The Evolution of Public Spending in the OECD Countries – Part II

18 Mag

l’articolo 18-5-15 by Arturo Hermann

OECD_LOGO_1The growing contradictions of the system

The problems highlighted in the first part tend to be reinforced by the unequal distribution of income and by the insecurity of life and work conditions.

Furthermore, there are also more structural aspects that tend to strengthen these effects: in particular, the satiation for particular categories of goods and the increase of labour productivity, which tends to traverse also the new products.

For instance, it is easily observable that, whereas the durable goods typical of 1960’s and 1970’s employed hundred thousands workers, the innovative cycles of today’s high-tech products would employ no more than some thousands workers. 

The increasing need of public spending and credit creation for ensuring an adequate level of effective demand engenders many contradictions. In this respect, we think that the present economic and financial crises do not depend on the Keynesian policies of the past and/or on an alleged inefficient and lobbistic nature of public intervention (even though, of course, it is true that public spending is likely to be driven, at greater or lesser extent, by the dynamics of various interest groups) but on the growing difficulty of effective demand to reach the full employment level.

For instance, there is a macroscopic and disruptive contradiction — which has paved the way for the eruption of the present-day economic and financial crisis — between (i) most credit policies, which aim to increase, also through well organized advertisement strategies, persons’ spending capacity well beyond their real earnings; and (ii) business strategies which, in order to gain price “competitiveness”, tend to reduce workers’ incomes and guarantees to a minimum. Under these growing burdens, personal bankrupt is likely to arise, with the spreading of all its negative consequences on the whole system.

 

The macroeconomic trend and policy implications

 

From 2000 onwards (when all the data are available) the trend of the increase of public debt shows a significant correlation with private debt and public spending for the average values of the OECD Countries. 

In this context, what can be done to attain the long run sustainability of public debt? It is necessary[1] that the growth rate of GDP is higher than the overall growth of debt.

In this situation, the issue of public debt sustainability acquires a different perspective. As a matter of fact, so high levels of public (and private) debt are unlikely to be paid back, but tend to be “consolidated” over longer and longer periods. Conversely, what seems highly needed for solving the public debt problem is:

 

(A) To restore a climate of trust in public action, so that people would reinvest the money invested in treasury bills when they expire. If this happens, treasury bills will be continually renewed and then there is no need to “repay the debt”, in the sense of extinguishing it and give the money back to the lenders. This aspect, of course, does not eliminate the problem of the continual growing of the debt, especially in cases of high real interest rates (cf.also below).

 

(B) To reduce public sector deficit, by rationalizing public spending and/or by realizing a more progressive taxation, especially for rent-based incomes and wealth. 

 

(C) It is important to recall from the “Haavelmo’s theorem” that public spending is likely to positively influence effective demand even with a corresponding level of taxation.

 

(D) To lessen as much as possible the real interest rate, in order to reduce the burden of public debt and so promote public and private investments. Of course, this is only a necessary condition for “getting the horse drink”.

 

(E) Of course, also more radical solutions can be envisaged, such as (i) a partial or total debt cancellation, or (ii) the payment of debt through the creation of new money from central banks, which is often indicated as the “monetization” of debt. This process can take various forms; for instance, the Central Bank can acquire the stock of debt in the hands of commercial banks or, in the last resort, can lend the required money directly to the Government.

In our view, these measures can be interesting but, taken in absence of a far-reaching perspective of economic and social change, run the risk of acting only as a temporary relief. What seems crucial is a structural transformation of the system in which the need of public debt will be gradually eliminated. This process, by entailing also a reduction of the interest expenses, will shift more resources from rent to public objectives.

 

These policies are also related to the following aspects:

 

(A) More systematic collaboration between the various strands of economics: for instance, Institutionalism, Keynesian theories, Marxism and other theories of socialism.

 

(B) Better coordination between macroeconomic and structural policies—in particular, those aimed at improving the human and social capital in order to realize a sustainable development.

 

(C) Analysis of how persons perceive, interpret and influence social change and policy action in relation to their orientations, conflicts and values; this also implies a better collaboration with psychological sciences. For instance, one of the reason why we perceive that public spending is too high and must be abated at any cost can be traced back to the role of superego which stems from the internalization of the social canons of conduct.

In this regard, since our “affluent societies” — as made evident by J.K.Galbraith and other scholars — pay all the attention to the quantitative process of production, any idea of an “easier life” associated with public spending may trigger in most of us a more or less unconscious feeling of guilt.

 

 

(D) Improvement of the institutional procedures for the “social assessment” of different policies; and importance of fostering an active participation of citizens in these issues.

 

 

Acknowledgments

 

The issues addressed in the articles were also presented at an ISTAT seminar, March 9th 2015, and build on part IV of the book The Systemic Nature of the Economic Crisis: Insights from Heterodox Economics and Psychoanalysis, London and New York, Routledge, April 2015. The usual disclaimer applies.

 

Sources of Data

 

For public spending the data are based on “General Government Expenditures”, in Government at a Glance 2011, OECD Publishing.

http://dx.doi.org/10.1787/gov_glance-2011-10-en

 

For private sector debt the data are based on “Financial Indicators – Stocks” http://stats.oecd.org/Index.aspx?DataSetCode=FIN_IND_FBS

in OECD.StatExtracts http://stats.oecd.org/

 

For public sector debt the data are based on “Financial Indicators – Stocks” http://stats.oecd.org/Index.aspx?DataSetCode=FIN_IND_FBS

in OECD.StatExtracts http://stats.oecd.org/

[1] This happens, in a situation of stable prices, when the following condition is realized:

 

 ∆≥  µ(Y/D)  + i

 

where y is the growth rate of the GDP, i is the real interest rate, and µ is equal to the primary deficit-surplus ratio to the GDP,

 

µ = (G T) /Y

 

where G is the general government spending and T the total tax revenue.

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