Archive for June, 2015

Greek Debt Disaster Bodes Ill for Daily Life

Pavlina Tcherneva | June 25, 2015

“There are red lines in the sand that will not be crossed,” Greek Prime Minister Alexis Tsipras said just weeks ago as he began the long negotiations process with creditors.

Some of these lines included no more pension cuts or value-added tax (VAT) increases, and a debt restructuring deal that incorporates renewed economic assistance from Europe. Tsipras has been working to complete the previous government’s austerity commitments, without any guarantee of a meaningful debt reprieve in the future.

Yet on Monday, he crossed his own previous red lines and offered a round of fresh austerity measures worth 7.9 billion euros ($8.9 billion) — the largest to date — which in turn prompted mass protests at home.

Crafted by the Greeks, an agreement seemed close at hand, but was nevertheless rejected by the International Monetary Fund and Greece’s euro partners at the European Commission and European Central Bank. The fiscal tightening that is currently being discussed is on the order of 2 to 3 percent of gross domestic product (GDP), comparable to that at the peak of the crisis in 2010.

If the creditors’ amendments are accepted, here is what the new arrangement will mean for the Greek people, especially those hardest-hit: …

Read the rest at Al Jazeera.


Martin Wolf on the UK’s Sectoral Balances

Michael Stephens | June 23, 2015

In this video segment, Martin Wolf briefly illustrates the UK’s “severe sectoral imbalances” and the dangers of the current government’s budget policy:



Below is what Wolf describes as his favourite chart (discussed at 48:40), which puts the UK’s public debt situation — the ostensible justification for the above-mentioned budget policy — in historical context: “the idea we were in a public debt crisis was a fantasy.”

Martin Wolf_Public Debt Since 1692


On Demands for Greek “Reform”

Michael Stephens | June 16, 2015

Senior Scholar James Galbraith on the “reforms” being demanded by creditors (vis. pensions, labor markets, privatization, and the VAT) in the negotiations over Greece’s fate:

On our way back from Berlin last Tuesday, Greek Finance Minister Yanis Varoufakis remarked to me that current usage of the word “reform” has its origins in the middle period of the Soviet Union, notably under Khrushchev, when modernizing academics sought to introduce elements of decentralization and market process into a sclerotic planning system. In those years when the American struggle was for rights and some young Europeans still dreamed of revolution, “reform” was not much used in the West. Today, in an odd twist of convergence, it has become the watchword of the ruling class.

The word, reform, has now become central to the tug of war between Greece and its creditors. New debt relief might be possible – but only if the Greeks agree to “reforms.” But what reforms and to what end? The press has generally tossed around the word, reform, in the Greek context, as if there were broad agreement on its meaning.

The specific reforms demanded by Greece’s creditors today are a peculiar blend. They aim to reduce the state; in this sense they are “market-oriented”. Yet they are the furthest thing from promoting decentralization and diversity. On the contrary they work to destroy local institutions and to impose a single policy model across Europe, with Greece not at the trailing edge but actually in the vanguard. …

Read it at Social Europe.

The Levy Institute’s latest strategic analysis for Greece lays out the ways in which the austerity and “reform” program has undermined the Greek economy, and thereby the country’s ability to manage its public debt.

The report (pdf) also examines how alternative financing arrangements — including a “parallel currency” — might be able to relieve some of the intense fiscal pressure being placed on the Greek government and allow it to invest in a direct job creation program (which would, incidentally, end up reducing Greece’s debt-to-GDP ratio. Reading the history of the Greek “bailout” through Galbraith’s interpretive lens makes one wonder whether that goal is really all that high on “reformers'” list of priorities …).


An Ecological Future for SFC Macroeconomics?

Greg Hannsgen | June 14, 2015

subsidence cal

(USGS Graphic from NYT, June 7, 2015)

SFC (stock-flow-consistent) economics is about watertight accounting: each model strictly accounts for all financial stocks and flows, making sure, for example, that when a change in someone’s income is assumed, all corresponding changes to other incomes and balance sheet items and their behavioral effects are taken into account. Along the same lines are the laws of physics, as ecological economists have emphasized—though seemingly with little regard for the all-important world of finance, government deficits, MMT, etc. This subfield has represented another group of dissenters in academic economics and the policy world since the 1970s or so. Some early ecological dissenters rejected academic economics altogether, with anti-economist Hazel Henderson, for example, devoting a chapter of one work to a critique of the Post-Keynesian school, which she found far too narrowly focused on economic growth and the distribution of wealth.

It is fortunate then that among the papers presented at the Post Keynesian Study Group (PKSG) workshop in the U.K. last month were two that attempted to meld Post-Keynesian economics with ecological economics. In particular, the paper by Yannis Dafermos, Giorgos Galanis, and Maria Nikolaidi echoed themes in SFC modeling, bringing back to mind the map in this news article on land subsidence in California (accompanying image above) which had appeared in the New York Times last weekend and seemed to be a good illustration of Dafermos’s theme.

From the article: “Underground water supply isn’t fenced or restricted; it is moisture held in the soil, rocks and clay, and drawn through wells like soda through a straw.
“In a normal year, Mr. Famiglietti says, 33 percent of California’s water comes from underground, but this year it is expected to approach 75 percent. Since 2011, he says, the state has lost eight trillion gallons from its overall water reserves, two-thirds of that from its underground aquifers.
“‘We can’t keep doing this,’ Mr. Famiglietti says.
“The draining of the aquifers creates another hazard above ground. As water is pulled from the spongy layers below, the ground above collapses, creating what is known as subsidence. Where subsidence is the worst, the land can sink as much as a foot each year.”

As the aquifers involved shrink, the earth’s surface seems to fall—a perhaps ineluctable implication of a fall in the total amount of rock, soil, water, etc., below.

The still-tentative study by the three authors attempts to comprehensively account for matter and energy within a Post-Keynesian SFC model, with tables reminiscent of the latter approach. For example, the matter that makes up the materials used by manufacturers winds up going up smokestacks, emerging as output, being recycled, etc., and all such destinations are included in the cells of an all-encompassing table. A similar scheme can be used for the use of energy, and in fact the paper draws upon early work by Nicholas Georgescu-Roegen—a hero of the ecological economists—to unify concerns about energy, the environment, and the economy in a systemic approach based on the laws of thermodynamics. In their paper, the authors cite Levy Institute research on SFC macroeconomics, including a paper on proposals to create green jobs. I recently blogged about some financial themes in a paper by Tai Young-Taft and myself, which also contained a (far less thoroughgoing) use of green accounting.

As I draft this post, I am away from the Institute for the day. I send my best wishes to the attendees and staff of our Minsky Summer Seminar, many of whom have come a long distance to learn more about Hyman Minsky and his economics.


Time to End Europe’s Disgrace of Holding Greek People Hostage

Jörg Bibow | June 12, 2015

It was never going to be easy. That much was known from the outset.

Greece’s newly elected government and the country’s creditors started from too far apart to quickly settle on anything that would be easily sellable to their respective constituencies.

Greece’s radical left-wing Syriza party came to power on a mandate to end austerity. The Greek people had experienced the worst crisis of any Western country in the postwar era; in the previous five years, their economy had shrunk by one-quarter, and unemployment skyrocketed, while indebtedness exploded accordingly.

No other Western nation has come even close to suffering a humanitarian crisis of this dimension for generations. A people in despair – brought to their knees, the Greeks are yearning for a revival of their fortunes.

Remarkably, in utter denial of the fact that the brutal austerity experiment imposed on Greece since 2010 had proved outstandingly counterproductive, Greece’s creditors remained set to continue with what to them had become business as usual. They held out sizable fresh austerity, naively expecting the Greeks to shoulder the costs of the administered austerity wreckage alone.

Their so-called bailout program assumed that Greece would run primary budget surpluses of 4.5% of gross domestic product as far as the eye could see. No other country had ever done so – but the Greek people were meant to endure lifelong punishment and smile in gratitude along the way.

Shared responsibility

It is good and right that the Greeks decided to not put up with this folly for any longer.

It is good for Greece, and it would be good and right for Europe to finally accept that the calamity that happened in Greece in recent years is one of shared responsibility, but not of Greece alone. It would be best if euro members remembered that their relationship was meant to be one of partnership: equal partners of a union with a common destiny.

The main problem is that governments in creditor countries, with Germany being the key one, have systematically misled their people. Their so-called bailout programs for Greece were never primarily a bailout of the Greek people. continue reading…


Call for Papers: Gender and Macroeconomics Conference

Michael Stephens | June 11, 2015

Gender and Macroeconomics: Current State of Research and Future Directions

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

BGIA, New York City
108 W. 39 St., Suite 1000A
March 9–11, 2016

Call for Papers

The goal of this conference 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 especially interested in topics relevant to Sub-Saharan African countries, including but not limited to:

  1. Relationships between economic structure (e.g., the relative importance of the service sector, agriculture, the care economy, trade, etc.), growth regime (wage-led versus investment-led growth), and gender inequities.
  2. Mechanisms and the extent to which unpaid work constrains women’s participation in paid work and access to economic opportunities.
  3. Implications of women’s labor market participation for their well-being and for intrahousehold allocation of time.
  4. Structural, macroeconomic, and microeconomic aspects of women’s employment in the informal sector.
  5. Formulation and analysis of gender-aware policy interventions.
  6. Frameworks for integrating the role of unpaid work in measures of well-being (e.g., time and income poverty).

We invite both theoretical and empirical studies and encourage submissions that employ innovative methodologies and new datasets. 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 conference organizers. Please send your abstract via e-mail to Ajit Zacharias (

Important dates:

500-word abstract due July 1, 2015
Acceptance notifications e-mailed September 1, 2015
Final paper due February 1, 2016


Fed Fiscal Policy, Treasury Monetary Policy

Michael Stephens | June 4, 2015

Don’t miss this post by Scott Fullwiler at New Economic Perspectives.

Fullwiler is reacting to Clive Crook’s Bloomberg column advocating “helicopter drops” (having the Fed simply send checks to households). Helicopter drops or “helicopter money” proposals are widely cast as monetary policy operations (Crook describes helicopter money as a monetary-fiscal “hybrid”) and defended as either preferable to fiscal stimulus or as the only remaining option in light of political obstacles to increasing government spending (to wit, the GOP Congress/Dem White House combination).

For Fullwiler, this way of framing helicopter money is problematic — and relies on a skewed understanding of our policy options:

I find it completely counterproductive to have a theory of macroeconomics in which we define fiscal policy and monetary policy based on who is acting. If the US Congress and Treasury choose to send $1 trillion to households without raising taxes, it’s called fiscal policy. But if the Fed does the exact same thing, it’s apparently called monetary policy. I think this only confuses our understanding of the macroeconomic policy mix and makes it more difficult to have an economics profession that can give good policy advice.


It seems much clearer to simply say that (a) the act of creating a deficit—raising the net financial wealth of the non-government sector—is fiscal policy, and (b) the act of announcing and then supporting an interest rate target with security sales (or purchases, or interest on reserves)—which has no effect on the net financial wealth of the non-government sector—is monetary policy. In the case of (a), whether the Treasury or the Fed cuts the checks, it’s fiscal policy, and with (b), whether the Treasury or the Fed sells securities, it’s monetary policy.

In other words, fiscal policy is about managing the net financial assets of the non-government sector relative to the state of the economy, and monetary policy is about managing interest rates (and through it, to the best of its abilities, bank lending and deposit creation) relative to the state of the economy. This is in fact how Randy Wray explained both in his 1998 book; it’s also how Warren Mosler explained them in his 1996 paper. That is, from the beginning, MMT has labeled monetary and fiscal policies by their functions, not by who was doing what.

I think this is a much more useful taxonomy because it makes clear from the start that (1) the currency-issuing government isn’t constrained while (2) the interest rate on the national debt is a policy variable. All kinds of human suffering the past 6+ years may have been avoided if those two basic points were widely understood.

Read it.

Fullwiler spoke at the last Minsky conference on issues related to central bank operations (actual, vs. textbook): you can hear his remarks here; slides here.


A Cycle of Financial Fragility?

Greg Hannsgen | June 3, 2015


(click image above to enlarge)

Can a bull market founded largely on credit survive? A forthcoming Levy Institute working paper I wrote with Tai Young-Taft of Bard College at Simon’s Rock (link for those interested) represents an attempt to deal with the role of financial instability—along with other sources of economic fluctuations—in the dynamics of the economy. Here, I’ll focus mostly on the role of margin loans that are used by many investors and traders to leverage positions in stock. The model developed in the paper includes a role for several policy tools that might be used in attempts to stabilize the economy: a fiscal-policy rule with public production and unemployment rate targets, along with public-sector R&D, financial supervision and regulation, and a target for the inflation-adjusted interest rate on government debt.

Now, for the current situation. The figure above highlights one potential threat to stability designed to arise spontaneously in runs of the model: surges in the use of margin debt to finance investments in stock. The chart shows that the amount of such debt outstanding in the US relative to GDP rose sharply during the tech bubble and the period leading up to the financial crisis and recession of 2007–09, achieving a new peak each time. Subsequent financial market collapses led to cyclical declines in the use of this form of leverage. On average, for the first quarter of 2015, this ratio stood at more than .028, suggesting that the stock market’s vigor again rests to a great extent on heavy borrowing (see figure). (Moreover, some different but closely related uses of credit, such as bond issues that wind up financing stock buybacks, have also contributed to the post-recession bull market.) This column from the New York Times’s Floyd Norris from a couple of years back discussed evidence that margin-credit cycles helped fuel cyclical movements in stock prices and the economy. His column displayed a longer but now outdated margin loan series.

In the model, margin loans can generate positive feedback effects: a cycle of increasing margin loan balances and rising stock prices, or vice-versa.  The story is similar to that of the “levered losses” in housing that took place in a number of countries earlier in this decade (see the recent book House of Debt for one account of the story, although even in this version of the story, I am inclined to see excessive optimism about the usual cure by wage and price adjustments); indeed, big, unsustainable run-ups in asset prices tend to be driven at least in part by credit booms. The situation shown in the figure is only one of many somewhat worrisome signs of market fragility. At the moment, fragility generally seems to be manifested most clearly in big increases in the quantities of various assets and liabilities relative to flow variables such as income and GDP, rather than in yield data.

More on the new paper and the model in it, for those inclined to look into it: continue reading…