fiscal policy

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.

Lawrence Summers On The Failure Of The New Consensus

Published by Anonymous (not verified) on Fri, 23/08/2019 - 6:15pm in

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.

Modern Monetary Nonsense?

Published by Anonymous (not verified) on Thu, 07/03/2019 - 4:17am in

This is my take on Rogoff’s “Modern Monetary Nonsense”

Rogoff: “A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.

Rogoff’s use of the expression “as a cash cow to fund” ignores the fact that the Fed is already the “cash cow” that makes all economy’s payments possible. The Fed lends to banks when they purchase banknotes, when they buy Federal Treasuries, or when they pay taxes on behalf of their clients. All “base money” needed to make payments comes from the Federal “cash cow” Reserve.

2

Rogoff then quotes, in agreement, Powell: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong”.

Yet again, where is the exception? All countries whose institutions are politically stable are capable to borrow from residents in their own currency (This, by the way, is made possible by a loan of the central bank to the banks). Residents may then sell their Treasuries to foreigners, and the foreign sector may be willing to accumulate a stock of Treasuries if they desire to hold that particular currency. The consequence will be a higher value of that currency than otherwise, not any kind of enhanced ability of the government to borrow.

3

Again, Rogoff: “The US is lucky that it can issue debt in dollars, but the printing press is not a panacea.”

The luck is that they can buy from foreigners much more than what they sell, with no dollar depreciation. The printing press is not part of the picture.

4

Rogoff continues: “If investors become more reluctant to hold a country’s debt, they probably will not be too thrilled about holding its currency, either.”

Yes, but to put it more precisely, and with reference to national (federal) public debt and not to regional administrations’ debt (so this does not apply to the euro area), foreigners’ willingness to hold a country’s debt depends on their willingness to hold its currency. Holding public debt is the safest way to hold any currency.

5

Rogoff again: “If that country tries to dump a lot of it on the market, inflation will result.”

Rogoff leaves this unexplained. Dumping a currency (in the form of public debt or other assets denominated in that currency) will lower the value of that currency in the foreign exchange market. This may raise domestic prices if the country is highly dependent on imports that become more expensive with depreciation. Or may not. When China dumped euros at the time the ECB started its Asset Purchase Program, the foreign value of the euro went down but not much inflation followed.

6

And Rogoff: “While in “Japan […] most debt is held domestically, the US […] depends heavily on foreign buyers.”

The value of the dollar (not the financing of public debt) depends on foreign dollar holders. Foreigners hold dollars in various forms (public debt and private debt) and dollars are claims on the Fed and the U.S. government. When foreigners are tired to hold them, they can use them to purchase US goods, services, or real assets. But foreigners are not making Federal borrowing possible.

7

Finally, a light of truth from Rogoff: “QE, when it consists simply of buying government bonds, is smoke and mirrors. The Fed’s parent company, the US Treasury Department, could have accomplished much the same thing by issuing one-week debt, and the Fed would not have needed to intervene.”

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