Political business cycle

from David Ruccio

It’s not a liquidity trap, as the Keynesians want to see it, and it’s not a real business cycle, which is how it looks to the neoclassicals. It’s a political business cycle. And economists would know that if they ever read the work of Michael Kalecki.

But, of course, they don’t. And they don’t teach it to their students either. Essays like Kalecki’s “Political Aspects of Full Employment” [pdf] just aren’t on their reading lists.

If they did read Kalecki, they’d discover a prescient analysis of the current situation. Kalecki summarizes the debate concerning the “economic doctrine of full employment” (which seems not to have changed much in the past 60 years) and then analyzes the “political problems involved in the achievement of full employment.” Here’s Kalecki’s analysis of business opposition to measures designed to achieve full employment:

The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. . .

Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

Here’s his analysis of the “double-dip” depression:

In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business. . .would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.

This pattern of a political business cycle is not entirely conjectural; something very similar happened in the USA in 1937-8. The breakdown of the boom in the second half of 1937 was actually due to the drastic reduction of the budget deficit. On the other hand, in the acute slump that followed the government promptly reverted to a spending policy.

And, finally, here are Kalecki’s suggestions for progressives:

1. Should a progressive be satisfied with a regime of the political business cycle as described in the preceding section? I think he should oppose it on two grounds: (i) that it does not assure lasting full employment; (ii) that government intervention is tied to public investment and does not embrace subsidizing consumption. What the masses now ask for is not the mitigation of slumps but their total abolition. Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work. The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?

2. ‘Full employment capitalism’ will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.

Kalecki’s analysis of the dynamics of capitalist unemployment is clearly better than anything one will get in modern mainstream macroeconomics, and his advice to progressives surpasses anything in the contemporary political debate in the United States.

Or perhaps we’re already beyond that: capitalism has amply demonstrated that it can’t achieve or adjust itself to full employment, and therefore has shown itself to be “an outmoded system which must be scrapped.”