Money and Power Lecture 9

1
Money and PowerLecture 9

• Can politicians make you rich?

2
Money and Power. OutlineLecture 9

• Possible roles for the state
• Keynesian view
• What can politicians do to help the system work?
• How do politicians implement such a strategy?
• Why dont politicians always do it?
• Who has adopted a Keynesian policy today?

3
Money and Power. Possible roles for the state
Lecture 9

• Neo-conservative view
• Neo-liberal view
• Keynesian view
• Socialist view
• Marxist view
• Green view

4
Money and Power. Keynesian view Lecture 9

• The system fails due to lack of aggregate demand

Financial economy
AGGREGATE DEMAND
Firm making goods
Firms investing
Firms
Finance - The City
Spending on consumer goods
Income, wages, dividends etc.
Household buying goods
Households
Households saving
Income not spent
Real economy
Law of Aggregate Demand
5
Money and Power. What can politicians do to help
the system work?Lecture 9

• Politicians can use the state to adjust aggregate
  demand

Government spending

• Now 3 sources of
• aggregate demand
• Consumption spending
• Investment spending
• Government spending

AGGREGATE DEMAND
Firm making goods
Firms investing
Firms
Finance - The City
Spending on consumer goods
Income, wages, dividends etc.
Household buying goods
Households
Income not spent
Households saving
1st rule of aggregate demand management
6
Money and Power. How much does the state
spendLecture 9

• UK 2004 (all types of public spending)
• Spending 488bn
• Tax 455bn
• GDP 1.1 trillion

• US 2004 (federal budget)
• Spending 2.139 trillion
• Tax 1.798 trillion
• GDP 11.466 trillion

Types of UK Government expenditure
7
Money and Power. How do politicians manage
aggregate demandLecture 9

• 2nd rule of demand management

Budget deficit difference between government
expenditure and taxation revenues
In 2004 UK deficit 488bn - 455bn 33bn As
percentage of GDP 3
In 2004 US deficit 2.139tr 1.798tr
0.341tr As percentage of GDP 3
IN UK, deficit is determined every year following
the Budget in March
8
Money and Power. How are deficits
financedLecture 9
Gordon must borrow 33bn to finance deficit
From whom?
Governments bank Bank of England
City private finance
Government issues bonds
Expands money supply
9
Money and Power. Why dont politicians always do
this?Lecture 9

• 1970s and 1980s unemployment and inflation
• Monetarist critique (Milton Friedman)
• Supply side critique

10
Money and Power. Keynesianism todayLecture 9

• UK not very Keynesian golden rule
• US is Keynesian especially Reagan and Bush
• Keynesianism in a globalised world
• How is US avoiding globalisation problem
• Private debt
• International borrowing (from China)
• Future
• Can US sustain position
• Can we have an international Keynesianism