martes, 2 de abril de 2013

martes, abril 02, 2013


March 31, 2013 4:46 pm
 
Confessions of a Keynesian heretic
 
 
 
 

I may be the only self-professed Keynesian who is not actively campaigning for large public infrastructure projects. Don’t get me wrong; I believe repairing a few bridges or building an oil pipeline or two would be good things to do. But it is unhelpful to confuse arguments for public investment with plans to restore full employment.


Would a big-state investment programme increase employment? Yes. Would it be cheap, since interest rates are low? Absolutely. But it is much easier to increase the size of government than to shrink it.


The Keynesians are right: we need to increase demand. But what is the best way to do that? I prefer to see the creation of more private sector jobs, not more government jobs. One way to do that is through managing the value of financial wealth, an approach that offers a creative alternative to more government spending in a time of austerity.


John Maynard Keynes thought that public investment would restore full employment even in the extreme case when spending had no social value; for example, a scheme to dig holes and fill them in. He thought that the newly employed workers would spend more on consumer goods and trigger a virtuous cycle of increasing income and employment. Some argue that for every newly created public sector job, the associated increase in demand might trigger as many as two new private sector jobs. I disagree.


The social benefit of more government spending of this kind rests on the answer to a simple question. Does every extra pound of government expenditure raise gross domestic product by more tan £1? If so, the so-called multiplier is bigger than one. If, on the other hand, every pound of government expenditure raises GDP by less than £1, the multiplier is less than one. My reading of the facts is that this latter situation is closer to the truth.


If the multiplier is bigger than one, social investment projects, whatever their intrinsic worth, will increase private consumption and make everybody better off. If the multiplier is less than one, digging holes will create jobs but we will be worse off. We will have gained full employment at the cost of less consumption. We cannot eat holes in the road.


Until economies hit hard by the financial crisis grow to a point where we need all of those houses in Ireland or Nevada, they should, primarily, produce more consumer goods. Sincé households spend more when they feel wealthy, one way to get people back to work is to reflate the asset markets. Central banks and treasuries should actively intervene to reflate the asset market bubble.


This heretical view will be widely denounced by those who think that free trade in financial instruments leads to an efficient allocation of capital. That notion is hard to defend in the wake of yet another financial collapse. It has long been known that financial markets are excessively volatile.


Recent research has shown why: for markets to work well, everybody who has an interest in the outcome of volatility must be able to trade in those markets.


Financial crises have effects that last for decades and the earnings of those who enter the workforce in a boom, as opposed to a slump, can vary substantially. Many people who will be affected were not alive on the date the crisis hit and those people are unable to buy insurance against severe recessions. Government can and should trade on their behalf.


A further increase in equity prices, engineered by government, will benefit us all. As the economy recovers, employment will rise, tax revenues will rise and the need for austerity will fade.


For example, the Bank of England, backed by the Treasury, does not need to print money to restore full employment – a move that would potentially be inflationary. They need simply to absorb the risky assets that private markets are unable to absorb by swapping debt for equity held by the public.


If the market was overvalued in 2007, how could we possibly gain by going back to a situation of apparently unrealistic equity prices? An analogy may help. If we are sitting in a hot-air balloon that is out of control, the solution is not to burst the balloon and crash back to earth.


It is to install an escape valve and let the gas out slowly. So it is with the financial markets. Governments can, and should, restore demand and engineer a smooth return to sustainable growth.


The writer is distinguished professor of economics at the University of California, Los Angeles 

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Copyright The Financial Times Limited 2013.

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