A bright future can be ours! Macroeconomic policy for non-eurozone Western countries

Abstract

Radical changes in macroeconomic policy could produce a brighter future. The neoclassical myth that a free-market economy inevitably moves to an equilibrium position determined solely by supply-side factors must be rejected and replaced by the insight that the position of an economy in the longer term is path dependent. Fiscal policy in recessions should be biased towards increasing physical and human capital, which will improve the productivity of an economy and raise living standards and hence taxable capacity, thus enabling future public debt to be reduced if this is desirable. Monetary policy should play a very minor role in aggregate demand policy, with interest rate settings largely used to help achieve long-term income distribution goals. All this is fundamental to Geoff Harcourt’s vision of macroeconomic policy, and this paper spells out how this vision can be implemented in 2012 in Western countries not hamstrung by eurozone rules and regulations.