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Working Paper No.542
07 August 2008
Keynes’s Approach to Full Employment
AbstractThis paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to “close the demand gap,” are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an “on the spot” approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle.
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Working Paper No.541
23 July 2008
The Unpaid Care Work–Paid Work Connection
AbstractIn order to provide a coherent perspective of gender differences in the world of work, the many intersections of paid and unpaid work must be brought to light. It is well documented that gender-based wage differentials and occupational segregation continue to characterize the division of labor among men and women in paid work; yet unpaid work in social reproduction, subsistence production, family businesses, and the community is often ignored. When it is taken into account, it is usually done in a very limited manner, equating unpaid work with the traditional roles women play in raising children and performing maintenance chores. Beyond the obvious gender inequalities characterizing the latter, unpaid work constitutes an integral part of any functioning economy, and as such is linked to economic growth, government policy, migration, and many development issues. This paper concludes that the “world of work” cannot be treated in complete disregard to unpaid forms of labor, and gender equality must be understood through the lens of the paid–unpaid work continuum.
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Working Paper No.540
22 July 2008
The Effects of International Trade on Gender Inequality
AbstractThe process of economic globalization has winners and losers. Iran’s carpet industry provides a good illustration of the adverse side of this process. As the production costs of its rivals have fallen, surging international trade has reduced the market share of Iran’s labor-intensive products, especially Persian carpets.
This paper reports the findings of an informal survey of carpet weavers conducted in and around the Iranian city of Kashan, showing how harsh international competition has reduced the weavers’ real wages and restructured the labor force of the industry in Iran. Middle-income families have left the industry, and poor Afghan immigrant householders and their children are increasingly taking the place of Iranian weavers. Furthermore, weaving is consistent with the subordinate position of women carpet weavers within the household; as a form of employment, it has hardly affected the social status quo.
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Working Paper No.539
14 July 2008
The Return of Fiscal Policy
AbstractThe monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination. Recent mainstream contributions, however, have begun to reassess fiscal policy and have called for its restitution in certain cases. The goal of this paper is to delimit the role of and place for fiscal policy in the New Economic Consensus (NEC) and to compare it to that of Post-Keynesian theory, the latter arguably the most faithful approach to the original Keynesian message. The paper proposes that, while a consensus may exist on many macroeconomic issues within the mainstream, fiscal policy is not one of them. The designation of fiscal policy within the NEC is explored and contrasted with the Post-Keynesian calls for fiscal policy via Abba Lerner’s “functional finance” approach. The paper distinguishes between two approaches to functional finance—one that aims to boost aggregate demand and close the GDP gap, and one that secures full employment via direct job creation. It is argued that the mainstream has severed the Keynesian link between fiscal policy and full employment—a link that the Post-Keynesian approach promises to restore.
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Working Paper No.538
10 July 2008
The Buffett Plan for Reducing the Trade Deficit
AbstractThis paper considers a plan proposed by Warren Buffett, whereby importers would be required to obtain certificates proportional to the amount of non-oil goods (and possibly also services) they brought into the country. These certificates would be granted to firms that exported goods, which could then sell certificates to importing firms on an organized market. Starting from a relatively neutral projection of all major variables for the US economy, the authors estimate that the plan would raise the price of imports by approximately 9 percent, quickly reducing the current account deficit to about 2 percent of GDP. They discuss several problems that might arise with the implementation of the Buffett plan, including possible instability in the price of certificates and retaliation by US trade partners. They also consider an alternative version of the plan, in which certificates would be sold at a government auction, rather than granted to exporters. The revenues from certificate sales would then be used to finance a reduction in FICA payroll taxes. The authors report the results of simulations of the alternative plan’s effects on macroeconomic balances and GDP growth. Notably, the alternative plan would lessen the severity of the growth recession expected in our base projection.
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Working Paper No.537
09 July 2008
The Keynesian Roots of Stock-flow Consistent Macroeconomic Models
AbstractThis paper argues that institutionally rich stock-flow consistent models—that is, models in which economic agents are identified with the main social categories/institutional sectors of actual capitalist economies, the short period behavior of these agents is thoroughly described, and the “period by period” balance sheet dynamics implied by the latter is consistently modeled—are (1) perfectly compatible with John Maynard Keynes’s theoretical views, (2) the ideal tool for rigorous post-Keynesian analyses of the medium run, and (3) therefore crucial to the consolidation of the broad post-Keynesian research program.
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Working Paper No.536
03 July 2008
Deficient Public Infrastructure and Private Costs
AbstractThis paper presents new evidence on the links between public-infrastructure provisioning and time allocation related to the water sector in India. An analysis of time-use data reveals that worsening public infrastructure affects market work, with evident gender differentials. The results also suggest that access to public infrastructure can lead to substitution effects in time allocation between unpaid work and market work. The broad conclusion of the paper is that public-investment policy can redress intrahousehold inequalities, in terms of labor-supply decisions, by supporting initiatives that reduce the allocation of time in nonmarket work.
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Policy Notes No.2
05 June 2008
Securitization
Abstract“At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was ‘that which can be securitized, will be securitized.’” So notes Hyman Minsky in a prescient memo on the nature, and the implications, of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. This memo, which served as the basis for a lecture in Minsky’s monetary theory class at Washington University, has not been widely circulated. It is published here in its entirety, with a preface and an afterword by Senior Scholar L. Randall Wray that places Minsky’s work in context.
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Policy Notes No.1
27 May 2008
The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus
AbstractWhat in monetarism, and what in the "new monetary consensus," led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? Absolutely nothing, says Senior Scholar James K. Galbraith.
In this new Policy Note, Galbraith reevaluates monetary policy in light of the collateral damages inflicted by the subprime mortgage crisis. He provides a critique of monetarism—what Milton Friedman famously defined as the proposition that "inflation is everywhere and always a monetary phenomenon"—and of the "new monetary consensus" on which Federal Reserve Chairman Ben Bernanke’s ostensible doctrine of inflation targeting rests. Given the current economic crisis, Galbraith says, the Fed would do well to embrace the intellectual victory of John Maynard Keynes, John Kenneth Galbraith, and Hyman P. Minsky—and act accordingly.
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Policy Notes
27 May 2008
The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus
Abstract“What in monetarism, and what in the ‘new monetary consensus,’ led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? The answer is, of course, absolutely nothing.”—James K. Galbraith
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Policy Notes
27 May 2008
The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus
AbstractWhat in monetarism, and what in the “new monetary consensus,” led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? Absolutely nothing, says Senior Scholar James K. Galbraith.
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Book Series
20 May 2008
Stabilizing an Unstable Economy
AbstractThe late American economist and Distinguished Scholar Hyman P. Minsky first wrote about the inherent instability of financial markets in the late 1950s, and accurately predicted a transformation of the economy that would not become apparent for nearly a generation. In 2007, interest in his work suddenly exploded as the financial press recognized the relevance of his analysis to the meltdown of the mortgage-backed securities market. Indeed, in this book, first published in 1986, Minsky examined a number of financial crises in detail, several of which involved similar financial instruments, such as commercial paper, municipal bonds, and real estate and investment trusts. More important, he explained why the economy tends to evolve in such a way that these crises become more likely.
Minsky insisted that there is an inherent and fundamental instability in our sort of economy that tends toward a speculative boom. Unlike other critical analyses of capitalist processes, which emphasize the crash, Minsky was more concerned with the behavior of agents during the euphoric periods. And unlike other analyses that blame “shocks,” “irrational exuberance,” or “foolish” policy, he argued that the processes that generate financial fragility are “natural,” or endogenous to the system.
Stabilizing an Unstable Economy is Minsky’s seminal work, and it has been reissued so that it may be broadly available to a new generation of economists, analysts, and investors. The book covers, among other topics, the effect of speculative finance on investment and asset prices; booms and busts as unavoidable results of high-risk lending practices; government’s role in bolstering consumption during times of high unemployment; and the need to increase Federal Reserve oversight of banks.
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Book Series
19 May 2008
John Maynard Keynes
AbstractThis reissue of Hyman P. Minsky’s classic book offers a timely reconsideration of the work of economics icon John Maynard Keynes. In it, Minsky argues that what most economists consider Keynesian economics is at odds with the major points of Keynes’s The General Theory of Employment, Interest, and Money. Both Keynes and Minsky refuse to ignore pervasive uncertainty. Once uncertainty is given center stage, they observe, recurring financial crises are all but inescapable. For Minsky, economic calm on Main Street engenders financial system fragility that, in turn, ensures a perpetuation of boom-and-bust cycles.
As President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray write in their Introduction, this new edition of John Maynard Keynes has been published “in the hope that it will contribute to the reformation of economic theory so that it can address the world in which we actually live—the world that was always the topic of Minsky’s analysis.”
Hyman P. Minsky was an American economist who studied under Joseph Schumpeter and Wassily Leontief. He later taught economics at The University of California–Berkeley and at Washington, Brown, and Harvard Universities. In 1990, Minsky joined The Levy Economics Institute as a distinguished scholar, where he continued his research and writing until a few months before his death in October 1996.
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Working Paper No.535
13 May 2008
Statistical Matching Using Propensity Scores
AbstractThis paper summarizes the background, type, logic, and working procedure of the
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statistical matching used in the Levy Institute Measure of Economic Well-Being
(LIMEW) project to combine the various data sets used to produce the synthetic
data set with which the LIMEW is constructed. The authors use the match between the 2001 Survey of Consumer Finances and the Annual Demographic Survey of the Current Population Survey data sets to demonstrate the procedure and results of the matching. Challenges confronted in the use of this technique, such as the distribution of weights, are discussed in the conclusion. -
Working Paper No.534
08 May 2008
Argentina: A Case Study on the Plan Jefes y Jefas de Hogar Desocupados, or the Employment Road to Economic Recovery
AbstractAfter the 2001 crisis, Argentina—once the poster-child for pro-market structural-adjustment policies—had to define a new strategy in order to manage the societal demands that had led to the fall of the previous administration. The demand by the majority of the population for employment recovery spurred the government to introduce a massive employment program, the Plan Jefes y Jefas de Hogar Desocupados (Program for Unemployed Male and Female Heads of Households). This program, which accounted for less than 1 percent of GDP at the outset, paved the way for a reduction of the contractionary effects that otherwise would have caused a catastrophic devaluation of the currency.
This paper explores how Argentina pursued a strategy of employment generation, with the state participating as employer of last resort, to recover from one of the worst social and economic crises in its history.
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Working Paper No.533
29 April 2008
The Discrete Charm of the Washington Consensus
AbstractOver the last two centuries in Latin America a Washington Consensus development strategy based on integration in the global trading system has dominated both domestic demand management and industrialization "from within." This paper assesses the performance of each from the point of view of the impact of external conditions, and the validity of its underlying theory. It concludes by noting that replacing the Consensus will require not only reform of the international financial architecture but also a return to the integrated policy framework represented in the Havana Charter.
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Working Paper No.532
28 April 2008
Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences
AbstractThis paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies—leveraging and financial risk mismatching—that led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. However, these strategies are based on market innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in a new bottle. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that is a consequence of the kind of economic growth that produces various imbalances—trade imbalances, financial sector imbalances, and wealth and income inequality. The consequences of excessive risk, moral hazards, and rolling bubbles are discussed.
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Working Paper No.531
23 April 2008
The International Monetary (Non-)Order and the “Global Capital Flows Paradox”
AbstractThis paper sets out to investigate the forces behind the so-called “global capital flows paradox” and related “dollar glut” observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that result in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. The hypothesis put forward here is that systemic deficiencies in the international monetary and financial order have been the root cause behind today’s situation. Furthermore, it is argued that the United States’ position as issuer of the world’s premiere reserve currency and supremacy in global finance explain the related conundrum of a positive investment income balance despite a negative international investment position. The assessment is carried out in light of John Maynard Keynes’s views on a sound international monetary and financial order.
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Working Paper No.530
14 April 2008
Changes in the US Financial System and the Subprime Crisis
AbstractThis paper traces the evolution of housing finance in the United States from the deregulation of the financial system in the 1970s to the breakdown of the savings and loan industry and the development of GSE (government-sponsored enterprise) securitization and the private financial system. The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system.
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Strategic Analysis
09 April 2008
Fiscal Stimulus—Is More Needed?
AbstractAs the government prepares to dispense the tax rebates that largely make up its recently approved $168 billion stimulus package, President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza explore the possibility of an additional fiscal stimulus of about $450 billion spread over three quarters—challenging the notion that a larger and more prolonged additional stimulus is unnecessary and will generate inflationary pressures. They find that, given current projections of even a moderate recession, a fiscal stimulus totaling $600 billion would not be too much. They also find that a temporary stimulus—even one lasting four quarters—will have only a temporary effect. An enduring recovery will depend on a prolonged increase in exports, the authors say, due to the weak dollar, a modest increase in imports, and the closing of the current account gap.
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Public Policy Brief No.94
01 April 2008
Financial Markets Meltdown
AbstractIn this new Public Policy Brief, Senior Scholar L. Randall Wray explains today’s complex and fragile financial system, and how the seeds of crisis were sown by lax oversight, deregulation, and risky innovations such as securitization. He estimates that the combined losses throughout the entire financial sector could amount to several trillion dollars, and that the United States will feel the effects of the crisis for some time—perhaps a decade or more.
Wray recommends enhanced oversight of financial institutions, much larger stimulus packages, and creation of a new institution in line with President Franklin D. Roosevelt’s Home Owners’ Loan Corporation.
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Working Paper No.529
06 March 2008
Can Robbery and Other Theft Help Explain the Textbook Currency-demand Puzzle?
AbstractThis paper attempts to explain one version of an empirical puzzle noted by
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Mankiw (2003): a Baumol-Tobin inventory-theoretic money demand equation predicts
that the average adult American should have held approximately $551.05 in currency
and coin in 1995, while data show an average of $100. The models in this paper
help explain this discrepancy using two assumptions: (1) the probabilities
of being robbed or pick-pocketed, or having a purse snatched, depend on the
amount of cash held; and (2) there are costs of being robbed other than loss
of cash, such as injury, medical bills, lost time at work, and trauma. Two
models are presented: a dynamic, stochastic model with both instantaneous and
decaying noncash costs of robbery, and a revised version of the inventory-theoretic
model that includes one-period noncash costs. The former model yields an easily
interpreted first-order condition for money demand involving various marginal
costs and benefits of holding cash. The latter model gives quantitative solutions
for money demand that come much closer to matching the 1995 data—$75.98
for one plausible set of parameters. This figure implies that consumers held
approximately $96 billion less cash in May 1995 than they would have in a world
without crime. The modified Baumol-Tobin model predicts a large increase in
household money demand in 2005, mostly due to reduced crime rates. -
Working Paper No.528
18 February 2008
Financial Flows and International Imbalances
AbstractWhile the traditional approach to the adjustment of international imbalances assumes industrialized countries at a similar level of development and with similar production structures, such imbalances have historically been the result of a process of catching up by late-industrializing developing countries. This may call for an alternative approach that assesses how these imbalances can be managed in order to support developing countries’ efforts to achieve successful industrialization and integration into the global trade and financial system. In this light, the paper presents an alternative explanation of the existence and persistence of the currently high levels of imbalances and suggests reasons why they may persist in the medium term.
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Working Paper No.527
25 January 2008
Financing Job Guarantee Schemes by Oil Revenue
AbstractIran’s constitution emphasizes social justice and obliges government to provide a job for every citizen. But in fact, the government’s duty to provide jobs has shifted to government support for a measure designed to create new employment opportunities through subsidized loans to the private sector. This policy has not been successful to date, and the current stock of unemployed workers is about three million—12.75 percent of the country’s labor force.
To realize the desire of the Iranian people to achieve full employment and social justice, the government must implement employment guarantee schemes, or EGS, in the most deprived areas. Elected town and village councils can design and manage the public works with the help of other government, as well as nongovernment, institutions. Programs can be financed using less than 10 percent of the annual oil-exporting revenue that is deposited in the Oil Stabilization Fund.
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