Publications
Dimitri B. Papadimitriou
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Strategic Analysis | February 2024In this report, Dimitri B. Papadimitriou, Nikolaos Rodousakis, Giuliano T. Yajima, and Gennaro Zezza investigate the determinants of the recent performance of the Greek economy.
Despite geopolitical instability from the continuing Ukraine-Russia and Israel-Gaza wars and higher-than-expected inflation rates, the country has managed to register the highest growth rates among eurozone member-states in 2021 and 2022.
Yet the authors’ projections, based on 2023Q3 official statistics, show that there will be a deceleration of GDP growth in the upcoming two years. This will be driven mainly by sluggish consumption demand due to the falling trend of real wages and persistent higher imported inflation, coupled with the inability of the government to deploy NGEU funds and a significant loss of production due to climate damage from floods and fires. These dynamics will likely continue the brain drain of skilled workers, who opt to move abroad for better employment opportunities. The overreliance of the Greek economy on tourism is also questioned, given the dependency on foreign industrial inputs.Download:Associated Program:Author(s):Related Topic(s):
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Strategic Analysis | July 2023In this Strategic Analysis, Dimitri B. Papadimitriou, Michalis Nikiforos, Giuliano T. Yajima, and Gennaro Zezza discuss how the current state and structural features of the US economy might affect its future trajectory. The recent recovery after the pandemic has been remarkable, when compared to previous cycles, and offers evidence of the efficacy of fiscal policy. Moreover, the inflation rate has been finally decelerating as the problems in global value chains that emerged after the pandemic are resolving and the price of commodities and oil, which spiked after the pandemic and the war in Ukraine, are stabilizing.
Yet despite the recent success of fiscal policy in promoting output and employment growth, the recent debt ceiling deal—culminating in the 2023 Fiscal Responsibility Act—risks putting the US economy on the austerity path of the previous decade. And given the structural weaknesses of the US economy—including its high current account deficits, high level of indebtedness of firms, and overvalued stock and real estate prices—this projected fiscal policy tightening, combined with the impacts of high interest rates, could lead to a significant slowdown of the US economy.
The US economy, the authors contend, is in need of a structural transformation toward modernizing its infrastructure, promoting industrial policy, and investing in the greening of its economy and environmental sustainability. A necessary condition for achieving these goals is an increase in government expenditure; they show that such an increase could also have positive demand effects on output and employment.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2023/2 | June 2023Following the recent (June 25, 2023) elections in Greece, Institute President Dimitri B. Papadimitriou and Research Scholar Nikolaos Rodousakis outline the economic and policy challenges facing the Greek government.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2023/1 | May 2023In 2022, Greek GDP grew at a higher rate than the eurozone average as the nation’s economy rebounded from the COVID-19 shock.
However, it was not all welcome news. In particular, Greece registered its largest current account deficit since 2009. Despite a widespread focus on fiscal profligacy, it is excessive current account and trade deficits—largely caused by private sector imbalances—that are at the root of Greece’s multiple economic challenges. This policy note identifies the major determinants causing the deterioration of the current account balance in order to devise appropriate corrective policies.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | October 2022In this strategic analysis, Institute President Dimitri B. Papadimitriou, Senior Scholar Gennaro Zezza, and Research Associate Nikolaos Rodousakis discuss the medium-term prospects for the Greek economy in a time of increasing uncertainty—due to the geopolitical turbulence emanating from the Ukraine–Russian conflict, with its impact on the cost of energy, as well as the increase in international prices of some commodities.
Growth projections for the current year are lower than those recorded in 2021, indicating the economy needs to perform much better if it is to continue on the growth path that began in the pre-pandemic period. Similarly, growth projections for 2023 and 2024 appear much weaker, denoting serious consequences may be in store.
With increasing price levels and the euro depreciating, an economy like Greece’s that is highly dependent on increasingly costly imports will become more fragile as the current account deficit widens. In the authors’ view, the continuous recovery of the Greek economy rests with the government’s ability to utilize the NGEU funds swiftly and efficiently for projects that will increase the country’s productive capacity.
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Strategic Analysis | August 2022
The Fed Conundrum
In this report, Institute President Dimitri B. Papadimitriou, Research Scholar Michalis Nikiforos, and Senior Scholar Gennaro Zezza analyze how and why the US economy has achieved a swift recovery in comparison with the last few economic cycles.
This recovery has nevertheless been accompanied by significant increases in the trade deficit and inflation. Papadimitriou, Nikiforos, and Zezza argue that the elevated rate of inflation has been largely unrelated to the level of demand or the pace of the recovery, and has more to do with pandemic-related disruptions, the war in Ukraine, and the beginning of a new commodity super cycle.
The authors also identify persistent Minskyan processes that mean the US economy remains fundamentally unstable, with a risk of financial crisis and potentially severe consequences in terms of output and employment—a risk heightened by the reversal of the loose monetary policy that has prevailed over the last decade and a half. In their first scenario, they simulate the macroeconomic impact of such a financial crisis and private sector deleveraging. In two additional scenarios, the authors analyze the likely effects of a new round of fiscal stimulus that would be necessary in case of a crisis: a deficit-financed expenditure boost with no offsetting revenue increases, and a deficit-neutral scenario in which taxation of high-income households increases by an amount equivalent to the expansion of public expenditure.Download:Associated Program:Author(s): -
Strategic Analysis | March 2022In this strategic analysis, Institute President Dimitri B. Papadimitriou, Research Scholar Gennaro Zezza, and Research Associate Nikos Rodousakis analyze how the Greek economy started to recover from the shock of the COVID-19 pandemic and the prospects of continuing and sustaining its recovery. A key contribution is linked to tourism, which increased significantly in 2021, notwithstanding the pandemic, but was still very much below its 2019 level; it is expected, however, to continue its recovery in the current year. In addition, a key role will be played by NGEU funds and the Greek government’s capacity to use such funds in an effective and timely manner when starting and completing the already approved capital projects. A potential threat is linked to the possibility that persistent inflation will drive up the cost of borrowing, reducing the government’s fiscal space. Another “known unknown” —not considered in this report—is the geopolitical turbulence emanating from the Ukraine–Russian conflict, adding an additional layer of uncertainty to the medium-term prospects for Europe and Greece.Download:Associated Program:Author(s):
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Policy Note 2022/1 | February 2022In 2020, the Hellenic Statistical Authority (ElStat) started a revision of the national accounts for Greece to bring them into line with the new European System of Accounts. Data from national accounts have gained more relevance as a crucial set of information for policy, especially in the eurozone, since many indicators—like the size of the public deficit relative to GDP—depend on them. It is therefore crucial that these data provide a realistic description of the actual state of the economy.
Models that aim at understanding the medium-term trajectory of an economy usually need to abstract from short-term volatility due to the seasonal behavior of some variables, and it is therefore common practice to use seasonally adjusted data rather than the observed seasonal data. Research Scholar Gennaro Zezza, Institute President Dimitri Papadimitriou, and Research Associate Nikos Rodousakis recently noticed that the dynamics of relative prices, as measured by the ratios between the deflators of the different seasonally adjusted components of GDP, had an excess volatility, which made it more difficult to obtain meaningful econometric estimates of their determinants. They have therefore decided to investigate whether this excess volatility could be observed in the original seasonal data, and this note documents their results.Download:Associated Program:Author(s):Related Topic(s): -
Public Policy Brief No. 156 | December 2021
The Federal Reserve’s Continuing Experiments with Unobservables
Institute President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray contend that the prevailing approach to monetary policy and inflation is influenced by a set of concepts that are a poor guide to action. In this policy brief, they examine two previous cases in which the Federal Reserve misread the data and raised rates too soon, as well as the evolution of the Fed’s thought and practice over the past three decades—a period in which the central bank has increasingly turned to unobservable indicators that are supposed to predict inflation. Noting that their criticisms have now been raised by the Fed’s own members and research staff, the authors highlight the ways in which we need to rethink our overall framework for monetary and fiscal policy. The Fed has far less control over inflation than is presumed, they argue, and, at worst, might have the whole inflation-fighting strategy backwards. Managing inflation, they conclude, should not be left entirely in the hands of central banks.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | June 2021In this report, Institute President Dimitri B. Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza analyze how the US economy was affected by the pandemic and its prospects for recovery.
Their baseline simulation using the Institute’s stock-flow macroeconometric model shows a significant pickup in the growth rate in 2021 as a result of the American Rescue Plan Act. The report includes two additional scenarios simulated on top of the baseline, finding that President Biden’s infrastructure and families plans—whether paired with offsetting tax increases on high-earners or “deficit financed”—would have positive macroeconomic effects. Additionally, Papadimitriou, Nikiforos, and Zezza warn that if US policymakers do not prioritize decreasing the trade deficit, maintaining growth will require either continuous and very high government deficits or the private sector once again becoming a net borrower.
Finally, they argue that concerns about a sharp increase in inflation spurred by the fiscal stimulus are unwarranted: the US economy was not close to full employment or full utilization of resources before the pandemic, and the propagation mechanisms that could lead to accelerating inflation are not in place.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | May 2021The Greek economy—still fragile due to the lingering effects of the 2009–10 crisis—was hit particularly hard by the COVID-19 pandemic. Greece’s 2020 GDP decline was one of the worst among the group of EU and eurozone member states, along with the highest levels of unemployment and underemployment.
Dimitri B. Papadimitriou, Christos Pierros, Nikos Rodousakis, and Gennaro Zezza update their analysis of the state of the Greek economy on the basis of recently released provisional data for 2020Q4, and model three projections through 2023: (1) a baseline scenario in which no agreement is reached on the disbursement of EU funds (the Recovery and Resilience Facility); (2) a scenario in which EU grants and loans are distributed in a timely manner; and (3) an additional scenario that pairs EU funds with implementation of an employer-of-last resort program. The second scenario would see Greece’s GDP growth return to its pre-pandemic trend—albeit still leaving the economy below the level of real GDP it reached in 2008. The third scenario has the most favorable impact on growth and employment—raising real GDP above its pre-pandemic trend. Failure to achieve a proper recovery of GDP in Greece would be directly related to an absence of fiscal policy expansion.
This Strategic Analysis is the joint product of the Levy Economics Institute of Bard College and INE-GSEE (Athens, Greece). It is simultaneously issued in both English and Greek.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | December 2020While the effects of the COVID-19 pandemic have been broadly similar for individuals, families, societies, and economies globally, the policy responses have varied significantly between countries. In the case of Greece, the pandemic abruptly ended the country’s fragile recovery and threw its economy into a dramatic contraction beginning in 2020Q2. Fiscal stimulus programs financed by reserve funds and European-backed structural funds have been implemented, but to date there is no evidence of a significant impact. Given the emergence of COVID-19’s second wave of contagion and the economic consequences of business shutdowns and further job losses, our own growth projections, as well as those from the European Commission, IMF, OECD, and the Greek government, have been revised downward for 2021 and prospects for the beginning of a recovery before the end of 2020 have died out.
Using their stock-flow consistent macroeconomic model developed for Greece (LIMG), we run simulations for a baseline scenario and two alternative policy outcomes. The results of the projections for a “business as usual” baseline scenario are pessimistic and show that a V-shaped recovery is not in the cards. The European “recovery funds” alternative scenario projections, while more pessimistic than our report from May 2019, indicate that implementing these funds beginning in 2021Q3 will result in accelerating growth with positive outcomes. A more robust GDP growth rate and consequent employment growth can be realized with the combined effects of the European recovery funds together with an enhanced public job guarantee program. It is this mix of policies that can gain traction and bear fruit in putting the Greek economy on a path to sustainable and inclusive growth.
This Strategic Analysis is the joint product of the Levy Economics Institute of Bard College and INE-GSEE (Athens, Greece). It is simultaneously issued in both English and Greek.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | October 2020Italy was the first European country to be impacted by COVID-19, rapidly overwhelming healthcare facilities in some areas and prompting the government to shut down nonessential economic activities, with an inevitable (asymmetric) impact on production and income. Though the gradual reopening of most business activities began in 2020Q3, the extent of the shutdown’s damage is difficult to assess. The current political debate is now focusing on what can be achieved with European funds (in the form of both grants and loans), which should become available beginning in 2021. In this Strategic Analysis, Institute President Dimitri B. Papadimitriou, Research Associate Francesco Zezza, and Research Scholar Gennaro Zezza detail the shutdown’s impact on business activities in Italy, incorporating the planned government intervention with preliminary evidence available through 2020Q3 to evaluate a baseline projection for the Italian economy up to 2022.Download:Associated Program:Author(s):Related Topic(s):
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Strategic Analysis | May 2020Greece’s fragile economic recovery was halted by the COVID-19 pandemic: GDP, employment, exports, and investment are expected to record significantly negative trends. While some projections for GDP growth show a quick V-shaped recovery beginning in 2021, this is rather improbable given the Greek economy’s structural inefficiencies.
This strategic analysis explores the consequences of various assumptions about the fall in the different sources of aggregate demand in order to produce a baseline projection for the Greek economy. A more optimistic scenario is also analyzed, in which the European Commission’s recently announced Recovery Fund materializes, allowing the government to increase public consumption as well as investment through EU grants and loans. The authors recommend additional measures to alleviate the impact of the shock and help put Greece’s economy back on track when the epidemic has died out.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager No. 61 | March 2020The rapidly growing uncertainty about the potential global fallout from an emerging pandemic is occurring against a background in which there is evidence US corporate sector balance sheets are significantly overstretched, exhibiting a degree of fragility that, according to some measures, is unmatched in the postwar historical record. The US economy is vulnerable to a shock that could trigger a cascade of falling asset prices and private sector deleveraging, with severe consequences for both the real and financial sides of the economy.Download:Associated Program:Author(s):Related Topic(s):
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Strategic Analysis | January 2020
2020 and Beyond
This Strategic Analysis examines the US economy’s prospects for 2020–23 and the risks that lie ahead. The baseline projection generated by the Levy Institute’s stock-flow consistent macroeconomic model shows that, given current fiscal arrangements and the slowdown in the global economy, the pace of the US recovery will slacken somewhat, with a growth rate that will average 1.5 percent over the next several years.
The authors then point to three factors that can derail this already weak baseline trajectory: (1) an overvalued stock market; (2) evidence that the corporate sector’s balance sheets are more fragile than they have ever been in the postwar period; and (3) risks in the foreign sector stemming from the slowdown of the global economy, an overvalued dollar, and the current administration’s erratic trade policy.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | January 20202019 marked the third year of the continuing economic recovery in Greece, with real GDP and employment rising, albeit at modest rates. In this Strategic Analysis we note that the expansion has mainly been driven by net exports, with tourism playing a dominant role. However, household consumption and investment are still too far below their precrisis levels, and a stronger and sustainable recovery should target these components of domestic demand as well.
Fiscal austerity imposed on the Greek government has achieved its target in terms of public finances, such that some fiscal space is now available to stimulate the economy. Our simulations for the 2019–21 period show that under current conditions the economy is likely to continue on a path of modest growth, and that the amount of private investment needed for a stronger recovery is unlikely to materialize.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager No. 60 | July 2019Senators Elizabeth Warren and Bernie Sanders, along with Representative Alexandria Ocasio-Cortez, recently proposed to increase the rate of taxation on very high incomes and net worth. One of the primary justifications for such policies is that reducing inequality would help safeguard political equality. However, Dimitri B. Papadimitriou, Michalis Nikiforos, and Gennaro Zezza show how these tax policies, if matched by comparable increases in government spending, have the potential to boost aggregate demand while helping reform the unstable structure of the US economy.Download:Associated Program:Author(s):Related Topic(s):
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Strategic Analysis | April 2019Although the ongoing recovery is about to become the longest in the history of the United States, it is also the weakest in postwar history, and as we enter the second quarter of 2019, many clouds have gathered.
This Strategic Analysis considers the recent trajectory, the present state, and the future prospects of the US economy. The authors identify four main structural problems that explain how we arrived at the crisis of 2007–09 and why the recovery that has followed has been so weak—as well as why the prospect of a recession is increasingly likely.
The US economy is in need of deep structural reforms that will deal with these problems. This report analyzes a pair of policies that begin to move in that direction, both involving an increase in the tax rate for high-income and high-net-worth households. Even if the primary justification for these policies is not economic, this report shows that if such an increase in taxes is accompanied by an equivalent increase in government outlays, the redistributive impact will have a positive macroeconomic effect while moving the US economy toward a more sustainable future.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | November 2018The Greek government has managed to exit the stability support program and achieve a higher-than-required primary surplus so as not to require further austerity measures to depress domestic demand. At the same time, the economy has started to recover, mainly due to the good performance of both exports of goods and tourism and modest increases in investment
In this report, we review recent developments in the determinants of aggregate demand and net exports, and provide estimates of two scenarios: one which assumes business as usual and the other an alternate scenario simulating the medium-term impact of an acceleration in investment.
We conclude with a discussion on the sustainability of Greek government debt, showing that it is crucial that the cost of borrowing remains below the nominal growth of national income.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | October 2016
The Greek government has agreed to a new round of fiscal austerity measures consisting of a sharp increase in taxes on income and property and further reductions in pension and other welfare-related expenditures. Based on our model of the Greek economy, policies aimed at reducing the government deficit will cause a recession, unless other components of aggregate demand increase enough to more than offset the negative impact of fiscal austerity on output and employment.
In this report we argue that the troika strategy of increasing net exports to restart the economy has failed, partly because of the low impact of falling wages on prices, partly because of the low trade elasticities with respect to prices, and partly because of other events that caused a sharp reduction in transport services, which used to be Greece’s largest export sector.
A policy initiative to boost aggregate demand is urgently needed, now more than ever. We propose a fiscal policy alternative based on innovative financing mechanisms, which could trigger a boost in confidence that would encourage renewed private investment.
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Working Paper No. 867 | May 2016
This paper examines the issue of the Greek public debt from different perspectives. We provide a historical discussion of the accumulation of Greece’s public debt since the 1960s and the role of public debt in the recent crisis. We show that the austerity imposed since 2010 has been unsuccessful in stabilizing the debt while at the same time taking a heavy toll on the Greek economy and society. The experience of the last six years shows that the country’s public debt is clearly unsustainable, and therefore a bold restructuring is needed. An insistence on the current policies is not justifiable either on pragmatic or on moral or any other grounds. The experience of Germany in the early post–World War II period provides some useful hints for the way forward. A solution to the Greek public debt problem is a necessary but not sufficient condition for the solution of the Greek and wider European crisis. A broader agenda that deals with the malaises of the Greek economy and the structural imbalances of the eurozone is of vital importance.
Download:Associated Program(s):The State of the US and World Economies Monetary Policy and Financial Structure Economic Policy for the 21st CenturyAuthor(s):Related Topic(s): -
Working Paper No. 866 | May 2016
Proposals for the Eurozone Crisis
After reviewing the main determinants of the current eurozone crisis, this paper discusses the feasibility of introducing fiscal currencies as a way to restore fiscal space in peripheral countries, like Greece, that have so far adopted austerity measures in order to abide by their commitments to eurozone institutions and the International Monetary Fund. We show that the introduction of fiscal currencies would speed up the recovery, without violating the rules of eurozone treaties. At the same time, these processes could help transition the euro from its current status as the single currency to the status of “common clearing currency,” along the lines proposed by John Maynard Keynes at Bretton Woods as a system of international monetary payments. Eurozone countries could therefore move from “Plan B,” aimed at addressing member-state domestic problems, to a “Plan A” for a better European monetary system.
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Strategic Analysis | March 2016Our latest strategic analysis reveals that the US economy remains fragile because of three persistent structural issues: weak demand for US exports, fiscal conservatism, and a four-decade trend in rising income inequality. It also faces risks from stagnation in the economies of the United States’ trading partners, appreciation of the dollar, and a contraction in asset prices. The authors provide a baseline and three alternative medium-term scenarios using the Levy Institute’s stock-flow consistent macro model: a dollar appreciation and reduced growth in US trading partners scenario; a stock market correction scenario; and a third scenario combining scenarios 1 and 2. The baseline scenario shows that future growth will depend on an increase in private sector indebtedness, while the remaining scenarios underscore the linkages between a fragile US recovery and instability in the global economy.Download:Associated Program:Author(s):Related Topic(s):
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Policy Note 2016/1 | January 2016A complementary currency circulates within an economy alongside the primary currency without attempting to replace it. The Swiss WIR, implemented in 1934 as a response to the discouraging liquidity and growth prospects of the Great Depression, is the oldest and most significant complementary financial system now in circulation. The evidence provided by the long, successful operation of the WIR offers an opportunity to reconsider the creation of a similar system in Greece.
The complementary currency is a proven macroeconomic stabilizer—a spontaneous money creator with the capacity to sustain and increase an economy’s aggregate demand during downturns. A complementary financial system that supports regional development and employment-targeted programs would be a U-turn toward restoring people’s purchasing power and rebuilding Greece’s desperate economy.Download:Associated Program(s):Author(s):Related Topic(s): -
One-Pager No. 52 | January 2016
Even under optimistic assumptions, the policy status quo being enforced in Greece cannot be relied upon to help recover lost incomes and employment within any reasonable time frame. And while a widely discussed public investment program funded by European institutions would help, a more innovative, better-targeted solution is required to address Greece’s protracted unemployment crisis: an “employer of last resort” (ELR) plan offering paid work in public projects, financed by issuing a nonconvertible “fiscal currency”—the Geuro.
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Strategic Analysis | January 2016The Greek economy has not succeeded in restoring growth, nor has it managed to restore a climate of reduced uncertainty, which is crucial for stabilizing the business climate and promoting investment. On the contrary, the new round of austerity measures that has been agreed upon implies another year of recession in 2016.
After reviewing some recent indicators for the Greek economy, we project the trajectory of key macroeconomic indicators over the next three years. Our model shows that a slow recovery can be expected beginning in 2017, at a pace that is well below what is needed to alleviate poverty and reduce unemployment. We then analyze the impact of a public investment program financed by European institutions, of a size that is feasible given the current political and economic conditions, and find that, while such a plan would help stimulate the economy, it would not be sufficient to speed up the recovery. Finally, we revise our earlier proposal for a fiscal stimulus financed through the emission of a complementary currency targeted to job creation. Our model shows that such a plan, calibrated in a way that avoids inflationary pressures, would be more effective—without disrupting the targets the government has agreed upon in terms of its primary surplus, and without reversing the improvement in the current account.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2015/6 | October 2015
What Should Be Done with Greek Banks to Help the Country Return to a Path of Growth?
View More View LessThe recapitalization of Greek banks is perhaps the most critical problem for the Greek state today. Despite direct cash infusions to Greek banks that have so far exceeded €45 billion, with corresponding guarantees of around €130 billion, credit expansion has failed to pick up. There are two obvious reasons for this failure: first, the massive exodus of deposits since 2010; and second, the continuous recession—mainly the product of strongly deflationary policies dictated by international lenders.
Following the 2012–13 recapitalization, creditors allowed the old, now minority, shareholders and incumbent management (regardless of culpability) to retain effective control of the banks—a decision that did not conform to accepted international practices. Sitting on a ticking time bomb of nonperforming loans (NPLs), Greek banks, rather than adopting the measures necessary to restructure their portfolios, cut back sharply on lending, while the country’s economy continued to shrink.
The obvious way to rehabilitate Greek banking following the new round of recapitalization scheduled for later this year is the establishment of a “bad bank” that can assume responsibility for the NPL workouts, manage the loans, and in some cases hold them to maturity and turn them around. This would allow Greek banks to make new and carefully underwritten loans, resulting in a much-needed expansion of the credit supply. Sound bank recapitalization with concurrent avoidance of any creditor bail-in could help the Greek banking sector return to financial health—and would be an effective first step in returning the country to the path of growth.
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In the Media | July 2015Bloomberg Radio, July 8, 2015. All Rights Reserved.
Dimitri Papadimitriou talks to Kathleen Hays about anti-left sentiment in the eurozone, the possibility of a Grexit, and Greece's strategic value, as the deadline for submitting a new reform proposal to its creditors approaches.
Full audio of the interview is available here.
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In the Media | July 2015Background Briefing with Ian Masters, July 7, 2015. All Rights Reserved.
From Athens, Greece, Levy President Dimitri B. Papadimitriou provides an update on emergency negotiations between the new Greek finance minister and his European counterparts, amid warnings by German Chancellor Angela Merkel that “it is no longer about weeks, but a matter of days” before time runs out on striking a deal.
Listen to the complete interview here:
http://ianmasters.com/sites/default/files/bbriefing_2015_07_07c_dimitri%20papadimitrou.mp3 -
In the Media | June 2015Bloomberg Radio, June 29, 2015. All Rights Reserved.
Papadimitriou provides a picture of what it’s like on the ground in Athens, where the prevailing mood is defined by “negotiation fatigue” and anxiety about the end of the bailout agreement on June 30. Greece is being asked to do the impossible, says Papadimitriou: to impose extra austerity measures to maintain a primary surplus—a prescription even the IMF concedes just doesn’t work. The solution, he says, is to roll over Greek debt and put austerity policies aside. “We’re talking about simple economics here, not ideology.”
The full interview is available here (01:25): http://media.bloomberg.com/bb/avfile/Markets/Analyst_Calls/vXNvCeDOi46M.mp3
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In the Media | June 2015Background Briefing, June 11, 2015. All Rights Reserved.
Levy President Dimitri B. Papadimitriou and Ian Masters discuss the Institute’s latest Strategic Analysis of the US economy, and how destructive political ideology is crippling recovery and undermining an otherwise healthy economy. Full audio of the interview is available here.
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In the Media | June 2015
Genaro Grasso
Tiempo, 07 de Junio de 2015. Todos los derechos reservados.
El economista griego señala que los especuladores deberían estar regulados de la misma manera que las entidades financieras, tanto en forma global como a nivel país.
Apunta contra los efectos de la globalización en tanto ha sido el canal de difusión de una nueva ola de determinismo neoliberal, en los países en desarrollo y también en los desarrollados....
Leer más: http://tiempo.infonews.com/nota/154525/los-fondos-buitre-deben-ser-abolidos-del-sistema -
Strategic Analysis | May 2015
The Greek economy has the potential to recover, and in this report we argue that access to alternative financing sources such as zero-coupon bonds (“Geuros”) and fiscal credit certificates could provide the impetus and liquidity needed to grow the economy and create jobs. But there are preconditions: the existing government debt must be rolled over and austerity policies put aside, restoring trust in the country’s economic future and setting the stage for sustainable income growth, which will eventually enable Greece to repay its debt.
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Research Project Reports | May 2015
Responding to the Unemployment Challenge: A Job Guarantee Proposal for Greece—An Addendum
View More View LessThis addendum to our June 2014 report, “Responding to the Unemployment Challenge: A Job Guarantee Proposal for Greece,” updates labor market data through 2014Q3 and identifies emerging employment and unemployment trends. The overarching aim of the report, the outcome of a study undertaken in 2013 by the Levy Institute in collaboration with the Observatory of Economic and Social Developments of the Labour Institute of the Greek General Confederation of Labour, is to provide policymakers and the general public research-based evidence of the macroeconomic and employment effects of a large-scale direct job creation program in Greece, and to invite critical rethinking of the austerity-driven macro policy instituted in 2010 as a condition of the loans made to Greece by its eurozone partners.Download:Associated Program(s):Author(s):Related Topic(s): -
Strategic Analysis | May 2015
Fiscal Austerity, Dollar Appreciation, and Maldistribution Will Derail the US Economy
View More View LessIn this latest Strategic Analysis, the Institute’s Macro Modeling Team examines the current, anemic recovery of the US economy. The authors identify three structural obstacles—the weak performance of net exports, a prevailing fiscal conservatism, and high income inequality—that, in combination with continued household sector deleveraging, explain the recovery’s slow pace. Their baseline macro scenario shows that the Congressional Budget Office’s latest GDP growth projections require a rise in private sector spending in excess of income—the same unsustainable path that preceded both the 2001 recession and the Great Recession of 2007–9. To better understand the risks to the US economy, the authors also examine three alternative scenarios for the period 2015–18: a 1 percent reduction in the real GDP growth rate of US trading partners, a 25 percent appreciation of the dollar over the next four years, and the combined impact of both changes. All three scenarios show that further dollar appreciation and/or a growth slowdown in the trading partner economies will lead to an increase in the foreign deficit and a decrease in the projected growth rate, while heightening the need for private (and government) borrowing and adding to the economy’s fragility.Download:Associated Program:Author(s):Related Topic(s): -
In the Media | May 2015Background Briefing, May 10, 2015. All Rights Reserved.
From Athens, Levy Institute President Dimitri B. Papadimitriou updates Ian Masters on the financial crisis as Greece teeters on the brink of default, with an $840 million payment to the IMF looming and fears that there is no credible plan to reach an agreement with the country’s eurozone creditors.
Full audio of the interview is available here. -
In the Media | March 2015
By Dimitri B. Papadimitriou
The Huffington Post, March 18, 2015. All Rights Reserved.
"Greece's government and people have indulged in excesses and corruption; now it is time to pay the price." The argument for full repayment of Greece's debt is well known, easily understood, and widely accepted, particularly in Germany. Sacrifice, austerity and repayment are righteous, fair, and just.
That view is coloring this and next week's coming meetings between Greece and its international lenders, and with European leaders. A revision of Greece's debt terms has not been on the agenda.
Read more: http://www.huffingtonpost.com/dimitri-b-papadimitriou/greek-debt-do-the-right-t_b_6894678.html -
In the Media | February 2015
Interview with Dimitri B. Papadimitriou
Bloomberg Radio, February 24, 2015. All Rights Reserved.
Levy Institute President Dimitri Papadimitriou discusses the approval of Greece’s reform package and the four-month extension of the bailout agreement with its eurozone partners in this interview with Kathleen Hays.
To listen to the podcast: http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vLaWHOte5hq4.mp3
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Policy Note 2015/2 | February 2015
The Greek economic crisis started as a public debt crisis five years ago. However, despite austerity and a bold “haircut,” public debt is now around 175 percent of Greek GDP. In this policy note, we argue that Greece’s public debt is clearly unsustainable, and that a significant restructuring of this debt is needed in order for the Greek economy to start growing again. Insistence on maintaining the current policy stance is not justifiable on either pragmatic or moral grounds.
The experience of Germany in the early post–World War II period provides some useful insights for the way forward. In the aftermath of the war, there was a sweeping cancellation of the country’s public and foreign debt, which was part of a wider plan for the economic and political reconstruction of Germany and Europe. Seven decades later, while a solution to the unsustainability of the Greek public debt is a necessary condition for resolving the Greek and European crisis, it is not, in itself, sufficient. As the postwar experience shows, a broader agenda that deals with both Greece’s domestic economic malaise and the structural imbalances in the eurozone is also of vital importance.
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In the Media | January 2015
By Dimitri B. Papadimitriou
The World Post, January 8, 2015. All Rights Reserved.
Greece is facing front, looking towards the new year and the upcoming January elections. But it would be foolish not to learn from a look backwards, as well.
At the Athens economics conference, Europe At The Crossroads, the participants were a diverse collection of policymakers, overflowing with disagreements on the very best route to growth. Nonetheless, with one notable exception (the leader of Ireland's central bank, endorsing European Central Bank policy), the overwhelming majority united on a single principle:
The bailout and its related austerity programs have failed miserably.
Read more: http://www.huffingtonpost.com/dimitri-b-papadimitriou/hello-2015-goodbye-auster_b_6438328.html
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In the Media | January 2015
Markets Tank with Greece Poised to Leave the Euro: Ian Masters Interviews Dimitri B. Papadimitriou
View More View LessBackground Briefing with Ian Masters, January 5, 2015. All Rights Reserved.
Papadimitriou joins Masters to discuss the upcoming January 25 election in Greece that is likely to bring the anti-austerity left-wing Syriza party to power, sparking fears that Greece will reject the terms of the EU, ECB, and IMF bailouts and exit the euro.
Listen to the complete interview here: http://ianmasters.com/content/january-5-markets-tank-greece-poised-leave-euro-weaponization-finance-gop-114th-congress-80- -
Strategic Analysis | December 2014With the anti-austerity Syriza party continuing to lead in polls ahead of Greece’s election on January 25, what is the outlook for restoring growth and increasing employment following six years of deep recession?Despite some timid signs of recovery, notably in the tourism sector, recent short-term indicators still show a decline for 2014. Our analysis shows that the speed of a market-driven recovery would be insufficient to address the urgent problems of poverty and unemployment. And the protracted austerity required to service Greece’s sovereign debt would merely ensure the continuation of a national crisis, with spillover effects to the rest of the eurozone—especially now, when the region is vulnerable to another recession and a prolonged period of Japanese-style price deflation.Using the Levy Institute’s macroeconometric model for Greece, we evaluate the impact of policy alternatives aimed at stimulating the country’s economy without endangering its current account, including capital transfers from the European Union, suspension of interest payments on public debt and use of these resources to boost demand and employment, and a New Deal plan using public funds to target investment in production growth and finance a direct job creation program.Download:Associated Program:Author(s):Related Topic(s):
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In the Media | December 2014
Dimitri B. Papadimitriou: "Juncker's Stimulus Plan Is Unrealistic on Many Fronts"
View More View LessInterview with Dimitris Rapidis
Bridging Europe, December 16, 2014. All Rights Reserved.
As part of the Bridging Dialogue Initiative, Dimitris Rapidis discusses with Levy Institute President Dimitri B. Papadimitriou the ECB's interest rates policy, deflation, EC President Jean-Claude Junckers's fiscal stimulus plan, debt management and the Stability Pact, the US economy, and the economic crisis in Greece.
Read more: http://www.bridgingeurope.net/interview-with-dimitri-b-papadimitriou-president-of-the-levy-economics-institute.html
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Book Series | November 2014
Contributions to Economic Theory, Policy, Development and Finance: Essays in Honor of Jan A. Kregel
View More View LessEdited by Dimitri B. Papadimitriou
Levy Institute Senior Scholar Jan A. Kregel is a prominent Post-Keynesian economist. This study combines lessons drawn from events and experiences of developing countries and examines them in relation to his ideas on economics and development.
This collection brings together distinguished scholars who have been influenced by Kregel's prodigious contributions to the fields of economic theory and policy. The chapters cover and extend many topics analyzed in Kregel's published work, including monetary economic theory and policy; aspects of the Cambridge (UK and US) controversies; Sraffa's critique on neoclassical value and distribution theory; Post-Keynesianism; employment policy; obstacles in financing development; trade and development theories; causes and lessons from the financial crises in East Asia, Latin America, and Europe; Minskyan-Kregel theories of financial instability; and global governance. Combining rigorous scholarly assessment of the issues, the contributors seek to offer solutions to the debates on economic theory and the problem of continuing high unemployment, to identify the factors that determine economic expansion, and to analyze the impact of financial crises on systemic stability, markets, institutions, and international regulations on domestic and global economic performance.
The scope and comprehensive analyses found in this volume will be of interest to economists and scholars of economics, finance, and development.
Published by: Palgrave Macmillan
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Public Policy Brief No. 138 | October 2014To mobilize Greece’s severely underemployed labor potential and confront the social and economic dangers of persistent unemployment, we propose the immediate implementation of a direct public benefit job creation program—a Greek “New Deal.” The Job Guarantee (JG) program would offer the unemployed jobs, at a minimum wage, on work projects providing public goods and services. This policy would have substantial positive economic impacts in terms of output and employment, and when newly accrued tax revenue is taken into account, which substantially reduces the net cost of the program, it makes for a comparatively modest fiscal stimulus. At a net cost of roughly 1 percent to 1.2 percent of GDP (depending on the wage level offered), a midrange JG program featuring the direct creation of 300,000 jobs has the potential to reduce the unemployed population by a third or more, once indirect employment effects are taken into account. And our research indicates that the policy would do all this while reducing Greece’s debt-to-GDP ratio—which leaves little room for excuses.Download:Associated Program(s):Author(s):Related Topic(s):
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In the Media | September 2014
By Dimitri B. Papadimitriou
New Geography, September 25, 2014
It's September, but island beaches from the Aegeans to Zante are still buzzing in Greece. Mykonos has been the summer's Go-To spot for superstars and supermodels; the mainland and cities are also seeing the British and Europeans coming back....
Read more: http://www.newgeography.com/content/004533-will-lindsay-lohan-save-greece -
In the Media | August 2014
Greek Crisis and the Dark Clouds over the American Economy: An Interview with Dimitri B. Papadimitriou
View More View LessBy C. J. Polychroniou
Truthout, August 27, 2014
Is the Greek crisis nearly over as the International Monetary Fund, the European Commission and the Greek government like to proclaim because of the sharp decline in Greek bond yields, the attainment of a primary surplus and an increase in foreign tourism? If so, what about the 27.2 per cent of the population that remains unemployed and the widespread poverty across the nation, the ever growing public debt ratio and the dismal state of Greek exports? And what about the United States? Is America on the way to becoming Greece as many Republicans claimed a couple of years ago? Dimitri B. Papadimitriou, executive vice president and Jerome Levy professor of economics at Bard College, and president of the Levy Economics Institute at Bard, who foresees Greece emerging into a debt prison and a rather gloomy economic future for the United States, discusses these questions in an exclusive interview for Truthout with C. J. Polychroniou.
Read the entire post here: http://www.truth-out.org/news/item/25796-greek-crisis-and-the-dark-clouds-over-the-american-economy-an-interview-with-dimitri-b-papadimitriou -
In the Media | August 2014
By Dimitri B. Papadimitriou
The Huffington Post, August 21, 2014
Do European lenders want unemployment to keep rising in Greece?
It looks that way. The commitment to economic austerity policies by the "troika"–the European Central Bank, the European Commission, and the International Monetary Fund–hasn't wavered. Meanwhile, the country's unemployment rate has soared to yet another unexpected high. In a population of 9.3 million, 1.3 million are out of work....
Read the full article here: http://www.huffingtonpost.com/dimitri-b-papadimitriou/are-eu-bankers-trying-to-_b_5696270.html -
Strategic Analysis | August 2014What are the prospects for economic recovery if Greece continues to follow the troika strategy of fiscal austerity and internal devaluation, with the aim of increasing competitiveness and thus net exports? Our latest strategic analysis indicates that the unprecedented decline in real and nominal wages may take a long time to exert its effects on trade—if at all—while the impact of lower prices on tourism will not generate sufficient revenue from abroad to meet the targets for a surplus in the current account that outweighs fiscal austerity. The bottom line: a shift in the fiscal policy stance, toward lower taxation and job creation, is urgently needed.Download:Associated Program:Author(s):Related Topic(s):
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Research Project Reports | July 2014
A Proposal for Rural Reinvestment and Urban Entrepreneurship
The crisis in Greece is persistent and ongoing. After six years of deepening recession, real GDP has shrunk by more than 25 percent, with total unemployment now standing at 27.2 percent. Clearly, reviving growth and creating jobs should be at the top of the policy agenda.
But banks remain undercapitalized, and lending has been restricted to only the most creditworthy businesses and households. Many start-ups and small- and medium-size enterprises (SMEs) have almost no access to development loans, and for those to whom credit can be extended, it is at disproportionally high interest rates.
The success of micro-lending institutions in developing nations (such as the Grameen Bank in Bangladesh) has highlighted the positive economic performance of community-based credit, and such lending models have proven to be an important poverty policy alternative in areas where transfer payments are limited. Community or co-operative financial institutions (CFIs) can fill the gap when existing institutions cannot adequately perform critical functions of the financial system for SMEs, entrepreneurs, and low-income residents seeking modest financing and other banking services.
We propose expanding the reach and services of CFIs within Greece, drawing upon lessons from the US experience of community development banking and various co-operative banking models in Europe. The primary goals of this nationwide system would be to make credit available, process payments, and offer savings opportunities to communities not well served by the major commercial Greek banks.
Our blueprint includes suggestions on the banks’ organization and a framework within which they would be chartered, regulated, and supervised by a newly created central co-operative bank. It also looks at the possible impact that such a network could have, especially in terms of start-ups, SMEs, and rural redevelopment (agrotourism)—all of which are critical to Greece’s exit from recession.Download:Associated Program:Author(s):Related Topic(s): -
Research Project Reports | June 2014
This report presents the findings from a study undertaken by the Levy Institute in 2013 in collaboration with the Observatory of Economic and Social Developments of the Labour Institute of the Greek General Confederation of Labour. It uses as background the 2011 Levy Institute study “Direct Job Creation for Turbulent Times in Greece,” which focused on the need for direct job creation to address rising unemployment. The focus in this report, however, is different. Here, the aim is to make available to policymakers and the broader public research-based evidence of the macroeconomic and employment effects of a large-scale program of direct job creation program—a cost-effective and proven policy response. The ultimate goal of this undertaking is to draw urgently needed attention to the worsening levels of unemployment in Greece, and to invite critical rethinking of the austerity-driven macro policy instituted in 2010.
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In the Media | June 2014
By Dimitri B. Papadimitriou
The Guardian, June 15, 2014
The US Congressional Budget Office is projecting a continued economic recovery. So why look down the road – say, to 2017 – and worry?
Here's why: because the debt held by American households is rising ominously. And unless our economic policies change, that debt balloon, powered by radical income inequality, is going to become the next bust....
Read the full article here: www.theguardian.com/money/2014/jun/15/us-economy-bubble-debt-financial-crisis-corporations
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In the Media | May 2014
Levy Economics Institute President Dissects the Myth of the Greek "Success Story"
View More View LessBy C. J. Polychroniou
Truthout, May 4, 2014. All Rights Reserved.
When the global financial crisis of 2008 reached Europe's shores sometime in late 2009, Greece was the first victim of the euro system's failure. Facing persistently large deficits and very high public debt levels, the country ended up being shut out of the global bond markets, raising the prospect of a sovereign bankruptcy. In light of these developments, in May 2010, the Eurozone countries and the International Monetary Fund (IMF) agreed to provide a 110 billion euro bailout loan to Greece in exchange for severe austerity measures and strict conditions. The "rescue" plan, as has been openly admitted by now, was designed not for the purpose of reviving Greece's ailing economy but to save Europe's banks. Thus, as many economists had anticipated, the bailout plan made things worse, spreading havoc with its "economics of social disaster." Less than two years later - and with the debt-to-GDP ratio having increased substantially - a second international bailout plan went into effect for the sum of 130 billion euros. All the money lent to Greece was being used to pay off debt obligations on time while the radical budget cuts and sharp tax hikes that were adopted were meant to readjust the nation's fiscal condition, with no regard for the economic and social costs which these policies entailed.
Four years later, Greece looks like a badly battered boxer. Its economy has shrunk by 20%; the unemployment rate has reached stratospheric levels; poverty has become widespread; the debt-to-GDP ratio has increased dramatically and Greeks are leaving the country in record numbers. However, both EU and Greek government officials are claiming that the country is moving in the right direction, hailing its recent re-emergence in international credit markets as a sign the economy is recovering. Indeed, the government now talks of the Greek "success story," hoping that this narrative will tilt the electoral balance as Greece's main opposition Radical Left Coalition party (Syriza) is expected to win the European Parliamentary and local elections in May.
For an analysis of the latest developments in Greece, C. J. Polychroniou (a research associate and policy fellow at the Levy Economics Institute and a columnist for the Greek nationally distributed newspaper, The Sunday Eleftherotypia) interviewed Dimitri B. Papadimitriou, president of the Levy Economics Institute of Bard College, executive vice president and Jerome Levy Chair Professor of Economics, for Truthout. An edited and shorter version of the interview appears simultaneously in Greek on the Sunday edition of Eleftherotypia).
C.J. Polychroniou for Truthout: After four years as the pariah of the financial markets, in the course of which 330 billion euros was granted/guaranteed in international bailouts in order to avoid an official bankruptcy, Greece has made a successful return to the international bond markets. Why did Greece return to the bond markets now when the country's debt-to-GDP ratio is much bigger than it was back in 2010?
Dimitri B. Papadimitriou: The return to the bond markets was an act of pure symbolism. The government purposely made the success of the austerity program dependent on achieving a primary surplus as opposed to the return to growth in output and employment. Recall that the idea of expansionary austerity embraced by the country's international lenders was spectacularly discredited. Thus, the Troika (IMF, EU and European Central Bank ) and Greece's compliant government needed to invent a new metric of success, and it was associated with achieving a primary surplus as large as it could be so that financial markets can be impressed. However, no one else is impressed, especially the international lenders, for three main reasons: (1) The primary surplus was achieved by a one-off (non-recurring) excess revenue from the gains of Greek bonds in the portfolios of Eurozone's central banks and the European Central Bank's (ECB) holding that were returned to Greece; (2) collections of old tax revenue; and (3) non-recurring spending cuts and delayed payment of the government's debt to the private sector, whether VAT refunds or non-payments to private sector vendors.
Finally, the return to the markets was costly to the country - the apparent low interest rate of 4.95% notwithstanding - since the interest rate of the funds borrowed from the European Stability Mechanism (ESM) is at a very much lower interest rate. To be sure, the hedge funds and the private sector [parties] buying the new bonds knew that there was an implicit guarantee from the ECB that would accept these bonds under its Outright Monetary Transactions (OMT) program. So the bonds were not backed by the progress of the Greek economy - it would be ludicrous to assume so, for an economy in continuing recession and increasing debt to GDP ratio, especially if its credit rating is still below investment grade. So, all in all, it was an act of desperation and a strategy to give the government extra help in the soon-to-be-held local and European Parliament elections.
The government has hailed the return to the financial markets as a sign that the crisis is over. Yet, the unemployment rate right now stands at 28%; the education and health care systems have been decimated; 1 out of 3 Greeks live below the poverty line and, according to some estimates, the debt could grow to 190% of GDP by the end of 2015. Do these numbers spell out an economic "success story" or a national tragedy?
All these statistics point to the failure of the harsh program of fiscal consolidation, but if you are interested in presenting a portrait of success, you need to invent a condition that will persuade the non-critical mind that things are much better. No one likes Cassandras, even though they turn out to be quite accurate in the end. As has become clear by now, the Greek mass media industry has played an inappropriate role in persuading people that economic conditions are much better than they think, that the country has reached bottom and it is just about to turn the corner. How many times have we heard that we are seeing the light at the end of the tunnel? But the tunnel is unfortunately very, very long and it will take either a decade or more for conditions to be turned around if present policy continues, with more erosion of living standards and very high structural unemployment, or a relatively quick improvement with an immediate reversal of policy. For this, the omens are very clear, but the political will is not. And one should not expect any change of policy to happen without a change in political leadership. Brussels, Berlin and Frankfurt have a lot to lose with a change of the prevailing policy, and thus they must continue to enforce it despite the destroyed lives that it leaves behind as it moves forward. So we are seeing a tragedy which I am afraid will expand unless the European Parliamentary elections give a different message either with a significant showing of the extreme right or left parties. Marine Le Pen's impressive showing in the relatively recent local [French] elections speaks to my point. It would be ironic if voters, despite the catastrophic consequences they continue to endure, give the present European leadership another message of approval. It will be self-flagellation with a vengeance.
The feeling one gets as a result of the implementation of austerity in the case of Greece and the other fiscallytroubled countries in the Eurozone is that this is not simply a fine-tuning policy. If that is indeed the case, what is then the ultimate strategy of austerity?
In my view, the idea of austerity was not a policy of fine-tuning. To the contrary, it was a policy of radical change to allow markets to reign supreme with no government interference. This is a doctrine first put to test by the late US President Reagan and UK Prime Minister Thatcher. They both embraced the view that government is the problem to economic ills and not the solution. But the real world has taught us time and again that government at difficult times and downturns is the only solution. We saw it to be the case in the US, Germany, China, Japan and every other economy in trouble. Why Greece and the other fiscally troubled economies should become experiments of contrarian policy whose results were predicted is something that really boggles the mind. No one would dare apply the idea of austerity to the extent it has been applied to countries such as the US or even Germany and other countries of the industrial world irrespective of how high their debt-to-GDP ratios are. Why aren't we forcing Germany and France with their mighty GDP machines to have high public surpluses so they can decrease their debt to GDP ratios to the 69% limit as required by the Maastricht Treaty? After all, Germany is a growing economy. So it is clear that member states in the Eurozone are not equal. When Germany was the sick man in Europe, it was acceptable for the government to follow the Keynesian prescription, but now that its status has changed to that of hegemon, the laissez-faire paradigm returned in vogue. There will always be many thoughtless leaders, but sooner rather than later people take steps to remove them from positions of strength and power.
The advocates of austerity claim that this policy will improve the external fundamentals of fiscally troubled countries in the Eurozone. Has this happened in the case of Greece?
People who are not knowledgeable about structure of economies on which they impose policies should never be surprised with contrarian results. The Greek economy cannot be improved just because policy makers impose policies that supposedly restructure labor markets - read here, suppression of wages and eliminating labor rights and standards - if import and export elasticities are different than those assumed in the policy implementation. The sum of import and export elasticities in Greece is barely above one, which makes a substantial increase in net exports the goal of a wild imagination, at least in a relevant time frame. No wonder Greece's net exports have failed to offset the public spending cuts, and thus not contributed to the growth of GDP. And those increases are primarily from oil-related products that are volatile in concert with oil price volatility. To be sure, tourism is important, but despite last year's "huge" increase in foreign tourist arrivals to Greece, net employment continued to plummet. The external fundamentals are not dependent on labor reforms, but on large investment, public partnership with the private sector, which will not be forthcoming any time soon. It won't happen with the privatization of the old Athens airport or with other similar "privatization" schemes.
Radical structural reforms, which include labor and product markets and blanket privatizations, constitute the second component of the conditions behind Greece's bailout plans. First, is there in economic literature a direct connection between labor market flexibility, productivity growth and national economic performance?
The economic literature, as economists know, can produce conflicting results. It will not be surprising to find cases when statistics will prove that there is a positive outcome in terms of increasing productivity with flexible labor conditions, but this is always dependent on the level of technology diffusion. To be sure, German workers have the highest productivity in Europe along with those in the Netherlands, but it is not because they are paid less than other Eurozone workers but because of the high level of effective technology used. So they are about 70% more productive as compared to Greeks, Portuguese or Spaniards despite the fact that the latter work substantially many more hours during the week. Clearly, Germany's and other North European economies enjoy better economic performance, but this is not due to so-called labor flexibility only. Germany is successful because it is lucky, having an extraordinary number of idle and low-wage workers from East Germany when the unification took place. Unification gave Germany the ability to hold West German wages down. But this should not be used as an example of a successful application of a labor flexibility policy. The literature also abounds in studies showing that labor productivity is not dependent on labor flexibility. Indeed, the theory and policy of "efficiency" wages, promoted by none other than Nobel Laureate George Akerlof and current Fed Chair Janet Yellen, is part of the economic research which shows there are productivity gains and other positive outcomes to firms which pay higher than market wages. All in all, then, the argument of flexible wages does not, I am afraid, hold water.
The international experience with privatizing electricity, gas, water, sanitation, and public health services indicates that there are anti-social effects behind privatization. So why are Greek governments so eager to privatize virtually everything in Greece?
As has been shown in certain cases, the public sector can be inefficient, but this is not tantamount to the private sector being efficient either. There are key industries that must be in the public domain because their goods or services are considered public goods. In many advanced countries, such as in the US, the goods and services mentioned are mostly in the private sector's hands, but it does not mean that they are efficient or price competitive. To the contrary, whenever a service was privatized or became unregulated, it never gave the desired effects in being price competitive. For countries like Greece marked with high income distribution inequality, some of the services (such as health services, for example) must be the business of the public sector. Other services can be privatized, but they must be highly regulated. The privatization process in Greece is a fire sale of public property just because the international lenders have imposed it. If profitable, and in the public interest, then some of these services can be privatized, but should continue to be regulated. In the US, however, no one would dream of privatizing the national lotteries; they are the most profitable and high revenue sources of government revenue, yet in Greece it was the first public company to go on sale. There is no general rule that these services should be privatized. They need to be run efficiently either under the aegis of the government or the private sector - absent the corruption, nepotism or other ills of the up-to-now Greek clientist political system. The absence of transparency should not be the reason for privatizing them.
You have argued in a number of publications in the recent past that what Greece needs is a European type of a Marshall Plan. Doesn't this suggestion run counter to existing political structures and economic realities in Europe?
I am pleasantly surprised to read of late that even the government speaks of a European Marshall-type plan of aid to Greece. The existing political structure in Europe may be seeing such an aid program as anathema, but I believe it recognizes that if the European project is to be kept intact, it must begin to think along those lines. An economic and monetary union requires various types of support from the economically strong to the weak. This will eventually take place willingly or not, and the evidence shows that it not to the benefit of the weak only - but more so to the strong. The announcement of the creation of a Greek Investment Fund with the support of Germany's KfW is a step in the right direction even though the details of the plan are rather sketchy. Thus, even though I have been labeled by many the Cassandra of Greece, I want to be optimistic that such aid may not be that farfetched.
The European Union and the International Monetary Fund have disagreed all along about the sustainability of the Greek debt load. Who is right, if any?
There is no question in anyone's mind that the debt load is unsustainable. It was known from early on that a debt restructuring will be needed. The haircut that took place was ill-conceived and hurt the country more than it helped since it decimated the balance sheets of Greek and Cypriot banks along with public pension trust funds and middle-class Greek citizens. It occurred much too late after the German, French and Italian banks unloaded their Greek holdings to their counterparts in Greece and Cyprus. When it happened, it was a thoughtless decision despite the government celebrating it as a major accomplishment. I haven't agreed on anything with former ECB Vice President Papademos' views about the Greek economy except with his opposition to such a haircut when it happened. All in all, the IMF is, of course, correct - but Brussels, Berlin and Frankfurt are trapped, having convinced every European citizen that Greece's debt load is sustainable. The government will celebrate a new accomplishment after the European elections when the debt will be restructured by extending its maturity to perhaps 50 years and lowering the interest rate. This is in economic terms a present-value "haircut," but not a debt-load reduction. It is the proverbial kicking the can further down the road, which will subject the country to continued vigilance and restrict its sovereignty over its fiscal policy stance.
Syriza represents itself as a viable alternative to the current economic, social and political malaise in Greece by claiming that, when it comes to power, it will put an end to austerity and will force the European Union to rethink its policies towards Greece. However, while a good percentage of Greek voters have shifted to the left, many others seem to believe that Syriza's political rhetoric rests either on naive thinking or plain opportunism. What are your own thoughts on this matter?
I believe Syriza is the only viable alternative that Greece has at the present time if a change in policy direction is to be achieved. Its mandate to change policy would be very difficult indeed. But it can be done, although not free of risks. But risks are endemic in any policy prescription that would be implemented, and I believe the current policy being followed entails higher risks for the economic future of Greece. What I fear more is the disappearance of what used to be a middle class, let alone the immiseration of low-income, low-skilled workers. What these groups need right now is a lifeline - which, unfortunately, is not in the cards. Given the additional financing that will be needed in 2014 and 2015, more austerity will be needed which will affect even further the country's living standards, a process which will have even further adverse effects for the middle class and the low-income and low-skilled segments of the population. With conditions worsening, even more people are expected to question the prevailing policy. And if there is one political force which can offer a viable alternative to the current nightmare, it is none other than Syriza. Yes, perhaps there is an element of political naivete characterizing Syriza, but there is seriousness of purpose and the work of the gifted in its midst is very refreshing and encouraging. To be sure, political analysts talk about the importance of the incumbent candidates and this would be a very difficult problem to overcome. I want to believe, however, that despite the internal squabbling which frequently occurs among the different groups inside Syriza, the party will, at the end, prevail. At least I hope so. To those who oppose them, I can only respond by saying be careful what you wish for.
If the economic "success story" of Greece turns out in the end to be nothing more than a politically constructed myth, and the prospects of the European integration project remain what they are today, why shouldn't Greeks opt to leave the euro?
There is plenty of evidence that the success story is a politically constructed myth with the acquiescence of the European leadership. The question about the country remaining in the euro club is interesting and very important. I believe that Greece cannot leave the euro since the costs associated with an exit are very consequential. As I have written elsewhere, Greece has a number of options that it can follow, if the European leadership continues with its intransigence and continuing policy of the dangerous idea of austerity. If all other options fail, the introduction of a carefully designed parallel financial system is a very viable alternative in order to get a handle on both domestic financial market liquidity and employment growth and output. This is not a novel idea. The Greek government used a similar program in 2010, although very haphazardly conceived, but it was introduced nevertheless. It is not a crackpot idea and has been embraced by both conservative and liberal thinkers. This will address some of the most serious challenges the Greek economy and society face without endangering the country's membership in the euro. So, there are other alternatives available before the unthinkable becomes the only option. -
Strategic Analysis | April 2014The US economy has been expanding moderately since the official end of the Great Recession in 2009. The budget deficit has been steadily decreasing, inflation has remained in check, and the unemployment rate has fallen to 6.7 percent. The restrictive fiscal policy stance of the past three years has exerted a negative influence on aggregate demand and growth, which has been offset by rising domestic private demand; net exports have had only a negligible (positive) effect on growth.As Wynne Godley noted in 1999, in the Strategic Analysis Seven Unsustainable Processes, if an economy faces sluggish net export demand and fiscal policy is restrictive, economic growth becomes dependent on the private sector’s continuing to spend in excess of its income. However, this continuous excess is not sustainable in the medium and long run. Therefore, if spending were to stop rising relative to income, without either fiscal relaxation or a sharp recovery in net exports, the impetus driving the expansion would evaporate and output could not grow fast enough to stop unemployment from rising. Moreover, because growth is so dependent on “rising private borrowing,” the real economy “is at the mercy of the stock market to an unusual extent.” As proved by the crisis of 2001 and the Great Recession of 2007–09, Godley’s analysis turned out to be correct.Fifteen years later, the US economy appears to be going down the same road again. Postrecession, foreign demand is still weak and the government is maintaining its tight fiscal stance. Once again, the recovery predicted in the latest Congressional Budget Office report relies on excessive private sector borrowing, and once again, the recovery is at the mercy of the stock market. Given that the income distribution has worsened since the crisis—continuing a 35-year trend—the burden of indebtedness will again fall disproportionally on the middle class and the poor. In order for the CBO projections to materialize, households in the bottom 90 percent of the distribution would have to start accumulating debt again in line with the prerecession trend while the stock of debt of the top 10 percent remained at its present level. Clearly, this process is unsustainable. The United States now faces a choice between two undesirable outcomes: a prolonged period of low growth—secular stagnation—or a bubble-fueled expansion that will end with a serious financial and economic crisis. The only way out of this dilemma is a reversal of the trend toward greater income inequality.Download:Associated Program:Author(s):Related Topic(s):
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In the Media | March 2014
Dimitri B. Papadimitriou
Huffington Post, March 25, 2014. All Rights Reserved.
Negotiations between the Greek government and its international lenders were finally resolved last week, after seven long months. In January, Prime Minister Antonis Samaras made a celebratory announcement projecting a small, 2013 primary budget surplus of 1.5 billion euros. Also recently announced: European Union co-funding for a long-delayed 7.5 billion euro road construction project in 2014.
Sounds good. No reason to suggest that Greece needs an extreme monetary makeover right now, is there? Yes, there is. Talk of a recovery isn't just premature, it reflects a complete fantasy. For starters, at today's rate of net job creation Greece won't reach a reasonable employment level for more than a decade. That's too long.
An alternative domestic currency could be the basis for a solution. A parallel currency that was used to finance a government employment program would provide a relatively quick restoration of a lost standard of living to a large fraction Greece's population. We reached that conclusion at the Levy Institute after modeling multiple scenarios based on the narrow range of available options.
Here's the context that makes such a radical move rational: The failures of the current strategy have been so great that even a total abandonment of austerity programs now would provide relief only at a very slow pace. A modest increase in government spending like the infrastructure project, while the right approach, isn't nearly powerful enough to fuel a turnaround; once it's finished the economy will contract again. And the primary surplus stems from conditions unlikely to be sustained: dramatic spending cuts, higher taxes, and a one-off return of earnings by European central banks on their holdings of Greek government bonds.
Bank lending is down (by 3.9 percent), real interest is up to its highest rate since Greece joined the European Monetary Union (8.3 percent), and price deflation has set in. Unemployment just reached a new high of 24.9 percent for men, 32.2 percent for women, and a breathtaking 61.4 percent for youths. Even the shots at reducing the debt to GDP ratio, the foremost priority of Greece's creditors, have been spectacular misfires. It has risen from 125 percent at the crisis onset to 175 percent now.
To repair Greece's position, numerous ideas have been floated for a currency that would function alongside the euro. Proposals have been termed everything from 'government IOUs' to 'tax anticipation notes' to 'new,' 'local,' or 'fiscal' currencies; most visibly, Thomas Mayer of Deutsche Bank coined (so to speak) 'geuros.' Some plans envisioned an orderly exit out of the euro. Most shared the perspective of the troika -- the European Central Bank, the European Commission, and the International Monetary Fund -- that export-led growth through increased price competitiveness and lower wages is central to solving the problem.
Our policy synthesis fundamentally differs from those views. We see Greece remaining in the Eurozone and initiating a parallel financial system that, most importantly, restores liquidity in the domestic market.
Why not stress exports? Price elasticity in Greece's trade sector is low, our analysis shows, which explains why there hasn't been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.
That should be the focus in Greece, too. We modeled a parallel financial system that would stimulate demand by financing an employment guarantee program known as an ELR; the government serves as the Employer of Last Resort. It would hire anyone able and willing to work to produce public goods. Wage levels would be low enough to make private employment more attractive, but high enough to ensure a decent living standard. The program would be financed by a government issue of a parallel currency... call it the geuro.
Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.
The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.
Foreign trade would still require euros, which would remain in circulation, and Greece's private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.
In our simulation, 550,000 jobs (and many more indirect ones, via a sensible fiscal multiplier) would be created at a net cost of 3.5b geuros per year. The infusion would contribute a 7 percent GDP increase, and there would still be a sizable euro surplus. As with any fiscal stimulus, the overall deficit would increase and there would be a deterioration in the balance of payments, although a manageable one.
Restoring domestic demand needs to be Greece's economic policy emphasis. Despite any downsides, a parallel currency that supports an employment guarantee program would be a U-turn towards rebuilding the population's purchasing power -- and rebuilding Greece's ravished economy.
This article originally appeared on EconoMonitor on March 24, 2014, under the title "The Currency/Jobs Connection in Greece." -
Strategic Analysis | February 2014In this report, we discuss alternative scenarios for restoring growth and increasing employment in the Greek economy, evaluating alternative policy options through our specially constructed macroeconometric model (LIMG). After reviewing recent events in 2013 that confirm our previous projections for an increase in the unemployment rate, we examine the likely impact of four policy options: (1) external help through Marshall Plan–type capital transfers to the government; (2) suspension of interest payments on public debt, instead using these resources for increasing demand and employment; (3) introduction of a parallel financial system that uses new government bonds; and (4) adoption of an employer-of-last-resort (ELR) program financed through the parallel financial system. We argue that the effectiveness of the different plans crucially depends on the price elasticity of the Greek trade sector. Since our analysis shows that such elasticity is low, our ELR policy option seems to provide the best strategy for a recovery, having immediate effects on the Greek population's standard of living while containing the effects on foreign debt.Download:Associated Program:Author(s):Related Topic(s):
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In the Media | November 2013
By Dimitri B. Papadimitriou
Reuters, November 26, 2013. All Rights Reserved.
A recent visit by President Obama to an Ohio steel mill underscored his promise to create 1 million manufacturing jobs. On the same day, Commerce Secretary Penny Pritzker announced her department’s commitment to exports, saying “Trade must become a bigger part of the DNA of our economy.”
These two impulses — to reinvigorate manufacturing and to emphasize exports — are, or should be, joined at the hip. The U.S. needs an export strategy led by research and development, and it needs it now. A serious federal commitment to R&D would help arrest the long-term decline in manufacturing, and return America to its preeminent and competitive positions in high tech. At the same time, increasing sales of these once-key exports abroad would improve our also-declining balance of trade.
It’s the best shot the U.S. has to energize its weak economic recovery. R&D investment in products sold in foreign markets would yield a greater contribution to economic growth than any other feasible approach today. It would raise GDP, lower unemployment, and rehabilitate production operations in ways that would reverberate worldwide.
The Obama administration is proud of the 2012 increase of 4.4 percent in overall exports over 2011. But that rise hasn’t provided a major jolt to employment and growth rates, because our net exports — that is, exports minus imports — are languishing. Significantly, the U.S. is losing ground in the job-rich arena of exported manufactured goods with high-technology content. Once the world leader, we’ve now been surpassed by Germany.
America’s economic health won’t be strong while its trade deficit stands close to a problematically high 3 percent of GDP (and widening). Up until the Reagan administration, we ran trade surpluses. Then, manufacturing and net exports began to shrink almost in tandem.
Our past performance proves that we have plenty of room to grow crucial manufacturing exports, and even eliminate the trade gap. The rehabilitation should begin with a national commitment to basic research, which in turn boosts private sector technology investment. The resulting rise in GDP would be an important counterbalance to a slightly higher federal deficit.
Just-completed Levy Economics Institute simulations measured how a change in the target of government spending could influence its effectiveness. The best outcomes came about when funds were used to stoke innovation specifically in those export-oriented industries that might yield new products or cost-saving production techniques. When a relatively small stimulus was directed towards, for example, R&D at high tech manufacturing exporters, its effects multiplied. The gains were even better than the projections for a lift to badly needed infrastructure, which was also considered.
Economists haven’t yet pinpointed a percentage figure that reflects the added value of R&D, but there’s a strong consensus that it is significant. Despite the riskiness of each research-inspired experiment, R&D overall has proven to be a safe bet. Government-supported research tends to be pure rather than applied, but, even so, when aimed to complement manufacturing advances, small doses have a good track record.
Recognition that R&D outlays bring quantifiable returns partly explains why the federal National Income and Product Accounts have recently been altered to conform with international standards. NIPA will now treat R&D spending as a form of fixed investment. This will be a powerful tool to help reliably gauge its aftermath.
Private sector-based innovation has also proved to be far more likely to occur when it is catalyzed by a high level of public finance. (For amazing examples, check out this just-released Science Coalition report.) Contractors spend more once government has kicked in; productivity rises and prices drop.
The prospect of a worldwide positive-sum game is far more realistic than the “currency wars” dynamic so often raised by the media. Overseas buyers experience lower prices and the advantages of novel products. Domestic consumers, meanwhile, enjoy higher incomes and more employment, with some of the earnings spent on imports.
An export-oriented approach faces multiple barriers. Anemic economies across the globe could spell insufficient demand. Another challenge lies in the small absolute size of the U.S. export sector.
But the range of strategic policy options for the U.S. is limited. A rapid increase in research-based exports is the only way we see to simultaneously comply with today’s politically imposed budget restrictions and still promote strong job and GDP growth.
Instead of stimulating tech-dependent producers, though, we’ve been allowing manufacturing to stagnate and competitiveness to erode. Public R&D spending as a percentage of GDP has dropped, and is scheduled for drastic cuts under the sequester.
Sticking with the current plan means being caught up in weak growth and low employment for years. Jobs are being created at a snail’s pace, with falling unemployment rates largely a reflection of a shrinking workforce.
For our R&D/export model, we posited a modest infusion of $160 billion per year — about 1 percent of GDP — until 2016. We saw unemployment fall to less than 5 percent by 2016, compared with CBO forecasts that unemployment will remain over 7 percent. Real GDP growth — instead of hovering around 3.5 percent, by CBO estimates, on the current path — gradually rose to near 5.5 percent by the end of the period.
We need this boost. It’s urgent that we bring down joblessness and grow the economy. A change in fiscal policy biased towards R&D shows real promise as a viable way to help rescue the recovery. -
Strategic Analysis | October 2013If the Congressional Budget Office’s recent projections of government revenues and outlays come to pass, the United States will not grow fast enough to bring down the unemployment rate between now and 2016. The public sector deficit will decline from present levels, endangering the sustainability of the recovery. But as this new Strategic Analysis shows, a public sector stimulus of a little over 1 percent of GDP per year focused on export-oriented R & D investment would increase US competitiveness through export-price effects, resulting in a rise of net exports, and slowly lower unemployment to less than 5 percent by 2016. The improvement in net export demand would allow the US economy to enter a period of aggregate-demand rehabilitation—with very encouraging consequences at home.Download:Associated Program:Author(s):Related Topic(s):
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In the Media | September 2013
Ana Paula Grabois
Brasil Econômico, 26 Setembro 2013. © Copyright 2009–2012 Brasil Econômico. Todos os Direitos Reservados.
Dimitri Papadimitriou defende uma regulação do sistema financeiro mais forte: “A vigente não foi capaz de evitar o colapso de 2008.”
Pesidente do Instituto Levy Economics, de Nova York, Dimitri Papadimitriou, é um crítico feroz da autorregulação do mercado financeiro. O economista grego, radicado há 45 anos nos Estados Unidos, dirige o instituto que elabora pesquisas sobre os mercados financeiros e sobre o que se pode fazer para evitar crises, como a de 2008. Papadimitriou defende uma regulação financeira mais forte que se antecipe aos choques. "Precisamos re-regular o sistema financeiro. Porque a regulação vigente não foi capaz de evitar o colapso de 2008".
Em sua primeira visita ao Brasil, para participar da conferência "Governança financeira depois da crise", organizada pelo instituto que preside em parceria com o Instituto Multidisciplinar de Desenvolvimento e Estratégia (Minds), o economista diz que a instabilidade é inexorável ao sistema capitalista. "O aspecto mais importante é como regular esse sistema para prevenir que esse tipo de coisa aconteça de novo. Ou se entende as crises como acasos que ocorrem por choques e que não podem ser regulados", afirma o economista, ao Brasil Econômico, na véspera da conferência, que ocorre hoje e amanhã, no Rio.
Para o economista, é possível prever eventos que determinam instabilidades futuras, e assim, evitar crises mais complexas. Apesar de governos espalhados pelo mundo defenderem a ampliação dos mecanismos de regulação financeira, Papadimitriou diz que muito pouco foi feito.
"Desde o colapso de Lehman Brothers, nós ainda não tivemos nenhum progresso para prevenir que isso aconteça de novo", afirma. Parte do progresso quase nulo diz respeito à concentração das transações financeiras mas mãos de um grupo pequeno de grandes bancos. "É mais fácil regular os bancos pequenos porque você sabe o que realmente ele faz. Algumas vezes, é difícil entender o que os grandes bancos fazem e precificar o risco. A tendência desde 2008 é subprecificar os riscos dos bancos".
Com tantos tipos de transações, entre depósitos, empréstimos, títulos, investimento, derivativos em poucos bancos, a atual estrutura regulatória - seja nos Estados Unidos, na Europa ou na América Latina - é ineficaz. "É preciso saber quem regula e supervisiona quem e o quê", completa.
Na sua avaliação, os grandes bancos atingidos pela crise e depois ajudados pelo governo americano, como Citibank, JPMorgan e Chase Manhattan, continuam no controle das transações financeiras no mundo, sem avanços na regulação de suas atividades. "As restrições foram incapazes, por exemplo, de controlar questões como o caso da Baleia de Londres. O JP Morgan perdeu US$ 6 bilhões para seus clientes e teve US 1 bilhão de multa. Isso mostra que ainda falta regulação", diz. O escândalo do JP Morgan envolveu operações de alto risco com papeis derivativos.
O presidente do Levy Economics afirma que num mundo onde as transações financeiras equivalem a 35 vezes o valor do comércio de bens e serviços entre os países, a complexidade das transações aumenta, o que dificulta ainda mais a supervisão do mercado. Papadimitriou defende a modificação das estruturas de regulação no mundo, a começar pelos Estados Unidos. "O grande problema é o lobby dos bancos no Congresso, que querem evitar a regulação. O governo Obama não é muito agressivo em implementar novas regulamentações", complementa.
Totalmente favorável ao controle de capitais, o economista do instituto de pesquisa ressalta a conexão entre as crises financeiras e a economia real de vários países no ambiente globalizado atual.
"Wall Street não é isolado da economia real", diz. Uma crise financeira pode aumentar desemprego, retrair o crescimento da atividade econômica de vários países, além de forçar o corte de gastos do governo para evitar déficits de orçamento. "Isso significa menos infraestrutura, menos educação, menos seguridade social", afirma. -
One-Pager No. 41 | September 2013
Why the Troika’s Greek Strategy Is Failing
Greece’s unemployment rate just hit 27.6 percent. That wasn’t supposed to happen. Why has the troika—the European Commission, International Monetary Fund (IMF), and European Central Bank—been so consistently wrong about the effects of its handpicked policies? The strategy being imposed on Greece depends in large part on the idea of “internal devaluation”: that reducing wages will make its products more attractive, thus spurring a return to economic growth powered by rising exports. Our research, based on a macroeconomic model specifically constructed for Greece, indicates that this strategy is not working. Achieving significant growth in net exports through internal devaluation would, at best, take a very long time—and a great deal of immiseration and social disintegration would take place while we waited for this theory to bear fruit. Despite some recent admissions of error along these lines by the IMF, the troika still relies on a theory of how the economy works that badly underestimates the negative effects of austerity.
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In the Media | August 2013
By Dimitri B. Papadimitriou
Ekathimerini.com, August 12, 2013. © 2013 H Kaθhmepinh. All Rights Reserved.
At their White House meeting last week, U.S. President Barack Obama assured Greek Prime Minister Antonis Samaras of his support as Greece prepares for talks with creditors on additional debt relief amid record-high unemployment.
The U.S. should also endorse a new blueprint for recovery based on one of the most successful economic assistance programs of the modern era: the Marshall Plan.
It is clear by now that the European Union’s policies in Greece have failed. Projections that government spending cutbacks would stop the economy’s free-fall proved to be wildly optimistic. The 240 billion euro ($319 billion) bailout from the euro area and International Monetary Fund has shown little sign of success, and Greece is experiencing its sixth year of recession.
The spending cuts and tax increases, along with the dismissal of huge numbers of public-sector employees, demanded as a condition of the loans and assistance have only deepened the economic pain.
Instead of changing course, however, euro-area economists have responded to bad news by revising their forecasts to reflect lower expectations. Those numbers document a staggering record of mistaken assumptions that has led to today’s failure.
In December 2010, the so-called troika of lenders—the European Commission, the European Central Bank and the International Monetary Fund—predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.
This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.
Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.
Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.
Greece last faced economic ruin immediately after World War II. By 1949, the country was bankrupt, with virtually no industry; transportation networks, farmland and villages had been devastated, and about a quarter of the population was homeless.
Marshall Plan funds allowed Greece to rebuild, start power utilities, finance businesses and aid the poor. And, because social chaos had created an opening for communist and extremist parties, the U.S. hoped the stimulus would stabilize democracy, even as it created wealth.
Like other Marshall Plan nations, Greece experienced growth on a scale it had never known. The astonishing transformation was widely hailed as an “economic miracle,” and the nation continued to surge more than 20 years after the assistance ended.
With that enormous achievement in mind, the Levy Economics Institute has constructed a macroeconomic model of what a Marshall-type recovery plan could do for the Greek economy today. We assumed a modest stimulus from EU institutions of 30 billion euros between 2013 and 2016 that would be directed at public consumption and investment, and particularly jobs.Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.
A rebuilding plan could address Greece’s tremendous need to renovate schools, hospitals, libraries, parks, roads and bridges. Forests need to be replenished: Catastrophic fires have led to deforestation. Tourism once accounted for more than 25 percent of the economy; now, extraordinary beach cleanups are badly needed to attract visitors.
University graduates, after having been trained at public expense, are now forced to seek opportunity outside Greece. They could make valuable contributions, introducing information technology and other know-how to the government, health and education sectors.
These efforts could draw an idled, but ready and trained labor force, to construction, education, social service and technology. More employment would increase aggregate demand, which is now severely depressed. In turn, the multiplier effect of these expenditures would increase GDP substantially.
Instead, Greece is applying “expansive austerity.” The idea is based on a contested theory, and the real-world results have been a humanitarian disaster. These policies are lowering demand by reducing incomes, which cuts into tax revenue. The inevitable result is higher deficits and debt-to-GDP ratios.
For comparison, we modeled what we expect to happen in the coming years if Greece stays on its scheduled fiscal diet. The government has consistently been unable to meet troika-mandated deficit-reduction targets, and the lenders have consistently required further cutbacks.
The results of our modeling exercise were clear: Under today’s policies, unemployment would continue to increase, reaching almost 34 percent by the end of 2016. Under a Marshall Plan scenario, the rate would fall to about 20 percent.
Similarly, if Greece institutes the currently planned austerity measures, we calculate that its gross domestic product would reach about 158 billion euros by the end of 2016, compared with 162 billion euros projected for 2013. That would be more than 15 billion euros short of the troika-mandated target.
If, alternatively, government squeezes harder to meet the required deficit-to-GDP ratio goals, the endgame will be even worse: A poor and increasingly out of work population, among other factors, will push GDP to about 148 billion euros, more than 30 percent below its 2008 peak. A Marshall Plan scenario would put GDP a little above the troika’s target.
The first Marshall Plan wasn’t an act of charity or a bailout: It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration. To institute a modern version, we need to revise discredited austerity theories—or the euro-area institutions that promote them.
*Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College. -
In the Media | August 2013
By Dimitri B. Papadimitriou
Bloomberg, August 11, 2013. All Rights Reserved.
At their White House meeting last week, U.S. President Barack Obama assured Greek Prime Minister Antonis Samaras of his support as Greece prepares for talks with creditors on additional debt relief amid record-high unemployment.
The U.S. should also endorse a new blueprint for recovery based on one of the most successful economic assistance programs of the modern era: the Marshall Plan.
It is clear by now that the European Union’s policies in Greece have failed. Projections that government spending cutbacks would stop the economy’s free-fall proved to be wildly optimistic.
The 240 billion euro ($319 billion) bailout from the euro area and International Monetary Fund has shown little sign of success, and Greece is experiencing its sixth year of recession.
The spending cuts and tax increases, along with the dismissal of huge numbers of public-sector employees, demanded as a condition of the loans and assistance have only deepened the economic pain.
Instead of changing course, however, euro-area economists have responded to bad news by revising their forecasts to reflect lower expectations. Those numbers document a staggering record of mistaken assumptions that has led to today’s failure.
Shifting Forecasts
In December 2010, the so-called troika of lenders—the European Commission, the European Central Bank and the International Monetary Fund—predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.
This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.
Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.
Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.
Greece last faced economic ruin immediately after World War II. By 1949, the country was bankrupt, with virtually no industry; transportation networks, farmland and villages had been devastated, and about a quarter of the population was homeless.
Marshall Plan funds allowed Greece to rebuild, start power utilities, finance businesses and aid the poor. And, because social chaos had created an opening for communist and extremist parties, the U.S. hoped the stimulus would stabilize democracy, even as it created wealth.
Like other Marshall Plan nations, Greece experienced growth on a scale it had never known. The astonishing transformation was widely hailed as an “economic miracle,” and the nation continued to surge more than 20 years after the assistance ended.
With that enormous achievement in mind, the Levy Economics Institute has constructed a macroeconomic model of what a Marshall-type recovery plan could do for the Greek economy today. We assumed a modest stimulus from EU institutions of 30 billion euros between 2013 and 2016 that would be directed at public consumption and investment, and particularly jobs.
Debt Forgiveness
Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.
A rebuilding plan could address Greece’s tremendous need to renovate schools, hospitals, libraries, parks, roads and bridges. Forests need to be replenished: Catastrophic fires have led to deforestation. Tourism once accounted for more than 25 percent of the economy; now, extraordinary beach cleanups are badly needed to attract visitors.
University graduates, after having been trained at public expense, are now forced to seek opportunity outside Greece. They could make valuable contributions, introducing information technology and other know-how to the government, health and education sectors.
These efforts could draw an idled, but ready and trained labor force, to construction, education, social service and technology. More employment would increase aggregate demand, which is now severely depressed. In turn, the multiplier effect of these expenditures would increase GDP substantially.
Instead, Greece is applying “expansive austerity.” The idea is based on a contested theory, and the real-world results have been a humanitarian disaster. These policies are lowering demand by reducing incomes, which cuts into tax revenue. The inevitable result is higher deficits and debt-to-GDP ratios.
For comparison, we modeled what we expect to happen in the coming years if Greece stays on its scheduled fiscal diet. The government has consistently been unable to meet troika-mandated deficit-eduction targets, and the lenders have consistently required further cutbacks.
The results of our modeling exercise were clear: Under today’s policies, unemployment would continue to increase, reaching almost 34 percent by the end of 2016. Under a Marshall Plan scenario, the rate would fall to about 20 percent.
Shrinking GDP
Similarly, if Greece institutes the currently planned austerity measures, we calculate that its gross domestic product would reach about 158 billion euros by the end of 2016, compared with 162 billion euros projected for 2013. That would be more than 15 billion euros short of the troika-mandated target.
If, alternatively, government squeezes harder to meet the required deficit-to-GDP ratio goals, the endgame will be even worse: A poor and increasingly out of work population, among other factors, will push GDP to about 148 billion euros, more than 30 percent below its 2008 peak. A Marshall Plan scenario would put GDP a little above the troika’s target.
The first Marshall Plan wasn’t an act of charity or a bailout: It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration. To institute a modern version, we need to revise discredited austerity theories—or the euro-area institutions that promote them.
(Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College.) -
In the Media | July 2013Open Democracy, July 24, 2013. All Rights Reserved.
The lead author of a major econometric analysis of the Greek economic crisis discusses the disastrous outcomes of the policies enforced on Greece by its international lenders, and the IMF’s admission that it made serious errors in its assessment of the impact of austerity on the Greek economy and society.
C. J. Polychroniou: The Levy Economics Institute has just released a Strategic Analysis report (pdf), with you as its lead author, on the Greek economic crisis and the effects of austerity on growth and employment. The analysis relies on the Institute’s specially designed macroeconomic model for the Greek economy, which is similar to the Institute’s model of the US economy. First, what does the model consist of and how accurate has it been so far in assessing and predicting trends in the US economy?
Dimitri B. Papadimitriou: The model’s theoretical foundations are rooted in Wynne Godley’s new Cambridge approach to economics, developed in the 1980s, enabling economists and the public alike to produce a serious study of how the whole economic system functions. The determination of national income, GDP growth, inflation and unemployment are all predominant concerns by which the public judges the success or failure of governments. The US model on which the model for Greece is based has had a rather spectacular success in predicting first the 2001-02 recession and subsequently very early on the American and the global financial crisis of 2007-08. An increasing number of economists and policymakers have come to realize the power of its predictive capacity, at least for the US.
C.J.P: Reading the report, the first thing that stands out is that Greece is in a depression today (in addition to suffering from malaria, hungry school children and a surge in suicides) which is worse than anything experienced during the Great Depression of the 1930s in the US. This is shocking when we consider that benefits for those in retirement and the unemployed for example, did not even exist in the US until 1935. From this analysis, what is the driving force behind the ongoing and deepening economic crisis in Greece?
D.B.P: It is true the Great Depression never looked so good as seen currently from Greece. Whereas during the Great Contraction, US government spending for consumption not infrastructure continued to grow, helping to arrest the economy’s decline, in Greece the same spending has fallen severely every year since 2008 with last year being the steepest drop in the country’s continuing downturn.
This continuous decline is in concert with the country’s international lenders’ requirement in exchange for the two bail-out plans. This is an application of the dangerous idea of austerity that has been proven catastrophic wherever it has been applied during recessions, with the predictable consequences we are currently witnessing. During downturns, private consumption and investment are on declining paths and it falls on the public purse to stimulate the declining aggregate demand. The economic and social conditions you mention are the consequences of a foolish policy based on a discredited economic theory of “expansive austerity” along with labour market reforms as the best, most appropriate medicine for growth in countries like Greece running large government deficits and debt as percentages of GDP.
C.J.P: The IMF has admitted to miscalculations of the fiscal multipliers in the implementation of the austerity measures in Greece, yet the European authorities insist on fiscal restraint and implicitly accuse the IMF of playing politics. Who’s kidding whom here? The IMF and the EU represent today what I call the “twin monsters of global neoliberalism.” So why should any economist be paying attention to what the IMF says? Action, after all, is what matters – and theirs towards Greece certainly haven’t changed. Correct?
D.B.P: The IMF’s confession to big errors in the first rescue programme about three years ago has been viewed as irrelevant, and the Fund still insists that no matter what it did, then, Greece would have suffered a deep downturn. In effect, all three - IMF, EC and ECB (the troika) - still refuse to acknowledge the flawed handling of the Greek sovereign debt crisis, maintaining to the contrary that the overall policy was correct.
As my colleagues and I at the Levy Institute suggested when the first bailout programme was arranged, the amount was far smaller than required and the consequences of government spending cuts and tax increases were deeply underestimated. But those charged with running the European Union and the IMF would not increase the bail-out funds to assist Greece, opting instead for muddling through until the big European banks (read German and French primarily) were willing to slough off their Greek bond holdings, thereby not risking contagion and the erosion of investor confidence in other troubled southern European economies, i.e., Spain and Italy.
Conventional wisdom and free market ideology are alive and well, and very many economists consider themselves as high priests and defenders of this religion that informs IMF’s standard austerity remedies, despite the overwhelming evidence to the contrary.
C.J.P: These “twin monsters of global neoliberalism” and the Greek government seem to have placed their recovery hopes for the domestic economy on an exports boost. The Institute’s report analysis challenges this assumption. Why?
D.B.P: Exports have been on caught up in an unstable trend before and after the crisis and unable to offset the drop in domestic demand. The strategy imposed by the troika aimed at increasing exports through internal devaluation (a decrease in unit labour costs) has not brought about the anticipated effects, despite the reduction in relative unit labour costs achieved since in 2010.
Despite this decline in unit labour costs, consumer prices have not followed suit unlike in the single case of the European hegemon, Germany, that systematically maintains lower values in both. An analysis of the country’s exports by destination and technology content shows that the countries that import the bulk of Greek agricultural and medium-low technology goods and services are outside the euro area.
Greece has suffered a reduction in its exports to countries such as Germany, once a major foreign market. The recent large increase in the value of Greek exports is due to oil refinery operations positively affected by increases in the price of oil. In short, the current strategy of grounding Greece’s recovery on exports is not only wrong-headed but also will shift production toward sectors with lower value added, and larger volatility in oil-related trade.
C.J.P: Levy Institute projections are also highly pessimistic about unemployment and GDP growth rates in the middle term, questioning once again the rather optimistic predictions made recently by the European Commission and the IMF. How much worse can unemployment get in Greece, which, as the Institute’s report states, already suffers“the highest level of any industrialized country in the free world during the last 30 years?”
D.B.P: IMF and EC projections of GDP growth and employment are bizarrely incompatible within the framework of the imposed austerity policy. As our model simulations show, to meet the troika’s targets of government deficit to GDP ratios from now to 2016, even more austerity would be necessary, further depressing GDP and employment.
On the other hand, to meet the troika’s growth and employment targets will require the reversal of austerity and a fiscal stimulus of close to a further 41 billion euros between now and 2016. Their projections have been consistently revised downwards four times between May 2010 and the latest occasion in June 2013.
The fact is that since the peak in October 2008, over 1 million jobs have been lost, and there are no signs of meaningful easing of the flawed programme forthcoming. With joblessness now at 27%, a stark indicator of the troika’s and the government’s failure to accurately project the consequences of their own policies, it is astonishing that they continue to ask for more of the same. Our own simulations of unemployment show that more jobs would be lost should the current austerity policy be continued, with unemployment climbing the charts, and soaring close to 34% by the end of 2016.
C.J.P: To the surprise of many observers abroad, the Greek population has remained rather stoical (or, some might say, politically apathetic) in the midst of a deepening crisis and the collapse of the nation. How do you explain this attitude when, for years, the impression given to the outside world was that contemporary Greek society thrived on a culture based on political radicalism?
D.B.P: One easy answer would be that Greeks have are suffering from austerity fatigue. The other and perhaps more important explanation is that we should never take underestimate the capacity for a social meltdown. The Greek population may appear politically apathetic at present but the continuing social chaos has created a ever-wider opening for an extremist party. Only a progressive party of the left can reverse today’s carnage on the ground.
C.J.P: The way out of the crisis, according to the Institute’s Strategic Analysis report, is a recovery strategy along the lines of the Marshall Plan. Is it economics or politics and ideology that blocks discussions and initiatives from relying on the public sector for providing the necessary economic stimulus, via increases in public consumption and investment for a return to growth?
D.B.P: Our model’s simulations demonstrate that an EU-funded Marshall-type recovery programme would be a real “success story” for Greece. If it were directed at public consumption and investment and particularly at jobs this would put Greece on the road to recovery. The first Marshall plan wasn’t charity or a bailout. It was an effective investment strategy to create a vibrant European economic market and prevent political disintegration.
As Winston Churchill told us, we should learn from history. European leaders and our government need to learn fast. Instituting such a programme would necessitate our revising what are now discredited economic theories, together with the European institutions that continue to promote them. -
Research Project Reports | July 2013
Technical Paper
In this report Levy Institute President Dimitri B. Papadimitriou and Research Scholars Gennaro Zezza and Michalis Nikiforos present the technical structure of the Levy Institute's macroeconomic model for the Greek economy (LIMG). LIMG is a stock-flow consistent model that reflects the “New Cambridge” approach that builds on the work of Distinguished Scholar Wynne Godley and the current Levy Institute model for the US economy. LIMG is a flexible tool for the analysis of economic policy alternatives for the medium term and is also the analytic framework for a forthcoming Strategic Analysis series focusing on the Greek economy.Download:Associated Program:Author(s):Related Topic(s): -
Strategic Analysis | July 2013
A Strategic Analysis
Employment in Greece is in free fall, with more than one million jobs lost since October 2008—a drop of more than 28 percent. In March, the “official” unemployment rate was 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years.
In this report, Levy Institute President Dimitri B. Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza present their analysis of Greece’s economic crisis and offer policy recommendations to restore growth and increase employment. This analysis relies on the Levy Institute’s macroeconomic model for the Greek economy (LIMG), a stock-flow consistent model similar to the Institute’s model of the US economy. Based on the LIMG simulations, the authors find that a continuation of “expansionary austerity” policies will actually increase unemployment, since GDP will not grow quickly enough to arrest, much less reverse, the decline in employment. They critically evaluate recent International Monetary Fund and European Commission projections for the Greek economy, and find these projections overly optimistic. They recommend a recovery plan, similar to the Marshall Plan, to increase public consumption and investment. Toward this end, the authors call for an expanded direct public-service job creation program.Download:Associated Program:Author(s):Related Topic(s): -
In the Media | June 2013
By Dimitri B. Papadimitriou
The Huffington Post, June 18, 2013. Copyright © 2013 TheHuffingtonPost.com, Inc. All Rights Reserved.
Remember last summer? The London Whale, that blockbuster adventure thriller, triggered one chill after another as the high-risk action at JPMorgan Chase was revealed. Today, the threats posed by megabanks remain just below the surface—no crisis at the moment—but they’re equally dangerous. A major sequel this year cannot be ruled out.
Dodd-Frank, the law designed to reform the financial system, had already been on the books for two years when JPMorgan’s troubles surfaced. In an effort to figure out how it failed to prevent massive losses by one of the world’s largest banks, a Senate subcommittee investigated. This spring, it issued its report on the outsize positions taken by the bank’s Chief Investment Office (CIO)—with a lead trader known as ‘the London Whale’—and the department’s subsequent six billion dollar crash.
The committee detailed a list of concealed high-risk activities, and determined that the CIO’s so-called ‘hedging’ activities were really just disguised propriety trading, that is, volatile, high-profit trades on behalf of the bank itself, rather than on behalf of its customers in return for commissions.
Levy Economics Institute Senior Scholar Jan Kregel has taken these conclusions a step further, after analyzing the evidence. In a new research paper he makes the case that the primary cause of the bank’s difficulties was not that it engaged in proprietary trading: It was the concealment of this activity through the creation of a ‘shadow bank’, with the express purpose of this hardly-visible bank-within-the-bank being to create profits. What began as a unit to hedge risks—a safeguard—no longer served that purpose. He argues that when megabanks operate across all aspects of finance, this expansion of propriety trading becomes inevitable.
The solution, Kregel says, is not to prevent hedging, but rather to recognize that it can never be consistently profitable. A true hedging unit only generates profits when a bank’s bets on its primary investments are unexpectedly wrong. The legitimate hedge is expected to run losses most of the time, if the bank’s strategy and credit assessments are accurate. And for this reason, hedging activity should never be funded from customer deposits.
Did the London Whale revelations result in protections for bank customers—and their federal insurers—from this kind of gambling?
Dodd-Frank will reach its third anniversary in July. It mandated that Congress write 398 rules. About two-thirds of the deadlines for those rules have been missed. In addition, the hiring of regulators has been stalled in Washington, further undermining implementation of the law.
One rule that limited trading on derivatives contracts, the kind of activity that led to the London Whale debacle, was successfully challenged in the courts by a finance trade group. Another, the “Volcker Rule,” would require banks to separate consumer lending from speculative trading. It was Dodd-Frank’s most ambitious provision. Bank lobbyists have successfully kept regulators way behind schedule on finalizing it. Last week, an anti-regulatory bill to roll back other restrictions on derivatives trading passed in the House (the same bill was shelved last summer while the spotlight was on the London Whale). These are only a few examples. Attempts to reign in the recklessness are relentlessly dismantled as soon as they’re proposed.
A new bill to increase capital standards for the biggest banks has also recently surfaced. The requirement that these institutions hold less debt and more assets, sponsored by Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana), would, in addition, limit the federal safety net to only cover traditional banking activities. It faces tough opposition.
I’ve written before about the limits of Dodd-Frank’s scope, and the fundamental changes we need to make in how we approach financial regulation if it is going to succeed. Kregel’s analysis pinpoints some of the key abuses that urgently need to be addressed. Despite all the obstacles, the responsibility remains to reform banks that are too big to fail, and even, apparently, to regulate.
Meanwhile, the Senate subcommittee’s report has been forwarded to the Justice Department, where no particular indictments are anticipated. Until our increasingly fragile system is strengthened, expect a remake of the London Whale story. Only the cast and crew will change. -
In the Media | April 2013
By Dimitri B. Papadimitriou
Los Angeles Times, April 5, 2013. All Rights Reserved.
The government can and should increase the deficit to return us to prosperity. Without such outlays we can’t get enough GDP growth to seriously attack unemployment.
Just before the congressional spring break, a Senate budget proposal to decrease, but not eliminate, the deficit over 10 years was denounced as “pro debt” by an Alabama senator. It was the kind of proud and loud anti-deficit rhetoric that, no matter how nonsensical, plays nicely into Washington group-think on the subject.
The deficit has arguably gained the distinction of being the single most widely misunderstood public policy issue in America. Just 6% (6!) of respondents in a recent poll correctly stated that it had been shrinking, which has in fact been the case for several years, while 10 times more, 62%, wrongly believed that it’s been getting bigger.
Despite prevailing notions in the capital and throughout the nation, those of us at the Levy Economics Institute—along with many other analysts and economists—have concluded that the deficit should be increased.
Why add to the deficit right now? Jobs. Our economic models clearly show that without increased government outlays we’ll be unable to generate enough GDP growth to seriously attack unemployment. If we tried to balance the budget through tax hikes, our still-recovering economy would be hurt. That leaves a temporarily bigger deficit as an important option.
A mutation in the link between growth and jobs makes the issue urgent. While we are seeing some economic growth, the unemployment rate is not responding as strongly to the gains as it did in the past.
This slow job growth—today’s “jobless recovery”—isn’t an outlier. It’s a phenomenon that has been increasing over the last three decades, with jobs coming back more and more slowly after a downturn, even when GDP is increasing. The weak employment response has been an almost straight-line trend for more than 30 years.
Our institute’s newest econometric models show that each 1% boost in the GDP today will create, roughly, only a third as much improvement to the unemployment rate as the same 1% rise did in the late 1970s.
Traditionally, we’ve assumed that GDP growth would be followed by an employment surge. The break in that link is now very clear. It’s especially worrisome this year, with only a small GDP rise universally anticipated.
The Federal Reserve, for one, just reduced its growth outlook to 2.8% at most for 2013. The shallow recovery we’re seeing may indeed continue through 2014 and beyond. Since employment now consistently lags well behind GDP, we’ll have a long slog before we reach pre-crisis unemployment levels (below 4.6%). Some Federal Reserve officials believe it might take three years just to get from today’s 7.7% down to 6.5%. Full employment would still be nowhere in sight.
The quantitative data are telling us that without a stimulus, we can’t expect a strong employment lift. But instead of stimulus, we’re devising federal budgets that cut spending and lay off workers. The sequester is expected to depress GDP growth by perhaps half a percentage point—when we know that more growth than ever will be needed to raise employment—and cost anywhere from 700,000 to more than 1 million jobs.
Slower government spending is one reason that post-recession growth has been below par compared with other recoveries, Fed Vice Chair Janet Yellen has argued. As government outlays and employment have shrunk, the contribution of public funds to national growth has also fallen. By our estimates, that contribution now stands at about zero. That’s another data point indicating that federal deficits need to be increased.
To better understand the changing relationship between growth and jobs, the Levy Institute recently looked at three scenarios through 2016: what the results might be of a small, medium or large stimulus. A strong stimulus was clearly the most effective option, since it had a powerful, positive influence on employment growth and, in the long term, on deficit reduction. Of course, that route is completely unfeasible in the current political climate. But we saw that even a small amount of deficit spending could help put the recovery on track if it were combined with a mix of private investment, increased exports and good policy alternatives.
That points toward a way forward. Increasing the deficit while our economy is fragile is not “pro deficit,” any more than a family with a 30-year home mortgage is “pro debt.” To reclaim a phrase that deficit hawks have tried to make their own, it is “sensible and serious.” The federal government can run a deficit, as it almost always has, to help the nation return to prosperity.
With our new understanding of the fraying tie between GDP growth and jobs, we know that millions of Americans are on course for an agonizingly slow march out of joblessness unless we make a move. The nature of slumps and recoveries has changed, and the policies to manage them need to change too.
Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and executive vice president of Bard.
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Strategic Analysis | March 2013
As this report goes to press, the official unemployment rate remains tragically elevated, compared even to rates at similar points in previous recoveries. The US economy seems once again to be in a “jobless recovery,” though the unemployment rate has been steadily declining for years. At the same time, fiscal austerity has arrived, with the implementation of the sequester cuts, following tax increases and the ending of emergency extended unemployment benefits just two months ago.
Our new report provides medium-term projections of employment and economic growth under four different scenarios. The baseline scenario starts by assuming the same growth rates and government deficits as the Congressional Budget Office’s (CBO) baseline projection from earlier this year. The result is a new surge of the unemployment rate to nearly 8 percent in the third quarter of this year, followed by a very gradual new recovery. Scenarios 1 and 2 seek to reach unemployment-rate goals of 6.5 percent and 5.5 percent, respectively, by the end of next year, using new fiscal stimulus.
We find in these simulations that reaching the goals requires large amounts of fiscal stimulus, compared to the CBO baseline. For example, in order to reach 5.5 percent unemployment in 2014, scenario 2 assumes 11 percent growth in inflation-adjusted government spending and transfers, along with lower taxes.
As an alternative, scenario 3 adds an extra increase to growth abroad and to private borrowing, along with the same amount of fiscal stimulus as in scenario 1. In this last scenario of the report, the unemployment rate finally pierces the 5.5 percent threshold from the previous scenario in the third quarter of 2015. We conclude with some thoughts about how such an increase in demand from all three sectors—government, private, and external—might be realistically obtained.
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In the Media | March 2013
Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
March 18, 2013. Copyright © 2013 KPFK. All Rights Reserved.
Pacifica Radio host Ian Masters interviews Levy Institute President Dimitri B. Papadimitriou about the banking meltdown in Cyprus that has revived concerns about the viability of the eurozone. They also look into the exposure that Russian companies and individuals have in troubled banks in Cyprus, where banking assets are eight times the size of the country’s economy. -
In the Media | February 2013
By Dimitri B. Papadimitriou
The Huffington Post, February 20, 2013. All Rights Reserved.
Why has the world’s premiere deficit-reduction laboratory produced such a dismal failure? European leadership still expects the painful über austerity measures imposed on Greece to result in a dramatic improvement of its debt to GDP ratio. But the experiment in endurance is not succeeding for an important reason: Austerity programs have been rooted in myths about what caused the crisis in the first place.
The popular notion that government overspending is the basis of Greece’s deficit woes is simply wrong. Evidence doesn’t support what seems to be a never-ending scolding about profligate spending.
Greek national expenditures were at about 45 percent of GDP in 1990, long before the crisis. That share remained stable through 2006. Proportionally, its size was well below that of France, Italy, or even Germany. While Greece has a reputation for a nasty, historically oversized public sector, in the lead up to the crisis it behaved no differently than its neighbors, and its rate of spending didn’t prevent it from catching and surpassing affluent eurozone nations in growth. Rapid spending increases weren’t notable until the 2008 recession. The timeline reinforces the conviction that long-term government extravagance hasn’t been key to the Greek meltdown.
Its debt picture was also steady. For years, Greece ran a deficit of 3 to 5 percent of GDP, and roughly a 120 percent debt to GDP ratio without any market upheaval. In 2000, just before it joined the euro, its deficit was 3.8 percent, where it more or less remained through the early euro years. Government borrowing didn’t explode until the sovereign debt crisis surfaced in 2009, which indicates that its record of national debt wasn’t the primary cause of Greece’s deficit crunch, either.
Other trends were more worrisome than government spending and borrowing. Revenues, for one, had been a creeping problem. Even before Greece joined the euro, it lagged considerably behind other European economies in tax collection. A Levy Institute analysis shows that by 2005, revenues from income and wealth taxes in particular, were still well below other European countries. The notable increase in government revenue, from 9.8 percent of GDP in 1988 to 2005’s high of 13.5 percent (before stabilizing at a slightly lower level), was mainly from an increase in social contributions. Tax evasion was rampant in the robust shadow economy.
In the late 1990s another danger emerged. Investment was concentrated in construction, while machinery and transportation equipment, more important for creating productive capacity, played a smaller part. Greece’s increase in investment relative to savings and its strong growth in real GDP became dependent on private sector demand that was driven by debt. Household consumption, meanwhile, was being financed by running down family financial assets, as well as by borrowing. The private sector became a net borrower against the rest of the world.
Sound familiar?
These weren’t the only issues underlying the Greek crisis, of course. To tick a few more linked fundamentals off the list: A problematic effective exchange rate was propelling a deterioration in the trade balance. Export prices had risen much faster in Greece than in the rest of the eurozone, with Greek companies unable or unwilling to absorb euro appreciation by lowering their margins. At the same time, the transfer balance—mostly remittances from abroad—declined. Then property income fell.
Most importantly for the future, in contrast to some other troubled countries, Greece’s private sector, as well as its government, has a net debt against foreigners. This combination means that Greece must transfer real assets, rather than just financial ones, if it is going to reduce total debt.
Not one of these problems is likely to improve under a continued austerity regime. And while the probability of reaching European Commission targets is a fantasy, the fallout from making deficit reduction the foremost priority has been radioactive. Poverty and unemployment have increased disastrously. The threat of even more worker lay-offs, with a resulting national collapse, remains. Per capita GDP has declined by at least 5 percent in each of the last four years. By these and numerous other measures, cost-cutting has fueled a deep recession and devastating economic and social corrosion.
Before Greece’s debt and deficit troubles can be resolved, GDP growth needs to be restored, not the other way around. This in no way minimizes the debt’s alarming potential, and the need to roll it over at low or even zero rates. Even at the current lower interest level, payments could quickly become astronomical. Despite this, a focus on growth must be central.
Last year we finally saw small, scattered walk-backs from support for austerity policies. Let’s hope that this year will bring a giant step away from cherished—but nonetheless imaginary—legends of Greece’s fall. -
In the Media | January 2013
Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
January 30, 2013. Copyright © 2013 KPFK. All Rights Reserved.
Pacific Radio host Ian Masters interviews President Dimitri B. Papadimitriou about the unexpected contraction in GDP in the last quarter of 2012 and what it means for a slowing recovery—unwelcome news that might give Republican deficit hawks pause as they insist on more budget cuts. Full audio of the interview is available here. -
Public Policy Brief No. 127 | November 2012The United States must make a fundamental choice in its economic policy in the next few months, a choice that will shape the US economy for years to come. Pundits and policymakers are divided over how to address what is widely referred to as the “fiscal cliff,” a combination of tax increases and spending cuts that will further weaken the domestic economy. Will the United States continue its current, misguided, policy of implementing European-style austerity measures, and the economic contraction that is the inevitable consequence of such policies? Or will it turn aside from the fiscal cliff, using a combination of its sovereign currency system and Keynesian fiscal policy to strengthen aggregate demand?
Our analysis presents a model of what we call the “fiscal trap”—a self-imposed spiral of economic contraction resulting from a fundamental misunderstanding of the role and function of fiscal policy in times of economic weakness. Within this framework, we begin our analysis with the disastrous results of austerity policies in the European Union (EU) and the UK. Our account of these policies and their results is meant as a cautionary tale for the United States, not as a model.
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In the Media | November 2012
By Dimitri B. Papadimitriou
The Huffington Post, November 6, 2012. Copyright © 2012 TheHuffingtonPost.com, Inc. All Rights Reserved.
The gruesome package of spending cuts and tax increases scheduled for December 31 was dubbed the "Fiscal Cliff' by Federal Reserve Chairman Ben Bernanke. It's apparent why the phrase caught on. Less understandable is the urge to jump into equally dangerous policy options.
Virtually all of Washington is unhappy with the prospect of the measures. For months there've been reports of informal meetings to create a fix. But the austerity-worshipping ethos that underlies the plan is firmly entrenched, and some version of it will be enacted. Because of the wounds that extreme austerity will inflict, the Levy Institute is predicting—and we're hardly alone—that we're headed for another recession in 2013.
All the evidence confirms that austerity programs have been a counterproductive disaster in Europe. That hasn't persuaded fiscal conservatives to adapt their ideology to reality. They continue to point to the inevitability of a Greek or Portuguese-style meltdown in the United States unless we immediately put government on a no-calorie diet and extract higher tax payments from those least able to afford them. This is despite the understanding by economists, including the most orthodox, that our federal control of the dollar puts us in a fundamentally different position than that of countries yoked to the euro.
What we should be watching instead is the sorry mess in the United Kingdom. It's a more relevant comparison because, like the United States, the UK controls its own money; it stuck with the pound and never adopted the euro.
Britain's own fiscal cliff was the 2010 austerity agenda of Prime Minister David Cameron and the Conservative Party. A set of drastic measures aimed to increase growth and reduce debt, it has failed spectacularly on both fronts. The UK economy today is indisputably worse than it was when the tightening began, with a shrunken GDP and the deficit shooting up. Government spending cutbacks—integral to the plan—helped bring about this new recession. Cameron and Chancellor of the Exchequer David Osborne have yet to take responsibility for their policies, accusations of incompetence from the press and a slap-down from the International Monetary Fund not withstanding.
The U.S. Congress seems determined to follow this running leap into extreme austerity. The most likely modification to the current plan is an extension of some of the Bush-era tax cuts. Yet there hasn't been any move to extend the payroll tax holiday. Workers on the low end of the pay scale need the additional take-home pay that this measure has been providing. Because these employees spend their paychecks (they save the least of any group), they've also been helping to stimulate the larger economy. To eliminate this prime tax relief issue for the working class would be a major blunder.
Slashing federal agencies—the planned "sequestration" of Treasury Department funds when the overall budget hits a targeted figure—would be even worse. Medicare and Medicaid are exempt, but if the pressure to restore military spending succeeds, countless key economic drivers will have to be decimated instead, in order to reach the magic targeted number. With the pain spread across a wide range of departments, you might assume that the impact would be insignificant. No. The shrinkage would be, roughly, a substantial 12 to 15 percent. The cuts would lead to another recession here, in a mirror of what's happening in Great Britain.
The trap that occurs when austerity measures are used to balance a budget is predictable and preventable. On the most simple level, spending cuts and tax increases promote a cycle of low demand (because consumers buy less), low profits, high unemployment, and slow growth. These, in turn, inevitably lead to lower tax revenues and higher government safety net payouts, which of course produce rising government deficits. Greg Hannsgen and I detail other factors that also play significant roles in a new report [Fiscal Traps and Macro Policy after the Eurozone Crisis]. The austerity cult's response to this cycle is bigger spending cuts and more tax increases, which lead to ... you get the idea.
What's at the heart of this irrational strategy? A mistaken belief that our national economic problems stem only from a failure to control spending. The data shows that this simply is not the case. Total United States government spending has actually been falling as a percentage of GDP, while the total number of government employees has been declining. This alone clearly indicates that our deficits—like those in the UK, by the way—have more to do with meager tax revenue than with profligate spending.
Also key to the craze is the belief that austerity measures 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.
Our economic malaise has been consistently underestimated, and the result has been the adoption of inadequate half-measures. Swapping budget cuts at the edge of the fiscal cliff isn't a solution. A reduction in federal spending during a downturn will perpetuate the damaging cycle, no matter how judiciously the cuts are chosen.
The sequester should be repealed outright, and it certainly should not be replaced. We need a strong stimulus that increases employment, not by wishing for it, but through public sector hiring. The Fiscal Cliff show is a morality play that celebrates puritanical righteousness and unnecessary punishment. As we've already seen on the UK stage, it's headed towards an unhappy ending.
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In the Media | October 2012
Interview with Dimitri B. Papadimitriou
CNBC, October 26, 2012. All Rights Reserved.
President Dimitri B. Papadimitriou talks to CNBC's Rick Santelli about the failure of the bailouts in Greek and Spain, and the need for a completely different approach to the "European problem," including a broad-reaching plan to aid development in Europe's southern tier, a banking union to insure deposits, and true fiscal union for the eurozone—because clearly, monetary union has not worked. Full video of the interview is available here.
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Research Project Reports | October 2012
Interim Report
In this interim report, we discuss the evolution of major macroeconomic variables for the Greek economy, focusing in particular on the sources of growth before and after the euro era, the causes and consequences of the continuing recession, and the likely results of the policies currently being implemented. Some preliminary suggestions for alternative policies are included. These alternatives will be tested in a more robust econometric framework in a subsequent report.
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In the Media | August 2012
Ian Masters Interviews Dimitri B. Papadimitriou
Background Briefing, August 23, 2012. Copyright © 2012 KPFK. All Rights Reserved.
Dimitri B. Papadimitriou joins Ian Masters to discuss the accelerating run on the euro, as poorer nations move their money to Germany. Full audio of the interview is available here.
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In the Media | August 2012
By Dimitri B. Papadimitriou
The Nation, August 21, 2012. Copyright © 2012 The Nation. All Rights Reserved.
U.S. News and World Report, August 27, 2012. Copyright © U.S. News & World Report LP. All Rights Reserved.
European policymakers are still enjoying their famously long, languorous summer holiday. The vacations will end in the coming days, with Germany’s Chancellor Angela Merkel scheduled for a series of meetings with leaders from France, Greece and Italy this month. Meanwhile, at a more rapid pace, Europe is in the midst of a massive run on bank deposits in Greece, Portugal, Spain, Italy and Ireland. While the last out-of-office auto-responses zip across the continent in multiple languages, the bank runs continue to accelerate.
How did we get here? What can we expect next? And, most important, what is the way out?
Europe’s trip down the highway to hell began with an original sin. At the birth of the euro, nations that adopted it and formed the European Monetary Union (EMU) gave up their national currencies. They could no longer “print” money to pay for expenses (despite the longtime use of keystrokes for this purpose, the image of stacked, crisp bills somehow hangs on). The European Central Bank, comparable to the US Federal Reserve, could increase the supply of euros, but individual nations could not.
Like each of the US states, each nation in the EMU became a user, rather than an issuer, of money. But each country kept control of taxing and spending through its own treasury. The design flaw—think major miscalculation here—was the absence of a unifying body that could move resources from country to country in the event of local trouble, as the US government does between states.
The single currency was intended to insure that capital could flow easily across borders. For banks, this meant the ability to buy assets and make loans wherever the euro was used. And did they ever. The Basel Accords, initially set up in 1988 to establish international standards of capital adequacy, ended up allowing banks to self-determine the weight of risky assets on their balance sheets, leaving them without any supervision or regulation in their calculation and pricing. This added more opportunities to take on Wall Street–like risks.
Yet individual nations remained responsible for their own banks. Private “banks without borders” could, and did, run up fabulous debts that were easily several orders of magnitude greater than their host country’s total government spending or taxing. When the winning streak ended, the public had to pick up the tab. To visualize this debacle, picture a US state, any state, having to find the funds to settle a run on Bank of America because it happened to be headquartered there.
Covering the bank losses ballooned national deficits and debt to previously unheard of levels. This is what happened in Ireland, for example, and it is emerging now in Spain, where during the first five months of this year about 163 billion euros left the Spanish banks.
Finally, and key to the current cash exodus, depositors could shift their euros without cost from one bank to another throughout Euroland. Anyone with euros in, for example, a Spanish bank, can simply transfer them to a German bank.
The killer is that once the shift has been made, Spain, through its central bank, has to back up the money with reserve funds, which then accumulate in Germany’s Bundesbank. Where would Spain find those funds? Its central bank would need to borrow—deeply—from the European Central Bank.
This precise scenario is now playing out across Europe, as depositors in its poorer nations understandably move their money to relative safety in Germany. The cross-border mechanism is called TARGET2, for Trans-European Automated Real-time Gross settlement Express Transfer. The inelegant name is the least of its problems; it’s a system destined to crash and burn.
The flight of capital from the south had already begun in slo-mo by 2010. Then, this past May, as millions of euros a day were pulled from Greece and a major Spanish bank tottered, the world braced itself. Nationalization of the troubled Spanish bank and some largely insignificant measures on the part of European leadership followed, in what was widely reported as a definitive step back from the brink.
By this summer, optimism was replaced by increasingly frantic predictions of doom. When European Central Bank president Mario Draghi issued one in a string of we’ll-do-whatever-it-takes-to-save-the-euro statements in late July, the wheel turned again. Inaction followed, and the wheel lost traction.
The migration of money into Germany is quickening. And under TARGET 2, the trillions of euros that the ECB has loaned out to finance this race will be uncollectable.
How to counteract a disaster of these proportions? Unlimited deposit insurance for all euros in EMU banks, backed by the creation of a strong European federal treasury, would end the bank runs, just as deposit insurance in the United States has prevented them here ever since the Great Depression. The insurance liability would be on Europe’s central bank, which would become insolvent if Spain or Italy abandoned the euro. Since, unlike the United States, the ECB doesn’t have a unified European treasury to backstop it, Germany would presumably get the bill for a default.
As Randall Wray and I predict in a new Levy Institute policy paper [“Euroland’s Original Sin], “That’s a bill Germany will not accept, hence, probably no deposit insurance.” And no future for the euro.
Auto-response message to Europe’s banks: See you in September?
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In the Media | July 2012
By Dimitri B. Papadimitriou
Huffington Post Business, July 22, 2012. © 2012 TheHuffingtonPost.com, Inc. "The Huffington Post” is a registered trademark of TheHuffingtonPost.com, Inc. All rights reserved.
There's a sad truth about the fate of financial regulation: It's almost certain to be outmoded by the time it's introduced. This was as true of Glass-Steagall in 1933 as it is of Dodd-Frank today.
This month we begin the third year since the Dodd-Frank Wall Street reform act passed, with the struggle over its shape ongoing. It's a still-unmolded toddler, and already on the fast track to fossilization. Does the most ambitious finance legislation in decades carry the DNA to successfully cope with the next crisis? In a word, no.
The take-away from this challenge doesn't have to be cynicism, inaction, or laissez-faire tirades. To be ready for the next shock rather than the last one, though, we need to reset our thinking.
Dodd-Frank is based on the idea that financial markets are normally stable, with the exception of the occasional alarming "event." The New Deal's Glass-Steagall Act and the Clinton-era Gramm-Leach-Bliley "Modernization" shared those assumptions. All of these efforts were conceived as system-wide overhauls. In reality, though, they were designed only to remedy random, ad hoc crises; shocks like the 2008 meltdown, sometimes called "Minsky Moments."
Ironically, the late economist Hyman Minsky actually believed that these "moments" were anything but. At the Levy Institute, we share his view that instability is central to the genome of modern finance.
In other words, it's normal for the boat to keep rocking. The increasingly risky practices that fuel danger and instability are still being rewarded, and the absence of penalties for losses continues. The shocks will keep coming.
And each new threat to stability is destined to be different than the last. Dodd-Frank aims to identify the most vulnerable institutions and practices. That approach is too brittle to contain the disastrous effects of risks that are always morphing. Even constructive aspects of the Act could have perverse consequences, unless the rules are subject to sophisticated re-examination as the finance world develops.
Banks carry an urge -- maybe it's a genetic imperative? -- to evolve in a way that maximizes revenue. We're always witnessing how quickly markets create newer, riskier, and more profitable instruments. Credit default swaps aren't the only example, of course; look at the whole range of off-balance-sheet special purpose vehicles. It's the very nature of modern finance to transform its structure in response to the prevailing regulation, and to evade it successfully.
Under Dodd-Frank, banks will function more-or-less as they did in the past.
Their enormous size and multi-function operations -- the business model that underlies the latest crisis -- will be subject only to a series of cosmetic changes. The act's most significant measure, the Volcker Rule, continues to be diluted, and many of its other regulations are tied up in delays.
Instead of fundamental changes that would cushion our fragile system from shocks, Dodd-Frank's centerpiece is a limit on the use of public funds to rescue failing banks. By enabling rapid dissolutions, it aims to avoid a repeat of 2008, when the Lehman Brothers bankruptcy virtually froze capital markets. It's also an understandable response to TARP, which recapitalized insolvent financial institutions at a great cost, while allowing failing households to fall into foreclosure.
But limiting taxpayer exposure to the next bank breakdown is not the same as preventing a system-wide collapse. Tweaks to Dodd-Frank aren't a solution. Glass-Steagall contained features worth preserving, but reviving the law -- outdated then; infeasible now -- won't help. Neither will blaming Gramm-Leach-Bliley which, profound as it was, merely reflected the new status quo of its day. It institutionalized the changes that had already emerged in the markets.
We need banks that can earn competitive rates of return while they focus not on big risks, but on financing capital development. Reforms that promote enterprise and industry over speculation will have to be as innovative, flexible, opportunistic and plastic as the markets they aim to improve.
Regulators could begin by breaking banks down into smaller units. A bank holding company structure with numerous types of subsidiaries, each one subject to strict limitations on the type of permitted activities, would be a valuable deterrent to risky behavior. Restrictions on size and function would allow a reasonable shot at understanding esoteric subsidiaries, and a chance to react quickly to mutations.
As Dodd-Frank reaches its second anniversary, it faces both the limitations of its scope and the disheartening obstacles to its implementation. Will we really wait for the next, inevitable crisis before we start to develop adaptable reforms? In a word, probably.
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Policy Note 2012/8 | July 2012From the very start, the European Monetary Union (EMU) was set up to fail. The host of problems we are now witnessing, from the solvency crises on the periphery to the bank runs in Spain, Greece, and Italy, were built into the very structure of the EMU and its banking system. Policymakers have admittedly responded to these various emergencies with an uninspiring mix of delaying tactics and self-destructive policy blunders, but the most fundamental mistake of all occurred well before the buildup to the current crisis. What we are witnessing today are the results of a design flaw. When individual nations like Greece or Italy joined the EMU, they essentially adopted a foreign currency—the euro—but retained responsibility for their nation’s fiscal policy. This attempted separation of fiscal policy from a sovereign currency is the fatal defect that is tearing the eurozone apart.
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Book Series | June 2012
Edited by Dimitri B. Papadimitriou and Gennaro Zezza
In the 1970s, at a time of shock, controversy and uncertainty over the direction of monetary and fiscal policy, Wynne Godley and the Cambridge Department of Applied Economics rose to prominence, challenging the accepted Keynesian wisdom of the time. This collection of essays brings together eminent scholars who have been influenced by Godley's enormous contribution to the field of monetary economics and macroeconomic modeling.
Godley's theoretical, applied and policy work is explored in detail, including an analysis of the insightful New Cambridge 'three balances' model, and its use in showing the progression of real capitalist economies over time. Godley's prescient concerns about the global financial crash are also examined, demonstrating how his work revealed structural imbalances and formed the foundations of an economics relevant to the instability of finance.
Published By: Palgrave MacMillan
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In the Media | May 2012
Interview with Dimitri B. Papadimitriou
Capital.gr, May 18, 2012. © All Rights Reserved.
In an interview with Helen Artopoulou (DailyFX.gr/FXCM) that was posted on Capital.gr, Dimitri B. Papadimitriou, president of the Levy Economics Institute, discusses the failed policy of austerity that the European Union opted to enforce on Greece, and what it may take for Greece to overcome its current crisis.
Q. The political impasse in Greece, largely the outcome of the recent elections, had led to some reconsideration of the austerity policy measures being currently implemented in the indebted countries of the Eurozone. In fact, it seems that a number of public officials have shifted their position, calling now for a growth-oriented economic policy. Given the reality of Greece, how easy is to stir economic growth, and why didn’t the EU follow the growth path to economic recovery in the first place but relied instead on fiscal consolidation and draconian austerity measures?
Economic growth is dependent on public policy aiming at deploying the resources available, that is, labor and capital. Presently, in Greece, there is an abundance of labor, but no capital from either the private or public sectors. It will be some time before the economy becomes friendlier to private investment, markets offering increasing liquidity, and for the private sector to gain confidence in the country’s economic stability. The time horizon for these things to happen will be long so, the responsibility falls on the public sector to do the investing in the key sectors of the Greek economy. But the public sector is on the brink or bankrupt, and in effect restricted by the EU, ECB and IMF in investing for growth. When they call for a growth-oriented economic policy in response to the overwhelming election results in favor of the anti-austerity platform, they simultaneously insist on the implementation of the imposed austerity. This joint policy prescription, that growth and austerity can coexist, is the new “austerian” economics—a new frontier of economic nonsense. North European leaders believe that all member states in the Eurozone can be similar to Germany’s competitive export-led growth economy. But Germany’s competitive advantages that yield intra Eurozone better trade balances are dependent on other Eurozone’s countries worse balances.
Austerity programs were imposed, first, to discipline the eurozone’s profligate citizens and, second and most importantly to calm the financial markets, both of which have failed miserably. The medicine of austerity has worsened the patient’s condition and markets, as has been observed time and time again, have a mind of their own.
Q. Greece is facing once again the prospect of a forceful exit from the eurozone. How likely is this frightening scenario and is it manageable? Also, would it be as disastrous for the country as most people fear it would be?
I don’t believe thus far, all options have been explored. Greece can remain in the Eurozone with a reworked out bail out plan. Reasonable people can be convinced, if serious alternatives are presented. Everyone in the EU recognizes the harshness of the austerity measures and their most disproportional burden to the Greek people. Many proposals has been suggested from very serious economists, but have not made their way to the negotiating table. So there may be still time to avoid doing the unthinkable.
At the end, when all other options are exhausted then, the possibility of Greece exiting the euro remains the only options. This maybe a frightening scenario but it will have to be manageable, the inexorable difficulties notwithstanding. Exiting the euro will be accompanied with very serious challenges. We should expect to witness the workings of a dysfunctional economy and society characterized with bank runs, resulting in banks being nationalized, rapid devaluation of the domestic currency, immediate repudiation of all public debt and lender retaliation, closed financial markets for many years to come, and strong inflationary pressures. An economy with an under developed industrial base, like Greece, would be hard-hit on import prices, especially oil, natural gas, machinery and other necessary imports.
On the positive side, having its own currency the government can embark on large emergency employment programs, as those presently in place for public service works, and others used by other countries, i.e., the US New Deal-type programs, South Korea’s programs during the Asian crisis as well as those implemented in some countries in Latin America. More importantly, there can be public investment and promotion toward exporting agricultural goods, technical services to non-European countries, etc. And, there maybe still structural funds available from the EU. What is absolutely critical, however, for the country to ultimately find its way to growth and prosperity is spectacular and visionary leadership.
Q. The ECB has managed through different means to avoid a European credit crisis and to restore somewhat investors’ confidence in sovereign bond markets. Still, a lot of peripheral banks are on very shaky ground, with Spanish Bankia being the most recent case. What’s your assessment of the efforts undertaken so far by the ECB towards solving the eurozone crisis?
The ECB has done a lot less that it could have to calm the markets. For it is unfortunate that its charter—a version of the German Bundesbank—limits its functions as a central bank. Central banks have the ability to use tools at their disposal at times of financial crises, one of which is functioning as lenders of last resort (LOLR). The ECB is prohibited in doing so even though, its LTRO program is nothing more than a timid attempt to function as a LOLR, too little and too late to significantly calm the financial markets. The spreads for Spain and Italy continue to be under assault and the urgings from the Bundesbank to exit from the program earlier than its original time horizon worsen matters. European policymakers are well aware that the European financial institutions are severely undercapitalized and shaky, but hope that their intended private recapitalization will be a satisfactory solution. But as it has become obvious by now the method of solving Europe’s problems is to get each country’s fiscal house and banking sector in order by applying a band aid that helps kick the can down the road and somehow grow its way out of trouble. But even if the omens are clear, the willingness to deal with them effectively is not.
Q. It seems that the crisis in the European periphery is widening and deepening. Spain is set to be the next victim, but the bailout funds are hardly adequate given its size. Moreover, Germany continues to insist on the fiscal pact treaty as the only way out of the crisis. Is the European Union facing a dead-end? And is the current crisis essentially a structural crisis?
The euro project is an incomplete project. It is impossible to have a monetary union of countries with very different fiscal structures and earnings potential that are yoked to the same currency without a fiscal union. Germany’s insistence on a fiscal pact treaty is simply thoughtless and will sooner rather than later lead to euro’s dissolution. Aside from Greece, Portugal and Ireland—Chancellor Merkel’s poster children are not meeting their deficit targets and both Spain and Italy, two very large economies are in recession and their citizens are refusing to take the austerity medicine. Consequently, the end of the euro may be near and it will be a blow not just to European pride but, to the whole idea of Europe.
Q. During the last months the markets (including the US equity market) are showing signs that they are not in tune with the real economic conditions, which is to say that their performance does not seem to reflect what’s going in the global economy. Why is this happening, and have we faced a similar situation in the past?
As I indicated earlier, markets have a mind of their own. As the late Paul Samuelson once quipped, financial markets forecasted five of the last three recessions. Financial markets are globally interconnected and what happens in Europe affects the US markets and in their turn the Asian markets irrespective of the prevailing economic conditions. For example, the recent run-up in the US equity markets was due to some marginal improvement in the US economy, and more importantly, the sizable increase in corporate profits. This and last weeks volatility is attributed to the results of the Greek elections and the chorus proclaiming the country’s impending exit from the euro and the possible contagion to the rest of the Eurozone with spillover effects to the US economy.
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In the Media | May 2012
Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
With Greece teetering and increasing doubts about the solvency of Spanish banks, Masters and Papadimitriou discuss the growing likelihood of a cascading crisis in the eurozone and its potential impact on US elections in November. Full audio of the interview is available here.
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One-Pager No. 30 | May 2012
Hyman Minsky had particular views about how the regulatory system and financial architecture should be reformulated, and one of the many lessons we can learn from his work is that there is an intimate connection between how we think about the prospect of financial market instability and how we approach financial regulation. Regulation cannot be effective if it is simply based on “piecemeal” measures produced in response to the current “moment,” Minsky wrote. It needs to reformulate the structure of the financial system itself.
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In the Media | April 2012
Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
As stocks continue to plunge in Europe and on Wall Street, Masters and Papadimitriou revisit the malaise in the eurozone, where the cost of Spanish debt has reached unsustainable levels, austerity has proven to be disastrous, and there is no money for stimulus. Full audio of the interview is available here.
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Strategic Analysis | April 2012
Though the economy appears to be gradually gaining momentum, broad measures indicate that 14.5 percent of the US labor force is unemployed or underemployed, not much below the 16.2 percent rate reached a full year ago. In this new report in our Strategic Analysis series, we first discuss several slow-moving factors that make it difficult to achieve a full and sustainable economic recovery: the gradual redistribution of income toward the wealthiest 1 percent of households; a failure to fully stabilize and reregulate finance; serious fiscal troubles for state and local governments; and detritus from the financial crisis that remains on household and corporate balance sheets. These factors contribute to a situation in which employment has not risen fast enough since the (supposed) end of the recession to significantly increase the employment-population ratio. Meanwhile, public investment at all levels of government fell from roughly 3.7 percent of GDP in 2008 to 3.2 percent in the fourth quarter of 2011, helping to explain the weak economic picture.
For this report, we use the Levy Institute macro model to simulate the economy under the following three scenarios: (1) a private borrowing scenario, in which we find the appropriate amount of private sector net borrowing/lending to achieve the path of employment growth projected under current policies by the Congressional Budget Office (CBO), in a report characterized by excessive optimism and a bias toward deficit reduction; (2) a more plausible scenario, in which we assume that the federal government extends certain key tax cuts and that household borrowing increases at a more reasonable rate than in the previous scenario; and (3) a fiscal stimulus scenario, in which we simulate the effects of a fully “paid for” 1 percent increase in government investment.
The results show the importance of debt accumulation as a consideration in macro policymaking. The first scenario reproduces the CBO’s relatively optimistic employment projections, but our results indicate that this private-sector-led growth scenario quickly brings household and business debt to new all-time highs as percentages of GDP. We note that the CBO makes its projections using an orthodox model with several common, but fundamental, flaws. This makes possible the agency’s result that current policies will reduce the unemployment rate without a run-up in the private sector’s debt—“business as usual,” in the words of our report’s title.
The policies weighed in the second scenario do not perform much better, despite a looser fiscal stance. Finally, our third scenario illustrates that a small, tax-financed increase in government investment could lower the unemployment rate significantly—by about one-half of 1 percent. A stimulus package of this size might be within the realm of political possibility at this juncture. However, our results lead us to surmise that it would take a much more substantial fiscal stimulus to reduce unemployment to a level that most policymakers would regard as acceptable.
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Public Policy Brief No. 122 | February 2012President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a “sovereign debt crisis” ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster.
The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.Download:Associated Program:Author(s):Related Topic(s): -
In the Media | February 2012
Bloomberg Radio, February 10, 2012. © 2012 Bloomberg L.P. All Rights Reserved.
Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College, discusses whether or not Greece will hold together. Papadimitriou talks with Kathleen Hays and Vonnie Quinn on Bloomberg Radio's “The Hays Advantage.” Full audio of the interview is available here.
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In the Media | February 2012
By Dimitri B. Papadimitriou
The Huffington Post, February 9, 2012. Copyright © 2012 TheHuffingtonPost.com, Inc. All rights reserved.
The latest negotiations between Greece and its lenders have ended, at least momentarily. Athens has agreed to endure ever-more painful pension, spending, and wage cuts, with monthly minimum salaries dropping 20 percent. The powerful leaders of ”the troika”—the International Monetary Fund, the European Union, and the European Central Bank—have charted the direction of Greek public policy for years to come: substantial austerity measures, including the lay-offs of thousands of workers.
Within those confines, how can Greek competitiveness be rebuilt? The overwhelming, key, and most urgent imperative should be to raise employment levels. Here's why:
- The long-term effects of extreme unemployment on an economy have been well documented. The loss of output is permanent. Workers' skills deteriorate and become outdated, making the labor pool unattractive to potential employers.
- “Informal” work—the “shadow” sector—swells at the expense of the nation's formal economy, and in Greece, the grey-market is not just a statistical ding. It's widely estimated to compose (as is also the case in Italy) more than one quarter of the GNP.
- Inequality increases. In Greece, Ireland, Portugal and Spain the recent rise is estimated to be as much as 10 percent. Dangerous ideological shifts accelerate, too.
- Social cohesion disintegrates rapidly. Poverty, homelessness, and crime go up, along with poor health, depression, suicide rates and countless personal tragedies.
Greece now stands directly in the path of this onrushing apocalypse express. Between spring 2009 and mid 2011, its unemployment rose a heart-stopping 91.8 percent. The overall unemployment rate is now 20 percent; among youths, it's close to 40 percent, and expected to keep climbing. The damaged lives include 20,000 homeless, living in makeshift shelters during a miserably severe European winter, and an upswing in suicides and poverty.
As joblessness continues to snowball—and if the odds-makers in the credit markets are right, expect an avalanche—the unemployed themselves can involuntarily become a powerful force that prevents economic growth.
Until now, the Greek government has responded with small interventions to preserve jobs in the private sector. The emphasis has been on shortening the workweek (with the thought that more people would share the available work), and on employment subsidies.
But in places where reduced workweeks have been tried—Germany, the Netherlands, Belgium, France, Australia and Japan—they have failed to generate jobs. Employment subsidies have also been unsuccessful; they've tended to distort market mechanisms by interfering with employer decisions, and current workers end up being traded for newly subsidized ones.
Now, finally, in addition to those policies, a better option is being tried on a small scale: A labor department direct public service job creation program with an initial target of 55,000 jobs. Participants are entitled to up to five months of work per year, in projects—implemented by non-governmental organizations—that benefit their communities. A similar, streamlined, Interior department program, this one without NGO participation, will generate up to 120,000 openings.
This approach is the Greek government's best shot at slowing the nosedive in employment, and at circumventing further catastrophe. The plans have been designed to specifically address and avoid the nepotism, corruption, and favoritism that plague poorly conceived "workfare" schemes. With proper targeting, monitoring, and evaluation as the projects move along, the outcomes should be impressive.
The alternative to an active government labor policy is to rely on the private sector to provide enough work to derail astronomical unemployment. What is the realistic likelihood for this in a nation where jobs are already scarce, and where the public sector, now being dismantled, has composed 40 percent of the economy? It's hard to be optimistic.
A privately fueled reboot of Greece would require colossal input from start-ups, large ventures, and foreign capital. Historically, these investors have found Greece unattractive. Its competitiveness is likely to erode further as the engineered recession advances beyond the first phase of austerity. The massive unemployment fallout will seriously degrade the climate that's desirable to the same private sector sources being counted on to make Greece more competitive.
Greece's economy is also characterized by a high percentage of self-employment and small businesses, totaling about 35 percent of all workers. The destabilizing events that accompany high unemployment include a downward push on retail sales and other consumption; global demand shock is amplifying the problem. As the economy contracts, how will these enterprises survive without intervention?
Before the crisis, Greece drove its growth with public spending and jobs. Now that the government is shrinking, the range of employment policies needs to grow. Public service job creation programs are the government's best prospect. During the coming years of austerity, thousands of Greek workers will remain idle because policymakers believe that this makes economic sense. It simply does not.
Dimitri Papadimitriou is president of the Levy Economics Institute of Bard College, which, with underwriting from Greece's Labour Institute, has been instrumental in the design and implementation of a social works program of direct job creation throughout Greece. He recently co-authored a report (see Direct Job Creation for Turbulent Times in Greece) on Greek labor trends.
- The long-term effects of extreme unemployment on an economy have been well documented. The loss of output is permanent. Workers' skills deteriorate and become outdated, making the labor pool unattractive to potential employers.
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One-Pager No. 24 | February 2012
It’s a mistake to interpret the unfolding disaster in Europe as primarily a “sovereign debt crisis.” The underlying problem is not periphery profligacy, but rather the very setup of the European Monetary Union (EMU)—a setup that even now prevents a satisfactory resolution to this crisis. The central weakness of the EMU is that it separates nations from their currencies without providing them with adequate overarching fiscal or monetary policy structures—it’s like a United States without a Treasury or a fully functioning Federal Reserve. Without addressing this basic structural weakness, Euroland will continue to stumble toward the cliff—and threaten to pull a tottering US financial system over the edge with it.
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In the Media | January 2012
By Dimitri B. Papadimitriou
Los Angeles Times, January 5, 2012. Copyright © 2012 Los Angeles Times
International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis.
Is high unemployment as certain as death and taxes? Of course not. But if we depend on the private sector to bring rates down, joblessness could join those two certainties.
International experience shows that direct job creation by governments is one of the very few options that has succeeded at raising employment levels more than just marginally during a crisis. Nonetheless, unfounded optimism about the power of privately fueled growth underlies the latest round of interventions in Europe. The assumption that the business sector has the ability to absorb enough labor to end the unemployment crisis remains almost unquestioned.
And it is a crisis, despite the recent employment upsurge in much of the world. In Portugal, Ireland, Greece and Spain, high unemployment has continued, with anemic confidence indicators and planned-purchases data in Greece, for example, showing clear evidence that businesses and consumers are bracing for a protracted recession. In economies that are improving, outrageously high unemployment rates among important groups, particularly youths, signal the start of both a threat and a tragedy. Grave labor issues are scattered around the globe.
It's unreasonable to expect private enterprises to solve these problems. Full employment isn't an objective of businesses. Companies usually strive to keep staffing at a minimum—we've all heard the virtues of "lean and mean." 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.
In contrast, direct public-service job creation programs by governments have a history of long-term positive results. Throughout the last century, the United States, Sweden, India, South Africa, Argentina, Ethiopia, South Korea, Peru, Bangladesh, Ghana, Cambodia and Chile, among others, have intermittently adopted policies that made them "employers of last resort"—a term coined by economist Hyman Minsky in the 1960s—when private sector demand wasn't sufficient.
South Korea, for example, during the meltdown of 1997-'98, implemented a Master Plan for Tackling Unemployment that accounted for 10% of government expenditure. It employed workers on public projects that included cultivating forests, building small public facilities, repairing public utilities, environmental cleanup work, staffing community and welfare centers, and information/technology-related projects targeted at the young and computer-literate. The overall economy expanded and thrived in the aftermath.
In 2005, France outlined a program in which the government paid laid-off workers their former salaries. It showed that this model could ultimately cost the nation a lower percentage of GDP than unemployment compensation or other traditional remedies.
Of course, these ideas came long after America's Depression-era initiatives had already proved that government could successfully fulfill the role of employer without competing with the private sector. Programs such as the Public Works Administration and the Civilian Conservation Corps were followed by a "golden" era in American capitalism, and now, decades later, those policies are still providing rewards. The vogue to dismiss the 1940s recovery as entirely the result of World War II reflects political positioning, not economic data.
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.
And, as in any good public policy, another key is rigorous, scientific monitoring and evaluation. South Africa, in response to a projected unemployment rate of 33% by 2014, has launched a $2.5-billion initiative to create 1 million "cumulative work opportunities" over five years. Analysis by Rania Antonopoulos of the Levy Institute found that care-provisioning jobs—such as home-based workers who care for the ill, the elderly or young children—had a significantly stronger impact as an employment multiplier than infrastructure-oriented or "green" opportunities. Not all jobs are created equal.
The benefits of direct job creation aren't just transitory. It's well documented that persistent unemployment results in a permanent loss of output and labor productivity. During a crisis, jobs combat these potential future effects. When the good times are rolling, they support those excluded from the prosperity while stimulating demand through feedback loops that increase the economy's vibrancy.
This is the moment to expand the range of policy responses to unemployment.
There's no evidence that work creation policies either hurt private business or break national treasuries. Incurring national debt to restore an economy through direct job creation isn't frivolous. It is logical, practical, effective and humane.
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Strategic Analysis | December 2011
Fiscal austerity is now a worldwide phenomenon, and the global growth slowdown is highly unfavorable for policymakers at the national level. According to our Macro Modeling Team's baseline forecast, fears of prolonged stagnation and a moribund employment market are well justified. Assuming no change in the value of the dollar or interest rates, and deficit levels consistent with the Congressional Budget Office’s most recent “no-change” scenario, growth will remain very weak through 2016 and unemployment will exceed 9 percent.
In an alternate scenario, the authors simulate the effect of new austerity measures that are commensurate with the implementation of large federal budget cuts. Here, growth falls to 0.06 percent in the second quarter of 2014 before leveling off at approximately 1 percent and unemployment rises to 10.7 percent by the end of 2016. In their fiscal stimulus scenario, real GDP growth increases very quickly, unemployment declines to 7.2 percent, and the US current account balance reaches 1.9 percent by the end of 2016—with a debt-to-GDP ratio that, at 97.4 percent, is only slightly higher than in the baseline scenario.
An export-led growth strategy may accomplish little more than drawing a small number of scarce customers away from other exporting nations, and the authors expect no net contribution to aggregate demand growth from the financial sector. A further fiscal stimulus is clearly in order, they say, but an ill-timed round of fiscal austerity could result in a perilous situation for Washington.
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In the Media | November 2011
Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
Copyright © 2011 KPFK. All Rights Reserved.
Masters and Papadimitriou discuss the looming financial crisis in the eurozone, the possibility of contagion, and the OECD's warning of an impending recession in Europe and the UK unless the European Central Bank takes action. Full audio of the interview is available here.
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Research Project Reports | November 2011
Countries in crisis round the world face the daunting task of dealing with abrupt increases in unemployment and associated deepening poverty. Greece, in the face of her sovereign debt crisis, has been hit the hardest. Remediating employment policies, including workweek reductions and employment subsidies, abound but have failed to answer the call satisfactorily. Direct public-service job creation, instead, enables communities to mitigate risks and vulnerabilities that rise especially in turbulent times by actively transforming their own economic and social environment.
With underwriting from the Labour Institute of the Greek General Confederation of Workers, the Levy Economics Institute was instrumental in the design and implementation of a social works program of direct job creation throughout Greece. Two-year projects, funded from European Structural Funds, have begun.
This report traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. While its primary focus is identifying the needs in Greece, broader lessons for direct job creation are highlighted, and could be applied to countries entertaining targeted employment creation as a means to alleviate social strains during crisis periods.
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One-Pager No. 20 | November 2011As the crisis in Europe spreads, policymakers trot out one inadequate proposal after another, all failing to address the core problem. The possibility of dissolution, whether complete or partial, is looking less and less farfetched. Alongside political obstacles to reform, there is a widespread failure to understand the nature of this crisis. And without seeing clearly, policymakers will continue to focus on the wrong solutions.
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In the Media | October 2011
Background Briefing: Ian Masters Interviews Dimitri B. Papadimitriou
October 23, 2011. Copyright © 2011 KPFK. All Rights Reserved.
Pacific Radio host Ian Masters interviews President Dimitri B. Papadimitriou about the looming crisis in the eurozone, the inadequacy of current proposals to resolve it, and the real possibility of contagion on this side of the pond. Full audio of the interview is available here.
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Working Paper No. 693 | October 2011Yet another rescue plan for the European Monetary Union (EMU) is making its way through central Europe, but no one is foolish enough to believe that it will be enough. Greece’s finance minister reportedly said that his nation cannot continue to service its debt, and hinted that a 50 percent write-down is likely. That would be just the beginning, however, as other highly indebted periphery nations will follow suit. All the major European banks will be hit—and so will the $3 trillion US market for money market mutual funds, which have about half their funds invested in European banks. Add in other US bank exposure to Europe and you are up to a potential $3 trillion hit to US finance. Another global financial crisis is looking increasingly likely.
We first summarize the situation in Euroland. Our main argument will be that the problem is not due to profligate spending by some nations but rather the setup of the EMU itself. We then turn to US problems, assessing the probability of a return to financial crisis and recession. We conclude that difficult times lie ahead, with a high probability that another collapse will be triggered by events in Euroland or in the United States. We conclude with an assessment of possible ways out. It is not hard to formulate economically and technically simple policy solutions for both the United States and Euroland. The real barrier in each case is political—and, unfortunately, the situation is worsening quickly in Europe. It may be too late already.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager No. 13 | September 2011Research Scholar Greg Hannsgen and President Dimitri B. Papadimitriou disprove claims made by Social Security skeptics that the program is nothing more than a “Ponzi scheme.”
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In the Media | September 2011
By Dimitri B. Papadimitriou
Truthout, September 9, 2011. Copyright © 2011 Truthout. All Rights Reserved.
“By 1970, the governments of the wealthy countries began to take it for granted that they had truly discovered the secret of cornucopia. Politicians of left and right alike believed that modern economic policy was able to keep economies expanding very fast—and endlessly. That left only the congenial question of dividing up the new wealth that was being steadily generated.”
Those words, from a Washington Post editorial more than twenty-five years ago, echoed the beliefs not only of politicians and the press, but of mainstream economics professionals resistant to the idea that growth in a market economy would ever stagnate over a protracted period.
And some of the data did fit nicely. Through several recessions and recoveries, inflation-adjusted GDP rose almost in tandem with a line of predicted growth expectations. But in November 2007, something changed. Real GDP dropped down from what was expected by more than 11 percent, and, as this summer’s data has shown, it hasn’t returned to its pre-recession trend.
The unusual slump has provoked a stream of commentary that attempts to define the problem, but it hardly matters whether the downturn is identified as the second dip of a “double-dip” recession, a continuation of the “Great Recession,” a fast-moving slowdown, a slow nosedive, a long-term stall-out, or a confirmation that the economy has entered a Japanese-style “lost decade.” Growth during the 21st century is following a different trend line than it did in the 20th, and employment is also responding in new, different ways from earlier post–World War II recessions.
A range of additional data also indicates that what we’re hearing is not the regular breathing of an economy as it contracts and expands. Annual growth rates and quarterly moving averages—when examined starting in the mid 1970s, as Greg Hannsgen and I did at the Levy Economics Institute [see One-Pager No. 12]—show a steady decline beginning in 2000.
And the employment numbers make the case yet again. Look at the graph below, with separate lines for the past six recessions. It traces employment-to-population ratios, beginning with the first month of each recession. These ratios are used to measure, among other things, how well a nation utilizes its workforce—a kind of labor drop-out rate.
You can see at a glance that the pink line indicating the current recession—yes, that one down near the bottom of the chart—is an outlier in the group. It shows that by the 43rd month of the downturn, the ratio stood at just over 58 percent, meaning that 58 percent of the population was employed. That figure is 4.6 percent less than at the recession’s start, when more than 62 percent were working. And it means that this employment decline is steeper, deeper, and longer than in any of the previous five recessions by a long shot.
Even in the two worst recoveries during the past forty years, this ratio never before declined by more than three percent. By the time the five recessions were this far along, employment had returned either to pre-recession levels, or to a distance from the recession’s start that was, at worst, two percent, compared to the current more than four percent.
Together, this data makes the case that we’re in a prolonged slump that’s highly unusual, and requires action that’s far more aggressive than the usual responses. Job creation should be the government’s urgent, first priority. The nation needs to recognize just how perilous the employment disaster is—and what a marked departure this recession is from any we’ve seen in the modern era.
Dimitri B. Papadimitriou is President of the Levy Economics Institute of Bard College and Executive Vice President and Jerome Levy Professor of Economics at Bard College.
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One-Pager No. 12 | August 2011President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen make the case that the recession has turned into a prolonged and very unusual slump in growth, preventing a labor-market recovery—and the government lags far behind in creating the new jobs needed to deal with this disaster.
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One-Pager No. 10 | June 2011With quantitative easing winding down and the latest payroll tax-cut measures set to expire at the end of this year, pressing questions loom about the current state of the US economic recovery and its ability to sustain itself in the absence of support from monetary and fiscal policy.
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In the Media | May 2011
By Dimitri B. Papadimitriou
May 26, 2011. Copyright © 2011 New Geography
It's been more than three years since the Great Recession began, and it's no longer debatable that the federal spending in its wake did not provoke inflation. Years of forecasts by fiscal conservatives about the result of government expenditures have proved to be wrong. After three fiscal stimulus packages, core inflation—which excludes the volatile prices of oil and commodities—remains very much in check. The core rate is the most reliable guide to future inflation, and it has not trended upward.Headline inflation, however, the rate that does include these two, has increased. Is the recent uptick in gas and food prices a game-changer on inflation? Does it mean that predictions of an inflation tsunami were well-founded? And what's the best course to follow now?
Many commodity prices have made double and triple digit gains over the past year. The changes are more than a blip—cotton futures, for example, have risen 162 percent—even if the cost of oil continues to decline. These prices are notoriously subject to rapid change for reasons that don't reflect the structure of the U.S. economy. Factors can include Middle East politics, weather, activity in the developing world, and, most significantly today, speculative profiteering.
Gold and other commodities have become a hot destination for players—money managers—as these markets have become the rare opportunity for high returns. In the absence of federal regulation and supervision, the low interest rates that are so crucial to business growth and to the vast majority of Americans have been allowed to feed into the permissive speculative superstructure.
The run-up has clearly impacted the poor and the hungry in the undeveloped world. In academic and policy circles, there's a high level confidence that commodities account for only a small share of GDP in wealthy countries, and so aren't of concern as long as core inflation is under control. At the Levy Institute, in contrast, our research shows that even in the developed world expensive food, energy, and materials can crowd out other household purchases. Consumer budgets can be hurt even before serious headline inflation appears.
If commodity prices were to continue to climb broadly and sharply, the Federal Reserve could face the prospect of a serious episode of cost-push inflation, similar to what we saw in the 1970s and '80s. Fed Chairman Ben Bernanke might find himself occupying the chair of Paul Volcker in more ways than one.
This kind of inflation is caused neither by the effects of low interest rates on the broader economy, nor by government spending. And, as with any symptom of ill health, the cause dictates the appropriate treatment. So if Bernanke's response was to raise interest rates dramatically in the hope of abating inflation to some arbitrarily low target, it would be a risky mistake. An interest rate rise would be a serious danger to growth and job creation. Business and labor are far too fragile to deal with a double whammy from rising gas and food prices coupled with monetary policy tightening.
A better response would be "watchful waiting," a phrase seen in the December 1996 minutes of the FOMC (Federal Open Market Committee) meeting. A commodity price inflation could remain at least somewhat isolated.
Higher commodity prices will be used as an excuse to charge that the Fed's supposedly lax policy has unleashed an inflationary flood of cash throughout the economy. But the Fed's so-called "easy money" is parked at the Fed itself, as bank reserves, since banks are not lending. This can't cause inflation either. Logic hasn't stopped newly re-branded Republican presidential candidate Newt Gingrich, who recently admonished that "The Bernanke policy of printing money is setting the stage for mass inflation."
Those who purchase securities for long-term investment evidently disagree. Bond traders aren't anticipating an inflationary surge. Just look at the yield spread between inflation-indexed and non-indexed Treasury securities of the same maturity. It has remained almost constant over the past year. In other words, buyers who want their returns insulated from inflation are paying only slightly more for protection than they were last year. That flatness—the unwillingness to pay a premium for inflation insurance—indicates that long-term bond buyers haven't revised their inflation forecasts.
Also unlikely to revise their predictions: inflation doom-drummers, even as energy prices level, and wages, another inflation indicator, are by no means jumping. Like eons of "the-end-is-nigh" prognosticators, they don't exactly have a great track record. Back in spring 2008, a frenzied Glenn Beck urged Fox viewers to "Buy that coat and shoes for next year now." Some of his Washington cohorts are coy about inflation's estimated time of arrival. Republican House Majority Leader Eric Cantor, for example, tells us that "fears" of "future" inflation are "hanging over the marketplace." Others, like former Pennsylvania Senator Rick Santorum, say it's already arrived (Obama brought it). The accusations continue despite a lengthy stretch of the lowest inflation rates in modern US history, even with the current commodities rise.
Paul Ryan (R-WI) has been hailed as both a truth sayer and a soothsayer on the economy. He recommends that the Federal Reserve raise interest rates now to head off inflation "before the cow is out of the barn," ignoring the pain this would cause families and businesses. Here's my recommendation: Don't trust predictions about the future from those who've misread the present, and been very wrong in the past.
Dimitri Papadimitriou is President of the Levy Economics Institute of Bard College, and Executive Vice President and Jerome Levy Professor of Economics at Bard College.
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In the Media | May 2011
By Dimitri B. Papadimitriou
May 13, 2011. Copyright © 2011, Los Angeles Times
For 20 years, U.S. exports have trailed imports. Addressing the imbalance could hugely boost the job market.
One school of thought about the so-called jobless recovery of the American economy blames high unemployment on the federal deficit. But that’s blaming the wrong deficit.
To achieve an authentic recovery that includes new jobs, the deficit we need to cut is in trade.
For 20 years, America’s exports have been surpassed by its imports, with a big bite of that trade deficit composed of oil imports. Addressing the imbalance could have a huge effect on the job market, but only if it goes beyond reducing imports. We need to actively strengthen exports as well.
Even if the economic recovery continues, as is likely, joblessness will remain a colossal disaster. The unemployment rate is hovering at about 9%, and for some groups it is far higher. Nearly 16% of African Americans are unemployed, with young people and Latinos not far behind. The United States is about 19 million jobs behind the curve if employment is to return to its pre-recession levels. Among the world’s most developed nations, the G-7, we have the highest unemployment. Here at the Levy Economics Institute, even in our best-case growth scenario, we see unemployment dropping only to about 7%—way above healthy levels—by 2015. We’re not alone in that pessimism: The figures vary, but the prevailing outlook, including from the Federal Reserve is that job-seekers face years of pain.
Exports are key to meeting the urgent need for new jobs. The White House estimates that every $1 billion in exports creates 5,000 jobs. This makes it crucial for companies to find more customers in the rest of the world.
In addition to aircraft and other transport vehicles, U.S. industrial equipment, pharmaceuticals, chemicals, semiconductors and agricultural products—raw and processed—have a track record of success in the global marketplace, along with millions of goods from medium-size and small companies.
There are things that could be done to help American exporters. A devaluation of the dollar beyond the current downward creep would be a start. A weaker dollar would reduce the cost of our exports in foreign markets, in turn generating demand from buyers abroad. It would also encourage American consumers to buy domestic products because our goods would have a price advantage over imported ones. And the resulting rise in exports would have a side benefit: reducing the national budget deficit, because GDP growth and lower unemployment would mean larger government revenues and less spending on safety-net programs.
Devaluation does have some downsides, of course. Over the long haul, it can cause inflation, but that is not an immediate danger because core inflation is currently at or near record lows. Still, consumers would probably be paying more in the short term for oil and other imports.
In the long term, international monetary reforms would certainly be a preferable route to devaluing the dollar. Global imbalances are on the G-20 radar screen, but a serious policy response has yet to be floated. One helpful monetary reform would be to expand Special Drawing Rights—artificial, blended currency units governed by the International Monetary Fund—as supplemental currency reserves. This could only be done by an accord among the G-20 countries. International agreements take time—the World Trade Organization’s Doha talks will soon celebrate their 10th anniversary—so moving the dollar’s exchange rate is a better short-term solution.
Even then, ramping up American exports will be difficult. The White House has set a goal of doubling exports over five years, but the current mania for spending cuts may work against that ambition. In the House of Representatives, the Small Business Committee has advocated rescinding $30 million in Small Business Administration grants to states for promoting exports and sharply cutting the SBA’s Office of International Trade. These savings would be counterproductive and would work against the nation’s best interests.
It’s true that our trade account balance has recently improved. The better figures, though, aren’t a sign of healthy growth or an upcoming job surge. They reflect more a drop in imports rather than a growth in exports, and the drop has come because of less demand for goods in the recession’s shadow and amid ongoing financial fears.
Exports are starting to rise. But making sure that the upward curve continues will be crucial to addressing our still-worrisome unemployment rate.
Dimitri B. Papadimitriou is president of the Levy Economics Institute of Bard College and a professor of economics there. He is a former vice chairman of Congress’ Trade Deficit Review Commission
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Public Policy Brief No. 118 | April 2011
Four Fragile Markets, Four Years Later
In this brief, Research Scholar Greg Hannsgen and President Dimitri B. Papadimitriou focus on the risks and possibilities ahead for the US economy. Using a Keynesian approach and drawing from the commentary of other observers, they analyze publicly available data in order to assess the strength and durability of the expansion that probably began in 2009. They focus on four broad groups of markets that have shown signs of stress for the last several years: financial markets, markets for household goods and services, commodity markets, and labor markets. This kind of analysis does not yield numerical forecasts but it can provide important clues about the short-term outlook for the country’s economic well-being, and cast light on some longer-run threats. In particular, dangers and stresses in the financial and banking systems are presently very serious, and labor market data show every sign of a widespread and severe weakness in aggregate demand. Unless there is new resolve for effective government action on the jobs front, drastic cuts in much-needed federal, state, and local programs will become the order of the day in the United States, as in much of Europe.
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Strategic Analysis | March 2011
The US economy grew reasonably fast during the last quarter of 2010, and the general expectation is that satisfactory growth will continue in 2011–12. The expansion may, indeed, continue into 2013. But with large deficits in both the government and foreign sectors, satisfactory growth in the medium term cannot be achieved without a major, sustained increase in net export demand. This, of course, cannot happen without either a cut in the domestic absorption of US goods and services or a revaluation of the currencies of the major US trading partners.
Our policy message is fairly simple, and one that events over the years have tended to vindicate. Most observers have argued for reductions in government borrowing, but few have pointed out the potential instabilities that could arise from a growth strategy based largely on private borrowing—as the recent financial crisis has shown. With the economy operating at far less than full employment, we think Americans will ultimately have to grit their teeth for some hair-raising deficit figures, but they should take heart in recent data showing record-low “core” CPI inflation—and the potential for export-led growth to begin reducing unemployment.
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Working Paper No. 640 | December 2010
Remedies for High Unemployment and Fears of Fiscal Crisis
In recent years, the US public debt has grown rapidly, with last fiscal year’s deficit reaching nearly $1.3 trillion. Meanwhile, many of the euro nations with large amounts of public debt have come close to bankruptcy and loss of capital market access. The same may soon be true of many US states and localities, with the governor of California, for example, publicly regretting that he has been forced to cut bone, and not just fat, from the state’s budget. Chartalist economists have long attributed the seemingly limitless borrowing ability of the US government to a particular kind of monetary system, one in which money is a “creature of the state” and the government can create as much currency and bank reserves as it needs to pay its bills (this is not to say that it lacks the power to impose taxes). In this paper, we examine this situation in light of recent discussions of possible limits to the federal government’s use of debt and the Federal Reserve’s “printing press.” We examine and compare the fiscal situations in the United States and the eurozone, and suggest that the US system works well, but that some changes must be made to macro policy if the United States and the world as a whole are to avoid another deep recession.
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One-Pager No. 5 | November 2010
The Need for More Profound Reforms
There is no justification for the belief that cutting spending or raising taxes by any amount will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. We must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.
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One-Pager No. 4 | November 2010
The Rescue Plan Cannot Address the Central Problem
The trillion-dollar rescue package European leaders aimed at the continent’s growing debt crisis in May might well have been code-named Panacea. Stocks rose throughout the region, but the reprieve was short-lived: markets fell on the realization that the bailout would not improve government finances going forward. The entire rescue plan rests on the assumption that the eurozone’s “problem children” can eventually get their fiscal houses in order. But no rescue plan can address the central problem: that countries with very different economies are yoked to the same currency.
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Book Series | September 2010
Edited by Dimitri B. Papadimitriou and L. Randall Wray
Hyman Minsky’s analysis, in the early 1990s, of the capitalist economy’s transformation in the postwar period accurately predicted the global financial meltdown that began in late 2007. With the republication in 2008 of his seminal books John Maynard Keynes (1975) and Stabilizing an Unstable Economy (1986), his ideas have seen an unprecedented resurgence, and the essays collected in this companion volume demonstrate why both economists and policymakers have turned to Minsky’s works for guidance in understanding and addressing the current crisis. The volume brings together the world’s foremost Minsky scholars to provide a comprehensive overview of his approach, and includes chapters that extend his analysis to the present. Beginning with Minsky’s ideas on money, banking, and finance—including his influential financial instability hypothesis—subjects range from the psychology of financial markets to financial innovation and disequilibrium, to the role of Big Government in constraining endogenous instability, to a Minskyan approach to international relations theory.
Published By: Edward Elgar
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Public Policy Brief Highlights No. 114A | September 2010
In this new policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes by any amount will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.
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Public Policy Brief Highlights No. 113A | September 2010
Without Major Restructuring, the Eurozone is Doomed
Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing.
No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.
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Public Policy Brief No. 114 | August 2010In this new brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.Download:Associated Program:Author(s):
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Public Policy Brief No. 113 | July 2010
Without Major Restructuring, the Eurozone Is Doomed
Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing.
No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.
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In the Media | June 2010
Copyright 2010 The Economist; Letters, June 10, 2010
Sir,
Your obituary of Wynne Godley (May 29th) did an injustice to his considerable intellectual achievements in macroeconomics and his courage in going against the orthodoxy that has ruled the economics profession for the past three decades. That very orthodoxy is now under attack all across the world, its otiose theoretical constructions having been exposed to the harsh light of actual economic events. Godley’s contributions to macroeconomics include his 1978 work on pricing with Kenneth Coutts and William Nordhaus, the textbook written in 1983 with Francis Cripps that inspired the “New Cambridge” group, and his 2006 book on monetary economics, written with Marc Lavoie.
His often-cited success as a macroeconomic forecaster came about precisely because he developed a systematic framework for analysing the impact of potential developments, applied first to the British economy at Cambridge and subsequently to America’s economy at the Levy Economics Institute.
Instead of taking the trouble to address these contributions, your piece settled for personal gossip, ending with a snide comment that “against a background like this, a little waywardness in the world of macroeconomics seems entirely forgivable.”
Anwar Shaikh
Professor of Economics
New School for Social Research
New YorkGennaro Zezza
Associate Professor of Economics
University of Cassino
Cassino, ItalyDimitri Papadimitriou
President
Levy Economics Institute
Bard College
Annandale-on-Hudson, New YorkAssociated Program(s):Author(s): -
One-Pager No. 1 | May 2010
How to End America's Trade Deficits
Now that America’s financial institutions have been brought back from the brink, the greatest threat to global economic stability is the gigantic trade imbalance between the United States, China, and other trading partners. A second big threat to economic stability, in the longer run, is global warming. Both problems are related to America’s addiction to cheap imports and foreign oil—bad habits that a clever cap-and-trade system could help us kick at last.
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In the Media | February 2010
Friday, February 19, 2010 02:00. Copyright The Financial Times Limited 2010.
From Mr Dimitri B. Papadimitriou
Sir, Martin Feldstein (February 17) argues in favour of Greece taking a holiday from the eurozone. While his very thoughtful comment makes sense on the face of it, if implemented I believe it will bankrupt Greece absolutely.
Under his plan, once the new drachma is devalued there would be a very strong demand for wages and prices to rise in tandem with the devaluation, so that parity is maintained with the euro. The result would be high inflation rates and even bigger budget deficits. The country’s holiday from the eurozone would likely become permanent, and prime minister George Papandreou’s valiant efforts to change the culture of a country’s expanding and wasteful public sector, rife with tax avoidance and evasion, will be forever lost.
The plethora of articles in your pages and others, some arguing in favour and others against a bail-out, contribute to market confusion and drive the country’s financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government’s ability to achieve its deficit goals ever more difficult.
Since the architects of economic and monetary union are neither about to change the system, nor to provide a sympathetic ear and a helping hand, what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary.
Dimitri B. Papadimitriou
President
Levy Economics Institute
Annandale, NY, US -
Strategic Analysis | December 2009
Though recent market activity and housing reports give some warrant for optimism, United States economic growth was only 2.8 percent in the third quarter, and the unemployment rate is still very high. In their new Strategic Analysis, the Levy Institute’s Macro-Modeling Team project that high unemployment will continue to be a problem if fiscal stimulus policies expire and deficit reduction efforts become the policy focus. The authors—President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza—argue that continued fiscal stimulus is necessary to reduce unemployment. The resulting federal deficits would be sustainable, they say, as long as they were accompanied by a coordinated and gradual devaluation of the dollar, especially against undervalued Asian currencies—a step necessary to prevent an increase in the current account deficit and ward off the risk of a currency crash.
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Policy Note 2009/10 | October 2009
What Are the Lessons of the New Deal?
As the nation watches the impact of the recent stimulus bill on job creation and economic growth, a group of academics continues to dispute the notion that the fiscal and job creation programs of the New Deal helped end the Depression. The work of these revisionist scholars has led to a public discourse that has obvious implications for the controversy surrounding fiscal stimulus bills. Since we support a new stimulus package—one that emphasizes jobs for the 9.8 percent of the workforce currently unemployed—we have been concerned about this debate. With Congress, the White House, pundits, and the press riveted on the all-important health care debate, we worry that they are also distracted by skirmishes over economic theory and history, while millions wait for a new chance to do meaningful work and effective, if imperfect, policy tools are readily at hand. (See also, Public Policy Brief No. 104.)
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Working Paper No. 581 | October 2009
Did the New Deal Prolong or Worsen the Great Depression?
Since the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933’s National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.
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Public Policy Brief Highlights No. 104A | September 2009
The New New Deal Fracas: Did Roosevelt’s “Anticompetitive” Legislation Slow the Recovery from the Great Depression?
View More View LessA wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.
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Public Policy Brief No. 104 | August 2009
Did Roosevelt’s “Anticompetitive” Legislation Slow the Recovery from the Great Depression?
A wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.
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Strategic Analysis | April 2009
Recent Rise in Federal Government and Federal Reserve Liabilities: Antidote to a Speculative Hangover
View More View LessFederal government and Federal Reserve (Fed) liabilities rose sharply in 2008. Who holds these new liabilities, and what effects will they have on the economy? Some economists and politicians warn of impending inflation. In this new Strategic Analysis, the Levy Institute’s Macro-Modeling Team focuses on one positive effect—a badly needed improvement of private sector balance sheets—and suggest some of the reasons why it is unlikely that the surge in Fed and federal government liabilities will cause excessive inflation.
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Strategic Analysis | December 2008
Prospects for the United States and the World: A Crisis That Conventional Remedies Cannot Resolve
View More View LessThe economic recovery plans currently under consideration by the United States and many other countries seem to be concentrated on the possibility of using expansionary fiscal and monetary policies alone. In a new Strategic Analysis, the Levy Institute’s Macro-Modeling Team argues that, however well coordinated, this approach will not be sufficient; what’s required, they say, is a worldwide recovery of output, combined with sustainable balances in international trade.
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Policy Note 2008/6 | November 2008
While serving as chairman of the Federal Reserve Board, Alan Greenspan advocated unsupervised securitization, subprime lending, option ARMs, credit-default swaps, and all manner of financial alchemy in the belief that markets “work” to reduce and spread risk, and to allocate it to those best able to assess and bear it—in his view, markets would stabilize in the absence of nasty government intervention. But as Greenspan now admits, he could never have imagined the outcome: a financial and economic crisis of biblical proportions.
The problem is, market forces are not stabilizing. Left to their own devices, Wall Street wizards gleefully ran right off the cliff, and took the rest of us with them for good measure. The natural instability of market processes was recognized long ago by John Maynard Keynes, and convincingly updated by Hyman P. Minsky throughout his career. Minsky’s theory explained the transformation of the economy over the postwar period from robust to fragile. He pointed his finger at managed money—huge pools of pension funds, hedge funds, sovereign wealth funds, university endowments, money market funds—that are outside traditional banking and therefore largely underregulated and undersupervised. With a large appetite for risk, managed money sought high returns promised by Wall Street’s financial engineers, who innovated highly complex instruments that few people understood.
In this new Policy Note, President Dimitri B. Papadimitriou and Research Scholar L. Randall Wray take a look back at Wall Street’s path to Armageddon, and propose some alternatives to the Bush-Paulson plan to “bail out” both the Street and the American homeowner. Under the existing plan, Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.
But it is highly unlikely that relieving banks of some of their bad assets, or injecting some equity into them, will increase their willingness to lend. Resolving the liquidity crisis is the best strategy, the authors say, and keeping small-to-medium-size banks open is the best way to ensure access to credit once the economy recovers. A temporary suspension of the collection of payroll taxes would put more income into the hands of households while lowering the employment costs for firms, fueling spending and employment. The government should assume a more active role in helping homeowners saddled with mortgage debt they cannot afford, providing low-cost 30-year loans directly to all comers; in the meantime, a moratorium on foreclosures is necessary. And federal grants to support local spending on needed projects would go a long way toward rectifying our $1.6 trillion public infrastructure deficit.
Can the Treasury afford all these measures? The answer, the authors say, is yes—and it is a bargain if one considers the cost of not doing it. It is obvious that there exist unused resources today, as unemployment rises and factories are idled due to lack of demand. Markets are also voting with their dollars for more Treasury debt. This does not mean the Treasury should spend without restraint—whatever rescue plan is adopted should be well planned and targeted, and of the proper size. The point is that setting arbitrary budget constraints is neither necessary nor desired—especially in the worst financial and economic crisis since the Great Depression.
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Working Paper No. 545 | October 2008
Unemployment has far-reaching effects, all leading to an inequitable distribution of well-being. To put an economy on an equitable growth path, economic development must be based on social efficiency, equity—and job creation. Many economists, however, assume that unemployment tends toward a natural rate below which it cannot go without creating inflation. This paper considers a particular employment strategy: a government job creation program, such as an employment guarantee or employer-of-last-resort (ELR) scheme, that would satisfy the noninflationary criteria. The paper analyzes the international experience of government job creation programs, with particular emphasis on the cases of Argentina and India. It concludes by considering the application of an ELR policy to the developing world, and as a vehicle for meeting the Millennium Development Goals.
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Working Paper No. 538 | July 2008
This paper considers a plan proposed by Warren Buffett, whereby importers would be required to obtain certificates proportional to the amount of non-oil goods (and possibly also services) they brought into the country. These certificates would be granted to firms that exported goods, which could then sell certificates to importing firms on an organized market. Starting from a relatively neutral projection of all major variables for the US economy, the authors estimate that the plan would raise the price of imports by approximately 9 percent, quickly reducing the current account deficit to about 2 percent of GDP. They discuss several problems that might arise with the implementation of the Buffett plan, including possible instability in the price of certificates and retaliation by US trade partners. They also consider an alternative version of the plan, in which certificates would be sold at a government auction, rather than granted to exporters. The revenues from certificate sales would then be used to finance a reduction in FICA payroll taxes. The authors report the results of simulations of the alternative plan’s effects on macroeconomic balances and GDP growth. Notably, the alternative plan would lessen the severity of the growth recession expected in our base projection.
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Strategic Analysis | April 2008
As the government prepares to dispense the tax rebates that largely make up its recently approved $168 billion stimulus package, President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza explore the possibility of an additional fiscal stimulus of about $450 billion spread over three quarters—challenging the notion that a larger and more prolonged additional stimulus is unnecessary and will generate inflationary pressures. They find that, given current projections of even a moderate recession, a fiscal stimulus totaling $600 billion would not be too much. They also find that a temporary stimulus—even one lasting four quarters—will have only a temporary effect. An enduring recovery will depend on a prolonged increase in exports, the authors say, due to the weak dollar, a modest increase in imports, and the closing of the current account gap.
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Strategic Analysis | November 2007
In their latest Strategic Analysis, Distinguished Scholar Wynne Godley, President Dimitri B. Papadimitriou, and Research Scholars Greg Hannsgen and Gennaro Zezza review recent events in the housing and financial markets to obtain a likely scenario for the evolution of household spending in the United States. They forecast a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment, unless (1) the US dollar is allowed to continue its fall and thus complete the recovery in the US external imbalance, and (2) fiscal policy shifts its course—as it did in the 2001 recession.
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Book Series | October 2007
Edited by Dimitri B. Papadimitriou
The results are in: we are aging—individually and collectively, nationally and globally. In the United States, as in most countries with an advanced economy, the aging of the population will be a primary domestic public policy issue in the coming decades. According to Census Bureau estimates, the proportion of the elderly in the total population will increase, while the proportion of the working-age population is projected to decline. These demographic changes imply a significant growth in the number of beneficiaries in federal entitlement programs. Existing program rules and rapidly escalating health care costs are expected to lead to fiscal pressures, and to pose significant challenges for economic growth.
Coping with an aging population requires action in the near term to forestall more difficult choices in the long term. This book provides an assessment of the forces that drive government spending on retirees and explores alternate means of financing the retirement and health care of older citizens. Probabilistic forecasts and comparative analyses are used to measure the potential impact of various reform proposals. Individual essays examine European welfare state regimes and their generosity toward the elderly, global demographic trends and their implications for social welfare systems, the differing retirement prospects for women and men, the changing role of employer pensions in the United States, the adequacy of retirement resources among the soon-to-retire, and the effects of wage growth on the long-term solvency of Social Security.
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Working Paper No. 506 | July 2007
Longstanding speculation about the likelihood of a housing market collapse has given way in the past few months to consideration of just how far the housing market will fall, and how much damage the debacle will inflict on the economy. This paper assesses the magnitude of the impact of housing price decreases on real private expenditure, examines the role of new types of mortgages and mortgage-related securities, and analyzes possible policy responses.
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Public Policy Brief No. 90 | July 2007
What Will the Housing Debacle Mean for the U.S. Economy?
With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden. The signals are still mixed; for example, while April’s retail sales numbers caused concern, May’s were much improved, and so was the ISM manufacturing index for June. Consumption growth indicates a slowdown. This Public Policy Brief examines the American household and its economic fortunes, concentrating on how falling home prices might hamper economic growth, generate social dislocations, and possibly lead to a full-blown financial crisis.
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Public Policy Brief Highlights No. 90A | July 2007
What Will the Housing Debacle Mean for the U.S. Economy?
With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden.Download:Associated Program(s):Author(s): -
Working Paper No. 500 | May 2007
The aging of the American population will be a critical public policy issue in the years ahead. This paper surveys the recent literature on the economics of aging, with a special emphasis on government spending on the aged. The US Census Bureau projects that the proportion of the elderly in the total population will increase while the proportion of the working-age population will decline. This demographic shift implies a significant growth in the number of beneficiaries of major federal entitlement programs. Existing rules and escalating health care costs are expected to lead to fiscal pressures and to pose challenges for economic growth. The paper offers the author’s assessment of the forces that determine government spending on retirees. It also examines how the retirement and health care of older citizens might be financed, and measures the potential impact of different reform proposals. Finally, it provides an introduction to an edited volume, Government Spending on the Elderly.
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Strategic Analysis | April 2007
The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment. Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. Others believe that the turmoil will be contained, and that the US economy will recover quite rapidly and resume the steady growth it has enjoyed during the last four years or so.
Yet no participants in the public discussion, so far as we know, have framed their views in the context of a formal model that enables them to draw well-argued conclusions (however conditional) about the magnitude and timing of the impact of recent events on the overall economy in the medium term—not just the next few months.
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Policy Note 2007/1 | January 2007
Tax Reform Advice for the New Majority
Anyone who reads a newspaper knows that most Americans have accumulated excessive levels of debt, and realizes that as interest rates climb, it becomes more difficult to service financial liabilities. To add insult to injury, wage growth has been slow, while prices—especially for energy—have risen sharply. What is not clear, however, is the fact that taxes have also been rising rapidly, relative to both income and government spending. In this Policy Note, we concentrate on the last issue, and argue that many middle-income earners will find themselves unprepared for the coming surprise in April.
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Strategic Analysis | November 2006
Policies for the U.S. Economy
In this new Strategic Analysis, we review what we believe is the most important economic policy issue facing policymakers in the United States and abroad: the prospect of a growth recession in the United States. The possibility of recession is linked to the imbalances in the current account, government, and private sector deficits. The current account balance, which is a negative addition to US aggregate demand, is now likely to be above 6.5 percent of GDP and has been rising steadily for some time. The government balance has improved, again giving no stimulus to demand, which has therefore relied entirely on a large and growing private sector deficit. A rapidly cooling housing market is one of the signs showing that this growth path is likely to break down.
We focus first on the current account deficit. Our analysis suggests that a necessary and sufficient condition to address this problem, without dire consequences for unemployment and growth, is that net export demand grow by a sufficient amount. For this to happen, three conditions need to be satisfied: foreign saving has to fall, especially in Europe and East Asia; US saving has to rise; and some mechanism, such as a change in relative prices, should be put in place to help the previous two phenomena translate into an improvement in the US balance of trade.
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Book Series | July 2006
Edited by Dimitri B. Papadimitriou
This book focuses on the distributional consequences of the public sector. It examines and documents, both theoretically and empirically, the effects of government spending and taxation on personal distribution, that is, on families and individuals. In addition, it investigates the relationship between the public sector and the functional distribution of national income. In this respect, three sides of government activity are encompassed: the beneficiaries of government expenditures such as schools, highways, and police and fire departments; the beneficiaries of government transfer programs; and the bearers of the tax burden.
The book also analyzes government activity on the federal level and looks at the distribution of both the costs and benefits of a single government program such as Social Security.
A key feature is the empirical studies of other countries, including countries of the European Union, Poland, Australia, and South Korea, as well as comparative studies among a set of countries.
The chapters of this volume were selected from papers delivered at Levy Institute seminars and conferences aimed at finding policy options to pressing economic problems.
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Strategic Analysis | May 2006
The Growing Burden of Servicing Foreign-owned U.S. Debt
Can the growth in the current account deficit be sustained? How does the flow of deficits feed the stock of debt? How will the burden of servicing this debt affect future deficits and economic growth? President Dimitri B. Papadimitriou and Research Scholars Edward Chilcote and Gennaro Zezza address these and other questions in a new Strategic Analysis.Download:Associated Program:Author(s): -
Working Paper No. 442 | February 2006
An Overview
This paper is the overview chapter of an edited volume on “The Distributional Effects of Government Spending and Taxation.” The paper offers the author’s perspective on the government’s role as a redistributive agent. Taxation and public spending programs are analyzed using the experiences of the United States and other OECD countries. The stark differences among the respective welfare systems are examined from an economic policy lens assessing the success and failure of the tested social policy programs. The measurement and distribution of well-being for special segments of the population, i.e., the elderly and women, are considered.
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Strategic Analysis | January 2006
Rising home prices and low interest rates have fueled the recent surge in mortgage borrowing and enabled consumers to spend at high rates relative to their income. Low interest rates have counterbalanced the growth in debt and acted to dampen the growth in household debt-service burdens. As past Levy Institute Strategic Analyses have pointed out, these trends are not sustainable: household spending relative to income cannot grow indefinitely.
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Strategic Analysis | September 2005
Can the Symbiosis Last?
The main arguments in this paper can be simply stated:
1) If output in the United States grows fast enough to keep unemployment constant between now and 2010, and if there is no further depreciation in the dollar, the deficit in the balance of trade is likely to get worse, perhaps reaching 7.5 per cent by the end of the decade.
2) If the trade deficit does not improve, let alone if it gets worse, there will be a large further deterioration in the United States’ net foreign asset position, so that, with interest rates rising, net income payments from abroad will at last turn negative and the deficit in the current account as a whole could reach at least 8.5 per cent of GDP.
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Strategic Analysis | March 2005
As we projected in a previous Strategic Analysis, the United States' economy experienced growth rates higher than 4 percent in 2004. The question we want to raise in this Strategic Analysis is whether these rates will persist or come back down. We believe that several signs point in the latter direction. In what follows, we analyze the evidence and explore the alternatives facing the US economy.
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Book Series | August 2004
Edited and with an introduction by Dimitri B. Papadimitriou
This unique volume presents, for the first time in publication, the original doctoral thesis of Hyman P. Minsky, one of the most innovative thinkers on financial markets. Dimitri B. Papadimitriou’s introduction places the thesis in a modern context, and explains its relevance today. The thesis explores the relationship between induced investment, the constraints of financing investment, market structure, and the determinants of aggregate demand and business cycle performance. Forming the basis of his subsequent development of financial Keynesianism and his “Wall Street” paradigm, Minsky investigates the relevance of the accelerator-multiplier models of investment to individual firm behavior in undertaking investment dependent on cost structure. Uncertainty, the coexistence of other market structures, and the behavior of the monetary system are also explored.
In assessing the assumptions underlying the structure and coefficient values of the accelerator models frequently used, the book addresses their limitations and inapplicability to real-world situations where the effect of financing conditions on the balance sheet structures of individual firms plays a crucial and determining role for further investment. Finally, Minsky discusses his findings on business cycle theory and economic policy.
This book will greatly appeal to advanced undergraduate and graduate students in economics, as well as to policymakers and researchers. In addition, it will prove to be valuable supplementary reading for those with an interest in advanced microeconomics.
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Strategic Analysis | April 2004
Policies and Prospects in an Election Year
Wynne Godley, our Levy Institute colleague, has warned since 1999 that the falling personal saving and rising borrowing trends that had powered the US economic expansion were not sustainable. He also warned that when these trends were reversed, as has happened in other countries, the expansion would come to a halt unless there were major changes in fiscal policy.
Not long ago, official circles insisted that monetary policy was the most desirable tool, that fiscal deficits were not only unnecessary but also harmful (ERP 2000, pp.31–34; Greenspan 2000). Some economists, notably Edmund Phelps of Columbia University, went so far as to suggest that the economic expansion was not caused by rising demand, but rather because growth had become 'structural' (Financial Times, August 9, 2000).
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Public Policy Brief Highlights No. 74A | November 2003
Treating the Disease, Not the Symptoms
Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.Download:Associated Program:Author(s): -
Public Policy Brief No. 74 | November 2003
Treating the Disease, Not the Symptoms
Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.
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Working Paper No. 392 | October 2003
Treating the Disease, Not the Symptoms
Deflation can be defined as a falling general price level utilizing one of the common price indices.the consumer price index; the GDP deflator or other, narrower indices as the wholesale price index; or an index of manufactured goods prices. Falling indices of output prices can be the result of several mechanisms: productivity increases, quality increases and hedonic imputations of prices, competition from low-cost producers, government policy influences, or depressed aggregate demand. Falling output prices, in turn, can have strong effects, especially on the ability to service debts fixed in nominal terms; depending on the level of indebtedness of households and firms, they can set off a classic Minsky-Fisher debt deflation spiral. In this paper, we argue that deflation can and usually does generate large economic and social costs, but it is more important to understand that deflation itself is a symptom of severe and chronic economic problems. This distinction becomes important for the design and implementation of economic policy.
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Strategic Analysis | October 2003
A Reprieve but Not a Pardon
These are fast-moving times. Two years ago, the Congressional Budget Office (CBO, 2001) projected a federal budget surplus of $172 billion for fiscal year 2003. Within a year, the projected figure had changed to a deficit of $145 billion (CBO 2002). The actual figure, near the end of fiscal year 2003, turned out to be a deficit of about $390 billion. And just one month ago, President Bush submitted a request to Congress for an additional $87 billion appropriation for war expenditures, over and above the $166 billion tallied so far. It is widely anticipated that even this will have to be revised upward by the end of the coming year (Stevenson 2003; Firestone 2003).
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In the Media | August 2003
Only fiscal activism has the power to counter recession, because central banks are impotent
View More View LessCopyright 2003 The Financial Times Limited (London, England)
Friday, August 29, 2003; Financial Times; USA Edition; Letters to the EditorSir, Martin Feldstein (“Fiscal activism would speed a recovery,” August 26) is clearly correct to argue that fiscal activism should be used under current economic circumstances. He is, though, incorrect to suggest that monetary policy will be more effective as an economic stabiliser in the near future.
Fiscal policy, used prudently to manipulate aggregate demand to achieve high levels of employment, is very much in order. Monetary policy, on the other hand, is impotent when interest rates are rapidly approaching their floor of zero and inflation is practically non-existent.
The Americans, the Japanese and the eurozone economies are the primary examples of the ineffectiveness of central bank actions. Only fiscal policy can rescue economies that are either in recession, or growth recession, as the case may be.
The eurozone countries are experiencing unacceptable unemployment rates of 8.9 per cent, growth recession and inflation generally above the 2 per cent target of the European Central Bank. The European Commission now warns of further stagnation in the third quarter of 2003. This unenviable performance is the result of the stability and growth pact and its nature—along with that of monetary policy—of “one-size-fits-all,” an argument that has been well rehearsed in the Financial Times.
Fiscal policy has been severely constrained by the pact and it has not been allowed to support monetary policy, itself having become destabilising and contributing to the current eurozone recession.
France and Germany must be right when they justify their violation of the fiscal rules by saying the pact has brought “too much stability and not enough growth.”
Japan is emerging with some growth because of government commitment to fiscal deficit (currently at 7.5 per cent of gross domestic product—much higher than the pact’s 3 per cent). The US’s budget deficit will increase in the order of 6–7 per cent of GDP well into the future; it will not stabilise at the 2 per cent level as Mr. Feldstein argues. Indeed, the world is looking to the US with its changed fiscal stance, and not to the actions of the Federal Reserve, to become the motor of the global economy
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Strategic Analysis | November 2002
The long economic expansion was fueled by an unprecedented rise in private expenditure relative to income, financed by a growing flow of net credit to the private. On the surface, it seemed that the growing burden of the household sector’s debt was counterbalanced by a spectacular rise in the relative value of its financial assets, but this was never a match among equals, and the great meltdown in the financial markets has proved this imbalance to be true. The private sector has dramatically cut back its acquisition of new credit and reversed the path of its financial balance, but this adjustment has been uneven within the sector: the business sector has suffered a huge drop in investment while the household sector has continued to borrow.
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Policy Note 2001/10 | October 2001
It is now widely recognized that economists and policymakers alike had been living a 30-year fantasy. The best government is not that which governs least. The best economy is not that which is abandoned to the invisible fist of the unconstrained market. Our national and individual security is not best left to the fate of the private pursuit of maximum profit. The events of September 11 underscored what was already apparent: Big Government needs to play a bigger role in our economy. Our late Levy Institute colleague Hyman P. Minsky has been vindicated once more.
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Policy Note 2001/2 | February 2001
Large Tax Cuts Are Needed to Prevent a Hard Landing
Growing government surpluses, a ballooning trade deficit, and the resulting growth in private sector debt have placed the United States' economy in a precarious position. Papadimitriou and Wray agree with President Bush that fiscal stimulus is necessary to reinvigorate the economy; in the current economic environment, monetary policy will not work. However, a tax cut that would adequately stave off a downturn needs to be substantially larger than that proposed by the president. Therefore, in addition to the president's proposal to cut marginal income tax rates, the authors include among their recommends a payroll tax reduction and an expansion of the EITC.
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Book Series | December 1999
Edited by Dimitri B. Papadimitriou
Since the 1980s many changes have taken place in the financial system in the United States and to some extent in other countries—uniform capital requirements have been instituted, regulations have been eased, and market share consolidation of firms in the financial services business has been allowed. But more substantive reforms are necessary to avert crises such as those that occurred in Japan, Korea, and other Asian countries.
Financial and technological innovations have brought new dimensions of credit risk, requiring sophisticated skills of bank manager and regulator alike. The modernization of the financial system must reflect the changing and competitive nature of the market and be framed in a regulatory and supervisory environment that, first, ensures the safety of the payment system and, second, offers incentives for prudent risk taking and sound portfolio investments. This book offers a number of policy avenues that merit serious consideration.
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Policy Note 1999/8 | August 1999
Breaux Plan Slashes Social Security Benefits Unnecessarily
Neither the Breaux plan nor President Clinton’s proposal for “saving” Social Security promises much gain, but the Breaux plan, unlike the president's proposal, would inflict real pain in the form of reduced benefits.
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Public Policy Brief No. 55 | August 1999
Providing for Retirees throughout the Twenty-first Century
Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a “crisis” and could be eliminated with relatively simple adjustments when it occurs. The real issue regarding our ability to provide for retirees throughout the coming century is not the size of Social Security Trust Funds, but the size and distribution of the whole economic pie. When the issue is viewed in this light, it becomes clear that most proposals to “save” the system—locking away budget surpluses, investing the Trust Funds in the stock market, privatization, reduction of benefits—do not address the real problem of caring for future retirees. Solutions consistent with the true nature and scope of the problem lie not within the Social Security system itself but in the realm of a general fiscal policy aimed at ensuring the growth of the economy.
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Public Policy Brief Highlights No. 53A | July 1999
Full Employment Policy: Theory and Practice
Claims that the nation has reached full employment take for granted the need for a reserve pool of labor to maintain price stability and labor market flexibility. But are millions of jobless and underemployed workers the best we can do in these times of economic expansion? And what will happen when the inevitable downturn comes? Reduction of the workweek and employment subsidies have been proposed to achieve higher employment, but neither is sure to raise employment and both may have serious side effects. A public service employment program that offers jobs at a fixed wage to all who are willing and able to work can provide full employment without inflationary pressures and with labor market flexibility, preserve workers’ skills, contribute valuable public services, and be relatively inexpensive.Download:Associated Program:Author(s): -
Working Paper No. 275 | July 1999
In this paper, the authors discuss Minsky's analysis of the evolution of one variety of capitalism—financial capitalism—which developed at the end of the nineteenth century and was the dominant form of capitalism in the developed countries after World War II. Minsky's approach, like those of Schumpeter and Veblen, emphasized the importance of market power in this stage of capitalism. According to Minsky, modern capitalism requires expensive and long-lived capital assets, which, in turn, necessitate financing of positions in these assets as well as market power in order to gain access to financial markets. It is the relation between finance and investment that creates instability in the modern capitalist economy. Financial capitalism emerged from World War II with an array of new institutions that made it stronger than ever before. As the economy evolved, it moved from this more successful form of financial capitalism to the fragile form of capitalism that exists today.
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Public Policy Brief No. 53 | July 1999
Full Employment Policy: Theory and Practice
Claims that the nation has reached full employment take for granted the need for a reserve pool of labor to maintain price stability and labor market flexibility. But are millions of jobless and underemployed workers the best we can do in these times of economic expansion? And what will happen when the inevitable downturn comes? Reduction of the workweek and employment subsidies have been proposed to achieve higher employment, but neither is sure to raise employment and both may have serious side effects. A public service employment program that offers jobs at a fixed wage to all who are willing and able to work can provide full employment without inflationary pressures and with labor market flexibility, preserve workers’ skills, contribute valuable public services, and be relatively inexpensive.
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Policy Note 1999/5 | May 1999
The search for the solution to the problems faced by the Social Security system should focus not on how to amend OASDI but on how best to achieve faster long-term economic growth. Achieving such growth is better left to the purview of fiscal and monetary policy, not the OASDI system.
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Working Paper No. 270 | May 1999
The first part of this paper is an overview of projections of Social Security's future and an explanation of why the projections have led many to believe there is a looming financial crisis. We argue that any problems to be faced are far down the road and not severe enough to justify the use of the word "crisis." Something will have to be done to resolve the real and financial problems that are likely to crop up in two or three decades. However, this does not in itself mean that something has to be done today specifically to save Social Security
The second part of the paper discusses the real and financial nature of Social Security's problems. Almost all commentators have focused on the financing of Social Security and thus have proposed financial solutions. We argue that the questions about the future of Social Security concern the size and distribution of the real economic pie. Once this is recognized, it becomes obvious that none of the popular reforms, such as privatization, reduction of current benefits, and President Clinton's proposal to "set aside" budget surpluses, can really help. We conclude with alternative policy recommendations that are consistent with the true nature of the future problem.
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Working Paper No. 258 | December 1998
Theory and Practice
In 1998, the United States' unemployment rate was at its lowest level since the late 1960s. Yet the nation's employment problem is still far from solved. Although many economists assume that unemployment tends toward a natural rate below which it cannot go without creating inflation, this paper asks whether the current employment levels are the best that can be achieved in times of prosperity and whether current employment policies will be able to deal with the challenges of the next downturn. To evaluate these questions, the author examines the relative merits of three proposed strategies to improve the employment situation-a reduced workweek, employment subsidies, and a public service job opportunity program-to see if they will meet the challenges of upholding an individual's basic right to job while not stimulating inflation. He finds that a shorter workweek and wage subsidies both have failed to meet one or both of these challenges, but that a public service job opportunity program, such as the "employer of last resort policy," would satisfy both the full employment and noninflationary criteria.
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Policy Note 1998/6 | June 1998
Fiscal Policy and the Coming Recession
Neither Congress nor the president is on the right track. Rather than protecting the surplus, we should be increasing spending and cutting taxes to contain the looming world recession.
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Policy Note 1998/5 | May 1998
Some analysts have argued against monetary ease, fearing that it might fuel a speculative boom. Alas, given the recent substantial “market correction,” this objection may safely be put away.
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Working Paper No. 220 | December 1997
There has been widespread recognition of the existence of an "underclass" in American society, but no consensus on how to address the problem or even how to define it. The term was first coined in 1982 by New Yorker writer Ken Auletta, who used it broadly to include individuals with "behavioral and income deficiencies"; other definitions have been advanced by William Julius Wilson (1987), Erol Ricketts and Isabel Sawhill (1986), and Christopher Jencks (1992). In this working paper, Executive Director Dimitri B. Papadimitriou defines the underclass as residents in urban neighborhoods characterized by concentrated poverty, joblessness, violence, and a lack of institutions that support the community. He focuses specifically on the issue of urban poverty and the changes in the urban-poor population, and relates these changes to changes in the economic and policy landscape that has evolved over the last 15 years. Policy lessons drawn from other industrialized countries are also reviewed, and consideration is given to various proposals for public action to alleviate the problems of the underclass, including community development that can be achieved via a network of community banks.
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Working Paper No. 217 | December 1997
Varieties of Capitalism and Institutional Reform
Financial economist Hyman P. Minsky believed that because there are many types of capitalism determined by circumstances and an evolving set of institutional structures, an abstract economic theory could not be applicable in all times and places but must be institution-specific. Therefore, he focused his attention on the changing institutional structure of developed capitalist economies in the 20th century. Minsky refused to accept the interpretation of Keynes that was being popularized in the 1950s by Alvin Hansen and others. He saw this version of Keynesianism as flawed because it was almost a mechanistic use of countercyclical fiscal policy that ignored the role of uncertainty and finance in the complex capitalist economic system. In the first of several papers examining Minsky's contributions, Executive Director Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray assess Minsky's integration of post-Keynesian theory with an institutionalist appreciation for the varieties of past, current, and feasible future economic institutions.
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Public Policy Brief No. 27 | September 1996
The Effects of Monetary Policy on the CPI and Its Housing Component
The targets for monetary policy adopted by the Fed in recent years have not proven to be closely correlated with inflation, leading some theorists and policymakers to advocate the use of a price index, such as the consumer price index (CPI), as both the target and the goal of monetary policy. The authors of this brief show that such a choice is not wise because the CPI does not accurately reflect market-caused price increases and is not under the control of monetary policy. Their analysis extends beyond that of recent reports to show how and why the transmission mechanisms through which monetary policy is thought to affect the CPI are tenuous at best. The authors focus on the housing component of the CPI to illustrate their point. They conclude that those components of the CPI that monetary policy is likely to affect have been declining in importance, meaning that to produce a given reduction in the overall rate of inflation will require that monetary policy have an increasingly larger impact on an ever-diminishing portion of the consumer basket. Therefore, careful reconsideration of an alternative ultimate target, such as the rate of economic growth or the unemployment rate, is warranted.
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Book Series | September 1996
Edited by Dimitri B. Papadimitriou
The S&L crisis of the 1990s led many analysts to review the events that culminated in the banking crisis of the 1930s and the subsequent passage of the Emergency Banking Act, the Banking Act of 1933, the Banking Act of 1935, and other related legislation. The restructuring of the financial system accomplished by this legislation brought about the longest period of financial stability in American history, lasting half a century. This book has two goals: to show why the banking reforms enacted in the 1930s were so successful and to present policy proposals that include the institutional provisions necessary for the financing of the capital development of the economy and a safe payments system.
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Working Paper No. 164 | May 1996
A consensus is emerging among economists and policymakers that the consumer price index (CPI) as a measure of cost of living has an upward bias. As a result, downward revisions of cost-of- living adjustments are frequently recommended, especially in discussions about deficit reduction. Such revisions would lower the rate of increase of some entitlements and raise the rate of increase of federal government revenue by reducing future adjustments to tax brackets. In this new working paper, Dimitri B. Papadimitriou, executive director of the Levy Institute, and L. Randall Wray, research associate of the Levy Institute and associate professor of economics at the University of Denver, express their surprise that this discussion has not been broadened to include the use of the CPI as a measure of inflation and a target of monetary policy. The Federal Reserve has increasingly pursued the single goal of price stability, or zero inflation, although according to Papadimitriou and Wray, it has been unable to find a target that it can hit and to demonstrate a consistent link between any of its targets and inflation. The authors argue that if the CPI overstates inflation and the Federal Reserve uses it as a target, the Fed is basing its policy on a measurement error. Given recent findings of measurement bias in the CPI, they contend that it is inappropriate at this time to identify zero inflation with a constant CPI. In a detailed analysis of the components of the CPI they conclude that the CPI is not a reliable guide for policy purposes. They question whether tight money can reduce inflation as measured by the CPI, and they note that the impact of such a policy could be perverse.
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Public Policy Brief No. 15 | September 1994
Flying Blind: The Federal Reserve’s Experiment with Unobservables
Experience with a variety of targets has cast doubt on the likelihood that a single variable can be found to be closely and reliably linked to future inflation; it is even less likely that such a variable, should it be found, would somehow be under the control and manipulation of the Federal Reserve. This brief provides a review of the experiments with various targets undertaken by former Fed Chairman Paul Volcker and current Chairman Alan Greenspan. The authors contend that there is no reason to suppose that the Fed will discover a target variable whose control will yield stable prices. Finally, they conclude that economists lack sufficient information to calculate the costs of achieving stable prices in terms of unemployment and lost output.
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Working Paper No. 124 | September 1994
The Federal Reserve's Experiment with Unobservables
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Book Series | June 1994
Edited by Dimitri B. Papadimitriou
The essays in this volume explore several aspects of wealth and income distribution during the 1980s, a decade characterized not only by economic expansion, but also by a widening disparity of income and wealth. The changing fortunes of American households and individuals as manifested in demographic and structural changes are examined from different perspectives, and factors affecting saving behavior and poverty rates and earning gaps relating to gender, education, and race of the head of household are examined. The observed inequalities are compared with those of other industrialized nations, and policies to remedy these developments are suggested. Among the contributors are Robert B. Avery, Rebecca M. Blank, Alan S. Blinder, Gordon Green, Thomas Juster, James Morgan, Edmund Phelps, Isabel V. Sawhill, Paul Sarbanes, Erik Thorbecke, and Howard Wachtel.
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Public Policy Brief No. 12 | May 1994
Community-based Factoring Companies and Small Business Lending
At a time when small businesses are suffering from a credit crunch, “niche” financial institutions are filling the void left by more traditional sources of financing, such as commercial banks. The authors argue that the most important of these niche players are community-based factor companies, which are rapidly expanding from their client base in apparel and textiles to finance a range of firms in everything from electronics to health care. The purchase of accounts receivable by factors enhances the balance sheets of their clients, making it easier for the clients to obtain bank financing. Also, because factors are more interested in the creditworthiness of a client’s customers than of the client itself, they are willing to extend loans in excess of collateral to rapidly growing businesses. Because factors are becoming an increasingly important source of financing for small and start-up businesses, the authors propose that factors be encouraged to play a broader role in financing firms in distressed communities by (1) making some factors eligible for funding and assistance under legislation regulating community development financial institutions and (2) by allowing investments by banks in factors to count toward compliance under the Community Reinvestment Act.
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Working Paper No. 108 | April 1994
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Book Series | December 1993
Edited by Dimitri B. Papadimitriou and Edward N. Wolff
The fact that levels of poverty and inequality showed an unprecedented rise in the 1980s in the United States despite a sustained expansion beginning in 1983 raises concerns about appropriate policy actions needed to offset these developments. The papers in this volume explore manifestations of this inequality, including unexpectedly high poverty rates, shrinkage of the middle class, a growing intergenerational wage gap, a growing earnings gap between college and high school graduates, and increasing dispersion of the distribution of family income even with increased participation of female household members in the labor force. Measurement issues explored include the use of earnings capacity, health status, and indicators of living conditions to define poverty status. Contributors to this volume include Robert B. Avery, Rebecca M. Blank, Alan S. Blinder, David Bloom, Sheldon Danziger, William T. Dickens, Greg Duncan, Richard B. Freeman, Robert Haveman, Christopher Jencks, Susan E. Mayer, Timothy M. Smeeding, Barbara Wolfe, and Edward N. Wolff.
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Working Paper No. 95 | May 1993
The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks
View More View LessThe Community Development Banks (CDBs) should not be seen as a substitute for the Community Reinvestment Act (CRA) or for other programs designed to revitalize lower income areas. Rather, they should be seen as a complement for existing programs and for other programs that will be proposed by the Clinton administration. As discussed above, the CRA process ensures that a dialogue takes place among regulators, financial institutions, and served communities: it ensures that banks identify their communities and that they satisfy some of the needs of these communities. Moreover, it helps to expand the awareness of bankers such that their expectations about presently undeserved areas are revised. It is unrealistic to expect that any financial institution can meet all the needs of any community; this, there is a role for a CDB to play in some communities that supplements the role played by traditional financial institutions. Similarly, while we believe that CDBs have an important role to play in revitalizing low income communities, we certainly do not see these as a substitute for the wide range of programs (both public and private) that will be needed to reverse long trends of deterioration experienced by some distressed communities.
Finally, the CDBs are not intended to be welfare programs but to provide services to the community's residents, and consequently, they must meet the long-run market tests of profitability. Aside from the service aspect, community development banks will: (i)improve the well-being of our citizens not now served because of unresponsive, yet traditional loan qualification norms, and (ii) directly increase the opportunities for potential entrepreneurs and potential employees. The basic assumption underlying the community development bank is that all areas of the country need banks that are clearly oriented toward the small customer: households that have a small net worth, a small IRA account, and a small transactions account, and businesses that need financing measured in thousands rather then millions or billions of dollars.
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Public Policy Brief No. 6 | May 1993
The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks
The establishment of a system of federally regulated, for-profit community development banks (CDBs) would help to fill the financial gap in areas inadequately served by traditional banks, requirements of the Community Reinvestment Act (CRA) notwithstanding. These organizations would be charged with delivering credit, payment, and savings opportunities and providing basic financing to households and small businesses in underserved areas. Such a system would not substitute for the CRA, but rather act as a supplement to current regulation. Proposed exemptions from CRA compliance for depository institutions that invest in the equity of a CDB would weaken the existing law by diluting the investment of the depository institution in its own particular community. Such proposals (under which “investment” has been defined to be as little as one-quarter of one percent of total assets) are not consistent with the spirit of the CRA and would negate the beneficial dialogue that takes place between the institution and the community in which it operates.
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Public Policy Brief No. 3 | January 1993
A Proposal to Establish a Nationwide System of Community Development Banks
This brief proposes that the establishment of a nationwide system of community development banks (CDBs) would advance the capital development of the economy. The proposal is based on the notion that a critical function of the financial system is not being adequately performed by existing institutions for low-income citizens, inner-city minorities, and entrepreneurs who seek modest financing for small businesses. The primary goals of the CDBs are to deliver credit, payment, and savings opportunities to communities not well served by banks, and to provide financing throughout a designated area for businesses too small to attract the interest of the investment banking and normal commercial banking communities.
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Working Paper No. 83 | December 1992
The Clinton/Gore proposal for the creation of a network of 100 community development banks (CDBs) to revitalize communities is bold, and will contribute to the success of the U.S. economy. Banks are essential institutions in any community, and the establishment of a bank is often a prerequisite for the investment process. For this reason, the creation of banks in communities lacking such institutions is important to the welfare of these communities.
The vitality of the American economy depends on the continual creation of new and initially small firms. Because it is in the public interest to foster the creation of new entrants into industry, trade, and finance, it is also in the public interest to have a set of strong, independent, profit-seeking banking institutions that specialize in financing smaller businesses.
When market forces fail to provide a service that is needed and potentially profitable, it is appropriate for government to help create the market. Community development banks fall into such a category. They do not require a government subsidy, and after start-up costs, the banks are expected to be profitable.
The primary perspective of this concept paper is that the main function of the financial structure is to advance the capital development of the economy-to increase the real productive capacity and wealth-producing ability of the economy. The second assumption is that capital development is encouraged by the provision of a broad range of financial services to various segments of the U.S. economy, including consumers, small and large businesses, retailers, developers, and all levels of government. The third is that the existing financial structure is particularly weak in servicing small and start-up businesses, and in servicing certain consumer groups. The fourth is that this problem has become more acute because of a decrease in the number of independent financing alternatives and a rise in the size distribution of financing sources, which have increased the financial system's bias toward larger transactions. These are assumptions that appear to be supported by the evidence: they are also incorporated in other proposals that advance programs to develop community development banking.
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Book Series | November 1992
Essays in Honor of Hyman P. Minsky. Edited by Steven Fazzari and Dimitri B. Papadimitriou
This collection of papers on financial instability and its impact on macroeconomic performance honors Hyman P. Minsky and his lifelong work. The papers consider the clear and disturbing sequence of events described in Minsky’s definitive analysis: boom, government intervention to prevent debt contraction, new boom that causes progressive buildup of new debt and eventually leaves the economy more fragile financially. The collection is based on a 1990 conference at Washington University and contains papers by Benjamin M. Friedman, Charles P. Kindleberger, Jan A. Kregel, Steven M. Fazzari, and others.
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Book Series | April 1992
Edited by Dimitri B. Papadimitriou
Business accounting defines profits as total revenue minus total costs. Economic theory uses various definitions of profits according to what is being measured (for example, return to ownership, national income profits, real profits) and for what purpose. The concept of profits, however, cannot and should not be reduced to a matter of measurement, but should be considered in terms of the role of profits in the workings of an economic system. The papers in this volume provide original insights into secular and cyclical changes in production and employment, and the interrelationships among profits, corporate investment and financing, instability, and government deficits.
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