Non keynesian effects

In this country we have been hearing a lot about a theory which I suppose is aimed at countering Keynesian criticism of the austerity measures currently being applied in time of recession.

According to Keynes governments need to spend when there is a recession. As people get poorer they don't buy as much: and as companies get scared they pay off debt instead of investing. Which means there is not much money about and no jobs. So people spend even less and companies sell even less; and there is even less money about: and you end with a Great Depression unless someone does something about it. The only body which can do anything about it is government: they can print money and they can build infrastructure or anything else: which creates jobs and stops the vicious circle. This is called counter cyclical spending

According to neoclassicists governments need to spend less in a recession because they need to balance the books. To them the problem is overspending and once that is reduced the economy will come in to balance and all will be well. The idea is that we had a party on credit and so we need to pay the bill: once it is paid we will be back on a strong financial footing and we can go onward and upward.

I was a bit confused about how the latter is supposed to work. I can see that if I, as an individual, got into debt, then if I cut my spending eventually I would pay it off and be back to having the use of my wages. But an economy is not like an individual: because paying off my debt does not reduce my wages. In an economy it does precisely that: paying off debt cuts demand and that effectively cuts GDP.

I was interested to learn that there is more agreement between the two schools than I originally thought: the neoclassicists agree that demand has to be supported if we are to get out of trouble: I did not know that because earlier versions of the theory proposed no mechanism beyond the natural tendency for economies to tend to equilibrium all by themselves: and we know that does not work because we tried it in the 1930's and it didn't.

But there is a new mechanism. It is called "expansionary fiscal contraction" or as in the title of this post "non Keynesian effects" I have heard the former term for quite a while because our chancellor Mr Osborne is fond of it. I did not know what it meant. But I do now, I think. Not surprisingly it is an idea which the IMF likes: probably the EU and the World Bank as well, for all I know.

The idea is this: If the government cuts spending the adverse effects, as outlined by Keynes, will be offset by the private response. Folk will see that tax will not go up and so they will run out and buy stuff. In all seriousness that is what they say: I am not making this up.

It is not just private consumers who are supposed to rush out and spend because of the "confidence" engendered by the austerity measures: one of the other assumptions is that as public sector jobs are cut, the measures will improve the business climate and so the private sector will invest and create more jobs than are lost. As the banks were supposed to take the bail out money and invest in business so business itself is expected to contribute to that investment as well. We already know that the banks have done no such thing: and we now have the evidence that the private sector companies have not either

According to the Financial Times uk companies dividends to shareholders rose by about 20% last year. There are some things which are one off changes but even when those are stripped out the report estimates "underlying" dividend growth at 12.8 percent. What is paid out in dividends is not spent on investment which creates jobs: though arguably the shareholders will spend the money and that will indirectly help. But as noted before, rich people do not spend all the money they receive. The same measure forecasts dividends will grow by 11 percent in 2012.

The government would like us to believe we are all in this together. We obviously are not. The rich are doing very nicely, between huge increases in directors' remuneration reported at Xmas (49% was the figure reported) and now this for shareholders.

If companies are worried about their viability one would expect them to invest to improve their competitive position; or to save so they have a cash cushion if they think there will be a reduction in profits through low demand: but no. They have a lot of money and they have given it to shareholders

The other interesting thing in this report is that dividends increased over all sectors but in the UK there is distortion from the behaviour of some very large companies: Just 5 accounted for about 1/3 of the increase. It is worth noting that one of those was Vodaphone. Vodaphone, you will recall, does not pay tax. It was one of the companies which reached a very beneficial deal with the tax officials so they do not have to pay any penalty for refusing to pay, and they are given a very long time to pay the actual tax owed. This is not their money, in other words. Nonetheless they are the single biggest dividend payer in 2011.

http://www.thisismoney.co.uk/money/news/ar...f-6bn-bill.html

http://bilbo.economicoutlook.net/blog/?p=21494

This is an excellent response to the cowardice which is the so-called progressive economic alternative to neoliberal mainstream thinking. As I have noted before, the neo-keynesians basically agree with the neoliberals: the only difference is timing. This author rejects the idea that it is progressive at all and he founds on Modern Monetary theory, which I have linked elsewhere. If he is wrong then his opponents need to show why he is wrong: as ever, all they have at present is mere assertion