling that canyon with cash.

We don't see too much to change.  The expansion or contraction, boom or bust, in credit is the wild card.  Otherwise:
  • The impulse from the election and the political business cycle is gone
  • Gridlock remains
  • Austerity is the policy of the day
Let's call it the madness of austerity. We need balanced growth:  consumers, government, private investment. Growing together.  And that is consumer incomes, as in labor incomes, not personal debt.

A recent study from the Levy Institute (Papadimitriou, Hannsgen and Nikiforos, Is the Link between Output and Jobs Broken, March 2013) confirmed that quote "private investment has acted as a net reducer of economic growth for the United States, partly because of a tremendous post-crisis slump in the housing industry and related activities, but also because of subdued animal spirits.  The business sector has been stockpiling huge net cash holdings instead of purchasing new capital goods....  In terms of moving averages, this sector's contribution to overall growth is still stuck below zero, while those of net exports and government spending have been falling and that of personal consumption expenditures has turned only slightly upward."

Later we see, as in Steve Keen's recent chart, that consumer credit has returned to pre-crisis growth.  An increase of $152.8 billion for calendar year 2012.  Securitized debt remains low, compared to pre-crisis, but other areas, including student loans, have been increasing rapidly.  We suspect auto loans is in this category as well.

Debt is for investment. Incomes are for consumption.  Government invests.  Businesses invest.  We need this investment to create incomes for consumers to consume and ratify this investment and have the whole rise together in a balanced manner.  We cannot have consumers borrowing, businesses sitting on their hands and government bailing out.  It is just not going to work.
  • Monetary policy favors housing and bubbles
  • Zero interest rates
  • And no meaningful spending, not infrastructure, not education, not climate change 
  • No social insurance cuts yet.

So in lieu of a change in our call, we'll put up a series of provocative charts on the REMacroBaseline.com site.