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Levy Institute Senior Scholar James Galbraith was interviewed for a six-part series on the fiscal cliff by the Real News Network’s Paul Jay. Video of the first two parts of the interview are below; transcripts can be found here.

From 2009 to 2012, the US federal deficit shrank from 10.1% of GDP to 7% of GDP.  That’s the fastest deficit reduction we’ve seen in six decades—and all before the fiscal cliff has kicked in.  Here’s the chart from Jed Graham: Put this alongside a record-setting contraction of government employment and a 7.9 percent unemployment rate, and what you have is a portrait of fiscal irresponsibility.  A lot of this deficit reduction has to do with the fact that the economy is now growing (albeit feebly), instead of contracting, but looking at this chart should also reinforce how dangerous and unnecessary it is that we’ve decided to create an austerity crisis at this moment.  (This “austerity crisis,” by the way, should really be understood to include both the possibility of going over, and staying over, the fiscal cliff AND the possibility of the cliff being replaced by a “grand bargain” on deficit reduction.)  The last time the deficit was reduced at a faster rate was in 1937, when the government embraced a hard pivot to austerity and the economy tumbled back into recession. But don’t worry, we aren’t reliving the history of the 1930s.  Not exactly.  We are combining fiscal irresponsibility with regulatory negligence.  The Financial Stability Board (FSB) reported on Sunday that the shadow banking sector, after contracting in… Read More

Amity Shlaes, whose main claim to fame is an allegedly new history of the Great Depression, thinks we may be in trouble as a result of the election. Looking beyond her alarmingly alliterative title (“2013 Looks to be a Lot Like 1937 in Four Fearsome Ways!”  Oooh! Scary!) she has some valid points. Of course she is talking about the stock market not the real economy, which produces the jobs and the economic benefits most people rely on for a living. And, unfortunately, she doesn’t realize where she is right. But first, what are the four fearsome factors that will drive us to doom? First, a federal spending spree before the election. Shlaes uses “the old 19% rule” as a benchmark to argue that because federal government spending in 2012 “when the crisis was long past” was 24.3% of GDP, clearly the Obama administration was spending up a storm. To argue that the crisis is long past, one must be willing to ignore the employment crisis that still hasn’t left us, but let’s give her this one. Whether this is a problem given current economic conditions is another story. If it’s the debt implications you’re worried about, it is worth noting that revenues as a percentage of GDP are also quite low historically speaking, just over 15% for the last… Read More

The fiscal cliff is very easy to explain.  What many in Congress and the press are saying we should do about it is more confounding. If you were the sort of person who took expressions of policy preferences at face value, you would think that fiscal conservatives and deficit hawks would be ecstatic about this thing we’re calling the “fiscal cliff”—because contrary to our increasingly muddled popular dialogue, the fiscal event about which everyone is raising alarms is just a large and rapid reduction of the budget deficit (about $600 billion of spending cuts and tax increases scheduled for 2013).  Given the widespread deficit hysteria we’ve witnessed over the last few years, it is likely confusing to a lot of unsuspecting observers that so many in Washington and the mainstream press are dead set against this particular piece of deficit reduction. The American public has been ill-prepared for this consensus.  We’ve been told, ad nauseum, that fiscal “stimulus” didn’t and doesn’t work.  But the case for fiscal stimulus is simply the flip side of a case against austerity that few seem to realize (or are willing to recognize) that they are making.

Today Eurostat announced that the eurozone has plunged back into recession.  If you’re looking for a good explanation of the eurozone’s problems, you will only get so far by looking at the policy failures of particular countries.  The most fundamental problems—those that won’t go away with a mere shift in policy at the national level—are rooted in the very setup of the euro system. In October, the Columbia Law School-sponsored series “Modern Money and Public Purpose” held a seminar that featured Yanis Varoufakis and Marshall Auerback on the design defects of the eurozone.  Varoufakis began his presentation with these lines:  “Greece is not important enough to be occupying the headlines around the world for three years.  Imagine a situation where a crisis in the state of Delaware was threatening to bring the United States of America down.  If that happened, then the problem would not be with Delaware, it would have been with the United States of America.” (video below)

Randall Wray on quantitative easing and the accumulation of reserves: When the Fed buys assets, it purchases them by crediting banks with reserves. So the result of QE is that the Fed’s balance sheet grows rapidly—to, literally, trillions of dollars. At the same time, banks exchange the assets they are selling (the Treasuries and MBSs that the Fed is buying) for credits to their reserves held at the Fed. Normally, banks try to minimize reserve holdings—to what they need to cover payments clearing (banks clear accounts with one another using reserves) as well as Fed-imposed required reserve ratios. With QE, the banks have ended up with humongous quantities of excess reserves. As we said, normally banks would not hold excess reserves voluntarily—reserves used to earn zero, so banks would try to lend them out in the fed funds market (to other banks). But in the ZIRP environment, they can’t get any return on lending reserves. Further, the Fed switched policy in the aftermath of the crisis so that it now pays a small, positive return on reserves. So the banks are holding the excess reserves and the Fed credits them with a bit of interest. They aren’t thrilled with that but there’s nothing they can do: the Fed offers them a price they cannot refuse on the Treasuries and MBSs… Read More

As Dimitri Papadimitriou recently observed, the overwhelming push for austerity in the United States is partly driven by the sense that deficit reduction simply 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. Here’s how Papadimitriou and Greg Hannsgen illustrate the point in a recent policy brief: It is rather odd to be concerned about deficit reduction coming “too late” (i.e. that the black line will rise above the pink line), given how far we are from the historical growth trend.  As Papadimitriou and Hannsgen put it:  “Based on the present state of the economy, any notion that implementing better policy would be mostly a matter of precise timing is patently absurd.  The gap between recent real GDP growth and the historical trend is so large that the danger of overshooting the trend is hard to imagine.”* Many proposals in this budget battle, including some coming from… Read More

An upcoming Levy Institute conference: 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. A full schedule and list of participants can be found here.

Last month, numbers from the Bureau of Labor Statistics suggested that the years-long decline in public employment had finally halted, but Friday’s BLS report revealed that we moved back into negative territory in October:  the public sector as a whole (federal, state, and local) shrank by 13,000 jobs.  This should serve as another reminder that a significant part of this jobs crisis is self-inflicted.  There is a lot of policy work that needs to be done to help bring the economy back to full employment, but one of the baby steps the government can take in dealing with the crisis is this:  stop firing so many people. Here’s Floyd Norris back in August, writing about a fact that has received far too little attention in our civic dialogue: Employment in state and local government peaked at a seasonally adjusted 19.8 million workers in August 2008. Since then, the total is down by 697,000, or 3.5 percent. Since World War II, the only comparable decline was in 1950 and 1951, when payrolls fell by 3.7 percent. The recession left state and local governments, where most government jobs are located, in a very real budget bind, leading to a rate of layoffs unprecedented in over half a century.  While the federal government also saw its revenues drop precipitously when the recession hit,… Read More

Many of the themes in fiscal policy, economic growth, and distribution that we have been working on here have been in the news lately. Scholars from many fields are weighing in. One common theme is dynamics and their importance: 1)      Evidence of a self-reinforcing fiscal trap in operation in Britain, forwarded by the NIESR, a British think tank:  Dawn Holland and Jonathan Portes argue today in Vox that in the UK austerity has led to higher debt-to-GDP ratios, defying the predictions of orthodox macro models. For something from our Institute on the topic of fiscal traps, including the UK example, you might take a look at this public policy brief from Dimitri Papadimtriou and me, posted just last week. It is important to keep in mind, as the authors of the British study point out, that fiscal austerity is hardly the only cause of the economic crises now underway in much of the world. For example, they get at the problem of coordinating macro policies in a group of open economies. Above this paragraph is a diagram from our brief, illustrating, among other things, the role of Minskyan financial fragility in generating crises in many places in the world. This role is shown by the light green arrows in the diagram, which show how rising numbers of “Ponzi units,” (firms… Read More

Research associate Stephanie Kelton made an appearance on Harry Shearer’s “Le Show” over the weekend.  In the interview they managed to cover just about all of the major themes related to the debt and deficit anxiety that commands our civic dialogue (solvency constraints, inflation, interest rates, the gold standard, and so on; all the greatest hits). Kelton gave a particularly concise response to the claim that we are leaving ourselves at the mercy of China when we run up public debt.  Kelton explained that the Chinese are not the main holders of US government debt (not by a long shot), and that their holdings are not some nefarious long-term blackmail setup, but basically a function of China’s export-led growth strategy (this segment begins around the 21:40 mark): [W]hen the Chinese send us more goods and services than we send them, they end up with US dollars. … So, we get the stuff, and they get the credit to their bank accounts.  Now, what they do is they say “we have all these US dollars in our bank account, but they don’t pay us any interest, so why don’t we flip these out of our checking account into our savings account,” which is basically what the US Treasury is to them …  They get interest, and because the US government is… Read More

An announcement from the Levy Institute: Starting in fall 2013, the Levy Economics Institute will begin offering the Master of Science in Economic Theory and Policy, a two-year degree program designed to meet the preprofessional needs of undergraduates in economics and finance. Headed by Senior Scholar and Program Director Jan Kregel, this innovative program draws on the expertise of Institute scholars and select Bard College faculty, and emphasizes empirical and policy analysis through specialization in one of four key research areas: macroeconomic theory, policy, and modeling; monetary policy and financial structure; distribution of income, wealth, and well-being, including gender equality and time poverty; and employment and labor markets. The Levy Economics Institute Master of Science in Economic Theory and Policy degree program offers students a marketable set of skills and a strong understanding of economic and policy models at both the macro and micro levels, with direct application to a broad range of career paths. Thanks to the close links between our research agenda and the program’s core curriculum, students experience graduate education as a practicum, and all students participate in a graduate research assistantship at the Institute. There is also a 3+2 dual-degree option for undergraduates that leads to both a BA and the MS in five years. For more information, visit www.bard.edu/levyms.