Nicholas Kaldor on taxes and the illusion of incentives

Nicholas Kaldor was a post-Keynesian economist at Cambridge University and, during his final years in the 1980s, a devastating critic of the Thatcher government’s adherence to the doctrines of monetarism and ‘supply-side’ reform.

Here he is on tax cuts and incentives, taken from The Economic Consequences of Mrs Thatcher (1983), a collection of speeches made to the House of Lords (p. 9):

“Between 1880 and 1930, excluding the war years, hardly any new money was sunk into the coal industry or the iron and steel industry, and very little money – in comparison with Germany, not to speak of the United States – was put into the new technology industries which arose out of the invention of electricity, the motor car, heavy machinery, synthetic dye stuffs and other chemicals. Instead, vast sums were invested abroad. In some years during the Edwardian period, when home investment in manufacturing industry was almost zero, no less than 10 percent of our national income was invested abroad.

In those days there were incentives galore. However much Ministers may try to revive incentives through tax reductions, they can never hope to achieve the Victorian or Edwardian peaks in fiscal incentives, when income tax was not progressive and it was seven old pence in the pound or 3 percent instead of the present 33 percent. Yet with all those incentives, the economy was stagnating. If people think that we will now see miracles as a result of cutting income tax by, say, 3p or 6p in the pound, I can regretfully prophesy that it is more likely to make no difference whatever.

I have no doubt that without nationalisation we should have had the same situation after World War II as we had for 40 years before World War I and throughout a larger part of the inter-war years, and if one thinks that the period after World War II was bad, I can only say that in the opinion of all economic historians who have studied this matter seriously, the 20 years of the 1950s and 1960s showed more rapid economic progress and more rapid growth of productivity than any comparable 20 years in previous British history. That that was not just a reflection of a world trend is shown by the fact that while it was true of Britain, it was not true of Germany or the United States; in other words, their post-war record of productivity growth was no higher than had been achieved in previous periods. It was true in our case, and it is only in the last 10 years that our economic progress has broken down, for the reasons I mentioned (sic).”

Kaldor was not in favour of very high marginal rates of income tax, and instead favoured a progressive tax on consumption. However he was clear at the time that poor management was holding back British industry, and the problem, compared with our competitors, was ability rather than incentives.

Even today, the ‘burden’ of taxation in a number of European countries is higher than in Britain, and industrial performance has been notably more impressive. So other policies are more important, but successive Conservative and even Labour governments have failed to learn this.

All this remains relevant today, not least in the wake of the Trump tax cuts, and the turn to austerity in many countries in the wake of temporary fiscal stimulus following the 2008 crash. In Britain, cuts to public services were favoured over tax increases in the attempts to reduce the deficit. This surely reached its limit some time ago, with numerous crises across public services, from the health service to prisons.

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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.