The Barriers to Full Employment Are Political, Not Economic

Malcolm Sawyer

In “Political Aspects of Full Employment,” a still widely cited article from 1943, Michal Kalecki raised many questions about the ability of a capitalist economy to maintain prolonged full employment — even though in light of the understanding of tools for stimulating aggregate demand and the use of fiscal policy brought about by the Keynesian ‘revolution.’ In a series of papers, Kalecki showed that the arguments against the use of budget deficits to secure full employment were invalid. Among these arguments, and their rebuttals, were that:

> deficits add to government debt, which is a burden on future generations
(rather, the government debt is bonds owned by individuals, pension funds etc.);

> deficits crowd out investment
(rather, they allow savings to take place and enable investment); and

> deficits cause higher interest rates
(the current situation makes the rebuttal to this clear).

Yet those arguments are still trotted out.

In “Fiscal austerity: The ‘cure’ which makes the patient worse” (Centre for Labour and Social Studies, Policy Paper), I have set out the arguments at greater length.  Yet governments, often supported by international organisations such as the IMF and the OECD, continue to refuse to use budget deficits and other measures to secure a much higher level of economic activity.

Kalecki examined “three ways to full employment” – alternative ways in which demand could be stimulated: use of fiscal policy and budget deficits (he was sceptical that monetary policy could have much effect); stimulation of investment (where he queried how far that could go without the rate of profit falling); and tackling inequality (which would raise demand as spending power is moved from rich to poor).

But instead of the use of fiscal policy, investment stimulation or policies to reduce inequality, governments have turned to combinations of austerity programmes, attempts at fiscal consolidation and the adoption of balanced ‘structural budgets’ as a policy objectives. Backed by questionable evidence from the IMF, governments have directed their focus on reduction of public expenditure rather than raising tax rates. The argument that the deficit must be reduced is used to justify any policy which cuts back on the role of the state, rather than raising taxes in a progressive manner. The British government amongst others is using the opportunity of recession and deficit mania to attack social security and welfare benefits.

The motives of the economic ‘experts’ and journalists, who represent particular financial interests and a ‘free market’ in their promotion of ‘there is no alternative’ to austerity and ‘structural reforms’ were well summarised by Kalecki:

“Among the opposers of this doctrine [that full employment may be achieved by government spending] there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.”

Kalecki then argued that “the social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence (‘Political Aspects of Full Employment,’ p.350).” Any policy which is seen to threaten the state of confidence is then argued to threaten investment and employment. Although the terminology of ‘the state of confidence’ is not often used, common arguments — for example, that regulation tax on corporate profits will damage investment (particularly in a globalised world) — are consistent with the point being made by Kalecki.

Kalecki divided the “opposition of ‘industrial leaders’ to full employment by government spending” into three reasons: “dislike of government interference in the problem of employment as such,” “dislike of the direction of government spending (public investment and subsidizing consumption),” and “dislike of the social and political changes resulting from the maintenance of full employment.” Further, he argued that “subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’—unless you happen to have private means.”

The general thrust of economic policies among European countries in the past three years or so has been austerity programmes, often with the explicit intent of eliminating the budget deficit on a long-run basis. (The exceptions were some mild discretionary fiscal policy in early 2010, and allowing budget deficits to rise as ‘automatic stabilisers’ kicked in.)

Austerity programmes have been combined with attempts at major reforms of the welfare state and the labour market. The general direction of those policies has been to reduce any power of organised labour, and to put downward pressures on wages and social security benefits. This was conveniently expressed by British Prime Minster David Cameron at the Davos summit in January 2013: “How do we succeed when other nations are growing, changing, innovating so fast? A lot of the answers are clear. Deal with your debts. Cut business taxes. Tackle the bloat in welfare. And crucially: make sure your schools and universities are truly world-class. In the UK we’ve been doing all these things. Less than three years in and we’ve cut the deficit by a quarter. Our corporation tax rate is the lowest in the G7. In welfare reform we’ve been radical. In education – revolutionary, busting open the state monopoly and allowing new schools to start up (Cameron, 2013).”

The welfare state and social security systems have many purposes, but in terms of the quote from Kalecki above, reducing the welfare state reduces “mass consumption,” and seeks to ensure that “you shall earn your bread in sweat.”

In the sweep of policy agendas in the aftermath of the financial crisis, many elements which consistent with the arguments of Kalecki. There is no need for austerity or for getting rid of budget deficits to the detriment of employment, and this suggests that the promotion of austerity and other policy initiatives such as ‘structural reforms’ serves other purposes. This is not to suggest some grand conspiracy, but rather that opportunities are being taken in different ways and forms to seek the creation of a de-regulated, more insecure labour market and reduced social protection.

Michal Kalecki 1899-1970, was a renowned economist, born in Poland, whose work and ideas are highly regarded amongst heterodox economists but ignored by mainstream economists. In The Economics of Michal Kalecki (Macmillan) I have reviewed all of his writings.  Quotes in text are from Michal Kalecki, ‘Political Aspects of Full Employment’, Political Quarterly 1943.

This piece first appeared on Bob Pollin’s Back To Full Employment Blog

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6 Responses to “The Barriers to Full Employment Are Political, Not Economic”

  1. Peter Shaw says:

    Prof. Sawyer-
    Thank you for bringing Kalecki’s ideas into the blogosphere. They hint that the solutions to our current problems may lie less in new ideas than in proper discussion of what already exists. There appears a continuing need to explode economic myth, as you do.
    I suggest that there is no “moral duty to the next generation”; the duty (moral or otherwise) is not to short-change the present generation. In any future, the gainfully-employed young can sustain the old and infirm (to the extent they are permitted).
    A government spending mindfully, persistently, and predictably cannot be inflationary, and enables business executives to make commitments which only mature after 1-3 years. Economists seem to discount this lag.
    I argue a balanced budget is a property of a stable economy, and its primary function is to fix it in its present state, so cannot be a rational aim now.
    The natural economy must be self-starting, so no ‘confidence fairy’ is needed, only a removal of impediments and restoration of its normal needs (as you say).
    You imply that “printing” money is practical, but a last resort. I suggest that “new” money, responsibly spent, should be largely recovered within the year, and the rating-agency and future-indebtedness issues fall away. So this appears superior to the normal borrowing, and I hope it can be maintained in current awareness.
    As others do, you describe public spending cuts reducing public employee numbers as if the redundant vanish; in reality, people employed by the public purse become forced dependents on it, and this can only be a real economy to the extent that people starve.

    I cannot fault your paper’s final conclusion: “The austerity programme is economically irrational, socially irresponsible, and lacks credibility that it can reduce the budget deficit and secure any return to prosperity. The time has come to rebuild through investment and through a major assault on inequality.”

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