Post-Keynesian Fiscal Policy Post author By Philip Lane Post date June 7, 2010 Jeff Sachs writes on fiscal policy in the FT: you can read the article here. Categories In Fiscal Policy Tags Fiscal Policy 29 Comments on Post-Keynesian Fiscal Policy ← The ECB and Quantitative Easing → EU Finance Ministers Statements 29 replies on “Post-Keynesian Fiscal Policy” While I can credit his opposition to neo-keynesian spending, I can’t quite give the same credit to his green and knowledge economy. Who are we kidding? Are there lots of stupid people somewhere that need smart people to serve? Or perhaps there are a load of smart people somewhere who aren’t out making money already? Oh, there are – they work in the banks trading paper, don’t they? As for the Green economy, Mr. Tol has covered well that the economics of it are just not gezellig. If it made economic sense, it would happen anyway. If it needs government intervention, it doesn’t make economic sense. This is not to dismiss or deny the challenges faced, just to totally dis the responses and the claim that a world leading green economy can be created from scratch in a country with an industrial base the size of a fiat 500. Anyway, Mr. Sachs got rather a dressing down on Newsnight… http://www.planbeconomics.com/2010/05/27/hugh-hendry-jeffrey-sachs-on-europe/ This chap makes a better case for after neo-keynsian economics: http://www.radioopensource.org/nassim-nicholas-taleb-the-fragility-crisis-is-just-begun/ He also doesn’t acknowledge that the financial system is now being propped up by, among other things, both present fiscal stimulus and hope for an early recovery (itself sustained in part by the deficit spending). What will happen when those props are gone? It is surely time for the blog to record the forecasts of those who claim to know what will happen in the Irish economy? On a one year 5 year and 10 year basis? You chooses the headings! One should be the incarceration for corruption of a cabinet minister! I do not read articles in the FT. The WSJ isn’t much better! Over reliance on banking is not a black swan event! Is a pyramid scheme or a chain letter a Black Swan? The consequences are obvious even before they happen, but instead of people merely misdescribing the causes afterwards, many were poohpoohing the dangers while the bubble was preparing to burst. The actual problem is a market failure, we have produced too much and demand has now collapsed. BooHoo! Decades! Bit of a straw man IMO. I don’t think that Krugman, Wolf et al were looking for a return to the ‘old normal’. And I think they would have completely agreed that long run investments were preferable to scrappage schemes etc. I also think they would agree with Jeff’s long run prescriptions. PS, I don’t think Jeff got a dressing down: HH came across as a boor, which was disappointing since he is a bright guy, and Jeff handled himself very well. @ Pat Donnelly Beyond one year, a longer time horizon would surely produce a spoof job. Even if there is a half-decent global recovery, a trebling of China’a manufacturing wages within 5 years and rises in commodity prices would renew fears about inflation. The German car scrappage scheme has been useful coupled with the Kurzarbeit subsidised part-time working scheme. In the US, the economy has now lost a net of 2.2 million jobs since President Barack Obama signed his $787bn stimulus bill but that in itself does not support the argument that it was a failure. Now is of course payback time in Gernany with €80bn worth of cuts including 15,000 public sector job losses. In Ireland, what will become clear sooner than later is that both the Government and Opposition have no idea where jobs will come from apart from some tepid cyclical improvement. Glaxosmithkline has begun a review of its Irish operation and even though pharma/medical device exports rose by 26% in the five years to 2009, jobs hovered about 40,000. Jobs in foreign-owned firms are back to 1998 levels and Fine Gael wants to spend €18bn on infrastructure while Labour wants to set up a State investment bank as Dev did with the Industrial Credit Company in 1933. The Government’s only policy is the flawed innovation taskforce report that requires public funding of about 10% of current tax receipts and the public sector to be the major customer of the tech industry. John FitzGerald’s Hermes engine may need some re-jigging and rather than magic like Mandarin on the Leaving Certificate curriculum, there needs to be some reality on where the jobs will come from. Ireland: A jobs crisis in search of a national strategy Off topic: Did ye see this? http://www.irishtimes.com/newspaper/frontpage/2010/0608/1224272055689.html Anyone surprised? The way Bowler put up the fight and kept her job, it always seemed to fit that the Dept and the Regulator knew damn well what was going on. and the public sector to be the major customer of the tech industry. This is somewhat ambiguous. Do you want (i) the public sector to not spend on IT (ii) the tech industry to magically create large private entities for it to service or (iii) us to adopt a policy of “Buy Irish” and develop our own software and hardware alternatives to all that American stuff? (itself enabled by massive US public sector IT investment) @ EWI I don’t expect magic because for the medium term at a minimum, public finances will be under pressure. There is a trebling of direct funding envisaged over the next 10 years but for sales demand the public sector will be short of funds in Ireland and elsewhere. Ditto for financial firms. Accenture for example, is not likely to be back with 1,600 staff working on public projects very soon. @ Sarah Carey No surprise. “Listen lads, let’s hang together…it will all be grand” The length of time the investigations have taken so far, tells its own story. If it wasn’t a “nods and winks” or more direct situation, on the first day of the guarantee, Sept 30th, several policymakers were involved in tracking the reaction of the depositors. Nobody asked where did the big inflow of Irish deposits to Anglo come from? @ MH-FF: “Ireland: A jobs crisis in search of a national strategy” OK, as most of it goes, and you do point your finger in the correct direction re a significant increase in employment (or should that be re-employment?): ‘it just ain’t gonna happen.’ I challenge anyone to demonstrate where ‘growth’ is going to appear from. The current ideas (Green and Knowledge) are plain daft. Sentimental claptrap to lull the ill-informed back to sleep. The concepts themselves are sensible enough, but to delude ourselves that they will be an economic and financial ‘cure-all’ is just that – a delusion. PD above, mentioned ‘The Market’. Now, there is no such entity (physical), its a virtual construct – an intellectual swamp-hole. Read the withering comments of Cantillon and Smith about their respective ‘entrepreneurs’ and ‘merchants: greedy, dishonest and sef-serving. These persons ARE ‘The Market’. So who are the ‘suckers’ then? Us? And please, don’t anybody (ex Gavin Kennedy) qoute AS’s ‘invisible prosthesis’ at me – that’s another intellectual swamp-hole. This global debt predicament can really only be resolved by defaulting (or a Jubillee). These re-set the counters to zero. All other efforts merely extend, into an uncertain future, the need to consume less: ie. – aggregate economic contraction. I think this translates into ungrowth! B Peter @Brian Woods But the The Market is god-like in it’s prescience and rationality! Just keep repeating: “If it made economic sense, it would happen anyway. If it needs government intervention, it doesn’t make economic sense.” You know it makes sense. @Kevin O’Rourke Maybe a wedgie would be a better description? Maybe some people just like fighting old battles. But if this is Sachs’ version of post-Keynesianism, focusing on investment rather than ‘stimulus’, I’m all in favour of it.: Yes to Counter-cyclical spending Greening the economy Government investment Tax rises- big ones for the rich Promoting post-secondary education Income support for the poor Universal access to heathcare and education Promotion of exports, clean energy and transport infrastructure No to Car scrappage schemes Tax cuts Misplaced cuts in public spending It doesn’t read much like government policy, does it? @Kevin O’Rourke Bit of a straw man IMO. I don’t think that Krugman, Wolf et al were looking for a return to the ‘old normal’. In the case of Krugman it seems accurate to me. The characteristic of the ‘old “normal”‘ that Sachs was talking about wasn’t mere higher growth rates or whatever, it was the effectiveness of fiscal stimulus. Talk about delaying deficit reduction “until the recovery is firmly driven by the private sector and becomes more entrenched” (in the earlier words of the G20) only makes sense if you believe that the deficit spending is going to stimulate the private sector. Sachs evidently now believes that the private sector in the credit-bubble countries is presently going to continue work down its excessive debts regardless of public spending, and so there will be no “jump-start” to private demand from the public deficit. @Sarah Carey “Off topic: Did ye see this? http://www.irishtimes.com/newspaper/frontpage/2010/0608/1224272055689.html Anyone surprised? The way Bowler put up the fight and kept her job, it always seemed to fit that the Dept and the Regulator knew damn well what was going on.” No one is surprised but now the truth can’t be denied any longer. Not only the establishment but now even the INVESTIGATION is complicit in the establishment’s secrecy maintenance program. This is shocking. We are going to have to call in outside investigators because our own are as blackly tarred as the oil covered waters of Louisiana. @ Michael Burke Some noble goals but a menu without prices. Without reform of the vested interest system, most of the money would likely go down a sink-hole. One way of getting money is to put the green tag or innovation on it. Why do socialists support a conservative system which protects insiders, some of them wealthy and by extension rent-seeking professionals? Any chance of radicalism from conservative socialists? @Micheal burke http://www.bloomberg.com/apps/news?pid=20601087&sid=abM7IKo.INIk&pos=7 I think the idea of a stimulus – at least in common parlance – is based on a misconception. Like many of those above, I would agree that you cannot wave a wand (even if billions of dollars shoot out of it) and create real growth. It seems to me that growth, if it is not to be more than illusory, has to be organic, and based on the magical combination of well judged investment, technology and, preferrably, skilled or highly skilled Labour. You can create the conditions for it, but you cannot make it happen. The horse might stubbornly refush to put his nose to the water. Maybe Keynsian deficit spending when a recession is sharp, threatening depression could be better called an economic “air bag”, rather than a stimulus. At a time of crisis when private investment vanishes and employment is way above inflationary-causing levels, a government directed injection may help cushion the severity of the crash for a couple of years. True, much of the government spending may turn out to be highly inefficient, but at least the fabric of productive infrastructure is better preserved for an upturn. Viable long term businesses are help to survive that would have been killed by the economic shock if left unexpossed. And workers retain their skills and their moral. It probably can never be more than a holding manoevre – you cannot keep on borrowing to spend inefficiently forever. But it has a real value. But crucially it depends on your having credit worthiness and willing lenders! MH I don’t think anyone ever mistook Jeffrey Sachs for a socialist, conservative or otherwise. Christy I think the Keynesianism that the PIMCO speaker rails against is the same as the one Sachs has in his sights. He s a mythical beast, certainly not the author of the ‘General Theory’, where tihe phrase budget deficit is not mentioned, or perhaps but only in passing. But the current deficits are Keynes’ fault apparently, even though his prescriptions have not been implemented (in this, at least Sachs is right, investment, not stimulus is required). The deficits of the 60s and 70s were his fault too, although the bigger deficits came under Reagan and Bush II. In fact, Keynesianism cannot be said to have failed currently, it just hasn’t been tried yet. Tomaltach So real growth is if a private company builds it, but is illusory if government does so? This is a magic wand, which makes bridges, roads, airports, railways simply disappear if government-built, or financed. @ Michael So real growth is if a private company builds it, but is illusory if government does so? This is a magic wand, which makes bridges, roads, airports, railways simply disappear if government-built, or financed Governments get their money ultimately from taxing the private sector whether it be present or in the case of borrowing future private sector activity. If borrowed money is used, you are borrowing from future growth. This onlÿ makes sense if you interest rates are sufficiently low and that medium term demand for the project is sufficiently high. @ Tomaltach Like many other prophets, Keynes wasn’t consistent in his views. His views have , as Michael B suggests, been interpreted and applied inconsistently. Criticism of Keynes mirrors that muddy state of afffairs. More heat than light, but thankfully not on this blog. I think you agree that state spending, at least in infrastructure, is essential in our complex, differentiated, economies. I think you also agree that society needs to be protected from economic processes which are excessively violent. Change yes, but not catastrophic change. Your terms ‘real growth’, ‘illusory growth’ and ‘organic growth’ are interesting. What kind of horse are we/they bringing to the water ? @Michael Burke, Paul Quigley, I am all for government spending and yes, I particularly agree with Paul that state spending is essential in the ways you mention. But state spending in ordinary times is not the same as massive stimulus spending. The problem with rapid stimulus is that it tries to spend money too quickly – and that always results in terrible waste. Even in normal times in this country, our mechanisms for deciding how large projects are selected and those for overseeing the project execution are defective and often wasteful. (I made this point several times on progressive economy and only got reluctant agreement – state spending seems to nearly always get the blessing of the left, no matter how inept the regime). During a stimulus, when large (usually borrowed) funds are pumped out into the economy, it is not hard to imagine how this process is prone to massive waste. But that is still ok with me as long as a) the action taken is to cushion the most severe part of and economic shock – as opposed to pretending that it is creating real and sustainable growth (Paul seems to think there is no such thing as illusory growth. Well, it is easy to imagine. It is when you add up GDP and see a rising yearly figure but you don’t ask on what it is based. Then all of a sudden you realise it was not based on sound fundamentals after all and, running out of steam, your GDP slumps back. Anyone in Ireland for the last three years should have no problem with a concept like this) b) we can borrow the money at a reasonable rate and without making an already dangerously mounting stock of debt rise even more rapidly, this particularly if you are in an enviroment where those lending the money are extremely nervous after the worst financial crisis in several generations. If Keynes and his disciples did not encompass “bubbles” and central banking that openly, brazenly, fostered permanent inflation of 2-3% then of what possible relevance can someone citing what a dead man might or might not have said? It seems to be a retreat, as in rout, away from the actual battlefield into an intellectual backwater. Possibly where economics belongs? @ Tomaltach Your concerns about state spending are rational, and the ‘left’, like the right, is behind the game in its analysis. Much state spending is prompted by vested interests, that is to say private interests which have acquired (or never given up) their control of state decisions. Government decisions are mostly the result of various struggles between corporate interests, operating at various levels of the sructure. ‘Illusory growth’ can be highly profitable, (as is evidenced by the auditor-facilitated looting of the banks), and dysfunctional states can still employ many thousands. The dumping (and sometimes physical destruction) of agicultural products through the CAP is wasteful in the eyes of Joe Public. It is useful from the perspective of the farmer whose prices are supported. The CAP itself is the ‘wasteful’ price paid to secure the consent of farmer-influenced European governments for ‘productive’ industrial integration, which is operating at a higher level of the state. That process has in turn, been profoundly deranged by ‘financialisation’, which has tended to disconnect the capital markets from real world production. Schumpeter’s notion of creative destruction is pertinent. Like the rest of the world, economists have illusions, and it is painful to let them go. Miners don’t usually welcome redundancy, even if the mine is ‘uneconomic’. I would guess that the central bankers have no road map for handling a ‘financialised’ economy, in which it’s harder to distinguish between activity that is ‘real’ from that which is ‘illusory’. Their role is being eroded, and they may not be as central as they like to think. The deepening crisis shows (as if WW1 and WW2 were not enough) that economic processes have social consequences, and vice versa. As Bateson said ‘only connect’. The Berlin wall is well and truly down now, and the challenge is to avoid catastrophe. @ Michael Burke Michael, I was referring to you as the socialist rather than Sachs. I find the conservatism of the Irish Left intriguing as it bolsters the statis intermittantly interspersed with glacial change of the vested interests represented in the Oireachtas by the Right. I’m not advocating that one tyranny should replace another but transparency that would radically open up the Victorian processes of governance, would surely have an impact for the beter than the failed status quo. Sam If a developer builds homes and rents them, the government will receive very little taxes on his/her construction costs, but more on labour income. The government will then receive a proportion of the profits after allowances and exemptions, including the financing costs. If the government builds the same homes, or sub-scontracts to do so, it will receive all those same taxes, which in both cases are augmented by taxes on the consumption financed by that labour income. It will receive the entirety of the revenues otherwise due to the developer in the form of all the rental income, and even now with significantly lower financing costs. Finally, government will also make a saving currently, in the form of lower welfare payments as builders are brought back into work. In both cases the houses are real. But in the second case the government is able to build more cheaply, generates much higher revenues for itself, has lower financing costs and makes savings on its expenditure account through lower welfare payments. Paul, Tomaltach I think there is some measure of agreement on the need for government investment. And there is no disagreement that the private sector boom was partly a bubble. Since there is a Depression here (GNP falling by over 20% in nominal terms) then the time is ripe for decisive action. Where Sachs is correct is in drawing a distincion between stimulus and investment. Encouragements to consumption, like car scrappage, are wasteful and only temporarily effective (and in Ireland amount to turbo-charged ‘import leakage’). According to Philip, who posted the original piece from Sachs, the multiplier attached to government investment is 2.4. This rises, according to his model and that of his colleague Augustin Benetrix, to 4 if it is a temporary rise in investment, later reversed. With multipliers like that, and the deficit-reducing tax revenues & lower welfare payments that would follow, it is negligent not to increase investment. The contrary policy has doubled the deficit to the highest in the EU, not closed it. MH I understood that. But labels are less interesting than ideas, I think. Especially if they are misapplied; confused by -isms, when critics of those isms seem to be unfamiliar with the body of work that produced them. I was merely pointing out that I would agree with the policy approach outlined by Sachs, and so too would Keynes, despite the former’s attempts to bury him. Neither could ever be described as socialists. Paul Krugman on Jeff Sachs: “Calling for austerity and tight money feels courageous, tough-minded, and virtuous; it allows the economist making such calls to take the pose of a Serious Person standing firm against the easy-money guys” Comments are closed.