Archive for the ‘Economic Policy’ Category

Can R&D Help Get Us Out of this Mess? A New Stock-Flow Analysis

Michael Stephens | October 23, 2013

Dimitri Papadimitriou, Greg Hannsgen, Michalis Nikiforos, and Gennaro Zezza have just published a new strategic analysis for the US economy, with a baseline projection and alternative policy simulations through the end of 2016. The report takes a closer look at the potential payoff of R&D investment in the context of a US export strategy.

As Papadimitriou et al. point out, fiscal policy at the federal level is simply stuck on a self-defeating course, with nothing but further growth-killing contraction on the horizon. Their baseline projection shows that if we stay on the current fiscal path, in which the deficit continues to shrink rapidly, growth won’t be high enough to appreciably bring down the unemployment rate — as far out as 2016 unemployment would be just below 7 percent.

The significant increases in federal spending that would be needed to accelerate the recovery and quickly bring down the unemployment rate don’t seem to be politically viable, to put it gently. So the authors turn to the external sector; more precisely, to an export-oriented strategy driven by innovation.

Research and development may be an area in which a proposed increase in government investment would attract less rabid congressional opposition. And from the authors’ perspective, recent revisions to the National Income and Product Accounts (NIPA) now allow us to get a better handle on what to expect from this sort of strategy: “we now enjoy an improved ability to conduct an inquiry in this area: R&D activity is the largest change to measured US GDP, with the recently revised NIPA concepts treating this sort of spending as a form of investment.”

They examine the effects of an increase in R&D spending of $160 billion per year (around 1 percent of GDP) through the end of 2016. This would be R&D expenditure focused on fields with applications in the tradable goods and service sector. In addition to the fiscal stimulus effects, part of the mechanism here is that innovation would increase average productivity in these export sectors, reduce unit costs and relative prices, and thereby boost export volume (“We assume that this spending is aimed exclusively at reducing domestic costs of production, although in reality the effects might also include bringing novel products to market overseas”).

The results of the R&D simulation show that unemployment would drop below 5 percent by the end of the projection period (2016Q4), with economic growth nearing 5.5 percent. Their simulations also suggest that R&D investment would be slightly more potent than the same amount invested in infrastructure, though the authors don’t present this as an either/or policy choice.

The result is particularly noteworthy, given that the meat-axe approach to federal budgeting over the last couple of years has meant that government investment in R&D has been stagnating — and is scheduled for big cuts (from ITIF, via Brad Plumer):

R&D Sequester Cuts

Papadimitriou et al. also introduce a note of caution in their new report. Many economic forecasts assume that the post-financial-crisis deleveraging process — the reduction of the private sector’s debt-to-GDP ratio — will end shortly. In other words, a lot of growth projections for the next few years assume renewed household and business borrowing.

The authors run a simulation in which deleveraging continues for households in particular. Why should we consider this possibility? “Following the work of Wynne Godley, we think it reasonable to argue that historical norms are relevant as benchmarks for household indebtedness ratios.” In this instance, taking that approach would mean treating the private sector’s negative net saving from the 1990s through the 2000s as an exception.

This is what household indebtedness would look like in this scenario (“scenario 3” in the figure, which includes the R&D investment of 1 percent of GDP per year. “Scenario 1” and “scenario 2” correspond to the infrastructure and R&D investment scenarios, respectively, but with the CBO’s more optimistic assumptions about the path of household debt):

Continued Household Deleveraging

If households continue to reduce their debt levels, the positive effects of the R&D investment would be somewhat blunted: growth would just fail to reach 5 percent by the end of 2016 and the unemployment rate would be about 5.5 percent (compared to sub-5 percent unemployment for the R&D scenario in which the household deleveraging process ends).

The upshot is that policymakers need to be prepared for the possibility that the deleveraging process is not finished. If households continue to reduce their debts, there will be even more drag on the economy — and an even more urgent need for ambitious thinking about policies to boost growth and employment.

You can read the report here (pdf).

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Bellofiore on the Socialization of Investment

Michael Stephens | October 17, 2013

From part four of Mariana Mazzucato’s “Rethinking the State” series, Riccardo Bellofiore discusses Hyman Minsky’s Schumpeterian spin on the “socialization of investment”:

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The Global Crisis, a Recovery (?), and the Road Ahead

L. Randall Wray | September 11, 2013

I hope that all of you saw the very nice feature on Wynne Godley in the NYTimes. It is about time he’s getting the notice he deserved. I just came across a juicy quote from Wynne: “I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is.”

Here’s an interview I recently gave to a Brazilian reporter.

Q: The crisis, which began with the collapse of Lehman Brothers on September 15, 2008, will complete five years. What has changed in the world economy during this period?

LRW: Unfortunately, the global financial system was restored to its 2006 status through massive bail-outs by the public sector. It was not reformed. It was not investigated and prosecuted for fraud. Essentially, it was allowed to go back to doing what it did in the years preceding the crisis. Our real economies are still “financialized” with too much debt and with the financial sector taking far too big a share of profits. As a result, in most developed economies around the world, the real sector is very weak.

Of course, the success story was the BRICs—which largely avoided the worst of the crisis and even made gains in their real sectors. China’s development of its economy is unprecedented.

Q: The crisis is over? Is near the end? Still going to get worse?

LRW: No it is not over—especially in Euroland. While it might appear that the USA, UK, and some other developed non-European countries have recovered, as I said their real sectors are weak and their financial institutions have resumed risky practices. The global economic system is fragile and a full-blown crisis could return.

Q: U.S., Europe and emerging countries, such as Brazil, faced the crisis in different ways. How to describe these differences and which country or region got more successful in dealing with the crisis? continue reading…

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Barbera on the Case Against Mainstream Economics

Michael Stephens | September 6, 2013

Robert Barbera, a regular contributor to the Levy Institute’s Minsky conferences, has a great post at Johns Hopkins’ Center for Financial Economics on the cycle of amnesia and remembrance that seems to plague mainstream economic theorists. Here’s a key passage:

Perhaps the most indictable offense that mainstream economists committed, from 1988 through 2008, was to retrace, step by step, Keynes’s path of discovery from 1924 through 1936. Wholesale deregulation of finance and categorical confidence in a reductionist role for central banks came into being as the conventional wisdom embraced the 1924 view that free markets and stable prices alone gave us the best chance for economic stability. To add insult to injury, the conventional wisdom before the crisis was embedded in models called “new Keynesian” which were gutted of the insights of Keynes. This conventional wisdom gave license to a succession of asset market boom/bust cycles that defied the inflation/deflation model but were, nonetheless, ignored by central bankers and regulators alike. Quite predictably, in the aftermath of the grand asset market boom/bust cycle of 2008-2009, we are jettisoning Keynes, circa 1924, for the Keynes of 1936.

It’s worth reading the whole thing: “Exit Keynes, the Friedmanite, Enter Minsky’s Keynes.”

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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.”

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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…

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Kregel on Financial Liberalization and Rebalancing in China

Michael Stephens | April 16, 2013

Jan Kregel speaks at INET’s “Changing of the Guard?” conference in Hong Kong about the tensions between China’s highly regulated financial system and its efforts at rebalancing. Kregel compares elements of China’s financial system to what the United States had under Glass-Steagall and observes that, similar to the US experience, a de facto liberalization is occurring in China through the emergence of shadow banking:

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Polychroniou on a Post-Keynesian Political Economy for the 21st Century

Michael Stephens | March 21, 2013

In a new, wide-ranging policy note, C. J. Polychroniou traces the roots and evolution of the present “era of global neoliberalism”; an era he portrays as mired in perpetual crisis and dysfunction, and ripe for change.

[N]eoliberalism itself is more of an ideological construct than a solidly grounded theoretical approach or an empirically-derived methodology. In fact, the intellectual foundations of neoliberal discourse are couched in profusely vague claims and ahistorical terms. Notions such as “free markets,” “economic efficiency,” and “perfect competition” are so devoid of any empirical reference that they belong to a discourse on metaphysics, not economics.

Polychroniou attempts to outline the central principles of a progressive, post-Keynesian economic policy alternative.  His primary target:  changing the relationship between the state and the financial sector.

Read the policy note here.

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Seminar: William Janeway on Doing Capitalism in the Innovation Economy

Michael Stephens | February 28, 2013

The Bard Economics Program and the Levy Economics Institute present:

William H. Janeway
Institute for New Economic Thinking and Warburg Pincus Technology

Monday, March 4, 2013  4:45 p.m.
Bard College
Reem-Kayden Center for Science and Computation (RKC), Room 103

Excerpt from Doing Capitalism:

The Innovation Economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation. Each of these activities necessarily generates much waste along the way: dead-end research programs, useless inventions and failed commercial ventures. In between, the innovations that have repeatedly transformed the architecture of the market economy, from canals to the internet, have required massive investments to construct networks whose value in use could not be imagined at the outset of deployment. And so at each stage the Innovation Economy depends on sources of funding that are decoupled from concern for economic return.”

About the Author: continue reading…

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Reverse Pivot?

Michael Stephens | February 13, 2013

Is the era of the “grand bargain” over?  That was the implication of a number of news stories that pre-framed last night’s speech.  “When President Obama delivers his State of the Union address Tuesday evening,” wrote the Washington Post‘s Lori Montgomery, “here’s one thing you won’t hear: an ambitious new plan to rein in the national debt. In recent weeks, the White House has pressed the message that, if policymakers can agree on a strategy for replacing across-the-board spending cuts set to hit next month, Obama will pretty much have achieved what he has called ‘our ultimate goal’ of halting the rapid rise in government borrowing.”

There was indeed a small change in emphasis in this year’s SOTU.  The president began by highlighting how much deficit reduction had already been achieved ($2.5 trillion, not including the ACA) and downplayed how much remains to be done to stabilize the debt.  He then spent the bulk of his address on job creation and other national priorities that have been languishing for years, including proposals to raise the minimum wage, invest in infrastructure repairs, create wider access to quality pre-kindergarten, reduce carbon emissions, and so on.  The key line, rhetorically, was this one:  “deficit reduction alone is not an economic plan.”

The deficit-reduction industry isn’t going to close up shop after this speech.  You’ll still get to hear from Alan Simpson and Erskine Bowles about how Washington’s budget cuts have been insufficiently “hard” or “painful.”  Morning cable news hosts, and everyone they know, will still be so convinced that spending is “out of control” that they will find the very idea of checking the data to be laughable.  But ever since the Obama administration announced their “pivot” to deficit reduction in 2010, they have been doing little to dissuade the public from believing that we are on the verge of a government debt crisis that demands our immediate attention, and the SOTU suggests that, going forward, the administration may be providing a little less aid and comfort to the deficit hawks.

Unfortunately, the substance of the president’s speech, the economic policy, was still hemmed in by a prioritization of the federal budget balance.  Obama pledged, for instance, that none of his proposals would add to the deficit (“nothing I’m proposing tonight should increase our deficit by a single dime”).  That’s an unfortunate (and arbitrary) limitation.  For policies such as investment in infrastructure repair that are meant to stimulate the economy and create jobs, deficit neutrality is going to be a significant hindrance.

In the Levy Institute’s last strategic analysis, Dimitri Papadimitriou, Greg Hannsgen, and Gennaro Zezza showed how you can do “deficit neutral” economic stimulus:  this is mainly due to the different “multipliers” associated with various budgetary changes.  However, their simulation of a deficit-neutral stimulus demonstrated that while such policies can boost economic activity (a $150 billion increase in government investment that is “paid for” could reduce the unemployment rate by almost 0.5 percentage points), a deficit-financed stimulus would be more effective.  (Their newest strategic analysis and projections for the US economy will be coming out in late February/early March.)

It remains to be seen how these SOTU proposals get fleshed out, but a true pivot away from prioritizing the deficit would mean, instead of promising not to add a dime to the deficit, pledging not pass a budget that removes even one-tenth of a percentage point from growth until the unemployment rate dips below some target level.

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