Demand factors count and ignoring them will preclude growth
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Following parliament’s standing committee on finance’s near rejection of the supplementary budget, finance minister Tito Mboweni wrote an oped extolling structural reforms as a cure for a moribund economy.
His argument centred on three inter-meshed but analytically distinct issues. He reasoned that, with the current high debt levels, SA cannot spend its way to growth as fiscal multipliers are low and that potential growth has been slowing from 4% (2009) to 1% (2019).
He went on to ascribe the above negative outcomes to structural constraints and unsustainably high government spending that led to high debt, which constrains growth. Structural reforms and fiscal consolidation, Mboweni warned, are the best way to achieve growth.
Disquietingly, economists have squabbled over the sizes of multipliers, a matter difficult to settle due to modelling differences, but have not faulted Mboweni’s core reasoning.
However, not only is Mboweni and the Treasury’s reasoning deeply erroneous, it is frozen in a corrupted conceptual structure that has successfully undermined economic enfranchisement of the majority. It also undermines growth, debt sustainability, employment creation and structural transformation. It is the source of the mess SA sits in.
Here is how their structural reforms faux pas is constructed: SA’s declining potential output growth is ascribed to falling total factor productivity (TFP). Potential output is the maximum level of output that can be achieved without triggering inflationary pressure, and TFP, the major constituent component of potential growth, is the efficiency with which factor inputs (factors of production) are utilised.
To raise potential growth — what the Treasury and the Reserve Bank aim to achieve — declining productivity must be arrested then raised. They see potential output, a critical construct in the design and management of macro-economic policies, as determined exclusively by supply forces (factor inputs and productivity), therefore, only supply measures (structural reforms) must be employed to raise potential growth.
According to their logic, demand or demand factors, no matter how strong, can only cause temporary deviations in potential output, so there is no need to use demand interventions. This seemingly well laid out mainstream argument is fatally flawed and lacks empirical confirmation.
As high merchants of myths, deaf and blind to macro-economic science, Mboweni and his ilk, whose ideological default mental setting is on structural reforms, deliberately ignore empirical evidence that unambiguously implicates the effects of demand and demand factors not just on production, but potential growth and productivity.
That financial crises ...
His argument centred on three inter-meshed but analytically distinct issues. He reasoned that, with the current high debt levels, SA cannot spend its way to growth as fiscal multipliers are low and that potential growth has been slowing from 4% (2009) to 1% (2019).
He went on to ascribe the above negative outcomes to structural constraints and unsustainably high government spending that led to high debt, which constrains growth. Structural reforms and fiscal consolidation, Mboweni warned, are the best way to achieve growth.
Disquietingly, economists have squabbled over the sizes of multipliers, a matter difficult to settle due to modelling differences, but have not faulted Mboweni’s core reasoning.
However, not only is Mboweni and the Treasury’s reasoning deeply erroneous, it is frozen in a corrupted conceptual structure that has successfully undermined economic enfranchisement of the majority. It also undermines growth, debt sustainability, employment creation and structural transformation. It is the source of the mess SA sits in.
Here is how their structural reforms faux pas is constructed: SA’s declining potential output growth is ascribed to falling total factor productivity (TFP). Potential output is the maximum level of output that can be achieved without triggering inflationary pressure, and TFP, the major constituent component of potential growth, is the efficiency with which factor inputs (factors of production) are utilised.
To raise potential growth — what the Treasury and the Reserve Bank aim to achieve — declining productivity must be arrested then raised. They see potential output, a critical construct in the design and management of macro-economic policies, as determined exclusively by supply forces (factor inputs and productivity), therefore, only supply measures (structural reforms) must be employed to raise potential growth.
According to their logic, demand or demand factors, no matter how strong, can only cause temporary deviations in potential output, so there is no need to use demand interventions. This seemingly well laid out mainstream argument is fatally flawed and lacks empirical confirmation.
As high merchants of myths, deaf and blind to macro-economic science, Mboweni and his ilk, whose ideological default mental setting is on structural reforms, deliberately ignore empirical evidence that unambiguously implicates the effects of demand and demand factors not just on production, but potential growth and productivity.
That financial crises ...