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Distributional policy reference sheet

by JakeS Sat Apr 16th, 2011 at 06:52:54 PM EST

Somewhere deep in the comment thread of Mig's latest news roundup on the EPP's slow-motion murder of Southern Europe, I made a scorecard for the distributional consequences of various macroeconomic preferences. Since there proved to be considerable interest for seeing it in diary format, I've reproduced it below the fold.

Except where explicitly noted, one may expect that reversing policies will cause the advantages and disadvantages to be reversed. However, prolonged applications of policies systematically favouring some groups at the expense of others will typically also alter the underlying institutional structure. When you bend society out of shape, it doesn't quite go back to the original shape after you release it.


  • Inflation is a tax on net creditors and those wage-earners and benefits claimants that are in a weaker political position than they were when their wages and benefits were originally instituted (due to the high downward rigidity of nominal wages and benefits). It is a subsidy to net debtors and employers who are in a stronger bargaining position than they used to be. That makes it a net loss for the financial sector, lazy money and weakly organised labour, and a net gain for the industrial sector and homeowners.

  • Devaluation or depreciation is a tax on imports and a subsidy for exports. Overall that translates to a net benefit for people associated with primary or manufacturing industries and a net loss for people associated with the financial or service sectors.

  • Contractionary interest rate policy is a tax on the future and a subsidy to the present. Homeowners and the industrial sector lose, because they are capital intensive; lazy money and the financial sector win because they are capital-extensive.

  • Contractionary fiscal policies are a tax on labour and the industrial sector, both of which are sensitive to the state of demand.

Further, economic activity is impaired by double-digit inflation rates, appreciation of the currency, contractionary interest rate policy and contractionary fiscal policy, and boosted by depreciation of the currency and expansionary interest rate and fiscal policy (note that there is no documented gain from further lowering inflation once you've eliminated the disruption caused by impairment of the ability of the currency to function as money).

As you will see, there is no perfect overlap between any of these groups and "the wealthy" or "the poor." But it is often possible to construct combinations that will favour the groups you want to favour. A combination of expansionary fiscal policy and moderate inflation favours labour and the industrial sector while it penalises the financial sector, lazy money and benefit claimants that lack adequate political power to defend the real value of their claims. Conversely, a combination of a strong currency, low inflation and contractionary interest rates favours lazy money and the financial sector, at the expense of homeowners, the industrial sector and overall economic performance (incidentally, I think that is as good an explanation as any for why this policy combination is so popular with The Serious People).

- Jake

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