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Pavlina Tcherneva was interviewed yesterday on Los Angeles public radio about the ongoing debt ceiling face-off and government shutdown. She referenced Ben Bernanke’s “self-induced paralysis” phrase (which he used to describe Japan’s lost decade) as an accurate description of the current US situation and expressed concern that shutdown and debt ceiling standoffs may represent the new procedural status quo — effectively preventing the government’s fiscal power from operating on any normal basis. (The fact that yesterday’s GOP proposal centered on a mere six-week raise in the debt ceiling — and by some accounts would prevent Treasury from engaging in the “extraordinary measures” it has been using to buy time since bumping up against the debt ceiling — suggests that congressional Republicans may indeed be envisioning permanent hostage budgeting.) Tcherneva also discussed what we might expect from Janet Yellen’s Fed. Based on Yellen’s past testimony and academic work, Tcherneva argued we should see more of a focus on unemployment and employment issues, at least at the level of shaping the policy discourse — there is a separate question, Tcherneva cautioned, as to whether the Fed has the tools to get us to full employment. Listen to or download the interview here.

Some commentators and members of Congress have insisted that failing to raise the debt ceiling would not necessarily require defaulting on the national debt. The theory is that Treasury could prioritize payments to bond holders while defaulting only on commitments to other payees (say, Social Security recipients). Most of the discussion of what might happen if Congress fails to raise the borrowing limit has focused on the financial market consequences of defaulting on the debt. But even if prioritization is possible (there is some debate about whether it’s logistically possible, or even legal), we would still be facing a serious macroeconomic crisis. This is because failing to lift the debt ceiling would require extreme spending cuts some time after October 17. Essentially, the federal government would be forced to balance its budget. (This is all assuming that trillion dollar coins and premium bonds are off the table.) What would that kind of radical austerity do to the economy? Michalis Nikiforos uses the Levy Institute’s macroeconomic model to estimate the effects of beginning rapid fiscal consolidation in the last quarter of this year and maintaining a balanced budget through the rest of the 2014 fiscal year (which is to say, through 2014Q3). The result? A big swing in the expected growth rate, leading to a deep recession: Nikiforos stresses that if… Read More

From Mariana Mazzucato’s “Rethinking the State” video series: Pavlina Tcherneva discusses the implications of the Great Financial Crisis of 2007 for employment outcomes and fiscal policy. She argues that the current view of Keynesian fiscal policies is based on a misreading of Keynes. Simply boosting demand — through what should be understood as trickle-down fiscal policy — is not sufficient to promote inclusive growth. Keynes originally called for a more targeted approach, including “on the spot employment,” as the means to achieve full employment and equitable and sustainable growth. [See also her recent working paper on this theme.] [iframe src=”//www.youtube.com/embed/3f7RGoYdkvo?feature=player_detailpage” frameborder=”0″ allowfullscreen width=”480″ height=”270″]   L. Randall Wray argues that rethinking the State requires rethinking the relationship between the State and its currency. His analysis starts with the observation that money is based on State power (“currency sovereignty”): it is an “IOU” from the State — a liability — implying that fiscal constraints are in fact artificially created. In this sense, the State cannot run out of money, as it creates and enforces its own IOUs. Governments could — and should — afford to invest more in innovation and technology development to promote the capital development of the economy. [iframe src=”//www.youtube.com/embed/uFDxJuzaDq4?feature=player_detailpage” frameborder=”0″ allowfullscreen width=”480″ height=”270″] @michlstephens

Here’s a piece I published in HuffPost back on Oct 18, 2010. A flash from the past – three years ago – predicting that QE2 would prove to be as impotent as QE1 had been. And here we are, folks. No recovery in sight–at least once you get off Wall Street. We’re now set–yet again – to go off the fiscal cliff. Some have begun to talk again of the Trillion Dollar Coin – an idea President Obama has again rejected. He fears it would get tied up in the courts. So what? That would take years to settle. Or perhaps he doesn’t want to break the logjam. Politically, he’s winning while the Republicans self-destruct. However, here’s a better idea. We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell – and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two. Have you ever been inside one of… Read More

The policies Greece has been implementing as part of the price for its two bailouts are not working the way we were told they would. That’s pretty clear if you look at the troika’s endlessly downgraded projections for key economic indicators. Here, for instance, is actual Greek unemployment, compared to a series of troika projections (source): One common response to these apparent failures is to say that we just need to hold on, keep the faith, and perhaps double down on the strategy; eventually, internal devaluation and austerity will bear fruit. It is unfortunate, though not surprising, that this has become the “responsible” position; the stance of the supposed steadfast realist. Presumably it appeals to some deep-seated moral intuitions about the need to pay for past “excesses” or to suffer short-term pain for long-term gain, or some such pablum. And in that context, pointing to increases in poverty, falling living standards, and eye-popping levels of unemployment may not have the rhetorical effect we might hope for, at least among those who see themselves as committed to the policy strategy — perhaps it only reinforces their self-image as defenders of “tough choices” standing steely-eyed in the face of populist clamor. There are no signs that the internal devaluation strategy is having anything like the effect on growth we were told it would… Read More

Kenneth Rogoff placed an editorial in Wednesday’s Financial Times defending the Cameron government’s austerity policies as a kind of insurance against the possibility of investor flight from UK government debt. He concedes that the specific form of austerity that was implemented in the UK was ill-advised — public investments in infrastructure, he says, can be stimulative and pay for themselves. Nevertheless, he argues that in retrospect austerity in general was wise because we couldn’t have known for sure that the markets wouldn’t have panicked and ceased purchasing UK debt if the government had run higher deficits. Now, one thing we might want to recall is that the UK’s austerity policies have not been hugely successful at shrinking the debt-to-GDP ratio. What we’re looking at here is the “fiscal trap” phenomenon Greg Hannsgen and Dimitri Papadimitriou have written about. Austerity can be a pretty inefficient policy — assuming one’s goal is the reduction of debt ratios. (As Paul De Grauwe and Yuemei Ji recently found, this is clearly the case on the eurozone periphery: “more intense austerity programmes coincide with increasing government debt ratios.”) But even if UK austerity were more successful at shrinking public debt ratios, we would want a better sense of the probabilities and downsides involved in Rogoff’s “you never know,” market panic scenario. Just how valuable is… Read More

We’ve just returned from Rio de Janeiro, where the Levy Institute held a conference cosponsored by the Multidisciplinary Institute for Development and Strategies (MINDS), supported by the Ford Foundation. The two day conference dealt with global financial governance, financial reregulation, and development challenges in a Minskyan context — a lot of discussion of the regulation of global capital flows, Brazil’s economic prospects, and debate about whether China’s economy represents a development model to be imitated or a ticking time bomb of financial instability; along with the usual focus on banking regulation and reform. Paul McCulley, former PIMCO director and phrase-coiner (“Minsky moment” and “shadow banking”), delivered the keynote. Speakers and panelists included academics, financial market practitioners, and former and current government officials (Paulo Nogueira Batista, who sits on the Executive Board of the IMF, gave a fascinating inside glimpse at the coalitions and dynamics at the Fund and talked about how delays in implementing reforms designed to give emerging economies more sway in the structures of global financial governance risk creating a crisis of legitimacy). The full program, including speakers’ powerpoint presentations, is available. Audio clips can be accessed here (video may also be available in the near future). The next Minsky conference will be held in Athens, November 8-9.

Congressional Republicans may or may not suffer politically from the government shutdown and upcoming debt ceiling fight, but in terms of policy they have already secured a significant and lopsided victory in the battle over the budget, whether they realize it or not. Repeal of the Affordable Care Act seems pretty unlikely (not just because the President is wildly unlikely to repeal his signature legislation in return for something his opponents also claim to want — raising the debt limit — but also because he seems determined to learn from his 2011 mistake and is unlikely to grant any concessions in return for not defaulting on financial commitments). Still, below all the shutdown/debt limit/ACA drama, the discretionary budget number that Senate Democrats are offering to Republicans (the “clean” continuing resolution) represents a near-complete capitulation to GOP demands. Despite having lost the popular vote for the Presidency, Senate, and House, Republicans were not only able to extract major concessions on discretionary spending, but to exceed even their original demands, as Dylan Matthews observes: “So we’ve been cutting spending at a faster pace than Paul Ryan wanted to when Republicans took over Congress.” This figure by Michael Linden and Harry Stein illustrates the situation (they call this a “compromise,” but I’m not sure that’s the best choice of labels): What this means… Read More

I have recently signed the “Economists’ Warning” on the situation in the eurozone, which states that It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed. The Economists’ Warning was published by the Financial Times (“European governments repeat mistakes of the Treaty of Versailles,” September 23), and a reply by Professor Gilbert of the University of Trento appeared in the Letters section on September 25. Professor Gilbert seemed to imply that the Economists’ Warning was advocating external support for Southern European countries in trouble — a position that is not apparent in the original document, which only advocated “concerted action” among eurozone members. My reply to Professor Gilbert was published late last week in the Letters section of the Financial Times. I argue that structural reforms have already been implemented in Italy: such reforms aimed at cutting pension payments to generate a structural reduction in the government deficit (matched of course by a reduction in the purchasing power of people in retirement) and increasing flexibility in the labor market. The chart below documents the dramatic drop in employment since 2007 — almost one million jobs, with a fall in full-time positions of 1.77 million partially compensated by 813,000… Read More

(first appeared in Social Europe) Never miss a party – especially one you’ve been desperately waiting for for so long. This much the authorities in Europe’s currency union clearly understand. As soon as Eurostat had released its first estimate for GDP growth in the spring quarter in mid August (1st estimate here), which was missing the by now customary negative sign, the champagne began to flow, it seems, accompanying all-round self-congratulatory shoulder slapping. For instance, Spain’s economy minister Luis de Guindos confidently noted that “Spain will show clearly the quality of the policies implemented in the eurozone” (FT.com 4 September 2013). And European Commission President José Manuel Barroso declared in his State of the Union Address on 11 September 2013 that “the facts tell us that our efforts have started to convince.” Germany’s finance minister Wolfgang Schäuble also joined the chorus, just in time for the federal election, proudly announcing in The Financial Times that “while the crisis continues to reverberate, the eurozone is clearly on the mend both structurally and cyclically.” Dr Schäuble declared with poise that “what is happening turns out to be pretty much what the proponents of Europe’s cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth,” and then went on to boast that “despite what… Read More

Stephanie Kelton recently sat down with L. Randall Wray to discuss, among other things, the news that the Federal Reserve will refrain for the time being  from tapering its asset purchases (QE). Wray took the occasion to elaborate on his view that quantitative easing is ineffective as economic stimulus and that — given the tools at its disposal — the Fed can’t actually carry out its dual mandate (on employment and price stability). One interesting wrinkle here is that Wray makes this case not just with regard to asset purchases — which even some QE supporters have admitted don’t accomplish much in and of themselves — but also the “expectations channel” (forward guidance). Kelton and Wray also touch on the latest debt ceiling showdown and the future of retirement security programs. Download or listen to the podcast here.

Regarding spurious policy arguments about “excessive growth of the money stock”: Ed Dolan posts helpfully to Economonitor on the more realistic approach suggested by the theory of endogenous money. In particular, I took note of the following passage, which brings up a point that I wrote about recently:  “Formally, a model that includes a minimum reserve ratio or target plus unlimited access to borrowed reserves would not violate the multiplier model, in the sense that at any given time, the money stock would be equal to the multiplier times the sum of borrowed and non-borrowed reserves. However, the multiplier would have no functional effect, since the availability of reserves would no longer act as a constraint on the money supply. Economists describe such a situation as one of endogenous money, by which they mean that the quantity of money is determined from the inside by the behavior of banks and their customers, not from the outside by the central bank.” In this simplified setting, the constant known as the “money multiplier” becomes the “credit divisor,” a concept defined in a short article I wrote recently for the forthcoming Elgar volume Encyclopedia of Central Banking. Using the divisor D, instead of bank reserves ×  M = money, one can write credit/D = bank reserves. The equation reflects a theory in which causality… Read More