New Levy Institute Publications

This monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.   “Never waste a crisis.” Those words were often invoked by reformers who wanted to tighten regulations and financial supervision in the aftermath of the global financial crisis that began in late 2007. Many of them have been disappointed, since the relatively weak reforms adopted (for example, in Dodd-Frank) appear to have fallen far short of what is needed. But the same words can be invoked in reference to the policy response to the crisis—that is, to the rescue of the financial system. To date, the crisis was wasted in that area, too. If anything, the crisis response largely restored the deeply flawed system that existed on the eve of the crisis.   But it may not be too late to use the crisis, and the crisis response, to formulate a different approach to dealing with the next financial crisis—and another crisis is inevitable—by learning from the policy mistakes made in reaction to the last crisis, and by looking to successful policy responses around the globe. 

As this report goes to press, the official unemployment rate remains tragically elevated, compared even to rates at similar points in previous recoveries. The US economy seems once again to be in a “jobless recovery,” though the unemployment rate has been steadily declining for years. At the same time, fiscal austerity has arrived, with the implementation of the sequester cuts, following tax increases and the ending of emergency extended unemployment benefits just two months ago.

Our new report provides medium-term projections of employment and economic growth under four different scenarios. The baseline scenario starts by assuming the same growth rates and government deficits as the Congressional Budget Office’s (CBO) baseline projection from earlier this year. The result is a new surge of the unemployment rate to nearly 8 percent in the third quarter of this year, followed by a very gradual new recovery. Scenarios 1 and 2 seek to reach unemployment-rate goals of 6.5 percent and 5.5 percent, respectively, by the end of next year, using new fiscal stimulus.

We find in these simulations that reaching the goals requires large amounts of fiscal stimulus, compared to the CBO baseline. For example, in order to reach 5.5 percent unemployment in 2014, scenario 2 assumes 11 percent growth in inflation-adjusted government spending and transfers, along with lower taxes.

As an alternative, scenario 3 adds an extra increase to growth abroad and to private borrowing, along with the same amount of fiscal stimulus as in scenario 1. In this last scenario of the report, the unemployment rate finally pierces the 5.5 percent threshold from the previous scenario in the third quarter of 2015. We conclude with some thoughts about how such an increase in demand from all three sectors—government, private, and external—might be realistically obtained.

This policy brief by Senior Scholar and Program Director Jan Kregel builds on an earlier analysis (Policy Note 2012/6) of JPMorgan Chase and the actions of the “London Whale,” and what this episode reveals about the larger risks inherent in the financial system. It is clear that the Dodd-Frank Act failed to prevent massive losses by one of the world’s largest banks. This is undeniable evidence that work remains to be done to reform the financial system. Toward this end, Kregel reviews the findings of a recent report by the Senate Permanent Subcommittee on Investigations and expands on the lessons that we can draw from the evolution of the London Whale episode. 

Is There Space to Promote Gender Equality in the Evolution of Social Protection?

Social protection systems comprise public policies designed to prevent or alleviate economic insecurity and poverty. Throughout the developing world, social protection strategies and the dialogue surrounding them have recently been undergoing an important evolution. In this policy brief, Senior Scholar and Director of the Gender Equality and the Economy program Rania Antonopoulos highlights the opportunities and challenges for promoting gender equality and empowerment within this shifting policy landscape. Developed with financial support from the United Nations Development Programme, this brief is intended as an advocacy tool in the service of amplifying gender-informed policy considerations in country-level social protection debates. 

The EU and the Pillage of the Indebted Countries

The European Union (EU) is a treaty-based organization that was set up after World War II as a means of putting an end to a favorite practice of the Europeans: sorting out their national differences by engaging in bloody warfare. The European experiment—the formation of a Common Market, which led eventually to economic and monetary union—has been linked to some remarkable outcomes: Europe has experienced its longest period of peace since the end of World War II, and war among European member-states now seems highly unlikely. Naturally, senior EU officials never miss an opportunity to remind the public of this achievement whenever the policies of the “new Rome” are questioned by a European citizenship fed up with authoritarian decision-making processes by the EU core, bank bailouts masquerading as national bailouts, austerity policies—and what amounts to the pillaging of the debtor countries by the center.

In March of this year, the government of Cyprus, in response to a banking crisis and as part of a negotiation to secure emergency financial support for its financial system from the European Union (EU) and International Monetary Fund (IMF), proposed the assessment of a tax on bank deposits, including a levy (later dropped from the final plan) on insured demand deposits below the 100,000 euro insurance threshold. An understanding of banks’ dual operations and of the relationship between two types of deposits—deposits of customers’ currency and coin, and deposit accounts created by bank loans—helps clarify some of the problems with the Cypriot deposit tax, while illuminating both the purposes and limitations of deposit insurance.

The global financial crisis has generated renewed interest in the 1951 Treasury – Federal Reserve Accord and its lessons for central bank independence. A broader interpretation of the Accord and of Marriner S. Eccles’s role at the Federal Reserve should teach central bankers that independence can be crucial for fighting inflation, but also encourage them to be more supportive of government efforts to fight deflation and mass unemployment.

Several years before the onset of the recent financial crisis, ex – Federal Reserve Board Member Lawrence Meyer wrote that the Fed “is often called the most powerful institution in America,” its key decisions made by 19 people whose names are known by few, meeting regularly behind closed doors. Bernard Shull examines the origin and nature of Fed authority and independence, and reviews the impact of Dodd-Frank on our central bank. His conclusion? The new constraints placed on the Fed are modest at best, and its continued expansion inexorably raises questions of governance.

Following the financial crisis of 2008, transition countries—the economies of Central and Eastern Europe and the former Soviet Union—experienced an increase in female labor force participation rates and a decrease in male labor force participation rates, in part because male-dominated sectors were hit the hardest. These developments have prompted many to argue that women have been spared the full-blown effects of the crisis. In this paper, we critically evaluate this claim by investigating the extent to which the increase in the female labor force participation rate may have reflected a distress labor supply response to the crisis. We use the data on the 28 countries of the transition region assessed in the 2010 Life in Transition Survey. We find the presence of the female added worker effect, driven by married 45- to 54-year-old women with no children in the household. This effect is the strongest among the region’s middle-income countries. Among men, a negative relationship between labor force participation and household-specific income shocks is indicated.

Unlike the differences in the response to household-specific income shocks, the labor supply response to a weaker macroeconomic environment is negative for both men and women—hinting at the presence of the “discouraged worker” effect, which cuts across gender lines. We conclude that the decrease in men’s labor force participation observed during this crisis is likely a combined result of the initial sectoral contraction and the subsequent impact of the discouraged worker effect. For women, on the other hand, the added worker effect appears to outweigh the discouraged worker effect, contributing to an increase in their labor force participation rate. Our findings highlight the presence of heterogeneity in the way in which household-specific shocks, as opposed to economy-wide conditions, affect both female and male labor force participation rates.

Recent episodes of housing bubbles, which occurred in several economies after the burst of the United States housing market, suggest studying the evolution of housing prices from a global perspective. We utilize a theoretical model for the purposes of this contribution, which identifies the main drivers of housing price appreciation—for example, income, residential investment, financial elements, fiscal policy, and demographics. In the second stage of our analysis, we test our theoretical hypothesis by means of a sample of 18 Organisation for Economic Co-operation and Development (OECD) countries from 1970 to 2011. We employ the vector error correction econometric technique in terms of our empirical analysis. This allows us to model the long-run equilibrium relationship and the short-run dynamics, which also helps to account for endogeneity and reverse-causality problems.

By Hyman P. Minsky | Preface by Dimitri B. Papadimitriou | Introduction by L. Randall Wray

Although Hyman P. Minsky is best known for his ideas about financial insta­bility, he was equally concerned with the question of how to create a stable economy that puts an end to poverty for all who are willing and able to work. This collection of Minsky’s writing spans almost three decades of his published and previously unpublished work on the necessity of combating poverty through full employment policies—through job creation, not welfare.   Minsky was an American economist who studied under Joseph Schumpeter and Wassily Leontief. He taught economics at Washington University, the University of California–Berkeley, Brown University, and Harvard University. Minsky joined the Levy Economics Institute of Bard College as a distinguished scholar in 1990, where he continued his research and writing until a few months before his death in October 1996. His two seminal books were Stabilizing an Unstable Economy and John Maynard Keynes, both of which were reissued by the Levy Institute in 2008.   Minsky held a B.S. in mathematics from the University of Chicago (1941) and an M.P.A. (1947) and a Ph.D. in economics (1954) from Harvard. He was a recipient in 1996 of the Veblen-Commons Award, given by the Association for Evolutionary Economics in recognition of his exemplary standards of scholarship, teaching, public service, and research in the field of evolutionary institutional economics.

This book was made possible in part through the generous support of the Ford Foundation and Andrew Sheng of the Fung Global Institute.

Published By: Levy Economics Institute of Bard College

By L. Randall Wray

In recent years a new approach to macroeconomics has been developed that challenges conventional wisdom and uncovers how money “works” in the modern economy. This book synthesizes the key principles of Modern Money Theory, exploring macro accounting, currency regimes, and exchange rates in both the United States and developing nations. Senior Scholar L. Randall Wray addresses the pressing issues of how misunderstandings about the nature of money have caused the current global financial meltdown, and provides fresh ideas about how policymakers around the world should address the continued weaknesses in their economies.

Published By: Palgrave MacMillan

This issue of the Summary features the Macro Modeling Team’s latest Strategic Analysis and a collection of Hyman P. Minsky’s writings on poverty and employment titled Ending Poverty: Jobs, Not Welfare. Also included are publications focused on the Fed’s history, governance, and policies; the social and economic consequences of the ongoing crisis in Greece; the challenges and policy choices faced by the eurozone; a demonstration of the emergence of secondary markets from the flow part of the economy using only structural axioms; gender differences in the long-term benefits of worker migration; the impacts of financialization and uncertainty on the accumulation process; the link between endogenous bank credit and the housing market; a review of the stock-flow consistent modeling literature; analyses of factors affecting US economic growth and business-cycle patterns in Latin America and the Caribbean; a Kaleckian perspective on income redistribution; a discussion of the trends in income inequality and household finance in the United States; and a critical exploration of the opportunities to promote gender equality through social protection initiatives in developing countries.

INSTITUTE RESEARCH

Program: The State of the US and World Economies

• DIMITRI B. PAPADIMITRIOU, GREG HANNSGEN, and MICHALIS NIKIFOROS, Is the Link between Output and Jobs Broken?
• C. J. POLYCRONIOU, The Tragedy of Greece: A Case against Neoliberal Economics, the Domestic Political Elite, and the EU/IMF Duo
• GIORGOS ARGITIS, Greece: Caught Fast in the Troika’s Austerity Trap
• ROBERT J. BARBERA and GERALD HOLTHAM, ECB Worries / European Woes: The Economic Consequences of Parochial Policy

Program: Monetary Policy and Financial Structure

• PHILIP ARESTIS, ANA ROSA GONZÁLEZ, and OSCÁR DEJUÁN, Investment, Financial Markets, and Uncertainty
• THORVALD GRUNG MOE, Marriner S. Eccles and the 1951 Treasury–Federal Reserve Accord: Lessons for Central Bank Independence
• PHILIP ARESTIS and ANA ROSA GONZÁLEZ, Endogenous Bank Credit and Its Link to Housing in OECD Countries
• THOMAS M. HUMPHREY, Arresting Financial Crises: The Fed versus the Classicals
• BARRY Z. CYNAMON and STEVEN M. FAZZARI, Inequality and Household Finance during the Consumer Age
• EUGENIO CAVERZASI, The Missing Macro Link

Program: Gender Equality and the Economy

• RANIA ANTONOPOULOS, Expanding Social Protection in Developing Countries: A Gender Perspective

Program: Immigration, Ethnicity, and Social Structure

• SANJAYA DESILVA, Long-Term Benefits from Temporary Migration: Does the Gender of the Migrant Matter?

Program: Economic Policy for the 21st Century

Explorations in Theory and Empirical Analysis

• EGMONT KAKAROT-HANDTKE, Primary and Secondary Markets
• LEKHA S. CHAKRABORTY, Interest Rate Determination in India: Empirical Evidence on Fiscal Deficit – Interest Rate Linkages and Financial Crowding Out
• EUGENIO CAVERZASI and ANTOINE GODIN, Stock-flow Consistent Modeling through the Ages
• ECKHARD HEIN, Finance-dominated Capitalism and Redistribution of Income: A Kaleckian Perspective
• LEKHA S. CHAKRABORTY, YADAWENDRA SINGH, and JANNET FARIDA JACOB, Analyzing Public Expenditure Benefit Incidence in Health Care: Evidence from India
• ESTEBAN PÉREZ CALDENTEY, DANIEL TITELMAN, and PABLO CARVALLO, Weak Expansions: A Distinctive Feature of the Business Cycle in Latin America and the Caribbean
• OLIVIER G. GIOVANNONI, Growth Trends and Cycles in the American Postwar Period, with Implications for Policy
• MICHAEL A. VALENTI and OLIVIER GIOVANNONI, The Economics of Inclusion: Building an Argument for a Shared Society

INSTITUTE NEWS

• New Levy Institute Book
• New Master’s Degree Program in Economic Theory and Policy
• New Research Scholar
• Economic Forum in Athens

Upcoming Events:

• 22nd Annual Hyman P. Minsky Conference: Building a Financial Structure for a More Stable and Equitable Economy
• The 2013 Hyman P. Minsky Summer Seminar

PUBLICATIONS AND PRESENTATIONS

• Publications and Presentations by Levy Institute Scholars
• Recent Levy Institute Publications