Paul McCulley Has Had It with Orthodox Macroeconomists

Michael Stephens | June 13, 2016

Writing in The Hill, Paul McCulley argues that his profession’s fussy obsession with the Fed’s zero-point-whatever monetary policy is leading us into a dead end: “after a financial crisis, itself spawned by bursting of a bubble in private-sector debt creation, the power of monetary policy to generate robust aggregate spending growth is severely truncated.”

The policy problem we need desperately to solve — whose solution is key to a robust recovery, McCulley argues — is fiscal: “fiscal deficits need to be dramatically bigger.” To that end, he adds, it’s time to place the concept of “central bank independence” in its proper context:

Central bank independence has its time and place. But when economic growth is milquetoast and the reality is that inflation is too low, not too high (with the risk of outright deflation in the event of a recessionary shock), there is no reason whatsoever for the monetary and fiscal authorities to act independently — as if they were oil and water — in pursuit of the common public good.

Right now, what the country needs is for the fiscal authority to exercise its latitude to purposely ramp up its spending more than its taxing, and for the monetary authority to print however much money is necessary to keep interest rates low, unless and until inflation smacks the economy in the face. And the fiscal and monetary authorities need to openly declare that these actions are a political joint venture.

Yes, my profession needs to remember that macroeconomics, as a discipline, is about solving collective action problems. The solutions are often politically messy, offending the sensibilities of the moneyed class. Such is the nature of effective democracy: Messiness that delivers for all.

Read it all here.

Related: “Central Bank Independence: Myth and Misunderstanding


Basic Income and the Job Guarantee

Michael Stephens | June 8, 2016

Pavlina Tcherneva was interviewed by Joe Weisenthal yesterday to present the case against a universal basic income policy (a proposed version of which was just voted down in Switzerland). Watch:

Thcerneva Weisenthal_Basic Income v Job Guarantee

Tcherneva has written about the UBI versus Job Guarantee debate, including this contribution (pdf) to a special issue of the journal Basic Income Studies (paywall).

She also spoke about this last November at a roundtable convened by Dissent magazine:
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Of Voices in the Air and Never-Ending Dreams of Helicopter Drops

Jörg Bibow | May 31, 2016

Confusions about so-called helicopter money (HM) continue unabated. My recent letter to the editor of The Financial Times, titled “’Helicopter money’ is a muddled fiscal policy by another name,” has not met with universal approval. In fact, it seems to have ruffled some feathers and caused some annoyance.

Simon Wren-Lewis is a case in point. In a response to my letter (and a piece in the FT by John Kay) published on the Mainly Macro blog, Wren-Lewis reiterates his concerns that trying to distinguish fiscal from monetary policies is ultimately pointless and that central banks need to have HM in their armory since otherwise delegating stabilization would be dangerously incomplete. Mr. Wren-Lewis is perhaps best known for his selfless efforts at trying to wring any sense out of mainstream macroeconomics – an endeavor that takes a lot of wringing indeed. Another case in point is fellow helicopter warrior J. Bradford DeLong, who re-published Wren-Lewis’s HM elaborations on his own blog with the remark “intellectual garbage collection.” The wisdom of HM is just too obvious to be challenged, it seems.

But first recall here that Bradford DeLong is the supposedly “New Keynesian” macroeconomist who a few years back published a piece titled “The Triumph of Monetarism?” in the Journal of Economic Perspectives, arguing – quite correctly actually! – that New Keynesianism was really muddled New Monetarism by another name. It is also the same new monetarist economist who not so long ago published a piece together with Larry Summers titled “Fiscal Policy in a Depressed Economy,” in which the two argued that the time was right for governments to ramp up their investment spending and not worry about debt. That argument made quite a bit of sense to me at the time – and it still does today, as I suggested in my FT letter.

In any case, I was quite amused when at an event at the Brookings Institution on May 23 Larry Summers proclaimed that: “Helicopter money, hear me, helicopter money is fiscal policy. There is no such thing as helicopter money that isn’t fiscal policy.” That may well be just yet another useless point to make of course. But I will leave it to Messrs. Wren-Lewis and DeLong to do the intellectual garbage sorting of Mr. Summers’ remark.

Moving on, a rather interesting piece was published on VoxEU by Claudio Borio (together with Piti Disyatat and Anna Zabei). Borio’s earlier research at the BIS focused on central banks’ operating procedures. He isn’t someone who can be easily fooled about what central banks are doing or not doing. Furthermore, and this may not be a coincidence, he is also one of those rare cases among monetary economists who clearly identified what I long ago dubbed the “loanable funds fallacy” in Ben Bernanke’s “saving glut hypothesis” (see here). continue reading…


Bibow on Helicopter Money in the FT

Michael Stephens | May 19, 2016

In the Financial Times, Jörg Bibow writes in reaction to an article by Stephanie Flanders on “helicopter money” — the idea of having the central bank directly credit citizens’ bank accounts (or, in the thought experiment, to print bank notes and drop them from helicopters) with the aim of generating increases in consumer spending.

Bibow observes that helicopter money is really just fiscal policy, properly understood, and adds that it is preferable that elected fiscal authorities actually do their job — increase spending — during a period of inadequate demand; perhaps by investing in the “energy infrastructure,” as Bibow suggests.

Read the letter here.


Gexit: The Case for Germany Leaving the Euro

Jörg Bibow | May 18, 2016

The case for or against a British exit from the EU – #Brexit – is headline news. For the moment the earlier quarrel about a possible Greek exit from the Eurozone – #Grexit – seems to have taken the back seat – with one or two exceptions such as Christian Lindner, leader of Germany’s liberal FDP. Most EU proponents are deeply concerned about these prospects and the repercussions either might have on European unity.

Yet, while highly important, neither of them should distract Europe from zooming in on the real issue: the dominant and altogether destructive role of Germany in European affairs today. There can be no doubt that the German “stability-oriented” approach to European unity has failed dismally. It is high time for Europe to contemplate the option of a German exit from the Eurozone – #Gexit – since this might be the least damaging scenario for Europe to emerge from its euro trap and start afresh.

Germany’s membership in the eurozone and its adamant refusal to play by the rules of currency union is indeed at the heart of the matter. Of course, it was never meant to be this way. And it was not inevitable for Europe to end up in today’s state of never-ending crisis that impoverishes and disunites its peoples. I have always supported the idea of a common European currency as I believed that it could potentially provide a monetary order that is far superior to the status quo ante of deutschmark hegemony: the Bundesbank – in pursuit of its German price stability mandate – pulling the monetary strings across the continent. While I have also always held that the euro – the peculiar regime of Economic and Monetary Union agreed at Maastricht – was deeply flawed, I kept up my hopes that the political authorities would reform that regime along the way to make the euro viable.

In this spirit I proposed my “Euro Treasury” plan that would, among other things, fix the Maastricht regime’s most serious flaw: the divorce between the monetary and fiscal authorities that is leaving all key players vulnerable and short of the powers required to steer a large economy like the eurozone through anything but fair weather conditions, at best. Watching developments over in Europe from afar my hopes are dwindling by the day that the failed euro experiment will usher in reforms that could save it. Instead, the likelihood of some form of eventual euro breakup seems to be rising constantly. It is undeniable that the euro has turned out to be an instrument of widespread impoverishment rather than shared prosperity. It seems increasingly unclear for how much longer pro-European politics will be able to somehow cover up the blunder and hold things together – particularly as politics is turning more and more nationalistic and confrontational everywhere.

The quest for monetary stability in Europe was always about two things: price stability and the absence of “beggar-thy-neighbor” distortions in competitiveness and trade. Monetary stability was seen as a pre-condition for peace and shared prosperity. Today, the eurozone is on the verge of deflation, domestic demand is still below the level reached eight years ago, and unemployment remains extremely high, especially in over-indebted euro crisis countries. How did we get here? And how could #Gexit help? continue reading…


Donald Trump’s Printing Press Sends the Media to the Fainting Couch

Michael Stephens |

Donald Trump generated some breathless commentary last week (perhaps, for once, unjustified) for suggesting, in response in part to those who have pointed out that some of the policies he has pseudo-proposed would enlarge the deficit, that the US government can always pay its bills: “This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK?” (He had also suggested that the government might buy back government debt at a discount if interest rates rise. Dean Baker argues this would be pointless, not disastrous.) Among the responses to these comments were claims that this “money printing” business would, ipso facto, be (hyper)inflationary.

L. Randall Wray spoke to Bloomberg’s Joe Weisenthal about the issue. Wray emphasized that the government always spends by “printing money,” or more accurately, by crediting bank accounts through computer keystrokes. With respect to whether Trump’s purported policies would or would not be inflationary then, the central question for Wray is not whether Trump would or would not have the government “printing money,” but whether the economy would be at full employment. At that point, a government deficit of sufficient size could be inflationary (in other words: “So, yes, deficits do matter, but not for solvency“).

Watch the interview here at Bloomberg:

Weisenthal Wray Interview


A Global Marshall Plan for Joblessness?

Pavlina Tcherneva | May 12, 2016

The corrosive social and economic effects of what have now become ‘normal’ unemployment levels require new solutions, and trade without full employment exacerbates the problem.

Global unemployment is expected to surpass 200 million people for the first time on record by the end of 2017, according a recent ILO study, and limitations of official statistics suggest that the problem is much larger. As conventional measures increasingly fail to produce tight labor markets and jobless recoveries become the norm, economists grapple with this new reality by calling it secular stagnation and by adjusting upwards the rates of unemployment deemed ‘natural’ — but the human, social and economic costs of this growing problem are rarely considered in economic modeling.

The Problem: A Global Unemployment Epidemic

Mainstream economic theory considers some level of unemployment to be ‘natural’ (i.e., unresponsive to policy remedies without creating some other problem like inflation), but it largely ignores the harsh human, environmental, and economic costs of unemployment. In fact, some of the best work on this question comes from disciplines outside of economics.

It’s not hyperbole to note, for example, that unemployment kills. Literally. Research shows that one in five suicides is related to unemployment, and joblessness causes 32–37 percent excess mortality for men. And while for women the impact is less clear, we know that there are robust and lasting negative effects from unemployment on social participation and social capital – all prerequisites for a fulfilling and productive life at home and in the workplace. The deep negative impact of unemployment on individuals’ mental and physical health is well-established. And joblessness has been found to have strong scarring effects on life satisfaction.

The link between crime and unemployment is also well-established. Certain criminal activities vary with the business cycle, and studies have found significant and sizable impact of unemployment on the rates of specific violent and property crimes. The connection between youth unemployment and crime is particularly troubling in the context of the ILO’s findings that 74 million young people are unemployed globally (one third of their overall global unemployment estimate). Other studies suggest that the actual number of jobless youth around the world may be six or seven times the ILO estimates.

Unemployment doesn’t just harm the unemployed. It also harms their children and families. It exacerbates infant mortality, depression, alcohol consumption, and the spread of infectious disease. And joblessness is a root cause of human/child trafficking and global sexual and labor exploitation.

This list only scratches the surface of the insidious effects of unemployment. While the ‘natural’ unemployment rate is embedded in virtually every forecasting model used by government and industry, none of them account for the extraordinary social and economic costs of the epidemic that this ‘natural rate’ actually represents.

The Solution: A Global Marshall Plan for the Unemployed continue reading…


Dear Time Magazine Readers, the United States Is Not Insolvent

Michael Stephens | April 25, 2016

This is apparently the latest cover of Time magazine:

Zombie Time Magazine Cover

The idea that the US government or the nation as a whole is “insolvent” has an undying appeal. The fear of (or yearning for) some manner of budget crisis has waned somewhat over the last couple of years (one hopes this is due to the fact that most people alive today have never lived through a period in which the deficit has shrunk so rapidly), but stories like this will never go away.

The 25th Minsky conference wrapped up recently (video of all the speakers is posted here), and in one of the sessions Stephanie Kelton delivered a presentation in which she argued that, in contrast to almost any other area of policy, there is one issue on which Democrats and Republicans agree: a public debt crisis is looming. In addition to some disagreement over when the crisis will strike (hawks: yesterday; doves: in a decade or so), they differ merely on the question of how to solve this perceived problem: by cutting spending or raising revenue. This broader moment of bipartisan consensus, Kelton argued, is tarnished only by being wrong.

Among her efforts to dispel the appeal of the debt crisis narrative, Kelton pointed out that US government deficits are the mirror image of non-government surpluses (domestic private sector surpluses plus current account deficits), with a nod to what Goldman Sachs’ Jan Hatzius once described as “the world’s most important chart.” The upshot, she argued, is that calling for a reduction of public sector deficits in the presence of persistent current account deficits should be understood as calling for a reduction of the private sector’s surpluses. Kelton put together the following chart, which flips the script on the Simpson-Bowles-era discussions of how rapidly we should bring down the budget deficit:

Kelton_Flip the Script_Minsky Conference

“Ask the same question now. Now the graph doesn’t show the path of projected government deficits, but instead the path of projected non-government surpluses. So the question becomes how rapidly would you like to reduce the non-government surplus? You want to do it really quickly, follow the blue line; just bring surpluses down very sharply. Would you like to reduce the surpluses in the non-government sector more slowly, a more gradual approach. Or would you like to rethink this exercise all together because you think it’s madness that a policy objective is to reduce non-government surpluses? […]

In other words, their red ink is our black ink. And setting out to reduce budget deficits by $4.1 trillion over the next ten years is the same as saying my goal is to reduce the non-government surplus by 4.1 trillion over the next ten years. One might sound reasonable and the other sounds like madness, but it’s the same thing said two different ways.”

Watch her presentation (slides here):

Two other speakers at the conference mentioned a different, perfectly orthodox reason to stop worrying about a US public debt crisis. Even if you’re convinced that a debt ratio of the size predicted by the Congressional Budget Office’s long-run budget forecast represents a threat, there are reasons to doubt that we’re destined to reach that level. continue reading…


The Crisis in Brazil and the “Narrow Path” for Economic Policy

Michael Stephens | April 22, 2016

The big political story in Brazil is the potential impeachment of President Dilma Rousseff (Brazil’s lower house of congress voted in favor of impeachment; the motion now moves to the senate for consideration). To get an idea of how messy this situation is, note that the man leading the impeachment attempt, Speaker of the House Eduardo Cunha, is facing 184 years in prison for his role in the Petrobras corruption scandal. (In the NYTimes‘ Room for Debate series, Laura Carvalho describes the impeachment process as a parliamentary coup. See also Felipe Rezende’s critical take on the charges for which Rousseff is ostensibly being impeached: violation of the Fiscal Responsibility Law.)

All of this is happening against the backdrop of a multi-faceted economic crisis. Here’s Fernando Cardim de Carvalho’s summary of the situation from his latest policy note:

Brazilian real GDP is estimated to have contracted 3.8 percent in 2015. Meanwhile, annual inflation reached 10.7 percent in 2015 … The overnight cost of bank reserves in the interbank market (SELIC) is currently 14.25 percent. The exchange rate to the US dollar is around R$4, a 50 percent increase over a year ago. Fiscal space for implementing recovery policies is practically nonexistent, with fiscal deficits reaching 10.3 percent of GDP … Unemployment has been growing rapidly and the outlook for 2016 is not promising, to say the least, with the International Monetary Fund (IMF 2016) projecting a further contraction in GDP of 3.5 percent. Concerns about the solvency of large firms that have sharply increased their foreign indebtedness in recent years intensified with the steep devaluation of the real in 2015.

Cardim de Carvalho recently presented his analysis of Brazil’s political and economic challenges at the 25th Minsky Conference. He observed that for once the balance of payments has not played a key role in this economic crisis; nor are there any easily identifiable “external villains” this time around: “this … is an entirely domestically generated crisis.” (Here are the slides from his presentation; video is embedded below the fold.)

As he points out in the policy note (pdf), even a fully functioning, stable government would have a hard time addressing this mix of economic problems, but as it stands, it isn’t even clear who will be running the country in the near future. Cardim de Carvalho pins Brazil’s hopes[1] partially on maintaining the devaluation of the Brazilian real and advocates a change up in fiscal policy. But even here, there’s not much room for policy maneuvering: “For all practical political purposes, Brazil is stuck with fiscal austerity,” he laments.

Under the circumstances, policymakers might be able to do less damage by turning to what Cardim de Carvalho calls “smarter austerity”:  “an increase in public investment paired with less damaging spending cuts and revenue increases, could limit the negative impact on aggregate demand.” The problem, as he explains, is that implementing this kind of budgetary shift would require managing some complicated political trade-offs. Reading the headlines this week, it’s hard to imagine the political system pulling this off, no matter who ends up running the country until the 2018 elections. He’s not optimistic:

Only skillful negotiation led by a trusted political leadership could obtain current sacrifices from participants with a view to achieving better results in the future. Unfortunately, there does not seem to be the slightest possibility that such a negotiation could happen in the near future. The government does not seem capable of doing it. All initiative was lost when avoiding or beating an impeachment process became its first and practically only priority. On the other hand, no legitimate organized opposition exists to present demands and lead a negotiation on behalf of the people. The country has no “elders” to appeal to, no statesmen of recognized stature who deserve the trust of the nation.

Under such circumstances, until Brazil gets closer to the presidential elections scheduled for 2018, there seems to be no plausible alternative to the continuation of the recession and political uncertainty.

You can read the policy note here. See also Cardim de Carvalho’s working paper for more detailed data on how the Brazilian economy got to this point.

[1] “Hope” being the operative word: “While the extent to which the recent devaluation will help to engineer a sustained recovery is unclear, there is little doubt that a return to the overvaluation characteristic of the post-1994 period would kill any such possibility.” He expresses concern that Brazil’s deindustrialization may limit any potential expansionary effect from devaluation.

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Listen in on the Minsky Conference

Michael Stephens | April 11, 2016

Audio from the 25th Annual Minsky Conference will be broadcast live. Listen here beginning tomorrow at 9am.

Tuesday, April 12

9:00−9:15 a.m. Welcome and Introduction
Dimitri B. Papadimitriou, President, Levy Institute
MODERATOR: Theo Francis, Special Writer, The Wall Street Journal
SPEAKER: Jan Kregel, Director of Research, Levy Institute; Professor, Tallinn University of Technology
Fernando J. Cardim de Carvalho, Senior Scholar, Levy Institute; Emeritus Professor of Economics, Federal University of Rio de Janeiro
10:30 a.m. − 12:30 p.m. Session 2. COMMODITIES AND DERIVATIVES REGULATION
MODERATOR: Izabella Kaminska, Journalist, Financial Times
SPEAKERS: Robert A. Johnson, President, Institute for New Economic Thinking; Senior Fellow and Director, Franklin and Eleanor Roosevelt Institute
Michael Masters, Founder and Chairman of the Board, Better Markets
12:30−2:15 p.m. Lunch
SPEAKER: Robert J. Barbera, Codirector, Center for Financial Economics, The Johns Hopkins University
“Six Degrees of Separation: Why the Fed’s Strategy of Precautionary Unemployment Is Nutty”
MODERATOR: Jesse Eisinger, Senior Reporter, ProPublica
SPEAKERS: Henry Kaufman, President, Henry Kaufman & Company, Inc.
Richard Berner, Director, Office of Financial Research, US Department of the Treasury
Martin L. Leibowitz, Managing Director, Morgan Stanley
Albert M. Wojnilower, Economic Consultant, Craig Drill Capital
MODERATOR: Jan Kregel, Director of Research, Levy Institute; Professor, Tallinn University of Technology
SPEAKERS: Viral V. Acharya, C. V. Starr Professor of Economics, New York University Stern School of Business
Scott Fullwiler, Professor of Economics and James A. Leach Chair in Banking and Monetary Economics, Wartburg College
Stephanie A. Kelton, Research Associate, Levy Institute; Chief Economist, US Senate Budget Committee; Professor, University of Missouri—Kansas City

Wednesday, April 13

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