OP-ED: Why microeconomic policies cannot work if macroeconomic policies are wrong By Mark Swilling and Gael Giraud
Narayana Kocherlakota, Rochester University Professor of Economics and former President of the Federal Reserve Bank of Minneapolis, declared, “…we simply do not have a settled successful theory of the macroeconomy. The choices made 25-40 years ago – made then for a number of excellent reasons – should not be treated as written in stone or even in pen.”These statements from the high priests of mainstream economics are the equivalent of the pope renouncing Catholicism.
Armed with the new computing power delivered by the information technology revolution, elaborate extremely elegant mathematical general equilibrium models were built and installed by World Bank and IMF teams into the beating heart of economic policymaking in governments across the world. These “pacemakers” resulted in a kind of intellectual monocropping that allowed economists to abstract out everything about the real economy that really mattered .
In orthodox models, if public debt goes up, so should the spread on treasury bonds . This also did not happen. The graph shows a substantial increase in public debt in the US economy between 2005 and 2014 , but the spread in the ten year Treasury bond generally declined. So there is an alternative and it comes from so-called heterodox economists. The starting point is a shift from the supply side to demand-side economic policy thinking. Underpinning this is an acceptance that economies tend towards disequilibrium, and therefore state-led directionality and intervention is a necessity. The focus would be aggregate demand, employment creation, and inflation targeting would be subordinated to wider economic goals.
This approach would require the adequate regulation of domestic finance and management of cross-border economic flows. It would require reshaping and reforming financial markets to move away from high short-term returns and the maximisation of shareholder value that requires them to behave speculatively and exploitatively in domestic markets. Instead, the focus would be on the building of financial markets that serve the country’s socio-economic developmental goals.
Only three of the G7 countries are below 90% , and none are below 60% . In the most advanced models today, at least three other variables influence public debt levels: the employment rate, the labour share and the private debt/GDP ratio. From this perspective, the inflation-focussed National Treasury model is crude and totally inappropriate for the SA context.
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