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I seem to remember that there used to be a column in a magazine featuring contradictory newspaper headlines. One headline might say, “Fed Chair Says Interest Rates Likely to Rise,” while another in a different newspaper from the very same day would insist, “Fed Chair Says Interest Rates Likely to Fall.” Something like this appears to have occurred in blogs and articles that have published lists of prognosticators who predicted the financial crisis, the Great Recession, and/or the housing crisis. In fact, some pairs of these lists have very few names in common. For example, David Warsh’s often-fascinating online column, “Economic Principals” published the following “Pantheon of Prescients” two days ago: Raghuram Rajan Kenneth Rogoff Nouriel Roubini Robert Shiller William White On the other hand, here are the winners of the heterodox Revere Award, “for the economist who first and most cogently warned the world of the coming Global Financial Crisis”: Dean Baker Steve Keen Nouriel Roubini All of the economists on both lists have had some very interesting things to say about the financial crisis, recession, and/or various other developments since 2007 or so. A major concern of mine with the first list is that, in my view, some on the list have greatly underestimated the role of weak financial regulation as a factor in the crisis. (Another intriguing… Read More

A number of prominent economists have signed a letter calling for more economic stimulus from the United States government in order to put people back to work. Levy senior scholar James K. Galbraith and two other well-known Keynesians chose not to participate, and issued this comment explaining why. A statement from Paul Davidson, James Galbraith and Lord Skidelsky We three were each asked to sign the letter organized by Sir Harold Evans and now co-signed by many of our friends, including Joseph Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and Richard Parker. We support the central objective of the letter — a full employment policy now, based on sharply expanded public effort. Yet we each, separately, declined to sign it. Our reservations centered on one sentence, namely, “We recognize the necessity of a program to cut the mid-and long-term federal deficit… ” Since we do not agree with this statement, we could not sign the letter. Why do we disagree with this statement?  The answer is that apart from the effects of unemployment itself the United States does not in fact face a serious deficit problem over the next generation, and for this reason there is no “necessity [for] a program to cut the mid-and long-term deficit.” On the contrary: If  unemployment can be cured, the deficits we presently… Read More

A recent New York Times article highlighted the inadequacy of job training programs in the face of massive unemployment. The programs do not reflect the demand for highly skilled workers, such as those who can handle high-tech equipment and service jet engines. Even highly regarded programs have less than a 60 percent job placement rate. It is hard to predict the economy’s next great job-producing sectors and develop programs that train for them. We’ve reached the point, moreover, where the experience that come with age has become a roadblock to successful job hunting, and almost 39 percent of the long-term unemployed are men in their mid-40s or older. Unemployment checks barely covers their living expenses. Sometimes families break up or people move in with their elderly parents. It’s a sad story. When passive labor policies are not working and the end of recession seems too far away, it’s time to consider more active steps, including public employment programs. Once upon a time in America, the Civilian Conservation Corps reached out to jobless young people. Perhaps we need another large-scale jobs program, only this time for older workers. Just as the Fed is our lender of last resort, government could take on the role of employer of last resort. It’s paying the jobless anyway, in the form of unemployment insurance (about… Read More

That’s the headline for a defense of Modern Money Theory by Levy senior scholar L. Randall Wray, who complains that “even deficit doves like Paul Krugman, who favor more stimulus now, are fretting about “structural deficits” in the future.” Wray goes on to say: There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments. Regular readers of this blog will recall the earlier debate on these issues between Krugman and Levy senior scholar James K. Galbraith.

Aside from the new symbol adopted for the rupee, the big economic news in India lately is the national government’s deregulation of petroleum prices. In the face of rising food prices, naturally there are concerns about whether deregulated (read: higher) oil prices will fuel inflation. Is this policy not anti-poor? What will happen if oil prices keep rising? How will the growing economy of India, with its growing energy demand, adjust to a future of oil-price volatility? The success of Bhart Bandh (All-India Strike) on July 5th shows that the Aaam Admi (common man) did not take this new price deregulation kindly. People like having their energy subsidized, particularly people who are struggling financially. What’s more, administered prices—with their resulting distortion in the use of resources and corresponding economic loss—are not a visible, measurable macroeconomic variable like the inflation or interest rates. So no one cares if the distortion continues doing great harm to the economy for the simple reason that it’s invisible. It’s the old story: the costs are spread widely and hard to perceive, while the benefits are focused and tangible. But one needs to take a dispassionate view to examine this new policy of energy deregulation and its implications for everyone. What you discover, when you take such a view, is that energy price regulation in India… Read More

In this morning’s Wall Street Journal, Princeton’s Alan Blinder suggests a way to increase fiscal stimulus, deliver aid to those who need it most and avoid increasing federal deficits–all at the same time. Here’s his plan, in his own words: Let the upper-income tax cuts expire on schedule at year end. That would save the government an estimated $75 billion over the next two years. However, it would also diminish aggregate demand a bit. So, instead of using the $75 billion to reduce the deficit, spend it on unemployment benefits, food stamps and the like for two years. That would surely put more spending into the economy than the tax hike takes out, thus creating jobs. How much more? Getting a numerical estimate requires the use of a quantitative model of the U.S. economy. In recent testimony before the House Budget Committee, Mark Zandi of Moody’s Analytics used his model to estimate that extending unemployment insurance benefits has almost five times as much “bang for the buck” as making the Bush tax cuts permanent. Based on his estimates, the budgetary trade I just recommended would add almost $100 billion to aggregate demand over the next two years—without adding a dime to the deficit.

Paul Krugman and James K. Galbraith agree that this is a time for fiscal stimulus, not austerity. But they differ on a larger question: do government deficits ever matter? Or is the government so special–by virtue of its ability to create money out of thin air–that its spending can exceed income forever, by any amount? In an interesting blog post (warning: not safe for the equation-challenged), the New York Times columnist and Nobel laureate Krugman argues that, carried to extremes, deficit spending by government can lead to runaway inflation. But, he adds, “we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.” Krugman wrote this in response to testimony by Galbraith, a Levy senior scholar, to the federal Commission on Deficit Reduction. Galbraith responds in the comments by asserting that Krugman’s conclusion is the result of a modeling error. But his key graf comes earlier: If the government spent but declined to “borrow,” what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for… Read More

The Harlem Children’s Zone is an organization bent on addressing all the problems of poor families in its Manhattan catchment area.  The project involves many government and nonprofit programs and services that aim to improve the environment for disadvantaged kids outside of school. Established in 1997, it also includes a network of charter schools called, collectively, Promise Academy. Doctoral candidate Will Dobbie and economist Roland G. Fryer Jr., both of Harvard, recently published a careful study of the Zone’s  impact on student achievement. They’ve shown that high quality schools—with or without community investments in health, parenting, and early childhood program—boost student achievement, while community investments without high quality schooling have little effect. They’ve shown, to oversimplify, that schools matter. One is tempted to say: Of course they do! Then again, ever since James Coleman’s 1966 study, Equality of Educational Opportunity, which convinced people that family effects dwarfed anything schools could do to promote equality, the importance of schooling is always worth demonstrating. Interestingly, though this was not their primary focus, Dobbie and Fryer have also shown that money (doubtless well spent) is also vital in creating high quality schools. The successful HCZ schools Dobbie and Fryer studied spent $19,272 per student, while the median school district in New York State spent $16,171 and those at the 95th percentile of achievement… Read More

The sudden turn in the mood in Europe regarding the prospects of the global economy needs commenting. In this context, most European governments announced drastic cuts in government expenses in an effort to avoid following Greece to the precipice of default. It coincides with the outcome of the G20 deliberations a few days ago that dropped support for fiscal stimulus and emphasized the risk of having sovereign debts getting out of control. This turn is happening in an environment where the politicians seem to be incapable of directing stimulus to productive directions, while at the same time, the public continues to reject any tax increases to cover the future deficits that today’s stimuli may create. The critical issue is whether we need more and cautiously directed stimulus to enable the global economy to retain current economic activity, or whether we need a fiscal exit. Nobody would disagree with safety nets or government support to post-secondary education, investment in clean energy and new transport infrastructure. After all, these are all Keynesian measures indeed. Keynes never claimed either that his proposed policies can provide deleveraging overnight, or that they can correct the excesses that “Madoff economics” and unregulated markets usually bring about. But Keynes’s way might make deleveraging smoother and with the least possible negative repercussions, especially if appropriate monetary accommodation complements… Read More

The Wall Street Journal reports on signs that risky lending is once again on the upswing. For example: Credit-card issuers mailed 84.8 million offers of plastic to U.S. subprime borrowers in the first six months of this year, up from 43.7 million a year earlier, estimates research firm Synovate. Nearly 8% of loans for new cars in the latest quarter went to borrowers with the lowest range of credit scores, up from 6.2% in 2009’s fourth quarter, according to J.D. Power & Associates and Fair Isaac Corp. The lenders say they’re being careful–really!–and of course things aren’t as bad as they once were. But there are disturbing anecdotes of people who are essentially broke getting credit-card solicitations, and apparently these aren’t isolated incidents: Kathleen Day, a spokeswoman for the Center for Responsible Lending, said the consumer group is “seeing banks re-enter the subprime market at a steady clip and make loans to borrowers who don’t have the ability to repay.”

A Wall Street Journal “Heard on the Street” item plays up the early good news from Greece’s austerity program: In the first half, Greece’s budget deficit came in at €9.6 billion, down 46% from the same period of 2009, the Finance Ministry said this week. Revenues rose 7.2%, while spending fell by 12.8%. Revenue growth remains below target, but not all of the revenue measures have come into effect yet and spending cuts are well ahead. That continues the positive trend identified by the European Commission, IMF and European Central Bank in June’s interim review, and makes this year’s deficit target of 8.1% achievable. The writer’s conclusion is that perhaps a Greek tragedy can be averted after all. This assumes, of course, that the numbers can be believed.

A post in the Wall Street Journal’s Real Time Economics blog notes that counting research and development as investment rather than as an expense would have increased gross domestic product by 2.7 percent between 1998 and 2007 (they refer to new numbers from the BEA). If this were standard national accounting practice, then measured GDP would have grown 0.2 percent faster, or an average of 3 percent annually. It makes some sense to treat R&D as an investment, but this item begs the question: would anyone have been better off if we did?