‘Government money’ takes two forms: cash and reserve balances. Cash comprises notes and coins. Reserve balances are required for final settlement of transactions. Government is the sole issuer of both cash and reserve balances.
From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty.
In the long run, a higher rate of economic growth implies a higher share of investment in income. This will necessarily correspond to a lower combined share of other forms of spending. Knowledge of this point sometimes leads to unfortunate calls to cut back government spending as a means of boosting growth. Yet, if private investment can be said, in a long-run context, largely to be induced by income – which is consistent with the evidence (see, for instance, here, here and here) – then a sustained increase in the growth rate of government spending and other components of autonomous demand could be expected, through their direct impact on income, to induce higher investment. It is not at all obvious that the investment share in income would fall as a result of this process. To the contrary, there is reason to expect the investment share to rise and the share of other spending (and quite possibly government spending) to fall in consequence of demand-led growth of this nature. The purpose of the present post is to explain this possibility.
The neoliberal approach to economic growth of the past forty years has been to drive down real wages, deregulate the financial sector, privatize various government functions, cut social expenditures and reduce taxes on large corporations and the wealthy. The period has been characterized by sluggish growth and widening inequalities. In contrast, the markedly higher rates of growth achieved from the end of the Second World War until the early 1970s were sustained in a regime of steadily rising real wages, which were consciously linked through policy or collective bargaining to improvements in productivity. This approach to industrial relations was played out within a context of substantial direct public-sector involvement in the economy, tight financial regulation, high and steeply progressive taxation and a more equal distribution of income and wealth.
The economist Michal Kalecki once joked that economics is the science of confusing stocks and flows. These two concepts are important, but easy to mix up.
The rule that total spending equals total income is very important, but only true for the economy as a whole. It is not true for individual households, businesses or sectors of the economy. Here, we consider a household.
Macroeconomic controversies usually center on causation. Two questions of significance for policymaking concern output and growth:
- Is output demand or supply determined?
- Is economic growth demand or supply led?
If demand is the driver of output and growth, there will be considerable scope for government spending to influence the economy’s trajectory. If, instead, supply-side factors are determining, fiscal policy will be impotent other than possibly temporarily. Recent history suggests – much like the earlier history of the Great Depression and Second World War – that fiscal policy is important to the performance of the economy, and that demand matters. In my view, the causal significance of demand follows quite strikingly from Modern Monetary Theory’s institutional analysis of sovereign currencies together with the fully compatible Post Keynesian analysis of banking and endogenous money. Before getting into that, a brief summary of opposing positions on output and growth determination is perhaps warranted.
An issue that troubles me in relating Marx to Modern Monetary Theory (MMT) is whether to apply the ‘productive/unproductive labor’ distinction to production that is monetized in a state money. Although I am not especially enamored of the distinction in general, it is particularly its application to public-sector activity in a state money system that strikes me as problematic. I ask the reader to countenance two propositions:
Proposition 1. All public-sector labor in a state money system is productive.
Proposition 2. Proposition 1, if true, would alter none of Marx’s central theoretical conclusions.
If the following argument is mistaken, maybe someone can set me straight, and it will then be clearer how to proceed in future.
If you are of a certain age, you likely played Commander Keen. Cane’s run in the video embedded below was a world record at the time, but has since been beaten in a near flawless run by CapnClever. Even so, I like this video because of the amusing running commentary and chat that is conducted during game play. (There are some expletives, so any children watching might need to cover their parents’ ears.) The ‘death exit’ at the beginning of the second level is a glitch in which the player can allow Keen to die at the edge of the game’s map and then immediately save and reload to complete the level.
It’s that time of year again to try our hand at Holiday Time. It’s not easy, after fixating on economics, to switch our attention to something else. It seems advisable to do so only in stages. Accordingly, the first video installment below retains a distinctly economics flavor, perhaps leaning more toward the business end of the discipline. After that, though, things are likely to go somewhat haywire.