The Spanish Launch of Modern Money Theory

L. Randall Wray | February 25, 2015

Update 2/28: more details here.

Sorry, I’ve been very busy in recent weeks, finishing up a book on Minsky and revising my Modern Money Primer for a second edition (more on both of those projects later).

Meanwhile, Lola Books is gearing up to release the Primer in Spanish next week. I’ll be in Madrid for the launch and for a series of meetings. I’ll give two presentations that are open to the public. Details are below. Hope to see our Spanish friends there!

March 5, 2015
I’ll make a presentation at the Izquierda Unida economic program. This event will officially introduce MMT into Spanish politics.
Location: Sede Central de CC.OO.
Address: c/ Fernández de la Hoz 12, planta baja; Madrid
Time :19 h. See the event flyer below.

March 7, 2015
Presentation of the Primer at the ‘Association pour la Taxation des Transactions financière et l’Aide aux Citoyens’ (Association for the Taxation of Financial Transactions and Aid to Citizens)
Location: Fuhem
Address: c/ Duque de Sexto 40; Madrid
Time: 11 h.

Wray_Event Flyer_Spain

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What’s Wrong with David Leonhardt’s NYT Piece on Inequality?

Pavlina Tcherneva | February 20, 2015

The New York Times made waves this week with another piece on inequality, saying that it has not risen since 2007. The article was based on this paper by GWU’s Stephen Rose.

The article also suggests that expansions are not a good way of looking at trends in inequality (as I have done in the past, also covered by the NYT). Instead, one needs to look at the business cycle. It also concludes that, thankfully, because of government tax and transfer policies, inequality has not been “that bad” over the last few years and governments can clearly do something about it.

So what’s wrong with this picture?

Here is the graph that appeared in the NYT (I’ve reproduced it below showing only the bottom 90% and top 10% of families using the same Saez data).

Tcherneva_NYT1

Now let’s reproduce the exact same graph, using the same data but excluding capital gains. The trends reverse. The bottom 90% of families have lost proportionately more than the top 10% since 2007.

Tcherneva_NYT2

Now, I am not fond of excluding capital gains (I am in favor of annuitizing them), because they are very important to income dynamics, but still, without capital gains, the bottom 90% lose proportionately more (relative to the top 10%) than with them.

In any case, if we include the top 1% and the 0.01% in the above two charts, one would find that they do lose proportionately more including or excluding capital gains.

However, the bottom line is this: this exercise gives an extremely narrow look at income distribution trends, based on a very incomplete picture. As Nick Bunker from the Washington Center for Equitable Growth put it:

“Reasonable people can disagree about the best benchmark. But what isn’t reasonable is using a peak as a benchmark to claim inequality hasn’t increased over an incomplete business cycle.”

So let’s look at complete business cycle data. The following chart shows how the distribution of income growth has evolved from one peak to another.

Tcherneva_NYT3

There is a clear shift in trend after the ’80s. During 3 out of the last 4 complete business cycles, the wealthy 10% have gotten a proportionately greater share of the growth. And in the last full business cycle (2000-2007), they got all of the growth, while incomes of the bottom 90% fell. Yes, since 2007, both groups shared the losses about equally, but why should we be surprised that the top 10% shouldered 45% of the decline? (Again, this is not a complete business cycle yet!)

We live in a casino economy driven by serial asset bubbles, where the incomes of the wealthy (and not just their capital gains) are increasingly tied to stock market performance.

So when the biggest bubble in human history popped, the wealthy families lost a ton of income. At the same time middle class households fell into poverty, lost their decent jobs and pay, and got unemployment insurance or food stamps from the government. Can one really conclude from this that inequality is not “that bad”?

As an example, inequality will not be “that bad” if one person in the US earned 100% of all the national income, and then the ‘evil government’ (or ‘benevolent dictator’; take your pick) decided to tax most it and then gave transfers to the rest. But is this the kind of ‘better’ income distribution that we are aiming for? Aren’t we all talking about an economy where most people have decent jobs, decent wages, decent salary growth prospects, and a decent chance to participate and share in that growth?

There are many ways to slice and dice this data.

I have looked at expansions because they answer a very specific question: Once the economy returns to some normalcy and promises to deliver prosperity, to whom does it keep its promise? And the answer is, increasingly to the top 10%.

The problem with the NYT article is not the inequality chart, even though it shows an incomplete and thus misleading business cycle picture. The problem is the conclusion: that ‘taxes’ and ‘transfers’ are the solution to the deep structural economic problems that are causing the generation and distribution of incomes to be so inequitable from the very outset.

So the next time someone tells you that “a rising tide lifts all boats,” you can respond “no, increasingly it sinks most.”

(cross-posted from New Economic Perspectives)

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Video: James Galbraith on the Latest Eurogroup Meeting

Michael Stephens | February 19, 2015

In the interview below, James Galbraith provides a behind-the-scenes account of the latest rebuff of Greece’s offer by German Finance Minister Wolfgang Schäuble and talks about what lies ahead (in English and Greek):

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Greece Wants to Save Europe, but Can It Persuade Europeans?

Pavlina Tcherneva | February 18, 2015

Most analysis of the Greek debt crisis ignores an important reality: While Greece may be the villain du jour, every eurozone nation is profoundly short of cash. That’s because of a well-acknowledged, but not fully appreciated, flaw at the heart of eurozone financial architecture that converted a historically unprecedented number of nations from issuers of their own currency to users of a common currency.

Greece is simply the first country to experience the extreme consequences of that loss of monetary sovereignty. With no independent source of funding, no currency of its own, no central bank to guarantee its government liabilities, it has had to ask others for help. And as a condition for securing that help, Greece has until now been forced to consent to radical austerity policies.

As an analogy, consider a United States with a common currency but no Treasury to conduct macroeconomic policy, stabilization or stimulus spending. Imagine also that the Federal Reserve was banned by law from guaranteeing U.S. government debt. And imagine that one state, say, Illinois (think Germany) was the major net exporter, accumulating dollars (euros) while most other states (as is the case in the eurozone) were net importers, thereby bleeding dollars (or euros). Finally, imagine Illinois providing a loan to cash-strapped Georgia (think Greece), dictating that it implement slash-and-burn privatization of public assets and drastic cuts to state payrolls, pensions and other essential programs. This, in essence, is the situation in the eurozone today.

But Greek voters last month rejected continuation of an austerity program that has plunged their economy into depression, voting in a government determined to break out of the current terms on which Greece gets help from the Troika.

(Read the rest here at Al Jazeera America)

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Countering Austerity Economics

Greg Hannsgen | February 11, 2015

Untitled

As deflation sets in in the economies of Europe and Japan, Robert Kuttner’s words in Debtor’s Prison: The Politics of Austerity versus Possibility—an interesting, readable new volume—complement those of many of the Levy Institute’s scholars. The book argues that during the financial crisis and its aftermath, policymakers continually relied on excessively optimistic projections of economic growth. Hence, stimulus plans adopted by Congress were not up to the task. Meanwhile, monetary policy could do little more than keep the crisis from worsening. As a result, the recovery remained exceedingly weak, and deficits overshot estimates to boot. Kuttner notes that in spite of the end of the recession, US growth rates on the order of 1.7 percent in 2011 and 2.2 percent in 2012 have not been high enough “to blast out of the deflationary trap.”

The more recently released annual growth rate of 2.4 percent for 2014, as well as the 2.2 percent final figure for the year before, indicate that he is right when he argues against the political “consensus” that “borrowing money is the last thing the government should do.” In fact, fiscal policy still needs to be made more stimulative, perhaps through increased infrastructure spending. Kuttner decries a situation in which an “austerity lobby” is set to bat down such efforts in Washington.

Also notably, Kuttner uses a detailed historical argument to challenge the notion that fiscal austerity is the answer to foreign debt problems in highly indebted economies such as Greece. In essence, keeping economies in a debtor’s prison is not in anyone’s interest.

Kuttner’s book, published just last year, addresses many other big policy issues, including health care, all in relation to deflationary fiscal austerity and the problems and non-problems posed by high levels of different types of debt. His lucid argument brings home the sometimes counterintuitive insight from John Maynard Keynes that an increase in government borrowing is actually desirable in a world facing a huge unemployment problem. This situation, faced by policymakers, in fact differs completely from that of a household that is heavily indebted and finding itself with inadequate disposable income. “Austerity economics,” Kuttner points out, “conflates several kinds of debt, each with its own causes, consequences, and remedies. The reality is that public debt, financial industry debt, consumer debt, and debt owed to foreign creditors are entirely different creatures.”

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The Modern Money Primer: Spanish Language Edition

L. Randall Wray | February 6, 2015

For our Spanish-speaking followers, my Modern Money Primer has just been released in Spanish and is available:

Modern Money Primer_Spanish Book

Here’s the description of the book:

El esfuerzo intelectual que se realizó en el campo de la física tras la aparición de la teoría de la relatividad o del modelo copernicano, no se llevó a cabo en la economía tras la aparición del dinero fíat. Teoría Monetaria Moderna es la plasmación de dicho esfuerzo intelectual. En este libro se expone claramente qué es el dinero en realidad y lo que es más importante se exponen las políticas económicas que deberían llevarse a cabo para llevar a la práctica un programa político coherente con dicha realidad. L. Randall Wray es doctor en economía y profesor en la Universidad de Missouri-Kansas City, así como director de investigaciones del Center for Full Employment and Price Stability. Además, pertenece al Levy Economics Institute of Bard College de Nueva York.

I’ll be in Madrid for the book launch. See you there. More details to follow.

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Jobs for Greeks and for Americans, Too

L. Randall Wray | February 3, 2015

Here’s a nice piece:

The Workers’ Think Tank: With an eye on the United States and Greece, scholars at the Levy Economics Institute are developing plans to ensure full employment, by Sasha Abramsky, The Nation.

As Sasha notes, the Levy Institute has a novel approach to fighting unemployment: JOBS! Hardly anyone ever thinks about that—that the cause of unemployment is lack of jobs.

For some reason, virtually all policymakers and economists (including progressives) think that jobs will magically appear. True, some suggest that US unemployment is created because China (et al.) “steals” jobs that are rightfully due to America. Hence, the solution is to steal them back.

But why not just create more? Is it really that hard to come up with a list of things that people could usefully do, right here in America?

As Sasha writes, things appear to have improved in America,

“Yet scratch below the surface and you’ll see that the United States still has a considerable economic problem. While the official unemployment rate has fallen to 5.6 percent, the lowest since 2008, the percentage of the adult population participating in the labor market remains far lower than it was at the start of the recession. At least in part, headline unemployment numbers look respectable because millions of Americans have grown so discouraged about their prospects of finding work that they no longer try, and thus are no longer counted among the unemployed. Depending on the measures, only 59 to 63 percent of the working-age population is employed, far below recent historical norms.

Millions who lost their jobs during the recession have found work, but at lower wages and often for fewer hours per week than was the case before the financial collapse. In August, the US Conference of Mayors released data indicating that jobs created during the recovery paid an average of 23 percent less than jobs lost during the recession. That represents an extraordinary collapse in living standards for millions of people. Not surprisingly, according to the latest data, nearly one in six Americans are living below the federal poverty line.”

Unemployment remains far too high—and, more importantly, the employment rate remains far too low—because there are not enough jobs. Job seekers exceed job openings by a wide margin, across the entire spectrum of sectors. Here’s the latest data I could find (2012, and while things have improved a bit, it is not likely that we’d see much difference in 2014 data):

Unemployment by Sector

No matter where you look, there are plenty of job-seekers. And these data do not include those who’ve given up hope: official unemployment rates only include those actively seeking work. If you only hide 5 bones and send out 10 dogs to find them, you can be sure at least 5 dogs come back boneless. That’s what it still looks like across all sectors of our economy—far too few jobs out there. Five years into “recovery.” And with what looks like a possible slowdown coming.

(cross-posted from EconoMonitor)

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“The Top 10 Percent Get It All”

Michael Stephens | January 30, 2015

Yesterday on the floor of the US Senate, Sen. Bernie Sanders delivered a speech featuring Pavlina Tcherneva’s widely-discussed chart, which illustrates how the bottom 90 percent’s share of income gains during economic expansions has shrunk to (literally) less than nothing. Watch (beginning at 26min50s):

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Needed Macro Policies: Targeted, Broad, and Universal

Greg Hannsgen |

The recent 40 percent jump in the value of the Swiss Franc will have some effects similar to those of deflation where it seems to be taking hold, including Japan and much of Europe. When a currency increases in value, foreign debts in those currencies become more of a burden. The New York Times brings it home with the story of households in Poland and other European countries who have some foreign debt of their own—mortgages whose payments are suddenly much higher in their own currency, after the Swiss National Bank (the Swiss counterpart to the ECB and the Fed) stopped using foreign-currency operations to peg its currency against the Euro. In fact, the FT reports that mortgages in the Swiss currency make up 37 percent of Polish home loans. The Swiss decision was encouraged by a European Central Bank that is getting ready to push long-term interest rates down further through its own program of quantitative easing (QE). Instead of printing more Francs to buy Euro and other currency, the Swiss National Bank (SNB) allowed the Franc to rise in one big move, abandoning its peg to the depreciating Euro. This move will increase import demand in Switzerland from Poland and other European producers. But as always with a sudden devaluation, foreign-currency debtors suffer from a so-called currency mismatch problem as the amount of debt rises in terms of the things that they sell to make a living, including hours of labor.

Exchange rate pegs are difficult to maintain for an extended period, especially in relatively poor countries, as changing economic conditions cause misalignments in exchange rates. One reason not to institute a peg is the instability that can ensue when it is abandoned, and this instability can cause penury for debtors, including governments. A second bad policy is interest rates that that need to be reduced generally by the monetary policy authorities where possible. One policy approach is to target help at the debtors themselves, particularly households and countries that must be helped up to maintain autonomy. The latter include Greece, for which our Greek macro team recently suggested an interest-payment moratorium. Sometimes, a reduction in the amount owed, or principal, is in order, as it was —and probably still is—for many subprime and Alt-A (mid-range credit rating) borrowers affected by the US mortgage crisis. Eastern European countries debated converting Swiss mortgages into domestic-currency debts at a higher-than-market domestic exchange rate. A slightly less-targeted form of help is to implement jobs programs of various types and to hold the line on public-sector wages. But when unemployment and other economic indicators suggest stagnation if anything, such targeted policy stimulus helps, yet it has only an indirect impact on private investment, overall economic growth, and unmet infrastructure, poverty-reduction, and pension needs.

The ECB is smart to implement QE, given high rates of unemployment in almost every country in the Eurozone. The SNB may even be smart to allow its currency to rise, given strong economic performance. And by the same token, if the Polish government can broadly raise spending, increasing resources for budget items that encourage economic growth and inflation is under control (2 percent—one common benchmark—is rather low for a target, especially given high unemployment), it should do so. Monetary stimulus might also form part of the picture. With such a move, the government would take steps in the same direction as the ECB and the Japanese government, recognizing the threat of  debt deflation.

Generally, the a combination of the three types of policy outlined here would work effectively in many countries with high unemployment, weak growth, and large amounts of bad private-sector debt. Targeted help for borrowers can take many forms, but writing off a portion of the principal, with the central bank’s help, if necessary, is often the only way to avert widespread private-sector bankruptcies. In contrast, broad measures might include, for example, devaluations of the domestic currency, investments in infrastructure and R&D, wide-ranging open-market purchases, tax cuts, and other available measures to spur all sectors of the economy. Third, universal measures—programs available to all who meet eligibility criteria—would include Social Security and its counterparts in affected countries. (An employer-of-last resort, or ELR, program would fit within both universal and targeted categories.) It is more risky rather than less not to maintain such programs during a crisis.

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ECB: The Ultimate Enforcer of the European Neoliberal Project?

C. J. Polychroniou | January 28, 2015

If one were asked to describe the formal economic and political processes that have shaped the condition of the eurozone since the eruption of the euro crisis in late 2009 in a terse and peremptory way, he or she might boldly and truly say this: “German Chancellor Angela Merkel’s policies spearhead the unraveling of the European project while European Central Bank (ECB) President Mario Draghi seeks to keep the (neoliberal) game going.”

Indeed, there is little doubt that Germany’s neo-mercantilism is the driving force leading a sizable segment of the eurozone’s economy on the path to stagnation and decline, while the ECB has been trying hard to carry out the role of a traditional central bank by fulfilling its duty as a lender of last resort in order to save the euro and preserve the eurozone.

The ECB intervened in the euro crisis in May 2010 by buying up government bonds from Greece (even when a 110 billion euros bailout package had been approved for Greece), Spain, Portugal, and Ireland under its Securities Market Program. By 2011, the ECB was buying up Spanish and Italian bonds by the bucketload in order to force a drop in the bond yields of the two largest peripheral economies of the eurozone. With the end of the crisis in the periphery nowhere in sight, but Mario Draghi having already pledged in July 2012 to do “whatever it takes” to preserve the euro, in early September of that year the ECB introduced a new government bond purchasing program, known as the Outright Monetary Transactions (OTM) program.

Leaving aside the question as to whether or not ECB’s OTM program is legal (Advocate General Pedro Cruz Villalón opined in mid-January 2015 that while “the OTM programme is an unconventional monetary policy measure . . . it is compatible with the TFEU [Treaty on the Functioning of the European Union]”), the condition was that OTM would be attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) macroeconomic adjustment program. In other words, the imposition of austerity, privatization, and market liberalization was a conditionality in the event of the implementation of the OTM program, which raises an important question: Is the ECB seeking to enforce an economic policy measure rather than just a monetary policy measure? continue reading…

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