The economics of the possible and beyond


Here’s the main problem as articulated in the short piece:





As a group, economic elites care about the costs and benefits in general of greater government-fuelled growth—including the costs of losing power over ideas. Individually, they look at how it would affect their particular bottom lines. These calculations are never perfect, often tinged with the irrationality found everywhere in our market system, rarely explicit and very dependent on the context, but they are important. Austerity can be a politically rational decision, even if it is economically costly for the few—especially if it also debilitating for the many and their ability to self-organize.

The barriers to deficits

Going back to something concrete: can social democratic or left parties run deficits? In the simplest terms, the government is not a household and does not need to always have a balanced budget—this much is clear. Beyond this, there is legitimate economic debate about the role, or function, of government deficits and whether persistent deficits could be sustained. We’re very far from that, however, if left-of-centre politicians are unwilling to allow for even a year or two of deficits in lean times. It’s not so much economic theory that hampers economic policy ideas today as much as the reality of an economy that works to the favour of elites.


The political question is how badly bond markets and rating agencies would punish a deficit. First, there is the question of the kind of premium markets would actually demand on bonds to cover even moderate deficits created by a centre-left or left in power. When would ratings agencies step in to try to enforce discipline by changing bond ratings? Globally, there is a lot of money sloshing around, looking for a safe haven. With economic turbulence rearing its head while private investment is low and inequality is high, government bonds remain a very safe asset and interest rates today are spectacularly low. There is some chance some deficit-finance would see bonds soaked up at current record low interest rates, but it is not a purely economic decision.

Second, the question of the deficit is also a question of how much capital in one locale would be ready to pick up and flee. This is the even more basic threat at the disposal of money. And capital has fled before in the face of even social democratic governments. Mitterrand’s about face on his relatively radical program for France in the early 1980s is perhaps one of the best examples. Even the initial days of Bob Rae’s provincial NDP government in Ontario a decade later fits the bill (a milder program though at a subnational level). Most recently, it is perhaps unsurprising that Syriza promised in late 2014 to avoid deficits and engage in a program of humanitarian relief and economic transformation on its own.

Greece, however, is today essentially a debt colony. Canada’s social democrats today face a much better situation and better than previously. Canada’s debt burden is very low by advanced economy standards (pushed down by cross-party austerity), interest rates are at rock bottom and there are enormous private surpluses to be absorbed (largely held by corporations). While there are arguments that compare today’s NDP to that of the deficit-fighting, anti-debt CCF of Tommy Douglas, both the politics and the economics are much changed. Today we have a social democratic electoral upsurge taking place alongside weak social and labour movements, powerful capital sitting on surpluses and an economy in the midst of a downturn and an infrastructure deficit. Even the elite consensus is flexible.

Finally, it is worth asking how much an economic program fosters “national reconstruction” without challenging distribution and how much it challenges distribution of resources and power themselves. What kind of mild Keynesian alternative are we talking about?

There is no sharp line: deficits are not a lost cause and could be defended more robustly, even though there are serious political and ideological rather than just economic barriers. At most, they appear a short term tool. Taking the example of Canada, it says something about our politics if a very moderate centre-left party with a conciliatory leader cannot defend deficits in hard times. The power of the social majority to extract social gains for itself as it did during the vaunted post-war “Golden Age” has been broken; who will rebuild it?

Where to get the money

Given the Conservatives’ overoptimistic projections and legacy of tax cuts combined with low oil prices and slow growth, a deficit in 2016-17 is almost certain no matter who wins the election, but they might not be on the agenda in later years. What other means to finance new social spending and investment remain?

Concretely, can the funds be gained from taxes in the short term? So far, the NDP have committed to around a two percent increase in corporate taxes and either steady or lower levels of many other taxes. Given a projection of $1.5 billion new revenue for every percentage point of corporate tax, this means maybe $3 billion in new revenue from this source. Personal income tax rates, on the other hand, even on the wealthiest, are to stay put. This despite giving the Liberals another opportunity to score easy “left” points and the fact that Canadian taxes on high incomes are middling in terms of the OECD countries.

Aside from corporate taxes, the other major revenue tools announced so far by the NDP are cancelling income splitting and closing tax loopholes. The CCPA’s 2015 Alternative Budget estimates that the first would net $2 billion and a comprehensive plan on loopholes would give $3 billion (though remember that the rich have very good accountants!). Further options costed by the CCPA include $7.5 billion to be gained by taxing capital gains at the same rate as other income (a measure that hasn’t been mentioned so far), $2 billion by taxing large estates or $5 billion coming from a miniscule financial transactions tax.

Also ruled out are higher taxes on consumption (that could raise revenues and have exemptions for basics, exemptions for the consumption of the poor and higher rates on luxuries) or any new taxes on wealth. Aside from estates, take, for example, land values; property speculation is driving housing unaffordability for regular people across Canada.

Like deficits, tax rates are political, not simply economic, variables. Economists will argue about efficiency, but there is more to it. How much tax revenues can be raised with which taxes are also questions about non-economic costs and benefits, as above with deficits. We can ask not only how much new tax revenue can be generated, but how much will be politically feasible without stronger counter-pressure from those whose wealth, incomes and spending will not be subject to re-appropriation.

Socialize! But what?

Even “Keynesians” often forget that the radical idea in Keynes was not deficit spending, but socialized investment. In a piece last week that blatantly trolls the left but is at times quite perceptive, Financial Times economics editor Chris Giles writes,

The left’s important freedom is its ability to worry less about preserving individual property rights than others. Such rights are never absolute—any form of taxation is lawful extortion—and if they stand in the way of growth and greater equality, a leftwing government can remove them. This surely should be the guiding theme of any practical economics of the hard left.

The constraints are sadly real, however. You can tax the rich until the pips squeak, but if the pips are mobile, you will find the fruit you are squeezing is seedless. Governments can also fail more regularly than markets. With this in mind, an economically coherent leftwing platform would weaken the property rights that most impede prosperity.

We can quibble about whether it’s property, rather than taxation, that is an extortion or how often markets “fail” and how, but there are important grains of truth in this excerpt. Given today’s constraints, could there be room not just to tax but to socialize investment, new or existing, in ways that elites can fight but may be unable to prevent? This, it’s true, is where the left can push.

Keynesianism in one country?

Nevertheless, “full Keynesianism in one country” seems truly impossible today, or at least certainly not in small, open economies. The question is whether we’re living through a phase where even “small bits of Keynesianism in one country” are not feasible, though this may be less true for large states like the US, where the bigger issue is Keynesianism for whom. Truth be told, it’s unclear where the exact line of possibility is, but it can only be durably shifted by organized pressure from the social majority.

The next big question is then how to go about building an honest and durable politics in this situation. In the short term, some new revenues can be raised from taxes, some spending can be redistributed from the wasteful (like military spending or tax credits for the wealthy) to the useful (like childcare), some investment can be socialized and moderate deficits are certainly possible. The heart of the matter lies in politics, not economics; if the left wants to say, “we can do limited thing immediately because of the power of elites, but put us in power because […],” the […] will be have to be convincing in the long term and include a perspective of activating the social majority to radically change the power balance.

Today, even a figure like Jeremy Corbyn, who looks set to become leader of UK Labour from well to the left of establishment social democracy, is having trouble breaking out of the deficit hysteria frame set by the right. On the other hand, Corbyn shows that it is possible to successfully talk about not only new public investment, but bringing existing private corporations in important sectors under democratic public control. More importantly, his popular campaign has created mass participation in politics long forgotten in England (Scotland’s own anti-austerity awakening was far ahead on this).

If the political space for “Keynesianism in one country” on a large, or even a small, scale is extremely limited today, it should be used to make clear the sheer vindictiveness of elites and irrationality of an entire system. I keep coming back to the Polish economist Michal Kalecki’s famous 1942 essay, “Political Aspects of Full Employment,” that makes the points haphazardly made above far more clearly and succinctly than perhaps anything else:


Not much has changed since; if anything, the difficulties today are much greater. Regardless and maybe even more so, our politics should be transformative. It should center on the tasks of confronting these difficulties head on and looking beyond them.

2 thoughts on “The economics of the possible and beyond

  1. Since there is no difference between borrowing and printing (demonstrated via strict application of double-entry bookkeeping), the federal government can only be “punished” by the bond markets if it wants to be punished.

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