Tuesday, 23 September 2014

Kalecki and the ECB

In 1943, Michael Kalecki gave what has recently become a very influential analysis of why it was that capitalists might object to Keynesian demand stimulus policies designed to ensure full employment. Such objections might seem puzzling, insofar as demand stimulus puts money in the hands of customers, selling to whom is how capitalists make their money. Kalecki argued that capitalists would indeed support stimulus to get out of recession for precisely this reason. However, they would object to using this policy to reach full employment (sacrificing profit as necessary), because

  • Full employment raises worker bargaining power and undermines shop-floor discipline.
  • Deficit spending involves allocating money to people who haven't "earned" that money (for backup for the scare quotes see here), challenging "the fundamentals of capitalist ethics [which] require that 'You shall earn your bread in sweat'--unless you happen to have private means." 
  • For reasons explained here, without deficit spending, investment is crucial to maintaining full employment. Governments who shake business confidence therefore provoke unemployment.   "This gives to the capitalists a powerful indirect control over Government policy," which, Kalecki argues, they very much wish to preserve. Thus, "The social function of the doctrine of 'sound finance' [balanced budgets] is to make the level of employment dependent on the 'state of confidence'." 
It's really rather remarkable the extent to which these three motivations have found echoes in the Eurocrat and German establishments' reaction to the Eurozone crisis. 
  • Calls for structural reform and especially competitiveness are directed primarily at reducing worker bargaining power.
  • Moralised discourse about "earning" is deeply entwined with the export-led model that justifies the competitiveness emphasis.
  • Some officials have voiced the idea that the "state of confidence" should determine policy quite directly (obviating Kalecki's functionalism.)
One might think that recent events--the end of growth, the fall of inflation to just .4%, the increasingly manifest limitations of ECB string-pushing--might be enough to change some minds. Perhaps--but not at the ECB.  Here's an updated picture of the European demand situation (for background see here).
Source: Eurostat, chain-linked prices with 2005 reference year; these figures show a small amount of growth in Q2 2014 , so they're more optimistic than the headline real figure of zero growth. Investment is "gross capital formation."
One could look at this and note that the economy has replaced only 2/3s of its lost growth, government consumption has dramatically failed to keep pace with even this anaemic growth, that household consumption is lower than it was five years ago, and conclude that it's no surprise that investment has fallen. What market would investment seek to tap? Even remarkable growth in the trade surplus can't compensate for missing domestic demand--stimulating the latter would seem the obvious policy.

But Mario Draghi has a different take. As Kalecki would have expected of a capitalist, but perhaps not a public servant, it's the state of business confidence that's key.  Here's Draghi speaking to a committee of the European Parliament yesterday.
the success of our measures critically depends on a number of factors outside of the realm of monetary policy. Courageous structural reforms and improvements in the competitiveness of the corporate sector are key to improving business environment. This would foster the urgently needed investment and create greater demand for credit. Structural reforms thus crucially complement the ECB’s accommodative monetary policy stance and further empower the effective transmission of monetary policy. As I have indicated now at several occasions, no monetary – and also no fiscal – stimulus can ever have a meaningful effect without such structural reforms. The crisis will only be over when full confidence returns in the real economy and in particular in the capacity and willingness of firms to take risks, to invest, and to create jobs. This depends on a variety of factors, including our monetary policy but also, and even most importantly, the implementation of structural reforms, upholding the credibility of the fiscal framework, and the strengthening of euro area governance.
Draghi clearly does not believe in Keynesian arguments. Consider the italicised words in the passage above. The idea that monetary stimulus won't work without structural reform is at least coherent--the idea is that there will be no demand for cheap loans without confidence in the business environment. But a fiscal stimulus does not depend on confidence in the same way--the government just spends the money.

As if further evidence were needed, when pressed about whether countries with a better fiscal balance should spend more expansively, all Draghi would say is that the country-specific policy recommendations agreed by the European Council in July ought to be followed. For Germany, the relevant recommendations actually endorse rapid movement toward a budget surplus.  

In sum, the evidence that the supposed change of tone of Draghi's Jackson Hole speech was not serious mounts.

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