Protectionism and the rise of Donald Trump; Erin O‘Toole wins Tory leadership with the support of social conservatives, Quebec nationalists and Alberta energy sector

One of the books on my shelves of economics literature in my hallway is Protectionism by Jagdish Bhagwati who has taught at Colombia University for many years. It was published in 1989 by MIT press but most of it is still very relevant to the current world of globalization and the rise recently of protectionist arguments fuelled by the presidency of Donald Trump . Bhagwhati was an outspoken advocate of trade liberalization and a strong critic of protectionism. He also makes the case that protectionism harms the interests of the vast majority in order to protect the interests of the minority that benefit from protected domestic production even if global productivity. suffers because of truncated trade and punitive oligopoly prices because of tariffs. The rise of Donald Trump and economic nationalism is the consequence of the failure of globalists and trade liberals to take seriously the actual consequence of freer trade on the employment prospects of workers who increasingly were affected by job losses, off-shoring and income lost due to lower wages and loss of jobs. Globalization of supply chains already was recognized by Bhagwati in the 1960s. One should also cite the work of Stephen Hymer and his pathbreaking work on the rise of the multinational corporation. But the political impact was underestimated . We are now living with the consequences in this covid age. (more on this later)

The theme of economic nationalism was also one of the appeals that the newly elected leader of Canada‘s Conservative party Erin O‘Toole . O‘Toole won the leadership at a virtual convention yesterday by capturing 57 % of the vote on the third ballot. He ran a campaign that tried to build a coalition of Alberta energy provincialists, Quebec nationalists and older bleu Quebec tories, and social conservatives who are found throughout the country. The Conservatives hope to force an early election by passing a non confidence motion aimed at the recent controversy over the We charity and the failure of Justin Trudeau and Bill Morneau the Finance Minister to recuse themselves from the approval process of a proposal to allow the We charity to administer the roll out and delivery of a program to fund student jobs. The controversy turned into a debacle for the Liberals with Bill Morneau resigning and Trudeau receiving lots of criticism. I could be wrong but I would be surprised if there were an election given the covid crisis and the relative youth of this Parliament. The NDP may well support the government fearing an early election. Whether the new Tory leader would do well in a new election is very debatable. A new election so soon after the last one in the midst of a pandemic seems unwise at the very least.

In the current parliament the Liberals who received 33.1 % of the vote have 157 seats;Jody Wilson-Raybould as an Independent 1; the Conservatives 34.4 % and 121 seats; the NDP 15.9% and 24 seats; the Bloc Québécois 7.7% and 32 seats; the Green Party 6.5% and 3 seats; other 0.4 % and 0 seats.There are 338 seats and 170 seats are needed for a majority. Seats are not proportional to the vote share because of our first past the post plurality electoral system which cries out for reform.The latest polls show virtually identical results once the margin of error is factored in with the Liberals at 35.3 %, the Conservatives at 30.7 %, the New Democrats at 17.4 %, the Bloc Quebecois at 7.3 % and the Greens at 3 seats with 7.2% others 1.8%.

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The Demand for Money and the issue of liquidity preference

The demand for money and the issue of excessive liquidity preference.

Keynes developed his notion of liquidity preference as outlined in the GT (1936) building on ideas he may have developed in part through his earlier supervision of Fredrick Lavington who had been a student of Keynes and later he was the Girdler Lecturer in Economics at Cambridge. His work The English Capital Market was first published in 1921. Lavington lectured at Cambridge from 1918 to 1927 and spent seven prior years at the Board of Trade. He died in 1927. ( See Donald Moggridge, Maynard Keynes An Economist‘s Biography, Routledge, London&NYC, 1992; F. Lavington, The English Capital Market, Methuen, London 1921.) In addition Keynes made use of his considerable insights from his work The treatise on Money published in 1930.

Keynes developed his money demand and Money supply theory in the following way starting from classical assumptions but then building in risk, uncertainty, complexity in financial markets and liquidity preference in order to show that there was a non zero demand for cash balances. This is what permits what I once called quasi hoarding of money . If that is so then it is understandable how such idle balances do not produce full employment and financial markets can be unstable. Disequilibrium is a real possibility and Say‘s law does not hold.

Keynes writes that M = M1+M2=L1(Y)+L2(r) where M is the total demand for money M1 is transactions and precautionary demand, M2 is the speculative motive demand; L1 is the liquidity function corresponding to an income Y which determines M1 and L2 is the liquidity function of the rate of interest r which determines M2 .

Keynes then states It follows that there are three matters to explore. i) the relation of changes in M to Y and r, ii) what determines the shape of L1; and iii) what determines the shape of L2 (GT p.200).All the changes in M occur as a change in money income. The new level of additional income can be the result of the Government through the Fed creating additional money buying treasuries, for example, and expanding its balances sheet. But Keynes points out that the new higher level of income will not necessarily be high enough for the requirements of M1 to absorb the whole of the increase in M; some of the money will seek an outlet in buying securities or other financial assets until r has fallen so as to bring about an increase in the size of M2 sufficient to stimulate a rise in Y to the extent that the new money is absorbed either in M2 or in M1 which corresponds to the rise in Y caused by the fall in r.Remember that bond prices always move in the opposite direction to the rate of interest.Buying bonds bids up their price and lowers the rate of interest.Selling them lowers their price and hence bids up the rate of interest.

Keynes goes on to specify that V is the velocity of money and there is no reason to assume it is a constant. Hence he writes L1 (Y) = Y V = M1 where YV is Y divided by V. The value of V will depend on the character of banking and industrial organization, on social habits, on the distribution of income and on the effective cost of holding idle cash balances. In the short period (and in my view Keynes errs here which helps the classical find their way back to the quantity of money argument) We can safely assume no material change in these factors and we can treat V as nearly enough constant ,(GT pp200-201) In the Marshallian instant period which is no more than a snapshot in time this might be true but not always so.The current Covid crisis shows how quickly things can change.

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Keynes on Marx versus his own approach

Keynes wrote very little on Marx although at one point he dismisses the labour theory of value as ‘‘out of date controverialising‘‘ and at another refers to Marx as a lesser figure than Sylvio Gessell, the German revolutionary Minister of Finance in the short lived Bavarian Soviet Republic in 1919 and former merchant and  monetary theorist. But there is an intriguing short passage in his collected works that offers an insight  as to what he thought of the great Hegelian of the nineteenth century.

Keynes compares Marx‘s notion of M-C-M‘ where M‘ exceeds M to the widespread view that the chain should read C-M-C‘.  Keynes writes as follows in a note in volume xxix, p.81, (CW Macmillan, Cambridge University Press for The Royal Economic Society, 1979.)


The excess of M‘ over M is the source of Marx‘s surplus value. It is a curiosity in the history of economic theory that the heretics of the past hundred years who have in one shape or another, opposed the formula M-C-M‘ to the classical formula  C-M-C‘ have tended to believe either that M‘ must always and necessarily exceed M or that M must always and necessarily exceed M‘, according as they were living in a period in which one or the other predominated in actual experience. Marx and those who believe in the necessarily exploitatory character of the capitalist system, assert the inevitable excess of M‘ ; while Hobson, or Foster and Catchings or Major Douglas who believe in its inherent tendency towards deflation and underemployment, assert the inevitable excess of M. Marx ,however, was approaching the intermediate truth when he added that the continuous excess of M‘ , would be inevitably interrupted by a series of crises, gradually increasing in intensity, or entrepreneur bankruptcy and underemployment, during which presumably, M must be in excess. My own (Keynes‘s argument) should at least …serve to effect a reconciliation between the followers of Marx and those of Major Douglas, leaving the classical economists still high and dry in their belief that M and M‘ are always equal !

This passage aside from its somewhat limited  interpretation of surplus value shows that Keynes was always keen to appeal to progressives to recruit them to the cause of establishing a revolution in economic thought in the midst of the Great Depression and that Marx had a large following among the young during times of crisis.


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Keynes A monetary theory of production

One of the major mistakes of some Keynesian interpreters and followers has been to underestimate the extent to which Keynes believed that monetary policy along side fiscal policy was and remains important. It is a necessary but not sufficient mechanism in the battle to escape from a slump and lower unemployment. One can think of it as a scissors effect, both blades monetary and fiscal are essential. It is clear from the texts in the Halley Stewart lectures of 1931 and also in vol.XIII ,XIV and XXIX of Keynes‘s collected works that Keynes intended that both monetary policy and fiscal policy were to be mutually supportive. Keynes never believed or argued that one could accomplish low unemployment and economic recovery by using only one of the strategies. Alvin Hansen in his work Monetary Theory and fiscal policy published in 1949 goes too far at a time when Keynes‘s collected writings were unavailable. Hansen argues (pp83 ff) that Keynes s approach is ‘‘the income approach not the ‘‘quantity of money approach‘‘ Hansen maintains that monetary policy was still important but secondary although still significant. He cites an article by G Findlay Shirras in the Economic Journal that argues that the quantity of money is a ‘‘very imperfect guide to the causes of the trade cycle.‘‘  Hansen goes on to explore the income approach  in terms which have become very familiar in standards macroeconomics in the Keynesian era. Y=I +C+G. In his original formulation in the Collected Works Keynes wrote about the differences in entrepreneurial behaviour with respect to earnings derived from the sale of consumer goods and earnings derived from profitable investment projects.


‘‘the cure of unemployment involves improving business profits. the improvement of business profits can come about only by an improvement in new investment relative to saving. An increase of investment relative to saving must also ,as an inevitable by product bring about a rise in prices, thus ameliorating the burdens arising out of monetary indebtedness. … what means (can) we adopt to increase the volume of investment, which …means in my terminology the expenditure of money, on the output of new capital goods of whatever kind.‘‘… the practical means by which investment can be increased ,is, or ought to be, the bankers‘ business , and pre-eminently the business of the central banker



Keynes then goes on to detail 3 methods of accomplishing this task. these are the restoration of confidence for both the lender and the borrower; second new construction programmes under the direct auspices of the government or other public authorities. the government can borrow cheaply and will not be deterred by overnice calculations as to the rate of return and third the reduction in the long term rate of interest…‘‘the main volume of investment always takes the forms of housing, of public utilities and transportation and the rate of interest plays …a predominant part.‘‘ As is always the case during a business cycle downturn brought about by the growth of pessimistic expectations and a consumption shock there is an excessive tendency to hoard idle balances of cash and to overly speculate on the future of bond and stock prices. This exacerbates the crisis and can lead to a severe shock when markets crash.

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Deficit hysteria continues at the Globe and Mail

I don‘t like to dwell on this topic since I would have thought that after the massive deficits. following the last financial crisis, the amount of quantitative easing which is what I called greater monetization of the debt by the central bank and the total absence of inflation as a problem ever since then- which is now twelve years- that the out of date monetarist anti deficit argument could be shelved for the near to medium future so long as we had high unemployment and a trend to falling prices.But there continue to be claims that we are endangering our society by following this prudent policy. Konrad Yakabuski has written another opinion piece asserting this argument.( The Bank of Canada keeps making the rich richer, August 1, opinion . The Globe and Mail) In this piece he claims that ‘‘politicians and academic economists‘‘ insist that the central banks anti deflation pro growth strategy has artificially kept the economy afloat in the short term but in the long term will only boost the stock market and be unsustainable.

The current ratio of debt to GDP is well below what it reached at the end of World War II

Whenever the Federal Government seeks to support the economy it has to use one of the following methods or  set of them to do the job. It can spend money that covers the cost of its programs and have a balanced budget as opposed to a surplus. This is slightly stimulative provided the government does not create a sinking fund to retire the debt in the future. To be more stimulative it needs to run a deficit to counter recessionary forces in the economy. Both by replacing lost incomes in order to stimulate consumption and by changing investor expectations about the future rate of return on investment projects. These projects can be funded by private firms, the government itself from tax revenues or supplemented by the central bank purchasing of government treasury bills and bonds. Since the Federal government issues its debt in Canadian dollars it is a sovereign monetary authority with respect to the Canadian economy so long as the debt is issued in Canadian dollars. If inflation is low as it currently is there is no risk of currency depreciation by the actions of speculators. Furthermore the Bank of Canada has currently lowered interest rates close to zero. This also acts as a stimulant to investment both by the private and public sectors. This is an excellent time for infrastructure investments for example, or investments in our health care or investments in our social policy and education system.

Debt monetization or q.e. is also stimulative to the extent it permits greater investment than what might have occurred in its absence. Some analysts who understand that Keynes originally thought of and entitled his General Theory as a Monetary theory of Production, like Abba Lerner may also argue that the greater monetization will also permit more high powered money to be created and less of the savings done by the private sector and individuals to be depleted by short term debt reduction. More on this later.

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Conservatives respond to Federal government‘s act to supplement and improve further Covid 19 support measures

The Conservative party in the Canadian  House of Commons debate on Bill C 20 has raised some constructive suggestions about how to fine tune the wage subsidy and income support measures in Bill C20. But unfortunately some of their speakers in parliament, notably Pierre Poilievre from Ontario, has spoken out against the rising deficit and the role of the Bank of Canada in helping to keep interest rates low and supply liquidity to the capital markets by expanding its purchase of Treasury bills, government bonds and corporate bonds. What was perfectly acceptable in the era of the financial crisis of 2008-2009 is now suddenly unacceptable in financing the war against Covid -19. Deficit hysteria is now once again loose among the Conservative party . This is a pity, since it is ill-informed and illogical considering all of the current circumstances and the fact that John Maynard Keynes was published by the great British Conservative politician and publisher Harold Macmillan who defended Keynes‘s work throughout the 1930s and 1940s.( Alister Horne, Macmillan 1891-1956 vol.1 ,pp.63,103,107 and 290,London:Macmillan, 1988)

Winston Churchill once said that the greatest mistake of his political career was returning to the gold standard against the advice of Keynes in 1925. It is unclear exactly who M.Poilievre is listening to but he should think about getting a different advisor. There is no danger of inflation at the present and foreseeable future . The current danger rather lies in disinflation and even deflation.

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Trudeau government‘s fiscal snapshot update

The Finance Minister Bill Morneau has once again revealed the Government‘s commitment to sensible progressive economic policy from which there is additional room to continue to provide income support for both business and working people who have lost their jobs.The statement which is over 160 pp including charts and tables opens with a quick snapshot of the current situation.As we can see from the chart 2 below taken from the report real GDP growth in 2020 has been sharply negative and unemployment has risen to 10%. But without the 300 plus billion of deficit spending the results would have been significantly worse.The various programs of income support and support for business will begin to expire by September so the government will need to both reform and renew some of  them depending on the circumstances we face with the pandemic and the economy and in the light of suggestions received about how to improve their effectiveness. Despite the usual complaints about deficit spending from fiscal conservatives and politicians who hold those views the debt to GDP ratio is very reasonable at 49 %.

Chart 1.5 also taken from the snapshot shows that Canada leads the way in significant income and liquidity support for the economy as a percentage of the GDP among G20 countries at 13.8 % of the GDP along with Germany.

Screen Shot 2020-07-09 at 1.17.02 PM
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Fall course offerings at Concordia U.

Its now July 6 and the U.S. is facing a major spike in Covid-19 following their premature opening of the economy. This seems likely to lead to further lockdowns in the months to come. Here in Quebec the situation is better although there are still new cases but for the time being we appear to be doing better as the number of new cases falls below 80, about the preceding average of the past five days, We cannot be complacent with such a deadly virus and the number of deaths remains a tragic legacy.

But this fall, I and my colleagues will be offering a full complement of courses for both undergraduate and graduate students online. In my case these will be Poli 204 and poli 610. In the case of Poli 204 which is  an Introduction to Canadian politics there is an e book available, from the publisher or one can order the physical text from the publisher . The text is L.Tossuti, E.Mintz, K.Brock and D.Barrie,Canadian Politics Today Democracy, Diversity and Good Government, North York: Pearson, 2020 isbn 978-0-13-528447. 

In the case of poli 610 the texts are John Maynard Keynes, The General Theory of Employment Interest and Money which is widely available;

Haroldchorneyeconomist, posts on Keynes, the deficit, debt management, monetarism, the depression of the 1930s, the financial crash and crises, quantitative easing, laissez-faire and the impact of covid- 19. A comprehensive list of the most important posts will be provided;

a biography of Keynes chosen from the following Robert Skidelsky, Keynes the Return of the Master; Peter Clarke,Keynes :The Twentieth Century ‘s Most influential economist; Zachary Carter, The Price of Peace:Money, Democracy and the Life of John Maynard Keynes ; Richard Davenport -Hines, Universal Man:The Seven Lives of John Maynard Keynes; Donald Moggridge,Maynard Keynes An Economist‘s Biography.

A.Fitzgibbons, Keynes‘s Vision

More details to follow including the Course outlines.

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The virtues of debt monetization.

Two weeks ago I wrote a letter to the Editor at The Globe and Mail critiquing  Konrad Yakabuski for the deficit hysteria he was presenting in an opinion piece on the Bank of Canada and the pandemic . The paper didn’t publish the letter. I reproduce it below .

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The economic consequences of Covid-19: more or less severe than the immediate consequences of the crash of 1929 ?

Its difficult to discuss such a tragedy that has cost so many lives in economic terms. But to make certain the damage from the pandemic is not made worse by poor policy decisions we need to understand the full impact of the shock of lock downs and widespread premature death. The cost of the loss of so many good people before their time cannot be overestimated. For their loved ones the loss is incalculable.

In narrow economic terms the change in the GDP and rise in unemployment  is a useful place to begin. Month to month from March to April the Canadian economy as measured by the GDP shrank by 7.2 %. The American GDP fell over the one month period March to April by11.75 %. Over the year to year period the American GDP fell by 13.7 %.

In the period of 12 months August 1929- August 1930 American GNP fell by 20 % over the year.Given the current rate of decline it is possible perhaps even likely that the decline in American GDP will equal or surpass the record of 1929 to 1930.

.So if the period is standardized as 12 months even if the rate of change in unemployment slows down the unemployment shock in the US is very substantial . There are also definitional issues in assessing the impact since many workers currently laid off will not all immediately be hired back immediately once a safe effective vaccine is found .

In Canada the unemployment rate has jumped to 13.7 % already higher than the average of just over 13 % for the whole decade 1930 to 1939. In four of these years 1932 1933 1934 and 1935 the rate was above 14.2%.reaching a peak of 19.3 % in 1933 then falling to 9.1% in 1937 and rising to 11.4 % in 1938 and 1939.(p.29, Harold Chorney, The deficit and Debt Management, CCPA 1989 from M.C.Urquhart and K.A.H.Buckley  Historical Statistics of  Canada) Wages and salaries fell fro m $2948 million dollars in 1929 to $1796 million in 1933 recovering to 2,633 million dollars in 1939. The GNP fell from 6134 million $ in 1929 to $3,510 million in 1933 recovering to $5636 million by 1939.

 In the UK the rise in unemployment was very substantial also. In 1929 long term unemployment was 43000 in 1929 . It rose to 288,000 by 1937. The GDP fell by 5.4 % from 1929 to 1932.(Crafts, N. F. R. “Long-Term Unemployment in Britain in the 1930s.” The Economic History Review, vol. 40, no. 3, 1987, pp. 418–432. JSTOR, Accessed 13 June 2020.) In April of 2020 the GDP fell by 20.4 % suggesting a sharp rise in unemployment. Currently the data on unemployment is out of date based on March results when the rate was close to 4 %. But because of widespread furloughs temporarily supported by income replacement programs UK unemployment is likely to be underestimated until June data is released. From April 2019 to April 2020 the UK suffered a fall in the GDP of 24.5%.(The Office of National Statistics , cited in W.Schomberg & David Miliken, U.K. economy fell by a quarter during ‘catastrophic‘ March and April The Globe and Mail, June 13,  2020, p.B3) 

So its too soon to make a judgement on whether the pandemic has had worse narrow economic consequences than the crash of 1929 and the Great Depression. But the evidence is quite strong that much more stimulus, more public works and income replacement is necessary for Canada, the UK and the U.S.

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