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Public Policy Brief No.110
18 March 2010
Toward True Health Care Reform: More Care, Less Insurance
AbstractThe United States has the most expensive health care system in the world, yet its system produces inferior outcomes relative to those in other countries. This brief examines the health care reform debate and argues that the basic structure of the health care system is unlikely to change, because “reform” measures actually promote the status quo. The authors believe that the fundamental problem facing the US health care system is the unhealthy lifestyle of many Americans. They prefer to see a reduced role for private insurers and an increased role for government funding, along with greater public discussion of environmental and lifestyle factors. A Medicare buy-in (“public option”) for people under 65 would provide more cost control (by competing with private insurance), help to solve the problem of treatment denial based on preexisting conditions, expand the risk pool of patients, and enhance the global competitiveness of US corporations—thus bringing the US health care system closer to the “ideal” low-cost, universal (single-payer) insurance plan.
Download Public Policy Brief No. 110, 2010 PDF (683.68 KB) -
Working Paper No.591
18 March 2010
Global Imbalances, the US Dollar, and How the Crisis at the Core of Global Finance Spread to “Self-Insuring†Emerging Market Economies
AbstractThis paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets’ exposure to the turmoil in global finance itself. As “innocent bystanders,” even countries that had taken out “self-insurance” proved vulnerable to the global “sudden stop” in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the US dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities.
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Strategic Analysis
10 March 2010
Getting Out of the Recession?
AbstractResearch Scholar Gennaro Zezza updates the Levy Institute’s previous Strategic Analysis (December 2009) and finds that the 2009 increase in public sector aggregate demand was a result of the fiscal stimulus, without which the recession would have been much deeper. He confirms that strong policy action is required to achieve full employment in the medium term, including a persistently high government deficit in the short term. This implies a growing public debt, which is sustainable as long as interest rates are kept at the current low level. The alternative is an ongoing unemployment rate above 10 percent that would represent a higher cost to future generations.Download Strategic Analysis, March 2010 PDF (577.07 KB) -
Working Paper No.590
10 March 2010
Determining Gender Equity in Fiscal Federalism: Analytical Issues and Empirical Evidence from India
AbstractDespite the policy realm’s growing recognition of fiscal devolution in gender development, there have been relatively few attempts to translate gender commitments into fiscal commitments. This paper aims to engage in this significant debate, focusing on the plausibility of incorporating gender into financial devolution, with the Thirteenth Finance Commission of India as backdrop. Given the disturbing demographics—the monotonous decline in the juvenile sex ratio, especially in some of the prosperous states of India—there can be no valid objection to using Finance Commission transfers for this purpose. A simple method for accomplishing this could be to introduce some weight in favor of the female population of the states in the Commission’s fiscal devolution formula. The message would be even stronger and more appropriate if the population of girl children only—that is, the number of girls in the 0–6 age cohort—is adopted as the basis for determining the states’ relative shares of the amount to be disbursed by applying the allotted weight. A special dispensation for girls would also be justifiable in a scheme of need-based equalization transfers. While social mores cannot be changed by fiscal fiats, particularly when prejudices run deep, a proactive approach by a high constitutional body like the Finance Commission is called for, especially when the prejudices are blatantly oppressive. Indeed, such action is imperative. The intergovernmental transfer system can and should play a role in upholding the right to life for India’s girl children. That being said, it needs to be mentioned that it is not plausible to incorporate more gender variables in the Finance Commission’s already complex transfer formula. In other words, inclusion of a “gender inequality index” in the formula may not result in the intended results, as the variables included in the index may cancel one another out. Accepting the fact that incorporating gender criteria in fiscal devolution could only be the second-best principle for engendering fiscal policy, the paper argues that newfound policy space for the feminization of local governance, coupled with an engendered fiscal devolution to the third tier, can lead to public expenditure decisions that correspond more closely to the revealed preferences (“voice”) of women. With the 73rd and 74th constitutional amendments, this policy space is favorable at the local level for conducting gender responsive budgeting.
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Public Policy Brief No.109
10 March 2010
The Trouble with Pensions
AbstractPension funds have taken a big hit during the current financial crisis, with losses in the trillions of dollars. In addition, both private and public pensions are experiencing significant funding shortfalls, as is the government-run Pension Benefit Guaranty Corporation, which insures the defined-benefit pension plans of private American companies. Yeva Nersisyan and Senior Scholar L. Randall Wray argue that the employment-based pension system is highly problematic, since the strategy for managing pension funds leads to excessive cost and risk in an effort to achieve above-average returns. The average fund manager, however, will only achieve the risk-free return. The authors therefore advocate expanding Social Security and encouraging private and public pensions to invest only in safe (risk-free) Treasury bonds—which, on average, will beat the net returns on risky assets.
Download Public Policy Brief No. 109, 2010 PDF (894.29 KB) -
Working Paper No.589
09 March 2010
Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007
AbstractI find here that the early and mid-aughts (2001 to 2007) witnessed both exploding debt and a consequent “middle-class squeeze.” Median wealth grew briskly in the late 1990s. It grew even faster in the aughts, while the inequality of net worth was up slightly. Indebtedness, which fell substantially during the late 1990s, skyrocketed in the early and mid-aughts; among the middle class, the debt-to-income ratio reached its highest level in 24 years. The concentration of investment-type assets generally remained as high in 2007 as during the previous two decades. The racial and ethnic disparity in wealth holdings, after stabilizing throughout most of the 1990s, widened in the years between 1998 and 2001, but then narrowed during the early and mid-aughts. Wealth also shifted in relative terms, away from young households (particularly those under age 45) and toward those in the 55–74 age group. Projections to July 2009, made on the basis of changes in stock and housing prices, indicate that median wealth plunged by 36 percent and there was a fairly steep rise in wealth inequality, with the Gini coefficient advancing from 0.834 to 0.865.
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Working Paper No.587
19 February 2010
The Global Financial Crisis and the Shift to Shadow Banking
AbstractWhile most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the “shadow banking system” and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income—what is sometimes called “financialization”—as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme.
The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail—and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications.
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Working Paper No.586
18 February 2010
Is This the Minsky Moment for Reform of Financial Regulation?
AbstractThe current financial crisis has been characterized as a “Minsky” moment, and as such provides the conditions required for a reregulation of the financial system similar to that of the New Deal banking reforms of the 1930s. However, Minsky’s theory was not one that dealt in moments but rather in systemic, structural changes in the operations of financial institutions. Therefore, the framework for reregulation must start with an understanding of the longer-term systemic changes that took place between the New Deal reforms and their formal repeal under the 1999 Financial Services Modernization Act. This paper attempts to identify some of those changes and their sources. In particular, it notes that the New Deal reforms were eroded by an internal process in which commercial banks that were given a monopoly position in deposit taking sought to remove those protections because unregulated banks were able to provide substitute instruments that were more efficient and unregulated but unavailable to regulated banks, since they involved securities market activities that would eventually be recognized as securitization. Regulators and the courts contributed to this process by progressively ruling that these activities were related to the regulated activities of the commercial banks, allowing them to reclaim securities market activities that had been precluded in the New Deal legislation. The 1999 Act simply made official the de facto repeal of the 1930s protections. Any attempt to provide reregulation of the system will thus require safeguards to ensure that this internal process of deregulation is not repeated.
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Working Paper No.585
12 February 2010
Is Reregulation of the Financial System an Oxymoron?
AbstractThe extension of the subprime mortgage crisis to a global financial meltdown led to calls for fundamental reregulation of the United States financial system. However, that reregulation has been slow in implementation and the proposals under discussion are far from fundamental. One explanation for this delay is the fact that many of the difficulties stemmed not from lack of regulation but from a failure to fully implement existing regulations. At the same time, the crisis evolved in stages, interspersed by what appeared to be the system’s return to normalcy. This evolution can be defined in terms of three stages (regulation and supervision, securitization, and a run on investment banks), each stage associated with a particular failure of regulatory supervision. It thus became possible to argue at each stage that all that was necessary was the appropriate application of existing regulations, and that nothing more needed to be done. This scenario progressed until the collapse of Lehman Brothers brought about a full-scale recession and attention turned to support of the real economy and employment, leaving the need for fundamental financial regulation in the background.
Download Working Paper No. 585 PDF (131.02 KB) -
Working Paper No.584
03 February 2010
The Global Crisis and the Future of the Dollar: Toward Bretton Woods III?
AbstractThis paper investigates the United States dollar’s role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007–09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that United States spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the “Bretton Woods II” regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent US current account deficits may turn into a “Bretton Woods III” regime that sees US fiscal policy and public debt as “minding the store” in maintaining US and global growth.
Download Working Paper No. 584 PDF (598.75 KB) -
Public Policy Brief No.108
01 February 2010
Why President Obama Should Care About “Care”: An Effective and Equitable Investment Strategy for Job Creation
AbstractIn his State of the Union address President Obama acknowledged that “our most urgent task is job creation”—that a move toward full employment will lay the foundation for long-term economic growth and ensure that the federal government creates the necessary conditions for businesses to expand and hire more workers. According to a new study by Levy scholars Rania Antonopoulos, Kijong Kim, Thomas Masterson, and Ajit Zacharias, the government needs to identify and invest in projects that have the potential for massive, and immediate, public job creation. They conclude that social sector investment, such as early childhood education and home-based care, would generate twice as many jobs as infrastructure spending and nearly 1.5 times the number created by investment in green energy, while catering to the most vulnerable segments of the workforce.
Download Public Policy Brief No. 108, 2010 PDF (647.98 KB) -
Public Policy Brief No.107
22 January 2010
No Going Back: Why We Cannot Restore Glass-Steagall’s Segregation of Banking and Finance
AbstractThe purpose of the 1933 Banking Act—aka Glass-Steagall—was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation.
Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act’s restrictions on securities trading (deregulation). He concludes that a return to the Act’s simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks’ ability to compete with other financial institutions. Moreover, fundamental reform—the conflicting relationship between state and national charters and regulation—was bypassed by the Act.
Download Public Policy Brief No. 107, 2010 PDF (215.03 KB) -
Book Series
05 January 2010
Unpaid Work and the Economy
AbstractThis volume offers both theoretical and policy-oriented examinations of the value of unpaid work, usually unacknowledged but increasingly recognized as an organic component of the economy. Particularly in developing countries, much of the provisioning of basic needs occurs beyond the boundaries of market transactions. This book reveals a need to incorporate unpaid work in economic analysis—specifically, in the context of poverty and gender equality.
The research focuses on three significant regions: Africa, Latin America, and Asia. Contributors investigate the intersections of income poverty, unpaid work, and women’s overtaxed time, building upon the existing literature and synthesizing diverse strands of time-use survey data to make concrete policy recommendations for development strategies. Individual chapters assess established measures of time use, propose new ones, and analyze and compare possible alternates. Conceptual and empirical studies identifying key issues related to the measurement and evaluation of time distribution are also included, as are estimates and their significance.
This collection resulted from a project undertaken by the Levy Economics Institute of Bard College in collaboration with members of the International Working Group on Gender, Macroeconomics, and International Economics (GEM-IWG) to analyze the many economic implications of nonmarket activities disproportionately carried out by women worldwide—willingly or not.
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Policy Notes No.11
22 December 2009
Observations on the Problem of “Too Big to Fail/Save/Resolve”
AbstractPast experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking—a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered “too big to fail” are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of “too big to fail” is simply aggravated. Thus, the current thrust of government regulatory reform—increased capital and liquidity requirements, and further legislation—is unlikely to lessen the systemic risks these institutions pose.
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Strategic Analysis
03 December 2009
Sustaining Recovery: Medium-term Prospects and Policies for the US Economy
AbstractThough recent market activity and housing reports give some warrant for optimism, United States economic growth was only 2.8 percent in the third quarter, and the unemployment rate is still very high. In their new Strategic Analysis, the Levy Institute’s Macro-Modeling Team project that high unemployment will continue to be a problem if fiscal stimulus policies expire and deficit reduction efforts become the policy focus. The authors—President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza—argue that continued fiscal stimulus is necessary to reduce unemployment. The resulting federal deficits would be sustainable, they say, as long as they were accompanied by a coordinated and gradual devaluation of the dollar, especially against undervalued Asian currencies—a step necessary to prevent an increase in the current account deficit and ward off the risk of a currency crash.
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Public Policy Brief No.106
17 November 2009
Can Euroland Survive?
AbstractSocial unrest across Europe is growing as Euroland’s economy collapses faster than the United States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.
Download Public Policy Brief No. 106, 2009 PDF (1.07 MB) -
Research Project Report
16 November 2009
Has Progress Been Made in Alleviating Racial Economic Inequality?
AbstractReports of a postracial society may be premature. Studies continue to show wide racial gaps in income and, especially, wealth; although there is some evidence that income gaps have shrunk over the past half century, wealth inequality is large and persistent.
In this report, the authors examine trends in economic well-being between 1959 and 2007 based on the race/ethnicity of households. Using the Levy Institute Measure of Economic Well-Being, they find that changes in household wealth and net government expenditure are the key elements in the story that unfolds about racial differences.
Download LIMEW Report, November 2009 PDF (223.92 KB) -
Working Paper No.583
08 November 2009
The Euro and Its Guardian of Stability
AbstractThis paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe’s predicament. To keep its own house in order in the future, Euroland must shun the outdated “stability oriented” policy wisdom inherited from Germany’s mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.
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Working Paper No.582
04 November 2009
Minsky Moments, Russell Chickens, and Gray Swans
AbstractThe recent revival of Hyman P. Minsky’s ideas among policymakers, economists, bankers, financial institutions, and the mass media, synchronized with the increasing gravity of the subprime financial crisis, demands a reappraisal of the meaning and scope of the “financial instability hypothesis” (FIH). We argue that we need a broader approach than that conventionally pursued, in order to understand not only financial crises but also the periods of financial calm between them and the transition from stability to instability. In this paper we aim to contribute to this challenging task by restating the strictly financial part of the FIH on the basis of a generalization of Minsky’s taxonomy of economic units. In light of this restatement, we discuss a few methodological issues that have to be clarified in order to develop the FIH in the most promising direction.
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Public Policy Brief No.105
28 October 2009
It Isn’t Working: Time for More Radical Policies
AbstractThe Obama administration has implemented several policies to “jump-start” the American economy—efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style “lost decade.” They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.
Download Public Policy Brief No. 105, 2009 PDF (485.78 KB) -
Policy Notes No.10
15 October 2009
Fiscal Stimulus, Job Creation, and the Economy
AbstractAs the nation watches the impact of the recent stimulus bill on job creation and economic growth, a group of academics continues to dispute the notion that the fiscal and job creation programs of the New Deal helped end the Depression. The work of these revisionist scholars has led to a public discourse that has obvious implications for the controversy surrounding fiscal stimulus bills. Since we support a new stimulus package—one that emphasizes jobs for the 9.8 percent of the workforce currently unemployed—we have been concerned about this debate. With Congress, the White House, pundits, and the press riveted on the all-important health care debate, we worry that they are also distracted by skirmishes over economic theory and history, while millions wait for a new chance to do meaningful work and effective, if imperfect, policy tools are readily at hand. (See also, Public Policy Brief No. 104.)
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Working Paper No.581
14 October 2009
Lessons from the New Deal
AbstractSince the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933’s National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.
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Working Paper No.580
13 October 2009
An Alternative View of Finance, Saving, Deficits, and Liquidity
AbstractThis paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have “soaked up” global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve’s pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of US banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it’s necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit.
I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the US current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held—as liquid or illiquid assets. US current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy.
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Working Paper No.579
12 October 2009
A Perspective on Minsky Moments
AbstractThis paper aims to help bridge the gap between theory and fact regarding the so-called “Minsky moments” by revisiting the “financial instability hypothesis” (FIH). We limit the analysis to the core of FIH—that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky’s contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy o f financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit’s financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of the “Minsky moment” as the starting point of a Minskyan process—the phase of a financial cycle when many financial units suffer from both liquidity and solvency problems. Although the outlined approach is very simple and has to be further developed in many directions, we may draw from it a few policy insights on ways of stabilizing the financial cycle.
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