Friday, November 30, 2012

Furthering the Post-Keynesian View of Wealth and Income Concentration

As frequent readers of this blog are well aware, my approach to understanding business cycles is most closely associated with the Post-Keynesian sub-disciplines of Monetary Realism (MR) and Modern Monetary Theory (MMT). The order of appearance is intentional since I find myself more frequently in disagreement with MMT when its proponents stray too far from their monetary operations expertise into the realm of policy recommendations. Though I support the government’s ability to offset private sector deleveraging with budget deficits, I find it troubling that more specifics on the distribution of funds and current tax laws are often omitted from the discussion.

Although these disagreements are meaningful, they do not discount the shared goal of promoting multi-sectoral analysis of business cycles. Thornton (Tip) Parker, at New Economic Perspectives, puts forth two ideas to further this goal. His first idea revolves around the issue of wealth and income concentration that I noted above:

The wealthy use much of their money just to make more money by gambling through hedge funds, leveraged buy-out funds, and other financial schemes.  They take some out of the economy by spending in other countries and hiding from taxes with off-shore accounts.  They are not using much to make productive investments to create more jobs that would provide good pay and benefits in this country.  Too much of what high earners receive leaks out of the Main Street economy to Wall Street, and often to other countries.
I do not think that MMT and MS consider the leak adequately. They explain why the government must create more new dollars to offset private sector and foreign surpluses.  But they do not explain how to prevent many of those dollars from flowing up and increasing the wealth concentration.  I suspect that more dollars flow out of the Main Street economy through the leak than as payments for net imports.  Just the need of many middle and lower income families to borrow ensures that some of their income will flow up in the form of interest and finance charges.  (Margrit Kennedy has recently estimated that thirty-five to forty percent of all purchases go to interest.)
The effect of concentration might be analyzed by dividing households into two subgroups, one for the wealthy (say top 10%) and one the rest.  Showing each subgroup’s surplus or deficit in relation to the rest of the private sector and the foreign and government sectors would show how much of a problem inequality really is.
I know of no easy way to do that, but conceptually, it would debunk the idea that income inequality is an envy, special pleading, or made-up class warfare issue.  It would also show that taxes can do more than just prevent inflation, they can be used to limit the leak of money out of the productive parts of the economy.
Though this research project faces significant challenges, the potential results could vastly improve current policy discussions both among Post-Keynesians and in the broader political arena.

Related posts:
Debt Inequality Remains Major Headwind To Growth
Bubbles and Busts: IMF - Leveraging Inequality
Bubbles and Busts: Forgotten Lessons from Japan's Lost Decades
Hayekian Limits of Knowledge in a Post-Keynesian World


  1. I don't understand. You clearly state you often disagree with MMT fr making policy recommendations. But distribution and tax policies are exactly that, as is any approach to inequality.

    1. Ben,

      Maybe that statement was poorly worded on my part. I don't disagree with the decision by MMTers to make policy recommendations, although I think economists broadly should show less certainty in their ability to predict specific macro-outcomes. My disagreement is often with the specific recommendations, which I think have a tendency to overlook how current tax policies and other regulations affect distribution.

    2. and au contraire, Mr. Wojnilower, you on the other hand are not thinking about how those policies and regulations came into place to begin with (which effected distribution). What you really want to get down to are market governance regimes...that is, how is the market governed between government/business/labor and what effects will it produce? Its ridiculous to say we don't think about those other issues, it's simply that those other issues involve a lot of politics. If you want to change the other issues, you have to change the structure. To do this you have to wait for another collapse to happen, because there is no other way that this can occur absent a revolution.

      At one time I like you thought the exact same thing about MMT (that it ignored distributional issues and simply focused on increasing government deficits), you just have to understand that our understanding of the economy is much richer than you would think based on any comments made from its proponents online (well, thinking specifically the professors and their students like myself).

    3. For myself and almost certainly others, the initial exposure to and base of knowledge about MMT or other schools of heterodox economics stems from blogs. I don't discount the potential that proponents of MMT (professors and students) think deeply about the issues of market governance and structure (i.e. public choice economics), but wish it would seep out a bit more in comments and posts made online.

      While I agree that altering the market structure without some type of economic collapse seems near impossible, I do think more time could be spent considering the interplay of current proposals (JG or otherwise) with the given market structure. I recognize that may be a poor strategy for gaining broader acceptance, but it also might be a way to connect the different groups in this realm of monetary economics.

  2. You are entirely correct about the lack of addressing distributional issues. It's hard.

    Fiscal policy is (or can be) far more equitable for the income distribution.

    1. Mike,

      Thank you for the support. No doubt it's a difficult subject to breach.

      My view is that the current inequitable distribution of wealth and income, may lead to opportunities for adherence to a monetary economics approach to fiscal and monetary policy. If so, I hope these issues have been more fully integrated into the approach by that time.

  3. Actually, the Job Guarantee by itself changes the structure of the economy away from speculative activities and towards production (meaning jobs, and eventually higher paying jobs). This by itself alleviates a great proportion of the inequality, though certainly not all of it.

    1. What are the specific jobs within a Job Guarantee program? How will the government be restrained from raising wages to compete with the private sector?

      IMO, a significant portion of inequality stems from the reliance on debt which transfers wealth from debtors to creditors. As I understand the JG, it would effectively eliminate unemployment by creating low-paying jobs. I fail to see how this will materially alter the over-reliance on debt/credit.

    2. Joshua,

      I did once write about this (a little bit), read the last 2 paragraphs here:

      The reliance on debt is because people do not have an adequate income/do not have a job (well, it was initially). Though I agree that we have probably reached a point where debt is seen as the route to do everything now, the point is that it evolved precisely because wages have stagnated since the 70s. The argument with the JG is that countercyclical jobs programs (at some wage) do two things: 1) workers continue earning an income, meaning continued sales for business, and 2) through increased sales the MEC rises, thereby increasing investment into capacity. This also has the effect of businesses not discriminating against the jobless, as these workers have had a job until they get hired at their new job.
      Why would government raise wages to compete? The point is that they have a job at a certain wage, and if the private sector wants them then it hires them at a wage higher than that.

      I simply disagree when you say a significant portion of inequality stems from reliance on debt. It's true that it's wealth extraction, but extraction in the absence of wealth creation (ie jobs) is ultimately where the problem lies. Other benefits of the JG, IMO, is that if the MEC is higher then you won't see money going into speculative activities as much. Instead you see it go to productive capacity. Furthermore, an economy where firms are always hiring ultimately creates higher and higher wages, because jobs that require skills ultimately come back in some shape or form.

      Literally, almost all of our problems (as they exist today) stem from the fact that many people in society don't have a reliable source of income, if any. You fix this problem, and you'll fix a lot of other problems.

    3. I should have added, Pavlina Tcherneva has written some specifics on the JG over at the Levy economics website, I'd look it up. I think MMT'ers haven't agreed on the wage and on whether they have jobs (and wages) higher than that for workers with higher skills.

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    6. Joshua,

      There's all kinds of literature on the jobs proposed in a JG by Bill Mitchell, Wray, Mat Forstater, Pavlina, etc. Also, they've written extensively about the jobs provided in the Argentina Jefes program in the early 2000s.

      Note that the JG is an alternative to NAIRU, which creates a buffer stock of unemployed to stabilize inflation whereas the JG creates a buffer stock of employed to do the same, not a direct approach to inequality. That said, there are a number of qualifications to make. First, MMTers propose that nations that can afford it in terms of productivity should ultimately pay a living wage in the JG. Second, with or without a living wage, the JG wage can be raised each year by the inflation target and also some additional increase as a % of productivity growth to enable JG workers to share in increases in the national wealth. Third, you write that the JG only creates low paying jobs, but note that as Wray/Bell (Kelton) wrote in 2004 (go check this out at Levy), the JG could effectively eliminate poverty, and as Wray/Pigeon explained in the late 1990s (again, at Levy), even at low rates of unemployment the pvt sector does not create jobs for people that would have a job in the JG (among others, obviously). Fourth, note that during that past almost 40 years, the only time real pvt sector wages increased and inequality declined in the US was when unemployment was low in the late 1990s, and a JG is designed to recreate that environment.

      In short, your suggestion that the JG doesn't deal with inequality and only creates low paying jobs to me (a) misses the overarching point of the question, (b) is largely incorrect if one considers poverty alleviation as reducing inequality or at least important, and (c) misses significant side effects of the program. In particular, the JG deal with both far better than the NAIRU approach supported by everyone else, even as on its own it is not enough (which every MMTer would grant up front--nobody ever said it was a panacea). And note that you only have these two choices, by definition---NAIRU or JG. Being against JG means you are in implicitly in favor of NAIRU and all of the additional expenses that come from involuntary unemployment (healthcare, productivity, crime, incarceration, divorce, etc.), even if you want a lower NAIRU than the Fed or most economists currently propose.


    7. Dues-DJ and STF,

      Thank you both continuing the conversation and pointing me towards informative reading. I should note that I followed much of the discussion earlier in the year on the JG/ELR, including many of the authors you both mention, and have also considered Minsky's proposal in "Stabilizing an Unstable Economy". My caution on this subject was clearly correct, however, since you both have added to my understanding.

      My mention of govt raising wages to compete stems from a political question about the willingness of govt to shrink when the economy is improving. This may be a bit outside the scope of current discussion.

      If the JG were to both provide low paying jobs (that aren't provided during low unemployment) and to have raises baked in based on inflation and/or productivity, I assume that requires different pay-scales/grades within the JG? My opposition is less regarding the low paying jobs (which would be an improvement over indefinite unemployment benefits), but govt jobs that become higher paying than the private service sector over time (prob. referenced in a paper above).

      Let me temporarily conclude with this: I completely agree that NAIRU is a poor approach, but had not previously considered the options as being restricted to these two. The comparison is certainly something I need to consider further and maybe a third option exists.

  4. Oh, the MR crowd is not a sub-discipline of PK economics, they started out as MMT'ers and unfortunately because they have never read anything about the philosophy of science they decided to split. They never were and never have been PK economists.

    1. I'll let Mike or other MRers respond, if they choose, since I can't speak on how they classify themselves.

      Maybe there is a broader categorization I could/should use for summing up these views...suggestions?

    2. "Keynesian", rather than post-keynesian (or post keynesian, but I don't exactly remember what the distinction or debate was between the two now)

    3. IMO "Keynesian" has largely been co-opted by those following the Hicks-Samuelson neo-classical synthesis program (which unfortunately has relatively little to do with Keynes). Post-Keynesian I take to include those following in the line of Abba Lerner, Joan Robinson, Minsky (a favorite of mine) and maybe Kaldor. The latter takes a distinct view of disequilibrium and instability that focuses on the financial system and monetary economics.

      IMO, the MR crowd follows that line of thinking more closely than any others I'm aware of, which would make sense given the initial background within MMT.