Why not fiscal policy?

Simon Wren-Lewis suggests there might be “other motives at work“ than macroeconomic reasoning for the government’s refusal to consider using fiscal policy to combat rising unemployment.

If he is anything like the Oxford macroeconomics lecturers of my day, he is hinting at Michal Kalecki’s 1943 paper, Political Aspects of Full Employment:

Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence…This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.  But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness... The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence….
'Discipline in the factories' and 'political stability' are more appreciated than profits by business leaders.  Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.

Comments

[Jimmy Hill]

Is there *any* possibility that the refusal to engage in active fiscal policy is the result of honest disagreement as to its effectiveness?

One of my favourite quotes from Walter Lippmann:

"[The opponent] presents himself as the man who says, evil be thou my good. He is an annoyance who does not fit into the scheme of things. Nevertheless he interferes. And since that scheme is based in our minds on incontrovertible fact fortified by irresistible logic, some place has to be found for him in the scheme. Rarely in politics . . . is a place made for him by the simple admission that he has looked upon the same reality and seen another aspect of it."

[Luis Enrique]

I wonder also whether the neglect of fiscal policy for the purpose of stabilizing employment means we have over the years deprived ourselves of the necessary capacity to pull a 'fiscal policy' lever.

what I mean is, say we still had a "Ministry of Works" which had a portfolio of planned projects. This organization could be commanded to accelerate these projects.

Does the government lack the necessary organizational capacity for fiscal policy?

Of course not firing people would be a good start, fiscal stimulus wise, and I suppose building / refitting schools, hospitals, roads, and social housing are all within its power, and I guess (although don't know) it is able to spend on things like energy infrastructure.

So perhaps we do have the capacity - it was just a thought.

[chris]

@ Jimmy - Yes, there can be disagreement as to fiscal policy's effectiveness. In principle, though, such disagreement should be a narrow technical question. But it's not. It matches the left-right divide. Why should this be so?

[Jimmy Hill]

You're right that opinion on fiscal policy matches the left-right divide because people are corrupted by their ideology.

My point was more that could it not be that the government just really believes that fiscal expansion is a gamble that it doesn't want to take given the chances of it being successful versus the potential consequences of it being unsuccesful?

I see this as being a more reasonable explanation than the one provided by Kalecki.

[Keith]

You seem to be under the impression that the Government should promote the welfare and happiness of the public instead of merely pave the way for more Tax cuts for the very wealthy, on the usual Thatcherite lines! How old fashioned and social Democratic. Mr Osbourne has to cut and cut to allow him to buy more Bollinger in due course.

[Tommy]

Unfortunately, riots in the streets don't nsiresaecly help, because even the potential rioters are so convinced of the mainstream logic that deficit spending is bad that their anger will not be able to formulate a useful and coherent goal. The only thing you can do is educate, and I am very thankful for your blogging as it helps a layperson like myself. I am spending some time to spread the word among friends and colleagues, but it is a difficult endeavour.I am reminded of a story by the late Douglas Adams, which he used to illustrate the difficulty of talking with creationists, but in my discussions I sometimes have the feeling that it is much the same with some of the mainstream misconceptions. His story goes as follows:A man didn’t understand how televisions work, and was convinced that there must be lots of little men inside the box, manipulating images at high speed. An engineer explained to him about high frequency modulations of the electromagnetic spectrum, about transmitters and receivers, about amplifiers and cathode ray tubes, about scan lines moving across and down a phosphorescent screen. The man listened to the engineer with careful attention, nodding his head at every step of the argument. At the end he pronounced himself satisfied. He really did now understand how televisions work. But I expect there are just a few little men in there, aren’t there?

[Berat]

stone: I’m curious to know what ptoiorrpon of the $60T “global pool of hot money” came from horizontal stretching out of the $1T yen carry trade money ie If the cheap money from Japan had never been there,As far as I can tell, the yen carry trade was used mostly by hedge funds for arbitrage. The yen carry trade was/is relatively immaterial, just as the US carry trade is now. The humongous amount of money comes mostly from money creation in the commercial banking system through credit extension and its amplification through leverage and financial innovation. For example, the total amount of derivatives is estimated at 600T US.Most importantly from my perspective, I haven't seen anything indicating that the GFC was remotely related to the yen carry trade. The bubbles in assets have been explained in ways that don't involve the yen carry trade at all. The problems arose from fast-dealing and overreach, enabled by capture of the apparatus of the state. This was a breakdown of capitalism.