Archive for October, 2011

Uncle Sam Is Not Broke

Michael Stephens | October 14, 2011

The bowling alley cannot run out of points, and the US government cannot run out of keystrokes.  Research Associate Stephanie Kelton slaps down the folk wisdom that there is nothing the government can do about unemployment because it’s “broke.”  “We don’t understand our own monetary system.”

(hat tip to NEP)


Neoliberalism in a Time of Crisis

Michael Stephens | October 13, 2011

“Crises are an inherent feature of capitalism. Marx knew this only too well; so did Keynes and Minsky. Neoliberals, on the other hand, tend to believe that it is government action that causes market turbulence and economic instability.”  This is the opening salvo from a new one-pager by C. J. Polychroniou that takes on neoliberal doctrine in light of the global financial crisis (Read it here.)

Polychroniou also has a recent working paper that looks at the potential dissolution of the Eurozone as a failure of neoliberalism:

…the fact that EU’s leaders are having a difficult time getting a handle on the Greek problem and providing a comprehensive solution for the eurozone debt crisis is due to the very constraints of the neoliberal economic regime in which policymakers operate, and helped to create, and much less a question of political incompetence. The architecture of eurozone governance, combined with the asymmetries of European integration, severely limit quick, far-reaching political decisions for addressing the debt crisis, including Europe’s banking system that remains vastly undercapitalized.

The paper includes a detailed and compelling narrative of how Greece got to where it is today.  (Read the working paper here.)


The European Troika’s Rescue Plan Will Fail

L. Randall Wray | October 12, 2011

(cross posted from EconoMonitor)

Yet another rescue plan for the EMU is making its way through central Europe—raising the total funding available to the equivalent of $600 billion. Germany agreed to raise its contribution to the fund by more than $100 billion equivalent. However, Slovakia has vetoed the rescue and all eyes are now turned to a forthcoming October 23 summit.

In any event, some rescue package is assured because the center of Europe wants to save its banks—that hold billions of euros of troubled government debt.
No one is foolish enough to believe that will be enough. The latest casualty is Dexia Group, a Belgian-French behemoth that specializes in sovereign debt. It had already been bailed out once, and now needs another bail-out. Rest assured that Dexia is just today’s domino—the other big European banks will fail, too. This is not a Greek problem. It is not an Irish problem. It is not a Portuguese problem. It is not a Spanish problem. It is not an Italian problem.

It is an EMU problem and Band-Aids will never suffice.

The problem with the set-up of the EMU was the separation of nations from their currencies—as I have long argued, along with Charles Goodhart, Warren Mosler, and Wynne Godley. (Go here for a relatively recent piece.) And as I said a few weeks ago, it was a system designed to fail. With no central government that issues currency it has no way to use fiscal policy on a large enough scale to counter the business cycle, let alone to deal with a financial crisis on the scale we’ve seen since 2007.

And with the gathering storm, the individual members of the EMU will be swamped as their financial institutions are forced to realize losses.

Even if the member states were not busy pointing fingers and squabbling over profligate spending by neighbors, the current arrangements prohibit any effective response to crisis. When markets decide to attack one member, it quickly finds itself in a vicious debt trap, with interest rates rising that blow a hole in the budget. At most, other members can put together a debt package—lending at slightly more generous terms.

But what highly indebted members need is debt relief and economic growth, not more debt. With austerity demanded in order to get the proffered loans, growth turns negative, increasing budget deficits and leading to more desperate borrowing.

So either way, the indebted country gets into the debt trap: if it borrows from markets, interest rates rise; if it borrows from the EMU (or the IMF) its growth falls and tax revenue plummets.

Damned if you do, damned if you don’t. continue reading…


Study Abroad: Unemployment and Retraining

Michael Stephens | October 11, 2011

The National Journal asks whether we can learn something about addressing unemployment by studying elements of the unemployment insurance systems of other OECD nations, many of which make re-training a key part of transitioning from UI back to employment.  The American Jobs Act (dead man walking) contains a “bridge to work” provision that would include similar job training and apprenticeship programs (already in place in Georgia and North Carolina) as a means of aiding the long-term unemployed.  The Journal interviewed Dimitri Papadimitriou for their piece, who suggests that while a “bridge to work”-type program would be beneficial, this sort of thing would amount to (at best) nibbling around the edges of the unemployment problem:  “Papadimitriou cautioned that without a more general economic recovery, simply training unemployed workers doesn’t guarantee jobs.”  (read it here)

“Bridge to work” might be a positive addition to the social insurance system, but we shouldn’t mistake it for a “solution” to our unemployment problem.  As Papadimitriou illustrates in this Strategic Analysis, we should not expect unemployment to come down without a massive influx of demand, whether foreign (exports) or domestic (higher government deficits).


More on the Nobel Prize award and its possible meanings

Greg Hannsgen |

Without wading into the debate too much, we report on some commentary from the web on yesterday’s announcement that Thomas Sargent and Christopher Sims had won the Nobel Memorial Prize in Economics:

“Free-market” supporters differed greatly in their assessments. One “New Monetarist” argues that the choice of Sargent and Sims represents a nod to the anti-Keynesian “New Classical” school of macroeconomic theory, which introduced rational expectations into macro in the 1970s.

On the other hand, while Edward Glaeser also seems to view the award as partly an anti-Keynesian decision, his comments on Sims and the New Classical School of macroeconomics emphasize Sims’s efforts to minimize the use of macroeconomic theory of any kind in his econometric work:

“Sims — like Sargent, Lucas and Edward Prescott (another great theorist of the post-Keynesian world) — saw that the Keynesian macroeconometric models were a thing of the past, but he understood the ongoing need for economic prediction. Perhaps one day, economic theory will make complete sense of the business cycle, but until that time, policy makers and ordinary investors will still want to have some idea of what lies ahead. Sims’s work addressed that need, free from the confining assumptions of Keynesianism.”

Similarly, at this link, Keynesian-leaning Mark Thoma endorses the argument that Sims’s vector autoregression (VAR) techniques help economists avoid making an inordinately large number of dubious assumptions.

Getting to deeper issues, an economist quoted in a article notes wryly that the prize is partly about an issue as abstract and unworldly as cause and effect: continue reading…


Man Cannot Live by Fed Alone

Michael Stephens | October 10, 2011

Over the past several decades, many people adopted the view that monetary policy, almost alone, could effectively control the economy. Economists, politicians and scholars came to believe that the Federal Reserve was full of neutral technocrats who dutifully fine-tuned the economy. Through their careful orchestration of interest rates, the money supply and inflation, we assumed that they could guarantee a smoothly functioning economy. Fed officials seemed to do so well at their jobs that they were never doubted. But by depending on monetary policy and discounting fiscal policy as an effective way to secure economic stability, we have created a system that is now dysfunctional.

Randall Wray and Micah Hauptman have a piece in The Hill on the problems with our over-reliance on the Federal Reserve.  Due to the fact that fiscal policy is mired in political deadlock (more particularly, expansionary fiscal policy) we may be stuck relying on (inadequate) support from the Fed.

Wray recently wrote a policy brief with Scott Fullwiler (“It’s Time to Rein in the Fed”) that is relevant to this issue.  From their one-pager (referring here to QE2):  “…it’s truly remarkable that, three years into the crisis, the Fed still has not learned that monetary policy is about price, not quantity. The Fed is buying $600 billion in long-term Treasuries in the hope of bringing down the long-term rate. Yet, if it really understood monetary operations, the Fed would instead announce that it is standing ready to buy as many Treasuries as necessary in order to lower the long-term rate by a desired amount.”


This morning’s announcement and our Institute

Greg Hannsgen |

This morning, it was announced that Thomas Sargent and Christopher Sims are the winners of the 2011 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (link to New York Times article here; link to official Nobel economics site here). Sargent and Sims’s approach is often thought to imply, among other things, that monetary or fiscal stimulus is unlikely to be of very much benefit to an economy, even one in deep recession.  Of course, the Levy Institute, as a proponent of the Keynesian approach, almost always disagrees strongly with this view on macroeconomic policy, though extreme pessimism about Keynesian stabilization policies is only one possible implication of Sargent and Sims’s extensive oeuvres.

Moreover, the technical aspects of Sargent and Sims’s work are also crucial to neoclassical macroeconomics, and their influence is felt in many ways. Of special interest to me as a researcher is their work on vector autoregressions (VARs), which has led to literally thousands of studies in academic journals, even some authored by heterodox economists. (Sims’s seminal contributions to the VAR literature are the main Sims accomplishment cited in the Nobel committee’s “scientific background” paper for today’s announcement.)

Nonetheless, as with any research in the social sciences, the VAR approach to empirical work in macroeconomics has been subjected to many critiques and revisions since Sims (and to some extent Sargent) got the VAR ball rolling in the late 1970s and early 1980s. continue reading…


How to Improve Your Abstract

Michael Stephens | October 7, 2011

Since it’s Friday…

This one is for every graduate student who’s been on the receiving end of a glazed/skeptical/bemused expression after trying to respond to a “so what’s your dissertation about?” query.  Your elevator pitch would go over much better if it were more kinetic.  Via GonzoLabs, Science magazine and TEDxBrussels are sponsoring a competition for PhD students in science-related fields for the best dissertation interpreted through dance.  There don’t seem to be many entries from economists (dismal, dismal), but these physics students look like contenders (incidentally, there’s still time for some last-minute, ill-considered choreographing.  The deadline is Oct. 10.):

“For years I have been trying to explain to my mother what it is I do. This video was aimed at her. She now finally understands what the point of my research is. If I had known that all it would take was a little dancing, I would have done this a long time ago.”


Largest Decline in State and Local Jobs Since Korean War

Michael Stephens |

According to Floyd Norris at Economix.  Norris includes this chart, comparing our ongoing shedding of state and local government jobs to the one in the early ’80s:

I haven’t been looking at any employment reports lately, but I can only assume that this has sparked a massive boom in private payrolls.


If You Care About the Deficit, You Should Care About Jobs

Michael Stephens | October 6, 2011

The prevailing anxieties of elite opinion are focused relentlessly on the deficit and debt, with sporadic bouts of indigestion reserved for the slump in jobs.  This is a complete reversal of what ought to be the case.  But let’s say you really can’t get over the idea that there’s no major short-term economic problem currently being caused by high deficits.  Well then, if you are such a person, you ought to be deeply concerned that the economy is operating below potential.

Rep. Chris Van Hollen recently requested an estimate from the CBO (hat tip TPM) regarding what portion of the federal deficit can be attributed to cyclical factors—e.g. the non-recovery in the job market.  The answer:  roughly a third.  There’s nothing new here, but it is an excuse for futile repetition of the following upshot:  attempts to cut the deficit right now are self-defeating, to the extent that they drag down growth and employment.

Gennaro Zezza has been all over this.