Pavlina Tcherneva has a new paper up at the website of the Levy Institute of Bard College. In the paper, “Reorienting Fiscal Policy: A Critical Assessment of Fiscal Fine-Tuning,” Tcherneva argues for a bottom-up approach to countercyclical fiscal policy that explicitly targets the employment gap to achieve what Minsky called “tight full employment.” She opposes her approach to conventional pump-priming and newer New Consensus approaches that primarily target aggregate demand and output, and only achieve higher employment as a by-product of the growth in demand and investment. These conventional approaches are trickle down methods that exacerbate social inequalities and inequalities in labor skills, ratchet up the problem of long-term unemployment, and ultimately direct more income to capital than labor. They also fail to achieve full employment, thus perpetuating the precariousness of the labor market.
Tcherneva describes the key features of the alternative bottom up approach this way....Rugged Egalitarianism — Renewing social hope for progress, equality, democracy & solidarity
Tcherneva on the Bottom-up Approach to Unemployment
Dan Kervick
She’s got her knickers in a bit of a twist. For example, she claims “Aggregate demand management . . . . aims to produce investment-led growth.” Wrong. What DOES PRODUCE investment led growth is monetary policy (e.g. interest rate cuts). In contrast, FISCAL stimulus (e.g. Warren Mosler’s payroll tax cut) channels stimulus in a much broader fashion. Alternatively, an income tax cut for the less well-off would channel stimulus straight into the pockets of the less well off.
ReplyDeleteIn fact the defects in monetary stimulus are so serious, I’ve decided monetary policy is all bollox. See:
http://ralphanomics.blogspot.co.uk/2013/06/monetary-policy-is-nonsense.html
As to her “bottom up” approach, this just consists of using JG to provide employment in a recession. Well the advocates of JG have always claimed that JG should expand during a recession haven’t they? And I have no quarrel with that.
The federal government should provide indefinite income support to the unemployed and it should be generous enough to keep every unemployed person out of poverty.
ReplyDeleteRalph, you said..
ReplyDelete"For example, she claims “Aggregate demand management . . . . aims to produce investment-led growth.” Wrong. What DOES PRODUCE investment led growth is monetary policy (e.g. interest rate cuts)."
Do you not understand the basic Keynesian position, or do you not agree with it?
The Neolcassicals claim that investment decisions are a function of the interest rate. Keynes came along and said…no, while the interest rate does play some role, it's expected profits / marginal efficiency of capital in the face of uncertanty that is most important.
Seem to me Tcherneva isn't wrong here. Through aggregate demand management, increasing AD in a recession increases expected profits of businesses, thereby inducing "investment-led growth".
And you said: "What DOES PRODUCE investment led growth is monetary policy (e.g. interest rate cuts)" …. How's that been working for the last 5 years?
What am i missing?
Lots of economists are of the view that investment is largely interest rate inelastic (it doesn't change much as a result of changes in interest rates). The determinants for investment are found elsewhere. I'm also interested in knowing what Ralph is talking about. I think Dan is right in highlighting the paper.
ReplyDeleteJK,
ReplyDeleteRe Keynes, I have no quarrel with the idea that expected profits / marginal efficiency of capital has a bigger effect than interest rate changes. But that still leaves the question as to how we effect stimulus.
Interest rates can be adjusted, and that has some effect. As to increasing expected profits, you suggest doing it by “AD management”. OK, but how do you propose doing that? You don’t say.
There are about three possibilities: interest rate cuts, QE, and fiscal stimulus. The first two channel stimulus via investment, while fiscal stimulus can channel stimulus into the economy via a much broader range of activities (which was the point I made above).
Next, you question how well “investment led growth” has worked over the last few years. As I suggested above, I think monetary policy (which includes interest rate adjustments) is bollox (to use technical economics jargon). I.e. I agree interest rate cuts clearly haven’t worked too well. But my point was essentially that interest rate cuts bring growth via investment increases, whereas a fiscal boost brings growth via a broader range of activities.
See your point Ralph but fiscal can go to direct (public) investment, vice interest rates I look at as only perhaps stimulating private investment if business thinks they have sales/profit growth opportunities....
ReplyDeleteI submit that the public investment LEADS the private for all purposes..
I go back and look at the data and I cant see any evidence where credit growth was present where there is no growth in govt spending YoY...
That's imo why were flat to down on credit right now at about $7T here in the US, we've been stuck at about $4T on govt spending for a few years...
Right now imo, no matter what the interest rates are, we're stuck at $7T on bank credit and $4T of govt spending and will be until govt gets that $4T number heading up again...
We can get the $4T headed north again via public investment projects with high employment goals...
Then the private sector can use the newly injected $NFA to increase lending to Starbucks so the private sector can provide more coffee for the newly employed people working on the truly revolutionary public projects...
rsp,
Not a comment on the substance of the post, but Ralph, i think you can do better than "She’s got her knickers in a bit of a twist" in the future.
ReplyDeleteWould you have used that kind of gendered language if Pavlina wasn't a female? I can't imagine so. And while use of such gendered language may seem harmless in the context of a random blog comment, every little bit contributes to an ongoing "boys club" culture within the economics profession (and econ blogosphere) that is really not doing anyone any good (See, e.g. http://carolabinder.blogspot.com/2013/08/diversity-in-economics.html).
Furthermore, as someone who already faces scrutiny for your political affiliations, I can't see it doing you any favors either.
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ReplyDelete