Post-Keynesian Views of the Crisis and its Remedies

Óscar Dejuán, Eladio Febrero Paños, Jorge Uxo Gonzalez

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134052226
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

At the end of the 20th century, mainstream economics was based on theories which viewed capitalism as a self-regulating system, whereby crises come about due to external shocks and would be automatically corrected by the price mechanism if it was flexible enough. Post-Keynesian economists, however, consider that the business cycle and the crises are endogenously generated. They recommend active policies as a response, though the remedies may be worse than the illness if they are not applied at the right moment and in the right proportions.

The first great recession of the 21st century offers post-Keynesian economists an opportunity to prove the realism of their models. It is also a chance to make theoretical improvements, to abandon some hypotheses and to introduce new ones.

This book, from a top group of international economists, analyzes the causes, consequences and evolution of the crisis from a variety of post-Keynesian perspectives. It then presents a case for realistic and essential remedies. The book is both theoretical and applied, with a global reach and a particular focus on the European debt crisis.

Part I

The financial side

The burden of debt and the loss of confidence

1 Finance-dominated capitalism, re-distribution and the financial and economic crises

A European perspective¹

Eckhard Hein

Introduction

The financial and economic crises in Europe have occurred against the background of the long-run developments imposed by finance-dominated capitalism and neo-liberalism since the early 1980s. These developments have been characterised by de-regulation of national and international goods, labour and financial markets, in particular, re-distribution of income at the expense of (low) wages, and rising imbalances of current accounts at the global level and at regional levels, in particular within the European Monetary Union since its inception in 1999. The financial and economic crises, which started with the collapse of the subprime mortgage market in the US in 2007, which gained momentum by the breakdown of Lehmann Brothers in 2008, and which led to a serious recession at the world scale with a decline in real GDP in many advanced capitalist economies not seen for generations in 2008/09, has turned into a currency crisis, the euro crisis since 2010. This crisis is threatening the further existence of the euro because of the specific institutional conditions for economic policy making in the Euro area. First, the explicit guarantee of public debt of member countries by the monetary authority of the currency union, the European Central Bank (ECB), is excluded from the treaties and regulations of the EU. Therefore, member country governments issue debt in a common currency, the euro, but not in their own currency, in the sense that their own central bank would guarantee the monetisation of this debt if required. Second, fiscal transfers among member countries have also been ruled out by the treaties, so that government debt of a single member country is not guaranteed by the community of member country governments as a whole. Third, there have been no efficient mechanisms to prevent the building up of internal and external macroeconomic imbalances across the Euro area countries, which in the crisis contributed to the rapid increases in government deficits and debt and to the massive doubts regarding the creditworthiness of some member countries, given the first two deficiencies.

In this chapter we interpret the euro crisis as the most recent episode of the crisis of finance-dominated capitalism. Therefore, we will first analyse the dimensions of increasing inequality for the major European countries during the period of finance-dominated capitalism. Our analysis will focus on the Euro area member countries Austria, Belgium, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain. Having analysed the trends towards increasing inequality, we will then deal with the current account imbalances within the Euro area which have developed in the business cycle prior to the crisis and distinguish two extreme types of development, the debt-led consumption boom type and the export-led mercantilist type. Against this background we will then examine the euro crisis and the misguided economic policy reactions by European governments and European institutions. Since the dysfunctional economic policy institutions and misguided economic policy making are threatening the further existence of the euro as a currency, we will finally draft an alternative macroeconomic policy approach overcoming these deficiencies. The final section will sum up and conclude.

Rising inequality in the period of finance-dominated capitalism and neo-liberalism — the European case

The neo-liberal period since the early 1980s and the emergence of finance-dominated capitalism have been associated with considerable redistribution of income in major European countries.² With respect to functional income distribution we observe a massive redistribution at the expense of labour and in favour of broad capital income. The labour income share, as a measure taken from the national accounts and corrected for the changes in the composition of employment regarding employees and self-employed, has shown a falling trend in most of the Euro area member countries considered here since the early 1980s, with cyclical fluctuations due to the well-known counter-cyclical properties of the labour income share. In order to eliminate cyclical fluctuations of the labour income share, we have calculated cyclical averages for the three business cycles from the early 1980s until 2008 (Table 1.1). On average over the cycle the labour income share has fallen in all countries in our data set except Portugal, from the first cycle (early 1980s to the early 1990s) to the third cycle (early 2000s until 2008). The fall has been most substantial in Austria and Ireland with more than ten percentage points of GDP at factor costs, and in Greece, Italy, France and Spain with more than five percentage points of GDP. In Belgium, Germany and the Netherlands the labour income share has fallen by less than five percentage points of GDP at factor costs.

Three main channels through which financialisation and neo-liberalism have negatively affected the share of direct labour in national income can be identified (Hein 2011b, 2012, ch. 2). First, the sectoral composition of the economy has changed in favour of the high profit share financial corporations and at the expense of the non-financial corporate sector and the government sector with lower or zero profit shares. Second, overhead costs, in particular top management salaries and interest payments, and profit claims imposed on the corporate sector by shareholders have increased. This has caused the mark-up on direct unit labour costs in pricing of firms in incompletely competitive markets to rise and the share of labour income to fall, because the mark-up has to cover overhead costs and

Table 1.1 Labour income share as percentage of GDP at current factor costs, average values over the trade cycle, early 1980s to 2008

	1. Early 1980s to early 1990s	2. Early 1990s to early 2000s	3. Early 2000s to 2008	Change (3. – 1.), percentage points
Austria	75.66	70.74	65.20	-10.46
Belgium	70.63	70.74	69.16	-1.47
France	71.44	66.88	65.91	-5.53
Germany	67.11	66.04	63.34	-3.77
Greece^a	67.26	62.00	60.60	-6.66
Ireland	70.34	60.90	55.72	-14.61
Italy	68.31	63.25	62.37	-5.95
Netherlands	68.74	67.21	65.57	-3.17
Portugal	65.73	70.60	71.10	5.37
Spain	68.32	66.13	62.41	-5.91

Source: European Commission (2010), author's calculations.

Notes

The labour income share is given by the compensation per employee divided by GDP at factor costs per person employed. The beginning of a trade cycle is given by a local minimum of annual real GDP growth in the respective country.

a. Adjusted to fit in three-cycle pattern.

profit claims. Third, the bargaining power of workers and trade unions has been weakened, triggered by shareholder value orientation and shorttermism of management, increasing relevance of the financial sector with weak trade unions relative to the non-financial and the government sector with stronger trade unions, the threat-effect of liberalisation and globalisation of finance and trade, deregulation of the labour market, and downsizing or abandoning government demand management policies.

With respect to personal income distribution increasing inequality can be observed in many of the European countries in our data set from the mid 1980s until the mid 2000s. Taking the Gini coefficient as an indicator, this is true for the distribution of market income, with France and the Netherlands being exceptions (Table 1.2). In Germany, Italy and Portugal the Gini coefficient has risen considerably. If we include redistribution via taxes and social policies by the state, Belgium, France, Greece, Ireland and Spain have not seen an increase in their Gini coefficients, with considerable declines in Spain, France and Greece. The other countries, however, have also experienced an increasing inequality in disposable income in the period of neo-liberalism and finance-dominated capitalism. This increase was particularly pronounced in Austria, Germany, Italy and Portugal. Although tax and social policies have reduced income inequality in all the countries under investigation, in many countries this has not prevented an increase in inequality over time. This is also the conclusion the OECD (2008) draws for a broader set of countries and from the application of other measures of income inequality.

Table 1.2 Gini coefficient before and a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of contributors
• Introduction
• Part I The financial side: the burden of debt and the loss of confidence
• Part II The balance of payments constraint: trade deficits as a source of risky debt
• Part III The real side of the economy: the problem of effective demand and the failure of austerity policies
• Index