John Weeks is Professor Emeritus at the School of Oriental & African Studies, University of London. He is also a coordinator of of
the UK’s Progressive Economic Forum (“founded in May 2018 and brings together a Council of eminent economists and academics to develop a new macroeconomic programme for the UK.”).
John Weeks’ new book is The Debt Delusion: Living Within Our Means and Other Fallacies. It
aims at demolishing economic arguments for the necessity of austerity.
‘Austerity’ is the catch word for the policy of reducing government
spending and budget deficits and public sector debt. This has been
considered as necessary to achieve sustained economic growth in
capitalist economies after the Great Recession of 2008-9. The argument
of governments and their mainstream advisors was that public sector debt
had mushroomed out of control. The size of the debt compared to GDP in
most countries had got so high that it would drive up interest costs and
so curb investment and growth in the capitalist sector and even
generate new financial crashes. Austerity policies were therefore
essential.
Keynesians and other heterodox economists rejected this analysis
behind austerity policies. Far from trying to balance the government
books, governments should run deficits when economies were in recession
to boost aggregate demand and accelerate recovery. Rising public debt
was no problem as governments could always finance that debt by
borrowing from the private sector or just by ‘printing’ more cash to
fund deficits and debt costs (debt costs being the interest paid on
government bonds to the holders of that debt and the rollover of the
debt). Austerity was not an economic necessity, but a political choice
bred by the ideology of insane and out of date economics and
self-serving right-wing politicians.
In his new book, Weeks sets out to debunk six austerity “myths”: 1)
“We must live within our means” 2) “Our government must live within its
means” 3) “We and our government must tighten our belts” 4) “We and our
government must stay out of debt”; 5) “The way for governments to stay
out of debt is to reduce expenditures, not to raise taxes”; 6) “There is
no alternative to austerity”.
The most important myth to crack, according to Weeks, is the idea
that government budgets are like household budgets and must be
balanced. This is nonsense. Governments can run annual budget deficits
by borrowing, as indeed can households, as long as they have the income
to cover the interest and repayments costs. Moreover, in the case of
governments, all the major countries have run annual deficits for
decades. “Even the Germans, those paragons of a balanced budget,
have only had a surplus in seven of the past 24 years, and more than
half of these were in the past four years.”
Indeed, households often resort to credit, short and long term.
Long-term credit often even reduces expenditure. The same is true for a
government. As Weeks emphasises, most long-term credits for governments
are used to purchase assets (capital spending), some of which even
produce income (such as social housing), others that serve important
functions for our societies (for example schools, hospitals, public
transport). The public sector creates use values (to apply Marx’s terms)
ie things or services that people need and so boosts GDP.
Weeks makes the key point that before the global financial crash and
the Great Recession, it was not rising public sector debt that was the
problem, but fast-rising private sector debt as households increased
mortgage debt at low interest rates to buy homes and the finance sector
exponentially expanded their own debt instruments to speculate. It was
the bursting of this private sector credit boom that led to the credit
crunch of 2007 and the banking crash, not high public debt. Instead, the
latter became the trash can for dumping private debt as governments
(taxpayers) picked up the bill.
But from hereon I part with Professor Weeks’ analysis. Professor
Weeks adopts the Keynesian view that the cause of crises under
capitalism is the “lack of effective demand”. He argues that, as
austerity policies reduce aggregate demand, they are the main cause of
the Great Recession and the poor recovery afterwards “the principle
(sic) cause of our economic woes, which predates Brexit by several years
and largely accounts for the global slowdown, are austerity policies by
the governments of most of the G7 countries, whose economies together
account for over half of global output.”
Back in the 1970s and 1980s, Professor Weeks criticised convincingly
this Keynesian demand argument from a Marxist perspective (see John
Weeks, “The Sphere of Production and the Analysis of Crisis in
Capitalism,” Science & Society, XLI, 3 (Fall, 1977) and John Weeks on underconsumption) . But now as coordinator of the Keynesian Progressive Economy Forum, he writes that “capitalist
economies do suffer periodically from extreme instability, the most
recent example being the Great Financial Crisis of the late 2000s. These
moments of extreme instability, recessions and depressions, result …
from private demand “failures”; specifically, the volatility of private
investment and to a lesser extent of export demand.” He goes further:
“public expenditure serves to compensate for the inherent instability
of private demand. This is the essence of “counter-cyclical” fiscal
policy, that the central government increases its spending when private
demand declines and raises taxes when private expenditures create
excessive inflationary pressures. During 1950-1970 that was the policy
consensus, and it coincided with the “golden age of capitalism”.
So Weeks says, the lack of effective demand can be overcome or
avoided by government spending and that is why capitalism worked so well
back in the 1960s. If we just drop austerity policies and go back to
Keynesian-style government ‘demand management’, all will be well.
But
just as excessive government spending, budget deficits or public debt
was not the cause of the financial crash and the Great Recession,
neither was austerity. Indeed, Carchedi has shown
that before every post-war recession in most capitalist economies,
government spending was rising as a share of GDP, not falling.
% change in government spending one year before a recession
Rising government spending and regular budget deficits did not enable
any major capitalist economy to avoid the Great Recession. For
example, Japan ran budgets deficits for over a decade before the 2008-9
slump. It made no difference. Japan entered the slump, as did every
other major economy.
And after the Great Recession ended, there is little evidence that
those countries that ran budget deficits and thus increased public
sector debt recovered quicker and increased GDP more than those that did
not. I and others have done several studies that show the so-called
Keynesian multiplier (the ratio of real GDP growth to an increase in
government spending or budget deficit) is poorly correlated with the
economic recovery after 2009. The EU Commission finds that the
Keynesian multiplier was well below 1 in the post-Great Recession
period. The average output cost of a fiscal adjustment equal to 1% of
GDP is no more than 0.5% of GDP for the EU as a whole.
What does show a high correlation is the change in the rate of profit on productive assets owned by the capitalist sector.
Correlation between change in rate of profit and in real GDP growth for ten capitalist economies
If the rate of profit falls, there is a high likelihood that the rate
of investment will fall to the point of a slump. Then there is a ‘lack
of effective demand’. This Marxist multiplier, as Carchedi and I call it, is a much better explanation of booms and slumps in modern capitalist economies than the Keynesian demand multiplier.
This is not really surprising if you think about it. What happens in
the capitalist sector of the economy, which is about 80% of value in
most countries, must be more decisive than what happens in the
government sector, even if there is a significant Keynesian multiplier
effect (which there is not, on the whole). What matters in modern
capitalist economies is the level and change in the rate of profit and
the size and cost of corporate debt; not the size of public spending and
debt.
There has been a long debate about whether ‘excessive’ public debt
can slow economic growth by ‘crowding out’ credit for investment by the
capitalist sector. There was the (in)famous debate started by mainstream economists Reinhart and Rogoff etc.
They argued that if a country ran up a public debt ratio above 100% of
GDP, that was a recipe for a slump or at least economic slowdown. The
two Rs figure and methods were exposed to ridicule. But the debate
remains. Rogoff continues to argue the case. And others present more evidence that high public debt can damage the capitalist sector.
A recent paper looking at data for over half a million firms
in 69 countries found that high government debt affects corporate
investment by tightening the credit constraint faced by companies,
especially those companies that find it difficult to get credit: “when
public debt is at 25% of GDP, the correlation between investment and
cash-flow is just above 9%, but this correlation goes well above 10%
when public debt surpasses 100% of GDP. This finding is consistent with
the idea that higher level of public debt tightens the credit constraint
faced by private firms.” What this means is that, as banks use
more and more of their cash on buying government bonds, they have less
available to lend to firms – “crowding out”.
Christoph Boehm found the fiscal multiplier associated with government investment during the Great Recession was near zero. “After
a government investment shock, private investment falls significantly
below zero – without a lag. The estimates become insignificant in the
sixth quarter, but remain more than one standard error below zero until
the eighth quarter. Hence, the data support the theories’ prediction
that private investment is crowded out, and the government investment
multiplier small.”
In a way, Weeks’ book is outdated. ‘Austerity’ is no longer the cry
of the international agencies like the IMF, ECB or capitalist
governments. On the contrary, with the failure of monetary policy (zero
interest rates, quantitative easing) to get economies back on a
pre-2007 growth path, everybody (except the German government) has
become Keynesian. Fiscal policy (more government spending, running
budget deficits by issuing bonds or just ‘printing’ money) has become
the order of the day. Japan has just launched a massive new fiscal
stimulus programme to expand public works. New ECB President Christine
Lagarde has called for more fiscal spending by governments, as have the
IMF and the OECD.
But as I have argued before,
if introduced, fiscal stimulus will also fail in getting capitalist
economies out of the slowest economic ‘recovery’ from a slump since the
1870s. As European economist, Daniel Gros, shows in a recent paper, “the
overall conclusion is clear. One would need a very large fiscal deficit
to have even a modest impact on inflation or interest rates. Fiscal
policy cannot save the ECB.”
Professor Weeks’ book shows that opposing budget deficits and rising
public debt because it will cause slumps or low growth is a delusion.
But on the other hand, running government deficits won’t avoid slumps
and will have little impact on boosting economic growth in capitalist
economies.
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