Commentary

The latest chapter in the “why was the original stimulus so small?” story is a memo from December 2008 that reveals Larry Summers’ assessment as to why the stimulus (ARRA) had to be limited to around $800 billion—about half of what was necessary, in Summers’ estimation.  There are various conclusions you can draw from this memo, but the aspect I’d like to focus on is this:  Larry Summers’ suggestion that $225 billion of “actual spending on priority investments” is all that the government could get out the door over a two year time span (and so the rest had to be made up of tax cuts, aid to states, etc.). Let’s grant for the sake of argument that Summers is correct about this “shovel ready” figure.  The question is:  what can we do about it?  If you’re looking for short-term results, the answer is probably “not much.”  Even things like speeding up environmental impact assessments for infrastructure projects wouldn’t have much effect (at the link, Brad Plumer tells us that only 4 percent of highway infrastructure projects even require such environmental reviews). But looking ahead, there is more we could and should be doing.  Back in 2009 Martin Shubik sketched out a plan in a Levy Institute policy note for creating a “Federal Employment Reserve Authority“—a kind of Fed for…more

“…while Europe’s leaders haven’t hit upon a way to forestall a years-long span of catastrophically high unemployment and falling living standards, they do appear to be really really really really committed to saving banks.”  That’s Slate‘s Matthew Yglesias, who notes that this (seemingly exclusive) focus among European elites on saving their banks likely ends up protecting the US economy from eurozone contagion more effectively than would policies focused on growth and easing the plight of those whose wellbeing depends on the “real” economy. The reason is that, as Gennaro Zezza points out here, the US economy is not overly exposed to a slowdown in European growth; not overly exposed, that is, compared to the fallout from a European financial panic.  As Dimitri Papadimitriou and Randall Wray indicate, US finance is still entwined with the fate of European finance; at least in part due to the roughly $1.5 trillion invested in European banks by US money market mutual funds. In other words, comparatively speaking, the US economy will not suffer much from European policy elites’ apparent relative disinterest toward the fate of their people, but may dodge a bullet if current efforts to save the European banking system work out.  (At least in the short run.  In the longer run, Ryan Avent is probably right to worry that this LTRO stuff…more

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Dimitri Papadimitriou and Randall Wray deliver a second installment of their joint assessment of the risks that a renewed global financial crisis might be triggered by events in Europe or the United States.  In their latest one-pager they move past disputes over etiology and lay out their solutions for both sides of the pond:  addressing the basic flaws in the setup of the European Monetary Union (“the EMU is like a United States without a Treasury or a fully functioning Federal Reserve”) and outlining how to place the US financial system and “real” economy on more solid foundations. Read the newest one-pager here. Their first one-pager focused on the reasons it is unhelpful to label the turbulence in Europe a “sovereign debt crisis.”  This way of framing the situation obscures more than it enlightens.  To recap:  prior to the crisis only a couple of countries had debt ratios that significantly exceeded Maastricht limits.  For most, the economic crisis was the cause of rising public debt ratios, rather than the other way round.  What we really need to look at, Papadimitriou and Wray suggest, are private debt ratios and current account imbalances within the eurozone.  And as for current public insolvency concerns, this has far more to do with the flaws in the institutional setup of the European Monetary Union than…more

Some indigestible food for thought:  there is not a single state in the Union—not one—in which the top 1% of income earners pay a higher rate of state taxes than the bottom 20%.  For the majority of states, it’s not even close:  the poorest 20% pay somewhere between double and six times the tax rate of the richest 1%.  In Florida, those who make the least pay 13.5% of their income in state taxes, while those who make the most pay 2.1%. This comes to us from Mother Jones’ Kevin Drum, who dug into the comprehensive “Assets and Opportunity Scorecard” recently produced by the The Corporation for Enterprise Development.

Marshall Auerback appeared on the Business News Network to give his take on the latest developments in the eurozone crisis; specifically with respect to the ongoing negotiations over the proposed (now 70 percent) haircut on Greek debt.  Auerback also addressed the LTRO (noting the rather dramatic increase in the ECB’s balance sheet) and the credit default swaps on Greek debt (on this, see also Micah Hauptman’s take on the process for determining when these CDS payments are triggered:  “murky, unregulated, and replete with conflicts of interest“). You can watch a clip of Auerback’s interview here. (credit to Mitch Green at NEP)

Michael Hudson is giving a talk titled “The Road to Debt Deflation, Debt Peonage, and Neofeudalism” at the Levy Institute on Friday, February 10 at 2:00 p.m. Hudson is a research associate at the Levy Institute and a financial analyst and president of the Institute for the Study of Long Term Economic Trends. He is distinguished research professor of economics at the University of Missouri–Kansas City and an honorary professor of economics at Huazhong University of Science and Technology, Wuhan, China. The abstract for the presentation is below the fold.

In his General Theory, J.M. Keynes argued that substandard growth, financial instability, and unemployment are caused by the fetish for liquidity. The desire for a liquid position is anti-social because there is no such thing as liquidity in the aggregate. The stock market makes ownership liquid for the individual “investor” but since all the equities must be held by someone, my decision to sell-out depends on your willingness to buy-in. I can recall about 15 years ago when the data on the financial sector’s indebtedness began to show growth much faster than GDP, reading about 125% of national income by 2006—on a scale similar to nonfinancial private sector indebtedness (households plus nonfinancial sector firms). I must admit I focused on the latter while dismissing the leveraging in the financial sector. After all, that all nets to zero: it is just one financial institution owing another. Who cares? Well, with the benefit of twenty-twenty hindsight, we all should have cared. Big time. There were many causes of the Global Financial Collapse that began in late 2007: rising inequality and stagnant wages, a real estate and commodities bubble, household indebtedness, and what Hyman Minsky called the rise of “money manager capitalism”. All of these matter—and I think Minsky’s analysis is by far the most cogent. Indeed, the financial layering and leveraging that…more

The Bureau of Labor Statistics (BLS) noted on its website yesterday that in 2011, “annual totals for [layoff] events and initial claims were at their lowest levels since 2007.” Nonetheless, today’s report that the Fed open-market committee plans to keep short-term interest rates low until late 2014 reminds us of the obvious but unfortunate fact that the current slump in employment growth is continuing. Appearing at the top of this post is a chart showing monthly Bureau of Labor Statistics (BLS) figures on new hiring, which remains very slow. Last week, in citing similar data, Ed Lazaer argued that “If jobs are scarce and wages are flat or falling, decent increases in the gross domestic product or the stock market are almost irrelevant” (WSJ link here). One should not forget that the last official recession began in December 2007—well over four years ago. (National Bureau of Economic Research recession dates are indicated with grey shading in the figure above.)  Such dates are somewhat arbitrary. To take another example, the BLS’s broadest labor underutilization rate still stood at 15.2 percent as of last month, down only modestly from 16.6 percent the previous December.

Speaking of too big to fail, a petition organized by Public Citizen has been sent to the Federal Reserve and Financial Stability Oversight Council (FSOC) calling for the break up of Bank of America.  The petition identifies BofA, given its size and fragility, as a threat to the US financial system.  It cites a recent NYU study that ranks the financial institution as posing the greatest systemic risk among US firms, based on capital shortfall.  Public Citizen also argues that Bank of America is simply too large and too interconnected to be regulated effectively. Micah Hauptman explains that the break up and reorganization could be carried out under the authority given to the Fed and FSOC under section 121 of the Dodd-Frank Act (if a financial institution is determined to pose a “grave threat”).  The petition argues that taking action now under section 121 is preferable to attempting an orderly liquidation in the midst of a crisis: If the Agencies do not use section 121 in advance of financial distress at a firm that poses a grave threat to U.S. financial stability, they risk undermining other critical Dodd-Frank Act provisions. Many Dodd-Frank Act provisions related to systemic risk would be far easier to implement if systemically important institutions were smaller and less complex. One of the most critical is the…more

The Financial Times has been running a series for some time on “Capitalism in Crisis.” In yesterday’s paper Martin Wolf provided a summary of the discussion and proposed “Seven ways to fix the system’s flaws.” The first and most important task, he notes, is to manage macro instability. In this regard, he pays homage to the late Hyman Minsky and notes that … his masterpiece, Stabilizing an Unstable Economy, provided incomparably the best account of why this theory (of a stable capitalist economy) is wrong. Periods of stability and prosperity sow the seeds of their downfall. The leveraging of returns, principally by borrowing, is then viewed as a certain route to wealth. Those engaged in the financial system create – and profit greatly from – such leverage. When people underestimate perils, as they do in good times, leverage explodes. What is the answer to macro instability? According to Martin Wolf, the first answer is to recognize that crisis is inherent in free-market capitalism. Second, macroprudential policies matter, including restrictions on leverage and better capital buffers in banks. And finally, governments, including central banks, have a role to play in stabilizing the economy after a crisis. As for the financial system, Wolf wants “to protect finance from the economy and the economy from finance” by building bigger shock absorbers in the…more

Paul Krugman—orthodox economist? Heterodox economist? Pragmatic economist? New Keynesian economist? Michael Stephens recently commented on an article in the Economist that discussed MMT, as well as two other non-mainstream schools of macroeconomic thought. The article contrasted the three relatively unfamiliar and unorthodox approaches with “[m]ainstream figures such as Paul Krugman and Greg Mankiw[, who] have commanded large online audiences for years.” As Michael points out, If you step back, what’s slightly unsatisfactory about [describing Krugman simply as a mainstream economist] is that Krugman is, right now, more in tune with the policy preferences of two-thirds of these “doctrines on the edge of economics” than he is with the reigning fiscal or monetary policy stance of the US government.  But as Michael well knows, Krugman is hardly alone among neoclassical scholars in most of his policy views. Micheal’s point is true of quite a few mainstream economists right now—they are far more flexible on the policy issues that dominate the agenda today than they are on many other economic issues. This excerpt from a recent essay written by Marc Lavoie may help to illuminate the very significant differences of opinion that distinguish such forward-thinking neoclassicals from numerous heterodox economists around the world: Paul Krugman (2009) has also made quite a stir by