By Stephanie Kelton, Associate Professor and Chair of the Department of Economics at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives
John Kenneth Galbriath’s book, The Good Society: The Humane Agenda, creates a blueprint for a more just, prosperous and stable world. I’m re-reading it for the nth time because I continue to believe we might just get there one day. Indeed, I’m convinced we must.
Here are some excerpts:
While the economy must accord everyone a chance both to participate and to advance according to ability and ambition, there are two further requirements. There must be a reasonable stability in economic performance; the economic system cannot recurrently deny employment and aspiration because of recession and depression. And it may not frustrate the efforts of those who plan diligently and intelligently for old age and retirement or for illness or unanticipated need. The threat in this case is, of course, inflation — the diminished purchasing power of money — and with it the loss of provision for the future.
The flow of aggregate demand for goods and services must keep the economy at or near [full employment]. The failure to do so — resulting in cyclical or enduring unemployment — is inconsistent with the goals of the good society…
The stabilization of the flow of aggregate demand is the vital factor…There are three substantive lines of corrective action that will accomplish this, will increase the flow of aggregate demand as required…..
1. taxes can be lowered
2. interest rates can be reduced
3. the government can contribute directly to the flow of demand by new expenditure in excess of tax receipts
Action on interest rates, commonly referred to as monetary policy, has the highest establishment approval as an effective measure against stagnation and unemployment…
The serious flaw in monetary policy is that it may have little or no effect on the flow of aggregate demand. As noted, the lowered interest rates are assumed to work against depressive conditions by encouraging consumer borrowing and expenditure and business investment. The latter responds to the lower cost of borrowing and therewith the improved possibility for profit. But when times are poor and unemployment is high, lower interest rates do not reliably inspire consumer expenditure; depressive attitudes, including those which are the product of unemployment or uncertain employment, are in control. And at such times, excess business capacity being evident, business firms, old and new, may not be encouraged by low interest rates to borrow and invest and so contribute to the income flow; the larger prospect is too uncertain. There is also the adverse effect of low rates on those whose income comes from interest — a reduction in their contribution to aggregate demand. None of this, however, discourages faith in monetary action as a decisive economic instrument. Quasi-religious conviction here triumphs over conflicting experience.
Tax reduction is also celebrated as a way to sustain aggregate demand during recession…Here again the hope is at odds with reality; there is no certainty that the funds released by tax reduction will be invested or spent.
As a way to stimulate demand in times of negative growth or stagnation, there remains only one direct and active intervention by the state to create employment… the only true substantive action is for the government to move to provide jobs for those for whom unemployment is otherwise inevitable…
The deficit… must not be seen as a barrier to effective public action….When the economy recovers and public revenues rise, there must then be the discipline that brings stimulative expenditure to an end. Taxes must be kept at previous levels or increased as a counter to speculative excess and, at the extreme, the inflationary pressure of demand on markets.
There is nothing easy about this broad course of action. An influential body of opinion now dismisses it as beyond the collective intelligence of the modern polity. Once again the unfortunate fact asserts itself: there is no effective alternative. What is dismissed as functionally difficult, ideologically passé, is the only way to prevent recurrent periods of stagnation and unemployment.
The “influential body of opinion” remains too enthralled with monetary policy, too wedded to supply-side “solutions” and too focused on deficit reduction to allow us to build The Good Society. The rich and powerful, working through our elected officials, insist that There is No Alternative: we must spread sacrifice instead of prosperity, make tough choices rather than wise investments, focus on budget outcomes instead of human achievements. Theirs is a bleak world – at least for the masses – arrived at through the cultivation of fear and mysticism. The Good Society is out there, and while it may seem unachievable in this Plutocratic world, Galbraith offers this:
To identify and urge the good and achievable society may well be a minority effort, but better that effort than none at all.