Research Programs

The State of the US and World Economies

The State of the US and World Economies

This program's central focus is the use of Levy Institute macroeconomic models in generating strategic analyses of the US and world economies. The outcomes of alternative scenarios are projected and analyzed, with the results—published as Strategic Analysis reports—serving to help policymakers understand the implications of various policy options.

The Levy Institute macroeconomic models, created by Distinguished Scholar Wynne Godley, are accounting based. The US model employs a complete and consistent system (in that all sectors “sum up,” with no unaccounted leakages) of stocks and flows (such as income, production, and wealth). The world model is a “closed” system, in which 11 trading blocs—of which the United States, China, Japan, and Western Europe are four—are represented. This model is based on a matrix in which each bloc’s imports are described in terms of exports from the other 10 blocs. From this information, and using alternative assumptions (e.g., growth rates, trade shares, and energy demands and supplies), trends are identified and patterns of trade and production analyzed.

The projections derived from the models are not presented as short-term forecasts. The aim is to display, based on analysis of the recent past, what it seems reasonable to expect if current trends, policies, and relationships continue. To inform policy, it is not necessary to establish that a particular projection will come to pass, but only that it is something that must be given serious consideration as a possibility. The usefulness of such analyses is strategic: they can serve to warn policymakers of potential dangers and serve as a guide to policy instruments that are available, or should be made available, to deal with those dangers, should they arise.



Program Publications

United States

  • Working Paper No. 891 | May 2017
    A Survey

    The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

  • In the Media | May 2017
    By Atossa Araxia Abrahamian
    The Nation, May 22–28, 2017. All Rights Reserved.

    In early 2013, Congress entered a death
 struggle—or a debt struggle, if you will—over the future of the US economy. A spate of old tax cuts and spending programs were due to expire almost simultaneously, and Congress couldn’t agree on a budget, nor on how much the government could borrow to keep its engines running. Cue the predictable partisan chaos: House Republicans were staunchly opposed to raising the debt ceiling without corresponding cuts to spending, and Democrats, while plenty weary of running up debt, too, wouldn’t sign on to the Republicans’ proposed austerity....

     Read more: https://www.thenation.com/article/the-rock-star-appeal-of-modern-monetary-theory/
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Deirdre Fernandes
    The Boston Globe, April 19, 2017. All Rights Reserved.

    The next recession will likely force the Federal Reserve to once again buy up large amounts of assets to boost the supply of money and stimulate the economy, a move that nearly a decade ago was considered drastic and unconventional, according to Boston Federal Reserve President Eric Rosengren....

    Read more: https://www.bostonglobe.com/business/2017/04/19/remember-quantative-easing-could-make-comeback-says-boston-fed-president/FjNnoluxXb2WPXHJzjgQxO/story.html
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    MarketWatch, April 19, 2017. All Rights Reserved.

    The Federal Reserve should start shrinking its balance sheet relatively soon but do it so slowly that it doesn’t disturb the central bank’s plans to continue to gradually raise short-term interest rates, said Boston Fed President Eric Rosengren on Wednesday....

    Read more: http://www.marketwatch.com/story/feds-rosengren-wants-to-shrink-balance-sheet-so-slowly-that-rate-hikes-can-continue-2017-04-19
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    Bu Gary Siegel
    The Bond Buyer, April 19, 2017. All Rights Reserved.

    The Federal Reserve's balance sheet will probably continue to be used as a monetary policy tool in the future, since interest rates remain low, Federal Reserve Bank of Boston President and CEO Eric S. Rosengren said Wednesday....

    Read more: https://www.bondbuyer.com/news/rosengren-balance-sheet-will-be-policy-tool-going-forward
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    CNBC, April 19, 2017. All Rights Reserved.

    The U.S. Federal Reserve should begin shedding its bond holdings soon but do so in a very gradual way that has little effect on its planned interest rate hikes, Boston Fed President Eric Rosengren said on Wednesday....

    Read more: http://www.cnbc.com/2017/04/19/fed-should-shed-bonds-soon-keep-hiking-rates-rosengren.html
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Jessica Dye
    Financial Times, April 19, 2018. All Rights Reserved.

    Eric Rosengren, president of the Boston Fed, has added his voice to the chorus of policymakers who say they are prepared to start the process of unwinding the central bank’s massive balance sheet....

    Read more: https://www.ft.com/content/14e638f2-b0d8-347b-9eb5-5eff9d83d497
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Christopher Condon
    Bloomberg, April 19, 2017. All Rights Reserved.

    Federal Reserve Bank of Boston President Eric Rosengren said the central bank should shrink its out-sized balance sheet slowly enough that officials don’t need to alter the path of interest-rate increases....

    Read more: https://www.bloomberg.com/news/articles/2017-04-19/fed-s-rosengren-calls-for-trimming-balance-sheet-soon-but-slowly
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Jonathan Spicer
    Reuters, April 19, 2017. All Rights Reserved.

    The U.S. Federal Reserve should begin shedding its bond holdings soon but do so in a very gradual way that has little effect on its planned interest rate hikes, Boston Fed President Eric Rosengren said on Wednesday....

    Read more: http://www.reuters.com/article/us-usa-fed-rosengren-idUSKBN17L276
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Giovanni Bruno
    The Street, April 19, 2017. All Rights Reserved.

    Boston Fed President Eric Rosengren today said that he is prepared to begin the process of reducing the Federal Reserve's vast balance sheet, according to the Financial Times

    "In my view that process could begin relatively soon, and should not significantly alter the (Federal Open Market Committee's) continuing gradual normalization of short-term interest rates," Rosengren said today at the Hyman P Minsky Conference at Bard College....

    Read more: https://www.thestreet.com/story/14093318/1/boston-fed-president-rosengren-balance-sheet-reduction-should-begin-soon.html
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Wallace Witkowski
    Fox Business, April 19, 2017. All Rights Reserved.

    Economic news: Boston Federal Reserve President Eric Rosengren said at Bard College's Levy Economics Institute that he would like the Fed to start shrinking the balance sheet but at such a gradual rate (http://www.marketwatch.com/story/feds-rosengren-wants-to-shrink-balance-sheet-so-slowly-that-rate-hikes-can-continue-2017-04-19) that it doesn't disrupt the central bank's raising of interest rates.

    Read more: http://www.foxbusiness.com/features/2017/04/19/market-snapshot-stocks-mostly-higher-but-dow-dragged-down-by-ibm.html
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    Reuters, April 19, 2017. All Rights Reserved.

    A top U.S. financial regulator on Wednesday warned against scrapping, as some American lawmakers urge, the "Title II" part of the 2010 Dodd-Frank legislation that created an alternative insolvency process for large firms, saying further reforms would be needed to protect the economy....

    Read more: http://www.reuters.com/article/us-usa-banks-hoenig-idUSKBN17L1TO
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    Bloomberg Markets, April 18, 2017. All Rights Reserved.

    Federal Reserve Bank of Kansas City President Esther George discusses monetary policy and the state of the U.S. economy. She speaks with Bloomberg's Michael McKee on "Bloomberg Markets."

    Video: https://www.bloomberg.com/news/videos/2017-04-18/fed-s-george-says-2017-rate-hikes-depend-on-economy-video
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Michael S. Derby
    The Wall Street Journal, April 18, 2017. All Rights Reserved.

    Federal Reserve Bank of Kansas City President Esther George said on Tuesday the U.S. central bank needs to press forward with rate rises, adding it should also begin reducing its massive balance sheet later in the year.

    Read more: https://www.wsj.com/articles/feds-george-says-continuing-with-rate-rises-is-necessary-1492520723
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    CNBC, April 18, 2017. All Rights Reserved.

    Another Federal Reserve policymaker on Tuesday backed an emerging U.S. central bank plan to begin trimming its bond holdings later this year, as Kansas City Fed President Esther George warned against waiting too long in order to "overheat" labor markets....

    Read more: http://www.cnbc.com/2017/04/18/fed-official-backs-bond-pairing-this-year.html
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Steve Matthews and Matthew Boesler
    Bloomberg Markets, April 18, 2017. All Rights Reserved.

    Federal Reserve Bank of Kansas City President Esther George urged the Federal Open Market Committee to start shrinking its $4.5 trillion balance sheet this year, making reductions automatic and not subject to a quick reversal....

    Read more: https://www.bloomberg.com/news/articles/2017-04-18/george-calls-for-fed-s-balance-sheet-to-shrink-on-autopilot
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    By Jonathan Spicer
    Reuters, April 18, 2017. All Rights Reserved.

    Another Federal Reserve policymaker on Tuesday backed an emerging U.S. central bank plan to begin trimming its bond holdings later this year, as Kansas City Fed President Esther George warned against waiting too long in order to "overheat" labor markets....

    Read more: http://mobile.reuters.com/article/idUSKBN17K1J9
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2017
    Nasdaq, April 18, 2017. All Rights Reserved.

    Another Federal Reserve policymaker on Tuesday backed an emerging U.S. central bank plan to begin trimming its bond holdings later this year, as Kansas City Fed President Esther George warned against waiting too long in order to "overheat" labor markets....

    Read more: http://m.nasdaq.com/article/another-fed-official-backs-paring-bond-holdings-this-year-20170418-00756
    Associated Program:
    Region(s):
    United States
  • Conference Proceedings | April 2017

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

    The 2016 Minsky Conference addressed whether what appears to be a global economic slowdown will jeopardize the implementation and efficiency of Dodd-Frank regulatory reforms, the transition of monetary policy away from zero interest rates, and the “new” normal of fiscal policy, as well as the use of fiscal policies aimed at achieving sustainable growth and full employment. The proceedings include the conference program, transcripts of keynote speakers’ remarks, synopses of the panel sessions, and biographies of the participants.

    Download:
    Associated Program(s):
    Author(s):
    Barbara Ross Michael Stephens
    Region(s):
    United States

  • Strategic Analysis | April 2017
    From a macroeconomic point of view, 2016 was an ordinary year in the post–Great Recession period. As in prior years, the conventional forecasts predicted that this would be the year the economy would finally escape from the “new normal” of secular stagnation. But just as in every previous year, the forecasts were confounded by the actual result: lower-than-expected growth—just 1.6 percent.
     
    The radical policy changes promoted by the new Trump administration dominated economic conditions in the closing quarter of the year and the first quarter of 2017. Markets have responded with exuberance since the November elections, on the expectation that the proposed policy measures would increase profitability by boosting growth and cutting personal and corporate taxes. However, an evaluation of the US economy’s structural characteristics reveals three key impediments to a robust, sustainable recovery: income inequality, fiscal conservatism, and weak net export demand. The new administration’s often conflicting policy proposals are unlikely to solve any of these fundamental problems—if anything, the situation will worsen.
     
    Our latest Strategic Analysis provides two medium-term scenarios for the US economy. The “business as usual” baseline scenario (built on CBO estimates) shows household debt and GDP growth roughly maintaining their moribund postcrisis trends. The second scenario assumes a sharp correction in the stock market beginning in 2017Q3, combined with another round of private sector deleveraging. The results: negative growth and a government deficit of 8.3 percent by 2020—essentially a repeat of the crisis of 2007–9. 

  • Policy Note 2017/1 | April 2017
    Since 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.

  • Working Paper No. 887 | March 2017
    Job Creation in the Midst of Welfare State Sabotage

    President Trump’s faux populism may deliver some immediate short-term benefits to the economy, masking the devastating long-term effects from his overall policy strategy. The latter can be termed “welfare state sabotage” and is a wholesale assault on essential public sector institutions and macroeconomic stabilization features that were built during the New Deal era and ushered in the “golden age” of the American economy. Starting in the late ’70s, many of these institutions were significantly eroded by Republicans and Democrats alike, paving the way for the rise of Trump but paling in comparison with what is to come.

  • Working Paper No. 880 | January 2017
    Evidence from Measures of Economic Well-Being

    The Great Recession had a tremendous impact on low-income Americans, in particular black and Latino Americans. The losses in terms of employment and earnings are matched only by the losses in terms of real wealth. In many ways, however, these losses are merely a continuation of trends that have been unfolding for more than two decades. We examine the changes in overall economic well-being and inequality as well as changes in racial economic inequality over the Great Recession, using the period from 1989 to 2007 for historical context. We find that while racial inequality increased from 1989 to 2010, during the Great Recession racial inequality in terms of the Levy Institute Measure of Economic Well-Being (LIMEW) decreased. We find that changes in base income, taxes, and income from nonhome wealth during the Great Recession produced declines in overall inequality, while only taxes reduced between-group racial inequality.

  • Working Paper No. 869 | June 2016
    Phases of Financialization within the 20th Century in the United States

    This paper explores from a historical perspective the process of financialization over the course of the 20th century. We identify four phases of financialization: the first, from the 1900s to 1933 (early financialization); the second, from 1933 to 1940 (transitory phase); the third, between 1945 and 1973 (definancialization); and the fourth period begins in the early 1970s and leads to the Great Recession (complex financialization). Our findings indicate that the main features of the current phase of financialization were already in place in the first period. We closely examine institutions within these distinct financial regimes and focus on the relative size of the financial sector, the respective regulation regime of each period, and the intensity of the shareholder value orientation, as well as the level of financial innovations implemented. Although financialization is a recent term, the process is far from novel. We conclude that its effects can be studied better with reference to economic history.

    Download:
    Associated Program(s):
    Author(s):
    Apostolos Fasianos Diego Guevara Christos Pierros
    Related Topic(s):
    Region(s):
    United States

  • In the Media | May 2016
    By Gary D. Halbert
    ValueWalk, May 3, 2016. All Rights Reserved.

    Today we will focus on a recent study from the Levy Economics Institute which found that 90% of Americans were worse off financially in 2015 than at any time since the early 1970s. Furthermore, for the vast majority of Americans, the nation’s economy is in a prolonged period of stagnation, worse even than that of Japan.

    So are we really worse off today than Japan? This latest study concludes that the answer isYES, when it comes to real income – that is, income adjusted for inflation. According to their findings, 90% of Americans earn roughly the same real income today as the average American earned back in the early 1970s. It’s an eye-opening look at how the vast majority of Americans are struggling to make ends meet....

    Read more: http://www.valuewalk.com/2016/05/americans-worse-off/
     
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2016
    By Dora Mekouar
    Voice of America, April 25, 2016. All Rights Reserved.

    Donald Trump has famously declared that the American Dream is dead, but the majority of middle class Americans seem to disagree with the Republican presidential frontrunner.

    Sixty-three percent of people surveyed earlier this year believe they are living the American Dream. That finding suggests American optimism hasn’t been a casualty of the recession, despite a report that says 90 percent of Americans are worse off today than they were in the 1970s....

    Read more: http://blogs.voanews.com/all-about-america/2016/04/25/trump-says-american-dream-is-dead-is-he-right/ 
    Associated Program:
    Region(s):
    United States
  • In the Media | April 2016
    By Peter Eavis
    The New York Times, April 14, 2016. All Rights Reserved.

    Bank regulators on Wednesday sent a message that big banks are still too big and too complex. They rejected special plans, called living wills, that the banks have to submit to show they can go through an orderly bankruptcy.

    The thinking behind the regulators’ call for living wills is that if a large bank crash is orderly, there will be no need to save it and no need for taxpayer bailouts....

    Read more:
    http://www.nytimes.com/2016/04/15/upshot/how-regulators-mess-with-bankers-minds-and-why-thats-good.html  
  • In the Media | April 2016
    Von Tom Fairless
    Finanz Nachrichten, 14 April 2016. Alle Rechte vorbehalten.

    Für das Instrument der negativen Zinsen gibt es nach Aussage des EZB-Vizepräsidenten Vitor Constancio "klare Grenzen". Die Schwelle, an der die Leute anfangen, Geld abzuziehen, um die Negativzinsen zu umgehen, scheine aber noch weit weg zu sein, sagte Constancio in einer Rede beim Bard College in New York....

    Weiterlesen: http://www.finanznachrichten.de/nachrichten-2016-04/37060417-ezb-constancio-instrument-der-negativzinsen-hat-grenzen-015.htm
    Associated Program(s):
    Region(s):
    United States, Europe
  • In the Media | April 2016
    Foreign Affairs, April 14, 2016. All Rights Reserved.

    Speech by Vítor Constâncio, Vice-President of the ECB, at the 25th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies at the Levy Economics Institute of Bard College, Blithewood, Annandale-on-Hudson, New York, 13 April 2016 

    Ladies and Gentlemen,

    I want to start by thanking the Levy Institute for inviting me again to address this important conference honouring Hyman Minsky, the economist that the Great Recession justifiably brought into the limelight. His work provides crucial insights not only identifying the key mechanisms by which periods of financial calm sow the seeds for ensuing crises, but also the specific challenges that economies face in recovering from such crises....

    Read more: http://foreignaffairs.co.nz/2016/04/14/speech-vitor-constancio-international-headwinds-and-the-effectiveness-of-monetary-policy/
    Associated Program(s):
    Region(s):
    United States, Europe
  • In the Media | April 2016
    By Alessandro Speciale and Matthew Boesler
    The Washington Post, April 14, 2016. All Rights Reserved.

    European Central Bank Vice President Vitor Constancio on Wednesday said there was only so much that negative interest rates can do to boost the economy and defended the central bank’s strategy as positive for the euro area as a whole.

    It is “important to recall that there are clear limits to the use of negative deposit facility rates as a policy instrument,” he said in a speech at the Levy Economics Institute of Bard College in New York state. “Tier systems that simply pass direct costs at the margin can mitigate this concern but cannot dispel it altogether.” ...

    Read more: http://washpost.bloomberg.com/Story?docId=1376-O5LE8T6TTDS101-597LUN1M75BN1J81FK32I14G7R
  • In the Media | April 2016
    By Richard Leong
    Reuters, April 14, 2016. All Rights Reserved.

    Negative deposit rates are not required as a monetary fix for the United States at the moment, in contrast with the euro zone, which is struggling with deflation risk, a top European Central Bank official said on Wednesday.

    The U.S. economy, while far from robust, has been growing at a steady pace, and has seen some improvement in price growth since hitting a post-crisis low earlier this year.

    Read more: http://uk.reuters.com/article/uk-ecb-policy-constancio-negativerates-idUKKCN0XA2Q4
  • In the Media | April 2016
    By Richard Leong
    Yahoo! Finance, April 13, 2016. All Rights Reserved.

    Negative deposit rates are not required as a monetary fix for the United States at the moment, in contrast with the euro zone, which is struggling with deflation risk, a top European Central Bank official said on Wednesday.

    Read more: http://finance.yahoo.com/news/negative-rates-not-needed-u-225239865.html
  • In the Media | April 2016
    By Richard Leong
    Reuters, April 13, 2016. All Rights Reserved.

    Negative deposit rates are not required as a monetary fix for the United States at the moment, in contrast with the euro zone, which is struggling with deflation risk, a top European Central Bank official said on Wednesday.

    The U.S. economy, while far from robust, has been growing at a steady pace, and has seen some improvement in price growth since hitting a post-crisis low earlier this year....

    Read more: http://www.reuters.com/article/ecb-policy-constancio-negativerates-idUSL2N17G2GK
  • In the Media | April 2016
    By Alessandro Speciale and Matthew Boesler
    Bloomberg, April 13, 2016. All Rights Reserved.

    European Central Bank Vice President Vitor Constancio on Wednesday said there was only so much that negative interest rates can do to boost the economy and defended the central bank’s strategy as positive for the euro area as a whole.

    It is “important to recall that there are clear limits to the use of negative deposit facility rates as a policy instrument,” he said in a speech at the Levy Economics Institute of Bard College in New York state. “Tier systems that simply pass direct costs at the margin can mitigate this concern but cannot dispel it altogether.” ...

    Read more: http://www.bloomberg.com/news/articles/2016-04-13/ecb-s-constancio-says-negative-rate-policy-has-clear-limits
  • In the Media | April 2016
    By Richard Leong
    The Fiscal Times, April 13, 2016. All Rights Reserved.

    Negative deposit rates are not required as a monetary fix for the United States at the moment, in contrast with the euro zone, which is struggling with deflation risk, a top European Central Bank official said on Wednesday....

    Read more: http://www.thefiscaltimes.com/latestnews/2016/04/13/Negative-rates-not-needed-US-now-ECBs-Constancio
  • Strategic Analysis | March 2016
    Our latest strategic analysis reveals that the US economy remains fragile because of three persistent structural issues: weak demand for US exports, fiscal conservatism, and a four-decade trend in rising income inequality. It also faces risks from stagnation in the economies of the United States’ trading partners, appreciation of the dollar, and a contraction in asset prices. The authors provide a baseline and three alternative medium-term scenarios using the Levy Institute’s stock-flow consistent macro model: a dollar appreciation and reduced growth in US trading partners scenario; a stock market correction scenario; and a third scenario combining scenarios 1 and 2. The baseline scenario shows that future growth will depend on an increase in private sector indebtedness, while the remaining scenarios underscore the linkages between a fragile US recovery and instability in the global economy. 

  • e-pamphlets | March 2016
    American Prosperity in Historical Perspective
    Jordan Brennan, of Unifor and the Canadian Centre for Policy Alternatives, examines the rise of income inequality and the deceleration of economic growth in the United States in this two-part analysis. The first section explores the consolidation of corporate power, through mergers and acquisitions, between 1895 and 2013, and finds that reduced competition, declines in fixed asset investment, and the rise of practices such as stock buybacks have shifted investment away from the real economy, leading to weak economic growth and rising income inequality. The second section of Brennan’s analysis examines the interplay of labor unions, inflation, and income inequality. The author observes that the decline of unions as a countervailing force to corporate power and anti-inflationary monetary policy have shifted income away from middle- and lower-income groups. Similarly, he observes that over the past century inflation has tended to redistribute income from capital to labor—from the upper to the lower income strata. In this context, he observes that anti-inflation policy is a use of state power to effect a regressive redistribution of income.  
    Download:
    Associated Program:
    Author(s):
    Jordan Brennan
    Region(s):
    United States

  • Conference Proceedings | November 2015

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

    The 2015 Minsky Conference addressed, among other issues, the design, flaws, and current status of the Dodd-Frank Wall Street Reform Act, including implementation of the operating procedures necessary to curtail systemic risk and prevent future crises; the insistence on fiscal austerity exemplified by the recent pronouncements of the new Congress; the sustainability of the US economic recovery; monetary policy revisions and central bank independence; the deflationary pressures associated with the ongoing eurozone debt crisis and their implications for the global economy; strategies for promoting an inclusive economy and a more equitable income distribution; and regulatory challenges for emerging market economies. The proceedings include the conference program, transcripts of keynote speakers’ remarks, synopses of the panel sessions, and biographies of the participants.

    Download:
    Associated Program(s):
    Author(s):
    Barbara Ross Michael Stephens
    Region(s):
    United States, Europe

  • In the Media | October 2015
    By Richie Bernardo
    WalletHub, October 12, 2015. All Rights Reserved.

    For many Americans today, the Great Recession is nothing more than the distant shadow of a troubled economic past. The longest downturn since the Great Depression officially ended six years ago. Cities coast to coast have completely bounced back — some even surpassing their pre-recession economic levels, thanks to lucrative industries that helped them rebuild or stay afloat through the crisis.

    Yet the effects of the recession still reverberate in various parts of the U.S., falling deeper into debt and leaving millions of Americans wondering whether the recession has indeed blown over. ...

    Read more: https://wallethub.com/edu/most-least-recession-recovered-cities/5219/#pavlina-r-tcherneva 
    Associated Program:
    Region(s):
    United States
  • Working Paper No. 844 | July 2015

    We present a model where the saving rate of the household sector, especially households at the bottom of the income distribution, becomes the endogenous variable that adjusts in order for full employment to be maintained over time. An increase in income inequality and the current account deficit and a consolidation of the government budget lead to a decrease in the saving rate of the household sector. Such a process is unsustainable because it leads to an increase in the household debt-to-income ratio, and maintaining it depends on some sort of asset bubble. This framework allows us to better understand the factors that led to the Great Recession and the dilemma of a repeat of this kind of unsustainable process or secular stagnation. Sustainable growth requires a decrease in income inequality, an improvement in the external position, and a relaxation of the fiscal stance of the government.

    Download:
    Associated Program:
    Author(s):
    Related Topic(s):
    Region(s):
    United States, Europe

  • In the Media | June 2015
    Economia, June 23, 2015. All Rights Reserved.

    All'interno del quadro economico internazionale, Jan Kregel, direttore del programma “Politica Monetaria” presso il Levy Economic Institute negli USA, analizza qual è stato il ruolo degli Stati Uniti all'interno della crisi economica. Uno degli elementi che viene messo maggiormente in evidenza, è l' importanza data al settore finanziario, rispetto all'economia reale: ciò ha portando ad una minore attenzione a problemi come la disoccupazione, che rappresenta ancora una delle questioni irrisolte dell'Europa, ma soprattutto dell'Italia. 

    Una volta che la crisi economica è scoppiata negli Usa, si è diffusa a macchia d'olio specie nel continente europeo, dove la forbice presente tra europa meridionale e settentrionale, si è notevolmente ampliata.   A tale ritratto, Kregel, aggiunge anche un'attenta le politiche economiche messe in atto da Cina e Giappone e dalle loro ripercussioni sul sistema economico mondiale.

    intervista videoregistrata:
    http://www.economia.rai.it/articoli/la-crisi-negli-usa-il-punto-di-vista-di-jan-kregel/30575/default.aspx
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  • In the Media | June 2015
    Background Briefing, June 11, 2015. All Rights Reserved.

    Levy President Dimitri B. Papadimitriou and Ian Masters discuss the Institute’s latest Strategic Analysis of the US economy, and how destructive political ideology is crippling recovery and undermining an otherwise healthy economy. Full audio of the interview is available here.
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  • Strategic Analysis | May 2015
    In this latest Strategic Analysis, the Institute’s Macro Modeling Team examines the current, anemic recovery of the US economy. The authors identify three structural obstacles—the weak performance of net exports, a prevailing fiscal conservatism, and high income inequality—that, in combination with continued household sector deleveraging, explain the recovery’s slow pace. Their baseline macro scenario shows that the Congressional Budget Office’s latest GDP growth projections require a rise in private sector spending in excess of income—the same unsustainable path that preceded both the 2001 recession and the Great Recession of 2007–9. To better understand the risks to the US economy, the authors also examine three alternative scenarios for the period 2015–18: a 1 percent reduction in the real GDP growth rate of US trading partners, a 25 percent appreciation of the dollar over the next four years, and the combined impact of both changes. All three scenarios show that further dollar appreciation and/or a growth slowdown in the trading partner economies will lead to an increase in the foreign deficit and a decrease in the projected growth rate, while heightening the need for private (and government) borrowing and adding to the economy’s fragility. 

  • In the Media | April 2015
    By Pedro Nicolaci da Costa
    The Wall Street Journal, April 22, 2015. All Rights Reserved.

    The effort by financial regulators to ensure big banks and other financial institutions have adequate levels of capital is misguided since that will only help lessen the impact of a crisis, not prevent one.

    That’s the conclusion of Eric Tymoigne, an economist at Lewis & Clark Collegein a presentation last week at the Levy Economics Institute‘s 24th Minsky Conference.

    Read more:
    http://blogs.wsj.com/economics/2015/04/22/wall-street-watchdogs-should-prevent-crises-not-build-buffers/  
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  • In the Media | April 2015
    Moyers & Company, April 18, 2015. All Rights Reserved.

    Last Wednesday, Senator Elizabeth Warren delivered this speech at a conference at the Levy Institute in Washington which lays out the banking reform she believes still needs to happen.  The Nation’s George Zornick called it “a blueprint for how Warren thinks Democrats should attack continued financial reform.”

    Read more: http://billmoyers.com/2015/04/18/elizabeth-warren-speech/
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  • In the Media | April 2015
    By Robert Feinberg
    NewsMax, April 17, 2015. All Rights Reserved.

    Perhaps the highlight of the 24th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies was a speech by Paul Tucker, senior fellow at both the Kennedy School and the Business School at Harvard, who served as deputy governor of the Bank of England (BOE) from 2009 to 2013.... 

    Read more: http://www.newsmax.com/finance/robertfeinberg/tucker-financial-dodd-frank-bank/2015/04/17/id/639147/
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  • In the Media | April 2015
    By Jim Tankersley
    The Washington Post, April 17, 2015. All Rights Reserved.

    It still isn’t winter in Westeros, at least not on television, although there is no shortage of reminders that it is coming. The seasons in George R.R. Martin’s “Game of Thrones” aren’t regular or celestial. Summer can last a few minutes or many years. At this point in the show, the start of the fifth season, it has gone on for a decade, the longest in the realm’s recorded history. The balmy weather is about to give way to snows and famine, and astoundingly, no one in the land seems prepared....

    Read more: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/17/game-of-thrones-and-the-economic-darkness-that-awaits-us/
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  • In the Media | April 2015
    By David Dayen
    The Fiscal Times, April 17, 2015. All Rights Reserved.

    “Rules are not the enemy of markets,” Sen. Elizabeth Warren told me yesterday, on the heels of her major address on the unfinished business of financial reform at the Levy Institute’s Hyman Minsky Conference. “Rules promote innovation and competition. Rules prevent markets from blowing up. We learned that in 1929 and we should have learned it again in 2008.” 

    Read more:
     http://www.thefiscaltimes.com/Columns/2015/04/17/What-Elizabeth-Warren-Has-Hillary-Clinton-Needs
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  • In the Media | April 2015
    By Martin Sandbu
    Financial Times, April 17, 2015. All Rights Reserved.

    Elizabeth Warren may not be running for president but she does not relent in gunning for Wall Street. On Wednesday she gave a speech arguing powerfully that the task of taming finance is far from finished. It is an important speech that deserves to be widely read. The location she chose to give it was, incidentally, as apt as can be. The Levy Institute has covered itself in more glory than the economics profession at large, with research less marred by the blind spots that once distracted so many economists from the looming crisis. (It was Hyman Minsky's home institution.)

    Read more:
     http://www.ft.com/intl/cms/s/0/a37b9244-e386-11e4-9a82-00144feab7de.html#axzz3Xfu2l4dm
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  • In the Media | April 2015
    By Robert Feinberg
    NewsMax, April 16, 2015. All Rights Reserved.

    On the first day of the Levy Institute's two-day annual Hyman P. Minsky Conference, held at the National Press Club in Washington, high-powered speakers held forth on the most prominent issues in the financial world that will affect the economy as Congress begins to try to legislate during the two years that the Republican Congress has to make its mark as the Obama administration winds down. 

    Read more:
     http://www.newsmax.com/finance/robertfeinberg/bullard-hoenig-warren-financial/2015/04/16/id/638861/
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  • In the Media | April 2015
    By Portia Crowe
    Business Insider Australia, April 16, 2015. All Rights Reserved.

    Elizabeth Warren made a speech at the Levy Institute’s Minsky Conference on Wednesday and laid out some major financial reforms she wants to push through.

    “The culture of cheating on Wall Street didn’t stop with the 2008 crash,” the populist Massachusetts Senator said.

    Read more:
     http://www.businessinsider.com.au/elizabeth-warren-new-reforms-2015-4  
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  • In the Media | April 2015
    MPA Magazine, April 16, 2015. All Rights Reserved.

    U.S. Senator Elizabeth Warren has called on lawmakers to break up too-big-to-fail by capping the size of the largest financial institutions and separating commercial and investment banking. She also proposed limiting emergency lending by the Federal Reserve to troubled institutions by the Federal Reserve.

    Speaking at the Levy Institute’s 24thannual Hyman Minsky conference, Warren said the fact that the Federal Reserve and the Federal Deposit Insurance Corp. say 11 banks threaten the entire U.S. economy means they are too big.

    Read more:
     http://www.mpamag.com/mortgage-originator/warren-its-time-to-break-up-toobigtofail-banks-22121.aspx
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  • In the Media | April 2015
    By George Zornick
    The Nation, April 16, 2015. All Rights Reserved.

    If Elizabeth Warren ran for president, a key part of her campaign—if not the centerpiece—would likely involve how to restructure the financial sector in a less dangerous and more productive way. Dodd-Frank was by many accounts a good start, but it’s clear the economy is still over-financialized and too-big-to-fail banks continue to pose an existential threat.

    Warren isn’t running for president, but she unveiled that exact agenda in a sweeping speech Wednesday in a conference at the Levy Institute in Washington. It advocated an array of specific, often ambitious policy proposals, many of which have circulated in Washington for years and that Warren, at various times, has already called for.

    Read more:
     http://www.thenation.com/blog/204433/big-elizabeth-warren-speech-how-finish-financial-reform#  
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  • In the Media | April 2015
    By Jan Strupczewski
    Reuters, April 16, 2015. All Rights Reserved.

    The European Central Bank's monetary policy will be accommodative in the foreseeable future, the bank's Vice President Vitor Constancio said on Thursday.

    "... Monetary policy needs to be accommodative, as I expect to be the case for the foreseeable future in the euro area," Constancio told a seminar at the Levy Economics Institute. 
       
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  • In the Media | April 2015
    By Harriet Torry
    The Wall Street Journal, April 16, 2015. All Rights Reserved.

    Vitor Constancio, vice president of the European Central Bank, said Thursday that economic recovery in Europe remains “gradual and moderate,” underscoring the need for loose monetary policy in the eurozone for the foreseeable future.

    “Monetary policy has to remain accommodative with low interest rates,” Mr. Constancio said, adding that “getting Europe growing again is one of the most important challenges we face at present.”

    But Mr. Constancio also highlighted the importance of being aware of the limitations of monetary policy, in remarks at a conference hosted by the Levy Institute.

    Read more:
     http://blogs.wsj.com/economics/2015/04/16/ecb-constancio-eurozone-monetary-policy-needs-to-stay-accommodative/
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  • In the Media | April 2015
    By Charles Pierce
    Esquire, April 16, 2015. All Rights Reserved.

    It's been an interesting week for Senator Professor Elizabeth Warren. First, in Time Magazine's annual 100 Groovy Folks list, she gets a rapturous shout-out from none other than Hillary Rodham Clinton, currently touring the silos of Iowa and the clam shacks of New Hampshire....

    Read more:
     http://www.esquire.com/news-politics/politics/news/a34418/a-visit-from-senator-professor-warren/
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  • In the Media | April 2015
    By Victoria Finkle
    American Banker, April 15, 2015. All Rights Reserved.

    WASHINGTON — Sen. Elizabeth Warren, D-Mass., delivered a sweeping speech Wednesday aimed at what she's calling "the unfinished business of financial reform."

    Warren laid out a number of broad policy goals for the banking industry, arguing that while the Dodd-Frank Act "made some real progress," more needs to be done to resurrect a safe financial system.

    Read more:
     http://www.americanbanker.com/news/law-regulation/warren-lays-out-detailed-plan-to-take-on-wall-street-1073764-1.html  
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  • In the Media | April 2015
    By Matthew Yglesias
    Vox, April 15, 2015. All Rights Reserved.

    Elizabeth Warren isn't running for president. But she does have an agenda for reining in the big banks that would go well beyond the Obama administration's (underrated) bank regulation moves and substantially alter the role of Wall Street in American life.

    In a speech delivered on April 15 at the Levy Institute's 24th annual Hyman Minsky conference, Warren laid out the most comprehensive and ambitious version of her agenda yet.

    Read more:
     http://www.vox.com/2015/4/15/8420789/elizabeth-warren-prosecutions  
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  • In the Media | April 2015
    By Holly LeFon
    US News & World Report, April 15, 2015. All Rights Reserved.

    Sen. Elizabeth Warren, D-Mass., called Wednesday for breaking up big banks through structural reforms that would bring a decisive end to “too big to fail.”

    Warren told a Levy Economics Institute conference she has worked with other lawmakers to advance a bill that would build a wall between commercial banking and investment banking.

    Read more:
     http://www.usnews.com/news/articles/2015/04/15/warren-calls-for-breaking-up-the-banks  
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  • In the Media | April 2015
    By Barney Jopson and Gina Chon
    Financial Times, April 15, 2015. All Rights Reserved.

    Elizabeth Warren, the anti-Wall Street senator, has lashed out at US regulators for being soft on misbehaving banks, describing settlements that extracted billion dollar fines as a “slap on the wrist” and demanding that banks be put on trial.

    The remarks by Ms Warren, who has emerged as a standard bearer of the Democratic left, are designed to put pressure on the US authorities as they come close to concluding their investigation into the manipulation of the foreign exchange market.

    Read more:
     http://www.ft.com/cms/s/0/bce88134-e394-11e4-9a82-00144feab7de.html?siteedition=intl#axzz3XQnJg6ZU  
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  • In the Media | April 2015
    By Sam Fleming
    Financial Times, April 15, 2015. All Rights Reserved.

    US growth is set to remain relatively "robust" and low inflation is due largely to temporary factors, St Louis Federal Reserve president James Bullard said in a speech on Wednesday morning in Washington DC. 

    He renewed his recent calls for higher interest rates, in part because of the risks of stoking up asset bubbles by leaving them at near zero levels, reports the FT's Sam Fleming.

    Read more:
     http://www.ft.com/intl/fastft/308482/us-growth-remain-relatively-robust-feds-bullard  
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  • In the Media | April 2015
    By Ryan Tracy
    The Wall Street Journal, April 15, 2015. All Rights Reserved.

    WASHINGTON—The No. 2 official at the Federal Deposit Insurance Corp. said banks should get “regulatory relief” if they meet minimum capital requirements and other criteria, weighing in as Congress considers measures to ease rules on smaller banks.

    FDIC Vice Chairman Thomas Hoenig, who favors breaking up the largest banks and is influential with members of Congress on both sides of the aisle, said banks should only get regulatory relief if they hold foreign exchange and interest rate derivatives worth less than $3 billion, maintain an equity-to-asset ratio of at least 10%, and don’t engage in trading activity.

    Read more:
     http://www.wsj.com/articles/fdic-banks-should-meet-capital-minimum-to-get-regulatory-relief-1429107301  
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  • In the Media | April 2015
    By Steve MatthewsChristopher Condon
    Bloomberg, April 15, 2015. All Rights Reserved.

    Federal Reserve Bank of St. Louis President James Bullard repeated his call for beginning to normalize monetary policy and said maintaining interest rates near zero risks destructive asset-price bubbles.

    “A risk of remaining at the zero lower bound too long is that a significant asset-market bubble will develop,” Bullard said in prepared remarks in Washington on Wednesday. “If a bubble in a key asset market develops, history has shown that we have little ability to contain it,” he said, citing the housing bubble that preceded the last recession.

    Read more:
     http://www.bloomberg.com/news/articles/2015-04-15/fed-s-bullard-says-zero-policy-rate-risks-asset-price-bubbles  
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  • In the Media | April 2015
    Reuters, April 15, 2015. All Rights Reserved.

    (Reuters) – A top Federal Reserve official said on Wednesday that it's okay for the Fed to raise interest rates and then return to near-zero levels if the economic data shows that the central bank needs to retreat.

    "I don't think there's a problem with that," St. Louis Federal Reserve President James Bullard said, referring to the issue of hiking rates soon and then lowering them shortly afterward if economic growth drops.

    Read more:
     http://www.reuters.com/article/2015/04/15/usa-fed-bullard-rates-idUSN9N0WC01O20150415  
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  • In the Media | April 2015
    By Brai Odion-Esene
    MNI Deutsche Börse Group, April 15, 2015. All Rights Reserved.

    WASHINGTON (MNI) - The vice chair of the Federal Deposit Insurance Corp. Wednesday argued against giving all small banks an exemption from the ban on proprietary trading by traditional banks, commonly known as the Volcker Rule, arguing that it does not impose any added regulatory burdens on smaller institutions.

    "A blanket exemption for smaller institutions to engage in proprietary trading and yet be exempt from the Volcker Rule is unwise," Thomas Hoenig said in remarks prepared for delivery at the Levy Institute's Hyman Minsky conference in Washington.

    Read more:
     https://mninews.marketnews.com/content/fdics-hoenigblanket-small-bank-exemption-volcker-unwise
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  • In the Media | April 2015
    By Annie Linskey
    The Boston Globe, April 15, 2015. All Rights Reserved.

    Massachusetts Senator Elizabeth Warren wants to limit to just one the number of deals financial institutions accused of wrongdoing can cut with the government, a change that she believes would force corporations to follow the rules or face criminal charges.

    It’s among several new ideas that Warren unveiled in a speech at the National Press Club on Wednesday. The senator offered new initiatives that would require banks to par far higher “mandatory minimum” fines when they avoid prosecution after violating rules. She also suggested a tax incentive aimed at prodding highly leveraged banks to use capital to finance deals rather than debt.

    Read more: http://www.bostonglobe.com/news/politics/2015/04/15/elizabeth-warren-pitches-ideas-for-stronger-wall-street-curbs/4OHy5tGIOxcEhtAyEr7YYL/story.html  
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  • In the Media | April 2015
    By Jesse Hamilton and Silla Brush
    Chicago Tribune, April 15, 2015. All Rights Reserved.

    Wall Street banks and their top executives should face new tax penalties to keep them from engaging in risky practices that can pose threats to the financial system, Sen. Elizabeth Warren said Wednesday.

    Warren, who has been a leading defender of the Dodd-Frank Act, called on the Republican-led Congress to relent from attacks on the 2010 law and close a tax loophole that she said encourages bank chief executive officers to seek quick gains.

    Read more: http://www.chicagotribune.com/news/sns-wp-blm-news-bc-warren15-20150415-story.html  
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  • In the Media | April 2015
    By Zach Carter
    The Huffington Post, April 15, 2015. All Rights Reserved.

    WASHINGTON -- Sen. Elizabeth Warren (D-Mass.) assailed the nation's top bank regulators on Wednesday for coddling Wall Street offenders and ducking the responsibilities Congress assigned them in the wake of the 2008 financial meltdown.

    At a conference hosted by the Levy Economics Institute, Warren called not only for structural change to the banking system but for a revamping of the weak enforcement culture at the Federal Reserve, the Securities and Exchange Commission and the Department of Justice....

    Read more:
     http://www.huffingtonpost.com/2015/04/15/elizabeth-warren-wall-street_n_7073040.html  
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  • In the Media | April 2015
    By Victoria Finkle
    American Banker, April 15, 2015. All Rights Reserved.

    WASHINGTON — Hillary Clinton just kicked off her presidential bid on Sunday, but progressives have already begun a campaign of their own to shape the financial policy debate ahead of the 2016 elections.

    Sen. Elizabeth Warren, D-Mass., delivered a wide-ranging address on Wednesday, laying out an agenda for tending to "unfinished business" in the financial industry in the wake of the financial crisis and the Dodd-Frank Act.

    Read more:
     
    http://www.americanbanker.com/news/law-regulation/cheat-sheet-how-warrens-banking-agenda-could-influence-clinton-1073782-1.html?utm_campaign=daily%20briefing-apr%2016%202015&utm_medium=email&utm_source=newsletter&ET=americanbanker%3Ae4197921%3A4562712a%3A&st=email  
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  • In the Media | April 2015
    By Joe Mont
    Compliance Week, April 15, 2015. All Rights Reserved.

    If she had not already emphatically dismissed the idea of running for president, Sen. Elizabeth Warren (D-Mass.) delivered what would have been a headline-grabbing stump speech on Wednesday.

    Speaking at Bard College’s Levy Economics Institute, Warren presented her view of what is needed for continuing financial reforms beyond the Dodd-Frank Act....

    Read more:
     https://www.complianceweek.com/blogs/the-filing-cabinet/warren-on-the-warpath-slams-sec-pitches-financial-reforms#.VTFJtL6itUR  
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  • In the Media | April 2015
    Value Walk, April 15, 2015. All Rights Reserved.

    In a speech at the Levy Institute’s annual Hyman P. Minsky Conference today, Senator Elizabeth Warren laid out a set of proposals to advance the process of financial reform that began with the enactment of the Dodd-Frank Act of 2010.

    Read more:
     http://www.valuewalk.com/2015/04/elizabeth-warren-financial-reform/
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  • In the Media | April 2015
    By Eric Garcia
    National Journal, April 15, 2015. All Rights Reserved.

    For Sen. Elizabeth Warren, the Dodd-Frank financial reform law was an important first step to taming financial markets. On Wednesday, she laid out a series of bold next steps for financial reform that could provide a road map for the Democratic Party in 2016.

    Speaking at the Levy Economics Institute of Bard College's 24th Annual Hyman P. Minsky Conference on Wednesday, Warren gave a message that could serve as strong ammunition for Democrats in the future, saying that opponents of financial regulation often pit the argument as between being pro-market and supporting deregulation versus being anti-market and supporting more regulation.

    Read more:
     http://www.nationaljournal.com/economy/elizabeth-warren-s-new-agenda-for-democrats-on-financial-reform-20150415  
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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. 

  • In the Media | February 2015
    By Sasha Abramsky
    The Nation, February 2, 2015. All Rights Reserved.

    By many measures, the American economy has recovered from the 2008 implosion. The stock market is soaring, housing values in many markets have rebounded and GDP is growing at a healthy rate of more than 4 percent. Compared to Spain and Greece, where debt, mass unemployment and hardship remain widespread following the Eurozone crisis, America looks to be on easy street.

    Yet scratch below the surface and you’ll see that the United States still has a considerable economic problem. While the official unemployment rate has fallen to 5.6 percent, the lowest since 2008, the percentage of the adult population participating in the labor market remains far lower than it was at the start of the recession. At least in part, headline unemployment numbers look respectable because millions of Americans have grown so discouraged about their prospects of finding work that they no longer try, and thus are no longer counted among the unemployed. Depending on the measures, only 59 to 63 percent of the working-age population is employed, far below recent historical norms.

    Read more:
     http://www.thenation.com/article/196721/workers-think-tank
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  • In the Media | December 2014
    By Mustafa Caglayan
    Anadolu Agency, December 24, 2014. All Rights Reserved.

    The U.S. economy on Tuesday posted its fastest expansion in more than a decade, but experts warn that there may be a dark cloud to this silver lining.

    Official figures show that the gross domestic product—the broadest measure of economic output and growth—grew at its fastest rate since 2003, surging 5 percent in the third quarter.

    Read more:
     http://www.aa.com.tr/en/economy/440452--despite-growth-experts-skeptical-us-recovering-from-recession
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  • Conference Proceedings | November 2014
    A conference organized by the Levy Economics Institute with support from the Ford Foundation

    In the context of a sluggish economic recovery and global uncertainty, with growth and employment well below normal levels, the 2014 Minsky Conference addressed both financial reform and prosperity, drawing from Hyman Minsky’s work on financial instability and his proposal for achieving full employment. Panels focused on the design of a new, more robust, and stable financial architecture; fiscal austerity and the sustainability of the US and European economic recovery; central bank independence and financial reform; the larger implications of the eurozone debt crisis for the global economic system; the impact of the return to more traditional US monetary policy on emerging markets and developing economies; improving governance of the social safety net; the institutional shape of the future financial system; strategies for promoting an inclusive economy and more equitable income distribution; and regulatory challenges for emerging-market economies. The proceedings include the conference program, transcripts of keynote speakers’ remarks, synopses of the panel sessions, and biographies of the participants. 
    Download:
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    Author(s):
    Barbara Ross Michael Stephens
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    United States, Europe

  • One-Pager No. 47 | October 2014
    In the postwar period, income growth has become more inequitably distributed with virtually every subsequent economic expansion. From 2009 to 2012, while the economy was recovering from one of the biggest economic downturns in recent memory, the top 1 percent took home 95 percent of the income gains. To reverse this pattern, Research Associate Pavlina R. Tcherneva recommends policy strategies to promote growth from the bottom up—to change the income distribution directly by funding employment opportunities in the public, nonprofit, or social entrepreneurial sector. 

  • In the Media | September 2014
    By Joshua Holland
    Moyers & Company, September 29, 2014. All Rights Reserved.

    Matthew Yglesias calls this chart, from Pavlina Tcherneva, an economist at the Levy Economic Institute at Bard College, “the most important chart about the American economy you’ll see this year.” It illustrates how much income gains those at the top have enjoyed during each of our post-war expansions....

    Read more:
     http://billmoyers.com/2014/09/29/smart-charts-economic-recovery-1-percent/
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  • In the Media | September 2014
    By Aaron Abbruzzese
    Mashable, September 27, 2014. All Rights Reserved.

    If it seems like the rich are getting richer, well, the data might just back you up. A new graph based on data from times of growth backs up growing concern that the current economic system is disproportionately favoring those that are already wealthy....

    Read more:
     http://mashable.com/2014/09/25/this-really-depressing-graph-about-the-u-s-economy-is-turning-heads/
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  • In the Media | September 2014
    By Neil Irwin
    The New York Times, September 25, 2014

    Economic expansions are supposed to be the good times, the periods in which incomes and living standards improve. And that’s still true, at least for some of us....

    Read more:
     http://www.nytimes.com/2014/09/27/upshot/the-benefits-of-economic-expansions-are-increasingly-going-to-the-richest-americans.html?hp&action=click&pgtype=Homepage&version=HpSum&module=second-column-region®ion=top-news&WT.nav=top-news&abt=0002&abg=0    
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  • In the Media | September 2014
    By Christopher Ingraham
    The Washington Post, September 25, 2014

    Take a look at this chart, from Bard College economist Pavlina Tcherneva. In an August 2013 paper, she wrote:

    An examination of average income growth [in the U.S.] during every postwar expansion (from trough to peak) and its distribution between the wealthiest 10% and bottom 90% of households reveals that income growth becomes more inequitably distributed with every subsequent expansion during the entire postwar period.

    In other words, the wealthy are capturing more and more of the overall income growth during each expansion period....

    Read more:
     http://www.washingtonpost.com/blogs/wonkblog/wp/2014/09/25/this-depressing-chart-shows-that-the-rich-arent-just-grabbing-a-bigger-slice-of-the-income-pie-theyre-taking-all-of-it/
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  • In the Media | September 2014
    By Jordan Weissmann
    Slate, September 25, 2014

    When you write about the economy every day for a living, you can start feeling numb toward charts about income inequality. After all, the story doesn't change much week to week, and usually neither do the visualizations. But this one, from Bard College economist Pavlina Tcherneva, somehow still feels astonishing, and has stirred up a bunch of attention today. It shows how much of U.S. income growth has been claimed by the top 10 percent of households during economic expansions, and how much was claimed by the bottom 90 percent. Guess who's gotten the lion's share in recent years?

    Read more: 
    http://www.slate.com/blogs/moneybox/2014/09/25/how_the_rich_conquered_the_economy_in_one_chart.html
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  • In the Media | September 2014
    By Matthew Yglesias
    Vox, September 25, 2014. All Rights Reserved.

    Pavlina Tcherneva's chart showing the distribution of income gains during periods of economic expansion is burning up the economics internet over the past 24 hours and for good reason. The trend it depicts is shocking....

    Read more:
     http://www.vox.com/xpress/2014/9/25/6843509/income-distribution-recoveries-pavlina-tcherneva
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  • In the Media | September 2014
    By Kevin Drum
    Mother Jones, September 27, 2014. All Rights Reserved.

    It's not easy finding new and interesting ways to illustrate the growth of income inequality over the past few decades. But here are a couple of related ones. The first is from "Survival of the Richest" in the current issue of Mother Jones, and it shows how much of our total national income growth gets hoovered up by the top 1 percent during economic recoveries. The super-rich got 45 percent of total income growth during the dotcom years; 65 percent during the housing bubble years; and a stunning 95 percent during the current recovery. It's good to be rich....

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     http://www.motherjones.com/kevin-drum/2014/09/rich-are-getting-richer-part-millionth
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  • Conference Proceedings | August 2014
    This conference was organized as part of the Levy Institute’s international research agenda and in conjunction with the Ford Foundation Project on Financial Instability, which draws on Hyman Minsky’s extensive work on the structure of financial systems to ensure stability, and the role of government in achieving a growing and equitable economy.
      Among the key topics addressed: the challenges to global growth and employment posed by the continuing eurozone debt crisis; the impact of austerity on output and employment; the ramifications of the credit crunch for economic and financial markets; the larger implications of government deficits and debt crises for US and European economic policies; and central bank independence and financial reform. 

  • In the Media | June 2014
    By Dimitri B. Papadimitriou

    The Guardian, June 15, 2014

    The US Congressional Budget Office is projecting a continued economic recovery. So why look down the road – say, to 2017 – and worry?

    Here's why: because the debt held by American households is rising ominously. And unless our economic policies change, that debt balloon, powered by radical income inequality, is going to become the next bust....

    Read the full article here: www.theguardian.com/money/2014/jun/15/us-economy-bubble-debt-financial-crisis-corporations
     

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  • Working Paper No. 801 | May 2014
    Debt, Finance, and Distributive Politics under a Kalecki-Goodwin-Minsky SFC Framework

    This paper describes the political economy of shadow banking and how it relates to the dramatic institutional changes experienced by global capitalism over past 100 years. We suggest that the dynamics of shadow banking rest on the distributive tension between workers and firms. Politics wedge the operation of the shadow financial system as government policy internalizes, guides, and participates in dealings mediated by financial intermediaries. We propose a broad theoretical overview to formalize a stock-flow consistent (SFC) political economy model of shadow banking (stylized around the operation of money market mutual funds, or MMMFs). Preliminary simulations suggest that distributive dynamics indeed drive and provide a nest for the dynamics of shadow banking.

  • In the Media | October 2013
    Tim Mullaney
    USA Today, October 16, 2013. All Rights Reserved.

    Fitch Ratings took a step toward cutting the U.S. government's AAA debt rating Tuesday, as the clock ticked toward the Thursday deadline to raise the nation's debt ceiling or risk default.

    Chicago-based Fitch, the third-largest of the major debt-rating companies behind Standard & Poor's and Moody's Investors Service, put U.S. Treasury bonds on Rating Watch Negative, which is sometimes but not always a first step before a downgrade. Fitch said in a statement that it still thinks the debt ceiling will be raised in time to prevent a default.
      Fitch said the government would have only limited capacity to make payments on the $16.7 trillion national debt after Treasury Department's emergency measures run out Thursday.

    Some Republicans have advocated Treasury make debt service payments before paying day-to-day bills, but Fitch said that may not be legal or technologically possible. Even Treasury could do that, a failure to act would still leave the U.S. missing payments for Social Security and payments to government contractors, Fitch said.

    "All of (these) would damage the perception of U.S. sovereign creditworthiness and the economy,'' Fitch said in a statement. "The prolonged negotiations over raising the debt ceiling ... risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This `faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other AAA" bonds.

    Fitch said it could make a decision on whether to lower its AAA rating on U.S. debt by the end of the first quarter.

    "The announcement reflects the urgency with which Congress should act to remove the threat of default hanging over the economy," the Treasury Department said in response.

    One money manager quickly backed Fitch's action, which affects all U.S. bonds.

    "This action by Fitch is not about ability to pay,'' said Cumberland Advisors chief investment officer David Kotok. "It is about governance and our willingness to pay. In that category the United States has reached the brink of political failure.'' Economists have warned that there are two main ways failing to raise the debt ceiling could hurt the economy.

    One is by causing chaos in financial markets, forcing stock prices lower and freezing credit to many borrowers. The other is by forcing the government to cut spending by as much as $130 billion over as little as six weeks to avoid borrowing more, Moody's Analytics estimated last week.

    A study Tuesday by Bard College estimated that a rapid-fire balanced budget scenario would cause the U.S. economy to shrink by almost 3% in 2014 and the unemployment rate to surge to more than 9.5%.

    That is before accounting for the chance that a failure to raise the debt ceiling will push U.S. trading partners into recession, the Bard study says.

    "A recession in the United States would certainly exert a negative influence on growth in the rest of the world, which would in turn feed back to the States," Bard economist Michalis Nikiforos said.

    Moody's says it has no plans to change its Aaa rating on U.S. debt.

    Political brinksmanship was a key reason for S&P's downgrade of the U.S. to AA+ from AAA in 2011, the last time Washington flirted with refusing to raise the debt ceiling. The lack of an agreement on the debt limit this week would not necessarily trigger another S&P downgrade, spokesman John Piecuch said.

    "Passing (Oct.) 17th is not a specific trigger," Piecuch said.

    If the U.S. missed a debt payment, however, its rating would be lowered to selective default, he added.

    Contributing: John Waggoner, Adam Shell and David M. Jackson 
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  • Strategic Analysis | October 2013
    If the Congressional Budget Office’s recent projections of government revenues and outlays come to pass, the United States will not grow fast enough to bring down the unemployment rate between now and 2016. The public sector deficit will decline from present levels, endangering the sustainability of the recovery. But as this new Strategic Analysis shows, a public sector stimulus of a little over 1 percent of GDP per year focused on export-oriented R & D investment would increase US competitiveness through export-price effects, resulting in a rise of net exports, and slowly lower unemployment to less than 5 percent by 2016. The improvement in net export demand would allow the US economy to enter a period of aggregate-demand rehabilitation—with very encouraging consequences at home. 

  • 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.

  • In the Media | September 2013
    By Jonathan Schlefer

    The New York Times, September 10, 2013. All rights Reserved.

    Wynn Godley

    BOSTON — With the 2008 financial crisis and Great Recession still a raw and painful memory, many economists are asking themselves whether they need the kind of fundamental shift in thinking that occurred during and after the Depression of the 1930s. “We have entered a brave new world,” Olivier Blanchard, the International Monetary Fund’s chief economist, said at a conference in 2011. “The economic crisis has put into question many of our beliefs. We have to accept the intellectual challenge.”

    If the economics profession takes on the challenge of reworking the mainstream models that famously failed to predict the crisis, it might well turn to one of the few economists who saw it coming, Wynne Godley of the Levy Economics Institute. Mr. Godley, unfortunately, died at 83 in 2010, perhaps too soon to bask in the credit many feel he deserves.

    But his influence has begun to spread. Martin Wolf, the eminent columnist for The Financial Times, and Jan Hatzius, chief economist of global investment research at Goldman Sachs, borrow from his approach. Several groups of economists in North America and Europe — some supported by the Institute for New Economic Thinking established by the financier and philanthropist George Soros after the crisis — are building on his models.

    In a 2011 study, Dirk J. Bezemer, of Groningen University in the Netherlands, found a dozen experts who warned publicly about a broad economic threat, explained how debt would drive it, and specified a time frame.

    Most, like Nouriel Roubini of New York University, issued warnings in informal notes. But Mr. Godley “was the most scientific in the sense of having a formal model,” Dr. Bezemer said.

    It was far from a first for Mr. Godley. In January 2000, the Council of Economic Advisers for President Bill Clinton hailed a still “youthful-looking and vigorous” expansion. That March, Mr. Godley and L. Randall Wray of the University of Missouri-Kansas City derided it, declaring, “Goldilocks is doomed.” Within days, the Nasdaq stock market peaked, heralding the end of the dot-com bubble.

    Why does a model matter? It explicitly details an economist’s thinking, Dr. Bezemer says. Other economists can use it. They cannot so easily clone intuition.

    Mr. Godley was relatively obscure in the United States. He was better known in his native Britain — The Times of London called him “the most insightful macroeconomic forecaster of his generation” — though often as a renegade.

    Mainstream models assume that, as individuals maximize their self-interest, markets move the economy to equilibrium. Booms and busts come from outside forces, like erratic government spending or technological dynamism or stagnation. Banks are at best an afterthought.

    The Godley models, by contrast, see banks as central, promoting growth but also posing threats. Households and firms take out loans to build homes or invest in production. But their expectations can go awry, they wind up with excessive debt, and they cut back. Markets themselves drive booms and busts.

    Why did Mr. Godley, who had barely any formal economics training, insist on developing a model to inform his judgment? His extraordinary efforts to overcome a troubled childhood may be part of the explanation. Tiago Mata of Cambridge University called his life “a search for his true voice” in the face of “nagging fear that he might disappoint [his] responsibilities.”

    Mr. Godley once described his early years as shackled by an “artificial self” that kept him from recognizing his own spontaneous reactions to people and events. His parents separated bitterly. His mother was often away on artistic adventures, and when at home, she spent long hours coddling what she called “my pain” in bed.

    Raised by nannies and “a fierce maiden aunt who shook me violently when I cried,” Mr. Godley was sent at age 7 to a prep school he called a “chamber of horrors.”

    Despite all that, Mr. Godley, with his extraordinary talent, still managed to achieve worldly success. He graduated from Oxford with a first in philosophy, politics and economics in 1947, studied at the Paris Conservatory, and became principal oboist of the BBC Welsh Orchestra.

    But “nightmarish fears of letting everyone down,” he recalled, drove him to take a job as an economist at the Metal Box Company. Moving to the British Treasury in 1956, he rose to become head of short-term forecasting. He was appointed director of the Department of Applied Economics at Cambridge in 1970.

    In the early 1980s, the British Tory government, allied with increasingly conventional economists at Cambridge, began “sharpening its knives to stab Wynne,” according to Kumaraswamy Velupillai, a close friend who now teaches at the New School in New York. They killed the policy group he headed and, ultimately, the Department of Applied Economics.

    But after warning of a crash of the British pound in 1992 that took official forecasters by surprise, Mr. Godley was appointed to a panel of “six wise men” advising the Treasury.

    In 1995 he moved to the Levy Institute outside New York, joining Hyman Minsky, whose “financial instability hypothesis” won recognition during the 2008 crisis.

    Marc Lavoie of the University of Ottawa collaborated with Mr. Godley to write “Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth” in 2006, which turned out to be the most complete account he would publish of his modeling approach.

    In mainstream economic models, individuals are supposed to optimize the trade-off between consuming today versus saving for the future, among other things. To do so, they must live in a remarkably predictable world.

    Mr. Godley did not see how such optimization is conceivable. There are simply too many unknowns, he theorized.

    Instead, Mr. Godley built his economic model around the idea that sectors — households, production firms, banks, the government — largely follow rules of thumb.

    For example, firms add a standard profit markup to their costs for labor and other inputs. They try to maintain adequate inventories so they can satisfy demand without accumulating excessive overstock. If sales disappoint and inventories pile up, they correct by cutting back production and laying off workers.

    In mainstream models, the economy settles at an equilibrium where supply equals demand. To Mr. Godley, like some Keynesian economists, the economy is demand-driven and less stable than many traditional economists assume.

    Instead of supply and demand guiding the economy to equilibrium, adjustments can be abrupt. Borrowing “flows” build up as debt “stocks.”

    If rules of thumb suggest to households, firms, or the government that borrowing, debt or other things have gone out of whack, they may cut back. Or banks may cut lending. The high-flying economy falls down.

    Mr. Godley and his colleagues expressed just this concern in the mid-2000s. In April 2007, they plugged Congressional Budget Office projections of government spending and healthy growth into their model. For these to be borne out, the model said, household borrowing must reach 14 percent of G.D.P. by 2010.

    The authors declared this situation “wildly implausible.” More likely, borrowing would level off, bringing growth “almost to zero.” In repeated papers, they foresaw a looming recession but significantly underestimated its depth.

    For all Mr. Godley’s foresight, even economists who are doubtful about traditional economic thinking do not necessarily see the Godley-Lavoie models as providing all the answers. Charles Goodhart of the London School of Economics called them a “gallant failure” in a review. He applauded their realism, especially the way they allowed sectors to make mistakes and correct, rather than assuming that individuals foresee the future. But they are still, he wrote, “insufficient” in crises.

    Gennaro Zezza of the University of Cassino in Italy, who collaborated with Mr. Godley on a model of the American economy, concedes that he and his colleagues still need to develop better ways of describing how a financial crisis will spread. But he said the Godley-Lavoie approach already is useful to identify unsustainable processes that precede a crisis.

    “If everyone had remained optimistic in 2007, the process could have continued for another one or two or three years,” he said. “But eventually it would have broken down. And in a much more violent way, because debt would have piled up even more.”

    Dr. Lavoie says that one of the models he helped develop does make a start at tracing the course of a crisis. It allows for companies to default on loans, eroding banks’ profits and causing them to raise interest rates: “At the very least, we were looking in the right direction.”

    This is just the direction that economists building on Mr. Godley’s models are now exploring, incorporating “agents” — distinct types of households, firms and banks, not unlike creatures in a video game — that respond flexibly to economic circumstances. Stephen Kinsella of the University of Limerick, the Nobel laureate economist Joseph Stiglitz and Mauro Gallegati of Polytechnic University of Marche in Italy are collaborating on one such effort.

    In the meantime, Mr. Godley’s disciples say his record of forecasting still stands out. In 2007 Mr. Godley and Dr. Lavoie published a prescient model of euro zone finances, envisioning three outcomes: soaring interest rates in Southern Europe, huge European Central Bank loans to the region or brutal fiscal cuts. In effect, the euro zone has cycled among those outcomes.

    So what do the Godley models predict now? A recent Levy Institute analysis expresses concern not about serious financial imbalances, at least in the United States, but weak global demand. “The main difficulty,” they wrote, “has been in convincing economic leaders of the nature of the main problem: insufficient aggregate demand.” So far, they are not having much success.

    A version of this article appears in print on September 11, 2013, on page B1 of the New York edition with the headline: Embracing Economist Who Modeled the Crisis.

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  • Working Paper No. 772 | August 2013
    A Critical Assessment of Fiscal Fine-Tuning

    The present paper offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the New Consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment but also contributes to the increasing postwar labor market precariousness and the erosion of income equality. The two conventional demand-side measures are then contrasted with the proposed alternative—a bottom-up approach to fiscal policy based on a reinterpretation of Keynes’s original policy prescriptions for full employment. The paper offers a theoretical, methodological, and policy rationale for government intervention that includes specific direct-employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.

  • A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation   The 2013 Minsky Conference addressed both financial reform and poverty in the context of Minsky’s work on financial instability and his proposal for a public job guarantee. Panels focused on the design of a new, more robust, and stable financial architecture; fiscal austerity and the sustainability of the US economic recovery; central bank independence and financial reform; the larger implications of the eurozone debt crisis for the global economic system; improving governance of the social safety net; the institutional shape of the future financial system; strategies for promoting poverty eradication and an inclusive economy; sustainable development and market transformation; time poverty and the gender pay gap; and policy and regulatory challenges for emerging-market economies. The proceedings include the conference program, transcripts of keynote speakers’ remarks, synopses of the panel sessions, and biographies of the participants. 
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  • In the Media | April 2013
    By Gareth Hutchens
    The Age (Melbourne), April 21, 2013. All Rights Reserved.

    If we needed more evidence that economics is not a science, we have it now.

    A shock wave hit the economics world this week when two of its most famous practitioners—Kenneth Rogoff and Carmen Reinhart—were found to have produced some very dodgy data to support their claims about the consequences of high government debt.

    It comes back to a research paper of theirs, Growth in a Time of Debt widely quoted since it was published in 2010. The paper shows that if government debt becomes too high—say, around 90 per cent of gross domestic product—then economic growth will almost always suffer. Global policymakers have taken it to mean that if countries with too-high debt levels want to kick-start flagging economies then they ought to begin the resuscitation process by reducing debt levels first.

    It has been repackaged into a simple message: Reduce your debt and economic growth will begin to pick up. But the corollary is that highly indebted governments should not try to spend their way out of economic stagnation because spending more will only make things worse. It has helped to provide the intellectual justification that the proponents of austerity wanted; thus the wave of austerity policies washing around the world since 2010. Millions of people have suffered because of it.

    But the intellectual edifice for the global austerity movement was severely weakened this week after it emerged that professors Reinhart and Rogoff had made some basic errors in their interpretation of data that supported their research. The errors were discovered by Thomas Herndon, a student at the University of Massachusetts Amherst's doctoral program in economics. He published a paper this week explaining what he found, with help from two of his teachers, Michael Ash and Robert Pollin.

    The paper shows Reinhart and Rogoff had omitted data, made a mistake in their Excel spreadsheet, and used a bizarre statistical methodology, all of which skewed results. It set the academic world ablaze.

    As Nobel laureate Paul Krugman wrote: "In this age of information, maths errors can lead to disaster. NASA's Mars Orbiter crashed because engineers forgot to convert to metric measurements; JPMorgan Chase's "London Whale" venture went bad because modellers divided a sum instead of an average. So, did an Excel coding error destroy the economies of the Western world?"

    Reinhart and Rogoff have acknowledged they made a spreadsheet error, but they also say it didn't affect their result much.

    "It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," they said. "We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."

    But in the brouhaha that followed, a few people have been asking why it took so long for Reinhart and Rogoff's research to be tested.

    Imagine you've handed your assignment in at school. You make some wonderful claims in it about the way the world works. Your research—based on an analysis of data of 44 countries spanning 200 years—has led you to discover that high government debt to GDP ratios above a "90 per cent threshold" almost always lead to a slowdown in economic growth. It's a law that seems to hold no matter what you throw at it. You can compare different countries in disparate regions, and once you try to take account of the fact that a country's political and financial systems evolve over time you can mix and match these things across centuries of data and the law stays the same.

    It's a striking thesis. And luckily for you, you're not expected to hand your data in with your assignment so your work can be checked. Your teacher takes your word for it. That's not how the scientific method is supposed to work. Some economists, such as L. Randall Wray of the Levy institute, say they have written to Reinhart and Rogoff in the past to ask for data, but have been rebuffed. "They ignored our request. I have heard from several other researchers that Reinhart and Rogoff also ignored their repeated requests for the data," Professor Wray wrote this week.

    It is sobering to be reminded that economic analyses, produced in this way, can have such influence in the real world. It's worth remembering next time we hear some politician referring to "economic modelling" that supports his or her claim.
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  • In the Media | April 2013
    By Robert Lenzner
    Forbes, April 20, 2013. All Rights Reserved.

    The President of the Federal Reserve Bank of Boston, Erick Rosengren, suggested this week that there could still be runs on money market mutual funds, as took place at the peak of the 2008 financial crisis, since these funds have “no capital” and invest in uninsured short term securities of banks and other financial service firms. While debate over potential regulatory solutions for money market funds continues on, the Boston Fed chief, emphasized that the safety of the money market mutual funds are a “significant unresolved issue.”

    As of April 13 there was $903.56 billion in retail money market funds sponsored by Fidelity, T. Rowe Price, Dreyfus, Invesco and others, The total amount of all kinds of money market funds, some owned by institutional investors, was $2.6 trillion. The average weekly yield was a record low of only 0.02%.

    He also singled out the issue of capital for the broker-dealer fraternity, where he raised the problem of “virtually no change for broker-dealers since the collapse of Lehman Brothers in September, 2008 and the shotgun marriage of Merrill Lynch into BankAmerica. The solution Rosengren recommended was that the “larger(these investment firms) get the higher the capital ratio”: should be imposed on them. The Boston Fed chief executive, speaking at Bard College’s Levy Institute conference on the economy and financial markets, seemed to be suggesting that the cause for this vacuum in policy is that “Regulatory bodies haven’t evolved as much as the financial markets.” In other words, 5 years after the 2008 meltdown we still have a major challenge in trying to make the global financial system secure against runs and speculative bubbles. There is still further to go in the structural reorganization of the danger from derivatives, but he believes clearing derivatives contracts on exchanges and the decline in bilateral transactions has reduced an element of risk.

    Nevertheless, Rosengren made crystal clear in conversation after his talk that he “sees no bubbles anywhere, not even in real estate where prices are still below their 2006 peak.” He believes prices of residential real estate in Boston and New York are still 15-20% under their peak—and prices in Miami, Phoenix, Las Vegas, California– are still priced at a steeper discount to the peak in 2006.

    As for the economy in general, Rosengren sees “traction” picking up momentum, in which case he would support the “prudent” position of gradually reducing the QE stimulus program. However, he is troubled by the fact that monetary policy(quantitative easing and record low interest rates) are in conflict with fiscal policy, the restraint of sequester and reduction of federal, state and local government spending, ie “the Obama cuts.”
  • In the Media | April 2013
    By Robert Lenzner
    Forbes, April 19, 2013. All Rights Reserved.

    The growing disparity in wealth made the great recession worse and the recovery weaker than ever before. This nation’s wealth disparity widened more than ever before over the last five years because of the steep decline in the value of residential homes and stagnant wages for the lower and middle income groups in the U.S., explained a member of the Federal Reserve Board, Sarah Bloom Raskin, in a speech that explored for the first time a fresh explanation about the obstacles holding back economic growth.

    This “financial vulnerability and marginal ability” to recover from the decline in the wealth of lower income and middle income Americans is “undermining our country’s strength,” Governor Raskin emphasized in New York yesterday at an economic conference sponsored by the Levy Institute at Bard College and the Ford Foundation. Raskin admitted to a feeling of frustration at the central bank about the inability of the Fed’s low interest rate policy together with the expansion in the money supply to alleviate this growing disparity between the wealthy and the rest of American families. She admitted there was current exploration at the Board level of the central bank that “our macro models should be adjusted,” because four years into the recovery a confluence of factors have contributed to a weak recovery.

    “Inequality contributed to the severity of the recession,” Raskin said flatly, and blamed this inequality- for the “differential expectations” in the future between well-off families– with those families not so well off, who were battered by a plunge in the value of their homes, a high level of debt and a continuance of lower wages. I had never heard that theme so sharply expressed as the blame for the mediocre rate of growth we are experiencing.

    Here are the Fed’s latest breakdown on the disparity in wealth. The top 20% of the population own 72% of the nation’s wealth in large part due to their vast holdings in the common shares of publicly held companies. By comparison, the poorest 20% of the U.S. population only own 3% of the wealth, and so were unable to shelter themselves when their homes declined in value, often below the face value of their mortgage and their take-home pay was not growing– or they lost their jobs.

    The distribution of wealth inequality is far worse than the disparity in incomes. Nonetheless, the Fed Governor suggested it does explain the lower levels of consumer spending. As to income disparity between 1979 and 2007, the Federal Reserve figures shows the highest income cohort doubled their annual compensation when adjusted for inflation. The top 1% of earners in the nation saw their share of the national income rise from 10% to 20%. Meanwhile the bottom 40% of the nation’s workers saw their share of the national income decline slightly from 13% to 10%.

    The middle class average income rose in those 30 years to 2007 by only 20% or less than 1% a year, underscoring just how much middle income Americans have fallen behind their wealthier brethren. Fed Governor Raskin called this performance “sluggishness.”

    One hopeful sign is the gradual increase in prices for residential homes throughout the United States. This trend has restored some semblance of household wealth for homeowners from low income and middle income sectors of the population. Another 10% increase in home values, Gov. Raskin suggested, would allow many more low income families to stay in their homes.

    More worrisome, however, is the trend for more and more jobs to be only part-time with less pay and less benefits. “We have lost 9 million jobs,” she said and the growing trend for new jobs to be part-time employment or involving contingent work is “no way to upward mobility” in America.
  • 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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  • In the Media | April 2013
    By Dimitri B. Papadimitriou
    Los Angeles Times, April 5, 2013. All Rights Reserved.

    The government can and should increase the deficit to return us to prosperity. Without such outlays we can’t get enough GDP growth to seriously attack unemployment.

    Just before the congressional spring break, a Senate budget proposal to decrease, but not eliminate, the deficit over 10 years was denounced as “pro debt” by an Alabama senator. It was the kind of proud and loud anti-deficit rhetoric that, no matter how nonsensical, plays nicely into Washington group-think on the subject.

    The deficit has arguably gained the distinction of being the single most widely misunderstood public policy issue in America. Just 6% (6!) of respondents in a recent poll correctly stated that it had been shrinking, which has in fact been the case for several years, while 10 times more, 62%, wrongly believed that it’s been getting bigger.

    Despite prevailing notions in the capital and throughout the nation, those of us at the Levy Economics Institute—along with many other analysts and economists—have concluded that the deficit should be increased.

    Why add to the deficit right now? Jobs. Our economic models clearly show that without increased government outlays we’ll be unable to generate enough GDP growth to seriously attack unemployment. If we tried to balance the budget through tax hikes, our still-recovering economy would be hurt. That leaves a temporarily bigger deficit as an important option.

    A mutation in the link between growth and jobs makes the issue urgent. While we are seeing some economic growth, the unemployment rate is not responding as strongly to the gains as it did in the past.

    This slow job growth—today’s “jobless recovery”—isn’t an outlier. It’s a phenomenon that has been increasing over the last three decades, with jobs coming back more and more slowly after a downturn, even when GDP is increasing. The weak employment response has been an almost straight-line trend for more than 30 years.

    Our institute’s newest econometric models show that each 1% boost in the GDP today will create, roughly, only a third as much improvement to the unemployment rate as the same 1% rise did in the late 1970s.

    Traditionally, we’ve assumed that GDP growth would be followed by an employment surge. The break in that link is now very clear. It’s especially worrisome this year, with only a small GDP rise universally anticipated.

    The Federal Reserve, for one, just reduced its growth outlook to 2.8% at most for 2013. The shallow recovery we’re seeing may indeed continue through 2014 and beyond. Since employment now consistently lags well behind GDP, we’ll have a long slog before we reach pre-crisis unemployment levels (below 4.6%). Some Federal Reserve officials believe it might take three years just to get from today’s 7.7% down to 6.5%. Full employment would still be nowhere in sight.

    The quantitative data are telling us that without a stimulus, we can’t expect a strong employment lift. But instead of stimulus, we’re devising federal budgets that cut spending and lay off workers. The sequester is expected to depress GDP growth by perhaps half a percentage point—when we know that more growth than ever will be needed to raise employment—and cost anywhere from 700,000 to more than 1 million jobs.

    Slower government spending is one reason that post-recession growth has been below par compared with other recoveries, Fed Vice Chair Janet Yellen has argued. As government outlays and employment have shrunk, the contribution of public funds to national growth has also fallen. By our estimates, that contribution now stands at about zero. That’s another data point indicating that federal deficits need to be increased.

    To better understand the changing relationship between growth and jobs, the Levy Institute recently looked at three scenarios through 2016: what the results might be of a small, medium or large stimulus. A strong stimulus was clearly the most effective option, since it had a powerful, positive influence on employment growth and, in the long term, on deficit reduction. Of course, that route is completely unfeasible in the current political climate. But we saw that even a small amount of deficit spending could help put the recovery on track if it were combined with a mix of private investment, increased exports and good policy alternatives.

    That points toward a way forward. Increasing the deficit while our economy is fragile is not “pro deficit,” any more than a family with a 30-year home mortgage is “pro debt.” To reclaim a phrase that deficit hawks have tried to make their own, it is “sensible and serious.” The federal government can run a deficit, as it almost always has, to help the nation return to prosperity.

    With our new understanding of the fraying tie between GDP growth and jobs, we know that millions of Americans are on course for an agonizingly slow march out of joblessness unless we make a move. The nature of slumps and recoveries has changed, and the policies to manage them need to change too.

    Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and executive vice president of Bard.
  • Strategic Analysis | March 2013

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

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

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

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

  • In the Media | December 2012
    By Mitja Stefancic
    The University of Ljubljana Faculty of Economics provides an overview of the Institute's Minsky Conference on Financial Instability here.
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  • In the Media | November 2012
    Por Andrea Hopkins y Sarah Marsh, Reuters

    El Periòdico de México, 28 de Noviembre de 2012. Copyright © 2006 El Periòdico de México. Todos los derechos reservados.

    TORONTO / BERLIN — Las profundas divisiones de la Reserva Federal quedaron expuestas el martes, apenas dos semanas antes de la siguiente reunión de política monetaria del banco central de Estados Unidos, con un funcionario de la Fed impulsando un mayor alivio y otro defendiendo la fijación de límites.

    La brecha pone de relieve los obstáculos que enfrenta el presidente de la Fed, Ben Bernanke, en su intento de alcanzar un consenso entre sus compañeros sobre los esfuerzos políticos a veces polémicos del banco central por reducir la elevada tasa de desempleo del país, que registró un 7,9 por ciento el mes pasado.

    Charles Evans, presidente de la Reserva Federal de Chicago y uno de los moderados de la Fed, dijo que las tasas de interés deberían permanecer cerca de cero hasta que la tasa de desempleo caiga a menos del 6,5 por ciento. Tal política acarrearía "sólo riesgos mínimos de inflación", y podría impulsar el crecimiento más rápido que en otro caso, dijo.

    Evans, que pasará a ocupar en enero un asiento con derecho a voto en el panel de fijación de política de la Fed, también dijo que la Fed debería intensificar su programa de alivio cuantitativo en el nuevo año para mantener su nivel global de compras de activos en 85.000 millones de dólares al mes por la mayor parte, si no todo, el 2013.

    Pero el presidente de la Fed de Dallas, Richard Fisher, un duro que se inclina por el rigor fiscal, dijo que el banco central de Estados Unidos podría meterse en problemas si no se establece un límite a la cantidad de activos que está dispuesto a comprar.

    "No se puede expandir de manera ilimitada sin consecuencias terribles", dijo a periodistas en el marco de la conferencia organizada por el Levy Economics Institute de Berlín. "No hay un infinito en la política monetaria, sabemos eso a partir de la experiencia alemana", agregó.

    En septiembre, la Fed lanzó un abierto programa de compra de activos, partiendo con 40.000 millones de dólares en valores respaldados por hipotecas y prometiendo continuar o reforzar el programa a menos que las perspectivas del mercado laboral mejoren sustancialmente.

    Esas compras se suman a los 45.000 millones de dólares en bonos del Tesoro a largo plazo que la Fed está comprando cada mes bajo la Operación Twist, compras que se financian con la venta de una cantidad igual de bonos del Tesoro a corto plazo.

    "Es importante mantener el nivel general de compra de activos en 85.000 millones de dólares, al menos por un tiempo hasta que podamos ver si lo estamos haciendo mejor o no, o si las cosas van más lento, podemos ajustarlo, dependiendo de esa evaluación", dijo a los periodistas que asistían a una conferencia en el Instituto CD Howe en Toronto.

    "Creo que debemos tener una discusión sobre qué es una 'mejoría sustancial'. ¿lo hemos visto? En mi opinión, no lo hemos hecho", agregó.

    Evans dijo que juzgaría que el mercado laboral ha mejorado sustancialmente una vez que vea ganancias mensuales de al menos 200.000 puestos de trabajo durante unos seis meses, así como sobre una tendencia de crecimiento del Producto Interno Bruto que conduzca a la disminución del desempleo.

    "Estaría muy sorprendido si pudiéramos alcanzar eso antes de que hayan pasado seis meses, y no me sorprendería si tarda hasta fines del 2013", declaró.

    Evans dijo que la Fed debería mantener las tasas bajas mucho más allá de esa fecha, hasta que la tasa de desempleo llegue al 6,5 por ciento, siempre y cuando las perspectivas de inflación para los próximos dos o tres años se mantengan por debajo del 2,5 por ciento. El objetivo de inflación de la Fed es del 2 por ciento.

    Evans durante el último año había pedido tasas bajas hasta que la tasa de desempleo caiga al 7 por ciento, mientras la inflación no amenace con superar la barrera del 3 por ciento.

    El martes Evans dijo que ahora considera que un umbral de desempleo de un 7 por ciento es "demasiado conservador". El también dijo que ahora cree que una garantía de que la inflación no supere el 2,5 por ciento es apropiada, dado que un umbral mayor "pone a muchas personas ansiosas", y no es necesario para que la política funcione.

    "Es mucho más probable que alcancemos el umbral de un 6,5 por ciento de desempleo antes de que la inflación comience incluso a acercarse a un número modesto como un 2,5 por ciento", afirmó.

    La Fed han estado aumentando las discusiones sobre los llamados umbrales -puntos específicos de datos económicos como el desempleo y las tasas de inflación- que indicarían cuándo el banco central probablemente comenzará a subir las tasas de interés desde casi cero.

    El presidente de la Fed de Minneapolis, Narayana Kocherlakota, el presidente de la Fed de Boston, Eric Rosengren, y la influyente vicepresidenta de la Fed, Janet Yellen, han expresado apoyo a la idea.

    En Berlín, Fisher también intervino en el debate.

    "Una opción que creo que podríamos seguir es tener una definición de nuestro objetivo de desempleo, así como nuestro objetivo a largo plazo la inflación", dijo, haciendo notar que esto sería difícil, y que el establecimiento de un límite global de compras de activos era preferible.

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  • In the Media | November 2012
    Pide Fisher de Fed fijar límites a la compra de activos
    El Financiero, November 28, 2012. © 2012 Copyright Grupo Multimedia Lauman, SAPI de CV.

    El presidente de la Reserva de Dallas, Richard Fisher, subrayó que no estaba preocupado por la inflación en Estados Unidos, sino por el desempleo, al tiempo que el Banco Central debería considerar fijar un límite para el total de activos que está dispuesto a comprar.

    "Las tasas de interés son las más bajas en la historia de Estados Unidos, la pregunta es qué va a estimular a las empresas y poner a nuestra gente de vuelta en el trabajo", dijo Fisher, un crítico de la política de alivio de la Fed, en declaraciones en una conferencia organizada por el Levy Economics Institute de Berlín.

    "Es momento de que aclaremos cuáles son nuestros objetivos y nuestros límites", subrayó Fisher, un crítico de la política expansiva de la Fed, quien se describe a sí mismo como ortodoxo frente a la inflación.

    "Una opción es tener una definición de nuestra meta del empleo, además de nuestra meta de inflación de largo plazo. Será difícil de hacer, pero es una opción", resaltó.

    La segunda opción sería anunciar "más pronto que tarde" cuánto está dispuesta a comprar la Fed.

    El Banco Central estadunidense anunció una tercera ronda de compras de activos en septiembre, de final abierto, que según dice continuará hasta que haya una mejora sustancial en el mercado laboral.

    A la espera de la Fed

    En Estados Unidos se conocerá el informe económico conocido como Beige Book, esperando encontrar pistas sobre los próximos pasos a seguir por parte de la Reserva Federal y de su percepción en torno al problema fiscal.
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  • In the Media | November 2012
    Por Andrea Hopkins y Sarah Marsh

    TORONTO / BERLIN (Reuters) — Las profundas divisiones de la Reserva Federal quedaron expuestas el martes, apenas dos semanas antes de la siguiente reunión de política monetaria del banco central de Estados Unidos, con un funcionario de la Fed impulsando un mayor alivio y otro defendiendo la fijación de límites.

    La brecha pone de relieve los obstáculos que enfrenta el presidente de la Fed, Ben Bernanke, en su intento de alcanzar un consenso entre sus compañeros sobre los esfuerzos políticos a veces polémicos del banco central por reducir la elevada tasa de desempleo del país, que registró un 7,9 por ciento el mes pasado.

    Charles Evans, presidente de la Reserva Federal de Chicago y uno de los moderados de la Fed, dijo que las tasas de interés deberían permanecer cerca de cero hasta que la tasa de desempleo caiga a menos del 6,5 por ciento. Tal política acarrearía "sólo riesgos mínimos de inflación", y podría impulsar el crecimiento más rápido que en otro caso, dijo.

    Evans, que pasará a ocupar en enero un asiento con derecho a voto en el panel de fijación de política de la Fed, también dijo que la Fed debería intensificar su programa de alivio cuantitativo en el nuevo año para mantener su nivel global de compras de activos en 85.000 millones de dólares al mes por la mayor parte, si no todo, el 2013.

    Pero el presidente de la Fed de Dallas, Richard Fisher, un duro que se inclina por el rigor fiscal, dijo que el banco central de Estados Unidos podría meterse en problemas si no se establece un límite a la cantidad de activos que está dispuesto a comprar.

    "No se puede expandir de manera ilimitada sin consecuencias terribles", dijo a periodistas en el marco de la conferencia organizada por el Levy Economics Institute de Berlín. "No hay un infinito en la política monetaria, sabemos eso a partir de la experiencia alemana", agregó.

    En septiembre, la Fed lanzó un abierto programa de compra de activos, partiendo con 40.000 millones de dólares en valores respaldados por hipotecas y prometiendo continuar o reforzar el programa a menos que las perspectivas del mercado laboral mejoren sustancialmente.

    Esas compras se suman a los 45.000 millones de dólares en bonos del Tesoro a largo plazo que la Fed está comprando cada mes bajo la Operación Twist, compras que se financian con la venta de una cantidad igual de bonos del Tesoro a corto plazo.

    "Es importante mantener el nivel general de compra de activos en 85.000 millones de dólares, al menos por un tiempo hasta que podamos ver si lo estamos haciendo mejor o no, o si las cosas van más lento, podemos ajustarlo, dependiendo de esa evaluación", dijo a los periodistas que asistían a una conferencia en el Instituto CD Howe en Toronto.

    "Creo que debemos tener una discusión sobre qué es una 'mejoría sustancial'. ¿lo hemos visto? En mi opinión, no lo hemos hecho", agregó.

    Evans dijo que juzgaría que el mercado laboral ha mejorado sustancialmente una vez que vea ganancias mensuales de al menos 200.000 puestos de trabajo durante unos seis meses, así como sobre una tendencia de crecimiento del Producto Interno Bruto que conduzca a la disminución del desempleo.

    "Estaría muy sorprendido si pudiéramos alcanzar eso antes de que hayan pasado seis meses, y no me sorprendería si tarda hasta fines del 2013", declaró.

    Evans dijo que la Fed debería mantener las tasas bajas mucho más allá de esa fecha, hasta que la tasa de desempleo llegue al 6,5 por ciento, siempre y cuando las perspectivas de inflación para los próximos dos o tres años se mantengan por debajo del 2,5 por ciento. El objetivo de inflación de la Fed es del 2 por ciento. Evans durante el último año había pedido tasas bajas hasta que la tasa de desempleo caiga al 7 por ciento, mientras la inflación no amenace con superar la barrera del 3 por ciento.

    El martes Evans dijo que ahora considera que un umbral de desempleo de un 7 por ciento es "demasiado conservador". El también dijo que ahora cree que una garantía de que la inflación no supere el 2,5 por ciento es apropiada, dado que un umbral mayor "pone a muchas personas ansiosas", y no es necesario para que la política funcione.

    "Es mucho más probable que alcancemos el umbral de un 6,5 por ciento de desempleo antes de que la inflación comience incluso a acercarse a un número modesto como un 2,5 por ciento", afirmó.

    La Fed han estado aumentando las discusiones sobre los llamados umbrales -puntos específicos de datos económicos como el desempleo y las tasas de inflación- que indicarían cuándo el banco central probablemente comenzará a subir las tasas de interés desde casi cero.

    El presidente de la Fed de Minneapolis, Narayana Kocherlakota, el presidente de la Fed de Boston, Eric Rosengren, y la influyente vicepresidenta de la Fed, Janet Yellen, han expresado apoyo a la idea.

    En Berlín, Fisher también intervino en el debate.

    "Una opción que creo que podríamos seguir es tener una definición de nuestro objetivo de desempleo, así como nuestro objetivo a largo plazo la inflación", dijo, haciendo notar que esto sería difícil, y que el establecimiento de un límite global de compras de activos era preferible.

    (Reporte de Sarah Marsh y Reinhard Becker en Berlín, Andrea Hopkins y Jeffrey Hodgson en Toronto; Escrito por Ann Saphir. Editado en español por Carlos Aliaga)
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  • In the Media | November 2012
    The China Post, November 29, 2012. Copyright © 1999–2012 The China Post.

    TORONTO/BERLIN—Deep divisions at the Federal Reserve were on display on Tuesday, just two weeks before the U.S. central bank's next policy-setting meeting, with one top Fed official pushing for more easing, and another advocating limits. The divide underscores the hurdles Fed Chairman Ben Bernanke faces as he tries to win consensus among his fellow policymakers on the central bank's sometimes controversial efforts to bring down the nation's lofty unemployment rate, which registered 7.9 percent last month.

    Charles Evans, president of the Chicago Federal Reserve Bank and one of the Fed's most outspoken doves, said interest rates should stay near zero until the jobless rate falls to at least 6.5 percent. Such a policy would carry “only minimal inflation risks,” and could boost growth faster than otherwise, he said. Evans, who rotates into a voting seat on the Fed's policy-setting panel in January, also said the Fed should step up its program of quantitative easing in the new year to keep its overall level of asset purchases at US$85 billion a month for most, if not all, of 2013.

    But Dallas Fed President Richard Fisher, a self-identified inflation hawk, said the U.S. central bank could get into trouble if it does not set a limit on the amount of assets it is willing to buy.

    “You cannot expand without limits without horrific consequences,” he told reporters on the sidelines of the conference organized by the Levy Economics Institute in Berlin. “There is no infinity in monetary policy, we know that from the German experience.”

    In September the Fed launched an open-ended asset-purchase program, kicking it off with a monthly US$40 billion in mortgage-backed securities and promising to continue or ramp up the program unless the outlook for the labor market improves substantially.

    Those purchases come on top of the US$45 billion in long-term Treasurys the Fed is buying each month under Operation Twist, purchases that are funded with sales of a like amount of short-term Treasuries.

    “It's important to maintain the overall level of asset purchases at US$85 billion, at least for a time until we can see whether or not we are doing better or things are going more slowly, and we can adjust, depending on that assessment,” Evans told reporters attending a speech at the C.D. Howe Institute in Toronto.

    “I think we have to have discussion about what is 'substantial improvement.' Have we seen it? In my opinion, we have not,” he said.

    Evans said he would judge the labor market as substantially improved once he sees monthly job gains of a least 200,000 for about six months, as well as above-trend growth in gross domestic product that would lead to declines in unemployment.

    “I would be very surprised if we could achieve that before six months have passed, and I would not be surprised if it takes until the end of 2013,” he said.
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  • In the Media | November 2012
    By Phil Bolton
    Global Atlanta, November 27, 2012. All content © 1993- GlobalAtlanta.com, All Rights Reserved.

    The president and CEO of the Federal Reserve Bank of Atlanta, Dennis Lockhart, spoke at an economic conference in Berlin Nov 27 about the potential harm that cyber attacks on U.S. banks could do to the global payments system.
      Mr. Lockhart called the attacks “a real financial concern” that the Atlanta Fed is studying. He cited attacks in recent months on U.S. banks that flooded bank web servers with junk data, allowing the hackers to target certain web applications and disrupt online services.
      “The increasing incidence and heightened magnitude of attacks suggests to me the need to update our thinking,” he told attendees at the Hyman P. Minsky Conference organized by the Levy Economic Institute of Bard College. Dr. Minsky was an American economist who researched the characteristics of financial crises.
      The two-day conference is being supported by the Ford Foundation, the German Marshall Fund of the United States and Deutsche Bank AG to address challenged to global growth affected by the eurozone debt crisis; the impact of the credit crunch on economic and financial markets; the larger implications of government deficits and the debt crisis for U.S., European and Asian economic policy and central bank independence and financial reform.
      Mr. Lockhart is one of many speakers including Philip D. Murphy, the U.S. ambassador to Germany; Klaus Gunter Deutsch, director of Deutsche Bank Research; and Peter Praet, chief economist and executive board member of the European Central Bank.
    Mr. Lockhart qualified his concerns saying that he didn’t think cyber attacks on payment systems was as critical as fiscal crises or bank runs. But he suggested that resilience measures of the sort banks have to maintain operations in a natural disaster such as multiple back-up sites and redundant computer systems would be appropriate.
      Mr. Lockhart also said that the Atlanta Fed is investigating the current state of public pensions as a possible source of financial instability and called it “the other debt problem” that the U.S. faces.
      If public funds can attain an 8 percent average annual return on their portfolios, he said that public state and municipal pension funds in the U.S would still have an $800 billion funding gap to fill.
      Using more realistic return assumptions, such as the longer-term rate on U.S. Treasuries, the gap could reach as high as $3 trillion to $4 trillion, he added.
    He cited three strategies fund managers can apply: increase contributions, decrease promised future benefit or assume more investment risk.
      “As a financial stability consideration, the problem of pension underfunding is not likely to be the source of any immediate shock or trigger a broader systemic crisis,” he said.
      “However, the situation needs to be monitored, as public finance does contribute to financial and economic stability more broadly.”
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  • In the Media | November 2012
    By Andrea Hopkins and Sarah Marsh
    Yahoo! News, November 27, 2012. (c) Copyright Thomson Reuters 2012.

    TORONTO/BERLIN Nov 27 (Reuters) — Deep divisions at the Federal Reserve were on display on Tuesday, just two weeks before the U.S. central bank's next policy-setting meeting, with one top Fed official pushing for more easing, and another advocating limits.

    The divide underscores the hurdles Fed Chairman Ben Bernanke faces as he tries to win consensus among his fellow policymakers on the central bank's sometimes controversial efforts to bring down the nation's lofty unemployment rate, which registered 7.9 percent last month.

    Charles Evans, president of the Chicago Federal Reserve Bank and one of the Fed's most outspoken doves, said interest rates should stay near zero until the jobless rate falls to at least 6.5 percent. Such a policy would carry "only minimal inflation risks," and could boost growth faster than otherwise, he said.

    Evans, who rotates into a voting seat on the Fed's policy-setting panel in January, also said the Fed should step up its program of quantitative easing in the new year to keep its overall level of asset purchases at $85 billion a month for most, if not all, of 2013.

    But Dallas Fed President Richard Fisher, a self-identified inflation hawk, said the U.S. central bank could get into trouble if it does not set a limit on the amount of assets it is willing to buy.

    "You cannot expand without limits without horrific consequences," he told reporters on the sidelines of the conference organized by the Levy Economics Institute in Berlin. "There is no infinity in monetary policy, we know that from the German experience."

    In September the Fed launched an open-ended asset-purchase program, kicking it off with a monthly $40 billion in mortgage-backed securities and promising to continue or ramp up the program unless the outlook for the labor market improves substantially.

    Those purchases come on top of the $45 billion in long-term Treasuries the Fed is buying each month under Operation Twist, purchases that are funded with sales of a like amount of short-term Treasuries.

    "It's important to maintain the overall level of asset purchases at $85 billion, at least for a time until we can see whether or not we are doing better or things are going more slowly, and we can adjust, depending on that assessment," Evans told reporters attending a speech at the C.D. Howe Institute in Toronto.

    "I think we have to have discussion about what is 'substantial improvement.' Have we seen it? In my opinion, we have not," he said.

    Evans said he would judge the labor market as substantially improved once he sees monthly job gains of a least 200,000 for about six months, as well as above-trend growth in gross domestic product that would lead to declines in unemployment.

    "I would be very surprised if we could achieve that before six months have passed, and I would not be surprised if it takes until the end of 2013," he said.

    Evans said the Fed should keep rates low well beyond that date, until the jobless rate hits at least 6.5 percent, as long as the inflation outlook for the next two to three years remains below 2.5 percent. The Fed's inflation target is 2 percent.

    Evans for the past year had called for low rates until the jobless rate falls to 7 percent, as long as inflation does not threaten to breach 3 percent.

    On Tuesday Evans said he now views a 7 percent unemployment threshold as "too conservative," and sees a 2.5 percent inflation safeguard as appropriate, given that a higher threshold makes some people "apoplectic" and is not needed in order for the policy to work.

    "We're much more likely to reach the 6.5 percent unemployment threshold before inflation begins to approach even a modest number like 2.5 percent," he said.

    Fed policymakers have been ramping up discussions on so-called thresholds—economic data points such as specific unemployment and inflation rates - that would signal when the central bank is likely to begin raising benchmark interest rates from near zero.

    Minneapolis Fed President Narayana Kocherlakota, Boston Fed President Eric Rosengren and the Fed's influential vice chair, Janet Yellen, have all expressed support for the idea.

    In Berlin, Fisher also chimed into the debate. "One option I believe we might pursue is to have a definition of our unemployment target as well as our long-term inflation target," he said, noting it would be difficult, however, and setting an overall limit on asset purchases was preferable.

    Fed Chairman Bernanke said last week that adopting numerical thresholds for unemployment and inflation could be a "very promising" step to develop the Fed's communication strategy, but stressed that it was still under discussion.

    On at least one issue, Fisher and Evans agreed: lack of jobs, not high inflation, is the biggest problem for the U.S. economy.

    "I am not worried about inflation right now, I am worried about an underemployed workforce in America," said Fisher.
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  • In the Media | November 2012
    By Steve Matthews and Stefan Riecher
    Bloomberg Businessweek, November 27, 2012. ©2012 Bloomberg L.P. All Rights Reserved.

    Federal Reserve Bank of Atlanta President Dennis Lockhart said financial regulators need to be vigilant in identifying risks, including cybercrime at banks and the underfunding of public pensions.

    “At a global level, the span of vigilance needs to be extremely broad,” Lockhart said today in remarks prepared for a speech in Berlin. “The events of 2007 and 2008 brought many surprises,” he said. “Markets that some thought too small to cause much trouble ultimately posed systemic-scale problems.”

    U.S. regulators are grappling with how to identify threats to financial stability more than four years after the collapse of Lehman Brothers Holdings Inc. The Dodd-Frank Act tightening post-crisis supervision created a council of regulators to monitor sources of instability.

    Lockhart didn’t comment on the U.S. economic outlook or monetary policy in his prepared remarks.

    One concern is “the potential for malicious disruptions to the payments system in the form of broadly targeted cyber-attacks,” Lockhart said at the Levy Economics Institute’s Hyman P. Minsky Conference on Financial Stability.

    “Banks and other participants in the payments system will need to reevaluate defense strategies” in light of increasing attacks by “sophisticated, well-organized hacking groups,” he said.

    Funding Shortfalls U.S. states and municipalities face pension funding shortfalls of as much as $3 trillion or $4 trillion, when conservative investment returns are assumed, Lockhart said. While pensions may not trigger a financial crisis, the health of state and local governments contributes to economic stability, he said.

    “The situation needs to be monitored,” Lockhart said. “The public pension funding problem, as it grows, has the potential to sap the resilience we wish for to withstand a future spell of financial instability.”

    Lockhart, a former Georgetown University professor, has led the Atlanta Fed since 2007. The Atlanta Fed district includes Alabama, Florida, Georgia, and portions of Louisiana, Mississippi, and Tennessee.
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  • In the Media | November 2012
    Reuters, November 27, 2012. ©2012 Thomson Reuters. All rights reserved.

    (Reuters) — Dallas Fed President Richard Fisher, a top Federal Reserve official, said on Tuesday the U.S. central bank could get into trouble if it doesn’t set a limit on the amount of assets it is willing to buy.

    But Fisher, a critic of easy Fed policy, also said his main concern now was unemployment, not inflation.

    He said another option the Fed might consider to signal its aims to markets was a target for unemployment, although this would be difficult because monetary policy alone was not responsible for creating jobs. Fiscal policy was also key.

    Fisher kicked off his speech at a conference in Berlin with a reference to German policies in the 1920s that led to hyperinflation, saying that while inflation was not his main concern now, unlimited quantitative easing was risky.

    “You cannot expand without limits without horrific consequences,” he told reporters on the sidelines of the conference organized by the Levy Economics Institute. “There is no infinity in monetary policy, we know that from the German experience.”

    The Fed announced a third, open-ended round of asset purchases in September that it says will continue until there is a substantial turnaround in the labor market.

    A self-described anti-inflation hawk, Fisher said the Fed should announce “sooner rather than later” limits on the amount of assets it would purchase, preferably in December.

    Fisher said inflation need not be the inevitable consequence of quantitative easing, but the Fed must remain mindful.

    He said that while he backed the first round of the Fed’s purchases of mortgage-backed securities, he doubted it should be continued as it had not reduced interest rate differentials as he had hoped.

    He also said that he was not in favor of extending Operation Twist, under which the Fed has been selling short-term securities to buy $45 billion in longer-term debt every month to push down long-term borrowing costs.

    Over to Fiscal Policy Fisher chimed into the debate on setting specific numerical rates for unemployment and inflation as markers for when the Fed would consider lifting interest rates.

    “One option I believe we might pursue is to have a definition of our unemployment target as well as our long-term inflation target,” he said, noting it would be difficult however and setting an overall limit on asset purchases was preferable.

    Fed Chairman Ben Bernanke said last week that adopting numerical thresholds for unemployment and inflation could be a “very promising” step to develop the Fed’s communication strategy, but stressed that it was still under discussion.

    “I am not worried about inflation right now, I am worried about an underemployed workforce in America,” said Fisher.

    “American businesses are ready to roll ... they are just not doing so, and that requires the fiscal authorities to incentivize them properly, in whatever way they choose.” He also said that after dealing with its fiscal policy, the U.S. government should seek a free trade deal with Europe.

    “It is very important our government, in addition to getting its act together on fiscal policy, resist with every fiber in their body the temptation to follow a protectionist course.”

    (Reporting by Sarah Marsh and Reinhard Becker, editing by Gareth Jones/Ruth Pitchford)
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  • In the Media | November 2012
    MNI | Deutsche Börse Group, November 27, 2012.

    BERLIN (MNI) - Dallas Federal Reserve Bank President Richard Fisher said Tuesday that the main problem in the U.S. economy at the moment is unemployment, not inflation.

    “I believe inflation is under control in the United States,” Fisher said at a conference of the Levy Economics Institute here. “Our real problem is underemployment,” he said.

    Fisher said he currently saw “no evidence” of inflation risks. “I do not believe inflation need be the inevitable consequence of the Federal Reserve expanding its balance sheet,” he added.

    At the same time he cautioned that “we must be ever mindful...that a shift [in inflation expectations] comes quickly and suddenly.”

    Fisher said the Fed must define what the limits of its policies are. “We’re going to need to soon decide and signal to the market when the punchbowl will be ended and then will be withdrawn,” he said.

    “Monetary policy is necessary but not sufficient” to get the U.S. economy on track again, Fisher argued. “Now we need the fiscal side to do its job,” he said.

    Currently, worries about the so-called “fiscal cliff” in the U.S., as well as concerns about the Chinese and European economy, are holding back investments in the economy, he said
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  • In the Media | November 2012
    Terra.com, 27 de Noviembre de 2012. © Copyright 2012, Terra Networks, S.A.

    BERLIN (Reuters) — El presidente de la Fed de Dallas, Richard Fisher, un funcionario de alto rango de la Reserva Federal de Estados Unidos, dijo el martes que no estaba preocupado por la inflación en Estados Unidos, sino por el desempleo y sostuvo que la política monetaria no es suficiente para crear puestos de trabajo.

    “Las tasas de interés son las más bajas en la historia de la República Americana (...) La pregunta es qué va a estimular las empresas y poner a nuestra gente de vuelta en el trabajo”, dijo Fisher, un crítico de la política de alivio de la Fed.

    El hizo estas declaraciones en una conferencia organizada por el Levy Economics Institute de Berlín.

    (Reporte de Sarah Marsh. Editado en español por Carlos Aliaga.)
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  • In the Media | November 2012
    By Michael S. Derby
    NASDAQ, November 27, 2012. All Rights Reserved.

    NEW YORK—A rising wave of cyberattacks on banks and underfunded pensions represent potential threats to financial stability, a key Federal Reserve official said Tuesday.

    The central banker, Federal Reserve Bank of Atlanta President Dennis Lockhart, didn’t address monetary policy or the economic outlook in remarks prepared for delivery in Berlin before a conference held by the Levy Economics Institute. Instead, he talked about issues confronting regulators at a time where the promotion of financial stability is seen a critical task.

    Mr. Lockhart observed “at a global level, the span of vigilance needs to be extremely broad,” and that’s because “the events of 2007 and 2008 brought many surprises.” In his speech, he zeroed in on threats to the payment system, most notably the sharp rise in electronic attacks directed at banks.

    “Just in the last few months, the United States has experienced an escalating incidence of distributed denial of service attacks aimed at our largest banks,” Mr. Lockhart said, noting “the attacks came simultaneously or in rapid succession,” apparently at the hand of those who appeared to be “sophisticated” and “well organized.”

    Mr. Lockhart said the motives for the attacks are “not always clear.” He explained “the intent appears to be to disable essential systems of financial institutions and cause them financial loss and reputational damage.”

    The spate of attacks suggests that financial sector participants will need to view the situation as “a persistent threat with potential systemic implications.” And while such attacks are unlikely to bring the financial system down, they nevertheless need to be countered, he said.

    Mr. Lockhart also warned about underfunded nature of much of the public pension system. “At a systemic level, this area of concern is more likely to be manifested as a gradually accreting threat to growth than a single event shock,” the official warned.

    The central banker pointed at the large gaps between what has been promised and the money put into the funds. He said managers of these funds are often operating with unrealistic investment return goals that lead to an understating of the degree of the problem.

    “The public pension funding problem, as it grows, has the potential to sap the resilience we wish for to withstand a future spell of financial instability,” Mr. Lockhart said.
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  • In the Media | November 2012
    By Harriet Torry and Brian Blackstone
    4-Traders.com, November 27, 2012. Copyright © 2012 Surperformance. All Rights Reserved.
        BERLIN—The U.S. Federal Reserve should end its program aimed at lowering long-term interest rates, known as Operation Twist, next month, U.S. Federal Reserve Bank of Dallas President Richard Fisher said Tuesday.
     
    Under the program, the Fed buys long-term Treasury bonds and sells short-term ones. Operation Twist is due to expire at the end of the year and Mr. Fisher, who has been skeptical of the program from its beginning, said he doesn’t want it extended.
     
    “I question its efficacy,” he told reporters after a speech.
     
    Mr. Fisher, who is considered one of the Fed’s most strident anti-inflation hawks, also said he doesn’t feel the Fed needs to continue purchasing mortgage-backed securities. In September, the Fed announced it would buy $40 billion per month of mortgage-backed securities until the U.S. employment market improves.
     
    “My personal view is we don’t need to do more,” Mr. Fisher said.
     
    He also said the Fed should define the limits of monetary policy. One option, he said, is to have a target for unemployment. At the same time, the Fed should set limits on the size of its balance sheet, he added.
     
    During his speech, the veteran U.S. central-bank official said the Federal Reserve needs to think about how to harness monetary policy to spur businesses to put Americans back to work.
     
    Speaking at a conference organized by the Levy Economics Institute, Mr. Fisher said the central bank now has a duty not only to maintain price stability and maximize employment, but also to preserve financial stability. He also said he supports a free trade agreement with Europe, which he said would be “stimulative” and would strengthen ties.
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  • In the Media | November 2012
    By Greg Robb
    MarketWatch, November 27, 2012. Copyright © 2012 MarketWatch, Inc. All rights reserved.   WASHINGTON (MarketWatch) — The U.S. financial system and its regulators need to “update our thinking” about the threat of cyber-attacks given the spike and magnitude of recent events, said Dennis Lockhart, president of the Atlanta Federal Reserve Bank, on Tuesday. “What was previously classified as an unlikely but very damaging event affecting one or a few institutions should now probably be thought of as a persistent threat with potential systemic implications,” Lockhart told a conference in Berlin on financial instability, sponsored by the Levy Economics Institute. Banks have been defending themselves against such attacks for a while, but recent episodes carry up to 20 times more volume of traffic than before, he noted. Lockhart said that another financial-stability concern facing the United States that does not get headlines is the underfunding of public-pension plans. The gap might be as much as $3 trillion to $4 trillion because of losses on investment portfolios during the crisis, according to the Fed president.
    Associated Program:
    Region(s):
    United States, Europe
  • In the Media | November 2012
    By Dimitri B. Papadimitriou
    The Huffington Post, November 6, 2012. Copyright © 2012 TheHuffingtonPost.com, Inc. All Rights Reserved.

    The gruesome package of spending cuts and tax increases scheduled for December 31 was dubbed the "Fiscal Cliff' by Federal Reserve Chairman Ben Bernanke. It's apparent why the phrase caught on. Less understandable is the urge to jump into equally dangerous policy options.

    Virtually all of Washington is unhappy with the prospect of the measures. For months there've been reports of informal meetings to create a fix. But the austerity-worshipping ethos that underlies the plan is firmly entrenched, and some version of it will be enacted. Because of the wounds that extreme austerity will inflict, the Levy Institute is predicting—and we're hardly alone—that we're headed for another recession in 2013.

    All the evidence confirms that austerity programs have been a counterproductive disaster in Europe. That hasn't persuaded fiscal conservatives to adapt their ideology to reality. They continue to point to the inevitability of a Greek or Portuguese-style meltdown in the United States unless we immediately put government on a no-calorie diet and extract higher tax payments from those least able to afford them. This is despite the understanding by economists, including the most orthodox, that our federal control of the dollar puts us in a fundamentally different position than that of countries yoked to the euro.

    What we should be watching instead is the sorry mess in the United Kingdom. It's a more relevant comparison because, like the United States, the UK controls its own money; it stuck with the pound and never adopted the euro.

    Britain's own fiscal cliff was the 2010 austerity agenda of Prime Minister David Cameron and the Conservative Party. A set of drastic measures aimed to increase growth and reduce debt, it has failed spectacularly on both fronts. The UK economy today is indisputably worse than it was when the tightening began, with a shrunken GDP and the deficit shooting up. Government spending cutbacks—integral to the plan—helped bring about this new recession. Cameron and Chancellor of the Exchequer David Osborne have yet to take responsibility for their policies, accusations of incompetence from the press and a slap-down from the International Monetary Fund not withstanding.

    The U.S. Congress seems determined to follow this running leap into extreme austerity. The most likely modification to the current plan is an extension of some of the Bush-era tax cuts. Yet there hasn't been any move to extend the payroll tax holiday. Workers on the low end of the pay scale need the additional take-home pay that this measure has been providing. Because these employees spend their paychecks (they save the least of any group), they've also been helping to stimulate the larger economy. To eliminate this prime tax relief issue for the working class would be a major blunder.

    Slashing federal agencies—the planned "sequestration" of Treasury Department funds when the overall budget hits a targeted figure—would be even worse. Medicare and Medicaid are exempt, but if the pressure to restore military spending succeeds, countless key economic drivers will have to be decimated instead, in order to reach the magic targeted number. With the pain spread across a wide range of departments, you might assume that the impact would be insignificant. No. The shrinkage would be, roughly, a substantial 12 to 15 percent. The cuts would lead to another recession here, in a mirror of what's happening in Great Britain.

    The trap that occurs when austerity measures are used to balance a budget is predictable and preventable. On the most simple level, spending cuts and tax increases promote a cycle of low demand (because consumers buy less), low profits, high unemployment, and slow growth. These, in turn, inevitably lead to lower tax revenues and higher government safety net payouts, which of course produce rising government deficits. Greg Hannsgen and I detail other factors that also play significant roles in a new report [Fiscal Traps and Macro Policy after the Eurozone Crisis]. The austerity cult's response to this cycle is bigger spending cuts and more tax increases, which lead to ... you get the idea.

    What's at the heart of this irrational strategy? A mistaken belief that our national economic problems stem only from a failure to control spending. The data shows that this simply is not the case. Total United States government spending has actually been falling as a percentage of GDP, while the total number of government employees has been declining. This alone clearly indicates that our deficits—like those in the UK, by the way—have more to do with meager tax revenue than with profligate spending.

    Also key to the craze is the belief that austerity measures cannot wait. Many in Washington and the media are convinced that the recovery is well underway, and if spending cuts and tax increases are delayed for even a year it will be too late to tame inflation and tighten fiscal policy on a soaring economy. The urgency rests on unfounded optimism. We still have a very long way to go before the economy is anywhere near healthy enough to heat up. The GDP is now, and has long been, far below trend.

    Our economic malaise has been consistently underestimated, and the result has been the adoption of inadequate half-measures. Swapping budget cuts at the edge of the fiscal cliff isn't a solution. A reduction in federal spending during a downturn will perpetuate the damaging cycle, no matter how judiciously the cuts are chosen.

    The sequester should be repealed outright, and it certainly should not be replaced. We need a strong stimulus that increases employment, not by wishing for it, but through public sector hiring. The Fiscal Cliff show is a morality play that celebrates puritanical righteousness and unnecessary punishment. As we've already seen on the UK stage, it's headed towards an unhappy ending.
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  • In the Media | November 2012
    Leading European and U.S. Policymakers to Discuss Financial Instability and Its Global Economic Implications at the Levy Economics Institute's Hyman P. Minsky Conference, in Berlin, November 26-27
    BERLIN, Nov. 6, 2012 (GLOBE NEWSWIRE) -- From November 26 to 27, the Levy Economics Institute of Bard College will gather top policymakers, economists, and analysts at the Hyman P. Minsky Conference on Financial Instability to gain a better understanding of the causes of financial instability and its implications for the global economy. The conference will address the challenge to global growth affected by the eurozone debt crisis; the impact of the credit crunch on economic and financial markets; the larger implications of government deficits and the debt crisis for U.S., European, and Asian economic policy; and central bank independence and financial reform. Organized by the Levy Economics Institute and ECLA of Bard with support from the Ford Foundation, The German Marshall Fund of the United States, and Deutsche Bank AG, the conference will take place Monday and Tuesday, November 26 to 27, in Frederick Hall, 4th fl., Deutsche Bank AG, Unter den Linden 13–15, Berlin.

    Participants include Philip D. Murphy, U.S. Ambassador, Federal Republic of Germany; Steffen Kampeter, parliamentary state secretary, German Ministry of Finance; Lael Brainard*, under secretary for international affairs, U.S. Department of the Treasury;  Mary John Miller*, Treasury under secretary for domestic finance; Vítor Constâncio, vice president, European Central Bank; Peter Praet, chief economist and executive board member, European Central Bank; Richard Fisher, president and CEO, Federal Reserve Bank of Dallas; Dennis Lockhart, president and CEO, Federal Reserve Bank of Atlanta; Christine M. Cumming, first vice president, Federal Reserve Bank of New York; George Stathakis, member of the Greek Parliament (Syriza) and professor of political economy,University of Crete; Jack Ewing, European economics correspondent, International Herald TribuneBrian Blackstone, European economics correspondent, The Wall Street JournalWolfgang Münchau, associate editor, Financial TimesRobert J. Barbera, chief economist, Mount Lucas Management LP; Andrew Smithers, founder, Smithers & Co.; Frank Veneroso, president, Veneroso Associates, LLC; Michael Greenberger, professor, School of Law, and director, Center for Health and Homeland Security, The University of Maryland; Leonardo Burlamaqui, program officer, Ford Foundation; Dimitri B. Papadimitriou, president, Levy Institute; Jan Kregel, senior scholar, Levy Institute, and professor, Tallinn Technical University; Dimitrios Tsomocos, reader in financial economics, Saïd Business School, and fellow, St. Edmund Hall, University of Oxford; Alexandros Vardoulakis, research economist, European Central Bank and Banque de France; Michael Pettis, professor, Guanghua School of Management, Peking University, and senior associate, Carnegie Endowment for International Peace; Eckhard Hein, professor, Berlin School of Economics; L. Randall Wray, senior scholar, Levy Institute, and professor, University of Missouri–Kansas City; Éric Tymoigne, research associate, Levy Institute, and professor, Lewis and Clark College; and Jörg Bibow, research associate, Levy Institute, and professor, Skidmore College. *to be confirmed

    The Levy Economics Institute of Bard College, founded in 1986 through the generous support of the late Bard College trustee Leon Levy, is a nonprofit, nonpartisan, public policy research organization. The Institute is independent of any political or other affiliation, and encourages diversity of opinion in the examination of economic policy issues while striving to transform ideological arguments into informed debate.
     
    ECLA of Bard is a liberal arts university offering an innovative, interdisciplinary curriculum with a global sensibility. Students come to Berlin from 30 countries in order to study with our international faculty. The curriculum focuses on value studies, in which the norms and ideals we live by, and the scholarly attention they inspire, come together in integrated programs. Small seminars and tutorials encourage lively and thoughtful dialogue. The Ford Foundation is an independent, nonprofit grant-making organization. For more than half a century it has worked with courageous people on the frontlines of social change worldwide, guided by its mission to strengthen democratic values, reduce poverty and injustice, promote international cooperation, and advance human achievement. With headquarters in New York, the foundation has offices in Latin America, Africa, the Middle East, and Asia.

    © 2012 GlobeNewswire, Inc. All Rights Reserved.

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  • In the Media | October 2012
    By Brianna Ehley
    Washington Post, October 23, 2012. All Rights Reserved.

    The Congressional Budget Office predicted back in August that if the country went over the fiscal cliff, the economy would dip into a shallow recession and take about a year to recover. The U.S. economy would shrink about 0.5 percent over the year before bouncing back and growing at a rapid clip of 4.3 percent annually between 2014 and 2017.

    However, the Washington Post’s Brad Plumer reports that a new study by the Levy Economics Institute found problems with CBO’s estimate and claims that it is optimistic at best – without providing alternative projections for declining growth next year.

    The authors of the report argue that unless one assumes that U.S. households will start borrowing and spending at an unprecedented rate – which is not likely to happen -- the CBO’s numbers don’t work. The report notes, “households would have to carry more debt than they did at the height of the housing bubble for the CBO’s optimistic growth rates to come true.”

    The Levy Economics Institute maps out three post-cliff scenarios.:

    Scenario 1 -- There  is an unlikely boom in household borrowing and spending. 
Scenario 2 – The Bush tax cuts are extended and households increase their borrowing and consumption at a more realistic rate. Unemployment stays high.
Scenario 3 – Congress enacts a very modest fiscal stimulus. Unemployment goes down just a bit.

    The report also predicts that unemployment will remain unacceptably high for an indefinite period unless Congress and the White House agree to avert a year-end confluence of major tax increases and spending cuts. “Based on our results, we surmise that it would take a much more substantial increase in fiscal stimulus to reduce unemployment to a level that most policymakers would regard as acceptable.”
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  • Conference Proceedings | September 2012
    Debt, Deficits, and Financial Instability

    A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation

    The 2012 Minsky conference addressed the ongoing and far-reaching effects of the global financial crisis, including the challenge to global growth represented by the eurozone debt crisis, the impact of the credit crunch on the economic and financial markets outlook, the sustainability of the US economic recovery in the absence of support from monetary and fiscal policy, reregulation of the financial system and the design of a new financial architecture, and the larger implications of the debt crisis for US economic policy—and for the international financial and monetary system as a whole.

    Download:
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    Author(s):
    Barbara Ross Michael Stephens
    Region(s):
    United States

  • In the Media | June 2012

    American Banker, June 1, 2012. © 2012 American Banker and SourceMedia, Inc. All Rights Reserved.

    Hyman Minsky was a maverick economist in his day. He theorized about the inherent instability of financial markets, and viewed the Federal Reserve as the author of both the permission slip and the prescription for economic crises.

    None of it sounds very far-fetched now, of course. The Great Recession pulled Minsky’s ideas in from the fringes of the economics mainstream, and turned the late economist’s work into a touchstone for many who have tried making sense of the latest financial crisis. Accordingly, the annual Hyman P. Minsky Conference, where academics, policymakers and assorted market philosophers gather to apply Minsky’s lens to contemporary issues in finance, has taken on special significance since the events of 2008.

    This year, the forum focused mainly on the financial reforms underway in the United States, and on the continuing crisis in Europe.

    The upshot was that the US banking agencies are making decent, and in some cases helpful, progress in carrying out new duties assigned to them under the Dodd-Frank Act, while the European economy is, and likely will be for the next five to 10 years, a total basket case.

    Translation: Minsky was right to eschew the deregulation arguments that most of his contemporaries were making in the 1970s and 1980s, and if it hasn’t been proven yet that markets are inherently unstable, it can at least be agreed upon that they are frequently unstable-and not just on this side of the pond.

    But how should that instability be handled?

    Joseph Stiglitz, the Nobel Prize–winning economist from Columbia University, argued for fiscal solutions to the persistent US economic malaise, saying, “Monetary policy can’t help now.”

    But as Financial Times commentator Martin Wolf reminded the audience the next day, fiscal strength failed to ward off the crisis in Spain and Ireland, which were in excellent fiscal shape right up until their economic booms ended.

    Wolf wasn’t responding directly to Stiglitz, but juxtaposing the remarks by the two men, an important question is raised: if monetary policy can only go so far, and fiscal strength can only last so long, what other solution for stability is there?

    Better regulation, perhaps. Minsky put more stock in financial regulation than many of his contemporaries did. But even he acknowledged that regulators are poorly positioned to keep up with financial sector innovations-a point driven home whenever the conference discussion turned to the topic of derivatives regulation.

    Frank Partnoy, a University of San Diego School of Law professor who used to structure derivatives on Wall Street, was largely critical of the Dodd-Frank Act’s attempts to regulate derivatives, particularly its mandating of centralized clearing for swaps. He said a migration to clearing would have happened with or without the legislation, and that it wouldn’t do much to stabilize the financial system in any case, especially with exemptions being carved out for so many big pieces of the derivatives market. Partnoy readily acknowledged the paradox in his critique, admitting, “It’s sort of like Woody Allen’s complaining that the food is terrible and the portions are too small.”

    The challenge of chasing innovation also was addressed by J. Nellie Liang, the director of the Office of Financial Stability Policy and Research at the Federal Reserve Board. In her impressively succinct (and refreshingly apolitical) explanation of what Dodd-Frank does and does not do, she noted the act makes no attempt to control financial innovations, thus ensuring a healthy level of activities in the shadows for some time.

    Liang pointed out that most of Dodd-Frank’s accomplishments are of the pre-emptive variety-like prescribing higher capital requirements, establishing a Financial Stability Oversight Council and creating a resolution regime for the largest institutions. Such measures can’t prevent future crises (“Shocks are hard to predict,” Liang noted) but what they can dois “tell you how many people need to be in the room to solve the problem she said.

    Christine Cumming, first vice president of the New York Fed, provided some color on one of the most curious pre-emptive measures of all: end-of-life planning for the biggest institutions. She said discussions between regulators and bankers on living wills have been productive, if not easy conversations to have (though certainly easier than they would have been pre-2008, she pointed out).

    The living wills required by Dodd-Frank “will not be meet-me-at-the-bridge-at-5-o’clock kinds of plans, but they will be menus of options” for handling a wind-down, Cumming said.

    With the worst of the crisis slowly receding into rear view, the atmosphere at the conference was less combative than in past years, when the panels and audiences seemed to contain more, or at least more vocal, critics of banks and bank regulators.

    One of the more memorable moments of last year’s Minsky Conference came in a speech by Phil Angelides, who chaired the Financial Crisis Inquiry Commission. He was outraged that former Fed Chairman Alan Greenspan had been in the press that spring criticizing Dodd-Frank. It was Greenspan, Angelides said, who “had his foot on the gas pedal as we drove over the cliff, and now he wants to give the nation driving lessons once again.”

    Greenspan’s driving abilities were considered again this year, this time by Bruce Greenwald of Columbia University, who had a much more detached view of the whole situation.

    “Alan Greenspan is not a hero. Alan Greenspan is not a villain. Alan Greenspan is irrelevant,” Greenwald said, arguing that by the time Greenspan got “into the driver’s seat,” the steering column already “had been disconnected from the wheels.”

    Did this reflect a fundamental difference of opinion, or just an extra year’s worth of hindsight and contemplation as we move farther away from the most acute stages of the crisis?

    Maybe both. Dmitri Papadimitriou, president of the Levy Economics Institute of Bard College, which sponsors the annual Minsky gathering, explained the softening in tone thusly: “When you are having a crisis and you don’t see a ready solution to it, you want to put your views forward. There are real problems we haven’t come to a solution to yet ... But there is a lot more agreement now.”

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  • Book Series | June 2012
    Edited by Dimitri B. Papadimitriou and Gennaro Zezza

    In the 1970s, at a time of shock, controversy and uncertainty over the direction of monetary and fiscal policy, Wynne Godley and the Cambridge Department of Applied Economics rose to prominence, challenging the accepted Keynesian wisdom of the time. This collection of essays brings together eminent scholars who have been influenced by Godley's enormous contribution to the field of monetary economics and macroeconomic modeling.

    Godley's theoretical, applied and policy work is explored in detail, including an analysis of the insightful New Cambridge 'three balances' model, and its use in showing the progression of real capitalist economies over time. Godley's prescient concerns about the global financial crash are also examined, demonstrating how his work revealed structural imbalances and formed the foundations of an economics relevant to the instability of finance.

    Published By: Palgrave MacMillan

  • Working Paper No. 723 | May 2012

    Recently, some have wondered whether a fiscal stimulus plan could reduce the government’s budget deficit. Many also worry that fiscal austerity plans will only bring higher deficits. Issues of this kind involve endogenous changes in tax revenues that occur when output, real wages, and other variables are affected by changes in policy. Few would disagree that various paradoxes of austerity or stimulus might be relevant, but such issues can be clarified a great deal with the help of a complete heterodox model.

    In light of recent world events, this paper seeks to improve our understanding of the dynamics of fiscal policy and financial crises within the context of two-dimensional (2D) and five-dimensional heterodox models. The nonlinear version of the 2D model incorporates curvilinear functions for investment and consumption out of unearned income. To bring in fiscal policy, I make use of a rule with either (1) dual targets of capacity utilization and public production, or (2) a balanced-budget target. Next, I add discrete jumps and policy-regime switches to the model in order to tell a story of a financial crisis followed by a move to fiscal austerity. Then, I return to the earlier model and add three more variables and equations: (1) I model the size of the private- and public-sector labor forces using a constant growth rate and account for their social reproduction by introducing an unemployment-insurance scheme; and (2) I make the markup endogenous, allowing its rate of change to depend, in a possibly nonlinear way, on capacity utilization, the real wage relative to a fixed norm, the employment rate, profitability, and the business sector’s desired capital-stock growth rate. In the conclusion, I comment on the implications of my results for various policy issues.

  • Working Paper No. 721 | May 2012

    This paper investigates the causes behind the euro debt crisis, particularly Germany’s role in it. It is argued that the crisis is not primarily a “sovereign debt crisis” but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany’s part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all —perpetual export surpluses, a no transfer / no bailout monetary union, and a “clean,” independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro’s survival. The crisis in Euroland poses a global “too big to fail” threat, and presents a moral hazard of perhaps unprecedented scale to the global community.

  • Working Paper No. 719 | May 2012

    The paper evaluates the fiscal policy initiatives during the Great Recession in the United States. It argues that, although the nonconventional fiscal policies targeted at the financial sector dwarfed the conventional countercyclical stabilization efforts directed toward the real sector, the relatively disappointing impact on employment was a result of misdirected funding priorities combined with an exclusive and ill-advised focus on the output gap rather than on the employment gap. The paper argues further that conventional pump-priming policies are incapable of closing this employment gap. In order to tackle the formidable labor market challenges observed in the United States over the last few decades, policy could benefit from a fundamental reorientation away from trickle-down Keynesianism and toward what is termed here a “bottom-up approach” to fiscal policy. This approach also reconsiders the nature of countercyclical government stabilizers.

  • Strategic Analysis | April 2012

    Though the economy appears to be gradually gaining momentum, broad measures indicate that 14.5 percent of the US labor force is unemployed or underemployed, not much below the 16.2 percent rate reached a full year ago. In this new report in our Strategic Analysis series, we first discuss several slow-moving factors that make it difficult to achieve a full and sustainable economic recovery: the gradual redistribution of income toward the wealthiest 1 percent of households; a failure to fully stabilize and reregulate finance; serious fiscal troubles for state and local governments; and detritus from the financial crisis that remains on household and corporate balance sheets. These factors contribute to a situation in which employment has not risen fast enough since the (supposed) end of the recession to significantly increase the employment-population ratio. Meanwhile, public investment at all levels of government fell from roughly 3.7 percent of GDP in 2008 to 3.2 percent in the fourth quarter of 2011, helping to explain the weak economic picture.

    For this report, we use the Levy Institute macro model to simulate the economy under the following three scenarios: (1) a private borrowing scenario, in which we find the appropriate amount of private sector net borrowing/lending to achieve the path of employment growth projected under current policies by the Congressional Budget Office (CBO), in a report characterized by excessive optimism and a bias toward deficit reduction; (2) a more plausible scenario, in which we assume that the federal government extends certain key tax cuts and that household borrowing increases at a more reasonable rate than in the previous scenario; and (3) a fiscal stimulus scenario, in which we simulate the effects of a fully “paid for” 1 percent increase in government investment.

    The results show the importance of debt accumulation as a consideration in macro policymaking. The first scenario reproduces the CBO’s relatively optimistic employment projections, but our results indicate that this private-sector-led growth scenario quickly brings household and business debt to new all-time highs as percentages of GDP. We note that the CBO makes its projections using an orthodox model with several common, but fundamental, flaws. This makes possible the agency’s result that current policies will reduce the unemployment rate without a run-up in the private sector’s debt—“business as usual,” in the words of our report’s title.

    The policies weighed in the second scenario do not perform much better, despite a looser fiscal stance. Finally, our third scenario illustrates that a small, tax-financed increase in government investment could lower the unemployment rate significantly—by about one-half of 1 percent. A stimulus package of this size might be within the realm of political possibility at this juncture. However, our results lead us to surmise that it would take a much more substantial fiscal stimulus to reduce unemployment to a level that most policymakers would regard as acceptable.

  • Strategic Analysis | December 2011

    Fiscal austerity is now a worldwide phenomenon, and the global growth slowdown is highly unfavorable for policymakers at the national level. According to our Macro Modeling Team's baseline forecast, fears of prolonged stagnation and a moribund employment market are well justified. Assuming no change in the value of the dollar or interest rates, and deficit levels consistent with the Congressional Budget Office’s most recent “no-change” scenario, growth will remain very weak through 2016 and unemployment will exceed 9 percent.

    In an alternate scenario, the authors simulate the effect of new austerity measures that are commensurate with the implementation of large federal budget cuts. Here, growth falls to 0.06 percent in the second quarter of 2014 before leveling off at approximately 1 percent and unemployment rises to 10.7 percent by the end of 2016. In their fiscal stimulus scenario, real GDP growth increases very quickly, unemployment declines to 7.2 percent, and the US current account balance reaches 1.9 percent by the end of 2016—with a debt-to-GDP ratio that, at 97.4 percent, is only slightly higher than in the baseline scenario.

    An export-led growth strategy may accomplish little more than drawing a small number of scarce customers away from other exporting nations, and the authors expect no net contribution to aggregate demand growth from the financial sector. A further fiscal stimulus is clearly in order, they say, but an ill-timed round of fiscal austerity could result in a perilous situation for Washington.

  • In the Media | November 2011
    By Dan Monaco

    The Straddler, Fall 2011. All content © The Straddler

    I
    The events leading up to and following the financial crisis in 2008 led to widespread deployment of the term “Minsky Moment,” used to describe the painful termination of what Hyman Minsky called “runaway expansion.” In boom times, according to Minsky, stable profit growth resulting from speculative (debt-fueled) risk-taking leads to ever greater speculative risk-taking until the bubble finally bursts and a debt-deflation crisis ensues as investors liquidate their assets to cover their debt liabilities. The longer the “runaway expansion” lasts, the more dramatic the “Minsky Moment” is liable to be.

    In June I traveled to the Minsky Summer Seminar at the Levy Institute at Bard College. The train stop closest to Bard is Amtrak’s Rhinecliff station, and the journey to it from New York City takes you up the eastern bank of the Hudson River for about ninety minutes. It’s hard not to be struck by the beauty of the Hudson, broad and grand between its beveled cliffs, a steady, workmanlike current, simultaneously fierce and serene, operating like a paradoxically silent operatic ostinato. Pleasure cruises run between New York City and Albany, and it is not unusual to see a barge heading in this direction or that, evoking the Hudson Valley’s manufacturing history.

    Of course, the Hudson River is also infamous for its having been contaminated by toxic polychlorinated biphenyls (PCBs) from General Electric’s manufacturing plants in Hudson Falls and Fort Edward. The result of years of mostly legal dumping of PCBs between 1947 and 1977 led to a large stretch of the river being declared a Superfund Site in 1984. Turmoil, controversy, and legal battles ensued; cleanup dredging began in earnest in 2009.

    Knowing this as one looks out a railcar window at the river leads to an odd and occasionally eerie appreciation of the scenery. It might also inspire a thought or two on the occupation of the economist. For there is a sense in which all economists are implicitly charged with advancing recommendations on the appropriate use of an apparatus—call it the labor and money arrangements of man—which one might with only slight exaggeration describe as a sort of savage machinery. This apparatus is capable, when adequately structured, of advancing human well-being; it is capable, too, of setting well-being back, of passing over certain sections of humanity—including populations within nations, nations themselves, continents, and generations.

    But there is also a sense in which, at least to the eyes of an outsider, the codes of the profession, and the dominant modes of thought within the field, seem to put the economist who fully acknowledges the potency of the poorly secured munitions ship whose course he is seeking to influence in a bit of an odd position. If he thinks it is best to grapple with the navigation plan, he must still contend with the tendencies of the moiety of his brethren who, in spite of the field’s outsized political and cultural influence, either deny that their conclusions have anything to do with something as complex as the actual practice of seafaring, or who—hewing closely to the field’s first principles—regard an absence of captaincy as the best captaincy, the rarely manned bridge the best manned bridge.

    “Economists have lost their credibility because they do not actually deal with the real world,” Dimitri Papadimitriou, President of the Levy Institute, told me in my conversation with him. “But there were and are certainly some economists, including Hyman Minsky, who looked at the real world not as an exception case.”

    “Minsky was in some ways a pioneer. He saw that economic theory assumed that everything is known and that there is some tendency of the system to reach for equilibrium and, at times, to reach periods of ‘tranquility,’ as he preferred to call them. Of course, he never believed that stability was possible. He didn’t believe in the invisible hand. There’s a reason why it’s invisible—because it’s not there.”

    II
    It is characteristic of capitalism, according to Minsky’s John Maynard Keynes, that it fails to maintain full employment,(1) and that its most essential traits are instability and uncertainty.

    JMK appeared in 1975, just as the postwar “Golden Age” of global capitalism was coming to an end in a decade marked by oil shocks, unsustainable levels of inflation, the dismantling of the Bretton Woods international monetary system, rising rates of unemployment, and growing popular familiarity with the concepts of “stagflation” (stagnation and inflation) and the “misery index” (unemployment plus inflation).

    The 1970s were a crucial period for both economic policy and economic study; the decade’s disruptions were exhibited to impugn the effectiveness of, and ultimately abandon mainstream adherence to, Keynesian economics. As Peter Temin, an economic historian at MIT, told The Straddler in February, there were two reactions within economics to the problems of the 1970s: “One was to patch up [Keynesian] theory and extend it. The other came from people who said that Keynesian theory is terrible—it got us into this mess, we have to do something different. And that fed into this desire to use mathematics to set up elaborate models and to have everything be efficient."(2)

    It led, in other words, to the recrudescence of precisely the sort of clean neoclassical models of efficiency, equilibrium, and omniscience from which Keynes, in 1937, had broken by publishing The General Theory of Employment, Interest, and Money.

    The return back to neoclassical economics, however, was made easier by its never having really left. The Keynesianism prevailing for a time before, and for the thirty years after, the second World War was in fact a neoclassical synthesis of old ideas and new theory.

    In Minsky’s recap of the standard telling, the process of synthesis began with J.R. Hicks’ influential 1937 article “Mr. Keynes and the ‘Classics’,” which introduced an interpretation and a simplified model (IS-LM) by which to understand Keynes. Hicks’ interpretation was the foundation of the influential economist Alvin Hansen’s work “in hammering out the American version of standard Keynesianism."(3) As a result, American (and a great deal of international) economic policy was guided by a neoclassical synthesis called Keynesianism into the 1970s.

    Without getting into the neoclassical synthesis’ IS-LM model (which examines the relationships between interests rates and GDP), or the intricacies, such as they are, of neoclassical Quantity Theory (which essentially argues that prices are exclusively related to the amount of money in circulation), the fundamental difference between Keynesianism (whatever the version) and neoclassical theory is that the former argues that some form of government intervention into the economy is necessary to achieve full-employment stability, while the latter holds, to use Minsky’s words, that “a decentralized economy is fundamentally stable."(4)

    Johan Van Overtveldt’s history of the Chicago School provides a succinct summary of the worldview underlying neoclassical theory:

    The basic assumption of neoclassical economic theory is the proposition that in a competitive market environment, individuals and corporations pursuing their own self-interests necessarily promote the best interests of society as a whole.(5)

    Thus, neoclassical economics, whatever its modifications or adjustments, is always in essence a cry for “pure” capitalism, while Keynesianism, whatever its color, is always at heart a proffered solution (more or less “radical,” depending upon one’s interpretation) to the problems of capitalism from within capitalism.

    In JMK, Minsky writes that in the 1930s, neoclassical economics had held that events like the onset of depressions were anomalies; once they began there was nothing to do but ride them out. Coming from a different direction, orthodox Marxists “interpreted the Great Depression as confirming the validity of the view that capitalism is inherently unstable. Thus, during the depression’s worst days, the mainstream of orthodox economists and the Marxists came to the same policy conclusions: …nothing useful could be done to counteract depressions."(6)

    The General Theory was thus simultaneously a response to worldwide depression, a dramatic (if not a clean) break with neoclassical economics, and an argument that while capitalism is “inherently unstable,” policy solutions from within do exist to ensure that “business cycles, while not avoidable, [can] be controlled."(7)

    What made Keynes’ theory possible, in Minsky’s view, was a radical paradigm shift in perception that placed the “fragile” workings of the financial sector at the center of a complex modern capitalist economy:

    Whereas classical economics and the neoclassical synthesis are based upon a barter paradigm—the image is of a yeoman or a craftsman trading in a village market—Keynesian theory rests upon a speculative-financial paradigm—the image is of a banker making his deals on a [sic] Wall Street.(8)

    In this capitalist economy, full-employment equilibrium—indeed, equilibrium in general—is not possible because each stage of the business cycle contains the loose strands of its own unraveling. Actors operating in a sophisticated financial sector are engaged in “decision-making under conditions of intractable uncertainty” and as a result there are always “processes at work which will ‘disequilibriate’ the system."(9)

    Financial collapses are the most pronounced examples of these disequilibriations:

    [T]he financial system necessary for capitalist vitality and vigor…contains the potential for runaway expansion, powered by an investment boom. This runaway expansion is brought to a halt because accumulated financial changes render the financial system fragile, so that not unusual changes can trigger serious financial difficulties.… [S]tability…is destabilizing.(10)

    III
    What of Minsky’s claim that Keynes was basically misinterpreted by mainstream economics? And what of this claim in the context of capitalism’s “Golden Age?” Whether or not the neoclassical synthesis was an accurate interpretation of Keynes, the thirty years following World War II were notable in the history of capitalism for their relatively stable growth and their approximation to full employment. I put these questions to Papadimitriou.

    Papadimitriou: Minsky realized that there were some important features that prevented a full-blown crisis from occurring. There were a number of near crises, but Minsky would agree that during the “Golden Age” there was a crucial role that both big government played as well as the big bank [i.e., the Federal Reserve].

    Minsky was always interested in what is apt policy versus what particular item one should look for in a policy. Minsky’s own policy was that if you believe stability is destabilizing—that is, there is a tendency for the system to destabilize—you need to be prepared for that and do something about it to prevent it.

    Yes, you can assume that private markets can be self-regulating as a result of profit seeking—you don’t want anything bad to happen. But on the other hand, we know that avarice and greed become a lot more important than self-restraint and self-regulation. So my suspicion is that Minsky would have said that you have to be able to rely on something other than policies emanating from traditional economic theory, like the neoclassical synthesis. As, for example, in the same way as Schumpeter had said that there will always be technological innovation, and therefore you will have creative destruction, Minsky was cognizant of financial innovation. And, there is a need, then, for sophisticated instruments of regulation that are required to keep up with financial innovation, especially if you believe that a sophisticated economy as ours is more or less a finance-guided economy. Look what has happened especially now, where the free-market mantra took hold beginning with the Reagan Presidency. Look at the results.

    Had Minsky been alive today, he would have said that government doesn’t only have to play a role in expenditures [to generate adequate aggregate demand], but also, a role in industrial policy. And that has been absent. The American economy is superior to other economies in terms of high technology, aerospace, and probably agriculture. But you cannot sustain growth to provide for 300 million people [on these industries alone].

    In addition to emphasizing that “there is no final solution to the problems of organizing economic life,"(11) Minsky argued that policies based on a correct interpretation of Keynes would direct government expenditures towards more socially and individually productive ends, and would also promote a more equitable distribution of income. Writing as the neoclassical synthesis was on the verge of giving way, he lamented the military spending and empty consumption of capital-intensive goods that had marked its heyday.

    As Keynes summarized The General Theory, he avowed that there were two lessons to be learned from the argument. The first was the obvious lesson that policy can establish a closer approximation to full employment than had, on average, been achieved. The second, more subtle, lesson was that policy can establish a closer approximation to a more logical and equitable distribution of income than had been achieved.

    To date [i.e., 1975] the first lesson has been learned, albeit in a manner that makes an approximation to full employment heavily dependent upon government spending in the form of defense production and private investment that sacrifices present plenty for questionable benefits in the future. … [T]he second lesson has been forgotten; the need for policy aimed to achieve justice and equity in income distribution has not only been ignored but it has been so to speak turned on its head.(12)

    Raising questions of income distribution and inequality in America tends to lead, in both elite and barroom discourse, to cries of “class warfare” or worse, so I asked Papadimitriou to elaborate a bit on Minsky’s idea of equality in the context of the reality of default American economic ideology.

    Papadimitriou: Minsky was very concerned about poverty. He thought the government should approach the poor from the perspective of, “why are they poor?” and seek to restructure the view about what government should do. He was against the idea of government transfers to alleviate poverty. He would have been intolerant of the government’s failure to do now what was done during the Great Depression through employment programs such as the Works Progress Administration and other programs of the New Deal, because he thought that by giving the poor these transfers the government changed their behavior as opposed to providing them with a job—giving them a goal and, to some extent, the capacity to enjoy a standard of living and social inclusion.

    Minsky was realistic that the sort of equality connotated by the word “equality” is not achievable—it wasn’t achieved under socialism; it wasn’t achieved under communism. But, nevertheless, the question is, is it appropriate for one-tenth of the population to control that gigantic percentage of wealth, and to command that kind of income, relative to the bottom half, which basically does not have a chance to realize the prosperity that can be achieved in this country.

    You can put it in a different way. The government plays the role of a redistributive vehicle. As an example, Minsky and others would be appalled at the Bush tax cuts being continued. They don’t do anything for aggregate demand, they don’t do anything in terms of increasing employment, and they don’t do anything in setting the economy on a path for growth. Therefore, Minsky would have insisted that these tax cuts cause the wrong kind of debt for the government to incur. He would have suggested other policies—for example, promulgating a tax structure that is progressive and not, like the payroll tax, regressive—that could bring about better outcomes. That would not lead to the same maldistribution of wealth we are experiencing currently.

    But what about the perception of this maldistribution of wealth? There seems to be an odd phenomenon, arguably not limited to American society, by which the reality of discontent with income and wealth maldistribution is held in check by ambivalent feelings about to what degree it is actually malevolent. Back in April, former U.S. Senator Phil Gramm authored an op-ed in the Wall Street Journal in which he argued that Barack Obama’s presidency had brought about “higher taxes on the most productive members of American society."(13) This is a familiar stance on the right that is not wholly rejected by the population at large: the wealthy may create abundant riches for themselves, but they are the job creators who provide us with employment, and so anything we do to hurt their bottom line just ends up hurting our own. Or, even if that’s a bit hard to take, in any case, any remedy the government would come up with to address maldistribution would be worse than the malady itself.

    And this ambivalence has an additional, aspirational contour. There is a famous quote, attributed to John Steinbeck, that runs, “Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” I asked Papadimitriou if, putting the question of socialism aside, he thought the attitude towards the rich by the poor was in some ways informed by their seeing themselves not as the poor, “but as temporarily embarrassed millionaires.”

    Papadimitriou: The majority of the population has that perspective, and that comes out clearly in the surveys that are run on individuals who are surviving on welfare checks and yet are against taxation because they believe there could be a time that they will be hurt. There is this longing, to go back to Steinbeck’s words, to become a millionaire.

    On the other hand, there is another group of the population that is totally disenfranchised, and I doubt that these people have any notion that they will ever actually find a ticket out of their misery. You can see that in the inner cities, and in the increase of homelessness. IV
    With respect to creating a culture that is receptive to the idea that there is a role for the government in promoting a more equitable society, the challenge faced by people like the Minskians is fourfold. First, a significant portion of the population at large must agree that the so-called “American Dream” is not alive and well. As Papadimitriou told me, “the ‘American Dream’ is fulfilled only for a segment of the population. Maybe the one percent in the income distribution ladder.”

    Second, this same portion of the population must accept that the receding of the “American Dream” is not a result of government malfeasance but has its roots in the present structure of the system in which private actors operate.

    Third, there must be widespread willingness to accept that government has a place in bringing about better economic outcomes and more equitable distributions of income.

    Fourth, people must be willing to act on these beliefs to press the government to take action. (For all its myriad failings and inefficiencies, the government possesses a quality unique among powerful entities in that it is subject to some form of democratic accountability.)

    Just how challenging the current ideological climate makes all of this was well encapsulated in an exchange that took place in July between Paul Krugman and George Will. Just after word emerged of a pending agreement between the House, Senate, and President to raise the ceiling on federal debt in exchange for spending cuts and budgetary reductions, both Will and Krugman appeared on the “roundtable” segment of ABC’s This Week:

    Krugman: We used to talk about the Japanese and their lost decade. We’re going to look to them as a role model. They did better than we’re doing. This is going to go on—I have nobody I know who thinks the unemployment rate is going to be below eight percent at the end of next year. With these spending cuts it might well be above nine percent at the end of next year. There is no light at the end of this tunnel. We’re having a debate in Washington which is all about, “Gee, we’re going to make this economy worse, but are we going to make it worse on ninety percent of the Republicans’ terms or a hundred percent of the Republicans’ terms?” And the answer is a hundred percent.

    Will: Paul’s right, we are a third of the way to a lost decade. But we’re a third of the way after TARP, the stimulus, Cash for Clunkers, dollars for dishwashers, cash for caulkers, the entire range of stimulus—the Keynesian approach which, by its own evidence, simply hasn’t worked. Now, Paul would double down—

    Krugman: In advance—one important point to make is that people like me said, in advance, this wasn’t remotely big enough. It’s not an after the fact—

    Will: That’s true.

    Krugman: —it’s not coming back afterwards. Right from the beginning, I looked at the numbers—people like me looked at the numbers and said, we’re going to have cutbacks at the state and local level, you’ve got a federal increase which is going to be barely enough to limit those cutbacks. There’s going to be no net fiscal stimulus if you look at government as a whole, which is what happened. So here we are.

    Will: It would be good to go to the electorate and have a Krugman election this time, saying, “Resolved, the government is too frugal. Let’s vote."(14)

    And so, even in the face and fallout of a disastrous economic collapse brought about by a financial crisis that occurred in the maw of an era of pronounced deregulation and government rollback, the burden of proof remains on anyone who would argue that properly calibrated government intervention into the economy is not only necessary, but is also capable of producing more positive outcomes. (It is, of course, worth noting that many forms of government expenditure—defense and less visible subsidies and tax incentives for large businesses and wealthy individuals being obvious examples—are somehow exempted from categorization as government intervention into the economy.)

    Thus, Will, who is somewhat rare among contemporary conservative commentators in broadcast media in that his is the professorial posture of a man who likes to take his arguments on the plane of ideas, was quite comfortable responding to Krugman’s points with nothing more than an arched rhetorical eyebrow, confident (not without cause) that such a response was all that was necessary to refute the most modest and elementary recommendations derived from Keynesianism.

    In responding to a crisis which they agree calls for a basic Keynesian response, then, left-of-(rather conservative)-center political actors and analysts (Larry Summers, for example—a hedge-fund liberal and the most prominent embodiment of the “New Keynesian” heirs to the neoclassical synthesis, who was instrumental in developing the partially effective stimulus bill of 2009, and who was also an ardent supporter of financial deregulation in the 1990s—called for additional stimulus in 2011) find themselves in a circular process by which they are:

    constrained by politics and ideology which → limits the force of the response which → leads to outcomes that partially attenuate but do not end the crisis which → allows opponents who have helped build constraints on a potential Keynesian response to claim to demonstrate that Keynesianism does not work which → builds even more confining constraints on its application.

    And, if, returning to Minsky, he is correct that Keynes has been misinterpreted, the process above is, in some ways, the same process that Keynesianism itself underwent during, and immediately following, the reign of the neoclassical synthesis.

    V
    Why should Keynes’ theory have “triggered an aborted, or incomplete, revolution in economic thought?” Minsky offers a number of reasons. He suggests, for example, that The General Theory is a “clumsy statement” (“a great deal of the new [theory] is imprecisely stated and poorly explained”); that Keynes’ didn’t have a chance to participate in the interpretative debate following its publication (he was sidelined by a heart attack and then went to work in the war effort); and that it is not possible to perform controlled experiments in the social sciences (a familiar lament).(15) But two of Minsky’s explanations in particular stand out.

    1) According to Minsky, “the older standard theory, after assimilating a few Keynesian phrases and relations, made what was taken to be real scientific advances.”

    Even though economists had often argued as if the laissez-faire proposition, about the common good being served as if by an invisible hand by a regime of free competitive markets, were firmly established, it is only since World War II that mathematical economists have been able to achieve elegant formal proofs of the validity of this proposition for a market economy—albeit under such highly restrictive assumptions that the practical relevance of the theory is suspect.(16)

    Keynes was therefore “made to ride piggy-back on mathematical general-equilibrium theory.”

    As an outsider, it is hard not to see in this assimilation a manifestation of a broader tendency in mainstream economics to reach for an equilibrium of another kind. The au fond assumption away from which the field, generally speaking, seems to resist being pulled, and towards which it inevitably claws its way back, is precisely the neoclassical proposition Van Overtreldt describes in the citation above.

    Of all of the social sciences, famously incomplete in their ability to comprehend human affairs, economics seems to be the least capable of acknowledging its limitations—or perhaps it is simply the most skilled at cagily hedging those limitations. After all, it seems reasonable to assume that the economic affairs of man are a complex affair, full of inconsistencies, contradictions, and odd behavior. Messy, in other words. And yet, it appears that theories within mainstream economics seeking to account for this mess—or seeking to counter the deleterious consequences of this mess—are at best partially assimilated, and at worst, wholly rejected in favor of models and modes of thought that don’t just envision and promote the benefits of the competitive workings of free and unfettered markets, but that also create an ideal out of them.(17) Further, any deviation is met with a redoubled effort to reinforce and/or retrofit the ideal. As Peter Temin told The Straddler, “The kind of models that many people use—general equilibrium models—start from assumptions of perfect competition, omniscient consumers, and various like things which give rise to an efficient economy. As far as I know, there has never been an economy that actually looked like that—it’s an intellectual construct."(18)

    James Kenneth Galbraith’s words to The Straddler back in March of 2010 are of a similar flavor—and go further towards hinting at an explanation of why this might be:

    [W]hen we encounter a doctrine of harmonization, of the smoothly functioning realization of the interests of all, the great and the small, which is textbook market economics, people should recognize that this is sand being thrown in their faces—that this cannot possibly be a realistic representation of the world in which we actually live. Take it as an analytic principle that one has to look at the behavior of the great with a cold eye.(19)

    There is a famous and oft-cited quote of Keynes from The General Theory which runs:

    The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

    Minsky agrees and disagrees, proposing that this quote “needs to be amended to allow the political process to select for influence those ideas which are attuned to the interests of the rich and powerful.” That is, ideas are important, but those ideas best suited to the advance and further entrenchment of the “vested interests” are often selected as the most important.

    Perhaps it is this process, beyond the limitations of the field qua investigative social science, that accounts for mainstream economics’ radical idealism with respect to the functioning of capitalism.

    2) But there is a further point to be made, using the final potential reason Minsky lists for the failure of full-throated Keynesianism to take hold as a point of departure:

    [T]he Keynesian Revolution may have been aborted because the standard neoclassical interpretation led to a policy posture that was adequate for the time. Given the close memory of the Great Depression in the immediate post-World War II era, all that economic policy really had to promise was that the Great Depression would not recur. … Questions as to whether the success of standard policy could be sustained and questions of “for whom” and “what kind” and about the nature of full employment were not raised. The Keynesian Revolution may have been aborted because the lessons drawn from the standard interpretation not only did not require any radical reformulation of the society but also were sufficient for the rather undemanding performance criteria that were ruling.(20)

    One wonders—in an age of florid and ever-increasing income inequality, stagnating wages for the majority of Americans, the recent development of high and persistent unemployment, and the pronounced deterioration in the quality of experience for the citizen as laborer (not only has job security disappeared, but the erosion of benefits for members of the workforce has increased as a structural adjustment of the meaning of employment continues apace) and for the citizen as consumer (interactions with providers of goods and services leave the consumer not infrequently in a netherworld between simultaneously complex, shoddy, and quickly obsolete products and poor, generally unresponsive support service)—if the implementation of an effective method to remedy the recent trajectory of economic citizenry would now require a radical reformulation of society. Or, what is more likely, if a change in society’s structure that, while not particularly radical, would be perceived as radical by those who have benefitted most from its current arrangements. Perhaps this is why Barack Obama’s speech on September 19th, in which he issued recommendations for tax increases on high-end incomes, and which contained a knowing and preemptive rhetorical strike against those who would call it class warfare, was greeted with cries of class warfare. (Class warfare, incidentally, is a concept with notable and defining instances in the actions of mankind. Examples in modern history include the French Revolution, the Russian Revolution, the Chinese Revolution, and America’s nineteenth-century labor battles. None of these events or movements seem to have had at its vanguard a battering ram in the shape of a modest tax increase.)

    While a small sector of the society has been well served by the workings of America’s economic system, the vast majority of the population has reason for discontent. One suspects that this might become even more the case as the future unfolds. Under these circumstances, if you’re interested in defending the status quo, better to fight on the plane upon which you are strongest by wrapping yourself in the rhetorical trappings of American economic ideology and the reassuring tropes of American self-identity than to join the battle on the plane of real-world outcomes and conditions.

    And better, too, if you are an economist with a stake in the game—a little too cozy, perhaps, with those who foot the bills, but by no means operating outside of the ethics of the field in which you ply your trade—to retreat to models demonstrating the fundamental correctness of your position, even if these models, in the end, have a dubious relationship to the actual world.

    VI
    It should be noted that in some ways, Minsky’s pessimism about the possibilities for stability within capitalism, may prove—subsequent to the 2008 “Minsky Moment”—too optimistic for present circumstances.

    Speaking extemporaneously on a panel at the Levy Institute in June, the Washington University economist Steven Fazzari pointed up the potential for a cycle to get stuck at a particular stage:

    What’s the converse of “stability is destabilizing?” Instability is stabilizing. I don’t know that Hy[man Minksy] would have ever said that, but the theory does imply this to some extent because it is a theory of indefinite cycles. So you get the boom, you hit the peak, you get the crisis, the crisis is cleansing—it may be extremely painful, but you wipe out the weaker units and you reestablish the conditions for growth again when the balance sheets are in some sense repaired. I think that’s the basic theory, the basic story.

    So in that context, if you want to tie my question—what will be the aggregate demand generating process going forward—to a Minsky perspective, you have to ask how long will it take for balance sheets to be repaired? How long will it be until more robust conditions in the financial system are established?

    A necessary condition for a more robust recovery is the improvement of the household balance sheet—leading to a restoration of better consumption, given that consumption is such a big part of demand. But I’m actually not fully convinced that this is sufficient. It’s necessary, but I’m not sure it’s sufficient.

    Income distribution is a fundamental structural problem that goes beyond finance. The growth model in the US over the past three decades was one of relatively stagnant income growth across much of the income distribution, plugging the hole in demand with more consumer borrowing. So balance sheet improvement can help but it doesn’t seem to me that it deals with the additional issue of the income distribution. And there’s nothing on the table from a policy perspective or a structural perspective that would change this.

    In other words, absent some significant event or dramatic change in policy, the fuse may have blown on the washing machine, leaving us stuck on soak.

    Paul Davidson, editor of the Journal of Post Keynesian Economics, made a similar argument in his remarks at the Institute:

    From the end of World War I to the beginning of World War II, the unemployment rate in the UK was double digits, except for one year when it was 9.7. That doesn’t sound like a cyclical problem to me, and it didn’t sound like it to Keynes, who basically argued that the economy had settled down at a long-run, stable unemployment rate which was very high. Just look at Japan in the 1990s and 2000s—and, I’m afraid to say, maybe a decade or two in the United States, beginning in 2007. So it’s not the ups and downs of a roller coaster—the capitalist system can be stable at less than full employment.

    No one can know what will happen as the avenues to affluence and the economic expectations (be they grand or modest) that people have for their lives are more and more ostentatiously occluded for more and more members of the population. It’s not likely to be pleasant, as grievances tend to manifest themselves in all sorts of odd and often irrational ways (the Tea Party being Exhibit A in our own times). But it’s also always possible, of course, that the worm will turn and those who benefit least will fix their attention on those who benefit most. Perhaps this is American capitalism’s fundamental anxiety—indeed, perhaps it always has been. But in the aftermath—and in the midst—of its greatest crisis in eighty years, a heightened unease may help account for its pronounced defensiveness,(21) and the rigidity of its scholarly underpinnings.

    VII
    There remain broader questions. Though we are in a tough spot today partially because consumers are less able to play their accustomed role in demand generation, Minsky’s speculation that “[t]he joylessness of American affluence may be due to the lack of a goal, the acceptance of a standard in which ‘more’ is really not worth the effort"(22) rings no less true in these circumstances.

    As of 1975, according to Minsky, “[t]he combination of investment that leads to no, or minimal net increment to useful capital, perennial war preparation, and consumption fads [had] succeeded in maintaining employment.” But though the period of the “Golden Age” had been remarkable in purely quantitative economic terms, in America it had “put all—the affluent, the poor, and those in between—on a fruitless inflationary treadmill, accompanied by…deterioration in the biological and social environment."(23)

    And so, even if we accept that an economy should be geared towards full-employment with stable growth, a reasonably equitable distribution of income, and the potential to enjoy prosperity and affluence as goals, what form will this growth take? What do we mean by prosperity and affluence? And what are qualitative contours by which to gauge the well-being of members of our society?

    At a time where a move back to some contemporary approximation of the moderate principles underlying the neoclassical synthesis would be regarded as radical, perhaps it is worth putting these larger, qualitative questions on the table as well.

    Perhaps, too, it is time to urge the field of economics to wrestle with the complexity of a system whose limitations it is best not to elide in simplified models that have a Panglossian sanguinity at their core. And perhaps too it would be well to investigate the complexities that are actually produced by the limits of the capabilities of field.

    For, as Minsky writes as he closes JMK, if, like Keynes, we think it best to live under an economic system “that sustains the basic properties of capitalism,” it should not be “because of the virtues of unfettered capitalism but in spite of its defects, which, though great, can in principle be controlled. ...[I]f capitalism is to be controlled so that the basic triad of efficiency, justice, and liberty is achieved, then the design of the controls will have to be enlightened by an awareness of what was obvious to Keynes—that with regard to both the stability of employment and the distribution of income, capitalism is flawed."(24)

    Notes

    1. “Full employment” is generally understood to mean a situation in which every person of working age who wants to work has a job, which is of course different than saying every person of working age has a job. In practical terms, unemployment rates below three, four, or even five percent—like those seen in the 50s and 60s, and again in the 90s—have typically been considered reasonably close approximations to full employment, not least because of the perceived relationship between low unemployment rates and the danger of an “overheating” economy leading to high rates of inflation. Indeed, there is a not uncontroversial concept in economics, the NAIRU (Non Accelerating Inflation Rate of Unemployment), which argues that there is a rate of unemployment (sometimes infelicitously termed the “natural” rate of unemployment) below which an economy ought not go lest it risk unsustainable rates of inflation. It is a subject of some debate precisely what this rate is, or if it is the same rate at all times, or if it is even a useful concept, but it’s typically claimed to be in the neighborhood of five percent.

    It is also worth noting, of course, that the official rate of unemployment is always lower than the actual rate of unemployment because official measurements fail to include significant portions of the nonworking population. For example, in September of 2011, the unemployment rate in the United States stood at 9.1 percent, or 14 million, according to the Department of Labor. But there were an additional 2.5 million, or 1.6 percent, who were officially not counted (how many were unofficially not counted is another matter):

    “In September, about 2.5 million persons were marginally attached to the labor force, about the same as a year earlier.… These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.…

    “Among the marginally attached, there were 1.0 million discouraged workers in September…. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.”* (*United States Department of Labor. Employment Situation—September 2001. Washington D.C.: Bureau of Labor Statistics, 2011. http://www.bls.gov/news.release/pdf/empsit.pdf [bold type in original].)

    The so-called “underemployed,” people who would like to work full time but are working in part-time jobs, are also not included in official measures of unemployment.

    2. “What’s Natural? Peter Temin in Conversation with The Straddler.” The Straddler, springsummer2011. http://www.thestraddler.com/20117/piece5.php

    3. Minsky, Hyman P. John Maynard Keynes. New York: McGraw Hill, 2008. 32.

    4. Ibid. 2.

    5. Overtveldt, Johan van. The Chicago School. Evanston, IL: Agate B2, 2007. 52.

    6. Minsky. Op. cit. 6

    7. Ibid. 7.

    8. Ibid. 55.

    9. Ibid. 11, 59.

    10. Ibid. 11.

    11. Ibid. 166.

    12. Ibid. 158.

    13. Gramm, Phil. “The Obama Growth Discount.” Wall Street Journal. 15 Apr 2011.
    http://online.wsj.com/article/SB10001424052748703983104576262763594126624.html [my emphasis].

    14. “Roundtable.” This Week with Christiane Amanpour. ABC: 31 Jul 2011.
    http://abcnews.go.com/ThisWeek/video/roundtable-part-budget-endgame-14198610.

    15. Minsky. Op. cit. 11-15.

    16. Ibid. 15. Minsky continues:

    “It turns out that the accomplishments of pure theory during the 1950s and 1960s are more apparent than real, when the problems of a financially sophisticated capitalist economy are under consideration.… Thus the purely intellectual pursuit of consistency between what was taken to be an elegant and scientifically valid microeconomics and a presumably crude macroeconomics has turned [o]ut to have been a false pursuit; microeconomics is at least as crude as macroeconomics.”

    17. As one of The Straddler’s contributing editors, Gary Peatling, observes:

    “I’m wondering if this unreality of neoclassical economics is itself a defense mechanism. Since a really unregulated economy is impossible (and is not even desired by the richest and most powerful vested corporate interests), any failure can be blamed on residual regulation. Hence the tenets are always irrefutable, in the manner of what Karl Popper termed a ‘bad science’ (although Popper might not have identified this). Also I’m reminded of John Ruskin’s comment that political economy was like science of gymnastics devised on the assumption that humans have no skeletons.” (Peatling, Gary. Personal communication. October 25, 2011)

    18. Temin. Op. cit.

    19. “The Predators’ Boneyard: A Conversation with James Kenneth Galbraith.” The Straddler, springsummer2010. http://www.thestraddler.com/20105/piece2.php

    20. Minsky. Op. Cit. 16.

    21. A comparatively mild articulation of this defensiveness was on display in a sympathetic 2010 New York Times Magazine profile of “lifelong Democrat” Jamie Dimon, CEO of Chase Bank:

    “The executive I encountered was on a mission to reclaim a respected place for his industry, even as he admits that it committed serious mistakes. He was adamant that government officials—he seemed to include President Obama—have been unfairly tarring all bankers indiscriminately. ‘It’s harmful, it’s unfair and it leads to bad policy,’ he told me again and again. It’s a subject that makes him boil, because Dimon’s career has been all about being discriminating—about weighing this or that particular risk, sifting through the merits of this or that loan.” (Lowenstein, Roger. “Jamie Dimon: America’s Least-Hated Banker.” New York Times Dec. 1, 2010. www.nytimes.com/2010/12/05/magazine/05Dimon-t.html)

    22. Minsky. Op Cit. 164.

    23. Ibid. 163.

    24. Ibid. 165.

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  • Conference Proceedings | November 2011
    Financial Reform and the Real Economy
    A conference organized by the Levy Economics Institute of Bard College with support from the FordFoundationLogo.

    This year’s Minsky conference marks the Levy Institute’s 25 anniversary, and the third year of the Ford–Levy joint initiative on reforming global financial governance. This initiative aims to examine financial instability and reregulation within the theoretical framework of Minsky’s work on financial crises. Minsky was convinced that a program of financial reform must be based on a critique of the existing system that identifies not only what went wrong, but also why it happened. Speakers addressed the ongoing effects of the global financial crisis on the real economy, and examined proposed as well as recently enacted policy responses. Should ending too-big-to-fail be the cornerstone of reform? Do the markets’ pursuit of self-interest generate real societal benefits? Is financial sector growth actually good for the real economy? Will the recently passed US financial reform bill make the entire financial system, not only the banks, safer?

  • Working Paper No. 695 | November 2011
    Explosion in the 1990s versus Implosion in the 2000s

    Orthodox and heterodox theories of financial crises are hereby compared from a theoretical viewpoint, with emphasis on their genesis. The former view (represented by the fourth-generation models of Paul Krugman) reflects the neoclassical vision whereby turbulence is an exception; the latter insight (represented by the theories of Hyman P. Minsky) validates and extends John Maynard Keynes’s vision, since it is related to a modern financial world. The result of this theoretical exercise is that Minsky’s vision represents a superior explanation of financial crises and current events in financial systems because it considers the causes of financial crises as endogenous to the system. Crucial facts in relevant financial crises are mentioned in section 1, as an introduction; the orthodox models of financial crises are described in section 2; the heterodox models of financial crises are outlined in section 3; the main similarities and differences between orthodox and heterodox models of financial crises are identified in section 4; and conclusions based on the information provided by the previous section are outlined in section 5. References are listed at the end of the paper.

  • In the Media | October 2011
    The Gold Report

    Business Insider, October 19, 2011. Copyright © 2011 Business Insider, Inc. All rights reserved.

    The Gold Report: Many of the resource companies in Pinetree Capital’s investment portfolio are gold companies. Gold went from above $1,900/ounce (oz.) in early September to around $1,600/oz. currently. Now, European central banks have sold 1.1 million metric tons of gold into the market to drive the price lower. Pinetree’s share price has followed gold lower and your exposure to gold remains high. What’s Pinetree’s pitch to investors right now?

    Marshall Auerback: We had a very significant run up in the gold price, so some correction is understandable. But the conditions that created the run-up to $1,900/oz. have not dissipated. If anything, they’ve become more pronounced, notably in the Eurozone, where investors must begin to seriously consider the possibility of a break-up of the European monetary union and the implications that has for gold. And if you look at the monetary overhangs in places like China and Japan, it’s hard to find stores of value there either. So we have had some significant spec liquidation, some central bank sales—a plus, as central bankers are usually a great contrary indicator—and yet the price appears to have stabilized around $1,600/oz. Gold stocks, in contrast, still reflect valuations that are substantially lower than the current gold price. It is also important to note that the capital markets, in contrast to late 2008, have not shut down. Good quality mining projects can still obtain funding, especially for projects with robust economics, which a number of our holdings possess.

    Pinetree has a unique structure. We raise money from the markets, which means that our longer-term funding requirements are, to some degree, shaped by market perceptions and market enthusiasm for resource stocks. But it also means we are not subject to monthly, daily or quarterly redemption pressures, so we can hold on to some smaller names that now offer the most compelling value they have offered in years.

    TGR: A few years ago, Pinetree went from being focused on technology and biotechnology stocks to resource-based equities.

    MA: Yes, the fundamental thesis has not changed. The developing world is likely to remain the dominant social, political and economic theme for at least the next few generations. Commodity prices have soared because the depletion of readily available resources is now finally outstripping the ingenuity of mankind to extract these resources. That is not just our view. Jeremy Grantham of GMO believes that this has changed the fundamental trend in real commodity prices, though the explosive nature of these prices in recent years has no doubt been amplified by speculation and historically unprecedented and ultimately unsustainable fixed investment in China. So you will get periodic corrections, especially during periods of global economic slowdown, but we don’t think this changes the long-term thesis. The portfolio composition has changed somewhat to reflect a changed economic environment of less base metals, more precious metals, but that is a tactical, as opposed to strategic, decision.

    TGR: Did that one-month, $300-dollar drop in the gold price ruin gold’s reputation as a safe-haven investment?

    MA: Not really. The price rise was, like other commodities, undoubtedly amplified by the actions of trend-following speculators. These are generally weak holders, and they tend to get shaken out when there are market gyrations of the sort that we have experienced over the past few months. But the fundamental reasons for holding gold have, if anything, grown stronger over the past few months.

    TGR: Is the fear-trade gone? Is gold now trading strictly on supply and demand fundamentals?

    MA: Given the way that markets have traded toward the end of the quarter, where you get maximum incentive to “paint the tape” in an upward direction, we think it is way too premature to suggest that the fear trade is over. Ultimately, though, gold is a supply/demand story. The market has been in fundamental deficit for decades and only the sales and leasing of gold by the central banks have prevented an even more acute price explosion.

    TGR: The market is always about timing, but timing is even more important now given the rampant volatility in the markets. Fearing an economic collapse, many investors exited the junior sector once the volatility started in August. Many of those same investors remain on the sidelines today and some probably want to get back in. Is there something they should wait for—like a bottoming of the gold price—or is now the time to return?

    MA: We think the time when you get maximum valuation is during these periods of turbulence and fear, when the baby gets thrown out with the bathwater. The good stuff is thrown out along with the bad as redemption pressures mount. Since we are in a comfortable position vis-à-vis our cash positions, we are in a good position to capitalize. Especially as Pinetree, for reasons explained before, doesn’t face comparable redemption pressures.

    TGR: Our readers are primarily retail investors who like the high-risk, high-reward nature of the precious metals juniors. Pinetree is essentially a retail investor with lots of cash and a crack research team. How is Pinetree playing the current market? Have you been adding to your positions on the market dips? Have you sold off? Have you held tight? Give us the scoop.

    MA: We try to “feed the ducks while they’re quacking,” in the sense that we recognize that many of these holdings are small and illiquid, and we tend to take large, strategic stakes. When our assessments are largely validated by market action, then we find that it is a good time to reduce, particularly because with these smaller, less liquid names, we are almost always going to be a bit early because we have to trim when there is good demand. This is especially the case when the company’s development has largely tracked what our analysts forecasted and with that comes the growing popularity of the shares with the broader market. Selling in those kinds of situations gives us the flexibility to take on new deals or, as is the case today, to buy from distressed sellers.

    TGR: What are your favorite five gold plays in the Pinetree Capital portfolio?

    MA: Gold Canyon Resources Inc. (GCU:TSX.V) is one. We are big believers in this deposit. The initial resource should be out by the end of this year and is promising to be several million ounces with grades exceeding most other bulk tonnage deposits in Canada. Looking at the dimensions of the deposit, specifically the new extension to the southeast, the potential here continues to grow far beyond what the company’s initial resource will give it credit for.

    Queenston Mining Inc. (QMI:TSX) is the consolidation of key past producing mines in the prolific Kirkland Lake mining camp. There is an Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) take-out potential. Extensive drilling on the Upper Beaver and the South Mine complex joint venture with Kirkland Lake Gold Inc. (KGI:TSX) continues to add ounces.

    RoxGold Inc. (ROG: TSX.V) is operating in Burkina Faso and has just raised the money needed to acquire 100% of its flagship asset. High-grade deposits are very hard to come by and the results it has consistently seen show potential for just that. With mid-major companies operating in the region, as RoxGold continues to add size, it becomes more and more likely to be an attractive candidate for a take-out.

    Continental Gold Ltd. (CNL:TSX) recently reported a very large high-grade resource on its Buritica gold/silver/base metals deposit in Colombia. If you look around right now there aren’t too many deposits that hold size and grade like this one and, with 250 kilometers of assays to come since the resource was calculated, there is still a lot of upside from here.

    Mawson Resources Ltd. (MAW:TSX; MWSNF:OTCPK; MRY:Fkft) is exploring at Rompas in Finland, a new discovery with bonanza gold where samples up to 22,723 grams per ton (g/t) gold and 43.6% uranium have been identified. The weighted average of all channel samples from the 2010 program is 0.59m at 203.66 g/t of gold and 0.73% uranium within a sampling footprint of 6.0 km. strike and 200–250m width. More than 300 discovery sites have now been identified within the mineralized footprint. At this very early stage of exploration, Rompas has to be considered as one of the most exciting global gold discoveries (with a uranium credit) to emerge into the marketplace, in terms of its high grades and hundreds of surface showing over a large area.

    TGR: What are three gold plays Pinetree has positions in that few have ever heard of?

    MA: Redstar Gold Corp. (RGC:TSX.V) is exploring in Alaska where properties have limited historical drilling. However, the company has seen very high grades. Currently, it is drilling up there and with the recent addition of the International Tower Hill Mines Ltd. CEO to their board, there is reason for interest. The company also has a joint venture with Confederation Minerals Ltd. (CFM:TSX.V) up in Red Lake. Thus far, Redstar has seen very high grades over 200 g/t over narrow widths stretching over a potentially several kilometer-long strike length. This kind of project requires lots of drilling; however, thus far, there has been some good continuity of success and with any sort of thicker intervals, this would be a project well worth the interest.

    Prosperity Goldfields Corp.’s (PPG:TSX.V) exploration is headed up by Quinton Hennigh, who is also on the board of Gold Canyon and is heading up its exploration program. Stock had a large run-up prior to results, which the market clearly saw as disappointing. Despite this, we think these results show great promise given that Prosperity was the first in the area and the potential size of this deposit is very large. This project is in Nunavut; however, a winter camp has been set up and, relative to the region, the infrastructure is better than most.

    Terreno Resources Corp. (TNO:TSX.V) is focused on a few different resources in South America. The company just raised $2.8 million and so it is cashed up to move forward on the initial exploration of both precious/base metal projects in Argentina as well as their phosphate/potash exploration in Brazil. It has had some solid trench results thus far down in Argentina, which is promising. The phosphate/potash market seems to be one of the few places where most analysts agree there will be a lift in pricing in the future so we are excited to see the exploration results.

    TGR: Let’s switch gears to silver. Does Pinetree believe silver is a better near-term investment than gold?

    MA: No, we think gold is likely to be the better performer if a global recession becomes the predominant concern, as opposed to systemic issues. That said, there have been some fairly violent moves to the downside over the last few weeks. The bear talk on China has really been overdone. Remember, China has over $2 trillion in foreign exchange reserves, so it has ample firepower to combat the forces of recession. In the very short term, we could get these massively oversold conditions worked off if it looked like the world was not coming to an end and silver could have a nice pop. Look at the U.S. data recently:

    • Since late August, the U.S. economic data has surprised somewhat to the upside.
    • Initial unemployment claims rose less than expected; September chain store sales look stronger than expected; Ford Motor Company’s sales for September were up 9%.
    • It looks as though GDP growth may come in better than 2% annually in both the third and fourth quarters, surpassing recent pessimistic expectations.

    As far as China itself goes, suddenly all the analysts, economists and portfolio managers that were all bulled up on China two years ago, a year ago and even six months ago have become all beared up on China. We are hearing about an imminent hard landing in China from everyone. So why the sudden bearishness about China?

    It is claimed that China’s informal credit market is out of control. Property developers and businesses are starved for credit; business investment and real estate will fall. A hard landing is at hand. Let’s put this informal credit market into perspective.

    This informal credit market is estimated at 3–4 trillion yuan RMB. The Chinese economy is now estimated at something north of 40 trillion yuan. According to Fitch, the formal credit market plus the shadow banking system totals about 70 trillion yuan.

    When one looks at these numbers one can see that the growth of informal lending and the extremely high interest rates on informal lending represent a problem in China. But it does not impact a significant share of aggregate expenditures.

    The real problem lies with the banking system and the shadow banking system.

    TGR: Is this important credit market now poised to take Chinese aggregate demand down?

    MA: We doubt it. Interest rates in the banking system are negative in real terms. The banking system is still expanding at a double-digit annual rate. Interest rates in the shadow banking system are much higher; they are no doubt positive in real terms, but it appears they are not usurious. In any case, this credit is still being allowed to expand at a very rapid rate. Will the authorities be able to deal with problems in the banking system or shadow banking systems, which are the credit markets that matter?

    The answer is probably yes. The biggest credit excesses and the biggest white elephant fixed investments in this cycle lie with the local authorities. The Chinese government in one fell swoop removed half a trillion dollars of such loans off the backs of these local authorities. A half a trillion dollars! That is as large as the entire alleged informal credit market that everyone is getting so beared up about.

    Longer term, the Chinese economy is an out-of-control Ponzi economy. Labor force growth will go negative. Surplus labor in agriculture is depleting. Fixed investment is impossibly high relative to a falling warranted rate of growth. Very bad things will eventually happen. However, the Chinese economy is also an extreme command economy. Extraordinary measures will be taken to avert these very negative outcomes.

    The Chinese economy is highly indebted. The Chinese central government is not. Before the proverbial you-know-what hits the fan, the Chinese government will use its balance sheet to keep the white-elephant over-investment juggernaut going. Do not underestimate the fiscal capacity of the Chinese government and its willingness to use it. We do not think the excesses today in the Chinese informal credit market are a reason to get very beared up on China all of a sudden. The Chinese bear story will unfold progressively over a long time.

    The real threat in China is inflation. China’s fixed investment has become increasingly credit dependent. To keep the fixed-investment juggernaut going and avert a hard landing, there must be sustained rapid money and credit expansion. There is already a large monetary overhang. The combination of these flow and stock dynamics threaten a very high inflation down the road. Which again makes the long-term case for gold very bullish.

    TGR: Where is Pinetree getting its exposure to silver?

    MA: Apogee Silver Ltd. (APE:TSX.V). The company’s primary focus is the Pulacayo-Paca Property located in southwestern Bolivia. The property includes the historic Pulacayo mine, which was the second largest silver mine in Bolivia’s history with historical production exceeding 600 million ounces of silver. Although there is obviously some risk with dealing in Bolivia, there are still many operating mines and we feel the deposit warrants the risk.

    Southern Silver Exploration Corp. (SSV:TSX.V; SEG:Fkft) recently acquired the Cerro Las Minitas property in Durango, Mexico. There is a history of production right in the middle of the property and thus far, the company’s initial holes have been promising. This is a very early stage project and there is a lot more definition needed before a resource can be laid out; however, Southern Silver is in a good region and we feel the property certainly has potential.

    TGR: What are some investment themes that you expect to play out in the coming months?

    MA: We think that the markets could surprise again to the upside as we have apparently discounted a double dip recession, whereas a slowdown might be more accurate. This period might end up being closer to 1998 than 2008.

    The trouble with the view that we are heading for another 2008 is that all crises are different. But they do share one common element: the inability of markets to perceive that when a market discontinuity is fresh in the minds of investors (e.g., 2008); it seldom repeats until that institutional memory is dissipated. Now, I believe that European banks are insolvent conditional upon the PIIGS collectively being insolvent. Clearly, this is the case for Greece (although the European Central Bank (ECB) could easily forestall this if it keeps buying Greek debt), but for the others, this is unclear—and, particularly in the case of Spain and Italy, a function of the rates at which they can borrow. So while the ECB provides a liquidity backstop, they have the room to adjust. Of course, the missing ingredient is growth. Europe already looks as though it has slid into recession. I would argue that recession, as opposed to systemic risk and bank runs, is already priced into European stock markets. But nothing is certain.

    While the current crisis in Europe is worse than the 1998 crisis with LTCM and Russia, in 1998 it was thought that the entire system would collapse. Remember in 1998 Fed funds were 5%, not zero; 10-year notes, above 4%, not 2%+; 2-year notes were 5%; SPX was 30x earnings, not 15x. We had not gone through a 1974-style liquidation in reverse parabola terms except for the one day 1987 sell-off, as we did in 2008–2009. Real estate (houses) was not selling for prices yielding 10%–15% on lower-end real estate, but that is where the focus of foreclosures is felt. The story will be told in the next eight trading days.

    TGR: Thank you for your insights.

    As Pinetree Capital’s corporate spokesperson, Marshall Auerback is a member of Pinetree’s board of directors and has some 28 years of global experience in financial markets worldwide. He plays a key role in the formulation and articulation of Pinetree’s investment strategy. Auerback is a research associate for the Levy Institute and a fellow for the Economists for Peace and Security.

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  • Working Paper No. 693 | October 2011
    Yet another rescue plan for the European Monetary Union (EMU) is making its way through central Europe, but no one is foolish enough to believe that it will be enough. Greece’s finance minister reportedly said that his nation cannot continue to service its debt, and hinted that a 50 percent write-down is likely. That would be just the beginning, however, as other highly indebted periphery nations will follow suit. All the major European banks will be hit—and so will the $3 trillion US market for money market mutual funds, which have about half their funds invested in European banks. Add in other US bank exposure to Europe and you are up to a potential $3 trillion hit to US finance. Another global financial crisis is looking increasingly likely.

    We first summarize the situation in Euroland. Our main argument will be that the problem is not due to profligate spending by some nations but rather the setup of the EMU itself. We then turn to US problems, assessing the probability of a return to financial crisis and recession. We conclude that difficult times lie ahead, with a high probability that another collapse will be triggered by events in Euroland or in the United States. We conclude with an assessment of possible ways out. It is not hard to formulate economically and technically simple policy solutions for both the United States and Euroland. The real barrier in each case is political—and, unfortunately, the situation is worsening quickly in Europe. It may be too late already.

  • In the Media | October 2011
    By Catherine Hollander

    National Journal, October 11, 2011. Copyright © 2011 by National Journal Group Inc.

    The U.S. job market has shown lackluster growth recently, to put it mildly.

    The September employment report, released on Friday, revealed that nonfarm payrolls added just 103,000 jobs last month—not horrific, but still under the threshold economists say they need to cross in order to dent unemployment. The Senate is likely to vote on the job-creation proposals in President Obama’s $447 billion American Jobs Act this week, but the bill’s passage is a long shot.

    As they consider the legislation, lawmakers may want to reflect on their counterparts across the Atlantic.

    While each economy faces unique obstacles to growth, fellow developed countries like Germany, Denmark, and France have implemented programs analogous to some found in Obama’s jobs bill with success. These include job-search programs accompanying unemployment benefits and stepped-up apprenticeship programs.

    Other countries have developed programs not found in the president’s legislation, such as mechanisms to certify workers who have gained skills on the job rather than in the classroom.

    Unemployment insurance programs vary widely from country to country. As of 2007, the most recent year for which data was available, the U.S. paid employees 13.6 percent of their previous earnings on average, compared with 24.7 percent in the Organisation for Economic Co-operation and Development as a whole, which counts the U.S. and 33 other wealthy countries as members.

    The U.S. also has short-lasting unemployment benefits compared with most of the other OECD members. By itself, this provides a “powerful incentive” for the unemployed to look for their next job, according to Gary Burtless, an economist at the Brookings Institution.

    But other OECD countries have deployed different incentives to get recipients of unemployment benefits back to work. Many low-paying jobs in the U.S. pay around the same as the benefits. Other countries have ensured work earnings are higher than unemployment benefits, incentivizing recipients to look for a job, according to Stefano Scarpetta, the OECD’s Deputy Director for Employment, Labour, and Social Affairs. 

    Some OECD countries have bolstered their programs to help the recipients of unemployment insurance re-enter the workforce. France and others have made unemployment benefits conditional on searching for a job and participating in re-employment programs. The U.S. has paid less attention to investing in such labor market institutions, Scarpetta said.

    He recommended focusing on “training, apprenticeship, and skills” to boost unemployment among the most vulnerable sectors of the population -- the young and long-term unemployed. Countries such as Germany and Denmark stepped up their traditional apprenticeship programs in response to the economic downturn. The pumped-up programs have a strong track record of landing apprentices with jobs, Scarpetta said.

    The American Jobs Act proposes to do this through new training for the recipients of unemployment insurance -- so-called “bridge to work” programs modeled after efforts in Georgia and North Carolina. These programs allow long-term unemployed workers to continue receiving unemployment benefits while they pursue work-based training.

    Such training could have secondary benefits, eliminating unwanted social trends such as crime and depression that are associated with high unemployment levels, according to Dimitri Papadimitriou, president of Bard College’s Levy Economics Institute. He called the training programs a “very good idea.”

    But Papadimitriou cautioned that without a more general economic recovery, simply training unemployed workers doesn’t guarantee jobs. Others fear it will be difficult to find employers willing to bring in unpaid trainees. They like to maintain control over the hiring process, Brookings’s Burtless said.

    It would be more fruitful in the long run to reform the way the U.S. thinks about employment training, he said.

    Several OECD countries, including Portugal, have created mechanisms by which workers who drop out of school but gain skills on the job can have those skills certified, making them more attractive to potential employers.

    The U.S. places too much emphasis on formal educational credentials and not enough on skills acquisition, Burtless said. A European-style certification program could make on-the-job training more valuable by providing workers with proof that they have a transferable skill.

    Such a program runs the risk of locking workers into too-rigid skill certifications, which could harm their ability to appear flexible in a changing workforce, according to Randall Eberts, president of the Upjohn Institute for Employment Research. It would not provide immediate unemployment relief, and it would take time for employers and workers to recognize the value of the certificate, but it could provide a huge help in the long run to a large portion of workers who complete their training on the job, Burtless said.

    Some economists were hesitant to make comparisons between the U.S. and the smaller European countries, whose economies operate in a different political environment. And it will ultimately take strong overall economic growth to turn around the labor market. Supply-side changes will have a limited impact without an accompanying improvement in demand, Papadimitriou argued.

    But in the end, the point is not that other developed countries have it all figured out—it’s that no one does, and looking at programs that have been implemented abroad can be a useful jumping-off point for discussions of job-creation measures in the U.S.

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  • In the Media | September 2011
    Interview with Pavlina R. Tcherneva

    September 8, 2011. © 2011 by Wisconsin Public Radio

    As Obama tours the East promoting his jobs bill, and jobs forums spring up across Wisconsin, Research Associate Tcherneva and host Ben Merens talk about what should be done now to address unemployment. Full audio of the interview is available here.

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  • In the Media | August 2011
    By Agostino Fontevecchia

    Forbes, August 30, 2011. © 2011 Forbes.com LLC™. All Rights Reserved.

    “[This] recession has turned into a prolonged and very unusual slump in growth, preventing a labor-market recovery,” explained Dimitri Papadimitriou, head of the Levy Economics Institute, in a recent paper called Not Your Father’s Recession. The economist makes the argument that post-crisis GDP growth rates are about 11.9% off of historical standards, which, along with the employment-to-population ratio, suggest the current macroeconomic environment is a lot more challenging than in other recessions and will need the intervention of government to recover.

    “Considering the already severe slump in job creation, it hardly matters whether such a downturn would constitute the second dip of a ‘double-dip’ recession, a continuation of the ‘Great Recession,’ or a confirmation that the economy has entered a Japanese-style ‘lost decade,’” wrote Papadimitriou, adding that a labor-market recovery appears unlikely without help from the government, and the data proves it.

    Economics hasn’t come to terms with the possibility of a market economy stagnating over a protracted period because its models are based on constant growth. The reality is that market economies have grown relentlessly during the XX century.

    Papadimitriou illustrates it with a chart overlaying an exponential growth line to an inflation adjusted-GDP series from 1967 to today. The match is almost exact all the way to 2007; today, real GDP is “11.9 per cent less than one would have expected based on earlier data.”

    It’s no surprise that a depressed U.S. economy has kept output at multi-year lows. Recent revisions show Q2 GDP growing at a meager 1%, suggesting post-recession growth came from now-exhausted stimulus packages. Papadimitriou takes it one step further, arguing that average GDP, as illustrated by 12-quater, 20-quarter, and 28-quarter moving averages, has been declining since 2000.

    One of the most worrying signs of the U.S.’ generalized economic weakness is the state of labor markets, particularly when compared with other post-recession recoveries.

    Employment-to-population ratios bottom out 18 to 37 months after the onset of the recession in each of the previous six cases of output contraction. This time around, 43 months after the beginning of the recession, the trend continues to be negative, with the ratio down 4.6% to 58.1% in what has been almost four years of negligible recovery in labor markets.

    With Chairman Ben Bernanke choosing to stay on the sidelines and the private sector immersed in a cycle of deleveraging, Papadimitriou points the finger at government, noting “the [federal] government has barely begun the task of creating the new jobs needed to deal with this disaster.”

    Further stimulus will face staunch opposition in Congress, with Tea Party candidates taking the reins of the Republican Party on a cut spending-platform. The White House has leaked, though, an announcement that President Obama will unveil a new jobs plan, which is expected to be some sort of stimulus, in September.

    It remains to be seen whether the situation in Europe will worsen, or if a moderate improvement in economic conditions in the second half of the year, coupled with Obama’s coming plan, will help push the economy out of the gutter.

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  • Public Policy Brief No. 119 | August 2011

    The export-led growth paradigm is a development strategy aimed at growing productive capacity by focusing on foreign markets. It rose to prominence in the late 1970s and became part of a new consensus among economists about the benefits of economic openness.

    According to Thomas I. Palley, this paradigm is no longer relevant because of changed conditions in both emerging-market (EM) and developed economies. He outlines the stages of the export-led growth paradigm leading to its adoption worldwide, as well as the various critiques of this agenda that have become increasingly prescient. He concludes that we should reduce reliance on strategies aimed at attracting export-oriented foreign direct investment and institute a new paradigm based on a domestic demand–led growth model. Otherwise, the global economy is likely to experience asymmetric stagnation and increased economic tensions between EM and industrialized economies.

  • In the Media | August 2011
    By Alexander Eichler

    Huffington Post, August 22, 2011. Copyright © 2011 TheHuffingtonPost.com, Inc. | “The Huffington Post” is a registered trademark of TheHuffingtonPost.com, Inc. All rights reserved.

    During the 2008 financial crisis, when the nation’s banking system seemed on the verge of collapse, President George W. Bush authorized a $700 billion bailout of the financial industry. The U.S. Treasury implemented that program, known as TARP, in an effort to stave off economic catastrophe.

    At the same time, and in the years that followed, the Federal Reserve was undertaking its own rescue operation, in the form of private, previously undisclosed loans to banks and other institutions—lending as much as $1.2 trillion, nearly twice the amount of the Treasury bailout, according to a data analysis performed by Bloomberg News and published on Monday.

    The scope of the Fed’s private lending had previously only been guessed at, but figures obtained under the Freedom of Information Act by Bloomberg News show that the nation’s central banker issued loans to more than 300 institutions between August 2007 and April 2010, including over 100 loans of $1 billion or more.

    While the Fed’s loans likely helped to prevent a complete implosion of the global banking system, analysts say they fear the loans may have contributed to an atmosphere of complacency on Wall Street. Banks that received emergency cash infusions during the crisis may now believe the Fed will always be there to bail them out of trouble, the thinking goes.

    “It is a classic case of moral hazard,” Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College, told The Huffington Post.

    The Federal Reserve itself had argued that the details of its emergency loans should be kept out of the public eye, claiming that the reputations of the firms involved could suffer if they were seen to be taking money from the government in order to stay afloat. Many of the banks that borrowed from the Fed had previously appealed to the Supreme Court to keep those records secret.

    However, an invocation of the Freedom of Information Act forced the Fed to release more than 29,000 pages of documents, revealing the extent to which the financial sector relied on Federal Reserve dollars during the worst days of the crisis.

    Given the extraordinary size of the loans, the public has a right to know what happened, said David Jones, an executive professor at the Lutgert College of Business at Florida Gulf Coast University.

    “It’s completely valid at some point to say, ‘Who did the borrowing?’“ Jones told The Huffington Post. “It was appropriate, under this special set of circumstances, to divulge the information.”

    Among the largest borrowers were Bank of America, which borrowed $91.4 billion; Goldman Sachs, which was in debt for $69 billion; JPMorgan Chase, which borrowed $68.6 billion; Citigroup, which borrowed $99.5 billion and Morgan Stanley, the biggest borrower of all, to which the Fed loaned $107 billion.

    In addition, the Fed issued sizable loans to a number of foreign banks, including the Royal Bank of Scotland, which borrowed $84.5 billion; Credit Suisse Group, which borrowed $60.8 billion and Germany’s Deutsche Bank, to which the Fed lent $66 billion. Nearly half of the 30 largest borrowers were European firms, according to Bloomberg News.

    While the amount of lending that took place is remarkable, some argue that the Fed’s error was not in issuing the loans, but rather in doing so without setting stronger policy reform conditions for the money.

    Dean Baker, co-director of the Center for Economic and Policy Research, told The Huffington Post that Federal Reserve Chairman Ben Bernanke could have attached a “quid pro quo” to the emergency loans—stipulating, for example, that the money would only come through if the banks agreed to do business in a less risky way going forward.

    “This is the moment all the banks were on their backs,” Baker said. “The Fed ran to the rescue and got nothing in return.”

    A previous disclosure in December found that the Fed issued $9 trillion in low-interest overnight loans to banks and other Wall Street companies during the crisis. The $1.2 trillion figure represents the peak amount of outstanding loans, which occurred on December 5, 2008, according to Bloomberg News.

    Some critics contend that while the Fed was right to support the financial sector, the government didn’t do enough to help ordinary citizens who were also seeing their wealth evaporate during the crisis.

    Papadimitriou told The Huffington Post that the Fed issued many of its biggest loans during the Bush administration, and that “they didn’t appear to have any difficulty supporting the financial sector, but very much difficulty supporting the real sector, households.”

    Consumer spending suffered and unemployment spiked in the wake of the financial crisis, and the economy remains weak today. Output is low, consumer confidence is down and millions are still out of work—factors that have some economists worried about the possibility of a double-dip recession.

    The TARP bailout, led by the Treasury, was the subject of much popular ire when it occurred, since it was seen as a case of the government throwing money at the financial sector at the expense of everyday Americans. Similarly, the Fed’s $1.2 trillion in emergency loans were primarily aimed at keeping major financial institutions on their feet.

    “One would assume banks are too interconnected, you have to help all of them,” Papadimitriou said. “But if you take households in total, they are also all interconnected. They are also too big to fail.”

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  • In the Media | August 2011

    New Economic Perspectives, August 13, 2011. Copyright © 2010 KPFK. All Rights Reserved.

    Senior Scholar Wray joins Masters for a macroeconomic analysis of adverse economic trends at home and abroad amid dire predictions of a double-dip recession in the United States and defaults in Europe, connecting the dots to see if we are indeed at a Smoot-Hawley moment where the Congress, instead of reversing economic decline, has accelerated it. Full audio of the interview is available here.

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  • Working Paper No. 681 | August 2011

    This paper begins by recounting the causes and consequences of the global financial crisis (GFC). The triggering event, of course, was the unfolding of the subprime crisis; however, the paper argues that the financial system was already so fragile that just about anything could have caused the collapse. It then moves on to an assessment of the lessons we should have learned. Briefly, these include: (a) the GFC was not a liquidity crisis, (b) underwriting matters, (c) unregulated and unsupervised financial institutions naturally evolve into control frauds, and (d) the worst part is the cover-up of the crimes. The paper argues that we cannot resolve the crisis until we begin going after the fraud, and concludes by outlining an agenda for reform, along the lines suggested by the work of Hyman P. Minsky.

  • One-Pager No. 12 | August 2011
    President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen make the case that the recession has turned into a prolonged and very unusual slump in growth, preventing a labor-market recovery—and the government lags far behind in creating the new jobs needed to deal with this disaster.

  • Working Paper No. 678 | July 2011
    Reevaluating the Role of Fiscal Policy

    Conventional wisdom contends that fiscal policy was of secondary importance to the economic recovery in the 1930s. The recovery is then connected to monetary policy that allowed non-sterilized gold inflows to increase the money supply. Often, this is shown by measuring the fiscal multipliers, and demonstrating that they were relatively small.

    This paper shows that problems with the conventional measures of fiscal multipliers in the 1930s may have created an incorrect consensus on the irrelevance of fiscal policy. The rehabilitation of fiscal policy is seen as a necessary step in the reinterpretation of the positive role of New Deal policies for the recovery.

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  • Working Paper No. 675 | July 2011

    This paper traces the rise of export-led growth as a development paradigm and argues that it is exhausted owing to changed conditions in emerging market (EM) and developed economies. The global economy needs a recalibration that facilitates a new paradigm of domestic demand-led growth. Globalization has so diversified global economic activity that no country or region can act as the lone locomotive of global growth. Political reasoning suggests that EM countries are not likely to abandon export-led growth, nor will the international community implement the international arrangements needed for successful domestic demand-led growth. Consequently, the global economy likely faces asymmetric stagnation.

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  • One-Pager No. 10 | June 2011
    With quantitative easing winding down and the latest payroll tax-cut measures set to expire at the end of this year, pressing questions loom about the current state of the US economic recovery and its ability to sustain itself in the absence of support from monetary and fiscal policy.

  • Working Paper No. 673 | June 2011

    We present strong empirical evidence favoring the role of effective demand in the US economy, in the spirit of Keynes and Kalecki. Our inference comes from a statistically well-specified VAR model constructed on a quarterly basis from 1980 to 2008. US output is our variable of interest, and it depends (in our specification) on (1) the wage share, (2) OECD GDP, (3) taxes on corporate income, (4) other budget revenues, (5) credit, and the (6) interest rate. The first variable was included in order to know whether the economy under study is wage led or profit led. The second represents demand from abroad. The third and fourth make up total government expenditure and our arguments regarding these are based on Kalecki’s analysis of fiscal policy. The last two variables are analyzed in the context of Keynes’s monetary economics. Our results indicate that expansionary monetary, fiscal, and income policies favor higher aggregate demand in the United States.

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  • In the Media | May 2011
    By Dimitri B. Papadimitriou
    May 26, 2011. Copyright © 2011 New Geography

    It's been more than three years since the Great Recession began, and it's no longer debatable that the federal spending in its wake did not provoke inflation. Years of forecasts by fiscal conservatives about the result of government expenditures have proved to be wrong. After three fiscal stimulus packages, core inflation—which excludes the volatile prices of oil and commodities—remains very much in check. The core rate is the most reliable guide to future inflation, and it has not trended upward.

    Headline inflation, however, the rate that does include these two, has increased. Is the recent uptick in gas and food prices a game-changer on inflation? Does it mean that predictions of an inflation tsunami were well-founded? And what's the best course to follow now?

    Many commodity prices have made double and triple digit gains over the past year. The changes are more than a blip—cotton futures, for example, have risen 162 percent—even if the cost of oil continues to decline. These prices are notoriously subject to rapid change for reasons that don't reflect the structure of the U.S. economy. Factors can include Middle East politics, weather, activity in the developing world, and, most significantly today, speculative profiteering.

    Gold and other commodities have become a hot destination for players—money managers—as these markets have become the rare opportunity for high returns. In the absence of federal regulation and supervision, the low interest rates that are so crucial to business growth and to the vast majority of Americans have been allowed to feed into the permissive speculative superstructure.

    The run-up has clearly impacted the poor and the hungry in the undeveloped world. In academic and policy circles, there's a high level confidence that commodities account for only a small share of GDP in wealthy countries, and so aren't of concern as long as core inflation is under control. At the Levy Institute, in contrast, our research shows that even in the developed world expensive food, energy, and materials can crowd out other household purchases. Consumer budgets can be hurt even before serious headline inflation appears.

    If commodity prices were to continue to climb broadly and sharply, the Federal Reserve could face the prospect of a serious episode of cost-push inflation, similar to what we saw in the 1970s and '80s. Fed Chairman Ben Bernanke might find himself occupying the chair of Paul Volcker in more ways than one.

    This kind of inflation is caused neither by the effects of low interest rates on the broader economy, nor by government spending. And, as with any symptom of ill health, the cause dictates the appropriate treatment. So if Bernanke's response was to raise interest rates dramatically in the hope of abating inflation to some arbitrarily low target, it would be a risky mistake. An interest rate rise would be a serious danger to growth and job creation. Business and labor are far too fragile to deal with a double whammy from rising gas and food prices coupled with monetary policy tightening.

    A better response would be "watchful waiting," a phrase seen in the December 1996 minutes of the FOMC (Federal Open Market Committee) meeting. A commodity price inflation could remain at least somewhat isolated.

    Higher commodity prices will be used as an excuse to charge that the Fed's supposedly lax policy has unleashed an inflationary flood of cash throughout the economy. But the Fed's so-called "easy money" is parked at the Fed itself, as bank reserves, since banks are not lending. This can't cause inflation either. Logic hasn't stopped newly re-branded Republican presidential candidate Newt Gingrich, who recently admonished that "The Bernanke policy of printing money is setting the stage for mass inflation."

    Those who purchase securities for long-term investment evidently disagree. Bond traders aren't anticipating an inflationary surge. Just look at the yield spread between inflation-indexed and non-indexed Treasury securities of the same maturity. It has remained almost constant over the past year. In other words, buyers who want their returns insulated from inflation are paying only slightly more for protection than they were last year. That flatness—the unwillingness to pay a premium for inflation insurance—indicates that long-term bond buyers haven't revised their inflation forecasts.

    Also unlikely to revise their predictions: inflation doom-drummers, even as energy prices level, and wages, another inflation indicator, are by no means jumping. Like eons of "the-end-is-nigh" prognosticators, they don't exactly have a great track record. Back in spring 2008, a frenzied Glenn Beck urged Fox viewers to "Buy that coat and shoes for next year now." Some of his Washington cohorts are coy about inflation's estimated time of arrival. Republican House Majority Leader Eric Cantor, for example, tells us that "fears" of "future" inflation are "hanging over the marketplace." Others, like former Pennsylvania Senator Rick Santorum, say it's already arrived (Obama brought it). The accusations continue despite a lengthy stretch of the lowest inflation rates in modern US history, even with the current commodities rise.

    Paul Ryan (R-WI) has been hailed as both a truth sayer and a soothsayer on the economy. He recommends that the Federal Reserve raise interest rates now to head off inflation "before the cow is out of the barn," ignoring the pain this would cause families and businesses. Here's my recommendation: Don't trust predictions about the future from those who've misread the present, and been very wrong in the past.

    Dimitri Papadimitriou is President of the Levy Economics Institute of Bard College, and Executive Vice President and Jerome Levy Professor of Economics at Bard College.

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  • In the Media | May 2011
    By Dimitri B. Papadimitriou

    May 13, 2011. Copyright © 2011, Los Angeles Times

    For 20 years, U.S. exports have trailed imports. Addressing the imbalance could hugely boost the job market.

    One school of thought about the so-called jobless recovery of the American economy blames high unemployment on the federal deficit. But that’s blaming the wrong deficit.

    To achieve an authentic recovery that includes new jobs, the deficit we need to cut is in trade.

    For 20 years, America’s exports have been surpassed by its imports, with a big bite of that trade deficit composed of oil imports. Addressing the imbalance could have a huge effect on the job market, but only if it goes beyond reducing imports. We need to actively strengthen exports as well.

    Even if the economic recovery continues, as is likely, joblessness will remain a colossal disaster. The unemployment rate is hovering at about 9%, and for some groups it is far higher. Nearly 16% of African Americans are unemployed, with young people and Latinos not far behind. The United States is about 19 million jobs behind the curve if employment is to return to its pre-recession levels. Among the world’s most developed nations, the G-7, we have the highest unemployment. Here at the Levy Economics Institute, even in our best-case growth scenario, we see unemployment dropping only to about 7%—way above healthy levels—by 2015. We’re not alone in that pessimism: The figures vary, but the prevailing outlook, including from the Federal Reserve is that job-seekers face years of pain.

    Exports are key to meeting the urgent need for new jobs. The White House estimates that every $1 billion in exports creates 5,000 jobs. This makes it crucial for companies to find more customers in the rest of the world.

    In addition to aircraft and other transport vehicles, U.S. industrial equipment, pharmaceuticals, chemicals, semiconductors and agricultural products—raw and processed—have a track record of success in the global marketplace, along with millions of goods from medium-size and small companies.

    There are things that could be done to help American exporters. A devaluation of the dollar beyond the current downward creep would be a start. A weaker dollar would reduce the cost of our exports in foreign markets, in turn generating demand from buyers abroad. It would also encourage American consumers to buy domestic products because our goods would have a price advantage over imported ones. And the resulting rise in exports would have a side benefit: reducing the national budget deficit, because GDP growth and lower unemployment would mean larger government revenues and less spending on safety-net programs.

    Devaluation does have some downsides, of course. Over the long haul, it can cause inflation, but that is not an immediate danger because core inflation is currently at or near record lows. Still, consumers would probably be paying more in the short term for oil and other imports.

    In the long term, international monetary reforms would certainly be a preferable route to devaluing the dollar. Global imbalances are on the G-20 radar screen, but a serious policy response has yet to be floated. One helpful monetary reform would be to expand Special Drawing Rights—artificial, blended currency units governed by the International Monetary Fund—as supplemental currency reserves. This could only be done by an accord among the G-20 countries. International agreements take time—the World Trade Organization’s Doha talks will soon celebrate their 10th anniversary—so moving the dollar’s exchange rate is a better short-term solution.

    Even then, ramping up American exports will be difficult. The White House has set a goal of doubling exports over five years, but the current mania for spending cuts may work against that ambition. In the House of Representatives, the Small Business Committee has advocated rescinding $30 million in Small Business Administration grants to states for promoting exports and sharply cutting the SBA’s Office of International Trade. These savings would be counterproductive and would work against the nation’s best interests.

    It’s true that our trade account balance has recently improved. The better figures, though, aren’t a sign of healthy growth or an upcoming job surge. They reflect more a drop in imports rather than a growth in exports, and the drop has come because of less demand for goods in the recession’s shadow and amid ongoing financial fears.

    Exports are starting to rise. But making sure that the upward curve continues will be crucial to addressing our still-worrisome unemployment rate.

    Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and a professor of economics there. He is a former vice chairman of Congress’ Trade Deficit Review Commission

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  • In the Media | May 2011
    Pema Levy Interviews James K. Galbraith

    The American Prospect, May 5, 2011. © 2011 by The American Prospect, Inc.

    A deal is taking shape between Congress and the administration on the debt-ceiling vote, and it will likely include some spending cuts in exchange for increasing the amount the government can borrow.

    As these negotiations play out, we’re constantly warned that the debt-ceiling fight has high stakes. Refusing to raise the ceiling will prevent us from paying debts and will destroy the faith our bondholders—that is, China—have in us. Or will it? The Prospect talked with James K. Galbraith, the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas at Austin, about just how accurate the doomsday predictions really are.

    Everyone says that if we don’t raise the debt ceiling soon, we’ll have a financial disaster on our hands. How accurate are these catastrophic predictions?

    Failure to raise the debt limit would be, for sure, a bad idea. Whether it would produce a fiscal and bond market Armageddon, I think, is really doubtful.

    This is a group of politicians saying, give me cuts or I will shoot the economy. So that’s the political problem that we face. And one way I think to handle that problem is to point out that what the hostage-takers have in their hands may well not be a nuclear grenade; it might be something much less cataclysmic.

    A few weeks ago, the ratings agency Standard & Poor’s warned that the United States could lose its AAA rating on U.S. debt (securities, bonds, etc.), which could have serious repercussions for the economy. How do you gauge the chances of a downgrade?

    One can’t judge what Standard & Poor’s or Moody’s will do, because they’ve gotten most everything else wrong in the last decade. These are firms that graded vast mounds of worthless mortgage-backed paper as AAA because of the crafty ways it was securitized. These are firms that never to my knowledge downgraded a major corporate fraud—Enron and so forth—more than a few days in advance of its collapse. And they routinely give cities lower ratings than they should based upon the default rates on those instruments. They have no particular competence in Europe, either. So, it’s a little bit unpredictable what a corporation with that track record is going to do.

    Is there a danger we’ll default?

    If you read the 14th Amendment, Section 4, it says that the [validity of the] debt of the United States authorized by law—including pensions, by the way, so including Social Security—shall not be questioned. So long as we are run by the Constitution, we’re going to pay the debt.

    One fear is that not raising the ceiling will cause a global panic or at least a ripple effect if the U.S. fails to pay its foreign creditors. What will foreign creditors do if we default on our bonds?

    Let’s suppose that the Treasury actually says to the People’s Bank of China, sorry, we can’t write a check to you right now. Well, in the case of the People’s Bank of China, the bond that they hold would become a defaulted bond, but it would still be there. And the Treasury would still recognize its obligation on that bond and would presumably be willing to pay accrued interest on it. The Treasury would probably say, it’s going to be a few days while we resolve this, and the People’s Bank of China would, in my view, probably do nothing.

    If I were sitting in the position of a foreign holder of U.S. Treasury securities in that situation, the last thing I would want would be a panic. I would want this problem to go away.

    And if there is a panic?

    I think the right analogy to that would be the failure of Congress to pass the [Troubled Asset Relief Program] on the first round. The stock market went down by 800 points. That sent a very powerful political wake-up call, and suddenly people changed their positions. The most likely thing if we actually go to this stage where there is real turmoil would be that Congress—the hostage-takers—would drop their guns.

    So the question I would have then is: Does it make sense to give the hostage-takers what they want? Which are massive cuts. And I think it does not make sense by any stretch of the imagination to agree that the debt ceiling shall be the point of leverage for coming to a decision, which is what the Republicans want and unfortunately what some Democrats like Kent Conrad want.

    This would be an act of just gross negotiating folly to set the precedent that the debt-ceiling negotiations become the way in which the extremists get what they want.

    This Q&A has been edited for length and clarity.

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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.

  • Working Paper No. 668 | May 2011
    Functional Finance and Full Employment

    Forty-five years ago, the A. Philip Randolph Institute issued “The Freedom Budget,” in which a program for economic transformation was proposed that included a job guarantee for everyone ready and willing to work, a guaranteed income for those unable to work or those who should not be working, and a living wage to lift the working poor out of poverty. Such policies were supported by a host of scholars, civic leaders, and institutions, including the Rev. Dr. Martin Luther King Jr.; indeed, they provided the cornerstones for King’s “Poor Peoples’ Campaign” and “economic bill of rights.”

    This paper proposes a “New Freedom Budget” for full employment based on the principles of functional finance. To counter a major obstacle to such a policy program, the paper includes a “primer” on three paradigms for understanding government budget deficits and the national debt: the deficit hawk, deficit dove, and functional finance perspectives. Finally, some of the benefits of the job guarantee are outlined, including the ways in which the program may serve as a vehicle for a variety of social policies.

  • Public Policy Brief No. 118 | April 2011
    Four Fragile Markets, Four Years Later

    In this brief, Research Scholar Greg Hannsgen and President Dimitri B. Papadimitriou focus on the risks and possibilities ahead for the US economy. Using a Keynesian approach and drawing from the commentary of other observers, they analyze publicly available data in order to assess the strength and durability of the expansion that probably began in 2009. They focus on four broad groups of markets that have shown signs of stress for the last several years: financial markets, markets for household goods and services, commodity markets, and labor markets. This kind of analysis does not yield numerical forecasts but it can provide important clues about the short-term outlook for the country’s economic well-being, and cast light on some longer-run threats. In particular, dangers and stresses in the financial and banking systems are presently very serious, and labor market data show every sign of a widespread and severe weakness in aggregate demand. Unless there is new resolve for effective government action on the jobs front, drastic cuts in much-needed federal, state, and local programs will become the order of the day in the United States, as in much of Europe.

  • Working Paper No. 665 | April 2011
    Don’t Forget Finance

    Given the economy’s complex behavior and sudden transitions as evidenced in the 2007–08 crisis, agent-based models are widely considered a promising alternative to current macroeconomic practice dominated by DSGE models. Their failure is commonly interpreted as a failure to incorporate heterogeneous interacting agents. This paper explains that complex behavior and sudden transitions also arise from the economy’s financial structure as reflected in its balance sheets, not just from heterogeneous interacting agents. It introduces “flow-of-funds” and “accounting” models, which were preeminent in successful anticipations of the recent crisis. In illustration, a simple balance-sheet model of the economy is developed to demonstrate that nonlinear behavior and sudden transition may arise from the economy’s balance-sheet structure, even without any microfoundations. The paper concludes by discussing one recent example of combining flow-of-funds and agent-based models. This appears a promising avenue for future research.

  • Strategic Analysis | March 2011

    The US economy grew reasonably fast during the last quarter of 2010, and the general expectation is that satisfactory growth will continue in 2011–12. The expansion may, indeed, continue into 2013. But with large deficits in both the government and foreign sectors, satisfactory growth in the medium term cannot be achieved without a major, sustained increase in net export demand. This, of course, cannot happen without either a cut in the domestic absorption of US goods and services or a revaluation of the currencies of the major US trading partners.

    Our policy message is fairly simple, and one that events over the years have tended to vindicate. Most observers have argued for reductions in government borrowing, but few have pointed out the potential instabilities that could arise from a growth strategy based largely on private borrowing—as the recent financial crisis has shown. With the economy operating at far less than full employment, we think Americans will ultimately have to grit their teeth for some hair-raising deficit figures, but they should take heart in recent data showing record-low “core” CPI inflation—and the potential for export-led growth to begin reducing unemployment.

  • Working Paper No. 640 | December 2010
    Remedies for High Unemployment and Fears of Fiscal Crisis

    In recent years, the US public debt has grown rapidly, with last fiscal year’s deficit reaching nearly $1.3 trillion. Meanwhile, many of the euro nations with large amounts of public debt have come close to bankruptcy and loss of capital market access. The same may soon be true of many US states and localities, with the governor of California, for example, publicly regretting that he has been forced to cut bone, and not just fat, from the state’s budget. Chartalist economists have long attributed the seemingly limitless borrowing ability of the US government to a particular kind of monetary system, one in which money is a “creature of the state” and the government can create as much currency and bank reserves as it needs to pay its bills (this is not to say that it lacks the power to impose taxes). In this paper, we examine this situation in light of recent discussions of possible limits to the federal government’s use of debt and the Federal Reserve’s “printing press.” We examine and compare the fiscal situations in the United States and the eurozone, and suggest that the US system works well, but that some changes must be made to macro policy if the United States and the world as a whole are to avoid another deep recession.

     

  • One-Pager No. 7 | November 2010

    The stability of the international reserve currency’s purchasing power is less a question of what serves as that currency and more a question of the international adjustment mechanism, as well as the compatibility of export-led development strategies with international payment balances. Export-led growth and free capital flows are the real causes of sustained international imbalances. The only way out of this predicament is to shift to domestic demand–led development strategies—and capital flows will have to be part of the solution.

  • One-Pager No. 5 | November 2010
    The Need for More Profound Reforms

    There is no justification for the belief that cutting spending or raising taxes by any amount will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. We must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.

  • 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.

  • Working Paper No. 635 | November 2010
    A Review of the Literature

    This paper provides a survey of the literature on trade theory, from the classical example of comparative advantage to the New Trade theories currently used by many advanced countries to direct industrial policy and trade. An account is provided of the neo-classical brand of reciprocal demand and resource endowment theories, along with their usual empirical verifications and logical critiques. A useful supplement is provided in terms of Staffan Linder’s theory of “overlapping demand,” which provides an explanation of trade structure in terms of aggregate demand. Attention is drawn to new developments in trade theory, with strategic trade providing inputs to industrial policy. Issues relating to trade, growth, and development are dealt with separately, supplemented by an account of the neo-Marxist versions of trade and underdevelopment.

  • Working Paper No. 632 | November 2010
    A Structural VAR Analysis

    This paper investigates private net saving in the US economy—divided into its principal components, households and (nonfinancial) corporate financial balances—and its impact on the GDP cycle from the 1980s to the present. Furthermore, we investigate whether the financial markets (stock prices, BAA spread, and long-term interest rates) have a role in explaining the cyclical pattern of the two private financial balances. We analyze all these aspects estimating a VAR—between household and (nonfinancial) corporate financial balances (also known as the corporate financing gap), financial markets, and the economic cycle—and imposing restrictions on the matrix A to identify the structural shocks. We find that households and corporate balances react to financial markets as theoretically expected, and that the economic cycle reacts positively to corporate balance, in accordance with the Minskyan view of the operation of the economy that we have embraced.

  • Public Policy Brief No. 116 | October 2010

    The stability of the international reserve currency’s purchasing power is less a question of what serves as that currency and more a question of the international adjustment mechanism, as well as the compatibility of export-led development strategies with international payment balances. According to Senior Scholar Jan Kregel, export-led growth and free capital flows are the real causes of sustained international imbalances. The only way out of this predicament is to shift to domestic demand–led development strategies—and capital flows will have to be part of the solution.

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  • Public Policy Brief Highlights No. 114A | September 2010

    In this new policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes by any amount will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.

  • Press Releases | September 2010
    Budget Deficits Are Inevitable Result of Low Economic Growth and Lost Tax Revenues, and a Normal Part of Boom-Bust Cycle, Scholars Say

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  • Public Policy Brief Highlights No. 112A | August 2010

    The global abatement of the inflationary climate of the past three decades, combined with continuing financial instability, helped to promote the worldwide holding of US dollar reserves as a cushion against financial instability outside the United States, with the result that, for the United States itself, this was a period of remarkable price stability and reasonably stable economic expansion.

    For the most part, the economics profession viewed these events as a story of central bank credibility, fiscal probity, and accelerating technological change coupled with changing demands on the labor market, creating a model of self-stabilizing free markets and hands-off policy makers motivated by doing the right thing—what Senior Scholar James K. Galbraith calls “the grand illusion of the Great Moderation.” A dissenting line of criticism focused on the stagnation of real wages, the growth of deficits in trade and the current account, and the search for new markets. This view implied that a crisis would occur, but that it would result from a rejection of US financial hegemony and a crash of the dollar, with the euro and the European Union (EU) the ostensible beneficiaries.

    A third line of argument was articulated by two figures with substantially different perspectives on the Keynesian tradition: Wynne Godley and Hyman P. Minsky. Galbraith discusses the approaches of these Levy distinguished scholars, including Godley’s correlation of government surpluses and private debt accumulation and Minsky’s financial stability hypothesis, as well as their influence on the responses of the larger economic community.

    Galbraith himself argues the fundamental illusion of viewing the US economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization. The real sources of American economic power, he says, lie with those who manage and control the public-private sectors—especially the public institutions in those sectors—and who often have a political agenda in hand. Galbraith calls this the predator state: a state that is not intent upon restructuring the rules in any idealistic way but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with deregulation.

  • Public Policy Brief No. 114 | August 2010
    In this new brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.

  • 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.
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  • After the Crisis: Planning a New Financial Structure
    A conference organized by the Levy Economics Institute of Bard College with support from the FordFoundationLogo.

    On April 14–16, more than 200 policymakers, economists, and analysts from government, industry, and academia gathered at the NYC headquarters of the Ford Foundation for the Levy Institute’s annual Minsky conference on the state of the US and world economies. This year’s conference drew upon many Minskyan themes, including reconstituting the financial structure; the reregulation and supervision of financial institutions; the relevance of the Glass-Steagall Act; the roles of the Federal Reserve, FDIC, and the Treasury; the moral hazard of the “too big to fail” doctrine; debt deflation; and the economics of the “big bank” and “big government.” Speakers compared the European and Latin American responses to the global financial crisis and proposals for reforming the international financial architecture. Moreover, central bank exit strategies, both national and international, were considered.

  • Public Policy Brief No. 112 | June 2010
    Senior Scholar James K. Galbraith argues the fundamental illusion of viewing the US economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization—the prevailing view among economists over the past three decades. The real sources of American economic power, he says, lie with those who manage and control the public‑private sectors—especially the public institutions in those sectors—and who often have a political agenda in hand. Galbraith calls this the predator state: a government that is intent, not upon restructuring the rules in any idealistic way, but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with financial deregulation.

  • Working Paper No. 603 | June 2010
    A Critique of This Time Is Different, by Reinhart and Rogoff

    The worst global downturn since the Great Depression has caused ballooning budget deficits in most nations, as tax revenues collapse and governments bail out financial institutions and attempt countercyclical fiscal policy. With notable exceptions, most economists accept the desirability of expansion of deficits over the short term but fear possible long-term effects. There are a number of theoretical arguments that lead to the conclusion that higher government debt ratios might depress growth. There are other arguments related to more immediate effects of debt on inflation and national solvency. Research conducted by Carmen Reinhart and Kenneth Rogoff is frequently cited to demonstrate the negative impacts of public debt on economic growth and financial stability. In this paper we critically examine their work. We distinguish between a nation that operates with its own floating exchange rate and nonconvertible (sovereign) currency, and a nation that does not. We argue that Reinhart and Rogoff’s results are not relevant to the case of the United States.

  • One-Pager No. 1 | May 2010
    How to End America's Trade Deficits

    Now that America’s financial institutions have been brought back from the brink, the greatest threat to global economic stability is the gigantic trade imbalance between the United States, China, and other trading partners. A second big threat to economic stability, in the longer run, is global warming. Both problems are related to America’s addiction to cheap imports and foreign oil—bad habits that a clever cap-and-trade system could help us kick at last.

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  • Working Paper No. 597 | May 2010
    This paper sets out to investigate the forces and conditions that led to the emergence of global imbalances preceding the worldwide crisis of 2007–09, and both the likelihood and the potential sustainability of reemerging global imbalances as the world economy recovers from that crisis. The “Bretton Woods 2” hypothesis of sustainable global imbalances featuring a quasi-permanent US current account deficit overlooked that the domestic counterpart to the United States’ external deficit—soaring household indebtedness—was based not on safe debts but rather toxic ones. We critique the “global saving glut” hypothesis, and propose the “global dollar glut” hypothesis in its stead. With the US private sector in retrenchment mode, the question arises whether fiscal expansion might not only succeed in filling the gap in US domestic demand but also restart global arrangements along BW2 lines, albeit this time based on public debt—call it “Bretton Woods 3.” This paper explores the chances of a BW3 regime, highlighting the role of “dollar leveraging” in sustaining US trade deficits. Longer-term prospects for a postdollar standard are discussed in the light of John Maynard Keynes’s “bancor” plan.

  • Public Policy Brief No. 111 | May 2010
    Why We Should Stop Worrying About U.S. Government Deficits
    This brief by Yeva Nersisyan and Senior Scholar L. Randall Wray argues that deficits do not burden future generations with debt, nor do they crowd out private spending. The authors base their conclusions on the premise that a sovereign nation with its own currency cannot become insolvent, and that government financing is unlike that of a household or firm. Moreover, they observe that automatic stabilizers, not government bailouts and the stimulus package, have prevented the US economic contraction from devolving into another Great Depression. The authors dispense with unsubstantiated concerns about deficits and debts, noting that they mask the real issue: the unwillingness of deficit hawks to allow government to work for the good of the people.

  • Working Paper No. 594 | May 2010
    This paper argues that modified versions of the so-called “New Cambridge” approach to macroeconomic modeling are both quite useful for modeling real capitalist economies in historical time and perfectly compatible with the “vision” underlying modern Post-Keynesian stock-flow consistent macroeconomic models. As such, New Cambridge–type models appear to us as an important contribution to the tool kit available to applied macroeconomists in general, and to heterodox applied macroeconomists in particular.

  • Working Paper No. 591 | March 2010

    This paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets’ exposure to the turmoil in global finance itself. As “innocent bystanders,” even countries that had taken out “self-insurance” proved vulnerable to the global “sudden stop” in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the US dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities.

  • Strategic Analysis | March 2010
    Research Scholar Gennaro Zezza updates the Levy Institute’s previous Strategic Analysis (December 2009) and finds that the 2009 increase in public sector aggregate demand was a result of the fiscal stimulus, without which the recession would have been much deeper. He confirms that strong policy action is required to achieve full employment in the medium term, including a persistently high government deficit in the short term. This implies a growing public debt, which is sustainable as long as interest rates are kept at the current low level. The alternative is an ongoing unemployment rate above 10 percent that would represent a higher cost to future generations. 

  • In the Media | January 2010
    By James K. Galbraith

    By James K. Galbraith, Thought and Action, The NEA Higher Education Journal, Fall 2009.

    This article is partly a response to Paul Krugman’s piece in the Sunday New York Times of September 6, 2009, on the failures of the economists in the face of the crisis. Here, Senior Scholar James K. Galbraith takes up the challenge of identifying some of those economists—the “nobodies” of the profession—who did see it coming, and who have not gotten the credit they deserve. He also points out the urgent need to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time—an imperative for university administrators, for funding agencies, for foundations, and for students.

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  • Strategic Analysis | December 2009

    Though recent market activity and housing reports give some warrant for optimism, United States economic growth was only 2.8 percent in the third quarter, and the unemployment rate is still very high. In their new Strategic Analysis, the Levy Institute’s Macro-Modeling Team project that high unemployment will continue to be a problem if fiscal stimulus policies expire and deficit reduction efforts become the policy focus. The authors—President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza—argue that continued fiscal stimulus is necessary to reduce unemployment. The resulting federal deficits would be sustainable, they say, as long as they were accompanied by a coordinated and gradual devaluation of the dollar, especially against undervalued Asian currencies—a step necessary to prevent an increase in the current account deficit and ward off the risk of a currency crash.

  • 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.)

  • Working Paper No. 581 | October 2009
    Did the New Deal Prolong or Worsen the Great Depression?

    Since the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933’s National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.

  • Public Policy Brief Highlights No. 104A | September 2009

    A wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.

  • In the Media | September 2009
    By Stephen Mihm

    Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own. Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

    Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a “Minsky moment,” and a growing number of insiders began to warn of a coming “Minsky meltdown.”

    “Minsky” was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through. A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.

    In recent months Minsky’s star has only risen. Nobel Prize–winning economists talk about incorporating his insights, and copies of his books are back in print and selling well. He’s gone from being a nearly forgotten figure to a key player in the debate over how to fix the financial system.

    But if Minsky was as right as he seems to have been, the news is not exactly encouraging. He believed in capitalism, but also believed it had almost a genetic weakness. Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed; rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

    In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of capitalism.”

    Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place. Indeed, as economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready to reckon with the full implications of what he saw.

    In an ideal world, a profession dedicated to the study of capitalism would be as freewheeling and innovative as its ostensible subject. But economics has often been subject to powerful orthodoxies, and never more so than when Minsky arrived on the scene.

    That orthodoxy, born in the years after World War II, was known as the neoclassical synthesis. The older belief in a self-regulating, self-stabilizing free market had selectively absorbed a few insights from John Maynard Keynes, the great economist of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment. Most economists still believed that free-market capitalism was a fundamentally stable basis for an economy, though thanks to Keynes, some now acknowledged that government might under certain circumstances play a role in keeping the economy—and employment—on an even keel.

    Economists like Paul Samuelson became the public face of the new establishment; he and others at a handful of top universities became deeply influential in Washington. In theory, Minsky could have been an academic star in this new establishment: like Samuelson, he earned his doctorate in economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter, as well as future Nobel laureate Wassily Leontief.

    But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants from Minsk, in modern-day Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists. While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall Wray, a former student, a “character.”

    So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of academia, Minsky languished. He drifted from Brown to Berkeley and eventually to Washington University. Indeed, many economists weren’t even aware of his work. One assessment of Minsky published in 1997 simply noted that his “work has not had a major influence in the macroeconomic discussions of the last thirty years.”

    Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which despite its seeming importance had no place in the theories formulated by Samuelson and others. He also began to ask a simple, if disturbing question: “Can �it’ happen again?”—where “it” was, like Harry Potter's nemesis Voldemort, the thing that could not be named: the Great Depression.

    In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes—that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel—Minsky had no interest in what he and a handful of other dissident economists came to call “bastard Keynesianism.”

    Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

    This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism's ceaseless process of “creative destruction.” But Minsky spent more time thinking about destruction than creation. In doing so, he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.

    Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

    As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers—what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

    Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment—what was later dubbed the “Minsky moment”—would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system.

    From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this shift was already underway: postwar stability, financial innovation, and the receding memory of the Great Depression were gradually setting the stage for a crisis of epic proportions. Most of what he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers scurrying to Minsky. Instead, a new free market fundamentalism took root: government was the problem, not the solution.

    Moreover, the new dogma coincided with a remarkable era of stability. The period from the late 1980s onward has been dubbed the “Great Moderation,” a time of shallow recessions and great resilience among most major industrial economies. Things had never been more stable. The likelihood that “it” could happen again now seemed laughable.

    Yet throughout this period, the financial system—not the economy, but finance as an industry—was growing by leaps and bounds. Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and the growing use of leverage within the financial system.

    By the end of the 20th century, the financial system that Minsky had warned about had materialized, complete with speculative borrowers, Ponzi borrowers, and precious few of the conservative borrowers who were the bedrock of a truly stable economy. Over decades, we really had forgotten the meaning of risk. When storied financial firms started to fall, sending shockwaves through the ”real” economy, his predictions started to look a lot like a road map.

    “This wasn’t a Minsky moment,'' explains Randall Wray. “It was a Minsky half-century.”

    Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky's 1986 “masterpiece”—“Stabilizing an Unstable Economy”—“helped clear my mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights—Paul Krugman and Brad DeLong—both tipped their hats to him in public forums. Indeed, the Nobel Prize–winning Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read Minsky.”

    Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another depression [won't] cure.”

    But does Minsky’s work offer us any practical help? If capitalism is inherently self-destructive and unstable—never mind that it produces inequality and unemployment, as Keynes had observed—now what?

    After spending his life warning of the perils of the complacency that comes with stability—and having it fall on deaf ears—Minsky was understandably pessimistic about the ability to short-circuit the tragic cycle of boom and bust. But he did believe that much could be done to ameliorate the damage.

    To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists) was to have the Federal Reserve—what he liked to call the “Big Bank”—step into the breach and act as a lender of last resort to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control. This time, under the leadership of Ben Bernanke—like Minsky, a scholar of the Depression—it took a very different approach, becoming a lender of last resort to everything from hedge funds to investment banks to money market funds.

    Minsky’s other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic for pulling the economy out of a crisis was—and is—based on the Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized labor—by building a new high-speed train line, for example.

    Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government—or what he liked to call “Big Government”—should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

    While economists may be acknowledging some of Minsky’s points on financial instability, it's safe to say that even liberal policymakers are still a long way from thinking about such an expanded role for the American government. If nothing else, an expensive full-employment program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”

    But not perfect. Indeed, if there's anything to be drawn from Minsky’s collected work, it's that perfection, like stability and equilibrium, are mirages. Minsky did not share his profession's quaint belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential economics: capitalism, like life itself, is difficult, even tragic. “There is no simple answer to the problems of our capitalism,” wrote Minsky. “There is no solution that can be transformed into a catchy phrase and carried on banners.”

    It's a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy. But that’s probably how he would have preferred it, believes liberal economist James Galbraith. “I think he would resist being domesticated,” says Galbraith. “He spent his career in professional isolation.”

    Stephen Mihm is a history professor at the University of Georgia and author of “A Nation of Counterfeiters” (Harvard, 2007).

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  • In the Media | September 2009
    By Dirk Bezemer

    September 7, 2009. Copyright 2009 The Financial Times Limited.

    From the beginning of the credit crisis and ensuing recession, it has become conventional wisdom that “no one saw this coming.” Anatole Kaletsky wrote in The Times of “those who failed to foresee the gravity of this crisis”—a group that included “almost every leading economist and financier in the world.” Glenn Stevens, governor of the Reserve Bank of Australia, said: “I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it.” We must indeed.

    Because, in fact, many had seen it coming for years. They were ignored by an establishment that, as the former Federal Reserve chairman Alan Greenspan professed in his October 2008 testimony to Congress, watched with “shocked disbelief” as its “whole intellectual edifice collapsed in the summer [of 2007].” Official models missed the crisis not because the conditions were so unusual, as we are often told. They missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change habitat.

    I undertook a study of the models used by those who did see it coming.* They include Kurt Richebächer, an investment newsletter writer, who wrote in 2001 that “the new housing bubble—together with the bond and stock bubbles—will [inevitably] implode in the foreseeable future, plunging the US economy into a protracted, deep recession”; and in 2006, when the housing market turned, that “all remaining questions pertain solely to [the] speed, depth and duration of the economy’s downturn.” Wynne Godley of the Levy Economics Institute wrote in 2006 that “the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010.” Michael Hudson of the University of Missouri wrote in 2006 that “debt deflation will shrink the ‘real’ economy, drive down real wages, and push our debt-ridden economy into Japan-style stagnation or worse.” Importantly, these and other analysts not only foresaw and timed the end of the credit boom, but also perceived this would inevitably produce recession in the US. How did they do it?

    Central to the contrarians’ thinking is an accounting of financial flows (of credit, interest, profit and wages) and stocks (debt and wealth) in the economy, as well as a sharp distinction between the real economy and the financial sector (including property). In these “flow-of-funds” models, liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate fixed-capital investment, production and consumption, but also asset-price inflation and debt growth. Liquidity returns to the financial sector as investment or in debt service and fees.

    It follows that there is a trade-off in the use of credit, so that financial investment may crowd out the financing of production. A second key insight is that, since the economy’s assets and liabilities must balance, growing financial asset markets find their counterpart in a growing debt burden. They also swell payment flows of debt service and financial fees. Flow-of-funds models quantify the sustainability of the debt burden and the financial sector’s drain on the real economy. This allows their users to foresee when finance’s relation to the real economy turns from supportive to extractive, and when a breaking point will be reached.

    Such calculations are conspicuous by their absence in official forecasters’ models in the US, the UK and the Organisation for Economic Co-operation and Development. In line with mainstream economic theory, balance sheet variables are assumed to adapt automatically to changes in the real economy, and can thus be safely omitted. This practice ignores the fact that in most advanced economies, financial sector turnover is many times larger than total gross domestic product; or that growth in the US and UK has been finance-driven since the turn of the millennium.

    Perhaps because of this omission, the OECD commented in August 2007 that “the current economic situation is in many ways better than what we have experienced in years. . . . Our central forecast remains indeed quite benign: a soft landing in the United States [and] a strong and sustained recovery in Europe.” Official US forecasters could tell Reuters as late as September 2007 that the recession in the US was “not a dominant risk.” This was well after the Levy Economics Institute, for example, predicted in April of that year that output growth would slow “almost to zero sometime between now and 2008.”

    Policymakers have resisted inclusion of balance sheets and the flow of funds in their models by arguing that bubbles cannot be easily identified, nor their effects reliably anticipated. The above analysts have shown that this is, in fact, feasible, and indeed essential if we are to “see it coming” next time. The financial sector is just as real as the real economy. Our policymakers, and the analysts they rely on, ignore balance sheets and the flow of funds at their peril—and ours.

    *No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models, MPRA

    The writer is a fellow at the economics and business department of the University of Groningen in the Netherlands.

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  • Public Policy Brief No. 104 | August 2009
    Did Roosevelt’s “Anticompetitive” Legislation Slow the Recovery from the Great Depression?

    A wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.

  • Working Paper No. 569 | June 2009

    This paper presents the main features of the macroeconomic model being used at The Levy Economics Institute of Bard College, which has proven to be a useful tool in tracking the current financial and economic crisis. We investigate the connections of the model to the “New Cambridge” approach, and discuss other recent approaches to the evolution of financial balances for all sectors of the economy. We will finally show the effects of fiscal policy in the model, and its implications for the proposed fiscal stimulus on the US economy. We show that the New Cambridge hypothesis, which claimed that the private sector financial balance would be stable relative to income in the short run, does not hold for the short term in our model, but it does hold for the medium/long term. This implies that the major impact of the fiscal stimulus in the long run will be on the external imbalance, unless other measures are taken.

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  • Working Paper No. 567 | June 2009
    An SFC Look at Financialization and Profit-led Growth

    Many heterodox strands of thought share both a concern with the study of different phases or growth regimes in the history of capitalism and the use of formal short-run models as an analytical tool. The authors of this new working paper suggest (1) that this strategy is potentially misleading, and (2) that the stock-flow consistent (SFC) approach, while providing a general framework that may facilitate dialogue among those currents, is particularly well suited to all those who think that macroeconomic models may illuminate historical quests.

  • Working Paper No. 561 | May 2009

    To save America—indeed, the global economy as a whole—the private/public sector balance has to shift, and the neoliberal economic model on which the country has been based for the past 25 years has to be modified. In this new working paper, Marshall Auerback details why the role of the state needs to be reemphasized.

    The abandonment of a mixed economy and corresponding diminution of the role of government was hailed as the “rebirth of individualism,” yet it caused rising inequality and the decline of median wages, and led to the widespread neglect of public goods vital to its citizens’ welfare. Meanwhile, the country ran through the public investment it had made from the 1930s to the 1970s, with few serious challenges from policymakers or mainstream economists.

    The neoliberal model was also aggressively exported: the “optimal” growth strategy for all emerging economies was supposedly one that emphasized limited government, corporate governance, rule of law, and higher levels of state-owned and -influenced enterprise—in spite of significant historical evidence to the contrary. Not even the economic wreckage in Mexico, Argentina, Thailand, Indonesia, and Russia seemed sufficient to challenge, let alone overturn, the prevailing paradigm.

    That is, until now: in reaction to the financial crisis, many governments—led by the United States—are enacting massive economic stimulus packages and taking a central role in promoting economic growth strategies. This reemergence of state-driven capitalism constitutes a “back to the future” investment paradigm, one that is consistent with a long and successful pattern of economic development. But once we get beyond the pothole patching and school repairing, what industries can be pushed forward using public seed capital or through Sematech-like consortiums? What must be brought to the fore is the need for a new growth path for the United States, one in which the state has a significant role.  There are already indications that the private sector is beginning to adapt to this new, collaborative paradigm.

  • Conference Proceedings | April 2009
    Meeting the Challenges of Financial Crisis

    A conference organized by The Levy Economics Institute of Bard College with support from the Ford Foundation.

    On April 16 and 17, more than 150 policymakers, economists, and analysts from government, industry, and academia gathered at the NYC headquarters of the Ford Foundation for the Levy Institute’s annual Minsky conference on the state of the US and world economies. This year’s conference focused on the extraordinary challenges posed by the current global financial crisis. Topics included current conditions and forecasts, macro policy proposals by the Obama administration and others, the rehabilitation of mortgage financing and the banks, financial market reregulation, proposals to limit foreclosures and modify servicing agreements, regulation of alternative financial products (derivatives and credit default swaps), the institutional shape of the future financial system, and international responses to the crisis.

  • Strategic Analysis | April 2009

    Federal government and Federal Reserve (Fed) liabilities rose sharply in 2008. Who holds these new liabilities, and what effects will they have on the economy? Some economists and politicians warn of impending inflation. In this new Strategic Analysis, the Levy Institute’s Macro-Modeling Team focuses on one positive effect—a badly needed improvement of private sector balance sheets—and suggest some of the reasons why it is unlikely that the surge in Fed and federal government liabilities will cause excessive inflation.

  • Strategic Analysis | April 2009

    In 1930, John Maynard Keynes wrote: “The world has been slow to realise that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.” The same holds true today: we are in the shadow of a global catastrophe, and we need to come to grips with the crisis—fast. According to Senior Scholar James K. Galbraith, two ingrained habits are leading to our failure to do so. The first is the assumption that economies will eventually return to normal on their own—an overly hopeful view that doesn’t take into account the massive pay-down of household debt resulting from the collapse of the banks. The second bad habit is the belief that recovery runs through the banks rather than around them. But credit cannot flow when there are no creditworthy borrowers or profitable projects; banks have failed, and the failure to recognize this is a recipe for wild speculation and control fraud, compounding taxpayer losses.

    Galbraith outlines a number of measures that are needed now, including realistic economic forecasts, more honest bank auditing, effective financial regulation, measures to forestall evictions and keep people in their homes, and increased public retirement benefits. We are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business as usual, says Galbraith. Rather, we are at the beginning of a long, painful, profound, and irreversible process of change—we need to start thinking and acting accordingly.

  • Press Releases | January 2009
    New Strategic Analysis Argues that Coordinated Effort to Address Imbalances in International Trade Is Necessary to Restore Sustained Growth and Full Employment

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  • Strategic Analysis | January 2009

    The Federal Reserve’s latest flow-of-funds data reveal that household borrowing has fallen sharply lower, bringing about a reversal of the upward trend in household debt. According to the Levy Institute’s macro model, a fall in borrowing has an immediate effect—accounting in this case for most of the 3 percent drop in private expenditure that occurred in the third quarter of 2008—as well as delayed effects; as a result, the decline in real GDP and accompanying rise in unemployment may be substantial in coming quarters.

    For further details on the Macro-Modeling Team’s latest projections, see the December 2008 Strategic Analysis Prospects for the US and the World: A Crisis That Conventional Remedies Cannot Resolve.

  • Strategic Analysis | December 2008

    The economic recovery plans currently under consideration by the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies alone. In a new Strategic Analysis, the Levy Institute’s Macro-Modeling Team argues that, however well coordinated, this approach will not be sufficient; what’s required, they say, is a worldwide recovery of output, combined with sustainable balances in international trade.

  • Public Policy Brief Highlights No. 96A | October 2008
    Money Manager Capitalism and the Financialization of Commodities

    In a new public policy brief, Senior Scholar L. Randall Wray shows how money manager capitalism—characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk—has destabilized one asset class after another, with commodities being simply the latest. Policymakers must fundamentally change the structure of our economic system and reduce the influence of managed money, Wray argues, in order to break the speculative boom-and-bust cycle.

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  • Public Policy Brief No. 95 | August 2008

    A bursting asset bubble inevitably requires central bank action, usually when it is already too late and with adverse spillover effects. In this sense, the Federal Reserve and other central banks already target asset prices; yet, by taking aim at them only on the way down—as in the current housing and credit crisis—the "Big Banks" create a self-perpetuating cycle of perverse incentives and moral hazard that often gives rise to yet another round of bubbles.

    The US central bank's current premise is that policymakers cannot and should not target asset bubbles. However, the housing story has rendered untenable the prevailing belief that bubbles are impossible to spot ahead of time. The warning signals were ubiquitous—for example, price charts showing home values rising impossibly into the stratosphere, and Wall Street's increasing reliance on housing-backed bonds for its record-setting profits. It has become abundantly clear that there was plenty the Fed could have done to discourage speculative behavior and put a stop to predatory lending.

    Recent US experience has bolstered the view that asset prices must come under the central bank's purview in order for the economy to retain some semblance of stability. Former Fed Chairman Paul Volcker recently called for a broader regulatory role for the central bank in light of the housing-centered credit crisis. Indeed, Treasury Secretary Henry Paulson's latest plan for tackling the crisis involves giving the Fed vast new authority to regulate investment banks, not just depository institutions. However, news analyst Pedro Nicolaci da Costa argues that attitude changes among regulators will be even more important than shifts in mandate in ensuring that regulators like the Fed do their jobs properly.

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  • Public Policy Brief Highlights No. 95A | August 2008
    Policy Lessons from America’s Historic Housing Crash

    Treasury Secretary Henry Paulson’s latest plan for tackling the housing-centered credit crisis involves giving the Federal Reserve vast new authority to regulate investment banks, not just depository institutions. However, news analyst Pedro Nicolaci da Costa argues that attitude changes among regulators will be even more important than shifts in mandate in ensuring that regulators like the Fed do their jobs properly.

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  • Working Paper No. 538 | July 2008

    This paper considers a plan proposed by Warren Buffett, whereby importers would be required to obtain certificates proportional to the amount of non-oil goods (and possibly also services) they brought into the country. These certificates would be granted to firms that exported goods, which could then sell certificates to importing firms on an organized market. Starting from a relatively neutral projection of all major variables for the US economy, the authors estimate that the plan would raise the price of imports by approximately 9 percent, quickly reducing the current account deficit to about 2 percent of GDP. They discuss several problems that might arise with the implementation of the Buffett plan, including possible instability in the price of certificates and retaliation by US trade partners. They also consider an alternative version of the plan, in which certificates would be sold at a government auction, rather than granted to exporters. The revenues from certificate sales would then be used to finance a reduction in FICA payroll taxes. The authors report the results of simulations of the alternative plan’s effects on macroeconomic balances and GDP growth. Notably, the alternative plan would lessen the severity of the growth recession expected in our base projection.

  • Working Paper No. 537 | July 2008
    Peering Over the Edge of the Short Period

    This paper argues that institutionally rich stock-flow consistent models—that is, models in which economic agents are identified with the main social categories/institutional sectors of actual capitalist economies, the short period behavior of these agents is thoroughly described, and the “period by period” balance sheet dynamics implied by the latter is consistently modeled—are (1) perfectly compatible with John Maynard Keynes’s theoretical views, (2) the ideal tool for rigorous post-Keynesian analyses of the medium run, and (3) therefore crucial to the consolidation of the broad post-Keynesian research program.

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  • Conference Proceedings | April 2008
    Credit, Markets, and the Real Economy: Is the Financial System Working?

    In April 2008, top policymakers, economists, and analysts from government, industry, and academia gathered at the Levy Institute’s research and conference facility in Annandale-on-Hudson, New York, to present their insights about the American economy and the financial sector in the context of Minsky’s economic theories. Participants discussed Minsky’s financial instability hypothesis and the ability of monetary policy to stabilize financial markets and the economy, as well as the role of the Federal Reserve and its ability to function as a systemic lender of last resort. Speakers frequently compared events in the 1930s (the New Deal era) to the present, and they considered the prospect of another debt deflation rivaling the Great Depression. They also examined today’s complex and fragile financial system (e.g., the advent of securitization) and potential solutions to the mortgage crisis. Other related topics included the timing, cause, and length of recession; the nature and effectiveness of proposed economic stimulus packages; regulatory failures and the reformulation of policy; and the deleveraging process and potential financial losses.

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  • Working Paper No. 532 | April 2008

    This paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies—leveraging and financial risk mismatching—that led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. However, these strategies are based on market innovations that have heightened, not reduced, systemic risks and financial instability. They are as the title implies: old wine in a new bottle. Going beyond these financial practices, the underlying structural causes of the crisis are located in the loose monetary policies of central banks, deregulation, and excess liquidity in financial markets that is a consequence of the kind of economic growth that produces various imbalances—trade imbalances, financial sector imbalances, and wealth and income inequality. The consequences of excessive risk, moral hazards, and rolling bubbles are discussed.

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  • Press Releases | April 2008
    New Study Argues Government Expenditure More Effective Than Tax Rebates

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  • Working Paper No. 530 | April 2008

    This paper traces the evolution of housing finance in the United States from the deregulation of the financial system in the 1970s to the breakdown of the savings and loan industry and the development of GSE (government-sponsored enterprise) securitization and the private financial system. The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system.

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  • Strategic Analysis | April 2008

    As the government prepares to dispense the tax rebates that largely make up its recently approved $168 billion stimulus package, President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza explore the possibility of an additional fiscal stimulus of about $450 billion spread over three quarters—challenging the notion that a larger and more prolonged additional stimulus is unnecessary and will generate inflationary pressures. They find that, given current projections of even a moderate recession, a fiscal stimulus totaling $600 billion would not be too much. They also find that a temporary stimulus—even one lasting four quarters—will have only a temporary effect. An enduring recovery will depend on a prolonged increase in exports, the authors say, due to the weak dollar, a modest increase in imports, and the closing of the current account gap.

  • Public Policy Brief Highlights No. 94A | April 2008

    According to Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the “originate and distribute” model), leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand.

  • Public Policy Brief No. 94 | April 2008
    What Can We Learn from Minsky?

    In this new Public Policy Brief, Senior Scholar L. Randall Wray explains today’s complex and fragile financial system, and how the seeds of crisis were sown by lax oversight, deregulation, and risky innovations such as securitization. He estimates that the combined losses throughout the entire financial sector could amount to several trillion dollars, and that the United States will feel the effects of the crisis for some time—perhaps a decade or more.

     

    Wray recommends enhanced oversight of financial institutions, much larger stimulus packages, and creation of a new institution in line with President Franklin D. Roosevelt’s Home Owners’ Loan Corporation.

     

  • Strategic Analysis | November 2007

    In their latest Strategic Analysis, Distinguished Scholar Wynne Godley, President Dimitri B. Papadimitriou, and Research Scholars Greg Hannsgen and Gennaro Zezza review recent events in the housing and financial markets to obtain a likely scenario for the evolution of household spending in the United States. They forecast a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment, unless (1) the US dollar is allowed to continue its fall and thus complete the recovery in the US external imbalance, and (2) fiscal policy shifts its course—as it did in the 2001 recession.

  • Public Policy Brief No. 91 | October 2007
    Suggestions for a New Agenda

    The failure of the Doha Development Round of World Trade Organization (WTO) negotiations in July 2006 was the first major collapse of a multilateral trade round since World War II. Research Associate Thomas Palley sees the failure as an event that could mark the close of a 60-year era of trade policy largely centered on increasing market access and reducing tariffs, quotas, and subsidies. Doha’s demise represents an opportunity to challenge the intellectual dominance of the current WTO paradigm, to expose the failings of the neoliberal model of economic development, and to reposition the global trade debate.

  • In the Media | September 2007
    By Wolfgang Münchau

    FT.com, September 3, 2007. Copyright 2007 The Financial Times Limited. “FT” and “Financial Times” are trademarks of the Financial Times

    “Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design. . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” —John Kenneth Galbraith, A Short History of Financial Euphoria

    The late John Kenneth Galbraith would have enjoyed this summer. He was no expert on modern credit markets but his analysis of historic bubbles fits our most recent boom and bust episode with uncanny precision.

    All historic bubbles were accompanied by a sharp rise in leverage. A salient feature of modern bubbles is the emergence of innovative financial products. No matter whether we are talking about junk bonds or modern collateralised debt obligations (CDOs), as Galbraith has pointed out, such products boil down to variants of debt secured on a real asset.

    By historic standards, our credit bubble is probably one of the largest ever, given the sheer size of the market itself and the degree of euphoria that was characteristic in the final stages of the boom. While the fallout was initially concentrated in the financial sector itself, it would be surprising if the ongoing problems did not trickle down into the real economy. The availability of credit affects house prices and numerous studies have demonstrated the interlinkages between US house prices and US economic growth.

    So what should central banks do? I suspect that central banks are not going to be the main actors in any rescue operation, but rather governments. Central banks' room for manoeuvre to cut interest rates is more constrained this time than during the most recent recession. But more important, this is not the kind of crisis that can easily be stopped by a few hasty rate cuts or bank bail-outs. If your subprime mortgage exceeds the value of your house by 10 per cent, and if the monthly payments exceed your income, no positive interest rate could bail you out. Your only hope is some serious debt relief.

    The economists Dimitri Papadimitriou, Greg Hannsgen and Gennaro Zezza last week published a study* in which they demonstrated the danger to US economic growth posed by the present real estate crisis. Their policy recommendations go significantly beyond the usual bail-out calls. They argue that it is almost impossible for policymakers to stop the decline in real estate prices, but “if the Fed and Congress can work to stop any incipient recession, they will prevent job losses, which are one of the main contributors to foreclosures. An effective job-creation method could be some form of employer-of-last-resort programme that offers government jobs to all workers who ask for them”.

    We should remember that the subprime market is not the only unstable subsection of the credit market. Once US consumption slows, we should prepare for a crisis in credit card and car finance CDOs. And once corporate bankruptcies start to rise again as the cycle turns down, both in the US and in Europe, we will probably hear about problems with collateralised loan obligations. The credit market is very deep and offers significant potential for contagion.

    In this sense, the debate about whether this is a liquidity or a solvency crisis is beside the point. Banks may look at their CDO investments as a source of temporary illiquidity, but may sooner or later realise that they are sitting on a pile of junk. The fiscal and monetary authorities should therefore assume that they are confronted with a solvency crisis. Bailing out the odd bank, as the Germans did last month, is not going to be sufficient and perhaps not even necessary.

    Instead, the monetary and fiscal authorities should stand ready to support the economy if and when needed. Lower interest rates will probably be part of any such deal, but a large part of the help will invariably come from fiscal policy. The US Federal Reserve will probably cut interest rates soon and the European Central Bank will almost certainly postpone the rate rise it unwisely preannounced only a few weeks ago. I am convinced the next interest rate movement both in the US and the eurozone will be downwards.

    One of the problems the monetary authorities have to deal with is moral hazard. This is not a theoretical issue, as some suggest, but a far more immediate concern. Moral hazard is the result of asymmetric expectations, as markets expect the central bank to bail out the financial sector during a time of crisis. The problem of moral hazard is to some extent related to the monetary policy strategy of central banks, with their mechanistic focus on a single consumer price index. Such strategies often have no space for asset prices, but markets know fully well that central banks must invariably take account of asset prices during sharp downturns. One way out of this asymmetry is for central banks to include asset prices into their policy frameworks in some form or other.

    This said, a bail-out of the financial system will probably become unavoidable, but it should be accompanied with structural policy changes. Tighter financial regulation is probable. The role of the ratings agencies is bound to change too. And central banks should reconsider their monetary policy frameworks. They are part of the problem.

    *Cracks in the Foundations of Growth, Levy Institute, www.levyinstitute.org/pubs/ppb_90.pdf

  • Working Paper No. 506 | July 2007

    Longstanding speculation about the likelihood of a housing market collapse has given way in the past few months to consideration of just how far the housing market will fall, and how much damage the debacle will inflict on the economy. This paper assesses the magnitude of the impact of housing price decreases on real private expenditure, examines the role of new types of mortgages and mortgage-related securities, and analyzes possible policy responses.

  • Public Policy Brief No. 90 | July 2007
    What Will the Housing Debacle Mean for the U.S. Economy?

    With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden. The signals are still mixed; for example, while April’s retail sales numbers caused concern, May’s were much improved, and so was the ISM manufacturing index for June. Consumption growth indicates a slowdown. This Public Policy Brief examines the American household and its economic fortunes, concentrating on how falling home prices might hamper economic growth, generate social dislocations, and possibly lead to a full-blown financial crisis.

  • Public Policy Brief Highlights No. 90A | July 2007
    What Will the Housing Debacle Mean for the U.S. Economy?
    With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden.

  • Working Paper No. 503 | June 2007

    Despite being arguably one of the most active areas of research in heterodox macroeconomics, the study of the dynamic properties of stock-flow consistent (SFC) growth models of financially sophisticated economies is still in its early stages. This paper attempts to offer a contribution to this line of research by presenting a simplified Post-Keynesian SFC growth model with well-defined dynamic properties, and using it to shed light on the merits and limitations of the current heterodox SFC literature.

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  • Strategic Analysis | April 2007

    The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment. Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. Others believe that the turmoil will be contained, and that the US economy will recover quite rapidly and resume the steady growth it has enjoyed during the last four years or so.

    Yet no participants in the public discussion, so far as we know, have framed their views in the context of a formal model that enables them to draw well-argued conclusions (however conditional) about the magnitude and timing of the impact of recent events on the overall economy in the medium term—not just the next few months.

  • Working Paper No. 494 | April 2007

    This paper deploys a simple stock-flow consistent (SFC) model in order to examine various contentions regarding fiscal and monetary policy. It follows from the model that if the fiscal stance is not set in the appropriate fashion—that is, at a well-defined level and growth rate—then full employment and low inflation will not be achieved in a sustainable way. We also show that fiscal policy on its own could achieve both full employment and a target rate of inflation. Finally, we arrive at two unconventional conclusions: first, that an economy (described within an SFC framework) with a real rate of interest net of taxes that exceeds the real growth rate will not generate explosive interest flows, even when the government is not targeting primary surpluses; and, second, that it cannot be assumed that a debtor country requires a trade surplus if interest payments on debt are not to explode.

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    Wynne Godley Marc Lavoie
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  • Conference Proceedings | April 2007
    Global Imbalances: Prospects for the U.S. and World Economies

    The 2007 Hyman P. Minsky Conference focused on monetary and fiscal policies for continued growth and employment; currency markets fluctuations and the consequent exchange-rate misalignments, as well as possible cures; and the United States' households and trade deficits, their implications for growth and employment, and their effect on the conduct of monetary and fiscal policy. The US role in the global marketplace was examined in view of the current international economic landscape.

     

    The conference was held April 19–20, 2007, at the Levy Institute’s research and conference center at Blithewood on the campus of Bard College, Annandale-on-Hudson, N.Y.

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  • Working Paper No. 488 | January 2007

    In a series of articles and books, Harold Vatter and John Walker attempted to make the case that the American economy suffers from chronically insufficient demand that leads to growth below capacity. Of particular interest are a 1989 Journal of Post Keynesian Economics article that extends Domar's work on the supply side effects of investment spending and a 1997 book that provides a comprehensive analysis of the evolution of the US "mixed" economy. Their analysis of secular growth complements the well-known writings of Hyman Minsky, who also emphasized the role of the "big government" and the "big bank" in stabilizing an unstable economy over the cycle. This article will summarize, provide support for, and extend the Vatter and Walker approach, concluding with an examination of some of the dangers facing the US economy today. As appropriate, the ideas of Minsky will be used to supplement the argument.

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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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  • Working Paper No. 486 | December 2006

    Approaching the issue of mounting global imbalances from the perspective of the "Bretton Woods II hypothesis," this paper argues that the popular preoccupation with China's supposed export-led development strategy is misplaced. It also suggests, similar to Japan's depression, subdued growth in Euroland for most of the time since the Maastricht Treaty has been of first-order importance in these developments. Germany is identified as being at the heart of the European trouble. Globally, there is an ongoing clash between two approches to macroeconomic policy making: a highly dogmatic German approach, and a very pragmatic Anglo-Saxon one. The low levels of interest at which global demand imbalances have been smoothed out financially reflect deficient global demand in an environment of vast supply-side opportunities. After contributing greatly to the build-up of imbalances, Euroland is unlikely to play any constructive part in their unwinding. Hampered by an exchange-rate policy vacuum, a small-country mindset, and soaring intra-area imbalances, Euroland is also illpositioned to cope with fading external growth stimuli.

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  • Public Policy Brief No. 88 | November 2006
    A Rendezvous with Reality

    Over the past decade, deficit spending by consumers has supported the United States economy. Research Associate Robert Parenteau analyzes the financial balance of American households and finds that the pace of deficit spending is likely to stall and, possibly, reverse course. This reversion will jeopardize US profit and economic growth, as well as the growth of countries dependent on export-led development strategies. His research supports the position of other Levy Institute scholars who have urged policymakers to recognize the consequences of current imbalances in the US economy.

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