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Working Paper No.627
19 October 2010
The Transition from Industrial Capitalism to a Financialized Bubble Economy
AbstractFor the past decade, the US economy has been driven not by industrial investment but by a real estate bubble. Although the United States may seem to be the leading example of industrial capitalism, its economy is no longer based mainly on investing in capital goods to employ labor to produce output to sell at a profit. The largest sector remains real estate, whose cash flow (EBITDA, or earnings before interest, taxes, depreciation, and amortization) accounts for over a quarter of national income. Financially, mortgages account for 70 percent of the US economy’s interest payments, reflecting the fact that real estate is the financial system’s major customer.
As the economy’s largest asset category, real estate generates most of the economy’s capital gains. The gains are the aim of real investors, as the real estate sector normally operates without declaring any profit. Investors agree to pay their net rental income to their mortgage banker, hoping to sell the property at a capital gain (mainly a land-price gain).
The tax system encourages this debt pyramiding. Interest and depreciation absorb most of the cash flow, leaving no income tax due for most of the post-1945 period. States and localities have shifted their tax base off property onto labor via income and sales taxes. Most important, capital gains are taxed at a much lower rate than are current earnings. Investors do not have to pay any capital gains tax at all as long as they invest their gains in the purchase of new property.
This tax favoritism toward real estate—and behind it, toward bankers as mortgage lenders—has spurred a shift in US investment away from industry and toward speculation, mainly in real estate but also in the stock and bond markets. A postindustrial economy is thus largely a financialized economy that carries its debt burden by borrowing against capital gains to pay the interest and taxes falling due.
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Working Paper No.626
11 October 2010
Technical Change in India’s Organized Manufacturing Sector
AbstractWe use the real wage–profit rate schedule to examine the direction of technical change in India’s organized manufacturing sector during 1980–2007. We find that technical change was Marx biased (i.e., declining capital productivity with increasing labor productivity) through the 1980s and 1990s; and Hicks neutral (increasing both capital and labor productivity) post-2000. The historical experience suggests that Hicks-neutral technical change may only be a passing phase before we see a return to the long-term trend of Marx-biased technical change. We also find that the real profit rate has increased from about 30 percent to a very high 45 percent, that the real wage rate increased marginally, and that the share of capital in value added doubled. Overall, technical change in India’s organized manufacturing sector during 1980–2007 favored capital.
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Working Paper No.625
10 October 2010
A Post Keynesian Perspective on the Rise of Central Bank Independence
AbstractThis paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.
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Working Paper No.624
30 September 2010
A Reassessment of the Use of Unit Labor Costs as a Tool for Competitiveness and Policy Analyses in India
AbstractWe reinterpret unit labor costs (ULC) as the product of the labor share in value added, times a price adjustment factor. This allows us to discuss the functional distribution of income. We use data from India’s organized manufacturing sector and show that while India’s ULC displays a clear upward trend since 1980 (with a decline since the early 2000s), this is exclusively the result of the increase in the price deflator used to calculate the ULC. The labor share of India’s organized manufacturing sector has been on a downward trend, from 60 percent in 1980 to 26 percent in 2007. This means that the sector’s capital share increased from 40 to 74 percent over the same period. We also find that real wages have increased minimally during the period analyzed—well below labor productivity—while the real profit rate and unit capital costs have increased substantially. We conclude that if India’s organized manufacturing sector has lost any competitiveness, it is the result of the increase in unit capital costs. Our analysis questions policy recommendations that advocate wage moderation, which result from simply looking at the evolution of the ULC, and that blame the loss of competitiveness on high or increasing wages.
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Working Paper No.623
28 September 2010
The Meltdown of the Global Economy
AbstractThe enormity and pervasiveness of the global economic crisis that began in 2008 makes it relevant to analyze the circumstances that can explain this catastrophe. This will also provide clues to the appropriate remedial measures needed to prevent future occurrences of similar developments.
The paper begins with some theoretical concerns relating to factors that could trigger a similar crisis. The first of these concerns relates to the deregulated financial institutions and the growing uncertainty that can be witnessed in these liberalized financial markets. The secondrelates to financial engineering with innovations in these markets, simultaneously providing cushions against risks while generating flows of liquidity that remain beyond the conventional sources of bank credit.
Interpreting the role of uncertainty, one can observe the connections between investment and finance, both of which are subject to changes in the state of expectations. The initial formulation can be traced back to John Maynard Keynes’s General Theory (1936), where liquidity preference is linked to asset prices and new investments. The Keynesian analysis of the impact of uncertainty related expectations was reformulated in 1986 by Hyman P. Minsky, who introduced the possibility of sourcing external finance through debt, which further adds to the impact of uncertainty. Minsky’s characterization of deregulated financial markets considers the newfangled sources of nonbank credit, especially with the involvement of banks in the securities market under the universal banking model.
As for the institutional arrangements that provide for profits on transactions, financial assets bought and sold in the primary market as initial public offerings of stocks are usually transacted later, in the secondary market, where these are no longer backed by physical assets.In the upswing, finance creates a myriad of financial claims and liabilities, and thus becomes increasingly remote from the real economy, while innovations to hedge and insulate assets continue to proliferate in the financial market, especially in the presence of uncertainty.
The paper dwells on an account of the pattern of the financial crisis and its spread in the United States. This is appended by a stylized account of the turn of events in terms of a theoretical model that highlights the role of uncertainty in the process.
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Working Paper No.622
27 September 2010
Innocent Frauds Meet Goodhart’s Law in Monetary Policy
AbstractThis paper discusses recent UK monetary policies as instances of John Kenneth Galbraith’s “innocent fraud,” including the idea that money is a thing rather than a relationship, the fallacy of composition (i.e., that what is possible for one bank is possible for all banks), and the belief that the money supply can be controlled by reserves management. The origins of the idea of quantitative easing (QE), and its defense when it was applied in Britain, are analyzed through this lens. An empirical analysis of the effect of reserves on lending is conducted; we do not find evidence that QE “worked,” either by a direct effect on money spending, or through an equity market effect. These findings are placed in a historical context in a comparison with earlier money control experiments in the UK.
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Working Paper No.621
25 September 2010
Gendered Aspects of Globalization
AbstractWe need to go beyond the accepted notions relating to the role of women in the economy and society, especially in terms of what is recognized in mainstream theory and policy as “work” done by women. Thus, the traditional gender roles, with the man as the breadwinner and the woman in the role of housekeeper, do not explain the contribution of women in general. We also need to go beyond standard models to interpret the intrahousehold gender inequities. We do not gain much insight from dwelling on the cooperative-conflict type of bargaining concepts either, which are offered in the literature to unfold the process of women’s subordination within households. The issues relate to the intrahousehold power structure, which has an inbuilt bias against female members under patriarchy.
In terms of a policy agenda, especially in the context of social and economic disparities that affect women in particular, we need to recognize not only the collective social norms but also the unequal power relations that influence the sexual division of labor, both within the family and in the workplace. A notion of “gendered moral rationality,” complemented by the Rawlsian concept of “justice as fairness” (implying compensation for the underprivileged), can be used to devise policy that addresses the status of women both in the workplace and at home. We need a concerted move toward sensitization of gender issues and scrutiny entailing a gender audit at every level of activity. This may work at least partially until society is ready to remodel itself by treating men and women equally.
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Book Series
23 September 2010
The Elgar Companion to Hyman Minsky
AbstractHyman Minsky’s analysis, in the early 1990s, of the capitalist economy’s transformation in the postwar period accurately predicted the global financial meltdown that began in late 2007. With the republication in 2008 of his seminal books John Maynard Keynes (1975) and Stabilizing an Unstable Economy (1986), his ideas have seen an unprecedented resurgence, and the essays collected in this companion volume demonstrate why both economists and policymakers have turned to Minsky’s works for guidance in understanding and addressing the current crisis. The volume brings together the world’s foremost Minsky scholars to provide a comprehensive overview of his approach, and includes chapters that extend his analysis to the present. Beginning with Minsky’s ideas on money, banking, and finance—including his influential financial instability hypothesis—subjects range from the psychology of financial markets to financial innovation and disequilibrium, to the role of Big Government in constraining endogenous instability, to a Minskyan approach to international relations theory.
Published By: Edward Elgar
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Working Paper No.620
20 September 2010
Measuring Poverty Using Both Income and Wealth
AbstractThis paper presents a comparative analysis of the approaches to poverty based on income and wealth that have been proposed in the literature. Two types of approaches are considered: those that look at income and wealth separately when defining the poverty frontier, and those in which these two dimensions are integrated into a single index of welfare. We illustrate the implications of these approaches on the structure of poverty using data for two industrialized countries—for example, the United States and Spain. We find that the incidence of poverty in these two countries varies significantly depending on the poverty definition adopted. Despite this variation, our results suggest that the poverty problem is robust to changes in the way poverty is measured. Regarding the identification of the poor, there is a high level of misclassification between the poverty indices: for most of the pairwise comparisons, the proportion of households that are misclassified is above 50 percent. Interestingly, the rate of misclassification in the United States is significantly lower than in Spain. We argue that the higher correlation between income and wealth in the United States contributes to explaining the greater overlap between poverty indices in this country.
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Working Paper No.619
19 September 2010
Asia and the Global Crisis
AbstractThe global crisis of 2007–09 affected developing Asia largely through a decline in exports to the developed countries and a slowdown in remittances. This happened very quickly, and by 2009 there were already signs of recovery (except on the employment front). This recovery was led by China’s impressive performance, aided by a large stimulus package and easy credit. But China needs to make efforts toward rebalancing its economy. Although private consumption has increased at a fast pace during the last decades, investment has done so at an even faster pace, with the consequence that the share of consumption in total output is very low. The risk is that the country may fall into an underconsumption crisis.
Looking at the medium and long term, developing Asia’s future is mixed. There is one group of countries with a highly diversified export basket. These countries have an excellent opportunity to thrive if the right policies are implemented. However, there is another group of countries that relies heavily on natural resources. These countries face a serious challenge, since they must diversify.
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Working Paper No.618
16 September 2010
Quality of Match for Statistical Matches Used in the 1992 and 2007 LIMEW Estimates for the United States
AbstractThe quality of match of four statistical matches used in the LIMEW estimates for the United States for 1992 and 2007 is described. The first match combines the 1992 Survey of Consumer Finances (SCF) with the 1993 March Supplement to the Current Population Survey, or Annual Demographic Supplement (ADS). The second match combines the 1985 American Use of Time Project survey (AUTP) with the 1993 ADS. The third match combines the 2007 SCF with the 2008 March Supplement to the CPS, now called the Annual Social and Economics Supplement (ASEC). The fourth match combines the 2007 American Time Use Survey with the 2008 ASEC. In each case, the alignment of the two datasets is examined, after which various aspects of the match quality are described. Also in each case, the matches are of high quality, given the nature of the source datasets.
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Working Paper No.617
15 September 2010
How to Sustain the Chinese Economic Miracle?
AbstractThis paper investigates China’s role in creating global imbalances, and the related call for a massive renminbi revaluation as a (supposed) panacea to forestall their reemergence as the world economy recovers from severe crisis. We reject the prominence widely attributed to China as a cause of global imbalances and the exclusive focus on the renminbi-dollar exchange rate as misguided. And we emphasize that China’s response to the global crisis has been exemplary. Apart from acting as a growth leader in the global recovery by boosting domestic demand to offset the slump in exports, China has in the process successfully completed the first stage in rebalancing its economy, which is in stark contrast to other leading trading nations that have simply resumed previous policy patterns. The second stage in China’s rebalancing will consist of further strengthening private consumption. We argue that this will be best supported by continued reliance on renminbi stability and capital account management, so as to assure that macroeconomic policies can be framed in line with domestic development requirements.
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Public Policy Brief No.115
13 September 2010
What Should Banks Do?
AbstractIn this new brief, Senior Scholar L. Randall Wray examines the later works of Hyman P. Minsky, with a focus on Minsky’s general approach to financial institutions and policy.
The New Deal reforms of the 1930s strengthened the financial system by separating investment banks from commercial banks and putting in place government guarantees such as deposit insurance. But the system’s relative stability, and relatively high rate of economic growth, encouraged innovations that subverted those constraints over time. Financial wealth (and private debt) grew on trend, producing immense sums of money under professional management: we had entered what Minsky, in the early 1990s, labeled the “money manager” phase of capitalism. With help from the government, power was consolidated in a handful of huge firms that provided the four main financial services: commercial banking, payments services, investment banking, and mortgages. Brokers didn’t have a fiduciary responsibility to act in their clients’ best interests, while financial institutions bet against households, firms, and governments. By the early 2000s, says Wray, banking had strayed far from the (Minskyan) notion that it should promote the capital development of the economy.
Download Public Policy Brief No. 115, 2010 PDF (240.00 KB) -
Working Paper No.616
09 September 2010
Product Complexity and Economic Development
AbstractWe rank 5,107 products and 124 countries according to the Hidalgo and Hausmann (2009) measures of complexity. We find that: (1) the most complex products are in machinery, chemicals, and metals, while the least complex products are raw materials and commodities, wood, textiles, and agricultural products; (2) the most complex economies in the world are Japan, Germany, and Sweden, and the least complex, Cambodia, Papua New Guinea, and Nigeria; (3) the major exporters of the more complex products are the high-income countries, while the major exporters of the less complex products are the low-income countries; and (4) export shares of the more complex products increase with income, while export shares of the less complex products decrease with income. Finally, we relate the measure of product complexity with the concept of Complex Products and Systems, and find a high degree of conformity between them.
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Working Paper No.615
01 September 2010
Quality of Match for Statistical Matches Used in the 1999 and 2005 LIMEW Estimates for Canada
AbstractThe quality of match of four statistical matches used in the LIMEW estimates for Canada for 1999 and 2005 is described. The first match combines the 1999 Survey of Financial Security (SFS) with the 1999 Survey of Labour and Income Dynamics (SLID). The second match combines the 1998 General Social Survey (GSS) with the 1999 SLID. The third match combines the 2005 SFS with the 2005 SLID. The fourth match combines the 2005 GSS with the 2005 SLID. In each case, the alignment of the two datasets is examined, after which various aspects of the match quality are described. Also in each case, the matches are of high quality, given the nature of the source datasets.
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Working Paper No.614
25 August 2010
The “Keynesian Moment” in Policymaking, the Perils Ahead, and a Flow-of-funds Interpretation of Fiscal Policy
AbstractWith the global crisis, the policy stance around the world has been shaken by massive government and central bank efforts to prevent the meltdown of markets, banks, and the economy. Fiscal packages, in varied sizes, have been adopted throughout the world after years of proclaimed fiscal containment. This change in policy regime, though dubbed the “Keynesian moment,” is a “short-run fix” that reflects temporary acceptance of fiscal deficits at a time of political emergency, and contrasts with John Maynard Keynes’s long-run policy propositions. More important, it is doomed to be ineffective if the degree of tolerance of fiscal deficits is too low for full employment.
Keynes’s view that outside the gold standard fiscal policies face real, not financial, constraints is illustrated by means of a simple flow-of-funds model. This shows that government deficits do not take financial resources from the private sector, and that demand for net financial savings by the private sector can be met by a rising trade surplus at the cost of reduced consumption, or by a rising government deficit financed by the monopoly supply of central bank credit. Fiscal deficits can thus be considered functional to the objective of supplying the private sector with a provision of financial wealth sufficient to restore demand. By contrast, tax hikes and/or spending cuts aimed at reducing the public deficit lower the available savings of the private sector, and, if adopted too soon, will force the adjustment by way of a reduction of demand and standard of living.
This notion, however, is not applicable to the euro area, where constraints have been deliberately created that limit public deficits and the supply of central bank credit, thus introducing national solvency risks. This is a crucial flaw in the institutional structure of Euroland, where monetary sovereignty has been removed from all existing fiscal authorities. Absent a reassessment of its design, the euro area is facing a deflationary tendency that may further erode the economic welfare of the region.
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Working Paper No.613
23 August 2010
As You Sow So Shall You Reap
AbstractWe develop an Index of Opportunities for 130 countries based on their capabilities to undergo structural transformation. The Index of Opportunities has four dimensions, all of them characteristic of a country’s export basket: (1) sophistication; (2) diversification; (3) standardness; and (4) possibilities for exporting with comparative advantage over other products. The rationale underlying the index is that, in the long run, a country’s income is determined by the variety and sophistication of the products it makes and exports, which reflect its accumulated capabilities. We find that countries like China, India, Poland, Thailand, Mexico, and Brazil have accumulated a significant number of capabilities that will allow them to do well in the long run. These countries have diversified and increased the level of sophistication of their export structures. At the other extreme, countries like Papua New Guinea, Malawi, Benin, Mauritania, and Haiti score very poorly in the Index of Opportunities because their export structures are neither diversified nor sophisticated, and they have accumulated very few and unsophisticated capabilities. These countries are in urgent need of implementing policies that lead to the accumulation of capabilities.
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Working Paper No.612
20 August 2010
What Do Banks Do? What Should Banks Do?
AbstractBefore we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled “Reconstituting the United States’ Financial Structure.” This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper).
Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.
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Working Paper No.611
17 August 2010
Why China Has Succeeded—and Why It Will Continue to Do So
AbstractThe key factor underlying China’s fast development during the last 50 years is its ability to master and accumulate new and more complex capabilities, reflected in the increase in diversification and sophistication of its export basket. This accumulation was policy induced and not the result of the market, and began before 1979. Despite its many policy mistakes, if China had not proceeded this way, in all likelihood it would be a much poorer country today. During the last 50 years, China has acquired revealed comparative advantage in the export of both labor-intensive products (following its factor abundance) and sophisticated products, although the latter does not indicate that there was leapfrogging. Analysis of China’s current export opportunity set indicates that it is exceptionally well positioned (especially taking into account its income per capita) to continue learning and gaining revealed comparative advantage in the export of more sophisticated products. Given adequate policies, carefully thought-out and implemented reforms, and skillful management of constraints and risks, China has the potential to continue thriving. This does not mean, however, that high growth will continue indefinitely.
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Working Paper No.610
13 August 2010
Investing in Care
AbstractMassive job losses in the United States, over eight million since the onset of the “Great Recession,” call for job creation measures through fiscal expansion. In this paper we analyze the job creation potential of social service–delivery sectors—early childhood development and home-based health care—as compared to other proposed alternatives in infrastructure construction and energy. Our microsimulation results suggest that investing in the care sector creates more jobs in total, at double the rate of infrastructure investment. The second finding is that these jobs are more effective in reaching disadvantaged workers—those from poor households and with lower levels of educational attainment. Job creation in these sectors can easily be rolled out. States already have mechanisms and implementation capacity in place. All that is required is policy recalibration to allow funds to be channeled into sectors that deliver jobs both more efficiently and more equitably.
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Working Paper No.609
11 August 2010
Using Capabilities to Project Growth, 2010–30
AbstractWe forecast average annual GDP growth for 147 countries for 2010–30. We use a cross-country regression model where the long-run fundamentals are determined by countries’ accumulated capabilities and the capacity to undergo structural transformation.
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Working Paper No.608
09 August 2010
Assessing the Returns to Education in Georgia
AbstractThe economic returns to education in transition countries have been extensively evaluated in the literature. The present study contributes to this literature by estimating the returns to education in Georgia during the last transition period 2000–04. We find very low returns to education in Georgia and little evidence of an increasing trend in the returns. This picture contrasts with somewhat higher rates of return to education in the mid-1990s in Georgia and the recent estimates from other transition countries. A further analysis of the shifts in the supply and demand for education sheds light on possible causes. In particular, on the supply side, the decline in the quality of education in the 1990s has negated the improvements in the provision of skills needed by market economies during this period. On the demand side, the expansion of the Georgian economy has taken place in the direction of fields such as public administration and education that employ a highly educated workforce but do not remunerate well. Yet it would be a mistake to conclude that education is not a valuable asset in Georgia. The role of education is largely manifested in its impact on the employability of individuals, an issue that has been overlooked in the transition literature. Once this impact is taken into account, education is shown to play an increasingly important role in influencing the earnings of the working population in Georgia. The paper uses the ordinary least squares approach, instrumental variables approach, and sample selection correction, taking into account conditional and unconditional marginal effects of education on earnings.
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Public Policy Brief No.114
06 August 2010
Debts, Deficits, Economic Recovery, and the US Government
AbstractIn this new brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.
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Working Paper No.607
03 August 2010
Extrinsic Rewards and Intrinsic Motives
AbstractEmployers structure pay and employment relationships to mitigate agency problems. A large literature in economics documents how the resolution of these problems shapes personnel policies and labor markets. For the most part, the study of agency in employment relationships relies on highly stylized assumptions regarding human motivation, e.g., that employees seek to earn as much money as possible with minimal effort. In this essay, we explore the consequences of introducing behavioral complexity and realism into models of agency within organizations. Specifically, we assess the insights gained by allowing employees to be guided by such motivations as the desire to compare favorably to others, the aspiration to contribute to intrinsically worthwhile goals, and the inclination to reciprocate generosity or exact retribution for perceived wrongs. More provocatively, from the standpoint of standard economics, we also consider the possibility that people are driven, in ways that may be opaque even to themselves, by the desire to earn social esteem or to shape and reinforce identity.
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