Journées de l'OFCE 12 février 2009 Re-distribution of revenues and global imbalances Jean-Luc...

Journées de l'OFCE 12 février 2009

Re-distribution of revenues and global imbalances

Jean-Luc Gaffard

and Francesco Saraceno


Motivation and Conjecture We want to look not so much at the contingent sources

of today’s crisis (securitisation of loans, growth of derivatives markets, financial markets’ collapse, too easy monetary policy in the US), but rather to the deep roots of the crisis

Conjecture: These deep roots lie in a structural modification of the economy linked to a long term change in the distribution of revenues.

This drastic change created the conditions of global (real) imbalances only ‘hidden’ for a while by an increasing public and private indebtedness, and by the illusion of a new growth regime


Working Hypothesis• Since 1980 there has been a significant redistribution from

middle/low incomes to high incomes

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Bottom quintile Middle three quintiles Top quintile

France Germany Italy United Kingdom United States OECD France 1995-2005

Difference between yearly average growth of income and the growth rate of the economy 1985-2005 (source: OECD).


The reasons for this change of distribution (tax policy, globalization, high interest rates due to a tight monetary policy) are not our main concern

The change in distribution has been hidden and justified by two related arguments The extreme sophistication of financial products and the

restructuring of the economy that favored capital and eliminated frictions would propel the economy on a high innovation/high growth path (the “new economy”) that would benefit everybody (the trickle-down argument)

Maintaining the old consumption habits through indebtedness would not be a problem because sustainability would be guaranteed by higher future growth.


The change in distribution has engendered an aggregate demand reduction: strategies on the two sides of the Atlantic have been different:

In the EU no reaction: Soft growth over the medium/long run, increase in savings, etc

In the US the structural imbalance due to the changing distribution has been hidden by financial innovation, explosion of indebtedness, accommodating economic policies. This sustained consumption and aggregate demand.

The unsustainable US growth path has been pushed in the background by increasing and opposite unbalances in other parts of the world, notably Europe and East Asia (and lately also Middle Eastern countries): the savings of these areas financed debt and consumption in the US


What about the new economy

The economic and financial changes (that define the so-called new economy) were supposed to make the economy more diversified with the consequence of having a marked decline in aggregate volatility and an increased growth rate : business cycles would have disappeared and catastrophic events would be made impossible

But they also render the economy more vulnerable mainly because existing institutions (including the financial ones) do not support the formation of consistent beliefs


What about the new economy

Firms’ interactions and experiences may or may not converge over time to an equilibrium set of consistent beliefs and strategies

Redistribution of revenues would be an essential dimension of the co-ordination issues

Very high returns to financial investment do not correspond to a higher growth rate of the economy: they imply a drastic redistribution of revenues, which does not reflect differences in productive capabilities


Our Contribution Our research wants to focus on a related aspect, which is the

structural change in the composition of consumption that accompanied the shift in distribution

It is a question of wage/profit distribution, but also of low/high wage distribution

The consumption basket is not invariant with respect to income levels, thus some sectors have suffered from the shift in distribution

Everything else equal, the new distribution corresponds necessarily to a different relative weight of the consumption sectors in the economy.

The question is: What are the problems faced by the economy in converging to the new equilibrium? And what is the role of economic policy?


Hicks’ analytical framework

Dynamic analysis requires to put at the centre of the stage the temporal dimension of production processes

That is to consider that production takes time

There is an initial construction period with large inputs but not output, followed by a running-out or utilisation period with inputs and output



The proper of the neo-Austrian or Hicksian framework is to focus on a fully integrated process of production described as a scheme for converting a stream of labour inputs in a stream of final output

This makes it possible to take explicitly into account the phase of construction of productive capacity



At each moment, the productive capacity of the economy is represented by a population of production processes of different ages and belonging to different technologies.

An equilibrium path is sustained by a constant age distribution of production processes.

A qualitative change necessarily creates a distortion in this distribution, which propagates itself and generates an out-of-equilibrium path



A change in the distribution will be represented by an increased take-out, that, is by an increased consumption out of profits at the detriment of the wage fund

In fact by a shift from productive to unproductive spending


An increased take-out


With an accommodating monetary policy


Elements for an alternative model• Two sectors: advanced (a) and basic goods (b)• No capital, but two types of workers: low (l) and high (h)

skilled/educated• h and l have different utility functions, h having a

stronger preference for advanced goods everything else equal

• Labour demand depends on domestic and foreign demand for goods, and from technical coefficients

• Standard Equilibrium, but• We build into the model sticky reaction to shocks

– Technical irreversibilities (time to build)– Market (price) rigidities– Inertia in expectation formation


Elements for an alternative model

• Pressure on low wages derives from a change in composition of demand

• The decrease of low wages has a double effect– Decrease aggregate demand (Kaleckian mechanism)– Change of relative demand for the two sectors

• The change in relative demand implies a restructuring of the economy, in which investment conditions become crucial.

• Market adjustment may not be viable• Policy, broadly speaking, has a role.

– On one side it has to facilitate the transition (for example by loosening financial constraints)

– On the other it may prevent the necessary adjustments (by facilitating debt accumulation)

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