Tuesday, January 15, 2013

Polish economist, Michel Kalecki, and the 'political business cycle'

In a must read Guardian column, Aditya Chakraborrty looks at the assault on the social contract that has occurred as a result of policymakers pursuing the Japanese Model for handling a bank solvency led financial crisis.  He finds this is exactly what Polish economist Michel Kalecki warned about in 1941 when describing the 'political business cycle'.

As you are reading about the 'political business cycle', please keep in mind that the Japanese Model only benefits bankers and by extension those they reward.  The Japanese Model does this at great cost to society and the social contract.

The single best guide to what happened in Britain last week was published in 1944. Naturally, its author was a Polish economist. Even economics students may not have heard of MichaƂ Kalecki – but it's the discipline that got small, rather than his legacy. 
In his time, Kalecki was recognised as having anticipated some of Keynes's most important ideas, years before the Master published his General Theory, and he exerted a big influence on such legendary Cambridge thinkers as Joan Robinson and Nicky Kaldor. 
His article, Political Aspects of Full Employment, explains with an almost eery prescience why the coalition is attacking our wages, our working terms and conditions and our welfare state.... 
"A solid majority of economists" agree on how to solve a slump, Kalecki says. The government borrows more and invests the cash either in building schools and hospitals or in providing benefits and tax cuts; this boosts demand and generates employment. 
Ta-da! Two pages in, and he has both fixed the problem of recessions and despatched most of the arguments against public borrowing that we have heard with such tedious frequency in the past five years. 
What if savers become wary of lending to the state? 
Then, Kalecki says, the Treasury pays higher interest rates – and, since most of its lenders are British (just like now), the money will still flow back into the economy. But he notes that Churchill's war coalition has run "astronomical budget deficits", while "the rate of interest has shown no rise since the beginning of 1940". 
What if it becomes too costly to keep on top of the national debt? 
Then ministers should raise more funds, not by taxing ordinary pay or spending, which would slow the economy, but with a levy on idle wealth. 
That proposal, by the way, is tossed out in a mere footnote on the second page; and, reader, if you can't love a man who comes up with a novel way of soaking the rich in one short italicised paragraph, then I fear we're never going to be friends. 
Having rattled through the urgent problems, Kalecki points out that a booming economy and healthy profits would be good for the "leaders of industry", but that they will never support such government intervention. 
And in a sentence that sums up post-crash Britain, he identifies one of the principal sources of resistance as "so-called 'economic experts' closely connected with banking and finance" along with "big business".
Please re-call Jeff Connaughton's Blob while re-reading the highlighted text.  The Blob consists of politicians, economic experts, lobbyists and the bankers.

It is the Blob that insists on pursuing the Japanese Model despite the fact that it has never worked to end a bank solvency led financial recovery.

It is well known that ending a bank solvency led financial crisis requires pursuing the Swedish Model and making the banks absorb the losses on the excess debt in the financial system.  This protects both the real economy and the social contract by not placing the burden of the excess debt on the real economy.

The Swedish Model was first implemented by the FDR administration to, in the words of the NY Fed, "break the back of the Great Depression".  Recognizing how successful the Swedish Model was, the FDR Administration then proceeded to design our modern banking system to support adopting the Swedish Model whenever there was a bank solvency led financial crisis.

A modern banking system supports the Swedish Model because of the combination of deposit insurance and access to central bank funding.  With deposit insurance, banks with low or negative book capital levels can continue to support the real economy because the taxpayers effectively become the banks' silent equity partner.
The opposition posed by this coalition of bosses and financiers is motivated by three factors. First, they want as little government interference in the economy as possible; second, they don't want the state expanding into new areas and so doing them out of business. 
But the thing that really keeps the capitalists awake at nights is the boost to workers' confidence that will be provided by a heathy jobs market. They will demand more pay, better working conditions, perhaps even a say in how their companies are run. Fully employed, well-paid Britons will have more cash to buy things, so a healthy economy supported by the government is better for corporate profits than a sick one. 
"But 'discipline in the factories' and 'political stability' are more appreciated by the business leaders than profits". Rather an insecure and cowed workforce than a confident and boisterous one. 
But it's Kalecki's "political business cycle" that sums up the world we're in now. Rather than opting for public investment and a healthy recovery, Britain is stuck in a slump that austerity and a blind trust in private-sector vigour is only deepening. But the parallels don't stop there.... 
Whether from politicians or the press, these justifications for austerity are getting more strident even while evidence of austerity's failure is stacking up. 
It may be that Britain goes into a third recession this year; it is certainly not going to enjoy a recovery. 
And what was always evident in the coalition's spending plans issued back in 2010 – that our welfare state and public realm were going to get shredded – is slowly but surely materialising. 
This assault on an entire social contract, says Malcolm Sawyer, a leading expert on Kalecki, is what his subject warned about. "The argument for dealing with budget deficits has provided cover for attacking wages and benefits." And austerity is just code for the transfer of wealth and power into ever fewer hands.

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