Many people, upon hearing “fiscal policy” mentioned in relation to “financial sustainability”, might imagine that it is the government’s financial sustainability that needs to be placed under scrutiny. Given the mass media’s proclivity for pumping out superstition and myth, especially when it comes to macroeconomics, this reaction would be entirely understandable. But, actually, assuming the government is a currency issuer that refrains from borrowing in currencies other than its own, questions of its financial sustainability do not apply. Rather, concerns of financial sustainability properly pertain to the private sector. Whereas a currency-issuing government faces no financial constraint (its only hard constraint is in terms of real resources), the financial reality for private households and firms is completely different. Private debt can very definitely reach financially unsustainable levels. This occurs when growth in income is insufficient to service private debt.
Regular readers may have noticed that I am interested, among other topics, in demand-led growth theories as explanations of capitalist growth performance. In the following discussion, I borrow very liberally from two approaches in this theoretical tradition, without remaining completely true to either of them. One is Kalecki’s approach, especially as outlined in his 1954 work, Theory of Economic Dynamics. Following Kalecki, the current discussion treats the long run simply as a sequence of short runs without any independent existence of its own. Lagged effects of private investment generate cycles. Capitalist growth is considered to be dependent upon ‘external markets’, by which is meant sources of demand that are external to the domestic private sector. Here, for simplicity, government is taken to be the only external source of demand. (For an open economy, exports are another important example of demand that is external to the domestic private sector.)
‘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.
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.
There appears to be a considerable degree of compatibility between Marx and various Kalecki- and Keynes-influenced approaches to macroeconomics. Compatibility, of course, does not imply that all these theoretical approaches stand or fall together. It simply suggests, to the extent that the compatibility exists, that it is possible to see them all as fitting within an overarching, open analytical framework. In this post, the compatibility is considered in relation to the private-sector monetary circuit of a capitalist economy.
In view of the xenophobia that seems to be rearing its ugly head in various parts of the world, I broach this topic with hesitation. To be very clear from the outset, I am not an opponent of international trade. I do think there need to be controls and safeguards, and the ideal should be ‘fair’ and ‘managed’ rather than so-called ‘free’ trade. I think it is in the interests of any nation to develop a broadly based network of production to enable self-sufficiency in the event of external conflict. And moves to weaken sovereignty and democracy (such as through the Trans-Pacific Partnership Agreement and similarly notorious “trade” deals) need to be resisted. When it comes to the negative impacts of global capitalism, I am not inclined to privilege the interests of disgruntled westerners over workers in lower-income countries. Many westerners, judging by post-Second World War voting patterns, appear to have thought it perfectly okay for much of the world to be poverty-stricken and war-ravaged just so long as they retained their relatively high-paid jobs. It’s not clear why the workers of any particular country have the right to a job or income over anybody else. If somebody is going to miss out, why not westerners who only now react against the social and ecological calamity that is global capitalism, and even then in a misguided manner? The problem is the existence of war and environmental destruction per se; poverty amidst plenty per se; exploitation per se; the fact that many who want decent living conditions and the opportunity to contribute to society in a meaningful way are denied their chance. The mistreatment of a westerner is abhorrent; the mistreatment of anybody else, equally so. Having spelled out my starting point, I want to comment on a statement tweeted out by Donald Trump (hat tip to Matt Franko, who reproduces the actual tweets in this post).