Commentary

In advance of this week’s Ford–Levy Institute conference in Athens, Greece (Nov. 8–9), Jörg Bibow gave an interview with George Papageorgiou, senior editor of newmoney.gr, on the role German policy has played (and still plays) in generating and exacerbating many of the problems plaguing the eurozone periphery — something Bibow was warning about back in 2005 (see here, for instance). He also addressed where the eurozone needs to go from here, touching on a plan for a Euro Treasury he’ll be discussing at the Athens conference. The English text of the interview follows (Greek version here): You have been critical of German policy. How does it really affect the rest of Europe? In what ways does it cause harm to the peripheral economies? Yes, indeed, German policy bears foremost responsibility for the euro crises and German policy is key to Europe’s future. Germany is Europe’s largest economy. For that reason alone whatever happens in Germany inevitably significantly impacts the eurozone economy. For instance, when Germany prescribed itself an extra dose of wage repression and fiscal austerity in the early 2000s, this had rather fateful consequences for the currency union. For one thing, stagnant domestic demand in Germany constrained its euro partners’ exports to Germany. For another, stagnation in Germany provoked some degree of monetary easing from the ECB, monetary easing…more

A new issue of Accounting, Economics and Law has published a series of articles (open access) on Minsky and banking. In addition to my contribution, you can find some nice pieces by Thorvald Moe, Yuri Bondi, and Robert Boyer. According to Minsky, “A capitalist economy can be described by a set of interrelated balance sheets and income statements”. The assets on a balance sheet are either financial or real, held to yield income or to be sold or pledged. The liabilities represent a prior commitment to make payments on demand, on a specified date, or when some contingency occurs. Assets and liabilities are denominated in the money of account, and the excess of the value of assets over the value of liabilities is counted as nominal net worth. All economic units – households, firms, financial institutions, governments – take positions in assets by issuing liabilities, with margins of safety maintained for protection. One margin of safety is the excess of income expected to be generated by ownership of assets over the payment commitments entailed in the liabilities. Another is net worth – for a given expected income stream, the greater the value of assets relative to liabilities, the greater the margin of safety. And still another is the liquidity of the position: if assets can be sold quickly or pledged…more

Randall Wray and Éric Tymoigne just released a new working paper that rounds up and responds to various critiques of Modern Money Theory (MMT); critiques they organize into five categories: One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors. You occasionally see MMT loosely described as being “pro-deficit,” but Tymoigne and Wray explain that their…more

The next Minsky conference in the Levy Institute’s international series is taking place in Athens next week, November 8-9. The central theme, as you can probably guess from the location, is the ongoing eurozone crisis. This conference is 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 the conference will address are: 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. Keynote speakers will include Már Gudmundsson, governor of the Central Bank of Iceland (“Iceland’s Crisis and Recovery: Are There Lessons for the Eurozone and Its Member Countries?”), Yves Mersch, member of the ECB’s Executive Board and General Council (“Intergenerational Justice in Times of Sovereign Debt Crises”), and Lord Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick (“The Experience of Austerity: The UK”). You can find…more

Here’s a piece I wrote with Yolanda Fernandez for the Asian Development Bank: Monetary and Fiscal Operations in the People’s Republic of China: An Alternative View of the Options Available You’ve no doubt read various analyses predicting the impending collapse of the Chinese financial sector, and arguments that China cannot continue to grow at a rapid pace. While we do think that China faces some challenges, we part company with the gloom and doom crowd. What most of them do not understand is that China is a sovereign country that issues its own currency. Affordability is not an issue. China has the fiscal capacity to resolve any financial crisis, and it can “afford” to grow fast if it chooses to do so. Our paper examines the fiscal and monetary policy options available to the PRC as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance…more

Larry Summers recently noted that the projected long-term budget deficit for the federal government basically disappears if we’re able to achieve annual economic growth rates that are 0.2 percentage points higher than the Congressional Budget Office assumes. The notion that eliminating the budget deficit is a valuable goal in and of itself deserves some pushback. But if you start from the premises of those who do think (or claim to think) there’s a problem with debt levels of the sort projected by the CBO, then debt hawks should be running around promoting any scheme they can think of that will boost growth. If the debt really is as big of a problem as they claim, this ought to be their first priority. And it’s a far better strategy than the current one, which seems to revolve around pushing for an increase in the eligibility ages for Social Security and Medicare. Now, it’s obviously the case that “push the US political system to pass policies that increase growth” isn’t an easy thing to accomplish, but there are a couple of reasons why this would be a better goal for (genuine) debt hawks to pursue. First, even if the FixtheDebters succeed in getting what they want, which seems to be a particular type of entitlement cut (raising the retirement age counts; reducing…more

Dimitri Papadimitriou, Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza have just published a new strategic analysis for the US economy, with a baseline projection and alternative policy simulations through the end of 2016. The report takes a closer look at the potential payoff of R&D investment in the context of a US export strategy. As Papadimitriou et al. point out, fiscal policy at the federal level is simply stuck on a self-defeating course, with nothing but further growth-killing contraction on the horizon. Their baseline projection shows that if we stay on the current fiscal path, in which the deficit continues to shrink rapidly, growth won’t be high enough to appreciably bring down the unemployment rate — as far out as 2016 unemployment would be just below 7 percent. The significant increases in federal spending that would be needed to accelerate the recovery and quickly bring down the unemployment rate don’t seem to be politically viable, to put it gently. So the authors turn to the external sector; more precisely, to an export-oriented strategy driven by innovation. Research and development may be an area in which a proposed increase in government investment would attract less rabid congressional opposition. And from the authors’ perspective, recent revisions to the National Income and Product Accounts (NIPA) now allow us to get a better handle…more

As is well known, Hyman Minsky was a student of Joseph Schumpeter’s at Harvard. Minsky’s “stages” theory of capitalist development, fleshed out during the later part of his life while he was here at the Levy Institute, arguably owes something to the influence of his former dissertation adviser. There’s a short paper in the archive from 1992, “Schumpeter and Finance” (pdf), in which Minsky presents a tight, clear summary of his vision of the evolution of capitalism and finance, right up to the present-day stage of “money manager capitalism.” You should read it for that reason alone (especially if your acquaintance with Minsky’s work extends only to his “financial instability hypothesis”), but it also contains a short passage that deserves to be quoted on its own, in which Minsky, in the context of a reminiscence of his teacher (“We talked about important things as well as about economics”), insists on the need to approach economics as the study of an “evolutionary beast”: “In 1948–49 the representative graduate student considered Schumpeter to be passé. Paying attention to him, joining him in his study was evidence of a lack of fundamental seriousness, of dilettantism. Given the command of mathematics that economists of that time possessed, Schumpeter’s model was not tractable. As a result his vision was ignored by the candidates striving to…more

From part four of Mariana Mazzucato’s “Rethinking the State” series, Riccardo Bellofiore discusses Hyman Minsky’s Schumpeterian spin on the “socialization of investment”: [iframe width=”448″ height=”242″ src=”//www.youtube.com/embed/rj8vyzWbZh8?feature=player_detailpage” frameborder=”0″ allowfullscreen]

I recently returned from a conference in Brazil jointly sponsored by the Levy Economics Institute, the Ford Foundation, and the Brazilian research group MINDS. It is part of a bigger project to take Hyman P. Minsky global. In my view, Minsky was hands-down the greatest economist of the second half of the twentieth century and he deserves the attention he’s getting. Watch for an upcoming film by Monty Python’s Terry Jones that will feature Minsky and his work. Minsky will even make an appearance—or, more accurately, a bigger-than-life Minsky puppet will be in the film. (Steve Keen and I were also interviewed.) Minsky the puppet had to travel from England to NY for filming. Question: how do you transport a huge puppet across the Big Pond? Well, you buy him a seat, of course! It would have been worth the price of airfare to be on that flight, buying Minsky a drink. In any event, I’m going to focus my comments around the conference’s kick-off presentation by the always entertaining Paul McCulley, formerly the brains behind PIMCO. I was sitting with Paul right before his talk, during which he apparently put the whole thing together. He asked for three fundamental principles to structure his presentation. In a matter of minutes he came up with three, fleshed them out, and then…more

Pavlina Tcherneva was interviewed yesterday on Los Angeles public radio about the ongoing debt ceiling face-off and government shutdown. She referenced Ben Bernanke’s “self-induced paralysis” phrase (which he used to describe Japan’s lost decade) as an accurate description of the current US situation and expressed concern that shutdown and debt ceiling standoffs may represent the new procedural status quo — effectively preventing the government’s fiscal power from operating on any normal basis. (The fact that yesterday’s GOP proposal centered on a mere six-week raise in the debt ceiling — and by some accounts would prevent Treasury from engaging in the “extraordinary measures” it has been using to buy time since bumping up against the debt ceiling — suggests that congressional Republicans may indeed be envisioning permanent hostage budgeting.) Tcherneva also discussed what we might expect from Janet Yellen’s Fed. Based on Yellen’s past testimony and academic work, Tcherneva argued we should see more of a focus on unemployment and employment issues, at least at the level of shaping the policy discourse — there is a separate question, Tcherneva cautioned, as to whether the Fed has the tools to get us to full employment. Listen to or download the interview here.

Some commentators and members of Congress have insisted that failing to raise the debt ceiling would not necessarily require defaulting on the national debt. The theory is that Treasury could prioritize payments to bond holders while defaulting only on commitments to other payees (say, Social Security recipients). Most of the discussion of what might happen if Congress fails to raise the borrowing limit has focused on the financial market consequences of defaulting on the debt. But even if prioritization is possible (there is some debate about whether it’s logistically possible, or even legal), we would still be facing a serious macroeconomic crisis. This is because failing to lift the debt ceiling would require extreme spending cuts some time after October 17. Essentially, the federal government would be forced to balance its budget. (This is all assuming that trillion dollar coins and premium bonds are off the table.) What would that kind of radical austerity do to the economy? Michalis Nikiforos uses the Levy Institute’s macroeconomic model to estimate the effects of beginning rapid fiscal consolidation in the last quarter of this year and maintaining a balanced budget through the rest of the 2014 fiscal year (which is to say, through 2014Q3). The result? A big swing in the expected growth rate, leading to a deep recession: Nikiforos stresses that if…more