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Developments surrounding the recent G-20 summit further underlined some starkly conflicting views among key global policymakers, an important “American-German divide” in matters of macroeconomic policy in particular.

In an interesting (pun intended) post (Economist’s View: Interest on Reserves and Inflation) Mark Thoma says that the Fed’s paying banks interest on their reserves does not dampen investment, for two reasons, one on the supply side and one on the demand side. On the supply side of the market for loans, Thoma points out that 0.25% (the rate the Fed is paying on reserves) isn’t that high. On the demand side, Thoma says that businesses have a lot of cash on hand that they’re not using to invest, meaning the demand for loans isn’t really there. I want to take issue with the second point, because while large corporations may indeed have a lot of cash on hand, small businesses and households don’t. And they are the ones who are being denied access to credit.

This idea first occurred to me while I was in France in September. I marveled that the debate they’re having (complete with effective social mobilization), is about raising the retirement age to 62. The current Social Security retirement age is 67, and the ‘serious’ proposal from Bowles-Simpson is to index it to life expectancy. This proposal sounds reasonable. But life expectancy, like income, is unevenly distributed. As Paul Krugman and Tom Tomorrow have both pointed out, life expectancy has been increasing much more rapidly for the well-off, not for the rest of the workforce. My proposal is to implement a progressively higher retirement age for low, middle, and high-income workers. If chosen well, the tiered retirement ages by themselves could eliminate the relatively small projected shortfall twenty-five years from now. When I have time, I plan to run some numbers, but I think that such a system could lower the retirement age for low-income workers. This proposal would allow more of those workers who do the back-breaking and health-damaging work of our society to retire while they still have some time to enjoy it. Of course, for most of the working poor, social security alone is unlikely to provide a comfortable retirement. But the point of this counter-proposal is simply to shift the burden of balancing the small imbalance in… Read More

With the recent announcement of QE2 (quantitative easing 2), the Federal Reserve’s new round of long-maturity asset purchases, it is worth looking at some of the effects of QE1. In November 2008, the Fed announced large-scale purchases of mortgage-backed securities and debt issued by the GSEs. Its securities holdings began to climb sharply in early 2009. As shown in blue, the monetary base (a broad measure of the Fed’s liabilities) had already begun to rise several months earlier. New asset purchases for QE1 ended earlier this year. The effects of QE1 and the other stimulative policies adopted by the Fed since late 2008 will be debated for some time to come. But notably, the green line shows that a trade-weighted index of the dollar’s value against a basket of foreign currencies has declined quite a bit. Some world leaders are unhappy about this development, but it may have helped to spur real (inflation-adjusted) U.S. exports, shown in red. The orange line shows the yield on a 10-year inflation-indexed Treasury security, which can be used as a measure of the real interest rate. This rate has tumbled from well over 3.5 percent to negative levels. Some economists doubt that a monetary authority such as the Fed can succeed in reducing real long-term interest rates over a prolonged period, but this is… Read More

In recent weeks, the explanation for the financial and economic crisis that has gripped the world economy has shifted sharply from deregulation and lack of governmental oversight of financial institutions to fraud and criminal activity. In truth, the US Federal Bureau of Investigation began to warn of an “epidemic” of mortgage fraud back in 2004, and my colleague Bill Black has been pointing to the role played by fraud since the crisis began. (See our recent two part series at www.huffingtonpost.com.) To be sure, there was ample fraud in the “pump-and-dump” schemes during the dot-com bubble at the end of the 1990s, which was closely followed by the commodities market speculative boom and bust. (See my article at http://www.levyinstitute.org/publications/?docid=1094. ) And before those episodes we had in quick succession the developing country debt crisis of the early 1980s, the US Saving and Loan fiasco of mid 1980s (with bank crises in many other nations), the Japanese meltdown and the Asian crisis, the Mexican peso crisis, Long Term Capital Management and Russian default, and the Enron affair. Seemingly, the crises have become more frequent and increasingly severe until almost the whole world was infected. It is obvious that there must be some link among these crises and that while fraud played a role in most or even all of them, it… Read More

I’ve emerged this morning to report on some of what’s transpired recently. I’m not referring to whatever might have happened yesterday and overnight at major centers of research in neoclassical macroeconomics, such as the University of Minnesota. I’m referring to a new book by John Quiggin entitled Zombie Economics: How Dead Ideas Still Walk Among Us, which was published late last week by Princeton University Press. While this book is not meant to be on the cutting edge of research, it will hopefully help to bring popular discussion of mainstream macroeconomics and its foibles up to date, adopting a welcome skeptical attitude to this controversial subject. The book deals in part with developments in macroeconomics that began in the 1970s, with the emergence of the New Classical approach to macroeconomics at places like the “U,” as it is sometimes known in the Twin Cities. This new type of macroeconomics quickly became associated in the public mind with ideas like “rational expectations,” a technical assumption that seemed to lead to some preposterous conclusions, including the claim that monetary policy had no effect on unemployment and economic output. Its adherents often saw the Keynesian economists of the day as moving down the tracks just a little more slowly than themselves. It is fair to say that at the time, other mainstream schools… Read More

Hyman P. Minsky, the renowned financial economist, macroeconomist, and Levy Institute distinguished scholar, was born 91 years ago today. A short bio of Minsky, along with links to many of his publications, can be found here. Minsky’s papers are collected at the Minsky Archive, which is housed at the institute. In April, we will be holding our 20th Annual Hyman P. Minsky Conference in New York City. I hope you enjoy these links to information about an economist who was and is very important to this institute.

Last week, my colleague Tom Masterson commented on an op-ed piece by Robert Barro, which argued that much of the U.S. unemployment problem―perhaps 2.7 percentage points of the June unemployment rate of 9.5 percent―could be attributed to the availability of extended unemployment insurance benefits. According to Barro’s argument, huge numbers of people are out of work by their own choice. In fact, data released yesterday from the Job Openings and Labor Turnover Survey (JOLTS) suggest that something very different is going on. Some economic theories about unemployment are based on the notion that workers use more of their time for leisure activities or full-time job search at times when their wages or salaries are relatively low. An example would be an  ice-cream vendor who takes time off on cool or rainy days because sales are expected to be weak at such times. Along these lines, Barro has recently argued that Congressional extensions of benefit eligibility have made paid work less desirable for recipients whose checks might have been discontinued in the absence of new legislation. The figure above shows seasonally adjusted JOLTS data on the private sector for December 2000 through July 2010. This monthly survey, conducted by the Bureau of Labor Statistics, covers approximately 16,000 nonagricultural businesses. The black line shows that the estimated “hire rate” in the private… Read More

The Free Exchange blog calls President Obama’s proposed $50 billion infrastructure stimulus “A New Hope.” Our research begs to differ. We find that spending $50 billion on infrastructure would create little more than half a million new jobs. That’s not an inconsiderable number, but it’s a drop in the bucket compared to the 14.9 million who were unemployed in August (according to the last employment situation report). There are strong arguments to made in favor of infrastructure spending. But if the administration were to spend the same amount on social care (child care, home health care, etc.), the employment gain would be more than twice as great, reaching nearly 1.2 million.Those would be lower paying jobs, but they would go to individuals further down the economic ladder–the people, in other words, most in need of help and most likely to provide further stimulus by promptly spending their earnings. Perhaps the president’s latest proposal is merely a political trap Obama is setting for the Republicans, giving them yet another opportunity to ostentatiously oppose something popular. If so, good luck. But after the weaker-than-needed stimulus package last year, which is now running out of gas in terms of boosting employment, this proposal won’t provide much additional job growth. Half measures, as the saying goes, avail us naught. And this proposal is much less… Read More

Levy Senior Scholar L. Randall Wray explains the foresight of Hyman Minsky in this video.

Suggestions a few months back by Germany’s chancellor that countries running consistently high deficits be expelled from the Euro zone evidently haven’t fallen on deaf ears. Even though almost everyone thinks of expulsion as a remote possibility, the notion does get factored into the thinking of bankers and investors in a way that may ultimately become a self-fulfilling prophesy. Fears of sovereign-debt debt default are not about to go away anytime soon. But there is an alternative for dealing with public debt that may help achieve a more perfect union. The European Central Bank should create a large sum of money—say, a trillion Euros—and distribute it across the Euro zone on a per capita basis. Each country could use this emergency relief as it sees fit. Greece might purchase some of its outstanding public debt; others might spend it on fiscal stimulus. If you think this idea will force every European household to purchase a wheelbarrow with which to transport its soon-to-be-worthless currency, consider the case of Japan. With a 227 percent sovereign debt to GDP ratio, Japan is the world’s most indebted nation. But close to half of this debt is held by the country’s central bank, and interest payments on this half are returned to the Japanese government, making it in effect interest-free. Basically, the central bank printed… Read More

The only way that extending unemployment benefits could actually increase the unemployment rate above what it would otherwise be (other than just assuming it will, as Barro does) is to assume that the people receiving those benefits, rather than spending them on food and rent, use the checks to set fires to businesses that are currently employing people.