a well-defined analytical concept or one more arbitrary straightjacket?

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Transcript a well-defined analytical concept or one more arbitrary straightjacket?

‘Structural budget balance’ a well-defined
analytical concept or one more arbitrary
straightjacket?
Post-Keynesian Conference
Friday, 23rd May 2014
Jesper Jespersen
Why ‘structural’ deficit?
EU-regulation:
•
Has become a part of the European Fiscal Compact:
public sector ‘structural deficit’ must not exceed ½
percent of GDP
2. This is an addendum to the requirement in the Stability
Pact that the current deficit should never exceed 3
percent of GDP
3. Medium term requirement of public sector balance or
surplus (does not make sense)
Danish fiscal policy ‘rule of thumb’ – more pragmatic
4. ‘Financial Sustainability’ – a constant Debt/GDP-ratio
Conventional Economics
short term
Structural budget measures fiscal policy – a
balanced SB means neutral fiscal policy.
The rule from Bruxelles (max. ½ pct. structural
deficit) is severely to restrict the use of
(expansionary) fiscal policy in the short run! –
independently of the rate of unemployment and
other imbalances.
The argument is, that the private sector is selfadjusting, does not need support, if the labour
market is flexible enough
– in any case, persistent unemployment is a
symptom of labour market reforms!
Conventional economics
long term
1. Labour market ‘full employment/natural
unemployment’ equilibrium
2. Private sector equilibrium between savings
and real investment
3. Deviations are cleared via the financial capital
markets, domestically
4. Internationally via the balance of payments,
capital account (especially within a monetary
union without exchange rate risk).
These ‘beliefs’ are challenged by
post-Keynesian Theory:
1. Any analysis of the public sector budget should always
be modelled as a part of the ‘economy as a whole’
Because:
•
No empirical evidence that the labour market is selfadjusting to anything like ‘full employment’
•
Employment in a closed economy depends on
effective demand, because private investment is not
necessarily equal to private savings at full employment
•
Effective demand has to be managed (by policies).
•
Furthermore (private) ‘Balance of payments deficit’ is
not automatically financed - not even in Monetary
Union
Here we are
The Stability Pact limits the working of the ‘automatic
stabilizers’
2. The Fiscal Compact limits fiscal policy
 Which most likely destabilizes the macroeconomic system
1.
For what reason?
•
Are Conventional Economists doing their best? Or they
justdon’t trust politicians (Democracy?)
•
Politicians don’t trust each other:
a. domestically – the constitution is changed
b. In the Monetary union – the Lisbon Treaty and independent
European Central Bank.
Jesper’s methodological
’iceberg’
World 1
Fundamental clash between
normative and descriptive
economics
data
World 2
clock-work
agents
Market
System
Prediction
within an
Inspiration: Martin Hollis
ideal marketsystem
World 3:
actors
Power,
structures,
culture
Understand
reality
reflexive
‘organism’
Conventional Economics
The rules of the European Monetary Union
Demonstrate how dominant conventional economics is
(accepted by 25 out of 27 EU-countries):
1. Independent Central Bank
2. Stability Pact
3. Fiscal Compact
Undisputed Recommendations: EU, Berlin and IMF
1. Balanced budgets in the long run– austerity policy
2. Labour markets reforms á la Hartz-laws in the
short run
Where does it comes from?
The neoclassical – or dare I say mainstream
– macroeconomists’ believe (or
fundamental assumption) in the market
economic system as a long run general
equilibrium system.
This believe has not yet been challenged by
the mainstream? Macroeconomists.
The macroeconomic genealogy
Athur Cecil Pigou, 1933
Selfadjusting system:General equilibrium
Old Keynesians
(Neoclassical synthesis)
ISLM-model
Short term Macro
Demand & rigid wages
John Hicks
Monetarism I
Exogenous money
supply
Vertical Phillips-curve
Milton Friedman
New-classical
(Monetarism II)
Rationel expectation
Representative Agents
‘Policy Ineffectiveness’
‘Real Business Cycles’
Robert Lucas
New-Keynesianism
(Monetarisme III)
Transaction costs
Asymetric information
Hysteresis effects
Edmund Phelps
Gregory Mankiw
Normative economics
John Maynard Keynes, 1936
Open, indeterment system: trends
Post-keynesianisme I
Uncertainty
Effective Demand
Income distribution
Joan Robinson
Nicholas Kaldor
Michal Kalecki
Post-keynesianisme II
Endogeous money
Cost inflation
Dynamic method
Paul Davidson
Hyman Minsky
Post-keynesianismeIII
Open Methodology
Path-dependency
Macro  n * micro
Sheila Dow
Victoria Chick
Wynne Godley
Positive economics
Perhaps, I should stop here
This story has been told so many times.
That general equilibrium theory is bad as descriptive
economics;
but easy to ‘sell’ as economics’, because it pretends:
individual freedom, neutral markets, rationality and
objective analyses. Who can object to these principle?
Which leads to an individual/voluntary excuse for
unemployment: lack of wage flexibility, social generosity
and too high taxes,
Government should – like any other household - not have
deficits  it burdens future generation etc. etc.
Fallacies of composition-arguments are
abstract and often unconvincing economics
1. Higher saving ratios cause total saving to fall
2. Lower wages cause employment to fall
3. Public investments financed by deficits are to
the benefit of future generations
4. The welfare state and equality makes everyone
better off
5. Higher Taxes increase productivity
These arguments are abstract, difficult to give a
popular explanation and for the time being not
politically correct!
Which facilitates the propaganda of normative
economics in populistic settings
The outcome: public sector deficits
are considered bad politics
• Based on normative economics
• Intention: to limit expansionary fiscal policy
• Probably with the consequence of making
economic growth lower than otherwise
• Which of course is debatable, but for quite
other reasons!
• The ‘Dismal Science’