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Relative to what might have been, one shouldn’t be too depressed about the fiscal cliff deal.  There are no cuts to the country’s most successful anti-poverty program, Social Security, and no rise in the Medicare eligibility age.  Relative to the basic macroeconomic logic of the situation, however, the fiscal cliff deal is a policy mistake. Contrary to a wildly successful marketing campaign, the fiscal cliff was a crisis of too much austerity.  The deal approved by the House last night either cancels or delays for two months much of the austerity that was planned for 2013, but in the end we are still left with austerity-lite. If you insist on looking at it from the old “current law” baseline (which is to say, the law as it would have been if we had “gone over” the cliff), this deal expanded the deficit by some $4 trillion.  However, from the perspective of the baseline that matters for economic growth and employment, fiscal policy in 2013 will be more contractionary than it was in 2012.  Some already-existing measures like the expanded unemployment insurance benefits and a number of tax credits benefiting those with low incomes will continue, but there is no new stimulus in this deal; no infrastructure investment; no move to shore up public payrolls.  And relative to 2012, the government… Read More

by Joerg Bibow Mario Draghi’s pledge to do “whatever it takes” to save the euro has been widely hailed as a watershed event. Both the markets and euro politics have since been operating on the premise that the euro’s survival is ensured. Unfortunately, that is not a safe assumption at all. Not only because even agreement on the Single Supervisory Mechanism, the easiest element in any banking union-to-be, proved to be anything but easy. But even more so since concentrating energies on preventing future crises is somewhat premature anyway, as long as the current one remains largely unresolved. The point is that the policy strategy that has been adopted for overcoming the crisis, with or without any ECB liquidity promise in support of government bonds (i.e. Outright Monetary Transactions), is doomed to fail. The underlying causes of the crisis have been thoroughly misdiagnosed, and the medication ill-conceived as a result, while reforms of the flawed euro policy regime are so ill-designed as to ensure the euro’s final demise. The ultimate fear of the Maastricht regime’s designers was that fiscal profligacy of nations lacking Germany’s legendary “stability culture” could usher Euroland into hyperinflation. The Bundesbank’s worst nightmares seemed to come true when Greek budget deficit (ratio) numbers were revised strongly upwards in 2009. So the ill-named pact that has so far… Read More

Paul Krugman points out today that once you take into account the lingering effects of the recession, it may very well be the case that there is no significant near-term budget shortfall at all. Once the economy has recovered, the budget may already be destined to come in at a level that would stabilize public debt as a share of GDP.  The real problem we have in the short-run is that budget deficits are too low—and shrinking—not that they are too high and growing. The least unpersuasive case for worrying about the federal budget deficit focuses on the long-term increases in Medicare and Medicaid that will result if health care costs follow their projected, steep upward pathway.  If you accept this case (which should not simply be accepted as gospel), then you can stop listening to any purported “grand bargain” plan that does not address this projected rise in health care costs. Yet, if the news reports have any validity, the “entitlement reform” side of the fiscal cliff negotiations has become focused on a proposal to increase the Medicare eligibility age by two years.  This would deliver roughly $5 billion in savings to federal government in 2014.  You might say that, given the hardship it would cause to so many near-retirees, this seems like an awfully small sum.  But it’s… Read More

Stephanie Kelton was interviewed on RT’s “Capital Account” with Lauren Lyster on the subject of Modern Monetary Theory:

Registration is now open for the Levy Institute’s fourth Hyman P. Minsky Summer Seminar, to be held on the Bard College campus in June 2013. The annual Summer Seminar provides a rigorous discussion of both the theoretical and the applied aspects of Minsky’s economics, and is geared toward recent graduates, graduate students, and those at the beginning of their academic or professional careers. Application deadline: March 31, 2013. Apply early, as space is limited. See here for more information.

Stephanie Kelton appeared on NPR’s “On Point” this week with Paul Krugman and Stan Collender to discuss (do I really need to finish this sentence?) the fiscal cliff. You can listen to or download the podcast here.  (Kelton enters at roughly the 13.20 mark)

James Galbraith and Randall Wray spoke about returning full employment to the policy agenda at an event in Helsinki on Monday organized by the Foundation for European Progressive Studies and supported by the Kalevi Sorsa Foundation and the Finnish Confederation on Trade Unions (SAK). Wray focused on Minsky’s under-discussed work on poverty and full employment (the Levy Institute is currently putting together a new book containing a collection of Minsky’s published and unpublished writings on the topic):  “Minsky wrote almost as much on poverty, unemployment, and employment policy as he had on financial instability.”  Video of the presentations is below: Video of the panel discussion can be seen here.

Last week, a short walk from the Brandenburg Gate, the Levy Institute held its most recent Hyman P. Minsky Conference on Financial Instability.  The two day conference in Berlin featured a mix of central bankers, academics, politicians, and financial practitioners and dealt with issues related to the eurozone debt crisis, the Federal Reserve, signs of instability in China, Dodd-Frank and financial reform, the payments system (including the threat of cyber attacks and the potential destabilizing effect of the development of alternative payments technologies), indexes of financial fragility, and a host of other intriguing topics. On the first day, Vítor Constâncio, Vice President of the European Central Bank, delivered a morning speech that highlighted the poverty of the dominant economic thinking underlying the flawed institutional design of the European Monetary Union, with its centralized monetary policy and decentralized fiscal and financial stability policy. “In the pre-EMU economic modelling world,” said Constâncio, “there was no need to counter financial imbalances and financial instability as the financial sector did not play a crucial role from a macroeconomic perspective.  Similarly, under the assumption of self-equilibrating markets, there was no need to monitor macroeconomic imbalances and disequilibria on the labour, product or financial markets.  With an assumed stable private sector, apart from exogenous shocks, the only source of instability acknowledged were governments and their fiscal profligacy.”  In… Read More

Levy Institute Senior Scholar James Galbraith was interviewed for a six-part series on the fiscal cliff by the Real News Network’s Paul Jay. Video of the first two parts of the interview are below; transcripts can be found here.

From 2009 to 2012, the US federal deficit shrank from 10.1% of GDP to 7% of GDP.  That’s the fastest deficit reduction we’ve seen in six decades—and all before the fiscal cliff has kicked in.  Here’s the chart from Jed Graham: Put this alongside a record-setting contraction of government employment and a 7.9 percent unemployment rate, and what you have is a portrait of fiscal irresponsibility.  A lot of this deficit reduction has to do with the fact that the economy is now growing (albeit feebly), instead of contracting, but looking at this chart should also reinforce how dangerous and unnecessary it is that we’ve decided to create an austerity crisis at this moment.  (This “austerity crisis,” by the way, should really be understood to include both the possibility of going over, and staying over, the fiscal cliff AND the possibility of the cliff being replaced by a “grand bargain” on deficit reduction.)  The last time the deficit was reduced at a faster rate was in 1937, when the government embraced a hard pivot to austerity and the economy tumbled back into recession. But don’t worry, we aren’t reliving the history of the 1930s.  Not exactly.  We are combining fiscal irresponsibility with regulatory negligence.  The Financial Stability Board (FSB) reported on Sunday that the shadow banking sector, after contracting in… Read More

Amity Shlaes, whose main claim to fame is an allegedly new history of the Great Depression, thinks we may be in trouble as a result of the election. Looking beyond her alarmingly alliterative title (“2013 Looks to be a Lot Like 1937 in Four Fearsome Ways!”  Oooh! Scary!) she has some valid points. Of course she is talking about the stock market not the real economy, which produces the jobs and the economic benefits most people rely on for a living. And, unfortunately, she doesn’t realize where she is right. But first, what are the four fearsome factors that will drive us to doom? First, a federal spending spree before the election. Shlaes uses “the old 19% rule” as a benchmark to argue that because federal government spending in 2012 “when the crisis was long past” was 24.3% of GDP, clearly the Obama administration was spending up a storm. To argue that the crisis is long past, one must be willing to ignore the employment crisis that still hasn’t left us, but let’s give her this one. Whether this is a problem given current economic conditions is another story. If it’s the debt implications you’re worried about, it is worth noting that revenues as a percentage of GDP are also quite low historically speaking, just over 15% for the last… Read More

The fiscal cliff is very easy to explain.  What many in Congress and the press are saying we should do about it is more confounding. If you were the sort of person who took expressions of policy preferences at face value, you would think that fiscal conservatives and deficit hawks would be ecstatic about this thing we’re calling the “fiscal cliff”—because contrary to our increasingly muddled popular dialogue, the fiscal event about which everyone is raising alarms is just a large and rapid reduction of the budget deficit (about $600 billion of spending cuts and tax increases scheduled for 2013).  Given the widespread deficit hysteria we’ve witnessed over the last few years, it is likely confusing to a lot of unsuspecting observers that so many in Washington and the mainstream press are dead set against this particular piece of deficit reduction. The American public has been ill-prepared for this consensus.  We’ve been told, ad nauseum, that fiscal “stimulus” didn’t and doesn’t work.  But the case for fiscal stimulus is simply the flip side of a case against austerity that few seem to realize (or are willing to recognize) that they are making.