Commentary

In economics, there is a remarkable “stickiness” in bad ideas and confusions. In fact, some bad ideas and confusions never seem to go away. For instance, last summer Martin Feldstein bravely suggested that euro weakening would help solve the euro crisis and rescue Europe (WSJ: “A weaker euro could rescue Europe”). Similarly, in a Bruegel Institute Policy Brief also published last summer and titled “Intra-euro rebalancing is inevitable but insufficient,” Zsolt Darvas argued that euro weakening was badly needed to restore competitiveness of euro crisis countries whose perceived inability to rebalance their external positions was a major root of the euro crisis. More recently, these two issues, euro external competitiveness and intra-euro competitiveness imbalances, were also bundled together in a piece by David Keohane titled “Why strength could be the single currency’s undoing” (FT.com 17 April 2013). Mr. Keohane seemed to identify a “euro paradox,” or even two paradoxes actually. One apparent paradox is that policy measures by the euro authorities that boost confidence in the euro run the risk of doing damage to it by undermining its long-term existence through enticing euro strength, which would postpone an export-led recovery. The other seeming paradox is that the single currency cannot exist at different levels for different countries and that it will therefore always be expensive for some and cheap for…more

In recent days both Brad DeLong and Paul Krugman have written good pieces arguing against the austerity marketed by deficit hyperventilators. We can thank Thomas Herndon’s muckraking that pushed the topic front and center, showing that there is no empirical evidence in support of the austerian’s claim that big government debts slow growth. Here’s Krugman’s argument. To briefly summarize, historical experience has demonstrated that the “growth through austerity” argument is false. Further, the monetarists have also got it wrong: monetary policy won’t get us out of this recession trap; what we really need is a good dose of fiscal policy. Given that we are in a “liquidity trap,” we can safely expand government spending without worrying about the usual downside to deficits. And in a liquidity trap, there is really no difference between Modern Money Theory and the conventional ISLM analysis. It is only once we return to a more “normal” situation that budget deficits would “matter” in the sense that they’d cause problems. DeLong amplifies the argument here. Once we’re out of the liquidity trap, then sustained budget deficits will push up interest rates and crowd out private spending (especially investment). This is basic ISLM stuff. For those who have not taken intermediate macro, it is enough to know that in current conditions increasing budget deficits will not raise…more

When top managers at our largest financial firms claim to have been oblivious of dangerous financial practices carried out under their watch, the most serious implications for regulatory reform don’t actually follow from scenarios in which these managers are lying.  It’s a bigger deal, in terms of how far we need to go in changing the way we regulate the banking system, if they’re telling the truth. Bad apples, after all, can be replaced.  But what if the ignorance is real; if managers really don’t know what’s going on in the units below them due to the sheer complexity of the financial institutions they’re running?  This might be thought of as a convenient excuse; a universal “get out of jail free” card.  But if true, it has more far-reaching, radical implications than most Bankers Behaving Badly scenarios, because it points to a problem that touches on the very structure of the financial system and its key institutions. This, says Jan Kregel, is part of the the deeper lesson of JP Morgan Chase’s “London whale” fiasco.  In a new policy brief, Kregel reviews the recent Senate Permanent Subcommittee on Investigations report on JP Morgan Chase’s difficulties and draws out the lessons for financial reform: The most probable explanation of the misinformation concerning the “London whale” affair is a massive failure of…more

France and Germany held largely contradicting hopes and aspirations for Europe’s common currency. To France the key issue in establishing a European monetary union was to end monetary dependence, both from the vagaries of the U.S. dollar and from regional deutschmark hegemony, and to establish a global reserve currency that could actually stand up to the dollar as part of a new international monetary order. By contrast, the main German concern was to forestall the threat of deutschmark strength as undermining German competitiveness within Europe. Reserve currency status and currency overvaluation stand in conflict with Germany’s export-led growth model. In light of the euro crisis both nations are bound to reassess the euro’s viability. No doubt France has seen all its hopes for the euro disappointed. France is facing the prospect of a lost generation today, a prospect shared with other debtor nations in the union, and a prospect that undermines the Franco-German axis and may soon turn it into the ultimate euro battleground. …  Continue reading in English / Spanish (see this working paper for more background)

Today’s GDP report estimated that the US economy grew at an annual rate of 2.5 percent in the first quarter of 2013.  If the economy were translating GDP growth into jobs at rates similar to those seen in the past, this 2.5 percent pace would not get us to full employment until, say, the end of Hillary Clinton or Jeb Bush’s second term.  But evidence suggests that, in fact, the link between output and jobs has been weakening for the past thirty years or so.  In other words, we need higher growth rates today than we did thirty years ago to produce the same employment increases.  In that context, 2.5 percent growth is nowhere near good enough. In a new policy note, Michalis Nikiforos looks closely at US employment recovery (or lack thereof) after the “Great Recession.”  In part, the dismal job creation record — which, says Nikiforos, is more accurately reflected by looking at the total number of employed workers rather than just the unemployment rate — is due to slow growth rates.  Such slow growth is to be expected for an economy recovering from a financial crisis, he explains:  “following the burst of a bubble and a financial crisis, the private sector seeks to minimize the debt it accumulated before the crisis.  This leads to a large private…more

The 22nd Hyman P. Minsky conference, “Building a Financial Structure for a More Stable and Equitable Economy,” is underway.  Today featured speeches by James Bullard of the St. Louis Fed, Eric Rosengren of the Boston Fed, and Thomas Hoenig of the FDIC. This year’s event combines the Minsky conference’s usual focus on financial stability and financial reform with another of Minsky’s abiding intellectual interests:  full employment policy.  This was reflected in today’s varied panel sessions on measuring inequality, Minskyan employment policies, and the current state of financial regulation. Follow the second and third days of the conference, livestreamed here. Tomorrow will feature Narayana Kocherlakota, Sarah Bloom Raskin, Alan Blinder, James Galbraith, Jan Kregel, and L. Randall Wray, among many others. Audio of all sessions and speakers is posted here; media coverage can be found here in the press room.

Jan Kregel speaks at INET’s “Changing of the Guard?” conference in Hong Kong about the tensions between China’s highly regulated financial system and its efforts at rebalancing. Kregel compares elements of China’s financial system to what the United States had under Glass-Steagall and observes that, similar to the US experience, a de facto liberalization is occurring in China through the emergence of shadow banking:

The President’s budget has arrived and, as reported, it does contain proposed cuts to Social Security (through adopting a different measure of inflation called “chained CPI”).  The emerging consensus seems to be that this is mainly intended as a political/messaging ploy.  The idea here is that Republicans are extremely unlikely to make a deal that contains any revenue increases on high-income-earners; even one that includes the entitlement cuts they have (sort of) demanded.  As a result of the President putting these cuts on the table in so public a fashion, so the theory goes, centrist op-ed writers will finally drop the false equivalence and declare that Republicans are being intransigent and are not negotiating in good faith toward a grand deficit-reduction bargain. Paul Krugman points out that this is an exceedingly unlikely scenario.  But even if DC pundits play along, here’s a question about this gambit that I don’t think has an obvious answer:  what’s supposed to happen next?  What’s meant to be the tangible payoff of the new narrative that would be created by all these editorial spankings? Put it this way.  What will have a bigger impact on a (generally more elderly) midterm electorate in 2014:  ads about Republican obstinacy featuring sorrowful quotations from Fred Hiatt, or ads savaging Democrats for trying to slash Social Security?  Charges of…more

In the LA Times, Dimitri Papadimitriou explains that the link between growth and employment has been steadily weakening over the last several decades, and that this makes getting help from fiscal policy — increasing the deficit in the short run — more urgent than ever.  If we want to get back to pre-crisis unemployment rates (below 4.6%) anytime soon, the private sector isn’t going to be able to do it on its own, and certainly not with payroll tax increases and indiscriminate budget cuts weighing down already-insufficient growth rates: 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. Read the op-ed here. For more on this broken link between output and jobs, the…more

Hyman Minsky is probably best known for his work on financial instability and financial reform, but he also wrote extensively about how to address the persistent problem of all those left behind by our increasingly financialized economy; about how to design policies that would put an end to income poverty in the midst of plenty. Despite the fact that far more attention has been paid to his writing on financial fragility, these were intimately related issues in Minsky’s research, connecting the financial and “real” economies. As with his work on finance, Minsky’s approach to poverty did not fit comfortably within the confines of the status quo. With “trickle-down” on one side, pure tax-and-transfer approaches on the other, and vague calls for retraining floating somewhere in the middle, Minsky found the conventional menu of policy options incomplete and inadequate (a menu that has changed very little over the last several decades). Calling for “upgrading” workers without ensuring there are enough jobs to go around is, as Minsky put it, “analogous to the great error-producing sin of infielders — throwing the ball before you have it.” What’s missing, he thought, is a commitment to ensuring that paying jobs are available to all who are ready and able to work; a commitment to “tight full employment.” The question is how to get there…more

Here are today’s big pieces of economic policy news:  (1) net job creation in the month of March (+88,000) was too low to keep up with population growth; (2) the president’s budget proposal will reportedly include cuts to Medicare and Social Security (or as the latter will be described in most newspapers, “adjustments to the way inflation is calculated for the purposes of determining Social Security benefits”). These two items may seem unrelated, but in reality they form the basis of an unhappy remarriage. 

There have been many concerns expressed on the internet about the eventual necessity of reversing the Fed’s cheap-money policies, which include “quantitative easing,” as well as a near-zero federal funds rate. One idea some have is that there are “too many bonds” in the Fed’s portfolio, and that problems will occur with insufficient demand whenever the Fed attempts to reduce its holdings. This doomsday scenario often seems to vex public discussion but is unlikely to materialize, given that the Fed can always make use of its ability to “make a market” for Treasury securities. An alternative way of looking at the same situation is that there is a huge amount of money and money-equivalents on bank balance sheets and in nonfinancial corporate coffers, and that the tendency of the modern economy toward financial fragility will eventually lead to risky loans and investments using these funds. (Jeremy Siegel adopts this view in the FT, with, however, an unfortunate emphasis on the possibility of a takeoff of inflation. Inflation remains below the Fed’s 2-percent approximate objective, and the greater risk by far is still recession. An Alphaville comment on his column makes the point that the threat of fragility remains regardless of whether banks have excess reserves on hand.) Concerns have already emerged about “junk” bonds, so-called leveraged loans, and other effervescent…more