Politics, economics, and business cycles

Posted: 26 July 2012 in Uncategorized
Tags: , , , , , , , , ,


In the midst of the Second Great Depression, mainstream economists continue to heap scorn on one another concerning the relative merits of their “screw-the-unemployed” monetary-policy-has-no-effect and “hydraulic Keynesian” IS-LM-in-the-liquidity-trap models.

And they continue to ignore the “political-business-cycle” model of Michal Kalecki, which I wrote about a year ago, and which has been rediscovered by Steve Waldman.

Here is Kalecki describing with preternatural precision the so-called “Great Moderation”, and its limits:

The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

Dude wrote that in 1943.

What we’re watching right now is a race to the bottom, with both interest rates and income taxes, in an attempt to boost private consumption and investment. The result is that corporate profitability and income inequality continue to rise and, yet, full employment remains as elusive as ever.

*The graph shows the real (deflated) Federal Funds Rate, which is the interest rate at which banks trade with each other (usually overnight, on an uncollateralized basis) the balances they hold at the Federal Reserve. This is the rate Casey Mulligan got wrong in his initial post, and later had to correct.

  1. Excellent article about politics and business cycles! Read more about Business Cycle. The post is linked there.

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