Commentary

Robert Skidelsky runs through and corrects five fallacies about debt that one often hears lazily deployed in the public arena.  His third correction: …the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had. Nick Rowe had a post a couple weeks back on this same topic that might be of interest to some MMTers and Abba Lernerites.  Rowe lays out four different positions on the question of whether or in what sense the national debt imposes a burden on future generations, the first of which (it’s labeled “Abba Lerner”) sounds like it’s supposed to represent functional finance.  Rowe is ultimately dismissive of the functional finance approach, but you’ll find quite a bit of lively discussion in comments and a number of links to the ongoing debate. For some background reading…more

Phil Izzo of the Wall Street Journal points us to the invaluable work of the people at The Daily Stag Hunt, who tallied the number of times that laughter appears in the transcripts of the Fed’s FOMC meetings.  Peak laughter, as The Daily Stag points out, corresponds nicely with the height of the housing bubble: If there weren’t a six-year delay on the release of these transcripts, this could be a useful tool for measuring systemic risk.

You may not agree with Alan Blinder when he writes in the Wall Street Journal that the budget deficit should be an issue in the 2012 campaign.  But it certainly will be.  And Blinder deserves kudos for pointing out that there are no immediate or near-term economic problems stemming from US deficit and debt levels: “Myth No. 2 is that America’s deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be “paid for” immediately. Wrong. Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates. In purchasing-power terms, they are paying the U.S. government to borrow their money!” Blinder also points out that if you accept the CBO’s long-term budget forecasts (James Galbraith notes some problems with the projections here), then the issue is entirely one of healthcare costs.  Deficit doves and deficit owls (proponents of “functional finance”) will dispute the optimal or sustainable level of long-term deficits, but if you care about the long-term deficit, then you care about government healthcare costs.  And growth of government healthcare costs is largely a function of cost…more

As a counterpoint to the last post on the curious dominance of conservative macro policy ideas in Europe, here is Matías Vernengo getting into the political economy of who benefits from these failed policies and why there seems to be no sense of urgency around the fact that the real economy is broken: (This is from a Real News Network interview from December, originally highlighted at TripleCrisis) Also check out Vernengo’s recently released working paper.  Vernengo and his coauthor, Pérez-Caldentey, give a post-Keynesian interpretation of the eurozone crisis that places financial deregulation and the core-periphery imbalances that are inherent in the euro model at center stage.

Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably).  One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US. For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising.  You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy.  But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy: … the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift. (To muddy the waters a bit, due in part to the strength of the aforementioned social welfare supports the default fiscal policy stance in Europe is actually more expansionary than in the US.  More robust automatic stabilizers in Europe make a “do…more

Randall Wray passes on this piece by Chris Hayes (of The Nation and MSNBC) on the challenge mounted by heterodox economists to the neoclassical consensus.  Reporting from the ASSA, Hayes gets into the ways in which the boundaries of the “mainstream” are policed in economics.  It’s really worth reading the whole thing.  I particularly liked this bit: Despite the fact that as many as one in five professional economists belongs to a professional association that might be described as heterodox, the phrase “heterodox economics” has appeared exactly once in the New York Times since 1981. During that same period “intelligent design,” a theory endorsed by not a single published, peer-reviewed piece of scholarship, has appeared 367 times.

I previously summarized research that two of my graduate students, James Felkerson and Nicola Matthews, are conducting on the Fed’s bailout. Using data that the Fed was forced to release, they demonstrated that the cumulative total lent and spent on assets by the Fed was over $29 trillion. (See the first paper here: http://www.levyinstitute.org/publications/?docid=1462) Their estimate was larger than previously reported because others have focused on loans, and in some cases, guarantees, outstanding at a point in time. The Fed’s own estimate is $1.5 trillion (loans outstanding), while Bloomberg’s number was $7.7 trillion (including commitments that were promised but never used). To be sure, using methodology similar to that of Felkerson and Matthews, the GAO had obtained an estimate of $26 trillion for the cumulative total. The value added of our research is the detail provided—how much lending was provided in each facility, how many assets did the Fed buy through each facility, and who were the major users of each facility—and how much did they get.  In coming weeks and months we will release a lot more analysis of this data. Our figure of $29 trillion made headlines, and attracted a fair amount of commentary. Although we were very clear in our presentation, casual readers as well as many reporters from the media wrongly interpreted our results as a…more

First The Economist, now CNBC.  CNBC’s Senior Editor John Carney has put together a series of posts on Modern Monetary Theory at his blog.  One of Carney’s objections to MMT is this: …my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending. I’m not sure this is a problem for MMT in particular, but you might put the point a little differently.  Fully MMT-inspired public policy would require a particular set of political and policy-making institutions.  If inflation is going to be fought through raising taxes, for example, we will need a policy-making process that is able to pull this off, and with the right timing. But having said that, after observing the process since the outbreak of the Great Recession it’s pretty clear that we don’t even have the right policy apparatus for carrying out conventional aggregate demand management.  Having a robust set of automatic stabilizers in place during the crisis would have been far more…more

Over the break an article appeared in The Economist spotlighting three “schools of macroeconomic thought”:  Scott Sumner’s market monetarism, Austrian free banking, and neo-chartalism (MMT).  In addition to noting the role of the blogosphere in refining and promoting these heterodoxies, the article elects to use Paul Krugman as a stand-in for the “mainstream” opponent. If you step back, what’s slightly unsatisfactory about this choice 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.  Krugman has written extensively about the fact that our current debt and deficit levels present no serious current economic problem.  (The dispute between Krugman and MMTers stems from disagreements about the long-term debt.)  And as The Economist points out, Krugman is fine with nominal GDP targeting. Figuring out where to draw the boundaries of “the mainstream” in the economics profession is one thing, but when it comes to the range of politically acceptable policy options (a different kind of mainstream, admittedly) Krugman stands shivering in the cold side-by-side with a lot of heterodox thinkers.  With respect to both policy outcomes and policy rhetoric, our institutions seem to pay a great deal more attention to deficits, debt, and inflation…more

Courtesy of INET, here is Pavlina Tcherneva explaining her “bottom up” approach to fiscal policy. Notice the way she uses the term “trickle down” to apply also to conventional pump-priming fiscal policy (targeting growth and hoping for the right employment side-effects).  We need to move beyond the conventional options on fiscal policy, says Tcherneva; beyond a fiscal policy space marked out by aggregate demand management on one end and austerity on the other.  There’s a third approach that’s more in tune with the “original Keynesian spirit,” as she puts it:  directly employing the unemployed.  We should be targeting employment and the unemployed directly rather than trying to achieve this through the kind of bank-shot maneuver represented by conventional pump priming. You can read some of Tcherneva’s work on this issue here and here.  One-pager here.

Via Matías Vernengo, here is the audio of James Galbraith’s keynote address at the ANPEC (Associação Nacional dos Centros de Pós-Graduação em Economia) conference in Brazil.  Galbraith addresses the global financial crisis and the intellectual reactions (or non-reactions) to it, dealing both with those who attempted to explain away the crisis and those with a “rage to return” who scrambled for past insights.  Here Galbraith has in mind what he regards as the superficial return to Keynes in the early portion of the Great Recession:  “Half-remembered insights were framed into half-measures advocated by Keynesians of convenience. … [T]he authority that continues to be associated with Keynes was invoked to deflect and bury his spirit.” Galbraith also talks about the Marxian, Godleyan, Minskyan, and “Galbraithian” (John Kenneth) schools of thought (which he likens to “Millenarian sects”), joined by their acceptance of the possibility and likelihood of crises, and runs through the differences in their approaches to thinking about financial crises.

In an op-ed in today’s LA Times Dimitri Papadimitriou makes the case for a direct job creation program: It’s unreasonable to expect private enterprises to solve these problems. Full employment isn’t an objective of businesses. … There simply isn’t any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work. … At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate — in this case, a wage — is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages. Papadimitriou goes on to describe successful examples of direct public service job creation programs around the world, and finishes with a discussion of the need for decent monitoring and evaluation systems for these programs (a set of topics highlighted in the recent Levy Institute report on…more