Research Programs

Economic Policy for the 21st Century

Economic Policy for the 21st Century

Nearly all Levy Institute research focuses not only on economic analysis, but also on the creation of possible strategies through which policymakers may solve the issue at hand. This program includes research on those macroeconomic policy areas most closely associated with public sector activities: monetary policy and financial institutions, federal budget policy, and the labor market. Examples of studies on monetary policy and financial institutions include explorations of the repercussions the euro’s introduction has had on monetary and fiscal policies and monetary institutions within the European Community; the effectiveness of monetary policy; and Minskyan analyses of the current economic problems in the United States, Japan, and Brazil. Examinations of federal budget policies cover such topics as the effects of budget surpluses on the economy, the need for fiscal expansion to combat economic torpor, and analyses of the Social Security and health care systems.

Associated Programs

Federal Budget Policy
Explorations in Theory and Empirical Analysis
INET–Levy Institute Project



Program Publications

  • Working Paper No. 985 | February 2021
    No! And Yes.
    Modern Money Theory (MMT) economists have used Japan as an example of a country that demonstrates that high deficits and debt do not lead to insolvency, high interest rates, or inflation. MMT insists that governments that issue their own sovereign currency cannot be forced into insolvency, that they can make all payments as they come due, and that they do not really spend tax revenue or borrow in their own currency—with Japan serving as an example of a country that does not face financial budget constraints as normally defined. In this paper we evaluate whether Japan is the poster child of MMT and argue that policy-wise Japan is not following MMT recommendations; in fact, it is generally adopting policies that are precisely the opposite of those proposed by MMT, consistently adopting the path of stop-go fiscal measures and engaging in inadequate and temporary fiscal stimuli in the face of recessions, followed by austerity whenever the economy has seemed to recover.

  • Working Paper No. 979 | November 2020
    As the nation is experiencing the need for ever-increasing government expenditures to address COVID-19 disruptions, rebuild the nation’s infrastructure, and many other worthy causes, conventional thinking calls for restoring at least a portion corporate taxes eliminated by the 2017 Tax Cuts and Jobs Act, especially from progressive circles. In this working paper, Edward Lane and L. Randall Wray examine who really pays the corporate income tax and argue that it does not serve the purposes most people believe.

    The authors provide an overview of the true purposes and incidence of corporate taxation and argue that it is inefficient and largely borne by consumers and employees, not shareholders. While the authors would prefer the elimination of the corporate profits tax, they understand the conventional thinking that taxes are necessary to help finance government expenditures—even if they disagree. Accordingly, the authors present alternatives to the corporate tax that shift the burden from consumers and employees to those who benefit the most from corporate success.

  • Working Paper No. 964 | July 2020
    Analyzing the Fiscal Forecasting Errors of 28 States in India
    Budget credibility, or the ability of governments to accurately forecast macro-fiscal variables, is crucial for effective public finance management. Fiscal marksmanship analysis captures the extent of errors in the budgetary forecasting. The fiscal rules can determine fiscal marksmanship, as effective fiscal consolidation procedures affect the fiscal behavior of the states in conducting the budgetary forecasts. Against this backdrop, applying Theil’s technique, we analyze the fiscal forecasting errors for 28 states (except Telangana) in India for the period 2011–16. There is a heterogeneity in the magnitude of errors across subnational governments in India. The forecast errors in revenue receipts have been greater than revenue expenditure. Within revenue receipts, the errors are more significantly pronounced in the grants component. Within expenditure budgets, the errors in capital spending are found to be greater than revenue spending in all the states. Partitioning the sources of errors, we identified that the errors were more broadly random than due to systematic bias, except for a few crucial macro-fiscal variables where improving the forecasting techniques can provide better estimates.

  • Working Paper No. 961 | July 2020
    Modern money theory (MMT) synthesizes several traditions from heterodox economics. Its focus is on describing monetary and fiscal operations in nations that issue a sovereign currency. As such, it applies Georg Friedrich Knapp’s state money approach (chartalism), also adopted by John Maynard Keynes in his Treatise on Money. MMT emphasizes the difference between a sovereign currency issuer and a sovereign currency user with respect to issues such as fiscal and monetary policy space, ability to make all payments as they come due, credit worthiness, and insolvency. Following A. Mitchell Innes, however, MMT acknowledges some similarities between sovereign and nonsovereign issues of liabilities, and hence integrates a credit theory of money (or, “endogenous money theory,” as it is usually termed by post-Keynesians) with state money theory. MMT uses this integration in policy analysis to address issues such as exchange rate regimes, full employment policy, financial and economic stability, and the current challenges facing modern economies: rising inequality, climate change, aging of the population, tendency toward secular stagnation, and uneven development. This paper will focus on the development of the “Kansas City” approach to MMT at the University of Missouri–Kansas City (UMKC) and the Levy Economics Institute of Bard College.

  • Working Paper No. 960 | July 2020
    Fiscal policy is useful as a government instrument for supporting the economy, contributing to an increase in employment, and reducing inequality through more egalitarian income distribution. Over the past 30 years, developing countries have failed to increase their real wages due to the lack of domestic value-added in the era of globalization, where global supply chains are the driving factor for attracting foreign direct investment. Under such circumstances, the role of fiscal policy has become an important factor in creating the necessary conditions for boosting the economy. With the end of commodity-export-led growth, Mexico experienced a moderate reduction of 5 percent in poverty between 2014 and 2018 due to the structural adjustment of social policies and its economic and trade relationship with the United States; during the same period there has been no change in poverty in Argentina, and Brazil has suffered a rise in poverty. Following the global financial crisis, greater attention has been paid to fiscal policy in developed and developing countries—specifically Argentina, Brazil, and Mexico (ABM)—in order to attain macroeconomic stability. One of the consequences of the financial crisis is rising income inequality and its negative effects on economic growth. Over the past decade, fiscal policy has been adopted for the economic recovery. However, the recovery has been accompanied by a decrease in real wages of the middle class. The purpose of the present research is to critically examine the results of fiscal policy in ABM and the United Nations’ 2030 Agenda for Sustainable Development.

  • Policy Note 2020/3 | April 2020
    Research 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.

  • One-Pager No. 63 | April 2020
    As governments around the world explore ambitious approaches to fiscal and monetary policy in their responses to the COVID-19 crisis, Modern Money Theory (MMT) has been thrust into the spotlight once again. Unfortunately, many of those invoking the theory have misrepresented its central tenets, according Yeva Nersisyan and L. Randall Wray.

    MMT provides an analysis of fiscal and monetary policy applicable to national governments with sovereign, nonconvertible currencies. In the context of articulating the elements of that analysis, Nersisyan and Wray draw out one of the lessons to be learned from the pandemic and its policy responses: that the government’s ability to run deficits is not limited to times of crisis; that we must build up our supplies, infrastructure, and institutions in normal times, and not wait for the next crisis to live up to our means.

  • Working Paper No. 950 | April 2020
    The United States government recently passed legislation and stabilization packages to respond to the COVID-19 (i.e., coronavirus disease 2019) outbreak by providing paid sick leave, tax credits, and free virus testing; expanding food assistance and unemployment benefits; and increasing Medicaid funding. However, the response to the global pandemic might be hindered by the lassitude of the state and the administration’s conception of social policy that leaves the most vulnerable unprotected. The administration’s “zero tolerance” immigration campaign poses public health challenges, especially in the prevention of communicable diseases. In addition to the systemic obstacles noncitizens face in their access to healthcare, recent changes to immigration law that penalize recipients of some social services on grounds that they are a public charge will further restrict their access to treatment and hinder the fight against the pandemic.

  • Working Paper No. 945 | January 2020
    The present paper emphasizes the role of demand, income distribution, endogenous productivity reactions, and other structural changes in the slowdown of the growth rate of output and productivity that has been observed in the United States over the last four decades. In particular, it is explained that weak net export demand, fiscal conservatism, and the increase in income inequality have put downward pressure on demand. Up until the crisis, this pressure was partially compensated for through debt-financed expenditure on behalf of the private sector, especially middle- and lower-income households. This debt overhang is now another obstacle in the way of demand recovery. In turn, as emphasized by the Kaldor-Verdoorn law and the induced technical change approach, the decrease in demand and the stagnation of wages can lead to an endogenous slowdown in productivity growth. Moreover, it is argued that the increasingly oligopolistic and financialized structure of the US economy also contributes to the slowdown. Finally, the paper argues that there is nothing secular about the current stagnation; addressing the aforementioned factors can allow for growth to resume, as has happened in the past.

  • Public Policy Brief No. 148 | January 2020
    In this policy brief, Yeva Nersisyan and Senior Scholar L. Randall Wray argue that assessing the “affordability” of the Green New Deal is a question of whether there are suitable and sufficient real resources than can be mobilized to implement this ambitious approach to climate policy. Only after a careful resource accounting can we address the question of whether taxes and other means might be needed to reduce private spending to avoid inflation as the Green New Deal is phased in.
     
    Nersisyan and Wray provide a first attempt at resource budgeting for the Green New Deal, weighing available resources—including potential excess capacity and resources that can be shifted away from existing production—against what will be needed to implement the major elements of this plan to fight climate change and ensure a just transition to a more sustainable economic model.