The current system of tax-exempt bond financing is inefficient and inequitable because a large portion of the federal subsidy provided by the tax exemption does not reach state and local governments and accrues instead to the wealthiest investors. In addition, the current system excludes large institutional investors, both domestic and foreign, with their huge pools of capital, and it lacks the stable oversight characteristic of the taxable bond market. Edward V. Regan and his associates have developed a new security concept to overcome these weaknesses. The American global infrastructure security (AGIS) bond has two components that are sold separately—tax exemption and income flow—creating a taxable bond for sale in the regular capital markets in addition to the tax exclusion benefit.

Download Public Policy Brief Highlights No. 58A, 1999 PDF (56.50 KB)

Union strength is capable of boosting wages for workers at the low end of the income scale. Even when differences in education and industry type are accounted for, workers in right-to-work states have a greater probability of earning close to the minimum wage than workers in states with relatively high union density. The decline of unionization requires that other labor market institutions, mainly the minimum wage, be used to improve the distribution of income in order to combat the continuing growth of inequality in the United States.

Download Public Policy Brief Highlights No. 57A, 1999 PDF (56.81 KB)

The causes for the instability that has marked the financial system over the past decade lie deep in the economic theory that urges easy and efficient substitution of one piece of paper for another, in the technology-driven tight articulation of receipts and payments, and in the growth of leverage that diminishes the creditworthiness of major institutions when an interruption in their receipts requires them to seek funds. Many of the proposals aimed at reducing risk in the financial system, however, do not recognize these changes or their importance. The call for greater bank transparency, for example, fails to take into account both that bankers and regulators are jealous of their “privacy” and that financial markets, not banks, have lately become the more important player in the financial system. Guidelines are needed that reflect the new financial architecture: controls on the creation of leverage in the repo and derivatives markets and limits on banks’ freedom to back away from borrowers’ cross-border liabilities in currencies other than their own. When such preventive measures fail, then crisis management will require “standstill” agreements to encourage the continuation of something like normal economic life while the losses from financial failure are sorted out.

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In a Special Report, Distinguished Scholar Wynne Godley argues that the long expansion of the American economy has been propelled by forces that cannot be sustained into the medium term. These forces include a wholly exceptional rise in private expenditure relative to disposable income: at no time during the last 40 years has private expenditure exceeded income by such a large amount or for so long a time.

Contents: Conference: "The Macrodynamics of Inequality in the Industrialized and Developing Countries" * Editorial: "Overcoming America’s Infrastructure Deficit" * New Working Paper topics include: Minsky’s Analysis of Financial Capitalism * A Central Banker’s Perspective on the Asian Crisis * The Stock Market and Psychology * Open Economy Macroeconomics Using Models of Closed Systems * A New America with Less Government * Monetary Policy in an Era of Capital Market Inflation * Special Report: Seven Unsustainable Processes * Levy Institute News: Lectures by Leon Levy, Joan R. and John L. Rodgers, Leonard Greene, and Christopher Magee

Download Volume 9, No. 4 PDF (351.17 KB)

Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a “crisis” and could be eliminated with relatively simple adjustments when it occurs. The real issue regarding our ability to provide for retirees throughout the coming century is not the size of Social Security Trust Funds, but the size and distribution of the whole economic pie. When the issue is viewed in this light, it becomes clear that most proposals to “save” the system—locking away budget surpluses, investing the Trust Funds in the stock market, privatization, reduction of benefits—do not address the real problem of caring for future retirees. Solutions consistent with the true nature and scope of the problem lie not within the Social Security system itself but in the realm of a general fiscal policy aimed at ensuring the growth of the economy.

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A new Public Policy Brief argues that the prediction of a coming crisis in Social Security is based on overly pessimistic assumptions about revenues and costs. Even if the prediction were to come to pass, the resulting financial shortfall could be resolved by relatively minor adjustments in the tax system at that time; cutting benefits now, the authors say, simply lowers living standards prematurely without in any way reducing burdens on future workers.

Contents: Levy Institute Workshop on Earnings Inequality, Technology, and Institutions * Workshop: Association for Evolutionary Economics/Levy Institute Summer School on Institutional Economics * Symposium on Behavioral Economics and Policy * Breaux Plan Slashes Social Security Unnecessarily * New Working Paper topics include: Can Social Security Be Saved? * Functional Finance and Full Employment * Keynesian Alternatives to the Independent European Central Bank * New Policy Notes: The Minimum Wage Can Be Raised * Capital Income Taxes and Economic Performance * Breaux Plan Slashes Social Security Benefits Unnecessarily * New Public Policy Brief: Down and Out in the United States

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Claims that the nation has reached full employment take for granted the need for a reserve pool of labor to maintain price stability and labor market flexibility. But are millions of jobless and underemployed workers the best we can do in these times of economic expansion? And what will happen when the inevitable downturn comes? Reduction of the workweek and employment subsidies have been proposed to achieve higher employment, but neither is sure to raise employment and both may have serious side effects. A public service employment program that offers jobs at a fixed wage to all who are willing and able to work can provide full employment without inflationary pressures and with labor market flexibility, preserve workers’ skills, contribute valuable public services, and be relatively inexpensive.

Download Public Policy Brief Highlights No. 53A, 1999 PDF (51.47 KB)

Based on neoclassical theory, cutting budget deficits has come to be seen as a principal way to increase long-run growth, but the empirical evidence is ambiguous on the outcome of this macropolicy. A new model, the classical growth cycles (CGC) model, offers an alternative theoretical framework for analyzing the complex effects of fiscal policy. The CGC model holds that the impacts of fiscal policy on growth are transmitted through its effects on business profitability and the business saving rate. Investigation of both short-run and long-run effects of government spending and of the distinctive long-run effects of different types of government spending suggests that indiscriminate deficit cutting will not lead to a rise in the long-run profit rate and may exacerbate poverty and inequality in the short and the long run.

Download Public Policy Brief Highlights No. 52A, 1999 PDF (56.48 KB)

Despite a long period of strong economic growth, more than 28 million working-age persons were categorized by the Bureau of Labor Statistics as out of the labor force in 1998. A small portion of this population will move into the labor force, but the majority will remain without work. This brief examines the demographics of the out-of-the-labor-force population, their reasons for not working, the likelihood that they will move into the labor force, and the adverse effects on them of prolonged joblessness. Current labor market policies, and especially welfare reform measures, have proved ineffective for the “hard-core” jobless because the policies are predicated on the mistaken notion that the private labor market is dynamic and flexible enough to accommodate anyone who wants to work. A public employment program would complement the operation of the private market, providing those who are able and willing with income, a sense of worth, the opportunity to make a social and economic contribution, and preparation for entry into the labor force.

Download Public Policy Brief Highlights No. 54A, 1999 PDF (104.34 KB)

In The Levy Report Interview, James K. Galbraith discusses his views on the state of the American economy and the economics profession, including the Federal Reserve’s focus on controlling inflation, monetary policy’s role in lowering unemployment, and the connection between unemployment and inequality in the wage structure.

Contents: Ninth Annual Hyman P. Minsky Conference on Financial Structure * James K. Galbraith on the State of the American Economy and the Economics Profession * New Working Paper topics include: Risk Reduction in the New Financial Architecture * Potential for Financial Instability in the European Union * Union Density and the Minimum Wage * Distributional Effects of Disinflationary Monetary Policy* * New Policy Note topics include: How Negative Can US Saving Get? * Surplus Mania: A Reality Check * Providing for Baby Boomers in Their Old Age * Levy Institute News: Lectures on Computers and the Wage Structure * The Psychology and Institutional Determinants of Foreign Exchange Rates * Social Security: Is There a Real Problem? * Sectoral Changes in Employment

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The objective of the Ninth Annual Hyman P. Minsky Conference on Financial Structure was to determine the extent to which domestic and global economic events coincided with the types of instabilities Minsky describes, and to analyze his policy recommendations to alleviate instability and other economic problems. The conference was held April 21–23, 1999, at the Levy Institute’s research and conference center at Blithewood on the campus of Bard College, Annandale-on-Hudson, New York,

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The Levy Institute conducted a survey of small businesses to elicit information about their hiring and employment practices, especially the hiring of former welfare recipients; preferences regarding education, training, and other characteristics of potential employees; effects of increases in the minimum wage on employment decisions; and their responses to various forms of government wage and training subsidies. Analysis of the survey results indicates weaknesses in the assumptions on which recent welfare reform has been based. It also suggests a role for small business that has been overlooked. An active partnership between government and small business, involving incentives for hiring and training as well as mandates for welfare reduction, is required if former welfare recipients are to become independent and productive members of the labor force.

Download Public Policy Brief Highlights No. 51A, 1999 PDF (58.64 KB)

Central banks, national governments, and international organizations have resisted policies that would promote full employment because high employment and high capacity utilization are associated with structural rigidities that result in sluggish growth, inflationary pressures, and other undesirable consequences. What has been almost entirely overlooked is the way in which public sector activity can enhance flexibility with regard to labor, capital goods, natural resources and environmental protection, methods of production, and location of economic activity. The job opportunity approach makes strategic use of public sector activity to create truly full employment, thereby reducing the social and economic costs of unemployment, and to promote projects designed to be consistent with broad macroeconomic goals and social values.

Download Public Policy Brief Highlights No. 50A, 1999 PDF (55.19 KB)

Jeffrey G. Madrick talks with Levy Institute Vice Chairman Leon Levy about hedge funds’ influence over financial markets, and what went wrong with Long-Term Capital.

Contents: Hedge Fund Mysteries: An Interview with Leon Levy by Jeffrey Madrick * New Working Paper topics include: Modern Money * Government Spending and Growth Cycles * The Minimum Wage in Historical Perspective * An Irreverent Overview of the History of Money * Levy Institute News: Lectures on Strategic Prospects for the US and World Economies * The Asian Financial Turmoil * Do Employees Behave the Way Economists Think They Do?

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This double issue of the Summary features the Ninth Annual Hyman P. Minsky Conference on Financial Structure, which underscored the renewed general interest in Minsky’s work as it applies to the global financial system.

 

Contents: Risk Reduction in the New Financial Architecture · Can Goldilocks Survive? · Workshop: Earnings Inequality, Technology, and Institutions · Keynesian Alternatives to the Independent Central European Bank · Ninth Annual Hyman P. Minsky Conference on Financial Structure: Structure, Instability, and the World Economy · The Minimum Wage and Regional Wage Structure: Implications for Income Distribution · How Can We Provide for the Baby Boomers in Their Old Age? · Financing Full Employment · Surplus Mania

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In a new Policy Note summarized in this issue, Senior Scholar L. Randall Wray describes three threats to the current “Goldilocks” economy: global financial crisis, global deflation and excess demand, and a domestic surplus coupled with record private deficits.

Contents: The Minimum Wage in Historical Perspective · Constructing Long and Dense Times-Series of Inequality Using the Theil Statistic · Women’s Work? School Teaching across American Regions · Is Keynesianism Institutionalist? · Government Spending and Growth Cycles · Distributional Effects of Disinflationary Monetary Policy · President Clinton’s Proposed Social Security Reform · How Negative Can US Saving Get? · From Common Market to EMU

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New Working Papers summarized in this issue cover a broad range of topics, including the effects of the Clinton expansion on employment opportunities, the development of modern money from a Chartalist perspective, the federal budget surplus in the context of the coming economic slowdown, concepts of time in economic theory, and the effect of the Asian crisis on Indian economic growth.

Contents: The American Wage Structure 1920-194 · (Full) Employment Policy: Theory and Practice · Symposium: Employment Policies to Reduce Poverty · Money and Credit in a Keynesian Model of Income Determination · Finance and the Macroeconomic Process in a Classical Growth and Cycles Model · Can Expenditure Cuts Eliminate a Budget Deficit? · Modern Money

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HMO medicine sets up an inevitable conflict between the physicians’ traditional fiduciary role and the financial interests of the health plan and its physicians. Regulatory interventions, such as the formulation of rules regarding clinical practice, put government in a micromanagement role it cannot hope to perform well. Government instead should focus on building a regulatory framework to protect patients that would deal with the ethical problems that flow from the very design of HMO medicine. It should address fundamental issues, principally, the financial incentives under which HMO physicians work, restrictions on communication with patients about care options not covered by their health plan, accountability for decisions to withhold care, and the return of care decisions to the province of the physician. The challenge for regulators is to retain the power of the economic incentive to encourage cost-conscious practice, but to separate it from the welfare of patients.

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The postwar system of corporate governance in Germany is being threatened by the failure of some industries to maintain their competitive position (with resulting significant job losses) and pressures for financial liquidity driven by those who have accumulated substantial financial holdings, institutions competing for control of those holdings, and those concerned about the funding of the pension system. The strength of the competitors (mainly the Japanese) lies not in cost differences, but in their capabilities, based on financial commitment and organizational integration, to innovate and thereby to build the long-run future of the corporation. If German labor, finance, and corporate managers each insist on pursuing independent strategies to extract returns from industrial enterprises and if corporations replace investment in innovation with shareholder value as the basis for corporate decision making, German industry may be unable to regenerate the basis of sustainable prosperity.

Download Public Policy Brief Highlights No. 49A, 1998 PDF (57.58 KB)

Despite the crisis in the Japanese financial sector, prolonged recession, and competitive challenges, Japan’s formidable productive system remains strong. Nevertheless, the system of corporate governance, which has pursued a strategy of retaining corporate revenues and reallocating labor resources and returns to labor in order to invest in productive capabilities, faces short-term pressures from a transformation of the financial sector and long-term pressures from the growth of intergenerational dependence. Current reforms seek to generate funding for the pension system and profits for financial enterprises from international securities and money markets. These reforms seem to work within the corporate governance framework that emphasizes the retain-and-reallocate strategy, but the question is whether they will create powerful pressures to extract returns from the domestic economy, thereby affecting how corporations are managed and resources allocated.

Download Public Policy Brief Highlights No. 48A, 1998 PDF (57.77 KB)

HMO medicine sets up an inevitable conflict between the physicians’ traditional fiduciary role and the financial interests of the health plan and its physicians. Regulatory interventions, such as the formulation of rules regarding clinical practice, put government in a micromanagement role it cannot hope to perform well. Government instead should focus on building a regulatory framework to protect patients that would deal with the ethical problems that flow from the very design of HMO medicine. It should address fundamental issues, principally, the financial incentives under which HMO physicians work, restrictions on communication with patients about care options not covered by their health plan, accountability for decisions to withhold care, and the return of care decisions to the province of the physician. The challenge for regulators is to retain the power of the economic incentive to encourage cost-conscious practice, but to separate it from the welfare of patients.

Download Public Policy Brief Highlights No. 47A, 1998 PDF (57.14 KB)

The United States’ official poverty measure defines the poor in terms of a family’s actual, yearly cash income relative to an estimate of the income needed to sustain a minimally acceptable standard of living. An alternative definition, designed to reflect a family’s ability to achieve economic independence, would instead rest on its capacity for generating income. Net earnings capacity (NEC) is an indicator of the income a family could earn if all working-age family members work full-time, full-year, at earnings consistent with their age, education, and other characteristics, with an adjustment made for child care costs. NEC is not intended as a replacement for the official measure, but as a supplement. The official measure identifies the population in need of short-term monetary assistance, whereas NEC identifies the population in need of longer-term skill-enhancing assistance in order to become self-reliant. Two general policy approaches to reduce the prevalence of NEC poverty are to increase the level of education and other income-generating characteristics of those with low earnings capacity and to increase the returns they receive for work.

Download Public Policy Brief Highlights No. 46A, 1998 PDF (58.18 KB)

In this issue’s editorial, James K. Galbraith and George Purcell trace the chain of worldwide events that followed from the Federal Reserve’s failure to pursue interest rate cuts.

Contents: Symposium: Employment Policies to Reduce Poverty * Wall Street Blues: An Interview with Leon Levy by Jeffrey Madrick * Editorial: The Butterfly Effect (James K. Galbraith and George Purcell) * New Working Paper topics include: An Ethical Framework for Cost-Effective Medicine * Derivatives and Global Capital Flows: Applications to Asia * Can Expenditure Cuts Eliminate a Budget Deficit? * The American Wage Structure, 1920-1947 * New Policy Notes: Small Business and the Minimum Wage * Small Business and the New Welfare * Levy Institute News: Scholars Brief Members of Congress * Upcoming Conferences on Financial Structure

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During the recent robust expansion only 700,000 of the almost 12 million jobs created went to the half of the population that does not have at least some college education. Even though the number of officially unemployed fell to less than 4 million in the 25-and-over age group, there remain in that group over 26 million potentially employable workers—the combined number of those who are actively seeking work (and are counted as officially unemployed) and those who are currently out of the labor force but would be willing to participate. Since expansion has not proven sufficient to remedy this intolerably high level of wasted human resources, well-targeted, active labor market policies are required. One such policy is a job opportunity program that “hires off the bottom,” providing minimum-wage jobs for all those who are ready, willing, and able to work. The program would create a buffer stock of labor from which employers could hire during upturns instead of bidding up the wages of the already employed, and thus would offer both full employment and price stability.

Download Public Policy Brief Highlights No. 45A, 1998 PDF (95.72 KB)