Archive for the ‘Distribution’ Category

Minsky on the War on Poverty

Michael Stephens | January 10, 2014

Roughly a year after President Johnson used the occasion of his first State of the Union address to declare war on poverty, Hyman Minsky presented a paper on the subject at a conference in Berkeley. Here’s what he wrote:

The war against poverty is a conservative rebuttal to an ancient challenge of the radicals, that capitalism necessarily generates “poverty in the midst of plenty.” This war intends to eliminate poverty by changing people, rather than the economy. Thus the emphasis, even in the Job Corps, is upon training or indoctrination to work rather than on the job and the task to be performed. However, this approach, standing by itself, cannot end poverty. All it can do is give the present poor a better chance at the jobs that exist: it can spread poverty more fairly. A necessary ingredient of any war against poverty is a program of job creation; and it has never been shown that a thorough program of job creation, taking people as they are, will not, by itself, eliminate a large part of the poverty that exists.

The war against poverty cannot be taken seriously as long as the Administration and the Congress tolerate a 5 percent unemployment rate and frame monetary and fiscal policy with a target of eventually achieving a 4 percent unemployment rate. Only if there are more jobs than available workers over a broad spectrum of occupations and locations can we hope to make a dent on poverty by way of income from employment. To achieve and sustain tight labor markets in the United States requires bolder, more imaginative, and more consistent use of expansionary monetary and fiscal policy to create jobs than we have witnessed to date. …

The single most important step toward ending poverty in America would be the achieving and sustaining of tight full employment. Tight full employment exists when over a broad cross-section of occupations, industries, and locations, employers, at going wages and salaries, would prefer to employ more workers than they in fact do. Tight full employment is vital for an anti-poverty campaign. It not only will eliminate that poverty which is solely due to unemployment, but, by setting off market processes which tend to raise low wages faster than high wages, it will in time greatly diminish the poverty due to low incomes from jobs.

Ending Poverty_cover


The Next Bubble?

Gennaro Zezza | December 2, 2013

Is the U.S. economy heading towards another bubble? Since last week, the number of commentators on this subject has been growing, from Robert Shiller to Nouriel Roubini (on housing markets).

In our first chart we report the Standard & Poor’s 500 stock market index, normalized by a consumer price index to remove the common trend in prices. Our measure has increased by 105.6 percent from its most recent bottom in March 2009. In the previous rally, which started from a bottom value in February 2003, the index increased by only 63 percent before the start of a rapid descent in July 2007.


Is a buoyant stock market justified by expected profitability? In the next chart, we report gross saving of non-financial corporations – that is, undistributed profits gross of capital consumption – scaled by GDP, along with gross investment (which includes changes in inventories). All figures are computed from the Integrated Macroeconomic Accounts published by the B.E.A.

The chart clearly shows that profits have reached an all-time high at 11.5 percent of GDP, compared to an average of 9 percent over the 1960-2007 period. If current profits are the basis for expected future profitability, our data suggest that the stock market rally is justified. But is this trend stable and sustainable?


The chart also shows what we may call an investment gap. While profits and investment have usually moved in line, it was usually the case that investment exceeded retained profits. But since the second half of 2008, profits have soared while investment dropped, opening a gap which is currently over 2 percent of GDP. A low level of investment is not a good sign for future growth.

What are companies doing with such exceptional profits? In the next chart we add U.S. foreign direct investment (FDI) made abroad to domestic investment in our previous chart (while at the same time switching to moving averages to reduce the volatility of quarterly FDI).


The new chart is suggesting that foreign direct investment is a major destination for retained profits, and that FDI did not suffer the same downturn seen in domestic investment during the last recession.

Data from the B.E.A. on the composition and direction of U.S. FDI show it is difficult to evaluate where U.S. foreign direct investment is directed. While data for FDI in manufacturing show the emerging role of China as recipient of U.S. FDI, its weight is still below 5 percent of total FDI in manufacturing. Besides, the share of manufacturing in total FDI in 2012 is only 14 percent, while multinational companies, classified as “Holding Companies (non bank)” in B.E.A. statistics, account for almost 44 percent of total FDI in 2012. Countries receiving FDI in this grouping seem to be financial centers: the Netherlands (25.6 percent), Luxembourg (15.5 percent), Bermuda (11.2 percent), and the U.K. (10.7 percent).

Summing up, our findings suggest that U.S. non-financial corporations are in a healthy state – as measured by their net profits – but that this will not necessarily imply stronger U.S. growth and job creation. On the contrary, the data are coherent with a further increase in the concentration of income leading to financial speculation, in the U.S. as well as in foreign financial markets.

Restoring jobs and prosperity in the U.S. does not seem to be what U.S. corporations are working towards, and yes, the soaring stock market may change course very quickly, if “financial markets” make this decision.

Restoring sustainable growth in the U.S. (and elsewhere) requires a reversal of the trend in income distribution, since, as Stockhammer reminds us, “rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups,” and “higher inequality has led to higher household debt as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages” – a fact we already investigated a few years ago.


The Long Battle for a Living Wage Goes On

Pavlina Tcherneva | September 2, 2013

(cross-posted from

This week workers in fast food restaurants across the country gathered to protest the minimum wage in the United States, which currently is a paltry $7.25, and to fight for a better standard of living. The battle for a living wage for the nation’s poorest workers is set against the backdrop of mass unemployment and the highest level of economic inequality in the U.S. in almost a century.

The first minimum wage laws in the U.S. were the result of a state-by-state effort in the Progressive era to secure a floor to a decent life to employed women and youth. The first of these was enacted in Massachusetts in 1912 and eventually led to the 1938 Fair Labor Standards Act, which instituted a minimum wage at the federal level.

The objective was fairness, economics opportunity, stability, and social cohesion. The problem was the unequal power between labor and capital—a rationale that even early neoclassical economists embraced on the grounds that it constrained labor’s bargaining power and reduced morale, productivity, and wellbeing.

The solution was to set the “rules of the game” so that working women could support their families and young workers would not fall prey to discriminatory practices of their employers. In the absence of such rules, economists thought, the market mechanism wouldn’t work. Firms simply could not be counted on to self-regulate or reinforce these rules. The minimum wage movement required legislation.

The Supreme Court initially resisted and ruled that the state laws were unconstitutional, but states and organized labor prevailed, and by the time the New Deal rolled around, the Supreme Court had changed its mind. It had begun to work with a much broader definition of “the public interest” and supported various state legislations to protect the “welfare of its citizens.” It was understood that the wellbeing of workers served an important public purpose.

American economists – neoclassical and institutionalists alike – all supported the movement, the legislation, and the rationale. This wonderful excursion in the history of the minimum wage movement and the history of economic thought by Robert Prasch (1999) shows that economists in the U.S. were virtually unanimous in their support. The objections largely came from the British, notably from Professor Pigou, until another British economist, John Maynard Keynes, disproved his argument. Not only were the assumptions behind the labor market mechanism unfounded in Pigou’s analysis, but the notion that the minimum wage caused unemployment was also theoretically and empirically flawed. As Keynes explained, reducing wages as a macroeconomic policy was a “method socially disastrous in the process and socially unjust in the result.”

A federally mandated minimum wage was not enough to secure fairness, economic opportunity, stability, and social cohesion. The missing piece was a policy for full employment – one that guaranteed jobs for all who wished to work. That came later with the work of John Maynard Keynes, John Pierson, William Beveridge, and others. All advanced specific policies for full employment that aimed to secure decent work at decent pay to anyone who was ready, willing, and able, regardless of whether the economy was reeling from a Great Depression or enjoying relative prosperity. The right to work was codified by the international community in the 1948 Universal Declaration of Human Rights and found a special place in Martin Luther King, Jr.’s “I Have a Dream” speech during the 1963 March on Washington for Jobs and Freedom.

The New Deal put full employment front and center on the policy agenda. Though it did not deliver a long-term job guarantee program, it boldly and successfully experimented with direct employment policies. The war mobilization delivered true full employment, but Keynes insisted that public policy could and ought to achieve the same in peacetime.

In 1949, the minimum wage nearly doubled at a time when the economy was as close to true full employment as it has ever been, and when direct job creation was the policy of choice to deal with unemployment. Full employment and high wages ushered in the Golden Age of the American economy.

Today we have neither. Mainstream economists have successfully convinced themselves and policy makers that true full employment is impossible and that the minimum wage is the root of all evil.

Jobs for all (via a Full Employment Program through Social Entrepreneurship, a Green Jobs Corp, or a Job Guarantee) and a doubling of the minimum wage is what the economy needs today. Keynes made the case, Martin Luther King, Jr. made the case, and the international community made the case.

Sometimes the good old ideas are the best new ideas.

Follow me on Twitter at @ptcherneva


QE vs the Recovery Act: How Does Our Approach to Stimulus Affect Inequality?

Michael Stephens | June 6, 2013

Annie Lowrey recently renewed the ongoing discussion over whether the Federal Reserve’s attempts at reviving the economy through quantitative easing (QE) are exacerbating inequality.  The abbreviated version of the argument is that QE operates mainly through boosting asset prices, leading to gains in stocks and housing that largely benefit those at the top.  If that’s the case (Lowrey quotes Josh Bivens suggesting that one would also have to weigh any potential reductions in the unemployment rate from the Fed’s easing), it’s bad news for those who care about inequality, because for the next three years, monetary stimulus is the only game in town (it will be interesting to see whether Republicans continue to be skeptical of fiscal stimulus if they win the White House in 2016).

Turning to fiscal policy, Ajit Zacharias, Tom Masterson, and Kijong Kim did a preliminary estimate (pdf) of the likely distributional impacts of the American Recovery and Reinvestment Act (ARRA).  They found that the Recovery Act would have a positive impact on employment (largely “palliative,” given the rapid rate of job loss at the time) and little overall effect on inequality.  A fiscal stimulus skewed more toward expenditure and less dominated by tax cuts than the Recovery Act could have a greater positive impact for low-income households and individuals.

This is particularly the case if those expenditures come in the form of direct job creation — and even more so if we also consider projects in areas beyond infrastructure and green energy.  Along with Rania Antonopoulos, Zacharias, Masterson, and Kim studied (pdf) the potential benefits of a direct job creation program in the social care sector (early childhood education and home-based care).  They found that such a program would not only have a greater employment impact when compared to investment in infrastructure, but would also be particularly beneficial for households at the bottom of the income distribution.

PPB 108_Figure 3


What Is “Time Poverty” and Why Should You Care?

Michael Stephens | June 5, 2013

This is how we came up with the official poverty line for the United States, back in the early 1960s:  essentially, we put together a very basic diet, figured out the monetary value, and multiplied by three.  If a family has less income than that number, adjusted for inflation, they’re poor.

There are numerous problems with this measure, and the Census Bureau has since come up with an alternative, the Supplemental Poverty Measure (SPM), which they started reporting in 2011.  But there’s one very important item that’s left out of both the official and supplemental poverty measures:  time.  What does time have to do with poverty, you might ask?  The extent to which you find yourself tempted to ask that question is partly a reflection of how much we still take unpaid work and its products for granted in economic analysis, and more generally.

Many of the products of household labor, like edible meals and basic healthcare and sanitation, are among those things absolutely essential to attaining a bare bones standard of wellbeing.  Providing these products and services in adequate amounts takes time.  If we don’t have the time to do this work ourselves, it’s often possible to buy substitutes on the market (housekeeping, day care, and so on), but either the time for unpaid work or the money to purchase substitutes needs to be accounted for.  The outputs of unpaid household work can’t simply be taken for granted when we’re trying to measure people’s ability to secure the basics.  Yet all around the world, we do just that when we put together our official poverty statistics.

A research team led by Ajit Zacharias, Rania Antonopoulos, and Thomas Masterson has been examining how the depth and breadth of poverty change when we take the demands of unpaid work seriously — how this changes who is counted as poor, and how poor they are considered to be.  Their alternative measure is called “LIMTIP,” the Levy Institute Measure of Time and Income Poverty.  In a recent interview, Rania Antonopoulos explained why LIMTIP is a crucial tool for figuring out how widely our formal and informal economies are delivering a meaningful chance at a decent life: continue reading…


Safety Nets vs Economic Empowerment

Michael Stephens | May 21, 2013

There are important changes in how many developing countries are approaching the problem of poverty. Specifically in the area of “social protection” policy — policies intended to prevent or alleviate income insecurity and poverty — these changes are reflected in attempts to move beyond one-off interventions and “safety nets” to policies designed to address some of the underlying problems causing economic vulnerability in the first place.

In a new policy brief, developed with support from the United Nations Development Programme, Rania Antonopoulos considers how women’s economic empowerment can be advanced in the context of this evolution in social protection policy.  She zeroes in on the ways in which social protection policies, while addressing income gaps, also shape women’s opportunities through the manner in which these programs “see” or “position” women (whether intentionally or not).  To explain how this “positioning” works, she points to three different policies for addressing food insecurity (all targeted at women): cash transfers, free delivery of food staples, and access to land plus subsidized seed and fertilizer.  While all these interventions are aimed at reducing food insecurity, Antonopoulos observes that “there are stark differences between them in terms of the process through which deprivation is addressed, and from a gender perspective, differences in the (implicitly) assigned positioning of the beneficiary”:

The first addresses income poverty by enabling women to participate in the economy as consumers, which they otherwise cannot do on their own. The second, in the case of free rationed food, allocates food directly to those deserving of support because of their destitute status and inability to cope. The third approach addresses the income gap through means that enable the beneficiary to engage in the economy as a producer.While all three reduce an identified deprivation, the last one acknowledges it as an outcome of social relations of exclusion in production (i.e., women farmers do not have access to necessary agricultural inputs and support systems) that often underpin people’s experiences of chronic poverty and vulnerability.

While Antonopoulos stresses that there is no one-size-fits-all approach that follows from these observations, these “positioning” dynamics should inform program design:  social protection instruments can reinforce gender inequalities, or leave them untouched, but they also offer the potential to help promote women’s roles as active participants in economic life. continue reading…


A New Collection of Minsky’s Work

Michael Stephens | April 8, 2013

Hyman Minsky is probably best known for his work on financial instability and financial reform, but he also wrote extensively about how to address the persistent problem of all those left behind by our increasingly financialized economy; about how to design policies that would put an end to income poverty in the midst of plenty. Despite the fact that far more attention has been paid to his writing on financial fragility, these were intimately related issues in Minsky’s research, connecting the financial and “real” economies.

As with his work on finance, Minsky’s approach to poverty did not fit comfortably within the confines of the status quo. With “trickle-down” on one side, pure tax-and-transfer approaches on the other, and vague calls for retraining floating somewhere in the middle, Minsky found the conventional menu of policy options incomplete and inadequate (a menu that has changed very little over the last several decades). Calling for “upgrading” workers without ensuring there are enough jobs to go around is, as Minsky put it, “analogous to the great error-producing sin of infielders — throwing the ball before you have it.” What’s missing, he thought, is a commitment to ensuring that paying jobs are available to all who are ready and able to work; a commitment to “tight full employment.” The question is how to get there without sparking runaway inflation or inducing financial crises. Private markets, left to their own devices, aren’t going to get us there. For part of the answer, Minsky turned to a forgotten side of the New Deal:  direct job creation.

In the interests of providing a more complete picture of Minsky’s intellectual legacy, the Levy Institute has published a collection of his central writings on poverty and full employment: Ending Poverty: Jobs, Not Welfare. The chapters span roughly three decades of Minsky’s writing and feature four never-before-published pieces. The earliest were written in the context of the “War on Poverty” of the Kennedy and Johnson years, but readers will find more than mere historical interest here. Minsky’s critiques of both the “neoclassical synthesis” and the welfare state hold up rather well. If anything, the material is even more relevant today, given our widening income inequality and chronic rates of long-term unemployment — and the fact that the battle against poverty, while not won, has largely been forgotten.

The paperback is now available on Amazon; the Kindle version will be appearing shortly.

Ending Poverty_cover


Fiscal Policy Debates and Macro Models Abound in the News

Greg Hannsgen | November 1, 2012

Many of the themes in fiscal policy, economic growth, and distribution that we have been working on here have been in the news lately. Scholars from many fields are weighing in. One common theme is dynamics and their importance:

1)      Evidence of a self-reinforcing fiscal trap in operation in Britain, forwarded by the NIESR, a British think tank:  Dawn Holland and Jonathan Portes argue today in Vox that in the UK austerity has led to higher debt-to-GDP ratios, defying the predictions of orthodox macro models. For something from our Institute on the topic of fiscal traps, including the UK example, you might take a look at this public policy brief from Dimitri Papadimtriou and me, posted just last week.

It is important to keep in mind, as the authors of the British study point out, that fiscal austerity is hardly the only cause of the economic crises now underway in much of the world. For example, they get at the problem of coordinating macro policies in a group of open economies. Above this paragraph is a diagram from our brief, illustrating, among other things, the role of Minskyan financial fragility in generating crises in many places in the world. This role is shown by the light green arrows in the diagram, which show how rising numbers of “Ponzi units,” (firms and households that need to borrow in order to make their interest payments) can play a role in a fiscal trap. Spending cuts or tax increases are sometimes “self-defeating” in this view because they undermine the tax base—the amount of activity subject to taxation. The mechanism involved is a Keynesian multiplier effect. Internationally, there are many examples of this problem these days.

2)      More on models of economic growth and income distribution and their relationship to models from applied mathematics in letters to the editor of the Financial Times (here and here) and in a blog post from a mathematician: The FT letters discuss, among other things, the perhaps debatable role of unemployment in keeping real wages from rising. On the other hand, the blog post discusses various kinds of discontinuous dynamic behavior that fall under the rubric of catastrophe theory, mentioning a classic business-cycle model by Nicholas Kaldor and various sorts of straws that break camels’ backs. Author Steven Strogatz notes that “in some…cases (boiling water, optical patterns), the picture from catastrophe theory agrees rigorously with observation. But when applied to economics, sleep, ecology, or sociology, its more like the camel story—a stylized scenario that shouldn’t be taken for more than it is: a speculation, a hint of something deeper, a glimpse into the darkness.”

All of these ideas play a role in numerous macroeconomic models, including the one that I discussed in this post, which features CDF interactive graphics. New macro team hire Michalis Nikiforos has been working on many of these issues, too.


Unemployment Figures and the Uncertain Future

Greg Hannsgen | October 12, 2012

We expect the unexpected at the Levy Institute. As followers of Keynes, most economists here, including this author, believe that one cannot assign exact probabilities to most important economic outcomes even, say, six months into the future.

On the other hand, thinking about the economic debate on job creation, and the recent release of new jobs data, I have not been very surprised at the gradual pace of progress in reducing the unemployment rate. In fact, we on the macro team have consistently called for more fiscal stimulus rather than less. The reason is that unemployment is a relatively slow-moving variable. As the chart at the top of this post shows, the unemployment rate (shown as a blue line) fell only rather gradually after each of the previous three recessions (shown as shaded areas in the figure). (Here, we count the double-dip recessions of 1980 and 1981–82 as one.) Hence, once the recovery began, we knew that with the unemployment rate at very high levels, it needed to fall unusually fast to be at reasonable levels by this point in the Obama administration.  Hence, since 2007, the team has advocated an easing of fiscal policy. Instead, especially after the 2009 ARRA, little action was taken by the government to stimulate the economy. Partly as a result of inaction on fiscal stimulus, government employment as a percentage of the civilian workforce (red line in the figure above) peters out after 2010.

At this point, we hope for legislation to moderate January’s expected “fiscal cliff”—which will lead to perhaps a $500 billion in reductions in the federal deficit in 2013 unless laws are changed, by CBO estimates.  (In its current form, the cliff would probably have a serious impact on all economic and demographic groups. Lately, I’ve been working on a model that incorporates the larger effects of an additional dollar of income on spending at lower income levels—not a simple task.)

In the figure, both lines are shown in the same units, namely percentages of the civilian labor force age 16 and above, though the two lines use different scales, one on each side of the figure.  For example, a one-unit change in the blue line represents the same number of workers as a move of one unit in the red line. A hypothetical jobs program or another spending measure that gradually increased government employment (red line) by, say, 1 percent of the total US workforce might easily have led to an unemployment rate (blue line) for last month of 1 to 3 percent less than the actual reported amount. But government does not seem to be expanding; in fact, the red line shows that government employment shrank at a time when more hiring from that sector would have been of great help to the economy. (The figures include employees of local and state governments, as well as those of the federal government. The smaller governmental units have seen the biggest cuts in payrolls.) continue reading…


What Are the Post Keynesians Up To?

Greg Hannsgen | October 2, 2012

I returned to the Levy Institute yesterday after the International Post Keynesian Conference in beautiful Kansas City. I will mention some of the news from the conference, for readers who are interested in the kinds of events that Levy Institute scholars attend.

At such conferences, ideas are taken very seriously, and many interesting debates were simmering at this one.  Theories and models abounded. Many of them went right to the heart of the causes of the financial crisis.

Speaking of interesting, students were among those attending and helped to organize the conference. Some were selling official conference t-shirts as well as used books in the vendors’ area. I haven’t had a chance to try my shirt on, having returned home only Sunday night on a delayed flight.

Many of the giants in the field were there.  A surprise event in honor of the Institute’s Jan Kregel took place last Thursday night, the first night of the conference.  Kregel recently joined Paul Davidson as an editor of the Journal of Post Keynesian Economics. A new Post Keynesian economic policy forum is online, and many from the Institute are editors. This new paperback from Eckhard Hein and Englebert Stockhammer, also on display at the conference, explains some of the ideas and history of this school of economists, including their conferences. Post Keynesian and Keynesian economics have of course been resurgent in recent years, and the topic of Hyman Minsky (whose archive is here) in particular frequently came up in the presentations and discussions among the economists.

An enjoyable keynote speech by noted author Robert Skidelsky came after the conference was officially adjourned. Skidelsky argued in favor of an “underconsumptionist” interpretation of the current world economic situation. In other words, a tilt in income distribution reduces spending by the masses. He noted that Keynes himself deployed such an argument in his later work, though his 1936 General Theory of Employment, Interest and Money emphasized that volatile investment, driven by changing expectations, largely accounted for fluctuations in total output and employment.  The speech also mentioned the views of Depression-era Fed Chair Marriner Eccles, which were featured in this recent post by Thorvald Grung Moe, another conference participant.  Skidelsky also discussed his new book, How Much Is Enough? (Amazon link), which is coauthored by Edward Skidelsky.

As for myself, I presented my most recent Levy Institute working paper and two example computable documents based on the model. The documents, which allow one to experiment with the model, along with links to the paper, appear in this May post.*  A somewhat skeptical Marc Lavoie, Fred Lee, and Sunanda Sen asked questions during the Q and A. After the session, Davidson was kind enough to bring up a few important issues that did not figure in my paper and presentation, including the key role of household credit, which has, however, been an important part of some previous work by me and other macroeconomists at the Institute (like this 2007 brief on the potential for a mortgage crisis, which I coauthored with Dimitri Papadimitriou and Gennaro Zezza).

*Note: The post is now slightly revised.- G.H., October 3.