| Phillipscurves | |
Marginal approaches | Traditional: only labour supply | Nash bargaining |
Standard marginal analysis | (1) the marginal tax rate has a disincentive on labour supply and thus causes wages to rise | (2) the marginal tax rate has a disincentive on wage claims |
Dynamic marginal tax rate | (3) the marginal tax rate has no disincentive, relevant is the average tax | (4) ? |
I have not performed the analysis yet. By the next edition of this book I should have. My intuition however suggests - and I keep an eye on reality - that the two approaches only combine into a stronger argument against the conventional view. Doing this additional work thus currently is expected to be a bit overdone just now.
Investment, growth and productivity
The following has been in my mind since Colignatus (1989) but was not stated in the first edition of this book. One of the key points of Keynes in the General Theory was that the true, real, savings of an economy consist of what is invested. All the money that people save does not count as an investment or real saving. Whatever amount they bring to the banks or even hide under their beds, it is only money. One can have nominal saving S and price level P, but the division S / P is more psychological than real. What counts are the houses built, bridges constructed, lessons learnt, all that can be carried over to the next period. In fact, a company that produces but can’t sell and goes bankrupt might actually do society a favour, since at least some goods have been produced which otherwise might not have come into existence. The challenge is to get production and investment without such perceived incompetence or fraud. The economy should be designed so that those investments come about in an optimal way, where the optimum must be defined not only in terms of expectations and stability but also in terms of social welfare and full employment.
Governments, especially European ones, have been experimenting since World War II with all kinds of methods to control investments, but have been confronted with two major outcomes: (a) unemployment remained high, (b) many investments were considered failures. The economic paradigm since the Reagan years has been to let investments be determined by the market. Also Dutch social democrats like Wim Kok supported this approach, since it was thought that employment depended upon growth while growth depended upon the best investments that the market could provide. This paradigm led to reduced government outlays, less fiddling in the market, privatisation, and reduced taxes for the wealthy who were assumed to do the investing. The 1990s showed the boom associated with silicon valley - though should properly be associated also with this policy and the implementation of new financial instruments. But the boom went bust and the world was reminded of the logic of Keynes’s depression economics, see Krugman (1999).
The point of criticism is that employment and growth are rather separate issues. Our own analysis in this book shows that a return to full employment is possible. The main instrument is to get rid of the tax void. Employment does not depend upon growth per se but employment depends upon a properly working system to allocate the work that is being done in an economy. Growth comes only into the story when we aspire at higher welfare by means of higher productivity. If we don’t want growth, we can easily imagine a stagnant economy. That said, most economies aspire at a growth in welfare. We can do this by designing new products or by material investments or by creative ways to reorganise production. [104] Then the problem returns of optimising investments that define real savings. Since some sections of the economy are devoted to investments, there is also the Keynesian phenomenon that investments influence activity, income and nominal savings.
The paradigm to ‘minimize’ the role of government in investment was misguided since the relation between growth and employment was misspecified. Now that we know that the tax void was the main cause of stagflation we can reconsider the paradigm. The argument that remains is that government meddling supposedly caused failed investments. The answer to that argument is (i) that failures must be judged on a case-by-case manner, by Cost Benefit Analysis, and (ii) that one should include the concept of Keynesian recession and that some investments might seem a failure but actually are beneficial. Note that there is no need for a government deficit since the analysis on the dynamic marginal rate shows that progressive taxes need not be a drawback for the richer. If growth is the issue, then the true issue is its optimality in terms of level and composition and effects.
The line of thought that I would suggest is that this optimum requires competing investment banks that develop plans during the economic upswing that can be implemented during the economic downswing. Who worries about pensions and the EU Lissabon Strategy is advised to consider this approach. Since the market is an anonymous beast that may or may not generate such competition, it remains the challenge for governments to mastermind and manage it all.