Germany May Be the Biggest Loser If It Doesn’t Start Spending

Jörg Bibow | October 21, 2014

There’s growing pressure on Germany to spend more to support Europe – and for good reason. But it’s proving to be a hard sell to the country’s leaders.

Germany’s budget is balanced and the government insists that its current policy stance is the best it can do – for itself, the eurozone and the world at large. The government’s mantra is that a balanced budget inspires confidence, which in turn propels growth. That’s not actually happening of course, as is plainly visible for anyone to see, yet the ongoing stagnation and sense of crisis felt across the eurozone have only encouraged the German government to repeat its flawed logic.

The rest of the world is not amused, especially eurozone members that have been at the receiving end of Germany’s economic policy wisdom and have been more actively pushing against its gospel of austerity of late.

For much of the time since the euro was launched in 1999, Germany has depended on foreign purchases of its exports for its own meager growth, particularly when domestic demand stagnated for much of the 2000s, just as it does today. But Europe’s biggest country has not been willing to return the favor, as public and private investment remain severely depressed. Even as the government has just cut its own growth forecast for this year and next, it also signaled its continued stubborn refusal to change course.

A nation of surpluses

That protracted stagnation in domestic demand helped cause Germany to run up huge and persistent current account surpluses, averaging about 7% of GDP since 2006. Germany’s current account surplus, on pace to be the world’s largest for a second year in a row, is significantly bigger than China’s, which has declined sharply as a share of GDP from 10% to 2% since the financial crisis.

Bibow_German Current Account

Meanwhile Germany’s has gone the other way, and its leaders do not see anything wrong with that. Rather, the government views it as evidence of the country’s sound policies and restored competitiveness. Eurozone partners are invited to follow the German lead. They are told to balance their budget, liberalize their labor markets and improve their own competitiveness.

There is something fundamentally wrong about this prescription. continue reading…


Did Ms. Rousseff’s Epiphany Come Too Late?

Michael Stephens | October 15, 2014

by Felipe Rezende

If you’ve been tracking the news on Brazil’s presidential election, you already knew that incumbent Rousseff will face Neves in a runoff election for Brazil’s presidency on October 26th. The tight election reflects the perception of a downward trend of the nation’s economic outlook augmented by news that Brazil’s economy has fallen into recession in the first and second quarters of 2014. This really isn’t looking like the election the Workers’ Party expected. Brazil’s unemployment rate has hit record lows, real incomes have increased, bank credit has roughly doubled since 2002, it has accumulated US$ 376 billion of reserves as of October 2014 and it has lifted the external constraint. The poverty rate and income inequality have sharply declined due to government policy and social inclusion programs, it has lifted 36 million out of extreme poverty since 2002. Moreover, the resilience and stability of Brazil’s economic and financial systems have received attention as they navigated relatively smoothly through the 2007-2008 global financial crisis. Brazil’s response to the largest failure of capitalism since the Great Depression included a series of measures to boost domestic demand.

So, what happened? The reason is fairly obvious, in the aftermath of the global financial meltdown, policy makers misdiagnosed the magnitude of the crisis, the changing circumstances because of it, and ended up withdrawing stimulus policies too early. The premature withdrawal of stimulus measures opened up space for critics, such as the main centre-right opposition party, to blame Ms. Rousseff’s administration as being excessively interventionist leading the Brazilian economy to perform poorly during the past four years. It fueled Mr. Neves’s campaign to convince anti-Rousseff voters he can get Brazil’s economy back on track.

Five years after the crisis where do we stand?

The Brazilian economy in the New Millennium experienced extremely favorable external conditions such as increasing global demand for emerging market exports and rising financial flows to emerging markets (Kregel 2009). Some critics of the Brazilian government argue that the positive economic performance during the past decade was solely due to external tailwinds fueled by the boom in commodity prices, buoyant external demand, and massive foreign flows into Brazil’s economy. This group tends to overlook domestic policies designed to foster private demand. Brazilian economic policymakers, by contrast, proudly point to government policies designed to boost growth. continue reading…


Exclusive Growth

Michael Stephens | October 8, 2014

This chart, a version of which Pavlina Tcherneva posted on Twitter, has been getting a lot of attention (e. g., NYTimes, Vox, NPRWaPo, Slate, Moyers & Co.).

Tcherneva_Distribution of Income Growth_Levy OP 47

The chart shows, for each postwar economic recovery in the United States (trough to peak), the share of income growth going to the bottom 90 percent and top 10 percent of the income distribution. And the trend is unmistakable. This is how Tcherneva puts it in a new One-Pager: “For the vast majority of people in the United States, economic growth has become little more than a statistical sideshow.”

This is a picture of an economy that has been broken for some time; well before the cartoonish result in the last partial expansion (during that 2009-12 period, the top 10 percent received 116 percent of the income growth [possible because the bottom 90 percent saw their incomes drop] — and the top 1 percent alone captured 95 percent of the gains).

But Tcherneva also has a particular view of how we can change our policies to help solve this problem. She writes about two ways of improving the income distribution through public policy:

“One is to work within existing structures and reallocate income through various income redistribution schemes after income has been earned. The other is to change the very way income is earned from the outset.”

The way we normally use fiscal and monetary policy to stabilize the economy represents a lost opportunity to affect the income distribution through the second channel, she says. Most conventional policies operate by aiming primarily to boost investment and growth, with the employment effects following as mere byproducts of this process. These conventional stabilization tools (including fiscal pump-priming) don’t do enough to disrupt what she describes as a broken “income-generating mechanism”; one that benefits capital over labor and the incomes of high-wage workers over low-wage workers.

Tcherneva argues that direct job creation policies are different. They can stabilize the economy by targeting the incomes and employment prospects of people at the bottom of the income scale, rather than, for instance, waiting for the effects of improved bank balance sheets to trickle down through the income distribution. By having the government fund employment in the public, nonprofit, and social entrepreneurial sectors for all who are ready and willing to work, her “bottom-up” reorientation of fiscal policy is meant to bring about full employment while raising incomes at the bottom of the distribution faster than those at the top.

As Tcherneva points out, severe income inequality doesn’t just raise concerns about distributive justice, it’s also a serious economic problem: for instance, the Levy Institute’s last strategic analysis argued that inequality has been a significant driver of financial instability in the US economy.

Download the One-Pager: “Growth for Whom?” (pdf)


Related: An older version of this chart appeared in a Levy working paper, and more recently, in an article published in the Journal of Post Keynesian Economics.


A Recovery for the Top 10%

Michael Stephens | October 7, 2014

Pavlina Tcherneva was interviewed on the Real News Network about what’s behind the numbers in her chart (below) showing the increasingly inequitable distribution of income growth in US economic expansions–and what we can do about it.

Tcherneva_Distribution of Income Growth_Levy OP 47


Related: “Growth for Whom?


No, Tourism Will Not Save Greece

Michael Stephens | September 25, 2014

From Dimitri Papadimitriou today in New Geography:

Will Lindsay Lohan Save Greece?

It’s September, but island beaches from the Aegeans to Zante are still buzzing in Greece. Mykonos has been the summer’s Go-To spot for superstars and supermodels; the mainland and cities are also seeing the British and Europeans coming back.

Greece’s reemergence on the tourist circuit and the celebrity-watch sites has brought travel revenue, which accounted for 12 billion euros through April, actually above the previous peak in 2008. And, based on arrivals, the national tourism agency predicts that visitors will account for 13 billion euros this year.

So did the appearance of Lindsay Lohan and friends in the Greek isles signify, as one newspaper put it, a template for Greece’s economic recovery?

It didn’t. It’s even still possible that Greece’s economic troubles have yet to hit bottom — no one really knows. There is one definite, though. Even with a dramatic increase in its significant tourism industry, the dance floor under Greece’s summer parties has been resting on a breathtakingly shaky foundation.

Read the rest here.

The supporting research mentioned in the piece is from the Levy Institute’s latest strategic analysis: “Will Tourism Save Greece?


Post Keynesian Conference Goes Live Tonight

Michael Stephens | September 24, 2014

The 12th International Post Keynesian conference, cosponsored by the University of MissouriKansas City, Journal of Post Keynesian Economics, and Levy Institute, with support from the Ford Foundation, begins this evening at UMKC with a keynote by Bruce Greenwald. The full schedule for the conference can be accessed here.

If you can’t attend, portions of the event will be livestreamed at this link, beginning tonight at 7pm EST with Greenwald’s talk. Here is the livestreaming schedule*:

*All times below listed in Eastern Standard*

Wednesday, 7:00-9:00pm: Bruce Greenwald, “Value Investing and the Mis-measures of Modern Portfolio Theory”

Thursday, 6:45-8:30pm: Panel: “What Should We Have Learned from the Global Crisis (But Failed To)?” (with Bruce Greenwald, Lord Robert Skidelsky, and Steve Kraske)

Friday, 6:45-8:15pm: James Galbraith, “The End of Normal”

Saturday, 12:45-2:00pm: Lord Robert Skidelsky, “The Future of Work”

Saturday, 8:00pm: Lord Robert Skidelsky, “Economics After The Crash: What Should Students Be Taught?”


Europe at the Crossroads: A Union of Austerity or Growth Convergence?

Michael Stephens | September 19, 2014

Co-organized by the Levy Economics Institute of Bard College and Economia Civile with support from the Ford Foundation

Megaron Athens International Conference Centre
Athens, Greece
November 21–22, 2014

On November 21 and 22, the Levy Economics Institute of Bard College will hold its second annual conference at the Megaron Athens International Conference Centre in Athens, Greece. Co-organized by the Levy Institute and Economia Civile, the conference will focus on the continuing debate surrounding the eurozone’s systemic instability; proposals for banking union; regulation and supervision of financial institutions; monetary, fiscal, and trade policy in Europe, and the spillover effects for the US and the global economy; the impact of austerity policies on US and European markets; and the sustainability of government deficits and debt.

To register, click here.


George Argitis, Professor of Economics, University of Athens; Scientific Director, Institute of Labour, GSEE

Emilios Avgouleas, Chair, International Banking Law and Finance, University of Edinburgh

Elga Bartsch, European Chief Economist, Morgan Stanley

Marek Belka, Governor, National Bank of Poland

Peter Bofinger, Member of the German Council of Economic Experts; Professor of Monetary Policy and International Economics, University of Würzburg; Research Fellow, Centre for Economic Policy Research

Carlos da Silva Costa, Governor, Bank of Portugal

Stanley Fischer, Vice Chair, US Federal Reserve System*

Richard W. Fisher, President and CEO, Federal Reserve Bank of Dallas*

Heiner Flassbeck, formerly Director, Division on Globalization and Development Strategies, UNCTAD, and Deputy Finance Minister, Germany

Eckhard Hein, Research Associate, Levy Institute; Professor of Economics, Berlin School of Economics and Law; Adjunct Professor of Economics, Carl von Ossietzky University Oldenburg

Stuart Holland, Professor, University of Coimbra

Patrick Honohan, Governor, Central Bank of Ireland

Lex Hoogduin, Professor of Economics and Business, University of Groningen

Joanna Kakissis, Correspondent, NPR and PRI, Athens

Stephen Kinsella, Lecturer in Economics, Kemmy Business School, University of Limerick

Jan Kregel, Senior Scholar, Levy Institute; Professor of Finance and Development, Tallinn University of Technology

Roberto Lavagna, formerly Minister of Economy and Production, Argentina*

Panagiotis Liargovas, Director of the Budget Office, Greek Parliament; Jean Monnet Chair in European Integration and Policies, University of Peloponnese

Lubomír Lízal, Member of the Board, Czech National Bank

Gyorgy Matolcsy, Governor, National Bank of Hungary*

Michalis Nikiforos, Research Scholar, Levy Institute

Dimitri B. Papadimitriou, President, Levy Institute

Sarah Bloom Raskin, Deputy Secretary, US Department of the Treasury*

Engelbert Stockhammer, Professor of Economics, Kingston University

Mihai Tănăsescu, Vice President, European Investment Bank

Andrea Terzi, Professor of Economics and Coordinator of the Mecpoc Project, Franklin University Switzerland

Mario Tonveronachi, Professor of Financial Systems, University of Siena

Raymond Torres, Director, Research Department, International Labour Organization



Options for an Independent Scotland

Michael Stephens | September 18, 2014

People in Scotland are heading to the polls today to decide the question of secession. One of the major policy questions for an independent Scotland is whether the country should attempt to keep the pound. As many have now begun to appreciate — with a little help from the eurozone spectacle — this would likely be a big mistake.

In “Euroland’s Original Sin,” Dimitri Papadimitriou and L. Randall Wray explained why a separation between fiscal and monetary sovereignty — when countries do not issue their own currency yet retain responsibility for fiscal policy — is the root of the problem in the eurozone. Any country with this setup will face budgetary constraints to which currency-issuing nations are not subject; the kind of constraints that can generate a sovereign debt crisis if, for instance, the country’s fiscal authority is forced to handle the fallout from a large banking crisis. This is a drum that many people affiliated with the Levy Institute have been banging for some time (well before the eurozone fell into its current mess).

Recently, both Paul Krugman and Martin Wolf  have written columns in which they make similar arguments in the context of Scottish independence (and the SNP’s ostensible plan to retain the pound). Philip Pilkington wrote a policy brief a few months ago in which he also argued, with the aid of an analysis of Scotland’s financial balances, that retaining the pound would leave the country open to a eurozone-periphery-style crisis. Pilkington’s story focuses on Scotland’s reliance on oil and gas revenues and the particular instability that could be generated, for a currency-using (vs. issuing) Scotland, by oil price fluctuations.

Although Pilkington suggests it might make sense to retain the pound in the short run (during which time he advocates the use of “tax-backed bonds” to limit instability, a proposal Pilkington originally developed with Warren Mosler [see here and here] for the eurozone), he argues that Scotland ultimately needs to move toward issuing its own freely-floating currency. The question is how to move from the first to the second phase with a minimum of disruption. The policy brief thus lays out a “dual currency” transition plan for Scotland: continue reading…


Mission-Oriented Finance (Video)

Michael Stephens | September 10, 2014

The following clips are from the Mission-Oriented Finance for Innovation conference held in London, organized by Mariana Mazzucato as part of a research project with L. Randall Wray on “Financing Innovation.”

L. Randall Wray, “Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis” (slides)


Pavlina Tcherneva, “Full Employment, Value Creation and the Public Purpose” (slides)


Can Fiscal Policy Stabilize the Economy?

Greg Hannsgen |

Download site for CDF reader program
[WolframCDF source=”” width=”468″ height=”458″ altimage=”” altimagewidth=”468″ altimageheight=”427″]

Here is a new Wolfram CDF, which I have constructed based on a macro model. The assumptions behind the model–other than the exact parameter values–are loosely stated in this list:

1) industries dominated by a handful of firms, rather than perfect competition
2) production technology that requires capital and labor inputs
3) chronic underemployment and less-than-full capacity utilization (percent of capital stock in use at a given time)
4) sovereign money and a policy-determined interest rate
5) two groups of households, only one of which has money to save
6) net investment a function of the profit and capacity utilization rates
7) budget deficits offset by the issuance of treasury bills and sovereign money
8) a government that employs workers to produce free public services
9) a fiscal policy rule with (a) a balanced budget target (labeled “0” in the CDF above) or (b) public production and capacity utilization targets (labeled “1” in the CDF above)
10) nonlinear functions that result in endogenous cycles in this figure for some parameter values and policy functions (try different parameter values with policy rule “1” for example)
11) gradual adjustment of public and private-sector output toward levels indicated by one of the two fiscal policy rules and output demand, respectively.

The arrows in the CDF show directions of movement in 2D space, where the two axes represent public production (horizontal) and capacity utilization (vertical). We got a different look at the same model in this previous post. In this new CDF, I have tried to improve on the realism of the parameter values. Here is a link to the download site at Wolfram for the needed CDFPlayer software.

The most serious omissions in the model above, by the way, are a foreign sector, a mechanism by which the broad price level can change over time, and commercial bank deposits and loans. As mentioned before, I am working on adding these and other new features to a larger version of the model depicted above for the upcoming International Post Keynesian Conference in Kansas City later this month. Any macroeconomic model, of course, is only an abstract and simplified version of a real economy. But the bottom line is that (1) guiding fiscal policy with a balanced-budget target leads to instability in all cases, while (2) the output-stabilizing fiscal rule generates a business cycle of varying size or convergence to a point.