By Malcolm Sawyer
In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:
- deficits add to government debt, which is a burden on future generations (rather, the government debt is bonds owned by individuals, pension funds etc.);
- deficits crowd out investment (rather, they allow savings to take place and enable investment); and
- deficits cause higher interest rates (the current situation makes the rebuttal to this clear).
The above article claims that Sawyer and Kaleki rebut the idea that deficits funded by borrowing tend to raise interest rates and crowd out private sector investment. That claim is true in one sense and not in another.
ReplyDeleteKalecki seems to say that deficits funded by borrowing probably do raise interest rates, but that rise can be countered by having the central bank buy government debt – an idea I fully agree with. Kalecki actually says:
“It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing.”
In short, if he is saying that fiscal policy AS SUCH will raise interest rates and crowd out private sector investment, but that the latter undesirable effect can be countered by the central bank, then I agree with him.
It’s for that reason that I have long regarded the above form of fiscal policy as a complete nonsense: i.e. if you want a stimulatory effect, then have the government / central bank machine print and spend extra money (and/or cut taxes). But what’s the point in accompanying that by borrowing, which to a greater or lesser extent negates the effect of the borrowing? Completely mad.
And monetary policy on its own is equally ridiculous: for example boosting the value of the assets of the rich via QE so as to bring stimulus is daft.