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Q: “Now why do you believe the US government will never, ever have a problem funding its public expenditures and deficits?” A: “Because the electricity supply to the computers that send those signals will never be cut off.” Q: “It’s that simple?” A: “Simple as that.” [iframe width=”448″ height=”252″ src=”//www.youtube.com/embed/qD3XMyNmfeY?feature=player_detailpage&start=51″ frameborder=”0″ allowfullscreen></iframe] If you want the more complicated version, Galbraith wrote a policy note a couple years back that explains why the long-term budget projections that elicit so much bipartisan anxiety are unjustifiably pessimistic with regard to the question of whether the US public debt is “sustainable” over the long term, which is to say, whether the public debt-to-GDP ratio will stabilize or continue to grow without limit. On this question, as he explains, it’s all about the relationship between the rate of economic growth and the rate of interest on government debt. If the real growth rate is greater than the real interest rate on debt, then even a small primary deficit is consistent with a debt-to-GDP ratio that stabilizes over the long term. (Paul Krugman also danced on the edge of this idea a few weeks back, as part of his meditations on “secular stagnation” and the possibility of real interest rates staying low (or negative) for the foreseeable future: “I don’t want to push this too hard,… Read More

C. J. Polychroniou: A strong case can be made that what we have been witnessing since [2007-08] is not simply a severe financial crisis centered in the developed world but the fact that today’s capitalism is simply incapable of functioning in an economic way conducive to maintaining sustainable and balanced growth. The so-called “financialization” of the economy, so prone to financial crises and meltdowns as the late Hyman Minsky has shown, cannot be understood independent of the production processes or developments in the real economy. Advanced capitalism had been facing severe structural stresses, strains and deformations — including overproduction, trade deficits, lack of job growth and elevated public and private debt levels — for quite a few decades prior to the eruption of the financial crisis of 2007-08. Indeed, the “financialization” wave — which many have labeled “casino capitalism” or “stock market capitalism” but which amounts essentially to the deregulation of giant financial entities capable of shaping and controlling the fate of national economies — began as a result of the structural problems associated with the postwar regime of capital accumulation, whose collapse in the mid-1970s threatened the growing expansion of capitalism. Thus, “financialization” does not spring out of the blue but emerges as an alternative model to the decay of the postwar regime of accumulation. Read the rest here.

The Levy Institute’s Jan Kregel and L. Randall Wray took part in a workshop at the UK House of Commons, November 25th, on “Financial Governance for Innovation and Social Inclusion,” organized by Mariana Mazzucato (SPRU) and Leonardo Burlamaqui (Ford Foundation) and hosted by Shadow Minister for the Cabinet Office, MP Chi Onwurah. Kregel and Wray’s presentations follow: [iframe width=”448″ height=”252″ src=”//www.youtube.com/embed/kqrUJWWYIUg?feature=player_embedded” frameborder=”0″ allowfullscreen></iframe]   [iframe width=”448″ height=”252″ src=”//www.youtube.com/embed/mJg04BBsz8Y?feature=player_embedded” frameborder=”0″ allowfullscreen></iframe]   The rest of the speeches from day 1 can be found here.

Amazon’s Jeff Bezos is all over the news with his statement that drones will sooner or later be delivering packages to your home. Predictably, this has generated two types of buzz: what about the inevitable mishaps, and what about the poor displaced UPS workers? For me, the first is a wee bit scary. Of course, you now have the prospect of being run over by a UPS driver whose workload has already been increased so much that he doesn’t have the time to drive carefully. With the coming of drones we’ll have to constantly scan the sky for incoming errant flights and packages falling to earth. I suppose the drones are scarier than the trucks. However, it is the second worry that is getting most of the attention: What are we going to do as robots increasingly replace human workers? That sort of apocalypse has been featured in science fiction from time immemorial. Not only do we have the worry of rising unemployment of humans, but also the growing intelligence of robots as they realize they don’t need no damn humans any more. Ahhhnold Is Baaaack! Open the Bomb Bay Doors, Hal! An interesting piece in Salon addresses these latter issues. Indeed, the title tells it all: “Amazon, Applebee’s and Google’s job-crushing drones and robot armies: They’re coming for your… Read More

The Hellenic Statistical Authority (ElStat) reports today that real GDP in the third quarter of 2013 has fallen by “only” 3 percent. More in detail, from their press release: Total final consumption expenditure recorded a decrease of 6.6% in comparison with the 3rd quarter of 2012 (Table 4). Gross fixed capital formation (GFCF) decreased by 12.6% in comparison with the 3rd quarter of 2012 (Table 4). Exports increased by 5.7% in comparison with the 3rd quarter of 2012 (Table 4). Exports of goods increased by 2.4% and exports of services increased by 8.8%. Imports increased by 2.3% in comparison with the 3rd quarter of 2012 (Table 4). Imports of goods increased by 2.6% and imports of services increased by 1.1%. (Imports will be growing with exports also because, as we have argued, a large and growing portion of Greek exports are intra-industry trade connected to oil products.) My personal guess is that these figures will be revised downwards. In the chart above we show exports of services in euros, as published by ElStat, together with the Turnover Index in Accommodation and Food Service Activities, also published by ElStat. The definition of the index given by Eurostat is as follows: “The definition of turnover is rather straightforward. It comprises basically what is invoiced by the seller. Rebates and price deductions are… Read More

1) In an interview with Roger Strassburg, James Galbraith discusses the “Modest Proposal,” a plan for resolving the eurozone’s multiple crises without creating any new institutions or amending any treaties. Galbraith is a co-author of the latest version of the proposal, joining Yanis Varoufakis and Stuart Holland (an earlier version was published as a Levy Institute policy note). The interview then turned to a discussion of next year’s potential US debt standoff in the context of Modern Money Theory. Read Galbraith’s full interview here at Yanis Varoufakis’s site. 2)  Starting off from Wynne Godley’s 1997 observation that the fundamental problem with the EMU setup was the institutionalized divorce between fiscal policy and currency sovereignty, Rob Parenteau develops an alternative public financing instrument that attempts to get around this flaw: … governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers. These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros. In addition, and most importantly, these revenue anticipation notes would be accepted at… Read More

Last year, Philip Pilkington and Warren Mosler argued that they had come up with a financial innovation that had the potential to help control the crippling borrowing costs faced by many member-states on the eurozone periphery. Their “tax-backed bond” proposal worked like this: if a member-state issuing these bonds defaulted on a payment, the bonds could, under such circumstances (and only under such circumstances), be used to make tax payments in the country in question (and would continue to earn interest). This financial innovation attempts to address, obliquely, one of the critical design flaws of the eurozone setup: that member-states remain responsible for their own fiscal policy after having given up control over their own currency. (Dimitri Papadimitriou and Randall Wray explain here why separating fiscal policy from a sovereign currency was such a fatal mistake.) Part of the idea behind the tax-backed bond proposal is that it would allow a member-state to enjoy borrowing costs that would be more comparable to those of a currency issuer (countries that issue their own currency have lower debt-servicing costs, even when their government debt-to-GDP ratios soar above some of the ratios seen on the eurozone periphery, because they can always make payments when due). Tax-backing is meant to assure investors that these bonds are always “money good.” Since they first published their… Read More

I recently had the great fortune to listen to a speech delivered by Mr Yves Mersch, Member of the Executive Board of the European Central Bank. This was in Athens on November 8 at the first Minsky Conference in Greece organized by the Levy Economics Institute. The title of the conference was “The Eurozone crisis, Greece, and the Austerity Experience.” The conference was well attended by the interested public. As is typical of Minsky conferences, annually held in the United States, it brought together academic scholars, financial market practitioners, journalists, as well as policymakers, including Mr. Mersch, whose speech was titled “Intergenerational justice in times of sovereign debt crises” (see here). Mr Mersch played part in the negotiations of the Maastricht Treaty and has served as the Governor of the Central Bank of Luxembourg since its formation in 1998, before joining the ECB’s Executive Board last year. Apart from lauding Greece’s pension reforms as measures that were necessary in view of demographic trends, Mr Mersch hailed Greece’s achievements in closing its fiscal deficit as “remarkable,” describing the Greek austerity experience as a “fiscal adjustment of historic proportions.” That it truly was, and Mr Mersch was keen to emphasize that the “extraordinary efforts” undertaken by the Greek people refuted the naysayers and proved wrong prophetic claims heard in May 2010 that… Read More

Is the U.S. economy heading towards another bubble? Since last week, the number of commentators on this subject has been growing, from Robert Shiller to Nouriel Roubini (on housing markets). In our first chart we report the Standard & Poor’s 500 stock market index, normalized by a consumer price index to remove the common trend in prices. Our measure has increased by 105.6 percent from its most recent bottom in March 2009. In the previous rally, which started from a bottom value in February 2003, the index increased by only 63 percent before the start of a rapid descent in July 2007. Is a buoyant stock market justified by expected profitability? In the next chart, we report gross saving of non-financial corporations – that is, undistributed profits gross of capital consumption – scaled by GDP, along with gross investment (which includes changes in inventories). All figures are computed from the Integrated Macroeconomic Accounts published by the B.E.A. The chart clearly shows that profits have reached an all-time high at 11.5 percent of GDP, compared to an average of 9 percent over the 1960-2007 period. If current profits are the basis for expected future profitability, our data suggest that the stock market rally is justified. But is this trend stable and sustainable? The chart also shows what we may call an… Read More

In a recent speech at the Levy Institute conference on “The Eurozone Crisis, Greece, and the Experience of Austerity” held in Athens, Mr. Yves Mersch, a member of the Executive Board and General Council at the ECB, made it clear that the success of the troika plan for the Greek economy requires the current account balance to improve as the public deficit is reduced. In his own words, To facilitate an export-led recovery, this trend [decreasing competitiveness] has to be corrected and there is no way this can be achieved in the short run other than by adjusting prices and costs. I know the difficulties that such adjustment creates and the criticisms that are leveled against it. But we are in a monetary union and this is how adjustment works. Sharing a currency brings considerable microeconomic benefits but it requires that relative prices can adjust to offset shocks. The troika requests for a reduction in costs have been met by Greeks, as our first chart shows. Indeed, nominal wages(1) have fallen by 23 percent from their peak in the first quarter of 2010, and real wages(2) have fallen by 27.8 percent over the same period. While it is true that prices started to fall later than wages, and therefore the improvement in competitiveness has been limited, its impact on exports… Read More

Dimitri Papadimitriou, in Reuters’ “Great Debate” series: The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade. It’s the best shot the U.S. has to energize its weak economic recovery. R&D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide. … For our R&D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period. Read it here. The research underlying these proposals and projections can be found in the Levy Institute’s most recent US macroeconomic analysis: “Rescuing the Recovery: Prospects… Read More