Blog

C. J. Polychroniou delivers his verdict on the recent eurozone “haircut” deal for Greece (that already looks likely to fall apart given yesterday’s news that Papandreou will submit the plan to a sure-to-be-defeated referendum).  In this new one-pager, he highlights a number of elements that make the deal destined for failure—even if the referendum were to succeed.  The most glaring flaw, says Polychroniou, is the absence of any credible plan for growth (and as the leaked “troika” document reveals, even some policymakers in the eurozone are coming to admit that “austerity!” does not constitute such a plan): More fundamentally, a 50 percent haircut alone will not solve the Greek debt problem. When all is said and done, neither recapitalizing European banks nor turbo-charging the EFSF (especially with dubious schemes) can credibly resolve the eurozone crisis without also enacting policies to promote long-term growth. And at this stage, the only viable and immediate solution to reviving the economies of Greece and the other European member-states is through public spending and quantitative easing. But these are policies that are precluded by Germany’s incorrigibly stubborn disposition toward expansionary fiscal consolidation. Read the one-pager here.

This post provides our latest update of the quarterly figures for the real and nominal GDP of U.S. trading partners (1970q1-2016q4), which were presented a few years ago in a Levy Institute working paper and have now been updated to the second quarter of 2011, with predictions up to 2016 based on the latest IMF World Economic Outlook. The database has been requested over the years by other researchers, so we decided to put it up on our web site. It is, and will be, available here: http://www.levyinstitute.org/pubs/gdp_ustp.xls Our index for the annual growth rate in the real GDP of U.S. trading partners, reproduced above, now shows that no boost in U.S. exports from accelerating growth in the rest of the world can be expected. More specifically, according to the IMF the eurozone will not contribute much to global growth, and if fiscal consolidation in Southern European countries will indeed be implemented, we expect a further slowdown in the area. Given that the eurozone accounts for roughly 16 percent of U.S. exports, the impact on the U.S. economy of a European slowdown, through trade, will not be dramatic — certainly not as dramatic as the potential negative impact on financial wealth if the eurozone sovereign debt crisis spirals out of control.

At Eurointelligence, Rob Parenteau digs into a recently-leaked “Troika” (the IMF, European Central Bank, and European Commission) document that discusses the outlines of a Greek debt restructuring deal.  Among the revelations Parenteau extracts from the document is evidence of a growing willingness to concede that fiscal consolidation is not expansionary.  As Parenteau comments: In 2009 and 2010, citizens across the eurozone were sold large, multi-year tax hikes and government spending cuts on the idea that [expansionary fiscal consolidations] are commonplace and achievable, and besides, balanced fiscal budgets are a sign of prudence and moral purity. In fact, a closer inspection of history suggests fiscal consolidation will tend to be expansionary only under fairly special conditions, namely when accompanied by a) a fall in the exchange rate that improves the contribution of foreign trade to economic growth, and b) a fall in interest rate levels that improves interest rate sensitive spending by households and firms. Notice that neither of these special conditions are automatic, and neither of them have been present in the eurozone of late. Read the whole article, including a link to the leaked document, here.

Sign up here to get the latest updates on new publications at the Levy Economics Institute, including Institute news, featured scholars, and media appearances, sent directly to your inbox.

[The following is the text of my keynote presentation delivered October 20th at “The Capitalist Mode of Power:  Past, Present, Future,” a conference that took place at York University in Toronto.] Back in 1997 I was finishing up my book titled Understanding Modern Money and I sent the manuscript to Robert Heilbroner to see if he’d write a blurb for the jacket. He called me immediately to tell me he could not do it. As nicely as he could he said (in the most soothing voice), “Your book is about money—the most terrifying topic there is. And this book is going to scare the hell out of everybody.” Here we are a decade and a half later and I’m still scaring them. Why? Because nobody wants the truth about money. They want comforting fictions, fantasies, bedtime stories. As Jack Nicholson put it: “They can’t handle the truth.” To be sure, on the left the story is about the evil Fed and bankers and conspiracies against the poor; on the right it is the evil Fed and Congress and conspiracies against the rich. The one thing they seem to be coalescing around is the need for a return to sound money—and I note that Ron Paul and Denis Kucinich are inching toward consensus on that—although they don’t necessarily agree on what… Read More

Ryan Avent digs into the latest GDP numbers at Free Exchange and lays out a set of facts that ought to be drilled into the heads of the public and every opinion-maker:  fiscal policy, particularly when you factor in state and local governments, has basically been either null or contractionary for almost two years now. Federal government spending contributed positively to growth, as an increase in defence spending offset cuts on the non-defence side of the ledger. That positive federal contribution, in turn, offset continued contraction at the state and local government level. All told, the government contribution to output was essentially nil. Government consumption has contributed positively to growth in just 2 of the last 8 quarters. Non-defence federal government spending has contributed positively to growth in just 1 of the last 5 quarters. Generally speaking, fiscal policy has not been stimulative in nearly two years and has been clearly contractionary for the past four quarters. That’s a remarkable situation to contemplate given the rock bottom rates on Treasuries. Truly remarkable.  Multiplier Effect recently featured a couple of posts pointing to Levy scholars arguing that aggregate demand management and short-term stimulus are inadequate to the challenges we’re facing.  It’s important to emphasize, however, that this does not mean the near-term fiscal position is irrelevant.  The status quo, for some… Read More

James Galbraith, interviewed by Henry Blodget, suggests that more “stimulus,” if this means a program that will run out in a couple of years, is not sufficient.  What we need, he insists, is something more like a “strategic plan” for the next 10-15 years, investing in growth and dealing with problems like energy, climate change, and infrastructure (and that laying this groundwork would ultimately shore up private sector confidence).  Galbraith is also careful to distinguish between concerns about private and public debt:  while private, household debt has been a problem for the US, he argues, the public debt is sustainable and should not be a concern.  His closing line is worth repeating:  “We’re a big country.  We can finance our own reconstruction if we choose to do so.”

Today in the New Yorker John Cassidy asks “where is the new Keynes”?  Where, in other words, are the new ideas that have emerged from this historic economic crisis?  While there is nothing, he insists, comparable to a new Keynesianism, there has been a rediscovery of some “important ideas.”  The first: 1. Finance matters. This lesson might seem obvious to the man in the street, but many economists somehow managed to forget it. Two who didn’t were Hyman Minsky and Wynne Godley, both of who were associated with the Levy Institute for Economics at Bard College. Minksy’s now-famous “Financial Instability Hypothesis” can be found here, and one of Godley’s warnings about excessive household debt can be found here. (It is from 1999!)

Research Associates Marshall Auerback and Rob Parenteau have a long piece up at Naked Capitalism taking on the lazy anthropology that poses as economic analysis regarding Greece and the euro zone crisis.  With respect to the image of Greeks lolling about living off an absurdly generous dole at the expense of frugal Germans, they provide some helpful contextual data: … the Greek social safety nets might seem very generous by US standards but are truly modest compared to the rest of the Europe. On average, for 1998-2007 Greece spent only €3530.47 per capita on social protection benefits… By contrast, Germany and France spent more than double the Greek level, while the original Eurozone 12 level averaged €6251.78. Even Ireland, which has one of the most neoliberal economies in the euro area, spent more on social protection than the supposedly profligate Greeks. One would think that if the Greek welfare system was as generous and inefficient as it is usually described, then administrative costs would be higher than that of more disciplined governments such as the German and French. But this is obviously not the case, as Professors Dimitri Papadimitriou, Randy Wray and Yeva Nersisyan illustrate. Even spending on pensions, which is the main target of the neoliberals, is lower than in other European countries.

Here’s one fairly standard reading of our economic policy challenge:  the economy needs more pump priming, the federal government has more than enough fiscal space to provide it, but for political reasons it won’t be forthcoming.  (If you needed further evidence of that last proposition, take a look at the latest House Republican job creation offering:  repealing a law designed to prevent tax evasion by federal contractors, paid for by kicking some seniors off of Medicaid.  Take a moment to gape at the boundary-probing cynicism.  This is the legislative equivalent of planting a giant foam middle finger on the White House lawn.)  So as far as aggregate demand goes, in other words, there’s little reason to think that the federal government will step into the breach (and as things stand, we expect the government to be withdrawing demand from this economy).  But a new one-pager by Pavlina Tcherneva (“Beyond Pump Priming“) suggests that the above reading of the situation is … too optimistic. Even if the AJA, or some other form of aggregate demand injection is passed, there are serious limitations to relying too heavily on an approach that boils down to boosting growth and hoping for the right employment side effects.  Featuring a rather stark graph portraying the ratcheting up of long-term unemployment over the last several decades, the… Read More

“You cannot solve the problem with this level of financing.  It’s not possible.” Dimitri Papadimitriou, interviewed yesterday for Ian Masters’ “Background Briefing,” gets to the heart of the matter on the shortcomings of the proposals for resolving the eurozone crisis that are currently on the table.  Papadimitriou argues that we’re likely looking at a default from the Greek state and that estimates of bondholders facing a 50-60 percent haircut are actually quite optimistic.  He also discusses the possibilities of the “contagion” spreading to this side of the pond.  Listen to the full interview here.

The office of Senator Bernie Sanders (Independent – Vermont) has announced the formation of a panel tasked with drafting legislation to reform the Federal Reserve.  Levy Senior Scholars Randall Wray and James Galbraith and Research Associate Stephanie Kelton have been named to the team. Wray’s recent brief on the Federal Reserve, co-authored with Scott Fullwiler (“It’s Time to Rein in the Fed“), looks at our over-reliance on the Fed (something Wray has discussed elsewhere) and the relative lack of transparency and oversight, wading into issues surrounding democratic accountability and the “independence” of the central bank: There is no difference between a Treasury guarantee of a private liability and a Fed guarantee. If the Fed buys an asset (say, a mortgage-backed security) by “crediting a balance sheet,” it is no different from the Treasury buying an asset by “crediting a balance sheet.” The impact on Uncle Sam’s balance sheet is the same in either case: it is the creation, in dollars, of government liabilities, and it leaves the government holding some asset that could carry default risk. …in practice, the Fed’s promises are ultimately Uncle Sam’s promises, and they are made without the approval of Congress—and in some cases, even without its knowing about them months after the fact. [We are not] implying that Uncle Sam would be unable to keep… Read More