Commentary

In 2010, the first year of the economic recovery, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez.  There are a whole host of reasons for the stubborn persistence of corrosive levels of inequality, but one of the surprising contributing factors may be found in the way we approach fiscal stimulus policy. In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them.  The status quo, at best, offers us two choices in fiscal policy flavors:  austerity and stimulus through aggregate demand management.  While stimulus is preferable, says Tcherneva, there are still flaws in a fiscal strategy that aims at boosting investment and growth without explicitly targeting unemployment.  The problem with pump priming is that it is rarely aggressive enough to adequately reduce unemployment—and when it is sufficiently aggressive, it has inflationary tendencies. Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution.  She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct…more

It says something about how badly the battle for public opinion on budget matters has been lost when a headline about a “fiscal cliff” the US is about to fall over in 2013 leaves you grimly expecting a pile of words dedicated to the poorly articulated threat of near-term public debt and deficits.  But in this case, hold off on letting your eyes glaze over.  The author is Alan Blinder and the fiscal emergency he’s talking about is a large scheduled swing toward further budget austerity: a combination of expiring tax cuts and automatic spending cuts (from the debt ceiling deal) that are all set to occur in January 2013.  Combined, says Blinder, the fiscal contraction amounts to a drag of 3.5% of GDP—a serious blow to aggregate demand. And if the macro-level view of things doesn’t grip you, the view from the ground offers enough frustrating examples of the self-inflicted wounds to come.  As Nancy Folbre points out today, Head Start, the early childhood education (ECE) funding program, is destined for cuts.  This isn’t just a “think of the poor children!” moment (though, seriously, think of the poor children.  For whatever reason, only budget hawks are allowed to chastise us for short-changing the next generation).  The economic case for borrowing right now (at negative real interest rates) to make…more

The Nation notes that austerity policies in Europe have proved to be very damaging to economic growth in the region, and points out that after adhering to IMF and EU austerity programs since last May, Portugal is “even deeper in the hole. The austerity has only increased its debt, as it has spread more suffering.” The editorial goes on to point out that the euro countries have also been hindered by their unified currency system. This system currently makes it difficult for member governments to see to it that there is a market for their bonds and other securities—namely, their central banks. Taking exception to Republican fears of a “Greek-type collapse,” the Nation emphasizes that the “sovereign currency” possessed by the American government has always allowed it to avoid difficulties making payments on its debt. (A web version of the editorial is here. A similar Washington Post opinion piece is posted here.) Compare this with the current financial problems experienced by many state and local governments, as documented by recent articles in the New York Times (“Deficits Push New York Cities and Counties to Desperation”) and the Wall Street Journal (“States Keep Axes Sharpened”). Many things can go wrong in an economy, even one with a smoothly running monetary system.  But the Nation’s argument remains crucial for the U.S.—first, that…more

C J Polychroniou explains how the latest pair of efforts aimed at addressing the Greek crisis, the newest bailout package and the bond swap, create tremendous complications down the road even if they may offer a temporary respite.  As you know, the bailout money was shackled to a series of grim austerity measures that will push the already struggling nation further under water.  But his analysis of the bond swap is even more intriguing. One way of getting at the political challenge in the eurozone is to note that many powerful economic solutions involve, not to put too fine a point on it, reinvesting resources from countries like Germany into countries like Greece.  This is something that happens all the time within units that understand themselves as nations (or aspire to such an understanding.  As Dimitri Papadimitriou and Randall Wray point out, after reunification Germany invested resources in the former East Germany in much the same way).  But the question of whether revenues from New York are being shoveled into Mississippi rarely becomes a live issue.  Within the eurozone, however, these distributional questions are fraught with political peril; dooming a whole host of solid policy solutions.  And Polychroniou suggests that the restructuring of roughly 200 billion euros in private debt that just took place may have actually made these political…more

Although recent employment numbers seem to have set off a fresh round of complacency, the December Strategic Analysis from the Levy Institute makes it pretty clear that more fiscal stimulus is necessary if the economy is going to reach decent levels of growth and employment anytime soon. However, there’s very little reason to think that anything substantial is forthcoming on the stimulus front, as the US slides slowly into austerity.  And the biggest obstacle is congressional opposition.  Short of an historic wave election, substantial new stimulus just isn’t likely (although when it comes to increasing government spending to counteract a recession, Congress appears to be much more accommodating when there’s a Republican in the Oval Office).  But short of these once-in-generation electoral outcomes, there’s another possibility:  business groups could come around to the realization that they might benefit from an increase in aggregate demand and start seriously pushing their clients in Congress to pass something. An article in Bloomberg points out that just such a push occurred in the 1940s, as a coalition of business interests, concerned about what would happen to demand as war spending wound down, pushed for fiscal stimulus (interesting side note:  Fed Chairman Marriner Eccles is featured in the article as someone whose Depression-era experience in the private sector led him to conclude that government stimulus…more

Philip Pilkington shares a discussion he had with Dean Baker about, among other things, the Post-Keynesian take on the limitations of some conventional economic models (of the “LM” part of IS-LM, in particular.  And if that just looks like an arbitrary string of letters to you, Pilkington has an accessible explanation at the beginning of his post).  His description of the “self-justifying” dynamics of the IS-LM view of money and central banking is worth quoting: By assuming an upward-sloping LM-curve – that is, a fixed supply of funds – there is an implicit assumption that actions on the part of the central bank are somehow neutral. ISLM enthusiasts implicitly assume that the central bank is simply responding to some otherwise ‘equilibrating’ market conditions and adjusting its rates in line with this. … … [The standard ISLM model] buries the fact that the central bank is actually taking a specific stance on policy and then tries to pass off this stance as a sort of quasi-market response (i.e. as if there were a market for a fixed supply of funds). But the central bank’s policy stance is nothing of the sort. Instead it is a sort of a simulation of what a market response is thought to be. Thought to be by whom? By economists that adhere to models similar to…more

Medicare cost growth has been slowing down, and according to research published in the New England Journal of Medicine there may be more going on here than just a temporary reaction to the recession.  This is just one analysis of course, but if it pans out, if it marks the beginning of a sustained trend, the implications for the budget debates would be huge. If Medicare cost growth tapers off, this would address the most pressing issue for those who are concerned (in good faith at least) about the long-term US budget picture.  “Deficit doves,” who are careful to state that we need to increase deficits in the short-term to deal with the recession’s aftermath, will tell you that in the long run the problem is not spending in general, or entitlements (the long-term gap in Social Security funding is estimated to be about 0.6 percent of GDP), or even demographics (the aging of the population will inevitably mean more spending on programs for the elderly, but this trend levels off after a certain period; it’s predictable and manageable).  The very core of their case for long-term debt anxiety is the belief that healthcare costs (and by extension Medicare costs) will rise much faster than GDP for the foreseeable future. But this means that a large part of the debate…more

The title of C. J. Polychroniou’s latest policy note, “Neo-Hooverian Policies Threaten to Turn Europe into an Economic Wasteland,” gives you a pretty good idea of where he’s coming from: There can be no denying that, despite the experiences provided by the Great Depression and the numerous financial crises that have taken place since 1973, policymakers have been dismally wrong in their assessment of the 2007–08 global crisis and governments dreadfully incompetent in developing a clear strategy for addressing it appropriately. The reason for this lies with an economic ideology, a conceptual framework with which government officials and bankers deal with economic reality, that is fundamentally flawed. As a way of addressing some of the flaws of the eurozone policy architecture, and of counteracting the ideology of austerity that is embedded in that architecture (the “fiscal compact” currently being debated, which would place more automatic penalties on governments that deviate from severe limits on budget deficits, goes even further in embedding this ideology in the setup of the European Monetary Union), Polychroniou is looking to a “United States of Europe” model, with an expansion of EU-level fiscal policy powers. As he observes, however, the European project is moving in the opposite direction: Indeed, in an indication of where Europe may be headed politically, the EU’s budget was slashed by four…more

Randall Wray has been engaged in a back-and-forth with John Carney of CNBC.  Their latest exchange touched on the question of the “real” economic burdens of Social Security (distinct from issues of affordability).  Wray responds: “John Carney agrees with me that supporting our elderly is not an ‘affordability’ problem, but he claims that I fail to see the ‘real’ burden—the dependency ratios and all that. Actually I’ve been writing about that since the early 1990s. The ‘real’ burden is the only thing that matters. Here’s just a short list of easily accessible things I’ve written at www.levy.org: The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare [2009] Global Demographic Trends and Provisioning for the Future [2006] The Burden of Aging [2006] Social Security’s 70th Anniversary [2005] Killing Social Security Softly with Faux Kindness [2001] More Pain, No Gain [1999] Does Social Security Need Saving? [1999] … There are two important issues here.

It won’t be quite as satisfying as having Marshall McLuhan stashed in a corner to back up your argument, but for the next time you find yourself in a real-time wonkfight, FRED (the go-to database of the St. Louis Fed) is now available as a mobile app.

Your Minsky quotation of the day: The rise in bank share prices that follows a growth in profitability is particularly important in a world of professionally managed institutionalized banks.  The typical professional bank president is not a rich man when he starts his career.  As a bank president he is a hired hand trying to achieve a personal fortune.  But given the tax structure, it is difficult to accumulate a fortune by saving out of income; the most efficient route for a business executive is by way of stock options and the capital gains that accrue as the stock market price per share rises.  As holders of stock options, bank management is interested in the price, on the exchanges, of their bank’s shares. The price of any stock is related to the earnings per share, the capitalization rate on earnings of the bank’s perceived risk class, and the expected rate of growth of such earnings.  If bank management can accelerate the growth rate of earnings by increasing leverage without a decrease in the perceived security and safety of the bank’s earnings, then the price of shares will rise because both earnings and the capitalization rate on earnings that reflects growth expectations rise.  In a capitalist society with institutionalized organizations and tax laws such as ours, fortune-seeking by the mangers of…more

C. J. Polychroniou surveys the distressing results, in terms of unemployment (and particularly youth unemployment), of the “neo-Hooverism” and obsession with price stability that permeate European Union policymaking and explains that a fundamental change in approach is needed: Europe is in dire need of an economic and political revolution. It needs an immediate return to Keynesian measures and a new institutional architecture for the eurozone. It needs to move toward a United States of Europe. If such steps are not taken, Europe’s economies and societies could very well end up in a situation similar to that of the United States in the 1930s. Read Polychroniou’s one-pager here.