Re: DIVISIONS PERSIST

Tony offered more to substantiate his view that seeing the world in the
eyes of a GBC is
useful. I would say that (a) his viewpoint is difficult to distinguish in
substance from a NAIRU
interpretation of the world; and (b) expresses an implicit theory of
unemployment which I find
difficult to accept. Explanation follows point by point.

>This is a response to Randall Wray's communications of 18 February and 20
February, in response to my earlier comment (plus attached >model) on the
financing issue.

>>I think I have already dealt with the point RW repeats in his of 18/02:
>>"so long as the govt offers HMP ... and finds willing sellers, Tony's
>>assumptions about portfolio preferences simply are irrelevant. Can we
>>imagine a situation in which $ are offered, but there are no sellers? Can
>>we imagine a situation in which $ are offered, but output does not
>>increase (only prices rise ...".
>>
>>The immediate or short-run elasticity of output with respect to a
>>monetary injection easily can be imagined less than unity (quantity
>>stickiness, in the upwards direction). So that it is more than possible
>>that in the process, involving lags, inflationary pressures can emerge --
>>particularly if sellers perceive that there is operating in the product
>>or labour market a purchaser (government) with very deep (or infinitely
>>deep, RW might like say) pockets.

An imagination is a good thing but doesn't replace empirical scrutiny. The
experience of the U.S. economy and the
Australian economy, for example, over the 1990s, would suggest that an
upward sloping aggregate supply curve within
relevant segments is not a useful depiction of the structure of the economy
especially with the decline of primary labour
markets that had been previously (heavily) buttressed by powerful unions.
very strong (relative ) GDP growth (though
parlous in terms of a full employment objective) and low to zero inflation
throughout the cycle.

No doubt we can imagine a "NAIRU" economy, just as the vast majority of our
impoverished (intellectually) profession
does. But the model and its assumptions about stickiness, lags and
anti-competitive price setting power, do not seem
to accord with the world we live in.

So then we are talking about the slope of the phillips curve. I have it
flat. Tony clearly has it steeper. The empirical evidence
supports the former view.

>>But the more general point (just repeating my earlier argument in ROPE)
>>is that whether private sector agents are willing to receive outside
>>money in exchange for goods and services is not the end of the matter. If
>>I stand outside the Post Office and offer people $100 to shake hands with
>>me, I think many people will trade. But the fact that they are willing to
>>ACCEPT outside money in exchange for this service does not mean that they
>>wish to HOLD outside money -- in their pockets or portfolios. The same
>>applies to providers of other labour services under an ELR/JG policy. If
>>there are excess money balances in the aggregate, in the private sector,
>>as a result of the financial mechanism of an ELR/JG policy, how will
>>attempts by agents to relieve themselves of these excess balances be
>>resolved? And will the consequences of that resolution be benign and/or
>>desirable?

This is clear (by construction) and gives no problem to the JG view.
Surely, if the private sector cannot be forced
by the government spending responsibility (measured as that net spending
required to maintain full employment) to
hold the extra liquidity and there is no government paper issued to drain
this liquidity then the following things might
occur:

(a) the RBA loses control over its positive interest rate target (unless it
then uses its other support mechanisms which
are preferable anyway) - Doesn't seem to be a problem.
(b) the corporate sector might decide to offer some corporate paper to
encourage the "cashed-up" private agents to
become part of real capacity building - rather than speculating in
financial assets etc...... That would seem to be a good
thing if you like private investment growing.
(c) the private agents might prefer to just spend the undesired cash
"relieve themselves of the excess balances" -
so consumption rises. That would seem to be a good thing unless it is
manifest in environmentally destructive activities
including 4-wheel drive death machines!
(d) the government might decide to drain the liquidity via taxation if
inflationary pressures mounted beyond full employment
(this is clearly in the functional finance tradition).

So under (b) or (c), the private leaks from the expenditure-income flow are
reduced and other things equal the net government
spending required to maintain full employment is lower. In the JG, that is
simple - the pool diminishes. In a Keynesian-non JG
economy, government would have to implement lower discretionary G or (d).
In a JG-Keynesian economy - both.

What is the problem that remains Tony? Inflation due to demand-push then
cost-push as distributional pressures mount?
Maybe. But I don't see that you have articulated a case to show how the
economy reacts differently to any
unspecified increase in nominal demand as opposed to an increase arising
from net government spending.
In that sense, you are really articulating a story that says - well at the
current unemployment rate, demand pressures
are such (and the current associated stocks held as portfolios) that
inflation is stable..... if we have more nominal
demand (credit rises or net G increases) then inflation becomes a problem.
Maybe. But that sounds indistinguishable from
a NAIRU argument. In which case, we essentially disagree about the
viability of returning to full employment defined a
a number of jobs and NOT AN UNEMPLOYMENT RATE THAT CONTROLS INFLATION.

>>If moving from the sort of unemployment regimes we are now used to in
>>contemporary societies, to a vigorous full employment policy, must be
>>consistent with definite budgetary constraints (deficit to GDP, debt to
>>GDP ratios), this shift will probably require higher taxes.

Then we have the second problem. Many progressives, seemingly to give the
impression that they understand
the need to be "cautious" and "financially prudent and responsible" (all
current ALP rhetoric by the way), couch
their Keynesian "full employment" advocacy in terms of budget neutral
outcomes..... Seemingly that sounds wise
and will pacify the financial markets and conservatives who are rooted in
the GBC mania (and blindness).

so we have some budget constraints and thus we have to spend more and get
the "money" from taxes. The social
democrats then appeal to "taxing the rich" to give more demand to the poor.
Robin Hood was a myth.

What is your theory of unemployment then? My very basic understanding of
macroeconomics tells me that unemployment
arises when there is insufficient demand for the goods and services that
might be offered at production levels which would
be consistent with everyone who wants a job having one. Once an economy
driven by private spending gets itself into this
state then there are no market forces present to get it out of it again.
Along comes the only sector that can provide
the net spending (without offsetting liabilities) - that is the Government.
The mass unemployment we observe is always
and everywhere a sign that net G spending (other sectoral flows given) is
deficient. Budget neutral suggestions thus do
not address this "theory" of unemployment unless they want to appeal to
very bizarre differences in spending propensities
across demographic groups.

I would have thought the "theory" of unemployment that I hold is basic
progressive theory. Am I such a simpleton Tony
that things have moved on and somehow mass unemployment can be solved with
budget neutral (that is, zero changes
in net G spending) policies? Please explain my failures!

>>The policy question then becomes a political issue -- with repect to
>>which we, as economists, are more or less by-standers. A political
>>consensus around such a regime shift requires "constituency building"
>>around institutionalized forces and movements -- of which there are far
>>too few, and too weak, at the moment. [I am thinking of left and
>>centre-left political parties with some backbone, trade unions with
>>non-opportunistic leaderships, church elements with more "spirit" than
>>our quasi-Head-of-State "Dr" Hollingworth(less), and so on.
>>(Conservatives have long enjoyed pointing to the alleged evil, that the
>>Labor Party is run by the unions. But the real evil is that the unions
>>are run by the Labor Party.)]

Total agreement.

>>There might be an acceptable "model" for an activist-academic, pertinent
>>to pursuing this political problem, but that is a matter for individual
>>choice. I must say though, that even if one were attracted as an academic
>>or intellectual (not the same thing) to this model, it requires that the
>>political constituencies exist: even under this model, academics have
>>only ever been pissing in the wind, when NOT attached to such social
>>forces. [Such a model of an intellectual life of course is not only
>>available on the left.] The role of intellectuals then is to provide such
>>constituencies with the policy means to sensibly pursue decent objectives
>>(in the economic dimension, Keynes's goals at the beginning of the last
>>ch. of the GT, quoted in my earlier attachment).

total agreement. but then there is a time horizon that is not dealt with in
your point. The role of intellectual (progressive)
life is to provide theoretical input that is a reasonable representation of
the system in terms of the goals that we
desire. It is not to be cautious for fear of being called a lunatic by the
conservatives who after all desire to pursue
objectives that are different to what I think might be common ground here.
The political imperatives shift (rather dramatically)
over time as different constraints and contingencies arise. The real
politic in Australia for the next several year requires
that we do all we can to help the ALP to self-destruct and encourage the
unions and left of the current ALP to get behind
a strong green based social democratic consensus that restores the role of
net government spending and eliminates this
fetish for "financial prudence" which is just conservative-speak for
allowing the better-healed parts of our society to prosper
at the expense of the disadvantaged. They have somehow managed to convince
us that the government is equivalent to a
household and has to "finance" its activities. then they convince us that
"finance is bad for government because it will be
bad for us" and the result is that we learn to tolerate the intolerable -
unemployment. We now never talk about systemic
macro failure driven by irresponsible government policy as the source of
unemployment. It is an individual problem after
all - just like the need for governments to "respect" the portfolio
preferences of the private sector..... I just don't buy the line.
And the unions could help us all by withdrawing financial support to the
ALP immediately. That is my individual view anyway.

best wishes
bill

------

William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle
New South Wales, Australia
E-mail: ecwfm@alinga.newcastle.edu.au
Phone: +61-2 4921 5065
Fax: +61-2 4921 6919
Mobile: 0419 422 410

http://econ-www.newcastle.edu.au/economics/bill/billeco.html
http://www.billmitchell.org
Received on Thu Mar 6 02:48:00 2003