Are Concerns over Growing Federal Government Debt Misplaced?

L. Randall Wray | November 10, 2021

If the global financial crisis (GFC) of the mid-to-late 2000s and the COVID crisis of the past couple of years have taught us anything, it is that Uncle Sam cannot run out of money. During the GFC, the Federal Reserve lent and spent over $29 trillion to bail out the world’s financial system,[1] and then trillions more in various rounds of “unconventional” monetary policy known as quantitative easing.[2] During the COVID crisis, the Treasury has (so far) cut checks totaling approximately $5 trillion, often dubbed stimulus. Since the Fed is the Treasury’s bank, all of these payments ran through it—with the Fed clearing the checks by crediting private bank reserves.[3] As former Chairman Ben Bernanke explained to Congress, the Fed uses computers and keystrokes that are limited only by Congress’s willingness to budget for Treasury spending, and the Fed’s willingness to buy assets or lend against them[4]—perhaps to infinity and beyond. Let’s put both affordability and solvency concerns to rest: the question is never whether Uncle Sam can spend more, but should he spend more.[5]

If the Treasury spends more than received in tax payments over the course of a year, we call that a deficit. Under current operating procedures adopted by the Fed and Treasury, new issues of Treasury debt over the course of the year will be more-or-less equal to the deficit. Every year that the Treasury runs a deficit it adds to the outstanding debt; surpluses reduce the amount outstanding. Since the founding of the nation, the Treasury has ended most years with a deficit, so the outstanding stock has grown during just about 200 years (declining in the remainder).[6] Indeed, it has grown faster than national output, so the debt-to-GDP ratio has grown at about 1.8 percent per year since the birth of the nation.[7]

If something trends for over two centuries with barely a break, one might begin to consider it normal. And yet, strangely enough, the never-achieved balanced budget is considered to be normal, the exceedingly rare surplus is celebrated as a noteworthy achievement, and the all-too-common deficit is scorned as abnormal, unsustainable, and downright immoral. continue reading…

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Is Climate Change a Fiscal or Monetary Policy Challenge?

Lekha Chakraborty |

Lekha Chakraborty
(Professor, NIPFP, and Member of Governing Board, International Institute of Public Finance, Munich)

Climate change is about risks and uncertainty. How well the monetary policy stance can incorporate such risks and uncertainties is questioned by many economists. There is a broad consensus among economists that fiscal policy is capable of dealing with the climate crisis but monetary policy is not, due to the latter’s lack of tools. It is widely acknowledged that public finance commitments are essential to lowering carbon emissions. Public finance interventions—through taxation to reduce carbon prints or through public expenditure to support green energy and technology—have proven to be effective in reducing emissions. However, such empirical evidence is absent in the case of monetary policy.

India was the first to integrate a climate change criterion in its inter-governmental fiscal transfers. The macroeconomic policy channel of these “ecological fiscal transfers” works through the prioritization of public expenditure on climate change commitments by subnational governments, to make a “just transition” towards a sustainable climate-resilient economy. continue reading…

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Women’s Economic Empowerment and Control over Time in Sub-Saharan Africa (Nov 1-2)

Michael Stephens | October 29, 2021

November 1–November 2, 2021

The onset of the COVID-19 pandemic and the subsequent losses in lives and livelihoods are looming over Sub-Saharan Africa. As in the rest of the world, the pandemic has exposed the enduring inequalities and injustices in stark terms, including those based on gender and those intersecting with gender, such as economic deprivation. There is a growing realization that collective action to overcome the long-term and ongoing challenges requires greater engagements between researchers, civil society organizations, and policymakers. Accordingly, we are organizing a two-day virtual workshop that will feature research and policy discussions that address economic aspects of gender inequalities in Sub-Saharan Africa from various angles. Part of the research to be presented is work conducted by scholars at the Levy Economics Institute of Bard College in collaboration with scholars from Sub-Saharan Africa with the generous support of the Hewlett Foundation. The workshop will also highlight recent research by leading scholars in the region. The presentation of research will be accompanied by a free-wheeling exchange of ideas between scholars and participants. A policy roundtable with a select group of prominent members of the academic, policymaking, and civil society communities will conclude the workshop.

The workshop will be held between 13:00 and 15:30 (GMT) on November 1, 2021 and between 13:00 and 16:00 (GMT) on November 2, 2021.

This event is free and open to the public.

The complete schedule and information for participants is available below:

continue reading…

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Podcast on Gender Budgeting

Michael Stephens | June 18, 2021

Research Associate Lekha Chakraborty, recently chosen to join the governing council of the International Institute for Public Finance, was interviewed for an Onmanorama podcast on the question of gender budgeting and the advantages of centering care work.

Chakraborty argues policymakers in India should prioritize integrating a comprehensive care economy policy package in macroeconomic management, and laments the separation (disciplinary and otherwise) between questions of gender and of macroeconomics. In the context of the ongoing pandemic, she advocates sending monthly cash transfers to women engaged in otherwise unpaid and undervalued household work.

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The Minsky Conference Returns

Michael Stephens | April 29, 2021

After pausing last spring due to the pandemic, the Minsky Conference is back. Join us next week, May 5-6.

It would be an understatement to say this has been an eventful year in world economies and financial markets. It is also a period in which we are seeing some signs of change in economic thought and policymaking. The conference has always been an important occasion for contact between heterodox and more mainstream economics; this year, that could be a particularly interesting dynamic to watch.

The full program is below. Register here for the online event.

 

Wednesday, May 5, 2021
9:15–9:30 a.m. Welcome and Introduction
Dimitri PapadimitriouPresident, Levy Institute
9:30–10:30 a.m. Speaker
Charles EvansPresident and CEO, Federal Reserve Bank of Chicago
MODERATOR: Binyamin AppelbaumEditorial Board Member, New York Times
10:30 a.m.–12:00 p.m. Session 1. PROSPECTS FOR REFORMING THE FINANCIAL SYSTEM
MODERATOR: Robert HuebscherAdvisor Perspectives
SPEAKERS: Charles GoodhartEmeritus Professor of Banking and Finance, London School of Economics
Paolo SavonaChairman, CONSOB
Jan KregelDirector of Research, Levy Institute
12:00–1:00 p.m. Speaker
Robert Barbera, Director, J.H.U. Center for Financial Economics; Economics Department Fellow, The Johns Hopkins University
1:00–2:30 p.m. Session 2. WHAT’S AHEAD FOR THE US ECONOMY
MODERATOR: Michael StephensLevy Institute
SPEAKERS: Lakshman AchuthanCofounder, Economic Cycle Research Institute
Michalis NikiforosResearch Scholar, Levy Institute; Professor University of Geneva
Frank VenerosoPresident, Veneroso Associates, LLC
2:30–4:00 p.m. Session 3. ECONOMIC POLICY FOR THE NEW ADMINISTRATION
MODERATOR: David Henry, Reuters
SPEAKERS: Jason Furman, Aetna Professor of the Practice of Economic Policy, Harvard Kennedy School (HKS) and the Department of Economics at Harvard University
Bruce GreenwaldProfessor, Columbia Business School
L. Randall WraySenior Scholar, Levy InstituteProfessor, Bard College
Thursday, May 6, 2021
10:00–11:00 a.m. Speaker
Robert KaplanPresident and CEO, Federal Reserve Bank of Dallas
MODERATOR: Deborah SolomonEconomics Editor, New York Times
11:00 a.m.–12:30 p.m. Session 4. FINANCIAL GOVERNANCE AND REGULATION
MODERATOR: Peter CoyBloomberg
SPEAKERS: Michael GreenbergerProfessor, University of Maryland Law School
Kathryn JudgeHarvey J. Goldschmid Professor of Law, Columbia Law School
Patricia McCoy, Liberty Mutual Insurance Professor, Boston College Law School
12:30–2:30 p.m. Session 5. US FINANCIAL MARKET INSTABILITY
MODERATOR: Jeanna Smialek, New York Times
SPEAKERS: Jan Hatzius, Chief Economist, Goldman Sachs
Bruce KasmanManaging Director and Global Head of Economic Research, J.P. Morgan
James PaulsenChief Investment Strategist, The Leuthold Group, LLC
2:30–4:00 p.m. Session 6. WHAT’S AHEAD FOR EUROPE
MODERATOR: Dimitri Papadimitriou, Levy Institute
Lex HoogduinProfessor, Groningen University, the Netherlands; Founder, GloComNet
Denis MacShaneFormer Europe Minister, UK; Senior Advisor, Avisa Partners, Brussels
Gennaro Zezza, Research Scholar, Levy Institute; Professor, University of Cassino

continue reading…

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Direct Job Creation in Greece

Michael Stephens | April 28, 2021

Senior Scholar Rania Antonopoulos recently participated in a webinar for the European Trade Union Institute, during which she discussed the rationale behind and experience with the implementation of the “Kinofelis” direct job creation program—a limited job guarantee for Greece. Watch her presentation below (accompanying slides are here).

The Levy Institute’s previous Strategic Analysis for Greece found that supplementing EU Recovery Funds with a more expansive job guarantee program (employing up to 300,000 people by 2022Q1) would help lift the Greek economy closer to its pre-pandemic growth trend.

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The “Thing” with Job Guarantee Programs…

Martha Tepepa | February 21, 2021

In a February 18th front page article in the business section of the New York Times, Eduardo Porter surveys the potential for a job guarantee program. After starting with the caveat issued by Republican politicians—why trust your life choices to bureaucrats?—the piece goes on to present opinions of various experts on employment programs.

It is noteworthy that even among the specialists, not one has ever been involved in actual fieldwork or research in the various experiments with job guarantee programs. In an era in which we are asked to respond to facts, none of those consulted on the implementation of job programs has ever provided statistical analysis of results, nor studied the communities where the programs were actually successful in achieving their stated goals—which in general are much wider than the suggestions that the programs have not contributed significantly to lessen economic recessions, or that they are too expensive and that they might produce “useless make-work.” Indeed, there are no references to the many existing experiments.

Consider Argentina, where there is ample evidence that the Head of Households Program (HHP) played an important role in alleviating the recession and actually had a significant impact on the recovery of the economy after the 2001-2 economic, political, and social collapse. In situ fieldwork based on participant interviews conducted in urban irregular settlements shows[1] that the impact of program work experience was much greater than a simple impact on sustenance incomes. Indeed, program design produced significant impacts on gender equality and environmental preservation. continue reading…

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The IMF as Deficit Owl? What’s Wrong with This Argument?

Jan Kregel | February 4, 2021

It seems the IMF aviary has turned on the hawks and embraced the deficit owls. Has the IMF joined the policy shift to MMT? Yes, in part, but it appears to be a viral form of MMT: according to Vitor Gaspar, the IMF’s head of fiscal policy, “Nations’ first priority should be vaccination, while the reduction of public debt is now far down the list of urgent actions… the main role of fiscal policy in the immediate future should be to be stimulative, to help restore economic growth, reduce unemployment and beat Covid-19.”

This is a big shift in IMF policy advice on post-crisis response, Chris Giles notes: “After the financial crisis a decade ago the fund recommended that countries should reduce their debt levels.”

But the pervasive pandemic is not the real reason for the change in feathered preferences: “Mr Gaspar said the IMF’s change of heart towards a relaxed approach to high levels of public debt stemmed from central banks’ reduction in interest rates. The drop in market funding costs means that, although advanced economies’ public debt has doubled as a share of GDP from 60 per cent to 120 per cent over the past 30 years, interest payments have halved from 4 per cent of GDP to 2 per cent.” Or perhaps the IMF is following Keynes’s wish for the euthanasia of the rentiers?

If fiscal policy is the weapon to fight the war against the coronavirus, then the same logic used by Wright Patman, MMT’er before his time, and every other sensible politician when faced with war finance, should raise the question of why the government should pay interest on the money it issues in order to spend. So, to follow the new IMF fiscal logic: If interest rates on government debt were zero, which is very close to conditions in many countries—indeed, some are negative—this should mean that the size of debt ratios should be even less of a concern. But zero interest rate debt is called currency. If government expenditure were financed by currency issue, following Congressman Patman, the government would not have to pay interest. And would it then follow the IMF could stop worrying about debt ratios?

But this is not the problem with the debt argument. Other things being equal, the level of interest rates has an impact on the total debt level associated with a particular level of the deficit. Higher interest rates should then be associated with higher debt ratios and vice versa, so it should be clear that the IMF position has not changed that much: it still prefers lower interest rates and the associated lower debt ratios because that means that it will require less austerity to reduce the debt burden in future.

However, while interest rates represent the costs of debt, they also represent income to someone in the system. Could higher interest rates make a lower deficit necessary to achieve a given impact on growth and employment and lead to lower debt ratios? It largely depends on who receives the interest as income—retired savers and pension recipients, or financial institutions, or even the Central Bank—and the impact on growth and employment. Low interest rates help some financial institutions, but for pension funds and insurance companies they can be a source of incipient financial instability.

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Jiu-Jitsu Comes to the Stock Market

Jan Kregel | January 29, 2021

The core philosophy of this Japanese defensive art used by the weak against the stronger Samurai is to mobilize the opponent’s greater force to your own advantage. Many have criticized the run-up in the quotation of the GameStop shares as a violation of market principles or regulations. Far from it, it simply represents the fact that day traders may be dumb money, but they have understood how to apply jiu-jitsu.

If the intent was simply to profit from trading the stock, no retail trader could ever compete with the institutions. To attempt to directly manipulate the price of the stock through outright purchase or sale would be impossible. The strategy that was used was simply to recognize, as Softbank had done earlier in the year, the nature of market hedging.

There is a myth that hedging can eliminate risk. This almost never happens, unless there is a perfect match between risk of gain and risk of loss. In all other cases, hedging requires compensation to transfer the risk—to those more able to bear the risk, as Greenspan would say. After the 2008 financial crisis, we learned that ability had nothing to do with it; it was who was willing to bear the loss, and most were not able and required the government to bail them out.

So in the run-up in the market quotes of GameStop shares, this was not really a question of the dubious behavior of a bunch of day traders; it was an application of market knowledge of how financial contracts work in practice. continue reading…

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Why “Output Gap” Is Inadequate

Lekha Chakraborty | January 4, 2021

by Lekha Chakraborty and Amandeep Kaur[1]

The macroeconomic uncertainty during the Covid-19 pandemic is hard to measure. Economists and policymakers use the “output gap” variable to capture “slack.” It is a deviation between potential output and actual output, which is a standard representation of a “cycle.” The potential output is an unobserved variable. There is an increasing concern about the way we measure potential output—decomposing the output into trends and cycles. This is because the business cycle is not always a “cycle.” Sometimes, the “cycle is the trend.”[2]

When macroeconomic crises and recessions tend to “permanently” push down the level of a country’s GDP, it is inappropriate to assume that output will bounce back to previous levels. The notion of the output gap is ill-conceived and ill-measured. Scholars have highlighted the significance of “hysteresis” (the dependence of economic path on history) in analyzing the output dynamics in crisis.[3] Against the backdrop of the Covid-19 pandemic crisis, there is a renewed interest in hysteresis and business cycles. The state of the economy and the level of GDP are history dependent (hysteresis). The concept of hysteresis has urgent relevance for designing apt fiscal and monetary policies to tackle low demand during recessions. continue reading…

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