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Working Paper No.352
01 September 2002
Critical Realism and the Political Economy of the Euro
AbstractThis paper is concerned with two issues. First, it discusses some of the main problems and inferences the methodological approach of critical realism raises for empirical work in economics, while considering an approach adopted to try to overcome these problems. Second, it provides a concrete illustration of these arguments, with reference to our recent research project analyzing the single European currency. It is argued that critical realism provides a method that is partially appropriate to concrete levels of analysis, as illustrated by the attempt to explain the falling value of the euro. It is concluded that the critical realist method is inappropriate to the most abstract and fundamental levels of theory.
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Public Policy Brief No.68
01 August 2002
Optimal CRA Reform
AbstractAt issue in the debate over the renewal of the Community Reinvestment Act (CRA) of 1977 are the various yardsticks regulators use to judge whether individual institutions are meeting the credit and service needs of low- and moderate-income (LMI) communities. Based on careful examination of new CRA data and assessments of comments by selected stakeholders, the author concludes that if the new rules are to succeed, regulators will have to strike a careful balance between various competing interests vying to tip the balance of power in their favor. For example, to offset the effects of a possibly too-close relationship between industry and government agencies, the rules could mandate very explicit and objective measures of institutions’ lending performance. To relieve the burden of compliance, the rules could be simplified and pared down to their essentials. And to prevent banks from taking advantage of vulnerable members of LMI communities, rule makers could adopt strong measures against “predatory lending.”
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Working Paper No.351
01 August 2002
Race, Ethnicity, and the Gender-poverty Gap
AbstractWe use data from the Current Population Survey (CPS 1994-2001) to document the relationship between gender-specific demographic variations and the gender-poverty gap among eight racial/ethnic groups. We find that black and Puerto Rican women experience a double disadvantage owing to being both women and members of a minority group. As compared with whites, however, gender inequality among other minority groups is relatively small. By utilizing a standardization technique, we are able to estimate the importance of gender-specific demographic and socioeconomic composition in shaping differences in men’s and women’s poverty rates both within and across racial/ethnic lines. The analysis reveals that sociodemographic characteristics have a distinct effect on the poverty rate of minority women, and that the form and the magnitude of the effect vary across racial/ethnic lines. By incorporating the newly available immigration information in the CPS data, we are also able to document the effect of immigration status on gender inequality. The social and economic implications of the findings for the study of gender inequality are discussed in the last section of the article.
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Working Paper No.349
01 July 2002
State Policies and the Warranted Growth Rate
AbstractThis paper raises questions about austerity policies by investigating the effects of the state’s tax and expenditure policies on the warranted growth rate. It proposes two mechanisms to raise the warranted growth rate in the event that there is long-run unemployment. First, it incorporates Pasinetti’s taxation function into Harrod’s growth framework to show how, with an unbalanced budget, an increase in any kind of tax rate, including the tax rate on profits, will raise the warranted path. Such a policy can be accompanied by an increase in aggregate government spending. Second, by introducing a public investment function and, following Keynes, by assuming that the government’s expenditures are split into a current and a capital budget, it shows that an increase in capacity-augmenting investment by state enterprises can also raise the warranted path. In other words, judicious tax and expenditure policies provide the basis for increases in government spending, including a greater degree of capacity-augmenting public investment. The paper thus formalizes Keynes’s proposals regarding the socialization of investment and shows how this can be accomplished via appropriate compositional changes in government spending and taxation policies.
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Working Paper No.348
01 June 2002
Asset Prices, Liquidity Preference, and the Business Cycle
AbstractIn his Treatise on Money, John Maynard Keynes relied on two different premises to argue that the interest rate need not rise with rising levels of expenditure. One of these was the elasticity of the money supply, and the other was the interaction between financial and industrial circulation. A decrease (increase) in what Keynes called the bear position was similar in its impact to that of a policy-induced increase (decrease) in the money supply. In his General Theory, this second line of argument lost much of its force as it became reformulated under the rubric of Keynes’s liquidity preference theory of interest. Assuming that the interest rate sets the return on capital, Keynes dismissed the effect of bull or bear sentiment in equity markets as a second-order complication that can be ignored in analyzing the equilibrium level of investment and output. The objective of this paper is to go back to this old theme from the Treatise and underscore its importance for the Keynesian theory of the business cycle.
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Working Paper No.347
01 June 2002
What Has Happened to Monetarism?
AbstractIt is widely perceived that today’s conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially “monetarist” by nature, if not by name. One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman’s monetary thought and that of John Maynard Keynes. Among the paper’s main theoretical findings are that the key issue is the theory of interest, which is at the root of differences in approach to money demand and liquidity preference. Similarities are more pronounced with respect to the supply of money and monetary policy control issues. However, while Keynes favored a stabilized wage unit combined with a flexible central bank to steer interest rates and aggregate demand, Friedman advocated a stabilized central bank combined with a free interest rate and employment determination in financial and labor markets, respectively. Additional differences arise at the practical and empirical levels: the dynamics of adjustment processes and expectation formation on the one hand, and the relative efficiency and riskiness of market-driven versus government-guided adjustments on the other. The puzzling fact is that, despite today’s dominant market-enthusiast ideology, Friedman’s idea of delegation—not to independent central bankers, but to the markets—enjoys remarkably little popularity.
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Working Paper No.346
01 June 2002
CRA’s 25th Anniversary
AbstractThis paper focuses on the past, present, and future rules and regulations implementing CRA as developed, applied, and enforced by the federal bank and thrift regulators. The past rules and regulations refer to those in effect during the law’s first 18 years, through 1995, when CRA underwent its first major reform. The present CRA rules and regulations were adopted then, with the mandate that they would be reviewed for possible reform in 2002. The future rules and regulations are being drafted now by the regulators, based on their review of approximately 400 public comments; the reform recommendations should be released sometime during the second half of 2002.
The future of CRA’s legacy as arguably the perfect fair market regulation in a world of Compassionate Capitalism will depend upon the direction of these reforms. Optimal public policy by the bank and thrift regulators in this regard must represent the ideal balance between competing consumer and industry interests. This paper represents the first comprehensive analysis of the public comments and concludes with specific recommendations that will lead to optimal public policy.
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Working Paper No.345
01 May 2002
The “Third Way” and the Challenges to Economic and Monetary Union Macropolicies
AbstractIn the United Kingdom the emergence of a “New Labour” has been closely associated with the development of the notion of the “third way.” Tony Blair, for example, stated that “New Labour is neither old left nor new right. . . . Instead we offer a new way ahead, that leads from the centre but is profoundly radical in the change it promises.” In a similar vein Giddens locates the “third way” by reference to two other “ways” of classical social democracy and neoliberalism. Although some notable contributions have been made on the subject of the “third way,” rather little has been written specifically on the economic analysis underpinning it. This paper infers such an analysis by working back from the policies and policy pronouncements of governments. To do so, the paper examines the types of economic analyses being used to underpin the ideas of the “third way”; the suggestion that the ideas surrounding the economic analysis of the economic and monetary union’s (EMU’s) theoretical and policy framework are firmly embedded in that of “third way”; and the argument that the challenge for EMU macropolicies lies in their potential to achieve full employment and low inflation in the euro system. On the last point, the author concludes that these policies, as they currently operate, are not very promising. Alternatives are therefore suggested.
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Strategic Analysis
01 April 2002
Strategic Prospects and Policies for the US Economy
AbstractNotwithstanding the great achievements of the American economy, the growth of aggregate demand during the past several years has been structured in a way that would eventually prove unsustainable. During the main period of economic expansion, the fiscal stance tightened at a much greater pace than in any period during the previous 40 years, and net export demand progressively deteriorated to record deficit levels. It follows that the expansion aggregate demand had been driven by a similarly unprecedented expansion of private expenditure relative to income, financed by growing injections of net credit, which caused the indebtedness of the nonfinancial private sector to escalate to unprecedented levels. The conclusion drawn was that this process must come to an end at some stage, and that when it did, the entire stance of fiscal policy would have to move in an expansionary direction, and that for economic growth to be sustained indefinitely, net export demand would have to recover as well.
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Working Paper No.344
01 March 2002
Dollarization
AbstractWhen economies “dollarize,” their exchange rate and monetary policy, both considered to be sources of instability, are simultaneously discarded. Often, dollarization becomes an attractive option for developing countries that have experienced successive failures of exchange rate and monetary management. This paper makes use of a theoretical model that shows, contrary to the commonly accepted view, that a dollarized economy would experience financial instability in the event of external shocks should it attempt to operate discretionary fiscal policies. Shocks not simultaneously contained by adjustments to spending would lead to ever-increasing fiscal and current account deficits because public sector borrowing requirements can only be financed by selling bonds in the open market at constantly rising rates of interest. Hence, such a path cannot be an option. Alternatively, if fiscal spending were curbed at par with the shock, external and current account balances would converge to equilibrium, but trigger a recession and increased unemployment. Since this, too, is unacceptable, dollarization turns out to be a “dead end.”
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Policy Notes No.3
01 March 2002
European Integration and the “Euro Project”
AbstractThe introduction of the euro has been a significant step in the integration of the economies of the countries that form the European Union (EU) and the 12 countries that comprise the Economic and Monetary Union (EMU). Its adoption not only means that a single currency prevails across the Eurozone, with reduced transactions costs for trade between member countries; the currency also has become embedded in a particular set of institutional and policy arrangements that tell us about the nature of economic integration in the EU. In fact, the euro is a relatively small step along the path to further economic integration at the global level, and the neoliberal agenda of globalization can be clearly seen from the ways in which the euro has been introduced.
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Policy Notes No.2
01 February 2002
The Brazilian Swindle and the Larger International Monetary Problem
AbstractThe International Monetary Fund has offered Brazil a $30 billion loan, most of it reserved for next year, on condition that the country continue to run a large primary surplus in the government budget. In this way the Fund maintains a strong arm over Brazil’s next government. Any significant move toward fiscal expansion would trigger revocation of the promised loan, followed by capital market chaos. Or so one is led to suppose.
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Working Paper No.342
01 February 2002
A Note on the Hicksian Concept of Income
AbstractEmpirical studies of intertemporal dynamics of individual income, distribution of personal income, and growth and distribution of national income are all based on statistics that rely on some concept of income. The dominant one today appears to be the so-called Haig-Simons-Hicks (HSH) concept of income. I examine the foundations of this concept in Hicks? Value and Capital and conclude that there is nothing “Hicksian” about the HSH concept of income. Furthermore, I argue that Hicks? failure to distinguish between definition and calculation, and the consequent lack of adequate ex post concepts, make it impossible for his income definitions to serve as a basis for income accounting.
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Policy Notes No.1
01 January 2002
Kick-Start Strategy Fails to Fire Sputtering US Economic Motor
AbstractThere is a strategic need, if a “growth recession” is to be avoided, for a new motor to drive the economy, particularly if there is a further decline in private expenditure relative to income that could generate a further hole in aggregate demand.
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Public Policy Brief No.67
01 November 2001
The Economic Consequences of German Unification
AbstractAlthough the costs associated with moving an antiquated socialist economy toward its capitalist counterpart was anticipated to be significant, German industrial efficiency was expected to quickly overcome any challenges. Things turned out rather differently. Conventional wisdom blamed poor economic performance on unification. The government and the Bundesbank therefore put in place fiscal and monetary policies aimed at reducing borrowing and, in turn, containing the threat of inflation. The positive results (albeit in five years) supported this perception. The author of this brief, however, takes exception to the notion that these policies were effective in stabilizing the economy. His analysis shows that the country’s poor economic performance dramatically dampened economic activity and led to an extended period of sluggish growth. Blame for anemic growth and high unemployment, he believes, should be placed squarely on the country’s finance department and central bank rather than on unification.
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Public Policy Brief No.66
01 November 2001
Racial Wealth Disparities
AbstractDespite decades of policies aimed at improving the economic position of African Americans in terms of relative income and earnings, they remain substantially behind whites. The research presented in this brief indicates that the wealth gap is even more staggering. Following families over time in order to understand racial differences in the sources and patterns of wealth accumulation, Senior Scholar Edward N. Wolff finds that African Americans would have gained significant ground relative to whites in the past 30 years if they had inherited similar amounts, comparable levels of family income, and more similar portfolio compositions. Therefore, even if the income gap between whites and African Americans were immediately eliminated, it may take another two generations for the wealth gap to close. However, certain policies could help speed up the process.
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Working Paper No.341
01 November 2001
Israeli Attitudes about Inter Vivos Transfers
AbstractUsing data from the 1994–95 Survey of Families in Israel—which includes 1,607 urban Jewish respondents interviewed on topics relating to work behavior, household income, wealth, assistance received from parents and given to children, and views about financial responsibilities between parents and children—the authors examined attitudes in Israel about intergenerational assistance and the effects of these attitudes on transfer decisions by parents. Views about parental obligations are likely not independent of a country’s economic and social organization. In a country with an extensive program of public assistance for young adults, for example, there may be less need for private family transfers and less of a sense of parental responsibility for providing support. Similarly, where young couples face severe liquidity constraints or otherwise require substantial resources in order to begin a household, parental feelings of obligation might be heightened. Israel is a country in which the need for parental support is high and the level of parental involvement in the financial lives of young adults is often considerable.
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Policy Notes No.10
01 October 2001
Are We All Keynesians (Again)?
AbstractIt is now widely recognized that economists and policymakers alike had been living a 30-year fantasy. The best government is not that which governs least. The best economy is not that which is abandoned to the invisible fist of the unconstrained market. Our national and individual security is not best left to the fate of the private pursuit of maximum profit. The events of September 11 underscored what was already apparent: Big Government needs to play a bigger role in our economy. Our late Levy Institute colleague Hyman P. Minsky has been vindicated once more.
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Strategic Analysis
01 October 2001
The Developing US Recession and Guidelines for Policy
AbstractThe United States should now be prepared for one of the deepest and most intractable recessions of the post–World War II period, with no natural process of recovery in prospect unless a large and complex reorientation of policy occurs both here and in the rest of the world. The grounds for reaching this somber conclusion are that very large structural imbalances, with unique characteristics, have been allowed to develop. These imbalances were always bound to unravel at some stage, and it now looks as though the unraveling is well under way. There may be no spontaneous recovery because the unraveling that has started is a reversion toward what, in the relevant sense, is a normal situation. This consideration leads us to take issue with some distinguished commentators, such as Alan Blinder (2001) and Laura Tyson (2001), who apparently assume that because a spontaneous recovery will occur relatively soon, any fiscal relaxation should be temporary. The general predicament is made worse by a deteriorating world economy; US exports fell sharply in the first seven months of 2001, when the balance of payments was already heavily in deficit.
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Working Paper No.340
01 October 2001
Incentives in HMOs
AbstractWe studied the effect of physician incentives in an HMO network. Physician incentives are controversial because they may induce doctors to make treatment decisions that differ from those they would choose in the absence of incentives. We set out a theoretical framework for assessing the degree to which incentive contracts do, in fact, induce physicians to deviate from a standard, guided only by patient interest and professional medical judgment. Our empirical evaluation of the model relies on details of the HMO’s incentive contracts and access to the firms’ internal expenditure records. We estimate that the HMO’s incentive contract provides a typical physician an increase, at the margin, of $.10 in income for each $1.00 reduction in medial utilization expenditures. The average response is a 5 percent reduction in medical expenditures. We also find suggestive evidence that financial incentives linked to commonly used "quality" measures may stimulate an improvement in measured quality.
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Working Paper No.339
01 October 2001
Uncertainty, Conventional Behavior, and Economic Sociology
AbstractThis paper addresses the problem of the conceptualization of social structure and its relationship to human agency in economic sociology. The background is provided by John Maynard Keynes’s observations on the effects of uncertainty and conventional behavior on the stock market; the analysis consists of a comparison of the social ontologies of the French Intersubjectivist School and the Economics as Social Theory Project in the light of these observations. The theoretical argument is followed by concrete examples drawn from a prominent recent study of the stock market boom of the 1990s.
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Policy Notes No.9
01 September 2001
Hard Times, Easy Money?
AbstractThe tools of countercyclical monetary policy have been brought fully to bear on a potentially severe recession. This note argues, however, that such a policy is less effective in times such as these—that is, when uncertainty is especially high—and so is likely to be particularly ineffective in combating the current economic slowdown.
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Working Paper No.338
01 September 2001
The Monetary Policies of the European Central Bank and the Euro’s (Mal)performance
AbstractThe stability-oriented macroeconomic framework established in the Maastricht and Amsterdam Treaties on European Union (TEU), especially the unparalleled status of independence and peculiar mandate of the European Central Bank (ECB), were promised to virtually guarantee price stability and a “strong” euro. Actual developments have shattered these hopes in a rather drastic way. Despite the dismal monetary developments, conventional wisdom holds that neither the Maastricht regime nor the ECB might possibly be at fault. Yet, the euro’s performance over 2000–01 is generally seen as a puzzle. This paper assesses the ECB’s role in relation to the euro’s (mal-) performance, explores the institutional setting and traditions behind the ECB’s conduct, and scrutinizes the rationale that inspired its interest rate policies.
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Working Paper No.337
01 August 2001
Can Countries under a Common Currency Conduct Their Own Fiscal Policies?
AbstractThe debate about balance of payment problems is generally linked with adjustments in the fiscal sector, especially since the views of Bretton Woods institutions became predominant. For the majority of theoretical models that currently inform policy, it is becoming common thought that in a world of free trade and free movement of capital, a floating rate of exchange may clear the market for financial assets. In these models, the persistence of balance of payment problems can be attributed to rigidities either in the fiscal sector (that is, the inability of the public sector to run a balanced budget), or the labor market (that is, trade union pressures and welfare protective measures leading to uncompetitive salaries). This approach, which makes the fiscal stance the culprit of macroeconomic imbalances in countries with floating exchange rates, is, however, also applied to countries that have adopted other, more rigid forms of exchange rate policy, such as currency boards, dollarization, and common currency agreements. It seems to be overlooked that systems of common currency pose problems of an entirely different kind because two major mechanisms of macroeconomic adjustment—exchange rate flexibility and money issuing—are obviously removed. Thus, theoretical and policy-oriented propositions need to take into account this new set of restrictions.
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