[OPE] Interview with Hillel Ticktin, Financial turmoil heralds return to Keynesianism

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Thu Apr 24 2008 - 12:08:00 EDT

I don't really understand what Hillel Ticktin is talking about, because I do not know what exactly he means by "Keynesianism". I sketched out a few things the other day about it.

Some important factors deciding the issue are:

- the capacity for governments to engage in Keynesian policies after a quarter century or so of trade liberalisation, privatisation and "globalisation"
- the general political balance of power between different interest groups represented in the polity (whether this would favour implementing Keynesian policies)
- the political clout of different fractions of the propertied classes
- the intellectual coherence of Keynesian policies and their popularity among influential policy advisors
- the total economic environment, in which the private sector is in control over a large chunk of the credit supply, and capital can freely enter and exit different countries
- the presence of significant agitation to improve the lot of the poor

I would say that all these factors do not augur for any return to Keynesian policies in the foreseeable future, beyond a bit of social-reformist tinkering to promote social cohesion and co-opt sufficient support from important interest groups in society. Of course, in countries with a very large state involvement in the economy and a very large budget deficit, you might say that they are pursuing some kind of Keynesian policy anyway. But in these days of "financialization", it often becomes a bit difficult to understand objectively how you should regard the debits and credits.

Michael Bleaney defines Keynesian doctrine as "acceptance that budgetary measures are to be judged by their impact on aggregate demand rather than on the financial balance of the government itself (i.e. the rejection of the balanced budget as a policy objective) and a willingness to use such measures in order to attain the desired level of effective demand"  - Bleaney, The Rise and Fall of Keynesian Economics, Macmillan 1985, p. 117). I would say that is a pretty fair definition.

I don't really see any real evidence yet however of a willingness to return to Keynesian policies in this sense, in the foreseeable future. Rather, the primary concern of Reserve Banks is to keep price inflation low, and if possible keep interest rates down - the critical question is really, whether they will be able to do that in the longer term, in a globalised financial environment. 

But supposing they are not able to do it, then they are going to be even more concerned with price stability. A few percent extra inflation is not so bad, but runaway inflation cuts into profits. Just because inflation starts to increase again, however, doesn't automatically mean a "Keynesian" policy.

That aside, you cannot very well "manage" aggregate demand, if you don't have much grip on aggregate demand anyway in a globalized economy, and don't have many policy levers left to channel capital effectively into job-creating production that are politically and financially acceptable. I think that, given a more and more segmented labour market, even if unemployment rises to 10%, you wouldn't get any very large policy shift out of that, but if it goes much beyond that, you would because then it would affect the job prospects for the majority - protectionism of various sorts, stricter immigration controls, attempts at more financial regulation etc. 

The ultimate problem of Keynesianism is that, whereas you might be able to apply a few carrots and sticks to influence the situation, in the end, as long as you have capitalism, you cannot force investors to invest where they don't want to invest, and you cannot prevent them from investing where they do want to invest, and that is even more true in a deregulated, speculative, internationalized environment. And obviously, investors are going to invest where their profit margins are competitive and where the risks are acceptable. They are unlikely to invest where this doesn't apply.

The FT notes for example that "The weak dollar notwithstanding, US foreign direct investment (FDI) inflows declined 13.4 per cent in the fourth quarter of last year from the same period a year ago, and were only one-third the level of the prior period. On the M&A [mergers & acquisitions] front, foreign purchase of US firms plunged roughly 25 per cent in the first quarter of from the same period last year (...) [while] US FDI outflows hit a record $317bn in 2007, a 46 per cent rise from the prior year." (Joe Quinlan, "Foreign investors shun cheap US assets", FT April 23 2008) http://www.ft.com/cms/s/0/fe3071fa-1142-11dd-a93b-0000779fd2ac.html 

If those figures are correct, that must be an effect of the fact that the average US industrial rate of profit has been trending down for half a year now, and that expectations for higher profitability are low. Profit expectations are down for all of the G7. But it is not true at all that foreign investors aren't buying up US assets more, utilising a weaker dollar, because they are, it's just that those assets are mainly not productive assets, but financial assets and real estate. There's a huge debt market nowadays, but it's not really clear to me how "Keynesian" policies can significantly influence that anymore.

The economic advisors of US political leaders are not "Keynesian". The ECB is not "Keynesian". The Bank of Japan is not "Keynesian". The world is awash with idle capital, but the double problem is really that speculative capital doesn't invest a whole lot in cumulative expansion of job-creating production, and that the level of real wages for the majority of workers remains fairly stagnant. And that means real GDP growth stays at a rather modest level. The "credit squeeze" only makes for an even more conservative economy. 


ope mailing list

This archive was generated by hypermail 2.1.5 : Wed Apr 30 2008 - 00:00:18 EDT