BEE Partner, South Africa Economy Watch

ADDITIONAL ASPECTS OF PSE

One of the chief limitations of the PSE approach is that PSE subsidies may bemisdirected when used by state or local governments to pay employees already hired, or workers who would have been hired in the absence of the program. This kind of ‘fiscal substitution’ appears inherent in a PSE approach because it functions as a disguised form of revenue sharing.

A study prepared under the auspices of the National Planning Association estimated a fiscal substitution effect of 0.46 after one year. Subsequent studies produced conflicting results, but verified that the fiscal-substitution effect can be substantial (Bergman and Bennett, 1977). The greater the substitution of federal funds for state and local funds, the less effectively PSE will operate as an employment program. Read the rest of this entry »

Proponents of functional finance are committed to the principle that government’s power to tax, spend, borrow and manage its debt can and should be used as an instrument for achieving the goals sanctioned by a democratic voting process for the macroeconomy. The premise of functional finance is quite explicitly that a dynamic capitalistic economy is inherently unstable, so that unemployment and price instabilities periodically impose economic pain on the economy as a whole, which impacts most severely on labor markets. Wages and salaries comprise two-thirds of earned income; both J.M. Keynes, and subsequently Laurence Klein and Richard Kosabud, have shown the ratio of the wage relative to the profit share to be historically constant in national income (Keynes, 1939; Klein and Kosabud, 1961). Read the rest of this entry »