The debt delusion — Michael Roberts [book review]

Michael Roberts reviews and critiques The Debt Delusion by John Weeks.

Michael Roberts Blog — blogging from a marxist economist
The debt delusion
Michael Roberts

Three Reasons To Be In Favor Of A Payroll Tax Cut — John T. Harvey

For at least a few moments this week, President Trump suggested a payroll tax cut to stimulate the stalling macroeconomy. Although it appears that he has already changed his mind, it’s worth taking a look at the strategy...just in case.

Let’s say for sake of argument that the negative signals we have received of late are accurate. What should we do if we slip into full-fledged recession? Cut interest rates? Lower the budget deficit? Decrease payroll taxes? It turns out that the last one is the clear and easy winner. Why?

Forbes — Pragmatic Economics
Three Reasons To Be In Favor Of A Payroll Tax Cut
John T. Harvey | Professor of Economics, Texas Christian University

Dirk Ehnts — Keynes on the quantity theory and techniques of recovery (letter to FDR)

Changes in expenditure rather than changes in the money stock are causal in economic performance. Changes in money stock do not necessarily result in changes in expenditure. Velocity of money depends on liquidity preference. If the money stock increases while the population increasingly desires to save rather than spend, no change in economic performance will follow. A chief point of the General Theory is that spending as "effective demand" drives an economy. As a consequence fiscal policy is more influential economically than monetary policy in that it concerns spending which can be targeted through specific appropriations.

Here we are with MMT reiterating the point that Keynes was making to FDR in this letter.

econoblog 101
Keynes on the quantity theory and techniques of recovery (letter to FDR)
Dirk Ehnts | Lecturer at Bard College Berlin

Lars P. Syll — The causes of secular stagnation and the loanable funds theory

Like Keynes said.

Lars P. Syll’s Blog
The causes of secular stagnation and the loanable funds theory
Lars P. Syll | Professor, Malmo University

Brad DeLong — John Maynard Keynes: Essays In Biography

Brad rates this as a should-read. For anyone interested in Keynesianism, Post Keynesianism and MMT, the history of economics, or economic theory, it is a must-read.

Conventional economists have apparently concluded that they don't need to read it if they even thought about, which most probably haven't, being under the spell of the "normal paradigm" in spite of its poor results empirically.

Washington Center for Equitable Growth
John Maynard Keynes: Essays In Biography

Brad DeLong

Here is a link to download Keynes's Essays in Biography (1933) as a PDF.

Another must-read from Brad.

 I think the very smart Jeffrey Friedman gets this… not quite right. The case for the empirical benefits of capitalism is very strong—but only if one is willing to remove libertarian blinders and focus on eliminating the market failures (in distributions, in aggregate demand, in externalities, in information, etc.) that keep the function the market maximizes from being a good proxy for societal well-being. And once one has the market properly supported and disciplined, the philosophical discussion can commence: Jeffrey Friedman: What’s Wrong with Libertarianism: “Libertarian arguments about the empirical benefits of capitalism are, as yet, inadequate…

From the Marxian and Institutionalist points of view,  economic liberalism, of which contemporary Libertarianism is a variant, provides the philosophical framework for bourgeois capitalism. Its fundamental weakness is prioritizing economic liberalism over social and political liberalism, which gives rise to many paradoxes of liberalism that result in illiberality such as have been pointed out many time here at MNE.

Brad also provides another keeper Keynes quote.

Here is an excerpt:

But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice.

Individualism as the pursuit of self-interest does not lead to the greatest good for the greatest number the spontaneous emergence of natural order, unless "natural order" is conceived as the outcome of social Darwinism. This result is so grossly unfair that overtime it becomes unstable politically.

Keynes is saying here that individualism only works as a guiding principle of liberalism if collective consciousness is sufficiently high, which is manifested in a society's culture and institutions. The fact that civil and criminal law are needed goes to show that collective consciousness alone is not that high presently. In addition, the level of social and political dysfunctionality in liberal countries shows that the culture and institutions of the society are insufficient to bridle narrow self-interest to the degree necessary to generate a harmonious society and balanced social, political and economic conditions.

This is a design problem.

Jeffrey Friedman: What’s Wrong with Libertarianism

More from BDL:

Three Books for 2017: Economics for the Common Good, Janesville, Economism

Weekend Reading: Richard Thaler: Behavioral Economics

Peter Cooper — A Notion of Demand-Led Growth

A key purpose of demand-led growth theory is to extend the ‘principle of effective demand’ to contexts in which productive capacity is best considered variable rather than fixed. The central idea is that, over any time frame, it is demand that determines output, and demand-led variations in income that adjust planned leakages to planned injections. Once it is acknowledged that capacity is variable, it becomes clear that the adjustment of output to demand, and planned leakages to planned injections, can be achieved not only by utilizing existing capacity more fully, but by expanding capacity through investment....

heteconomist
A Notion of Demand-Led Growth
Peter Cooper

Adair Turner — The Normalization Delusion

There is a psychological bias to believe that exceptional events eventually give way to a return to “normal times.” But the world economy is far from a return to pre-2008 normality, with most of the obstacles to more robust recovery to be found on the demand side.

Project Syndicate

The Normalization Delusion
Adair Turner

C.P. Chandrasekhar and Jayati Ghosh — Where will global demand come from? (4 charts)

The authors attribute the problem chiefly to mercantilist Germany.

Real-World Economics Review Blog
Where will global demand come from? (4 charts)

C.P. Chandrasekhar and Jayati Ghosh

Bill Mitchell — Another Milton Friedman legacy bites the dust

Milton Friedman and his gang at Chicago, including the ‘boys’ that went back and put their ‘free market’ wrecking ball through Chile under the butcher Pinochet, have really left a mess of confusion and lies behind in the hallowed halls of the academy, which in the 1970s seeped out, like slime, into the central banks and the treasury departments of the world. The overall intent of the literature they developed was to force governments to abandon so-called fiscal activism (the discretionary use of government spending and taxation policy to fine-tune total spending so as to achieve full employment), and, instead, empower central banks to disregard mass unemployment and fight inflation first. Several strands of their work – the Monetarist claim that aggregate policy should be reduced to a focus on the central bank controlling the money supply to control inflation (the market would deliver the rest (high employment and economic growth, etc); the promotion of a ‘natural rate of unemployment’ such that governments who tried to reduce the unemployment rate would only accelerate inflation; and the so-called Permanent Income Hypothesis (households ignored short-term movements in income when determining consumption spending), and others – were woven together to form a anti-government phalanx. Later, absurd notions such as rational expectations and real business cycles were added to the litany of Monetarist myths, which indoctrinated graduate students (who became policy makers) even further in the cause. Over time, his damaging legacy has been eroded by researchers and empirical facts but like all tight Groupthink communities the inner sanctum remain faithful and so the research findings haven’t permeated into major shifts in the academy. It will come – but these paradigm shifts take time.

The latest research effort to wipe Friedman’s theoretical legacy off the map was presented to the ASSA Annual Meetings (in Chicago, this year) at a session on January 8, 2017 by two young Harvard economists.…

Arguably, "Friedmanism" led to the Global Financial Crisis (system failure) that is still unfolding around the world, resulting in a discrediting of conventional economics, the unwinding of the post-WWII liberal order, and the inception of a new world order that is now in the making, unfortunately led by the right since the left is absorbed in navel-gazing and blaming.

Bill Mitchell – billy blog
Another Milton Friedman legacy bites the dust
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Edward Lambert — Yellen wants to understand effective demand

Janet Yellen is really asking for research into effective demand. She sees a weakness in aggregate demand affecting aggregate supply… or potential output. That is effective demand, but she cannot even use the term effective demand because economists do not understand it.

I have been researching effective demand for 4 years. I have seen really a complete lack of understanding of what effective demand is among economists. It surprises me that Janet Yellen would be calling for research on its dynamics....

Janet Yellen just might understand more about Keynes and Post Keynesianism that she wants to let on publicly. She was excoriated as a "Keynesian" by economists on the right at the time of her appointment to the Fed chair. Maybe she is nudging without rocking the boat too much.

Has anyone read Yellen, Janet L, 1980. "On Keynesian Economics and the Economics of the Post-Keynesians," American Economic Review, American Economic Association, vol. 70(2), pages 15-25, May. (Link is to JSTOR. Registration required.)

She may be considered a New Keynesian, but this paper shows that she is at least familiar with some Post Keynesian thinking.

Angry Bear
Yellen wants to understand effective demand
Edward Lambert

Also

So whilst Janet gets empirically what is wrong with modern macro research she misses the fundamental reasons this matters.

1. Economics must be rebuilt around balance sheets and fundamental accounting identities
2. Hence state – balance sheets- must be the basis of all models. If the model is not a state machine it cannot describe the state of anything economic.
3. Hence credit and debt, and money matters
4. As debt issues are fundamentally non linear and complex models which require linearisation, such as DGSE, must be discarded, they are too broken to be fixed.

Decisions, Decisions, Decisions
Yellen Almost, but not Quite, Gets Whats wrong with Modern MacroAndrew Lainton

Lars P. Syll — What is ‘effective demand’?

Economists of all shades have generally misunderstood the theoretical structure of Keynes’s The General Theory. Quite often this is a result of misunderstanding the concept of ‘effective demand’ — one of the key theoretical innovations of The General Theory.

Jesper Jespersen untangles the concept and shows how Keynes, by taking uncertainty seriously, contributed to forming an analytical alternative to the prevailing neoclassical general equilibrium framework:

Lars P. Syll’s Blog
What is ‘effective demand’?
Lars P. Syll | Professor, Malmo University

C.P. Chandrasekhar and Jayati Ghosh — And Now, Price Deflation in India and China?

 Obviously other factors must also be at play in the ongoing producer price deflation in both countries. It may be that the features that have operated to cause price deflation in the advanced economies – inadequate effective demand because of suppression of wage incomes and continuing emphasis on fiscal consolidation, with very loose monetary policies no longer working as stimulus – are also operated to at least some degree in these economies. 

Clearly, the lack of “decoupling” of these economies from the advanced economies goes beyond GDP and extends also to the behaviour of producer prices. This can only add to the concerns for policy makers in both countries, especially in India where debt default is already putting major strains on bank balance sheets.

TripleCrisis
And Now, Price Deflation in India and China?
C.P. Chandrasekhar and Jayati Ghosh

Edward Lambert — A New Model of the Economy Please

Brad DeLong wrote recently concerning the Uncertainty at the Fed…

“The heart of the trouble consists in the fact that neither financial-market participants nor, it seems, the Fed itself know the true state of the economy or how best to model it – especially in the wake of the 2008 financial crisis” (link)

It is a fact he says. The Fed and others do not know how best to model the state of the economy.

I stand alone with a new model for an Effective Demand limit as Keynes envisioned it

Angry Bear
A New Model of the Economy Please
Edward Lambert

Gerald Friedman responds to Christina and David Romer

The Romers, and I suppose other neoclassical macro economists, believe that the economy tends towards full employment equilibrium and will move there on its own without need for government intervention or stimulus. They would acknowledge that following a negative shock, government stimulus spending may accelerate the recovery somewhat, as Bernstein and Romer in 2009 anticipated the Obama stimulus would speed recovery by about 6 months. They deny, however, that stimulus spending could change the permanent level of output because the economy will on its own return to full employment at a capacity output set without regard to the level of employment by factor endowments, by preferences, and by the level of exogenous technology. From this perspective, because a period of prolonged measured slow growth cannot be caused by involuntary unemployment, it must, by a priori assumption, be due to a decline in the exogenously determined growth rate in capacity. Like mosquitos on an otherwise delightful summer afternoon, slow growth is unfortunate but there is little that can safely be done about it.

Or maybe we can find safe pesticides. Here I agree with John Maynard Keynes that the economy can have a low-employment equilibrium because of a lack of effective demand, and I agree with Nicholas Kaldor and Petrus Verdoorn that productivity and the growth rate of capacity can be increased by policies that push the economy to a higher level of employment. And to the contrary, periods of prolonged unemployment and underutilization of capacity can lower capacity by discouraging workers and reducing the incentive to invest, to innovate, and to raise productivity. Unfortunately, this is what has been happening in the US for the last few years; and, fortunately, there is reason to believe following Keynes/Kaldor/Verdoorn that policy can reverse this decline by pushing the economy to a higher level of output and thus a higher level of productivity….

Gerald Friedman responds to Christina and David Romer

Steve Keen — Our Dysfunctional Monetary System

Steve Keen sums it all up on one sentence:

The great tragedy of the global eco­nomic malaise is that it is caused by a short­age of some­thing that is essen­tially cost­less to pro­duce: money.

It's beyond inane, especially post Keynes and post Lerner. Not that this was unknown or overlooked before. But Keynes and Lerner elaborated economic policy based on a theory that disproves the conventional approach.

Steve Keen's Debtwatch
Our Dysfunctional Monetary System
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London

Edward Lambert — Re: Tim Duy… Brains need not explode

Edward Lambert's effective demand model is turning bearish.

Angry Bear

Re: Tim Duy… Brains need not explode
Edward Lambert

Edward Lambert — Adair Turner: Is it Debt Deleveraging or the Fall in Labor Share?

Decreasing labor share results in contracting demand, which in turn results in a sluggish economy that then turns into debt deflation if private debt levels are sufficiently high. Duh.

Angry Bear
Adair Turner: Is it Debt Deleveraging or the Fall in Labor Share?
Edward Lambert

Ramanan — UNCTAD On Economic Dynamics

UNCTAD On Economic Dynamics— based on sectoral balances. It's getting around.

"It's the demand, stupid."

The Case of Concerted Action
UNCTAD On Economic Dynamics

Ramanan

Peter Radford — Stagnation

The downscaling is said to fit with the empirical evidence, and in particular with the trends that seem to have set in since around 1980. 

In other words, a sputtering economic performance over the past few decades is seen as proof that we now live in more constrained times, where limited growth puts a cap on our latitude in dealing with economic issues. People drawing this conclusion almost inevitably then jump into discussions of how this reduced latitude implies a more austere role for government, and – naturally – that everyday folks just will have to manage on less. 

I have a slightly different perspective. 

The onset of the downward shift coincides quite neatly with another great beginning. That of an era of economic policy focused on supply side initiatives, giveaways to the rich, and of corporate welfare. Is it simply a strange coincidence that the entire post-Reagan era is exactly that we are now describing as one of lower growth? Or is it that the right of center free market policies that have dominated policy making throughout the west since the early 1980′s, are to blame?

The Radford Free Press
Stagnation
Peter Radford

Edward Lambert — Blanchard & Krugman are trying to understand Effective Demand

…Effective Demand. This is a term so rarely used in economic discourse. It is not understood. For me, effective demand sets a "definable" limit upon the utilization of labor and capital. So it follows that lower effective demand leads to lower investment, lower output, lower productivity, lower taxes and less ability to pay debts.
Effective demand is based upon labor's share of a national income.…

…sufficient Effective Demand depends upon labor receiving a larger share of national production than they currently receive. No one is going to just give it to them. Labor will have to fight for it.  

Effective Demand
Blanchard & Krugman are trying to understand Effective Demand
Edward Lambert


Domestic private sector over-saving (hoarding), which is due to the ratio of capital share to labor share being excessively high since unspent income increases proportionally with income and wealth, results in insufficient effective demand to sustain output at full employment unless offset by the sum of the government and external balances.

Consolidated domestic private sector balance + government balance + external sector balance = zero (by accounting identity).

Given output of production is less that its aggregate potential using available resources including labor, if the capital to labor share in the consolidated domestic private sector is not reduced by giving labor a greater sharer and capital a lesser, thereby reducing unspent income (saving), then the sum of the government fiscal balance and the external sector balance must increase to offset the shortfall in consumption that would otherwise send a signal to firms to reduce output to less than aggregate potential at full employment in order to prevent an increase in unplanned inventory.

Keynes defined effective demand as the point at which the the aggregate supply curve and aggregate demand curve intersect. Aggregate demand falls when decreasing demand in one industry is not offset by increasing demand in another. As demand spreads across industries, effective demand drops blow the point at which the the aggregate supply curve and aggregate demand curve intersect at full employment.

Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = φ(N), which can be called the Aggregate Supply Function.[5] Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D = f(N), which can be called theAggregate Demand Function. 

Now if for a given value of N the expected proceeds are greater than the aggregate supply price, i.e. if D is greater than Z, there will be an incentive to entrepreneurs to increase employment beyond N and, if necessary, to raise costs by competing with one another for the factors of production, up to the value of N for which Z has become equal to D. Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs’ expectation of profits will be maximised. The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand. Since this is the substance of the General Theory of Employment, which it will be our object to expound, the succeeding chapters will be largely occupied with examining the various factors upon which these two functions depend. — General Theory, 3, I

What this says when worked out is that if consumption demand is insufficient to result in production at potential output using available resources, then for output at full employment to occur, the domestic private sector saving desire must either reduced, or be accommodated by an offsetting combination of the government fiscal balance (by running a deficit) and the external saving desire in the currency (increasing net exports).

One way to reduce private sector saving is by reducing capital share to distributed labor share, since consumption is inversely proportional to income and wealth. If capital and labor share are such that saving is nil so that all output at full is purchased, then the government and external balances can be zero. However, this is unrealistic since some saving is required for future use and also to hedge against uncertainty. So some desire to save must be accommodated in achieving full employment. But excessive saving at the top will result in social, political and economic asymmetries.

From this it follows that either the capital to labor share of income decreases, thereby reducing income that flows to wealth at the top, leading to asymmetrical social status and political power, or that this saving desire be fully or mostly accommodated with the resulting increase of these asymmetries.

From a purely economic perspective, which of the two takes place is more or less irrelevant unless the asymmetries can be shown to introduce inefficiencies owing to income and wealth inequality. Economically, distributional effects are not relevant unless they can be shown to have economic consequences.

However, from the social and political perspective, bringing labor share in line with productivity would result in greater income and wealth equality, hence, greater social and political equality, which are arguably more conducive to democracy than social and political asymmetries based on income and wealth inequality that lead to de facto oligarchy through capture.

It can be argued that simply accommodating consolidated domestic private saving without regard for capital and labor share achieves full employment that the expense of social, political and economic asymmetries that tend toward oligarchy and disrupt democracy and democratic processes. This results in legal and other institutional effects that have economic consequences that create augmenting feedback loops.

Optimal economic policy would balance growth, employment and price stability, and also encourage distributed prosperity. It would also promote social (class), political (power), and economic (income and wealth) symmetry conducive to liberal participatory democracy.

The way to achieving this is by inquiring into how to live a good life in a good society, which has been the basis for ethical, social and political inquiry since the dawn of the Western intellectual tradition. This requires an integrated and balanced approach, which necessitates using a systems approach that draws on all relevant inputs.

Problems arise when economics and economies are abstracted from the societies that they serve as material life-support systems, which is only one aspect of holistic community.