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Here are today’s big pieces of economic policy news:  (1) net job creation in the month of March (+88,000) was too low to keep up with population growth; (2) the president’s budget proposal will reportedly include cuts to Medicare and Social Security (or as the latter will be described in most newspapers, “adjustments to the way inflation is calculated for the purposes of determining Social Security benefits”). These two items may seem unrelated, but in reality they form the basis of an unhappy remarriage. 

There have been many concerns expressed on the internet about the eventual necessity of reversing the Fed’s cheap-money policies, which include “quantitative easing,” as well as a near-zero federal funds rate. One idea some have is that there are “too many bonds” in the Fed’s portfolio, and that problems will occur with insufficient demand whenever the Fed attempts to reduce its holdings. This doomsday scenario often seems to vex public discussion but is unlikely to materialize, given that the Fed can always make use of its ability to “make a market” for Treasury securities. An alternative way of looking at the same situation is that there is a huge amount of money and money-equivalents on bank balance sheets and in nonfinancial corporate coffers, and that the tendency of the modern economy toward financial fragility will eventually lead to risky loans and investments using these funds. (Jeremy Siegel adopts this view in the FT, with, however, an unfortunate emphasis on the possibility of a takeoff of inflation. Inflation remains below the Fed’s 2-percent approximate objective, and the greater risk by far is still recession. An Alphaville comment on his column makes the point that the threat of fragility remains regardless of whether banks have excess reserves on hand.) Concerns have already emerged about “junk” bonds, so-called leveraged loans, and other effervescent… Read More

From Mariana Mazzucato’s “Rethinking the State” series.

An update on some developments on the fiscal-trap front:  After a Levy brief on fiscal traps was issued in November, events continue to bear out the fears expressed therein that budget cuts and tax increases being implemented in Europe and the US would lead to disaster.  For example, recent news coverage of events surrounding the announcement of the UK budget confirm that the trap can hit nations that possess their own currencies, particularly in a region such as Europe where recessionary forces are dominating at the moment. Martin Wolf notes that owing to disappointing growth figures, the UK deficit surprised again on the high side. As the fiscal-trap theory asserts, governments implementing austerity policies have run into unexpectedly low growth in their attempts to reduce government debt. Meanwhile, despite the warnings of macroeconomists, including those here, the austerity measures that together make up the fiscal cliff in the US were only partly averted.  Among these policy changes are the loss of the 2-percent partial payroll-tax holiday and the sequester cuts to discretionary spending. The latter unfortunately went into effect at the beginning of this month, following a two-month Congressional reprieve. Based on unofficial data from the Bipartisan Policy Council in this New York Times article, which are similar to those in a recent and more detailed CBPP report, the cuts… Read More

How much fiscal stimulus would the government need to inject into the economy over the next two years in order to get the unemployment rate into the 5.5–5.9 percent range?  In their newest strategic analysis, Dimitri Papadimitriou, Greg Hannsgen, and Michalis Nikiforos provide us with some harrowing answers. The authors lay out a scenario (“scenario 3” in the analysis) featuring some favorable macroeconomic tailwinds in the form of higher private sector borrowing and increased exports.  As they explain, such developments are not entirely unlikely (and policy changes could help contribute to such an export boost).  Nevertheless, even in these relatively rosy circumstances the government would need to pitch in a spending increase of 6.8 percent* (after inflation) in each of 2013 and 2014 to bring the unemployment rate below 6 percent by the end of 2014.  That would amount to a stimulus program worth around $600 billion over the next two years.  Without these tailwinds from private sector borrowing and exports (“scenario 2”), spending would need to increase by 11 percent per year — or roughly over a trillion dollars of stimulus over two years — in order to bring unemployment down to around 5.5 percent. As the authors note, Washington is not in the mood for a trillion-plus-dollar stimulus program, or a program half that size.  Congress has consistently… Read More

Earlier this month the Athens Development and Governance Institute and the Levy Economics Institute held a forum on the eurozone crisis:  “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap.”  Below are the remarks delivered by senior scholars Jan Kregel and James Galbraith.

In a new, wide-ranging policy note, C. J. Polychroniou traces the roots and evolution of the present “era of global neoliberalism”; an era he portrays as mired in perpetual crisis and dysfunction, and ripe for change. [N]eoliberalism itself is more of an ideological construct than a solidly grounded theoretical approach or an empirically-derived methodology. In fact, the intellectual foundations of neoliberal discourse are couched in profusely vague claims and ahistorical terms. Notions such as “free markets,” “economic efficiency,” and “perfect competition” are so devoid of any empirical reference that they belong to a discourse on metaphysics, not economics. Polychroniou attempts to outline the central principles of a progressive, post-Keynesian economic policy alternative.  His primary target:  changing the relationship between the state and the financial sector. Read the policy note here.

Yesterday, Dimitri Papadimitriou joined Ian Masters to discuss the response to the banking crisis in Cyprus.  The plan on the table, in which Cypriot banks would impose a deposit tax (9.9 percent on deposits above €100,000, and 6.75 on deposits below that) in order to gain access to a €10 billion bailout from the troika, unconscionably makes small depositors pay for someone else’s regulatory blunders — and is likely to be ineffective anyway, said Papadimitriou. The entire episode once again points to the fundamentally unworkable setup of the eurozone, in which each member-nation is (ostensibly) responsible for its own banking system.  For more on these deeper structural problems, see this policy note:  “Euroland’s Original Sin.” Listen to the interview here.

Victoria Chick, a student of Hyman Minsky’s, elaborates on an issue that often strikes non-economists as somewhere between scandalous and baffling:  the absence of any substantive acknowledgment of money in much of contemporary economics and economic modelling. (Particularly interesting around the 12:10 mark, where Chick argues that faulty or outdated language in relation to banking helps reinforce misunderstandings about deposits, lending, and the relationship between the two.) (via David Fields) For more on this question of how to understand money and its role in our economic systems, see this working paper.

The evident failure of the ongoing austerity and “structural adjustment” experiments in Greece and the rest of the eurozone might have prompted some reconsideration of the intellectual foundations of those policies.  Instead, as C. J. Polychroniou observes in his latest policy note, one notable reaction seems to have been to blame the test subjects: In drafting the document for the so-called “Second Economic Adjustment Programme for Greece,” the EU’s neoliberal lackeys contended that “Greece made mixed progress towards the ambitious objectives of the first adjustment program.” On the positive side, it is noted, the general government deficit was reduced “from 15.75 percent of GDP in 2009 to 9.25 percent in 2011.” On the negative side, the recession “was much deeper than previously projected” because, it is claimed, factors such as “social unrest” and “administrative incapacity” (including a lack of effectiveness in combating tax evasion) “hampered implementation.” The antigrowth “fiscal and structural adjustment” program was perfectly designed and would have produced all the anticipated results if the government were better fit to carry out the policies … and if the citizenry did not on occasion make some fuss about them by staging demonstrations here and there or by occupying the square outside the Greek parliament building. In essence, this is what the above statement says. The puny excuses of the EU… Read More

The Bard Economics Program and the Levy Economics Institute present: William H. Janeway Institute for New Economic Thinking and Warburg Pincus Technology Monday, March 4, 2013  4:45 p.m. Bard College Reem-Kayden Center for Science and Computation (RKC), Room 103 Excerpt from Doing Capitalism: “The Innovation Economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation. Each of these activities necessarily generates much waste along the way: dead-end research programs, useless inventions and failed commercial ventures. In between, the innovations that have repeatedly transformed the architecture of the market economy, from canals to the internet, have required massive investments to construct networks whose value in use could not be imagined at the outset of deployment. And so at each stage the Innovation Economy depends on sources of funding that are decoupled from concern for economic return.” About the Author:

A forum organized by the Athens Development and Governance Institute and the Levy Economics Institute — “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap” — will take place in Athens, Greece on March 8–9.  The Levy Institute’s Dimitri Papadimitriou, James Galbraith, Jan Kregel, and Rania Antonopoulos are among the academics, journalists, politicians, and organizers participating in the two-day forum at the Athinais Cultural Centre (Kastorias 34–36, Votanikos).  Simultaneous translation (Greek / English) will be provided. Topics include: Major Challenges and Policy Choices European Union: Toward Which Way and for Whom? National Strategic and Security Challenges in S.E. Europe and the Eastern Mediterranean Empowering Democracy: Legitimization, Accountability, Effectiveness, and Social Oversight Productive Restructuring and Sustainable Development Social Cohesion Fairness and Democracy Toward a Social Front for Change: Prerequisites and Priorities For more information and a full list of participants, see here.