Archive for the ‘Economic Policy’ Category

Minsky Meets Brazil (Part IV)

Michael Stephens | September 20, 2016

by Felipe Rezende

Part IV

This last part of the series (see Part I, II, and III here, here, and here) will focus on the Brazilian response to the crisis.


1. What Should Brazil Do?

The current Brazilian crisis fits with Minsky’s theory of instability (see here, here, and here). The traditional response to a Minsky crisis involves government deficits to allow the non-government sector to net save. That is, if the private sector desire to net save increases, then fiscal deficits increase to allow it to accumulate net financial assets. The sharp increase in budget deficits in 2015 comes as no surprise. Rezende (2015a) simulated

a scenario in which we have rising government deficits to offset current account deficits, to allow the domestic private sector balance to generate financial surpluses. In this case, in the presence of current account deficits equal to 4% of GDP, to allow the private sector to net save 2% of GDP, it would require government deficits equal to 6% of GDP.  If the private sector is going to save 5% of GDP (equal to the 2002-2007 average pre-crisis) and a current account deficit equal to 4% of GDP then we must have an overall government budget in deficit equal to 9% of GDP. Given the current state of affairs, government deficits of this magnitude might be politically unfeasible right now. (Rezende 2015a)

In 2015, Brazil’s budget deficit increased from 2% of GDP in 2008 to 10.38% of GDP in 2015. Though government deficits support incomes (cash flow and portfolio effects) and stabilizes profits, the bad composition of the government budget, that is, virtually the entire deficit is due to interest payments, did little to sustain employment. Brazil’s primary budget balance swung from a surplus of 3% of GDP over a decade to a deficit. As this happened, credit rating agencies’ decision to downgrade Brazil’s sovereign debt to junk status put Ms. Rousseff under growing pressure to cut public spending. In this regard, with the implementation of austerity policies in 2015 automatic stabilizers were switched off, that is, the real growth (deflated by IPCA) of expenses by the central government sharply declined (figure 1) aggravating the recession. continue reading…


Minsky Meets Brazil (Part III)

Michael Stephens | September 6, 2016

by Felipe Rezende

Part III

This part of the series (see Parts I and II, here and here) will focus on macroeconomic and microeconomic aspects of financial fragility and the provision of liquidity. Minsky’s framework not only sheds light on how to detect unsustainable financial practices, but the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory. This is a Minsky crisis in which during economic expansions market participants show greater tolerance for risk and forget the lessons of past crises so economic units gradually move from safe financial positions to riskier positions and declining cushions of safety. continue reading…


Minsky Meets Brazil (Part II)

Michael Stephens | August 24, 2016

by Felipe Rezende

This series will discuss at length the underlying forces behind Brazil’s current crisis. (See Part I here)

Part II

Building on Keynes’s investment theory of the cycle, Minsky’s work suggests that the structure of the economy becomes more fragile over a period of tranquility and prosperity. That is, endogenous processes breed financial and economic instability. While Minsky adopted Keynes’s “investment theory of the cycle,” he added a financial theory of investment, with a detailed exposition of the theory in his book John Maynard Keynes (1975), which put at the forefront the interrelation between investment decisions and the financial structure designed to allow economic units to take positions in assets by issuing debt. In this regard, debt accumulation is at the core of Minsky’s instability theory. His financial theory of investment incorporated Kalecki’s approach in which aggregate profits are created, mostly, by the autonomous components of demand (Minsky 1986, 1989). One can add to this analysis Godley’s three balances approach, which explores the interlinkages between the government sector, the private sector, and the external sector. This means that a surplus must be matched by an equal deficit and flows accumulate to stocks.

In this regard, Godley’s framework sheds light on the identification of financial fragility at the macro level, in which, to accumulate financial wealth, the private sector (firms and households) needs to spend less than its income. This can be accomplished through a combination of government budget deficits and current account surpluses. This framework is then incorporated into Minsky’s theory of the business cycle to analyze Brazil’s current crisis. In particular, Minsky’s framework not only sheds light on how to detect unsustainable financial practices, but the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory.

This article attempts to demonstrate the existence of endogenously generated instability in the Brazilian economy, which has created frequent and systemic financial crises. Brazil’s current crisis is not due to unsustainable policies; the country’s problem is systemic. continue reading…


Tcherneva: Time for a US Job Guarantee (Part 2)

Michael Stephens | August 22, 2016


Tcherneva on the “Growth Lobby” and the Sanders Plan

Michael Stephens | April 4, 2016


Credit Rating Agencies and Brazil: Why the S&P’s Rating of Brazil’s Sovereign Debt Is Nonsense

Michael Stephens | September 13, 2015

by Felipe Rezende

So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’.

First, what are sovereign debt ratings? Standard & Poor’s sovereign rating is defined as follows:

A current opinion of the creditworthiness of a sovereign government, where creditworthiness encompasses likelihood of default and credit stability (and in some cases recovery).

So the ratings are related to “a sovereign’s ability and willingness to service financial obligations to nonofficial (commercial) creditors.”

What does this tell us? To begin with, credit rating agencies have repeatedly been wrong. The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple-A rating to toxic subprime mortgage-backed securities are now downgrading Brazil’s sovereign debt. As the FCIC report pointed out, “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011)

After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign currency debt (figure 2). Brazil’s public sector can pay all of its long-term financial obligations denominated in foreign currency. Moreover, Brazil’s federal government can never become insolvent on obligations denominated in its own currency (note that since 1999 Brazil maintains a floating exchange rate regime, which increases domestic policy space). continue reading…


Binzagr Institute Inaugural Conference: Sustainable Full Employment and Transformational Technologies

Michael Stephens | September 9, 2015

The Binzagr Institute for Sustainable Prosperity is holding its inaugural conference — Provisioning and Prosperity: Sustainable Full Employment and Transformational Technologies  — October 2nd-3rd at Denison University. For those who cannot attend, the event will be livestreamed (and questions can be posed via Facebook and Twitter @BinzagrInfo).

More information on registration and conference themes can be found here. See below for the list of speakers:

Jan Kregel*, Advisory Board Member, Binzagr Institute
William A. Darity, Jr.*, Professor of Economics, Duke University
Stephanie Kelton*, Chief Economist, U.S. Senate Budget Committee
Julianne Malveaux*, Advisory Board Member, Binzagr Institute
L. Randall Wray, Professor of Economics, University of Missouri – Kansas City
Mathew Forstater, Research Director, Binzagr Institute
Fadhel Kaboub, President, Binzagr Institute
Ahmed Soliman, Research Scholar, Binzagr Institute
Scott Fullwiler, Research Scholar, Binzagr Institute
Pavlina Tcherneva, Research Scholar, Binzagr Institute
Ellen Brown, Research Scholar, Binzagr Institute
R. Paul Herman, Founder and CEO, HIP Investor
Robert W. Parenteau, Research Fellow, Binzagr Institute
Elsadig Elsheikh, Director, Global Justice Program: Haas Institute (UC-Berkeley)
Marco Vangelisti, Research Fellow, Binzagr Institute
Raúl Carrillo, Research Fellow, Binzagr Institute
Shama Azad, Research Fellow, Binzagr Institute
Natalie Brown, Research Assistant, Binzagr Institute
Aqdas Afzal, Research Assistant, Binzagr Institute

* invited (to be confirmed)


S&P Threatens to Downgrade Brazil to Junk

Michael Stephens | July 30, 2015

by Felipe Rezende

S&P has issued a negative outlook regarding Brazilian sovereign debt. The S&P’s announcement stated that

Over the coming year, failure to advance with (on- and off-budget) fiscal and other policy adjustments could result in a greater-than-expected erosion of Brazil’s financial profile and further erosion of confidence and growth prospects, which could lead to a downgrade. The ratings could stabilize if Brazil’s political certainties and conditions for consistent policy execution–across branches of government to staunch fiscal deterioration–improved. It is our view that these improvements would support a quicker turnaround and could help Brazil exit from the current recession, facilitating improved fiscal out-turn and provide more room to maneuver in the face of economic shocks consistent with a low-investment-grade rating.

This warning has been echoed by other credit rating agencies threatening to downgrade Brazilian sovereign debt to junk. But, should anyone trust credit rating agencies? Once more, credit rating agencies are clueless in their assessments. They have specialized in making the wrong assessments regarding sovereign governments’ capacity to pay local-currency debts. They have downgraded sovereign governments like the US, UK, Japan, and now Brazil. Paradoxically, credit rating agencies, which have a track record ranging from arbitrary and imprecise to clueless (here, here, here, here), can still dictate the outcomes of the fiscal policies of sovereign governments.

Recent downgrade warnings by CRAs and market pundits have triggered discussions inside the Brazilian government to implement austerity measures, including welfare programmes and public investment initiatives.

President Dilma Rousseff won’t change course. She has reiterated that “[It] will last as long as necessary to rebalance our economy.” She has invoked the government-as-household analogy, stating that: “You who are a housewife or the father of a family know what this is … Sometimes we have to rein in expenses to keep our budget from going out of control … to ensure our future.” Rousseff is under pressure to impose a fiscal austerity agenda to avoid a downgrade by credit agencies.

The current direction of Rousseff’s policies has exposed its contradictory tendencies in combining austerity policies while trying to maintain or reclaim the pre-crisis progress. This combination leads to incoherent policy formulations and more drift, rather than embracing a demand-led strategy. continue reading…


Not All Macro Models Failed to Predict the Crisis

Michalis Nikiforos | April 16, 2015

Noah Smith has a post on the failure of macro theory to predict the crisis. He concedes that DSGE models did very badly on this score, but, he continues, “There are no other models out there that did forecast the crisis” and there is no better alternative.

The word “better” is important here because some “angry heterodox” people have pointed Smith to at least one alternative—Wynne Godley’s Seven Unsustainable Processes—that had in fact predicted the crisis. However, Smith rejects this as “basically just chartblogging” [emphasis added]. He writes that

Yeah, sure, if you put out hand-wavey reports saying “capitalism sux, there’s gonna be a crash!” every year or two, you’re eventually going to be able to say “see, I told you so”. But that’s no replacement for real modeling.[sic]

First of all, there is nothing wrong with chartblogging. In fact, Noah Smith is a chartblogger—an excellent one.

Having said that, is Godley’s argument just hand-wavey-capitalism-sux-chartblogging or is there something more to it (perhaps even some real modeling)?

To begin with, Godley’s argument in the Seven Unsustainable Processes (which is a policy paper) is based on his theoretical work. Godley was one of the major proponents of what is today called Stock-Flow Consistent methodology. Some of his books and his writings (with real models and everything) are here, here, and here.

(The other major proponent of this methodology was James Tobin. His lecture when he was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was a manifesto of this methodology.)

Based on this theoretical work, in the 1990s Godley built a more policy-oriented macroeconomic model at the Levy Economics Institute. The simulations in the Seven Unsustainable Processes were produced with this model (and are thus far from chartblogging).

To understand the argument of the Seven Unsustainable Processes we need to keep two things in mind. First of all, the analysis is Keynesian, so it is aggregate demand that drives output, employment, and growth. These Keynesian results do not stem from imposing rigidities on an otherwise supply-side neoclassical model.

A second important piece of the analysis is a simple macroeconomic identity that comes straight from the National Accounts:

(Private Expenditure – Income) + (Government Expenditure – Income) = Current Account Deficit

In other words, the sum of the private sector and government sector deficit is always equal to the current account deficit. Accounting consistency requires that the flows expressed in the three balances accumulate into related stocks. For example, if the private sector is running a deficit, that will (ceteris paribus) tend to decrease its net worth and increase its debt and debt-to-income ratio.

The examination of these financial balances in relation to income (or GDP) is important because it gives clues about (i) central structural characteristics of an economy, (ii) which component of demand is driving growth, and finally (iii) what net assets/income ratio for each sector is implied from the current situation.

Having said this, we can now go to the crisis and the question of whether Godley actually predicted it or not. continue reading…


How Do We End the Inequality Feedback Loop?

Michael Stephens | April 7, 2015

“As Hyman Minsky argued, there are many varieties of capitalism, some more stable than others—and, we can add, some more equitable than others.” — Pavlina Tcherneva

Pavlina Tcherneva has revisited her (in)famous inequality chart, which showed an ever-rising majority of the income growth during post-1970s economic expansions being captured by the wealthy (specifically the top 10 percent of income earners). In a recently released policy note, “When a Rising Tide Sinks Most Boats: Trends in US Income Inequality,” she has updated the numbers through 2013 and broken down the top decile further (top 1 percent and 0.01 percent), compared the results of including or excluding capital gains, and looked at what happens to the distribution of income growth when we expand our scope to the entire business cycle (Tcherneva looks at NBER-dated GDP cycles as well as “income cycles” based on real income data from Piketty and Saez).

Here are some of the results:

  • The capital gains discussion yields a somewhat counterintuitive result: when you exclude capital gains, the distribution of income growth between the top 1 percent and bottom 99 percent appears more unequal. Tcherneva explains that this is because even though the bottom 99 percent have barely any capital gains income to speak of (2 percent of their income), their shrinking wage incomes meant that, from 2009-13, these meager capital gains were making the difference between declining (excl. cap gains) and merely stagnating (incl. cap gains) incomes for the bottom 99 percent.
  • When we look at entire economic cycles (peak-to-peak GDP or peak-to-peak income) rather than just the expansion periods, the picture doesn’t look any better. In fact, it’s worse. As Tcherneva notes, although the wealthy tend to lose disproportionately more of their income very early on during downturns, they recover faster and stronger than the bottom 90 percent: “Since the ’70s, when we look at the period beginning only one year after a downturn [and ending at the subsequent peak of the income cycle], the cycle delivers between 78 percent and 107 percent of the income growth to the wealthiest 10 percent of families.” In other words, she writes, “the way we grow recovers the incomes of the top 10 percent first.”
  • She also includes the chart below, which, though not quite as striking at first glance, becomes even more galling as you let it sink in. The chart shows the shares of income growth captured by the bottom 99.99 percent and the top 0.01 percent. By contrast with the other charts (90 percent vs. 10 percent and 99 percent vs. 1 percent), the blue bar is still bigger than the red, but keep in mind we’re talking about a tiny fraction of a fraction of the population in that red bar — around 16,000 families — and as you can see, they gobbled up practically one-third of all the income growth in the last full expansion period (2001-07), with the same worrying trend suggesting itself.

Tcherneva_Levy Institute_When a Rising Tide Sinks Most Boats_Fig3

Tcherneva also comments on the need to reorient our broader policy approach (such that it exists) to combating inequality. One of the points she makes is that we give up too much terrain when we focus disproportionately on raising top marginal income tax rates. continue reading…