Working Paper Roundup 8/31/2015

Michael Stephens | August 31, 2015

A Nonbehavioral Theory of Saving
Michalis Nikiforos

“We present a model where the saving rate of the household sector, especially households at the bottom of the income distribution, becomes the endogenous variable that adjusts in order for full employment to be maintained over time. An increase in income inequality and the current account deficit and a consolidation of the government budget lead to a decrease in the saving rate of the household sector. Such a process is unsustainable because it leads to an increase in the household debt-to-income ratio, and maintaining it depends on some sort of asset bubble. This framework allows us to better understand the factors that led to the Great Recession and the dilemma of a repeat of this kind of unsustainable process or secular stagnation. Sustainable growth requires a decrease in income inequality, an improvement in the external position, and a relaxation of the fiscal stance of the government.”

Is a Very High Public Debt a Problem?
Pedro Leão

“we propose a policy architecture that differs from [Abba] Lerner’s in two aspects: it envisions a different way of preventing a very high public debt from ending in default, and it eliminates the burden associated with levying taxes to meet the interest payments on the debt (in one word, it eliminates the debt burden altogether). Our architecture requires flexible exchange rates. It involves (i) having the central bank impose near-zero nominal government bond yields for as long as necessary—a stance that should be accompanied by (ii) a replacement of monetary by fiscal policy as the instrument to control inflation.

A second objective of this paper is to show that government deficits associated with a full-employment fiscal policy do not face a financing problem. After these deficits are initially financed through the net creation of base money, the private sector’s savings always come in the form of government bond purchases or, if a default is feared, of ‘acquisitions’ of new money.”

Making the Euro Viable: The Euro Treasury Plan
Jörg Bibow

“The idea is to create a Euro Treasury as a vehicle to pool future eurozone public investment spending and have it funded by proper eurozone treasury securities. Member state governments would agree on the initial volume of common area-wide public investment spending and on the annual growth rate of public investment thereafter. Beyond that, the Euro Treasury operates on auto-pilot. … This is not simply another ‘euro bonds’ proposal, though. In particular, there is no debt mutualization of existing national debts involved here. Member states alone would remain responsible for their respective national public debt. …

As to the evolution of national public debts under the Euro Treasury plan, steady deficit spending on public investment funded at the center that is the basis of Europe’s common future will finally allow and enable national treasuries to (nearly) balance their structural current budgets. Within one generation, there will be little national public debt left to worry about. … In general, member states will experience a decline in their overall interest burden as cheaper debts replace more expensive debts over time. While mimicking the original Maastricht criteria of fiscal rectitude and stability at the union level, the overall outcome would also resemble the situation in another—functioning—currency union during normal times: the United States.”

Marx’s Theory of Money and 21st-century Macrodynamics
Tai Young-Taft

“Marx’s theory of money is critiqued relative to the advent of fiat and electronic currencies and the development of financial markets. Specific topics of concern include (1) today’s identity of the money commodity, (2) possible heterogeneity of the money commodity, (3) the categories of land and rent as they pertain to the financial economy, (4) valuation of derivative securities, and (5) strategies for modeling, predicting, and controlling production and exchange of the money commodity and their interface with the real economy.”

The Effects of a Euro Exit on Growth, Employment, and Wages
Riccardo Realfonzo and Angelantonio Viscione

“A technical analysis shows that the doomsayers who support the euro at all costs and those who naively theorize that a single currency is the root of all evil are both wrong. A euro exit could be a way of getting back to growth, but at the same time it would entail serious risks, especially for wage earners. The most important lesson we can learn from the experience of the past is that the outcome, in terms of growth, distribution, and employment, depends on how a country remains in the euro; or, in the case of a euro exit, on the quality of the economic policies that are put in place once the country regains control of monetary and fiscal matters, rather than on abandoning the old exchange system as such. …

Although the exit from a monetary union such the eurozone would be unprecedented, some important pointers can be found in the currency crises of the past that more closely resemble the present case. For this purpose, we will examine the currency crises that in recent history have entailed large devaluations of the exchange rate and that were accompanied by the abandoning of previous agreements or exchange systems. This allows us to take into account both the phenomenon of devaluation and the political-institutional changes that follow when exchanges regimes are abandoned.”


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…


Crystal Balls, or Robust Economic Research?

Gennaro Zezza | July 16, 2015

An article from Bloomberg listed nine people who saw the Greek crisis coming years ago. The list may be narrowly confined to Anglo-Saxon economists, but I am quite happy that most of the people listed worked at, or were/are affiliated with, the Levy Institute.

Wynne Godley

Wynne Godley is the first on the list, given his prescient words in the London Review of Books in October 1992. I am happy I contributed to spreading his thoughts in Italy.

Mat Forstater

Mat Forstater is a friend I regularly meet at the annual Minsky Summer Seminar at Levy.

Stephanie Kelton

Stephanie Kelton, now chief economist on the U.S. Senate Budget Committee, was often at the Minsky Seminar, before her latest appointment.

Randy Wray

Stephanie worked with Randy Wray, who is among the most prolific and influential economists at Levy.

If so many economists doing research together got it right on Greece (as well as on the 2007 recession) maybe it is not by the power of crystal balls, but because of robust, consistent economic thinking?


Deflation Über Alles

Michael Stephens | July 15, 2015

The “negotiations” that surrounded the latest Greek deal do not reflect well on the system (such as it is) of EMU governance. And there are no silver linings to be found in the outcome of this process. It is a testament to how far we are from “normal” that even the best-case scenario would have left little room for optimism. Even if Greece had received a sensible package — one involving debt restructuring and a pause in austerity — this would still have meant an intolerably long period of high unemployment. (“Even if the Greek economy were to miraculously bounce back to its precrisis growth rate, it would take almost a decade and a half to return to precrisis employment levels.” p. 3 [pdf])

Moreover, the particulars of the Greek situation aside, it is important to recall how far we are from a resolution of the broader eurozone crisis, which will arguably not end until the fundamentally flawed euro setup — of which the Greek crisis is a symptom — is addressed. In this vein, Pavlina Tcherneva recently spoke to Richard Aldous of The American Interest about the latest Greek deal and the “stateless currency” that is the euro (listen to the podcast here).

Tcherneva also touched on an aspect of this broader theme in her recent RT interview. In the clip below she links the “deflationary environment” in the eurozone to the absence of a central fiscal authority:



(See here for a proposal for Greece that aims to [temporarily] relieve the constraints rooted in the divorce of fiscal policy from monetary sovereignty: by funding a direct job creation program through the creation of a parallel currency.)

National animosities and idiosyncratic personalities aside, the blame for the underlying crisis ultimately falls on the very structure of the EMU. This is why it was possible for figures like Wynne Godley to have seen this coming decades ago.


Papadimitriou on Making an Example of Greece (Audio)

Michael Stephens | July 8, 2015

From Athens, Dimitri Papadimitriou spoke with Ian Masters about Tuesday’s emergency meeting in Brussels (attended by Greece’s new finance minister)  and the country’s prospects going forward.

Papadimitriou touched on both the economic and political facets of the crisis, and discussed the idea that Greece is being “taught a lesson” as a demonstration to the rest of the eurozone (think Spain and Podemos) that the “wrong type of government” will not be allowed to succeed. Listen/download here.


Euro Union – Quo Vadis?

Jörg Bibow | July 3, 2015

This week a slow-motion train wreck hit the wall in Europe. Greece’s Syriza government came to power earlier this year on a mandate to keep Greece in the euro but end austerity. It was clear from the start that this project could only work out if Greece’s euro partners finally acknowledged that their austerity policies of the past five years had failed and that it was about time to change course and actually start helping Greece to recover.

This was not such an outrageous proposition. Any sane and economically literate person would consider a 25-percent decline in GDP and a youth unemployment rate north of 50 percent as evidence that the utterly brutal troika-imposed austerity experiment had backfired badly. Any European of normal emotional disposition would look at the humanitarian crisis in Greece with horror and shame. Yes, this is really happening in Europe, inside the European Union, in the 21stcentury! There was a time when Europeans appealed to their common destiny and spelled solidarity in capital letters. There was a time when Europe felt strongly that its future place in the world would only be one of peace and prosperity if the nations and peoples of Europe respected each other and joined forces to act constructively and in unison – “united in diversity.”

Not so anymore. In Berlin, Germany, in Dr. Schäuble’s “parallel universe,” austerity works always and everywhere, and the more the better – no matter what the facts might say on this planet. If anything went wrong in Greece, it must be the Greeks’ own fault, 100 percent. Because the Greeks are lazy, corrupt, and untrustworthy – as Germany’s rotten media, plagued by inhumanly stupid economic journalism, have been preaching to the German public for many years now. So the Germans believe what “Mama” Merkel tells them. And the Germans even believe that their finance minister represents unquestionable economic wisdom and rectitude: the only finance minister on earth who understands how to “balance the budget” year after year so as to protect their grandchildren from the evils of debt. These profound illusions and delusions are proving a catastrophe for Europe (and beyond). Once again, the collective folly of the German people risks exposing Europe to the naked forces of barbarism.

What went wrong? continue reading…


Why Greece’s Budget and Debt Restructuring Discussions Need to Be Tied Together

Michael Stephens | July 2, 2015

Pavlina Tcherneva spoke to RT’s Erin Ade yesterday on Greece’s impossible situation:


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 …).