The “German Problem” Is Not a Problem for Anyone to Worry About. Or Is It?

Jörg Bibow | July 19, 2017

It took a very long time. Too long. But just in time for the recent G20 meeting in Hamburg on July 7-8, The Economist’s cover page story featured Germany’s persistent current account surpluses as the world community’ new “German problem”; supposedly an issue of foremost interest to the G20. In fact, Germany has run up current account surpluses exceeding 4 percent of GDP in each and every year since 2004. For the last couple of years Germany’s surpluses even exceeded 8 percent of GDP. Running at over 250 billion euros annually, Germany is the world champion in what is often portrayed as a global competition by the German media and body politic, and not without pride. At close to 300 billion US dollars last year, China’s surplus of 200 billion dollars only came in as a distant second.

Just as with Germany’s, China’s external surpluses had started to skyrocket at the time of the global boom of the 2000s. It reached a peak at over 400 billion in 2008, amounting to close to 10 percent of China’s GDP at the time. Since then China’s current account surplus has roughly halved and amounts to less than 2 percent of China’s GDP today.

At least in that regard, China is a good global citizen. Reducing and containing “global (current account) imbalances” has indeed been one of the agreed upon objectives of the G20 from the time the group of leading countries took fresh prominence in the context of the global crisis. At the 2009 Pittsburgh summit, the G20 leaders conceived the group’s “Framework for Strong, Sustainable, and Balanced Growth.” While other countries have generally significantly reduced their current account deficits or surpluses, respectively, since the crisis, Germany is the conspicuous outlier as the country’s current account surplus has leaped into its unchallenged lead position of today.

The Economist was rather late in pointing this out so prominently on its cover page just prior to the G20 Hamburg summit. Perhaps it is too hard today to miss the writing on the wall that is a signature piece in Donald Trump’s “America first” strategy to global issues. The US president may get some of the details wrong about Germany’s trade and may also be wrong in bringing a sharp bilateral angle to the matter. But, globally, the situation is simply undeniable: Germany is the world champion of large and persistent current account surpluses. The country is in continuous breach of the “rules of the game” without showing any signs of discomfort about an “achievement” that much of the country even takes pride in. continue reading…


Why Macron Should Not (and Cannot) Follow the German Model

Jörg Bibow | June 2, 2017

The Economist‘s analysis of Germany’s job market miracle of the past ten years offered in “What the German economic model can teach Emmanuel Macron” is more balanced than the usual accounts one hears in Germany itself. Germans are in love with the idea that structural reform of their labor market and persistent budgetary austerity were solely responsible for the German economy’s superior performance in recent years. The Economist highlights that Germany was fortunate enough to embark on its route for national salvation – the decisive lowering of its labor costs relative to its European partners – at a time when the world economy and global trade were booming, when China was craving German capital goods, and German companies were restoring their special relationship with a region reemerging from behind the iron curtain. No doubt France and its struggling euro partners are facing a far less benign regional and global environment today.

The Economist would have done well to remind us that despite enjoying a more favorable economic context, Germany became known at the time as “the sick man of Europe/the euro.” Between 1996 and 2006, Germany managed to almost persistently suffocate domestic demand to such an extent that the economy was growing, if barely, on exports alone: the background to Germany’s 8.5 percent-of-GDP current account surplus today. As for France, the bar is much higher today, not only because of stagnant export markets, but also for the fact that France is a far more closed economy than Germany. In other words, there is more to suffocate in terms of domestic demand, but less to gain in terms of exports. In short, the chances of France getting seriously sick by mimicking Germany are very high indeed.

Also, if Europe’s second-largest economy were to embark on the deflationary path earlier trodden by Germany, bear in mind here that the European Central Bank is already in a quagmire. After overcoming many obstacles, legal and intellectual, the bank is applying its full weaponry today in trying to move Eurozone inflation back closer to its 2 percent price stability norm – while facing the prospect of soon running out of ammunition in terms of the fast-shrinking German public debt available for purchase on the market.

And this directs the attention to the true challenge that France and Europe are facing today: German public debt is shrinking fast because Germany runs a sizeable budget surplus. Quite obviously – as the vast imbalance between private saving and investment reveals, which is closely related to the surge in inequality in Germany –this is only made possible by the fact that Germany runs a massive external surplus: the counterparts to which are current account deficits and rising debts of other countries. The upshot of all this is that France and Europe have a zero chance to rebalance for as long as Europe’s largest economy refuses to rebalance too; which means that Germany’s evangelized, but greatly distorted, narrative of its own success will need some fine-tuning too.

For the sake of Europe, let us hope that Angela Merkel’s newfound wisdom that “we Europeans must really take our destiny into our own hands” means that Germany is finally getting ready for a decisive course change to its own economic affairs. Failure to do so, leaving France out in the cold under Emmanuel Macron, would bring Marine Le Pen back into the limelight much sooner than in five years’ time.


On the Concert of Interests and Unlearning the Lessons of the 1930s

Michael Stephens | April 20, 2017

Jan Kregel opened this year’s Minsky Conference (which just wrapped up yesterday) with a reminder that the broader public challenges we face today are still in many ways an echo of those that faced the nation in 1930s. What follows is an abridged version of those remarks:

This year’s conference takes place in an increasingly charged and divisive economic and political atmosphere. Sharp differences in approach are present within the new administration, within the majority party, and even within the opposition. It is a rather different environment than the one envisaged when planning for the Conference started last September. I had originally proposed as a title “The New Administration meets the New Normal: Economic Policy for Secular Stagnation.” It was an obvious attempt to hedge our bets on the outcome of the election. After the election the first adjustment to the title was “Can the New Mercantilism Displace the New Normal: Economic Policy under the New Administration.” As you can see the final title eventually adopted the elocution proposed at the presidential Inauguration.

My intention was not to elicit recollection of the “America First” committee’s support of isolation from the emerging European conflict in the 1930s. It was rather to recall that the phrase was first used, to my knowledge, by Franklin Roosevelt during his first election campaign.

Herbert Hoover had resolutely refrained from direct government support for the growing masses of the unemployed (although support was more than most give him credit for) for fear of interfering with the operation of the market mechanism in producing recovery from what was presumed to be a temporary cyclical downturn: “Recovery was just around the corner.” When this did not occur as expected the blame was laid on foreign financial and political events eroding confidence.

For Roosevelt, Hoover’s policy implied that “farmers and workers must wait for general recovery until some miracle occurs by which the factory wheels revolve again” but “No one knows the formula for this miracle.” Instead he argued in favor of direct measures to “restore prosperity here in this country by re-establishing the purchasing power of half the people of the country … In this respect, I am for America first.”

Instead of the miracle of a spontaneous market recovery, Roosevelt promised to take action to defend the condition of the “forgotten man” by offering him a “new deal” to protect from the ravages of bankers and industrialists. The simple substitution of “America Great” for “new deal” suggests an important similarity between the rhetoric and the target audience of the two campaigns.

It is instructive that in both cases the election was won with promises, creating a belief that appropriate actions would be forthcoming. We know from history how Roosevelt proceeded by experimentation, by trial and error, of what at the time were considered audacious, radical policies.

The question before us today is how the experimentation of the new administration may be directed to fulfill campaign promises. continue reading…


India’s Unexplored “Bill of Rights”: A Tool for Gender-Sensitive Public Policy

Lekha Chakraborty | March 3, 2017

The Justice Verma Committee submitted its report on January 23, 2013. In addition to recommendations for reforming laws related to sexual violence, harassment, and trafficking, it provided a comprehensive framework for gender justice through a proposed “Bill of Rights.” The Verma Committee’s recommendations are still waiting to be transformed into public policy.

We must not forget that this document represents an intense 30 days of work in response to a brutal gang rape of a young student in the heart of the nation’s capital in a public transport vehicle in the late evening of December 16, 2012. She was returning home with her friend after watching “Life of Pi.”

The power of this report is the acknowledgment (in the very first line of the report) that this brutal event represents a “failure of governance to provide a safe and dignified environment for the women of India, who are constantly exposed to sexual violence.” The acknowledgement is a clarion call for government policies to ensure dignity, safe mobility, and security for women.

“Bill of Rights”

The Bill of Rights is a proposed charter that would set out the rights guaranteed to women under the Constitution of India, against the backdrop of India’s commitment to international conventions. These rights are articulated as the right to life, security, and bodily integrity; democratic and civil rights; the right to equality and non-discrimination; the right to secured spaces; the right to special protections (for the elderly and disabled); and the right to special protection for women in distress.

The beauty of this Bill of Rights is that, unlike public policy approaches in which women facing differing challenges and circumstances are all treated the same, a careful analysis of heterogeneity is captured in these five dimensions (in this context, it is noteworthy that the Committee’s work is informed by Amartya Sen’s “capabilities approach”). Conceptually, the Bill of Rights lays out an analytical framework for gender budgeting to be conducted in the realm of “internal security.” When translating the Bill of Rights into policy, we need to examine existing budgets through a “gender lens” and rectify the deprivations thereby revealed.

Gender Issues in Public Policy

After every Union Budget, questions arise as to “what’s in it for women?”, but these debates have been largely been confined to just the rise and fall in allocations. The “rule of law” is a public good. The purpose of this post is to highlight this significant policy document—lying largely unexplored and with its recommendations mostly untouched—on women’s rights in India. Though the Verma Committee report was constituted to recommend “amendments to the Criminal Law so as to provide for quicker trial and enhanced punishment for criminals accused of committing sexual assault against women,” it is written in a broader context than just analyzing the legal codes.

The mere existence of the best-designed democratic institutions does not guarantee success: as noted by the Verma Committee report, even perfect laws would remain ineffective without the “individual virtuosity” of the human agency necessary for implementing the laws. Similarly, although gender budgeting—a silent revolution that integrates gender consciousness into fiscal policy frameworks—has been applied in the case of a few public expenditure budgets, it has remained sporadic and ineffective, in part due to insufficient capacity-building among the bureaucracy and a lack of accountability mechanisms.

Will the Fifteenth Finance Commission Integrate Gender?

In a co-operative federalism, it is high time that the Finance Commission “own” and integrate the gender concerns articulated in the Verma Committee’s proposed “Bill of Rights”—either in formula-based unconditional grants with a gender indicator/index as one of the criteria (just as a “climate change” variable appeared in the formula of the Fourteenth Finance Commission in sharing the divisible tax pool with the States), or as specific-purpose grants to the States to engage in meaningful gender-budgeting fiscal policy practices at the subnational level. This idea has been analyzed in my papers published by the IMF (2016) and the Levy Economics Institute (2016; 2014; 2010).

The Bill of Rights framed in the Justice Verma Committee Report can form the foundation for gender budgeting in a “law and order” context. Gender budgeting in criminal justice is a public good and needs effective planning and financing strategies, but it has so far been limited to the creation of the “Nirbhaya Fund” (designed to fund new schemes for the safety and security for women, with an initial allocation of Rs. 1,000 crores), which has been unused since 2013.


“America First” and Financial Stability: 26th Minsky Conference

Michael Stephens | February 16, 2017


April 18–19, 2017

Levy Economics Institute of Bard College
Annandale-on-Hudson, New York 12504

The 2017 Minsky Conference will address the implications of the new administration’s “America First” policies, focusing on the outlook for trade, taxation, fiscal, and financial regulation measures to generate domestic investments capable of moving the growth rate beyond the “new normal” established in the aftermath of the Great Recession, without jeopardizing financial stability. It will also seek to assess the impact of different financing schemes on both infrastructure investment and the return of central bank monetary policies to more neutral interest rates. Since these new policy proposals will have a global impact, the conference will focus on their implication for the performance of European and Latin American economies.

Register here.

The preliminary program and list of participants is below the fold: continue reading…


L. Randall Wray on MMT and Positive Money

Michael Stephens |


Xmas Cheer: The Debt Is Not Our Biggest Problem

Michael Stephens | December 31, 2016

Why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? It’s one of the most effective, and most abused, wedge issues in American politics.

by Kerry Pechter

The nomination of Mick Mulvaney—deficit hawk, three-term Republican congressman from South Carolina and founding member of the House “Freedom Caucus”—to the cabinet-level directorship of the Office of Management and Budget is not good news for the financial system.

Mulvaney has said (and perhaps even believes) that one of the “greatest dangers” we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it’s dangerously untrue. If it were true, the country would have failed long ago.

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can’t productively solve the Social Security and Medicare funding problems, defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.

Hamilton, the Broadway star

If you don’t believe me, believe Alexander Hamilton. In 1790, the new nation was awash in government IOUs but had little cash or coinage for daily commerce. Hamilton, the impetuous future Broadway subject, resolved the crisis with a simple argument. He reminded his fellow founders that debts are also assets, and that the most secure assets are those that yield a guaranteed income stream from a sovereign government with the power to tax.

At the time, according to Hamilton’s “First Report on the Public Credit,” the U.S. debt in 1790 stood at $54.1 million and change. In that document, the first Treasury Secretary laid out his plan—over the protests of deficit hawks—to restore the debt’s face value, secure the new nation’s credit rating, and put new money into circulation through interest payments on the debt, with revenue from taxes on imports.

The plan worked. With its par value established, U.S. debt became—and still is—the basis of the nation’s money supply. “In countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money,” Hamilton wrote. “Transfers of stock or public debt are there equivalent to payments in specie; or, in other words, stock, in the principal transactions of business, passes current as specie.”

Not a burden on our backs

Since then, during times of doubt, others have re-explained all this. In 1984, many people were panicking that the federal budget deficit had reached $185 billion. That July, economic historian Robert Heilbroner, author of The Worldly Philosophers, explained in a New Yorker essay that their fear was based on a misconception.

“The public’s concerns about the debt and the deficit arises from our tendency to picture both in terms of a household’s finances,” Heilbroner wrote. “We see the government as a very large family and we all feel that the direction in which these deficits are driving us is one of household bankruptcy on a globe-shaking scale.”

That’s not so, he explained. The government is more like a bank, which lends by creating brand new liabilities. (You can also think of it as the cashier at a casino, who has an infinite number of chips at her disposal.) “As part of its function in the economy, the government usually runs deficits—not like a household experiencing a pinch but as a kind of national banking operation that adds to the flow of income that government siphons into households and businesses,” he wrote.

Robert Heilbroner

“The debt is not a vast burden borne on the backs of our citizenry but a varied portfolio of Treasury and other federal obligations, most of them held by American households and institutions, which consider them the safest and surest of their investments.”

‘Heterdox’ economic view

Over the past 30 years, however, as the national debt has become a political football, this common-sense explanation of it has been suppressed. You hardly ever hear it articulated. It is kept alive mainly by “heterodox economists” like Stephanie Kelton and L. Randall Wray.

In the 2015 edition of his book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Wray explained the flaw in the idea that the deficit, the debt or the interest on the debt will eventually overwhelm us. It’s the kind of straight-line forecasting, he wrote, that ignores self-limiting factors or feedback mechanisms.

“If we are dealing with sovereign budget deficits we must first understand WHAT is not sustainable, and what is,” Wray wrote. “That requires that we need to do sensible exercises. The one that the deficit hysterians propose is not sensible.” He uses the analogy of Morgan Spurlock, the maker of the 2004 documentary Supersize Me, to illustrate his point.

In the movie, Spurlock wanted to discover the effects of consuming 5,000 calories worth of food at McDonald’s every day. Wray pointed out that, if you ignored certain facts about human metabolism, the 200-lb Spurlock would inevitably weigh 565 pounds after a year, 36,700 pounds after 100 years and 36.7 million pounds after 100,000 years. Of course, that can’t happen.

Randall Wray

“The trick used by deficit warriors is similar but with the inputs and outputs reversed,” according to Wray. “Rather than caloric inputs, we have GDP growth as the input; rather than burning calories, we pay interest; and rather than weight gain as the output we have budget deficits accumulating to government debt outstanding.

“To rig the little model to ensure it is not sustainable, all we have to do is to set the interest rate higher than the growth rate – just as we had Morgan’s caloric input at 5,000 calories and his burn rate at only 2,000 – and this will ensure that the debt ratio grows unsustainably (just as we ensured that Morgan’s waistline grew without limit).”

Fooling the people

Like any other threat, the debt’s scariness factor depends on how you frame it. The 2016 budget deficit was $587 billion, which sounds terrible. But that was just 3.3% of Gross Domestic Product. The U.S. debt reached $19.9 trillion in 2016, which also sounds terrible. But that is the amount accumulated since 1790. Our annual GDP is almost $18 trillion.

To enlarge the frame, we should include the whole “financial position” of the United States. According to Wikipedia, it “includes assets of at least $269.6 trillion and debts of $145.8 trillion. The current net worth of the U.S. in the first quarter of 2014 was an estimated $123.8 trillion.” In that context, neither the deficit nor the debt seem like terrible threats.

If you’re bent on making the math look scary, you can easily do it. As Wray noted above, “If the interest rate [i.e., costs] is above the growth rate [i.e., revenues], we get a rising debt ratio. If we carry this through eternity, that ratio gets big. Really big. OK, that sounds bad. And it is. Remember, that is a big part of the reason that the global financial crisis (GFC) hit: an over-indebted private sector whose income did not grow fast enough to keep up with interest payments.”

But the government doesn’t face the same constraints as the private sector (which is why it could bail out the private sector in 2008-2010). Once you recognize that U.S. assets are huge, that U.S. debts are also private wealth, and that the debt needs to be serviced but never zeroed out, then today’s debt shrinks into the manageable problem that it is and not a source of panic. (Paying down the national debt—in effect, deleveraging the government—would be disastrously deflationary; that’s a topic for another article.)

So why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? The answer is obvious. It provides an evergreen reason to delegitimize any and every type of government spending, regulation and taxation. It’s one of the most effective, and most abused, wedge issues in American politics.

Kerry Pechter is the founder and editor of the Retirement Income Journal. Reprinted with permission.


“Stimulus” Isn’t the Best Reason to Support (or Oppose) Infrastructure Spending

Michael Stephens | December 15, 2016

A little while back, Pavlina Tcherneva appeared with Bloomberg’s Joe Weisenthal to talk about the potential infrastructure policy of president-elect Donald Trump. She noted that, contrary to initial assumptions, the upcoming administration may not end up pushing public-debt-financed infrastructure spending, and that if the program simply amounts to tax incentives and public-private partnerships, it won’t be nearly as effective. But Tcherneva added another important dimension to this debate. (You can watch the interview here):

Tcherneva’s point is that infrastructure investment should be determined primarily by the state of dilapidation or obsolescence of our roads, bridges, etc., and not so much by the moment we occupy in the business cycle.

There are some who would argue that the time for a large fiscal stimulus has passed, with unemployment at 4.6 percent and growth continuing apace. There’s a good argument to be made that we’re not at “full employment” even at this moment, and that there’s no need to back off on stimulus (though there’s still the question as to whether the Federal Reserve would attempt to depress economic activity by raising interest rates in response to any substantial fiscal expansion — and, additionally, whether the Fed would succeed in those circumstances). But the point is, where you stand on this debate regarding the business cycle and the meaning of full employment shouldn’t be the driving factor behind infrastructure policy — we shouldn’t necessarily pursue or avoid infrastructure repairs and improvements for those reasons.

Moreover, if you’re looking for a job creation program, which Tcherneva would argue ought to be the point of “stimulus,” there are more effective options. In particular, she advocates a job guarantee that would provide paid employment at a minimally decent wage to all who are willing and able to work. Among other reasons, Tcherneva notes that such a program, which automatically expands during economic downturns and contracts in better times, is more effective as a countercyclical stabilizer, as compared to spending on infrastructure projects (read the tweet-storm version of the argument here).

And given that infrastructure seems to have become the go-to spending-side stimulus policy, we might also want to think about the distributive implications. continue reading…


Call for Papers: Gender and Macro Workshop in NYC

Michael Stephens | November 30, 2016

New York City
September 13–15, 2017

A workshop organized by the Levy Economics Institute of Bard College with the generous support of The William and Flora Hewlett Foundation

The goal of this workshop is to advance the current framework that integrates gender and unpaid work into macroeconomic analysis and enables the development of gender-aware and equitable economic policies. We are interested in contributions that address the gender implications of macroeconomic processes and policies and examine mechanisms that link gender inequalities to macroeconomic outcomes. These may include but are not limited to:

  • Incorporation of the realm of unpaid productive activities into economy-wide models (e.g., SAM, CGE).
  • Analysis of the links that connect economic structure (e.g., sectoral composition of economy, degree of openness) and growth regimes (e.g., wage-led versus investment-led growth) with women and men’s economic outcomes and gender inequalities.
  • Assessment of the channels through which macroeconomic policies influence women’s and men’s economic outcomes and gender inequalities. These include fiscal policies and monetary policies related to interest rates, exchange rates, and financial markets.
  • Evaluation of the mechanisms whereby gender inequalities influence macroeconomic outcomes, such as aggregate output and employment and their sectoral composition, inflation, budget deficits, and current account balance.
  • Aspects of interconnections between unequal international economic relations (trade and finance) and gender inequalities.

The types of gender inequalities to be modeled may potentially encompass inequalities in care and unpaid work, labor force participation, employment composition (by sector and/or type of employment, such as formal or informal), education, and access to and utilization of social and financial services.

We invite theoretical contributions that utilize existing and novel macroeconomic modeling approaches as well as empirical studies, in particular those focusing on the dimensions of gender inequalities relevant to the countries of Sub-Saharan Africa and other low-income economies. We are also interested in papers that provide a comprehensive picture of the state of the art, identify gaps, and indicate directions for future research.

Accommodation and travel-related expenses will be covered by the workshop organizers. Please submit your abstract using the form found here.

If you have any questions, please contact Ajit Zacharias at

Important dates:
500-word abstract due January 25, 2017
Acceptance notifications e-mailed March 1, 2017
Final paper due July 31, 2017


Can Financial Regulatory Changes Help Jumpstart Long-Term Investment?

Michael Stephens | November 15, 2016

In a presentation here at the Levy Institute, Emilios Avgouleas argued that financial regulatory changes since the crisis have become so complex they represent a source of financial instability, and that new liquidity and capital requirements have contributed to the problem of “short-termism” in finance.

Avgouleas proposed regulatory simplification and a reorientation that would create greater relative incentives for funding long-term investment projects (e.g., infrastructure), including a lower regulatory and tax burden on long-term instruments. Empowering issuers of long-term instruments like project bonds with intellectual property rights could, he suggested, help control the quality of these financial products by preventing “slicing and dicing” in derivatives markets, on pain of losing prescribed privileges.

You can watch the presentation below: “The Financial Regulation Conundrum: Why We Should Discriminate in Favor of Long-Term Finance”