A Macro-Theoretic Exploration of Some Covid-19 Induced Constraints on Economic Policy

ABSTRACT

The Covid-19 pandemic has spawned a crisis whose dimensions encompass the domains of health and the economy. The latter is on account of the use of non-pharmaceutical interventions such as lockdowns in order to deal with a highly contagious disease. Though some vaccines have emerged, lockdowns of varying degrees are still required since geographical coverage of vaccines is uneven, the protection afforded by vaccines is only for a finite period of time and new variants may escape existing vaccines. This provides the context within which economic policy could intervene. Monetary policy is either unavailable or ineffective, especially when the neoliberal project is hegemonic. Therefore, the specific policy instrument that tends to be utilised is fiscal policy wherein it is postulated that the government tries to achieve a target degree of capacity utilisation. It is demonstrated within the framework of a heterodox macroeconomic model that considerations involving macroeconomic stability (and political economy more generally) may cause this target to be below what is warranted by public health requirements. The paper concludes with some suggestions for future work in this research direction.

KEYWORDS:

• Target degree of capacity utilisation
• share of profits
• stability
• fiscal policy
• constraints

JEL CODES:

• I15
• I18
• B51
• E12
• E62

Acknowledgements

A previous version of this paper was presented at the 6th International Conference on South Asian Economic Development, South Asian University, New Delhi, 25–27 February 2021. I am grateful to Dr Jyotirmoy Bhattacharya for his comments on an earlier version of this paper. Thanks are due to two anonymous referees for their critical intervention.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1 A detailed discussion of the contours of the neoliberal project is presented in Neilson (2020). Marshall and Correa (2020) discuss the contours of the neoliberal project in the current conjuncture with special reference to Latin America. Azad and Saratchand (2020) provides a discussion of the challenges before government policy seeks to tackle both the health and economic domains of the Covid-19 pandemic, in the context of India, where the government is itself a constituent of the neoliberal project.

2 Sawyer (2020) provides a detailed discussion of Kalecki’s writings on fiscal policy and the constraints that impinge on fiscal policy when the neoliberal project is hegemonic.

3 The basic structure of the macrodynamic model set out in the paper, develops on the framework set out in Kalecki (1954 [2013]).

4 Apart from the capital stock, all other assets of capitalists are liabilities of someone else (often other capitalists). Therefore the net wealth of a capitalist economy equals the capital stock (Nikiforos and Zezza 2017). Thus for the capitalist class as a whole, consumption out of wealth will be proportional to the capital stock. Consumption of capitalists out of wealth would stabilise their total consumption even if their induced consumption out of profits falls temporarily.

5 This type of adjustment of actual towards desired investment is employed in some recent papers (such as Saratchand and Datta 2021; Datta and Saratchand 2021a).

6 It needs to be mentioned here that lockdown is used here as a portmanteau term that is meant to encompass various types of restrictions on economic activity.

7 Palley (2019) discusses the issue of a zero rate of interest and why even a negative rate of interest may not overcome Keynesian unemployment.

8 Besides this, Barbosa-Filho and Izurieta (2020) also point out that the role of the public sector has been de-emphasised in many capitalist countries, which has circumscribed the policy response, not only with respect to the health dimension of the Covid-19 pandemic but also towards its economic dimension, especially over time.

9 Though we have assumed that the capitalist economy is closed, the activities of international rentiers also impose constraints on the level of economic activity in those capitalist economies which are within the ambit of international finance, more so during the Covid-19 pandemic (Bortz, Michelena, and Toledo 2020). Thus, international rentiers discourage high fiscal deficits because (Patnalik 2011): firstly, a higher fiscal deficit may cause the current account deficit to rise, which may result in an exchange rate depreciation, which in turn may reduce the rate of return for international rentiers in the domestic economy; secondly, international rentiers tend to see greater demand management in the capitalist economy as a measure that de-legitimises them by making it transparent that they are “functionless” investors (Keynes 1936 [2013]).

10 Since the steady state share of profits must be less than unity by definition it will be the case that $u_0$ will be bounded from below where this lower bound is $\left(m-\mathrm{bn}-1\right)/\left(\mathrm{jn}\right)$. A floor to the share of wages in income is arguably connected to issues of legitimacy (Laibman 1997).

11 If the RHS of equation 16 is equated to zero then there will emerge two roots of $u_0$ since this equation will be quadratic in $u_0$. The real parts of both roots will be positive according to Descartes Theorem of Signs since the sign configuration of the quadratic equation is $\left[-+-\right]$ (Kurosh 1984). The effective upper bound on $u_0$ will be the lower of these two positive roots which is set out in the RHS of equation 17. We are assuming that both roots are real. The condition that ensures this is discussed in the main text in equation 18.

12 If a higher degree of capacity utilisation is preferable to a lower level of capacity utilisation, is local stability necessarily desirable? There are at least two reasons why local stability is desirable: one, divergence in case of local instability is possible in both directions and the government will not countenance the economy entering into a depression due to reasons linked to political economy (Laibman 1997); second, if the level of activity and prices in a capitalist economy are highly volatile then calculations of expected profitability on both productive investment (and financial assets) may become involved, resulting in reduced productive investment (Schumpeter 1939; Patnaik 1997).