Galbraith and Skidelsky: The End of Normal and the Future of Work (Video)

Michael Stephens | November 13, 2014

Here are the keynote addresses delivered by James Galbraith (“The End of Normal”) and Robert Skidelsky (“The Future of Work”) at the 12th International Post Keynesian Conference (more videos from the conference can be found here):

 

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Berlin Wall

Jörg Bibow | November 12, 2014

Germany is celebrating: it is 25 years ago that the Berlin Wall came down, marking the end of Stasi tyranny, and much more than that. No doubt that is reason to celebrate, for Germany, Europe, and the world. As a German and European, I am celebrating too.

Alas, this is also an occasion for hearing that tiresome story again about how costly and burdensome it was for Germany to reunite. For instance, Terence Roth writes a piece in the WSJ titled “After Fall of Berlin Wall, German Unification Came With a Big Price Tag.” Now, this kind of statement really needs to be qualified, especially as the myth about the “burden of unification” paved the way for yet another German myth a few years later that has proven rather catastrophic for Europe: namely, the myth that Germany had to “restore its competitiveness,” which it apparently had lost in the context of reuniting. Undisturbed by any doubt or reason, the German authorities live in their mythical world of economic virtue and vice, famously referred to by finance minister Wolfgang Schäuble as his “parallel universe.” Let’s try to get the matter straight then.

To begin with, it is unquestionably true that German unification came along with a big price tag. But the price Germany ended up paying was only partly due to the wreckage that communism had produced in the east. The macroeconomic policy response, featuring ultra-tight money and mindless fiscal austerity, proved far more costly. In 1991, both Germany’s consumer price inflation and budget deficit as a share of GDP were about 3 percent. Imagine the Federal Reserve responding to the historical challenge and responsibility of national reunification by monetary overkill—which is exactly what the Bundesbank chose to do, hiking rates to 10 percent and pressuring fiscal policy into sharp tightening too. Ironically, this counterproductive macro policy mix pushed headline inflation up, apart from crushing growth. As a consequence, on top of the legacy of wreckage in East Germany, unemployment in former West Germany doubled as 1.5 million jobs (5 percent of the labor force) were destroyed. Unsurprisingly, Germany struggled until 1998 to get the budget deficit back to just below 3 percent. Only the smaller part of the rise in Germany’s debt ratio from 40 to 60 percent of GDP over the 1990s owed to East German legacies (see here and here).

This is not where the story ends though. continue reading…

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Why the Eurozone Needs a Treasury

Jörg Bibow | November 11, 2014

Slowly but surely a new consensus is emerging emphasizing the need for Europe’s currency union to organize public investment as a means to overcome its crisis, by now in its seventh year; the outlook being truly grim. Back in July President-elect of the European Commission Jean-Claude Juncker called for a €300bn public-private investment program. ECB president Mario Draghi lent his support to the idea in his Jackson Hole speech, finally acknowledging that the eurozone is suffering from deficient aggregate demand.

Former EU Commission President Mario Monti has also recently thrown in his voice, observing that public investment has been crushed by the Stability and Growth Pact and relentless austerity drive undertaken across the continent in its name. In its latest World Economic Outlook, the IMF highlights that at the current juncture public investment is as close to a free lunch as it ever gets: countries renege on their grandchildren’s possibilities by not going for it. For far too long the debate in Europe was exclusively focused on the liability side of the public ledger: debt. But it is the asset side, the public investment undertaken, or not, which is far more relevant in shaping our future.

Today, embarking on a joint public investment initiative represents a special opportunity for the eurozone, a chance to fix the euro regime’s ultimate defect: the lack of fiscal union. The scheme proposed here is simple and straightforward. The idea is to create a Euro Treasury as a vehicle to pool future eurozone public investment spending and have it funded by proper eurozone treasury securities. The Euro Treasury would allocate investment grants to euro member states based on their GDP shares. And it would collect taxes to service the interest on the common debt, also exactly in line with member states’ GDP shares. The arrangement amounts to a rudimentary fiscal union, not a transfer union though, as benefits and contributions are shared proportionately. Nor would the joint public debt issued for investment purposes mutualize any existing national debts. Instead, the Euro Treasury securities would provide the means to fund the joint infrastructure spending that is the basis for the union’s joint future.

Currently, eurozone public investment spending is at a very depressed level of around 2 percent of GDP. continue reading…

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Germany’s Über-Economists Are Rampant Again

Jörg Bibow | October 31, 2014

The rest of the world is holding its breath as the eurozone continues wobbling along the brink of deflation. In fact, numerous member states are already experiencing what it means to let “it” happen again. With the region stuck in depression since 2008, Euroland authorities are writing fresh world records in failing to improve the well-being of their citizens. The only thing that keeps rising in the eurozone is indebtedness—as the unsurprising consequence and symptom of its collective austerity insanity.

But that is not how the German authorities, or for that matter German economists, view the world. Blatantly ignoring the dismal facts that their favored medicine has produced, they never tire of calling for more of the same: austerity, austerity, and another extra dose of austerity please. By contrast, anything that might possibly help to turn fortunes around gets rejected out of hand as conflicting with the requirements of stability-oriented policymaking. In Germany, neither facts nor economic theory matter at all, it seems. Policy prescriptions simply have to match the ruling austerity-cum-competitiveness ideology, no matter what.

Hans-Werner Sinn, president of Munich’s IFO think tank, provided us with a fresh sample of German economic wisdom about a month ago, calling on Germany’s Chancellor Angela Merkel to stop ECB President Mario Draghi from even trying to regain control over its primary price stability mandate, defined as “below but close to two percent” inflation. Eurozone HICP inflation is currently running at only 0.3 percent. But even the thought of the ECB purchasing government bonds is giving rise to hyperinflation fears among German economists, it seems. It’s all a matter of principle and firm belief.

Professor Sinn is known to readers of Germany’s tabloid Bild-Zeitung as the country’s smartest economist. As if to confirm this popular verdict, Professor Sinn was at least making one valid point in his FT op-ed: namely, that the ECB has finally stopped ignoring super-low inflation while the eurozone’s political leadership remains stuck in denial. As the political authorities continue dreaming their austerity-boosts-growth delusion, the ECB (at last) has started devising actions intended to stop the nightmare reality from getting worse. To be sure, it is not an enviable position for any central bank to be in. The ECB is learning the hard way that not having a euro treasury partner means doing the tango on your own (which may look somewhat curious, if not ridiculous). But perhaps some central bankers have come to realize that not even trying to solo-dance might be judged as gross negligence should the eurozone end up sinking into full-blown deflation and chaos.

Professor Sinn reminds his fellow German citizens that they may petition the German Federal Constitutional Court in case they fear that their country’s Basic Law gets trampled upon. The law says that Germany can transfer monetary policy to a European institution that is independent and committed to the primary goal of price stability. This would seem to open up the interesting possibility that the court, if petitioned by its citizens, could also force German politicians to take action against the Bundesbank for failure, as part of the Eurosystem, to effectively stem deflation. Of course this is not exactly what Professor Sinn has in mind. It is utterly inconceivable that Germans, supposedly scared of nothing else in the world but hyperinflation, could ever worry too much about the opposite threat wreaking havoc across Europe—even as destructively-low inflation has been the reality for quite some time now.

And then there is Otmar Issing, formerly a professor of economics at Würzburg University and chief economist at the Bundesbank and then the European Central Bank. His recent FT op-ed is a response to worldwide calls on Germany to change its steadfastly-held austere fiscal stance and finally help the eurozone to recover. Here is Professor Issing’s diagnosis of the situation: continue reading…

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New Book: Economic Development and Financial Instability, Selected Essays

Michael Stephens | October 28, 2014

The first collection of essays by Jan Kregel, focusing on the role of finance in development and growth, has just been made available through Anthem (edited by Rainer Kattel).

From the foreword by G. C. Harcourt:

As I wrote in my remarks when Jan and I were the co-recipients of the 2011 Veblen Commons Award, “I regard Jan as the best all-round general economist alive” (Journal of Economic Issues, XLV, June 2011, 261). I have been nagging him for years to bring out a volume (preferably volumes) of his essays for surely, in his case, the whole is greater than the sum of the parts, splendid though each part is. … Jan is steeped in the history of our subject. He has an intimate knowledge and understanding of the work of past greats and the relevance of their contributions to their times and ours. Jan has an especially deep understanding of the nature of money and finance, and of the institutions associated with them and of the indissoluble relationship between them and the real economy, whether in developed or developing economies. He couples this with a flair for designing humane, realistic policies, in the process bringing out clearly the shortcomings of existing institutions and policies in a wide variety of settings.

Economic Development and Financial Instability_Selected Essays Kregel

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Germany May Be the Biggest Loser If It Doesn’t Start Spending

Jörg Bibow | October 21, 2014

There’s growing pressure on Germany to spend more to support Europe – and for good reason. But it’s proving to be a hard sell to the country’s leaders.

Germany’s budget is balanced and the government insists that its current policy stance is the best it can do – for itself, the eurozone and the world at large. The government’s mantra is that a balanced budget inspires confidence, which in turn propels growth. That’s not actually happening of course, as is plainly visible for anyone to see, yet the ongoing stagnation and sense of crisis felt across the eurozone have only encouraged the German government to repeat its flawed logic.

The rest of the world is not amused, especially eurozone members that have been at the receiving end of Germany’s economic policy wisdom and have been more actively pushing against its gospel of austerity of late.

For much of the time since the euro was launched in 1999, Germany has depended on foreign purchases of its exports for its own meager growth, particularly when domestic demand stagnated for much of the 2000s, just as it does today. But Europe’s biggest country has not been willing to return the favor, as public and private investment remain severely depressed. Even as the government has just cut its own growth forecast for this year and next, it also signaled its continued stubborn refusal to change course.

A nation of surpluses

That protracted stagnation in domestic demand helped cause Germany to run up huge and persistent current account surpluses, averaging about 7% of GDP since 2006. Germany’s current account surplus, on pace to be the world’s largest for a second year in a row, is significantly bigger than China’s, which has declined sharply as a share of GDP from 10% to 2% since the financial crisis.

Bibow_German Current Account

Meanwhile Germany’s has gone the other way, and its leaders do not see anything wrong with that. Rather, the government views it as evidence of the country’s sound policies and restored competitiveness. Eurozone partners are invited to follow the German lead. They are told to balance their budget, liberalize their labor markets and improve their own competitiveness.

There is something fundamentally wrong about this prescription. continue reading…

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Did Ms. Rousseff’s Epiphany Come Too Late?

Michael Stephens | October 15, 2014

by Felipe Rezende

If you’ve been tracking the news on Brazil’s presidential election, you already knew that incumbent Rousseff will face Neves in a runoff election for Brazil’s presidency on October 26th. The tight election reflects the perception of a downward trend of the nation’s economic outlook augmented by news that Brazil’s economy has fallen into recession in the first and second quarters of 2014. This really isn’t looking like the election the Workers’ Party expected. Brazil’s unemployment rate has hit record lows, real incomes have increased, bank credit has roughly doubled since 2002, it has accumulated US$ 376 billion of reserves as of October 2014 and it has lifted the external constraint. The poverty rate and income inequality have sharply declined due to government policy and social inclusion programs, it has lifted 36 million out of extreme poverty since 2002. Moreover, the resilience and stability of Brazil’s economic and financial systems have received attention as they navigated relatively smoothly through the 2007-2008 global financial crisis. Brazil’s response to the largest failure of capitalism since the Great Depression included a series of measures to boost domestic demand.

So, what happened? The reason is fairly obvious, in the aftermath of the global financial meltdown, policy makers misdiagnosed the magnitude of the crisis, the changing circumstances because of it, and ended up withdrawing stimulus policies too early. The premature withdrawal of stimulus measures opened up space for critics, such as the main centre-right opposition party, to blame Ms. Rousseff’s administration as being excessively interventionist leading the Brazilian economy to perform poorly during the past four years. It fueled Mr. Neves’s campaign to convince anti-Rousseff voters he can get Brazil’s economy back on track.

Five years after the crisis where do we stand?

The Brazilian economy in the New Millennium experienced extremely favorable external conditions such as increasing global demand for emerging market exports and rising financial flows to emerging markets (Kregel 2009). Some critics of the Brazilian government argue that the positive economic performance during the past decade was solely due to external tailwinds fueled by the boom in commodity prices, buoyant external demand, and massive foreign flows into Brazil’s economy. This group tends to overlook domestic policies designed to foster private demand. Brazilian economic policymakers, by contrast, proudly point to government policies designed to boost growth. continue reading…

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Exclusive Growth

Michael Stephens | October 8, 2014

This chart, a version of which Pavlina Tcherneva posted on Twitter, has been getting a lot of attention (e. g., NYTimes, Vox, NPRWaPo, Slate, Moyers & Co.).

Tcherneva_Distribution of Income Growth_Levy OP 47

The chart shows, for each postwar economic recovery in the United States (trough to peak), the share of income growth going to the bottom 90 percent and top 10 percent of the income distribution. And the trend is unmistakable. This is how Tcherneva puts it in a new One-Pager: “For the vast majority of people in the United States, economic growth has become little more than a statistical sideshow.”

This is a picture of an economy that has been broken for some time; well before the cartoonish result in the last partial expansion (during that 2009-12 period, the top 10 percent received 116 percent of the income growth [possible because the bottom 90 percent saw their incomes drop] — and the top 1 percent alone captured 95 percent of the gains).

But Tcherneva also has a particular view of how we can change our policies to help solve this problem. She writes about two ways of improving the income distribution through public policy:

“One is to work within existing structures and reallocate income through various income redistribution schemes after income has been earned. The other is to change the very way income is earned from the outset.”

The way we normally use fiscal and monetary policy to stabilize the economy represents a lost opportunity to affect the income distribution through the second channel, she says. Most conventional policies operate by aiming primarily to boost investment and growth, with the employment effects following as mere byproducts of this process. These conventional stabilization tools (including fiscal pump-priming) don’t do enough to disrupt what she describes as a broken “income-generating mechanism”; one that benefits capital over labor and the incomes of high-wage workers over low-wage workers.

Tcherneva argues that direct job creation policies are different. They can stabilize the economy by targeting the incomes and employment prospects of people at the bottom of the income scale, rather than, for instance, waiting for the effects of improved bank balance sheets to trickle down through the income distribution. By having the government fund employment in the public, nonprofit, and social entrepreneurial sectors for all who are ready and willing to work, her “bottom-up” reorientation of fiscal policy is meant to bring about full employment while raising incomes at the bottom of the distribution faster than those at the top.

As Tcherneva points out, severe income inequality doesn’t just raise concerns about distributive justice, it’s also a serious economic problem: for instance, the Levy Institute’s last strategic analysis argued that inequality has been a significant driver of financial instability in the US economy.

Download the One-Pager: “Growth for Whom?” (pdf)

 

Related: An older version of this chart appeared in a Levy working paper, and more recently, in an article published in the Journal of Post Keynesian Economics.

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A Recovery for the Top 10%

Michael Stephens | October 7, 2014

Pavlina Tcherneva was interviewed on the Real News Network about what’s behind the numbers in her chart (below) showing the increasingly inequitable distribution of income growth in US economic expansions–and what we can do about it.

Tcherneva_Distribution of Income Growth_Levy OP 47

 

Related: “Growth for Whom?

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No, Tourism Will Not Save Greece

Michael Stephens | September 25, 2014

From Dimitri Papadimitriou today in New Geography:

Will Lindsay Lohan Save Greece?

It’s September, but island beaches from the Aegeans to Zante are still buzzing in Greece. Mykonos has been the summer’s Go-To spot for superstars and supermodels; the mainland and cities are also seeing the British and Europeans coming back.

Greece’s reemergence on the tourist circuit and the celebrity-watch sites has brought travel revenue, which accounted for 12 billion euros through April, actually above the previous peak in 2008. And, based on arrivals, the national tourism agency predicts that visitors will account for 13 billion euros this year.

So did the appearance of Lindsay Lohan and friends in the Greek isles signify, as one newspaper put it, a template for Greece’s economic recovery?

It didn’t. It’s even still possible that Greece’s economic troubles have yet to hit bottom — no one really knows. There is one definite, though. Even with a dramatic increase in its significant tourism industry, the dance floor under Greece’s summer parties has been resting on a breathtakingly shaky foundation.

Read the rest here.

The supporting research mentioned in the piece is from the Levy Institute’s latest strategic analysis: “Will Tourism Save Greece?

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