Commentary

For those of you who haven’t seen it already, Duncan Weldon did a feature on Hyman Minsky for the BBC last week, including this short article and a 30-minute piece for BBC radio. In the radio segment, Adair Turner says this about Minsky’s contribution and his departure from the mainstream (a description of the pre-crisis orthodoxy which is probably baffling to many unfamiliar with the field): “The dominant strain of modern economics had assumed, before the crisis, that you could largely ignore the details of the financial system and banks in particular. The phrase that was used was that finance was simply a sort of veil through which relationships between savers and borrowers passed and it didn’t have an influence, and at the … core of Minsky’s analysis is the fact that financing contracts and banks in particular have a crucial influence.” Weldon devotes a great deal of the program to the “financial instability hypothesis,” for which Minsky is, perhaps, best known, but Minsky also offered an approach to re-regulating the financial system that makes his work as useful as a prescription for a more stable capitalism as it is as a diagnosis of financial crises. (The Levy Institute’s short ebook, Beyond the Minsky Moment (pdf), includes a survey of Minsky’s views about how to reconstitute the financial structure and…more

I recently did an interview for Euro Truffa on six topics related to MMT. The website is here. They are transcribing my interview to Italian (I think that only two are up so far) and putting up the videos. They have also posted all of the videos to YouTube. As you can tell, I did not realize they were recording the video—I might have tried to sit still if I had known. Also, the coffee had not quite kicked in so I was not entirely awake. Here are the links with just a brief indication of the topic for each. The first two videos have already been embedded here. (1) The first one addresses all the (silly) (non)-controversy about “consolidating” the Government’s central bank and treasury for the purposes of analysis of fiscal and monetary policy operations. I provide three responses to the critics. (2) The second video tackles the belief that the Euroland crisis is due to current account “imbalances.” As I explain, the real problem is the abandonment of sovereign currency. No one describes the USA financial crisis as a problem of current account imbalances between, say, Alabama and New York. Why? We unified our currency—the dollar—but under Uncle Sam in Washington. The EMU only partially unified, without a central fiscal authority that issues the euro. (3) In…more

From Senior Scholar James Galbraith’s review of Thomas Piketty’s much-discussed Capital in the Twenty-First Century: Although Thomas Piketty, a professor at the Paris School of Economics, has written a massive book entitled Capital in the Twenty-First Century, he explicitly (and rather caustically) rejects the Marxist view. He is in some respects a skeptic of modern mainstream economics, but he sees capital (in principle) as an agglomeration of physical objects, in line with the neoclassical theory. And so he must face the question of how to count up capital-as-a-quantity. His approach is in two parts. First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial. This, I fear, is a source of terrible confusion. […] Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts…more

In a new article, Dimitri Papadimitriou looks at the possibility of creating a parallel financial system — dubbed the “geuro” (following Thomas Mayer) — to help rescue the Greek economy: Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance. The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros. Foreign trade would still require euros, which would remain in circulation, and Greece’s private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro. There’s a certain view that, if Greece weren’t in the eurozone, the ideal solution would be to devalue its currency and grow its way out of depression through exports. But since Greece doesn’t have its own currency, we’re left with “internal devaluation” — trying to boost exports through reducing unit labor costs. As Papadimitriou and some other members of the Levy Institute’s macromodeling team (Michalis Nikiforos and Gennaro Zezza) have pointed out, that internal devaluation strategy isn’t working — even…more

In this interview with Euro Truffa, L. Randall Wray responds to some recent critiques of Modern Money Theory (MMT). In the first segment, Wray defends the idea that we can, for the purposes of simplifying the analysis of affordability constraints faced by modern governments, safely disregard many of the self-imposed constraints on Treasury-Central Bank cooperation (this is sometimes referred to as the “consolidation hypothesis.” For more on this topic, see “Modern Money Theory 101: A Reply to Critics,” by Randall Wray and Éric Tymoigne, as well as Tymoigne’s recent working paper on Fed-Treasury operations in the United States). [iframe width=”448″ height=”252″ src=”//www.youtube.com/embed/4tJ8cCkVKyY?feature=player_detailpage&start=86″ frameborder=”0″ allowfullscreen></iframe] In this next segment (sorry, video quality is bad, but audio is fine), Wray challenges the idea that the eurozone crisis is chiefly a balance of payments crisis. [iframe width=”448″ height=”252″ src=”//www.youtube.com/embed/IJP0hooa7D0?feature=player_detailpage&start=293″ frameborder=”0″ allowfullscreen></iframe]

It is quite interesting to see how popular myths can live on in the public’s mind and continue to cause harm and irritation even when the facts speak to totally different language. How can education fail so badly? The particular example I have in mind here is Germans’ supposed exceptionalism in matters of inflation hyper-sensitivity. Whether or not Germans really are special in this regard, even internationally many observers seem to feel that Germans would be truly justified to be that way. Hence Germans are readily excused for doing stupid things because they seem to be justified that way. There is a highly relevant context to this today: the ECB’s asymmetry in mindset and approach. I recently argued in a Letter to the Editors, “Beware what you wish for when it comes to ECB measures,” published by The Financial Times on February 26 2014, that there was actually nothing really new about the ECB’s revealed asymmetry regarding inflation versus deflation risks. At issue is a genetic defect inherited from the Bundesbank. In fact, there can be absolutely no doubt anymore about the ECB being asymmetric in mindset and approach, and more and more observers have come to realize that in more recent times. But there is also a long track record of asymmetric “stability-oriented” monetary policy that includes and precedes…more

The Levy Institute’s annual Minsky conference will be held at the National Press Club in Washington, D.C. on April 9-10. Day one features a speaker lineup that includes Sen. Sherrod Brown, Rep. Carolyn Maloney, head of the Chicago Fed Charles Evans, member of the Fed Board of Governors Daniel Tarullo, and many others. On day two, Jason Furman, Chair of President Obama’s Council of Economic Advisers (and recently featured in this Washington Post profile), asks “Is the Great Moderation Coming Back?” The full conference program is online. Session titles include: Financial Reregulation to Support Growth and Employment Financial Regulation and Economic Stability: Was Dodd-Frank Enough, or Too Much? The Global Growth and Employment Outlook: Cloudy with a Risk of … ? The Euro and European Growth and Employment Prospects What Are the Monetary Constraints to Sustainable Recovery of Employment? Registration is open.

In a recent post, Daniel Gros asks why Greece has failed to get out of recession through an increase in exports, as he claims happened in Portugal, Spain and Ireland. He is suggesting that the problem lies in the economy resisting structural reforms: “In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated” “So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.” Gros is therefore endorsing the Troika vision: European peripheral countries with a large current account deficit, and large government deficits, should use austerity to improve the public sector balance, and wage and price deflation to improve export competitiveness. These policies have been devastating for Greece. Our first chart reports the level of real output: real GDP in Greece has fallen by almost 25 percent, relative to 2007, the last year before the recession started. Indeed, as we have argued, the recession in Greece has been worse than the 1929 Depression in…more

Central Bank Independence: Myth and Misunderstanding L. Randall Wray “This paper argues that the Fed is not, and should not be, independent, at least in the sense in which that term is normally used. … Our understanding of policy, of the policy space available to the sovereign, and of the operational realities of fiscal and monetary policy would be improved if we abandoned the myth of central bank independence.” Changes in Global Trade Patterns and Women’s Employment in Manufacturing: An Analysis over the Period of Asianization and Deindustrialization Burca Kizilirmak, Emel Memis, Şirin Saraçoğlu, and Ebru Voyvoda “We provide estimates for total and women’s employment effects of world trade, evaluating the changes in trade flows in 30 countries (21 OECD and 9 non-OECD countries) for 23 manufacturing sectors by breaking up the sources of these changes between the trade with the North, the South, and China. … Our results present a net negative impact of trade on total employment as well as on women’s employment in 30 countries over the period of analysis [1995-2006]. … Country level results show that the United States has by far the largest estimated employment losses from the change in structure of trade: 81 percent of the employment losses in the North originate in the US” Full Employment: The Road Not Taken Pavlina R. Tcherneva…more

From Jörg Bibow’s recent letter in the Financial Times, reacting to an article by Wolfgang Münchau on deflation and ECB policy: What is really new today is that wages are becoming unanchored and hence cease to provide the safety net that asymmetric central bankers habitually rely on. This is the consequence of the collective effort to restore competitiveness practised across the eurozone. Deflationary structural reforms of labour markets can only amplify this futile and hazardous process. But with the ECB applauding these efforts as the supposed panacea to the eurozone’s ills, what kind of miracle weapon can we expect the bank to deploy to halt the resulting plight? Read the rest here.

Memo to Obama: Don’t tie progressive spending policy to progressive tax policy. Each can stand on its own. Reported today in the Washington Post: Obama proposes $600 billion in new spending to boost economy President Obama on Tuesday unveiled an ambitious budget that promised more than $600 billion in fresh spending to boost economic growth over the next decade while also pledging to solve the nation’s borrowing problem by raising taxes on the wealthy, passing an overhaul of immigration laws and cutting health costs without compromising the quality of care. Obama seeks to raise more than $1 trillion – largely by limiting tax breaks that benefit the wealthy – to spend on building roads and bridges, early childhood education and tax credits for the poor. Here’s the conceit: Uncle Sam is broke. He’s got a borrowing problem. He’s gone hat-in-hand to those who’s got, trying to borrow a few dimes off them. But they are ready to foreclose on his Whitehouse. Obama knows his economy is tanking. Five and a half years after Wall Street’s crisis, we still have tens of millions of workers without jobs. Even the best-case scenarios don’t see those jobs coming back for years. Obama will leave office with a legacy of economic failure. Belt-tightening austerity isn’t working. He wants to spend more, but he doesn’t…more