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1. John Quiggin offers a critique of what he calls a “misreading of MMT.” 2. Bill Mitchell, interviewed by the Harvard International Review, waxes functional (emphasis added): Particular budget outcomes should never be a policy target. What the government should be targeting is real goals, by which I mean a sustainable growth rate buoyed by full employment. Why do we want governments? We want them because they can do things that improve our welfare that we can’t do individually. In that context, it becomes clear that public policy should be devoted wholly to making sure that there are enough jobs, that poverty is eliminated, that the public health and public education systems are first class, that people who are less well off are able to become better off, etc. From a macroeconomic point of view, the spending and tax decisions of government should be such that total spending in the economy is sufficient to produce the level of real output at which firms will employ the available labor force. This is the goal, and the particular budget outcomes must serve this goal. None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is… Read More

In his latest one-pager (“Dawn of a New Day for Europe?“) C. J. Polychroniou anticipates the outlines of a Merkel-Sarkozy agreement on policies designed to address the eurozone debt crisis, and comes away skeptical.  Polychroniou suggests that a massive infusion of emergency funding, somewhere on the order of 2 to 3 trillion euros, would be required, but that the self-imposed necessity of operating within the constraints of the ECB’s 2 percent inflation ceiling, as well as the political challenge of passing any far-reaching measures through the national parliaments, make a sufficient response unlikely.  Read it here.

Add central banker Mark Carney (governor of the Bank of Canada—and former vampire squidite) to the list of class traitors unlikely supporters of the Occupy Wall Street movement, calling it “entirely constructive“: In a television interview, Mr. Carney acknowledged that the movement is an understandable product of the “increase in inequality” – particularly in the United States – that started with globalization and was thrust into sharp relief by the worst downturn since the Great Depression, which hit the less well-educated and blue-collar segments of the population hardest. Carney, whom the Harper government is pushing as the next head of the Financial Stability Board, was also the proximate instigator of Jamie Dimon’s well-publicized tirade last month about “anti-American” financial regulation.

Rob Parenteau has a post at Naked Capitalism commenting on Wolfgang Münchau’s article in the Financial Times.  Münchau argues that policy makers in Europe largely ignored the spillover effects of simultaneous fiscal contraction across the entire eurozone.  Parenteau insists that, at least at the level of ideas, the problem occurs at a much more basic level: …while this pursuit of simultaneous, multi-year fiscal consolidation can only thwart itself by dragging down growth and dampening tax revenues, thereby leading perversely to still higher public debt outstanding, the problem does not lie so much in failure of policy makers to recognize and take into account the interactive effects of fiscal consolidation across countries. Rather, the truth of the matter is that most of the eurozone policy makers and their erstwhile economic advisors are practicing a faith based economics. They believe in the moral purity of balanced fiscal budgets. They also believe private sector activity will pick up to more than compensate for public sector cutbacks. That is the essence of the Ricardian Equivalence Theory, which is a central theoretical proposition that mainstream economists believe in and teach every graduate student to parrot. Paul Krugman had a similar reaction: That said, I think Munchau is being too kind here. European leaders and institutions by and large didn’t even get to the point of… Read More

Nouriel Roubini argues at Project Syndicate that widening inequality lends itself to both economic and political instability.  In his latest policy brief, “Waiting for the Next Crash,” Randall Wray connects some of these same dots, tying the rise of “financialization” and soaring household debt levels to stagnating median incomes in the US: …as finance metastasized, the “real” economy was withering—with the latter phenomenon feeding into the former. High inequality and stagnant wage growth tends to promote “living beyond one’s means,” as consumers try to keep up with the lifestyles of the rich and famous. Combine this with lax regulation and supervision of banking, and you have a debt-fueled consumption boom. Add a fraud-fueled real estate boom, and you have the fragile financial environment that made the [global financial crisis] possible. Partly inspired by the work of Hyman Minsky (the Minsky Archives here at the Levy Institute, incidentally, are in the process of being digitized), Wray recommends a set of policy changes that are aimed at righting this imbalance between finance and the “real” economy.  These include restructuring (shrinking) and re-regulating (with strict limits on securitization) the financial sector, and an “employer of last resort” policy that would offer a guaranteed job to everyone willing and able to work (federally funded, with decentralized administration).  The ELR would not just be aimed… Read More

The bowling alley cannot run out of points, and the US government cannot run out of keystrokes.  Research Associate Stephanie Kelton slaps down the folk wisdom that there is nothing the government can do about unemployment because it’s “broke.”  “We don’t understand our own monetary system.” (hat tip to NEP)

“Crises are an inherent feature of capitalism. Marx knew this only too well; so did Keynes and Minsky. Neoliberals, on the other hand, tend to believe that it is government action that causes market turbulence and economic instability.”  This is the opening salvo from a new one-pager by C. J. Polychroniou that takes on neoliberal doctrine in light of the global financial crisis (Read it here.) Polychroniou also has a recent working paper that looks at the potential dissolution of the Eurozone as a failure of neoliberalism: …the fact that EU’s leaders are having a difficult time getting a handle on the Greek problem and providing a comprehensive solution for the eurozone debt crisis is due to the very constraints of the neoliberal economic regime in which policymakers operate, and helped to create, and much less a question of political incompetence. The architecture of eurozone governance, combined with the asymmetries of European integration, severely limit quick, far-reaching political decisions for addressing the debt crisis, including Europe’s banking system that remains vastly undercapitalized. The paper includes a detailed and compelling narrative of how Greece got to where it is today.  (Read the working paper here.)

(cross posted from EconoMonitor) Yet another rescue plan for the EMU is making its way through central Europe—raising the total funding available to the equivalent of $600 billion. Germany agreed to raise its contribution to the fund by more than $100 billion equivalent. However, Slovakia has vetoed the rescue and all eyes are now turned to a forthcoming October 23 summit. In any event, some rescue package is assured because the center of Europe wants to save its banks—that hold billions of euros of troubled government debt. No one is foolish enough to believe that will be enough. The latest casualty is Dexia Group, a Belgian-French behemoth that specializes in sovereign debt. It had already been bailed out once, and now needs another bail-out. Rest assured that Dexia is just today’s domino—the other big European banks will fail, too. This is not a Greek problem. It is not an Irish problem. It is not a Portuguese problem. It is not a Spanish problem. It is not an Italian problem. It is an EMU problem and Band-Aids will never suffice. The problem with the set-up of the EMU was the separation of nations from their currencies—as I have long argued, along with Charles Goodhart, Warren Mosler, and Wynne Godley. (Go here for a relatively recent piece.) And as I said a… Read More

The National Journal asks whether we can learn something about addressing unemployment by studying elements of the unemployment insurance systems of other OECD nations, many of which make re-training a key part of transitioning from UI back to employment.  The American Jobs Act (dead man walking) contains a “bridge to work” provision that would include similar job training and apprenticeship programs (already in place in Georgia and North Carolina) as a means of aiding the long-term unemployed.  The Journal interviewed Dimitri Papadimitriou for their piece, who suggests that while a “bridge to work”-type program would be beneficial, this sort of thing would amount to (at best) nibbling around the edges of the unemployment problem:  “Papadimitriou cautioned that without a more general economic recovery, simply training unemployed workers doesn’t guarantee jobs.”  (read it here) “Bridge to work” might be a positive addition to the social insurance system, but we shouldn’t mistake it for a “solution” to our unemployment problem.  As Papadimitriou illustrates in this Strategic Analysis, we should not expect unemployment to come down without a massive influx of demand, whether foreign (exports) or domestic (higher government deficits).

Without wading into the debate too much, we report on some commentary from the web on yesterday’s announcement that Thomas Sargent and Christopher Sims had won the Nobel Memorial Prize in Economics: “Free-market” supporters differed greatly in their assessments. One “New Monetarist” argues that the choice of Sargent and Sims represents a nod to the anti-Keynesian “New Classical” school of macroeconomic theory, which introduced rational expectations into macro in the 1970s. On the other hand, while Edward Glaeser also seems to view the award as partly an anti-Keynesian decision, his comments on Sims and the New Classical School of macroeconomics emphasize Sims’s efforts to minimize the use of macroeconomic theory of any kind in his econometric work: “Sims — like Sargent, Lucas and Edward Prescott (another great theorist of the post-Keynesian world) — saw that the Keynesian macroeconometric models were a thing of the past, but he understood the ongoing need for economic prediction. Perhaps one day, economic theory will make complete sense of the business cycle, but until that time, policy makers and ordinary investors will still want to have some idea of what lies ahead. Sims’s work addressed that need, free from the confining assumptions of Keynesianism.” Similarly, at this link, Keynesian-leaning Mark Thoma endorses the argument that Sims’s vector autoregression (VAR) techniques help economists avoid making an… Read More

Over the past several decades, many people adopted the view that monetary policy, almost alone, could effectively control the economy. Economists, politicians and scholars came to believe that the Federal Reserve was full of neutral technocrats who dutifully fine-tuned the economy. Through their careful orchestration of interest rates, the money supply and inflation, we assumed that they could guarantee a smoothly functioning economy. Fed officials seemed to do so well at their jobs that they were never doubted. But by depending on monetary policy and discounting fiscal policy as an effective way to secure economic stability, we have created a system that is now dysfunctional. Randall Wray and Micah Hauptman have a piece in The Hill on the problems with our over-reliance on the Federal Reserve.  Due to the fact that fiscal policy is mired in political deadlock (more particularly, expansionary fiscal policy) we may be stuck relying on (inadequate) support from the Fed. Wray recently wrote a policy brief with Scott Fullwiler (“It’s Time to Rein in the Fed”) that is relevant to this issue.  From their one-pager (referring here to QE2):  “…it’s truly remarkable that, three years into the crisis, the Fed still has not learned that monetary policy is about price, not quantity. The Fed is buying $600 billion in long-term Treasuries in the hope of bringing… Read More

This morning, it was announced that Thomas Sargent and Christopher Sims are the winners of the 2011 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (link to New York Times article here; link to official Nobel economics site here). Sargent and Sims’s approach is often thought to imply, among other things, that monetary or fiscal stimulus is unlikely to be of very much benefit to an economy, even one in deep recession.  Of course, the Levy Institute, as a proponent of the Keynesian approach, almost always disagrees strongly with this view on macroeconomic policy, though extreme pessimism about Keynesian stabilization policies is only one possible implication of Sargent and Sims’s extensive oeuvres. Moreover, the technical aspects of Sargent and Sims’s work are also crucial to neoclassical macroeconomics, and their influence is felt in many ways. Of special interest to me as a researcher is their work on vector autoregressions (VARs), which has led to literally thousands of studies in academic journals, even some authored by heterodox economists. (Sims’s seminal contributions to the VAR literature are the main Sims accomplishment cited in the Nobel committee’s “scientific background” paper for today’s announcement.) Nonetheless, as with any research in the social sciences, the VAR approach to empirical work in macroeconomics has been subjected to many critiques and revisions since… Read More