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This figure shows how government spending as a percentage of GDP has evolved since 2000Q1. The numbers reflect the recent 5-year revision of the National Income and Product Accounts (the so-called “NIPA revisions”) and preliminary Q2 numbers, which are due for an update about a week from now. The figure shows that government consumption (at the top of the figure in blue) and gross investment (farther down, at about 4 percent of GDP in an aqua, or light blue, color) have been on a downward trend when expressed as percentages of GDP. Current transfer payments are depicted in red. They remain higher as a percentage of GDP than before the financial crisis; nonetheless, they are relatively flat. Government interest payments, in green, were well under control, in part because rates remained very low as of the end of Q2. The fixed-investment series is gross in the sense that it does not adjust for depreciation. Adding together all of these figures, total gross expenditures were 37.9 percent of GDP in Q2, less than a tenth of a percentage point (.1%) higher than in Q1. For a longer-term comparison, try a total of 42.3 percent in 2009Q2. Gross (and net) government spending has been falling for a long time. The sequester, whose effects are beginning to be reflected in official data, continues… Read More

It is almost conventional wisdom today to view Germany as the winner of the euro crisis. Reisenbichler and Morgan recently argued this case in Foreign Affairs, although cautiously adding that Germany’s supposed gains may not last. The miserable truth is, however, that the euro has yet to produce any real winner, while Germany’s apparent gains from the euro crisis in particular are largely an illusion about to unravel. Ultimately only a fundamental re-design of institutions and policies in the Euro-zone would open up the prospect of creating a union of true euro winners. Misled by ill-conceived ideas and beliefs – and against its own national interest – Germany is adamantly blocking such a move. Actual policies pursued and regime reforms undertaken since 2009 under German dictate have made Europe progressively more vulnerable, and ever more of a threat to global stability as well. As of now, the euro remains firmly on track for eventual breakup – an event which would see Germany among the biggest losers. The view of Germany as the winner of the euro crisis points as evidence at Germany’s current low unemployment rate, balanced public budget, and low borrowing costs. The contrast with the situation elsewhere in the Euro-zone is so crass that Germany currently also enjoys an influx of skilled immigrants, providing further support to its… Read More

L. Randall Wray and Mariana Mazzucato explain some of the motivation behind their joint project that brings together the insights of Schumpeter and Minsky (note that Schumpeter was Minsky’s dissertation adviser) to explore the relationship between finance and innovation, the changing nature of each, and how the financial system might be restructured to better support the capital development of the economy — by contrast with a system that seems to revolve around financial innovation (the focus of Minsky’s earliest work) for the sake of speculation. [iframe src=”http://www.youtube.com/embed/QLuQB4zybRk?feature=player_detailpage” frameborder=”0″ allowfullscreen” width=”480″ height=”270″]

Dimitri Papadimitriou in Bloomberg View yesterday: In December 2010, the so-called troika of lenders — the European Commission, the European Central Bank and the International Monetary Fund — predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent. This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24. Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014. Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted. … Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors,… Read More

One of the theories that motivates the policies the troika (EC/IMF/ECB) is imposing on Greece is that reducing Greek wages will make Greek exports more attractive, helping to contribute, so the theory goes, to growth in GDP and employment. And in an interview that appeared yesterday at Truthout, Dimitri Papadimitriou points out that Greek competitiveness, at least in terms of relative unit labor costs, has indeed increased, more so than in any other eurozone country save Germany. But despite the fact that exports have also risen some, Greece is still stuck — and likely hasn’t even seen the worst of its social and economic deterioration. This graph from the Levy Institute’s recent stock-flow analysis (pdf) of the Greek economy illustrates the point (N.B. in this figure, an increase in value, i.e., moving to the right, implies a decrease in competitiveness). Although relative unit labor costs (in orange) have declined in Greece, Papadimitriou points out in the interview that “the declining fortunes do not affect consumer prices [in green] that are continuously rising, pushing more and more people into deeper poverty”: Papadimitriou goes on to lay out an alternative negotiating strategy for Greece, based on exploiting what he calls a “division in the house of troika.” If this strategy fails, the options become more “unthinkable”:

When it comes to the Federal Reserve and Fed policy, the bulk of today’s progressives can be sorted into two broad groups. There are those who, in the face of congressional sabotage of fiscal policy, shrug their shoulders and conclude that we might as well get behind QE because it’s the only game in town — thus setting the “progressive” pole of the debate in such a way that Milton Friedman represents the leftward edge of the possible — and there are those who largely cede the battlefield on Fed policy, either for lack of interest or due to skepticism that the Fed can do much to affect growth and employment anyway. There are, of course, some notable exceptions, but they are a minority — and this has the effect of narrowing the dialogue when it comes to central bank policy. Bill Greider, in two new policy notes drawn from his work at The Nation, shows us what it might look like to go beyond progressive indifference or hostility to the Fed and articulate a positive alternative agenda. Both of Greider’s notes focus on how the Federal Reserve’s money-creation power, which was used to great effect in propping up the financial system, might be redirected to aiding the “real” economy: The Federal Reserve’s most distinctive asset is money—its awesome and… Read More

On the face of it, the troika’s (ECB/IMF/EU) bailouts of Greece, with their attendant demands for budget austerity, privatization, and labor market reforms, have failed and failed again — whether we’re talking about basic material well-being or debt ratios: Currently, the official unemployment rate stands at 27 percent, while youth unemployment is above 62 percent and more than 30 percent of the population lives near or below the poverty line. In a nation of less than 11 million people, more than half a million children live in poverty—that’s one out of three—with nearly 60 percent of them living in households that experience “severe material deprivation.” The debt-to-GDP ratio declined from 170 percent at the end of 2011 to 156 percent at the end of 2012 (following a rather sizable “haircut” among private holders of Greek bonds) and will remain at unsustainable levels for the unforeseeable future. In fact, the best scenario envisioned by Greece’s international lenders is that the country’s debt-to-GDP ratio will be reduced to 120 percent by 2020 — only 6.8 percent less than what it was when the debt crisis began in late 2009. When the same policies are tried over and over again, with the same dismal results, there are plenty of potential reasons for an unwillingness to change course. As frequently noted, the allure of… Read More

The Congressional Budget Office’s analyses of the Senate immigration bill were a boon (at least rhetorically) to those pushing for comprehensive immigration reform. The CBO estimated the bill would produce some significant budgetary savings and a macroeconomic boost, helping undermine the argument that comprehensive reform would prove too costly. However, the Senate bill contains some slightly more popular provisions — those related to increasing high-skill immigration — packaged together with some decidedly less popular provisions — like offering a pathway to legal immigration (and eventual citizenship) to currently undocumented immigrants. The latter seems to be the biggest obstacle to getting House Republicans on board with comprehensive reform. So what happens when we look exclusively at the economic impact of something like the “pathway to citizenship”? Selçuk Eren, drawing on research he conducted with Hugo Benítez-Silva and Eva Cárceles-Poveda, provides the answer. Legalizing 50 percent of the undocumented population, far from being a massive burden, would actually add $36 billion per year to GDP. And these macroeconomic benefits would be large enough that there would be little perceptible net impact on the social insurance system (they examined Social Security and unemployment insurance in particular). Now, in a roughly $14 trillion economy, adding $36 billion per year isn’t a huge deal (the Senate bill would involve more like 70 percent legalization, so… Read More

Dimitri Papadimitriou, Levy Institute president and one of the coauthors of a new macroeconomic report on the Greek economy, appeared on Skai TV to discuss the new austerity measures passed by that country’s parliament last week. Segment (in Greek) begins at 36:00.

October 2—4, 2013 International Conference on Applied Business and Economics The Levy Institute is cosponsoring the 2013 edition of the International Conference on Applied Business and Economics (ICABE), which will be held in Manhattan at the John Jay College of Criminal Justice, City University of New York. The main goal of this annual conference is to provide a place for academics and professionals from a variety of fields to meet and exchange ideas and expertise. ICABE 2013 focuses on the role of financial accountability and transparency in economic activities, and aims to address issues arising from financial speculation and limited disclosure in the buildup to financial and economic crises. Special sessions for graduate students are scheduled, and selected papers will be published in one of the 12 international journals participating in the conference. The deadline for registration is September 1. For more information, including fee schedules, special events, and logistics, visit the conference website.

Yanis Varoufakis and Stuart Holland have come out with a new version of their “Modest Proposal” for resolving the euro crisis (an earlier version of the Proposal appeared as a Levy Institute policy note in 2011). The latest iteration (4.0) adds a new co-author in James Galbraith and an additional “sub-crisis” to the original three: the eurozone, they say, faces a banking crisis, a public debt crisis, a crisis of under-investment, and now, after five years of policy failure (due in part to treating the situation as only a debt crisis) Europe faces a social crisis. The “modesty” of the authors’ policy approach hinges on avoiding what they describe as a false choice between “draconian austerity and a federal Europe.” They argue that we can make substantial progress on addressing these multiple crises without resorting to things like national guarantees, fiscal transfers, or treaty changes. For instance, here is the outline of their proposal for dealing with sovereign debt: The Maastricht Treaty permits each European member-state to issue sovereign debt up to 60% of GDP. Since the crisis of 2008, most Eurozone member-states have exceeded this limit. We propose that the ECB offer member-states the opportunity of a debt conversion for their Maastricht Compliant Debt (MCD), while the national shares of the converted debt would continue to be serviced separately… Read More

Casey B. Mulligan, of whom I have written before, has a new post on the New York Times Economix blog, in which he attempts to school the less wise what policy impact assessment is all about. It is not about Red Herrings, for example. He references one of his recent posts that I opted to mostly let go at the time. Though I did make a comment not unlike the one he disparages. In this post he says that the point of policy impact assessment is to compare what will happen if a policy is implemented to a baseline, without the policy. Fair enough, but is that enough? He says: Policy impact quantifies how things are different as a consequence of the policy. [emphasis mine] His analysis of the impact of the Affordable Care Act on the part-time labor market concludes that two of the things that keep people in full-time employment, access to health insurance coverage and higher pay, will be eroded by the ACA. The bit about the insurance coverage is obvious enough. Well done! The bit about the higher pay is not quite as obvious. The numbers Mulligan uses are telling, however.