15 May 2009

Letter from Lhasa, number 103. (Michl 2009): Capitalists, Workers, and Fiscal Policy

Letter from Lhasa, number 103. (Michl 2009): Capitalists, Workers, and Fiscal Policy

by Roberto Abraham Scaruffi

Michl, T. R., Capitalists, Workers, and Fiscal Policy, Harvard University Press, 2009.

(Michl 2009).

Thomas R. Michl

(Michl 2009) explores the implications of various versions of the Kaldor-Pasinetti model of economic growth. The [Pasinetti] Cambridge theorem states that the relationship between growth rate and profit rate depends only on the saving behaviour of capitalist agents and is independent of workers' and government saving rates, and of technology. Through this theorem, the classical growth model elaborated in (Michl 2009) analyses the main effects of public debt and pension systems on the class structure of capitalist accumulation. (Michl 2009, p. 269)

Michl outlines two basic models of economic growth in the classical tradition (Michl 2009, Chapter 3) and uses them as a platform for studying some traditional macroeconomic questions concerning the long run effects of fiscal policy.

The first model is an endogenous growth model. It assumes an exogenously determined income distribution, leaving the system growth rate as a free variable. Capital is here constrained.

The second model is an exogenous growth model. It assumes an exogenously determined growth rate of the fully employed labour force. Labour is here constrained.

One implication of the dynamics of both models “is that the workers' share of wealth should be increasing (not necessarily monotonically) if the system is destined to achieve a one-class equilibrium.” (Michl 2009, p. 81)

Then, (Michl 2009, Chapter 5) develops two endogenous growth models with public debt, the former with a capitalists' infinite planning horizon and prevailing Ricardian equivalence, the latter with a capitalists' finite planning horizon and non-prevailing Ricardian equivalence.

Ricardian equivalence means, in practice, that whether a government finance its spending by debt or taxes, the effect on the total level of demand be the same. Consumers internalize government budget constraints.

“Under the assumption of an infinite horizon, capitalists treat only the share of debt serviced by workers as net wealth. Fiscal policy is neutral with respect to growth (the Cambridge theorem inverted) but is not neutral with respect to distribution. From the perspective of workers, distribution is unambiguously worsened by increases in their debt burden, either from more debt itself or from a diminished share of taxes to service the debt falling on capitalists. An increase in debt is doubly punishing to workers. By temporarily slowing accumulation, it reduces the level of output and jobs in the long run (even while leaving their growth rates invariant); and by increasing each worker's tax burden, it reduces their lifetime wealth.

“Under the finite horizon, capitalists treat all the debt as net wealth, and as a result, the Cambridge theorem does not go through in pure form: debt has long-run negative consequences for the rate of accumulation (not just its level) because it makes capitalists feel richer and consume more. Whether this leads to a greater concentration of capital wealth then depends on the distribution of taxes. If capitalists pay all the taxes, an increased debt ratio will reduce their share of capital wealth. But this is no boon to workers, because the growth of employment and output will be permanently lower in every case.

“From a classical perspective, in both cases public debt places distinctive burdens on workers in the long run that should be considered by policy makers and economists alongside the well-established Keynesian benefits of debt-financing for stabilization purposes in the short run.”

(Michl 2009, p. 114)

(Michl 2009, Chapter 6) applies the same basic elements to an exogenous growth model. There are equally two different sub-models of public debt effects. In the former, there are capitalist dynasties planning over an infinite horizon, so that Ricardian equivalence prevails. In the latter, there are capitalists planning over the finite horizon of their own life span, so that Ricardian equivalence does not prevail.

“Increases in debt (normalized by capital) have identical effects on the wealth distribution across the two regimes. Under the infinite planning horizon, where the Cambridge theorem prevails, the rate of profit and the wage are invariant, but workers still shoulder the burden of debt through the higher taxes needed to service it. Under a finite planning horizon, the rate of profit must rise with the debt ratio, which reflects the fact that capitalists treat all the debt as net wealth, and increase their consumption as the result of a higher debt target. In order to keep growth at its natural rate, a higher profit rate is needed to offset the increased capitalist consumption. Consequently, the negative effects on workers of public debt are amplified in this case by the decline in their before-tax wage. From the capitalist perspective, of course, these redistributions represent a net gain in wealth.” (Michl 2009, p. 131)

Public debt, demagogically presented as something “for the people”, has actually, according (Michl 2009), opposite effects:

“A core lesson of this and the previous chapter is that regardless of whether the model is capital or labor constrained (i.e., endogenous or exogenous) public debt can lead to greater concentrations of wealth in the long run. The major exception occurs when capitalists pay a large share of taxes in an endogenous setting. Debt may or may not lead to greater concentration in the short run, under more Keynesian, or demand-constrained, conditions. (...)

“Whether this is an accurate depiction of fiscal policy in the United States remains debatable. (...)”


“While the top share of total wealth has been remarkably constant over the last four decades (despite a quite sharp increase in the concentration of income over the last two decades), the top share of financial wealth moves obligingly with the fiscal position of the state. An increase in debt in the 1980s goes along with rising concentration. The decline in debt during the Clinton administration accompanies a decline in concentration, made all the more remarkable by its synchronization with a stock market boom of bubble proportions, which might have been expected to disproportionately benefit equity-laden top groups.

“But it would be misleading to infer that these comovements represent some sort of corroboration of the theory presented here since this episodic drama is far from a natural experiment. First, the United States is a large, open economy and a substantial share of the fiscal deficits over the last three decades have been financed by foreign capital inflows. The underlying theory developed here would obviously need to be emended to deal with these issues. Second, the theory itself is ambiguous: if myopic capitalists pay a sufficient share of taxes and growth is endogenous, an increase in the debt burden could reduce their share of wealth.

“Third, (...), much of the action involves changes in the distribution of the federal tax burden (...). The effective tax rate on the top 1 percent (nota bene: this time by income not wealth, and among households not individuals) has ebbed and flowed with the lunar cycle of domestic politics; one detects no hint of the theoretician's “distribution-neutral” tax changes.” (... [Referred to the US experience:]) “There certainly is no sign that making the tax system more progressive will actually increase the capitalist share of wealth, as it did under the hypothetical conditions of the finite horizon model in this chapter.”

(Michl 2009, p. 132-136)

“(...), according the to the models in the last two chapters, the debt accumulation will quite possibly have redistributed wealth regressively, even with no change in the distributional impact of the tax regime (although we are certainly not suggesting that this was a motivation for the policy). While the evidence neither confirms nor refutes the long-run theory of public debt presented in this and the previous chapter, it offers an opportunity to narrate the journey between the abstraction of the theory and the concreteness of the statistical record.” (Michl 2009, p. 136)

(Michl 2009, Chapter 7) incorporates a social security system into an endogenous growth model. (Michl 2009, Chapter 8) incorporates it in a exogenous growth model.

(Michl 2009, Chapter 10) embeds the fossil production function in two simplified growth models, for illustrating its properties. Later, in the following chapter, some empirical evidence is examined.

The fossil production function is the mathematical representation of the progressive mechanization of the production process. The technical change is modelled as exogenous exponential growth in the technical coefficients. The empirical testing shows that the choice of technique has been sensitive to real wage only in a few cases: “(...) the preponderance of evidence supports the view that technical change offers capitalist firms new methods of production that dominates the old methods at the existing wage. Under these conditions, a theoretical model that abstracts from technical change or technical choice is unlikely to mislead.” (Michl 2009, p. 266)

“The neoclassical production function provides the theoretical foundation for thinking of prefunding as a way to transfer real resources to the future (or of public debt as a way to transfer them from the future to the present). The classical tradition insists that this abstraction is misleading, and that it is more helpful to think of capital as an ensemble of social, property, and technological relationships rather than as a resource that can be transferred through time. In this book we have assumed, as is fairly standard in classical growth theory, that technical conditions evolve independently from distribution. That decision brings into sharp relief the effects of parameter changes on the structure of accumulation, sometimes, as in our consideration of an optimal pension in a pure life-cycle setting, with substantive implications.

“(...) Our purpose in elaborating the fossil production function is simply to demonstrate that an alternative parable can be constructed and empirically implemented, and that it arguably captures what Joan Robinson (1953) called the “common sense” of the production function.”

(Michl 2009, p. 273-274)

Michl, T. R., Capitalists, Workers, and Fiscal Policy, Harvard University Press, 2009.