Start of term thoughts for eastern Europe

[...continued from the previous post]

In order to sustain the growth or the long-term growth in a healthy manner, the governments, therefore, should commit themselves to reducing the income velocity of money (V) when the money is being relaxed. That is to commit themselves to institutions, social habits, the distribution of income between different classes, and the effective cost of holding idle cash. That is;
1. The spirit of the Glass-Steagall Act should be revived as a new institutional framework, establish a better system of indirect finance as opposed to direct finance, and higher tax rates on financial transactions.
2. Education to improve social habits (e.g. on card loans, mortgages and so on as for households, and time punctuality, discount on bills and so on as for workers and entrepreneurs), and higher tax rates on financial transactions.
3. Redistribution or the redistribution of capital investment as opposed to the direct redistribution of household income.
4. Mildly high inflation expectations, due to institutional and geographical changes, including tax changes (e.g. relatively low VAT rates and a steep schedule of progressive income and inheritance taxes).

On the other hand, it is to move the growth ceiling upwards – though rather too violent or neoclassical-synthetic in view of macroeconomics – without implementing the above reform and with maintaining the radical market-liberal framework. It is an attempt of increasing capital investment at home by any channels – such as a larger form of monetary ease, a larger form of deficit spending, lower rates of corporate tax, flatter rates of household-income tax, a more ‘thorough’ form of deregulation. (Forget the propensity to consume, the schedule of MEC, and either the interest rate or, more theoretically aptly, money supply – the three variables that should be sole independent or explanatory variables). That is what the capitalist economies throughout the world have been doing since the final phase of the Cold War. One might easily predict that the subsequent growth stagnation in output and employment would be enormous. And, the stagnation is indeed enormous today.

Thus the crises we are facing today come from long-term factors, which have also been crooked not only directly by changing them but indirectly by manipulating on short-term factors.

At an international economic forum in Krynica-Zdroj, Poland a couple of days ago, Mr Jan Vincent-Rostowski, Finance Minister of Poland, urged European leaders to institutionalize economic management of the European Union and emphasised the significance of solidarity as the key motive for the reform. Europe and the rest of the world should listen to the warning from this academic-policymaker.

[end comment]

Quote: “But they have a long way to go before they repair the damage done by communism. The big danger is that they grow old before they grow rich.”

It’s been two decades since they were all but broke due to the full collapse of the COMECON. They do indeed have a long way to go. But, it shouldn’t be considered as a danger that they grow old before they grow rich if ‘they’ means the generation of people.

I read of Japan’s past. The nation was completely penniless due to the defeat in 1945. A hyperinflation was rampant then. After two decades it was 1965, and one may be surprised to know that the Japanese were still poorer than the then Poles. A lot of Japanese grew old before they grew rich. The country had to remain patient for a decade or two to become an advanced economy. But, their old generations were happy with just imagining that their descendants would live better lives. It was a form of love indeed.

On the contrary, some ex-Soviet-bloc states, especially those in the CEE region, have been doing much better than the Japanese of 1965 for the last two decades, and the peoples are living better material lives, although the Beatles made their first and last concert tour to Tokyo in 1965.

The danger to them lies in another point: The states which have taken the lead for the last two decades have actively adopted market-liberalism, a radical form of free-economy. Now that the pendulum has swung a bit too far on the opposite side of planned economy, the entrepreneurs who run small businesses in the region, especially small manufacturing firms, find hard to expand their businesses while they find it easy to expand large firms and to ‘just establish’ small firms.

This suggests that the schedule of the marginal efficiency of capital (MEC) is steep downwards. The notion of the schedule of the MEC explains the reason why, as an economy grows, it is increasingly hard for a marginal increase in investment at the macroeconomic level to increase the national income. When the liquidity preference grows (or is expected to keep growing), the marginal propensity to consume falls correspondingly, and when the marginal propensity to consume falls, the schedule of MEC is steepened downwards. On the other hand, when money is relaxed – by either fiscal or monetary policy – along with a large and growing liquidity preference, the propensity to consume falls, and when the propensity to consume falls, the MEC falls. These explain what is happening in the US, the EU (as a whole) and Japan right now. Hence, I find the following print-edition article so superficial that it rather focuses on politics than economics:
Debt and politics in America and Europe: Turning Japanese
http://www.economist.com/node/21524874

That the schedule is increasingly steep downwards means that the economies are in closer proximity to that growth ceiling or growth stagnation that the 1965 Japan was. It mainly comes from the growing liquidity preference. The liquidity preference is decided by the volume of money held by speculative motives (Ms) compared to the volume of money held by entrepreneurial motives (Me). The money supply (M) is defined as:
M = Me + Ms
In a short term, Me can be considered as the liquidity function (Le) of the income (Y):
Me = Le(Y)
In a short term, Ms can be considered as the liquidity function (Ls) of the interest rate (r):
Ms = Ls(r)
Therefore;
M = Me + Ms = Le(Y) + Ls(r)
If V is the income velocity of money:
Le(Y) = Y/V = Me
There must be few who are against this explanation, which anybody could find on textbooks. In a short term, one may reasonably consider V as all but invariable. But, people tend to forget the fact that there is no reason that V is constant in a long term. V will depend on institutions (i.e. banking and industrial organisation) – both at home and international, on social habits of the market participants, on the distribution of income between different classes and on the effective cost of holding idle cash. That the mainstream policymakers and economists in the US stick only to fiscal and monetary policies means that they only see the short-term near-zero changes in V.

(to be continued...)

@gktscrk-KR

There was nothing dramatic in re-electing THI. It is absolutely OK that TE did not dedicate too much attention to that election. The power he holds according to our Constitution is comparable to Christian Wulff. Some may now ask, who on Earth is Christian Wuff? Well, he the President of Germany.

I found the mention that you said existed and given it is a nod towards his son without even mentioning re-elections, I don't think that can actually count.

@ Semicontinuous : Not an avid reader of German newspapers (nor of Nordic ones). Just speaking of the English media here.

@ Short Telegram : I'll certainly take a look there and see what they say.

@gktscrk-KR>
Certainly the re-election of Mr. Ilves has been mentioned in all major nordic newspaper, and in most German language newspapers too.

While I'm otherwise rather pleased with this column bringing up issues from Eastern Europe I have to say that presently it is somewhat odd to notice that no publication anywhere in the "West" that I have noticed (and I kept an eye out for both UK and US ones) has bothered to note that Estonia elected its president a few weeks ago.

Surely, while not being an important country by the weight of its population or GDP, it should still deserve some notice.

Will southern and western Europe actually implement the reforms that post-communist EU countries have been forced to do over the past 20 years? I somehow doubt it! As to countries outside the EU, they could learn from the mistakes and positive reforms of CEE EU but watch out for "false prophets" from the "old EU"!

Estonia will soon be able to have its own Iceland moment. Estonia can be the first country in the world to support Palestinian independence by voting for a Palestinian state on Sept. 20 at the United Nations. What is Arabic for Estonian Square?