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Don’t miss this post by Scott Fullwiler at New Economic Perspectives. Fullwiler is reacting to Clive Crook’s Bloomberg column advocating “helicopter drops” (having the Fed simply send checks to households). Helicopter drops or “helicopter money” proposals are widely cast as monetary policy operations (Crook describes helicopter money as a monetary-fiscal “hybrid”) and defended as either preferable to fiscal stimulus or as the only remaining option in light of political obstacles to increasing government spending (to wit, the GOP Congress/Dem White House combination). For Fullwiler, this way of framing helicopter money is problematic — and relies on a skewed understanding of our policy options: I find it completely counterproductive to have a theory of macroeconomics in which we define fiscal policy and monetary policy based on who is acting. If the US Congress and Treasury choose to send $1 trillion to households without raising taxes, it’s called fiscal policy. But if the Fed does the exact same thing, it’s apparently called monetary policy. I think this only confuses our understanding of the macroeconomic policy mix and makes it more difficult to have an economics profession that can give good policy advice. […] It seems much clearer to simply say that (a) the act of creating a deficit—raising the net financial wealth of the non-government sector—is fiscal policy, and (b) the act of announcing and then supporting an interest rate target with… Read More

(click image above to enlarge) Can a bull market founded largely on credit survive? A forthcoming Levy Institute working paper I wrote with Tai Young-Taft of Bard College at Simon’s Rock (link for those interested) represents an attempt to deal with the role of financial instability—along with other sources of economic fluctuations—in the dynamics of the economy. Here, I’ll focus mostly on the role of margin loans that are used by many investors and traders to leverage positions in stock. The model developed in the paper includes a role for several policy tools that might be used in attempts to stabilize the economy: a fiscal-policy rule with public production and unemployment rate targets, along with public-sector R&D, financial supervision and regulation, and a target for the inflation-adjusted interest rate on government debt. Now, for the current situation. The figure above highlights one potential threat to stability designed to arise spontaneously in runs of the model: surges in the use of margin debt to finance investments in stock. The chart shows that the amount of such debt outstanding in the US relative to GDP rose sharply during the tech bubble and the period leading up to the financial crisis and recession of 2007–09, achieving a new peak each time. Subsequent financial market collapses led to cyclical declines in the use of… Read More

The pseudo-debate about whether Keynesians and other fellow travellers ought to be embarrassed when governments that engage in fiscal austerity nevertheless experience positive economic growth rates has become a distraction. For countries like the US and the UK, it is possible under current circumstances for governments to implement budget cuts and still see their economies grow. But the truth of that statement is not fatal to the Keynesian-inspired critique of austerity policies; it is not by any means the end of the story. The more meaningful question is this: What would have to happen in these economies for significant growth to occur in the midst of budget tightening? Finding an answer to that last question is one of the strengths of the approach to thinking about the economy pioneered by Wynne Godley, and fleshed out further in the Levy Institute’s strategic analysis series. This approach also provides a clear understanding of how deeply irresponsible it is to cut government spending under present economic conditions: because the danger, given the state of the US and UK economies, is not just that budget cuts might slow down the economy, but that they might not. Let’s look at the United States in particular. In their just-released report, Dimitri Papadimitriou, Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza point out that, with the exception of a short cycle in the ’70s, “there has been no other recovery in the modern history of the US economy in which… Read More

Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis Mariana Mazzucato and L. Randall Wray “Over [the postwar] period, the financial system grew rapidly relative to the nonfinancial sector … To a large degree, this was because finance, instead of financing the capital development of the economy, was financing itself. At the same time, the capital development of the economy suffered perceptibly. If we apply a broad definition—to include technological advances, rising labor productivity, public and private infrastructure, innovations, and the advance of human knowledge—the rate of growth of capacity has slowed. … The key goal of this paper is to reconsider and discuss the role of finance … that is, how to restructure it to serve the ‘real’ economy, rather than itself, in order to produce both innovation-led growth and full employment. This requires bringing together the thinking of Keynes, Minsky, and Schumpeter, as well as understanding the role of the public sector as doing much more than fixing static market failures.” Direct Estimates of Food and Eating Production Function Parameters for 2004–12 Using an ATUS/CEX Synthetic Dataset Tamar Khitarishvili, Fernando Rios-Avila, and Kijong Kim “This paper evaluates the presence of heterogeneity, by household type, in the elasticity of substitution between food expenditures and time and in the goods intensity parameter in the household food and eating production functions. We use a synthetic… Read More

From yesterday’s session of the 24th Annual Minsky Conference in Washington, D.C.: [iframe width=”427″ height=”255″ src=”https://www.youtube.com/embed/HSpfGodTrtk?list=PLGGYihhM4K23u5h-2wBFx5bd3hX_8NjlX;start=41″ frameborder=”0″ allowfullscreen></iframe]

Noah Smith has a post on the failure of macro theory to predict the crisis. He concedes that DSGE models did very badly on this score, but, he continues, “There are no other models out there that did forecast the crisis” and there is no better alternative. The word “better” is important here because some “angry heterodox” people have pointed Smith to at least one alternative—Wynne Godley’s Seven Unsustainable Processes—that had in fact predicted the crisis. However, Smith rejects this as “basically just chartblogging” [emphasis added]. He writes that Yeah, sure, if you put out hand-wavey reports saying “capitalism sux, there’s gonna be a crash!” every year or two, you’re eventually going to be able to say “see, I told you so”. But that’s no replacement for real modeling.[sic] First of all, there is nothing wrong with chartblogging. In fact, Noah Smith is a chartblogger—an excellent one. Having said that, is Godley’s argument just hand-wavey-capitalism-sux-chartblogging or is there something more to it (perhaps even some real modeling)? To begin with, Godley’s argument in the Seven Unsustainable Processes (which is a policy paper) is based on his theoretical work. Godley was one of the major proponents of what is today called Stock-Flow Consistent methodology. Some of his books and his writings (with real models and everything) are here, here, and here. (The… Read More

How has the Greek government used international loans? Using the data available from the flow of funds published by the Bank of Greece and the sectoral accounts published by the Hellenic Statistical Institute (ElStat), we have the following: Table 1. Greece. Use of international loans (billion euro) 2010 2011 2012 2013 2014* Sum Sources of funds 1. Long-term loans from abroad 24.3 30.0 110.0 30.8 5.3 200.5 Uses of funds 2. Purchases of securities held abroad 19.9 24.4 44.3 8.0 10.7 107.4 3. Purchases of financial sector equities 0.2 0.9 0.0 19.0 0.0 20.2 4. Capital transfers 3.6 3.7 8.6 23.3 1.4 40.7 5. Interest payments 13.2 15.1 9.7 7.3 5.3 50.6 6. Residual = 1 – (2+3+4+5) -12.7 -14.2 47.3 -26.8 -12.1 -18.4 NB: * First three quarters for 2014 We start by estimating the funds received, using the table on “Financial liabilities broken down by holding sector,” and taking the line “Long-term loans received from abroad.” The largest part of these funds has been used to reduce the existing stock of debt held abroad: line 2 in Table 1 is obtained by the change in government long-term debt securities held abroad, which has been negative from 2010 onwards. A negative change in liabilities amounts to purchasing back the existing stock of debt(1). Another large part has been transferred… Read More

“As Hyman Minsky argued, there are many varieties of capitalism, some more stable than others—and, we can add, some more equitable than others.” — Pavlina Tcherneva Pavlina Tcherneva has revisited her (in)famous inequality chart, which showed an ever-rising majority of the income growth during post-1970s economic expansions being captured by the wealthy (specifically the top 10 percent of income earners). In a recently released policy note, “When a Rising Tide Sinks Most Boats: Trends in US Income Inequality,” she has updated the numbers through 2013 and broken down the top decile further (top 1 percent and 0.01 percent), compared the results of including or excluding capital gains, and looked at what happens to the distribution of income growth when we expand our scope to the entire business cycle (Tcherneva looks at NBER-dated GDP cycles as well as “income cycles” based on real income data from Piketty and Saez). Here are some of the results: The capital gains discussion yields a somewhat counterintuitive result: when you exclude capital gains, the distribution of income growth between the top 1 percent and bottom 99 percent appears more unequal. Tcherneva explains that this is because even though the bottom 99 percent have barely any capital gains income to speak of (2 percent of their income), their shrinking wage incomes meant that, from 2009-13, these meager capital gains were making the difference between declining (excl. cap gains) and merely stagnating (incl…. Read More

Below is the wide-ranging interview L. Randall Wray gave to EKO – Público TV in Spain as part of the launch of the Spanish edition of his Modern Money Primer (questions in Spanish): [iframe width=”512″ height=”306″ src=”https://www.youtube.com/embed/949JLYr2L90″ frameborder=”0″ allowfullscreen></iframe]

While in Spain for the launch of my Modern Money Primer in Spanish, I gave a long interview for Public Television. Parts of that interview are interspersed in this segment on public banking. My interview is in English (with Spanish subtitles), while the rest is in Spanish. Other portions of my interview will be broadcast later. The Boom Bust Boom movie on Minsky will be released next month. Watch for it. I do not know how widely it will be distributed, but it is well worth seeing. Here’s a nice piece from The Guardian: To Move Beyond Boom and Bust, We Need a New Theory of Capitalism By Paul Mason, The Guardian UK 23 March 15 his is the year that economics might, if we are lucky, turn a corner. There’s a deluge of calls for change in the way it is taught in universities. There’s a global conference at the Organisation for Economic Co-operation and Development in Paris, where the giants of radical economics – including Greek finance minister Yanis Varoufakis – will get their biggest ever mainstream platform. And there’s a film where a star of Monty Python talks to a puppet of Hyman Minsky. Terry Jones’s documentary film Boom Bust Boom hits the cinemas this month. Using puppetry and talking heads (including mine), Jones is trying to popularise the… Read More

Dimitri Papadimitriou takes on the assumption that European leaders demanding the continuation of large fiscal surpluses from Greece can claim the moral high ground. The economics behind these demands are unrealistic, and the insistence on full debt repayment is both immoral and imprudent—not to mention deaf to the lessons of history: “Greece’s government and people have indulged in excesses and corruption; now it is time to pay the price.” The argument for full repayment of Greece’s debt is well known, easily understood, and widely accepted, particularly in Germany. Sacrifice, austerity and repayment are righteous, fair, and just. That view is coloring this and next week’s coming meetings between Greece and its international lenders, and with European leaders. A revision of Greece’s debt terms has not been on the agenda. European leadership insists that repayment is possible, and that Greece’s economy will take off, if only Greeks are willing to bite the bullet and economize. The quasi-religious ground under the wishful thinking on economic growth is that with deep financial pain comes high moral ground. Exactly the opposite case makes far more sense … […] In the aftermath of [World War II], Germany was the beneficiary of the largest debt restructuring deal in history. Today, German leaders have positioned themselves as the moral gatekeepers of justice in Europe, with a firm stance against any debt… Read More

The Levy Institute and SEIU 775 are cosponsoring a labor workshop at Bard College on April 20th. The workshop, which is free and open to the public, will focus on three major themes, each corresponding to a panel: The State of the American Labor Movement, The Future of Work, and New Models of Organizing and Worker Power. The flyer for the event, including the schedule and list of participants, is below (click to enlarge; download pdf here):