Tag Archives: fiscal policy

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Marc Lavoie’s Lecture On Policy Response To The Pandemic From A Post-Keynesian Perspective

There’s a lecture (on Zoom) by Marc Lavoie hosted by Department of Economics at Kyungpook National University, from January this year which I only found recently.

The lecture is on some aspects of policies such as fiscal policy, large scale asset purchases by central banks (LSAP, or “QE”) during the pandemic and some comments on neochartalism or “MMT”. Basically distinguishing PKE and neochartalism.

Enjoy!

Gita Gopinath On Fiscal Policy

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Gita Gopinath, the IMF’s chief economist is now arguing for a coordinated fiscal expansion, and that “coordinated spending is better than the sum of the individual parts” (CNN interviewer quoting her) and that “it is time for a global synchronised fiscal push to lift up prospects for all” (FT article referred in the CNN interview.

This is of course welcome! A lot of countries can’t do it alone and a coordinated expansion would allow them to raise output, keeping balance of payments in check.

It’s sad however, that the message was this late (although anything better than never). Also the characterisation of the problem as if we’re in a liquidity trap is dubious as they just want to say that fiscal policy will work only now, not after a recovery. But fiscal policy always works.

Michał Kalecki, From 1932, On Coordinated Fiscal Expansion

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I came across this 1932 article by Michal Kalecki, Inflation And War, in which he talked of a coordinated fiscal expansion (although he was not optimistic that politicians might do it)!

He says:

What indeed could change the situation is fiscal inflation on large scale, for instance, by the government obtaining large credits from the central bank and spending them on massive public works of one sort or another. In this case the money no doubt would be spent and this would result in increased employment (combined with an overall reduction in wage rates). However, even such an intervention could be effective only if it were undertaken in a closed economy, e.g. in the capitalist system as a whole, embracing the whole world, where there is one exchange only and no tariff barriers. If fiscal inflation is carried out on a broader scale in one country alone it must cause disturbances in the rate of exchange. A rise in local output requires increased supplies of foreign raw materials and imports as well. At the same time, together with employment domestic prices rise which restricts exports. Consequently, the balance of payments deteriorates, an outflow of gold and foreign exchange follows, and the exchange rate falls.

In general, these processes will end earlier because in expectation of their development foreign capital will withdraw and local capitalists will purchase foreign exchange thus accelerating devaluation. This, in turn, will distort the fiscal inflation process because of rise in prices of foreign raw materials will add to a general price rise until the symptoms of hyperinflation, already known from our experience, appear. Therefore, a necessary condition for fiscal inflation to be effective is an international agreement of the capitalist powers, which is, of course, totally utopian. Thus, imperialism, which is an unavoidable phase in the development of capitalism, makes the ‘inflationary’ way of mitigating the crisis unavailable.

The article in available in his Collected Works, Volume VI, pages 175-179 and was originally written in Polish.

Joan Robinson On Public Sector Deficits And Debt

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Some good quotes by Joan Robinson on deficits and debt:

In Introduction To The Theory Of Employment, Chapter 5, Change In Thriftiness, in the section A Budget Deficit, 1937:

A special kind of reduction in thriftiness is represented by a budget deficit. If the state is paying out more money in salaries to civil servant, commissions to contractors and so forth, than it is receiving in taxation, and is borrowing the difference by issuing Treasury bills or otherwise raising loans from the public, then it is in just the same position as an individual who is spending on current consumption more than his income, by means of drawing on past accumulated wealth or getting into debt. In short the state is dis-saving. The result is to increase incomes and expenditure all round. Suppose that the state keeps its outlay constant and remits taxation. Then out of the increased net income of taxpayers part will be spent, and this extra spending will raise the incomes of those on whose output the expenditure is made. Out of this extra income, again, a part will be spent; and so on. Just as in the case of investment, the extra expenditure will lead to such an increase in incomes that the public are saving more than they otherwise would have done at just the same rate the government is borrowing.

The idea that a budget deficit is good for trade is often found to be shocking, but it is a fact which has become obvious to the governments of the world since the great depression began in 1929. The argument used to be common, particularly in England, that a budget deficit upsets the confidence of entrepreneurs, and so does more indirect harm to employment than direct good. But this is a case where “thinking makes it so”, and it is found nowadays that a deficit accompanies by the right kind of propaganda can have a very beneficial effect.

The mere fact that a deficit is good for trade is not a sufficient argument for having a deficit, since other methods of improving trade may be preferable. It can, however, be regarded as a merciful dispensation that budgets have a tendency to come unstuck when trade is very bad. Taxes fail to yield as much as was expected, while expenses in connection with unemployment go up, and the government is forced to borrow to meet its current outgoings. This has the effect if preventing the decline in employment from going so far as it would if the budget were kept balanced.

In The Problem Of Full Employment, Chapter 9, Some Fallacies, 1943:

1. “THE TREASURY VIEW”
During the great slump it was the official view that Government investment cannot increase employment. The argument ran: there is a certain amount of saving going on at any time, and if more savings are invested by the Government, less will be available for private enterprise. This overlooks the fact that if there is more investment there will be a higher level of activity and of incomes and consequently more saving. The argument is so childish that it would not deceive anyone who had not a strong wish to believe it. Nevertheless, it was for many years the basis of Government policy, and was set out in a famous White Paper in 1929.

2. “ECONOMY”
The National Government which was formed in 1931 went in for a great economy campaign. Local authorities were compelled to cease work on building schemes, roads, fen drainage, and so forth. An emergency budget was introduced, increasing taxation, cutting unemployment allowances and reducing the pay of public servants, such as teachers and the armed forces. Private citizens felt it was patriotic to spend less. Some Cambridge Colleges gave up their traditional feasts as a recognition of the crisis. All this helped to increase unemployment and make the economic situation of the country still more depressed. Nowadays there is considerably more understanding of how things work and it is unlikely that such a completely idiotic policy will be tried again.

3. THE BURDEN OF THE NATIONAL DEBT
The National Debt is often brought forward as an argument against public spending to create employment. There is a good deal of confusion between the National Debt and the debt of an individual. An individual who is in debt has to pay interest to someone else, and will be obliged to return the sum borrowed to the lender. A nation which is in debt has to pay interest to its own citizens (a foreign debt is a different story and is much more like a private debt). That is to say, the Government has to raise taxes from Peter and Paul and pay interest to Paul and Peter. Taking the country as a whole, there is no burden of the debt. Moreover, the debt need never be repaid. As one lot of bonds fall due to be redeemed a fresh lot can be sold to the public. If the debt is finally repaid, it is repaid out of the wealth of the citizens of the country, and this, like interest payments, is merely a swap round among the members of the community.

At the same time there are genuine objections to a large National Debt. It means that there is a large volume of rentier income (the interest on Government bonds), so that the active part of the population has to allot a large share of the proceeds of production to the mere owners of wealth. This objection is all the stronger if the holders of the National Debt are mainly the richer part of the community, while taxes to pay their interest are raised from the population as a whole. This drawback can be kept within bounds, first, by keeping interest rates low, and second, by arranging the tax system so that the same class which gets the interest has to pay the extra taxes. But however well the national finances are managed, some objection must remain.

This does not mean that fear of increasing the National Debt is a sound objection to having a full employment policy. The drawback of having a swollen rentier class is trivial compared to the loss of wealth and of happiness, and of life itself, which is entailed by unemployment.

If, however, we are to have a full employment policy in any case, the problem must be viewed in a different light. Government outlay covered by taxation on the rich is to be preferred to borrowing. A full employment policy conducted according to the rules of Sound Finance is far more radical than a policy of deficits, and Government loan expenditure can only be justified as a concession to the status quo.

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Lawrence Summers On The Failure Of The New Consensus

Larry Summers has a Twitter thread in which he talks of how the economics profession got it wrong by downgrading fiscal policy. He also concedes to Post-Keynesians:

We have come to agree w/ the point long stressed by Post Keynesian economists & recently emphasized by Palley that the role of specific frictions in economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.

The title is the link.

Mainstream Economics Compared To Keynesian Times

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Paul Krugman has endorsed an article by Jason Furman and Lawrence Summers on fiscal policy. It has a mix of pre-Keynesian orthodoxy and the Keynesian thinking of the 40s.

The economics profession got it wrong on fiscal policy, claiming it is impotent for raising real output and is now making it look like they already knew this.

For comparison, here’s Nicholas Kaldor, free of all pre-Keynesian orthodoxies:

It is impossible to judge intelligently the system of taxation, or the scale of public expenditures, without a quantitative record of the total economic activity of the nation, which forms the background. This is perhaps even more important in war-time, when the Government controls so much larger a part of the national income; but it is vital in peace-time as well. If a statement of this kind had been presented year by year, simultaneously with the Budget, many financial mistakes of past Governments might have been avoided.

Moreover, the regular publication of this document would stimulate both Government and Parliament to look upon the level and the stability of the National Income, rather than the conventional and narrowly financial standards, as the true criterion of budgetary policy; to regard the movements of the national expenditure, and not merely of the expenditures of public departments, as within their province. It is on the assumption of this wider responsibility that our best hope lies for the post-war world.

– Nicholas Kaldor, The White Paper On National Income And Expenditure, 1941

Oh, Jeremy Corbyn!

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Jeremy Corbyn is a great leader and perhaps one of the few leaders speaking for fiscal expansion. You could say some others too, but what I have realised is that politicians say nice things just to look good and them saying nice things about fiscal policy doesn’t mean much. But Jeremy Corbyn is different. He is pushing aggressively against austerity.

Here’s a great video posted by him on social media. It is really nice and captures the important elements of Keynesianism. It’s something that not even most economists understand and yet we have Labour, which has got it right!

click to view the video on Twitter.

A problem of our times is that even the left has abandoned Keynesianism. Jeremy Corbyn stresses to European parties regularly that if left ideas are to survive, they ought to oppose austerity.

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The IMF And The New Fiscalism: Was There A U-turn?

The new issue of ROKE is out and the journal has made available Marc Lavoie and Brett Fiebiger’s article free.

Abstract:

In late 2008 a consensus was reached amongst global policymakers that fiscal stimulus was required to counteract the effects of the Great Recession, a view dubbed as the New Fiscalism. Pragmatism triumphed over the stipulations of the New Consensus Macroeconomics, which viewed discretionary fiscal actions as an irrelevant tool of counter-cyclical macroeconomic policy (if not altogether detrimental). The partial re-embrace of Keynes was however relatively short-lived, lasting only until early 2010 when fiscal consolidation came to the forefront again, although the merits of fiscal austerity were questioned when economic recovery did not really materialize in 2012. This paper traces the ups and downs of the debate over the New Fiscalism, especially at the International Monetary Fund, by analysing IMF documents and G20 communiqués. Using fiscal policy as a means to exit the crisis remains contentious even amidst recognition of secular stagnation.

Referred is also a 2016 article by Janet Yellen who makes a huge concession about the state of Macroeconomics:

The Influence of Demand on Aggregate Supply

The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply?

Prior to the Great Recession, most economists would probably have answered this question with a qualified “no.” They would have broadly agreed with Robert Solow that economic output over the longer term is primarily driven by supply–the amount of output of goods and services the economy is capable of producing, given its labor and capital resources and existing technologies. Aggregate demand, in contrast, was seen as explaining shorter-term fluctuations around the mostly exogenous supply-determined longer-run trend. This conclusion deserves to be reconsidered in light of the failure of the level of economic activity to return to its pre-recession trend in most advanced economies. This post-crisis experience suggests that changes in aggregate demand may have an appreciable, persistent effect on aggregate supply–that is, on potential output.

The idea that persistent shortfalls in aggregate demand could adversely affect the supply side of the economy–an effect commonly referred to as hysteresis–is not new; for example, the possibility was discussed back in the mid-1980s with regard to the performance of European labor markets.

[the title is the link]

An Important Note By The United Nations On The IMF And The World Order

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I recently came across a phrase, social silence, which Gillian Tett of FT describes:

As Pierre Bourdieu, the French anthropologist and intellectual, observed in his seminal work Outline of a theory of practice, the way that an elite typically stays in power in almost any society is not simply by controlling the means of production (i.e. wealth), but by shaping the discourse (or the cognitive map that a society uses to describe the world around it.) And what matters most in relation to that map is not just what is discussed in public, but what is not discussed because those topics are considered boring, irrelevant, taboo or just unthinkable. Or as Bourdieu wrote: “The most successful ideological effects are those which have no need of words, but ask no more than a complicitous silence.”

Very few talk of the world order and how it operates. The current world order can be described as a neoliberal. It is a system of free trade (or more generally globalization), tight fiscal policy, deregulation and privatization.

The IMF is one institutional which has been responsible for maintaining this world order. Since governments need exceptional financing, they are arm-twisted by the IMF.

A recent United Nations General Assemby note, Promotion Of A Democratic And Equitable International Order, has recognized this and criticizes the IMF strongly. Many economists and pundits deny there’s something called neoliberalism but the note is open about the ideology and the word.

In fact, IMF advocacy of structural adjustment has privileged powerful corporate interests and created a vicious cycle of dependence for borrower countries. As noted by Peter Dolack:

Ideology plays a critical role here. International lending organizations … consistently impose austerity. The IMF’s loans, earmarked … to pay debts or stabilize currencies, always come with the same requirements to privatize public assets (which can be sold far below market value to multi-national corporations waiting to pounce); cut social safety nets; drastically reduce the scope of government services; eliminate regulations; and open economies wide to multi-national capital, even if that means the destruction of local industry and agriculture. This results in more debt, which then gives multi-national corporations and the IMF, which enforces those corporate interests, still more leverage to impose more control, including heightened ability to weaken environmental and labour laws.

and also:

IMF still appears more committed to the obsolete neoliberal economic
model.

The report is 18 pages long and critical of the IMF from the start to the end. Please read. You won’t find any discussion of the report in the mainstream media.