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On the Dynamics of Growth and Debt.

This is a study of the interrelationship between growth, public debt and the distribution of income/wealth. More specifically, it is a study of the effects of government deficit spending on growth, distribution and indebtedness. The book also studies the stabilizing conditions of such government fiscal policies. In examining these conditions, the author looks into various "fiscal policy regimes" in terms of specific targets. These include the Blinder-Solow regime, the Tobin-Buiter regime, the Domar regime, the Barro regime, and the Christ regime. Which regime performs best at any particular time depends on the state of the economy.

While the study examines the growth, distribution and stability impacts of government spending under each of these regimes, it rejects the respective analytical models (i.e., the public debt models employed by Blinder-Solow and others) on the grounds that these models are based on the IS/LM framework, which is a short-term framework, and therefore "does not offer a very suitable framework for this analysis".

After thus rejecting the conventional short-term models of equilibrium as unsuitable for his analysis, the author then chooses a long-term disequilibrium model of growth inspired largely by the post-Keynesian theories of growth--those of Pasinetti, Kelecki, Kaldor, Malinvud, Kuipers, and others. But while his major focus is the long-run, the author also analyses short-and medium-term growth models. In fact, he sets up disequilibrium growth models for all three time spans: short, medium-and long-term. Each of the three time periods (and the corresponding models) are characterized by specific properties. While the short period is characterized by income-expenditure disequilibrium, the medium period is characterized by demand-capacity disequilibrium (the income-expenditure equilibrium is taken for granted in the medium period). In the long-term, the analysis concentrates on technical change, on labor market disequilibrium and wages, and on the accumulation of debt and wealth. The central question here (i.e., in the long-term) is "whether the system tends to a 'golden age' with a constant rate of unemployment and a constant distribution of income and wealth," as the author puts it.

The book can thus be characterized as a synthesis of various main stream growth theories and models. As such, its theoretical contribution to the body of the existing macroeconomics is minimal. But while the book's theoretical revelations are few, its innovations in the realm of macro modeling are not. In fact, the author must be commended for his ability to have successfully employed the two-dimensional systems of quadratic functions in the construction of a number of elaborate models for his analysis of the dynamics of the post-Keynesian disequilibrium models of growth and distribution.

With the exception of brief introductions and conclusions for each chapter/section, the major bulk of the book consists of the description and analysis of abstract theoretical models and simulations. Very little attempt is made at establishing some necessary connections between the major issues discussed in the book--government spending, growth, distribution and public debt--and the corresponding categories in the real world. And while essential conditions for long-term stable growth with government spending are clearly identified in terms of interest rate and growth rate (that the interest rate must be smaller than the growth rate), discussion of the distribution effects of public debt and growth remains far from satisfactory. For example, in his discussion of debt and distribution, the author completely ignores the role of financial institutions. Instead, he treats the working class as the "creditor sector" and the "corporate class" (sic) and the government as the "debtor sector".

To argue that the working class is the rentier class is obviously a most bizarre argument. Statistics show that in 1989, for example, less than 10% of the federal government debt of $2.8 trillion was owned by private individuals--the majority of them non-workers. The rest was owned by commercial banks, insurance companies, social security trust, corporations, foreign investors and the Federal Reserve Bank (Economic Report to the President, Washington, D.C., Government Printing Office).

On the basis of the unrealistic assumption that the workers are the interest earning class, the author then argues that a rise in interest rate or public debt or both can have a destabilizing impact on income-expenditure equilibrium "due to the redistribution of income from the debtor sector (government and the corporate sector) to the creditor sector (workers)". That is, as the workers benefit from higher public debt and higher interest rates, they tend to save less and spend more, thereby disturbing the income-expenditure equilibrium!

While this view of distribution is gravely flawed, it is by no means specific or limited to this book. It is a weakness of all two-sector growth and/or distribution models that disregard the financial/rentier sector of the economy/society and focus solely on the industrial entrepreneurs and workers in their theory of distribution. Despite this weakness, the book is a welcome addition to the post-Keynesian economic literature on growth, distribution and public debt.
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Author:Hosseinzadeh, Esmail
Publication:Southern Economic Journal
Article Type:Book Review
Date:Oct 1, 1993
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