Presentation on theme: "Journées de l'OFCE 12 février 2009 Re-distribution of revenues and global imbalances Jean-Luc Gaffard and Francesco Saraceno."— Presentation transcript:
Journées de l'OFCE 12 février 2009 Re-distribution of revenues and global imbalances Jean-Luc Gaffard and Francesco Saraceno
Journées de l'OFCE 12 février 2009 Motivation and Conjecture We want to look not so much at the contingent sources of today’s crisis (securitisation of loans, growth of derivatives markets, financial markets’ collapse, too easy monetary policy in the US), but rather to the deep roots of the crisis Conjecture: These deep roots lie in a structural modification of the economy linked to a long term change in the distribution of revenues. This drastic change created the conditions of global (real) imbalances only ‘hidden’ for a while by an increasing public and private indebtedness, and by the illusion of a new growth regime
Journées de l'OFCE 12 février 2009 Working Hypothesis Since 1980 there has been a significant redistribution from middle/low incomes to high incomes Difference between yearly average growth of income and the growth rate of the economy (source: OECD).
Journées de l'OFCE 12 février 2009 The reasons for this change of distribution (tax policy, globalization, high interest rates due to a tight monetary policy) are not our main concern The change in distribution has been hidden and justified by two related arguments The extreme sophistication of financial products and the restructuring of the economy that favored capital and eliminated frictions would propel the economy on a high innovation/high growth path (the “new economy”) that would benefit everybody (the trickle-down argument) Maintaining the old consumption habits through indebtedness would not be a problem because sustainability would be guaranteed by higher future growth.
Journées de l'OFCE 12 février 2009 The change in distribution has engendered an aggregate demand reduction: strategies on the two sides of the Atlantic have been different: In the EU no reaction: Soft growth over the medium/long run, increase in savings, etc In the US the structural imbalance due to the changing distribution has been hidden by financial innovation, explosion of indebtedness, accommodating economic policies. This sustained consumption and aggregate demand. The unsustainable US growth path has been pushed in the background by increasing and opposite unbalances in other parts of the world, notably Europe and East Asia (and lately also Middle Eastern countries): the savings of these areas financed debt and consumption in the US
Journées de l'OFCE 12 février 2009 What about the new economy The economic and financial changes (that define the so-called new economy) were supposed to make the economy more diversified with the consequence of having a marked decline in aggregate volatility and an increased growth rate : business cycles would have disappeared and catastrophic events would be made impossible But they also render the economy more vulnerable mainly because existing institutions (including the financial ones) do not support the formation of consistent beliefs
Journées de l'OFCE 12 février 2009 What about the new economy Firms’ interactions and experiences may or may not converge over time to an equilibrium set of consistent beliefs and strategies Redistribution of revenues would be an essential dimension of the co-ordination issues Very high returns to financial investment do not correspond to a higher growth rate of the economy: they imply a drastic redistribution of revenues, which does not reflect differences in productive capabilities
Journées de l'OFCE 12 février 2009 Our Contribution Our research wants to focus on a related aspect, which is the structural change in the composition of consumption that accompanied the shift in distribution It is a question of wage/profit distribution, but also of low/high wage distribution The consumption basket is not invariant with respect to income levels, thus some sectors have suffered from the shift in distribution Everything else equal, the new distribution corresponds necessarily to a different relative weight of the consumption sectors in the economy. The question is: What are the problems faced by the economy in converging to the new equilibrium? And what is the role of economic policy?
Journées de l'OFCE 12 février 2009 Hicks’ analytical framework Dynamic analysis requires to put at the centre of the stage the temporal dimension of production processes That is to consider that production takes time There is an initial construction period with large inputs but not output, followed by a running-out or utilisation period with inputs and output
Journées de l'OFCE 12 février 2009 Hicks’ analytical framework The proper of the neo-Austrian or Hicksian framework is to focus on a fully integrated process of production described as a scheme for converting a stream of labour inputs in a stream of final output This makes it possible to take explicitly into account the phase of construction of productive capacity
Journées de l'OFCE 12 février 2009 Hicks’ analytical framework At each moment, the productive capacity of the economy is represented by a population of production processes of different ages and belonging to different technologies. An equilibrium path is sustained by a constant age distribution of production processes. A qualitative change necessarily creates a distortion in this distribution, which propagates itself and generates an out-of-equilibrium path
Journées de l'OFCE 12 février 2009 Hicks’ analytical framework A change in the distribution will be represented by an increased take-out, that, is by an increased consumption out of profits at the detriment of the wage fund In fact by a shift from productive to unproductive spending
Journées de l'OFCE 12 février 2009 An increased take-out
Journées de l'OFCE 12 février 2009 With an accommodating monetary policy
Journées de l'OFCE 12 février 2009 Elements for an alternative model Two sectors: advanced (a) and basic goods (b) No capital, but two types of workers: low (l) and high (h) skilled/educated h and l have different utility functions, h having a stronger preference for advanced goods everything else equal Labour demand depends on domestic and foreign demand for goods, and from technical coefficients Standard Equilibrium, but We build into the model sticky reaction to shocks –Technical irreversibilities (time to build) –Market (price) rigidities –Inertia in expectation formation
Journées de l'OFCE 12 février 2009 Elements for an alternative model Pressure on low wages derives from a change in composition of demand The decrease of low wages has a double effect –Decrease aggregate demand (Kaleckian mechanism) –Change of relative demand for the two sectors The change in relative demand implies a restructuring of the economy, in which investment conditions become crucial. Market adjustment may not be viable Policy, broadly speaking, has a role. –On one side it has to facilitate the transition (for example by loosening financial constraints) –On the other it may prevent the necessary adjustments (by facilitating debt accumulation)