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Thomas R. Michl

This paper presents a simple stock-flow consistent model of corporate capitalism with a financial market for firm equities issued by managers as part of their investment plan with the investment rate in turn sensitive to the q ratio, workers who save for life-cycle motives, and capitalist rentier households who save from a bequest motive. The model assumes full capacity utilization; saving and investment decisions are coordinated through changes in the valuation of the capital stock or q ratio. Changes in valuation can induce enough investment and capitalist consumption to fill the demand gap left by a reduction in the wage share. But unless there is a strong sensitivity of investment to the q ratio, the increased profitability will be dissipated in a profit-led stock market boom. The model helps resolve the neoliberal paradox of rising profitability with little growth. It also clarifies the relationship between classical and Keynesian growth models which can be seen as special cases arising from limiting values of the investment sensitivity to the q ratio.

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Thomas R. Michl

This paper corrects an error in and offers an alternative interpretation of the difference between Cambridge and Kaleckian growth models. Using a Cambridge model with a variable profit share and full utilization of capital, a fiscal transfer from capitalists to workers is shown to increase (not decrease as Palley wrote) the capitalist share of wealth and to increase the profit share enough to impoverish workers, creating a type of transfer paradox. A balanced budget spending program financed with a tax on capitalists also has this effect. These results dramatize the fact that the Cambridge model confronts the distributional conflicts that the Kaleckian models are able to overlook by virtue of their assumption that the output–capital ratio (the utilization rate) is a free variable.

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Thomas R. Michl

This paper discusses the problem of public debt in the long run. The working premise is that debt has negative effects on growth, mainly because it stimulates consumption spending that ultimately crowds out capital accumulation. Since this is a controversial viewpoint among Keynesian economists, the paper first provides an impressionistic survey of empirical evidence that supports the working premise before turning to a family of two-class growth models in the Kaldor–Pasinetti tradition that provide a theoretical environment conducive to gaining a deeper understanding of the burden of debt, both across overlapping generations of workers and across social classes. These models show how public debt can have regressive effects on the distribution of income and wealth as well as negative effects on growth. The policy implication is that fiscal consolidation needs to address these regressive effects, thus shifting the conversation away from the productivity-based narrative associated with neoclassical theory to a distributional narrative in the classical and Keynesian traditions.

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Duncan K. Foley and Thomas R. Michl

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Thomas R. Michl and Kayla M. Oliver

Hysteresis, path dependence, and multiple equilibria are characteristic features of post-Keynesian economics. This paper constructs an otherwise conventional three-equation model that includes a hysteresis-generating mechanism and an invariant output target. We use it to explore the implications for monetary policy of an output-targeting policy framework that seeks to reverse the damage caused by hysteresis. We restrict ourselves to negative aggregate demand shocks and positive inflation shocks that in most instances require a disinflationary response from the central bank. One important finding is that as long as inflation expectations are to some degree anchored, the central bank can achieve its output target after an aggregate demand shock by overshooting its inflation target temporarily and running a ‘high-pressure labor market.’ If expectations are unanchored, an aggregate demand shock will not have long-run hysteresis effects because the central bank is obliged to reflate aggressively, replacing on a cumulative basis all the demand that was lost through the shock. However, with unanchored expectations a pure inflation shock will create hysteresis effects since the central bank will need to disinflate and it does not have the option of running a high-pressure labor market. Anchoring gives the central bank this option, making inflation shocks manageable.