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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.

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[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

I study the distribution of wealth and income here at the Levy Institute, so I read the first five hundred words of Robert Samuelson’s Washington Post column on inequality (“The backlash against the rich,” Oct. 9th) with interest and approval. But I knew it couldn’t last. Once Samuelson gets beyond description and attempts explanation and analysis, he is clearly out of his depth. Samuelson turns his gaze to the proposal to raise income taxes on those with incomes above a million dollars, whom he refers to as “job creators”—a Republican Party talking point that Samuelson repeats uncritically. He makes two mistakes in citing a paper, written by my colleague Ed Wolff, in which the distribution of assets for the top 1% of households by wealth (total assets minus total debt) is compared to the distribution for the bottom 80%. First, Samuelson seems to assume that those people who own privately held businesses are small business owners. Second, not all of the people in the top 1% of household wealth are households making more than $1 million a year in income. In Ed Wolff’s paper we see that the wealthiest 1% of U.S. households in 2007 held more than half of their net worth in “unincorporated business equity and other real estate,” and only 26% in financial assets such as stocks,… Read More

Are you a reclusive economist-savant who happens to know how a member state might be able to exit the European Monetary Union in an orderly fashion?  Would your idea appeal to a center-right British think tank?  If so, you need to shave your beard and put in for the Wolfson Prize (don’t worry, with the 250,000 pounds sterling you can buy a new beard).  Via Free Exchange, the winning proposal will be chosen by a panel of economists selected by Policy Exchange, a London-based think tank.  Lord Wolfson of Aspley Guise, who is putting up the cash, explains what they’re looking for:  “Consideration will need to be given to what a post-euro Eurozone would look like, how transition could be achieved and how the interests of employment, savers, and debtors would be balanced. Importantly, careful consideration must also be given to managing the potential impact on the international banking system.” Some of the Levy Institute’s work on the eurozone crisis more generally can be found here: Papadimitriou and Wray, “Euroland in Crisis as the Global Meltdown Picks Up Speed” Polychroniou, “An Unblinking Glance at a National Catastrophe and the Potential Dissolution of the Eurozone” Varoufakis and Holland, “A Modest Proposal for Overcoming the Euro Crisis” Auerback, “What Happens if Germany Exits the Euro?” Papadimitriou, Wray, and Nersisyan, “Endgame for the… Read More