Cambridge Journal of Economics 2006, 30, 985–987 doi:10.1093/cje/bel026
A reply to Michl Sergio Cesaratto* In his ‘Comments’, Tom Michl defends the proposal for a fully funded pension scheme based on a saving-led ‘classical growth model’ against my Keynesian contention that a higher saving supply would be deflationary in both the short run and the long run. Michl adds a further argument that an increase in the saving rate associated with a lower interest rate may speed up the accumulation process. I remark that the thesis that a lower interest rate has a positive influence on investment is empirically and theoretically controversial, while the idea that an increase in investment requires a larger saving supply is open to further Keynesian objections. Key words: Social security, Pensions, Sraffian economics, Post-Keynesian theory JEL classifications: H55, J26, J32, B51
In my recent paper in this journal (Cesaratto, 2006A), I criticised the neoclassical argument in support of the adoption of fully funded pension schemes. In Cesaratto (2005), I took issue with a similar proposal by Tom Michl and Duncan Foley (M&F hereafter), also presented in this journal (M&F, 2004), based on a saving-led ‘classical growth model’.1 My main contention was that M&F lacked a convincing argument to demonstrate that a higher saving supply, in particular a fiscal surplus obtained by increased taxation and used to pre-fund the social security, would translate itself into higher investment. In their view, if taxation is ‘progressive taxation on capitalist wealth’, this would also lead to ‘greater public ownership’. My concern was that a higher saving supply would be deflationary in both the short run and the long run. 1. The controversial effects on investment depend in the first place on the effects of increasing taxation on private saving. If this falls correspondingly, the net effect of the fiscal surplus on the aggregate saving supply is nil. In this case, if taxation is progressive and the fiscal surplus—transferred to social security—is used to buy the capital assets that would otherwise be acquired by the rich, or that are dismissed by them to pay the wealth-tax, we just obtain a redistribution of wealth and related returns in favour of the working class with prima facie effects on growth neither positive, as M&F would wish, or negative (see Cesaratto, 2005, p. 225). In his Comment, Michl fails to see that the effects on aggregate saving can be nil and argues that the ‘redistribution effect’ of progressive taxation is not Manuscript received 14 June 2006. Address for correspondence: Dipartimento di Economia Politica, Piazza San Francesco 7, 53100 Siena, Italy: email:
[email protected] * Universita` di Siena. I thank Tom Michl for this opportunity to share with a larger audience our discussion on such an important topic and, without implications, Roberto Ciccone for useful comments. 1 My criticism is reported also in Cesaratto (2006B). For a similar criticism, cf. Palley (2002, 2003). Ó The Author 2006. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.
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accompanied by a ‘growth effect’ only if ‘growth is . . . tightly constrained by labour supply’ (Michl, 2006, p. 981), a case that Michl tends to dismiss.1 Assuming next that there is a positive effect on aggregate saving, the big query regards the effects on investment. 2. M&F, preoccupied by the deflationary effects of an higher saving supply, at least in the short run, evoke ‘fiscal or monetary policy compensations for aggregate demand effects of changes in social security policy’ (M&F, 2004, p. 3; see also Michl, 2001, p. 87; 2002, p. 113). With regard to fiscal policy, my objection was that this policy, if financed by new debt, would precisely cancel out the initial fiscal surplus. An expansionary fiscal policy might rely on increasing, ceteris paribus, tax progressiveness. This is fine but, leaving aside the political sustainability of the double increase in tax progressiveness (first to generate a surplus and then to sustain consumption), the impression is that we are again in a zerosum-game in which an expansionary measure is used to compensate a recessionary one, with nil net effects on growth. The same zero-sum game conclusion applies if we utilise monetary policy. In this regard, I disputed the effect of a lower real interest rate on investment—although I am ready to admit that it may positively influence other components of aggregate demand such as autonomous consumption (Cesaratto, 2005, p. 211) and indirectly investment, through the multiplier–accelerator effects. Summing up, I believe that economic policies have a primary long-run role in determining the accumulation rate, and in fact their role is sacrificed in M&F’s policy mix, in which they are not used for growth, but as short-run measures to compensate for the deflationary effects of the pension reform they suggest. This reform should be discarded, at least from the point of view of its effects on growth. I believe that the proposition ‘Keynesian in the short-run, ‘‘classical’’ in the long run’ is rather inconsistent. 3. My criticism must have been rather effective if, in his present comment, Michl adds a new theoretical dimension arguing that there are (non-neoclassical) reasons to believe that a lower interest rate may positively affect investment. The main argument he uses is Kalecki’s principle of increasing risk, later adopted by Minsky and others. I have not enough competence to judge the theoretical and empirical consistency of Kalecki’s argument, but I urge the reader to consider in this regard the stringent criticism put forward by Petri (1993, 2004, pp. 268–70). What strikes me, moreover, is Michl’s idea that an increase in the saving rate is necessary to obtain a lower interest rate and speed up the accumulation process. It is clear that he is assuming that, in the long run, productive capacity is, on average, fully utilised so that a higher investment rate is necessarily associated with a higher saving rate. In his view, the interest rate is the policy variable that must keep investment constantly in line with saving. This is open to various criticism. (A) Were we to assume that in the long run, as well as in the short run, market economies, if left to themselves, are not able to reach full capacity utilisation (as Kalecki himself seems to believe), then a higher accumulation rate does not require measures to increase the saving supply out of current incomes. But even a normal degree of capacity utilisation is consistent with a high degree of elasticity of output, so that an existing capacity may meet higher levels of investment and aggregate demand without requiring a corresponding fall in consumption. When the additional investment is operative, capacity can return to a normal degree of utilisation (Ciccone, 1990). (B) Outside a neoclassical world in which it is the 1 Michl’s case of a tight labour supply is open to some objections. If the aggregate saving supply has increased—that is the fiscal surplus is not associated with a corresponding fall in private saving—it means that workers are freed from the consumption good sector that can be used, potentially, to produce additional investment goods (assuming prima facie that the capital–labour ratio is similar in the two sectors). A labour shortage may subsequently, at least partially, be accommodated by labour-saving innovations or immigration.
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duty of the monetary policy to approximate the ‘natural’ interest rate determined by the intertemporal preferences (on the saving supply side) and the marginal product of capital (on the saving demand side), the interest rate can be conceived of as a distribution and policy variable, influenced by the monetary authorities independently of the savinginvestment equilibrium (cf., Pivetti, 2001; Stirati, 2001). Michl’s position echoes a Wicksellian or Robertsonian stance, rather than a Keynesian one. 4. To conclude, in my view—Keynesian in both the short run and the long run— accumulation is governed by the autonomous components of effective demand (e.g., autonomous consumption, government spending, exports) with investment as an induced component (Cesaratto et al., 2003). Monetary and fiscal policies—the latter would include the support to pay-as-you-go programmes financed out of progressive taxation—are the main forces in sustaining those autonomous components and should be let to display their growth effects, that would instead be wasted if associated with a potentially deflationary saving-based social security reform. In this respect, I believe that the main interest of workers is not in participating directly in the casino of the capitalist financial sector, and certainly not at the cost of deflationary reforms, but in securing high rates of growth and an income distribution favourable to wages in order to strengthen the economic and solidarity foundations of pay-as-you-go schemes.
Bibliography Cesaratto, S. 2005. Pension Reform and Economic Theory: A Non-Orthodox Analysis, Cheltenham, Edward Elgar Cesaratto, S. 2006A. Transition to fully funded pension schemes: a non-orthodox criticism, Cambridge Journal of Economics, vol. 30, 33–48 Cesaratto, S. 2006B. The saving–investment nexus in the debate on pension reforms, in Salvadori, N. (ed.), Economic Growth and Distribution: On the Nature and Causes of the Wealth of Nations, Cheltenham, Edward Elgar Cesaratto, S., Serrano, F. and Stirati, A. 2003. Technical change, employment and effective demand, Review of Political Economy, vol. 15, 33–52 Ciccone, R. 1990. Accumulation and capacity utilisation: some critical considerations on Joan Robinson’s Theory of Distribution, in Bharadwaj, K. and Schefold, B. (eds), Essays on Piero Sraffa—Critical Perspectives on the Revival of Classical Theory, London, Unwin Hyman Michl, T. R. 2001. Why we should fund social security permanently, Challenge, vol. 44, 78–92 Michl, T. R. 2002. Prefunding is still the answer, Challenge, vol. 45, 112–16 Michl, T. R. 2006. Comments on Cesaratto’s ‘Transition to fully funded pension schemes: a non-orthodox criticism’, Cambridge Journal of Economics, vol. 30, no. 6, 981–84 Michl, T. R. and Foley, D. K. 2004. Social security in a classical growth model, Cambridge Journal of Economics, vol. 28, 1–20 Palley, T. I. 2002. Social security: prefunding is not the answer!, Challenge, vol. 45, 97–118 Palley, T. I. 2003. The case against prefunding social security with equities, Challenge, vol. 46, 123–9 Petri, F. 1993. Critical notes on Kalecki’s Theory of Investment, in Mongiovi, G. and Ruhl, C. (eds), Macroeconomic Theory: Diversity and Convergence, Aldershot, Edward Elgar Petri, F. 2004. General Equilibrium, Capital and Macroeconomics—A Key to Recent Controversies in Equilibrium Theory, Cheltenham, Edward Elgar Pivetti, M. 2001. Money endogeneity and monetary non-neutrality: a Sraffian perspective, in Rochon, L. P. and Vernengo, N. (eds), Credit, Interest Rates and the Open Economy—Essays on Horizontalism, Cheltenham, Edward Elgar Stirati, A. 2001. Inflation, Unemployment and hysteresis: an alternative view, Review of Political Economy, vol. 13, 427–51
