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From Jörg Bibow’s recent letter in the Financial Times, reacting to an article by Wolfgang Münchau on deflation and ECB policy: What is really new today is that wages are becoming unanchored and hence cease to provide the safety net that asymmetric central bankers habitually rely on. This is the consequence of the collective effort to restore competitiveness practised across the eurozone. Deflationary structural reforms of labour markets can only amplify this futile and hazardous process. But with the ECB applauding these efforts as the supposed panacea to the eurozone’s ills, what kind of miracle weapon can we expect the bank to deploy to halt the resulting plight? Read the rest here.

Memo to Obama: Don’t tie progressive spending policy to progressive tax policy. Each can stand on its own. Reported today in the Washington Post: Obama proposes $600 billion in new spending to boost economy President Obama on Tuesday unveiled an ambitious budget that promised more than $600 billion in fresh spending to boost economic growth over the next decade while also pledging to solve the nation’s borrowing problem by raising taxes on the wealthy, passing an overhaul of immigration laws and cutting health costs without compromising the quality of care. Obama seeks to raise more than $1 trillion – largely by limiting tax breaks that benefit the wealthy – to spend on building roads and bridges, early childhood education and tax credits for the poor. Here’s the conceit: Uncle Sam is broke. He’s got a borrowing problem. He’s gone hat-in-hand to those who’s got, trying to borrow a few dimes off them. But they are ready to foreclose on his Whitehouse. Obama knows his economy is tanking. Five and a half years after Wall Street’s crisis, we still have tens of millions of workers without jobs. Even the best-case scenarios don’t see those jobs coming back for years. Obama will leave office with a legacy of economic failure. Belt-tightening austerity isn’t working. He wants to spend more, but he doesn’t… Read More

After taking a short breather in late January-early February, the markets now seem to be back in “happy mode.” Whether the news on the economic recovery is good or bad doesn’t really matter. The current convention is that growth acceleration is under way. That emerging markets had become key drivers of global growth was yesterday’s story, today they don’t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon – as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what. Curiously, not even the long-awaited ruling by Germany’s constitutional court on the ECB’s “outright monetary transactions” (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB’s supposedly all-powerful weapon meant to bolster the earlier “whatever it takes” promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. “So what?”, Mr. Market shrugged his shoulders…. Read More

I recently did an interview for the magazine “Synchrona Themata” (“Contemporary Issues”). The interview, which will appear in Greek, was conducted by Christos Pierros, doctoral student at the University of Athens Doctoral Program in Economics (UADPhilEcon). What follows is the English transcript: What do you think went wrong in 2008? Why was standard macro theory unable to predict such an event? This was a collapse of what Hyman Minsky called “Money Manager Capitalism.” In many ways it was similar to the 1929 collapse of “Finance Capitalism” that led to the Great Depression. MMC and FC share several common characteristics. First, the dominant approach of economists and policy makers in the 1920s and in the 2000s was one of “laissez faire”—that is, a worship of free markets. Importantly, that meant that finance was “freed” from regulation and supervision. Second, in both cases we lived in an era of globalization—with both goods and finance crossing borders fairly freely. That ensured that when crisis hit, it would spread around the world. Third, finance dominated over industry. Our economy in both cases was “financialized”—with finance sucking 40 percent of all corporate profits out of the economy. To say that “finance ran amuck” is an understatement. To say that our economies were completely taken over by “blood sucking vampire squids of Wall Street” is only… Read More

(The following is an extended version of a piece that originally appeared in Greek in Kathimerini.) The responses to unemployment by the last three governments in Greece have been characterized by sloppy proposals and an insignificant amount of funds in relation to the size of the problem. Regardless of whether there were political considerations behind it (or not), the recent announcement of the Prime Minister highlights, unfortunately, a relentless continuation of a lack of understanding of reality. The Prime Minister recently (on January 29) told us that unemployment is a “sneaky enemy” and proceeded to announce measures to tackle the problem. He also indicated that “we do not promise things we cannot do, and we say no to populism and fine words.” The goal of the proposed measures, we heard, is to create 440,000 “work opportunities,” of which 240,000 will target the unemployed 15-24 years of age with no prior work experience. The announced measures totaling 1.4 billion euros will be financed by funds from the National Strategic Reference Framework (NSRF), social funds from the EU, and are classified into three pillars. Specifically, the first pillar sets a target to recruit 114,000 unemployed for the private sector; an initiative that essentially subsidizes wages and social security contributions for businesses that hire unemployed who are up to 29 years old and… Read More

From C. J. Polychroniou’s latest policy note: [I]n 2001, a three-year, multi-country study by the Structural Adjustment Participatory Review International Network (SAPRIN), prepared in cooperation with the World Bank, national governments, and civil society organizations, offered a damning indictment of the policies of structural adjustment reform pursued by the IMF and the World Bank in third world countries. Here is a partial summary of the organization’s findings […]: “The intransigence of international policymakers as they continue their prescription of structural adjustment policies is expanding poverty, inequality and insecurity around the world. These polarizing measures are in turn increasing tensions among different social strata, fueling extremist movements and delegitimizing democratic political systems. Their effects, particularly on the poor, are so profound and pervasive that no amount of targeted social investments can begin to address the social crises that they have engendered.” (SAPRIN 2001, 24) […] The structural adjustment programs in Greece, combined with the policies of austerity, are producing results that fit the patterns outlined in the SAPRIN study like a glove. No doubt, this is part of the reason why the IMF was invited to participate in Europe’s rescue schemes: the Fund’s technical expertise in advancing the neoliberal agenda, which has been fully embraced by the EU at least since the Maastricht Treaty, carries more than three decades of experience.

(The following is the translation of an interview that appeared in Sunday’s Eleftherotypia. C. J. Polychroniou talks to Jörg Bibow about the latter’s proposal for a Euro Treasury and how it represents a viable solution to the eurozone crisis — a crisis that is very much ongoing, Bibow explains.)   CJP: A number of economists, including yourself, maintain that the eurozone crisis remains unresolved, yet the financial markets are calm. Is this a case of seeing the glass half empty rather than half full? JB: Sure, if you are a believer in the efficient market theory you might conclude that things are just fine. Well, I don’t. Does anyone remember that the markets were also in a state of bliss in the years leading up to the crises in the US and Europe? As serious economists such as Keynes and Minsky well understood, financial markets are subject to conventional behavior and prone to instability. The current convention appears to be that Mr. Draghi’s famous “whatever it takes” promise is insurance enough that really bad stuff is not going to happen. Fine, but how powerful is Mr. Draghi, really? At some point the markets might wake up and wonder what it would actually take to fix the situation and how Mr. Draghi might possibly deliver on that. Complacency can turn into… Read More

Unions and Economic Performance in Developing Countries: Case Studies from Latin America Fernando Rios-Avila The Rational Expectations Hypothesis: An Assessment from Popper’s Philosophy Iván H. Ayala and Alfonso Palacio-Vera Integrating Time in Public Policy: Empirical Description of Gender-specific Outcomes and Budgeting  Lekha S. Chakraborty Financial Crisis Resolution and Federal Reserve Governance: Economic Thought and Political Realities Bernard Shull Options for China in a Dollar Standard World: A Sovereign Currency Approach L. Randall Wray and Xinhua Liu Feasible Estimation of Linear Models with N-fixed Effects Fernando Rios-Avila A Stock-flow Approach to a General Theory of Pricing  Philip Pilkington

One thing Jan Kregel’s new policy note makes clear is that congressional debates about raising the debt ceiling were a great deal more enlightening in the 1940s and ’50s. Here is Rep. Wright Patman (D-TX) in 1943 defending his proposal to fund what were expected to be huge wartime expenditures by bypassing the private financial system and placing government debt directly with the Federal Reserve Banks at zero interest rates: the Government of the United States, under the Constitution, has the power, and it is the duty of the Government, to create all money. The Treasury Department issues both money and bonds. Under the present system it sells the bonds to a bank that creates the money, and then if the bank needs the actual money, the actual printed greenbacks to pay the depositors, the Treasury will furnish that money to the banks to pay the depositors. In that way, the Government farms out the use of its own credit absolutely free. To Patman, “farming” out the government’s credit in this way was just a direct — and unnecessary — subsidy to private banks: “I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of creating money, paying private bankers for the use of its own money. These private bankers do not hire their own… Read More

23rd Annual Hyman P. Minsky Conference Stabilizing Financial Systems for Growth and Full Employment The National Press Club Washington, D.C. April 9–10, 2014 Organized by the Levy Economics Institute with support from the Ford Foundation. In a context of global uncertainty, with growth and employment well below normal levels, the 2014 Minsky Conference will address both financial reform and prosperity, drawing from Minsky’s work on financial instability and his proposal for achieving full employment. Panels will focus on the design of a new, more robust, and stable financial architecture; fiscal austerity and the sustainability of the US and European economic recovery; central bank independence and financial reform; the larger implications of the eurozone debt crisis for the global economic system; the impact of the return to more traditional US monetary policy on emerging markets and developing economies; improving governance of the social safety net; the institutional shape of the future financial system; strategies for promoting an inclusive economy and more equitable income distribution; and regulatory challenges for emerging-market economies. Registration is now open. Participants include: Anat Admati Professor of Finance and Economics, Stanford University Robert Barbera Co-director, Center for Financial Economics, The Johns Hopkins University Richard Berner Director, Office of Financial Research, US Department of the Treasury Sherrod Brown US Senator (D-OH) Willem H. Buiter* Global Chief Economist, Citi Vítor… Read More

From the preface to a new policy brief by Amit Bhaduri: In our era of global finance, the theory of aggregate demand management is alive and unwell. In this policy brief, Bhaduri describes what he regards as a prevalent contemporary approach to demand management. Detached from its Keynesian roots, this “vulgar” version of demand management theory is being used to justify policies that stand in stark contrast to those prescribed by the original Keynesian model. Rising asset prices and private-debt-fueled consumption play the starring roles, while fiscal policy retreats into the background. … While some might insist that the age of global finance leaves little room for the idea of demand management, Bhaduri contends that the theory survives, but that it does so in a form that is nearly unrecognizable from the original. This contemporary model of demand management receives its inspiration from the presuppositions of neoclassical economics, and its policy emphasis is often the very opposite of the old Keynesian model. … To support demand, the “vulgar,” or “Great Moderation,” model hinges on the interplay between expectations of ever-rising asset prices and a consumption boom driven by private debt. Bhaduri cautions, however, that a model centered on private credit creation is prone to instability. More and more financial investment is needed to produce greater returns and boost asset prices,… Read More

The Commission’s latest “Quarterly Report on the Euro Area” makes an interesting read; at least to those who simply can’t get enough of the “structural reform” gospel that has been running high in the Commission’s corridors for the past 30 years or so. So be warned: For any more enlightened minds the report is mainly of interest for what it does not talk about. One might perhaps start by congratulating the Commission for noticing that the euro area is falling behind internationally. In case you had not known, the euro area’s GDP is still about 3 percent below its pre-crisis peak level, domestic demand about 5 percent. Few other policymakers on this planet have such a stellar record to show for themselves. And the Commission is surely part of that gang. The Commission does not wish to talk about the crisis too much though. It is more concerned with long-run trends that started some time before the crisis. In particular, the Commission points out that after catching up quite successfully with the US in terms of productivity levels and living standards from the mid-1960s up until the mid-1990s, something seems to have happened in the mid-1990s that enabled the US to persistently outperform the euro area ever since. What happened around that time that allowed the US to achieve respectable… Read More