These two interview segments, with Marshall Auerback and Edward Harrison (at 23mins), feature some basic discussion of Hyman Minsky and his view of financial crises:
These two interview segments, with Marshall Auerback and Edward Harrison (at 23mins), feature some basic discussion of Hyman Minsky and his view of financial crises:
On Saturday, Daniel Alpert delivered the closing remarks at the Levy Institute’s Hyman P. Minsky Summer Seminar:
Minsky had the rarely seen ability to stand back from all he had learned—even at times from his own mentors—and not only see and articulate what was misunderstood, what wasn’t working, but also to explain why conventional wisdom is often not always all that wise and why markets often proceed in delusional fashion. And by this I mean not merely the often irrational animal spirits of markets, nor the Keynes’ casino, nor his beauty contest, but an almost collective agreement to ignore the most obvious of fact-pictures staring right back at us. And often, to ignore them because they force consideration of exogenous variables that aren’t readily incorporated into existing mainstream models, to ignore them because they are too heterodox to be considered by those who have invested their lives work in developing and interpreting mainstream theory, or to overlook them because they involve understanding the often obtuse complexities of actual market operations that go beyond ivory tower theories of market behavior.
Read Alpert’s full remarks here.
In The Guardian, Dimitri Papadimitriou warns that the combined forces of persistent inequality, shrinking government budgets, and the US trade deficit are setting the stage for another private-debt-driven financial crisis:
Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn’t going to be propelled by an export bonanza, or by a government investment boom.
It will have to be driven by spending. Even a limping recovery like the one we’re nursing along today depends on domestic demand – consumer spending not just by the wealthy, but by everyone else.
We believe that Americans will keep consuming at the same ever-rising rates of past decades, during good times and bad. But for the vast majority, wages and wealth aren’t going up, so we’re anticipating that the majority of Americans – the 90% – will once again do what was done before: borrow, and then borrow more.
The more – proportionally – that the top 10% has prospered, saved and invested (naturally, the gains found their way into the financial markets), the more the bottom 90% has borrowed.
Look at the record of how these phenomena have travelled in lockstep. In the first three decades after the second world war, the income of the 90% rose at the same pace as its consumption. But after the mid-1970s, a gap formed – the trend lines on earning and outlays spread apart. Spending continued apace. Real income, meanwhile, stagnated. It was lower in 2012 than it had been forty years earlier. That ever-increasing gap between income and consumption has been filled by borrowing.
Papadimitriou also points out that corporations, which pulled back after the recession, are once again increasing their debt (this began in 2010), and the expectation is for non-financial corporations to add some $4 trillion in debt between now and 2017.
If these debt-fuelled spending dynamics (on the part of corporations and the bottom 90 percent households) don’t come to pass, then we’re looking at a period of low growth and high unemployment–”secular stagnation”–instead.
There are a number of lessons here, but I’d like to highlight two, in case they aren’t obvious. First, even if you aren’t persuaded that income inequality needs to be addressed for reasons of fairness, then financial stability concerns alone should suffice. Second, in the absence of some impending export boom, continuing to reduce the budget deficit at a record pace is the height of recklessness.
Read the Guardian piece for more. The underlying macroeconomic research comes from the Levy Institute’s most recent strategic analysis: “Is Rising Inequality a Hindrance to the US Economic Recovery?“
This is another installment in the series on the MMT view of taxes. I’m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and “green jobs.” Along the way he made two particularly insightful comments on MMT and taxes that I’ll use to introduce this installment.
First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years,” at least, as Keynes put it in his Treatise on Money. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US.
It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure.
Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds.” We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them.
You cannot run out of a unit of measure!
The “dollar” is the measuring unit in which we keep our monetary records. We cannot run out.
Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be “tax bads, not goods.”
We’ve previously established that “taxes drive money.” We’ve also established that from the perspective of the sovereign that creates the money, the purpose of the monetary system is to move resources to the public sector.
Clearly we do not want to move all resources to the public sector; we want to leave some for the “private purpose.” Further, we want some “efficiency” (I’ll leave the definition of that vague for now) in this process, in the sense that while we want to move some resources to the public sector we do not want to discourage useful private sector activity.
It would be even better if this process of taxing to move resources to the public purpose actually encouraged more activity that was beneficial for pursuit of both public and private purposes.
So we need to think about what kind of tax can “drive” a currency, without diminishing private initiative.
For example: what if we taxed paid work at a rate of 15% in an effort to “drive the currency”? continue reading…
Last week the ECB’s governing council agreed on interest rate cuts and some fresh liquidity measures. The policy move has sparked off quite some excitement in all kinds of corners. Certainly financial markets highly welcomed the ECB’s much-awaited new easing initiative, with stock indices surging and bond yields plunging to record levels. International commentators generally felt that the ECB was – finally, if belatedly – doing the right kind of thing. And, generally speaking, the European political body seems to be sufficiently famished, and perhaps also a little terrified by the recent EU parliament election results, to welcome any perceived easing of pain. Only one party felt seriously short-changed by the euro’s independent guardian of stability: German savers.
In Germany, the ECB’s latest policy decisions, featuring a negative interest rate to be paid by banks to the ECB for lending to the ECB by means of its deposit facility, triggered an across-the-board outcry orchestrated by the German media, ranging from heavyweight tabloid Bild to the mouthpiece of Germany’s conservative intelligentsia Frankfurter Allgemeine Zeitung. German savers appear to be up in arms against the ECB’s outrageous decision to shave 10 basis points off its key policy rate and introducing a negative rate on its deposit facility. The president of Germany’s savings bank association declared that the ECB’s move amounted to expropriating German savers. And former ECB executive board member Jürgen Stark, who had resigned back in 2012 for “personal reasons,” which seemed to be all too clearly related to the ECB’s government bond buying program, was glad to add fuel to the flames by declaring in an interview that the ECB was breaching its mandate.
The German media reaction to the ECB rate cut is more than a bleak statement about the quality of economic journalism in Germany. One probably has to concede that it also well reflects the general state of mind and German psyche about Europe’s common currency project and the havoc it has wreaked across the continent. There are some important lessons here for Germany’s euro partners – and beyond.
First of all, these events once again highlight that in the German euro debate superficial morals prevail over any economic expertise. In Germany, saving is by its nature always virtuous. Savers, as creditors, occupy the moral high ground. Creditors are simply morally superior to debtors. In fact, debtors are suspected to be afflicted by some moral defect. As savers apparently have a moral right to get paid interest, the ECB’s move is seen as expropriation; its decision to make the creditor pay what seems like a “Strafzins” (penalty interest rate) for lending to the debtor seems outright immoral.
Within these pseudo-moralistic dimensions inspiring the German euro debate economic reasoning is conspicuous for its absence. It is somehow lost that there can be no creditor without any debtor. It is also lost that Germany as a nation can only run a current account surplus if other nations run deficits and pile up debts. So it has never entered the German national debate that Germany only managed to balance its public budget thanks to other countries’ willingness to borrow and spend on German exports. Instead, morally, it seems a clear-cut case that Germany has done everything right. If there is trouble in the system, it must be because of others’ failures and moral deficiencies. continue reading…
Paul McCulley, a familiar face at Levy Institute events (he gave a keynote at our Rio conference and at last year’s Minsky Summer Seminar), is back at PIMCO and his first note is (predictably) worth a read.
His latest essay looks at Federal Reserve policy from the standpoint of what McCulley terms the Fed’s “secular victory in the long War Against Inflation” and discusses, among other things, how the Great Moderation fed into Minskyan financial instability, how we should think about the Fed’s “neutral” real policy rate, and what this means for the question of whether stocks and bonds are overvalued. Here he is on the Taylor Rule:
The “neutral” real policy rate is not secularly constant.
It evolves as a function of changing “real” economic variables – demographics, technological progress, productivity, etc. – as well as changing institutional arrangements, notably changes in the degree of regulation of banking and finance, domestically and internationally. Thus, the notion of a “fixed” center of real policy rate gravity for prudent monetary policy is an oxymoron.
Which is why, for me, it is so befuddling that the Fed, and thus the markets, still clings – even if reluctantly – to one man’s estimate of an “equilibrium” real fed funds rate, made in 1993: John Taylor, who assumed it to be 2%, which, in his own words, was because it was “close to the assumed steady state growth rate of 2.2%.”
And that assumption became embedded in his ubiquitous Taylor Rule.
… that’s the origin of the 4% number that, to this day, the FOMC prints as its “longer-term blue dot” for where the fed funds rate “should be” (if the Fed were, theoretically, pegging the meter on both of its mandates).
I’ve got to hand it to John, whom I’ve known and liked for a very long time: Twenty-one years on, and you are still hardwired into the catechism of Fed policy!
But surely, economic life has changed since 1993, about the same time that Al Gore was inventing the Internet.
I believe the FOMC’s 4% nominal longer-term blue dot – which implicitly embeds John’s 2% real rate assumption – is wrong, unless we want to say that 2014 is 1993 redux. I don’t.
Read the whole thing.
It’s well known that the wages of US workers have become disconnected from productivity growth, with real wages growing much more slowly than advances in productivity over the last several decades. This is a key part of the story of widening income inequality.
But these observed trends actually understate the degree to which working people have been left behind. New research reveals that the US economy is doing a worse job passing on productivity gains to workers than the wage growth (or even stagnation) numbers suggest.
The Levy Institute’s Fernando Rios-Avila and the Atlanta Fed’s Julie Hotchkiss looked back to 1994 and tried to see what proportion of real wage growth since then can be accounted for by key changes in the demographic profile of the labor force: principally, the fact that the average worker has become older (i.e., more experienced) and more educated.
What they found is that over 90 percent of real wage growth between 1994 and 2013 was due to demographic shifts. And the 2002–13 period, commonly referred to as the decade of flat wages, is more accurately described as “a decade of declining real wages within age/education worker profiles.” If we control for demographics, wages are back to where they were in 1998. That’s what you’re seeing in the red line below:
Of course, generally speaking, the fact that we have a more educated workforce is good news. But we also want to know the extent to which workers with a particular demographic profile—workers with a given level of experience and/or education—are seeing increases in compensation as labor becomes more and more productive. “When describing the evolution of well-being in the population,” Rios-Avila and Hotchkiss suggest, “an official index for a ‘fixed’ wage trend might be more appropriate for policymakers.” Such an index would paint a disappointing picture of the last decade.
Since 2002, wages have fallen for workers at all levels of educational attainment (this is true whether or not we take ageing into account). And as you can also see in the next figure, when we control for changes in the age/experience profile within each educational grouping, workers without a college diploma are being paid less than they were in 1994 (the gradual erosion of their wages over 2002–08, combined with the recession and unimpressive recovery, have wiped out all the gains these groups at the lower end of the educational scale made from 1994 to 2002).
The authors also find that gender and racial wage gaps have shrunk by less than it may appear over the last decade, once we account for demographic changes. Controlling for shifts in the average age and educational attainment within each group allows us to disentangle reductions in pay inequality between male and female workers that are due to, say, women’s educational advancements outpacing men’s, from other sources of progress (or lack thereof) in gender-based wage inequality.
To see the full results, download their new policy note.
In yesterday’s Financial Times, Jörg Bibow addressed Mario Draghi’s recent announcement that the ECB will take new steps (including cutting its deposit rate to -0.1 percent) in an attempt to deal with (or, one might argue, in an attempt to appear to deal with) the fact that inflation in the eurozone is too low, according to the ECB’s own alleged target.
For Bibow, the proposed measures are unlikely to get the job done, and the same could be said, he argues, for any last-ditch attempt at quantitative easing (a prospect mentioned by Wolfgang Münchau in his last column). The problem is that it’s hard to characterize eurozone disinflation as some unforeseen bump in the road:
The driving force behind the eurozone’s disinflation process is wage repression – exercised to a brutal degree across the currency union. In fact, wage repression – joined by fiscal austerity – is the eurozone’s official policy meant to resolve the euro crisis … With wages in übercompetitive Germany creeping up at a mere 2 to 3 per cent annual rate, the rest are forced into near, if not outright, deflation to restore their lost competitiveness. …
The ECB was late to diagnose the issue and super-late to act. But the real issue is that neither its recent move nor any imagined future quantitative easing will do anything to reverse deflationary wage trends any time soon – trends established by deliberate policy.
Read Bibow’s letter here.
C. J. Polychroniou, reflecting on the results of the European Parliament elections:
The stunning victory of Marine Le Pen’s National Front in France that came in first with 25 percent of the vote—when it had won less than 6.5 percent in the last European elections—is quite indicative of the general political and social trends in Europe today. The parties of the far right scored quite well in Europe’s parliamentary elections …
What all these parties have in common … is their opposition to the current EU regime, which they blame directly for the loss of national sovereignty, the high levels of unemployment, the corrosion of traditional beliefs and values and the massive flows of immigrants.
[I]t is also not clear whether the far right parties will form a political alliance amongst themselves in the new European parliament. It is not certain at all that UKIP, or even the Finns Party, will collaborate with Marine Le Pen’s National Front. In short, it is highly unlikely that the parties of the far right will pose a systemic threat to the status quo in the EU.
What seems to be happening in Europe today is that the far right is simply taking advantage of the growing bitterness and resentment all across the continent towards the “New Rome”[*] and citizens’ lost faith in the ability or willingness of mainstream political parties to secure a better tomorrow for themselves and their children, let alone protecting the common good.
Of course, the key question here is why is it mainly the far right, and not the left, attracting voters dismayed with the status quo. This is by no means an easy question to answer. However, until the latter happens, the odds are that “New Rome” will continue with business as usual.
MMT has emphasized that there is a close relation between sovereign power to issue a currency and its power to impose tax liabilities. For shorthand, we say “Taxes Drive Money.” I’ve dealt with that topic in the previous installments of this series on MMT’s view of taxes.
We’ve also demonstrated (as if it needed demonstration!) that sovereign governments do not “need” tax revenue in order to spend. As Beardsley Ruml put it, once we abandoned gold, federal taxes became “obsolete” for revenue purposes. I’ll have more to say about good old Beardsley in the next installment.
In today’s installment I want to step back a bit to ask a more fundamental question: does the issuer of a money-denominated liability need to obtain some of those liabilities before spending or lending them?
In this installment I will examine three analogous questions (each of which has the same answer):
1. Does the government need to receive tax revenue before it can spend?
2. Does the central bank need to receive reserve deposits before it can lend?
3. Do private banks need to receive demand deposits before they can lend?
If you’ve already answered “Of course not!”, you are probably up to speed on this topic. If you answered yes (to one or more), or if you haven’t a clue what the questions means, read on.
As we’ll see, these are reducible to the question: which comes first, Creation or Redemption? continue reading…