Designing a Capitalist Economy for Fast Growth and High Employment in Today's Globalized World Economy

The paper begins with a consideration of the hypothesis that public sector employment is a means to reduce the general unemployment rate. It then takes up the proposition that subsidizing domestic investment is an effective way to reduce unemployment. The rest of the paper addresses some of the questions arising about employment subsidies as a means to reduce unemployment. A crucial question is the best way to finance an employment subsidy. Is it a payroll tax? a Value Added Tax? if enforceable, some sort of tax on wealth or non-wage income? Or is the best answer a cutback in welfare entitlements - in "social wealth" - which would permit the introduction of employment subsidies without widening the budgetary deficit. The paper goes on to consider the hypothesis that, in the medium term and beyond, the best remedy is a cut of tax rates (on labor, possibly on domestic capital) financed by the same cutback in welfare entitlements.

Macroeconomics for a Modern Economy

Nobel Prize Lecture, December 8, 2006Macroeconomics;

Income tax cuts without spending cuts: Hazards to efficiency, equity, employment and growth

Samuelson's "neoclassical synthesis" retrieved the theory of fiscal policy from Keynesian economics to the nonmonetary domain. But no agreement emerged over the right kind of "real" model to adopt. In the neo-Keynesian theory fashioned by Tobin and Modigliani, deficits were anti-growth and inoptimally so, and Tobin argued for budgetary surplus to boost investment. Mundell proposed harnessing budgetary policy instead to the stabilization of employment, which inspired the supply-side case for budgetary deficit through reduced tax rates. Rubin and Summers revived the Wall Street asset market argument for budgetary surplus as a means to low real interest rates, thus to high investment, growth and employment - in the present, not only the future. This paper uses these ideas, some old ideas by the author and some recent modeling in collaboration with Hian Teck Hoon to critique the 2001 Bush income tax cut, with its delayed action and sunset feature. First, the tax cut reduces economic efficiency to the extent it misleads households into overestimating their true wealth, thus over-consuming and underworking. Second, in a non-Ricardian economy, the tax cut reduces intergenerational justice, conceived in the spirit of Rawls. Finally, drawing on a model with Hoon combining supply-side and Wall Street channels, the paper argues that the delayed tax cut legislation forces an unambiguous rise of the natural unemployment rate until the tax rate cuts kick in, at which point the net effect becomes ambiguous

ICT-Producing Sector on Business Activity

It seems to be taken for granted by many commentators that the sharp decline in prices of computers, telecommunications equipment and software resulting from the technological improvements in the information and communications technology (ICT)-producing sector is good for jobs and is a major driving force behind the non-inflationary employment miracle and booming stock market in the latter half of the nineties in the U.S. and their recurrence since 2004. We show that, in our model, a technical improvement in the ICT-producing sector by itself cannot explain a simultaneous increase in employment and a risein firms’ valuation (or Tobin’s Q ratio). There are two cases. If the elasticity of equipment price (pI ) with respect to ICT-producing sector’s productivity is less than one, labor’s value marginal productivity increases thus pulling up the demand wage and expanding employment. However, the increased output by adding to the capital stock and thus driving down future capital rentals causes a decline in firms’ valuation, q per unit, even though Tobin’s Q (= q=pI ) is up. If the elasticity is greater than one, equipment prices fall so dramatically that labor’s value marginal productivity declines, employment in the ICT-using sector expands proportionately more than the increase in capital stock, thus raising future capital rentals, so both firms’ valuation and Tobin’s Q rise; but then real demand wage falls and employment contracts. The key to generating a booming stock market alongside employment expansion is to hypothesize that when technical improvement in the ICT-producing sector occurs, the market forms an expectation of future productivity gains to be reaped in the ICT-using sector. Then we can explain not only the stock market boom and associated rise in investment spending and employment in the period 1995-2000 but also the subsequent decline in employment, in Tobin’s Q and in investment spending in 2001, with consumption holding up well as productivity gains in the ICT-using sector were realized. An anticipation of a future TFP improvement in the ICT-using sector can once more play the role of raising the stock market.Business asset valuation, Tobin’s Q, investment spending,employment

Future Fiscal and Budgetary Shocks

We study the effects of future tax and budgetary shocks in a non-monetary and possibly non-Ricardian economy. An (unanticipated) temporary labor tax cut to be effective on a given future datea delayed debt bombcauses at once a drop in the (unit) value placed on the firms business asset, the customer, with the result that share prices, the hourly wage, and employment drop in tandem. This paradox of reduced activity through announcement of future stimulus does not hinge on an upward jump of long interest rates. A future tax-rate cut lacking a sunset provision has the same negative effects.Future shocks, business assets, Employment

Dangers in a Repeat of Historic Corporatism

In the view of many commentators, we are seeing in America a political shift from left-leaning “elites” to right-leaning “populists” – from the metropolitan to the rural, the cosmopolitan to the nationalist. A wave of rebellion has swept over much of the West. In America, Economic ideology has shifted from the corporatism of “solidarity” born in the 19th century to the corporatism of central control tried in the 20th

This Thing Called the American Dream

In 1968, gonzo journalist Hunter S. Thompson mused about “this Death of the American Dream thing.” But what was this thing called the American Dream? What made it uniquely American

A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run

Open-economy macroeconomics contains a monetary model in the Keynesian tradition that is deemed serviceable for analyzing the short run and a nonmonetary neoclassical model thought capable of handling the long run. But do the Keynesian and neoclassical models meet the challenges thrown out by the main events of the past few decades? We first indicate that the effects of these shocks on the open economy are not well captured by either the standard Keynesian model or the standard neoclassical theory. Next we provide a careful development of a nonmonetary model of the equilibrium path of the real exchange rate, share price level, as well as natural output, employment and interest that contains trading frictions of the customer-market type. We then examine its implications for these shocks not only over the medium run but over the short run and the long run as well.structuralist model, share price, Real exchange rate, Employment