Quote of the week: Paul Samuelson on the essential contribution of Keynes’ General Theory

paul samuelsonPaul Samuelson was the high priest of the post-war “neoclassical synthesis” in economics, which combined a particular interpretation of Keynesian macroeconomics with mainstream microeconomics. He was the author of two influential textbooks which were widely used by students on the US side of the Atlantic and, as time went on, on the UK side as well. Keynes’s disciples at Cambridge University, and many of their students, tended to be politically to the left of their American counterparts, and were critical of Samuelson’s approach to Keynesian economics. But fast forward to today, and the left Keynesians, or post-Keynesians, are sadly confined to a heterodoxy with limited influence on the dominant mainstream of the subject.

This week’s quote, by Samuelson, is another from the 1947 collection of essays The New Economics, published not long after Keynes’ death the previous year. It provides a fascinating snapshot of how some of the influential (mostly American-based at the time) voices in academia assessed Keynes’ contribution to economic theory and public policy. It includes essays by Keynes himself, as well as Joan Robinson, one of the founders of the post-Keynesian school at Cambridge. Continue reading

Anwar Shaikh on the paths to development

Here is another short but useful paper by Anwar Shaikh, in which he explores the pathways to capitalist development. In doing so, he summarises many of the ideas contained in his magnum opus Capitalism: Competition, Conflict, Crises, which was published in 2016. He explores competition, growth, international trade, aggregate demand, unemployment, inflation and the limits to economic stimulus policies. His book contains all this in much greater detail and includes critiques of neoclassical, Keynesian and post-Keynesian alternatives alongside a wealth of empirical evidence.

Shaikh is critical of post-Keynesian ideas on wage-led versus profit-led growth, and argues in the paper that one of the ‘secrets’ to successful development is to enact policies which enable productivity to grow faster than real wages, so that the economy-wide wage share falls and the profit share rises, stimulating increased investment and accelerating growth in output and productivity. This may well be the case, but there are surely limits to a falling wage share, if this constrains growth in consumption and household income. In the debate over models of growth and development, this can be summarised as the difference between high wages and high savings models.

Historically, many economies have adopted the high savings model of growth, which represses wage growth relative to productivity, giving rise to high savings which are then channelled into investment, a process which is often coordinated by the state. This can lead to rapid growth, often referred to as a ‘growth miracle’, to the extent that the investment remains productive. But after a time, it tends to reach certain limits and then reforms which eliminate wage repression and enable faster growth in consumption and household income become necessary, which can be a difficult transition to make if there are wealthy and powerful vested interests which depend on the maintenance of the high savings model. Perhaps the best example of this today is China, which probably maintained the highest savings rate in history, at up to 50 percent of national income. Since 1978, it has managed the transition away from its command economy towards capitalism with an extraordinary degree of success, lifting hundreds of millions of its population out of poverty. But now it is struggling to rebalance away from its very high level of investment, a substantial proportion of which is unproductive, and to boost the share of consumption and household income in GDP. Japan has been through a similar process, with its post war growth miracle followed by two decades of stagnation as it struggled to rebalance its economy.

Shaikh’s paper is certainly interesting, but both it and his wonderful book do not address these issues: that there are limits to profit-led or high savings pathways to growth and development.

The political economy of the current inflation

Contando_Dinheiro_(8228640)Today’s inflation is leading to calls for mitigating policy responses. The distributional outcomes of higher inflation are necessarily uneven, creating winners and losers across society and the economy. I outline some of the likely impacts on households, businesses, government, and the wider economy, as well as the effects of changes in economic policy.

In recent months rising inflation, termed ‘the cost of living crisis’ by the media, has become a major issue for households, businesses and, increasingly, governments and central banks, who are tasked with policy responses. Caused by a combination of bottlenecks in global supply chains and recovering demand as many economies emerge from severe pandemic-induced downturns, it has hit rates not seen for decades in countries such as the US and UK. What are the likely impacts on the various elements of the economy? It is important for decision makers across the economy, from ordinary workers to policymakers, to understand how higher inflation can affect livelihoods and behaviour. Continue reading

Deficits, savings and a post-lockdown consumer boom

Lockdown restrictions are slowly being lifted here in the UK, and after a severe downturn there are signs of economic recovery, with consumption predicted to rebound substantially. It may be some time before the economy returns to its previous growth ‘trend’, but the signs are that consumers are returning to the shops as pent-up demand is beginning to be unleashed.

If this rebound in consumer spending takes place, it will be funded, at least in part, from the high levels of household saving that have been accumulated during the lockdowns. It is my contention that these high rates have been made possible in part due to a massive increase in government borrowing. Without the latter, household incomes and savings would have been much more constrained than otherwise. This is a typically Keynesian argument, and it will be illustrated with a ‘financial balances’ equation. Continue reading

Ricardo, Keynes or Schumpeter? Paths out of lockdown

Across the world, government borrowing has soared in response to a dramatic shrinkage in economic activity. State-mandated lockdowns have been a major cause of this. As vaccination programmes gather pace in a number of the wealthiest nations, and some of them begin to ease their lockdown restrictions, attention turns to the likely form and pace of economic recovery and the implications for the public finances.

Although lockdowns have seen a significant shift among households towards online shopping, and some of this may persist even as high streets become busier again, the recession, unprecedentedly severe for peacetime, has seen consumption, the largest component of aggregate spending, contract, albeit unevenly as spending patterns have changed. The government response to this in terms of its budget has been twofold: support aggregate demand by allowing the deficit to rise, and to a degree temporarily maintain the structure of aggregate supply via support for existing firms and jobs. These two elements have produced a large government deficit. The economy has still shrunk dramatically, and with interest rates already extremely low, it has been left to fiscal policy to support aggregate demand. Continue reading

Michael Hudson on Reaganomics and the Laffer Curve

hudson-200x300Here is another extract, in an occasional series, from Professor Michael Hudson’s J is for Junk Economics, his iconoclastic ‘dictionary’ of misleading terms in economics and political economy. (the two quotes are taken from pages 194 and 138, respectively):

Reaganomics: The policy of cutting taxes for the wealthy (especially for real estate investors) while increasing the Social Security tax on employees. The effect was to quadruple the public debt during the 1981-1992 Reagan-Bush administration, while dismantling environmental regulations and deregulating finance to produce a wave of Savings and Loan (S&L) fraud, junk bond takeovers and a stock market bubble. This was euphemized as “wealth creation,” not debt creation.”

Laffer Curve: Originally drawn on a table napkin by Republican advisor Arthur Laffer in 1974, the hypothetical correlation shows an inverse relationship between tax rates and tax revenues. As tax rates are reduced, tax collection is supposed to rise instead of falling – as if lower tax rates will give less incentive for tax avoidance and more incentive to invest in production and hire more employees. The logic is that taxes stifle business investment, reduce earnings and hence income-tax payments. The deeper the tax cuts, the more tax revenue is supposed to be collected – seemingly without limit. The actual result in the Reagan-Bush administration (1981-92) was a massive budget deficit and a quadrupling of public debt.”

Support for these ideas among the political right has persisted, right through to the Trump administration. Once again, steep tax cuts for the wealthy and corporations seemed to give a short term boost to economic performance, but could not be sustained, and left the country with a larger budget deficit. The boost, as far as it went, was probably more on the demand-side, rather than improving the supply-side of the economy.

Put simply, and more honestly, these kinds of arguments boil down to whether or not policy-induced increases in inequality improve economic performance. An increase in inequality may do so if productive investment is constrained by the supply of savings. Since an increase in inequality will shift incomes to those who are more likely to save it, at the level of the economy as a whole, this will enable investment to rise, which could raise growth in output and productivity.

On the other hand, if productive investment is constrained by consumption rather than savings, then an increase in inequality will have the opposite effect. Wealthier individuals and households are less likely to consume their increase in income, and so investment will not rise. Policies which shift income and wealth to poorer households, which are more likely to consume it, will create incentives for investment in new capacity and increases in employment among firms so as to support the increased level of consumption.

This latter effect could be described as a ‘trickle-up’ policy. By reducing inequality, increased consumption spending by poorer households leads to faster growth in investment, output and productivity for the economy as a whole. On the other hand, if investment is constrained by a shortage of savings, then increasing inequality to boost growth is a form of ‘trickle-down’ economics. This macroeconomic analysis is different from the original arguments presented in the simplified form of the Laffer Curve, which focused on microeconomic incentives to work and invest alongside the potential for tax avoidance.

Covid-19 and the unbalanced budget

Countries across the world have responded to the economic damage induced by the global pandemic by allowing budget deficits to rise dramatically. They have undertaken a variety of schemes ostensibly designed to support the economy. But what kind of support is most effective?

The pandemic itself, and the policy responses, have induced dramatic economic ‘shocks’ to both aggregate demand and aggregate supply, that is the demand and supply for the economy as a whole. The increased uncertainty about the future among consumers, alongside the various lockdown restrictions, have generally reduced aggregate consumption, the largest component of aggregate demand. They have also changed the composition of consumption giving rise, taking the most obvious example, to an accelerated rise in the demand for online shopping and home delivery. Continue reading

Trade Wars are Class Wars – models of development

PettisKleinTWACWThis is the third in a recent series of posts which draws on ideas discussed in the book Trade Wars are Class Wars by Matthew C. Klein and Michael Pettis. Previously, I explored the importance of a macro or systemic analysis in economics, and the nature and dynamics of savings and profits in the economy. Today, I want to look at the two broad models of growth and development outlined by the authors: the high savings model and the high wages model.

In fact, I posted on this a couple of years ago here, following a blog post by Pettis, so I will try not to repeat myself too much and explore some different aspects of the topic. If you haven’t read their book, or any of the authors’ previous output on this, I recommend reading my blog post first, as well as that of Pettis. Continue reading