PUBLICATIONS
Using the Levy Institute’s macro model of the U.S. economy, the authors conclude that the world’s economies will not be able to achieve balanced growth and full employment unless the associated institutions replace their total reliance on market forces with an entirely new framework. They note that their previous (contrarian) forecasts and remedies were ahead of the curve: that is, unsustainable imbalances in the U.S. economy would require a large fiscal stimulus, a rise in net exports, and depreciation of the dollar; and both lending and private expenditure relative to income would collapse, leading to a recession in 2008.
Research Scholar Gennaro Zezza reviews the latest Federal Reserve flow-of-funds data and finds a steeper drop in borrowing than previous projections in April 2008. While the last two recessions saw a marked fall-off in business borrowing and minor consequences for households, the current recession’s drop in credit is having a greater effect on household finances.
In 2004, the South African government initiated a direct job creation initiative—the Expanded Public Works Programme (EPWP). Research Scholar Kijong Kim shows how to incorporate a new hypothetical sector such as EPWP into a social accounting matrix (SAM) in order to accurately capture the impact of the program and its proposed expansion in terms of sectoral development, job creation, and poverty reduction.
In the case of South Africa, the modification of the SAM lifts the aggregate income of poor and ultrapoor households in response to EPWP job targeting. Without reformulation of the SAM, the multiplier analysis would underestimate the effect of the public works program on income distribution and poverty reduction. The author shows that fixed multiplier analysis using a SAM can articulate any multiplicative effects of economic policy instruments and provide valuable insights to policymakers.
The “global capital flows paradox” refers to the fact that the developing world is both a hoarder of reserves, in the form of U.S. Treasury securities, and a net capital exporter to rich countries. Research Associate Jörg Bibow argues that the breakdown of the Bretton Woods system in the early 1970s did not fundamentally change the hegemonic position of the U.S. dollar or the lead role of the U.S. economy as the driver of global demand. Contrary to expectations, Bretton Woods II is unlikely to get back on track anytime soon, so there is the possibility that consumer retrenchment in the United States could pose a serious threat to global stability.
The Summary, published three times a year, is aimed primarily at an academic audience. It updates current Levy Institute research, with synopses of new publications, special features on continuing research projects, accounts of professional presentations by the research staff, and an overview of Levy Institute events.
In this issue, Levy scholars foresee an extended period of stagnation and possibly deflation if the government does not take a more active role in terms of fiscal policy, direct homeowner relief, and regulatory system reform.
