Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I got of a plane this afternoon and learned about the devastation in Christchurch. I am feeling for my NZ colleagues today. I suppose some conservative idiots will claim the NZ government doesn’t have the money to do what is necessary to provide some relief. There is also strife in the Middle East as poverty and unemployment finally combine with a sense that governments in nations in that region are working against people rather than for them. In the UK and the US the governments are no longer working in the best interests of their citizens and public displays of anger are emerging (for example, Wisconsin). While the agenda of the oppressive regimes in the Middle East has always been clear the narratives of the conservatives in the advanced nations has always been hidden by a web of lies often supported by well-paid economists who urge us to accept austerity and deregulation because it will make us all wealthier. They tell us that the textbooks show that. The crisis has demonstrated to all that the textbooks are incapable of saying anything useful about the way the monetary system operates and the policy choices that a government running a fiat currency system has available to them. But as the conservatives are regaining control of the political processes after being shocked into silence in the early days of the crisis, it is clear they are overstepping themselves. They are continually claiming there is a fiscal crisis. But the reality is that their agenda – to crush unions and redistribute real income to capital – is becoming more transparent. That should be exposed by progressives and popular rebellions encouraged.
On February 10, 1936 – John Maynard Keynes’s The General Theory of Employment, Interest and Money was published. History tells us that there was a huge interest in the publication as people were weary from the long period of economic devastation which began in 1929 and wanted some hope for the future.
Keynes’s book clearly appealed and provided the blueprint for the recovery and the conduct of macroeconomic policy for the next 40 odd years. I am personally not a great fan of the General Theory having come into macroeconomics via Marx and Kalecki (the alternative route for Post Keynesians).
Macroeconomics emerged out of the failure of mainstream economics to conceptualise economy-wide problems – in particular, the problem of mass unemployment. Marx had already worked this out and you might like to read Theories of Surplus value where he discusses the problem of realisation when there is unemployment. In my view, Marx was the first to really understand the notion of effective demand – in his distinction between a notional demand for a good (a desire) and an effective demand (one that is backed with cash). This distinction, of-course, was the basis of Keynes’ work and later debates in the 1960s where Clower and Axel Leijonhufvud demolished mainstream attempts to undermine the contribution of Keynes by advancing a sophisticated monetary understanding of the General Theory.
But whether you read Keynes first or came to him via Marx and Kalecki you learned that deficient demand in macroeconomic systems constrains employment opportunities and forces some individuals into involuntary unemployment. The concept of systemic failure means that individuals cannot improve their own circumstances.
The link between deficient demand and employment losses is straightforward. Demand for aggregate output determines production levels which in turn determine total employment. Whereas the classical economists (Say, Ricardo etc) believed that supply determines its own demand), Keynes model reversed this causality.
In our system, demand determines output. Production levels then determined employment based on the current level of productivity. The labour market is then constrained by this level of employment demand. At the current money wage level, the level of unemployment (supply minus demand) is then determined. The firms will not expand employment unless the aggregate constraint is relaxed.
Keynes also argued that in a recession, the real wage might not fall. But it should be clear that the problem is not that this real wage is too high, but rather that the prices are too low (as prices fall with lower production).
Workers, Keynes pointed out, bargain for money or nominal wages, not real wages. The act of dropping money wages across the board would also reduce aggregate demand and prices would also fall. So there was no guarantee that real wages (the ratio of wages to prices) would therefore fall. They may rise or stay about the same.
Falling prices might, however, depress business profit expectations and so cut into demand for investment. This would actually reduce the demand for workers and prevent total employment from rising. The system interacts with itself, and an equilibrium of full employment cannot be achieved within the labor market.
However, in Keynes’ analysis, attempting to cut real wages by cutting nominal wages would be resisted by the workers because they will not promote higher employment or output and also would imperil their ability to service their nominal contractual commitments (like mortgages). The argument is that workers will tolerate a fall in real wages brought about by prices rising faster than nominal wages because, within limits, they can still pay their nominal contractual obligations (by cutting back on other expenditure).
A more subtle point argued by Keynes is that wage cut resistance may be beneficial because of the distribution of income implications. If real wages fall, the share of real output claimed by the owners of capital (or non-labour fixed inputs) rises. Assuming such ownership is concentrated in a few hands, capitalists can be expected to have a higher propensity to save than the working class.
If so, aggregate saving from real output will increase and aggregate demand will fall further setting off a second round of oversupply of output and job losses.
While I don’t particularly like the General Theory (I consider it turgid and opaque) – it is without doubt that its publication was highly influential and its message continued to dominate economic policy across the world for 4 decades. At the time, it was vehemently attacked by conservatives which included the mainstream neo-classical economists of the day (the basis for modern-day neo-liberalism) and the rabid Austrians like Hayek who are still rabid.
But the facts are facts. Most nations enjoyed very low unemployment, strong economic growth and rising equality under the policy structures that Keynes had influenced. The neo-liberal policies that were tried in the early years of the Great Depression made matters worse.
Western governments realised that with deficit spending supplementing private demand, they could ensure that all the workers who were prepared to work could find jobs. All political persuasions accepted this commitment to full employment as the collective responsibility of society.
Very low levels of unemployment in most Western nations persisted until the mid-1970s as a result. While private employment growth was relatively strong during this period, the governments also maintained a buffer of jobs which provided easy employment access to the least skilled workers. These jobs were found in the major utilities, the railways, local councils and major infrastructure functions of government. They acted as a safety valve by absorbing workers who lost jobs when private investment fluctuated.
It was understood that when the market failed provide enough jobs the state had to step in. In addition, welfare systems emerged to provide income support to citizens in need and provided access to other public services (such as health and education). While there were significant differences across nations in the coverage of these systems, they all shared the view that the state had a role to play in providing security to its citizens.
In the last 30 years, the gains made by nations during the Keynesian period have been steadily lost.
1. We have had persistently higher unemployment (in some cases much higher) and rising underemployment.
2. There has been a massive redistribution of national income back to capital which has undermined the capacity of workers to maintain consumption growth without recourse to rising indebtedness.
3. Households and firms are now carrying record levels of indebtedness which is unsustainable.
4. Many welfare benefits and working conditions have been reduced, retrenched altogether or compromised.
5. Many regulations that provided for financial stability by keeping the banking sector in check have been abandoned and poor behaviour by banks etc have pushed the world financial system to the brink.
5. Economic growth has faltered and the advanced nations are now enduring the worst economic crisis since the Great Depression. There has been a massive loss of wealth; workers have been impoverished by the loss of income and savings; and prospects for their children have been severely diminished.
In terms of the economic crisis this is what actually happened:
1. Private spending collapsed as a result of the effects on confidence of the global financial crisis. Firms felt the pinch as inventories rose and cut back production. The spending collapse was sharp as was the production response.
2. Unemployment rose as firms sacked their workers and the impact of the lost spending arising from the unemployment worsened the situation.
3. Government revenue fell sharply because of the unemployment and they were forced to increase outlays via existing welfare provisions – the so-called automatic stabilisers that are built into government fiscal policy. The consequence – budget deficits rise (or surpluses fall) – solely as a response to the decline in economic activity – the problem is the unemployment not the rising deficits.
4. Governments also chose to increase their discretionary net spending despite advise from conservative economists and Austrian school adherents who claimed the “market” would resolve the problem quickly.
5. The dominance of neo-liberal thinking was weakened but still was evident in the misguided reliance on monetary policy. Central banks cut interest rates and engaged in quantitative easing. The premise was that these policies would reduce borrowing costs and stimulate credit demand.
There were two things wrong with this approach: (a) it doesn’t work. Consumers and firms were not borrowing because banks didn’t have enough funds. They were not borrowing because they were pessimistic for the future and realised they were carrying record levels of debt which had to be reduced via saving; and (b) the central bankers thought it would work which makes you wonder why they would want to be pushing the private sector to accumulate more debt when the crisis was the manifestation of excessive private debt.
What had to happen was a move from credit-based private spending (particularly consumption) to public spending.
6. Public debt levels rose because governments have been hectored into retaining institutional arrangements that were relevant under the gold standard but totally superfluous under the fiat monetary systems that emerged when President President Nixon abandoned what had been called the gold standard (or US-dollar standard).
Under that monetary system which endured for 80 odd years (with breaks for war), currencies were convertible into gold, exchange rates were fixed and governments could only expand their spending by increasing taxes or borrowing from the private sector.
After 1971, governments issued their own currencies which were not convertible into anything of value and were floated freely in foreign currency markets. Most nations have operated “fiat monetary systems” ever since and as a result national governments no longer have to “fund” their spending. The level of the liquidity in the system is not limited by gold stocks.
Under the “gold standard” governments had to borrow to spend more than their tax revenue. But since 1971 that necessity has lapsed. Governments issue debt to match their deficits now as a result of the pressure placed on them by neo-liberals to restrict their spending. The conservatives know that rising public debt can be politically manipulated and demonised and this places a brake on government spending.
But there is no operational necessity to issue debt in a fiat monetary system. Interestingly, the conservatives become schizoid when public debt is involved. The on-going public borrowing provides corporate welfare in the form of risk-free income flows to the rich. The fact that bond yields have remained low throughout the crisis (reflecting strong demand for public debt) tells you that the parasitic bond markets do not buy the neo-liberal political rhetoric. They know that national governments (outside of the Eurozone) have no solvency risk.
7. There are massive stockpiles of machines and productive capital idle and ready to be brought back into production but there is no spending to justify switching them on. One of the problems of a lengthy recession is that firms go broke and productive capacity is scrapped reducing the potential output level. The longer the recession the worse this problem becomes.
It is true that creative destruction is a positive force that emerges during a recession. Low productivity capital is driven out and in the recovery best-practice capital is introduced so the overall vintage of capital becomes younger and more productive. This is one of the arguments that the conservatives make – let the recession rip and clean out all the bad capital.
But when the recession is deep and long, otherwise productive capital is lost and the future growth path is severely compromised as a result. When that impact is observed (as it is now) it becomes much harder to kick start the economy and the losses are very large.
8. Most importantly, there are millions of workers who still have two arms and legs as before willing to work but unable to find jobs.
The real situation seems to have become obscured in all the policy debates at present.
Prior to the crisis, the overall aim of this neo-liberal agenda was clear – reduce government protection of the weak and transfer power to employers by undermining the capacities of trade unions to bargain for advantage. While the public justifications were all about creating more jobs and reducing the poverty the reality was different. Since 1975 most nations have failed to create enough jobs to match the willing labour supply.
The program of deregulation and the attack on workers’ rights set in place the conditions for the global financial crisis. A defining characteristic of the neo-liberal era has been the increasing gap between labour productivity and real wages growth which has resulted in a dramatic redistribution of national income towards capital in most countries. For example, there was a 6 per cent drop in the wage share in G7 countries as a whole between 1982 and 2005. This was a global trend.
In the past, real wages grew in line with productivity and ensured that firms could realise their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming. The trick was found in the rise of “financial engineering” which pushed ever increasing debt onto the household sector.
Capitalists found that they could sustain sales yet receive an additional bonus in the form of interest payments while also suppressing real wages growth. Households, enticed by the lower interest rates and the vehement marketing strategies of the financial sector, embarked on a credit binge.
The increasing share of real output (income) expropriated by capital became the gambling chips for the rapidly expanding and de-regulated financial sector. Governments claimed this would create wealth for all. For a while, nominal wealth did grow although its distribution did not become fairer. However, greed got the better of the bankers as they pushed increasingly riskier debt products onto people who were clearly susceptible to default. This was the origins of the sub-prime crisis.
Now there is no doubt in my mind that the conservatives are using the recovery period to finish off this “program” of decimation of workers’ rights and weaken the welfare system. While they tell everyone that this is a fiscal crisis – governments are broke etc – it is obvious that that is a lie.
All that is needed is for the US government today to announce that they will put everyone who is unemployed and willing to work on the payroll at a fixed wage and you would see a very rapid recovery. Spending would resume and firms would react by increasing private employment; debt defaults would taper off; and firms would start to invest again.
There is no need to cut worker entitlements. Firms were profitable before the recession at higher levels of aggregate demand. As demand returns to those levels firms will once again be profitable.
But the conservatives, realising they now are winning the political debate (say in the US and the UK), are getting ahead of themselves and revealing the crude nature of their ambitions.
Consider what is going on in Wisconsin at present. In this New York Times article (February 21, 2011) – Union Bonds in Wisconsin Begin to Fray – we learn that the State government lead by a rabid conservative who is lying about the fiscal situation of his state is running a classic divide and conquer campaign to turn workers against each other.
The Republicans are going for broke under the smokescreen of a so-called fiscal crisis and are planning to terminate the right of workers to bargain collectively.
They are extending fiscal austerity into an all out attack on unions. I don’t have a lot of time for some unions (specifically) but I fiercely defend their right to exist and I consider them an essential institution in a capitalist system. Without unions, the workers have very little. They are on the path back to the C19th.
The Republicans are setting private workers against public workers, the latter they portray as living beyond the means of the state and enjoying protections that the private workers do not have.
This develops and anti-public sentiment and makes it much easier to cut the size of government. The agenda is two-fold: deplete the public sector and reduce all workers back to the worst conditions that are to be found in a (recessed) private sector.
The alternative solution is much more appealing. First, stop worrying about the automatic stabilisers and spend them back to where they were pre-recession – that is, get growth going. Second, improve the wages and conditions of the private workers to ensure they have the same stability as exist in the public sector.
Otherwise, you are on a race-to-the-bottom – which is exactly what the conservatives want but are too dishonest to say that clearly. The one caveat in their approach – of-course – is that the vested monied interests don’t join in the race. They are standing ready to be the beneficiaries (see the article on the New York Times article (February 21, 2011) – Koch Brothers’ Money Fuels Wisconsin Fight).
Across the Atlantic, the same story is playing out in Britain.
In this UK Guardian article (February 17, 2011) – A rotten sort of recovery = which articulates that “(t)he coalition’s ‘flexible’ economic model relies on cripplingly low pay and rising job insecurity”.
The article notes that there is a passage in the British coalition agreement “to which not nearly enough attention has been paid”. The passage says:
We will review employment and workplace laws, for employers and employees, to ensure they maximise flexibility for both parties while protecting fairness and providing the competitive environment required for enterprise to thrive.
Which is politician-speak for deepening the insecurity that workers “experienced under the last government, and then some”.
It is clear that the coalition plans:
… to make access to employment tribunals more difficult
… the pushing of more and more work from the public to private sector shreds plenty of protection, the growth of temporary and agency work continues apace, and rising unemployment pushes wages and conditions further downward.
Wisconsin? This is the agenda.
The article outlines how the last several years have already been pretty bleak for the average worker in Britain with “the combination of stagnating pay and rising cost of living” making life “increasingly unmanageable”.
The case study says that “this picture is not restricted to unskilled work, or the more blighted parts of the country”. They provide ample evidence that from “all corners of Britain, both public and private sectors, and most parts of the economy” that the “low pay, worsening conditions and ever-tightening budgets” are reducing the living standards of workers and increasing inequality.
The article concludes that:
Such are the wonders of all that dynamism and flexibility, and an economic model with a rotten promise at its core. Work for less, with even fewer protections than before, but fear not – because that way lies recovery, and prosperity. For whom, exactly?
My feeling is that the conservatives are taking us back to the conditions that led to the emergence of wide-scale worker revolts and ultimately the formation of unions and demands for broader public protections. Yes … somewhere around the end of the C19th. The struggles for decent work and better pay occupied nations for the next 70 odd years but were driven by the fact that people will not be downtrodden forever.
The conservatives are on top at the moment and will destroy the prospects for many people. But eventually there day will come given there is no operational reality to their claims and actions. People will eventually want to take more and so the struggle will begin again.
It is just ridiculous that we have reverted back into history and progress has to start again.
You might also want to read this Guardian article (February 17, 2011) – NHS cuts put my lifeline at risk – which outlines a very harrowing tale about the way the British government’s austerity campaign will undermine the capacity of the public health system to save lives and provide adequate care but is also deliberately targetting the career structure of workers in the health care industry.
We read that:
The government’s proposals spell the end of national collective bargaining in the health service and with it the breakup of the NHS career structure … In the future, hospitals like Barts will not be run for profit, but they will be run by profit. They will compete in a profit-governed marketplace, locked into dependence on the private sector to which they will turn for management and finance services. Hospitals will be under pressure to take more private patients. They will not be able to do that unless they offer something better to those who pay than they can get on the NHS. Preferential treatment is inevitable, and with it a two-tier environment in which the lower tier is starved of resources.
The UK can clearly “afford” to have a first-class health care system. If the government net spending necessary to maintain this level of service strains the productive capacity of the economy (thus pushing up against the inflation barrier) then political choices have to be made.
I would bet anything that the overwhelming proportion of the population – who were educated to understand that the Government has no financial constraint – would argue that the provision of a first-class public health care system was a paramount expression of a caring society.
I would guarantee such a society would support increased taxation on high income earners etc (bankers etc) as a way of creating “real resource” room for the health system spending.
The problem is that the voters never get to make that choice. The choice they are presented with is based on a lie – it is a non-choice. TINA – as Thatcher used to say. Austerity is being held out as the only choice. It is not and its justification is underpinned by lies and mis-information.
None of this austerity is remotely justifiable. The state budgets collapsed largely because of the automatic stabilisers which are like canaries in the mind – they tell you that the real economy is in trouble. The fiscal aggregates (budget deficit etc) are just like thermometers – they send signals about how the economy is going.
You do not cure a failing real economy by cutting spending. That is like curing a cut leg with amputation and then leaving the wound open. It is madness.
There are workers ready and willing to work. People are pessimistic. They need to feel secure and confident. Keynes knew that well. You don’t give people hope by worsening their circumstances. Desperation does not lead to positive responses.
The people are rebelling in the Middle East as an expression of their recognition that their governments have failed to represent their best interests.
It is clear to me that the British government and the US governments (and many state governments in the US) are no longer serving public interest. They are punishing innocent and disadvantaged citizens to satisfy the ideological (religious) beliefs of a monied elite.
I think people don’t tolerate that forever.
As an aside: I note that some of the most rabid conservatives in the US (Rush Limbaugh and his ilk) have dammed the demonstrators in the Middle East and want the US to intervene and prop up the repressive regimes that are now being toppled. That says everything about the credibility of these creeps.
That is enough for today!