terça-feira, 1 de maio de 2007


by franklin serrano

In a recent issue of the Cambridge Journal of economics[ NOV. 2006] there is a debate between my friend Sergio Cesaratto and Tom Michl concerning the possible long run effects on capital accumulation of a fall in current consumption (in the case under discussion following some kind of pension reform that cuts benefits or increases contributions). Michl, echoing and older argument by Paul Krugman (1997) against what Krugman called the Vulgar Keynesians, complains that Cesaratto´s negative conclusion gives too much importance to the paradox of thrift, which would not be relevant in the long run in an economy in which the central bank runs an anti-cyclical policy. I think this is a very important discussion because more and more heterodox (and even leftist) economists think we should be "Keynesian in the short run and Classical in the long run". Since Cesaratto and I hold the opposite view that we should be Classsical and Keynesian in the long run (even long run growth is usually demand-led)

The argument of Michl and also of Krugman can be summarised as follows:
given that:
1. aggregate demand is interest elastic (lower interest rates
increase aggregate spending)
2. The fed controls interest rates
3. The fed has a target for the unemployment rate (its view, real
or imagined, of the NAIRU)

From these three assumptions they conclude that, at least for the U.S. were the fed does actively cut interest rates when unemployment is seen to be too high, the paradox of thrift is irrelevant. an increase in the marginal propensity to save will increase investment. Giving up consumption today (of current capacity output) willl lead to higher levels of consumption in the future (of future capacity output).
Krugman accuses Jamie Galbrath and Michl accuses Cesaratto of not
seeing that we cannot accept premises 1,2 and 3 and deny the inevitable conclusion. That is what Krugman calls Vulgar Keynesians.
I cannot speak for Jamie Galbraith or the post keynesians but no such incoherence is to be found in the demand led sraffians (such as cesaratto and myself). Our assumptions are slightly different. And this leads to a very different conclusion.

The crucial point of the Sraffians is that productive investment, i.e., investment that generates productive capacity for the private sector of the economy for a number of theoretical and empirical reasons is NOT interest elastic [Check Fabio Petri´s 2005 book].
In other words, by lowering interest rates the fed does NOT directly increase non residential investment. Non residential, productive investment is driven by expected and (over a longer run) actual evolution of effective demand.
Now, this being the case, aggregate demand only respond to reductions and/or lower
levels of interest rates through their effects on unproductive expenditures, i.e., those that do not increase the productive capacity of the private sector (namely housing "investment" and consumption of durables).
Therefore we may say that the Sraffians would in principle accept a modified form of
assumption 1 above:

1a- Aggregate demand is interest elastic but only through the interest
elasticity of consumption or unproductive expenditures

Now, if we put together assumptions 1a, 2 and 3 what would be the effect of an increase in the marginal propensity to save? Initially current consumption would fall . This would cause unemployment to increase. Then the fed would start cutting interest rates. This would make consumption and housing demand increase until aggregate demand went back to its former level.
What is the long run effect of that? productive (non -residential) investment does NOT change at all since in the end aggregate demand is exactly what was before.
Therefore a desire to cut present consumption , presumably in order
to increase future consumption, in the long run leads to no fall in current aggregate consumption whatsoever, no change in productive investment and therefore no increase in future consumption.
The correct conclusion is that is there is simply no way an economy in which productive investment is not interest elastic can increase future consumption by foregoing present consumption through "capital deepening", even if the fed adopts an efficient counter cyclical policy.
We have assumed that consumption and residential investment are regularly interest elastic which sometimes may not be the case. But note that even if they were not we could still reach the same conclusions through fiscal policy. If the government runs a perfect countercyclical policy cutting taxes and increasing consumption to the
extent necessary to bring aggregate demand and unemployment back to
its former level, the result is the same. A cut in current consumption leads to an offsetting increase in...current consumption.
Even if we believed in the old pigou or real balance effect (which of course does not work with the fed pegging interest rates) the same conclusion would follow. A fall in the induced consumption would be offset by an increase in autonomous consumption with no permanent change in either aggregate demand or productive investment.
When Cesaratto replies to Michl that given an increase in the marginal propensity to save at most the anti cyclical policy would bring the economy back to its previous situation with no change in productive investment and capacity growth he is absolutely right.
And prof. Krugman is indeed "missing something" : the distinction between an interest elastic aggregate demand and an interest elastic non residential investment function. In the U.S. economy, the former seems to be less regular and stable than he thinks and the latter is nowhere to be found. Capital deepening and the natural rate of interest do not exist.

Nenhum comentário: