Austerity and Aggregate Demand:some harsh facts

Posted on January 30, 2012 by haroldchorneyeconomist

The European leadership has announced it has agreed to a new pact on fiscal discipline with the German Chancellor Angela Merkel leading the way in imposing strict austerity on member countries in the Eurozone.

The goal is to force countries with supposedly high deficits and debt to GDP ratios to reduce them so that their deficits do not exceed 0.5 % of their GDP. But since the countries with elevated debt to GDP ratios are almost always countries experiencing high unemployment, this pact make little sense.

Europe is still mired in high unemployment (except in Germany) and is still suffering the fallout from the financial crash of 2007-2008. Imposing austerity and budget cutting is the wrong policy in the wrong place at the wrong time. It quite simply makes no sense and demonstrates the very weak hold of the politicians and their chief advisors on understanding macroeconomics and the nature of aggregate demand.

Just look at the arithmetic involved. Aggregate demand is composed of consumption, investment, government expenditures less taxes  and total exports minus imports. That is: ∑ D= C+I +(G-T) +X-M. Austerity and budget cutting involves a combination of increasing taxes and reducing government expenditures. In other words reducing the value of the expression G-T which is a measure of the government deficit. But if we do this, then aggregate demand ∑D is also reduced by at least an identical amount. Since employment is a function of aggregate demand , N=f(D), unemployment must rise because of these policies. Deliberately increasing unemployment during a deep slump is madness and bound to increase the severity of the slump and the suffering that goes with it. These may seem like harsh judgements but they are the facts.

Unless you believe that imposing austerity somehow stimulates private investment. But there is absolutely no evidence for this approach. Why should entrepreneurs increase investment if governments are cutting back ? Since the public sector cuts and increased taxes decrease aggregate demand, who will buy the new output associated with the new investment ? Rather than risk losses the entrepreneurs will more likely sit on their cash rather than risk it prematurely. Investments will be frozen out by the chilly climate and decline in aggregate demand that austerity promotes.

In the presence of public sector stimulus private investment is crowded in by the prospects of greater profits that accompanies the rise in aggregate demand even if the entrepreneurs oppose stimulus for ideological reasons. So long as the central bank defeats bond market blackmail by keeping interest rates low, public sector deficits that finance useful investments increases and sustains aggregate demand.

But in austerity the exact opposite will occur.

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The importance of aggregate demand

Posted on January 24, 2012 by haroldchorneyeconomist

It amazes me but it appears from the largely negative reaction to a good piece by Larry Summers in the Financial Times, Economic Uncertainty  is no Excuse for  Inaction, about the importance of combining low interest rates with government spending to bolster both positive expectations and aggregate demand that there are plenty of otherwise sophisticated people who still do not understand the concept or denounce it for foolish partisan reasons. Have a look at the FT piece by Summers in todays edition of the FT and the comments of readers including myself) and later today when I return from my teaching I will develop the point at greater length. In the meantime just remember its not enough to produce the goods and potential services you have to sell them as well. Just like ABC,  C+I+(G-T) +(X-M) = Aggregate Demand is a bedrock principle of the macro-economy.

Aggregate demand as Keynes pointed out in his General Theory is at the core of his critique of classical economic theory. From the time of Ricardo forward into the first part of the 20th century it had literally largely disappeared from discussion except in the work of Malthus, Marx, Hobson, Sylvio Gesell and certain other marginalized critics of unregulated capitalism.(See Keynes GT p. 32) the classical doctrine influenced as it was by Say’s law argued that except for brief periods of disproportionality between supply and demand all gluts could be cured by the adjustment of the price system since the cost of labour would with minimal friction adjust to the labour market clearing wage. Keynes takes great trouble at the outset of the GT to explain that every increase in output  which generates additional income leads to increased consumer spending but not as much as spending as the increase in income itself. This then leads to the necessity for additional investment to supplement the increased consumption and thereby soak up the additional savings that have been generated. Otherwise the gap between supply and effective demand  will grow. In the absence of the special assumptions of the classical school by which there is ”some force in operation” to fill the gap between  the increased supply and D1 the economy can be stuck at an equilibrium at well below full employment. (GT, p.30) Hence the marginal disutility of labour and the real wage do not contrary to the classical assumptions establish the level of employment. Rather total effective aggregate demand and especially the propensity to consume and the rate of new investment are the determining factors.

Hence investment becomes a key component of aggregate demand. In Keynes’s original terminology  D1 + D2 =D where D1 is consumption and D2 is investment and D is aggregate Demand. D= f(N)   D1 is a function of employment and the marginal propensity to consume and D2 is a function of N, total employment but also influenced by the marginal efficiency of capital, itself influenced by expectations, animal spirits and uncertainty. In modern macroeconomics   these are known as C+I. but in recent years in the new classical macroeconomics that dominated the profession the very notion of aggregate demand had been supressed since it was and is a bedrock principle of this school that markets always clear , what counts is aggregate supply Z=Φ(N) as Keynes described it and the elimination of market frictions.

The classical school according to Keynes operated with a version of Say’s law of markets which argued in its vulgar form that supply always created its own demand. (David Laidler, Thomas Sowell and other classically inclined economists dispute this, arguing that Keynes set up a straw man in his description of Say’s law. See also Samuel Hollander, Classical Economics,Uof Toronto press, pp.242-250) This meant according to Keynes that f(N) and Φ(N) would be equal for all values of N. As he stated in the classical world ”effective demand instead of having a unique equilibrium value , is a… range of  values all equally admissible” (p.26,GT)  . In such circumstances there is never an obstacle to full employment and the marginal disutility of labour sets the level.Unemployment then becomes either voluntary or the result of inadequate job search or ignorance about what the market clearing wage is.  Keynes sets out then to demolish this notion to demonstrate that inadequate effective aggregate demand can result in involuntary unemployment.

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U.S. unemployment drops to 8.5% Canadian unemployment rises to 7.5%. Euro area 10.3 %.

Posted on January 6, 2012 by haroldchorneyeconomist

American unemployment fell to 8.5% last month as 200,000 more jobs were added to U.S. employment. This is another modestly positive development suggesting that the slow but steady recovery is continuing in the U.S. If one had experienced job gains in the public sector as opposed to little gain in the sector the results would be even better. The number of unemployed persons continued its downward trend as since August the unemployment rate has fallen 0.6%. Discouraged workers who have stopped looking for work because they believe there are no jobs available remains high at 945,000 but is down from a year ago by some 373,000. the main areas that showed positive employment growth were manufacturing up by 23,000, retail trade up by 28,000, and health care up by 23,000, food service and drinking places also added 24,000 jobs up over the year by 230,000 jobs.Unemployment among Black and Afro Americans remains elevated at 15.8 % and among Hispanics at 11.0 %. Unemployment among Asian Americans is 6.8% and among Whites is 7.5%. Among those over the age of 25 the unemployment rate among those holding a college degree is low at 4.1% while those with less than a high school diploma have a rate of unemployment of 13.8 %.the overall labour participation rate held steady at 64 % but this down from a year ago when it was 64.3 %. So the trend remains positive but bigger gains are still needed to bring the rate more swiftly below  8 % in the next few months and perhaps below 7 % a year from now.

In Canada the situation was somewhat the opposite. The change is small but in the wrong direction. Unemployment rose for 7.4 % last month to 7.5 % this month. Most of this rise in unemployment took place in Quebec where the rate rose to 8.7% up from 8.0 % in November.In contrast, the rate fell in Ontario down from 7.9 to 7.7 %.    The latest survey of consumer confidence was the most pessimistic it had been in more than a decade. But perhaps this will shift as the American economy continues to recover and if the Federal and provincial governments reverse policy that has leaned in recent months in a contractionary direction. Given the rise in unemployment and the troubles in Europe it is clearly the wrong time to be implementing or even speaking of cuts and austerity.

According to the latest release from Eurostat unemployment in the Euro area has risen to   10.3 %(in the broader European union it is 9.8 % It is highest in Spain at 22.9 % and lowest in Austria at 4.0 %. the following table is derived from Eurostat data.

European unemployment rates:selected countries

Austria 4.0 %

Netherlands 4.9 %

Luxembourg 4.9 %

Germany 5.5 %

Belgium 7.2 %

Sweden 7.4 %

Denmark 7.8 %

U.K. 8.3%

Italy 8.6%

France 9.8 %

Youth unemployment is 46.6 % in Greece; 49 % in Spain;35 % in Slovakia; 8.1 % in Germany;8.3 % in Austria and 8.6 % in the Netherlands.

 

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Poli 463 course outline:Keynes versus the monetarists

Posted on January 2, 2012 by haroldchorneyeconomist

Poli 463/ 2012

Poli 463/2 fall 2012 course outline under constructionPoli 463/2
Government and Business course outline
Keynes versus monetarists before and after the crash of 2008
Prof.Harold Chorney
Fall/winter 2012Course overview:This course explores the tools that are necessary to deal with the contemporary global economy and the public policy that is appropriate after the events in the financial markets these past four years.The crash of September 2008 in the financial markets,the financial bubble that preceded it, the global dimension to the recession which followed it and the presence of widespread significant fraud and excessive reckless risk taking obliges us to reinvigorate standards of regulation in the public interest and to understand the full dimension of financial instability.Governments all over the world have reacted by engaging in re-regulation, Keynesian deficit finance and a dramatic overhaul of policy to roll back some of the laissez-faire ideology that had come to dominate public policy over the past two decades. In recent months there has been considerable backtracking as the defenders of laissez-faire and the Republican critics of President Barack Obama have reasserted the ”wisdom” of laissez faire against what they claim are the failures of liberal socialism and Keynesian intervention and social engineering. Jean Claude Trichet the former head of the European central bank has also been outspoken in his defense of sound finance and budget balance. Austerity rather than stimulation has been adopted by Europe and consequently there has been a major rise in the rate of unemployment and the slump in Europe has deepened.Hence the debate between the two schools continues.The new British coalition Liberal conservative Government under the leadership of David Cameron and Nicholas Clegg has unfortunately also embraced sound finance and budget slashing despite the severity of the recession in the U.K. and the evidence that Labour’s return to Keynesian stimulation was working.

In the past this course examined intensively the clash between the Keynesians and the monetarists and the impact of this paradigmatic debate upon public policy. It also examined the neo-conservative and neo-liberal ideology and the break these ideologies have made with post-war liberalism, progressive toryism and social democracy. It argued the case for a return to Keynesian public policy.

This has happened to an extent in the leading capitalist economies like the US and Japan, post crash. In many respects the new American Presidential administration of Barack Obama has led the way, although critics like Nobel prize winners Joseph Stiglitz and Paul Krugman and others have argued that the American stimulus was too small and improperly focused. It had also been undertaken minimally in Europe with Great Britain and to a lesser extent France leading the way, with Germany a very reluctant follower. But in the past year Europe has reversed course and foolishly embraced austerity. Despite considerable resistance it has, in a much less dramatic fashion, been undertaken in Canada by the Harper conservative government.

We shall still do some exploration of the history of the previous monetarist classical macroeconomics paradigm but I intend to spend more time this year on deepening our understanding of how the Keynesian technique of demand stimulation is intended to work, the implications for public policy, and how I believe it should work given all of the economic and ideological changes that have occurred over the past thirty years. We will also explore the current return to austerity in Europe and the sovereign debt crisis in Europe.
as well as  the environmental movement and assesses how environmentalism and green public policy can be integrated with Keynesian approaches to globalization.

We explore the transition from the original Keynesian welfare state to the neo-con/neo-liberal doctrine of balanced budgets, free trade and unregulated globalization and to its consequences and now to the partial return of a refurbished Keynesian approach to public policy. The role of the media and popular culture in transmitting these changes is also explored.The impact of the successful Obama campaign for the Presidency as well as the Republican neo-conservative counter-attack will also be explored in terms of its impact upon public policy.

Texts and basic readings:

The first six works are basic texts and are available either from the Concordia bookshop , the library on reserve, on the net or in the case of The Deficit papers from me.

John Maynard Keynes, The General Theory of Employment, Interest and Money.

Mario Seccareccia and Hassan Bougrine, eds. Introducing Macroeconomic Analysis:Issues , Questions and Competing Views:Toronto: Edmund Montgomery publications, 2010.

Joseph Stiglitz, Free Fall:America, Free Markets and the Sinking of the World economy , 2010

Peter Clarke, Keynes:The  Rise, Fall, And Return of the 20th Century’s Most influential Economist, New york :Bloomsbury Press, 2009.

The Rotman School of Management, the finance Crisis and rescue:What went wrong? Why? What lessons can be Learned ? Toronto:U of Toronto Press, 2008.

Harold Chorney, The Deficit Papers available from me in electronic format.

Other core readings:

Robert Skidelsky, Keynes, The Return of the Master:New York:Public Affairs, Perseus group,+ in U.K.  Allen Lane,  Penguin, 2009,2010.

Hyman Minsky, Stabilizing an Unstable economy

Can ”It” Happen again?:Essays on instability and finance

John Maynard Keynes

Kevin Phillips, Bad Money:Reckless finance, Failed Politics and the Global Crisis of American Capitalism

David Mendell, Obama from Promise to Power

Harold Chorney, “On Manias, panics and bail-outs:further thoughts on the financial crisis” see my blog Haroldchorneypoliticaleconomist.piczo.com.

Harold Chorney, Revisiting deficit hysteria, labour/Le travail, #54, 2004 available on the net

Harold Chorney, The Global Financial Crisis, the Re-emergence of Keynes and the Role of Quantitative Easing
paper Presented to the World Congress of Social Economics, Concordia university, Montréal, June 2010 (excerpt on blog.)

Harold Chorney Restoring full employment:the natural rate of inflation versus the natural rate of unemployment paper presented to the Conference on Social Policy as if People Matter, Adelphi university, Garden City New York, November 12, 2004 (available on net)

Alvin Hansen, A Guide to Keynes (on reserve)

Sidney Blumenthal, The rise of the Counter-establishment:From Conservative Ideology to Political Power

Desmond King, The New Right:Politics, Markets and Citizenship

Brian Snowdon and Howard Vane, eds. A macroeconomics reader, 1997.

Snowdon and Vane, Modern Macroeconomics:its origins, development and current state.Edward elgar, 2006

The following are some selected basic supplementary readings.You are not expected to read them all but rather portions of some of them. Some of them will be placed on reserve. Others are available through the library .They are intended to help with your research papers and illustrate the breadth and richness of the literature in the area.

John McMurtry, Unequal freedoms:the global market as an ethical system.

Adam Harmes, The Return of the state: protestors, power brokers and the new global compromise, douglas and mcIntyre, 2004.

Henry M.Paulson,Jr. On The Brink, Inside the Race to Stop the Collapse of the Global Financial System, N.Y. :Business plus, 2010;

Scott Patterson, The Quants:How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, N.Y.: Crown Business, 2010;

William Cohan; House of Cards:A Tale of Wretched Excess on Wall Street,N.Y.:Random House Doubleday, 2009;

Benoit Mandelbrot & Richard Hudson, The Misbehaviour of Markets:A Fractal View of Financial turbulence, N.Y.:Basic Books, 2004;

Kevin Phillips, Bad Money:Reckless Finance, failed politics, and the Global Crisis of American Capitalism, N.Y.:Viking, 2008;

Haroldchorneypoliticaleconomist.piczo.com; Haroldchorneyeconomist.com

Nouriel Roubini & Stephen Mihm, Crisis Economics:A crash course in the future of finance, N.Y.&London: the Penguin Press, 2010;

Paul Jorion, La Crise:Des subprimes au seisime financier planétaire,Paris, France: Fayard, 2008;

Richard Posner, A failure of Capitalism:The crisis of 08 and the descent into depression, Cambridge, Mass. and London U.K., 2009;

Bill Bamber & Andrew Spencer,Bear Trap: The Fall of Bear Stearns and the Panic of 2008, New York :Brick Tower Press, 2008;

Richard Bookstaber,A Demon of Our Own Design: Markets, Hedge funds and the Perils of Financial Innovation,Hoboken N.J., John Wiley & sons, 2007 )
John Kenneth Galbraith, The Great Crash,1929
Alvin Hansen, Monetary theory and Fiscal Policy.
Fausto Vicarelli, Keynes:The Instability of Capitalism
George Soros, The New Paradigm for financial markets..
Charles Kindleberger, Manias, Panics and Crashes.
The World in Depression:1929-1939.
David Colander and Dewey Daane, The Art of Monetary Policy.
J.A. Trevithick , Involuntary Unemployment:Macroeconomics from a Keynesian Perspective.
Robert Kuttner, Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.
Tim Lewis, In the Long Run We`re all Dead: The Canadian Turn to Fiscal restraint.(on reserve)
Robert Ascah, Politics and Public debt:the Dominion, the Banks and Alberta’s Social Credit.
Doug Henwood, Wall Street.
Richard Parker, John Kenneth Galbraith: His Life, His Politics , His Economics.
Peter Clarke, The Keynesian Revolution in the Making.
Will Hutton, The Revolution that Never Was: an Assessment of Keynesian Economics.
Lawrence Klein, The Keynesian Revolution.
J.C.Gilbert, Keynes’Impact on Monetary Economics.
Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes.
Gary Teeple, Globalization and the Decline of Social Reform(reserve)
Jonathon Michie and John Grieve Smith eds., Managing the Global Economy.
David Held & Mathias Koenig-Archibugi, Taming globalization: frontiers of Governance.
Bao Gao, Japan’s Economic Dilemma:the institutional origins of prosperity and stagnation.
Sidney Blumenthal, The Rise of the Counter Establishment, From Conservative Ideology to Political Power.
Armand Van Dormael, Bretton Woods: Birth of a Monetary System.
Robert Lucas, Studies in Business Cycle Theory.
Milton Friedman,” The role of monetary policy” The American Economic Review, 1968, vol.58, March, pp.1-17 reproduced in Brian Snowdon and Howard Vane, A Macroeconomics Reader.
Alan Blinder, The fall and rise of Keynesian economics, Economic Record, 1988, December reproduced in Snowdon and Vane., A Macroeconomics Reader
James Tobin, “Price Flexibility and output stability:an old Keynesian view.Journal of Economic Perspectives, 1993 vol7, Winter. reproduced in Snowdon and Vane.a Macroeconomics reader
David Laidler, Monetarism:an Interpretation and an assessment.Economic Journal,1981, vol.91 March reproduced in Snowdon and Vane.
F.A.Hayek, The Fatal Conceit:The Errors of Socialism.
Allan Meltzer, A History of the Federal Reserve, Vol. 1:1913-1951.
James Rock ed. ,Debt and the Twin Deficits Debate.
Robert Heilbroner and Peter Bernstein, The debt and the Deficit:false Alarms/Real Possibilities.
Harold Chorney& Phil Hansen, Toward a Humanist Political Economy
Joseph Stiglitz, The Roaring Nineties;
Making Globalization Work
Thomas Kuhn, The Structure of Scientific revolutions;
Adam Harmes, The Return of the State:Protesters, power brokers and the new global compromise;
Georges Campeau, From UI to EI:Waging War on the Welfare State;
Stephen Clarkson, Uncle Sam and Us.
Michael Woodin & Caroline Lucas, Green alternatives to Globalisation.
Al Gore, An Inconvenient Truth,the planetary emergency of global warming and what we can do about it.
Nicholas Stern, Review Report on the economics of climate change to the British government (available on the internet)
Gwyne Dyer, Climate Wars.
Rubin Simkin, Comments on Consumption, Income distribution and Growth (on reserve)
E.F.Schumacher, Small is Beautiful.(on reserve)
E.J.Mishan, the Costs of Economic Growth (on reserve)
J.Kenneth Galbraith, The New Industrial State (on reserve)
The Affluent Society (on reserve)
A Short history of financial euphoria.
Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (on reserve)
Joseph Schumpeter, History of Economic Analysis.
Paul Davidson, Post Keynesian Macroeconomic Theory.
H.Binhammer, Money and Banking and the Canadian Financal System
Alan Booth, British Economic Policy 1931-1949.Was There a Keynesian Revolution?
Anna Carabelli, On Keynes’ Method.
Leo Pliatzky, The Treasury under Mrs. Thatcher.
L.Randall Wray, Understanding Modern Money.the Key to Full Employment and Price Stability
William Greer, Ethics and Uncertainty, The Economics of John M. Keynes and Frank H. Knight.

Students are also expected to read extensively the financial and quality press each week.These include The Financial Times, The New York Times,the Wall Street Journal, The Guardian,the Globe and Mail, and focus on stories on the economy, the financial crisis and the recovery.

Evaluation: Essay due mid term, the first week of  March 50 %

Final exam 50 %.

Topics

1.Introduction and overview.The interface between economics and politics.The art and science of political economy. The recent financial crisis, sub -prime mortgages, bank bailouts and the crash of 2008. Sovereign debt , the euro and the potential of quantitative easing. The need for stimulus and the revival of Keynes. The eclipse of monetarism.? The challenge of climate change and the protection of the environment. The impact of the crash and challenges before Barack Obama. The rise and fall of the new right.The Canadian response. the origins of macroeconomics.

readings: Chorney, On manias , panics and crashes; Chorney; the introduction to the Deficit papers,Chorney the global financial Crisis, re-emergence of Keynes and origins of Quantitative easing.the essay on Keynes in the Deficit papers;chapter one in Kuttner.Obama’s challenge.chapter one in Phillips. Kindleberger; Galbraith, on the crash and Minsky, introduction to Can it Happen again and editors’ introduction to stabilizing an unstable economy.
chapter one Seccareccia and Bougrinepp.1-33.Snowdon and Vane, introduction.modern macroeconomics.

2.Globalization and the ethical dilemma. Myths and truths about globalization.The environmental challenge.Economic growth and entropy.
Readings: Nicholas Stern, Al Gore;K.Phillips; Stiglitz, introduction and chapter one. John McMurtry pp.1-52.

3. The myth of no alternative.The role of regulation and public enterprise. Laissez-faire versus planning.Hayek versus Keynes. The eclipse of Marx.The rejection of Keynes. Daniel Bell and the End of Ideology. The rise of post-modernism and the new classical macroeconomics.
Readings :Chorney global financial crisis…; Chorney deficit papers :The future of crown corporations:government ownership, Regulation or market control,A Keynesian approach, 1998; Blumenthal; King, Hayek, Mcmurtry, Harmes, Lucas, Friedman,Laidler.

4.The role of the media; political pressure groups;democracy propaganda and the policy process. The rise of the neo-cons.
Media and popular culture in the post modern age.The post war consensus and how it unravelled. Stagflation
and misinterpreting the General theory.
Readings :Chorney the deficit papers: The economic and political consequences of Canadian monetarism; Keynes and the problem of inflation.Keynes, the General Theory The two postulates of classical economics; the possibility that labour markets do not clear; the notion of involuntary unemployment.
Blumenthal, King, Block, Chorney, the natural rate of inflation…, Keynes GT ch.1-3; Peter Clarke Keynes, introduction.

5. The consumption function. The multiplier. Savings and investment.The theory of interest rate determination.Readings: Keynes GT; Hansen a guide to Keynes.

6. The controversy over debt and public finance.readings:Cavenaugh, Rock; Eisner; Heilbroner and Chorney: Rediscovering deficit hysteria, The deficit: hysteria and the current crisis and Chorney commentary on the FT’s austerity debate plus U tube video on deficits and debt.

7. The strategy of stimulus. investment in infrastructure. Investment versus tax cuts. The impact of capital flows.
Readings :Chorney blog entries on stimulus and the strategy behind it plus others tba.

8. The roots of neo-conservatism.The cold war. The Vietnam war and the sixties. The OPEC crisis of the 1970s. Stagflation. Thatcher Reagan and Mulroney in the 1980s. The Clinton, Blair and Chretien third way.The Bush and Blair war in Iraq. The challenge of Afghanistan.The resurgence of liberalism in America. Obama’s challenge.
Readings: blog; Stiglitz Free Fall; Stiglitz The roaring nineties;globalization and its discontents.Chorney and P.Hansen Toward a Humanist Political economy, The falling rate of legitimation ; introduction and Neo-conservatism, social democracy and provinve building;King and Blumenthal.

9. The roots of monetarism.Hayek versus Keynes in the thirties. Friedman versus neo-classical Keynesianism in the sixties and seventies. The post-Keynesians and John Kenneth Galbraith. Towards a new Keynesian paridigm.The return of regulation and the state. The bail-out of the banks , Freddie Mac and Fannie Mae and AIG insurance ; cleaning up the bubble,Readings :Stiglitz,Paulson,Phillips, Tobin; Blinder; Davidson;Harmon; Chorney

10. Post and neo-Keynesian policy in the age of OPEC. readings:Davidson,Harmon , others TBA.

11. Development issues. The IMF and the World Bank. The turn to the left in Latin America. The return of full employment ? Capitalism in Asia.
Readings: Stiglitz, Chorney.

12. Prospects for democracy, balanced ecologically sound growth and the compassionate society in the new world order.

Weekly notes: I will use this space to refer students to readings, updates sources etc.

Please note that the reading Harold Chorney,”On manias, panics and bailouts:further thoughts on the financial crisis” is available by referring to my blog. Jan.14, 2009 On manias, panic and bailouts: further thoughts. Keynes GT is sold at the co-op bookshop on Bishop. There are also numerous copies in the libraries around town including Concordia and it is also accessible on line. Begin reading the first 50 pages and we will discuss it in class.

Please go to the PBS.org site and watch their excellent documentary Inside the financial Meltdown which was broadcast on Frontline.It provides an insightful and personal look at the financial crisis as it unfolded in New York and Washington in 2008.

Essay assignment due in class in the first week of  March .
Please research and write a 12 to 15 page essay on one of the following topics or if you prefer propose an alternative topic to me. Be sure to use a manual of style, include a full bibliography and proper notes identifying your sources. Sources should include books, periodical literature, quality financial papers like the Wall Street Journal, the Globe and Mail, The Financial Times or the New York Times well as internet sources.

Possible topics include:

1. Discuss the root causes of the financial crisis. Explore the factors that influenced its unfolding as it has. What are the principal flaws in the economic theory that business leaders and policy makers relied upon that led to this crisis? How must economic theory be reconstructed to avoid these policy failures in the future?

2. Compare and contrast the monetarist approach to public policy and management of the business cycle with the Keynesian schools’ approach.Why and how did monetarism displace the Keynes style approach in the 1970s? Does the current crisis suggest another paradigm shift?

3. Discuss the controversy over government use of deficits to stimulate the economy in an economic downturn.Explore the role of deficits in the current policy environment. How does the Canadian Harper stimulus compare with that of the Obama administration? What is the appropriate monetary policy in conjunction with stimulative deficits ? what impact will the new Osborne budget in the U.K. likely have ?

4. Explore the roots and current operations of the IMF and the World Bank.
What reforms appear necessary at these institutions. Give concrete country based examples.

5. Explore panics, manias and crashes in financial history. How does this panic compare with previous ones ?

6. Explore the theory of the multiplier and Keynes’ theory of investment. How ought we to modify Keynes’ theory of investment to adjust to the current circumstances of globalization ?

7. Explore the roots of neo-conservatism. Does it have a future ?

8. Explore the environmental aspects of economic stimulus. Is there an inherent contradiction between stimulus leading to full employment and sound environmental policy ?

9. What would constitute a viable and contemporary theory of economic liberalism that would respect the social and economic needs of people but at the same time be open to global values ?

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Poli 349 Winter term 2012 course outline

Posted on January 2, 2012 by haroldchorneyeconomist

Poli 349 winter 2012

POLITICS 349 Winter 2012
Professor Harold Chorney
Concordia university
Chorney@alcor.concordia .ca
office hours Tuesday 5:10 to 6 +Thurs. 5:30 -7.
This course explores the deep seated search for community in the context of the debate between postmodernism and modernism and the nature of metropolitan culture.We trace the emergence of the global city and the profound impact this form of urbanization has had on everyday life.The recent economic slump that has emerged following the great crash of 2008 once again casts a shadow on the life of modernity. The need for solidarity and community is once again a high priority in the values of many.Indeed it may well be an existential need. For the past two centuries the rise of the city has been one of the most profound transformations in daily life. We explore the the evolution of the town into the city, the city into the metropolis, and the rise of class and then mass society.We examine the role of mass society in contributing to the rise of global culture and the tensions that this presents. The debate between modernism and postmodernism is essential to tracing the cultural, political and socio-economic impact of this evolution. The course explores this argument in the history of social theory and the on-going quest for community that appears to be at the heart of the modern urban and political experience.

Texts: Harold Chorney, City of Dreams, Nelson Canada 1990. A large format edition of this work is available from Nelson-Thomson, 2002 and has been ordered for the Concordia  bookshop.

Lawrence Cahoon ed. , From Modernism to Postmodernism:An Anthology Blackwell, 2003.2nd edition.Available in the  bookshop.

Richard Appignanesi and Chris Garrat, Postmodernism for Beginners.

An additional text on contemporary cities and urban politics will be announced in the first several weeks of class. Evaluation: One essay 50 % due mid term and one final test 50 %; or one practicum 20% and one essay 30 % and one final test 50 %.

Topics:

1. Introduction: The quest for community.reading: Chorney, introduction, pp1-9. Cahoone, introduction pp1-13.

2. Modernism versus post-modernism.The emergence of virtuality. La vie quotidiene.reading; Cahoone introduction, and pp.17-62. Appignesi and Garrat, introduction.

3. Further exploration of modernism versus post modernism.Readings: Cahoone: Hegel, Baudelaire, Freud, Husserl, Heidigger,Bell, Derrida, Horkheimer and Adorno, Lyotard, Rorty and Habermas.Others tba.

4. Alienation and class consciousness. The quest for community in the work of Marx and Engels. The influence of Hegel.The significance of the French Revolution. Reading Chorney. chapter two.

5. The critique of Ferdinand Toennies. Gemeinschaft versus Gesellschaft.Chorney , chapter 3.

6. The metropolis and mental Life. Georg Simmel, Berlin and the intensification of nervous stimuli. chapter 4

7. Urbanization and anomie: The work of Emile Durkheim.Chorney chapter 5

8.Max Weber: Modernism and Disenchantment.Chorney , chapter 6; Max Weber, Economy and society, selected chapters; Arthur Mitzman, Max Weber and the Iron Cage of Reason.Hans Girth and C.Wright Mills, Introduction to Max Weber.

9. The Chicago School and contemporary American mainstream urban theory. From Frank Park to Louis Worth to Herbert Gans and Claude Fischer. Saskia Sassen, Globalization and its discontents .

10. Georg Lukacs:Reification and the consciousness of the proletariat.Chorney, ch. 8.

11.Walter Benjamin:The culture of mechanical reproduction. The culture industry, from Berlin to Paris to Hollywood.The eclipse of post-modernism ? The dialectic of enlightenment. Canadian Renaissance cities. Benjamin, the arcades project.Chorney ch.9.

12. The phenomenology of the urban.From Social theory to public policy and urban politics.The Canadian metropolis;Montreal urban politics. Chorney, ch.10 & .Macleans cover story on Montreal. Nov. 9, 2009.

13. Conclusion: Toward a critical theory of public policy. The metropolis and globalization.

Essay assignment: Due in class the first week in March on Thursday.

Please research and write a 12-15 page essay on one of the the following topics. Be certain to use a manual of style for example , Kate Turabian, A Manual for Writers, University of Chicago Press and include it in your bibliography. Each essay should have a cover page with your name, the title of the essay, course details etc , as well as footnotes or end notes and a separate bibliography. In your bibliography include all works you have consulted and cited. Be sure to consult books, periodical literature of an academic nature, quality newspapers and magazines where appropriate and internet material .Do not plagiarise other authors’ work. Always acknowledge your sources properly.With respect to internet items give the time and date at which you consulted the material. List of suggested topics:

1. Discuss the relationship between Marx and Hegel. Is it possible to understand Marx without seeing his Hegelian connection?

2. What is post-modernism ? What is its relevance to the contemporary world we live in ? Is it excessively pessimistic or realistic about political change and popular culture ?

3. Select a writer from City of Dreams and explore his work in depth.

4. Discuss the political economy of Marx. What relevance , if any does it have to the global metropolis ?

5. What is a feminist critique of metropolitan life entail ? Can we differentate the urban experience by gender ? Provide a detailed answer.

6. Select an urban planning issue like homelessness, public transportation, building an ecological city, grassroots urban political movements or rebuilding urban infrastructure and explore it in detail.

7. Explore the political and constitutional status of cities in Canada. What changes are needed in order to improve the governance and economic performance of our cities.

8. How has the recent economic crisis affected our sense of global culture and metropolitan life ?

9. Select a major Canadian or global metropolis and do an intensive case study of the city, its history, its contemporary status, its political economy and its cultural life.

Class notes:

A:Useful in conjunction with the lectures on Marx and the metropolis

1. The falling rate of profit. Major financial crises like the one we have just experienced and the tensions surrounding globalization raise fascinating questions about the structural problems of modern capitalism. In the nineteenth century and for much of the twentieth century many economists debated this question. Keynes was convinced that there was little value in returning to any debate that was wedded to the anachronistic labour theory of value. Instead, he approached the issue of crisis from the point of view of less than full employment aggregate demand and the failure of the classical labour market clearing mechanism to operate consistently to deliver full employment. The labour theory of value that originated in the work of David Ricardo and was built upon by Marx to develop his theory of crisis that was rooted in the tendency of the rate of profit to fall over time because of a tendency to increase the organic composition of capital, that is the ratio of embodied technology, physical plant and raw material that was a key ingredient in the production process. These increases were motivated by the entrepreneurial and corporate desire to increase labour productivity.If the productivity gains are large enough they can reverse the tendency for the profit rate to fall. This was the argument of Bortkiewicz .In a funny sort of way it is also the argument of those who argue that high end technological innovation will rescue the first world from the global outsourcing that is going on whereby production is being shifted from North America and West Europe to countries like China, India and Asia generally. The unresolved problem still remains that high end technology does not appear so far to generate enough jobs quickly enough to replace all those that are being lost due to outsourcing. In addition there is the very real problem of ensuring enough global effective aggregate demand to purchase all of the high end output generated by these high tech centres of activity. Keynes dismissed the labour theory of value as out of date controversializing, but members of his circle like Michal Kalecki were less certain. Even Keynes chose to use an hour’s employment of ordinary labour and the remuneration it received as his numeraire in the General Theory.(see ch.4 GT) Bortkiewicz and Bohm Bawerk in their work raised effective critiques of Marx’s doctrine, according to Sweezy, although Sweezy remained much more convinced that Bortkiewicz was closer to the truth than was Bohm Bawerk.( Bohm Bawerk, Karl Marx and the Close of his System, P.Sweezy editor, London , 1948; L.Bortkiewicz, “Value and price in the Marxian system” translated from “Archiv fur Socialwissenschaft und Sozialpolitik, ertrechnung und Preisrechnung in Marxschen System” Bd.xxlllHeft 1, 1906, International economic papers no.2.) Bortkiewicz argues that Marx was guilty of methodological inconsistencies and neglected the mathematical relation between the productivity of labour, dependent upon the organic composition of capital and the rate of surplus value.The rise in productivity may be such as to totally reverse any tendency for the rate of profit to fall. Roman Rosdolsky attempts not completely successfully to refute both Sweezy and Bortkiewicz and Keynes’s colleague, Cambridge economist Joan Robinson in their critique of the falling rate of profit in his work the Making of Marx’s Capital, (London, Pluto Press, 1980, pp.398-411). Meghnad Desai in Marxian Economic Theory, ( London, Gray Mills publishing , 1974) has pointed out that Michio Morishima (whose class I regularly attended at the L.S.E.) believed that it would be better to abandon the labour theory of value because of the very difficult technical complications requiring complex mathematics to resolve in order to transform values into prices. Morishima wrote ” We conclude by suggesting to Marxian economists that they ought radically to change their attitude towards the labour theory of value. If it has to determine the amounts of labour which the techniques of production actually adopted in a capitalist economy require, directly and indirectly , in order to produce commodities, it is not a satisfactory theory at all.” M.Morishima, Marx’s economics, Cambridge University press, 1973 p.193. Paul Baran and Paul Sweezy attempted to do precisely that in their classic Monopoly Capital wherein they substituted the tendency for the surplus to rise and the problem of surplus absorption for the falling rate of profit.Piero Sraffa’s classic work The Production of Commodities by Means of Commodities:Prelude to a Critique of Economic Theory, 1960, Cambridge University press, demonstrates a workable mathematical method for assessing dated labour in terms of its contribution to the value and price of a commodity which makes a very key contribution to this debate. Sraffa demonstrates convincingly how prices and values vary with variations in the rate of profit. Sraffa was a friend and colleague of Keynes who Keynes had helped rescue from fascist Italy before the Second World War by helping him secure a position at Cambridge. Sweezy in his classic Theory of Capitalist Development reduces the falling rate of profit to the following striking formulation; p=s'(1-q) where p is the rate of profit and q the organic composition of capital i.e. c/c+v (Marx in Capital vol 2 defines it as c/v rather than as Sweezy defines it c/c+v )p.625 chapter 23, vol.2 Dutton, Everyman’s library edition, London&N.Y. translated by Eden and Cedar Paul, introduction by G.D.H. Cole. &vol.3 p.214 ch xlll, progress edition, 1966.) He arrives at this as follows. p= s/c+v = sv/v(c+v) = sc+sv -sc/v(c+v) = s(c+v)/v(c+v) – sc/v(c+v) = s/v-s/v.c/c+v= s/v(1-1.c/c +v) = s'(1-q) (p.68) We won’t be pursuing this controvery further in the course but those who wish to read further about it consult the works cited above and also look at Ronald Meek, Studies in the Labour theory of Value, Jesse Schwartz, The Subtle Anatomy of Capitalism and M.Desai, Marx’s Revenge as well as Paul Mattick, Marx and Keynes. Desai who is a former teacher of mine who may now want to revise his assessment about the success of globalization in the light of recent events has an interesting chapter on Marx, Hayek and Keynes.You might also want to look at my conference paper which I presented to the association for heterodox economics in London in 2001 which is part of the Deficit Papers, The Theory of the Business cycle in Keynes, Hayek and Schumpter:What do we know in the Age of globalization ?

Perspectivism:One of you brought up this approach which is identified with Nietzsche’s view of the relativity of belief according to the perspective of the individual , as opposed to the objective circumstances of reality. You are right , of course, to suggest a close affinity between the views of the post moderns, relativism and those of Nietzsche. However, in City of Dreams I drew not upon Nietzsche but rather upon the phenomenology of Husserl, Merleau Ponty, Schutz, Mead and Berger and Luckmann among others, as well as my own observations about the metropolis and the work of Benjamin.Clearly the approaches are related.

Jurgen Habermas: for those interested in exploring the work of Jurgen Habermas and the culture of communications in more detail you can start by checking out the references in footnote 34 on pp.52-53. see also Harold Innis’s Bias of Communications. See also, Jurgen Habermas’s prolific writing for example: Knowledge and Human Interests; Toward a Rational Society;Legitimation Crisis(available on the internet)The Theory of Communicative Action; also Thomas McCarthy, The Critical Theory of Jurgen Habermas.

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Happy New Year:A Time for Recovery

Posted on January 2, 2012 by haroldchorneyeconomist

For the past several weeks I have been buried in the work of academia, grading a mountain of exams and essays. I am nearly finished and will return to regular blogging shortly. My students  will be able to find the course outlines for the second term, Poli 349 and Poli 363 on this blog shortly. In the meantime they can consult the previous year’s outlines for these courses on my previous blog, Harold Chorney political economist. Simply google the course numbers and my name and you will be directed to the outlines. The new ones should appear here by Tuesday morning.

Despite an absence from the blog for most of the past month I can’t really say that there have been dramatic improvements in either the on going crisis of the euro and sovereign debt or the long overdue economic recovery. But there have been some smaller signs of progress. In the United States there are some positive signs in terms of employment, the housing markets and the general level of confidence. If it were not for the fears about Europe I suspect the recovery would even be stronger in the U.S. Canada has showed some signs of a slower rate of growth but we will have to await further data to confirm this. Europe is still mired in its obsession with counterproductive austerity and the ECB still refuses to buy sovereign debt directly but it did inject close to 500 billion euros in the form of very cheap loans to the private banking sector . Some of these loans may well be used to increase the purchase of sovereign debt and thereby improve the private banks balance sheets plus lower interest rates on the debt. This appears thus far to have happened to a small extent with Italian sovereign debt. But there is much more work to be done to ensure that there is not another deep technical recession in Europe. Austerity is a bad policy that needs to be abandoned in order to permit the European economies to grow and generate jobs. The ECB is moving in a better direction but it needs to go much further . Nevertheless its a new year and what could be better a time for reawakening some optimism, animal spirits, entrepreneurial enthusiasm and a sense of hope  for a healthy, happy and more prosperous year for everyone than the dawn of a new year. So once again Happy New Year !

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S+P Downgrade Warning on European Sovereign Debt May throw Spanner in the Works

Posted on December 5, 2011 by haroldchorneyeconomist

When it really counted in the past in the lead-up to the financial crisis S+P and other ratings agencies failed to warn about the quality or lack thereof of the asset backed financial derivatives that caused so much disaster in the financial crash. Now possibly to show that are acting responsibly and prudentially S+P is  warning that they may be downgrading the sovereign debt of the Euro-zone countries, in many cases from AAA to AA. Downgrades may well make sense where Greece is concerned but how can they make sense where France, Germany and Luxembourg are concerned ? It is a pity that the Euro zone countries are having a hard time reaching a comprehensive agreement on how to use the ECB and their special stabilization fund effectively to end the uncertainty over the future of their debt management policies but the threatened downgrades don’t make much sense if they are applied across the board. Furthermore, the austerity that is being demanded of these countries makes little or no sense in view of the possibility of recession returning in Europe because of the crisis. The timing of this announcement has  also raised eyebrows because if it scares investors away from buying these debt instruments it will only make matters worse.

Posted in austerity, classical economics, deficit hysteria, deficits and debt, European debt crisis, European financial stability fund, Greek sovereign debt crisis, Italian debt crisis, Uncategorized | Leave a comment

U.S. Unemployment falls to 8.6% Canadian rate rises to 7.4 %

Posted on December 2, 2011 by haroldchorneyeconomist

There is some potentially good news on the U.S. unemployment front as the headline rate of unemployment fell from 9.0 % last October to 8.6% for the past November. Part of this fall in unemployment is due to the positive news on the job creation front where the jobs report shows an additional 120,000 jobs were created and the previous months preliminary job estimates were upgraded substantially  in subsequent revisions.The unemployment percentages also dropped because of private sector job creation while the public sector regrettably continues to shed jobs, some 20,000 last month alone. But part of the reason for the fall in unemployment is also because a large number of people gave up looking for work and left the labour force altogether. Nevertheless, if the trend in job creation continues in the coming months we can expect unemployment to fall perhaps by as much as a full percentage point in the coming months. The broader measure of unemployment U6 which includes discouraged workers, part time workers who would rather be working full time and other marginally attached members of the labour force also fell to 15.6 %. One other important statistic is the ratio of employment people 16 years or older to the popuklation. This remains depressed at 58.5% down from the 63 % levels that prevailed prior to 2008.

In Canada the rate of unemployment rose by one tenth of a percentage point to 7.4 % with unemployment higher in Quebec at 8 % and slightly lower in Ontario at 7.9 %.

In the U.S. if we adjust the data for the additional people who left the labour force and assume that they were all discouraged workers as opposes to those retiring  and add them back in as unemployed the rate of unemployment becomes 8.8 %. Not as impressive as 8.6 % but significant improvement in the right direction, nevertheless. There is a possibility that if things go well in the coming months and the European situation is stabilized that unemployment next fall might well be significantly below 8 %. But this is much more likely to happen if on neither side of the Atlantic interest rates rise nor draconian austerity is imposed.

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The euro sovereign debt crisis and the irrationality of the bond markets:the need for a lender of last resort

Posted on November 24, 2011 by haroldchorneyeconomist

Throughout the history of the capitalist system the markets have played a pivotal role. Of course, the Walrasian conception of markets that inevitably clear temporary gluts and misallocations through the process of tatonnement and the invisible auctioneer is obviously a utopian notion that avoids the realistic impact of oligopolies, near monopolies and other less than perfectly rational influences on the real economy.

Depressions borne out extraordinary popular delusions and the madness of crowds, and other manias , panics and crashes have been a regular part of financial market history. Ponzi finance and outright fraud have also been a persistent problem. Hyman Minsky brilliantly developed an entire theory of financial instability on the basis of this sort of analysis. In Minsky’s view as in Keynes there were three reasons for holding money, the spending transactions motive, the precautionary motive and the speculative motive. But in Minsky the speculative motive is developed further than in Keynes although Keynes was clearly familiar with the terrain of speculation. Minsky outlines it as follows: ”securing profit by speculation involves the appreciation(or depreciation) of asset prices.The fundamental speculative demand for money centers around the extent to which borrowing takes place to finance positions in assets whose price may vary; these expected asset prices as well as the terms on money loans are the determinants of the speculative demand for money.

Keynes writes the demand for money states Minsky as follows. M=M1+M2= L1(Y) +L2(R). where L1(Y) consists of both the transactions demand and the precautionary demand and L2(R) the speculative demand for money.(See Minsky, John Maynard Keynes, p.72& Keynes,(GT) p.199.Minsky rewrites this equation as M=M1+M2+M3-M4 = L1(Y) + L2(r,Pk) + L3(F) -L4(NM) where L3 is the precautionary motive due to the outstanding private financial commitments, F. F increases as planned or ex ante investment increases as increases in investment activity require a greater precautionary reserve of money. In addition near monies(NM) as represented by certain financial instruments offset part of the insurance and precautionary demands for money. (Minsky JMK, p.73) Minsky makes the striking argument that the creation of near monies reflects a demand for financing and thus a period of financial innovation (such as we have gone through). This can lead to a rising price of capital assets side by side with rising interest rates on money loans.

However, as we now well understand a highly leveraged asset boom can implode and asset values can crash. In such circumstances the incentive to hold cash increases dramatically as cash becomes a form of insurance against the potential  losses of various asset classes.

Sovereign debt is normally seen as a very secure and less risky asset. However, if interest rates are low, bond prices are high and should rates rise bond holders can experience capital losses hence the move to cash is accelerated. In addition the fundamental irrationality which dominates contemporary markets is far removed from the idyllic world of Walras and the market clearing process. Hence, it becomes possible for very secure assets to become viewed irrationally as very risky. This is clearly the case of European sovereign debt of the leading economic powers in the euro zone. In such circumstances it is necessary and highly prudent for central banking institutions and governments to intervene to ensure that the financial instability is moderated and systemic stability restored. As Minsky puts it they have to ensure that central bank exercise its role as a lender of last resort. This means with respect to financial institutions it short circuits the process by which the financial house in order to raise funds is forced to sell its position in real and financial assets which can lead to enormous losses. (H.Minsky, A Deep Recession But Not a Depression: the impact of Lender of Last Resort Intervention , in Stabilizing an Unstable Economy, p.49.) We can now amend this to include participating in sovereign debt management.With respect to governments lending needs it means intervening directly in the bond markets to temporarily acquire government treasuries and bonds when the demand for them  is insufficient to ensure low enough interest rates to promote an economic recovery or avoid a serious crisis.

The real question that investors should be asking is where if not in the sovereign debt markets of the leading economic powers or in the equity markets should they be placing their cash ? Hoarding it will be self defeating helping to bring out the very circumstances they fear.

Unfortunately, thus far in Europe the central banking and government leading players have stumbled in resolving their differences over the role of the ECB and the degree of intervention they are willing to live with and in understanding the role of lender of last resort in the operations of a central bank.

Its a pity because as Minsky clearly shows without sensible and substantial intervention considerable instability may result.

Posted in business cycles, classical economics, European debt crisis, European financial stability fund, J.M.Keynes, labour market clearing | Tagged | Leave a comment

Trade balances, debt to GDP and unemployment rates of some European countries of interest

Posted on November 9, 2011 by haroldchorneyeconomist

Trade as a percentage of the GDP and unemployment rates selected European countries, and debt to GDP ratios.

X                     Country                          M                         U                  D/GDP(2009)

45%               Germany                     36%                     5.9 %                 47.2%

27                   France                          25                       9.9                     83.5

24                    Italy                             24                       8.3                     119

28                    UK                                30                      8.1                     73.2

23                    Spain                            26                      22.6                   46.3

28                   Portugal                      35                        12.5                   83.9

91                    Ireland                         75                        14.2                  70.9

18.8                 Greece                         29.6                    17.6                   139.9

X exports as a percentage of the GDP; M imports as a percentage of the GDP; U rate of unemployment.   Source:The World Bank and Eurostat. Unemployment rates are for Sept.,2011, trade data for 2010; D/GDP world bank data for central govt.gross debt as of end of 2009.

Further to the argument I was making in my last post about the role of trade in a currency union and its possible impact on sovereign debt questions here is some further useful data. Of the five countries now the subject of pressure Greece, Portugal, Spain, Ireland and now Italy, only Greece and Portugal have serious imbalances where their imports strongly exceed their exports.

Italy had perfectly balanced trade in 2009 in fact a small surplus,(although in 2010 it ran a small 3.35 negative trade balance) relatively lower unemployment, although still too elevated. It clearly does not belong in a camp of beleagured countries. In terms of its net debt  to GDP ratio while it is elevated it is much less than that of  Greece or Japan. Furthermore, Italy has been running a primary surplus on its budget. It is only because of the actions of ill informed speculators and those trying to advance a neo-conservative agenda of privatization, imposed austerity, and reductions in pensions and other social benefits, as well as the failure of the European central bank to do its job in terms of helping to burn speculators and buy a fair share of Italy’s debt, that it is coming under pressure. Note that unemployment is way too high, in fact at depression levels in Portugal, Spain and Greece. On the other hand the northern countries are much better off, although unemployment is far too high in the U.K. and France. Both of these countries have close to balanced trade although France is running a small surplus and Britain a small deficit. Germany, on the other hand , has relatively low unemployment and a  a very large trade surplus.

Posted in austerity, balance of payments, deficit hysteria, deficits and debt, European debt crisis, European financial stability fund, Greek sovereign debt crisis, Italian debt crisis, J.M.Keynes, Uncategorized, unemployment | Leave a comment