25 May 2009

Letter from Lhasa, number 107. (Heckner 2008): Don't worry About Micro

Letter from Lhasa, number 107. (Heckner 2008): Don't worry About Micro

by Roberto Abraham Scaruffi

Heckner, D. and T. Kretschemer, Don't worry About Micro. An Easy Guide to Understanding the Principles of Microeconomics, Springer-Verlag, 2008.

(Heckner 2008).

Dominik Heckner,

Tobias Kretschemer

(Heckner 2008) is an agile, splendid and rigorous microeconomics book coproduced from a student and a university teacher aspiring creating a new genre of microeconomics texts. The result is a positively original and didactically skillful exposition conjugated with academic precision and exhaustiveness.

There is everything there is in whatever basic macroeconomics' manual, written not for other teachers but for students (or other fields' scholars) wanting to reason and exercise on concepts, not only to memorise them. From it, one may go directly through Varian, Intermediate Macroeconomics.

Heckner, D. and T. Kretschemer, Don't worry About Micro. An Easy Guide to Understanding the Principles of Microeconomics, Springer-Verlag, 2008.

19 May 2009

Letter from Lhasa, number 106. (Neck 2008): Sustainability of Public Debt

Letter from Lhasa, number 106. (Neck 2008): Sustainability of Public Debt

by Roberto Abraham Scaruffi

Neck, R., and J.-E. Sturm [editors], Sustainability of Public Debt, MIT Press, Cambridge, MA, USA, 2008.

(Neck 2008).

Reinhard Neck,

Jan-Egbert Sturm

17 authors discuss, in 9 chapters, different contexts from the point of view of the sustainability of public debt.

“The starting point in the formal discussion of the requirements for debt sustainability is the government's budget constraint, which requires that current spending on goods and services plus the cost of servicing current debt equals current tax revenues plus the issuance of new debt.” (Neck 2008, 1. Sustainability of Public Debt: Introduction and Overview, by Reinhard Neck and Jan-Egbert Sturm, p. 5-6)

“(...) the debt ratio will increase indefinitely if the real interest rate exceeds real GDP growth unless the primary budgets is in sufficient surplus. In this approach, the interest rate and the GDP growth rate are taken as exogenous.

“Making the evaluation of fiscal policy sustainability dependent on the preceding conditions might be of little practical use. Bohn (1995) shows that policies that are sustainable in a certain world may no longer be so in case of uncertainty. Hence, while ex post evaluation of fiscal sustainability is rather straightforward, ex ante evaluation of current or planned fiscal policies in not trivial. The literature has thus proposed a large number of methods and indicators for the evaluation of fiscal policy. This volume extends the existing literature and applies its methods to actual fiscal policies.”

(Neck 2008, 1. Sustainability of Public Debt: Introduction and Overview, by Reinhard Neck and Jan-Egbert Sturm, p. 7)

“(...) The entire concept of public debt sustainability shifts policymakers' and citizens' attention toward the long run, which, owing to political constraints and to the (probably “pseudo”) Keynesian legacy, often tends to be neglected in the actual political process. Although it is true that in a world of fully informed rational agents with perfect foresight, there will never be unsustainable government debt development because nobody will lend money to a government that is going to repudiate, in the actual economic environment of imperfect information and other market failures and, not the least, government failures, this is no longer true.” (Neck 2008, 1. Sustainability of Public Debt: Introduction and Overview, by Reinhard Neck and Jan-Egbert Sturm, p. 10)

The authors seem here to have forgotten to underline that economists, as well as economic journalists and other opinion makers, can be and are actually easily buyable and bought, both for selling, as sustainable, policies are not and for selling, as unsustainable, policies eventually could be sustainable. Provoked collapses are automatically self-[pseudo-]evidence of some inevitability as well as delayed collapses may be self-[pseudo-]evidence that “we could not know” just catastrophes eventually verify. Since markets, at whatever their level, are “law and order” creation, their manipulation depends on force-military relationships. A public debt may be unsustainable for Argentina, while an even worse one, may become sustainable for the USA. And it is actually right that be such. A market actor with real military strength may not be considered at the same level of beggars of the world market. Call that “credibility”/“non-credibility” or “brute force”/“weakness”, the actual terms of how reality works are not changed.

Force relations, and connected propaganda apparatuses, equally count in other aspects, for example in printing or coining money, or simply creating it as an accounting value, in relevant quantities as a way for facing expenditures. What is accepted from a world power would have driven whatever other country/State to a rapid bankruptcy.

Chapter 2 discusses the USA. “The real series shows that debt growth from 1950 to 1980 was entirely nominal, whereas the post-1980 debt growth was real.” (Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 17)

In the USA, there is a “central role of wars in the build-up of debt. Five major wars – the America War of Independence, the Spanish-American War, the American Civil War, World War I, and World War II – were largely deficit-financed. This explains the high debt-to-GDP ratio in 1791 and the sharp increase in in 1812-1816, 1861-1866, 1916-1919, and 1941-1946. The debt-to-GDP ratio generally declined during peacetime periods, with the exception of the Great Depression/New Deal era (1929-1939), the 1980s, and the post-2001 period. One might even interpret the 1980s as a hot phase in the cold war and the post-2001 period as the war on terror, which would leave the Great Depression as the sole episode of peacetime increase in the debt-to-GDP ratio.” (Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 17-18)

“In summary, for the last two hundred plus years the U.S. Government has been able to rely on economic growth to keep its debt-to-GDP ration from rising. Most of the time, the United States has had no need to run primary surpluses, and indeed, it did not run primary surpluses on average. Much of the sustainability literature, in contrast, starts from the premise that primary surpluses are necessary to keep public debt from growing exponentially.” (Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 22)

The definition of ad hoc sustainability given in chapter 2 is: “A fiscal policy satisfies ad hoc sustainability, if it is on a trajectory that the present value of expected future primary surpluses equals the initial debt.” (Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 22)

“A disturbing feature of ad hoc sustainability is the apparent disconnection from practical politics. While political debates about sustainability are mostly about bounds on debt-to-GDP and/or deficit-to-GDP ratios, much of the academic literature has focused on real fiscal series and treats nonstationary debt-to-GDP ratios as unproblematic.” (Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 25)

“(...) which fiscal policies are sustainable? The basic economic answer is that an agent's ability to borrow is constrained by other agents' willingness to lend. The question concerning which policies are sustainable is therefore a general equilibrium question, a question of who the government's potential lenders are and what determines their behavior. Different assumptions about lenders lead to different conclusions about the set of sustainable policies.”(Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 30)

There are different formal conditions of sustainability: “These differences reflect an economic intuition that is fundamental for an understanding of budget constraints under uncertainty . The key point is the distinction between uncertainty about specific debt securities and uncertainty about the future path of total public debt.” (Neck 2008, 2. The Sustainability of Fiscal Policy in the United States, by Henning Bohr, p. 31)

The formal analysis of chapter 2 concludes that the US public debt is sustainable. However, it is evidenced that public debt should not be confused with the gross federal debt which is different entity, considerably greater than public debt, including intragovernmental obligations to social security and other trust funds.

Chapter 3 (Neck 2008, 3. The Sustainability and Determinants of Italian Public Deficits before and after Maastricht by Emma Galli and Fabio Padovano) is dedicated to the Italian public debt. The authors remember that in its 145 years history, only 30 years saw the Italian public debt inferior to 60% GDP, and this thanks to hyperinflations collapsing it. It was 39% of GDP in 1948 and remained below 60% until 1974. Continuously growing more than GDP, it reached 126% in 1994. The authors do not notice that not casually that maximum was reached in the couple of years of the Great Purge that de facto collapsed the 1944-48 political and Constitutional system.

The analysis of this chapter concludes that the determinants of the Italian public deficits have not changed with the Maastricht treaty. What considerably changed has been the way fiscal policy reacts to these determinants. Internal and external institutional constraints “have always been the main condition for Italian public finances to be in equilibrium. Our analysis also suggests that the sensitivity of Italian budget deficits to these institutional constraints has increased since 1991. The recent weakening of the Stability and Growth Pact is therefore not good news for the sustainability of Italian public finances.” (Neck 2008, 3. The Sustainability and Determinants of Italian Public Deficits before and after Maastricht by Emma Galli and Fabio Padovano, p. 78). It is the depiction of a [neo-]colonial area.

Chapter 4, which discusses Holland, concludes that successful fiscal adjustment in the Netherlands “were quite gradual and successful adjustments often relied on tax increases. Still, during the final two decades of the previous century, government spending as share of GDP declined substantially, and this was realized to some extent by cutting transfers.” (Neck 2008, 4. Policy Adjustments and Sustainability of Public Finances in the Netherlands by Jakob de Haan, Jan-Egbert Sturm, and Olaf de Groot, p 102)

In the mid-2000s Austria, 2% GDP federal budget deficit and lower income tax rates were presented as a way for combating unemployment and enhancing growth. More generally, there is a problem of sustainability of this, as well as of whatever other policy, in the specific context. The formal analysis carried on in Chapter 5 concludes that “from the early 1960s until 1974 the debt-to-GDP ratio was stable at around 10-12 percent, while from 1975 to 2003 it increased at an average annual rate of about 2.5 percentage points, culminating at a more than 60 percent in the last few years. Since 1995, the ratio has been rather stable again.” (Neck 2008, 5. The Long Shadow of “Austrokeynesianism”? Public Debt Sustainability in Austria by Reinhard Neck and Gottfried Haber, p. 128)

Chapter 6 reviews different aspects about a revision of the SGP (the Stability and Growth Pact). (Neck 2008, 6. The Stability Pact Pains: A Forward-Looking Assessment of the Reform Debate by Marco Buti, Sylvester Eijffinger, and Daniel Franco, p. 131-160) It is nearly impossible efficient governance on confederal bases, without adequate institutions.

Chapter 7, the Danish experience is interesting for remembering that not all Statism are equal and that they are not necessarily “corrupted”. Frequently they are. Finally, it depends on specific contests. Formal laws and rules do not magically change the brains and behaviours of different populations. What works in north Europe does not necessarily works it its south.

Denmark has a large public sector providing services on a universal base. The tax burden is around 50% of GDP. Public debt, already reduced from 81% of GDP in 1993 to 46% in 2003 will be further contracted. Demographic and other factors may easy alter delicate equilibria, although Denmark credibly managed and is managing its Statist model. (Neck 2008, 7. The Welfare State and Strategies toward Fiscal Sustainability in Denmark by Torben M. Andersen, Svend E. Hougaard Jensen, and Lars Haagen Pedersen, p. 161-192)

Chapter 8 is a depiction of British successful fiscal policies and their comparison with the Euro area. The essay is played around the binomial represented from monetary policies and fiscal policies, and the consequent kinds of leadership.

The hypothesis in this chapter is that the United Kingdom's improved performance is due to the fact that fiscal policy leads an independent monetary policy. This leadership derives from the fact that fiscal policies typically have long-run targets (sustainability, low debt), are not easily reversible (public services, social equality), and do not stabilize well if efficiency is to be maintained. Nevertheless, there are also automatic stabilizers in any fiscal policy framework, implying that monetary policy must condition itself on the fiscal stance at each point. That automatically puts the latter in a follower's role. That is all to the good, however, because it allows the economy to secure the benefits of an independent monetary policy but also to enjoy a certain measure of coordination between the two sets of policymakers – discretionary/automatic fiscal policies on one side, and active monetary policies on the other.” (Neck 2008, 8. Post-Thatcher Fiscal Strategies in the United Kingdom: An Interpretation by Andrew Hughes Hallett, p. 195)

“To draw a sharp distinction between actively managed long-run policies, and short-run stabilization efforts restricted to the automatic stabilizers is of course the strategic policy prescription of Taylor (2000). Marring that with an activist monetary policy directed at cyclical stabilization, but based on an independent Bank of England and a monetary policy committee with instrument (but not target) independence, appears to have been the distinctive U.K. feature. It implies a leadership role for fiscal policy that allows fiscal and monetary policies to be better coordinated – but without either losing their ability to act independently.

“In short, Britain appears to have adopted a Stackelberg solution that lies somewhere between the discretionary (but Pareto-superior) cooperative solution and the fully independent (but noncooperative) solution. Nonetheless, by forcing the focus onto long-run objectives, to the exclusion of the short term, this setup has imposed a degree of precommitment (and potential for electoral punishment) on fiscal policy because governments naturally wish to lead. But the regime remains noncooperative so that there is no incentive to renege on earlier plans in the absence of changes in information. Thus the policies and their intended outcomes will be sustained by the government of the day.”

(Neck 2008, 8. Post-Thatcher Fiscal Strategies in the United Kingdom: An Interpretation by Andrew Hughes Hallett, p. 193-194)

According the author, British fiscal policy had been more successful than the Euro area one, producing “lower debt, more stable incomes, and employment but without any additional inflation.” (Neck 2008, 8. Post-Thatcher Fiscal Strategies in the United Kingdom: An Interpretation by Andrew Hughes Hallett, p. 195)

Relatively to monetary and fiscal policies, there are different kinds of leadership: “More generally, leadership implies complementarity between policy instruments in the leader's reaction function but conflicts (competition) between them in the follower's responses. A weak form of leadership also allows for independence between instruments in the leader's policy rules. Thus monetary leadership would imply some complementarity (or independence) in the Tailor rule, but conflicts in the fiscal responses. And fiscal leadership would mean complementarity or independence in the fiscal rule, but conflicts in the monetary responses.” (Neck 2008, 8. Post-Thatcher Fiscal Strategies in the United Kingdom: An Interpretation by Andrew Hughes Hallett, p. 201). The Taylor rule is the response in nominal interest rate to divergences of actual inflation rates from target inflation rates, and to divergences of actual GDP from potential GDP.

The author finds evidence of a possible fiscal leadership and no suggestion of monetary leadership, in the UK, and of a possible weak monetary leadership in the Eurozone. In the Eurozone, he finds a situation of conflict between instruments of monetary policy and the same conflict in the fiscal policy reactions. The advantages of fiscal leadership are that “fiscal leadership eliminates an inflationary bias and results in lower inflation. Fiscal leadership also yields higher taxes and more income redistribution.” (Neck 2008, 8. Post-Thatcher Fiscal Strategies in the United Kingdom: An Interpretation by Andrew Hughes Hallett, p. 212)

In the conclusions, the author underlines that: “Fiscal leadership leads to improved outcomes because it implies a degree of coordination and reduced conflicts between institutions, without the central bank having to lose its ability to act independently.” He evidences also “that the important property for monetary policy is instrument independence. Given that, target independence brings few additional gains and may have the effect of undoing the complementarity between fiscal and monetary policies.

(...) The United Kingdom appears, both from its institutional structure and the available empirical evidence, to have adopted this leadership framework since 1997. This is perhaps the main reason for the country's improved performance both in terms of outcomes and in making more effective use of her fiscal and monetary instruments.

(...) the incentive to adopt fiscal leadership is clear from the theoretical results. Confirmation of those results then comes from the outcomes. The leadership with separation model predicts improvements in growth, inflation, or income distribution of the order of 1 percent of GDP. And that is exactly what we have observed since 2000. In addition, the leadership framework requires less precise information on the strategic and institutional parameters than do other strategies.”

(Neck 2008, 8. Post-Thatcher Fiscal Strategies in the United Kingdom: An Interpretation by Andrew Hughes Hallett, p. 215-216)

The last chapter, the ninth, concerns Switzerland. Budgetary questions are discussed in the institutional frame of federal (actually confederal, in Switzerland) institutions. (Neck 2008, 9. On the Effectiveness of Debt Brakes: The Swiss Experience by Lars P. Feld and Gebhard Kirchgässner, p. 223-255)

Neck, R., and J.-E. Sturm [editors], Sustainability of Public Debt, MIT Press, Cambridge, MA, USA, 2008.

17 May 2009

Letter from Lhasa, number 105. (Runde 2008): Building Conflict Competent Teams

Letter from Lhasa, number 105. (Runde 2008): Building Conflict Competent Teams

by Roberto Abraham Scaruffi

Runde, C. E., and T. A. Flanagan, Building Conflict Competent Teams, Jossey-Bass – A Wiley Imprint, San Francisco, CA, USA, 2008.

(Runde 2008).

Craig E. Runde,

Tim A. Flanagan

The book is, actually, more about how to deal with differences inside organisations. What is perhaps only implicit is the decisive role of leadership or management both in creating and in suppressing conflicts.

In my opinion, competition among individuals is always at least latent, although not necessarily it erupts in conflicts. Conflicts in organisations are created from power sources inside or outside the same organisations. Individuals are spontaneously adaptive, conflict avoiding and cowards. Generally, they let openly flow their insanities only when they feel covered from power and powers.

It is important to know how to manage internal differences. It is important to know how to manage internal competition. However, conflict rarely is spontaneous. If it is, the solution may not exist, if not removing the conflict sources. The opening of communication channels may be only a waste of resources, and even embarrassing for the people in it involved, if the individuals did not have some spontaneous tendency to conform to power.

Equally, perhaps, the book overvalues the so-called “cultural differences”. Since, finally, people in multi-cultural contexts perfectly understand each other, “cultural differences” are raised when in need of [self-]justifications for odd behaviours or for not submitting to formal power because influenced from other [real] power/s.

Formal and real elites have an enormous power on people behaviour, power frequently they do not know how to use. So, when internal disasters verify or approach, they call specialists or “specialists” for solving problems they [elites] perhaps already should know how to deal with. Subordinate individuals have also an enormous power inside organisations. As in everything, there are peculiarities and trade-offs.

Runde, C. E., and T. A. Flanagan, Building Conflict Competent Teams, Jossey-Bass – A Wiley Imprint, San Francisco, CA, USA, 2008.

15 May 2009

Letter from Lhasa, number 104. China Security, Winter 2009

Letter from Lhasa, number 104. China Security, Winter 2009

by Roberto Abraham Scaruffi

China Security, vol. 5 (1), Winter 2009.

It is the news of the day, of the year, of the century, of the millennium: on 26 December 2008, the Chinese Navy sent two battleships and a supply vessel to join the multinational forces mobilized against Somali pirates. China Security reserves its Winter 2009 issue for impressionistically discussing such a banal event and other aspects of the PRC imperialism.

Chinese bureaucracies and their subjects are insanely convinced, not differently form other imperial bureaucracies, of being the real world power with the mission of seeing its superiority accepted from whoever and whichever. The paranoid myth of a unique China has been carefully cultivated from Anglophone powers, as well as the myth of the millenary indestructible Chinese civilization and Empire.

China has never been a sea power. In fact, it has been reached and submitted from small European States had become sea powers, so world empires. Will China become now also a sea power? It claims itself with the slogan of the “multi-millenary civilization” ...fearful of seas, of waters.

Strategy is the subject of nothing, where everything is “strategic”, alias relevant, or eventually irrelevant for competitors just power cantors are ordered to declare useless for competitors what was and is “essential” for their bosses.

It is in the USA-UK nature to constantly create their enemies. Also by these ideological operations they do that. China, now exploited, and made a little stronger at the same time, is one of their present and future enemies. It replaced Japan, although Japan be, silently, even considerably stronger than China.

Inevitably, in a “Western” agitprop “logic”, China [PRC] is discussed. China is evaluated. Its present and its future are discussed and evaluated, on the basis of the US power. Are aircraft carriers indispensable to a world power? Are foreign bases indispensable? And intercontinental missiles and anti-missiles? Is nowadays a military navy indispensable? Is really relevant to operate inside a UN Security Council which always complied to US will on all key questions?

Military and “security” bureaucracies are bureaucracies as the other ones, obeying to law of progressive expansion. Their expansion, with its inevitable damages, is the reality. Whatever else are pretexts.

Financial-industrial-military complexes are progressive constructions where corruptions and ideologies adaptively intertwine with real needs. Ideologies, ideologies and ideologies are disseminated in this China Security issue. Human beings are just animals in constant need of justifications. They need to create and to diffuse stories, tales. Academicians call that “making sense”, alias suggesting and imposing opportunistic, convenient, interpretations of reality.

Call that “propaganda”. Such is “strategy”, “strategic studies”.

What is finally a State if not its profiteers and the subjects-slaves of State profiteers? Propagandists call that “fatherland”, and “patriotism” ...of its [idiotic] subjects-slaves in need of ideological narcotics for fulfilling their frustrations and insanities.

More than 1,3 billion subjects, although self-claimed Han at 91.5%, are decidedly too many for whatever functional entity. The same self-claiming of a Han race or nationality is clearly an ideological construction. A plurality of languages are actually spoken everywhere in China. “Central” Chinese (the so called common language, putonghua / pǔtōnghuà / 普通话 / 普通話) is a power's language, a minority language. Local diversification is hampered with the trick of a non alphabetic “central” language, also because a “central” alphabetic language would immediately explode in a variety of “local” languages. Clearly, local cultures and languages cannot been formalised in written languages since the central government of the official written language of more than 1,3 billion subjects.

It is evidently diffused world power interest to simulate the existence of a Chinese nation, so of a legitimacy for an artificial Chinese State. All discussions about China, even more “strategic” “analyses”, have this basic bias. They are basically ideological and false.

Really, 2,000 “Somali” pirates with 60 boats are such a world threat for justifying extraordinary operations? Who/which provides them with weapons? Independent weapons traders do not exist. Their electronic devices (radar) and boats are really not easily detectable from who-which detect whatever electronic signal of the world and can easily detect whatever movement overall in not so crowded spaces as seas are? Or is that simply the usual technique of provoking crises for justifying military expenditure wastes? The USA and their “allies”, not differently from their “enemies”, have scientifically destroyed Somalia and are preserving it without whatever State. Privateering is, apparently, just one of the consequences of such condition, although even privateering could not exist without some [international] power promotion and cover.

Somali” piracy is in the same broad area which is core of the British Empire recruiting for “Islamic” fundamentalism. Yemen (as well as others) does not provide any cover for “piracy”? For “public opinions”, there is the show of “interventions” and of “multinational forces”.

China Security, vol. 5 (1), Winter 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.