Archive for December, 2012

Draghi’s Liquidity Bluff Will Be Called

Michael Stephens | December 31, 2012

by Joerg Bibow

Mario Draghi’s pledge to do “whatever it takes” to save the euro has been widely hailed as a watershed event. Both the markets and euro politics have since been operating on the premise that the euro’s survival is ensured. Unfortunately, that is not a safe assumption at all. Not only because even agreement on the Single Supervisory Mechanism, the easiest element in any banking union-to-be, proved to be anything but easy. But even more so since concentrating energies on preventing future crises is somewhat premature anyway, as long as the current one remains largely unresolved. The point is that the policy strategy that has been adopted for overcoming the crisis, with or without any ECB liquidity promise in support of government bonds (i.e. Outright Monetary Transactions), is doomed to fail. The underlying causes of the crisis have been thoroughly misdiagnosed, and the medication ill-conceived as a result, while reforms of the flawed euro policy regime are so ill-designed as to ensure the euro’s final demise.

The ultimate fear of the Maastricht regime’s designers was that fiscal profligacy of nations lacking Germany’s legendary “stability culture” could usher Euroland into hyperinflation. The Bundesbank’s worst nightmares seemed to come true when Greek budget deficit (ratio) numbers were revised strongly upwards in 2009. So the ill-named pact that has so far failed to deliver on either stability or growth was further strengthened, with fiscal discipline henceforth to be anchored in national law. Irrespective of the collateral damages already endured, the big austerity stick will keep on bashing the Euroland economy for years to come.

This ignores the key flaws in the Maastricht regime of the EMU and the true causes of the crisis. One original sin was to put no one in charge of minding the store of the giant integrated euro economy. No demand management was foreseen in good times, no lender of last resort in bad. Predictably, the Euroland economy has proved prone to protracted domestic demand stagnation and conspicuous reliance on exports for its meager growth, while crisis management has been by trial and error; and errors with no end it would seem. The second original sin was to forget what fifty years of European monetary cooperation were all about, namely to forestall the risk of beggar-thy-neighbor currency devaluation. The euro provided the coronation of that very endeavor in the sense that exchange rates disappeared with national currencies. But this only meant that under the EMU trends in national unit labor costs have taken on the role of determining intra-union competitiveness positions alone. The golden rule of monetary union therefore requires that national unit labor cost trends stay aligned with the common inflation rate that union members have committed to – when they didn’t. continue reading…


Medicare for All and the Long-term Deficit

Michael Stephens | December 14, 2012

Paul Krugman points out today that once you take into account the lingering effects of the recession, it may very well be the case that there is no significant near-term budget shortfall at all. Once the economy has recovered, the budget may already be destined to come in at a level that would stabilize public debt as a share of GDP.  The real problem we have in the short-run is that budget deficits are too low—and shrinking—not that they are too high and growing.

The least unpersuasive case for worrying about the federal budget deficit focuses on the long-term increases in Medicare and Medicaid that will result if health care costs follow their projected, steep upward pathway.  If you accept this case (which should not simply be accepted as gospel), then you can stop listening to any purported “grand bargain” plan that does not address this projected rise in health care costs.

Yet, if the news reports have any validity, the “entitlement reform” side of the fiscal cliff negotiations has become focused on a proposal to increase the Medicare eligibility age by two years.  This would deliver roughly $5 billion in savings to federal government in 2014.  You might say that, given the hardship it would cause to so many near-retirees, this seems like an awfully small sum.  But it’s worse than that.  While this policy change might save the government $5 billion, it would increase health care spending system-wide by twice as much.  In other words, the grand deficit bargain is centered on a proposal that makes the problem of rising health care costs worse.

There is a tried-and-true method of controlling health care costs—but it requires moving in precisely the opposite direction as this proposal.  Many other countries are facing shifting patterns in government spending due to aging populations, but the United States is unique in the developed world in the amount of money it spends, per person, on health care; all in order to obtain slightly inferior health outcomes.  Pick any wealthy country at random, and if the United States were to spend the same amount, per person, as this randomly selected country, the projected long-term US budget shortfall would disappear—completely.  Why?  The answer is that many other countries (with universal coverage) use the bargaining power of a government payer to control the per-unit cost of health care services. Raising the eligibility age for Medicare, making the government insurance pool smaller and sicker, moves us in the opposite direction.

You can either commit yourself to “reducing the size of government,” or you can commit yourself to getting health care costs under control, but you’ll have a hard time doing both.


MMT on “Capital Account”

Michael Stephens | December 12, 2012

Stephanie Kelton was interviewed on RT’s “Capital Account” with Lauren Lyster on the subject of Modern Monetary Theory:


Registration Open for Minsky Summer Seminar

Michael Stephens | December 11, 2012

Registration is now open for the Levy Institute’s fourth Hyman P. Minsky Summer Seminar, to be held on the Bard College campus in June 2013. The annual Summer Seminar provides a rigorous discussion of both the theoretical and the applied aspects of Minsky’s economics, and is geared toward recent graduates, graduate students, and those at the beginning of their academic or professional careers. Application deadline: March 31, 2013. Apply early, as space is limited. See here for more information.


Kelton, Krugman, and Collender On Point

Michael Stephens | December 7, 2012

Stephanie Kelton appeared on NPR’s “On Point” this week with Paul Krugman and Stan Collender to discuss (do I really need to finish this sentence?) the fiscal cliff.

You can listen to or download the podcast here.  (Kelton enters at roughly the 13.20 mark)


Putting Full Employment Back on the Agenda

Michael Stephens | December 5, 2012

James Galbraith and Randall Wray spoke about returning full employment to the policy agenda at an event in Helsinki on Monday organized by the Foundation for European Progressive Studies and supported by the Kalevi Sorsa Foundation and the Finnish Confederation on Trade Unions (SAK).

Wray focused on Minsky’s under-discussed work on poverty and full employment (the Levy Institute is currently putting together a new book containing a collection of Minsky’s published and unpublished writings on the topic):  “Minsky wrote almost as much on poverty, unemployment, and employment policy as he had on financial instability.”  Video of the presentations is below:

Video of the panel discussion can be seen here.


Minsky in Berlin

Michael Stephens | December 3, 2012

Last week, a short walk from the Brandenburg Gate, the Levy Institute held its most recent Hyman P. Minsky Conference on Financial Instability.  The two day conference in Berlin featured a mix of central bankers, academics, politicians, and financial practitioners and dealt with issues related to the eurozone debt crisis, the Federal Reserve, signs of instability in China, Dodd-Frank and financial reform, the payments system (including the threat of cyber attacks and the potential destabilizing effect of the development of alternative payments technologies), indexes of financial fragility, and a host of other intriguing topics.

On the first day, Vítor Constâncio, Vice President of the European Central Bank, delivered a morning speech that highlighted the poverty of the dominant economic thinking underlying the flawed institutional design of the European Monetary Union, with its centralized monetary policy and decentralized fiscal and financial stability policy.

“In the pre-EMU economic modelling world,” said Constâncio, “there was no need to counter financial imbalances and financial instability as the financial sector did not play a crucial role from a macroeconomic perspective.  Similarly, under the assumption of self-equilibrating markets, there was no need to monitor macroeconomic imbalances and disequilibria on the labour, product or financial markets.  With an assumed stable private sector, apart from exogenous shocks, the only source of instability acknowledged were governments and their fiscal profligacy.”  In running through the flaws in these theoretical assumptions, Constâncio noted Minsk’s remark in Stabilizing an Unstable Economy that “… for an economic theory to be relevant, what happens in the world must be a possible event in the theory.”

Against that background, Constâncio traced a path for reform of the eurozone structure. He also included a discussion of the reasoning behind the European Central Bank’s policy on Outright Monetary Transactions (OMT)—the ECB’s bond purchasing program, designed to bring down rising interest rates on peripheral government debt—and said after the speech that he expects Spain to apply for the program.  He portrayed OMT as a way of getting peripheral nations out of “a vicious circle of rising interest rates, falling growth and deteriorating public finances.”  (In other words, as a way of getting out of what Greg Hannsgen and Dimitri Papadimitriou have dubbed a “fiscal trap.”  OMT, Hannsgen and Papadimitriou observe, partially moves the EMU away from its effectively “metallist” currency setup.)

The text of Constancio’s speech can be read here.

Audio of all the conference presentations and sessions can be found here.


Is the Fiscal Cliff a Scam?

Michael Stephens |

Levy Institute Senior Scholar James Galbraith was interviewed for a six-part series on the fiscal cliff by the Real News Network’s Paul Jay.

Video of the first two parts of the interview are below; transcripts can be found here.