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)

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Can Fiscal Policy Stabilize the Economy?

Greg Hannsgen |

Download site for CDF reader program

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.

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Is the Eurozone Turning into Germany?

Jörg Bibow | September 8, 2014

It has been pretty clear since at least the spring of this year that the ECB was keen to see the euro weakening. At the time the euro stood near to $1.40. Policymakers in a number of euro area member states issued calls for a more competitive exchange rate, directing barely hidden criticisms in this regard at the ECB.

The ECB itself ever more forcefully asserted that international factors, including euro strength, were largely responsible as the bank’s price stability misses got ever crasser. Either through direct references to the euro’s exchange rate expressing discomfort about its strengthening, or by highlighting that the prospective monetary policy stances on either side of the Atlantic were on diverging paths, inviting the markets to bet on the dollar and against the euro, Mr. Draghi applied his magic in talking the euro down.

The latest package of ECB easing measures introduced in early June steered the euro overnight rate closer to zero, raising the euro’s attractiveness as a funding currency for carry trades. All along Mr. Draghi has held out the prospect of some kind of quantitative easing even beyond the credit easing measures promised to be unleashed in the fall. As inflation has declined even more and the so-called recovery stalled once again, the beggaring for a weaker euro has brought some visible success: in late August the euro was approaching the $1.30 mark.

Should the Euro Weaken?

Should the euro have weakened, should it weaken even more? The euro area as a whole, which is the relevant entity here, does not lack international competitiveness. Most common measures suggest that the euro is valued about right in its recent range. Certainly the euro area’s soaring current account surplus together with inflation close to zero – and lower than in competing economies – suggest otherwise. Are the world economy and global trade booming and overheating so that more relief through even bigger euro area export surpluses might seem warranted and welcome?

Quite the opposite. continue reading…

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Greece, Rock Bottom, and Co-operative Banking

Michael Stephens | August 29, 2014

In a recent interview, C. J. Polychroniou asked Dimitri Papadimitriou about the idea that Greece is on the verge of economic recovery:

Both the International Monetary Fund (IMF) and the European Commission (EC), in their assessments of the performance of the Greek economy, appear more optimistic on the future of Greece because of the deceleration of the negative growth and a very slight decline of the unemployment rate, even though this was due to using statistics based on the new census that has resulted in demographic adjustments, and not due to growth in employment.

An artificial positive sign on Greece that indicates nothing about Greece’s economic condition, yet it was celebrated as a sign of recovery, was the primary budget surplus and “going back to the financial markets” for a new issue of bonds. The budget surplus was achieved at the cost of creating many damaged lives. On the other hand, going back to the markets was purely a public relations exercise, since the interest cost of almost 5 percent of the new bonds was much higher than that paid on the bailout funds. Moreover, the bonds were implicitly guaranteed by the ECB because they could be used as collateral to the ECB for lower-cost bank borrowing. Finally, the demand for these bonds reflected the current state of excess global liquidity available and not because investors considered Greek bonds as a good risk. The latter is in concert with the well-known adage in Wall Street that at times of “excess liquidity, even turkeys can fly.” All in all, even if the economy were to have hit bottom, this does not necessarily mean it is out of the woods and to a better outlook for its future.

In another segment, Polychroniou and Papadimitriou discussed a recent Levy Institute report that features a proposal to reform and expand co-operative banking in Greece:

Greek banks remain fragile and undercapitalized, thus unable to help the economy recover. A recent Levy Economics Institute publication strongly endorses co-operative banking for Greece as a much-needed alternative financing model for start‐up and existing small enterprises and as an all-important poverty policy alternative. Does the American experience with co-operative banking support this recommendation for Greece?

In the United States, there are no co-operative banks per se. There are what we call Credit Unions and Community Development Banks. Credit Unions have been established throughout the United States and are very successful and mostly unaffected by the subprime financial crisis of 2007-09. They were originally established to serve customers who possessed some common characteristic, i.e. employees of a large organization such as the UN, or big business – IBM – or a locality, Hudson Valley in upstate New York and so on. By now depositors do not need to share a common characteristic. The present credit unions are not very big and serve their local customers since they are geographically focused. Community development banks are very similar and provide banking services to individuals and businesses with limited credit history, such as start-up businesses, firms in agricultural and remote regions, or to inner cities that big banks do not find it profitable to extend their services to. They are doing quite well serving the interests of the unbanked.

Co-operative banks are mostly a European phenomenon and some have become very important in their respective countries and quite large. Others continue their mission of providing services, especially depository and lending functions, to people and areas that large banks shy away from. The most successful are in Germany. There is serious interest from these German co-operative banks to establish their model and operation in Greece. We don’t really need them. We can establish the Greek co-operative bank system very much different than the one we now have, which did not perform well all the time. Our proposal for cooperative banking in Greece incorporates a strong regulatory and supervisory structure, fully transparent, guided by a strong and professional board that will serve the liquidity needs not in the form of “red loans” (κόκκιναδάνεια), but to promote regional entrepreneurship. These banks would contribute to restarting the engine of economic growth, especially within the European framework of the social economy. It has been shown that the large systemic banks in Greece are still in the process of strengthening their balance sheets and have created the credit crunch I mentioned earlier.

Read the rest of the interview here.

Related: “Co-operative Banking in Greece: A Proposal for Rural Reinvestment and Urban Entrepreneurship” (pdf)

See also this policy brief from 1993, co-authored by Hyman Minsky, Dimitri Papadimitriou, Ronnie Phillips, and L. Randall Wray: “Community Development Banking: A Proposal to Establish a Nationwide System of Community Development Banks” (pdf)

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Direct Job Creation and Greece’s Debt Trap

Michael Stephens | August 28, 2014

Dimitri Papadimitriou, after noting the ongoing failure of austerity policies in Greece, shares the results of a recent study led by Rania Antonopoulos on the effects of implementing direct job creation programs of various sizes in the beleaguered country. In one scenario, a 300,000-job program (in the low-to-medium-sized range of the  policy options examined) would have reduced the ranks of the unemployed, once the likely multiplier effects are taken into account, by 30 percent if the program had been implemented in 2012, and GDP would have been increased by 4 percent. And the cost?

To run this impressive game-changer, Greece would have to net spend a little over 1 percent of its GDP. That’s a relatively modest stimulus. Other nations, when faced with hard times that didn’t come close to the distress in Greece today, have launched stimulus programs that were far larger. Germany and Brazil invested 4 percent of GDP, the U.S. 5 percent, and China invested 13 percent of GDP.

The program could feasibly be funded by a dedicated EU employment fund, the issuance of special-purpose tax-backed zero coupon bonds, or a temporary suspension of sovereign debt interest payments. Even if the government borrowed the funds, the debt-to-GDP ratio, the measure of health most important to European leadership and financial markets, would improve.

In case you didn’t catch that: investing in a direct job creation program of this size, even if it were funded by increased borrowing (not the best approach, according the authors), would still actually reduce the size of Greece’s public debt relative to its economy — something troika policy has so far failed to accomplish — because the economy would be growing faster than the debt. And the bigger the program, the greater the debt-ratio-reduction effect: had Greece implemented a 550,000-job program in 2012, its debt-to-GDP ratio would have declined by 9 percentage points — all in the course of reducing unemployment in Greece by nearly two-thirds.

Read the rest of Papadimitriou’s article here.

For the study in question, see: “Responding to the Unemployment Challenge: A Job Guarantee Proposal for Greece

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12th International Post Keynesian Conference

L. Randall Wray | August 27, 2014

Update: see here for the complete conference schedule.

There is still time to register for our upcoming Post Keynesian conference at the University of Missouri-Kansas City. Unfortunately, the program is full so we cannot accept paper proposals. However, there is still space for participants.

The registration is very affordable, and includes all dinners and special events, some of which are listed below. For more information regarding registration, contact Avi Baranes: avrahambaranes@gmail.com

 

THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE

Kansas City, Missouri
September 25–27, 2014

Cosponsored by the University of Missouri–Kansas City, Journal of Post Keynesian Economics, and Levy Economics Institute of Bard College, with support from the Ford Foundation

 

List of special events:

Sept 24, Wed night 6:30-9:00 p.m.: Pre-Conference Presentation by Professor Bruce Greenwald

Described as “the guru to wall street gurus,” Dr. Bruce Greenwald, the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School will kick off the event with a pre-conference lecture on “Value Investing and the Mismeasure of Modern Portfolio Theory,” Wednesday September 24th, 6pm. His lecture is free and is open to the public.

Sept 25,Thurs 5:30—7:30 p.m.: Moderated Panel Discussion

What Should We Have Learned from the Global Crisis (But Failed To Learn)?

1) Bruce Greenwald
2) Lord Robert Skidelsky, Keynes’s Biographer
Moderator: Steve Kraske

Sept 26, Fri 4:00—5:15 p.m.: Special Session in Honor of Paul Davidson

Money and the Real World

Moderator: Mathew Forstater

Raconteur: Paul Davidson

Sept 26, Fri 5:30—7:00 p.m.: James K. Galbraith Keynote Presentation

Sept 27, Sat 11:45—1:00 p.m.: Lunch, Student Union. Lord Robert Skidelsky Keynote: “The Future of Work”

Sept 27, Sat 5:45—9:00 p.m.: Conference Dinner and Celebration of Post Keynesian Economics

-A Celebration of Post Keynesian Economics: M.E. Sharpe and the Journal of Post Keynesian Economics, Past, Present, Future
-The International Post Keynesian Workshop: Trieste, the University of Tennessee, and the University of Missouri-Kansas City
-Lord Robert Skidelsky Keynote: “Economics After the Crash: What Should Students Be Taught?”

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Last Update on Greek GDP

Gennaro Zezza | August 24, 2014

ElStat, the Greek statistical institute, has recently published a flash estimate for GDP in the second quarter of 2014. In current euro prices, GDP keeps falling by 2.5% against the same quarter of 2013. We already know many will claim this as a success of the austerity plans, since the fall is now slower than in previous quarters … but output is still falling.

It is also interesting to note that the flash estimate has also revised GDP in the first quarter of 2014, lowering it by 1% against the previous GDP estimate (see chart). The revision is larger on the current price GDP, against constant price GDP, which implies that the new estimate of the fall in prices is larger than it was.
GreekGDP2014q2
Our last analysis of the Greek economy is available here

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A Fiscal Policy Rule Without Austerity

Greg Hannsgen | August 18, 2014

What will happen about fiscal policy after the tumultuous events beginning in 2010 or so in Europe and the end of Great-recession-era fiscal stimulus in the US? In the US, Paul Krugman and other economists debate the meaning of the CBO’s recent fiscal report, which, as Krugman points out, clearly show a drastic fall in the US deficit—to less than 3 percent of GDP at last check.

This brings us to the main subject of our post: an interesting article that seems to be out in the July issue of the Cambridge Journal of Economics (abstract—rather technical). I happened to run across this new study last week. It may be one of those cases in which an academic article has some implications for macro policy. The authors consider an inflation-targeting fiscal rule: they explore the outcome when government spending is always adjusted upward or downward, depending upon the actual inflation rate, according to an algorithm of sorts set in advance.

Before I go on, I should note the disclaimer that a paper of my own featuring fiscal targets also appeared last month in Metroeconomica, an international journal whose chief editors are based in Austria and Italy. I argue in the paper against deficit targets that restrict spending levels without regard to the strength of the economy. This notion that fiscal policy should aim for budget balance rather than good economic performance is the “Treasury view” lambasted, by the way, in another article in the same journal, penned by Suzanne Konzelman. I will try to outline the article on fiscal targets in terms of what I found in the process of working on my own paper. The post also includes an interactive model of how the rule in my own paper would work in a simplified version of the economy.

I am happy to see various parallels and hope the new piece is indicative of widespread interest in output-stabilizing policy rules, or at least non-austerity rules, and in stock-flow-consistent macro models, including the Levy Institute macro model. The differences between the policy rules and other assumptions in the two papers are numerous. Most importantly perhaps, Matthew Greenwood-Nimmo, the author of the new CJE article, considers a different type of rule. An inflation-targeting rule is the main fiscal policy rule considered in the paper. Inflation-targeting is certainly run-of-the-mill for monetary policy around the world, but as this IMF country-by-country list of fiscal rules now in force indicates, most actual rules simply specify low deficits or low ratios of the budget deficit to GDP.

The new CJE article notes, commenting on a fiscal policy rule from our former Distinguished Scholar Wynne Godley’s work with Canadian Marc Lavoie, that “it seems unlikely that the form of fiscal intervention advocated by Godley and Lavoie…could be fine-tuned to the degree required to achieve a point target in practice, as activating and deactivating public works projects, for example, is likely to generate a somewhat lumpy path of government spending [i.e., one that moved in big steps rather than smoothly]. For this reason, the use of a band target [a range, rather than a specific number] for fiscal policy seems more appropriate.”*

Specifically, Godley and Lavoie’s rule–published years ago in the Journal of Post Keynesian Economics and reprinted in 2012 and in a collection of papers by Godley —called for a level of government spending that would immediately fill the gap between actual and potential output—and hopefully keep unemployment low. In contrast, Greenwood-Nimmo adopts a rule with spending changes in specific amounts that go into force abruptly once inflation exceeds or drops below certain upper and lower bounds or thresholds.

continue reading…

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Can a Euro Treasury End the Crisis?

Michael Stephens | August 14, 2014

Dimitri Papadimitriou introduces Jörg Bibow’s plan for the creation of a Euro Treasury:

It was only a matter of time until the euro area was hit with the kind of crisis from which it is still struggling to recover—this was understood well in advance, by many at the Levy Institute and elsewhere. The problem has always stemmed from a structural weakness in the design of the currency union: member-states gave up control over their own currencies but retained responsibility for fiscal policy. This situation rendered them subject to sovereign debt runs—which occurred when the fallout from a banking crisis fell squarely on euro area national treasuries—of the sort that countries controlling their own currencies do not face.

As we have pointed out previously, member-states are in some ways in the same situation as US states, which are forced to cut back when the economy contracts—that is to say, at the very moment when expanded public spending is required to place a floor under the economic collapse. But US states have the benefit of a treasury at the federal level that can spend without the same sovereign debt concerns (which the US federal government did, briefly, before succumbing in 2010 to a misguided notion of “fiscal responsibility,” not to mention congressional obstruction). The eurozone member-states, however, do not have the benefit of this treasury–central bank combination at the level of the central government—a lacuna Jörg Bibow addresses with the proposal outlined in this policy brief.

One challenge for “United States of Europe” or “complete the union”-type plans is their political toxicity, but Bibow has tailored his Euro Treasury plan so as to minimize the political vulnerabilities (this is not a transfer union) while preserving the principal benefit: ending the divorce between monetary and fiscal powers in the euro area. continue reading…

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A New Book on Money to Please Fans of Minsky and MMT

Greg Hannsgen | August 12, 2014

Opinions heard on the subject of money and the economy often seem uninformed or absurd. For a great book about money and monetary theory, I would strongly recommend Money: The Unauthorized Biography by Felix Martin, a 2014 book from Alfred A. Knopf. This book might just please students of history and finance and others who might already be familiar with one theory or another about the origins of money and ways of managing a monetary system. These and other readers might benefit from a readable account of these theories up to the current time and what they might have to say about the recent financial crisis and its roots in theory and practice.

Martin is critical of mainstream finance as well as orthodox macroeconomics, and friendly to points of view related to Hyman Minsky’s financial fragility hypothesis and other truly monetary forms of economics. The latter were introduced to the civilized world by John Maynard Keynes, Bagehot, Wynne Godley, James Tobin, our own Randy Wray, and others sometimes mentioned in this blog. But as the new book shows, their intellectual roots in monetary thought go deeper into the centuries. Martin’s accounts seems fair all around. I think it will be one of those books that offers almost everyone who reads it something surprising and of interest.  Nonetheless, the book is one of those many signs of widespread recognition that Keynes’s monetary production theory and related points of view offer a vantage point that the mainstream missed, helping to bring on the financial crisis. It is a fascinating and lucid read.

(By the way, the New York Times Book Review ran a favorable review earlier this year in an edition that covered many titles related to the theme of money–some not so good.)

As you may have guessed, I have been doing some reading of new books from a summer trip to my local bookstore and hope to get to more of them in posts in the near future.

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