Roof falls in for Tories in EU elections Labour also does poorly big wins forNigel Farage,Brexit party, also for Lib Dems

The results of the European election as of Monday May 27,2019 show the biggest winner is the new Brexit party headed by Nigel Farage the UK nationalist anti EU English politician. his party won 29 seats and got more than 5 million votes, out of the 17.2 million cast and over 31 % of the vote.The two major parties will be worried that this swing in the new party‘s favour might affect the next general election.

Somewhat behind but doing very well were the pro remain anti Brexit Liberal Democrats who won  3.4   million votes and 20.3 percent of the vote and 16 seats. The Labour Party won just 10 seats and over 2.3 million votes followed by the Greens who won 7 seats with 2 million votes. Then in fifth place the governing tory party with just 4 seats just ahead of the Scottish Nationalists with 3 seats and Plaid Cymru and the DUP with one seat each. Overall voters who voted for pro remain parties outnumber those who voted for Brexit parties . Since Labour sought to straddle the two positions some of its vote is pro Brexit and some pro remain but if they and the Tory vote are left aside the voters who voted remain parties significantly outnumber the Brexiteers . The Guardian estimates by a margin of 50 % to 47 % however the voter turnout  under 38 % is rather low compared to a general election or referendum so much is still unclear.For example the last general election in the UK had a turnout of just under 69 %.

Overall in the rest of Europe the two largest blocks the conservative Christian democrats and. the socialist social democratic bloc lost some ground to the Greens and the nationalist parties who each gained seats at the expense of the two largest parties. the Liberal coalition parties to which the Lib Dems belong also gained seats and will likely influence policy alongside the Greens who won 69 seats. In France Marine Le Pen‘s nationalist party edged out President Macron 22 to 21 seats.The Greens doubled their seat number to 12, France insoumise, a socialist ecologists anti globalization party won 6 seats and les Republicans a right coalition won 8 seats and the left coalition won 5 seats. Nationalist parties also did well in Sweden, Italy Hungary and Poland. In Germany the ruling CDU-CSU coalition won  29 seats, the Grune, Green party20 seats, the SPD 16 seats , the right wing nationalist AfD 11 seats, die Link the radical left  6 seats the FDP the free Democratic Party 5 seats with 7 smaller parties winning 1 or 2 seats each. The next few years will be an interesting test of the resilience of the centrist parties  against the onslaught of the more radical left and right nationalist parties.Governing will require lots of compromise.

In Italy the Northern League right wing won 28 seats and 33.4 % of the vote while the PD Democratic Party centre left 22% of vote won 18 seats and M5S five star party 14  seats  ,the FI7 Forza Italia 7 seats the FDI 5 a right wing party fratelli d‘Italia with a connection to a descendant of Mussolini and the SVP 1.

In Spain the PSOE-PSC  the Spanish socialist workers party won 20 seats; the PP the conservative popular party won 12 seats; the C‘s a liberal citizens party won 7 seats, the Catalonian coalition party won 6, another coalition party won 3 seats and Vox a right wing party won 3 seats.Two Catalan nationalist parties won 3 seats

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Theresa May Resigns

The long arm of Brexit has struck again as Prime Minister Theresa May has been forced to resign because she was unable to get her withdrawal agreement enough support from her own party and from Labour and the other parties to pass it through Parliament.Her apparent insistence on placating members of the Tory Eurosceptic wing made approval less likely. Her resignation was clearly an emotional event for Britain‘s second female prime minister and her supporters. It confirmed her dedication and years of service to the country was clearly sincere and  heartfelt .She faced an impossible task considering how divided the country and parliament are over Brexit given her negotiating style. But Brexit is a very difficult perhaps intractable question to resolve .

Indeed without a new election or a new decisive referendum based on all the new information that has been revealed by the last few years about the pros and cons of Brexit and more careful regulation of the possible foreign meddling that affected the last referendum and the role of Cambridge Analytica, its quite difficult to see how this question can be resolved. Boris Johnson‘s claim that if he were Prime Minister the United Kingdom would leave by October with or without an agreement is likely to come back to haunt him should he become the new Prime Minister.

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The economics of Fuller Employment in the Twenty-first Century

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CLICK LINK BELOW FOR PDF OF FULL PAPER WITH ALL CHARTS INCLUDED:

HRc The economics of fuller employment in the twenty first century may 29 2019 5-48pm

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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,).

CHART 1

 

CHART 2

 

 

 

 

 

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHART 3

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.

 

CHART 4

 

 

 

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)

 

Chart 6:
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

Source(s):

Table 18-10-0004-01.

Chart description

 

The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline, 12-month % change
  CPI CPI excluding gasoline
April 2014 2.0 1.8
May 2014 2.3 2.1
June 2014 2.4 2.2
July 2014 2.1 2.1
August 2014 2.1 2.2
September 2014 2.0 2.2
October 2014 2.4 2.5
November 2014 2.0 2.3
December 2014 1.5 2.3
January 2015 1.0 2.4
February 2015 1.0 2.2
March 2015 1.2 2.2
April 2015 0.8 1.9
May 2015 0.9 1.9
June 2015 1.0 1.9
July 2015 1.3 2.0
August 2015 1.3 1.9
September 2015 1.0 2.0
October 2015 1.0 1.9
November 2015 1.4 1.9
December 2015 1.6 1.9
January 2016 2.0 2.0
February 2016 1.4 1.9
March 2016 1.3 1.9
April 2016 1.7 2.0
May 2016 1.5 1.9
June 2016 1.5 1.9
July 2016 1.3 1.9
August 2016 1.1 1.7
September 2016 1.3 1.5
October 2016 1.5 1.4
November 2016 1.2 1.3
December 2016 1.5 1.4
January 2017 2.1 1.5
February 2017 2.0 1.3
March 2017 1.6 1.1
April 2017 1.6 1.2
May 2017 1.3 1.0
June 2017 1.0 1.2
July 2017 1.2 1.1
August 2017 1.4 1.1
September 2017 1.6 1.1
October 2017 1.4 1.2
November 2017 2.1 1.5
December 2017 1.9 1.5
January 2018 1.7 1.5
February 2018 2.2 1.8
March 2018 2.3 1.8
April 2018 2.2 1.7
May 2018 2.2 1.5
June 2018 2.5 1.6
July 2018 3.0 2.2
August 2018 2.8 2.2
September 2018 2.2 1.9
October 2018 2.4 2.1
November 2018 1.7 1.9
December 2018 2.0 2.5
January 2019 1.4 2.1
February 2019 1.5 2.1
March 2019 1.9 2.2
April 2019 2.0 2.3

 

 

 

 

 

 

 

Chart 7: Unemployment Rates in Canada and the United States, 1976-2016

Table 2

 

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

See also: Thematic mapTime series comparison

Find indicator:

Rank Country Value Year
1 South Africa 63.40 2011
2 Namibia 61.00 2009
3 Botswana 60.50 2009
4 Suriname 57.60 1999
5 Zambia 57.10 2015
6 Central African Republic 56.20 2008
7 Lesotho 54.20 2010
8 Belize 53.30 1999
9 Swaziland 51.50 2009
10 Brazil 51.30 2015
11 Colombia 51.10 2015
12 Panama 51.00 2015
13 Guinea-Bissau 50.70 2010
14 Rwanda 50.40 2013
15 Honduras 50.10 2015
16 Congo 48.90 2011
17 Guatemala 48.70 2014
18 Kenya 48.50 2005
19 Mexico 48.20 2014
19 Costa Rica 48.20 2015
21 Paraguay 48.00 2015
22 Benin 47.80 2015
23 Chile 47.70 2015
24 The Gambia 47.30 2003
25 Cabo Verde 47.20 2007
26 Venezuela 46.90 2006
27 Seychelles 46.80 2013
28 Nicaragua 46.60 2014
29 Cameroon 46.50 2014
29 Ecuador 46.50 2015
31 Malaysia 46.30 2009
32 Malawi 46.10 2010
33 Bolivia 45.80 2015
34 Mozambique 45.60 2008
35 Jamaica 45.50 2004
36 Comoros 45.00 2013
37 Dominican Republic 44.90 2015
38 Guyana 44.50 1998
39 Peru 44.30 2015
40 Djibouti 44.10 2013
41 Chad 43.30 2011
42 Zimbabwe 43.20 2011
43 Togo 43.00 2015
43 Nigeria 43.00 2009
45 Argentina 42.70 2014
45 Angola 42.70 2008
45 Madagascar 42.70 2012
48 St. Lucia 42.60 1995
49 China 42.20 2012
49 Gabon 42.20 2005
49 Ghana 42.20 2012
52 Dem. Rep. Congo 42.10 2012
53 Samoa 42.00 2008
54 Papua New Guinea 41.80 2009
55 Côte d’Ivoire 41.70 2015
55 Uruguay 41.70 2015
57 Israel 41.40 2012
58 Turkey 41.20 2014
59 United States 41.00 2013
59 Uganda 41.00 2012
61 Haiti 40.90 2012
62 El Salvador 40.80 2015
62 Turkmenistan 40.80 1998
64 Morocco 40.70 2006
65 Senegal 40.30 2011
65 Trinidad and Tobago 40.30 1992
67 Philippines 40.10 2015
68 Indonesia 39.50 2013
69 Burundi 39.20 2013
69 Sri Lanka 39.20 2012
71 Tuvalu 39.10 2010
72 Bhutan 38.80 2012
72 Iran 38.80 2014
74 Georgia 38.50 2015
75 Myanmar 38.10 2015
76 Thailand 37.80 2013
76 Tanzania 37.80 2011
78 Russia 37.70 2015
78 Lithuania 37.70 2014
80 Tonga 37.50 2009
81 Bulgaria 37.40 2014
82 Vanuatu 37.30 2010
83 Solomon Islands 37.00 2013
83 Kiribati 37.00 2006
85 Yemen 36.70 2014
86 Fiji 36.40 2013
86 Lao PDR 36.40 2012
88 Spain 36.00 2014
89 Greece 35.80 2014
89 Syrian Arab Republic 35.80 2004
89 Tunisia 35.80 2010
89 Mauritius 35.80 2012
93 Cyprus 35.60 2014
93 Portugal 35.60 2014
93 Macedonia 35.60 2015
96 Sudan 35.40 2009
97 Uzbekistan 35.30 2003
97 Burkina Faso 35.30 2014
99 India 35.20 2011
100 Latvia 35.10 2014
101 Vietnam 34.80 2014
102 Italy 34.70 2014
102 Australia 34.70 2010
104 Estonia 34.60 2014
105 United Kingdom 34.10 2014
106 Canada 34.00 2013
106 Tajikistan 34.00 2015
106 Sierra Leone 34.00 2011
106 Niger 34.00 2014
110 Bosnia and Herzegovina 33.80 2011
111 Jordan 33.70 2010
111 Guinea 33.70 2012
113 Ethiopia 33.20 2010
113 Liberia 33.20 2014
115 Mali 33.00 2009
116 Nepal 32.80 2010
117 Switzerland 32.50 2013
118 Mauritania 32.40 2014
118 Armenia 32.40 2015
120 France 32.30 2014
121 Croatia 32.20 2014
122 Japan 32.10 2008
122 Bangladesh 32.10 2010
122 Poland 32.10 2014
125 Mongolia 32.00 2014
126 Montenegro 31.90 2014
126 Ireland 31.90 2014
128 Azerbaijan 31.80 2008
128 Lebanon 31.80 2011
128 Egypt 31.80 2015
131 Korea 31.60 2012
132 Germany 31.40 2013
133 Luxembourg 31.20 2014
134 Hungary 30.90 2014
135 São Tomé and Principe 30.80 2010
136 Pakistan 30.70 2013
137 Austria 30.50 2014
138 Timor-Leste 30.30 2007
139 Iraq 29.50 2012
140 Serbia 29.10 2013
141 Albania 29.00 2012
141 Kyrgyz Republic 29.00 2015
143 Netherlands 28.60 2014
144 Denmark 28.50 2014
145 Belgium 28.10 2014
146 Algeria 27.60 2011
147 Romania 27.50 2013
148 Sweden 27.20 2014
149 Moldova 27.00 2015
150 Norway 26.80 2014
150 Finland 26.80 2014
152 Belarus 26.70 2015
153 Kazakhstan 26.50 2015
154 Slovak Republic 26.10 2014
155 Czech Republic 25.90 2014
156 Slovenia 25.70 2014
157 Iceland 25.60 2014
158 Ukraine 25.50 2015

More rankings: Africa | Asia | Central America & the Caribbean | Europe | Middle East | North America | Oceania | South America | World |

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: %

Periodicity: Annual

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.

 

 

 

 

 

 

 

 

Chart 8
The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline

 Back to main article

 

Skip interactive chart, go to accessible chart description

Interactive – SelectedImageCSV (2 KB)

12-month % change0.51.01.52.02.53.03.54.0Apr.20142015201620172018Apr.2019CPICPI excluding gasoline

Source(s):

Table 18-10-0004-01.

Chart description

 

The 12-month change in the Consumer Price Index (CPI) and the CPI excluding gasoline, 12-month % change
  CPI CPI excluding gasoline
April 2014 2.0 1.8
May 2014 2.3 2.1
June 2014 2.4 2.2
July 2014 2.1 2.1
August 2014 2.1 2.2
September 2014 2.0 2.2
October 2014 2.4 2.5
November 2014 2.0 2.3
December 2014 1.5 2.3
January 2015 1.0 2.4
February 2015 1.0 2.2
March 2015 1.2 2.2
April 2015 0.8 1.9
May 2015 0.9 1.9
June 2015 1.0 1.9
July 2015 1.3 2.0
August 2015 1.3 1.9
September 2015 1.0 2.0
October 2015 1.0 1.9
November 2015 1.4 1.9
December 2015 1.6 1.9
January 2016 2.0 2.0
February 2016 1.4 1.9
March 2016 1.3 1.9
April 2016 1.7 2.0
May 2016 1.5 1.9
June 2016 1.5 1.9
July 2016 1.3 1.9
August 2016 1.1 1.7
September 2016 1.3 1.5
October 2016 1.5 1.4
November 2016 1.2 1.3
December 2016 1.5 1.4
January 2017 2.1 1.5
February 2017 2.0 1.3
March 2017 1.6 1.1
April 2017 1.6 1.2
May 2017 1.3 1.0
June 2017 1.0 1.2
July 2017 1.2 1.1
August 2017 1.4 1.1
September 2017 1.6 1.1
October 2017 1.4 1.2
November 2017 2.1 1.5
December 2017 1.9 1.5
January 2018 1.7 1.5
February 2018 2.2 1.8
March 2018 2.3 1.8
April 2018 2.2 1.7
May 2018 2.2 1.5
June 2018 2.5 1.6
July 2018 3.0 2.2
August 2018 2.8 2.2
September 2018 2.2 1.9
October 2018 2.4 2.1
November 2018 1.7 1.9
December 2018 2.0 2.5
January 2019 1.4 2.1
February 2019 1.5 2.1
March 2019 1.9 2.2
April 2019 2.0 2.3
Posted in anti austerity, Brexit, Canada, deficit hysteria, European unemployment, European Union and UK, France politics+economy, Free trade and Canadian history, free trade and globalization, full employment, infrastructure investment, J.M.Keynes, Uncategorized | Leave a comment

Canadian Federal budget once again a progressive document

I haven‘t yet fully read and digested the latest Canadian  Federal budget but so far I find it to be a realistic and progressive assessment of the likely course of the Canadian economy over the next year. Unemployment although at its lowest point in four decades could still be lowered further and may well be, provided the trade disturbances on a global scale do not spread and undermine economic growth. This is equally true of the Bank of Canada. Given the low petroleum prices and overall inflation low at 1.9 % there is absolutely no reason for the Bank to raise interest rates and thereby prevent unemployment from falling lower.Currently unemployment is 5.8%.The private sector banks and financial houses project unemployment to rise to 6 % the budget projects 5.9 %. The federal  debt to GDP ratio, the only sensible measure of debt burden is low, stable at roughly 30.8 % and slowly falling over the next three years projected to fall to 29.3 % by 2022. The government proposes a. number of detailed progressive expenditures on seniors, millennials ,indigenous peoples, infrastructure and social policy generally and I will comment on these in further posts after I have finished reading the budget papers.

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Financial market shenanigans resurface

The New York Times has an excellent article by William D.Cohan warning about the reappearance in the financial markets of 2008 style financial practices which led to the collapse in 2008. Citing speeches by the Fed chairman Jerome Powell , a discussion of former Fed chair Janet Yellen about the dangers of these new instruments and practices with Paul Krugman the Nobel prize winning columnist with the NYT,  and a Fed Wall Street regulator as corroborating witnesses Cohan explains how new instruments called collateralized loan obligations are being bought and sold and speculated on by various financial companies . That disastrous instrument the credit default swap has resurfaced this time attached to these CLOs which often represent corporate debt. Hedge funds have bought small amounts of precarious CLOs and  then massive amounts of credit default insurance on the same vehicles.They then put pressure on the company to file for bankruptcy and  when they fail their credit default insurance far outweighs their losses. Like poison ivy these dangerous speculative vehicles are spreading throughout the industry. Hedge funds pension funds and mutual funds are particularly vulnerable.Regulators need to intervene before we have 2008 all over again.

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The United Kingdom at the crossroads (I update this sometimes daily until the situation is clarified latest updates at the end of the post)

The British writers and historians Anthony Beevor and Artemis Cooper in 1994 co-authored a richly detailed history and narrative of Paris after the liberation 1944-1949 (London: Penguin Books revised edition, 2004) In the preface to the book they make a haunting statement applicable to the past but also to the immediate present and future. They argue that despite the heady growth of post war internationalism and globalist sensibility as well as the rise of great global institutions of governance and democratic order, nationalism is not yet and will not be banished. It is, according to Jean Monnet a founder of the European Union a ‘ recurring fever‘. Despite all the multilateral and internationalist institutions nationalist passions have not faded away. .‘‘ if anything , one finds in our increasingly fragmented world that many people terrified of drowning in anonymity, seize hold of tribal or national banners even more firmly.‘‘ (p.ix) Nowhere has this been truer in contemporary Europe and in particular in the United Kingdom, It is at the very centre of the debate over Brexit.

On Tuesday the UK parliament voted by a wide margin 391 to 242 votes to reject the Brexit deal that the Theresa May Conservative Government had negotiated with the EU to leave the European Union.75 conservatives and the DUP, the SNP and the Lib Dems voted with Labour to defeat the May government‘s proposed deal. So now parliament will vote on a no deal Brexit option and if that is rejected(which it was) there will have to be a deal which is premised on extending article 50  provided the EU agrees (and that is somewhat uncertain) or calling off Brexit with possibly a new election.(Parliament has now passed by 413 to 202 votes the government‘s resolution calling for an extension of article 50 until June 30, assuming that the EU 27 agree .) The situation remains somewhat unclear until the EU responds.( They as of March 29th rejected that date and offered as the deadline May 22n provided Parliament approved the withdrawal agreement which PM May had negotiated. Otherwise the deadline was to be  April 12th.)

But overall what this situation reveals is the damage that can arise out of poor decision making based on  inadequate study of the implications of a victory for the leave side and also the instabilities which xenophobia and nationalism born out of economic insecurity and austerity can create.Have a look at the excellent Tory politician Kenneth Clarke‘s contribution to the debate on no deal and the indicative resolutions for an excellent analysis of the failure of the referendum to properly explore all the grave implications of the leave position and the appalling extent to which people were misled about the consequences of Brexit and the nature of contemporary international trade.There is also an excellent article by the British Canadian based writer Adam Foulds in the opinion section of the Saturday March 16 th Globe and Mail .

It is not just the UK which is plagued by the problem.  We can find evidence of similar pathologies in other modern western style societies like the U.S. , in past times in Canada, in Western and Eastern Europe as well as in parts of Asia ,Africa and Latin America. It is a complex reality that progressive policy theorists and government actors have now to deal with.The accelerated globalization of the past few decades created many winners but also many losers. It is the latter who can drive contemporary politics and development strategies in disturbing directions.

No democratic inclined politician or analyst can afford to ignore this fact.Where the UK ends up after the dust is cleared will be unclear for some time to come. The political and economic fallout is likely to be large and last for a number of years.

Earlier last week the UK House of Commons passed an amended motion to rule out leaving without a deal. The vote was decisively a rejection of the May government‘s strategy by 321 to 278 votes despite a three line whip pressuring their members to vote against the amended motion. The amendment which clearly stated that there would not be a no deal crashing out of the UK from the EU was sponsored by Yvette Cooper of the Labour Party.  The Government seems very divided as another cabinet minister has resigned and the group of dissenting Tory MPs has grown in number. The House then considered the resolution around asking for an extension to article 50 by which the UK had given notice of its determination to leave the EU by March 29, 2019. Some members who are mostly remainers have suggested that if the EU doesn’t‘ grant the extension which must be agreed to by all member states, the UK could and should revoke article 50 . Future debate will very interesting, indeed.

 Monday March 18th the UK speaker of the House, John Bercow has thrown a major monkey wrench into the strategy of Theresa May by ruling that the Government cannot reintroduce for the third time after twice been rejected the same resolution involving the BREXIT deal that May has negotiated with the EU without significant changes in its substance. May had patently planned to reintroduce her negotiated and twice rejected deal a third time in the hope that the urgency of the hour would cause enough opponents to relent and pass the deal finally. This greatly increases the pressure on May to find the necessary concession from the EU or to ask for a longer extension of article 50 than she had planned thereby displeasing many of the more frantic Brexiteers.

Today Wednesday March 20th The UK Prime minister has requested a delay and an extension of article 50 until June 30th. But the EU has stated that it would only accept this if the UK parliament approves the existing withdrawal agreement that they have twice rejected. Otherwise the options are crashing out without a deal on March 29th -an option parliament had rejected by a vote of 321 to 278- or withdrawing article 50 altogether. So the choice for parliamentarians is quite stark a no deal crash out or accepting a withdrawal deal they have already rejected twice by a large margin. Perhaps the EU is bluffing and with a change in Prime Minister the UK can get a better deal or set of options but that is far from clear. No one except the radical Tory Brexiteers wants a no deal crash out . But that is now certainly a real possibility given the large margin by which the withdrawal agreement negotiated by May was rejected by Parliament.Its a sub optimal outcome but one whose probability has just increased.

Thursday March 21st The E.U. according to media sources is prepared to agree to an extension until May 22 provided parliament passes the withdrawal deal. Jeremy Corbyn as suggested that if it votes no for the third time and refuse to pass a Labour backed compromise he would try to get article 50 revoked and \ or have a second referendum . Its unclear what the EU members would then do. President Macron of France has stated that if May‘s proposed deal is rejected then France expects and is prepared for a no deal crash-out. The latest version of the EU proposal according to reporters is a French sponsored motion to grant an extension until May 8 with a provision to extend the date until the end of the year if the UK notifies the EU that it agrees to hold EU  elections for MEPs.

Corbyn and the Labour party leaders have been meeting with EU officials and Conservative MPs discussing various alternative scenarios as PM May‘s grip on her party and parliament weakens. Some MPs notably Oliver Letwin believe a cross party majority would approve a Norway variant of a deal with the UK still in the customs union and an affiliate but autonomous member of the EU. That may be possible but it like all solutions requires co-operation from the EU. The EU has finally decided on the timetable and its deadlines in responding to the request of the UK for an extension of article 50. If parliament agrees to the withdrawal agreement embedded in Theresa May‘s deal the UK is granted an extension until May 22. If on the other hand if parliament rejects the deal then the deadline is moved forward to April 12 in order that the EU can finalize arrangements for the MEP elections. This would leave parliament a short time frame to build a cross party coalition to propose an alternative plan. Otherwise the UK might crash out and this would be a bad outcome.In an effort to prevent that from happening Yvette Cooper of Labour and Oliver Letwin from the conservatives have co-sponsored a bill that rules out crashing out and compels the government to negotiate either a prolongation of article 50 or if that is not possible withdrawing article 50 altogether. It passed the House by only one vote 313 to 312 opposed . It has now passed the first reading in the House of Lords.

Monday March 25 th. The grand coalition of the Labour Party, the SNP, the Liberal Democrats , the Independent group, Plaid Cymryu the Green Party and 29  Conservative remainers have successfully wrested control of the agenda from Theresa May and her Brexit Conservatives supported by the DUP and eight Labour Brexiteers. The vote on a resolution sponsored by Yvette Cooper(Labour) and Oliver Letwin garnered 329 votes for the cross party progressive opposition votes as opposed to 302 votes for the pro Brexit government position. The vote split  for the cross party position was as follows: Labour 232 votes; SNP 34 ; Conservatives 30; Independent group 11; Lib Dems 11; Plaid Cymru 6;Independent 4; Green 1. The Government side was supported by  277 Conservatives, 10 from the DUP and eight from Labour Brexiteers and 3 independents .

MPs will now get to vote on a range of indicative resolutions ranging from a variant of the Norway gambit, the Canada free trade arrangement  withdrawing article 50, passing a deal with a guarantee of a confirmatory referendum among others.

Wednesday March 27. Parliament today debated and voted on 8 indicative resolutions. The outcome was not a surprise as none of them gained enough votes to overcome negative votes. Anyone familiar with Nobel prize winning Kenneth Arrow‘s impossibility theorem would know that the failure in the first round of voting was a possible outcome. Democratic electoral or voting systems are vulnerable to such  impasses. Where  there are 3 or more sets of preferences and three or more independent actors there is no guarantee that one can prevail with a majority.

There will be a second round of voting next Monday and hopefully the various actors in favour of a soft Brexit and a second referendum will find a way to increase the yes vote for their amended proposals.

Here are results which are presented in detail by the British media.

Kenneth Clarke‘s proposal to commit to a customs union was narrowly rejected 272 to 264. It would not take much to get this proposal passed.

Margaret Beckett‘s confirmatory vote commitment was rejected 295 votes to 268  Again this would not require too large of a vote shift to pass it.

Labour‘s proposal for a customs union and close alignment with the single market was also defeated despite Conservatives like Kenneth Clarke voting for it, 237 for 307 against.

A proposal to join EFTA and the European economic area was defeated 188 to 283.

A proposal to ensure that article 50 would be revoked two days before April 12th if no deal was yet approved also was defeated 293 to 184.

Another proposal to leave without a deal on April 12th was roundly defeated by 400 to 160.

A seventh proposal also defeated proposed  preferential trade arrangements with the EU.It lost 422 to 139.

An eighth proposal proposed remaining in the EEA but rejoin EFTA and remaining outside the customs union was defeated 377 votes against to 65 for.

A ninth proposition is a rerun of Theresa May‘s deal which was defeated twice the last time 391 to 242 votes.

So upon  cursory analysis it would seem that the most promising propositions likely to attract a majority vote are the first two. The voting system needs to be an elimination system that results in a run off between the two leading contenders. Otherwise there is the possibility of the impossibility theorem outcome.

Thursday March 28 The May government in order to get around the speaker‘s ruling that the government cannot submit a twice defeated resolution a third time. So in order to get around this May is separating the withdrawal agreement from the political declaration which lays out the desired details of a new relationship with the EU. If they can get it passed they then will have until May 22nd get the  political declaration hammered out and then be in a position to pass the entire package.  However, both Labour and the DUP are opposed to this procedure preferring to wait until Monday and round two of the search for a consensus compromise resolution . But as I explained above that is unlikely unless they change the voting system and have a final choice between just two options as opposed to three or more options.

Friday March 29 Parliament has rejected PM May‘s withdrawal agreement for the third time 344 to 286 as her gambit to separate the withdrawal agreement from the political declaration has failed to attract enough votes.Now Parliament will have to act swiftly to avoid crashing out before the April 12 th deadline by agreeing to a consensus position or by withdrawing article 50 or by negotiating a further extension. The vote by party affiliation was as follows:For the May position and the withdrawal agreement.          Conservatives 277. Labour 5, Independent 4  Total 286.

Against   Labour 234, SNP 34, Conservative 34,  Independent 16,  Lib Dems 11, DUP 10, Paid Cymru 4, Green 1.  Total 344

Monday April 1: Once again none of the indicative motion won a majority. This time the speaker reduced the options to 4 possibilities. these were as follows: a proposal for a customs union sponsored by Kenneth Clarke . This time it lost by a mere three votes 276 to 273. There was another motion sponsored by Conservative Nick Boles which proposed staying in the single market and a customs union which  lost by  282 to 261.

Boles then announced he was leaving the Conservative party because of its unwillingness to compromise. A third motion committed to a final confirmatory referendum also was defeated 280 to 268.A fourth motion sponsored by SNP  MP Joanna Cherry to revoke or extend article 50 if there was no other option than to crash out lost by 292 to 191 votes.

We shall see what happens tomorrow  and Wednesday but the odds of crashing out have definitely increased unless they change the voting system to offer a choice between the two strongest motions only and there are further compromises over wording and coalition building.

Tuesday April 2nd. Theresa May has chaired a length cabinet meeting and emerged fro it to propose a compromise meeting with Jeremy Corbyn to hammer out an agreement that both party leaders will accept and abide by allowing Britain to leave the EU after a short further extension . Her only condition is that her withdrawal agreement would be part of the package approved by the House of Commons. We shall see how Corbyn responds in a few minutes. Nigel Farage has criticized her not surprisingly on his LBC one line radio show for betraying Brexit.He also admitted on air that he has been lobbying some of the EU27 to veto a further extension. 3:12 Montreal time Jeremy Corbyn has responded positively saying that he will be very happy to meet with the PM and that he recognizes her willingness to find a mutually agreeable compromise. He once again restated Labours preference for a deal that kept Britain in a customs union.

Wednesday April 3rd. Jeremy Corbyn and his team held the first exploratory meeting with the Prime minister and her team to see if the can agree to a joint compromise on a way forward to unlock the deadlock with each side expressing some willingness to compromise in the interests of the nation. Corbyn later called the talks constructive but expressed some disappointment as to the limited extent that May was prepared to compromise. May, for her part, had to endure harsh criticism from her right wing nationalist fraction for inviting Corbyn into the process. Two cabinet ministers resigned and and it is possible there will be others doing so.On the Labour side 25 members sent a letter to Corbyn insisting that he not ask for a second referendum on whatever is agreed to. These members mostly represented areas that had voted in favour of Brexit. so schisms have appeared in both of the major parties on Brexit.

Some Tory MPs insisted on calling Corbyn a marxist on economic policy. This nineteenth century label and the way it is being thrown about would apply to many tens of millions of people in the western world who are fed up with inequality, austerity, ecological neglect and mismanagement of their economic and social policy and who seek democratically to change to social democracy, red toryism and progressive liberalism. Its time for some fresh thinking on ideology and utopia from both sides.

April 5th It appears that the party talks have stalemated . Labour accuses Mrs.May of refusing to compromise. The PM has requested a further extension to June 30th but the EU seems likely to reject that and instead offer a much longer extension , which Tusk has called a flextension permitting the UK to then leave with a deal whenever one can be found in that period which might be as long as a year. France has stated it would reject a long extension unless there were a clear and agreed path forward. So unless something changes crashing out without a deal or the recinding of article 50 looks much more likely now. If the Government reaches a compromise over a customs union acceptable to Labour at the last days and ultimately to the EU the dismal result of crashing out can be avoided.

 April 8th The Yvette Cooper – Oliver Letwin motion to prohibit the government from crashing out on the 12th if there were no agreement and which mandates the PM to ask for an extension which would be no shorter than May 22nd or rescind article 50 has passed the House of Commons and the Lords and received royal assent and hence become law. This simply reinforces the prime minister‘s intention to seek an extension and avoid crashing out and find a compromise with Labour over a customs union. Experienced political conservatives like Lord Michael Heseltine remain skeptical however.(see interview with him in the FT)

April 10th The EU has granted an extension until October 31st but with the proviso that if a deal on the withdrawal agreement can be made prior to that date then Brexit will take place then. so the extension is a very flexible one. the EU has made it clear that the flexible nature of the agreement makes the widest possible range of choices ranging from Brexit with modification of the political agreement including a customs union for the UK all the way to rescinding article 50 and abandoning Brexit altogether. The Tory Brexiteers will now seek to remove May as PM .

But their option is restricted to a no deal crash out which Parliament has already rejected. The EU has made it clear that it would not accept any change in the withdrawal agreement per se as opposed to the political preamble.It remains unclear what alterations the two largest parties will agree to to facilitate  acceptance of the withdrawal agreement.

The latest Survation poll based on an on line survey of 6062 persons in England and Wales shows Labour at 41 % down 1 % point from the election result in 2017,  the Conservatives at 37 % down 8 % points with the Liberal Democrats at 10 % up 2 % points,  UKIP at 7 % up 5 %points, Greens at 2 % unchanged and Plaid Cymru 1 %unchanged and the new Independent Group at 1 %.  Given that Scotland tends to vote more  Scottish National than Conservative these results seem to point to a substantial defeat for the Tories if an election were held soon.( In 2017 in Scotland the SNP won 35 seats, the Conservatives 13, Labour 7 and the Lib Dems 4 )

Data in the poll were weighted by age, sex, region,2017 election results and population estimates for each region .However, the reliability of on line polls from a panel is always a major question as it is not a true random sample of the whole population.

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The technique of deficit finance

I am republishing below again. a post I wrote trying to explain the multiplier as an effective policy tool embedded in Keynesian deficit finance. It first appeared in my older blog on blogspot Harold Chorney political economist in the middle of the financial crisis.Alongside my post on my current blog on the multiplier it is I think a useful guide.It was posted here on haroldchorneyeconomist as Some notes on the multiplier, April 4, 2012.I feel the need to do this because despite all we have learned about the negative consequences of sound finance and austerity we still see many conservative politicians trumpet the virtues of balanced budgets even when unemployment is elevated and and expectations pessimistic.

The technique of deficit finance
January 17, 2008 11:30 pm originally published on Haroldchorneypoliticaleconomist.com during the financial crisis.

The stimulus package being discussed in Washington will temporarily increase the American federal government deficit in order to inject a positive fiscal impulse to the economy. There seems to be, perhaps understandably, a fair bit of confusion about how such a stimulus can work to counter the recessionary forces now underway in the American manufacturing, housing and financial sectors of the American economy. First one should understand the assumptions that lie behind the theory of deficit finance as well as some statistical facts about the history of deficits and surpluses and the business cycle in the US.
First of all, whenever the government spends on programs or transfer payments more than it takes in in revenues the government will run a deficit. This deficit can be measured and financed in a variety of ways and it can be spent on a variety of programs or tax reductions.In terms of measurement it seems sensible to view expenditures on infrastructure as long term investments and treat them accordingly in the public accounts.

In addition most economists who advocate deficit finance to counter an economic downturn assume that for every dollar spent directly there will be at least another dollar or possibly $.66 of additional spending that will be induced by the original expenditure. Some economists would suggest that the multiplier would be larger others that it would be smaller.

This multiplier is bound up with what is called the Keynesian or more accurately Kahnian multiplier(named after the brilliant British Jewish economist R.F.Kahn who was a very close colleague of Keynes at Cambridge , one of the first economists to develop the idea and who made a major contribution to the General Theory.)

The way that the multiplier works is derived from the mathematical formula for summing up the total of a geometric series. For example let us assume that the series is 1+ v + v(v) + v(v)(v) +….= 1/(1-v) if -1 is less than v and v is less than 1.
(see Robert Barro, Macroeconomics, p.508)

The formula for the multiplier is then 1/1-mpc where mpc is the marginal propensity to consume equivalent to v in the above geometric progression.

In other words the percentage of the last additional dollar you receive that you spend. It also matters where you spend the money. If you spend it on goods and services produced in the country the multiplier is much larger than on goods and services produced elsewhere but sold in the country by a local sales staff. These leakages plus monies received which are not spent but either saved or hoarded are subtractions from the overall multiplier impact.

So lets begin with some statistical facts. The current American deficit is about 1.7 % of the US GDP. The GDP is 13.97 trillion dollars( as of the end of the third quarter 2007) so the deficit is around 244 billion dollars. A 1 % stimulus package would increase the deficit by a further 140 billion, a 2 % package by 280 billion a 3 % package by 420 billion. During the war years 1943, 44 and 45 the deficit rose above 15% of the GDP peaking at over 31 % in 1943. A 3-5 % deficit is very modest indeed in comparison.

If we assumed a multiplier effect of secondary increases in expenditures traceable to the initial injection of 140 billion and a multiplier of 1.5(not all economists would agree that it would be that large, others might suggest it would be larger) the total impact of a one time injection would be $210 billion .

Total accumulated gross Federal debt of 9196.5 billion is currently(the net product of previous deficits and surpluses) 65.7 % of the GDP. During the war years 1942-45 this ratio reached 119 %of the GDP.

To finance this without raising interest rates the Fed Reserve can either buy bonds originally issued by the Treasury but currently held by individuals or financial houses for some of this additional amount thereby creating high powered money that partly offsets the sale of bonds by the Treasury which finances the deficit and then sell some of these bonds to the general community of investors or it can simply expand the money stock. If it does the former however and the financial markets resist the interest rate that the bonds are offered at, the Fed will have to purchase an equivalent further offsetting amount and or inject further high powered money into the system.Later as the economy recovers it can and should withdraw some of the stimulus by selling these bonds back to the investing markets.

(For a thorough discussion of these techniques and the operations of the Fed and the treasury see the work of Robert Eisner , a former president of the American Economics Association and late Professor of Economics at Northwestern University in Chicago where he taught macroeconomics. I had the pleasure of discussing these themes with Eisner in person in Montreal when I brought him to lecture to my students in 1988. Robert Eisner, How Real is the Federal Deficit, pp.131-135.New York;The Free Press, 1986. Eisner’s research and his book was supported by research grants from the National Science Foundation.)

The point is that true Keynesian stimulus involves the scissors effect of a fiscal stimulus financed by by a supportive monetary policy. This is why monetarists like Karl Brunner insist that Keynesianism would only work with the creation of high powered money. But that is a debate for another time.

In the current environment in the financial markets I would think that these bonds will be viewed as highly desirable investments. The more that the Fed purchases the bonds the greater the stimulus however. Strict monetarists will argue that this will also lead to higher inflation in the medium to long run.

Keynesians would not necessarily agree arguing that with a slowing economy and higher unemployment the stimulus will increase largely output rather than prices. Later as unemployment drops some of the stimulus will be transferred to the price side of (P.O i.e.average prices times units of output) at which time the Fed can sell more of the debt to the market.

Once the money is spent on tax rebates, infrastructure projects, food stamps and environmental projects it is received as income by both taxpayers and employees who are hired to work in these projects or who are hired by the private sector who because of the stimulus project have experienced a greater demand for their products or services and have changed their mood from pessimistic contraction to optimistic expansion.

The additional money injected circulates in the economy. Much of it depending on the average marginal propensity to consume will be spent again and recirculate throughout the economy changing expectations from pessimistic ones to optimistic ones.

Investments once postponed will be considered again and a number of them undertaken. As unemployment drops the economy moves from recession to steady growth again.The newly employed both spend their money on goods and service and pay taxes to government. Some of what was spent, but not all, returns to the Federal Government in new tax revenues. As the economy grows larger the debt to GDP ratio provided the interest rates are kept lower than the growth rate in the economy begins to fall.

A little later the actual deficit may well shrink as well.Excess savings that would have subtracted from total aggregate demand because they could not find suitable safe and attractive investment opportunities will now be effectively channelled into attractive investment opportunities.

The stock market beset by uncertainty and insecurity will also begin to experience bullish sentiments. The unemployment rates will drop perhaps by as much as 1 % point as over a million and a half new jobs
are added to the labour force. If the jobs pay on average 40-50,000 dollars the federal and state governments will reap substantial additional tax revenues to help reduce the cost of the stimulus package.

The stimulus package will have done its work.

What might go wrong ? Well the multiplier might be smaller because of leakages to foreign imports. Recipients of the tax rebates might decide not to spend their rebates trying to save them instead, less likely if the rebates disproportionately target moderate and low income people. The Fed may cause interest rates to rise by trying finance the deficit too quickly in the bond markets.

Financial journalist might write influential articles that convince people that the stimulus package won’t work and that interest rates will rise and inflation will result.

Here the collective wisdom of the public which is somewhat more Keynesian than the financial journalists will cancel out most of this kind of negative journalism.

Keynesian rational expectations rather than monetarist ones should prevail !

But for the moment if the members of Congress seize the day and the President co-operates and the package is large enough to do the job, the US can once again demonstrate western leadership in economic policy making that will have far reaching positive consequences.

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