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The following table has been computed using data from the latest (April 2013) IMF World Economic Outlook database, with IMF estimates starting in 2013 for most countries. In my view, these projections are based on heroic assumptions and wishful thinking. The eurozone is supposed to improve its position, even though the current account balance of Germany is supposed to drop substantially (from 1.52 percent of US GDP in 2012 to 0.93 percent in 2018): Greece, Italy, Portugal, and Spain are all supposed to move from a current account deficit in 2012 to a surplus from 2013 onwards, and France is also supposed to reduce its current account deficit. It therefore seems that the IMF is assuming some equilibrating process inside the eurozone, but overall this area will either be importing less from abroad (while keeping its exports constant) or exporting more. In the former case, the eurozone will impart a deflationary impulse to its trading partners. In the latter case, which area is supposed to absorb the additional eurozone exports? Looking at the table, the candidates are either the United States, which is projected to see its current account deteriorate even further, or developing countries. If export-led growth from China – the only country in the BRICs for which the IMF projects an improvement in its current account – and… Read More

On Tuesday, the Congressional Budget Office released its new projections (pdf) for the long-term budget. A Bloomberg article titled “CBO Says Short-Term Deficit Cut Won’t Avert Fiscal Crisis” provided a fairly typical summary: [F]ederal spending will rise from 22 percent of GDP in 2012 to 26 percent in 2038 … The deficit [currently 3.9 percent of GDP] would be 6.5 percent of GDP in 2038, greater than any year between 1947 and 2008 … Even though tax receipts would grow …, the revenue increase wouldn’t be “large enough to keep federal debt” from “growing faster than the economy starting in the next several years,” according to the CBO report. Here’s another way of presenting those CBO numbers. Spending on actual government programs is projected to fall from its current 19.5 percent of GDP to 18.8 percent in 2023, before rising to 21.3 percent in 2038. And revenues are also projected to rise, from 17 percent to 19.7 percent of GDP by 2038. The result, according to the CBO, is that the primary budget balance (that is, excluding interest payments) shrinks from its current level of -2.5 percent of GDP to -0.3 percent in 2023, and then grows to -1.6 percent of GDP by 2038. In other words, a quarter-century from now, the primary deficit — the gap between tax revenues… Read More

As a member of the eurozone, Greece does not control its own currency and therefore cannot devalue said currency in an effort to promote an export-led recovery. Instead, Greece is stuck with the troika’s strategy of internal devaluation: seeking export growth through reducing unit labor costs (wages). As Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza have pointed out, however, that strategy isn’t working (pdf). Two interesting pieces by J. W. Mason suggest that the option of leaving the eurozone, which would allow Greece to revert to and subsequently devalue the drachma, may not look much more promising, at least in terms of the prospects of generating an export-led expansion. Mason examines the experience of a number of countries following the 1997 Asian crisis and sees little evidence for the currency devaluation/export-led growth story: You can argue, I suppose, that without the devaluations export performance would have been even worse. But you cannot claim that faster export growth following the devaluations boosted demand, because no such faster growth occurred. It’s really remarkable how much the devaluation-export growth link is taken for granted in discussions of foreign trade. But in the real world, for whatever reason, the link is often weak or nonexistent. If that’s the case, Greece may truly be stuck — that is, without a major, and wildly unlikely, intellectual… Read More

In case you missed it, what with all the celebrating going on in the eurozone over the incredible success of austerity policies, the unemployment rate in Greece is now at 27.9 percent and the country is likely on its way to a third bailout. C. J. Polychroniou argues in a new one-pager that offering Greece another bailout package like the first two makes no sense, and he provides some much-needed (and daunting) perspective on how far Greece would need to climb — assuming its economy started growing, and wasn’t still contracting (Greek output shrank by “only” 3.8 percent in the second quarter of 2013) — just to get its economy back to where it was before its version of the Great Depression set in: “At this stage, in order for Greece to be able to service its debt and recapture its lost GDP and employment levels, one would have to rely on an outrageously optimistic scenario of economic growth: probably somewhere in the range of a long-term nominal GDP growth rate of 7–8 percent. While Greece may soon end up with wages comparable to those of China, the odds of its experiencing growth rates close to those of China are probably the same as achieving time travel.” C. J. Polychroniou, Fiscal Sadism and the Farce of Deficit Reduction in Greece

Back in 2009, Janet Yellen delivered a speech at the Levy Institute’s Minsky conference that explained how the financial crisis had changed her views about the role of central banks in handling financial instability. At the time she was the head of the San Francisco Fed. The focus of her 2009 remarks was the question of how (or whether) central banks should try to counteract bubbles in asset markets. (Yellen also recalled the unfortunate topic of her 1996 conference speech: supposedly promising new innovations in the financial industry for better measurement and management of risk.) Bursting suspected bubbles has become the topic du jour in US monetary policy discussions, as it currently stands as the fashionable justification for tightening despite low inflation and high unemployment. With the announcement that Larry Summers’ name has been withdrawn from consideration for the next Fed chair, the spotlight has turned to Yellen. Here (from the 2009 conference proceedings) is the text of her speech and a transcript of the brief Q&A that followed:   A Minsky Meltdown: Lessons for Central Bankers? (1) It’s a great pleasure to speak to this distinguished group at a conference that’s named for Hyman Minsky. My last talk at the Levy Institute was 13 years ago, when I served on the Fed’s Board of Governors, and my topic then… Read More

(The following was written by Sunanda Sen and first appeared at TripleCrisis) A panic of unprecedented order has struck the crisis-ridden Indian economy. It brings to the fore the question of what led to this massive downturn, especially when the country was touted, not long back, as one of the high-growth emerging economies of Asia. A volte-face, from scenes of apparent stability marked by high GDP growth and a booming financial sector to a state of flux in the economy, can completely change the expectations of those who operate in the market, facing situations with an uncertain future. Such possible transformations were identified by Kindleberger in 1978 as a passage from manias, which generate positive expectations, to panics, which head toward a crisis. While manias help continue a boom in asset markets, they are sustained by using finance to hedge and even speculate in the asset market, as Minsky pointed out in 1986. However, asset-market bubbles generated in the process eventually turn out to be on shaky ground, especially when the financial deals rely on short-run speculation rather than on the prospects of long-term investments in real terms. With asset-price bubbles continuing for some time under the influence of what Shiller described in 2009 as irrational exuberance, and also with access to liquidity in liberalised credit markets, unrealistic expectations of the… Read More

From a panel discussion yesterday at the George Washington University Law School on what we have(n’t) learned since the 2008 financial collapse (via Matias Vernengo). Galbraith begins by cautioning that these “lessons learned” frameworks often leave unchallenged the premise that the crisis is over and done with, when, as he argues, the events of 2008 were merely an “acute phase” of a broader crisis we are still living through. [iframe  src=”http://www.youtube.com/embed/rY-U9A7f-7o?start=822″ frameborder=”0″ allowfullscreen width=”432″ height=”243″]

The policy strategy being imposed on Greece by its international lenders depends on the success of something called “internal devaluation”: in the absence of being able to devalue its own currency, Greek wages have been cut in the hopes that this generates an export-led economic recovery. So, how is this going? As Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza explain in a new One-Pager, not very well. The authors observe that Greece has succeeded in increasing the sort of “competitiveness” required by this strategy: it has lowered its relative labor costs more than any other country in the eurozone except for Germany. Furthermore, Greece’s net exports have expanded since 2009. Mission accomplished? Not quite. One problem, the authors point out, is that 71 percent of Greek export growth since 2009 has come in the form of an increase in the value of trade related to its oil refineries — which is to say, in an area that has little to do with internal devaluation (and depends on volatile factors like changes in oil prices). Most of the increase in net exports came from a decline in imports (a result of the neverending recession). But most important of all, the gains from net exports have not come close to offsetting the dramatic plunge in domestic demand, as you can see here… Read More

The Heritage Foundation presents what one hopes it doesn’t believe is a clever critique of US public finances: Brad Plumer has the inevitable takedown here. This pretty much sums up the inanity of these government-as-household analogies: “Anyway, it’s a good analogy. The U.S. federal government really does resemble your typical money-printing family that owns lots of tanks, operates a giant insurance conglomerate, can borrow money at extremely low rates, and is assumed to be immortal.”

I hope that all of you saw the very nice feature on Wynne Godley in the NYTimes. It is about time he’s getting the notice he deserved. I just came across a juicy quote from Wynne: “I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is.” Here’s an interview I recently gave to a Brazilian reporter. Q: The crisis, which began with the collapse of Lehman Brothers on September 15, 2008, will complete five years. What has changed in the world economy during this period? LRW: Unfortunately, the global financial system was restored to its 2006 status through massive bail-outs by the public sector. It was not reformed. It was not investigated and prosecuted for fraud. Essentially, it was allowed to go back to doing what it did in the years preceding the crisis. Our real economies are still “financialized” with too much debt and with the financial sector taking far too big a share of profits. As a result, in most developed economies around the world, the real sector is very weak. Of course, the success story was the BRICs—which largely avoided the worst of the crisis and even made gains in their… Read More

In this video, Pavlina Tcherneva and Philip Harvey look at the job guarantee and basic income grant proposals in the context of a discussion of economic rights. Tcherneva begins with the theory behind the job guarantee — a federally-funded (and in Tcherneva’s version, locally-administered) program that would offer a paid job to anyone willing and able to work — and then (16:10) turns to a real-world example that, while not quite a job guarantee, was in the family of direct job creation programs: Argentina’s Plan Jefes. (Tcherneva has a related working paper that analyzes the socially transformative potential of direct job creation, over and above its macroeconomic stabilization benefits, in the context of the alteration of Plan Jefes into a pure cash transfer program, Plan Familias.) Philip Harvey (31:45) looks at the legal bases of the rights to work and income (beginning with US statutes) before moving on to a comparison of basic income guarantees with job guarantees: [iframe src=”http://www.youtube.com/embed/-3uWDnLVPv8?start=190″ frameborder=”0″ allowfullscreen” width=”480″ height=”270″] This talk was delivered as part of Columbia’s “Modern Money” series; you can find links to background reading for this seminar here.

Robert Barbera, a regular contributor to the Levy Institute’s Minsky conferences, has a great post at Johns Hopkins’ Center for Financial Economics on the cycle of amnesia and remembrance that seems to plague mainstream economic theorists. Here’s a key passage: Perhaps the most indictable offense that mainstream economists committed, from 1988 through 2008, was to retrace, step by step, Keynes’s path of discovery from 1924 through 1936. Wholesale deregulation of finance and categorical confidence in a reductionist role for central banks came into being as the conventional wisdom embraced the 1924 view that free markets and stable prices alone gave us the best chance for economic stability. To add insult to injury, the conventional wisdom before the crisis was embedded in models called “new Keynesian” which were gutted of the insights of Keynes. This conventional wisdom gave license to a succession of asset market boom/bust cycles that defied the inflation/deflation model but were, nonetheless, ignored by central bankers and regulators alike. Quite predictably, in the aftermath of the grand asset market boom/bust cycle of 2008-2009, we are jettisoning Keynes, circa 1924, for the Keynes of 1936. It’s worth reading the whole thing: “Exit Keynes, the Friedmanite, Enter Minsky’s Keynes.”