Associated Programs
Federal Budget Policy
The demographic shift resulting from the aging of the baby boomer generation presents a number of potential dilemmas for policymakers. Whether a shrinking working-age population can support its own dependents, in addition to retirees, has led to debates about the increasing size of Social Security, Medicare, and Medicaid budgets—now and in the future. Questions have been raised about whether these government programs can continue to function in the same manner, and achieve the same goals, as they do today. Will structural reform be necessary? Do we wish to provide the same, or a higher, level of support equally throughout the aging population? Should some, or all, benefits be “income tested”? What can be done today to offset the problems of the future?
In aggregate terms, fiscal debates have turned from what to do about growing federal budget surpluses to what constitutes the necessary size and composition of a stimulus package. Some economists have argued that, by creating a wider pool of funds available for investment, “fiscal responsibility” resulted in greater access to investment funds by private sector firms, which, in turn, stimulated economic growth. Others contend that the unprecedented growth of the 1990s happened in spite of budget surpluses, and that if the composition of private versus public funding had been more in balance, growth and employment would have expanded even further. These debates are related to those that surround the current demand shortfall and to calls for fiscal stimulus: if budget surpluses were the cause of economic growth, an argument can be made that fiscal stimulus should focus on investment-targeted tax cuts. If, however, surpluses were the result of economic growth, then demand-led fiscal policies, such as spending programs and tax cuts aimed broadly over the income distribution, should be the focus.
In responding to the above-listed issues, Levy Institute scholars have concentrated recent research on evaluating proposals that would alter the structure of Social Security to deal with future funding shortfalls, privatize any or all of the Social Security program, and restructure Medicaid financing to widen the availability of funding for long-term care. Other recent analyses deal with specific budgetary issues, such as tax-cut proposals and evaluation of the causes and effects of federal budget surpluses.
Research Program
Economic Policy for the 21st Century
Program Publications
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Working Paper No. 1032 | October 2023The policy evaluation is a crucial component in analyzing the efficacy of public spending in translating the money spent into desired outcomes. Using OECD evaluation criteria, we analyzed the child protection schemes of Odisha to understand whether legal commitments on child protection are translated into fiscal commitments. The intergovernmental fiscal transfers and state-targeted programs for children in need of care and protection (CNCP) and children in conflict of law (CCL) are evaluated using the OECD criteria of relevance, coherence, effectiveness, efficiency, and sustainability. Using the theory of change, various fiscal interventions for child protection are analyzed with activities, outputs, intended outcomes, and impacts. The analysis revealed that, in the post-pandemic fiscal strategy of Odisha, various programs have been designed by the government to tackle the capability deprivation, hardships, and vulnerabilities faced by children within the budgetary frameworks, and that these programs are made fiscally sustainable through public expenditure convergence within the classification of budgetary transactions. However, the low utilization ratios of the funds and the institutional constraints are identified as challenges in the effective implementation of child protection programs in Odisha.Download:Associated Program:Author(s):Related Topic(s):
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One-Pager | December 2022While the trigger for the Covid recession was unusual—a collapse of the supply side that produced a drop in demand—the inflation the US economy is now facing is not atypical, according to L. Randall Wray. In this one-pager, he explores the causes of the current inflationary environment, arguing that continuing inflation pressures come mostly from the supply side.
Wray warns that, given federal spending had already been declining substantially before the Fed started raising interest rates, rate hikes make a recession—and potentially stagflation—even more likely. A key part of our fiscal policy response should be focused on well-designed public investment addressing the substantial supply constraints still affecting the US economy—constraints that are not just due to the Covid crisis, but also decades of underinvestment in infrastructure. Such an approach, in Wray's view, would reduce inflationary pressures while supporting growth.
Download:Associated Program(s):The State of the US and World Economies Monetary Policy and Financial Structure Federal Budget PolicyAuthor(s):Related Topic(s):Region(s):United States -
One-Pager No. 69 | February 2022A recent article in the New York Times asks whether Modern Money Theory (MMT) can declare victory after its policies were (supposedly) implemented during the response to the COVID-19 pandemic. The article suggests yes, but for the high inflation it sparked. In the view of Yeva Nersisyan and Senior Scholar L. Randall Wray, the federal government’s response largely validated MMT’s claims regarding public debt and deficits and questions of sovereign government solvency—it did not, however, represent MMT policy.Download:Associated Program(s):Author(s):Region(s):United States
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One-Pager No. 68 | November 2021With the US Treasury cutting checks totaling approximately $5 trillion to deal with the COVID-19 crisis, Senior Scholar L. Randall Wray argues that when it comes to the federal government, concerns about affordability and solvency can both be laid to rest. According to Wray, the question is never whether the federal government can spend more, but whether it should. And while there are still strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, with two centuries of experience the evidence for these concerns is mixed at best.Download:Associated Program(s):Author(s):Related Topic(s):Federal budget policy Federal debt Federal deficit Inflation Modern Money Theory (MMT) Monetary policyRegion(s):United States
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Public Policy Brief No. 155 | June 2021
Yes, If He Abandons Fiscal “Pay Fors"
President Biden’s proposals for investing in social and physical infrastructure signal a return to a budget-neutral policymaking framework that has largely been set aside since the outbreak of the COVID-19 crisis. According Yeva Nersisyan and L. Randall Wray, this focus on ensuring revenues keep pace with spending increases can undermine the goals internal to both the public investment and tax components of the administration’s plans: the “pay for” approach limits our spending on progressive policy to what we can raise through taxes, and we will only tax the amount we need to spend.
Nersisyan and Wray propose an alternative approach to budgeting for large-scale public expenditure programs. In their view, policymakers should evaluate spending and tax proposals on their own terms, according to the goals each is intended to meet. If the purpose of taxing corporations and wealthy individuals is to reduce inequality, then the tax changes should be formulated to accomplish that—not to “raise funds” to finance proposed spending. And while it is possible that general tax hikes might be needed to prevent public investment programs from fueling inflation, they argue that the kinds of taxes proposed by the administration would do little to relieve inflationary pressures should they arise. Under current economic circumstances, however, the president’s proposed infrastructure spending should not require budgetary offsets or other measures to control inflation in their estimation.Download:Associated Program(s):Author(s):Region(s):United States -
Policy Note 2021/3 | June 2021Edward Lane and L. Randall Wray explain how federal taxes on corporate profits are not well suited to either containing inflationary pressures or reducing inequality. They are not only a poor complement to President Biden’s proposed infrastructure plans, but are inefficient and ineffective taxes more broadly, according to Lane and Wray. The authors follow Hyman Minsky in recommending the elimination of corporate taxes, and they outline a replacement centered on the taxation of unrealized capital gains.
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One-Pager No. 67 | June 2021President Biden has proposed pairing his American Jobs Plan with an increase in federal corporate income taxes. Leaving aside the issue of whether any tax increases are needed to “pay for” the plan, Edward Lane and L. Randall Wray assess the proposed corporate profits tax hike in terms of its ability to meet two objectives: (1) fighting potential inflation that might result from the new Jobs Plan (and all the other relief and stimulus plans enacted), and (2) taxing the rich to reduce inequality. They argue the federal corporate income tax is far less effective at combating inflation and inequality than what many might think, and propose replacing corporate taxation with taxes on individuals that would ensure the burden is mostly imposed on high earners.
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Working Paper No. 979 | November 2020As the nation is experiencing the need for ever-increasing government expenditures to address COVID-19 disruptions, rebuild the nation’s infrastructure, and many other worthy causes, conventional thinking calls for restoring at least a portion corporate taxes eliminated by the 2017 Tax Cuts and Jobs Act, especially from progressive circles. In this working paper, Edward Lane and L. Randall Wray examine who really pays the corporate income tax and argue that it does not serve the purposes most people believe.
The authors provide an overview of the true purposes and incidence of corporate taxation and argue that it is inefficient and largely borne by consumers and employees, not shareholders. While the authors would prefer the elimination of the corporate profits tax, they understand the conventional thinking that taxes are necessary to help finance government expenditures—even if they disagree. Accordingly, the authors present alternatives to the corporate tax that shift the burden from consumers and employees to those who benefit the most from corporate success. -
One-Pager No. 64 | August 2020As congressional negotiations stall and state governments are poised to enact significant austerity, Alex Williams argues that fiscal aid to state governments should be tied to economic indicators rather than the capriciousness of federal legislators. Building this case for reform requires confronting a common objection: that state fiscal aid creates situations of moral hazard. This objection misconstrues the agency of state governments and misunderstands the incentives of federal politicians, according to Williams. There is a serious moral hazard problem involved here—but it is not the one widely claimed.Download:Associated Program(s):Author(s):Alex WilliamsRelated Topic(s):
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Public Policy Brief No. 152 | August 2020The mainstream fiscal federalism literature has led to an instinctive belief that states receiving fiscal aid during a recession are taking advantage of the federal government in pursuit of localized benefits with dispersed costs. This policy brief by Alex Williams challenges this unreflective argument and, in response, offers a novel framework for understanding the relationship between the business cycle and fiscal federalism in the United States.
Utilizing the work of Michael Pettis, Williams demonstrates that a government unable to design its own capital structure is not meaningfully an agent with respect to the business cycle. As such, they cannot be considered agents in a moral hazard problem when receiving support from the federal government during a recession.
From the perspective of this policy brief, the operative moral hazard problem is one in which federal-level politicians reap a political benefit from a seemingly principled refusal to increase federal spending, while avoiding blame for crisis and austerity at the state and local government level. Williams’ proposed solution is to impose macroeconomic discipline on federal policymakers by creating automatic stabilizers that take decisions about the level of state fiscal aid in a recession out of their hands.Download:Associated Program(s):Author(s):Alex WilliamsRelated Topic(s): -
Working Paper No. 964 | July 2020
Analyzing the Fiscal Forecasting Errors of 28 States in India
Budget credibility, or the ability of governments to accurately forecast macro-fiscal variables, is crucial for effective public finance management. Fiscal marksmanship analysis captures the extent of errors in the budgetary forecasting. The fiscal rules can determine fiscal marksmanship, as effective fiscal consolidation procedures affect the fiscal behavior of the states in conducting the budgetary forecasts. Against this backdrop, applying Theil’s technique, we analyze the fiscal forecasting errors for 28 states (except Telangana) in India for the period 2011–16. There is a heterogeneity in the magnitude of errors across subnational governments in India. The forecast errors in revenue receipts have been greater than revenue expenditure. Within revenue receipts, the errors are more significantly pronounced in the grants component. Within expenditure budgets, the errors in capital spending are found to be greater than revenue spending in all the states. Partitioning the sources of errors, we identified that the errors were more broadly random than due to systematic bias, except for a few crucial macro-fiscal variables where improving the forecasting techniques can provide better estimates.Download:Associated Program(s):Author(s):Related Topic(s): -
Policy Note 2020/5 | July 2020In this policy note, Jan Toporowski provides an analysis of government debt management using fiscal principles derived from the work of Michał Kalecki. Dividing the government’s budget into a “functional” and “financial” budget, Toporowski demonstrates how a financial budget balance—servicing government debt from taxes on wealth and profits that do not affect incomes and expenditures in the economy—allows a government to manage its debts without compromising the macroeconomic goals set in the functional budget. By splitting the budget into a functional budget that affects the real economy and a financial budget that just maintains debt payments and the liquidity of the financial system, the government can have two independent instruments that can be used to target, respectively, the macroeconomy and government debt—overcoming a dilemma that makes fiscal policy ineffective. This analysis also explains how pursuit of supply-side policies that result in a financial budget deficit and functional budget surplus can lead to slow growth, rising government debt, and financial instability.Download:Associated Program(s):Author(s):Jan ToporowskiRelated Topic(s):
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Press Releases | April 2020Download:Associated Program(s):Author(s):Mark PrimoffRelated Topic(s):
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Policy Note 2020/2 | April 2020The federal government appears to have abandoned the idea of a coordinated public health response to the COVID-19 pandemic, leaving the entirety to state and local governments. Meanwhile, the economic standstill resulting from necessary public health measures will soon cripple state and local budgets. Alexander Williams outlines a proposal for an intragovernmental automatic stabilizer program that would provide a backstop for state and local finances—both during the pandemic and beyond. Without this program, states will be severely constrained in their ability to respond to COVID-19, and balanced budget requirements will force them to cut jobs and raise taxes during the deepest recession in living memory.Download:Associated Program(s):Author(s):Alex WilliamsRelated Topic(s):
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Working Paper No. 933 | July 2019
Making Sense of the Barro-Ricardo Equivalence in a Financialized World
The 2008 crisis created a need to rethink many aspects of economic theory, including the role of public intervention in the economy. On this issue, we explore the Barro-Ricardo equivalence, which has played a decisive role in molding the economic policies that fostered the crisis. We analyze the equivalence and its theoretical underpinnings, concluding that: (1) it declares, but then forgets, that it does not matter whether the nature of debt and investment is public or private; (2) its most problematic assumption is the representative agent hypothesis, which does not allow for an explanation of financialization and cannot assess dangers coming from high levels of financial leverage; (3) social wealth cannot be based on any micro-foundation and is linked to the role of the state as provider of financial stability; and (4) default is always the optimal policy for the government, and this remains true even when relaxing many equivalence assumptions. We go on to discuss possible solutions to high levels of public debt in the real world, inferring that no general conclusions are possible and every solution or mix of solutions must be tailored to each specific case. We conclude by connecting different solutions to the political balance of forces in the current era of financialization, using Italy (and, by extension, the eurozone) as a concrete example to better illustrate the discussion.Download:Associated Program(s):Author(s):Lorenzo Esposito Giuseppe MastromatteoRelated Topic(s): -
Working Paper No. 883 | February 2017
An Empirical Analysis of G20 Countries
This paper analyzes the effectiveness of public expenditures on economic growth within the analytical framework of comprehensive Neo-Schumpeterian economics. Using a fixed-effects model for G20 countries, the paper investigates the links between the specific categories of public expenditures and economic growth, captured in human capital formation, defense, infrastructure development, and technological innovation. The results reveal that the impact of innovation-related spending on economic growth is much higher than that of the other macro variables. Data for the study was drawn from the International Monetary Fund’s Government Finance Statistics database, infrastructure reports for the G20 countries, and the World Development Indicators issued by the World Bank.
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Working Paper No. 874 | September 2016
Is There a Case for Gender-sensitive Horizontal Fiscal Equalization?
This paper seeks to evaluate whether a gender-sensitive formula for the inter se devolution of union taxes to the states makes the process more progressive. We have used the state-specific child sex ratio (the number of females per thousand males in the age group 0–6 years) as one of the criteria for the tax devolution. The composite devolution formula as constructed provides maximum rewards to the state with the most favorable child-sex ratio, and the rewards progressively decline along with the declining sex ratio. In this formulation, the state with the most unfavorable child-sex ratio is penalized the most in terms of its share in the horizontal devolution. It is observed that the inclusion of gender criteria makes the intergovernmental fiscal transfers formula more equitable across states. This is not surprising given the monotonic decline in the sex ratio in some of the most high-income states in India.
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Working Paper No. 872 | August 2016
Do Fiscal Rules Impose Hard Budget Constraints?
The primary objective of rule-based fiscal legislation at the subnational level in India is to achieve debt sustainability by placing a ceiling on borrowing and the use of borrowed resources for public capital investment by phasing out deficits in the budget revenue account. This paper examines whether the application of fiscal rules has contributed to an increase in fiscal space for public capital investment spending in major Indian states. Our analysis shows that, controlling for other factors, there is a negative relationship between fiscal rules and public capital investment spending at the state level under the rule-based fiscal regime.
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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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Press Releases | September 2011
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Working Paper No. 539 | July 2008
Can the New Developments in the New Economic Consensus Be Reconciled with the Post-Keynesian View?
The monetarist counterrevolution and the stagflation period of the 1970s were among the theoretical and practical developments that led to the rejection of fiscal policy as a useful tool for macroeconomic stabilization and full employment determination. Recent mainstream contributions, however, have begun to reassess fiscal policy and have called for its restitution in certain cases. The goal of this paper is to delimit the role of and place for fiscal policy in the New Economic Consensus (NEC) and to compare it to that of Post-Keynesian theory, the latter arguably the most faithful approach to the original Keynesian message. The paper proposes that, while a consensus may exist on many macroeconomic issues within the mainstream, fiscal policy is not one of them. The designation of fiscal policy within the NEC is explored and contrasted with the Post-Keynesian calls for fiscal policy via Abba Lerner’s “functional finance” approach. The paper distinguishes between two approaches to functional finance—one that aims to boost aggregate demand and close the GDP gap, and one that secures full employment via direct job creation. It is argued that the mainstream has severed the Keynesian link between fiscal policy and full employment—a link that the Post-Keynesian approach promises to restore.
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Working Paper No. 471 | August 2006
This paper describes how stochastic population forecasts are used to inform and analyze policies related to government spending on the elderly, mainly in the context of the industrialized nations. The paper first presents methods for making probabilistic forecasts of demographic rates, mortality, fertility, and immigration, and shows how these are combined to make stochastic forecasts of population number and composition, using forecasts of the US population by way of illustration. Next, the paper discusses how demographic models and economic models can be combined into an integrated projection model of transfer systems such as social security. Finally, the paper shows how these integrated models describe various dimensions of policy-relevant risk, and discusses the nature and implications of risk in evaluating policy alternatives.
Download:Associated Program(s):Author(s):Shripad Tuljapurkar -
Working Paper No. 464 | July 2006
Young Old-Age, Old Old-Age, and Elder Care
Although elderly men and women share many of the same problems as they age, their lives are likely to follow different courses. Women are more likely than men to live into old old-age and are more likely to spend part of their young old-age caring for husbands or parents. By providing this unpaid care women might enter retirement earlier, rather than prolonging their working lives. Because they live longer, but are less likely than men to live with someone who will care for them, women are also more likely than men to require paid care either at home or in a nursing home. Proposals to reduce government spending on Social Security, Medicare, and Medicaid will thus have different implications for women and men. This paper evaluates changes in these programs, and describes alternative and innovative ways of providing and paying for eldercare in other countries as well as in the United States.
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Working Paper No. 463 | July 2006
The choice of retirement age is the most important portfolio choice most workers will make. Drawing on the Urban Institute's Dynamic Simulation of Income model (DYNASIM3), this report examines how delaying retirement for nondisabled workers would affect individual retiree benefits, the solvency of the Social Security trust fund, and general revenues. The results suggest that delaying retirement by itself does not generate enough additional revenue to make Social Security solvent by 2045. Benefit cuts or supplementary funding sources will be necessary to achieve solvency. However, the size of the benefit cuts or tax increases could be minimized if individuals worked longer. This additional work also substantially increases worker's retirement well-being. Lower-income workers, to the extent they can work longer, have the most to gain from their additional labor. Policy changes that encourage work at older ages will substantially improve both economic and personal well-being in the future
Download:Associated Program(s):Author(s):Barbara A. Butrica Karen E. Smith C. Eugene Steuerle -
Working Paper No. 461 | July 2006
Government spending on the elderly is projected to increase rapidly as the American population becomes older. As a result, many policymakers and budget analysts are concerned about the continued viability of entitlement programs such as Social Security. The Social Security trustees’ economic growth projections receive considerable attention because many people believe that higher growth would significantly improve the program’s actuarial balance (that is, reduce its actuarial deficit). This belief is validated by Social Security trustees’ calculations that show larger 75-year actuarial balances under faster assumed real wage growth rates. Since 2003 the trustees have reported the program’s actuarial balance measured in perpetuity. But they do not provide sensitivity analysis that examines the impact of various assumptions on the infinite-term actuarial balance.
This paper shows analytically that faster wage growth may reduce Social Security’s infinite-term actuarial balance if the ratio of workers to retirees continues to decline rapidly beyond the 75th year. This result holds even if the decline in that ratio ceases after just two decades beyond the 75th year. The paper reports stylized calculations of the impact of real wage growth and demographic change–including time-varying rates of change based on official projections for the US economy–on Social Security’s actuarial balance in a multi-period setting. Finally, the Social Security and Accounts Simulator (SSASIM) actuarial model of Social Security financing is used to estimate the degree to which increased wage growth could negatively affect the system’s infinite-term actuarial balance.
These results raise questions about the conventional wisdom that holds that improved wage growth would affect Social Security’s financing, and how a widely used measure of Social Security’s financing captures those effects.
Download:Associated Program(s):Author(s):Jagadeesh Gokhale -
Working Paper No. 450 | May 2006Minsky's classification of fragility according to hedge, speculative, and Ponzi positions is well-known. He wrote about fragile positions of individual firms and of the economy as a whole, with the economy transitioning naturally from a robust financial structure (dominated by hedge units) to a fragile structure (dominated by speculative units). In most of Minsky's writing, he introduced government through its impact on the private sector with its spending and balance sheet operations as stabilizing forces (although he insisted that stability is ultimately destabilizing). On a few occasions he also analyzed the government's own balance sheet position. More rarely, Minsky extended his analysis to the open economy, examining the fragility of external debt positions. In these works, he analyzed the United States as the "world's bank" and discussed the impact of various US balance sheet positions on the rest of the world. This paper will carefully examine Minsky's position on these topics, and will offer an extension of Minsky's work. It will also examine the "sustainability" of the current "twin US deficits."Download:Associated Program:Author(s):
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Working Paper No. 449 | May 2006Welfare states contribute to people's well-being in many different ways. Bringing all these contributions under a common metric is tricky. Here we propose doing so through the notion of "temporal autonomy": the freedom to spend one’s time as one pleases, outside the necessities of everyday life. Using surveys from five countries (the United States, Australia, Germany, France, and Sweden) that represent the principal types of welfare and gender regimes, we propose ways of operationalizing the time that is strictly necessary for people to spend in paid labor, unpaid household labor, and personal care. The time people have at their disposal after taking into account what is strictly necessary in these three arenas — which we call "discretionary time" — represents people's temporal autonomy. We measure the impact on this of government taxes, transfers, and childcare subsidies in these five countries. In so doing, we calibrate the contributions of the different welfare and gender regimes that exist in these countries, in ways that correspond to the lived reality of people's daily lives.Download:Associated Program(s):Author(s):Robert E. Goodin Antti Parpo James Mahmud Rice
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Policy Note 2006/4 | April 2006
A Cri de Coeur
Many papers published by the Levy Institute during the last few years have emphasized that the American economy has relied too much on the growth of lending to the private sector, most particularly to the personal sector, to offset the negative effect on aggregate demand of the growing current account deficit. Moreover, this growth in lending cannot continue indefinitely.Download:Associated Program(s):Author(s):Region(s):United States -
Policy Note 2006/3 | April 2006In the mid-to-late 1980s, the American economy simultaneously produced—for the first time in the postwar period—huge federal budget deficits as well as large current account deficits, together known as the “twin deficits”. This generated much debate and hand-wringing, most of which focused on supposed “crowding-out” effects. Many claimed that the budgetdeficit was soaking up private saving, leaving too little for domestic investment, and that the “twin” current account deficit was soaking up foreign saving. The result would be higher interest rates and thus lower economic growth, as domestic spending—especially on business investment and real estate construction—was depressed. Further, the government debt and foreign debt would burden future generations of Americans, who would have to make interest payments and eventually retire the debt. The promulgated solution was to promote domestic saving by cutting federal government spending, and private consumption. Many pointed to Japan’s high personal saving rates as a model of the proper way to run an economy.Download:Associated Program(s):Author(s):Region(s):United States
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Policy Note 2006/2 | February 2006
Public and Private Debts and the Future of the American Economy
Today’s federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? Does our fiscal condition warrant radical surgery, as some now prescribe? Or, are we in such deep trouble that there is no plausible route of escape?
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Policy Note 2005/6 | September 2005
Surviving 20 Years of Reform
Social Security turned 70 on August 14, although no national celebration marked the occasion. Rather, our top policymakers in Washington continue to suggest that the system is “unsustainable.” While our nation's most successful social program, and among its longest lived, has allowed generations of Americans to live with dignity in retirement, many think it is time to retire Social Security itself. They claim it is necessary to shift more responsibility to individuals and to scale back the promises made to the coming waves of retiring baby boomers. -
Public Policy Brief No. 82 | August 2005
Social Security Is Only the Beginning . . .
As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the “ownership society,” a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. L. Randall Wray, who has written for the Levy Institute on many topics, evaluates the premises and logic of this program in this new public policy brief.
Wray points out that much of the history of the Western world since the advent of liberalism has been marked by a gradual rise in the power of those who lack property. Some of the milestones in this progression include universal suffrage, regulation of business, and progressive taxation. Bush’s ownership society proposals, according to Wray, would result in a partial reversal of the progress of the last 250 years. The reason is that, while Bush’s plans would undoubtedly increase the choices and power of those who have property, they would fail to democratize ownership. Many gains to the wealthy would come at the expense of the poor, the sick, and the elderly.
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Public Policy Brief Highlights No. 82A | August 2005
Social Security Is Only the Beginning . . .
As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the "ownership society," a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. L. Randall Wray, who has written for the Levy Institute on many topics, evaluates the premises and logic of this program. Wray points out that much of the history of the Western world since the advent of liberalism has been marked by a gradual rise in the power of those who lack property. Some of the milestones in this progression include universal suffrage, regulation of business, and progressive taxation. Bush's ownership society proposals, according to Wray, would result in a partial reversal of the progress of the last 250 years. The reason is that, while Bush's plans would undoubtedly increase the choices and power of those who have property, they would fail to democratize ownership. Many gains to the wealthy would come at the expense of the poor, the sick, and the elderly.Download:Associated Program:Author(s): -
Public Policy Brief No. 81 | June 2005
The Case Against the Fiscal Hawks
For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy.
Other scholars are also concerned, but for reasons that we do not share. They argue that the interest rate is determined by the supply and demand of saving. When the government reduces its saving, the total supply of saving falls, and the interest rate inevitably rises. The result, they say, is that interest-sensitive spending, and investment in particular, falls. Finally, these scholars say, less investment now necessarily implies less output in the future.
In this new brief, Senior Scholar James K. Galbraith evaluates a recent article by William G. Gale and Peter R. Orszag, two economists who regard this view of deficits as plausible. He forwards an alternative, Keynesian view. This alternative suggests that deficits can increase overall output, possibly enabling the government to spend more money without increasing the ratio of the debt to GDP. He casts doubt on the notion that the interest rate is determined by the supply and demand of saving, arguing that monetary policy plays a much larger role than Gale and Orszag allow for. Moreover, he writes, strong demand for goods and services is more important than the supply of capital in determining the pace of technological advance and the rate of growth of output per worker.
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Public Policy Brief Highlights No. 81A | June 2005
The Case Against the Fiscal Hawks
For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy.
Other scholars are also concerned, but for reasons that we do not share. They argue that the interest rate is determined by the supply and demand of saving. When the government reduces its saving, the total supply of saving falls, and the interest rate inevitably rises. The result, they say, is that interest-sensitive spending, and investment in particular, falls. Finally, these scholars say, less investment now necessarily implies less output in the future.
In this new brief, Senior Scholar James K. Galbraith evaluates a recent article by William G. Gale and Peter R. Orszag, two economists who regard this view of deficits as plausible. He forwards an alternative, Keynesian view. This alternative suggests that deficits can increase overall output, possibly enabling the government to spend more money without increasing the ratio of the debt to GDP. He casts doubt on the notion that the interest rate is determined by the supply and demand of saving, arguing that monetary policy plays a much larger role than Gale and Orszag allow for. Moreover, he writes, strong demand for goods and services is more important than the supply of capital in determining the pace of technological advance and the rate of growth of output per worker.
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Policy Note 2005/2 | February 2005
The Neocon Attack on Social Security
For seven decades, the far right has never veered from its avowed mission to gut America’s most comprehensive, successful, and popular safety net: Social Security. While it had won a few small battles (most notably, the Greenspan Commission’s huge 1983 payroll tax hikes and two-year increase in the normal retirement age), its efforts never gained much political traction before 2000. Ironically, the Clinton administration provided some much-needed support to the conservative think tanks’ preposterous claim that Social Security faces financial Armageddon. And candidate Al Gore’s only significant campaign issue involved maintaining “lockboxes” to protect the trust fund by dedicating a portion of projected 15-year budget surpluses to the program. -
Policy Note 2004/2 | May 2004
Deficits, Debt, Deflation, and Depreciation
Recent economic commentary has been filled with “D” words: deficits, debt, deflation, depreciation. Deficits—budget and trade—are of the greatest concern and may be on an unsustainable course, as federal and national debt grow without limit. The United States is already the world’s largest debtor nation, and unconstrained trade deficits are said to raise the specter of a “tequila crisis” if foreigners run from the dollar. Federal budget red ink is expected to imperil the nation’s ability to care for tomorrow’s retirees. While public concern with deflationary pressures has subsided, concern continues regarding America’s ability to compete in a global economy in which wages and prices are falling. In fact, the current situation is far more “sustainable” than that at the peak of the Clinton boom, which had federal budget surpluses but record-breaking private sector deficits. Nevertheless, it is time to take stock of the dangers faced by the US economy.
Download:Associated Program(s):Federal Budget Policy Monetary Policy and Financial Structure The State of the US and World EconomiesAuthor(s):Region(s):United States -
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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Policy Note 2003/6 | September 2003
A Note of Caution
The current account deficit of the United States has been growing steadily as a share of GDP for more than a decade. It is now at an all-time high, over 5 percent of GDP. This steady deterioration has been greeted with an increasing amount of concern (U.S Trade Deficit Review Commission 2000; Brookings Papers 2001; Godley 2001; Mann 2002). At The Levy Economics Institute, we have long argued that this burgeoning deficit is unsustainable. A current account deficit implies a growing external debt, which in turn implies a continuing shift in net income received from abroad (net interest and dividend flows) in favor of foreigners. We have also noted that with the private sector headed toward balance, a growing current account deficit implies a corresponding growing “twin” deficit for the government sector (Papadimitriou et al. 2002; Godley 2003). This latter scenario has already come to pass: the latest figures show that the general government deficit rose to an annual rate of more than 4 percent of GDP in the first quarter of 2003 and will certainly rise even more in the near future, since the federal deficit alone is officially projected to reach 4 percent by the end of this fiscal year (CBO 2003).
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Policy Note 2003/5 | September 2003
For the first time since the 1930s, many worry that the world's economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. Given the singleminded pursuit of deflationary policies over the past decade, this does come as something of a surprise. But policymakers—especially central bankers—in Europe and the United States seem to have little inkling of how to stave off deflation, with the result that prices are already falling in much of the world. Contrary to widespread beliefs, the worst outcome will not be avoided if the only response is to balance budgets and introduce new monetary policy gimmicks. To the contrary, policymakers should increase deficits to at least 7 percent of GDP.
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Working Paper No. 382 | May 2003
This paper reconsiders the case for the use of fiscal policy based on a "functional finance" approach that advocates the use of fiscal policy to secure high levels of demand in the context of private aggregate demand, which would otherwise be too low. This "functional finance" view means that any budget deficit should be seen as a response to the perceived excess of private savings over investment at the desired level of economic activity. The paper outlines the "functional finance" approach and its relationship with fiscal policy. It then considers the three lines of argument that have been advanced against fiscal policy on the grounds of "crowding out." These lines are based on the response of interest rates, the supply-side equilibrium, and Ricardian equivalence. The paper advances the view that the arguments, which have been deployed against fiscal policy to the effect that it does not raise the level of economic activity, do not apply when a "functional finance" view of fiscal policy is adopted. A section on the intertermporal budget constraint considers whether this constraint rules out budget deficits, and concludes that in general it does not.
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Working Paper No. 381 | May 2003
Recent developments in macroeconomic policy, in terms of both theory and practice, have elevated monetary policy while downgrading fiscal policy. Monetary policy has focused on the setting of interest rates as the key policy instrument, along with the adoption of inflation targets and the use of monetary policy to target inflation. Elsewhere, we have critically examined the significance of this shift, which led us to question the effectiveness of monetary policy. We have also explored the role of fiscal policy and argued that it should be reinstated. This contribution aims to consider further that conclusion. We consider at length fiscal policy within the current "new consensus" theoretical framework. We find the proposition of this thinking, that fiscal policy provides at best a limited role, unconvincing. We examine the possibility of crowding out and the Ricardian Equivalence Theorem. A short review of quantitative estimates of fiscal policy multipliers gives credence to our theoretical conclusions. Our overall conclusion is that, under specified conditions, fiscal policy is a powerful tool for macroeconomic policy.
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Working Paper No. 380 | May 2003
The consumer has been on a tightrope since the bursting of the "new economy" bubble, as losses in equity markets have been partly offset by gains in real estate and fiscal support and mortgage refinancing have partly offset increased consumer cautiousness. The consumer will remain on a tightrope in the near future, but if the economy were to stumble, the fragile consumer might contribute to turning the downturn into a deep and protracted recession. There are two risks to the continuation of consumer resilience. The first arises from the fact that this has been a jobless recovery. The second arises from a growing personal sector imbalance that is fueled by the growing property bubble. Hence, the short-term outlook remains uncertain, but the long-term one is bleak.
Download:Associated Program(s):Author(s):Philip Arestis Elias KarakitsosRegion(s):United States -
Working Paper No. 378 | May 2003
The Role of Investment
The anemic US economic recovery and the threat of a double-dip recession stem from the weakness of investment, due to excess capacity created in the euphoric years of the "new economy" bubble. The current imbalances in the corporate sector (i.e., the all-time-high indebtedness in the face of falling asset prices) are preventing investment from picking up and are laying the foundations for a new, long-lasting expansion. Tax reductions may create a cyclical upturn in the short run, and may promote the anemic recovery, but such stimulus to demand is unsustainable in the long run. The root of the problem is the imbalance in the corporate sector, which will take time for correction.
Download:Associated Program(s):Author(s):Philip Arestis Elias KarakitsosRegion(s):United States -
Policy Note 2003/1 | January 2003
The Case for Public Spending
Keynesian economics is back. As John Maynard Keynes stressed, total spending matters—and not who does it or for what purpose. Tax cuts and deficit spending are, therefore, on the agenda; low interest rates seem here to stay. Stimulus is the watchword of the day. It remains only to fill in the details, or so it seems.
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Working Paper No. 358 | October 2002
This paper contributes to the debate on whether the United States' large federal budget deficits are sustainable in the long run. The authors model the government deficit per capita as a threshold autoregressive process, finding evidence that the deficit is sustainable in the long run and that economic policymakers will intervene to reduce the per capita deficit only when it reaches a certain threshold.
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Working Paper No. 346 | June 2002
The Past, Present, and Future
This paper focuses on the past, present, and future rules and regulations implementing CRA as developed, applied, and enforced by the federal bank and thrift regulators. The past rules and regulations refer to those in effect during the law's first 18 years, through 1995, when CRA underwent its first major reform. The present CRA rules and regulations were adopted then, with the mandate that they would be reviewed for possible reform in 2002. The future rules and regulations are being drafted now by the regulators, based on their review of approximately 400 public comments; the reform recommendations should be released sometime during the second half of 2002.
The future of CRA's legacy as arguably the perfect fair market regulation in a world of Compassionate Capitalism will depend upon the direction of these reforms. Optimal public policy by the bank and thrift regulators in this regard must represent the ideal balance between competing consumer and industry interests. This paper represents the first comprehensive analysis of the public comments and concludes with specific recommendations that will lead to optimal public policy.
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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 2001/6 | June 2001
The President’s commission claims that the Social Security program is “unsustainable” and requires a complete “overhaul.” It also claims that the program is a bad deal for women and minorities. However, any honest accounting of all Social Security benefits finds that the program is a good deal for disadvantaged groups. Social Security will become a worse deal only if tomorrow's politicians slash benefits—as the commission presumes they will—or increase the taxation of the disadvantaged. A suspicious person might conclude that the reason the report uses such scare tactics is because its authors fear that future Congresses will indeed keep their promises to maintain Social Security. Hence, the urgent need to privatize today.
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Policy Note 2001/5 | May 2001
This policy note examines the case for large tax cuts, focusing on the issues surrounding the purpose and overall size of the needed cut. Although Congress has passed a significant package of tax relief, many have worried that the budget surplus on which it was based will never appear. Thus, some have advocated “triggers” to reduce the size of the tax cuts should tax revenues begin to decline. This note argues that such a proposal represents “backward thinking.”
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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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Policy Note 2001/1 | January 2001
The United States' economic expansion of the past eight years has been fueled by a rise in private sector indebtedness. In 1997 the private sector spending exceeded income for the first time since 1952, and since then the gap between the two has risen markedly. The situation closely mirrors that experienced in the United Kingdom during the 1980s, when a two-year slowdown resulted in absolute declines in GDP and a three-percentage-point increase in the unemployment rate.
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Working Paper No. 315 | October 2000
A Classical-Harrodian Perspective
This paper investigates the effects of budget deficits within a classical-Harrodian framework in a closed economy. In this framework, growth and cycles are endogenous, underutilized capacity is a recurrent phenomenon, capacity utilization fluctuates around the normal level in the long run, and unemployment is persistent. Give the normal rate of profit, the key determinant of growth is the social savings rate. Along the warranted path when growth is balanced and is financed via retained earnings and equity, the social savings rate can be shown to be equal to the flow of business and household savings less the money and government bond holdings of the aggregate private sector--that is, it equals the flow of investable surplus available to firms to finance investment. An increase in the budget deficit always raises short-run output growth, although the stimulus is slowed down by the accumulation of debt by firms. However, with a fixed private savings rate, an increase in the deficit lowers the warranted path. If raising the warranted path is desired, appropriate policies that would raise the social saaving rate would have to be implemented. As in Harrod, whether crowding out is harmful depends on the rate of warranted growth relative to the natural growth rate.
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Policy Note 2000/7 | July 2000
The Fed has raised interest rates six times in the past year to slow the economy, in the belief that unemployment is too low. There is scant evidence, however, that low unemployment leads to inflation, that the economy is in danger of overheating, or that higher interest rates will reduce inflation. Instead, the Fed is merely hastening a downturn that will impose huge costs on society's most disadvantaged.
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Policy Note 2000/6 | June 2000
The economic expansion in the United States has been driven to an unusual extent by falling personal saving and rising borrowing by the private sector. If this process goes into reverse, as has happened under comparable circumstances in other countries, there will be severe recession unless there is a big relaxation in fiscal policy.
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Public Policy Brief Highlights No. 59A | February 2000
Replacing a Welfare Model with an Insurance Model
The nation is not prepared to deal with the jump in expenditures for long-term care that will come with the aging of the baby-boom generation. Only a small part of that care is paid for privately (out-of-pocket or through private insurance). Most is financed through Medicaid, the program that is intended to ensure medical care for the indigent. This use of Medicaid comes at a high cost for individuals and society: the allotment of more than a third of the Medicaid budget to long-term care; a two-tier care system; and the commandeering of limited funds by middle- and high-income people through elaborate estate planning to circumvent eligibility requirements. These problems would be mitigated by replacing the welfare model with an insurance model—voluntary or compulsory private insurance, with subsidies through income-scaled tax credits to ensure affordability. An equitable and efficient system could be created with a blend of public money, private insurance, and other private saving, with a safety net for those in greatest need.Download:Associated Program:Author(s):Walter M. Cadette -
Public Policy Brief No. 59 | February 2000
Replacing a Welfare Model with an Insurance Model
The nation is not prepared to deal with the jump in expenditures for long-term care that will come with the aging of the baby-boom generation. Only a small part of that care is paid for privately (out-of-pocket or through private insurance). Most is financed through Medicaid, the program that is intended to ensure medical care for the indigent. This use of Medicaid comes at a high cost for individuals and society: the allotment of more than a third of the Medicaid budget to long-term care; a two-tier care system; and the commandeering of limited funds by middle- and high-income people through elaborate estate planning to circumvent eligibility requirements. These problems would be mitigated by replacing the welfare model with an insurance model—voluntary or compulsory private insurance, with subsidies through income-scaled tax credits to ensure affordability. An equitable and efficient system could be created with a blend of public money, private insurance, and other private saving, with a safety net for those in greatest need.
Download:Associated Program:Author(s):Walter M. Cadette -
Public Policy Brief No. 58 | December 1999
Infrastructure Financing with the AGIS Bond
The current system of tax-exempt bond financing is inefficient and inequitable because a large portion of the federal subsidy provided by the tax exemption does not reach state and local governments and accrues instead to the wealthiest investors. In addition, the current system excludes large institutional investors, both domestic and foreign, with their huge pools of capital, and it lacks the stable oversight characteristic of the taxable bond market. Edward V. Regan and his associates have developed a new security concept to overcome these weaknesses. The American global infrastructure security (AGIS) bond has two components that are sold separately—tax exemption and income flow—creating a taxable bond for sale in the regular capital markets in addition to the tax exclusion benefit.
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Public Policy Brief Highlights No. 58A | December 1999
Infrastructure Financing with the AGIS Bond
The current system of tax-exempt bond financing is inefficient and inequitable because a large portion of the federal subsidy provided by the tax exemption does not reach state and local governments and accrues instead to the wealthiest investors. In addition, the current system excludes large institutional investors, both domestic and foreign, with their huge pools of capital, and it lacks the stable oversight characteristic of the taxable bond market. Edward V. Regan and his associates have developed a new security concept to overcome these weaknesses. The American global infrastructure security (AGIS) bond has two components that are sold separately—tax exemption and income flow—creating a taxable bond for sale in the regular capital markets in addition to the tax exclusion benefit.Download:Associated Program:Author(s):Edward V. Regan -
Working Paper No. 283 | October 1999
Options for Policy
The nation is ill-prepared to finance the quantum jump in long-term care spending that is on its way as the baby boom ages. By default rather than by design, Medicaid has become the main source of funds for long-term care. But reliance on Medicaid has fostered the institutionalization of the disabled elderly, has given rise to a two-tier care system, and has yielded the bizarre outcome of use of limited welfare funds by middle- and even high-income Americans who have succeeded in sheltering assets from Medicaid's spend-down requirements. Insurance would be a greatly better answer to the nation's long-term care needs. But the market will remain small and underdeveloped as long as Americans can make easy claim on Medicaid. The paper puts forth a plan for universal long-term care insurance, supported by income-scaled tax credits, to replace Medicaid in its current role. That would make for "honest government"--one that not only does not fund inheritance protection but also genuinely protects those with greatest need.
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Policy Note 1999/10 | October 1999
A Bad Idea
Would privatization yield sufficient benefits to support low-income retirees and satisfy all others? Does a focus on private management of assets take attention away from the real issues in the future of Social Security?
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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 Highlights No. 55A | 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.Download:Associated Program:Author(s): -
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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Policy Note 1999/7 | July 1999
Tax reform that reduces tax rates on capital income, no matter how successful it is in reducing the user cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the United States' economy.
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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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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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Policy Note 1999/3 | March 1999
A Reality Check
A federal government surplus has finally been achieved, and it has been met with pronouncements that it is a great gift for the future and with arguments about what to do with it. However, the surplus will be short-lived, it will depress economic growth, and, in any case, surpluses cannot be “used” for anything.
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Policy Note 1999/2 | February 1999
President Clinton’s Proposed Social Security Reform
If you were to write yourself IOUs to provide for your retirement and put them in a safety deposit box, would you rest comfortably, assured that you would be able to purchase all the necessities of life in 2020? Well, President Clinton’s proposal is even worse.
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Policy Note 1999/1 | January 1999
In 1998 the volume of private spending in the United States rose by almost twice the increase in disposable income. The impact of this excess private spending financed by increased net borrowing has been profound; without it, the economy would have stagnated. Can this pattern of demand growth continue? The answer is a resounding no.
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Working Paper No. 252 | September 1998
All modern economies have a "chartalist" or "state" money, as acknowledged by Friedrich Knapp and John Maynard Keynes. In this paper, I examine the "history" of money to shed light on its origins. I also examine in detail the views of those who accepted the chartalist, or state, approach to money, from Adam Smith to Knapp and Keynes, with some discussion of the views of Hyman Minsky and Abba Lerner. This is then linked to Lerner's "functional finance" approach to money and government spending. I next explore the implications of "modern money" for government policy and show that much economic analysis reaches erroneous conclusions because it fails to recognize the nature of modern money. The state "defines" money when it chooses that in which taxes must be paid. Government spending is the most important determinant of the supply of base money; government deficits are the most important source of net money holdings. This stands in stark contrast to traditional analysis, for fiscal policy is the primary determinant of the money supply and monetary policy determines the short-term interest rate. Because government deficits increase bank reserves, monetary policy is required to offer an interest-earning alternative to excess reserves; essentially, monetary policy consists of sales of government bonds (by the Treasury and central bank) to "drain" excess reserves in order to hit the interest rate target established for monetary policy. Thus, bond sales are not a part of fiscal policy nor are they needed to "finance" government deficits. This analysis leads to several interesting policy conclusions regarding the importance of government deficits and debts and regarding proposals to promote full employment.
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Working Paper No. 248 | August 1998
The Australian Experience
Australian governments since the late 1970s have attempted to eliminate the fiscal deficit through reductions in expenditure. These efforts have failed. With each successive business cycle the federal government's budget outcome has been an ever-growing deficit. This paper explains the failure of the government to achieve its balanced budget objective through expenditure reductions. It argues that the impact of these expenditure reductions on the course of the business cycle and the long-term development of the economy has actually fed back onto the budget outcome in a negative way. These feedbacks have rendered the instruments for achieving the government's objective self-defeating. The paper explores the compositional changes in government outlays, away from capital to current outlays, that have resulted from this policy and which may have a detrimental effect on long-run growth.
Download:Associated Program:Author(s):George Argyrous -
Working Paper No. 241 | July 1998
Effects on Economic Growth, Inflation, and Welfare
This paper contains an investigation of the effects of different means of financing government spending on economic growth, inflation, and welfare. In this setting, two different types of government spending are considered: productive expenditures that provide services to the private sector in its production activities, and unproductive expenditures that have no direct influence on the private economy. In turn, two different forms of finance are considered: proportional income taxation; and money creation.
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Policy Note 1998/7 | July 1998
Unlike the Papa, Mama, and Baby Bears faced by the storybook Goldilocks, our Goldilocks faced three ferocious grizzlies: a cascading, global financial crisis, global deflation and excess capacity (or insufficient demand), and a domestic fiscal surplus in conjunction with record private deficits.
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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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Public Policy Brief Highlights No. 40A | May 1998
A Fiscally Responsible Plan for Public Capital Investment
Condemned bridges, dilapidated school buildings, contaminated water supplies, and other infrastructure shortcomings threaten American growth, productivity, and prosperity. The authors of this brief propose a plan for financing infrastructure projects that is designed to have minimal effect on the federal budget and to promote sound fiscal operation. Federal zero-interest mortgage loans to state and local governments for capital projects specified by Congress can cut the cost of such projects, achieve needed improvements in the nation’s infrastructure, and thereby contribute to the American economy’s future.Download:Associated Program:Author(s):Walter M. Cadette -
Public Policy Brief No. 40 | May 1998
A Fiscally Responsible Plan for Public Capital Investment
Condemned bridges, dilapidated school buildings, contaminated water supplies, and other infrastructure shortcomings threaten American growth, productivity, and prosperity. The authors of this brief propose a plan for financing infrastructure projects that is designed to have minimal effect on the federal budget and to promote sound fiscal operation. Federal zero-interest mortgage loans to state and local governments for capital projects specified by Congress can cut the cost of such projects, achieve needed improvements in the nation’s infrastructure, and thereby contribute to the American economy’s future.
Download:Associated Program:Author(s):S. Jay Levy Walter M. Cadette -
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. 222 | January 1998
The Chartalist Approach
Senior Scholar L. Randall Wray traces the development of the chartalist approach to money from Adam Smith, Georg Friedrich Knapp, and John Maynard Keynes to the later theorists, including Hyman Minsky, Abba Lerner, and Kenneth Boulding, who follow the endogenous money approach.
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Working Paper No. 208 | October 1997
No further information available.
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Public Policy Brief No. 34 | September 1997
The Challenge of Financing the Baby Boom’s Retirement
The falling ratio of workers to retirees in the United States has raised concerns about Social Security’s ability to continue to provide a base level of support for all retired workers and to remain in balance with all of government's other fiscal obligations. Of alternative plans that have been proposed to safeguard the system, Walter Cadette argues against radical revamping through privatization and suggests instead minor modifications in the existing tax and benefits structure.
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Public Policy Brief Highlights No. 34A | September 1997
The Challenge of Financing the Baby Boom’s Retirement
The falling ratio of workers to retirees in the United States has raised concerns about Social Security’s ability to continue to provide a base level of support for all retired workers and to remain in balance with all of government's other fiscal obligations. Of alternative plans that have been proposed to safeguard the system, Walter Cadette argues against radical revamping through privatization and suggests instead minor modifications in the existing tax and benefits structure.Download:Associated Program:Author(s):Walter M. Cadette -
Public Policy Brief No. 32 | August 1997
Real Estate and Capital Gains Taxation
The recent enactment of a capital gains tax cut resulted, according to the authors, from the absence of a true appreciation or consideration of the real beneficiaries of such a cut, its probable actual effects, the distinction between productive and nonproductive sources of capital gains (two-thirds of capital gains accrue to real estate, which is a fixed, nonproductive asset), and distortions in our current income accounting system (which shield most real estate income from taxation). The across-the-board cut, which treats real estate appreciation and true capital gains as the same, is a giveaway to real estate and will steer capital and entrepreneurial resources to a search for unearned income.
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Public Policy Brief Highlights No. 32A | August 1997
Real Estate and Capital Gains Taxation
The recent enactment of a capital gains tax cut resulted, according to the authors, from the absence of a true appreciation or consideration of the real beneficiaries of such a cut, its probable actual effects, the distinction between productive and nonproductive sources of capital gains (two-thirds of capital gains accrue to real estate, which is a fixed, nonproductive asset), and distortions in our current income accounting system (which shield most real estate income from taxation). The across-the-board cut, which treats real estate appreciation and true capital gains as the same, is a giveaway to real estate and will steer capital and entrepreneurial resources to a search for unearned income. -
Public Policy Brief No. 31 | May 1997
The New Welfare and the Potential for Workforce Development
The author of this brief asks why welfare, workforce development, and unemployment insurance are operated as separate entities. If the goal of the new welfare law is to end dependency and foster a work ethic, then it needs to be tied more closely to existing policy aimed at developing the workforce. Instead of viewing the new welfare system as welfare policy with a new flexibility, we should see it as an opportunity to create a more comprehensive and coherent employment program to replace outmoded public assistance.
Download:Associated Program:Author(s):Oren Levin-Waldman -
Public Policy Brief Highlights No. 31A | May 1997
The New Welfare and the Potential for Workforce Development
The author of this brief asks why welfare, workforce development, and unemployment insurance are operated as separate entities. If the goal of the new welfare law is to end dependency and foster a work ethic, then it needs to be tied more closely to existing policy aimed at developing the workforce. Instead of viewing the new welfare system as welfare policy with a new flexibility, we should see it as an opportunity to create a more comprehensive and coherent employment program to replace outmoded public assistance.Download:Associated Program:Author(s):Oren Levin-Waldman -
Public Policy Brief Highlights No. 30A | April 1997
The Case for Retargeting Tax Subsidies to Health Care
With health care delivery increasingly shaped by market and budgetary discipline, the provision of health care for all seems an ever-more-distant goal.The high cost of American health care is the inevitable by-product of its method of financing. Walter M. Cadette proposes shifting the tax subsidies to health care from the tax exclusion of employment-based health insurance to an income-scaled tax credit for the individual purchase of basic health insurance. This plan holds out promise of improving the operation of the health insurance market, making the labor market more efficient, reducing overall health care costs, and providing protection for the unemployed.Download:Associated Program:Author(s):Walter M. Cadette -
Public Policy Brief No. 30 | April 1997
The Case for Retargeting Tax Subsidies to Health Care
With health care delivery increasingly shaped by market and budgetary discipline, the provision of health care for all seems an ever-more-distant goal.The high cost of American health care is the inevitable by-product of its method of financing. Walter M. Cadette proposes shifting the tax subsidies to health care from the tax exclusion of employment-based health insurance to an income-scaled tax credit for the individual purchase of basic health insurance. This plan holds out promise of improving the operation of the health insurance market, making the labor market more efficient, reducing overall health care costs, and providing protection for the unemployed.
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Working Paper No. 192 | April 1997
The Challenge of Financing the Baby Boom's Retirement
Some reform of Social Security is needed to keep the system solvent given the additional financial pressure that will be placed on it as the baby boom generation retires: the Social Security Administration estimates that payroll taxes will have to be increased 2.2 percent or benefits reduced by an equal amount to maintain financial balance over the next 75 years. The Advisory Council on Social Security has suggested two possible approaches to the long-term financing of the system. One would make minor changes to the existing system to close the gap between contributions and benefits; the other would privatize and thus radically alter the system. Senior Fellow Walter M. Cadette examines these two approaches and concludes that the nation would be better off reforming the current system than making such a fundamental change as privatization.
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Working Paper No. 191 | April 1997
Studies that have examined the effect of public spending on economic growth have reported esmates for the marginal product of public capital that are well in excess of, equal to, and less than the marginal product of private capital. Not only does this wide range of estimates call for further examination, but several questions about such spending have been neglected. Does a permanent increase in public spending induce a permanent or temporary increase in economic growth? Is public capital sufficiently productive to increase the rate of economic growth? Does the method by which new (public) spending is financed have a larger negative effect on growth than any positive effect induced by the increase in spending itself? Visiting Scholar David Alan Aschauer, of Bates College, explores these issues, making use of state-level data to examine the static and dynamic effects of public capital spending on output and employment growth. (See also, Working Papers No. 189 and No. 190.)
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Working Paper No. 190 | April 1997
Studies that have examined the effect of public spending on economic growth have reported esmates for the marginal product of public capital that are well in excess of, equal to, and less than the marginal product of private capital. Not only does this wide range of estimates call for further examination, but several questions about such spending have been neglected. Does a permanent increase in public spending induce a permanent or temporary increase in economic growth? Is public capital sufficiently productive to increase the rate of economic growth? Does the method by which new (public) spending is financed have a larger negative effect on growth than any positive effect induced by the increase in spending itself? Visiting Scholar David Alan Aschauer, of Bates College, explores these issues, making use of state-level data to examine the static and dynamic effects of public capital spending on output and employment growth. (See also, Working Papers No. 189 and No. 191.)
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Working Paper No. 189 | April 1997
Public Capital and Economic Growth
Studies that have examined the effect of public spending on economic growth have reported esmates for the marginal product of public capital that are well in excess of, equal to, and less than the marginal product of private capital. Not only does this wide range of estimates call for further examination, but several questions about such spending have been neglected. Does a permanent increase in public spending induce a permanent or temporary increase in economic growth? Is public capital sufficiently productive to increase the rate of economic growth? Does the method by which new (public) spending is financed have a larger negative effect on growth than any positive effect induced by the increase in spending itself? Visiting Scholar David Alan Aschauer, of Bates College, explores these issues, making use of state-level data to examine the static and dynamic effects of public capital spending on output and employment growth.
Aschauer formulates a growth model that contains a utility function and a Cobb-Douglas production function. The utility function has constant intertemporal elasticities of substitution and is maximized by producers and consumers; in the production function capital is divided into two components: public infrastructure capital and a broad measure of private capital containing both tangible and human capital. The production function exhibits constant returns to scale across private and public capital inputs, but increasing returns to scale across raw labor and capital. The government sector purchases and maintains a stock of public capital that is proportional to the stock of private capital. Public capital also is assumed to have some positive productivity effect on private capital. The initial public capital stock is funded by the issuance of perpetuities (debt) and is thereafter maintained by a tax levied on private production. (See also, Working Papers No. 190 and No. 191.)
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Working Paper No. 187 | March 1997
The recent budget agreement contains a capital gains tax cut. The principal justification for reducing the capital gains tax rate relies on the efficiency-equity trade-off. The capital gains tax is designed to increase equity by taxing the wealthy, but advocates of rate reduction claim that the tax has the side effect of decreasing efficiency because it discourages productive investment. The argument is that the tax structure errs on the side of equity so much that it has reduced the efficiency of the economy to the point where there is less wealth for everyone, and so a capital gains tax cut is needed to get the economy moving.
Research Associates Michael Hudson and Kris Feder call attention to a neglected aspect of the capital gains debate: two-thirds of capital gains are taken on real estate—that is, on unproductive investment. An investment in real estate merely changes ownership of existing wealth; it does not produce wealth. Any capital gains on the appreciation of land value are not a reward for productivity but a windfall for whoever happens to own the land. Yet the capital gains tax treats a return from the appreciation of land the same way it treats a return resulting from improvements to land or from business investment. Such a tax structure is both inefficient (because it rewards unproductive investment at the expense of productive investment) and inequitable (because it rewards some of the wealthiest individuals at the expense of everyone else). There is an efficiency-equity trade-off on productive investments such as capital, but not on fixed assets such as land. Therefore, Hudson and Feder argue, we should not decrease the capital gains tax unless we first separate returns to business investment from returns to real estate speculation and tax real estate at a higher rate.
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Working Paper No. 184 | January 1997
How Can It Be Improved?
During the summer of 1996, President Clinton signed what some consider to be the most sweeping welfare reform since the initial adoption of public assistance programs in 1935. Resident Scholar Oren Levin-Waldman compares the old and new welfare laws, assesses some of the possible effects of the new law, and provides policy prescriptions for how to combine existing welfare programs, job training programs, and the unemployment insurance system to achieve a more comprehensive and coherent employment program that meets individual needs and provides public services more efficiently.
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Working Paper No. 177 | November 1996
Resident Scholar Neil H. Buchanan offers an analysis of the macroeconomic effects of current proposals to reform the tax system (e.g., a flat tax or a national sales tax), focusing on the aspects of the proposals aimed at promoting saving. Buchanan notes that a drawback in the way in which saving is officially defined is that only businesses (and not households) are assumed to make purchases that have long-term payoffs—that is, personal spending on items such as education and durable goods is defined as consumption, when in fact it is investment in long-term economic well-being and therefore should be categorized as saving. The purest definition of saving would include all resources produced in the economy during the year "that are not consumed today but are put to use in a way that will provide returns to the economy in years to come." Consumption also should be redefined, the author says, to include those items utilized, but not directly paid for by consumers, such as employer-provided benefits and the value of owner-occupied housing.
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Working Paper No. 173 | October 1996
At almost any time there exists a plan to alter the structure of taxation, and their number seems to increase during election years. Resident Scholar Neil Buchanan analyzes several recent tax proposals in terms of their effects on the budget deficit, on different groups of taxpayers, and on taxpaying households as a whole. Buchanan groups the plans into three general categories: simplifying payment of income taxes, switching to a national sales tax or value-added system, and altering the current taxation of savings or labor incomes. The specific tax plans examined are the Gephardt plan, the Lugar plan, the USA Tax plan, and the Armey-Shelby flat tax plan, as well as flat tax proposals in general.
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Working Paper No. 169 | June 1996
Comparing Alternative Methods of Adjusting US Federal Fiscal Deficits for Cyclical and Price Effects
In this working paper, Resident Scholar Neil H. Buchanan statistically tests six alternative definitions of the federal budget deficit to determine if these definitions improve the results of econometric studies that use the deficit as an exogenous variable. His objectives are (1) to evaluate Robert Eisner's conclusion that a price-adjusted deficit definition improves econometric results and (2) to compare alternative measures of the deficit.
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Public Policy Brief No. 25 | April 1996
Effects of a Capital Gains Tax Cut on the Investment Behavior of Firms
This brief assesses the effect of a capital gains tax cut on firms’ decisions to undertake new investment projects and the possible effect of such projects on economic growth and employment. The authors' analysis takes into account such factors as projects’ degree of uncertainty, investors’ degree of risk aversion, whether capital gains losses are deductible against capital gains income, whether the market value of an investment project is affected by the imposition of capital gains taxes, and whether the project is financed by internal or external means. They find that there is little theoretical or empirical basis for the view that lowering the capital gains tax rate would have a substantial effect on economic growth or level of economic activity. They estimate that the current proposal to lower the highest capital gains tax rate from 28.0 percent to 19.8 percent would have a long-term effect on the level of output no greater than the impact of roughly two months of normal economic growth, and it would take years to realize even this small benefit. Indexing the rate to inflation would have a somewhat larger, but still small, effect. The authors conclude that capital gains taxes have a negligible influence on investment decisions and dispute the claim that a lower capital gains tax rate would have large beneficial effects on output, growth, or entrepreneurial activity in the US economy.
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Working Paper No. 152 | December 1995
Towards Greater Employment
In this working paper Resident Research Associate Oren M. Levin-Waldman builds on earlier work (see Working Paper No. 140) to argue that the unemployment insurance (UI) system is in need of reform. At a minimum, Levin-Waldman states, the system "needs to be tightened in such a way that it results in fewer layoffs." In addition, he says, it should be changed in order to offer greater assistance to the growing population of the long-term unemployed.
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Working Paper No. 149 | December 1995
Lessons from the States
A two-year budget and appropriations cycle at the federal level has been endorsed by Republicans and Democrats during the past 20 years. The first congressional proposal for a federal biennial budget appeared in the late 1970s, and several others have since been submitted. There are two dominant models for a biennial budget: the stretch model, which expands action on the budget resolution over a two-year period, and the split-sessions model, which confines budget resolution and appropriations actions to the first session of Congress. In this working paper, Resident Scholar Charles J. Whalen reviews states' experience with biennial budgeting and outlines policy implications of extending the budget period.
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Public Policy Brief No. 22 | September 1995
Evaluating the Sources of R&D Spending
Both spending and tax policies have been implemented in the United States with the goal of stimulating private sector research and development (R&D). Thomas Karier questions whether current R&D policy, especially the research and experimentation tax credit, can contribute to closing the gap between nondefense expenditures on R&D in the United States and such expenditures in other countries, such as Japan and Germany. He also explores possible changes to our current R&D policy to make it more effective.
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Public Policy Brief No. 21 | May 1995
Reforming Welfare by Synchronizing Public Assistance Benefits
In this brief, Oren M. Levin-Waldman examines the structure of existing welfare programs and concludes that the current array of benefits could be synchronized and consolidated to create a new system that would provide economic incentives to work. He suggests combining elements of the earned income tax credit (EITC) and current welfare programs into one program, a consolidated assistance program (CAP). Levin-Waldman argues that a program composed of an assistance component (with one set of benefits for working parents and a different set for nonworking parents) and a child support component could be designed to assure minimal subsistence to those unable to work while providing incentives for those on welfare to work without, in effect, penalizing them for getting off welfare. Such a program would reform welfare more expeditiously than a plan that would simply expand the EITC or put a time limit on welfare benefits. Moreover, such a plan would not necessarily add to the national budget deficit.
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Public Policy Brief No. 20 | April 1995
The Balanced Budget Amendment: Toxic, Not Tonic
Charles J. Whalen evaluates the political and economic arguments in favor of a constitutional amendment requiring a balanced budget and concludes that, although today’s federal budget process needs reform, the balanced budget amendment is not a solution. In fact, such an amendment would divert attention from what is really needed, namely, establishing priorities and making difficult decisions concerning the deficit. It would be damaging to both the economic and the political systems of the United States. He recommends budget alternatives—a full-employment budget, an investment budget, a narrowly defined federal capital budget, a biennial budget—that would give the budgeting process more direction and encourage more restraint than the amendment would.
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Public Policy Brief No. 13 | June 1994
Business Tax Incentives and Investments
In this brief, Thomas Karier explores the efficacy of the investment tax credit (ITC) in stimulating private investment spending. He notes that there are three possible channels through which an ITC can act on investment: price, income, and multiplier effects. He finds that ITCs do not appear to have had a significant effect on equipment investment; that the effects of a decline in corporate tax rates (the income effect) were distributed among increased dividends and fewer equity and debt issuances and had little influence on investment; and that capacity utilization and real GDP growth were the only business cycle variables that had a significant effect on equipment investment growth. Based on these findings, Karier concludes that alternatives to tax investment credit programs must be found and pursued. He suggests undertaking a modest program of direct public investment financed by rearranging spending priorities within the budget; a more expansive program could be financed through additional borrowing or through an increase in the corporate income tax.
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Public Policy Brief No. 4 | March 1993
Public Capital and Economic Growth, by David Alan Aschauer; New Federal Spending for Infrastructure: Should We Let This Genie Out of the Bottle? by Douglas Holtz-Eakin
This brief presents contrasting views on the effects of public infrastructure investment on private sector productivity. David Alan Aschauer states that the slower rate of productivity growth since the early 1970s—coupled with an aging population, the declining proportion of workers to the total population, and other demographic factors—poses a dilemma for policymakers interested in strengthening the long-term relative position of the United States in an increasingly competitive global economic environment. He considers public infrastructure to be a factor in production and the decline in public capital to be responsible for part of the productivity slowdown. In contrast, Douglas Holtz-Eakin dismisses the conventional arguments for a federal infrastructure program by asserting that a large-scale public infrastructure program has no appreciable effect on productivity growth; in the current fiscal climate of scarce federal resources, a federal infrastructure program is not consistent with the goal of deficit reduction; there are better infrastructure strategies than new spending and massive construction programs; and policies aimed at increasing private rather than public investment will have a more positive impact on US competitiveness.
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