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Time to Look Behind the Curtain and See Who is Against Full Employment

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Yves here. Have you noticed how political leaders are nowhere near as upset about unemployment as they ought to be? Ronald Reagan was far more concerned and took more aggressive measures when unemployment, measured more conservatively than it is now, reached 8% than Obama was when it was languishing over 8%. And now that is has fallen into the 7% range, he’s gone whole hog to implement deficit cuts which are sure to send jobless rates back up.

So what gives? Put crudely, the corporocrats have discovered that if job markets are weak enough, they can keep all the benefits of productivity gains for themselves. The current economic “expansion” has labor getting a vastly lower share of GDP gains than any of its predecessors. Those at the top don’t care, since their incomes continue to pull away from the rest of us. So lousy employment levels aren’t a policy mistake, they are a covert policy aim. Look at how some employers, even now, complain that they can’t find “qualified” workers. If you investigate what is really going on, in the overwhelming majority of cases, they aren’t willing to pay enough to get decent people.

Michael Sawyer explains that seventy years ago, economist Michal Kalecki described the political dynamics that keep unemployment higher than it needs to be. An economy with high employment levels gives too much power to the wrong people and requires a bigger government sector, which undermines the claims of businessmen that their role is of supreme importance and their pet wishes should therefore take precedence.

By Professor of Economics, University of Leeds, UK, and Managing editor International Review of Applied Economics. Cross posted from Triple Crisis and Back to Full Employment

In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:

• deficits add to government debt, which is a burden on future generations
(rather, the government debt is bonds owned by individuals, pension funds etc.);

• deficits crowd out investment
(rather, they allow savings to take place and enable investment); and

• deficits cause higher interest rates
(the current situation makes the rebuttal to this clear).

Yet those arguments are still trotted out.

In “Fiscal austerity: The ‘cure’ which makes the patient worse” (Centre for Labour and Social Studies, Policy Paper), I have set out the arguments at greater length. Yet governments, often supported by international organisations such as the IMF and the OECD, continue to refuse to use budget deficits and other measures to secure a much higher level of economic activity.

Kalecki examined “three ways to full employment” – alternative ways in which demand could be stimulated: use of fiscal policy and budget deficits (he was sceptical that monetary policy could have much effect); stimulation of investment (where he queried how far that could go without the rate of profit falling); and tackling inequality (which would raise demand as spending power is moved from rich to poor).

But instead of the use of fiscal policy, investment stimulation or policies to reduce inequality, governments have turned to combinations of austerity programmes, attempts at fiscal consolidation and the adoption of balanced ‘structural budgets’ as a policy objectives. Backed by questionable evidence from the IMF, governments have directed their focus on reduction of public expenditure rather than raising tax rates. The argument that the deficit must be reduced is used to justify any policy which cuts back on the role of the state, rather than raising taxes in a progressive manner. The British government amongst others is using the opportunity of recession and deficit mania to attack social security and welfare benefits.

The motives of the economic ‘experts’ and journalists, who represent particular financial interests and a ‘free market’ in their promotion of ‘there is no alternative’ to austerity and ‘structural reforms’ were well summarised by Kalecki:

Among the opposers of this doctrine [that full employment may be achieved by government spending] there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.

Kalecki then argued that “the social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence (‘Political Aspects of Full Employment,’ p.350).” Any policy which is seen to threaten the state of confidence is then argued to threaten investment and employment. Although the terminology of ‘the state of confidence’ is not often used, common arguments — for example, that regulation tax on corporate profits will damage investment (particularly in a globalised world) — are consistent with the point being made by Kalecki.

Kalecki divided the “opposition of ‘industrial leaders’ to full employment by government spending” into three reasons: “dislike of government interference in the problem of employment as such,” “dislike of the direction of government spending (public investment and subsidizing consumption),” and “dislike of the social and political changes resulting from the maintenance of full employment.” Further, he argued that “subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’—unless you happen to have private means.”

The general thrust of economic policies among European countries in the past three years or so has been austerity programmes, often with the explicit intent of eliminating the budget deficit on a long-run basis. (The exceptions were some mild discretionary fiscal policy in early 2010, and allowing budget deficits to rise as ‘automatic stabilisers’ kicked in.)

Austerity programmes have been combined with attempts at major reforms of the welfare state and the labour market. The general direction of those policies has been to reduce any power of organised labour, and to put downward pressures on wages and social security benefits. This was conveniently expressed by British Prime Minster David Cameron at the Davos summit in January 2013: “How do we succeed when other nations are growing, changing, innovating so fast? A lot of the answers are clear. Deal with your debts. Cut business taxes. Tackle the bloat in welfare. And crucially: make sure your schools and universities are truly world-class. In the UK we’ve been doing all these things. Less than three years in and we’ve cut the deficit by a quarter. Our corporation tax rate is the lowest in the G7. In welfare reform we’ve been radical. In education – revolutionary, busting open the state monopoly and allowing new schools to start up (Cameron, 2013).”

The welfare state and social security systems have many purposes, but in terms of the quote from Kalecki above, reducing the welfare state reduces “mass consumption,” and seeks to ensure that “you shall earn your bread in sweat.”

In the sweep of policy agendas in the aftermath of the financial crisis, many elements which consistent with the arguments of Kalecki. There is no need for austerity or for getting rid of budget deficits to the detriment of employment, and this suggests that the promotion of austerity and other policy initiatives such as ‘structural reforms’ serves other purposes. This is not to suggest some grand conspiracy, but rather that opportunities are being taken in different ways and forms to seek the creation of a de-regulated, more insecure labour market and reduced social protection.

Michal Kalecki 1899-1970, was a renowned economist, born in Poland, whose work and ideas are highly regarded amongst heterodox economists but ignored by mainstream economists. In The Economics of Michal Kalecki (Macmillan) I have reviewed all of his writings. Quotes in text are from Michal Kalecki, ‘Political Aspects of Full Employment’, Political Quarterly 1943.

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50 comments

  1. hidflect

    I’ve said for years the new agenda is to turn economies into a Bangkok-like state where there is an endless pool of beholden labour to draw upon for the crony-ringed elites who run the enterprises at a steady 80% capacity avoiding too many booms and bumps. Desperate people make hard working, uncomplaining employees. An owner’s paradise.

    1. Claudius

      You could have chosen almost any country outside Asia; Thailand’s unemployment rate has been lower than that of other countries Asia regional countries at 1% or so (next to Singapore at 2%, Malaysia,3; Brunei ,3%; Myanmar ,5%; Vietnam,6%; Indonesia, 7% and Philippines 7%). Bangkok, as a Capital is comparable in pro-rated terms to employment rate and skill mix of Manila, Hanoi, Kuala Lumpur, and Singapore in that order.

      The stereotypical difference with respect to the treatment of seasonal inactive labor is small, although there exits some difference, these are not main factors that affect employment between the Asia region countries.

      What marks Thailand out is: Decrease of wage inequality contributed to lower unemployment rate (the main factor of wage inequality decrease is the price increase of agriculture products. A global phenomenon that, disproportionately, affects Thailand); the share of short working hours in Thailand is lower than that of Philippines and Indonesia (more so if they move towards Lambert’s “perma-culture’ intensive rice farming anytime soon). Additionally, the “moving rate” of aging in Thailand is faster than that of other countries. So much so, that Unemployment rate of people age between 15 and 29 had dropped so much that the labor market in Thailand has actually tightened.

    2. Larry Barber

      Of course, none of these short-sighted morons stop to ask the question “To whom will I sell what I produce”. As long there are prosperous economies _somewhere_ (and global trade) they think they will always have customers. But when all economies are reduced to that of Bangkok?

    3. nonclassical

      ..not “Bangkok”-try your Central-South American ’70′s, ’80′s history-”Confessions of An Economic Hit Man” (Perkins), “Killing Hope” (Blum),
      “The Shock Doctrine” (Klein), “Hot Money” (Naylor), or video; “Superpower”,
      “Zeitgeist Addendum”, “The Fog of War”, “Hearts and Minds”; all on a completely parallel plane…

  2. Hilary Barnes

    When Kalecki was writing, government spending in most countries was not much more than 10% of GDP. Now it is above 40% in many rich world countries and in a few it is well over 50 (56% in France). This perhaps alters the dynamics. The spread of inequality is particularly noticeable in the USA and the UK. France is more notable for an unemployment level that has almost never been below 8% for the last 20 years and is now well over 10% and rising, but the Gini coefficient has not changed significantly.The shaare of corporate profits slipped below 28% of GDP at the end of 2012 after being stuck at around 28% for a long time, one of the lowest ratios in the OECD world. Kalecki has some explaining to do.

    1. James

      When Kalecki was writing in 1943, government spending in the UK was 64.37% of GDP, in 1944 it was 65.45%, in 1945 70.34%. the lowest it’s been since then is around 34%, and the results of that reduced spending has been lower standards for the majority of the citizens of the country, and a massive increase in private debt in an attempt to fill the gap left by under investment by successive governments.

    2. Yves Smith Post author

      Huh? He was writing during World War II. Defense spending alone was 42% of US GDP. The rest of the government would have taken it up a few more percentage points. And that’s just federal expenditures. Given the war debts England racked up, its expenditure levels were probably higher.

      Federal spending in the US in 2012 was 24% of GDP.

      You can also make a legitimate argument that the greater scale of business and rise of technologies that produce externalities (pollution, if nothing else, and one can argue financial crises fit in that bucket) necessitate more robust government as a counterweight.

      1. nonclassical

        “You can also make a legitimate argument that the greater scale of business and rise of technologies that produce externalities (pollution, if nothing else, and one can argue financial crises fit in that bucket) necessitate more robust government as a counterweight.”

        meanwhile NOONE in government is making such argument…other than…Elizabeth Warren…who all need gather to (not “get behind”), 2016…
        though 2016 is already written…as DLC bushbama sells out…

  3. jake chase

    I would argue that the ONLY objective of conventional economics is to destroy the bargaining power of labor. A reduced share for labor is required to support the increasing share for rent, interest and dividends, not to mention CEO compensation, rake offs by consultants, expenditures on propaganda, political payoffs, etc.

    This dovetails nicely with product devolution. Inasmuch as employees don’t make very much, they cannot buy very much and certainly do not deserve very much in exchange for their pathetic expenditures. Don’t worry though, the companies make it up on volume.

    This explains why every large corporation without exception now deliberately produces nothing but drek and shrugs off consumer rage with propaganda and soft soap customer service.

    Sorry for your inconvenience.

    1. Dan Kervick

      I have been arguing for full employment programs and egalitarian measures for several years now on all kinds of economics blogs. For the most part, professional economists have no good, convincing arguments against these proposals, but rather just a kit of quick defense mechanisms rooted in models that they, themselves know are fundamentally flawed. And yet the proposals are simply beyond the pale of things they are willing to consider. That has made me think that most modern economics is a theology: a scholastic pseudo-science whose function is to defend the power of capital and thwart the potential of genuine democracy.

      1. jake chase

        I think it is more about defending the power of rent. Capital today has no power and makes no return. Check the rate of interest on TBills, bank accounts. If you expect a return on capital, learn to gamble in rigged financial markets, and good luck.

        Megabanks get rent from the Fed on phony reserves, most of which are gifts disguised as loans on worthless assets.

        We no longer have capitalism. Rather, we have an imperialistic, corporatist kleptocracy. We should call it Impercorklepism.

        1. Dan Kervick

          Capital doesn’t make its money from T-bills. The return to capital in our pseudo-recovery is massive.

          1. Nathanael

            The distinction between real capital (industrial capital) and rent is actually important here. The big money-maker is rent from monopolistic control of land. (This includes, for instance, railway and telecom rights-of-way.) The returns on industrial equipment are fairly poor.

          2. Nathanael

            The situation with banks qualifies neither as rent nor as industrial capital.

            The major banks are making money partly by printing money (effectively, through accounting fraud), and partly by stealing money.

            The rate of return on theft and fraud has become very high. Hence “kleptocracy” as a description for the economy.

          3. jake chase

            Imagine you had $1 million. What would you do with it? If you were young enough you could establish a business, but few people accumulate this much until they are quite old. Apart from this your choices are collecting interest at under 1% or embarking on some kind of speculative gamble.

            Confusing monopolistic corporations with capital leads to all sorts of silly suggestions reflecting a conflict between capital and labor, but as Henry George explained in 1879, capital, essentially, is stored labor which wasn’t dissipated in consumption.

            Banks don’t need deposits while the Fed enables them with free reserves and pays interest on them at 100 times the market rate. The conflict is between labor and rent, and rent is winning hands down.

            Rent is any return sheltered from competition. It includes not only ground rent but any privileged exaction protected by a natural or legal monopoly.

            Of course, you could take your million and buy a franchise, but you will soon discover that all you own is a job.

    2. craazyman

      McDonald’s still makes good french fries.

      Otherwise, as in all things economic, the post is not wrong, since logic alone can’t navigate its postulates, but it is incomplete.

      Full employment in the form of casinos, jails, security guards, pawnshops, explosives manufacturing, strip malls, convenience stores and Foxconn-style factories would be mathematically equal to full-employment in the form of farms, small- to mid-sized businesses, craftsman and women, quality manufacturing, furniture making, local retailing, renewable energy production and the manufacture of fly fishing rods and whiskey and local wine.

      Math can be fun for some people — it is for me — but you can’t live there, inside its formless abstractions, unless you’re a professor of some kind.

        1. craazyman

          Right now you go to the counter and there’s a 4′ 10″ woman from Guatemala who looks at you like you’re Diego Cortez himself.

          Some people might like that.

          McDonald’s should be careful. If there’s a philosophy major well-versed in Liberation Theology behind the register instead, they might dress you down with such visual scorn you lose all appetite.

          There’s always Burger King if things get really bad.

      1. jake chase

        I would want to know more about the oil in those fries before eating too many of them.

        1. craazyman

          I write about it more than I do it.

          But still, if they turned the entire U.S. government at all levels over to graduates of McDonald’s University, I think conditions in America would dramatically improve across all areas of life. You can always get their yogurt with fruit and granola. It’s pretty good!

  4. Ignacio

    This is key to understanding what’s going on these days. I would also add what I think is an important observation. The impact of austerity and financial crises on unemployment has been the highest in countries that do not have a, let’s say, corporatist scheme that includes centralized wage negociation, export-oriented corporations and co-operative decision making, not only in wage negociation but also in social benefits or education. Scandinavian countries, Austria, Germany, the Netherlands are considered highly corporatist or integrative economies in which wage and social bargaining is centralized through negociations between strong centralized labour unions with moderate (or strong in the case of Scandinavian countries) participation of the state.

    What is called “competitivity”, and usually reduced to a simple question of unit labor costs, is the outcome of complex factors, some of them depend on the intensity of integration of different social forces in policy-making. Those countries that favour the participation of a wider spectrum of social characters are better equiped to reduce the natural and secular tendency of capital interests in the reduction of labor bargaining power.

  5. David Lentini

    In the end, it’a all about power. Those who seek power over their neighbors and complete freedom action seek wealth, as captured so well by Ayn Rand. (Honest) government activities defeat the concentration of wealth, dilute power (as the Founders understood so well), and therefore are an anathema to those who seek power.

  6. allcoppedout

    The key issue is not employment but rather wealth distribution. If we had Robot Heaven would we force people to work for a living?
    Defence spending peaked at 46% of GDP in 1943.

    1. Mr. Jack M. Hoff

      The answer depends on how much those robots cost to produce and maintain vs. the cost of human labor. Human labor would probably always be cheaper at the end of the day.

      1. allcoppedout

        I only venture Robot Heaven as a thought experiment Jack, though we are some percentage of the way there. Some work can only be done by robots – though to take your point, this hasn’t prevented owners using humans in the past!

    2. jrs

      All work except self-employment and worker ownership is a form of slavery to masters you must submit to to survive. It’s all a master-slave system. Oh your master might be a global corporation or your master might be the government but fundementally that’s what it is. Of course high unemployment is used to make the conditions of your slavery worse (you take and put up what you can get because jobs are scarce). But jobs worked for a master should never be glorified too much.

    3. jrs

      And yes a guaranteed minimum income would accomplish a lot of the same things as full employment, except continued dependency on employment.

    4. washunate

      Agreed.

      Unemployment is a symptom, not the original goal/causality. The policies advocating wealth concentration are the main problem (two tiered justice system, corporate welfare, tax loopholes, etc.)

      In fact, I think to the extent there is an ‘elite preference’ around employment, it would tend toward having people working than not (in stagnating wages and totalitarian work environments, of course, but that’s still employed).

      The leaders in this country abhor people with time on their hands gathering in public places :)

  7. Roquentin

    This is Marxism 101. The unemployed are necessary as the “reserve army of capital” in order to further and maintain the exploitation of those still working. People are far less likely to demand better pay and conditions when they know they can be replaced at the drop of a hat.

    1. Dan Kervick

      Another important role played by strong labor organizations is educating their members and other workers. Most working people don’t have the time or background experience to delve deeply into the economic system and understand how it all works. If there is no one they can turn to who is looking out for their interests, then they will get all of their information from the politicians and media who are out to subordinate them and fleece them.

  8. Larry Barber

    Of course high unemployment is one of the aims of Wall Street. Remember what happened during the 90′s? When employees, at least in some fields, began to get the upper hand and salaries started rising the Fed tipped the economy over into a recession. Said they were concerned about “wage driven inflation”. Funny that they don’t seem to be concerned about wage inflation when it’s concentrated in the upper echelons.

    In a rare moment of honest and candor, Greenspan admitted that part of his job was keeping some uncertainty in the labor markets. The Fed is evil and corrupt to its core, it’s time to eliminate it.

  9. Susan the other

    Yesterday’s hastily called press conference disguised as a speech and questions with Janet Yellen was weird. It was designed to reassure people that the Fed had listened to the GAO report. That the Fed had acted even before the GAO report came out by ending the “review” because it was too complex. That they were now going to disperse restitution to harmed borrowers directly. Nobody asked Janet how they were determining the harm. The Fed gets away with this because no one understands how it works. It works for the private financiers. And the financiers are dead-set-against fiscal responsibility. But to have a tarnished reputation because they got caught hoaxing the foreclosure review was intolerable. If the banksters can’t take the high road and control the dialog in a convincing manner the whole pretense will fail.

    One of the questions she was asked was about the usefulness of the Fed’s dual mandate of keeping inflation low and “promoting” full employment. But the question was asked by an austerian who was clearly angry about and interested in the inflation part of the question. Janet gave a long answer about how all the central banks in the world are getting together now to rewrite regulations, etc, effectively a non-answer begging for time. She implied that inflation was not a problem but curiously she said nothing about the intentional structural misery and unemployment which maintains a low level of inflation. And she blathered on about how the economy and employment were improving (a practiced lie), etc. I do get the feeling they’ve run out of tricks.

  10. Nathanael

    “Put crudely, the corporocrats have discovered that if job markets are weak enough, they can keep all the benefits of productivity gains for themselves.”

    Until the guillotines come out. Or the torches and pitchforks.

    Really, the corporocrats are idiots. Any king in ancient Egypt, and anyone who’d read Machiavelli, would know that full employment keeps the peasants busy and quiet (and then you can keep all the benefits). Unemployment gives them free time to get angry and mix Molotov cocktails.

    We have a rather peaceful population right now, but seriously, the corporocrats are relying *entirely* on ridiculous propaganda to prevent people from killing them and taking their stuff, and that’s *not reliable*. (Some may say they’re relying on paid mercenaries, but they aren’t treating the mercenaries well enough — the mercenaries are the people most likely to turn on the corporocrats.)

    1. tongorad

      The propaganda is working, it is indeed “all” they have, and they have it all.
      Try talking to anyone about full employment and watch what happens: you’ll be instantly dismissed as some of kook.
      Same-same with fix the debt.
      We are living in a period of “Everyone knows.”
      Future historians will chronicle how an entire population became so subdued and subordinated.

    2. digi_owl

      That is why you have circus. Reality TV, soccer world cup, super bowl, all to keep the masses distracted.

    3. H. Alexander Ivey

      It’s not the money, it’s the social standing. Money may talk, BS may walk, but your “class” is the ground you stand on.

  11. Expat

    So I didn’t read all of the analysis of the Cyprus situation, and I probably missed the insights. So maybe it’s not a surprise that yesterday’s Toronto Star ran a a story revealing the existance of an October 2011 report by the Financial Stability Board, the new international body headed by Bank of Canada Governor Mark Carney. The report states bluntly that taxpayers should not be required to assume the risk of bank failures and urges countries to adopt bail-in procedures “just in case.”

    About two weeks ago, Canada’s ruling Conservative party finance minister released regulations initiating the recommendations and, finally, it is hitting the Toronto papers.

    (http://www.thestar.com/news/canada/2013/04/04/jim_flahertys_cyprusstyle_bank_rescue_plan_walkom.html)

    Seems like Cyprus was a trial run….

    1. Ms G

      Exactly the same proposal was drafted as between the US Federal Reserve and the UK FSA in December 2012. I agree about Cyprus being the Phase III test for what’s coming.

      Interesting the distinction between “taxpayers” (who should not have to bail out banks) versus “depositors” (who should). How many depositors are not taxpayers?!

  12. Andrew Watts

    Kalecki was right to be suspicious of the theory behind monetary stimulus. It is assumed that expanding the money supply should cause economic growth in the short term. During the Great Depression, the Fed continually expanded the money supply through open market operations. Unfortunately all the newly created money was dead money. It did not boost or sustain the velocity of money. Thus as Herbert Hoover in his memoirs pointed out;

    “Again one part of the theory upon which the Reserve System was founded was tested the idea that business could be activated during depression by Federal Reserve credit expansion and lower discount rates. Subsequent events showed it had little effect in that direction. Credit expansion certainly proved to be an effective method of promoting a speculative boom when people were optimistic. But when they were pessimistic, it had no effect whatsoever.”

    Even if the theory is true, credit-driven growth is not sustained in the long term. The recession of ’37 wiped out pretty much all the economic gains made since 1929 in the United States. This situation should be eerily familiar to those of us in the present. Especially with such a weak recovery that we’re experiencing.

    1. Andrew Watts

      The Federal Reserve undertook to expand credit around pre-1928 in an effort to relieve the economic conditions in Europe. Under the stalwart leadership of Fed Chairman Benjamin Strong. This theory of monetary stimulus was tested with the result being that in the United States there was a stock market bubble. A bubble that finally burst in late 1929.

      This doesn’t sound familiar at all!

    2. nonclassical

      good article-Kalecki…BUT-”boil the frog slowly” keeps hidden till the end, “rentiers” manipulation…AND general misinformation=propaganda claims lifestyle will “come back” to “normal”…which most educated understand will never come to pass…

      Another way of viewing circumstance=just as Soviet arms race undercut Soviet
      economics, so has U.S. financial – Wall $treet banking race-with other economies-ways of financial transaction-appears today that “natural resource”
      based-producting economies are surviving, and in “nationalized” form…vs. democracies based upon military technology=U.S. Labor belongs to Asia…Europe is parallel competition=financial center…the 3 components of Orwellian nightmare…..though Huxley metaphor is also present…

  13. Hugh

    In a kleptocracy, permanently high unemployment is an important means of reducing the 99% to debt and fear filled servitude.

  14. ian

    Lets see – corporate interests are served when unemployment is maintained at a higher level. This high level of unemployment is then used as one of the main justifications for really low interest rates, which benefit mainly …. those same corporate interests.
    It is as if the plight of the 99% is being used as an excuse to help the 1%.
    Am I missing something?

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