nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2011‒09‒22
four papers chosen by
Karl Petrick
University of the West Indies

  1. Do Tax Cuts Boost the Economy? By David Rosnick; Dean Baker
  2. John Maynard Keynes: Is That you Knocking on the Door? By Tadeusz Kowalski; Yochanan Shachmurove
  3. Solow meets Marx: Economic growth and the emergence of social class By Heibø Modalsli, Jørgen
  4. Global Imbalances and the Paradox of Thrift By W. Max Corden

  1. By: David Rosnick; Dean Baker
    Abstract: There are many economists who argue that temporary tax cuts, like those in the 2009 stimulus and the ones proposed by President Obama last week, have no impact on the economy. They argue that people will save a temporary tax credit rather than spend it. Stanford Economics Professor John Taylor, who served as Under Secretary of the Treasury for International Affairs under President Bush, is one of the economists making this argument. He purports to show that there was no statistically significant increase in private consumption of goods and services as a result of certain types of government transfers made over the last decade. According to his analysis, it is unclear whether an additional dollar of government transfers led to any additional spending, or, alternatively, whether it raised personal savings by more than one dollar. This paper shows that there is very little indication that – based on Taylor’s work – personal transfers from the government fail to stimulate private spending.
    Keywords: stimulus, recession, tax cuts
    JEL: E E6 E64 E65 H H2 H3 H31
    Date: 2011–09
  2. By: Tadeusz Kowalski (Poznan University of Economics, Poznan, Poland); Yochanan Shachmurove (The City College of New York, New York, U.S.A.)
    Abstract: This paper provides an overview of the evolution of macroeconomic thought from 1936, the year John Maynard Keynes published his general theory of employment, interest and money to the year 2010. It explores the reasons for the extension of the business cycle during the postwar period. The paper details the decline in the popularity of the Keynesian theory and the return to classical economic principles. The recent crisis necessitates a shift in the way economists understand, theorize, teach and implement macroeconomic policies. The paper suggests some new elements needed in order to mitigate the next inevitable economic and financial crisis.
    Keywords: Financial crises; The United States Financial Crisis Inquiry Commission; The 2010 Economic Report of the United States President; Keynesian Theory; Adaptive Expectations; Rational Expectations; Monetary and Fiscal Policies; Business Cycles; Regulations; General Agreement on Tariffs and Trade (GATT); World Trade Organization (WTO); Trade Liberalization; United States; China; Euro; Econometric Policy Evaluation.
    JEL: B0 E0 E3 E4 E5 E6 F0 F3 F4 G0 H3 H6 K2 O51 P1 R3
    Date: 2011–09–10
  3. By: Heibø Modalsli, Jørgen (Dept. of Economics, University of Oslo)
    Abstract: This paper reconciles neoclassical models of economic growth ("Solow") with the formation of social classes during economic transition ("Marx"). An environment with missing capital markets and no labor divisibility is shown to lead to a steady state with no aggregate inefficiencies, but a very polarized wealth distribution. When capital cannot be rented, people must choose between self-production, potentially including hiring workers, and wage employment. As the first path is more profitable for the rich than the poor, inequality increases. The model is calibrated to illustrate polarization and increasing inequality in early modern Europe, starting from a continuous pre-industrial wealth distribution. During the early industrializing period, when labor markets operate and capital markets do not, inequality increases and a distinct working class emerges. Even if capital markets later improve, the polarization is persistent. The mechanism also has relevance for modern developing countries, where capital market access is limited. If a substantial amount of capital is needed in order to earn the market return, the poor have few incentives to save.
    Keywords: Inequality; polarization; social class; economic growth; capital market frictions
    JEL: E21 G32 O11 O43
    Date: 2011–09–14
  4. By: W. Max Corden (Department of Economics, The University of Melbourne)
    Abstract: Global imbalances refer to current account surpluses and deficits. This is a form of international intertemporal trade, and the neoclassical approach suggests that there are gains from trade, and hence there may be no problem created by global imbalances. This paper presents qualifications to this argument. A crucial concept is the "return journey", namely the need for borrowers to pay interest (or dividends) and eventually to be able to repay. Thus savings must lead to investment, which provides the future resources to enable the return journey. If borrowing is used to finance current consumption, wars, or unwise ("unfruitful") investment, such as excessive housing construction, the result will be a crisis. In this way the high net savings of some countries actually led to the recent crisis. This is a new version of Keynes’ “paradox of thrift” The central issue on which this paper focuses is the failure of high net savings by the “savings glut” countries to lead to fruitful investment in other countries, both in the United States and in developing countries. Hence a crisis was caused by the lack of provision for the return journey.
    Keywords: Global imbalances, paradox of thrift, financial crisis, instability of capital flows, world savings glut, quantitative easing
    JEL: F32 F34
    Date: 2011–07

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