Martin Wolf may not have written that r > g and so has not, as yet, achieved Thomas Piketty's status as alternative economist of the moment, but there is no doubt that his commentary in the FT remains invaluable to those seeking alternative explanation as to why the world is in its current mess. He wrote an article yesterday, about which I did not have time to comment because of other commitments, that was a powerful explanation of much of what is happening, and will happen, in the world's major economies. It is worth getting a free registration on the FT just to read it.
I want to pick out just one theme here. As he said, after explaining the range of policy responses such a s low interest rates and QE that the crisis precipitated:
These unprecedented policies are needed because of the chronic deficiency of global aggregate demand. Before the wave of post-2007 crises hit the world economy, this deficiency was met by unsustainable credit booms in a number of economies. After the crises, it led to large fiscal deficits and a desperate attempt by central banks to stabilise private balance sheets, mend broken credit markets, raise asset prices and ultimately reignite credit growth.
That is an extraordinary paragraph; the sort that takes a few minutes and well over thirty years of experience to write. Think about what is implicit in it.
First, Wolf is saying that the reason for the banking crisis was not loose regulation (although it helped, I do not deny); it was lack of demand, declining real wages, increasing inequality and the inability of markets to function and deliver both growth and reasonable levels of employment on the wages that companies were willing to pay that led to the crisis.
Second, he's saying that the same low level of earnings that leads to inadequate demand for the goods and services that the markets wish to offer also leads to a level of tax revenue too low to pay for the level of public services that the voters of most economies both want, and need.
This is deeply significant. What it means is that spillover effect of the failure of the markets to provide goods and services that the public want is that we apparently cannot, as a consequence, enjoy the benefit of the public services that we need even though the economic resources to provide them clearly exist. There are plenty of people who could, for example, be employed right now by the government to meet the demand for public services but who are unemployed instead because of a refusal to raise the revenue to actively engage them in the economy.
Martin Wolf makes one conclusion as a result of this: he suggests that low interest rates are here to stay for a long time because any increase will only reduce aggregate demand, and so exacerbate the problem, and that will not, as a consequence, happen in his opinion. I tend to agree with him, but I think he misses another point. This is the glaringly obvious one that if the problem needing a solution is how to re-engage those people who are currently unemployed in economic activity so that total aggregate demand, including that for public services, can be met then the only way to do this is to have them supply the services that are in greatest demand but shorter supply, which of those delivered by the government.
There are three ways of funding that route to recovery. The first is to literally print more money: we have clearly got away with it to date and there seems to be no reason why we could not do so again. Second, we could simply run a deficit: there is no shortage of demand for government bonds and in particular those long dated ones which are curiously attractive for this purpose. Thirdly, we could raise tax, by which I mean we could, for example, close the tax gap, increase tax on the wealthy, reduce tax on some forms of consumption, and ensure that some taxes (such as National Insurance) which are currently regressive are transformed into progressive taxes and are also applied to investment income.
Martin Wolf goes nowhere near these solutions, and yet they seem so glaringly obvious. If there is a fundamental problem of engaging people in the market economy because that market economy is either so efficient that it does not need their services, or is so inefficient that it cannot create goods and services that people want to buy ( with both potentially being true in different parts of the economy at the same time) then an entirely different approach to funding public services and to creating the prosperity which underpins our future has to be adopted, and that can only happen by breaking the link between private sector demand and the provision of public services. There is no implicit reason why one is dependent upon the other and it is time that this relationship was rethought.
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“What it means is that spillover effect of the failure of the markets to provide goods and services that the public WANT is that we apparently cannot, as a consequence, enjoy the benefit of the public services that we need even though the economic resources to provide them clearly exist.”
Is it not more true to suggest that, because of growing inequality, it’s not so much goods and services that the public want as goods and services that the public want AND CAN AFFORD TO PAY FOR? If that is so, the only possible future for continued neo-liberalism is that it will eventually consume itself and destroy the world economy.
Not sure that we should accept at face value that Piketty’s ‘r>g’ axiom is at all justified. He assumes a fairly constant ‘r’ over time. He assumes that ‘r’ is unaffected by changes in ‘g’ and vice versa. He achieves this in large part due to the way he defines ‘capital’ as the same as ‘wealth’ and thus includes residential property, even though houses are not means of production and do not ‘earn’ an income. Thus Piketty ends up with completely distorted results for his r. Strip out ‘residential property’ and r>g premise disappears.
So what you’re saying is let’s create a formula that pretends wealth disparities are not increasing? Have I read you properly?
How convenient…..
Pikkety argues that owning property means you don’t pay rent; this, he argues, is equivalent of income and is a return on capital. I find this logic compelling. Your motivation for wanting to remove residential property from the calculation of r is unclear. Perhaps you have concluded that Pikkety’s analysis is a threat to the neocon world view and are seeking to sow confusion.
Piketty is right
No.That’s putting the cart before the horse. Seeing a phenomenon and constructing a theory [formula] which is flawed simply in order to get the required phenomenon. The wealth disparities are real enough and we didn’t need Piketty to tell us. Piketty’s novel contribution [apart for the wealth of historical data]is the r>g as if it is some law. His projections are for things to inevitably go on getting worse premised on r being constant whilst g will tend to fall hence more profits MUST go to capitalists in increasing quantities over time. Yet r has not been constant If you take out private property and financial assets etc, you get Marx’s rate of profit and that is anything but constant. So Piketty’s work could be summarised thus: That’s OK in practice but does it work in theory? The answer appears to be no!
You might think that
You’re welcome to your selective delusion, but that’s what mainstream economics has done for a very long time
Which I suppose does go someway to explaining why mainstream economics is in such a hole.
How could a shortage of aggregate demand be the cause of the crisis if as stated there was a credit boom. Credit booms surely represent the opposite – increased demand? If the answer is it was the wrong sort of demand – credit induced demand – then surely printing money or government borrowing would also be the wrong sort of demand and trigger another crisis if over relied upon? I can’t help but think two of the greatest errors in economics are mistaking symptoms for causes and an obsession with ‘total aggregate demand’ as an explainer. Life is not so simple I fear.
Read what Wolf said
The credit boom was one response to inadequate demand
Now we have another
I think you have misunderstood the argument and have the cart before the horse
But what is meant by not enough aggregate demand? Do we mean not enough productivity in the economy? In which case how can we say this – productivity is what it is, there is no counterfactual. Compared to today there was less aggregate demand 100 years ago, but that doesn’t mean the economy must have been in recession 100 years ago. Remember we are talking about aggregates here, not distribution of demand. Or do we mean the lack of aggregate demand was due to increased savings? In which case empirically this was not the case at the time of the credit crisis happening – savings rates were very low. Or do we mean a lack of money – in which case the money supply was very high also. I guess I just don’t get the argument either way. Every way I consider it the lack of aggregate demand claim always turns out to be a symptom of the crisis, rather than a cause. Am I missing another way aggregate demand can be too low? Thanks.
I think those are questions easily answered elsewhere so I leave you to hunt them down
Sure create(print) the money to stimulate productive public investment (green and otherwise) but we also would then need to restrain the private banks ability to create credit money out of thin air for lending. We need to split investment/retail banks completely and or move to full reserve accoutning.
Otherwise i fear those with the private ability to create debt money out nothing would recreate more of the same problems in time.(hyperinflation in essential non avoidable spend).
Tax could be used to withdraw excess money growth.
How many mega takeovers to fund offshore shenanigans would happen if it were ‘real earned risk capital’ as opposed to created credit money which a taxpayer ultimately backs?
“Otherwise i fear those with the private ability to create debt money out nothing would recreate more of the same problems in time.(hyperinflation in essential non avoidable spend).”
There is one sure way to avoid this – nationalise the banks! Too radical for some? Then impose full reserve banking but require the banks to borrow the funds from the government. This may well throw up its own problems though.
A solution suggested by Ellen Brown was to let banks sell their loans to investment banks and sell them to investors to avoid fractional reserve banking, but we have been sown that road before with horrifying results, If this was to be done, it would require VERY tight bank regulation.