Archive for July, 2013

The “Success” of the Greek Bailouts

Michael Stephens | July 25, 2013

On the face of it, the troika’s (ECB/IMF/EU) bailouts of Greece, with their attendant demands for budget austerity, privatization, and labor market reforms, have failed and failed again — whether we’re talking about basic material well-being or debt ratios:

Currently, the official unemployment rate stands at 27 percent, while youth unemployment is above 62 percent and more than 30 percent of the population lives near or below the poverty line. In a nation of less than 11 million people, more than half a million children live in poverty—that’s one out of three—with nearly 60 percent of them living in households that experience “severe material deprivation.” The debt-to-GDP ratio declined from 170 percent at the end of 2011 to 156 percent at the end of 2012 (following a rather sizable “haircut” among private holders of Greek bonds) and will remain at unsustainable levels for the unforeseeable future. In fact, the best scenario envisioned by Greece’s international lenders is that the country’s debt-to-GDP ratio will be reduced to 120 percent by 2020 — only 6.8 percent less than what it was when the debt crisis began in late 2009.

When the same policies are tried over and over again, with the same dismal results, there are plenty of potential reasons for an unwillingness to change course. As frequently noted, the allure of fashionable economic theories can long outlast the nuisance of uncooperative empirical results.

Along with ideology and pet economic theories, C. J. Polychroniou suggests another (far more cynical) interpretation. The bailout programs, he says, are succeeding in some respects; the problem is that we may be incorrectly assuming what the main priorities are:

Amazingly enough, in the face of this ongoing and uncontrolled catastrophe, and despite the IMF’s admission that it misjudged the impact of austerity on Greece’s economy and its people, IMF and EU officials remain as committed as ever to the policies responsible for Greece’s collapse. But while many seem surprised by this apparently contradictory posture, they shouldn’t be. The austerity “shock treatments” administered by the IMF and the EU have two explicit goals: (1) to ensure that the loans are paid back no matter what the cost, and (2) to roll back the average standard of living in order to create highly favorable conditions for international business-investment opportunities and to increase the rate of profit for the corporate and financial elite at home. It is an avowedly class-warfare approach, cloaked in the organization’s holier-than-thou rhetoric about the overall benefits of a neoliberal economic order and the economic drag created by organized labor and workers’ rights, social welfare provisions, and decent wages.

He makes the rest of his case in a new policy note.


What’s the Economic Impact of a Pathway to Citizenship?

Michael Stephens | July 24, 2013

The Congressional Budget Office’s analyses of the Senate immigration bill were a boon (at least rhetorically) to those pushing for comprehensive immigration reform. The CBO estimated the bill would produce some significant budgetary savings and a macroeconomic boost, helping undermine the argument that comprehensive reform would prove too costly. However, the Senate bill contains some slightly more popular provisions — those related to increasing high-skill immigration — packaged together with some decidedly less popular provisions — like offering a pathway to legal immigration (and eventual citizenship) to currently undocumented immigrants. The latter seems to be the biggest obstacle to getting House Republicans on board with comprehensive reform.

So what happens when we look exclusively at the economic impact of something like the “pathway to citizenship”? Selçuk Eren, drawing on research he conducted with Hugo Benítez-Silva and Eva Cárceles-Poveda, provides the answer. Legalizing 50 percent of the undocumented population, far from being a massive burden, would actually add $36 billion per year to GDP. And these macroeconomic benefits would be large enough that there would be little perceptible net impact on the social insurance system (they examined Social Security and unemployment insurance in particular).

Now, in a roughly $14 trillion economy, adding $36 billion per year isn’t a huge deal (the Senate bill would involve more like 70 percent legalization, so the actual GDP boost would be larger, though not by much). But if you grant the humanitarian or republican arguments for a pathway to citizenship — that it’s a bad idea in a modern republic to maintain a semi-permanent underclass of individuals uniquely subject to the arbitrary will of others — or if you’re casting about for some politically correct reason to object to legalization, then the question becomes whether reform is too costly in economic terms. Eren’s research suggests that we can afford both the status quo and the Senate bill — even its most controversial provision — but the status quo is actually the more costly of the two.


Papadimitriou on New Austerity Measures in Greece (Greek)

Michael Stephens | July 23, 2013

Dimitri Papadimitriou, Levy Institute president and one of the coauthors of a new macroeconomic report on the Greek economy, appeared on Skai TV to discuss the new austerity measures passed by that country’s parliament last week. Segment (in Greek) begins at 36:00.


International Conference on Applied Business and Economics

Michael Stephens | July 22, 2013

October 24, 2013

International Conference on Applied Business and Economics

The Levy Institute is cosponsoring the 2013 edition of the International Conference on Applied Business and Economics (ICABE), which will be held in Manhattan at the John Jay College of Criminal Justice, City University of New York. The main goal of this annual conference is to provide a place for academics and professionals from a variety of fields to meet and exchange ideas and expertise.

ICABE 2013 focuses on the role of financial accountability and transparency in economic activities, and aims to address issues arising from financial speculation and limited disclosure in the buildup to financial and economic crises. Special sessions for graduate students are scheduled, and selected papers will be published in one of the 12 international journals participating in the conference.

The deadline for registration is September 1. For more information, including fee schedules, special events, and logistics, visit the conference website.


A New Modest Proposal for the Euro Crisis

Michael Stephens | July 18, 2013

Yanis Varoufakis and Stuart Holland have come out with a new version of their “Modest Proposal” for resolving the euro crisis (an earlier version of the Proposal appeared as a Levy Institute policy note in 2011). The latest iteration (4.0) adds a new co-author in James Galbraith and an additional “sub-crisis” to the original three: the eurozone, they say, faces a banking crisis, a public debt crisis, a crisis of under-investment, and now, after five years of policy failure (due in part to treating the situation as only a debt crisis) Europe faces a social crisis.

The “modesty” of the authors’ policy approach hinges on avoiding what they describe as a false choice between “draconian austerity and a federal Europe.” They argue that we can make substantial progress on addressing these multiple crises without resorting to things like national guarantees, fiscal transfers, or treaty changes. For instance, here is the outline of their proposal for dealing with sovereign debt:

The Maastricht Treaty permits each European member-state to issue sovereign debt up to 60% of GDP. Since the crisis of 2008, most Eurozone member-states have exceeded this limit. We propose that the ECB offer member-states the opportunity of a debt conversion for their Maastricht Compliant Debt (MCD), while the national shares of the converted debt would continue to be serviced separately by each member-state.

The ECB, faithful to the non-monetisation constraint (a) above, would not seek to buy or guarantee sovereign MCD debt directly or indirectly. Instead it would act as a go-between, mediating between investors and member-states. In effect, the ECB would orchestrate a conversion servicing loan for the MCD, for the purposes of redeeming those bonds upon maturity.


A Quantum of Herring

Thomas Masterson | July 17, 2013

Casey B. Mulligan, of whom I have written before, has a new post on the New York Times Economix blog, in which he attempts to school the less wise what policy impact assessment is all about. It is not about Red Herrings, for example. He references one of his recent posts that I opted to mostly let go at the time. Though I did make a comment not unlike the one he disparages.

In this post he says that the point of policy impact assessment is to compare what will happen if a policy is implemented to a baseline, without the policy. Fair enough, but is that enough? He says:

Policy impact quantifies how things are different as a consequence of the policy. [emphasis mine]

His analysis of the impact of the Affordable Care Act on the part-time labor market concludes that two of the things that keep people in full-time employment, access to health insurance coverage and higher pay, will be eroded by the ACA. The bit about the insurance coverage is obvious enough. Well done! The bit about the higher pay is not quite as obvious. The numbers Mulligan uses are telling, however.

continue reading…


How BIG is BIG Enough: Would the Basic Income Guarantee Satisfy the Unemployed?

L. Randall Wray | July 10, 2013

(This is a prequel, Part 1 on BIG; I already did Part 2. Sorry it is longish, but not technical.)

Last week I criticized an article by Allan Sheahan who argued that “Jobs Are Not the Answer” to America’s unemployment problem. The thesis was based on two propositions. First, labor productivity has grown so we’d never be able to find sufficient work for all. Second, we don’t need jobs anyway because:

“Job creation is a completely wrong approach because the world doesn’t need everyone to have a job in order to produce what is needed for us to live a decent, comfortable life. We need to re-think the whole concept of having a job. When we say we need more jobs, what we really mean is we need is more money to live on. One answer is to establish a basic income guarantee (BIG), enough at least to get by on — just above the poverty level — for everyone. Each of us could then try to find work to earn more.”

I devoted most of the space in my response to the first point. Labor productivity has been rising since caveman first grabbed a club. Productivity’s importance as a cause of unemployment is at best of second order importance and certainly not new. The real cause is money. To be more specific, it is because we choose to organize a huge part of our social provisioning process through the monetary system, with much of our production controlled by capitalists. It is a monetary production economy—capitalists will not employ labor if they do not believe it will be profitable. (Note that is a statement of fact, not a criticism.)

The problem is not that we cannot find useful things for people to do. Any one of the readers of this blog could come up with a list of hundreds of useful things to do that are not being done because no one can think of a way to make profits at them. So we can use the JG/ELR to put people to work doing useful things without worrying about profiting off their labor.

And if all else fails, we can share the work that we can imagine by cutting the work day and the work week, and providing vacations to Americans. Why not the 30 day type of vacation that other rich nations provide? Four day work weeks? A legal right to six months paid paternal and maternal care? Paid sabbaticals for all, one year off out of every seven? (Why should tenured faculty have all the fun?)

Ok, ‘nuff said on that one. I think many readers agree with me. All we need is the Job Guarantee/Employer of Last Resort and we will get everyone employed. And we can simultaneously work toward more paid time off—if the JG/ELR program offers it, private employers will, too.

So what we need to do is to look at the second argument in more detail. Many readers apparently do not know what a BIG is. And just how BIG a BIG is supposed to be. In other words, what it is supposed to accomplish. continue reading…


A New Stock-Flow Model for Greece Shows the Worst Is Yet to Come

Michael Stephens | July 9, 2013

Dimitri Papadimitriou, Gennaro Zezza, and Michalis Nikiforos have put together a stock-flow consistent model for Greece in order to analyze the path of that nation’s struggling economy and assess alternatives to reigning austerity policies. This is a macroeconomic model based on the New Cambridge approach of Wynne Godley and is the same sort of model used for the Levy Institute’s US strategic analysis series.

One thing the results of their simulations make clear is that the European Commission (EC) and International Monetary Fund (IMF) have been consistently too optimistic about the Greek economy and the effects of continuing with austerity policies — and still are, even after the IMF’s admission that it had overestimated the benefits of fiscal contraction. Here, for instance, are the EC’s past and current projections for Greek unemployment, compared to the actual results and the Levy Institute’s projections through 2016.

SA_Greece 2013_Unemployment_fig6

As you’ll notice, the baseline projection generated by the Levy Institute model for Greece (LIMG) shows a rather more dire path for unemployment going forward, compared to the EC’s latest projections. If current policies continue, the unemployment rate could rise from its ruinous 27.4 percent to almost 34 percent by the end of 2016.

The troika’s (EC/IMF/ECB) “internal devaluation” strategy — based on the idea that forcing a reduction in wages will increase competitiveness and boost export-led growth — isn’t faring well. Cutting wages by government fiat has contributed to a drop in domestic consumption. And as you can see below, while there was an increase in Greek exports that accompanied the onset of fiscal contraction, exports have not risen by nearly enough to compensate for the decrease in the other components of aggregate demand (from their trough, exports grew by almost 8 billion euros; over the same period, government expenditure alone fell by 13 billion euros).

SA_Greece 2013_GDP Components_fig8

The authors acknowledge that it’s possible exports could grow further, but it’s unlikely that the increase in net exports will be sufficient to make up for plummeting investment, consumption, and government expenditure (and the latest data show that Greek exports were actually declining in the last quarter of 2012). “The implication of our findings,” they conclude, “is that achieving growth in exports through internal devaluation will take a very long time, and furthermore, declining fortunes of the country’s major trading partners do not bode well for [Greece’s] exports.”

The troika’s continued devotion to faulty intellectual doctrines creates serious contradictions in terms of its deficit targets for Greece and its attendant expectations for growth and employment. This new stock-flow model for the Greek economy makes that all the more evident: the authors show that a fiscal stimulus worth around 41 billion euros would be necessary for Greece to reach the troika’s GDP target for the middle of 2016. That would require Greece’s deficit to rise to 12 percent of GDP. Needless to say, that amount — or any amount — of fiscal stimulus isn’t in the troika’s plans.

Papadimitriou, Nikiforos, and Zezza call for a “Marshall plan” for Greece: an investment, funded by the European Investment Bank (EIB), in an expanded public service job creation program — a program that has had impressive results in other countries and, on a smaller scale, in Greece itself.

The strategic analysis for Greece (download an early look at the full report here) is accompanied by a technical report that explains the specification of the model and discusses in more detail how the data were used.


Deficit Lovers?

L. Randall Wray | July 5, 2013

Here’s a piece from yesterday’s NYTimes by Annie Lowrey: “Warren Mosler, a Deficit Lover With a Following.”

In the piece, Lowrey quotes blogger Mark Thoma as follows:

“They [followers of MMT] deny the fact that the government use of real resources can drive the real interest rate up,” said Mark Thoma, an economics professor and widely followed blogger who teaches at the University of Oregon. After delving into the technical details of modern monetary theory for a few minutes, he paused, then added, “I think it’s just nuts.”

Thoma might have been misquoted, but the “real interest rate” is a compound term, comprised of the nominal interest rate and the rate of inflation. Technically, the real rate is the nominal rate less expected inflation. As we know, the Fed sets the overnight nominal rate. The real rate is then the Fed’s target rate less expected inflation.

Now, it is possible that “government use of real resources” might raise expectations of inflation. That is what gold buggism is all about. So let us say Ron Paul whips up inflationary expectations. What happens to the real rate? Well, we are subtracting a bigger expected inflation number from the Fed’s target rate. So the real rate goes down! Now, Thoma might think the Fed will also react to Ron Paul’s gold buggism and so increase its target rate. How much? Who knows. Is there any guarantee the Fed will raise it more than Ron Paul raises inflation expectations? I see no reason why one would jump to that conclusion. And historically, the ex post real rate does often fall when inflation rises (it even goes massively negative).

That is not proof that it is impossible for the real rate to rise when government uses real resources, but there’s no reason to think the real rate automatically goes up. It depends. On whether inflation expectations increase by less than the Fed raises the nominal rate target.

Finally, Warren and “Deficit Owls” are by no means “deficit lovers” – so Lowrey’s title is misleading. There’s a time for deficits, a time for balanced budgets, and even a time for budget surpluses. It all depends on the other two sectors (reminder: Government Balance + Private Domestic Balance + Foreign Balance = 0). A more accurate title would have been: Warren Mosler: Not Afraid of Deficits.


Papadimitriou: Layoffs of Public Employees “Only the Tip of the Iceberg” (Greek)

Michael Stephens | July 3, 2013

Segment (in Greek) begins at 49:35.