Raising aggregate demand without raising foreign debt

["Leigh Harkness" <leigh@xxxxxxxxxxx>]

The following is from a letter published in an Australian newspaper :

 

"Des ___ calls for even more economic rationalism to reduce unemployment.   Heaven forbid.

 His logic is that if the labour market were deregulated, wage costs would be reduced, Australian products would become cheaper relative to imports, we would buy more domestic products and so raise employment. 

 But would the floating exchange rate system allow Australia to shift demand from imports to domestic products, or raise exports?  Of course not. 

 If there were a reduction in demand for foreign funds (because of reduced imports) or an increase in the supply of foreign funds (from increased exports), the foreign exchange market would raise the value of the Australian dollar.  That would reduce the price of imports, reduce export revenues and raise the price of exports on foreign markets. 

 Any success at reducing the relative price of Australian products on the domestic market would be undone by the foreign exchange market.  Therefore, further labour market de-regulation would continue to fail to provide full employment.

 Australia needs to raise its aggregate demand to provide full employment, but without causing excess demand that would raise foreign debt. 

 Economic rationalism cannot solve this apparent dilemma."

 

Economic rationalism, or Neo-classical economics, may not be able to solve this problem but what solution does Post-Keynisian Economics offer? 

Any suggestions?

 

Leigh Harkness