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With all the recent coverage of the federal government’s debt-limit impasse, it has been some time since the private sector’s financial picture has received much attention in the popular press. Nonetheless, there seems to be little news, as the most recent flow-of-funds data release from the Fed depicts a continuation of trends that have held for at least the past two years or so. Specifically, for the business sector, the figure below shows declining ratios of debt to GDP and increasing ratios of cash-like assets to GDP. (You may need to click on the image to make it large enough.) (Liquid assets include checking and savings accounts at banks, Treasury securities, and currency, all of which can be useful in avoiding missed payments, etc., when financial stresses arise. Also, assets and debts are of course measured in terms of dollars, rather than numbers of bonds, shares, etc. In all of the financial ratios discussed in this post, GDP is expressed in terms of seasonally adjusted output per year, though the data are for individual quarters.) In the next figure, shown below, we can see that the personal sector (households, small businesses, and nonprofit organizations) has experienced increasing ratios of securities holdings to GDP in recent quarters, along with falling ratios of liquid assets to GDP. Moreover, as a percentage of… Read More

(Click figure to enlarge.) Could the government loan the money to itself? The federal government is expected reach its debt limit of $14.29 trillion early next month. Normally, the government more or less indirectly sells a large amount of Treasury securities to the Fed, which is technically a private entity, separate from the familiar government run by the President, Congress, and the Supreme Court. This amount has been increasing rapidly, as shown by the red line in the figure above. As the figure suggests, quantitative easing II, or QEII, which officially ended last month, represents only the most recent version of this sort of open-market policy initiative, though it was highly unusual in that it involved very large purchases of Treasury bonds. Hence, even when the government finds that it has to borrow money to pay for its expenditures, it need not borrow from domestic or foreign private investors, or even foreign central banks or the International Monetary Fund (IMF). Instead, it can essentially turn to itself, borrowing from what is close to a government agency, charged with acting in the public interest. Nonetheless, unfortunately, official Treasury Department bond auctions will presumably cease if and when the federal borrowing limit is reached, rendering Fed purchases largely irrelevant to the resolution of Washington’s debt-limit predicament. Hence, the question arises: if the… Read More

(Click figure to enlarge it.) Some “gold bugs” advocate a return to the gold standard, which the United States officially abandoned in the early 1970s.  The annual data in the chart above show that the price of gold has risen sharply in both euros and yen since 1999. Meanwhile, the dollar itself has fallen against both of the currencies, as shown by the lines near the bottom of the chart. Easy monetary policy has played a role in this drop. But a weakening currency has been one factor behind the recent increase in U.S. exports. The latter grew more than imports in percentage terms over the period shown in the figure. But nonetheless, both imports and exports grew by over 40 percent. It would have been difficult to increase exports at all with U.S. goods and services priced in a surging gold-backed currency. It goes without saying that the price of gold could possibly fall rather than rise in coming years. But dealing with a commodity money whose value can abruptly change in ways that harm the economy is always a severe drawback of a currency backed by gold. Of course, if the United States had adopted a gold-backed currency in 1999, U.S. wages, prices, etc. would likely have behaved much differently than they did. Hence, one cannot be sure… Read More

In a New York Times blog, Nancy Folbre recently discussed the alarming disconnect between economic growth and job creation in the United States. While the economy has been growing since the Great Recession’s end in 2009, the employment rate remains stuck at its December 2009 level of 58 percent. This percentage had reached 65 percent during the boom leading up to the 2001 recession—a level not seen since then. The slow recoveries of the job market after the last two recessions have fostered a concern among many that the link between economic growth and job creation has been severed, a phenomenon that might be called the American Output-Jobs Disconnect. Chart 1 at the top of this post illustrates this turning point in the employment rate (employed persons divided by population). The blue line shows the employment rate for males plunging from 71.9 percent in 2000 to 63.7 in 2010, while the red line depicts the rate for females falling from 57.5 percent to 53.6 percent during the same 11-year interval. Reading an interesting proposal from the Center on American Progress (CAP) and the Hamilton Project to reform the Social Security disability program, also known as SSDI, I noticed this chart, which seemed relevant to the same topic. Chart 2 above shows that among men aged 40 to 59, employment rates… Read More

Many Americans interested in economics will recall David Stockman as the controversial White House budget director who swam against a tide of increasing deficits during Ronald Reagan’s administration in the first half of the 1980s. Ultimately, while Reagan supported many high-profile cuts to social benefits and regulatory budgets, he vastly increased military spending and cut taxes drastically, leading to deficits that disappointed fiscal conservatives. Stockman has an op-ed article in yesterday’s New York Times blasting what he sees as weak efforts by the president and congressional Republicans to come up with long-term plans to cut deficits. He disagrees with the Ryan plan’s focus on cuts to programs that help the poor and Obama’s emphasis on ensuring that the rich pay their fair share.  In Stockman’s mind, these approaches to budget cuts leave the federal government’s main fiscal problems unaddressed but go down well politically. One should take note that while Stockman’s alarms of more than 25 years ago went largely unheeded, no serious U.S. fiscal crisis materialized, though deficits reached nearly 6 percent of GDP in 1983. On the other hand, unemployment touched double-digit levels early in Reagan’s tenure, making high deficits nearly inevitable and certainly justifiable from a policy perspective. Moreover, numerous other serious problems arose largely as a result of Reagan’s economic policies, including his attack on the… Read More

(Clicking on picture will make it larger.) Floyd Norris has an interesting column in this morning’s New York Times. Earlier this week, I was getting ready with some observations similar to his, though I am sure I could not have done as good a job as he has in getting across the gist of the problem and presenting some evidence. Essentially, Norris shows that since the introduction of the euro in 2000, products from the countries now in fiscal crisis have lost competitiveness relative to German products in international markets. Norris presents data on competitiveness. His data is similar to the series depicted in the chart at the top of this post, but the data above are real exchange-rate indexes. The lines in my chart compare the competitiveness of various economies’ exports, taking into account not only differences in unit labor costs but also the values of their currencies relative to those of their trading partners. Norris’s graph and my own feature data from different economies. Norris’s point is that Germany is an big exporter partly because it has reduced labor costs relative to its competitors. Meanwhile, according to Norris’s theory, the peripheral countries of Europe, such as Greece, Ireland, and Portugal, have become less competitive, as their labor costs have risen relative to those in Germany and other “core”… Read More

Many Levy Institute scholars and staff members are in New York City for this year’s conference on the late Institute scholar and author. Breakfast should be ending now, with the conference about to begin. The conference’s theme is “financial reform and the real economy.” More information about the conference, including the program, are available at the conference page on the Institute’s website. Update, approximately 3 pm, April 13: The first audio from the conference has now been posted to this page on the Institute website. Now available there is audio from the conference’s formal opening and from the first session. You can choose among recordings of Leonardo Burlamaqui, Dimitri B. Papadimitriou, Jan Kregel, L. Randall Wray, and Eric Tymoigne. The conference ends this Friday, April 15.

(Click graph to expand.) Recent months have seen double-digit increases in energy prices and the prices of many important agricultural commodities. Because of the recent inflation in various raw materials, fuels, and foods, many ordinary Americans have been finding it increasingly difficult to afford basic necessities. The figure above shows just how severe this trend has been. (You will probably need to click on the image to make it larger.) The lines for various commodity groups begin on the left side of the figure at a level of zero percent for the March 2006 observation. Each subsequent point on a given line shows the total percentage change since March 2006 in the amount of one type of farm product that can be purchased at the wholesale level with the average weekly paycheck. The dark blue line that appears nearly flat shows average real (inflation-adjusted) weekly earnings as reported by the government. The Bureau of Labor Statistics (BLS) uses the consumer price index (CPI-U) to deflate this series. The line shows that the purchasing power of wages for a typical job has increased by only about 2.2 percent over the five-year period shown in the figure. Moreover, ground has been lost since early last fall, when wages were as high as 3.3 percent above March 2006 levels. The other lines in… Read More

The new edition of The Atlantic contains this interesting map, showing how changing median incomes and demographics have divided the United States into 12 distinct geographic areas, each contributing to an overall picture of increasing economic inequality. (It may be helpful to use your browser’s “zoom” feature as you look at the map.) For example, our institute is located in a county described by the map as a “monied burb,” while I grew up in a county that the authors have labeled “boom town.” I would venture a guess that many readers who are familiar with these counties will be surprised to see how they are labeled. We take the new map and other efforts like it with a grain of salt, but as something to provoke thought about how things are indeed very different than they used to be.

Charts in last week’s entry, which contained approximations of  real interest rates for various European countries, were unfortunately incorrect.  The problem resulted from a silly mathematical error in the formula used to calculate the figures shown in the graphs. Accordingly, the author has recently uploaded a new version of the post, including corrected diagrams. He apologizes for the errors and any confusion they may have caused.

Paul Krugman slugs it out with our colleague Jamie Galbraith and many other “modern monetary theory” partisans at Krugman’s New York Times blog website. Jamie’s most recent retort is at the top of this page of the blog site. Many of the points raised in the discussion there are central to our work here at the Levy Institute and to the views of Galbraith and others in our macro research group. Update: More links to the ongoing Krugman-MMT debate can be found here.  -G.H., March 31. Update, August 11: Krugman on MMT again, this time drawing lessons from French fiscal policy between World Wars I and II.

(Click picture to enlarge.) Readers may have seen two charts that are part of a column by David Wessel published last week. For five European countries, they compare actual interest rates with those prescribed by a standard policy rule. Wessel’s charts provide some interesting evidence that European Central Bank monetary policy has been either too loose or too tight most of the time for several currently ailing European economies, given these countries’ inflation rates and gaps between actual and potential output.  Wessel’s charts support the article’s theme, which is that severe economic problems in some Eurozone countries result in part from the “one-size-fits-all” interest rate policies of the ECB. Along the same lines, at the top of this entry is a chart of short-term “real interest rates” faced by business borrowers who use overdraft loans in a group of European countries, which are mostly members of the euro area. I have used data on interest rates for this common type of loan, adjusting each month’s observation to reflect the same month’s measured consumer price inflation, so that the resulting “real rates” take into account inflation’s effects on the burden of loan payments. Inflation is helpful to debtors because it has the effect of reducing the amount of goods and services represented by each dollar owed under the terms of a… Read More