The Golden Age

In most societies, there is a myth of a ‘golden age’, a time when men and women lived simply and happily, free from the cares and troubles that afflict them today. This myth usually includes an account of how, through foolishness or malice, the golden age was lost. In Western versions, the blame has been placed upon women – Pandora opening the box and Eve taking the apple.

In the economic history of the developed world, there is one historical episode which might reasonably be regarded as a golden age. Between 1945 and 1973, developed countries in Western Europe, North America and Oceania experienced strong economic growth, combined with minimal levels of unemployment and a sharp decline in inequality. In policy terms. the dominant features of this period were the use of Keynesian macroeconomics to stabilize the economy and the development of a fairly comprehensive welfare state, protecting citizens from falling into poverty due to old age, incapacity or unemployment.

Those are the opening paragraphs for Chapter 2 of The Economic Consequences of the Pandemic. Comments and criticism much appreciated.

I adapted some of it, with more of a focus on Australia, for this article in Inside Story, also published in the Canberra Times

The Economic Consequences of Mr Biden

When I agreed to write The Economic Consequences of the Pandemic for Yale UP, with a target date of May 2021 the idea was that it would be a polemic against austerity along the lines of Keynes’ The Economic Consequences of Mr Churchill, and the The Economic Consequences of the Peace [1] . In view of the rapid resurgence of austerity politics after the Global Financial Crisis, about which Henry and I wrote here, it seemed like a safe bet that this would be a hot topic in 2021. Even when Joe Biden won the election, and then the voters of Georgia gave the Dems a wafer-thin Senate majority, it still seemed likely, that we would see, at best, a half-baked “compromise” along the lines of the Republican counter-proposal to the American Recovery Program.

But here we are, a couple of months later. Not only has the ARP passed with the only significant cutback being the exclusion of the $15 minimum wage rise, but the Administration is already talking about an additional $3 trillion in infrastructure expenditure. If that happens, it will be after I’m due to finish my manuscript, but well before the book comes out.

All of this is great news, but it means I need to produce a different book to the one I had planned and have already written a fair bit of.

I could continue in the vein of the oppositional polemic I had planned, and talk about the inadequacies of Biden’s program, but I don’t see any benefit in that.

What I now see as the big danger is not austerian limits on spending, but shying away from the need to raise taxes on the well-off [2]. Roughly speaking that means those in the top 5 per cent of the income distribution, who account for around 25 per cent of all income, more than everyone below the median (estimates vary a lot, here’s one based on 2010 Census)

This needs to happen quite soon if it is to be in effect by the time employment returns to pre-pandemic levels. Before ARP, the Congressional Budget Office estimated that this wouldn’t happen until 2024. But with ARP and another round of stimulus, it’s reasonable to expect a recovery (at the aggregate level, though not for all places and sectors) by 2022. With that timing, the correct option is to include revenue measures as part of the infrastructure packages. That seems to be on the agenda, but will face serious resistance, as increased taxes always do.

The constraints of the pandemic, and the substantial public assistance provided to deal with have left many households flush with cash. That’s particularly true of high-income households who were able to work remotely, didn’t lose their jobs and benefited from rising asset prices. To raise substantial revenue, and avoid hitting capacity constraints, it’s necessary to tax away some of those gains, as well as reversing corporate tax cuts, the benefits of which ultimately flow to the same group.

Apart from the obvious resistance that always faces higher taxes, and the presumption of uniform opposition from the Republicans, the biggest obstacle may come from those influenced by what I’ve called the pop version of Modern Monetary Theory, which suggests that there is no benefit from taxing the well-off other than to make them not so well-off. Bearing in mind that we are talking about millions of people who regard themselves as middle-class

Correctly understood, the core of MMT (namely, the functional finance version of Keynesianism presented by Abba Lerner in the 1940s is entirely supportive of higher taxes once the expansion is well under way. The key to functional finance is that taxes should be used to ensure that aggregate demand is consistent with the productive capacity of the economy, neither too low nor too high. If we want a big increase in public expenditure, its necessary to prevent high-end private consumption and speculative investment from crowding out vital social needs.

fn1. The Economic Consequences of the Peace was not precisely about austerity, but about the same underlying thinking, that massive reparations could be extracted from Germany without worrying about the macroeconomic effects there and in the recipient countries.
fn2. I’m carefully avoiding the term “rich” here, which mostly seems to be applied to a tiny stratum typified by Bill Gates and Jeff Bezos.

Economic lessons of the 20-year armistice

Another extract from my book-in-progress, Economic Consequences of the Pandemic

The 20-year armistice from 1919 to 1939 was a period of economic stagnation in Europe, punctuated by crises which had disastrous economic and political effects. And while the US boomed in the 1920s, the Great Depression that began in 1929 caused massive unemployment and suffering which lasted through the 1930s. What lessons can we learn for the present?

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The 20-year armistice

One of the striking discoveries of the Internet age for me is that, no matter how original and idiosyncratic you imagine your thoughts to be, someone else has already thought them[1].

My book-in-progress, The Economic Consequences of the Pandemic is largely about the mistakes made between 1919 and 1939, and what we can learn from them. This period is usually called ‘interwar’, going along with the conventional naming of World War I and World War II, implying two separate conflicts.

I’ve long thought of these conflicts as one long war, with the Cold War that followed as a falling out between the victors. In this context, it struck me that the ‘interwar’ period 1919-39 would better be described as a 20-year armistice.

In formal terms, the Armistice of 1918 was ended by the signing of peace treaties between the Allies and the defeated Central Powers, most importantly the Treaty of Versailles with Germany, signed on 28 June 1919, five years to the day after the assassination of Archduke Franz Ferdinand.

The starting point of my book is Keynes’ critique of the Treaty of Versailles, The Economic Consequences of the Peace. Given the failure of the Treaty to secure peace, it makes sense to regard the subsequent 20 years as one long armistice, ending in a renewal of the same war. Going to Wikipedia to check info on some technicalities of the Versailles Treaty, I found the following statement attributed (as usual, dubiously [2]) to French Marshal Ferdinand Foch “”this (treaty) is not peace. It is an armistice for twenty years.” So, Foch (or whoever actually coined the phrase) was way ahead of me. Foch’s view was that the treaty was not hard enough on Germany, and would therefore not remove the threat of German aggression

Whatever its provenance, I’m adopting the term[3], even if I can’t claim credit for it.

fn1. As with most things attributed to the Internet, this idea was around much earlier, a notable example being Merton’s discussion of multiple discoveries

fn2. The quote can’t be traced back before 1939 suggesting a case of what I would call prophetic hindsight (the technical term, it appears is vāticinium ex ēventū Foch’s position directly opposed to Keynes who was concerned with the economic part of the peace, notably reparations, rather than with the military and territorial clauses) . Both saw the Treaty as unlikely to secure peace.

fn3. It follows, I think that the best term for the entire conflict from 1914 to 1945 is The Great War, the name originally given to what is now called World War I.

Hands off the rich?

The idea that we should tax the rich to fund public services and transfers to the poor seems obvious from an egalitarian perspective, at least as long as we are in a society with significantly unequal incomes. But it has been challenged recently by some advocates of Modern Monetary Theory.

[note: The meaning of ‘rich’ is rarely spelt out, and isn’t very helpful. Hardly anyone is willing to admit to being rich, so the discussion tends to focus on a handful of cases like Bill Gates, rather than on people in the top 1 per cent or 10 per cent of the income distribution. So, from now on, I’m going to use the term ‘high-income’ and refer to proposals raising taxes on some subset of the top 10 per cent.]

Over the fold, an extract from my book-in-progress, The Economic Consequences of the Pandemic

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Footnote from, The Economic Consequences of the Pandemic,

The requirement that the rate of growth exceeds the rate of interest on government debt may be written algebraically as g > r. Readers of Piketty’s Capital in the 21st Century will recall that he places a lot of stress on the opposite formula r > g. What is going on here? The answer, in simple terms, is that Piketty is talking about the rate of return to investment, and more particularly the rate of return earned by high-wealth investors. This rate is as much as 6 percentage points higher than the rate of interest on government bonds. The magnitude of the difference, referred to as the ‘equity premium’ is a long-standing puzzle for economists, with profound implications, which will be discussed below.