Publications
Policy Notes
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Policy Note 2023/4 | August 2023Nischal Dhungel examines the impact of India’s demonetization experiment—an effort at “forced formalization” of the economy. He urges a more organic approach to formalization, pairing efforts to bring the unbanked population into the banking system with greater funding and accessibility for India’s signature employment guarantee program.Download:Associated Program:Author(s):Nischal DhungelRelated Topic(s):
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Policy Note 2023/3 | July 2023In recalling John Maynard Keynes’s revolutionary theory of interest, reviewing the doctrines Keynes sought to overthrow, and analyzing the structural transformations of the US economy, James K. Galbraith maintains there is no alternative to a policy of low interest rates. However, such a policy cannot be effective, he argues, without a radical restructuring of the US economy as a whole.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2023/2 | June 2023Following the recent (June 25, 2023) elections in Greece, Institute President Dimitri B. Papadimitriou and Research Scholar Nikolaos Rodousakis outline the economic and policy challenges facing the Greek government.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2023/1 | May 2023In 2022, Greek GDP grew at a higher rate than the eurozone average as the nation’s economy rebounded from the COVID-19 shock.
However, it was not all welcome news. In particular, Greece registered its largest current account deficit since 2009. Despite a widespread focus on fiscal profligacy, it is excessive current account and trade deficits—largely caused by private sector imbalances—that are at the root of Greece’s multiple economic challenges. This policy note identifies the major determinants causing the deterioration of the current account balance in order to devise appropriate corrective policies.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2022/3 | May 2022In the second round of the Chilean presidential elections, the coalition led by Gabriel Boric secured a victory under the premise of delivering long-awaited reforms to a financially volatile, structurally fragile, and deeply unequal economic structure. In this policy note, Giuliano Toshiro Yajima sheds light on these three aspects of the Chilean economy, showing that its external and internal fragility feeds back on the excessive specialization and heterogeneity of the productive sectors, which in turn influence income and wealth distribution.Download:Associated Program:Author(s):
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Policy Note 2022/2 | April 2022
Measuring Income Loss and Poverty in Greece
More than a decade after the 2009 crisis, the standards of living of the Greek population are still contracting and the prospects are gloomy. In this policy note, Vlassis Missos, Research Associate Nikolaos Rodousakis, and George Soklis deal with how to approach the measurement of income loss and poverty in Greece and argue for the use of household disposable income (HDI) in estimating adjustments, which offers a more accurate appreciation of the burden falling on the Greek population. They underline the significance of replacing a “southern-European model” of social protection with a passive safety net model—and the centrality to the latter model of embracing ideas of internal devaluation and fiscal consolidation—and suggest a better measure of poverty, for the case of Greece specifically and in general for developed economies in which front-loaded neoliberal policies are imposed. Finally, they comment on the sacrifice that would be required if fiscal discipline were to return in the aftermath of the COVID-19 pandemic lockdowns.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2022/1 | February 2022In 2020, the Hellenic Statistical Authority (ElStat) started a revision of the national accounts for Greece to bring them into line with the new European System of Accounts. Data from national accounts have gained more relevance as a crucial set of information for policy, especially in the eurozone, since many indicators—like the size of the public deficit relative to GDP—depend on them. It is therefore crucial that these data provide a realistic description of the actual state of the economy.
Models that aim at understanding the medium-term trajectory of an economy usually need to abstract from short-term volatility due to the seasonal behavior of some variables, and it is therefore common practice to use seasonally adjusted data rather than the observed seasonal data. Research Scholar Gennaro Zezza, Institute President Dimitri Papadimitriou, and Research Associate Nikos Rodousakis recently noticed that the dynamics of relative prices, as measured by the ratios between the deflators of the different seasonally adjusted components of GDP, had an excess volatility, which made it more difficult to obtain meaningful econometric estimates of their determinants. They have therefore decided to investigate whether this excess volatility could be observed in the original seasonal data, and this note documents their results.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2021/4 | November 2021
The Case of the Greek Tourism Sector
The COVID-19 pandemic has revealed multiple risks faced by economies whose production structures depend on the volatility of international conditions. In the case of Greece, this has manifested itself in the severe impact the pandemic has had on one of the linchpins of the Greek economy: the tourism sector. Vlassis Missos, Nikolaos Rodousakis, and George Soklis document the impact of the pandemic on tourism and the significance of tourism revenues for Greece’s 2021 GDP recovery. They argue that the distributional effect of the tourism sector plays a significant role in overall income inequality in Greece and develop a number of policy recommendations aiming to correct some of the problematic aspects of the country’s tourism sector.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2021/3 | June 2021Edward Lane and L. Randall Wray explain how federal taxes on corporate profits are not well suited to either containing inflationary pressures or reducing inequality. They are not only a poor complement to President Biden’s proposed infrastructure plans, but are inefficient and ineffective taxes more broadly, according to Lane and Wray. The authors follow Hyman Minsky in recommending the elimination of corporate taxes, and they outline a replacement centered on the taxation of unrealized capital gains.
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Policy Note 2021/2 | May 2021
The Impact of the Emergency Benefit on Poverty and Extreme Poverty in Brazil
Research Scholar Luiza Nassif-Pires, Luísa Cardoso, and Ana Luíza Matos de Oliveira analyze the importance of the “emergency benefit” (Auxílio Emergencial) in containing the increase in poverty and extreme poverty in Brazil during the COVID-19 pandemic. They find the emergency benefit mitigated the loss of income, brought the poverty rate to historically low levels, and reduced inequality: poverty gaps in terms of gender and (to a lesser degree) race narrowed in 2020. However, their simulations show that a planned reduction in transfer levels for 2021 will result in the emergency benefit providing substantially less social protection against loss of income than its more robust 2020 version.Download:Associated Program(s):Author(s):Related Topic(s): -
Policy Note 2021/1 | January 2021While governments may consider implementation of John Maynard Keynes’s original clearing union proposal for the international financial architecture too difficult or radical, Senior Scholar Jan Kregel notes that the private sector has already produced a virtual equivalent of an international global monetary system. Currently, this system is employed as an extension of the international mobile telephone services provided by a private company, rather than a financial institution. The clearing system he describes provides an example of a possible solution that retains national currencies without requiring the substitution of the dollar with another national currency or basket of national currencies.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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Policy Note 2020/6 | October 2020As COVID-19 infection and test positivity rates rise in the United States and federal stimulus plans expire, Senior Scholar Jan Kregel articulates an alternative approach to analyzing the economic problems raised by the pandemic and organizing an appropriate policy response. In contrast to both the mainstream and some Keynesian-inspired approaches, Kregel advocates a central role for direct social provisioning as a means of equitably sharing the costs of quarantine under conditions of strict lockdown.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Policy Note 2020/5 | July 2020In this policy note, Jan Toporowski provides an analysis of government debt management using fiscal principles derived from the work of Michał Kalecki. Dividing the government’s budget into a “functional” and “financial” budget, Toporowski demonstrates how a financial budget balance—servicing government debt from taxes on wealth and profits that do not affect incomes and expenditures in the economy—allows a government to manage its debts without compromising the macroeconomic goals set in the functional budget. By splitting the budget into a functional budget that affects the real economy and a financial budget that just maintains debt payments and the liquidity of the financial system, the government can have two independent instruments that can be used to target, respectively, the macroeconomy and government debt—overcoming a dilemma that makes fiscal policy ineffective. This analysis also explains how pursuit of supply-side policies that result in a financial budget deficit and functional budget surplus can lead to slow growth, rising government debt, and financial instability.Download:Associated Program(s):Author(s):Jan ToporowskiRelated Topic(s):
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Policy Note 2020/4 | May 2020The ongoing job losses, already numbering in the tens of millions, and the mass unemployment that will remain once the COVID-19 crisis has passed are of our own making, argues Pavlina R. Tcherneva, created by our inability to conceive of policies that protect and create jobs on demand. There is another option: instead of capitulating to a world of guaranteed unemployment, we can demand policies that guarantee employment. During the pandemic, the government can protect jobs by acting as a kind of employer of last resort, while in the post-pandemic world it can create jobs directly via mass mobilization and a job guarantee. In this environment, backstopping payrolls, mass mobilization, and the job guarantee are three different but organically linked policies that aim to secure the right to decent, useful, and remunerative employment opportunities for all.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2020/3 | April 2020Research Scholar Martha Tepepa explains how the US response to the COVID-19 crisis will be hindered by its approach to immigration policy. The administration’s “zero tolerance” immigration campaign creates a public health risk in the context of this pandemic, and the recent implementation of the “Inadmissibility on Public Charge Grounds” final rule penalizing noncitizen recipients of some social services will further restrict access to treatment and encumber the fight against the coronavirus.Download:Associated Program(s):Gender Equality and the Economy Immigration, Ethnicity, and Social Structure Economic Policy for the 21st CenturyAuthor(s):Related Topic(s):
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Policy Note 2020/2 | April 2020The federal government appears to have abandoned the idea of a coordinated public health response to the COVID-19 pandemic, leaving the entirety to state and local governments. Meanwhile, the economic standstill resulting from necessary public health measures will soon cripple state and local budgets. Alexander Williams outlines a proposal for an intragovernmental automatic stabilizer program that would provide a backstop for state and local finances—both during the pandemic and beyond. Without this program, states will be severely constrained in their ability to respond to COVID-19, and balanced budget requirements will force them to cut jobs and raise taxes during the deepest recession in living memory.Download:Associated Program(s):Author(s):Alex WilliamsRelated Topic(s):
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Policy Note 2020/1 | March 2020
The Economic Implications of the Pandemic
The spread of the new coronavirus (COVID-19) is a major shock for the US and global economies. Research Scholar Michalis Nikiforos explains that we cannot fully understand the economic implications of the pandemic without reference to two Minskyan processes at play in the US economy: the growing divergence of stock market prices from output prices, and the increasing fragility in corporate balance sheets.
The pandemic did not arrive in the context of an otherwise healthy US economy—the demand and supply dimensions of the shock have aggravated an inevitable adjustment process. Using a Minskyan framework, we can understand how the current economic weakness can be perpetuated through feedback effects between flows of demand and supply and their balance sheet impacts.Download:Associated Program(s):Author(s):Related Topic(s): -
Policy Note 2019/2 | May 2019Against the background of an ongoing trade dispute between the United States and China, Senior Scholar Jan Kregel analyzes the potential for achieving international adjustment without producing a negative impact on national and global growth. Once the structure of trade in the current international system is understood (with its global production chains and large imbalances financed by international borrowing and lending), it is clear that national strategies focused on tariff adjustment to reduce bilateral imbalances will not succeed. This understanding of the evolution of the structure of trade and international finance should also inform our view of how to design a new international financial system capable of dealing with increasingly large international trade imbalances.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Policy Note 2019/1 | April 2019While a consensus has formed that the eurozone’s economic governance mechanisms must be reformed, and some progress has been made on this front, what has been agreed to so far falls short of what is needed to address the central imbalances caused by the eurozone setup, according to Paolo Savona.
The key elements that are missing from the current package of reforms are interrelated: a common insurance scheme for bank deposits, the possible regulation of banks’ sovereign exposure, and the existence of a common safe asset. Savona outlines a proposal to increase the supply of safe assets provided by a common European issuer (the European Stability Mechanism) and explains how the plan could be made economically and politically satisfactory to all member states while facilitating progress on the deposit insurance and sovereign exposure issues.Download:Associated Program(s):Author(s):Paolo SavonaRelated Topic(s): -
Policy Note 2018/5 | November 2018
Minsky’s Forgotten Lessons Ten Years after Lehman
Ten years after the fall of Lehman Brothers and the collapse of the US financial system, most commentaries remain overly focused on the proximate causes of the last crisis and the regulations put in place to prevent a repetition. According to Director of Research Jan Kregel, there is a broader set of lessons, which can be unearthed in the work of Distinguished Scholar Hyman Minsky, that needs to play a more central role in these debates on the 10th anniversary of the crisis.
This insight begins with Minsky's account of how crisis is inherent to capitalist finance. Such an account directs us to shore up those government institutions that can serve as bulwarks against the inherent instability of the financial system—institutions that can prevent that instability from turning into a prolonged crisis in the real economy.
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Policy Note 2018/4 | May 2018
Some Lessons from Ghana and Tanzania
In this policy note, Thomas Masterson and Ajit Zacharias address the nexus between wage employment, consumption poverty, and time deficits in the context of Ghana and Tanzania. Based on a recently completed research project supported by the Hewlett Foundation, the authors apply the Levy Institute Measure of Time and Consumption Poverty (LIMTCP) to estimate whether the jobs that are likely to be available to potential employment-seeking, working-age individuals in consumption-poor households—who are predominantly female in both countries—can serve as vehicles of “economic empowerment.” They investigate this question using two indicators of empowerment, asking (1) whether the individual would be able to move their household to at least a minimal level of consumption via the additional earnings from their new job and (2) whether the individual would be deprived of the time required to meet the minimal needs of care for themselves (personal care), their homes, and their dependents.Download:Associated Program(s):Author(s):Related Topic(s): -
Policy Note 2018/3 | May 2018The idea of a universal job guarantee (JG) policy for the United States has become the subject of renewed public debate due to a number of high-profile political endorsements. L. Randall Wray recently coauthored a report that presented a JG proposal—the Public Service Employment program—along with estimates of the economic impact of the plan. However, several other variants have been proposed and/or endorsed. In this policy note, Wray seeks to establish common ground among the major JG plans and provides an initial response to critics.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2018/2 | March 2018Amid a recent upsurge in support for a national job guarantee program, L. Randall Wray, Stephanie A. Kelton, Pavlina R. Tcherneva, Scott Fullwiler, and Flavia Dantas outline a new proposal for a federally funded program with decentralized administration. Their Public Service Employment (PSE) program would offer a job—paying a uniform living wage with a basic benefits package—to all who are ready and willing to work. In advance of an upcoming report detailing the economic impact of the PSE, this policy note presents an overview of the goals and structure of the program in the context of current labor market trends and the prospects of poverty reduction.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2018/1 | February 2018It is beginning to look a lot like déjà vu in the United States. According to Senior Scholar L. Randall Wray, the combination of overvalued stocks, overleveraged banks, an undersupervised financial system, high indebtedness across sectors, and growing inequality together should remind one of the conditions of 1929 and 2007. Comparing the situations of the United States and China, where the outgoing central bank governor recently warned of the fragility of China’s financial sector, Wray makes the case that the United State is far more likely to “win” the race to the next “Minsky moment.” Instead of sustainable growth, we have “bubble-ized” our economy on the back of an overgrown financial sector—and to make matters worse, he concludes, US policymakers are ill-prepared to deal with the coming crisis.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2017/4 | November 2017
How Time Deficits and Hidden Poverty Undermine the Sustainable Development Goals
View More View LessThe predominant framework for measuring poverty rests on an implicit assumption that everyone has enough time available to devote to household production or enough resources to compensate for deficits in household production by purchasing market substitutes. Senior Scholar Ajit Zacharias argues that this implicit bias in our official poverty statistics threatens to undermine the Sustainable Development Goals (SDGs).
The SDGs include the following targets: (1) reduce the incidence of poverty by 50 percent by 2030, and (2) recognize and provide support to the unpaid provision of domestic services and care of persons undertaken predominantly by women in their households. This policy note suggests that a closer link exists between poverty reduction and support for household production activities than is commonly acknowledged. Failure to recognize the link in policy design can contribute to failure on both fronts. To obtain a more accurate assessment of poverty, time deficits in household production must be taken into account.
Download:Associated Program(s):The Levy Institute Measure of Time and Income Poverty Gender Equality and the Economy The Distribution of Income and WealthAuthor(s):Related Topic(s): -
Policy Note 2017/3 | July 2017
Because Healthcare Is Not Insurable
The growing political momentum for a universal single-payer healthcare program in the United States is due in part to Republican attempts to repeal and replace the Affordable Care Act (Obamacare). However, according to Senior Scholar L. Randall Wray, it is Obamacare’s successes and its failures that have boosted support for a single-payer system. Even after Obamacare, the US healthcare system still has significant gaps in coverage—all while facing the highest healthcare bill in the world. In this policy note, Wray argues that the underlying challenge for a system based on private, for-profit insurance is that basic healthcare is not an insurable expense. It is time to abandon the current, overly complex and expensive payments system and reconsider single payer for all. Social Security and Medicare provide a model for reform.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2017/2 | July 2017If the Trump administration is to fulfill its campaign promises to this age’s “forgotten” men and women, Director of Research Jan Kregel argues, it should embrace the broader lesson of the 1930s: that government regulation and fiscal policy are crucial in addressing changes in the economic and financial structure that have exacerbated the problems faced by struggling communities.
In this policy note, Kregel explains how overcoming the economic and financial challenges we face today, just as in the 1930s, requires avoiding what Walter Lippmann identified as an “obvious error”: the blind belief that reducing regulation and the role of government will somehow restore a laissez-faire market liberalism that never existed and is inappropriate to the changing structure of production of both the US and the global economy.
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Policy Note 2017/1 | April 2017Since the 1980s, economic recoveries in the United States have been delivering the vast majority of income growth to the wealthiest households. This policy note updates the analysis in One-Pager No. 47 and Policy Note 2015/4 with the latest data through 2015, looking at the distribution of average income growth (with and without capital gains) between the bottom 90 percent and top 10 percent of households, and between the bottom 99 percent and top 1 percent of households.
Little has changed when considering the distribution of average income growth in the current recovery (up to 2015) between the bottom 90 percent and top 10 percent of families, with or without capital gains. Although average real income for the bottom 90 percent of households is no longer shrinking, these families still capture a historically small proportion of that growth—only between 18 percent and 22 percent. The growing economy continues to deliver the most benefits to the wealthiest families.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2016/3 | August 2016In this policy note, Research Scholar Fernando Rios-Avila and Gustavo Canavire-Bacarreza, Universidad EAFIT, observe that immigration in the United States has a small but statistically significant impact on the labor market behavior of native-born unemployed workers. Their chances of transitioning from unemployment to employment are not affected by the share of immigrants in their job markets, but the native-born unemployed are more likely to leave the labor force when living in areas with a higher relative concentration of immigrants. Three additional results of the study shed light on what might be contributing to this higher rate of labor market exit, with each pointing to the potential role of expectations in creating a discouraged worker effect among the native-born unemployed in high-immigration states.Download:Associated Program(s):Author(s):Fernando Rios-Avila Gustavo Canavire-BacarrezaRelated Topic(s):
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Policy Note 2016/2 | April 2016
Brazil is mired in a joint economic and political crisis, and the way out is unclear. In 2015 the country experienced a steep contraction of output alongside elevated inflation, all while the fallout from a series of corruption scandals left the policymaking apparatus paralyzed. Looking ahead, implementing a policy strategy that has any hope of addressing the Brazilian economy’s multilayered problems would make serious demands on a political system that is most likely unable to bear it.
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Policy Note 2016/1 | January 2016A complementary currency circulates within an economy alongside the primary currency without attempting to replace it. The Swiss WIR, implemented in 1934 as a response to the discouraging liquidity and growth prospects of the Great Depression, is the oldest and most significant complementary financial system now in circulation. The evidence provided by the long, successful operation of the WIR offers an opportunity to reconsider the creation of a similar system in Greece.
The complementary currency is a proven macroeconomic stabilizer—a spontaneous money creator with the capacity to sustain and increase an economy’s aggregate demand during downturns. A complementary financial system that supports regional development and employment-targeted programs would be a U-turn toward restoring people’s purchasing power and rebuilding Greece’s desperate economy.Download:Associated Program(s):Author(s):Related Topic(s): -
Policy Note 2015/8 | December 2015
This policy note examines the formulation and reformulation of questions deployed by the US Census Bureau to gather information on racial and ethnic origin in recent decades. The likely outcome for the 2020 Census is that two older questions on race and Hispanic origin will be combined into a single question on ethno-racial origin. The authors welcome these changes but suggest that this may also be an opportune time to drop the “race or origin” label from this new, unified question. They also argue for modest and readily implemented modifications to capture valuable information on parental birthplaces in the American Community Survey. This information would support our ability to measure the social and economic well-being of the population and thus better understand the trajectory of demographic groups over time.
This policy note is accompanied by Working Paper No. 857, “Ethno-Racial Origin in US Federal Statistics: 1980–2020,“ in which the authors explore these issues in greater detail.
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Policy Note 2015/7 | November 2015
Demographic Trends in US Labor Force Participation
US labor force participation has continued to fall in the wake of the Great Recession. Improvements in the US unemployment rate reflect the fact that more people are falling out of the labor force, not a stronger labor market. Controlling for changes in the demographic makeup of the workforce (i.e., gender, age, education, and race), Research Scholar Fernando Rios-Avila investigates trends in labor force participation across and within groups between 1989 and 2013. He finds that not all groups have lost ground equally, while participation rates for some groups have actually increased. Understanding these patterns in labor force participation is a necessary first step toward crafting effective policy responses.
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Policy Note 2015/6 | October 2015
What Should Be Done with Greek Banks to Help the Country Return to a Path of Growth?
View More View LessThe recapitalization of Greek banks is perhaps the most critical problem for the Greek state today. Despite direct cash infusions to Greek banks that have so far exceeded €45 billion, with corresponding guarantees of around €130 billion, credit expansion has failed to pick up. There are two obvious reasons for this failure: first, the massive exodus of deposits since 2010; and second, the continuous recession—mainly the product of strongly deflationary policies dictated by international lenders.
Following the 2012–13 recapitalization, creditors allowed the old, now minority, shareholders and incumbent management (regardless of culpability) to retain effective control of the banks—a decision that did not conform to accepted international practices. Sitting on a ticking time bomb of nonperforming loans (NPLs), Greek banks, rather than adopting the measures necessary to restructure their portfolios, cut back sharply on lending, while the country’s economy continued to shrink.
The obvious way to rehabilitate Greek banking following the new round of recapitalization scheduled for later this year is the establishment of a “bad bank” that can assume responsibility for the NPL workouts, manage the loans, and in some cases hold them to maturity and turn them around. This would allow Greek banks to make new and carefully underwritten loans, resulting in a much-needed expansion of the credit supply. Sound bank recapitalization with concurrent avoidance of any creditor bail-in could help the Greek banking sector return to financial health—and would be an effective first step in returning the country to the path of growth.
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Policy Note 2015/5 | August 2015
An Assessment in the Context of the IMF Rulings for Greece
Developing countries, led by China and other BRICS members (Brazil, Russia, India, and South Africa), have been successfully organizing alternative sources of credit flows, aiming for financial stability, growth, and development. With their goals of avoiding International Monetary Fund loan conditionality and the dominance of the US dollar in global finance, these new BRICS-led institutions represent a much-needed renovation of the global financial architecture. The nascent institutions will provide an alternative to the prevailing Bretton Woods institutions, loans from which are usually laden with prescriptions for austerity—with often disastrous consequences for output and employment. We refer here to the most recent example in Europe, with Greece currently facing the diktat of the troika to accept austerity as a precondition for further financial assistance.
It is rather disappointing that Western financial institutions and the EU are in no mood to provide Greece with any options short of complying with these disciplinary measures. Limitations, such as the above, in the prevailing global financial architecture bring to the fore the need for new institutions as alternative sources of funds. The launch of financial institutions by the BRICS—when combined with the BRICS clearing arrangement in local currencies proposed in this policy note—may chart a course for achieving an improved global financial order. Avoiding the use of the dollar as a currency to settle payments would help mitigate the impact of exchange rate fluctuations on transactions within the BRICS. Moreover, using the proposed clearing account arrangement to settle trade imbalances would help in generating additional demand within the BRICS, which would have an overall expansionary impact on the world economy as a whole.
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Policy Note 2015/4 | March 2015
Trends in US Income Inequality
In the postwar period, with every subsequent expansion, a smaller and smaller share of the gains in income growth have gone to the bottom 90 percent of families. Worse, in the latest expansion, while the economy has grown and average real income has recovered from its 2008 lows, all of the growth has gone to the wealthiest 10 percent of families, and the income of the bottom 90 percent has fallen. Most Americans have not felt that they have been part of the expansion. We have reached a situation where a rising tide sinks most boats.This policy note provides a broader overview of the increasingly unequal distribution of income growth during expansions, examines some of the changes that occurred from 2012 to 2013, and identifies a disturbing business cycle trend. It also suggests that policy must go beyond the tax system if we are serious about reversing the drastic worsening of income inequality.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2015/3 | March 2015
From Bad to Worse
In a recent policy note (A Decade of Flat Wages?) we examined wage trends since 1994, and found that while wages grew between 1994 and 2002, average real wages stagnated or declined after 2002–03. Our latest study provides a more detailed analysis of wage trends for wage-level, age, and education groups, with emphasis on the periods following the 2001 and 2007–09 recessions.There was a more or less cohesive evolution of wages among different groups until 2002–03. However, after controlling for structural changes in the labor force, wages diverged sharply in the years that followed for different age, education, and wage groups, with the majority of workers experiencing real declines in their wages. This was not a short-term decline among a few numerically insignificant groups. Nearly two-thirds of all full-time wage earners have less than a four-year college degree and saw their wages decline compared to peak wages in 2002. Workers aged 44 and younger, representing slightly more than 38 million full-time wage earners or 71.4 percent of all full-time wage earners in the United States, also experienced a large reduction in cumulative wage growth after 2002. In terms of wage groups, the bottom 75 percent of full-time workers saw a decline in real wages, while those at the top of the wage distribution saw their wages rise—clear evidence of increasing wage inequality.Given the downward trend in real wages for the majority of full-time wage earners since 2009, it should come as no surprise that recovery from the Great Recession has been weak. In the absence of an employer-of-last-resort policy, federal and state policy must focus its efforts on increasing wages through measures such as progressive tax policy, raising the minimum wage, ensuring overtime pay laws are enforced, and creating opportunities for the most vulnerable workers.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2015/2 | February 2015
The Greek economic crisis started as a public debt crisis five years ago. However, despite austerity and a bold “haircut,” public debt is now around 175 percent of Greek GDP. In this policy note, we argue that Greece’s public debt is clearly unsustainable, and that a significant restructuring of this debt is needed in order for the Greek economy to start growing again. Insistence on maintaining the current policy stance is not justifiable on either pragmatic or moral grounds.
The experience of Germany in the early post–World War II period provides some useful insights for the way forward. In the aftermath of the war, there was a sweeping cancellation of the country’s public and foreign debt, which was part of a wider plan for the economic and political reconstruction of Germany and Europe. Seven decades later, while a solution to the unsustainability of the Greek public debt is a necessary condition for resolving the Greek and European crisis, it is not, in itself, sufficient. As the postwar experience shows, a broader agenda that deals with both Greece’s domestic economic malaise and the structural imbalances in the eurozone is also of vital importance.
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Policy Note 2015/1 | February 2015
Financial Fragility and the Survival of the Single Currency
Given the continuing divergence between progress in the monetary field and political integration in the euro area, the German interest in imposing austerity may be seen as representing an attempt to achieve, de facto, accelerated progress toward political union; progress that has long been regarded by Germany as a precondition for the success of monetary unification in the form of the common currency. Yet no matter how necessary these austerity policies may appear in the context of the slow and incomplete political integration in Europe, they are ultimately unsustainable. In the absence of further progress in political unification, writes Senior Scholar Jan Kregel, the survival and stability of the euro paradoxically require either sustained economic stagnation or the maintenance of what Hyman Minsky would have recognized as a Ponzi scheme. Neither of these alternatives is economically or politically sustainable.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Policy Note 2014/6 | December 2014Criticisms of the Federal Reserve’s “unconventional” monetary policy response to the Great Recession have been of two types. On the one hand, the tripling in the size of the Fed’s balance sheet has led to forecasts of rampant inflation in the belief that the massive increase in excess reserves might be spent on goods and services. And even worse, this would represent an attempt by government to inflate away its high levels of debt created to support the solvency of financial institutions after the September 2008 collapse of asset prices. On the other hand, it is argued that the near-zero short-term interest rate policy and measures to flatten the yield curve (quantitative easing plus "Operation Twist") distort the allocation and pricing in the credit and capital markets and will underwrite another asset price bubble, even as deflation prevails in product markets.Both lines of criticism have led to calls for a return to a more conventional policy stance, and yet there is widespread agreement that this would have a negative impact on the economy, at least in the short-term. However, since the analyses behind both lines of criticism are mistaken, it is probable that the analyses of the impact of the risks of return to more normal policies are also in error.Download:Associated Program:Author(s):Jan KregelRelated Topic(s):
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Policy Note 2014/5 | November 2014
The Fed’s zero interest policy rate (ZIRP) and quantitative easing (QE) policies failed to restore growth to the US economy as expected (i.e., increased investment spending à la John Maynard Keynes or from an expanded money supply à la Ben Bernanke / Milton Friedman). Senior Scholar Jan Kregel analyzes some of the arguments as to why these policies failed to deliver economic recovery. He notes a common misunderstanding of Keynes’s liquidity preference theory in the debate, whereby it is incorrectly linked to the recent implementation of ZIRP. Kregel also argues that Keynes’s would have implemented QE policies quite differently, by setting the bid and ask rate and letting the market determine the volume of transactions. This policy note both clarifies Keynes’s theoretical insights regarding unconventional monetary policies and provides a substantive analysis of some of the reasons why central bank policies have failed to achieve their stated goals.
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Policy Note 2014/4 | June 2014In the late 1990s low unemployment rates, increases in the minimum wage, and improvements in labor productivity contributed to a boost in wages, which translated into 12.4 percent cumulative growth in real wages from the late ‘90s until 2002. Real wages then stagnated despite continued growth in labor productivity. This period between 2002 and 2013 has become known as the decade of flat wages. However, over the same period there were significant changes in the composition of the labor market. In particular, the labor force has aged and become more educated. Increases in age, experience, and education could in fact be propping up observed real wages—meaning that wages of workers with a specific age and education profile may have actually declined over the decade. This is exactly what we uncover in this policy note: what appears to have been a decade of flat real wages was actually a decade of declining real wages within age/education worker profiles.
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Policy Note 2014/3 | February 2014In 2001, a three-year, multicountry study by the Structural Adjustment Participatory Review International Network (SAPRIN), prepared in cooperation with the World Bank, national governments, and civil society organizations, offered a damning indictment of the policies of structural adjustment reform pursued by the IMF and the World Bank in third world countries. The structural adjustment programs in Greece, combined with the policies of austerity, are producing results that fit the patterns outlined in the SAPRIN study like a glove.This policy note rejects the myth of Greece as an economic success story and argues that current trends and developments in the country make for a bleak economic future. The experiment under way in Greece will produce an economy resembling, not the Celtic Tiger of the mid-1990s to early 2000s, as the current government envisions, but an underdeveloped Latin America country of the 1980s.Download:Associated Program:Author(s):C. J. PolychroniouRelated Topic(s):
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Policy Note 2014/2 | February 2014
Lessons for the Current Debate on the US Debt Limit
In 1943, Congress faced unpredictably large war expenditures exceeding the prevailing debt limit. Congressional debates from that time contain an insightful discussion of how the increased expenditures could be financed, dealing with practical and theoretical issues that seem to be missing from current debates. In the '43 debate, Representative Wright Patman proposed that the Treasury should create a nonnegotiable zero interest bond that would be placed directly with the Federal Reserve Banks. As the deadline for raising the US federal government debt limit approaches, Senior Scholar Jan Kregel examines the implications of Patman's proposal. Among the lessons: that the debt can be financed at any rate the government desires without losing control over interest rates as a tool of monetary policy. The problem of financing the debt is not the issue. The question is whether the size of the deficit to be financed is compatible with the stable expansion of the economy.Download:Associated Program:Author(s):Jan KregelRelated Topic(s): -
Policy Note 2014/1 | January 2014The job guarantee is a proposal that provides greater macroeconomic stability and secures a fundamental human right. Despite the economic and moral merits of this policy, often the program is rejected because of concerns about its administration. How would the program be implemented? Who will create the jobs? Can work be found for every unemployed individual who wishes to work? This policy note addresses these concerns by elaborating on a proposal for the United States that would run the job guarantee through the social enterprise sector, which includes traditional nonprofit organizations and emerging nonprofit social entrepreneurial ventures.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2013/10 | December 2013
In a policy note published last year by the Levy Institute, Philip Pilkington and Warren Mosler argued that the eurozone sovereign debt crisis could be solved by national governments without the assistance of the European Central Bank (ECB) and without their leaving the currency union, through the issuance of a proposed financial innovation called “tax-backed bonds.” These bonds would be similar to standard government bonds except that, should the country issuing the bonds not make its payments, the tax-backed bonds would be acceptable to make tax payments within the country in question, and would continue to earn interest.
In the current policy note, Pilkington examines the continued relevance of the bond proposal in light of changes that have taken place with respect to ECB policy since the original proposal was made, as well as the case made by Ireland’s finance minister that tax-backed bonds would violate current Irish law (and, by implication, the law in other eurozone countries). He also outlines some changes made to the initial proposal in response to constructive criticisms received since its publication, and briefly notes another area in which the proposal might be utilized—outside the eurozone. His conclusion? That tax-backed bonds remain a valid policy tool, one that can be implemented at the national rather than at the federal level, and a stepping stone to solving the eurozone’s economic problems.
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Policy Note 2013/9 | October 2013
A Scenario of Hitting the Debt Ceiling
The United States entered the second week of a government shutdown on Monday, with no end to the deadlock in sight. The cost to the government of a similar shutdown in 1995–96 amounted to $2.1 billion in today’s dollars. However, the cost and broader consequences of today’s shutdown are not yet clear—especially since the US economy is in the midst of an anemic recovery from the biggest economic crisis of the last eight decades.
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Policy Note 2013/8 | August 2013Though it is not widely understood, the Federal Reserve has enormous untapped power to directly stimulate or influence the flows of lending and spending that generate jobs. Doing so would fulfill the Fed’s often neglected “dual mandate”: to strive for maximum employment as well as stable money. Fed technocrats often plead that legal or technical barriers won’t allow them to do this, but their objections reflect an institutional bias that favors finance over industry, capital over labor. The central bank has abundant precedent from its own history for taking more direct actions to aid the economy. And it has ample legal authority to lend to all kinds of businesses that are not banks.This policy note was originally published, in slightly different form, as “Can the Federal Reserve Help Prevent a Second Recession?,” The Nation, November 26, 2012. Reprinted with permission.Download:Associated Program:Author(s):William GreiderRelated Topic(s):
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Policy Note 2013/7 | August 2013Monetary policy is running out of gas. Six years ago, in the heat of crisis, the Federal Reserve’s response was awesome. The Fed created trillions of dollars and flooded the system with easy money—enough to stabilize financial markets and rescue wounded banks. It brought short-term interest rates down to near zero and long-term mortgage rates to bargain-basement levels. It provided a huge backstop for the dysfunctional housing sector, buying $1.25 trillion in mortgage-backed securities, nearly one-fourth of the market.
Flooding Wall Street with money saved the banks, but it didn’t work for the real economy, where most Americans live and toil. And official Washington now appears to have opted for an unspoken policy of complacency.
The Fed knows, even if politicians do not, the danger of sliding into a liquidity trap, which would utterly disarm its monetary tools. So the Fed wants Congress and the White House to borrow and spend more because, when the private sector is stalled and afraid to act, only the federal government can step in and provide the needed jump start. The country needs a stronger Fed—a central bank not afraid to use its awesome powers to help the real economy more directly. One of the ways it can do this is by revisiting—and extending—its bold ideas on debt relief. By harnessing the power of money creation, the Fed can help clear away the overhang of mortgage and student debt holding back the economic recovery.This policy note draws from articles originally published in The Nation. Portions are republished with permission.Download:Associated Program:Author(s):William GreiderRelated Topic(s): -
Policy Note 2013/6 | July 2013
The International Bailouts of Greece
Research Associate and Policy Fellow C. J. Polychroniou argues that a political solution based on a new economic vision is needed to bring an end to the Greek crisis. Polychroniou observes that what began as a financial crisis has been transformed into a full-fledged economic and social crisis by the neoliberal policies of the International Monetary Fund and the European Union (EU). Instead of growth, these policies have destroyed Greece’s economy, divided the eurozone states, and hobbled a fragile global recovery. The past six years have seen Greece’s descent into economic and social ruin. Exiting the current crisis, for Greece and countries throughout the eurozone, requires more than an end to austerity. Broadly, EU institutions must be radically restructured around the principles of sustainable, equitable growth. Specifically, Greece needs a comprehensive development plan, with massive public spending and investment.Download:Associated Program:Author(s):C. J. PolychroniouRelated Topic(s): -
Policy Note 2013/5 | May 2013
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.Download:Associated Program:Author(s):C. J. PolychroniouRelated Topic(s): -
Policy Note 2013/4 | April 2013In 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.Download:Associated Program(s):Author(s):Jan KregelRelated Topic(s):
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Policy Note 2013/3 | April 2013
This policy note discusses the prospects for job creation in the US based on the most recent Levy Economics Institute Strategic Analysis report, Is the Link between Jobs and Output Broken? The results of our analysis confirm the continued weakness of the US economy in terms of job creation—a phenomenon that has come to be known as a “jobless recovery.” We argue that to understand the problem we must look beyond the unemployment rate, which can conceal changes in the labor force. A prolonged recession can discourage workers, causing them to drop out of the labor market, thus lowering the unemployment rate without increasing employment. Therefore, the total number of people employed should be considered in tandem with the unemployment rate.
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Policy Note 2013/2 | March 2013
General Reflections and Considerations on an Era Ripe for Change
The global economy is in trouble. Indeed, the era of global neoliberalism, while still supreme, is fraught with serious problems and contradictions, as evidenced by both the recent global financial crisis and the inability of advanced economies to maintain steady growth and improve the condition of citizens. Global neoliberalism suppresses wages, increases inequality, and destroys the social fabric. It is a socioeconomic system in dire need of a replacement—and the responsibility falls clearly on progressive economics to chart a full-fledged alternative course.Download:Associated Program:Author(s):C. J. PolychroniouRelated Topic(s): -
Policy Note 2013/1 | March 2013
A Case against Neoliberal Economics, the Domestic Political Elite, and the EU/IMF Duo
The crisis in Greece reflects the deep structural problems of the country’s economy, its bureaucratic inefficiency, and a pervasive culture of corruption. But it also reflects the deadly failure of the neoliberal project, which has become institutionalized throughout the European Union’s operational framework—with the International Monetary Fund the world’s single most powerful enforcer of market fundamentalism.Download:Associated Program:Author(s):C. J. PolychroniouRelated Topic(s): -
Policy Note 2012/12 | December 2012On November 27, 2012, the Eurogroup reached a new “Greek deal” that once more discloses that there is no political will to address Greece’s debt crisis—or the country’s economic and social catastrophe.
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Policy Note 2012/11 | September 2012As the decline in Greek GDP should indicate—a contraction of more than 20 percent since the onset of the sovereign debt crisis in late 2009—the economic situation in Greece today is catastrophic. The economy is in freefall, and the social consequences are being widely felt. The main reason for this awful situation is that the country has suffered for more than two years under a harsh austerity regime imposed by the European Union and the International Monetary Fund. The bailouts have proven to be a curse. The nation is literally under economic occupation and sinking deeper into the abyss—and there is very little reason to expect a turnaround in the foreseeable future.
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Policy Note 2012/10 | August 2012Every crisis reveals unexpected consequences of economic policies. The current euro crisis should be no exception. As European Union governments search for a solution, there are already a number of lessons to be learned. Senior Scholar Jan Kregel outlines the top six.
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Policy Note 2012/9 | August 2012
The Fix Is In—the Bank of England Did It!
As the results of the various official investigations spread, it becomes more and more apparent that a large majority of financial institutions engaged in fraudulent manipulation of the benchmark London Interbank Offered Rate (LIBOR) to their own advantage, and that bank management and regulators were unable to effectively monitor the activity of institutions because they were too big to manage and too big to regulate. However, instead of drawing the obvious conclusion—that structural changes are needed to reduce banks to a size that can be effectively regulated, as proposed on numerous occasions by the Levy Economics Institute—discussion in the media and political circles has turned to whether the problem was the result of the failure of central bank officials and government regulators to respond to repeated suggestions of manipulation, and to stop the fraudulent behavior.
Just as the “hedging” losses at JPMorgan Chase have been characterized as the result of misbehavior on the part of some misguided individual traders, leaving top bank management without culpability, politicians and the media are now questioning whether government officials condoned, or even encouraged, manipulation of the LIBOR rate, virtually ignoring the banks’ blatant abuse of principles of good banking practice. Just as in the case of JPMorgan, the only response has been to remove the responsible individuals, rather than questioning the structure and size of the financial institutions that made managing and policing this activity so difficult. Again, the rotten apples have been removed without anyone noticing that it is the barrel that is the cause of the problem. But in the current scandal, the ad hominem culpability has been extended to central bank officials in the UK and the United States.
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Policy Note 2012/8 | July 2012From the very start, the European Monetary Union (EMU) was set up to fail. The host of problems we are now witnessing, from the solvency crises on the periphery to the bank runs in Spain, Greece, and Italy, were built into the very structure of the EMU and its banking system. Policymakers have admittedly responded to these various emergencies with an uninspiring mix of delaying tactics and self-destructive policy blunders, but the most fundamental mistake of all occurred well before the buildup to the current crisis. What we are witnessing today are the results of a design flaw. When individual nations like Greece or Italy joined the EMU, they essentially adopted a foreign currency—the euro—but retained responsibility for their nation’s fiscal policy. This attempted separation of fiscal policy from a sovereign currency is the fatal defect that is tearing the eurozone apart.
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Policy Note 2012/7 | June 2012
Possible Costs and Likely Outcomes of a Grexit
The European Union’s (EU) handling of the Greek crisis has been an unmitigated disaster. In fact, EU political leadership has been a failure of historic proportions, as its myopic, neoliberal bent and fear-driven policies have brought the eurozone to the brink of collapse. After more than two years of a “kicking the can down the road” policy response, it’s a do-or-die situation for Euroland. Greece has reached the point where an exit looks rather imminent (it’s really a matter of time, regardless of the June 17 election outcome), Portugal is bleeding heavily, Spain is about to go under, and Italy is in a state of despair. This Policy Note examines why the bailout policies failed to rescue Greece and boost the eurozone, and what effects a “Grexit” might possibly have—on Greece and the rest of Euroland.
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Policy Note 2012/6 | June 2012
What a Hedge Gone Awry at JPMorgan Chase Tells Us about What's Wrong with Dodd-Frank
What can we learn from JPMorgan Chase’s recent self-proclaimed “stupidity” in attempting to hedge the bank’s global risk position? Clearly, the description of the bank’s trading as “sloppy” and reflecting ”bad judgment” was designed to prevent the press reports of large losses from being used to justify the introduction of more stringent regulation of large, multifunction financial institutions. But the lessons to be drawn are not to be found in the specifics of the hedges that were put on to protect the bank from an anticipated decline in the value of its corporate bond holdings, or in any of its other global portfolio hedging activities. The first lesson is this: despite their acumen in avoiding the worst excesses of the subprime crisis, the bank’s top managers did not have a good idea of its exposure, which serves as evidence that the bank was “too big to manage.” And if it was too big to manage, it was clearly too big to regulate effectively.
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Policy Note 2012/5 | June 2012
The Baltic States and the Crisis
The commonly cited example of the successful application of “internal” devaluation as a strategy for economic recovery is that of the Baltic economies. In this Policy Note, we discuss whether the Baltic austerity plan worked, how it was designed to work—and, most important, whether it can be replicated anywhere else. We argue that the Baltic recovery has unique features that do not relate to domestic austerity policies, nor are they replicable elsewhere.
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Policy Note 2012/4 | March 2012The root of Europe’s sovereign debt crisis can be found in the fact that investors are concerned that countries in the periphery might default, causing them to demand a higher yield on government bonds. What’s needed is a way of giving peripheral debt a high degree of safety while allowing peripheral countries to remain users of the euro.A simple solution to this problem would be for peripheral countries to begin issuing a new type of government debt: the “tax-backed bond.” Tax-backed bonds would be similar to current government bonds except that they would contain a clause stating that if the country failed to make its payments when due—and only if this happens—the bonds would be acceptable to make tax payments within the country in question. This tax backing would set an absolute floor below which the value of the asset could not fall, assuring investors that the bond is always “money good,” leading to lower bond rates and thus ensuring that peripheral countries would not be driven to default.
Download:Associated Program:Author(s):Philip Pilkington Warren MoslerRelated Topic(s): -
Policy Note 2012/3 | March 2012
Writing Down Debt, Returning to Democratic Governance, and Setting Up Alternative Financial Systems—Now
The five-year-long crisis of Western finance capitalism is pushing advanced liberal societies to a breaking point. If governments continue to be proxies of finance capital and aspiring political leaders cheerleaders for their financial backers, a catastrophic economic scenario is not really as far-fetched as some might like to think. Governments, industries, and households are under debt bondage, with the result that revenues from every sector of the economy are being diverted toward interest payments and late fees for various loans taken out on largely exploitative, even fraudulent terms. Now, after years of building up a Ponzi financial regime, Western capitalism faces its ultimate test. Will it collapse, giving rise to long-term economic instability and authoritarian political regimes? Or will it find the strength and the wisdom to make a comeback?
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Policy Note 2012/2 | March 2012
The Nonprofit Model for Implementing a Job Guarantee
The conventional approach of fiscal policy is to create jobs by boosting private investment and growth. This approach is backward, says Research Associate Pavlina R. Tcherneva. Policy must begin by fixing the unemployment situation because growth is a byproduct of strong employment—not the other way around. Tcherneva proposes a bottom-up approach based on community programs that can be implemented at all phases of the business cycle; that is, a grass-roots job-guarantee program run by the nonprofit sector (with participation by the social entrepreneurial sector) but financed by the government. A job-guarantee program would lead to full employment over the long run and address an outstanding fault of modern market economies.
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Policy Note 2012/1 | March 2012
We live in a terrifying world of policymaking—an age of free-market dogmatism where the economic ideology is fundamentally flawed. Europe’s political leadership has applied neo-Hooverian (scorched-earth) policies that are shrinking economies and producing social misery as a result of massive unemployment.
Large-scale government intervention is critical in reviving an economy, but the current public-policy mania, which imposes fiscal tightening in the midst of recession, can only lead to catastrophic failure. The bailouts, for example, do not solve Greece’s debt crisis but simply postpone an official default. What is needed is a political and economic revolution that includes a return to Keynesian measures and a new institutional architecture—a United States of Europe.
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Policy Note 2011/6 | November 2011Although it didn't originate with an economist, the malaprop “It’s déjà vu all over again” is invariably what springs to mind in the aftermath of virtually any euro summit of the past few years, all of which seem to end with the requisite promise of a so-called “final solution” to the problems posed by the increasingly problematic currency union. But it’s hard to get excited about any of the “solutions” on offer, since they steadfastly refuse to acknowledge that the eurozone’s problem is fundamentally one of flawed financial architecture. Today’s crisis has arisen because the creation of the euro has robbed nations of their sovereign ability to engage in a fiscal counterresponse against sudden external demand shocks of the kind we experienced in 2008. And it is being exacerbated by the ongoing reluctance of the European Union, European Central Bank, and International Monetary Fund—the “troika”—to abandon fiscal austerity as a quid pro quo for backstopping these nations’ bonds.
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Policy Note 2011/5 | November 2011
Resolving the Eurozone Crisis—without Debt Buyouts, National Guarantees, Mutual Insurance, or Fiscal Transfers
View More View LessOne of the reasons for the failure of Europe’s governing bodies to resolve the eurozone crisis is resistance to debt buyouts, national guarantees, mutual insurance, and fiscal transfers between member-states. Stuart Holland argues that none of these are necessary to convert a share of national bonds to Union bonds or for net issues of eurobonds—two alternative approaches to the debt crisis that would offset default risk and, by securing the euro as a reserve currency, contribute to more balanced global growth.
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Policy Note 2011/4 | May 2011
Was Keynes’s Monetary Policy, à Outrance in the Treatise, a Forerunnner of ZIRP and QE? Did He Change His Mind in the General Theory?
View More View LessAt the end of 1930, as the 1929 US stock market crash was starting to have an impact on the real economy in the form of falling commodity prices, falling output, and rising unemployment, John Maynard Keynes, in the concluding chapters of his Treatise on Money, launched a challenge to monetary authorities to take “deliberate and vigorous action” to reduce interest rates and reverse the crisis. He argues that until “extraordinary,” “unorthodox” monetary policy action “has been taken along such lines as these and has failed, need we, in the light of the argument of this treatise, admit that the banking system can not, on this occasion, control the rate of investment, and, therefore, the level of prices.”
The “unorthodox” policies that Keynes recommends are a near-perfect description of the Japanese central bank’s experiment with a zero interest rate policy (ZIRP) in the 1990s and the Federal Reserve’s experiment with ZIRP, accompanied by quantitative easing (QE1 and QE2), during the recent crisis. These experiments may be considered a response to Keynes’s challenge, and to provide a clear test of his belief in the power of monetary policy to counter financial crisis. That response would appear to be an unequivocal No.
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Policy Note 2011/3 | May 2011
This “Modest Proposal” by authors Varoufakis and Holland outlines a three-pronged, comprehensive solution to the eurozone crisis that simultaneously addresses the three main dimensions of the current crisis in the eurozone (sovereign debt, banking, and underinvestment), restructures both a share of sovereign debt and that of banks, and does not involve a fiscal transfer of taxpayers’ money. Additionally, it requires no moves toward federation, no fiscal union, and no transfer union. It is in this sense, say the authors, that it deserves the epithet modest.
To stabilize the debt crisis, Varoufakis and Holland recommend a tranche transfer of the sovereign debt of each EU member-state to the European Central Bank (ECB), to be held as ECB bonds. Member-states would continue to service their share of debt, reducing the debt-servicing burden of the most exposed member-states without increasing the debt burden of the others. Rigorous stress testing and recapitalization through the European Financial Stability Facility (in exchange for equity) would cleanse the banks of questionable public and private paper assets, allowing them to turn future liquidity into loans to enterprises and households. And the European Investment Bank (EIB) would assume the role of effecting a “New Deal” for Europe, drawing upon a mix of its own bonds and the new eurobonds. In effect, the EIB would graduate into a European surplus-recycling mechanism—a mechanism without which no currency union can survive for long.
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Policy Note 2011/2 | May 2011
By general agreement, the federal budget is on an “unsustainable path.” Try typing the phrase into Google News: 19 of the first 20 hits refer to the federal debt. But what does this actually mean? One suspects that some who use the phrase are guided by vague fears, or even that they don’t quite know what to be afraid of. Some people fear that there may come a moment when the government’s bond markets would close, forcing a default or “bankruptcy.” But the government controls the legal-tender currency in which its bonds are issued and can always pay its bills with cash. A more plausible worry is inflation—notably, the threat of rising energy prices in an oil-short world—alongside depreciation of the dollar, either of which would reduce the real return on government bonds. But neither oil-price inflation nor dollar devaluation constitutes default, and neither would be intrinsically “unsustainable.”
After a brief discussion of the major worries, Senior Scholar James Galbraith focuses on one, and only one, critical issue: the actual behavior of the public-debt-to-GDP ratio under differing economic assumptions through time. His conclusion? The CBO’s assumption that the United States must offer a real interest rate on the public debt higher than the real growth rate by itself creates an unsustainability that is not otherwise there. Changing that one assumption completely alters the long-term dynamic of the public debt. By the terms of the CBO’s own model, a low interest rate erases the notion that the US debt-to-GDP ratio is on an “unsustainable path.” The prudent policy conclusion? Keep the projected interest rate down. Otherwise, stay cool: don’t change the expected primary deficit abruptly, and allow the economy to recover through time.
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Policy Note 2011/1 | February 2011
Like marriage, membership in the eurozone is supposed to be a lifetime commitment, “for better or for worse.” But as we know, divorce does occur, even if the marriage was entered into with the best of intentions. And the recent turmoil in Europe has given rise to the idea that the euro itself might also be reversible, and that one or more countries might revert to a national currency. The prevailing thought has been that one of the weak periphery countries would be the first to call it a day. It may not, however, work out that way: suddenly, the biggest euro-skeptics in Europe are not the perfidious English but the Germans themselves.
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Policy Note 2010/4 | November 2010
A common refrain heard from those trying to justify the results of the recent midterm elections is that the government’s fiscal stimulus to save the US economy from depression undermined growth, and that fiscal restraint is the key to economic expansion. Research Associate Marshall Auerback maintains that this refrain stems from a failure to understand a fundamental reality of bookkeeping—that when the government runs a surplus (deficit), the nongovernment sector runs a deficit (surplus). If the new GOP Congress led by Republicans and their Tea Party allies cuts government spending now, deficits will go higher, as growth slows, automatic stabilizers kick in, and tax revenues fall farther. And if extending the Bush tax cuts faces congressional gridlock, taxes will rise in 2011, further draining aggregate demand. Moreover, there are potential solvency issues for the United States if the debt ceiling is reached and Congress does not raise it. This chain of events potentially creates a new financial crisis and effectively forces the US government to default on its debt. The question is whether or not President Obama (and his economic advisers) will be enlightened enough to embrace this “teachable moment” about US main sector balances. Recent remarks to the press about deficit reduction suggest otherwise.
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Policy Note 2010/3 | October 2010The global financial breakdown is part of the price to be paid for the refusal of the Federal Reserve and Treasury to accept a prime axiom of banking: debts that cannot be paid, won’t be. These agencies tried to “save” the banking system from debt writedowns by keeping the debt overhead in place, while reinflating asset prices. In the face of the repayment burden that is shrinking the US economy, the Fed’s way of helping the banks “earn their way out of negative equity” actually provided opportunities for predatory finance, which led to excessive financial speculation. It is understandable that countries whose economies have been targeted by global speculators are seeking alternative arrangements. But it appears that these arrangements cannot be achieved via the International Monetary Fund or any other international forum in ways that US financial strategists will accept willingly.
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Policy Note 2010/2 | July 2010
Facts on the Ground
The developed world faces a cyclical deficiency of aggregate demand, the product of a liquidity trap and the paradox of thrift, in the context of headwinds born of ongoing structural realignments. According to Paul McCulley, PIMCO, front-loaded fiscal austerity would only add to that deflationary cocktail. This is why the market vigilantes are fleeing risk assets, which depend on growth for valuation support, rather than the sovereign debt of fiat-currency countries. McCulley bases his outlook on the financial balances approach (double-entry bookkeeping) pioneered by the late Wynne Godley, who was a distinguished scholar at the Levy Institute. Godley’s analytical framework, says McCulley, should be the workhorse of discussions on global rebalancing.Download:Associated Program(s):Author(s):Paul McCulley -
Policy Note 2010/1 | July 2010
The nation’s economic challenges are daunting. Restoring robust American prosperity and widespread economic opportunity will not be easy. But, as Hyman Minsky stressed, “Economic systems are not natural systems…. Policy can change both the details and the overall character of the economy.”
It’s clear that what we are now facing is not simply a cyclical crisis, or even an employment crisis, writes Charles J. Whalen. Rather, it is a standard-of-living-and-economic-opportunity crisis—the latest phase in a decades-long “silent depression.” In order to resolve it, our policy response must reflect that we are dealing with a deep-seated structural problem, one rooted in the evolution of US economic development. Policymakers must pursue an agenda of recovery and reform that includes, at minimum, a major assistance package for state and local governments; more relief for the unemployed and those facing foreclosure; tougher supervision of financial institutions; stronger automatic stabilizers (e.g., public service employment); policies that foster economic opportunities for working families; improved retirement security; and labor law reform that gives workers a more realistic chance to organize and bargain collectively.
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Policy Note 2009/11 | December 2009
Past experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking—a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered “too big to fail” are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of “too big to fail” is simply aggravated. Thus, the current thrust of government regulatory reform—increased capital and liquidity requirements, and further legislation—is unlikely to lessen the systemic risks these institutions pose.
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Policy Note 2009/10 | October 2009
What Are the Lessons of the New Deal?
As the nation watches the impact of the recent stimulus bill on job creation and economic growth, a group of academics continues to dispute the notion that the fiscal and job creation programs of the New Deal helped end the Depression. The work of these revisionist scholars has led to a public discourse that has obvious implications for the controversy surrounding fiscal stimulus bills. Since we support a new stimulus package—one that emphasizes jobs for the 9.8 percent of the workforce currently unemployed—we have been concerned about this debate. With Congress, the White House, pundits, and the press riveted on the all-important health care debate, we worry that they are also distracted by skirmishes over economic theory and history, while millions wait for a new chance to do meaningful work and effective, if imperfect, policy tools are readily at hand. (See also, Public Policy Brief No. 104.)
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Policy Note 2009/9 | October 2009
Banks Running Wild: The Subversion of Insurance by “Life Settlements” and Credit Default Swaps
View More View LessOblivious to any lessons that might have been learned from the global financial mess it has created, Wall Street is looking for the next asset bubble. Perhaps in the market for death it has found a replacement for the collapsed markets in subprime mortgage–backed securities and credit default swaps (CDSs). Instead of making bets on the “death” of securities, this new product will allow investors to gamble on the death of human beings by purchasing “life settlements”—life insurance policies that the ill and elderly sell for cash. These policies will then be packaged together as bonds—securitized—and resold to investors, who will receive payouts when the people with the insurance die. In effect, just as the sale of a CDS creates a vested interest in financial calamity, here the act of securitizing life insurance policies creates huge financial incentives in favor of personal calamity. The authors of this Policy Note argue that this is a subversion—or an inversion—of insurance, and it raises important public policy issues: Should we allow the marketing of an instrument in which holders have a financial stake in death? More generally, should we allow the “innovation” of products that condone speculation under the guise of providing insurance?
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Policy Note 2009 | June 2009
Special Report: Who Gains from President Obama's Stimulus Package ... And How Much?
View More View LessIn this Special Report, Levy scholars Ajit Zacharias, Thomas Masterson, and Kijong Kim provide a preliminary assessment of the 2009 American Recovery and Reinvestment Act (ARRA), a package of transfers and tax cuts that is expected to provide relief to low-income and vulnerable households especially hurt by the economic crisis, while at the same time supporting aggregate demand. By the administration’s estimate, ARRA will create or save approximately three and a half million jobs by the end of 2010; while the ameliorating impact of the stimulus plan on the employment situation is surely welcome, say the authors, the government could have achieved far more at the same cost by skewing the stimulus package toward outlays rather than tax cuts. Their analysis points toward the necessity for a comprehensive employment strategy that goes well beyond ARRA. The need for public provisioning of various sorts—ranging from early childhood education centers to public health facilities to the “greening” of public transportation—coupled with the severe underutilization of labor, naturally suggests an expanded role for public employment as a desirable ingredient in any alternative strategy.
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Policy Note 2009/8 | June 2009
The demand for reform of the financial system has focused on the dollar’s loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances.
In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the US consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.
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Policy Note 2009/7 | May 2009
The capital adequacy requirements for banks, enshrined in international banking regulations, are based on a fallacy of composition—namely, the notion that an individual firm can choose the structure of its financial liabilities without affecting the financial liabilities of other firms. In practice, says author Jan Toporowski, capital adequacy regulations for banks are a way of forcing nonfinancial companies into debt. “Enforced indebtedness” then reduces the quality of credit in the economy. In an international context, the present system of capital adequacy regulation reinforces this indebtedness. Proposals for “dynamic provisioning” to increase capital requirements during an economic boom would simply accelerate the boom’s collapse. Contingent commitments to lend to governments in the event of private-sector lending withdrawals, alongside lending to foreign private-sector borrowers, are a much more viable alternative.
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Policy Note 2009/6 | May 2009
A simple consideration of history tells us that each new piece of legislation contains loopholes that benefit a new class of entrepreneurs; some of these loopholes are small, but others are such that one could drive a bullion-laden truck through them. In this new Policy Note, Martin Shubik suggests creating a “war gaming group” to stress-test all major new legislation, with a first prize of $1 million to be awarded to the competing lawyer or team of lawyers who finds the most egregious loophole—a small amount relative to the potential savings.
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Policy Note 2009/5 | April 2009
There is already considerable talk about the possible need for a massive public works program in response to the deepening recession and rising unemployment; however, an ad hoc emergency approach is going to waste billions of dollars by mismatching skills and needs. In this new Policy Note, Martin Shubik of Yale University outlines a proposal aimed directly at providing good planning consistent with maintaining market freedom and minimizing pork-barrel legislation. Rather than an emergency relief program on the order of the New Deal Works Progress Administration, Shubik proposes a permanent agency modeled on the Federal Reserve that would monitor unemployment in each state and maintain a list of potential public works projects. Financing for any project could then be set in place as soon as the unemployment level in any state exceeded the trigger value, eliminating the need for relief legislation during a crisis.
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Policy Note 2009/4 | April 2009
The ad hoc emergency approach to the current economic crisis has a great chance of wasting billions of dollars by mismatching skills and needs. According to Martin Shubik of Yale University, the current deepening recession needs a “quick fix” solution now, but a longer-fix solution must be put into place along with it.
There is already considerable talk about the possible need for a large public works program to follow the massive infusion of funds into the financial and automobile sectors. But who is going to manage it? For us to weather this great economic storm we need to line up and coordinate (at least) four sets of highly different talents—political, bureaucratic, financial, and industrial. Without their coordination, economic recommendations, no matter how good they may appear to be in theory, will fail in execution.
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Policy Note 2009/3 | March 2009
All of the various schemes that have been put forward to resolve the current credit crisis follow either the “business as usual” or the “good bank” model. The “business as usual” model takes different forms—insurance or guarantee of the assets or liabilities of the financial institutions, creation of a “bad bank” to buy toxic assets, temporary nationalization—and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s.
The “good bank” solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression.
In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified “good bank” approach, with the government either guaranteeing a large proportion of the personal sector’s assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured.
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Policy Note 2009/2 | March 2009
Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out.
The authors of this new Policy Note say that a far better approach is for central banks to widen their scope and target the net wealth of the personal sector. Using interest rates in both the upswing and the downswing of a (business) cycle would avoid moral hazard. A net wealth target would not impede the free functioning of the financial system, as it deals with the economic consequences of the rise and fall of asset prices rather than with asset prices (equities or houses) per se. It would also help to control liquidity and avoid future crises. The current crisis has its roots in the excessive liquidity that, beginning in the mid 1990s, financed a series of asset bubbles. This liquidity was the outcome of “bad” financial engineering that spilled over to other banks and to the personal sector through securitization, in conjunction with overly accommodating monetary policy. Hence, targeting net wealth would also help control liquidity, the authors say, without interfering with the financial engineering of banks.
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Policy Note 2009/1 | January 2009
A Modest Proposal to Guarantee That He Meets and Exceeds Expectations
Job creation is once again at the forefront of policy action, and for advocates of pro-employment policies, President Obama’s Keynesian bent is a most welcome change. However, there are concerns that Obama’s plan simply does not go far enough, and that a large-scale public investment program may face shortages of skilled labor, put upward pressure on wages, and leave women and minorities behind. Both concerns can be addressed by a simple amendment to the Obama plan that will bring important additional benefits. The amendment proposed here is for the government to offer a job guarantee to all unemployed individuals who are ready, willing, and able to participate in the economic recovery—that is, to target the unemployed directly.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2008/6 | November 2008
While serving as chairman of the Federal Reserve Board, Alan Greenspan advocated unsupervised securitization, subprime lending, option ARMs, credit-default swaps, and all manner of financial alchemy in the belief that markets “work” to reduce and spread risk, and to allocate it to those best able to assess and bear it—in his view, markets would stabilize in the absence of nasty government intervention. But as Greenspan now admits, he could never have imagined the outcome: a financial and economic crisis of biblical proportions.
The problem is, market forces are not stabilizing. Left to their own devices, Wall Street wizards gleefully ran right off the cliff, and took the rest of us with them for good measure. The natural instability of market processes was recognized long ago by John Maynard Keynes, and convincingly updated by Hyman P. Minsky throughout his career. Minsky’s theory explained the transformation of the economy over the postwar period from robust to fragile. He pointed his finger at managed money—huge pools of pension funds, hedge funds, sovereign wealth funds, university endowments, money market funds—that are outside traditional banking and therefore largely underregulated and undersupervised. With a large appetite for risk, managed money sought high returns promised by Wall Street’s financial engineers, who innovated highly complex instruments that few people understood.
In this new Policy Note, President Dimitri B. Papadimitriou and Research Scholar L. Randall Wray take a look back at Wall Street’s path to Armageddon, and propose some alternatives to the Bush-Paulson plan to “bail out” both the Street and the American homeowner. Under the existing plan, Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.
But it is highly unlikely that relieving banks of some of their bad assets, or injecting some equity into them, will increase their willingness to lend. Resolving the liquidity crisis is the best strategy, the authors say, and keeping small-to-medium-size banks open is the best way to ensure access to credit once the economy recovers. A temporary suspension of the collection of payroll taxes would put more income into the hands of households while lowering the employment costs for firms, fueling spending and employment. The government should assume a more active role in helping homeowners saddled with mortgage debt they cannot afford, providing low-cost 30-year loans directly to all comers; in the meantime, a moratorium on foreclosures is necessary. And federal grants to support local spending on needed projects would go a long way toward rectifying our $1.6 trillion public infrastructure deficit.
Can the Treasury afford all these measures? The answer, the authors say, is yes—and it is a bargain if one considers the cost of not doing it. It is obvious that there exist unused resources today, as unemployment rises and factories are idled due to lack of demand. Markets are also voting with their dollars for more Treasury debt. This does not mean the Treasury should spend without restraint—whatever rescue plan is adopted should be well planned and targeted, and of the proper size. The point is that setting arbitrary budget constraints is neither necessary nor desired—especially in the worst financial and economic crisis since the Great Depression.
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Policy Note 2008/5 | October 2008
As the House Committee on Financial Services meets to hear the expert testimony of witnesses concerning the regulation of the financial system, the measures that have been introduced to support the system are laying the groundwork for a new domestic financial architecture. Hyman Minsky suggests that the basic principle behind any reformulation of the regulatory system should limit the size and activities of financial institutions, and should be dictated by the ability of supervisors, examiners, and regulators to understand the institutions’ operations. Following Minsky’s preference for bank holding company structures, Senior Scholar Jan Kregel proposes the creation of numerous types of subsidiaries within the holding company. The aim would be to limit each type of holding company to a range of activities that were sufficiently linked to their core function and to ensure that each company was small enough to be effectively managed and supervised.
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Policy Note 2008/4 | October 2008
A Simple Proposal to Resolve the Disruption of Counterparty Risk in Short-Term Credit Markets
View More View LessThe impaired risk assessment caused by the collapse of mortgage-backed securities is the major problem threatening the stability of the American financial system, yet it is not clear that removing these assets from institutional balance sheets, as the government has proposed, will make it easier to assess counterparty risk in short-term credit markets. Resolving the disruption of counterparty risk should be the first objective of policy, argues Senior Scholar Jan Kregel, since these markets provide basic liquidity support for institutions operating in the broader financial markets.
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Policy Note 2008/3 | August 2008
Policy Response to the Current Crisis
As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. Labor markets continue to weaken as firms shed jobs, and state tax revenues have plummeted. In March, the dollar fell to new record lows against the euro and other currencies. Commodities prices have boomed, fueling inflation and adding to consumer distress.
What's a central bank to do? So far, the Federal Reserve has met or exceeded the market’s anticipations for rate cuts. It has allowed banks to offer securitized mortgages as collateral against borrowed reserves, and opened its discount window to a broad range of financial institutions to guard against future liquidity problems (remember Bear Stearns?). It helped to formulate a rescue plan for Freddie Mac and Fannie Mae, and Chairman Ben Bernanke even supported the fiscal stimulus package that will increase the federal budget deficit—something that is normally anathema to central bankers. Most importantly, Fed officials have consistently argued that, while they are carefully monitoring inflation pressures, they will not reverse monetary easing until the fallout from the subprime crisis is past.
Unfortunately, the policy isn’t working—the economy continues to weaken, the financial crisis is spreading, and inflation is accelerating. The problem is that policymakers do not recognize the underlying forces driving the crisis, in part because they operate with an incorrect model of how our economy works. This Policy Note summarizes that model, offers an alternative view based on Hyman Minsky’s approach, and outlines an alternative framework for policy formation.
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Policy Note 2008 | August 2008
Policy Response to the Current Crisis
As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking, and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. Labor markets continue to weaken as firms shed jobs, and state tax revenues have plummeted. In March, the dollar fell to new record lows against the euro and other currencies. Commodities prices have boomed, fueling inflation and adding to consumer distress. What's a central bank to do? So far, the Federal Reserve has met or exceeded the market�s anticipations for rate cuts. It has allowed banks to offer securitized mortgages as collateral against borrowed reserves, and opened its discount window to a broad range of financial institutions to guard against future liquidity problems (remember Bear Stearns?). It helped to formulate a rescue plan for Freddie Mac and Fannie Mae, and Chairman Ben Bernanke even supported the fiscal stimulus package that will increase the federal budget deficit�something that is normally anathema to central bankers. Most importantly, Fed officials have consistently argued that, while they are carefully monitoring inflation pressures, they will not reverse monetary ease until the fallout from the subprime crisis is past. Unfortunately, the policy isn�t working�the economy continues to weaken, the financial crisis is spreading, and inflation is accelerating. The problem is that policymakers do not recognize the underlying forces driving the crisis, in part because they operate with an incorrect model of how our economy works. This Policy Note summarizes that model, offers an alternative view based on Hyman Minsky�s approach, and outlines an alternative framework for policy formation.Published By:Download:Associated Program:Author(s): -
Policy Note 2008/2 | June 2008
“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 Note 2008/1 | May 2008
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? 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 Note 2008 | May 2008
�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 Note 2008 | May 2008
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? Absolutely nothing, says Senior Scholar James K. Galbraith.
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Policy Note 2007 | May 2007
Toward a Path of Expanded Democracy and Gender Equality
The centrality of the state in promoting gender equality is generally acknowledged, but a perplexing and complex issue confronts us: should the state treat men and women in identical ways, or should it legislate and enforce policies that are aware of gender differences? In other words, should the state be gender-blind or gender-sensitive? Gender, ethnic, religious, sexual orientation, ideological, economic, political, and cultural dimensions represent diversity among citizens. This paper argues that if the goal of the state is to promote democratic participation for all, a distinction must be drawn between socioeconomic characteristics that signify difference and those that manifest inequalities. The former require a politics of acceptance and recognition and policies to match, leading to equal treatment for all despite differences, while the latter necessitate interventions that remedy or remove structural elements that result in inequalities. The authors suggest that such a framework is useful in that it lends itself to a better understanding of gender-based asymmetries.
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Policy Note 2007/1 | January 2007
Tax Reform Advice for the New Majority
Anyone who reads a newspaper knows that most Americans have accumulated excessive levels of debt, and realizes that as interest rates climb, it becomes more difficult to service financial liabilities. To add insult to injury, wage growth has been slow, while prices—especially for energy—have risen sharply. What is not clear, however, is the fact that taxes have also been rising rapidly, relative to both income and government spending. In this Policy Note, we concentrate on the last issue, and argue that many middle-income earners will find themselves unprepared for the coming surprise in April.
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Policy Note 2006/5 | July 2006
Much Ado about Nothing, or Little to Do about Something?
Demographers and economists agree that we are aging—individually and collectively, nationally and globally. An aging population results from the twin demographic forces of fewer children per family and longer lives. Most experts recognize the burden that aging causes as the number of retirees supported by each worker rises. This trend is reinforced by the graying of the baby-boom generation, but burdens will continue to rise even after the boomers are buried—albeit at a slower pace.Download:Associated Program:Author(s): -
Policy Note 2006/4 | April 2006
A Cri de Coeur
Many papers published by the Levy Institute during the last few years have emphasized that the American economy has relied too much on the growth of lending to the private sector, most particularly to the personal sector, to offset the negative effect on aggregate demand of the growing current account deficit. Moreover, this growth in lending cannot continue indefinitely.Download:Associated Program(s):Author(s): -
Policy Note 2006/3 | April 2006In the mid-to-late 1980s, the American economy simultaneously produced—for the first time in the postwar period—huge federal budget deficits as well as large current account deficits, together known as the “twin deficits”. This generated much debate and hand-wringing, most of which focused on supposed “crowding-out” effects. Many claimed that the budgetdeficit was soaking up private saving, leaving too little for domestic investment, and that the “twin” current account deficit was soaking up foreign saving. The result would be higher interest rates and thus lower economic growth, as domestic spending—especially on business investment and real estate construction—was depressed. Further, the government debt and foreign debt would burden future generations of Americans, who would have to make interest payments and eventually retire the debt. The promulgated solution was to promote domestic saving by cutting federal government spending, and private consumption. Many pointed to Japan’s high personal saving rates as a model of the proper way to run an economy.Download:Associated Program(s):Author(s):
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Policy Note 2006/2 | February 2006
Public and Private Debts and the Future of the American Economy
Today’s federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? Does our fiscal condition warrant radical surgery, as some now prescribe? Or, are we in such deep trouble that there is no plausible route of escape?
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Policy Note 2006/1 | January 2006
On September 15, the Federal Reserve convened 14 large credit derivatives–dealer banks to an unusual meeting. The last such meeting occurred on September 16, 1998, in secret. At that time, a major financial institution was melting down and threatening to take some large banks with it. This time, they met to discuss the same topic: the clearing of transactions in the credit derivatives market.
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Policy Note 2005/6 | September 2005
Surviving 20 Years of Reform
Social Security turned 70 on August 14, although no national celebration marked the occasion. Rather, our top policymakers in Washington continue to suggest that the system is “unsustainable.” While our nation's most successful social program, and among its longest lived, has allowed generations of Americans to live with dignity in retirement, many think it is time to retire Social Security itself. They claim it is necessary to shift more responsibility to individuals and to scale back the promises made to the coming waves of retiring baby boomers. -
Policy Note 2005/5 | June 2005Is it sufficiently realized how intractable those account imbalances—and how dangerous their potential consequences at home and abroad—have now become?Download:Associated Program:Author(s):
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Policy Note 2005/4 | April 2005The 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:Associated Program:Author(s):
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Policy Note 2005/3 | April 2005A 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:Associated Program:Author(s):Korkut A. Ertürk
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Policy Note 2005/2 | February 2005
The Neocon Attack on Social Security
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. -
Policy Note 2005/1 | January 2005The 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.Download:Associated Program:Author(s):
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Policy Note 2004/2 | May 2004
Deficits, Debt, Deflation, and Depreciation
Recent economic commentary has been filled with “D” words: deficits, debt, deflation, depreciation. Deficits—budget and trade—are of the greatest concern and may be on an unsustainable course, as federal and national debt grow without limit. The United States is already the world’s largest debtor nation, and unconstrained trade deficits are said to raise the specter of a “tequila crisis” if foreigners run from the dollar. Federal budget red ink is expected to imperil the nation’s ability to care for tomorrow’s retirees. While public concern with deflationary pressures has subsided, concern continues regarding America’s ability to compete in a global economy in which wages and prices are falling. In fact, the current situation is far more “sustainable” than that at the peak of the Clinton boom, which had federal budget surpluses but record-breaking private sector deficits. Nevertheless, it is time to take stock of the dangers faced by the US economy.
Download:Associated Program(s):Federal Budget Policy Monetary Policy and Financial Structure The State of the US and World EconomiesAuthor(s): -
Policy Note 2004/1 | April 2004
Inflation targeting has become an increasingly popular strategy for setting monetary policy during the last decade. While no countries had formal inflation targets before 1990, currently 22 countries use inflation targeting. One notable exception is the United States, where the Federal Reserve has a dual mandate to pursue both price stability and full employment. Some economists advocate inflation targeting for the United States, partly because they fear that otherwise the Fed will try to push unemployment below its “natural rate”—its lowest sustainable level—and trigger accelerating inflation. However, the natural rate theory has proven to be a poor guide for policy making over the last 10 years. Unemployment in 2000 fell two percentage points below estimates of the natural rate without spurring inflation. Since inflation targeting derives its justification largely from the theory of the natural rate, it is questionable whether the United States should switch to an inflation-targeting regime. These doubts are reinforced by the manifest success of monetary policy under the dual mandate.
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Policy Note 2003/7 | December 2003
Has the Unthinkable Become Thinkable?
The big question is whether the dollar—the world's reserve currency—can survive a steep fall in its value without the active support of the major central banks. Can the United States broker another Plaza Accord, as it did in 1985 when the dollar lost half of its value against the yen and the mark within two years, without jeopardizing its unique international role? Is an orderly retreat for the dollar possible today?
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Policy Note 2003/6 | September 2003
A Note of Caution
The current account deficit of the United States has been growing steadily as a share of GDP for more than a decade. It is now at an all-time high, over 5 percent of GDP. This steady deterioration has been greeted with an increasing amount of concern (U.S Trade Deficit Review Commission 2000; Brookings Papers 2001; Godley 2001; Mann 2002). At The Levy Economics Institute, we have long argued that this burgeoning deficit is unsustainable. A current account deficit implies a growing external debt, which in turn implies a continuing shift in net income received from abroad (net interest and dividend flows) in favor of foreigners. We have also noted that with the private sector headed toward balance, a growing current account deficit implies a corresponding growing “twin” deficit for the government sector (Papadimitriou et al. 2002; Godley 2003). This latter scenario has already come to pass: the latest figures show that the general government deficit rose to an annual rate of more than 4 percent of GDP in the first quarter of 2003 and will certainly rise even more in the near future, since the federal deficit alone is officially projected to reach 4 percent by the end of this fiscal year (CBO 2003).
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Policy Note 2003/5 | September 2003
For the first time since the 1930s, many worry that the world's economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. Given the singleminded pursuit of deflationary policies over the past decade, this does come as something of a surprise. But policymakers—especially central bankers—in Europe and the United States seem to have little inkling of how to stave off deflation, with the result that prices are already falling in much of the world. Contrary to widespread beliefs, the worst outcome will not be avoided if the only response is to balance budgets and introduce new monetary policy gimmicks. To the contrary, policymakers should increase deficits to at least 7 percent of GDP.
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Policy Note 2003/4 | August 2003
Germany’s fiscal crisis cannot be attributed to unification per se; it arose as a consequence of ill-guided macroeconomic policies pursued in response to that event. Many structural problems that popped up along the way were mere symptoms of persistent macroeconomic mismanagement and protracted stagnation. Since Germany provided the blueprint for Europe's stability-oriented macroeconomic policy regime, the risk is that the “German disease” is spreading throughout the regime and, potentially, beyond Europe.
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Policy Note 2003/3 | June 2003
The Coming Crisis in U.S. Health Care
The time has more than come to begin planning seriously for the aging of the baby-boom generation. The need for planning goes beyond concerns about the solvency of Social Security and Medicare. Another crisis looms in the form of a huge bill for the care of baby boomers who in their old age will need help dressing, eating, taking medication, and performing other daily tasks. Under the current system, most nursing home care is paid for by Medicaid—a program designed primarily to subsidize the acute care of indigent families. This arrangement diverts health care resources from their intended use, thwarts the development of a long-term-care insurance system, and provides meager resources to heavily burdened providers, forcing them to skimp on care needed by a vulnerable population.
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Policy Note 2003/2 | February 2003
The SGP has been the focus of growing controversy within the eurozone. The ECB continues to argue that reforming the SGP by relaxing its rules would damage the credibility of the euro. The opposite, however, may be closer to reality. Relaxing the rules according to the measures already taken by the European Commission has been inconsequential regarding the euro's credibility. In our view, many more fiscal policy reforms are needed so that the Eurozone can realize a true economic recovery and enhance the credibility of the euro.
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Policy Note 2003/1 | January 2003
The Case for Public Spending
Keynesian economics is back. As John Maynard Keynes stressed, total spending matters—and not who does it or for what purpose. Tax cuts and deficit spending are, therefore, on the agenda; low interest rates seem here to stay. Stimulus is the watchword of the day. It remains only to fill in the details, or so it seems.
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Policy Note 2002/3 | March 2002
The 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 Note 2002/2 | February 2002
The 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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Policy Note 2002/1 | January 2002
There 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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Policy Note 2001/10 | October 2001
It 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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Policy Note 2001/9 | September 2001
The 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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Policy Note 2001/8 | August 2001
There is no chance that events will right themselves in a few weeks, or that we will be saved by such underlying factors as technology and productivity growth or by lower interest rates or the provisions of the recent tax act. Rather, we are in for a crisis; the sooner this is recognized and acted upon, the better.
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Policy Note 2001/7 | July 2001
Consensus opinion sees the United States' economy growing by around 3 percent per year over the next few years, a high enough rate to keep unemployment low and outpace Europe. One problem with the consensus view is that it pays little heed to the very unusual nature of the American expansion. A minor downturn prompted by a bit of inflation and higher interest rates is one thing, and easily fixed by conventional means. But America's boom was unique and so, alas, will be its bust.
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Policy Note 2001/6 | June 2001
The President’s commission claims that the Social Security program is “unsustainable” and requires a complete “overhaul.” It also claims that the program is a bad deal for women and minorities. However, any honest accounting of all Social Security benefits finds that the program is a good deal for disadvantaged groups. Social Security will become a worse deal only if tomorrow's politicians slash benefits—as the commission presumes they will—or increase the taxation of the disadvantaged. A suspicious person might conclude that the reason the report uses such scare tactics is because its authors fear that future Congresses will indeed keep their promises to maintain Social Security. Hence, the urgent need to privatize today.
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Policy Note 2001/5 | May 2001
This policy note examines the case for large tax cuts, focusing on the issues surrounding the purpose and overall size of the needed cut. Although Congress has passed a significant package of tax relief, many have worried that the budget surplus on which it was based will never appear. Thus, some have advocated “triggers” to reduce the size of the tax cuts should tax revenues begin to decline. This note argues that such a proposal represents “backward thinking.”
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Policy Note 2001/4 | April 2001
According to Federal Reserve Chairman Alan Greenspan, we live in a time “profoundly different from the typical postwar business cycle.” Our experiences have “defied conventional wisdom” and mark ”veritable shifts in the tectonic plates of technology.” Evidently, the law of supply and demand has been repealed. This is the theme of “Put your chips on 35”—where 35 refers to the standard industrial classification code for machinery, of which 357, computers and office equipment, is the ground zero of the technological earthquake.
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Policy Note 2001/3 | March 2001
There Is a Better Way
The problem is that the payers of health care—government and employers alike—are in open revolt against costs they never anticipated would become so high. Payers succeeded for a time in limiting increases to rises in the general price level. But it is one thing to remedy the most glaring inefficiencies in the system—to pick, as it were, the low-hanging fruit—and quite another to maintain quality when all of that has been harvested.
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Policy Note 2001/2 | February 2001
Large Tax Cuts Are Needed to Prevent a Hard Landing
Growing government surpluses, a ballooning trade deficit, and the resulting growth in private sector debt have placed the United States' economy in a precarious position. Papadimitriou and Wray agree with President Bush that fiscal stimulus is necessary to reinvigorate the economy; in the current economic environment, monetary policy will not work. However, a tax cut that would adequately stave off a downturn needs to be substantially larger than that proposed by the president. Therefore, in addition to the president's proposal to cut marginal income tax rates, the authors include among their recommends a payroll tax reduction and an expansion of the EITC.
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Policy Note 2001/1 | January 2001
The United States' economic expansion of the past eight years has been fueled by a rise in private sector indebtedness. In 1997 the private sector spending exceeded income for the first time since 1952, and since then the gap between the two has risen markedly. The situation closely mirrors that experienced in the United Kingdom during the 1980s, when a two-year slowdown resulted in absolute declines in GDP and a three-percentage-point increase in the unemployment rate.
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Policy Note 2000/7 | July 2000
The Fed has raised interest rates six times in the past year to slow the economy, in the belief that unemployment is too low. There is scant evidence, however, that low unemployment leads to inflation, that the economy is in danger of overheating, or that higher interest rates will reduce inflation. Instead, the Fed is merely hastening a downturn that will impose huge costs on society's most disadvantaged.
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Policy Note 2000/6 | June 2000
The economic expansion in the United States has been driven to an unusual extent by falling personal saving and rising borrowing by the private sector. If this process goes into reverse, as has happened under comparable circumstances in other countries, there will be severe recession unless there is a big relaxation in fiscal policy.
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Policy Note 2000/5 | May 2000
A Minskyan View
Hyman P. Minsky’s insights into the relationship between profits, economic growth, and the public and private financial balances are particularly relevant to today’s conditions. How can a Minskyan view be applied to explain the processes that brought the economy to its current state and to recommend a policy stance for the future?
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Policy Note 2000/4 | April 2000
Hospitals have been squeezed by the Balanced Budget Act; the uninsured population is still on the rise; and long-term care is paid for largely by welfare grants. The nation's flawed structure of health care finance ultimately will adversely affect the quality of care for all.
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Policy Note 2000/3 | March 2000
Measuring the Impact of Welfare Reform
The rules and regulations that were developed to reduce welfare rolls through immediate employment discourage the achievement of economic independence through the pursuit of higher education.
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Policy Note 2000/2 | February 2000
Full employment without inflation can continue—with the right leadership, prudent policy changes to manage the dangers, and cooperation from all branches of the government.
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Policy Note 2000/1 | January 2000
Conventional theory makes the curious assumption that, in international trade, movements in the real exchange rate negate cost differences so as to make all countries equally competitive. But quite the contrary, it is absolute cost advantages that determine competition between countries, just as they determine the relative price of two sets of goods within one country.
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Policy Note 1999/10 | October 1999
A Bad Idea
Would privatization yield sufficient benefits to support low-income retirees and satisfy all others? Does a focus on private management of assets take attention away from the real issues in the future of Social Security?
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Policy Note 1999/9 | September 1999
An Impending Cash Flow Squeeze?
Modest sales expectations and limited access to bank credit may be curtailing small businesses’ plans for hiring and capital investment.
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Policy Note 1999/8 | August 1999
Breaux Plan Slashes Social Security Benefits Unnecessarily
Neither the Breaux plan nor President Clinton’s proposal for “saving” Social Security promises much gain, but the Breaux plan, unlike the president's proposal, would inflict real pain in the form of reduced benefits.
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Policy Note 1999/7 | July 1999
Tax reform that reduces tax rates on capital income, no matter how successful it is in reducing the user cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the United States' economy.
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Policy Note 1999/6 | June 1999
Lessons from the 1999 Levy Institute Survey of Small Business
Survey responses make it clear the minimum wage can be raised. The question now is, How high can it be raised before serious employment consequences occur?
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Policy Note 1999/5 | May 1999
The search for the solution to the problems faced by the Social Security system should focus not on how to amend OASDI but on how best to achieve faster long-term economic growth. Achieving such growth is better left to the purview of fiscal and monetary policy, not the OASDI system.
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Policy Note 1999/4 | April 1999
Growing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate.
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Policy Note 1999/3 | March 1999
A Reality Check
A federal government surplus has finally been achieved, and it has been met with pronouncements that it is a great gift for the future and with arguments about what to do with it. However, the surplus will be short-lived, it will depress economic growth, and, in any case, surpluses cannot be “used” for anything.
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Policy Note 1999/2 | February 1999
President Clinton’s Proposed Social Security Reform
If you were to write yourself IOUs to provide for your retirement and put them in a safety deposit box, would you rest comfortably, assured that you would be able to purchase all the necessities of life in 2020? Well, President Clinton’s proposal is even worse.
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Policy Note 1999/1 | January 1999
In 1998 the volume of private spending in the United States rose by almost twice the increase in disposable income. The impact of this excess private spending financed by increased net borrowing has been profound; without it, the economy would have stagnated. Can this pattern of demand growth continue? The answer is a resounding no.
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Policy Note 1998/7 | July 1998
Unlike the Papa, Mama, and Baby Bears faced by the storybook Goldilocks, our Goldilocks faced three ferocious grizzlies: a cascading, global financial crisis, global deflation and excess capacity (or insufficient demand), and a domestic fiscal surplus in conjunction with record private deficits.
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Policy Note 1998/6 | June 1998
Fiscal Policy and the Coming Recession
Neither Congress nor the president is on the right track. Rather than protecting the surplus, we should be increasing spending and cutting taxes to contain the looming world recession.
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Policy Note 1998/5 | May 1998
Some analysts have argued against monetary ease, fearing that it might fuel a speculative boom. Alas, given the recent substantial “market correction,” this objection may safely be put away.
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Policy Note 1998/4 | April 1998
To what extent have small businesses hired former welfare recipients and what might induce them to hire more? The Levy Institute conducts a national survey of small firms in many industries to find out.
Download:Associated Program:Author(s):Oren Levin-Waldman George W. McCarthy Jr. -
Policy Note 1998/3 | March 1998
To what extent have small businesses hired former welfare recipients and what might induce them to hire more? Do small businesses change their hiring and employment practices in response to an increase in the minimum wage? The Levy Institute conducts a national survey of small firms in many industries to find out.
Download:Associated Program:Author(s):Oren Levin-Waldman George W. McCarthy Jr. -
Policy Note 1998/2 | February 1998
The federal budget deficit is disappearing; some shadows linger, but the latest Congressional Budget Office projections put the government budget in deficit by only $5 billion in fiscal year 1998, in balance by 2001, and in surplus through at least 2008. In this Policy Note, Research Associate David Alan Aschauer examines the likely economic consequences, particularly on saving, investment, and long-term economic growth, of three alternative uses of budget surpluses: paying down the debt, increasing government spending, and cutting taxes.
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Policy Note 1998/1 | January 1998
College and Financial Independence
Are the effects of college-level education on income and financial independence positive enough to make it worthwhile for states to extend support to qualified welfare recipients to enable them to pursue such education? Welfare reform around the country has tended to focus on immediate work experience as a means to achieve financial independence. While many states continue to provide and encourage short-term education and training as a complement to job search, they often actively discourage longer-term education, especially two- and four-year college degree programs. Grants and loans may make it possible for low-income students to attend a college or university, but they are unlikely to be sufficient to enable those students to support a family as well. Low-income single parents may find themselves able to finance college tuition and fees, but unable to attend because they cannot support their family during the time required to earn their degree.
A proper analysis of this issue requires evaluating the benefits of providing welfare assistance to college students. Are the outcomes sufficiently positive that states should continue to support those welfare recipients with the necessary ability and desire to pursue postsecondary education? The results of this study indicate that the returns to a college degree for welfare recipients are sufficiently high to make postsecondary education a particularly promising avenue to financial independence.
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