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  • Strategic Analysis 06 September 2005

    The United States and Her Creditors

    Claudio H. Dos Santos, Wynne Godley, Dimitri B. Papadimitriou and Gennaro Zezza
    Abstract

    The main arguments in this paper can be simply stated:

    1) If output in the United States grows fast enough to keep unemployment constant between now and 2010, and if there is no further depreciation in the dollar, the deficit in the balance of trade is likely to get worse, perhaps reaching 7.5 per cent by the end of the decade.

    2) If the trade deficit does not improve, let alone if it gets worse, there will be a large further deterioration in the United States’ net foreign asset position, so that, with interest rates rising, net income payments from abroad will at last turn negative and the deficit in the current account as a whole could reach at least 8.5 per cent of GDP.

    Download Strategic Analysis, September 2005 PDF (1.24 MB)
  • Working Paper No.428 25 August 2005

    Europe’s Quest for Monetary Stability

    Jörg Bibow
    Abstract

    This paper provides an overview of central banking arrangements in those European countries that have adopted the euro. Issues addressed include the structure of the “Eurosystem” and its central banking functions, the kind of independence granted to the system and the role of monetary policy that central bankers have adopted for themselves, the “two-pillar policy framework,” operating procedures, and actual performance since the euro’s launch in 1999. The analysis concludes that, given the current macroeconomic policy regime, trends, and practices, the euro is on track for failure.

    Download Working Paper No. 428 PDF (359.96 KB)
  • Working Paper No.427 12 August 2005

    Liquidity Preference Theory Revisited

    Jörg Bibow
    Abstract

    This paper revisits Keynes’s liquidity preference theory as it evolved from the Treatise on Money to The General Theory and after, with a view of assessing the theory’s ongoing relevance and applicability to issues of both monetary theory and policy. Contrary to the neoclassical “special case” interpretation, Keynes considered his liquidity preference theory of interest as a replacement for flawed saving or loanable funds theories of interest emphasizing the real forces of productivity and thrift. His point was that it is money, not saving, which is the necessary prerequisite for economic activity in monetary production economies. Accordingly, turning neoclassical wisdom on its head, it is the terms of finance as determined within the financial system that “rule the roost” to which the real economy must adapt itself. The key practical matter is how deliberate monetary control can be applied to attain acceptable real performance. In this regard, it is argued that Keynes’s analysis offers insights into practical issues, such as policy credibility and expectations management, that reach well beyond both heterodox endogenous money approaches and modern Wicksellian orthodoxy, which remains trapped in the illusion of money neutrality.

    Download Working Paper No. 427 PDF (435.90 KB)
  • Public Policy Brief No.82 03 August 2005

    The Ownership Society

    L. Randall Wray
    Abstract

    As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the “ownership society,” a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. L. Randall Wray, who has written for the Levy Institute on many topics, evaluates the premises and logic of this program in this new public policy brief.

    Wray points out that much of the history of the Western world since the advent of liberalism has been marked by a gradual rise in the power of those who lack property. Some of the milestones in this progression include universal suffrage, regulation of business, and progressive taxation. Bush’s ownership society proposals, according to Wray, would result in a partial reversal of the progress of the last 250 years. The reason is that, while Bush’s plans would undoubtedly increase the choices and power of those who have property, they would fail to democratize ownership. Many gains to the wealthy would come at the expense of the poor, the sick, and the elderly.

    Download Public Policy Brief No. 82, 2005 PDF (488.89 KB)
  • Working Paper No.426 20 July 2005

    Gender Inequality in a Globalizing World

    Stephanie Seguino
    Abstract

    Emphasis on market-friendly macroeconomic and development strategies in recent years has resulted in deleterious effects on growth and well-being, and has done little to promote greater gender equality. This paper argues that the example of East Asia states, which recognized their position as “late industrializers,” relied on a managed-market approach with the state that employed a wide variety of policy instruments to promote industrialization. Nevertheless, while Asian growth was rapid, it was not enough to produce greater gender equality. A concentration of women in mobile export industries that face severe competition from other low-wage countries reduces their bargaining power and inhibits closure of gender-wage gaps. Gender-equitable macroeconomic and development policies are thus required, including financial market regulation, regulation of trade and investment flows, and gender-sensitive public sector spending.

    Download Working Paper No. 426 PDF (426.44 KB)
  • Working Paper No.425 11 July 2005

    Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?

    Jörg Bibow
    Abstract

    Challenging the conventional wisdom that structural problems are to blame for the euro area’s protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeter—and a rather soft one, too—it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECB’s failure to internalize the euro area’s fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future.

    Download Working Paper No. 425 PDF (407.38 KB)
  • Public Policy Brief No.81 27 June 2005

    Breaking Out of the Deficit Trap

    James K. Galbraith
    Abstract

    For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy.

    Other scholars are also concerned, but for reasons that we do not share. They argue that the interest rate is determined by the supply and demand of saving. When the government reduces its saving, the total supply of saving falls, and the interest rate inevitably rises. The result, they say, is that interest-sensitive spending, and investment in particular, falls. Finally, these scholars say, less investment now necessarily implies less output in the future.

    In this new brief, Senior Scholar James K. Galbraith evaluates a recent article by William G. Gale and Peter R. Orszag, two economists who regard this view of deficits as plausible. He forwards an alternative, Keynesian view. This alternative suggests that deficits can increase overall output, possibly enabling the government to spend more money without increasing the ratio of the debt to GDP. He casts doubt on the notion that the interest rate is determined by the supply and demand of saving, arguing that monetary policy plays a much larger role than Gale and Orszag allow for. Moreover, he writes, strong demand for goods and services is more important than the supply of capital in determining the pace of technological advance and the rate of growth of output per worker.

    Download Public Policy Brief No. 81, 2005 PDF (561.02 KB)

  • Policy Notes No.5 16 June 2005

    Some Unpleasant American Arithmetic

    Wynne Godley
    Abstract

    Is it sufficiently realized how intractable those account imbalances—and how dangerous their potential consequences at home and abroad—have now become?

    Download Policy Note 2005/5 PDF (424.62 KB)
  • Working Paper No.424 15 June 2005

    Macroeconomics of Speculation

    Korkut A. Ertürk
    Abstract

    Despite his emphasis on the speculative character of investment decisions, Minsky paid little attention to asset price speculation per se, ignoring asset price bubbles and their macroeconomic effects. That is perhaps because his views were formed during the era of financial regulation, when speculation “could do no harm as bubbles on a steady stream of enterprise.” Clearly, times have since changed. Keynes’s old warning that the situation “is serious when enterprise becomes the bubble on a whirlpool of speculation” has begun to ring true again. To deepen our understanding of financial fragility under present-day conditions, the paper builds on Keynes’s insights in his General Theory on the stock exchange by going back to his Treatise, where asset price expectations and speculation play an integral part in his analysis of the business cycle. More specifically, it develops the macroeconomic implications of some of his arguments that have mainly been eclipsed by his GT. These can be summarized in three related propositions:

    1. Asset price expectations systematically exhibit self-sustained biases in one direction or another over the business cycle;
    2. Once an asset price bubble emerges no automatic mechanism exists to check the deviation of prices from their true values;
    3. Mean reversion in asset prices over time plays itself out through a rise in inactive money balances in the banking system, which Keynes called the bear position, as more and more people begin to think that asset prices have reached levels that are unreasonable.
       

     This early picture of how financial variables interact with output determination over the business cycle is contrasted with Keyne’s better known analysis in the GT, which, it is argued, does not lend itself as readily to analyzing asset price misalignments.

    Download Working Paper No. 424 PDF (785.43 KB)
  • Working Paper No.423 06 May 2005

    Is More Mobility Good? Firm Mobility and the Low Wage–Low Productivity Trap

    Stephanie Seguino
    Abstract

    This paper explores the possibility that unregulated FDI flows are causally implicated in the decline in labor productivity growth in semi-industrialized economies. These effects are hypothesized to operate through the negative impact of firm mobility on worker bargaining power and thus affecting wages. Downward pressure on wages can reduce the pressure on firms to raise productivity in defense of profits, contributing to a low wage–low productivity trap. This paper presents empirical evidence, based on panel data fixed effects and GMM estimation for 37 semi-industrialized economies, that supports the causal link between increased firm mobility and lower wages, as well as slower productivity growth over the period 1970–2000.

    Download Working Paper No. 423 PDF (728.08 KB)
  • Research Project Report 01 May 2005

    Interim Report

    Hyunsub Kum, Edward N. Wolff and Ajit Zacharias
    Abstract

    This interim report compares the LIMEW and official measures of economic well-being for 1989–2002, a period marked by the economic boom of the late 1990s and a mild recession in 2001–02. All measures show that the well-being of the average American household was significantly higher in 2000 than in 1989, with most of the improvement occurring in the latter half of the 1990s. In contrast, while the official measures show deterioration in well-being of 2–3 percent for the average household in the period 2000–02, the LIMEW shows a hefty increase of more than 5 percent. Nevertheless, inequality was higher in 2002 than in 1989 according to all measures of well-being.

    Download LIMEW Report, May 2005 PDF (342.81 KB)
  • Working Paper No.422 29 April 2005

    The Disutility of International Debt

    Levy Blog
    Abstract

    In dealing with the problematic relationship of morality to rational choice theory, neoclassical economists since Lionel Robbins have often argued that they can incorporate moral values into consumer theory by putting those values into the utility function. This paper tests the viability of such an approach in the context of international finance. The moral value at stake is autonomy, which may be lost when borrowers must submit to the edicts of international financial institutions. When such a value is inserted into the utility function of a small economy, the growth rate of consumption and the level of investment change. Furthermore, potential borrowers may lose their ability to credibly commit to paying back loans, resulting in a complete absence of borrowing where it might otherwise take place. The author argues that while this model illustrates the possibility of analyzing a noneconomic value (sovereignty) through rational choice theory, it also shows that standard methods of empirical inference, policy evaluation, and welfare analysis may fail in such a situation. To answer questions that mix morality and economics, economists must seek tools other than conventional rational choice theory.

    Download Working Paper No. 422 PDF (303.45 KB)
  • Policy Notes No.4 29 April 2005

    Imbalances Looking for a Policy

    Wynne Godley
    Abstract

    The latest batch of numbers from the United States makes for a disturbing read. The GDP growth rate of GDP has been adequate. However, the current account deficit was 6.3 percent of GDP in the fourth quarter of 2004, and the terrible trade figures for January and February promise an even bigger deficit in the first quarter of 2005 (BEA 2005). Let no one suppose that this deterioration is a temporary effect that will automatically turn around soon.

    Download Policy Note 2005/4 PDF (203.79 KB)
  • Policy Notes No.3 26 April 2005

    Is the Dollar at Risk?

    Korkut A. Ertürk
    Abstract

    A massive fiscal stimulus and, until recently, aggressive monetary easing have been successful in raising bond and real estate prices to unprecedented levels, inducing a credit boom that has prevented private consumption from falling. While it might still be too early to say that it worked, the strategy has indeed, for the time being, prevented the United States economy from slipping into a severe depression after the collapse of the stock market at the turn of the millennium.

    Download Policy Note 2005/3 PDF (434.05 KB)
  • Working Paper No.421 07 April 2005

    A Simplified Stock-flow Consistent Post-Keynesian Growth Model

    Claudio H. Dos Santos and Gennaro Zezza
    Abstract

    Despite being arguably the most rigorous form of structuralist/post-Keynesian macroeconomics, stock-flow consistent models are quite often complex and difficult to deal with. This paper presents a model that, despite retaining the methodological advantages of the stock-flow consistent method, is intuitive enough to be taught at an undergraduate level. Moreover, the model can easily be made more complex to shed light on a wealth of specific issues. 

    Download Working Paper No. 421 PDF (397.91 KB)
  • Working Paper No.420 25 March 2005

    Is the Equalizing Effect of Retirement Wealth Wearing Off?

    Edward N. Wolff
    Abstract

    Retirement wealth is often viewed as a great equalizer, offsetting the inequality in standard household net worth. One of the most dramatic changes in the retirement income system over the last two decades has been a decline in traditional Defined Benefit (DB) pension plans and a sharp rise in Defined Contribution (DC) pensions. Using data from the Federal Reserve Board’s Survey of Consumer Finances, I find that retirement wealth (the sum of pension and Social Security wealth) has a considerably weaker offsetting effect on wealth inequality in 2001 than in 1983.  Whereas standard net worth inequality increased modestly between 1983 and 2001, the inequality of augmented wealth (the sum of retirement wealth and net worth) surged from 1983 to 2001, very much in line with income inequality. Moreover, whereas median net worth climbed substantially from 1983 to 2001, median augmented wealth actually fell over this period.

    Download Working Paper No. 420 PDF (802.95 KB)
  • Working Paper No.419 08 March 2005

    FDIC-sponsored Self-Insured Depositors

    Panos Konstas
    Abstract

    Insured depositors have no reason to care how their banks perform or how safe they are.  Only uninsured depositors have that incentive.  This paper offers a plan to replace some insured deposits with uninsured deposits.  The plan: the FDIC would guarantee loan contracts if the loan takers deposited the proceeds exclusively in uninsured deposits and backed those deposits with equity. This would ensure that the loan takers could share the likely costs if any of their depositories failed.  The loans made under FDIC guarantee would only require interest at the risk-free rate.  Thus the loan takers could offer the proceeds at lower rates than the rates paid on current deposits.  Accordingly, funding by banks would shift to the new deposits, and since the new “self-insured” depositors would have equity at stake, they would have no choice but to duly monitor their banks and impose rate premiums based on each bank’s indigenous risk.  With these reforms, some very costly imperfections of current deposit insurance would be eliminated: the FDIC would now have in place a program that would dissuade banks from moral hazard and high risk and set the foundation for better disciplined, safer, and more cost-efficient banking.

    Download Working Paper No. 419 PDF (302.99 KB)
  • Strategic Analysis 01 March 2005

    How Fragile Is the US Economy?

    Claudio H. Dos Santos, Dimitri B. Papadimitriou, Anwar M. Shaikh and Gennaro Zezza
    Abstract

    As we projected in a previous Strategic Analysis, the United States’ economy experienced growth rates higher than 4 percent in 2004. The question we want to raise in this Strategic Analysis is whether these rates will persist or come back down. We believe that several signs point in the latter direction. In what follows, we analyze the evidence and explore the alternatives facing the US economy.

    Download Strategic Analysis, March 2005 PDF (727.46 KB)
  • Research Project Report 01 March 2005

    Economic Well-Being in US Regions and the Red and Blue States

    Edward N. Wolff and Ajit Zacharias
    Abstract

    This report analyzes regional aspects of economic well-being according to four regions identified by the United States Census Bureau: the Northeast, Midwest, South, and West. Using the official measures and the Levy Institute Measure of Economic Well-Being (LIMEW), the authors examine how the average American household fared from 1989 to 2001 and discuss disparities in well-being among population subgroups and across regions. In light of the 2004 presidential election, the report also examines patterns of well-being in the “red” and “blue” states, where the electoral majority favored George W. Bush and John Kerry, respectively.

    Download LIMEW Report, March 2005 PDF (1.59 MB)
  • Working Paper No.418 24 February 2005

    Asset Ownership along Gender Lines

    Rania Antonopoulos and Maria Sagrario Floro
    Abstract

    Gender differences have long been documented in earnings, employment opportunities, and time spent within the unpaid care economy. This paper joins the recent efforts in the economics literature on gender differences in asset ownership. Specifically, it investigates whether a gender-specific composition in asset ownership between heads of households and spouses can be detected among low-income, urban households in Bangkok, Thailand. The present case study explores this issue empirically, using a sample of 134 couples from a 2002 survey that collected data at the level of the individual respondent on accumulated physical and financial assets. Both husband and wife were interviewed separately and the data gathered from the interviews include pertinent household and individual information on employment, credit and household decision-making issues. The findings suggest that asset composition varies by gender, indicating that further investigation is warranted on this topic. Tobit and Probit tests are used to examine the factors that may affect this gendered pattern.

    Download Working Paper No. 418 PDF (492.98 KB)
  • Policy Notes No.2 08 February 2005

    Manufacturing a Crisis

    L. Randall Wray
    Abstract

    For seven decades, the far right has never veered from its avowed mission to gut America’s most comprehensive, successful, and popular safety net: Social Security. While it had won a few small battles (most notably, the Greenspan Commission’s huge 1983 payroll tax hikes and two-year increase in the normal retirement age), its efforts never gained much political traction before 2000. Ironically, the Clinton administration provided some much-needed support to the conservative think tanks’ preposterous claim that Social Security faces financial Armageddon. And candidate Al Gore’s only significant campaign issue involved maintaining “lockboxes” to protect the trust fund by dedicating a portion of projected 15-year budget surpluses to the program.

    Download Policy Note 2005/2 PDF (223.50 KB)
  • Working Paper No.416 20 January 2005

    Occupational and Industrial Mobility in the United States 1969–93

    Asena Caner and Edward N. Wolff
    Abstract

    Using the Panel Study of Income Dynamics, we investigate occupational and industrial mobility of individuals over the 1969–80 and 1981–93 periods in the United States. We find that workers changed both occupations and industries more frequently in the later period. For example, occupational mobility for men ranged from 15 to 20 percent per year during the first period and from 20 to 25 percent per year over the second. We also find that, for men, occupational and industrial changes are associated with lower earnings, though this effect has lessened somewhat over time, while for women the results are mixed. Our results also indicate that older and less educated workers are less likely to shift occupation or industry, as are better paid men but not better paid women.

  • Policy Notes No.1 01 January 2005

    The Case for an Environmentally Sustainable Jobs Program

    Mathew Forstater
    Abstract

    The job numbers in the United States and around the globe continue to look bleak. Not only are the absolute numbers dismal, but also job growth has dragged on with no hope for a substantial change in prospects. This situation supports the view that we are facing a long-term problem that requires critical and creative problem-solving responses. Since unemployment is the major cause of poverty, many of our most pressing social problems are directly or indirectly related to joblessness. Forstater argues that not only the quantity but also the quality of jobs is at issue.

  • Public Policy Brief No.80 21 December 2004

    The Fed and the New Monetary Consensus

    L. Randall Wray
    Abstract

    The most charitable interpretation of the Federal Reserve’s recent interest rate hikes is that they appear to have been premature. A convincing array of data on payrolls, employment-to-population ratios, and other labor market indicators show that the current recovery has not yet attained the degree of labor market tightness that was common in previous recoveries, and therefore that the threat of inflation is minimal. Hence, the Fed, in raising rates, was unnecessarily jeopardizing the economy’s weak recovery.

    In this new brief, we learn about the flaws in the Fed’s thinking that have led to its frequent policy mistakes. Author L. Randall Wray traces several strands of current central bank thinking back to their roots in the Fed’s internal discussions in the mid-1990s. Transcripts of these discussions have recently been released, a development that has yielded some disturbing and telling insights about the way in which monetary policy is formed.

    Download Public Policy Brief No. 80, 2004 PDF (268.63 KB)