Re: CJE 2001 critical review of trade theory and policy

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

John wrote:

> No, I have simply recognized the need for a monetary policy
> to prevent deflation as well as inflation. With the
> deflationary impetus of the proposed change in the form of
> taxes that something is the reason for the chapter "Sharing
> Nature" has the title it has.


Your proposal was not a deflationary one. You were proposing a reduction in
wage costs and prices.  But this was not done by reducing the money supply.
The proposal I understood you were making had the effect of of increasing
the real money supply and demand.


John continues:

> Yes, that is the reason I put forward the analysis that
> demonstrates that it is the form of taxes and not the amount
> that has most to do with macro economic performance. In
> doing so, I have also demonstrated that the amount can be
> optimized to cause the greatest rate of growth in capital.

I had an assignment a couple of years ago checking the impact of tax reform
on a country.  That country was under pressure from the WTO to remove taxes
on imports and introduce a GST/VAT type general consumption tax on all
consumer goods and services.  To assess the proposed tax reform proposal, I
decided to model the whole economy and assess the impact of tax changes on
the whole economy.  What I found was that shifting the tax from imports to
local products raised the price of domestic products and lowered the price
of imports.  The net effect was that incomes and employment declined in that
economy.

However, that economy had a fixed exchange rate.  The proposed changes to
the tax system changed relative prices, so that the tax changes effectively
appreciated the currency.

If the country devalued the currency to restore relative prices, the tax
system would not have reduced employment.  Similarly, if the country had a
floating exchange rate or another form of variable exchange rate, the tax
system would not have reduced employment.

How can you propose that changing the tax system is going to effect
employment. in an economy with a variable exchange rate system?

In response to my question:
> > So:
> > 1.    why doesn't the floating exchange rate system ensure that the
exchange
> > rate (the relative price domestic products and imports) is appropriate
to
> > generate full employment; and

John writes:

> Because the value of a currency does NOT have a causal
> relationship to employment.

By exchange rate I do not mean the "value of currency".  I mean the relative
price of imports and domestic products.  If the exchange rate makes imports
cheaper than local products, then I expect people to buy imports and not the
local product.  Similarly, if the exchange rate makes domestic products
cheaper than imports, then I expect people to buy the cheaper local product
and not the import.

In response to my question:

> > 2.    why, despite the vast amount of money that our banks create each
year,
> > it is never enough to generate sufficient demand to provide full
employment?

John says:

> It is not the amount of money [i.e. -- dQ/dM = 0] that
> affects demand, it is the distribution [i.e. -- Keynes
> "propensity to consume"] of the purchasing power that
> establishes the point of market stability, as temporary as
> that stability may be.

But this money that is being created is widely distributed.  It goes on
consumption.  Probably more should be invested.  Yet it is never enough to
provide the demand necessary to provide full employment.  This does not only
happen in the USA and Australia.  It is a widespread phenominia many
economies since the 1970's.

John

You write:

>to reduce the nominal
> level of wages while concurrently increasing the standard of
> living by providing a government stipend to all.

I could never sensibly advise any government to do what you are proposing.
I have advised and implemented the opposite, moving government employees
engaged in enterprises from a fixed wage or stipend to a profit sharing
arrangement.  That has been very successful in stimulating productive
employment, increasing incomes and employment.

Regards

Leigh