fiscal policy

Who’s Credible on Tax?

Published by Anonymous (not verified) on Fri, 29/11/2019 - 8:00pm in

We now have the manifestos for the election. We know what
the parties now say about tax, even if we cannot know what they will actually
do.

The differences in opinion are stark. Addressing, due to
space, those parties standing in most seats, it is clear that none of the
parties come close to understanding the true role of tax in the economy as yet.
All are fixated on the idea that current spending must be covered by tax and
only investment may be financed by borrowing. The household analogy within
macroeconomics is alive and well and living in the UK, and it’s wrong. The role
of tax in delivering social and economic policy in its own right is still being
ignored by all the parties, excepting the Greens, with their proposal for a
Universal Basic Income, and that will not be happening any time soon. This
misunderstanding is a massive contributor to economic mismanagement.

Within that framework there is enormous difference in tax
policy on display. In particular, Labour’s recognises a threefold need. One is
to address poverty. The second is to end austerity. The two are, of course,
related. And third, it wants to promote a Green New Deal. And it will spend to
achieve all three.

The IFS have said this plan from Labour is not credible.
I disagree. The plan for investment is largely in small projects that can be
ratcheted up quickly as skills become available. And the social plans will
achieve their goal, including of increasing incomes. This is a plan for the
moment.

The tax dimension of it (and it’s always an aspect) also
makes sense. To the extend that tax is needed the aim is threefold. Wealth is
taxed more, as it is dramatically undertaxed now. Labour is right to tax it
more. The same is true of corporation tax, where Labour’s proposed unitary tax
base for international taxation will lead the world, whilst the increase in
rates will simply bring the UK back into line with the world. No one is actually
going to change their behaviour as a result of either reform. And nor, when it
comes down to it, will almost any one those who are well off enough to earn
more than £80,000 a year flee the country, or even work less, as a result.
First, most of those people are on contracts that do not vary pay with tax
rates. Second, most people have no clue how much tax they pay. And third, most
people work harder when they earn less if (as is true of many of those on high
pay) they have fixed and very expensive commitments. The plan does, then, make
sense. Inelastic behaviour will result in the higher taxes being settled with
little issue arising.

The Tories on the other hand are locked into the belief
that tax sells election victory, and so are committed to maintaining the status
quo. But in so doing, a very small change to national insurance apart, they
also lock in the existing social infrastructure and with it the income and
wealth inequality that even organisations like the OECD and IMF say is harmful.
Not only are the Tories not using spending to break austerity and defeat
inequality, they’re refusing to do anything at the top end either, meaning that
all the divisions in society that have been so destructive of our well-being
will be maintained. In this sense the Tories are really being true to form
conservatives.

And in the meantime the LibDems are so far out in the tax
cold that they think hypothecated taxes for the NHS might work with the
electorate and in practice. But that is not how tax works, and even given the
terribly low level of understanding of tax that pervades the UK I suspect
enough of the electorate realise that is the case to be indifferent to the
promise. The LibDems do really need to try harder.

As for the Greens, carbon tax dominates their agenda. It worries me. They are almost always regressive. The Greens proposal would be, I fear. And I am not wholly convinced a universal basic income makes up for that. The Green manifesto is only of interest on tax because it is a place where ideas can be explored. I suggest that this one still needs a lot more exploration.

Overall? Labour has a good offering that makes economic
and social sense. It has, thankfully, abandoned its fiscal rule. But like the
other parties it still shackles itself unnecessarily on tax by adopting an
inappropriate and discredited macroeconomic view of tax. The Tories do the same
to reinforce division in society that will cost millions a great deal
financially and even more in their wellbeing. And the rest took part, but without
serious intent.

All of which leaves only one rational choice when it comes to tax, and that is Labour.

The views in this piece do not necessarily represent the collective views of PEF, but those of the author.

Photo credit: Flickr/_SiD_.

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Fiscal Policy, Debt and Deficits

Published by Anonymous (not verified) on Fri, 29/11/2019 - 4:04am in

Labour and Conservative Parties, plus the Liberal Democrats, commit themselves to increased public expenditure, apparently ending almost a decade of debilitating fiscal austerity. PEF welcomes this change in policy by the Conservatives and the Liberal Democrats. No voter should conclude that the fiscal frameworks of these parties are essentially the same.

First, while the Labour Party commits to the most substantial budgetary expansion, it is a mistake to focus on the overall size of the expenditure increases each party promises. This quickly leads in bickers over what is actually new and whether commitments are sufficient for the goal sought. Second and equally unenlightening, focus on amounts invariably degenerates into assertions about “affordability”. The commitments of all parties are “affordable” in the basic sense that they are easily financed by an appropriate combination of growth-generated revenue flow, new and higher taxes, and borrowing.

These two considerations
identify the central difference that divides the party approaches. Of all
parties, large and small, only Labour places its expenditure programmes into a
clear fiscal framework, part of an overall plan for reversing austerity,
environmental protection, inequality reduction and economic modernisation.
Without an expenditure framework, commitments may be laudable, but their impact
is piecemeal. It is for that reason, their structured nature linked to
outcomes, that PEF assesses the Labour Party’s fiscal plans as the most
credible and effective.

Most assessments of the party
fiscal commitments by think-tanks will focus on their impact on the fiscal
balance (“deficit”) and the public debt. This approach is both misleading and
banal. It is misleading because few if any of the assessing organizations
employ a systemic framework and covers the entire economy. As a result, many
direct and indirect effects of expenditure and tax are ignored. For example,
spending tends to expand the economy, which generates more revenue. Tax
increases slow expansion, thus reducing revenue growth. Only a systemic
framework allows evaluation of the net effect of spending and taxation on
deficit and debt outcomes.

The narrow focus on deficit and debt is banal because it judges a broader public purpose, rejuvenation and transformation of UK society, on the basis of cost accounting. In the autumn of 1939 with Britain facing an existential threat, no major politician made the decision of war and peace based on affordability. Nor should we now, as we face existential threats of climate change and social cohesion.

Photo credit: Flickr/Rain Rabbit.

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We need to talk about the Institute For Fiscal Studies

Published by Anonymous (not verified) on Sat, 23/11/2019 - 12:20am in

In recent weeks political parties have started to announce their policy platforms for the forthcoming general election. Numerous organisations, including the Progressive Economy Forum (PEF), will be offering expert assessments of these policies and manifestos.

The Institute for Fiscal Studies (IFS) is perhaps the most well-known of these organisations. Its analysis frequently crowds out that of other institutions, such as the Institute for Public Policy Research (IPPR) and the Women’s’ Budget Group.

On its donations page, the IFS describes its purpose as follows:

“During an election campaign, objective analysis of economic policy is more important than ever…Our commentary on party manifestos and campaign promises leads the public debate, providing individuals with the tools to understand and evaluate complex decisions. What’s more, the IFS is entirely independent of political parties, companies and pressure groups, allowing us to hold politicians of all stripes to account when their numbers don’t add up or their policies are poorly designed.”

The key components here are 1) a commitment to “objective analysis”, 2) providing “the tools to understand and evaluate complex decisions”, and 3) independence from political parties that allows the IFS to hold politicians to account. Its guiding purpose is to show when “numbers don’t add up” and when policies are “poorly designed”.

The meaning of words is quite important here. One can claim “objective analysis” by applying the same assessment criterion to each proposal and still be biased. It is possible for a policy to be “well designed”, with numbers that “add up”, which would also impose devastating social costs. The IFS’s narrow criteria implicitly (or in some cases explicitly) ignores these social costs. This judgment reflects a clear bias in favour of accounting balance over social outcome.

Similarly, the claim of “independence” explicitly refers to no links to political groups. Crucially, however, this does not prevent political bias.

The political ideology of the IFS

Olivier Blanchard, Senior Fellow at the Washington-based Peterson Institute for International Economics (PIIE) and former chief economist of the International Monetary Fund (IMF), recently sparked debate in the economics profession with the following tweet:

The IFS’s view of fiscal policy conforms to Blanchard’s “counterproductive” approach. Its pledge to verify “the numbers” clearly presupposes a tendency for “politicians of all stripes” to “misbehave” by misrepresenting their policies as more favourable than they actually are.

This presumption of misbehaviour also manifests itself in the IFS’s use of the term “net giveaways” in relation to spending measures. The term carries a pejorative connotation, implying that the purchase of votes dominates the fiscal decisions of politicians. For example, free bus services for the elderly is portrayed as a “giveaway” – not a policy designed to reduce social isolation.

The IFS’s political ideology reveals itself most obviously in its approach to inequality. At several points on its website we are warned that “reliance on taxing ‘the rich’ and big companies to pay more has its limits and would be far from risk-free”. We find no equivalent warning about the risks associated with increased inequality or the growing concentration of corporate power. Repeatedly placing rich in inverted commas is in itself an indicator of political orientation.

Another concrete example of political bias can be found in the discussion of “living standards and prospects of younger generations”. The IFS attributes the problems younger households face entering the housing market to demographics, a rising average age of the population and (strangely enough) low interest rates.

The financial market deregulation that has fuelled property price inflation goes unmentioned. We are warned of a “long-term change in the balance of economic power” between young and old – but not poor and rich, or labour and capital.

The economic ideology of the IFS

My PEF colleague Richard Murphy has succinctly identified the fundamental economic bias in IFS’s work, namely its application of microeconomic techniques to what are macroeconomic issues. The assessment of fiscal policy should be placed in the context of the economy in its entirety to identify the direct and indirect effects of policies as they work their way through markets over time.

The standard way to achieve this economy wide approach involves using an interactive “model” of our economy. Ten years ago the IFS offered training in “dynamic econometric models”, though it does not appear to use models for its assessment of the fiscal proposals of political particles, offering instead what it calls “best educated guesses”.

The IFS suffers from serious misbranding. It identifies itself as an organisation that studies fiscal issues, when in practice its subject is a very narrow version of what is known in the economics profession as “public finance”. The difference comes out clearly in the description of a “Public Finance” course at the London School of Economics, which “draws on microeconomic theory [for] the development of analytical tools and their application to key policy issues relating to the spending, tax and financing activities of government”.

That emphasis on microeconomics is in contrast to another course at the same institution, “Introductory Macroeconomics”, described as “[a]n overview of the behaviour of the economy in the short term”, where one finds fiscal policy in the “part of the course [that] reviews business cycle fluctuations, the design of monetary and fiscal policy, budget deficits and government debt and the open economy.”

To the extent that the IFS provides “the tools to understand and evaluate complex decisions” they are the wrong tools. The IFS’s microeconomic approach by its nature presumes the economy to be stationary at maximum output (full utilization of resources). At maximum, an increase in spending has no feedback effects on tax revenue through household or corporate incomes. Treating the economy as stationary excludes feedbacks as our economy grows.

We find a clear example of the fallacy of microeconomic arguments in the recent IFS study of the impact of Conservative and Labour plans to raise the minimum wage. The IFS report inspects who would receive the proposed wage increases and concludes that the vast majority of poor people in work would not benefit, in part because they are self-employed.

However, an accurate assessment would also consider the impact of changes in the minimum wage on the economy as a whole, not merely those directly affected. Research indicates that the overall impact of minimum wages includes effects on aggregate purchasing power and productivity plus its spread effects through the entire labour market. The IFS’s focus on direct effects is at best trivial.

Independence and bias

The IFS is regularly called a “watchdog” for politicians’ policy proposals. But it would be more accurate to describe it as an expert in the bean-counter approach to policy assessment.

The basic problem lies not in the political bias or orientation of the IFS. I directed a small research organization for 20 years, which was, as the IFS claims, objective, independent and unaffiliated to political parties or interest groups. Our analytical orientation was clear and well-known. Our studies tended to be critical of mainstream analysis, and organisations came to us with that outcome in mind.

The basic problem of the IFS is not that the conclusions of its studies are predictable and easily anticipated; it is that its studies are not well done. They apply the wrong tools, and treat macroeconomic issues as if they were microeconomic. As Robert Chote, the former director of the IFS admitted: “they don’t do macro”.

By ignoring social, political and macroeconomic effects, IFS studies do not tell us whether a policy is a good idea, only whether “the numbers add up”.

At this election, we deserve better.

This piece is cross-posted from Open Democracy. The views in this piece reflect those of the author, they do not necessarily reflect the views of the Progressive Economy Forum as a whole.

Photo credit: Flickr/Howard Lake.

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Review: The Debt Delusion by John Weeks

Published by Anonymous (not verified) on Sat, 16/11/2019 - 1:58am in

When Ha-Joon Chang exhorted: “We need an economic literacy campaign so people understand the language used by the ruling class”, he was probably thinking of books like John Weeks’ “The Debt Delusion” that has just been published by Polity. As the subtitle “Living Within Our Means and Other Fallacies” explains, this work sets out among other things to expose the Swabian hausfrau myth popularised in 2008 by Germany’s chancellor, Angela Merkel, with regard to state budgets: “One should have simply asked the Swabian housewife. She would have cited the wise maxim: one cannot permanently live beyond one’s means.”

Weeks systematically and painstakingly dissects such populist arguments to which – as we were repeatedly told by governments – “There Is No Alternative” (TINA). Such arguments were used to pave the way for one of neo-liberalism’s most virulent and destructive political crusades: austerity. He writes the book for the non-economist with a patience and warmth that truly should make it accessible to a broad swathe of readers. Not only does he avoid using technical terms, he also does what he terms “jargon-busting”, explaining in simple language many economic terms that are often used by “experts” and politicians to obfuscate. The examples he employs are often taken from daily life, not from the economic textbooks.

In his book Weeks sets out to debunk six austerity “myths”:

1) “We must live within our means”

2) “Our government must live within its means”

3) “We and our government must tighten our belts”

4) “We and our government must stay out of debt”

5) “The way for governments to stay out of debt is to reduce expenditures, not to raise taxes”

6) “There is no alternative to austerity”

Austerity is not the devil’s work for Weeks. It is just an economic tool that needs to be utilised wisely, such as for reducing inflation. The same is true for deficit spending. But as Weeks makes clear: “Public sector spending and taxation are overwhelmingly about politics and only secondarily about economics”. Following the Great Financial Crisis of 2007, it was politics that prompted the wave of austerity, as we know, based on prescriptions by those same economists who had so egregiously failed to predict the crash, and rewarding the same minority whose greed had led to that calamitous event. A cosy affair indeed. Weeks presents us with the smoking gun.

The real beauty of Weeks’s book is its simplicity and irony, going from the political rhetorical to the practical. He commences his odyssey through the austerity myths with the claim by Margaret Thatcher in the 1980’s (Merkel stole the idea in 2008 for her speech, giving it a German touch) that government and household budgets function under the same premises. “She was half right for the wrong reason,” Weeks explains, because, just like governments, many households – and wisely so – “do not operate with balanced budgets”. Yes, even the Swabians, as obsessed with owning a home as the Anglo-Saxons, take out major mortgages. There are many good reasons for individuals to resort to credit, short and long term. Long-term credit often even reduces expenditure. The same is true for a government. As Weeks emphasises, most long-term credits for governments are used to purchase assets (capital spending), some of which even produce income (such as social housing), others that serve important functions for our societies (for example schools, hospitals, public transport). The money is not gone or wasted. It has simply been transformed into an asset or investment. And yes, governments also borrow short-term to cover emergencies, such as in a recession to combat unemployment and hardship.

A crucial element, as Weeks explains, is that most governments in high-income nations have strong currencies and a powerful central bank, can create money at will, and most importantly need not borrow in a foreign currency. Creating money is something no household can do, as it does not produce their own currency. Not only can a government create money, it can also borrow by selling bonds, even purchasing its own bonds (debt) via its central bank or other public institutions, saving by not having to pay interest. But bonds sold to the public have an important, if not crucial function, providing citizens, pensions funds, and banks with safe assets to invest in. In other words, government debt is not something negative, it is simply someone else’s asset that can have a positive role in the economy. Weeks takes the time to analyse the pros and cons of both methods of deficit financing. With regard to government deficits, even the Germans, those paragons of a balanced budget, have only had a surplus in seven of the past 24 years, and more than half of these were in the past four years.

Weeks continues just as methodically with Myth 2: “Governments must balance their books”. The two contentious issues he deals with are the formation of a “debilitating debt burden” and deficits resulting in inflation. He examines government expenditures, and on the other side, tax policies. The goal of taxation, Weeks explains, is not to have a balanced budget, but to manage the economy, balancing between excessive inflation and excessive unemployment. A government also has a political mandate regarding its finances, setting priorities in furthering the interests and well-being of its citizens.

While Myth 3, “We must tighten our belts”, concentrates on social benefits and their financing, especially with regard to the neo-liberal discourse concerning the demographic tsunami an ageing population, Myth 4, “Never go into debt” examines the difference between productive debt and other debt that results in disaster. Weeks begins with private debt, which has driven Western economies since the attack on workers’ wages began under Thatcher and Reagan. On the one side there is the predominant “secured debt”, backed by an asset, especially a mortgage, and on the other the “unsecured debt”, which one finds mainly among the less well-off in society. In other words, the wealthy take on debt to buy an asset to increase their wealth, the worker borrows to survive. Government finances have nothing to do with secured and unsecured debt, since a nation has not only its physical assets, but also a greater asset, its people. It is the management of this second element that especially concerns Weeks. A society that is well managed (infrastructure, education, health, environment, etc), and has its welfare – “the benign circle in which all benefit” – as its prioritised goal, will be able to deal with its debt.

Weeks make short shrift of Myth 5: “Taxes are a burden”. Starting with “Taxes reduce people’s ability to spend”, as if taxes do not provide value, Weeks moves on to examine who is taxed and how – in other words taxes as a means to promote political goals, such as reducing inequality or CO2. A government also decides to what degree essentials of society are paid directly by the individual or by contributions divided throughout society. He goes on to explain that we are following the wrong narrative: after massive tax reductions for the rich, resulting in increased public debt, the answer is not to reduce the debt (austerity), but to increase progressive taxes.

“Austerity: There is no alternative”, Myth 6, starts with the question of defaults by nations. Most of these were less developed countries that had borrowed in foreign currency and had thereby lost the ability to determine their own finances. Interestingly, as Weeks highlights, of the more recent cases of a default (resulting in bailouts) by developed nations, all three were in the euro zone: Greece (2012, 2013, 2015), Ireland (20139 and Portugal (2013),which he sees as a political, backed up with the usual myths dealt with in the previous chapters, not economic causality.

Weeks concludes by challenging TINA (There Is No Alternative) made famous by Thatcher. There are always alternatives, especially with regard to dogmatic, politically-motivated balanced budgets. This could be labelled Myth 7: “The narrative of neo-classical economists”. Of course Weeks concludes by listing and explaining what these alternatives are.

H. G. Wells wrote “Civilisation is a race between education and catastrophe.” With “The Debt Delusion“ John Weeks has made a major contribution to bringing economics to the people. Let us hope that they value this useful tool.

The Debt Delusion: Living Within Our Means and Other Fallacies by John Weeks

This piece is cross-posted from Brave New Europe. Photo credit:

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The Green New Deal means the UK has no shortage of “shovel-ready” projects

Published by Anonymous (not verified) on Wed, 13/11/2019 - 7:30pm in

This is a copy of Richard Murphy’s letter to the guardian on 10/11/2019.

Labour’s clear commitment to a £250bn “green transformation fund” correctly puts climate centre stage in this election (Turning on the spending tap: How the parties’ plans compare, 8 November). The usual economic suspects have immediately lined up to wring their hands, worrying about levels of debt and the availability of “shovel-ready” projects. They miss the real points.

The first is whether there are buyers for the bonds that will fund this spending. At present, more than 80% of UK personal wealth is invested in tax-incentivised assets.

In that case simple tax rule changes will drive buyers towards Green New Deal bonds. For example, if the rules on Isas were changed so that all funds saved had to be invested in Green New Deal bonds, and an interest rate of 1.85% (the current average cost of UK government borrowing) was paid then the £70bn that goes into Isas each year could be directed towards the Green New Deal. Simple changes to pension rules could provide the rest.

Second, as for a lack of shovel-ready projects, Labour’s plans include making the UK’s 30m buildings energy efficient while shifting energy supply to renewables. We already have the skills and knowledge to restart this transformation, since many in those sectors lost their jobs when the Conservatives cut support for such activity. Of course, a massive retraining programme will also be required, but if the government makes the money available you can be sure that the shovels will come.

Photo credit: Flickr/john-briody-photography


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Ten things to know about the 2019-20 Alberta budget

I’ve just written a ‘top 10’ overview of the recent Alberta budget. Points raised in the post include the following:

-The budget lays out a four-year strategy of spending cuts, letting population growth and inflation do much of the heavy lifting.

-After one accounts for both population growth and inflation, annual provincial spending in Alberta by 2022 is projected to be 16.2% lower than it was last year.

-Alberta remains Canada’s lowest-taxed province. It also remains the only province without a provincial sales tax.

The full blog post can be read here.

Ten things to know about the 2019-20 Alberta budget

I’ve just written a ‘top 10’ overview of the recent Alberta budget. Points raised in the post include the following:

-The budget lays out a four-year strategy of spending cuts, letting population growth and inflation do much of the heavy lifting.

-After one accounts for both population growth and inflation, annual provincial spending in Alberta by 2022 is projected to be 16.2% lower than it was last year.

-Alberta remains Canada’s lowest-taxed province. It also remains the only province without a provincial sales tax.

The full blog post can be read here.

Market economies require policy management: What Keynes taught us

Published by Anonymous (not verified) on Wed, 09/10/2019 - 1:45am in

Many including the
United Nations Conference on Trade and Development predict an imminent global
recession (Larry
Elliot
and the report
itself). What causes such instability to sweep the major capitalist economies? To
understand why we suffer severe global economic barely ten years after the
Great Financial Crisis of the late 2000s, we must look back at the immediate
post-WWII policy consensus and its demise.

Over five decades the
principle that capitalist economies required active, continuous management by
national governments established itself as policy orthodoxy, then the consensus
abruptly ended. The first governments to practice active policy management
could hardly have been less alike, the Nazi regime in Germany that took power in
January 1933 and the presidency of Franklin Delano Roosevelt inaugurated in
March of the same year. The abrupt end came in 1979-1980 with the election of
Margaret Thatcher in May 1979 and Ronald Reagan in the United States (inaugurated January
1981).

That the
responsibility for economic prosperity falls to governments drew its analytical
justification from the work of John Maynard Keynes, and its political urgency
from two great catastrophes that threatened to destroy the liberal capitalist
order, the Great Depression of the 1930s and the Second World War. As Kurt
Rothschild argued in his famous 1947
Economic Journal article
, the depression,
fascism and the subsequent world war resulted from the inherent dysfunction of
unmanaged capitalism.

Fiscal policy, monetary policy and exchange rate policy provided the three instruments for national governments to achieve effective macroeconomic management. The International Monetary Fund, established by the Bretton Woods Conference in 1944, served as the vehicle for international exchange rate management for 25 years. It collapsed in 1971 when the US government ended its guaranteed dollar price of gold. After brief and ineffective attempts to establish alternative international monetary “anchors” to replace the US guarantee, governments of major capitalist countries reverted to the various forms of partially managed exchange rate floats we have now.

Financial speculation and loss of the exchange rate as a policy tool followed as the long term effects of the end of the Bretton Woods system. The de facto control of exchange policy by financial interests prepared the ground for the same interests to take control of monetary policy a decade later. As part of a broader argument against democratic accountability in economic policy, the new financial orthodoxy advocated central bank “independence” from governments. This new orthodoxy asserted the necessity to exclude political considerations from monetary decisions, because of the technical nature and precision of central bank decisions made these decisions the territory of experts.

Arguments to de-commission fiscal policy represented an extension of the ideology of market-determined exchange rates and independent central banks. The vulgar arguments for a neutral, non-interventionist fiscal policy took and continue to take the form of the allegedly self-evident necessity for governments to “live within their means” (see Chapter 1 of my forthcoming book The Debt Delusion: Living within our means and other myths). Superficially more sophisticated, the new anti-policy orthodoxy argued that failure to balance budgets would provoke speculative attacks on currencies and stimulate inflation.

The neoliberal “neutral policy” orthodoxy made an integrated package. Governments have no alternative to floating exchange rates (so-called market-determined). Because this exchange rate policy facilitates speculation, governments must constrain their monetary and fiscal policies to adhere to the expectations of speculators (aka “investors”). Macroeconomic stability requires a passive approach to exchange rates, inflation targeting and balanced budgets (deflationary monetary policy and pro-cyclical fiscal policy).

This brave new
neoliberal macroeconomic policy world embodies a fundamental flaw. It derives
from the belief that market economies are inherently stable. Neoclassical
economics provides the theory underpinning the policy world of neoliberalism. If
stability cannot be established theoretically and empirically, the neoclassical
neutral policy framework collapses, and with it the justification for balanced
budgets, independent central banks and floating exchange rates.

Neoclassical automatic stabilizing adjustment occurs according to the principles of Walrasian general equilibrium (WGE). However, this theory does not address the practical problems of market instability. Explaining WGE to the non-specialist proves extremely difficult not because of its complexity but its inherent implausibility. Fortunately, it is not necessary to do so, because neoclassical economics invokes WGE to solve an imaginary problem, which proves to be theoretically unsolvable.

The neoclassical stability problem can be stated as follows. In a system of production and distribution without central coordination, what is the process by which markets stabilize? To put the problem simply, with so many products and markets what prevents instability-generating surpluses and shortages that would cause extreme price fluctuations? Neoclassical economists claim that WGE provides the answer to that question.

Quite the opposite is
the case: WGE demonstrates the impossibility of stability in an unregulated
market system. WGE achieves market instability through central coordination. That
coordination is achieved by the intervention
of an “auctioneer”
, who has the power to prevent any exchange in any
market that does not occur at a price that leaves that market (and by
implication all others) with neither a surplus nor a shortage. The Walrasian
auctioneer is a purely imaginary or hypothetical creation – no such auctioneer with
these powers exists in any market.

As I
have explained
in non-technical language, neoclassical economics offers no
operative solution to the problem it poses (the technical version here,
pages 44-45
). Market stability results because instability is excluded by
assumption (the imaginary auctioneer prohibits it).

The actual solution to
the neoclassical problem proves quite mundane. Market economies are
coordinated, by private producers. In practice, corporations set prices and
sell what they can at that price. The problem of price and quantity stability
in an uncoordinated market system of many buyers and sellers exists only in the
arcane world of neoclassical economics. Corporations minimize the effects of
surpluses and shortages of goods through inventory change.  Surpluses and shortage of services are managed
by decreasing or increasing employment.

Yet capitalist
economies do suffer periodically from extreme instability, the most recent
example being the Great Financial Crisis of the late 2000s. These moments of
extreme instability, recessions and depressions, result not from lack of
coordination across markets. They result from private demand
“failures”; specifically, the volatility of private investment and to
a lesser extent of export demand. For example, decline in export demand is the
source of the imminent
German recession
.

We can easily verify
the instability caused by private demand. The components of aggregate demand
consist of private consumption, private investment, exports and public
expenditure. The first of the four, private consumption, is a function of GDP
itself, so aggregate demand reduces to private investment plus exports plus
public expenditure.

Figure 1 shows the
variability of UK GDP and its two private components, measured by the
coefficient of variation (standard deviation divided by the mean). Over the
last 17 years, growth of gross domestic product had a variation approximately
equal to its average. In contrast, the variation in the growth rate of private
investment was more than three times its average and export growth in between
the two at about 1.5 times is average. Moderate fluctuations in aggregate
production result from extreme fluctuations in private demand, especially investment.

We find the same pattern
in the United States, with GDP growth showing a lower coefficient of variation
of approximately .3. The variability measures for private investment and
exports are three times larger. The measures refer to constant prices,
eliminating any variability due to inflation.

Figure 1: UK Variability of Growth Rates of GDP, GFCF and Exports, 2002-2018 (constant prices, coefficient of variation).

Notes: Coefficient of variation is the standard deviation divided by the mean. GFCF is private gross fixed capital formation. Source: ONS.

Figure 2 USA: of Growth Rates of GDP, GFCF and Exports, 2002-2018 (constant prices, coefficient of variation)

Notes: Coefficient of variation is the standard deviation divided by the mean.
GFCF is private gross fixed capital formation.
Source: Economic Report of the President 2018, Tables 3, 5, & 15.

In the simplest case,
we would expect that the variation in the total (GDP) would equal the sum of
the different elements weighted by their chares in GDP. For the UK the weighted
sum of the variation of the private components, private investment and exports
calculates as .89, slightly less than the 1.0 for GDP. The difference might be
explained by the variation in public expenditure resulting from the fiscal
austerity cuts after 2009. For the United States, private variation sums to .32.

The message from the statistics is clear — private demand causes aggregate economic instability. Keynes knew this, policymakers after WWII knew it, and they sought to counter the systemic instability caused by private producers. Private demand tends to instability, especially for investment. The instability results because investments are made in anticipation of future economic conditions, which are uncertain.

Public expenditure serves
to compensate for the inherent instability of private demand. This is the
essence of “counter-cyclical” fiscal policy, that the central
government increases its spending when private demand declines, and raises taxes
when private expenditures create excessive inflationary pressures. During
1950-1970 that was the policy consensus, and it coincided with the “golden
age of capitalism
“.

Those who argue that there is no return to that policy era fail to understand the fundamental contribution Keynes and his analysis made to economic policy. The guiding principle is simple and applies to all market economies — private sector instability requires public sector stabilization policies. That principle does not provide the solution to the ills of market economies, but it represents the basis upon which market economies flourish.

Photo credit: Flickr/Rog b.

The post Market economies require policy management: What Keynes taught us appeared first on The Progressive Economy Forum.

Rethinking Britain – How to build a better future

Published by Anonymous (not verified) on Mon, 09/09/2019 - 5:40pm in

Of the nineteen UK governments since the Second World War, only two have torn up the rule book and tried to build a better future, instead of simply recycling the tired slogans and policies of the past. The two governments that did try radical change – not always successfully – were those of Clement Attlee in 1945 and Margaret Thatcher in 1979.  We are therefore well overdue for another major policy rethink, aimed at solving the problems we have now – largely as a consequence of Thatcher’s legacy – rather than endlessly trying to reignite the ideological battles of the past. That’s why we concluded it was high time for Rethinking Britain: Policy Ideas for the Many.

Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them. Our aim is to help improve life for people living in today’s Britain. Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in. That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many. It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

The post-1979 dogma – that the British government should play as
small a part in the economy as possible – is also misguided. Far too much
capital is being used for short-term, speculative purposes, whilst not enough
is finding its way into the development of sustainable businesses that provide
long term employment and pay decent wages – not the hand to mouth existence of
a zero hours contract. In other words, the economy should work for the many,
not just the few.

Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself. This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”. Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy. Rethinking Britain shows how.

Photo credit: Flickr/Christian Reimer.

The post Rethinking Britain – How to build a better future appeared first on The Progressive Economy Forum.

Rethinking Britain – How to build a better future

Published by Anonymous (not verified) on Sat, 07/09/2019 - 1:58am in

Rethinking Britain2.JPG

 By Sue Konzelmann, John Weeks and Marc Fovargue-Davies

 ‘Rethinking Britain: Policy Ideas for the Many’ is a publication of Policy Press (19 September 2019), in partnership with PRIME and the Progressive Economic Forum (PEF).  Price £14.99, pre-orders £11.99 via Bristol University Press website. It is edited by Sue Konzelmann, Susan Himmelweit, Jeremy Smith and John Weeks.

 Of the nineteen UK governments since the Second World War, only two have torn up the rule book and tried to build a better future, instead of simply recycling the tired slogans and policies of the past. The two governments that did try radical change – not always successfully – were those of Clement Attlee in 1945 and Margaret Thatcher in 1979.  We are therefore well overdue for another major policy rethink, aimed at solving the problems we have now – largely as a consequence of Thatcher’s legacy – rather than endlessly trying to reignite the ideological battles of the past. That’s why we concluded it was high time for Rethinking Britain: Policy Ideas for the Many.

 Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them.  Our aim is to help improve life for people living in today’s Britain. Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

 Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in.  That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

 The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many.  It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

 The post-1979 dogma – that the British government should play as small a part in the economy as possible – is also misguided. Far too much capital is being used for short-term, speculative purposes, whilst not enough is finding its way into the development of sustainable businesses that provide long term employment and pay decent wages – not the hand to mouth existence of a zero hours contract. In other words, the economy should work for the many, not just the few.

 Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself.  This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”.  Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

 By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy.  Rethinking Britain shows how.

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