A Keynesian case for industrial policy

DSC00234Keynesian economics emphasises the primacy of aggregate demand or expenditure in driving the growth of output and employment. More mainstream neoclassical Keynesians, and the New Keynesians, tend to argue that inadequate demand is a short run phenomenon. The more radical post-Keynesians argue that it can be a problem in the long run too.

To varying degrees, these economists make the case for demand management via some combination of monetary, fiscal and exchange rate policy. The more radically minded have also long argued for incomes policies to manage wage and price inflation, and reform to the international monetary system in order to allow national governments the space to manage demand and promote full employment while preventing excessive and destabilising current account imbalances.

While Keynesian economics focuses on demand and, traditionally, macroeconomics, industrial policy aims to impact more on the supply-side of the economy and draws on microeconomics. Continue reading

Profitability and investment – via Michael Roberts blog

An interesting take on the reasons for the continued weakness of investment and growth in the aftermath of the Great Recession. For Marxist Michael Roberts, it is mostly about the failure of the rate of profit to recover to pre-recession levels. The link to his post is below.

Recently, Larry Elliott, the economics correspondent of the British liberal newspaper, The Guardian raised again the puzzle of the gap between rising corporate profits and stagnant corporate investment in the major capitalist economies. Elliott put it “The multinational companies that bankroll the WEF’s annual meeting in Davos are awash with cash. Profits are strong. The return on […]

via Profitability and investment again – the AMECO data — Michael Roberts Blog

Trickle-down versus trickle-up economics

From the blog of Michael Pettis (the link to the full post is highlighted):

Does cutting taxes on the wealthy lead to greater growth?

“Policies that increase income inequality can in some cases lead to higher savings, higher investment, and greater long-term growth. But, in other cases, such policies either reduce growth and increase unemployment or force up the debt burden. What determines which of these outcomes takes place is whether or not savings are scarce and have constrained investment.”

To give you a better idea of the argument, here is his conclusion. Pettis’ post may debunk the shibboleths of both left and right, while providing scope for reconciliation:

“Trickle-down economics does indeed work, as does its opposite, trickle-up economics, depending on underlying conditions that are not hard to specify. The key is the relationship between desired investment and actual investment. When the former exceeds the latter, policies that increase income inequality will generally cause savings to rise and expenditures to shift from consumption to investment; this leads to higher future growth that will eventually more than compensate ordinary and poor households for the increase in income inequality.

When desired investment is broadly in line with actual investment, however, there is no trickle-down effect. Policies that increase income inequality must permanently lower growth in the long run, although, in the short run, lower growth can be postponed by an increase in the debt burden.

In advanced economies, like those of the United States and Europe, there is no savings constraint on desired investment, so income inequality can only result in higher debt or higher unemployment and slower growth. It is only in developing countries that income inequality may boost growth, although in countries that have pursued the Gerschenkron model of forcing up domestic savings, like China has, actual investment can substantially exceed desired investment. This makes the reduction of income inequality or the channeling of wealth from the state to ordinary and poor households an urgent matter.”

Investment-savings, global imbalances and crisis: the economics of Michael Pettis

the-great-rebalancing-coverI have been greatly inspired by economist Michael Pettis, who blogs here. His work on the causes of the Great Recession, the eurozone crisis and, especially, Chinese development, seems to me to be both original and revelatory. In what follows I will outline the basic elements of his insightful theory of the global economy.

Pettis’ work draws on the ideas of Keynes, Minsky and many others, and incorporates lessons from economic history and political economy, which makes its scope broad and widely applicable.

At the heart of his theory are some accounting identities which are basic to international macroeconomics.

To begin with, for any economy, the current account surplus is equal to the excess of domestic savings over domestic investment. To put it another way, net domestic savings (gross savings minus gross investment, whether private or public) is equal to foreign borrowing, or domestic lending abroad. Continue reading

Stock buybacks and building a more equitable economy

This video tells the story of how a relatively equitable capitalist growth model in the 1950s and 60s gave way to rising inequality and weaker investment. For Professor William Lazonick, the economy of the US (and other advanced nations) currently generates “profits without prosperity”.

After World War II, average wages across the economy tended to increase in line with productivity, so that ordinary workers shared in rising economic efficiency over time. However, since the 1970s, the link has been broken as productivity continued to rise, while wages stagnated. This trend has been largely sustained to the present day.

The video discusses these changes in the US economy, and focuses on the phenomenon of stock buybacks, which shift firm resources away from productivity-raising investment in new technology and a more highly-skilled workforce towards short-term financial gains for CEOs and investors. Lazonick discusses possible solutions to these problems.