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REORIENTING FISCAL POLICY: A BOTTOM UP APPROACH by Pavlina Tcherneva
The present article offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the new consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment, but itself contributes to the increasing postwar labor market precariousness and the erosion of income equality. The two conventional demand-side measures are then contrasted with the proposed alternative—a bottom-up approach to fiscal policy based on a reinterpretation of Keynes’s original policy prescriptions for full employment. The article offers theoretical, methodological, and policy rationale for government intervention that includes specific direct employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.
Unemployment and income inequality were the very problems that Keynes proposed to remedy in the 1930s through fiscal policy. Yet, more than seventy years of fiscal activism have not been able to resolve what he called “the two outstanding faults of economic society” (Keynes, [1936] 1964, p. 327). Worse, as this article will argue, the manner in which fiscal stabilization policy has been implemented throughout the entire postwar period has itself contributed to the disturbing developments in income distribution and labor markets.
In the postwar era, short-term unemployment as a share of total unemployment has been on a secular decline. Yet long-term unemployment has experienced a ratchet effect: greater and greater numbers of people who become unemployed stay in forced idleness for longer and longer periods of time. During every postwar recession, the share of long-term unemployment in total unemployment outpaces its previous peaks and, in most expansions, it fails to reach its previous lows (Tcherneva, 2012a). Important structural shifts in the labor market have contributed to these trends, but fiscal policy has not been able to redress them.
PDF: http://media.wix.com/ugd/f4c1a3_a2f9d44a1a754ae2a542ca6a88c1d5f5.pdf
The present article offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the new consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment, but itself contributes to the increasing postwar labor market precariousness and the erosion of income equality. The two conventional demand-side measures are then contrasted with the proposed alternative—a bottom-up approach to fiscal policy based on a reinterpretation of Keynes’s original policy prescriptions for full employment. The article offers theoretical, methodological, and policy rationale for government intervention that includes specific direct employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.
Unemployment and income inequality were the very problems that Keynes proposed to remedy in the 1930s through fiscal policy. Yet, more than seventy years of fiscal activism have not been able to resolve what he called “the two outstanding faults of economic society” (Keynes, [1936] 1964, p. 327). Worse, as this article will argue, the manner in which fiscal stabilization policy has been implemented throughout the entire postwar period has itself contributed to the disturbing developments in income distribution and labor markets.
In the postwar era, short-term unemployment as a share of total unemployment has been on a secular decline. Yet long-term unemployment has experienced a ratchet effect: greater and greater numbers of people who become unemployed stay in forced idleness for longer and longer periods of time. During every postwar recession, the share of long-term unemployment in total unemployment outpaces its previous peaks and, in most expansions, it fails to reach its previous lows (Tcherneva, 2012a). Important structural shifts in the labor market have contributed to these trends, but fiscal policy has not been able to redress them.
PDF: http://media.wix.com/ugd/f4c1a3_a2f9d44a1a754ae2a542ca6a88c1d5f5.pdf
