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The economics of fuller employment in the twenty first century. By Harold Chorney Concordia University, Montreal, Quebec, CEA annual meetings Banff, Alberta May 31 2019 (This version is missing various charts because of computer problems. For full paper with all charts included, click link above).
The economics of fuller employment in the twenty first century.
By Harold Chorney Concordia University, Montreal, Quebec, CEA annual meetings Banff, Alberta May 30 2019
Ever since David Ricardo in the early nineteenth century, trade and free trade, and the increasingly global nature of capital expansion in particular has been central to economic policy and thought. We see these sort of questions have become central to politics and policy in the current debate over BREXIT in the UK and the European union. President Trump has reawakened these sorts of questions by his insistence that the US had to be made greatagain at the cost of its trading partners. But, of course none of them are as weak as they might have been decades ago. This is particularly true of China whose GDP is close to that of the US.
These sorts of questions were a natural complement to the theory and practice of full employment that Maynard Keynes and William Beveridge introduced into the world of neo-classical dominated economics in the 1930s and 1940s. But just as the integration of these rather disparate models of economic reality was taking place there were already forces at work seeking to undermine the Keynesian policy of low unemployment and distorting Keynes’ breakthrough into what Joan Robinson famously called bastardized Keynesianism. It is also relevant that politics continues to drive policy.
The shadow chancellor of the Exchequer in Britain , a left of centre Labour MP, John McDonell has recently told British economists and civil servants that in the event of a new Labour government, if that should happen as a consequence of a new election or the failure of Prime Minister May‘s government,(May has just announced her resignation effective June 7, 2019) that the Labour party would expect the economic branch of the government to bone up on left of centre economics which stressed anti-poverty and full employment economics as top priorities. McDonnell in the past has stressed that as chancellor he would introduce a wealth tax, 250 billion pound infrastructure spending, an end to austerity, opposition to globalist trade agreements, reinstatement of trade union rights, a crack-down on corporate greed and corruption, and a major increase in the minimum wage. (see FTJohn McDonnell unveils Labour‘s left wing economic prospectus Sept 26, 2016 and GuardianMarch 25 2018) He has also discussed the idea of a universal basic income as explored by Guy Standing to help deal with the challenges of labour being displaced by technology. As well, he explores the notion of the state in co-operation with the private sector emerging as an essential partner in co-creating a value-creating capitalism. Standing according to Hutton argues that ‘‘…inequality, insecurity, debt, stress, precarity, advancing artificial intelligence (“A.I.”), extinction, and the rise of populism and neo-fascism” define the times. Hutton is skeptical of the UBI but he appreciates the emphasis that both Standing and McDonnel have put upon the shortcomings of Britain‘s social policy amidst rising inequality and poverty. (Will Hutton, The zeitgeist has shifted. Now theleft is fizzing with ideas for a smarter economy, Guardian, May 24, 2019)
This neo classical synthesis depended upon a linear system of equations – as opposed to the original non-linear system – that also banished uncertainty which was an integral part of the original schema. A non-linear system meant that the impact upon the price system would vary according to where the economy was positioned with respect to capacity utilization and animal spirits and growth rates. This issue is now more complicated by the addition of ecological and inequality issues. Keynes hinted at this state of affairs in the opening pages of the preface to the GT. He compares the GT to the earlier Treatise on Moneywhich was published in 1930.
He writes; The relation of this book and my Treatise on Money….is probably clearer to myself than it will be to others… When I began to write my Treatise on Money I was still moving along the traditional lines of regarding the influence of money as something so to speak as separate from the general theory of supply and demand. When I finished it had made some progress towards pushing monetary theory back to becoming a theory of output as a whole. But my lack of emancipation from pre -conceived ideas showed itself in what now seems to be the outstanding fault of the theoretical parts of that work that I failed to deal thoroughly with the effects of changes in the level of output. My so called fundamental equations were an instantaneous picture taken on the assumption of a given output. They attempted to show how assuming the given output, forces could develop which involved a profit disequilibrium and thus required a change in the level of output…. This book (the GT) has evolved into what is primarily a study of the forces which determine changes in the scale of output and employment as a whole; and whilst it is found that money enters into the economic scheme in an essential and peculiar manner, technical monetary details falls into the background. A monetary economy we shall find is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction. But our method of analyzing the economic behavior of the present under the influence of changing ideas about the future is one which depends on the interaction of supply and demand, and is in this way linked up with our fundamental theory of value. We are thus led to a more general theory which includes the classical theory with which we are familiar, as a special case. (pp vi-vii, preface to GT 1936 edition, Macmillan and co., reprinted 1951)
Much of this variation and the policy consequences is lost by a linear system (See Keynes on inflation in the GT pp 192ff). The aggregate demand feature missing from the Say‘s law version was tacked on to the original model. Keynes‘s original model where uncertainty was central in effect was banished and the equilibrium neo classical model reintroduced with an aggregate demand feature . That revised version held sway in most of the macro textbooks and most of the introductory texts for the next 60 plus years. When I arrived as a new Ph.D. student at the LSE in the fall of 1970 some 49 years ago monetarism was largely the dominant belief system as opposed to Keynesian and neo-Marxist thought in command at Cambridge. Harry Johnson to his credit included Axel Leijonhufvud‘s path-breaking work on Keynesian Economics and The Economics of Keynesin his graduate course macro reading list.( 1968 Oxford U Press. See also his work Information and Co-ordination: Essays inMacroeconomic TheoryOxford U. Press, 1981) Leijonhufvud made an important distinction between the Keynes understood by the classicals and the breakthrough in disequilibrium non-market clearing adjustment that Keynes believed his general theory established.
As he pointed out in his work ‘‘His model is characterized by the absence of a Walrasian auctioneer assumed to furnish without charge and without delay, all the information needed to obtain the perfect co-ordination of the activities (both spot and future) of all traders. Keynes‘s revolution in thinking and its impact upon monetary theory and market clearing is still widely misunderstood today. The essence of Keynes‘s break with the classical system of market clearing is that equilibrium in the supply and demand for labour is not an automatic aspect of the market clearing system by which real wages are adjusted to yield an equilibrium. But rather disequilibrium is possible with a surplus of unemployed workers such as occurred in the great depression of the thirties. Interest rate reductions alone will not be enough to clear the capital market in slump circumstances. Indeed, as Klein pointed out it may require negative interest rates in the slump to do so. (see for example, Lawrence Klein, p.85 and figure 4; The Keynesian Revolution, J. C. Gilbert Keynes‘s Impact on Monetary Economics; John Eatwell and Murray Millgate, eds. KeynesEconomics and the Theory of Value and Distribution, pp1-3.) In the classical model the adjustment works through variations in the interest rates and the real wage. In Keynes instead of prices solely adjusting quantities of output and labour employed vary. This led the neo-classicals to insist that it was wage rigidity that was explanation for the failure of labour markets to clear rather than the uncertainty and the complication of non-matching expectations and the excessively speculative nature of the financial system that were to blame.
With the rise of post Keynesian critiques and more importantly the near total collapse of the global economy after the 2008 financial crash the search for a new paradigm in the sea of heterodoxy continues. The paper explores these issues and suggests the elements of a revised paradigm (expand and full citations needed See also the work of Joan Robinson, EconomicHeresies; The Economics of Imperfect Competition;Michal Kalecki, Theory of Economic dynamics; The Last Phase in the Transformation of Capitalism; Abba Lerner, The Economics ofControl; Functional Finance; Hyman Minsky, Stabilizing an Unstable Economy Paul Davidson, Money and the Real World; Post Keynesian Macroeconomic Theory; Alan Blinder, After the Music Stopped; Joseph Stiglitz Free Fall PaulKrugman, End This Depression Now,R.Clower, William Beveridge, Full Employment in a Free Society John Maynard Keynes, Collected WorksJohn Hicks, A Market theory of Money; Classics and Moderns Tony Thirlwall ,Essays on Keynesian EconomicsDavid Colander, Robert Skidelsky, John Maynard Keynes3 vols. Ana Carabelli ,Athol Fitzgibbons, Keynes’s VisionLawrence Klein, The Keynesian Revolution Donald Patinkin, Keynes’s Monetary Thought; Money Interest and Prices; D.Moggridge, Harry Johnson, Mario Seccareccia, (with Hassan Bougrine eds. Introducing Macroeconomic AnalysisJ.C.Gilbert, Keynes’s Impact on Monetary Economics, John Hotson and Harold Chorney, After theCrash: Rediscovering Keynes and the Origins of Quantitative Easing; The Deficit and DebtManagement: An Alternative to Monetarism; The Deficit Hysteria and the Current Crisis among others).
Ricardo wrote his famous text Principles of Political Economy and Taxation(1817) in the early nineteenth century. He also had published six pamphlets – essentially essays- focused on inflation, the corn laws and the national debt from 1810 to 1820. A seventh pamphlet on the quantity theory of money and questions of distribution, the gold standard and free trade was published posthumously in 1824. Ricardo was a powerful opponent of the corn laws and other comparable restrictive tariffs on imported goods. The corn laws were repealed by Prime Minister Robert Peel in 1846.Ricardo‘s critique of protectionism and its tendency to undermine most productive use of agricultural lands to the advantage of landlords at the expense of workers and owners of capital played a role in influencing Peel‘s decision.
Ricardo was one of the first economists to explain the benefits of comparative advantage, local specialization and unrestricted trade to the creation of greater national wealth. There were always critics of that position in Ricardo‘s time and thereafter who challenged his assumptions about free markets versus imperfect completion , cartels , oligopolies and monopolies and the potential imperialism of trade. But Ricardo‘s argument carried the day for over a century until the great depression of the twentieth century forced free traders like Maynard Keynes to rethink the wisdom of that position in a world dominated by austerians and fiscal conservatives wedded to laissez –faire obsessions about markets which always cleared and supply creating its own demand and Say‘s law and the rigors of the gold standard . It is very interesting that this debate remains at the centre of economic policy disputes in the contemporary world some 200 years later! The trade wars that President Trump has unleashed in response to Asian competitive pressure have once again placed these sort of debates at the centre of policy analsysis in this era of globalization.
To be fair there were neo-classical albeit monetarist leaning Keynesians like Harry Johnson who appreciated and largely understood what Keynes’s project was about but who still were critical of what they saw as exaggerated claims on behalf of a break with classical market clearing theory. The Donald Moggridge biography of Harry Johnson is an excellent guide to the Johnson contribution to the debate. See also Harry Johnson, The Keynesian Revolution and the MonetaristCounter – Revolution, American Economic Review61(May) 1-14, 1971; the F. de Vries lectures Inflation and the Monetarist Controversyon monetarist theory and inflation and stabilization policy in an open economy, July 1972. In the latter document Johnson neatly summarizes his monetarist orientation:
In the United States the governmental machinery is ill adapted to the execution of Keynesian- style economic policies, to the extent that the timing of fiscal policy changes has been pro-cyclical rather than anti-cyclical….there are good reasons rooted in both the real analysis of economic historians and in monetary theory, as to why capitalist economies should be expected in normal circumstances both to maintain a high level of employment and to enjoy some non- negligible rate of economic growth. “real” analysis calls attention to the opportunities for the profitable investment of savings that the world of reality constantly throws up, while monetary analysis assumes as a matter of empirical fact that the economic system tends toward a rational full employment allocation of resources so long as the management of money is well behaved, and can only be thrown off course by severe monetary mismanagement. This…is the crux of the issue prevailing between Keynesians and monetarists: the Keynesian position is that the real economy is highly unstable and that monetary mismanagement has both little relevance to it and little control over it; the monetarist position on the contrary is that the real economy is inherently fairly stable but can be destabilized by monetary developments which therefore need to be controlled so far as possible by intelligent monetary policy (lecture one pp. 4-5).
This was the issue as Johnson saw it at the zenith of the monetarist epoch and perhaps this is still the crux of the matter at its nadir 46 years later. Johnson viewed the central problem of inflation to be bound up in the UK with trade and exchange rate issues. He regarded nationalist anti free trade views as one of the principal barriers to lower unemployment and more rapid economic growth .Environmentalist pioneers like E J Mishan ,a colleague at the LSE, were seen as eccentric elitists who regarded mass tourism and travel as a form of pollution.(see Mishan‘s work The costof Economic Growth) The early work on the rise of the multinational corporation (see Kindelberger, Hymer and Baran and Sweezy and Galbraith) already was exploring the roots of globalization and off shoring which bedevil our contemporary world.
Brexit propelled by a resurgence of British nationalism with a strong touch of toryism is central to this debate. In a strange sort of way so too is the British tory repudiation of the globalist model. The repudiation of classic British and western world heroes like Winston Spencer Churchill on the grounds of his imperial connections and his colonial attitudes is misguided postmodern distortion of recent history. It is not fashionable to write or say this now in pomo circles but if it were not for Churchill‘s perspicacity and vision, the Nazis and Hitler might well not have been defeated and the fate of the West by which I mean the civilization of modernity and democracy would have been irrevocably damaged. Churchill always regretted his decision in 1925 not to listen to Maynard Keynes‘s advice not to reinstate the gold standard and the constraints which that imposed on monetary and employment policy. Keynes had very strongly criticized Churchill for his decision in The Economic consequences of Mr. Churchill1925 (see J. M. Keynes, Esssays in Persuasion,The economic consequences … 1932).
Churchill was far from perfect but warts and all he played a huge role in saving Britain from a Nazi invasion and the isolation of the British Isles from their North American and Commonwealth allies. He was of course a creature of his own world and times but without him democracy might well not exist. The future of democracy and the western alliance in the post war world was decisively shaped for the next 60 years by the outcome of the conflict between the appeasers like Chamberlain and Halifax and those who understood the threat posed by Hitler and the Nazis. For a somewhat contrary view of the dispute see Nigel Hamilton JFK reckless youth pp.451 -452. See also Alvin Finkel & Clement Leibowitz, In Our Time: The Chamberlain Hitler CollusionMonthly Review Press, 1998. The post war year triumph of Keynes‘s theory and policy was the direct result of this despite Keynes‘s circle who scarred by World War one were largely opposed to war.
One of the greatest controversies of the victory of Keynes over the classical school defenders revolved around deficit spending, labour market equilibria and the real wage clearing mechanism. It also involved the quantity theory of money. It is a controversy that never truly disappeared except for the golden age of Keynesian theory and policy. The triumph of monetarism in the Thatcher and Friedman years eroded the knowledge base of many younger economists about the nature of Keynes‘s argument. But with the crash of 2008-09 there was a desperation among the Wall street financial actors and the investment banks who feared a total financial panic and the collapse of global capitalism. Almost all that I and a few others had predicted about the dangers of the financial markets and the importance of greater monetization of the debt along with several other economists of Keynes and post Keynesian orientation came to pass. The Bush and Obama administrations ran what would have been unthinkable deficits to save most of Wall street and its investment banks from near total collapse.
My and John Hotson and Mario Seccareccia‘s work on deficit spending made a useful contribution to the debate. I argued at the time that because of the nature of the collapse and the shock it had delivered what came to be known as quantitative easing essentially what I had been advocating as sensible policy innovation since the 1980s was the most appropriate policy and it would not lead, contrary to monetarist orthodoxy, to inflation for a lengthy period of time if ever because inflation was not just a monetary policy outcome and the quantity theory of money was deeply flawed. The following charts which originate from the St. Louis branch of the Federal Reserve and which Paul Krugman featured in a recent op ed tells the story decisively (see Paul Krugman, NYT,).
As we can see since 2007 consumer price inflation in the US has been very low averaging 2 % or less from 2007 until 2018 measured by the consumer price index. But if we look at the monetary base fueled by greater monetization of the federal government‘s annual deficit the value has risen enormously by more than fourfold peaking at close to a fivefold increase. Contrary to the claims of leading monetarists, despite this large increase there has not been an outbreak of serious inflation. There is still some significant slack in the economy and oil prices have remained relatively low and while there have been some rises in general commodity prices the commodity price cycle has not resulted in general inflation. Hence Keynesian stimulus particularly when financed in part by greater monetization of the debt is clearly very effective in fighting a slump. This doesn‘t mean inflation willnever happen but there is a well-documented role and space for this Keynes policy technique.(see my paper After the Crash Rediscovering Keynes and the Origins of Quantitative easing,Haroldchorneyeconomist.com June 3 ,2011) When combined with infrastructure and social policy spending on the fiscal side the desired scissors effect can prevail. So fuller employment is both possible and feasible ifpolicy makers make the correct decisions. In fact, crises can be constructive as they may permit previous ill-founded dogmas to be shunted aside because of the clear and present dangers of the moment.
The net cost of the TARP bailout stimulus package is small compared to the impact, some 32.5 billion dollars out of 475 billion authorized to be spent after the initial 700 billion that was announced. The private sector cannot easily sustain a longer time horizon but the government is well positioned to wait for the speculative investments to recover and bear profitable fruit. In fact it was mostly AIG insurance that was responsible for the net liability. (see monthly report on TARP from the US treasury) Once the value of non-TARP AIG shares financed through the FRBNY is included the loss is substantially further reduced. (See note 10 table p.5 of the monthly TARP report for a full explanation.)
Given that the US banking system was saved from a catastrophic collapse, the 32 billion was a very good investment. Furthermore, much of the global system was at risk Writers like Joseph Stiglitz correctly complain that the very culprits who were responsible for the mess escaped and even in some cases were rewarded by TARP because in some instances executives inappropriately used TARP funds to award themselves excessive bonuses. (see Joseph Stiglitz Free Fall. New York: 2010) That should not have happened. Stiglitz argued that a proper approach would have involved a restructuring of the banks rather than providing them with handouts at taxpayers expense. I agree.
But the idea that saving the financial system was not a good idea is wrong. If it had collapsed completely the damage to middle and working class people who had their savings in the banking system would have been even greater. Stiglitz proposed in part nationalizing de facto the banks which were insolvent. That might have worked as it appeared to work in the UK but the politics of such a move in the very conservative United States is unpredictable, despite the history of FDR and the depression of the thirties. In any case people and many economists have had their distrust of speculative excesses in the financial system confirmed by the shattering events of 2008-09. Major reform was clearly needed.
So a key part of any policy of fuller employment is stricter regulation and oversight of the financial system including the volatile options and futures markets and the short sellers. Casino capitalism is inherently destabilizing. A number of writers have explored these questions including Hyman Minsky, Joseph Stiglitz, Paul Krugman, Alan Blinder and Henry Paulson. Even Alan Greenspan, a major advocate of deregulation has admitted that regulatory reform in certain cirumstances can be stabilizing (see Alan Greenspan, The Map and the Territory, p.101). ‘‘Although there are often multiple objectives of regulation, when it can identify and inhibit irrational behavior under certain conditions, regulations can be stabilizing. ‘‘In the very next sentence however Greenspan reverts to his deregulation position. “but there is an insidious cost of regulation in terms of economic growth and standards of living when it reaches beyond containing unproductive behavior.”
But the last decade since the Fed and quantitative easing plus deficit spending and more recently tax cuts albeit largely for upper income tax payers in the past two years have produced a sustained recovery as the chart below indicates. Of course, the growth is very welcome but critics rightly complain that because of the inequitable distribution of the wealth and income that has been created the result is much less positive than is claimed. Also raw growth often has important implications for the environment and climate change. Some growth involves damaging negative externalities that need to be properly accounted for in the regulatory system. This will be even more relevant in future cost benefit analyses. We shall turn to that question in the next section of the paper. But first it is necessary to specify as much as possible the precise components of this Keynes style synthesis which to date has resulted from the policy choices of the Bush administration which late in its term was faced by the collapse and implemented TARP, the Obama administration which although it could have spent more nevertheless revised TARP and then continued it in a diversified form and now in recent years President Trump‘s emphasis upon growth and a supportive monetary policy but flawed by his excessive tax cuts for the wealthy.
The chart depicts the seasonally adjusted rate of economic growth in the real GDP or decline that is the percentage change from the preceding quarter from Q2 in 2015 until Q1 2019. The fact that there have been no negative quarters over the past five years is a significant sign that the strategy has worked effectively. In fact this is now the tenth year of positive growth in the GDP. The last time annual growth was negative was the second quarter of 2009.It has been positive ever since that as we can see from the chart below which tracks the real GDP in billions of chained 2012 dollars on a quarterly basis from 2004 until the third quarter of 2018.
In terms of post war expansions this ten year post slump expansion is now the second longest in US history. If it last past this coming July it will be the longest. Of course, there are still plenty of complaints and criticism of the quality of the expansion from the point of view of workers and the low wages they find for too many of the jobs. Compared to the higher growth rates of earlier decades going back to the 1960s and 1970s these growth rates are smaller. (see the chart below) None the less the unemployment rates have fallen significantly. In the U.S. this past month to 3.6 % as the economy added 263,000 jobs, the unemployment rate was the lowest rate since 1969. However, the explanation lay in reduction in the size of the labour force which itself may have been the result of baby boomer retirement as much as discouraged workers as well as other demographic factors connected to immigration.
The Canadian unemployment rate which needs to be adjusted to compare it to the American has fallen to 5.6 %. One analyst Constance Sorrento writing in the Monthly Labour Reviewin June 2000 (International Unemployment rates: how comparable are they?; adjusted to U.S. concepts , the Canadian unemployment rate is reduced by 1 percentage point; effects of adjustments on European unemployment rates are smaller) argues that the Canadian unemployment rate should be reduced by one percentage point to make it comparable to the US rate. Essentially Canada has a more generous method of accounting for passive job search than does the US. If we do this Canadian unemployment measured on American terms is 4.6%. Either way rates have fallen substantially since they peaked in 2009 (For a European perspective and he fate of social democratic strategies for full employment see also The Radical Reformist, May 18 Jacobinre:Peter Gowan, Rudolph Meidner and Ghosta Rehn and the Swedish model and how it explains the fate of the Swedish model in the era of neo conservatism and the monetarist EU).
Of course, growth rates of the GDP and unemployment rates alone are not enough to demonstrate that a progressive fuller employment agenda is being advanced by our economic institutions. Growth has implications for environmental factors which increasingly are viewed as critical factors in the quality of life and indeed in planetary survival. As well the distribution of the fruits of growth in the income flows and the accumulation of wealth in an excessively unequal way is also a critical factor in assessing the quality of economic growth. In this latter area there has been an explosion of interest. Writers like Thomas Piketty, Joseph Stiglitz, Lars Osberg and Anthony Atkinson among others have had published influential books focusing on this issue exploring the apparent dramatic rise in inequality in Canada, the U.S. and Western Europe. The recent success of populist politicians who have highlighted issues of inequality ever since the crisis of 2008 has also unfortunately mixed the critique of inequality with xenophobic sentiments and slogans which now threaten in the Trump era to swamp the values of a progressive multicultural western society, But it also remains true that the entire basis of the post war Keynes inspired western model of democratic capitalism depended upon the achievement and maintenance of a reasonable degree of equality as well as the achievement principle which rewarded entrepreneurship but also hard work, sacrifice and education.
Atkinson puts the point well: Inequality fell during World War two in Europe. This decline continued in the decades following the war right up to the 1970s. But then the factors that had promoted this fall in inequality either ended or were reversed. (pp.2-3) Of course, the 1970s were the decade within which Margaret Thatcher and at the end of the decade Ronald Reagan came to power and neocon ideas began to affect public policy. Inflation and not low unemployment became the target. The wealth shares of the richest became the priority rather than the income of the broad middle classes. These trends were reinforced by the growth of labour displacing technology and the spread of globalization and global supply lines accompanied by the weakening of trade unions and workers’ rights and labour standards. There was also an ideological attack that argued for the weakening of the welfare state and more frequent and long in duration recessions. The growth of China as an economic power and major competitor also has played a role in exporting good jobs to Asia. Atkinson makes the point that it is not just about insuring that all members of society have an equality of opportunity to make the best of their talents and abilities but that we should also pay attention to equality of outcomes. A similar deep concern about inequality has emerged in the UK where the Institute of Fiscal studies has sponsored research on growing poverty and inequality in the country. (see Guardianarticle on this Britain risks heading toward US levels of inequality, Guardian, May 14, 2019 Sir Angus Deaton a Nobel prize winning economist heads the five year study which points out the risk of the UK following the US and developing much greater inequality, in pay, wealth and health. The UK has a Gini coefficient of 34.1 the US 41 and Canada 34. France 32. 3, Japan 32.1 Germany31.4 Netherlands 28.6, Denmark 28.5, Sweden 27.2 and Norway 26.8 (See Table 2, p19 below) .
Here in Canada a number of economists notably Lars Osberg has warned of growing inequality and distorted wealth distribution. Prolonged periods of higher unemployment such as occur during and after recessions have an obvious negative impact upon equality. In a democratic society excessive inequality and the growth of an impoverished underclass and homelessness undermine the values of a democratic society. Democracy is premised upon fair treatment of all citizens and the notion that there should be relatively equal rights for all and that values of community and caring are part of the culture. It is a kind of distortion of these liberal democratic values that has accompanied the drift away from liberal democracy and toward authoritarian values that we see in a number of countries around the world. The virtues of the market model were that all participants could participate in an optimal fashion, maximizing their personal well being so long as the distortions of monopoly and excessive greed were constrained. But the recent crisis in 2008-09 revealed very deeply rooted structural problems as well as policy errors and irresponsible behavior.
I have taught a course on inequality featuring the work of Piketty, Stiglitz, Clement, Porter, Galbraith, Desai, Mills, Phillips and others over the last several years. There is considerable interest among students in this topic. In France Thomas Piketty has led the way in arguing that inequality is a leading problem in advanced societies with his best seller Capital in the TwentyFirst Century. He also reaches quite pessimistic positions with respect to how difficult it will be to reverse the trend that is embedded in his sometimes criticized analysis of the growth rate of income as opposed to that of capital.
Of course, distributional questions have been central to economic thought since the Physiocrats in the 18thcentury, Ricardo and Marx in the nineteenth and Veblen in the twentieth. They were also central although in a subsidiary way in Keynes versus Pigou and the classics and in the work of Pierro Sraffa. But these distributional questions have been largely ignored by most neo-classical thought. Atkinson cites the microeconomics text book of Greg Mankiw which contains a chapter on distributional issues but which Mankiw excludes from his book on the Essentials of Economics(see Atkinson p.15).
Lucas and other rational expectations monetarists in the immediate aftermath of the 2008-09 crisis insisted on austerity as opposed to stimulus on the dubious grounds that it would be confidence building. That was also the position of the European Central Bank then president Jean Claude Trichet. He and others circulated this clearly historically disproven argument from the great depression that falling wages would boost exports and thus promote recovery (Krugman, Pp.195 ff +pp.106 ff). I was told the same argument in a public panel discussion I participated in on March 19, 2012 at Concordia University with the Greek consul in Montreal Thanos Kafopoulos about austerity and the Greek debt crisis.
Paul Krugman discusses this argument at length in his work End This Depression Now(New York: Norton, 2012). Clearly a major crash and subsequent deep recession have a major impact upon inequality that can take years to recover from. So it is not surprising that distributional questions that revolve around the growing public concern over inequality in a number of western societies have risen to the centre of political debate in the US and western economies generally as the economy recovered from the deep slump brought about by the shock of the crash. Liquidity preference and cash hoarding goes up dramatically in a slump because of fear. The campaign of Bernie Sanders who has turned the excessive wealth and income gained by the one percent into a political issue has helped make these inequality issues central in the US with contagion effects upon other leading societies. Any comprehensive strategy of fuller employment must pay attention to excessive wage, income and wealth inequality. Employment strategies need also to focus on economic and social inequality- in terms of gender, ethnicity, and class.
The period of stagflation that did so much to discredit Keynesian economics was an exceptional period brought about by the shock of the oil cartel and the rising commodity prices of the 1970s . WTI or NYMEX oil prices were as low as 20.72 dollars a barrel in May 1973 but rose to over 122$ a barrel by July1980 then falling again to 22.47 by October 1998.They rose again to a peak of 162.32 in June 2008 then fell again to 36.38 in January of 2016. Currently they are at just over 59 $ a barrel in the spot market as of May 27 2019. The price is typically driven by highly speculative futures trading. It is unwise in the extreme to allow such factors to affect monetary and fiscal policy. Right now the market appears bearish about the future of prices. To the extent this is reflected in energy prices generally the impact on the GDP price indexes is likely to be somewhat downward. In any case energy cost is roughly 11 % of total GDP (Natural Resources Canada, nrcan.gc.ca accessed May 27, 2: 49).
Chart 5: World Oil Prices WTI Dollars per Barrel, 1947-2019
Environmental issues and fuller employment
Economists since Keynes and Shumacher and Pigou have known about environmental constraints on the growth of capital. Nineteenth century writers like Marx, Dickens and John Stewart Mill captured the disasterous impact of industrial society and capital accumulation upon the well being of workers and their families and pollution and despoliation of nature. The earth was not ever a free resource although this was less evident when the global population was much smaller. The earth held one billion people at the beginning of the nineteenth century as compared to 7.7 billion today. By 1900 it was 1.6 billion (United Nations Dept of Economic and Social Affairs and Worldometers). Writers like Paul Erlich, E.J.Mishan, Hazel Henderson, Herman Daly, Barry Commoner, Kenneth Boulding, Karl Kapp, John Cobb ,Rubin Simkin, Georgescu-Roegen, Murray Bookchin and others have pointed the way forward to sustainable economic growth and quality of life and preserving spaceship earth has top priorities for economic theory. Fuller employment means also more fulfilling employment that supports sustainable growth and planetary preservation. This is a theme that is developed by a number of ecological communitarian economists beginning with John Stewart Mill, and continued by Kenneth Boulding, Herman Daly, Georegescu–Roegen, J. Cobb, R. Schumacher and Rubin Simkin and others.
Mill in the nineteenth century complained about the cruel treatment of tenants by their landowners and their abuse of their ownership of the land in his Principles of Political Economy
‘‘when landed property has placed itself upon this footing (by treating its tenants in an heartless matter) it ceases to be defensible and the time has come for making some new arrangements of the matter. No man made the land. It is the original inheritance of the whole species.‘‘ (John Stewart Mill, Principles of Political Economy 1973 edition pp.232-233, quoted in Daly and Cobb, p.105)
The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline Canada
So it seems reasonable to restate the variable factors of fuller employment as including the following (Cei – Cpi) +(Iei-Ipi) +(Gei –Gpi) +(Xei-Xpi ) – Tei – M (all subject to an appropriate monetary policy that facilitates a reduction of unemployment by funding deficit spending where appropriate by some quantitative easing or purchase by the government of Treasury bills and bonds to ensure interest rates are kept at a reasonable accommodating level.
C stands for consumption; I for investment; G for government expenditures. X for exports; T for taxes and M for imports Where Ce is ecologically neutral or even positive, the same is true of Ie and Ge. The subscript i refers to the rate of interest that is advanced by the central bank and is itself sensitive to the degree of monetization of the debt. Te is an equitable tax system that helps reduce inequality and ensures a greater degree of equity in the economy. Cp, Ip and Gp on the other hand, are damaged by pollution externalities or other negative environmental effects. We could also add a variable that could account for the contribution to psychic income and longevity insofar as communitarian values were enhanced.
Finally we come to the issue of technological innovation and the digital age and its impact upon employment and the need for a guaranteed annual income. In my lifetime there has been a revolution in technology that began during the second world war and the decades that followed it. The development of transistors that led to the miniaturization of radios and my first high tech purchase of a Sony tr608 radio when I was a teenager in 1959 or 1960 and my first computer in 1983.Indeed I last used my now ancient electric typewriter to type the first draft of my Ph.D.thesis in 1983.
From a consumption point of view the experience has been very enjoyable and delivered much psychic income (See the gross national happiness index) but the employment impact has been more ambivalent. According to a survey done by the World Economic Forum of 15 large economies and 350 leading companies some 7.2 million jobs will be lost to automation, artificial intelligence, robotics and bio technology in the coming few years. This will result in a net employment loss because the same forces will only create 2.1 million jobs
The Davos group doesn’t always get data or theory right but it is flagging what likely will turn out to be a serious challenge. Given this plausible development it makes sense to develop and have in place an income support program that first appeared in the early 1960s in the work of Robert Theobald and not long thereafter Milton Friedman, the guaranteed annual income now called the universal basic income. Theobald published his work on the universal basic income in 1962. It was titled Free Men Free Markets: Proposed A Guaranteed Income. He was certain that cybernetics, automation and artificial intelligence would have a profound impact on employment markets in the decades to follow. As he put it then almost sixty years ago ‘‘Today, the cybernated productive system is emerging-a new innovation in productive techniques and organization based on machine power and machine skill, that is to say, on the combination of automated machinery and the computer.‘‘ (Theobald, 1963 p xi) Theobald predicted that this technological trend would replace jobs with computers and lead to growing unemployment. He therefore proposed a guaranteed annual income. Society had changed so profoundly from the pre-industrial Jeffersonian era that was premised on full ownership of land by all of the people that a new guarantee of personal dignity was required. ‘‘human dignity in a cybernated era can only be guaranteed through a constitutional right to a share in the production of machine systems. ‘‘Theobald then proposes a guaranteed annual income which he calls Basic Economic Security. That is an automatic income paid by the state that guarantees an economic floor below which he or she cannot fall regardless of their position in the labour market (p.118ff). There have been over the past few decades a number of trials of the GAI in Manitoba during the 1970s and more recently in Ontario which suggest that the program is very workable. Obviously there are some risks with the program particularly if one finances it by eliminating traditional social assistance which is what appealed to Milton Friedman. Friedman’s version was based on his notion of the negative income tax. If your income was below a certain floor you would be automatically compensated by the system. There are several experiments or debates underway or were underway recently in Ontario and Nova Scotia based on the GAI and I suspect it could well return to centre stage in the years to come. Theobald was a visionary and I was enlightened by his work. I still favour a large measure of Keynesian policy, particularly when a proper mixture of monetary and fiscal policy is followed. But the GAI is a sensible adjunct tool to add to the policy kit bag to ensure fuller employment.
The great depression helped bring about a revolution in economic thought that lasted many decades. The great crash of 2008-09 and its consequences and the climate change crisis may well do the same.
12-month % change0.51.01.52.02.53.03.54.0Apr.20142015201620172018Apr.2019CPICPI excluding gasoline
|The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline, 12-month % change|
|CPI||CPI excluding gasoline|
Chart 7: Unemployment Rates in Canada and the United States, 1976-2016
Gini coefficient by country Source: World Bank.
Definition: Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. A value of 0 indicates perfect equality. A value of 100 perfect inequality. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.
Source: World Bank, Development Research Group. Data are based on primary household survey data obtained from government statistical agencies and World Bank country departments. For more information and methodology, please see PovcalNet (http://iresearch.worldban
|6||Central African Republic||56.20||2008|
|52||Dem. Rep. Congo||42.10||2012|
|54||Papua New Guinea||41.80||2009|
|65||Trinidad and Tobago||40.30||1992|
|89||Syrian Arab Republic||35.80||2004|
|110||Bosnia and Herzegovina||33.80||2011|
|135||São Tomé and Principe||30.80||2010|
Limitations and Exceptions: Gini coefficients are not unique. It is possible for two different Lorenz curves to give rise to the same Gini coefficient. Furthermore it is possible for the Gini coefficient of a developing country to rise (due to increasing inequality of income) while the number of people in absolute poverty decreases. This is because the Gini coefficient measures relative, not absolute, wealth. Another limitation of the Gini coefficient is that it is not additive across groups, i.e. the total Gini of a society is not equal to the sum of the Gini’s for its sub-groups. Thus, country-level Gini coefficients cannot be aggregated into regional or global Gini’s, although a Gini coefficient can be computed for the aggregate. Because the underlying household surveys differ in methods and types of welfare measures collected, data are not strictly comparable across countries or even across years within a country. Two sources of non-comparability should be noted for distributions of income in particular. First, the surveys can differ in many respects, including whether they use income or consumption expenditure as the living standard indicator. The distribution of income is typically more unequal than the distribution of consumption. In addition, the definitions of income used differ more often among surveys. Consumption is usually a much better welfare indicator, particularly in developing countries. Second, households differ in size (number of members) and in the extent of income sharing among members. And individuals differ in age and consumption needs. Differences among countries in these respects may bias comparisons of distribution. World Bank staff have made an effort to ensure that the data are as comparable as possible. Wherever possible, consumption has been used rather than income. Income distribution and Gini indexes for high-income economies are calculated directly from the Luxembourg Income Study database, using an estimation method consistent with that applied for developing countries.
Statistical Concept and Methodology: The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality. The Gini index provides a convenient summary measure of the degree of inequality. Data on the distribution of income or consumption come from nationally representative household surveys. Where the original data from the household survey were available, they have been used to calculate the income or consumption shares by quintile. Otherwise, shares have been estimated from the best available grouped data. The distribution data have been adjusted for household size, providing a more consistent measure of per capita income or consumption. No adjustment has been made for spatial differences in cost of living within countries, because the data needed for such calculations are generally unavailable. For further details on the estimation method for low- and middle-income economies, see Ravallion and Chen (1996). Survey year is the year in which the underlying household survey data were collected or, when the data collection period bridged two calendar years, the year in which most of the data were collected.
Unit of Measure: %
General Comments: The World Bank’s internationally comparable poverty monitoring database now draws on income or detailed consumption data from more than one thousand six hundred household surveys across 164 countries in six regions and 25 other high income countries.
The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline
12-month % change0.51.01.52.02.53.03.54.0Apr.20142015201620172018Apr.2019CPICPI excluding gasoline
|The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline, 12-month % change|
|CPI||CPI excluding gasoline|