A Teacher Writes to Students Series (52): Listen to Kolodko-5
Annavajhula J C Bose, PhD
Department of Economics (Retd.), SRCC, DU
I am choosing and reproducing six pragmatic discussions from the experiential perceptions of the great Polish economics Professor Grzegorz W. Kolodko for your perusal and consideration. He had his own political-economic practice as a four-time deputy prime minister and a minister of finance. Undergrad econ students are better off, in gaining good grounded knowledge, reading him than mainstream textbooks, journal articles and newspapers. What follows is, as if Prof. Kolodko is talking to you.
The theme of the fifth one in this posting is:
Ideological Haze and Honest Economics
“There is a major difference between the contemporary liberalism and neoliberalism, as confusing these terms gives rise to a lot of misunderstandings, that are not only intellectual in nature. Well, liberal values that cherish all kinds of freedom, including the economic one, may and should be the basis on which to build a better future. Ideals such as freedom, freedom of choice, democracy, pluralism, private property, entrepreneurship, market, competition are positives that are well worth an effort. Neoliberalism, however, both cynically and efficiently, exploits those liberal values to transfer revenues from the majority of the average and the poor to the minority of those well-to-do and rich.
Another thing that can be confusing is that in American social sciences the term liberal has positive overtones. Liberal means progressive, favouring freedom, market economy and democracy. The term neoliberal is basically not in circulation, and it it is used, it is without the negative connotation that we give it to in Europe. In American literature neoliberalism is most often referred to as the contemporary laissez-faireism or neoconservatism. So one should take care not to confuse neoliberalism in European sense with liberalism in the American sense.
Neoliberalism should also be distinguished from libertarianism and, furthermore, from anarcho-capitalism. Neoliberalism is more dangerous as it’s calculated and cynical while libertarianism and anarcho-capitalism are mostly dogmatic and, frankly speaking, primitive. The former can be used to cause a lot of economic and social damage while the latter may only be professed and naively believed in.
Let’s take, for example, the issue of fiscal adjustment, or consolidation, as it is called more often, which has been hotly discussed in recent years. It is necessary in many of the most developed countries, from the USA and United Kingdom to France and Italy and not only in Greece and Spain. It is undoubtedly desirable from the angle of creating conditions for sustainable growth in production and consumption. Consequently, we should trim the ballooning budget deficits and limit the public debt that is a burden to the economy. But the question is: how do we do it?
The neoliberal extremism says: cut expenditure! The social extremism says: increase expenditure! Common sense suggests: look for a middle ground, remembering our objectives and considering our dilemmas over a longer time horizon. The common sense leads us to a scientifically proven conclusion that under the present circumstances overly aggressive budget expenditure cuts would aggravate the situation, causing a slowdown or even a recession, which always makes budget balancing more difficult. Many a developed country experienced this in 2012-13.
This is due to the fact that public expenditure cuts involve a drop in revenues for many entities, which automatically causes a drop in their effective demand; if there is nobody willing to buy what they may produce, production stops The growth slows down, the production output falls and, consequently, the tax base is reduced (lower production, lower turnover, lower income, lower profit, lower tax receipts), so in the end this kind of fiscal adjustment actually does not adjust the situation to meet the challenges, but it can aggravate it further, by increasing the budget deficit rather than reducing it.
The International Monetary Fund calculated that a radical lowering of the budget deficit by expenditure cuts deeply slows down the production growth. This is the effect of the so-called multiplier. It’s very much. So much so that it makes the adjustment policy pointless.
Economists that keep advocating a policy that is harmful both from a macroeconomic and a social perspective, and recommend deep spending cuts—are they wrong or are they lying? It’s very hard to say, as many are genuinely wrong, miscalculating, making wrong assumptions or failing to grasp the complexity of the interdependencies involved. What is also to blame is the political inertia; since we have already taken this road, let’s struggle ahead.
Still, more than one is just lying as he has already realized he’s wrong but he keeps promoting the false view either because he serves those unwilling to pay higher taxes, either out of ideological stubbornness or for psychological reasons, as he cannot admit he was wrong. The one who gets it right is the one saying that in current conditions it’s easier to try and consolidate public finance by reasonably increasing tax receipts, which does no harm to entrepreneurs, than to weaken their opportunities for expansion by limiting the aggregate demand, which happens when the budget deficit is reduced too fast through spending cuts.
What does honest economics say on that matter? Well, it shows that reducing the scope of budgetary redistribution does not accelerate economic growth and, thus, over longer periods, it does not increase the general levels of output and consumption. Neither does it contribute to a higher accumulation rate in countries where income taxes are lower as this rate is more or less the same whether a country levies higher or lower taxes. The same is true of the rates of unemployment and inflation.
So what is the difference between highly developed economies with higher and lower scales of tax redistribution? Principally, income proportions. Where taxes and expenditure are higher, the scale of income inequality is lower and vice versa; where taxes are relatively lower, the scale of income and, consequently, income inequalities is higher. Let me add immediately that comparative studies reveal that where inequalities are lower, the level of life satisfaction is higher. Well, but the rich are a bit less rich and this concerns those advocating for their interests…
If we assume, for convenience, that a country with so-called small government has an economy where public spending amounts to around one-third of GDP, then countries that fit this category include, inter alia, the USA, Australia, Japan and Switzerland. By contrast, if we define big government as economies where fiscal instruments are used to redistribute around half of the gross product, then this pool includes countries such as France, Belgium, the Netherlands, Norway, Sweden and Italy. Norway is the richest of them, but the level of income is similar in all of these countries. The same is true for other ratios that describe economic growth or the quality of human capital, and if there are any differences, then they work to the advantage of big government, for example the secondary education level enrolment rate in this group is around four points higher than in the other one. On the other hand, what sets big governments apart from the small ones is the distribution of income. In the latter ones, those with lower taxes and consequently with lower public spending, income inequalities are higher, sometimes considerably so.
Before we assess this situation, we need to make an ideological choice—we need to decide on the values we are guided by in the economic process. If somebody believes that other circumstances notwithstanding, the greater the inequalities, the better, he thus formulates a clear view that is hard to agree with. These are views typical of neoliberalism rather than of a progressive social, economic and political thought. By contrast, in honest economics one must admit that as long as less even income distribution does not affect efficiency, competitiveness and growth or even favours them, we need to go in that direction.
If a hypothetical situation where economic growth is faster when some income groups are deliberately left out was a question of an economic choice, then there would be something to discuss. If there actually existed an alternative situation where a relatively higher extent of inequality resulted in a higher level of investment that shapes the future, then it would be something worth considering. If a greater distance between the rich and the poor did indeed favour improved employee skills and greater competitiveness, we would have something to meditate on. But it isn’t so. Thus there are no economic grounds for having a system that favours an improved income distribution of a minority at the expense of a majority, which thus contributes to a slower general growth rate.”
Reference
Grzegorz W. Kolodko. 2014. Whither the World: The Political Economy of the Future. Palgrave Macmillan.
