Keynesian economics – back from the dead?

Here is an interesting recent lecture given by Robert Rowthorn on the “main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago.” It can be downloaded for free. Alternatively the video of the lecture can be viewed here.

Rowthorn is Emeritus Professor of Economics at Cambridge University. Back in the 70s and 80s he was very much a Marxist, but has since moved away from that commitment and written on a wide range of topics, from Kaleckian growth and distribution theory to deindustrialisation in the advanced economies and the economics of the family.

For those who are interested in development economics, he supervised the PhD of another prominent Cambridge economist, Ha-Joon Chang, who has written a number of popular books alongside his academic work.

This is the rest of the abstract of Rowthorn’s paper:

It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory, expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, hysteresis, and heterodox theories of growth and distribution. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.

All of these topics are relevant to today’s economic problems, and Rowthorn argues that “many leading economists in the USA and the UK have Keynesian sympathies”.

Thanks to The Case For Concerted Action blog for drawing my attention to this lecture.

A low-inflation world and what to do about it

The Economist magazine recently published a special report on the world economy, looking at the ‘problem’ of low inflation. More than ten years have passed since the beginning of the Global Financial Crisis and Great Recession, and inflation is now strikingly low in many rich economies. This is despite unemployment falling to historically low levels in countries such as the US, UK and Germany, although it remains much higher in a number of European countries that have yet to recover from the worst of the eurozone crisis.

Normally economists expect wages to rise faster as unemployment falls below some critical level and the labour market tightens, and at some point this has tended, at least in the past, to lead to higher inflation.

In the US and UK, wage growth has been picking up, but inflation has remained low, and has even undershot central banks’ inflation targets. Wage increases are relatively good news for workers after a decade of sluggish or stagnant earnings growth, but remain weak compared to those seen prior to the recession. Continue reading

Richard Koo – The Other Half of Macroeconomics and the Fate of Globalization

Richard Koo The Other HalfRichard Koo’s big idea is the theory of balance sheet recessions (BSR), and he has written a number of books that explain and apply it to our current economic problems. His latest was published earlier this year: The Other Half of Macroeconomics and the Fate of Globalization.

I do enjoy his work, as it is somewhat iconoclastic, and despite some repetition, both within and between the individual works, he is well worth reading. I have summarized his previous ideas here, so in this review I will concentrate mainly on what is new in this book.

The not so new

For readers unfamiliar with his previous work, Koo outlines his theory of BSRs; his critique of Quantitative Easing and the risks involved as it is unwound by central banks; and the source of the Eurozone crisis and solutions to it which avoid the creation of a fiscal union, which still lacks political legitimacy and support across the EU.

All of this is already covered in his books The Holy Grail of Macroeconomics and The Escape from Balance Sheet Recession and the QE Trap.

The new

Koo’s latest book elaborates and extends his theory of BSRs (what he calls ‘the other half of macroeconomics’) to longer term questions of economic development. He also addresses the current backlash against aspects of globalisation embodied in support for Donald Trump, Brexit and the like. Continue reading

Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading

Michael Hudson on Quantitative Easing

Plenty of economists, investors and others have been wondering what will happen to financial markets and the real economy as monetary stimulus in the form of Quantitative Easing is wound down by central banks from the US to the Eurozone in the face of stronger growth.

I will be writing more about it next week, considering the perspectives of critic Richard Koo among others, but here is Michael Hudson from, as ever, his iconoclastic and insightful ‘dictionary’ J is for Junk Economics (p.189-91): Continue reading

Japan, Abenomics and moving beyond Keynesianism forever

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Japanese PM Shinzo Abe, instigator of ‘Abenomics’

The Japanese government yesterday announced a fiscal stimulus for the economy of 28 trillion yen, or $275bn. Although much of this money is not new, it has been hailed as leading the way against austerity and towards expanding demand. This is part of the three-pronged package of policies known as Abenomics, named after the Prime Minister Shinzo Abe. This includes monetary stimulus in the form of quantitative easing, fiscal stimulus (tax cuts and public spending increases) and structural reforms to labour and product markets.

The Economist magazine claimed recently that Abenomics has been a partial success. In a country with an ageing and shrinking population, labour force participation is slowly growing as more women find work. Inflation is now positive as the price level slowly rises, although this may be largely due to the yen’s depreciation. The yen has strengthened recently and price rises have for the moment stalled.

But stimuli to demand, whether monetary or fiscal, have their limits if the productive side of the economy does not expand its output and productivity. The real structural problem is the huge accumulation of savings by firms. Corporate savings exceed investment by a substantial margin. This imposes a deflationary impulse to the economy. Arguably, these savings need to fall, and the funds flow to households for them to spend on consumption. It could also redistribute the funds available for investment towards more efficient firms looking to invest in profitable new areas, so raising the productivity of capital spending. As Michael Pettis has argued, the key structural policy change is for corporate savings to be redistributed to households, and it is this process which will ensure the more rapid growth of private demand necessary for a reasonable growth rate. Continue reading

From austerity to expansion?

Contando_Dinheiro_(8228640)Could we be about to see a shift from austerity to fiscal expansion? The UK’s new finance minister, Phillip Hammond, as reported by the BBC here, has signalled that he may ‘reset’ economic policy at his next budget statement come Autumn.

There are some indications that the UK economy has been subject to a substantial negative ‘shock’ as a result of Brexit, the UK’s vote to leave the EU. The latest business managers survey showed a sharp move towards economic contraction. If this heralds a significant growth slowdown or even recession, the budget deficit will tend to increase as a result, even if the government does nothing. This is because slowing or negative growth reduces tax receipts and usually leads to higher spending on unemployment benefits and welfare, automatically increasing government borrowing. If this extra borrowing boosts spending in the economy overall, then it is known as the ‘automatic stabilizer’, in effect stabilizing the economy by compensating for lower private spending.

Mr Hammond could also increase borrowing further through tax cuts or extra spending on infrastructure, beyond what happens automatically, in order to try to boost growth. Alongside the abandonment of his predecessor George Osborne’s aim to achieve a budget surplus, in which tax receipts are greater than public spending, by the end of the parliament in 2020, this would represent a significant policy shift away from austerity. Continue reading

Some limits to Keynesian policy

9780199390632Can Keynesian policies create full employment under capitalism? And what are the limits to such policies? Many economists in the Keynesian tradition, from Paul Krugman on the mainstream wing, to Wynne Godley and Marc Lavoie on the more left-wing heterodox one, have persistently argued that some mixture of monetary and fiscal policy should be used to manage aggregate demand and achieve and maintain full employment under capitalism. What this means in practice is subject to some debate: full employment is a more abstract idea than simply arguing over whether 3% or 5% unemployment represents what is ‘full’.

There have been periods during the history of capitalism across different countries and at different times when full employment has been achieved. The so-called Golden Age of Capitalism in the 1950s and 60s saw very low unemployment in much of Western Europe. Continue reading