Archive for August, 2013

Modern Money Network

Michael Stephens | August 29, 2013

The Modern Money Network at Columbia University — heir to the “Modern Money and Public Purpose” seminar series — is starting up in September, with a pair of events that might be interesting to some of our readers:

1. Money as a Hierarchical System

Date: Thursday, September 12th, 6.15pm
Location: Room 104, Jerome Greene Hall, Columbia Law School

Moderator: Raúl Carrillo, J.D. Candidate (’15), Columbia Law School
Speaker 1: Christine Desan, Leo Gottlieb Professor of Law, Harvard Law School
Speaker 2: L. Randall Wray, Professor of Economics, University of Missouri-Kansas City
Speaker 3: Katharina Pistor, Michael I. Sovern Professor of Law, Columbia Law School & Director, Center on Global Legal Transformation
Speaker 4: Perry Mehrling, Professor of Economics, Barnard College & Director of Education Programs, Institute for New Economic Thinking

2. Central Banking in Theory and Practice

Date: Monday, September 23th, 6.15pm
Location: Room 103, Jerome Greene Hall, Columbia Law School

Moderator: Richard Clarida, C. Lowell Harriss Professor of Economics and International Affairs, Columbia University
Speaker 1: Lord Adair Turner, Senior Fellow, Institute for New Economic Thinking and former Director, U.K. Financial Services Authority
Speaker 2: James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government, University of Texas at Austin
Speaker 3: Matias Vernengo, Associate Professor, Bucknell University & Senior Research Manager, Central Bank of Argentina

Livestreaming of these events will be hosted at the MMN website (seminar 1; seminar 2) — the site also links to background reading for each seminar.


One More Reason to Stop Panicking About the Long-term Deficit

Michael Stephens | August 27, 2013

The case for being alarmed about the US budget deficit — more specifically, for being worried that it’s too high, or will be too high in the next decade or two — continues to weaken, and this is so even if we limit ourselves to the deficit hawks’ own theoretical turf. These days, you don’t need to have read Abba Lerner to know that we should be moving on to more pressing matters.

Now that the deficit is shrinking fast, the standard fallback is to shift the focus to the long term. The go-to story for long-term deficit anxiety has to do with the prospect of healthcare costs rising much faster than the rate of economic growth (in the medium term, it’s more about predictions of how high the Federal Reserve will raise interest rates).

The problem is that this healthcare story is badly out of date. The last several years have seen a significant slowdown in cost growth in the medical sector. Initially, it could be suggested that the recession was playing the main role here (so cost growth would simply snap back to previous trends when the economy recovered). However, more and more evidence is coming in to suggest that it’s primarily changes in practices and behavior unrelated to the recession that are “bending of the cost curve” (hence the trend may be more likely to persist). From the abstract of a new Congressional Budget Office working paper (pdf) that looks at Medicare spending in particular:

Growth in spending per beneficiary in the fee-for-service portion of Medicare has slowed substantially in recent years. The slowdown has been widespread, extending across all of the major service categories, groups of beneficiaries that receive very different amounts of medical care, and all major regions. We estimate that slower growth in payment rates and changes in observable factors affecting beneficiaries’ demand for services explain little of the slowdown in spending growth for elderly beneficiaries between the 2000–2005 and 2007–2010 periods. Specifically, available evidence does not support a finding that demand for health care by Medicare beneficiaries was measurably diminished by the financial turmoil and recession. Instead, much of the slowdown in spending growth appears to have been caused by other factors affecting beneficiaries’ demand for care and by changes in providers’ behavior.


What Do You Want in a New Fed Chair?

L. Randall Wray | August 26, 2013

I was recently asked by an interviewer who’s going to replace Chairman Bernanke. I declined to predict because I don’t do horseraces. You’d have to be inside the beltway to understand which way President Obama is leaning. There’s not much doubt that Wall Street is pulling for one of its own, Larry Summers, and Wall Street usually gets what it wants.

Let me turn to what we should want in a central banker, rather than trying to pick the winner of the contest. To understand the qualities desired, we need to know what central bankers should be able to do. There is a lot of misconception over the role played by the Fed in our economy.

The power of the central bank is substantially less than usually imagined, or at least what influence it has is not in the areas usually identified. It has little direct impact on inflation, unemployment, economic growth, or exchange rates. It does set the overnight interest rate, but there is no plausible theory nor evidence that this matters very much. The “interest rate channel” is weak — normally the Fed is raising rates in a boom, when everyone is enthusiastically borrowing and spending, so higher rates do not diminish optimism. In a slump, when the Fed normally lowers rates, it is too late — pessimism has already taken hold.

The way that raising rates actually can work is by causing insolvency of those already heavily indebted — by pushing payments on floating rate debt above what can be afforded. There is no smooth relation between borrowing and interest rates that can be exploited by policymakers. Rather, they can cause a financial crisis if they are willing to do a “Volcker”: push rates so high that defaults snowball through the economy.

Over the past three decades, where the Chairman’s influence has been significant has been in the area of regulation and supervision of the financial sector. Unfortunately, three successive Chairmen have failed to pursue the public interest preferring instead to promote Wall Street’s interest. This has been disastrous. continue reading…


Gross Government Expenditures Categorized

Greg Hannsgen | August 22, 2013

This figure shows how government spending as a percentage of GDP has evolved since 2000Q1. The numbers reflect the recent 5-year revision of the National Income and Product Accounts (the so-called “NIPA revisions”) and preliminary Q2 numbers, which are due for an update about a week from now.

Gross Government Expenditures

The figure shows that government consumption (at the top of the figure in blue) and gross investment (farther down, at about 4 percent of GDP in an aqua, or light blue, color) have been on a downward trend when expressed as percentages of GDP. Current transfer payments are depicted in red. They remain higher as a percentage of GDP than before the financial crisis; nonetheless, they are relatively flat. Government interest payments, in green, were well under control, in part because rates remained very low as of the end of Q2. The fixed-investment series is gross in the sense that it does not adjust for depreciation. Adding together all of these figures, total gross expenditures were 37.9 percent of GDP in Q2, less than a tenth of a percentage point (.1%) higher than in Q1. For a longer-term comparison, try a total of 42.3 percent in 2009Q2. Gross (and net) government spending has been falling for a long time. The sequester, whose effects are beginning to be reflected in official data, continues this trend.


The Euro Has Yet to Produce Any Real Winner

Jörg Bibow |

It is almost conventional wisdom today to view Germany as the winner of the euro crisis. Reisenbichler and Morgan recently argued this case in Foreign Affairs, although cautiously adding that Germany’s supposed gains may not last. The miserable truth is, however, that the euro has yet to produce any real winner, while Germany’s apparent gains from the euro crisis in particular are largely an illusion about to unravel. Ultimately only a fundamental re-design of institutions and policies in the Euro-zone would open up the prospect of creating a union of true euro winners. Misled by ill-conceived ideas and beliefs – and against its own national interest – Germany is adamantly blocking such a move. Actual policies pursued and regime reforms undertaken since 2009 under German dictate have made Europe progressively more vulnerable, and ever more of a threat to global stability as well. As of now, the euro remains firmly on track for eventual breakup – an event which would see Germany among the biggest losers.

The view of Germany as the winner of the euro crisis points as evidence at Germany’s current low unemployment rate, balanced public budget, and low borrowing costs. The contrast with the situation elsewhere in the Euro-zone is so crass that Germany currently also enjoys an influx of skilled immigrants, providing further support to its economy and housing market. Yet the state of Germany’s economy is far from stellar and the fact that Germany’s current superior performance in relative terms has come largely at the expense of its euro partners should prompt alarm rather than awe. The euro’s life expectancy was always dependent on convergence within the currency union. Instead, persistent divergences and the corresponding buildup of intra-zone imbalances have not only created the ongoing crisis, but also the illusion that Germany – its apparent winner – must have done everything right and should now be the unchallenged model for others to follow.

But to view Germany as the euro paragon is a grave misinterpretation of events. Not only should Germany’s current performance be viewed in a broader perspective: Germany has grown at an average rate of little over one percent per year under the euro; hardly impressive. It must also be understood that Germany cannot be the model for others to follow, precisely because the workability of the German model depends on others behaving differently. It is in the essence of Germany’s export-led growth model that it presupposes willing importers. The trouble is that the German authorities remain at a terrible loss when it comes to properly understanding the country’s economic model and the sources of its success under specific historical conditions. continue reading…


Financing Innovation and Innovative Finance

Michael Stephens | August 14, 2013

L. Randall Wray and Mariana Mazzucato explain some of the motivation behind their joint project that brings together the insights of Schumpeter and Minsky (note that Schumpeter was Minsky’s dissertation adviser) to explore the relationship between finance and innovation, the changing nature of each, and how the financial system might be restructured to better support the capital development of the economy — by contrast with a system that seems to revolve around financial innovation (the focus of Minsky’s earliest work) for the sake of speculation.


Shifting Troika Forecasts and a Marshall Plan for Greece

Michael Stephens | August 12, 2013

Dimitri Papadimitriou in Bloomberg View yesterday:

In December 2010, the so-called troika of lenders — the European Commission, the European Central Bank and the International Monetary Fund — predicted that their measures would move Greece’s unemployment rate to just under 15 percent by 2014. A year later, it changed the forecast to almost 20 percent.

This month, the Hellenic Statistical Authority reported that unemployment rose to a record in May, with a seasonally adjusted jobless rate of 27.6 percent. The rate was 64.9 percent for people 15 to 24.

Bold declarations that belt-tightening would produce growth have been pared back, too. Since 2010, the troika has gradually dropped its forecast for 2014 gross domestic product (in money terms) by almost 40 percent. IMF staff reported last week that GDP contracted 6.4 percent in 2012 and will drop 4.2 percent this year before expanding only a little in 2014.

Yet, despite admissions that mistakes were certainly made, no consideration is being given to ending austerity measures. Nor has there been effort to devise a renewal agenda for Greece. The Marshall Plan offers a spectacularly successful model that could easily be adapted.

… Here is how an EU-funded plan for recovery could succeed. Although past bailout funds benefited banks and financial institutions, with a large portion devoted to interest payments for creditors, the new program would focus on debt forgiveness, and then turn to reconstruction projects to rebuild national infrastructure and create public projects at the local level.

Read it all here.

This is what the troika’s constantly-downgraded predictions look like, compared to the actual paths of growth and unemployment and projections based on the Levy Institute’s stock-flow model for Greece (from “The Greek Economic Crisis and the Experience of Austerity“):

Fig4 Real GDP_Greek SA 2013

Fig6 Unemployment Rate_Greek SA 2013


Greece: More Competitive, Closer to Collapse

Michael Stephens | August 8, 2013

One of the theories that motivates the policies the troika (EC/IMF/ECB) is imposing on Greece is that reducing Greek wages will make Greek exports more attractive, helping to contribute, so the theory goes, to growth in GDP and employment.

And in an interview that appeared yesterday at Truthout, Dimitri Papadimitriou points out that Greek competitiveness, at least in terms of relative unit labor costs, has indeed increased, more so than in any other eurozone country save Germany. But despite the fact that exports have also risen some, Greece is still stuck — and likely hasn’t even seen the worst of its social and economic deterioration.

This graph from the Levy Institute’s recent stock-flow analysis (pdf) of the Greek economy illustrates the point (N.B. in this figure, an increase in value, i.e., moving to the right, implies a decrease in competitiveness). Although relative unit labor costs (in orange) have declined in Greece, Papadimitriou points out in the interview that “the declining fortunes do not affect consumer prices [in green] that are continuously rising, pushing more and more people into deeper poverty”:

Figure 14_Greek Competitiveness

Papadimitriou goes on to lay out an alternative negotiating strategy for Greece, based on exploiting what he calls a “division in the house of troika.” If this strategy fails, the options become more “unthinkable”: continue reading…


Money Creation for Main Street: Staking Out a Progressive Fed Policy

Michael Stephens | August 2, 2013

When it comes to the Federal Reserve and Fed policy, the bulk of today’s progressives can be sorted into two broad groups. There are those who, in the face of congressional sabotage of fiscal policy, shrug their shoulders and conclude that we might as well get behind QE because it’s the only game in town — thus setting the “progressive” pole of the debate in such a way that Milton Friedman represents the leftward edge of the possible — and there are those who largely cede the battlefield on Fed policy, either for lack of interest or due to skepticism that the Fed can do much to affect growth and employment anyway.

There are, of course, some notable exceptions, but they are a minority — and this has the effect of narrowing the dialogue when it comes to central bank policy. Bill Greider, in two new policy notes drawn from his work at The Nation, shows us what it might look like to go beyond progressive indifference or hostility to the Fed and articulate a positive alternative agenda.

Both of Greider’s notes focus on how the Federal Reserve’s money-creation power, which was used to great effect in propping up the financial system, might be redirected to aiding the “real” economy:

The Federal Reserve’s most distinctive asset is money—its awesome and somewhat mysterious power to create money and inject it into the economy by buying financial assets of one kind or another. If that power is abused, it can destabilize society. In an economic crisis, however, the money-creation power can be harnessed to public purposes and used to restore order and justice. That is essentially what Bernanke’s Fed attempted during the recent crisis when it created those surplus trillions for banking. The fact that the strategy did not entirely succeed suggests that maybe this power should be applied in a different direction.

According to Greider, the Fed’s authority to engage in direct lending to the real economy, to enable debt relief for underwater mortgages and the roughly $1 trillion in student debt, or to backstop infrastructure projects stems in part from from Section 13(3) of the Federal Reserve Act. In fact, the central bank has done this sort of thing before:

During the Great Depression, the Federal Reserve was given open-ended legal authority to lend to practically anyone if its Board of Governors declared an economic emergency. This remains the law today. The central bank can lend to industrial corporations and small businesses, including partnerships, individuals, and other entities that are not commercial banks or even financial firms. The Fed made thousands of direct loans to private businesses during the New Deal, and the practice continued for 20 years. Only in more recent times has the reigning conservative doctrine insisted that this cannot be done.

The Fed carried out its bank rescues under the auspices of Section 13(3), and although Dodd-Frank placed new limits on the use of this provision, Greider argues that there is still sufficient scope for the Fed to harness its “money power” for broader public purposes.

Read “Debt Relief and the Fed’s Money-creation Power” and “‘Unusual and Exigent’: How the Fed Can Jump-start the Real Economy.”