Is the dangerous idea making a comeback?
Capitalism is both a dynamic and an unstable economic system. This is mainly due to its monetary and financial characteristics. As the great John Maynard Keynes highlighted already in the 1930s, business investment decisions are guided not only by logical profitability calculations but also by instinctive expectations about the future and fundamental uncertainty. Also, global economic fluctuations and the function of complex and unstable financial markets repeatedly give rise to debt crises that threaten to spread to the real economy.
Following the Keynesian approach, the Finnish Centre for New Economic Analysis emphasises that achieving full employment and macroeconomic stability requires active demand management and strong stabilising institutions. Without adequate fiscal and monetary policy, the economy may be left stuck in a long-lasting phase of underemployment and weak growth which is unacceptable both from the viewpoint of the individual and society more generally.
Fiscal policy is a key tool for stabilising the economy. As unemployment increases, the public sector can increase public investment and spending or reduce taxes. Moreover, institutions like unemployment benefits automatically stabilise economic fluctuations. It is also necessary to use public job creation schemes since economic growth does not necessarily lead to radical reduction of long-term unemployment.
The reform of the fiscal policy framework in the EU and in Finland is one of the central issues for UTAK. We collaborate closely on these themes with Dezernet Zukunft and the European Macro Policy Network. Fiscal rules must be designed in a way that does not prevent necessary counter-cyclical economic policies or public investment.
UTAK holds the view that central banks’ monetary policy should not be overly sacrificed to target low inflation. The central banks should also consider production potential, employment and the stability of financial markets when setting interest rates. At the moment, the mandate of the European Central Bank is solely focused on maintaining price stability. UTAK considers that price stability should be pursued by means that do not increase unemployment, the risk of a downturn or social inequality.