Commentary

The Bureau of Labor Statistics released its occupational employment and wages summary today. With a surge of interest in economics in the general public, I wondered how many of us are hired to work (search Economists and Economics Teacher, Postsecondary). What is your guess? (Hint: for every 5,021 hired workers, one economist is at work)

Distinguished Scholar Wynne Godley, longtime head of the Levy Institute’s Macro-Modeling Team, died on May 13. He was 83. At the time of his death, Godley was professor emeritus of applied economics at the University of Cambridge and a fellow of King’s College. He was formerly a senior visiting research fellow at the Cambridge Endowment for Research in Finance, and a member of the British Treasury’s Panel of Independent Forecasters—the so-called “Six Wise Men.” Much of his work focused on the strategic prospects for the US, UK, and world economies, and the use of accounting macroeconomic models to reveal structural imbalances. He published extensively. His most recent book, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth (2007; with Marc Lavoie), is an elaboration of his classic textbook Macroeconomics, written in 1983 with Francis Cripps. He is survived by his wife, the former Kathleen “Kitty” Garman, and their daughter. An extensive obituary appeared in the Times of London on May 17. “Wynne Godley,” it said, “was the most insightful macroeconomic forecaster of his generation.” Another extensive appreciation appeared later, this one in the Guardian.

Michael Scherer at Time has a fascinating story on three women in Washington–Sheila Bair, Elizabeth Warren and Mary Schapiro–who have risen from the ashes of the financial meltdown. If nothing else, the crisis has at least helped put some women in charge of Wall Street.

Dean Baker debunks the myth that banks are failing to lend money. Long story short: it’s the recession! Businesses are looking less like good credit risks because they have less revenue. What bank would be lending more in this atmosphere? A foolish bank.

Any time you talk about a contagion, it’s sensible to ask: where did the infection come from? The European debt crisis may look like it started in Greece, but really it began with the Stability and Growth Pact, the final framework of the European Monetary Union (EMU) that gave us the euro. That agreement is just too rigid to allow for the kind of fast, coordinated action necessary in a crisis. And because it launched the joint currency without any kind of federal transfer system, it made the new currency unsustainable. The euro’s founding framework thus contained the seeds of instability. What’s really surprising about recent developments is that the imbalances in the euro-zone have caught the world by surprise. The recent trillion-dollar rescue package calmed the markets, at least for now, but it also highlights the level of imbalances in Europe. The fact that this rescue package took the better part of four months to construct underscores that the monetary and fiscal institutions in the euro-zone are not conducive to a single currency. The euro bailout is the product of what a federal government could construct in days. The austerity measures that will accompany the program at the hands of the IMF and a politically reticent Germany will do little more than choke off growth and fuel political discontent…more

From the way markets reacted, the trillion-dollar rescue package hurled by European leaders at the continent’s growing debt crisis might well have been code-named Panacea. Stocks rose all over the place while Greek bond yields tumbled on Monday. But this is far from the end of the story. The rescue package alleviated the growing Eurozone liquidity crisis, but the solvency crisis remains. While the acute problem (liquidity) was a serious threat, so is the chronic problem of excessive indebtedness that besets Greece, Portugal, Spain and Ireland. The rescue plan cannot address the central problem, which is that countries with very different fiscal cultures (and earnings potential) are yoked to the same currency. The idea was that this would help the profligate keep in line, but instead it’s shaping up as a way for them to ship their liabilities to their fitter neighbors. How long will voters in rich countries stand for this? Perhaps not much longer than the voters in the debtor countries will stand for the austerity measures imposed on them. The entire rescue plan presumably rests on the assumption that, with more time, the Eurozone’s problem countries can get their fiscal houses in order—and Europe can somehow grow its way out of trouble. But Greece and some of the other major European debtors are seriously uncompetitive. And the…more

The good news on U.S. employment is that we added 290,000 nonfarm jobs in April. The bad news is that unemployment rose as well, to 9.9%, because more people entered the labor force and many more returned to seeking work. So unfortunately, the employment picture remains grim, with a level of unemployment we might have found horrifying just a couple of years ago. Many of us agree that the government has a role to play in creating more jobs, but nobody is paying much attention to the best kinds of jobs Washington should create. As it turns out, they’re not the kinds of high-paying jobs most of us would want. But they are the kind that would help the most people—and get taxpayers the biggest bang for their buck. How can the government accomplish these twin goals? My Levy Institute colleagues Rania Antonopoulos, Kijong Kim, Thomas Masterson, and Ajit Zacharias studied this question and came up with a surprising answer. The best jobs for Washington to create don’t involve repairing bridges and digging subway tunnels, worthy as those initiatives may be. Nor do they involve wind power or other green technologies, although those too are fine undertakings. No, the best jobs government could possibly create are what we’ll call “social sector” jobs—roughly speaking, work taking care of people. We’re talking…more

I’m Italian, and I’m an economist, so as European leaders work feverishly to save the Euro, I’ve been wondering: what would happen if the feared contagion occured and my own country saw its finances melt down just as Greece’s have? The short answer is that this would generate a fatal shock to the Euro, given the size of Italian public debt and the fact that a large share is owned by other Euro countries. Of course, such an event is by no means a foregone conclusion. But I can’t help noticing an ominous correlation. The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes. Much of the problem in these countries in Europe, in other words, is tax evasion. As the chart shows, the size of the shadow economy in Italy and Greece is much larger than in other developed countries, inside and outside the Euro area. Massive tax evasion helps produce large public-sector deficits. Let’s make some simple back-of-the-envelope calculations: if the shadow economy is adding 25 percent to GDP, with income going untaxed, and if the average tax rate on such income is a conservative 20 percent, recovering such tax revenues would imply…more

The Bureau of Labor Statistics released its monthly Employment Situation Report this morning. The headlines will announce an increase of 290,000 in nonfarm payroll employment and a jump in the unemployment rate to 9.9%. While employment grew, the labor force grew faster than usual, with 195,000 lured back into looking for work by better prospects in the job market. Even without these re-entrants, the labor force grew by 610,000 in April. So while trends are pointing in the right direction, the unemployment rate will continue to look bleak for quite awhile.

With the recent financial turmoil in Greece, the press has turned its attention away from the bailouts of Citigroup, AIG, Fannie Mae, Freddie Mac, and other major U.S. financial corporations. Less than a month ago, though, Gretchen Morgenson noted in the New York Times that a Treasury Department estimate of the costs of the main financial bailouts probably understated their total costs to the economy. Around the same time, federal officials and others pointed to the government’s investment in Citigroup as a relatively successful venture that could make a profit—perhaps $11 billion plus $8 billion in interest and fees. (The company’s stock has fallen somewhat since then.) Bailouts are of course intended to benefit the economy as a whole, and it is certainly hoped that such benefits will greatly exceed the return to the government on its investment. A large part of the return went to investors who have increased their wealth by owning the shares of Citigroup since it was saved by the government. The market capitalization of Citigroup is now very roughly $90 billion, after subtracting the U.S. government’s stake of about $32 billion. (The latter figure may overstate the size of the government’s share, because it may include stock that has been sold by the government this year.) Predictions of a good return on the Citigroup bailout…more

Financial regulation might stifle financial innovation. And that would be a good thing. But is it likely to happen?

(This is the testimony of Levy Institute Senior Scholar James K. Galbraith before the Senate Subcommittee on Crime, Senate Judiciary Committee, May 4, 2010.) Chairman Specter, Ranking Member Graham,  Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record. I write to you from a disgraced profession.  Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on,  and that widespread fraud therefore could  not occur. Not all economists believed this – but most did. Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft-pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble.  They continue to do so now.  At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury,…more