OECD Economic Outlook: the need for public investment

The Organisation for Economic Cooperation and Development (OECD) has recently come out strongly in favour of public borrowing to fund infrastructure investment across the industrialised world. In its recent Economic Outlook, and in view of slowing growth in the global economy, it favours ‘accommodative’ (ie loose) monetary policy, public investment in infrastructure, especially in Europe, and structural reform.

This is fairly mainstream stuff, but the focus on public investment is something that, given very low interest rates, should be a no-brainer. This is especially true in countries which have embarked on austerity policies. In many cases, such as the US, UK and Germany, spending on infrastructure has been weak for some time, so there are plenty of opportunities which will yield a positive net return. Continue reading

Some macroeconomic paradoxes: part 2

As a follow-up to my last post, here are four more paradoxes that can occur in a truly macroeconomic analysis. As before, what may be true for individual economic agents when acting alone or in small numbers can lead to the opposite outcome when this is applied to the economy as a whole. Once again, the ideas are taken from Marc Lavoie’s textbook Post-Keynesian Economics: New Foundations (2014), Ch.1, p.18-22.

  • The paradox of debt. For firms and financial institutions, attempts to reduce leverage ratios (borrowing) may lead to them cutting back on investment. If all companies do this, it will cause a slowdown in growth, reducing overall profitability. This will make it harder to reduce leverage and may even lead to ratios rising if the slowdown is large enough. This could also apply to governments if public sector austerity reduces the growth rate. For the financial sector, reducing leverage could lead to large-scale sales of assets, driving down their price and creating losses; this will reduce the institutions’ own funds, and could lead to a rise in leverage ratios.

Continue reading

Some macroeconomic paradoxes: part 1

DSC00228Mainstream macroeconomics (the study of the economy as a whole) places great importance on ‘microfoundations’. The microfoundations of macroeconomics start from the behaviour of isolated individuals, or more accurately a single representative individual, and generalise his or her behaviour in order to derive macroeconomic outcomes.

More heterodox (non-mainstream) schools of thought hold that holism should not be so neglected. More holistic theories suggest that emergence is a characteristic of social structures and forces: the whole cannot necessarily be reduced to the sum of its parts and there is therefore a place for starting analysis at the macroeconomic level. Continue reading

Wealth inequality and asset prices: a critique of Piketty

Thomas Piketty is undoubtedly a famous economist, thanks to his bestselling book on inequality. Despite his data showing that inequality is on the rise in many countries, there is at least one flaw in his argument that deserves a mention.

He equates capital and wealth and defines them to include both real and financial assets, or everything from machines in factories to housing and shares in companies. He then claims that the return on wealth has in recent decades been higher than the rate of economic growth, leading to rising inequalities of income and wealth. But the economists Robert Rowthorn of Cambridge University and Michael Roberts, a Marxist working in the City of London, have both shown that it is important to distinguish different types of capital and to consider changes in the valuation of financial assets. Continue reading

Thomas Piketty, inequality, demand and growth


Thomas Piketty

The work of economist Thomas Piketty, in particular his Capital in the Twenty-First Century, painstakingly documents the changing evolution of inequalities in income and wealth since the 18th century. The part of the book that has received a great deal of attention focusses on rising inequality since the mid-1970s in industrial countries.

Piketty argues that r, the rate of return on capital, broadly defined, has in recent decades been greater than g, the rate of growth of income. This has resulted in rising inequality and accompanied slow growth as the accumulation of wealth by the richest percentiles has grown faster than income, especially from wages, among poorer groups. This is likely to continue, contends Piketty, leading to political instability and the undermining of democracy, unless far more progressive tax rates are implemented. He admits that this is unlikely, given current political realities.

It is not the purpose of this entry to contest Piketty’s theory; instead, I wish to outline the possible impact on economic growth of the widening inequality he describes. Continue reading

Inequality, credit and financial crises: establishing a link

Rising inequality of income and wealth has been a much documented trend in the richest countries during the last three decades. Free-market economists have readily embraced this as necessary for improved economic performance, claiming that it improves individual incentives to work, invest and create wealth. The benefits are held to ‘trickle-down’ to all levels of society.

Even if this analysis is correct, there are other economic forces creating more complex chains of causation when it comes to the impact of inequality. Incentives matter, but can be affected by many factors. Continue reading

Inequality and economic growth: a brief note

What is the relationship between inequality and economic performance? Inequality within many countries has risen over the last 30 years, while that between them has fallen as poorer nations such as China have been ‘catching up’ with richer ones.

Many non-mainstream or heterodox economists, as well as some more mainstream but left-liberal figures such as Joseph Stiglitz, have argued that rising inequality and wage stagnation among middle and lower income groups was part of the cause of the excessive accumulation of private debt which led to the financial crisis.

A 2014 study by the OECD has shown that reducing inequality could significantly boost growth. Continue reading

The Thatcher revolution: all for nothing?


Margaret Thatcher in 1983. Photo by Rob Bogaerts / Anefo – Nationaal Archief

Did the Thatcherite reforms of the 1980s and 90s improve UK economic performance? A special report by Ken Coutts and Graham Gudgin of Cambridge University suggests not. This is a controversial claim, but one examined in some detail by the two authors.

It has become the conventional wisdom among commentators in the UK, including many on the centre left, that the liberalisation of the economy beginning in 1979 led to an economic renaissance. But the report shows that the growth in productivity in the 1950s and 60s, when the economy was more regulated and managed along corporatist lines, was better than the decades since Thatcher came to power, which includes the years of the ‘New’ Labour governments under Tony Blair and Gordon Brown. Continue reading

UK and global economic prospects: some alternative scenarios

Contando_Dinheiro_(8228640)How should we view the UK’s recent economic performance and prospects for the next decade? A recent paper, published by the Cambridge Centre for Business Research (CBR) at the Judge Business School is more pessimistic than the forecasts of the independent Office for Budget Responsibility (OBR). It also paints a bleaker picture, perhaps unsurprisingly, than the government.

The UK government has been a little quiet about its management of the economy in recent weeks, as much economic data has pointed to a gradual slowdown from a recovery that was publicized ad infinitum as being the strongest in the G7 in 2014. It is par for the course for governments to try to take credit for the good times, and blame the bad times on previous governments or global events, apparently beyond their control. Continue reading

Market failure on a grand scale: housing and productivity in the UK

Northwest_Kowloon_reclamation_area_no._6_public_housing_estate_construction_siteProductivity growth in the economy makes advances in living standards possible. As output per hour increases workers can, at least in theory, make some sort of choice between an increase in wages and an increase in leisure time. They could either produce and earn more for constant hours of work, or possibly earn the same for reduced working time and increased leisure.

Rising productivity also potentially allows profits to rise, which can be reinvested in production, or used to pay dividends or interest and repay loans used to finance investment.

Of course, the workings of the market economy and the way rising productivity is distributed between wages, profits and other forms of income are more complex than this stylized description. The balance of power between different groups in society has an effect on the distribution and appropriation of wealth and income. Continue reading