Archive for January, 2012

How Austerity Could Fail Its Way Into US Hearts and Minds

Michael Stephens | January 18, 2012

Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably).  One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US.

For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising.  You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy.  But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy:

… the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift.

(To muddy the waters a bit, due in part to the strength of the aforementioned social welfare supports the default fiscal policy stance in Europe is actually more expansionary than in the US.  More robust automatic stabilizers in Europe make a “do nothing” policy more fiscally expansionary, even while official or discretionary European policy is dedicated to deficit reduction and tight money.  In the US you have almost the reverse:  automatic stabilizers play less of a role in counteracting recessions, while official policy—in the White House, if not Congress—continues to feature calls for more discretionary stimulus.)

To add a cute little twist to this tale, the dismal failure of these contractionary policies in Europe could, perversely, help entrench the American right and its ideas for some time.  If Europe collapses outright or even continues to limp along, the US recovery is likely to get bogged down, which in turn makes the election of a Republican President in 2012 more likely.  And as Ezra Klein points out, if more robust catch-up growth emerges in the US some time in the next five years, the person sitting in the Oval Office, and his policy message, will get most of the credit.  So the abysmal practical failure of a set of policy ideas in Europe could actually end up entrenching those same ideas on this side of the pond.


The Orthodox Economics “Mafia”

Michael Stephens | January 13, 2012

Randall Wray passes on this piece by Chris Hayes (of The Nation and MSNBC) on the challenge mounted by heterodox economists to the neoclassical consensus.  Reporting from the ASSA, Hayes gets into the ways in which the boundaries of the “mainstream” are policed in economics.  It’s really worth reading the whole thing.  I particularly liked this bit:

Despite the fact that as many as one in five professional economists belongs to a professional association that might be described as heterodox, the phrase “heterodox economics” has appeared exactly once in the New York Times since 1981. During that same period “intelligent design,” a theory endorsed by not a single published, peer-reviewed piece of scholarship, has appeared 367 times.


The Real Problem with the $29 Trillion Bailout of Wall Street

L. Randall Wray | January 12, 2012

I previously summarized research that two of my graduate students, James Felkerson and Nicola Matthews, are conducting on the Fed’s bailout. Using data that the Fed was forced to release, they demonstrated that the cumulative total lent and spent on assets by the Fed was over $29 trillion. (See the first paper here: Their estimate was larger than previously reported because others have focused on loans, and in some cases, guarantees, outstanding at a point in time. The Fed’s own estimate is $1.5 trillion (loans outstanding), while Bloomberg’s number was $7.7 trillion (including commitments that were promised but never used).

To be sure, using methodology similar to that of Felkerson and Matthews, the GAO had obtained an estimate of $26 trillion for the cumulative total. The value added of our research is the detail provided—how much lending was provided in each facility, how many assets did the Fed buy through each facility, and who were the major users of each facility—and how much did they get.  In coming weeks and months we will release a lot more analysis of this data.

Our figure of $29 trillion made headlines, and attracted a fair amount of commentary. Although we were very clear in our presentation, casual readers as well as many reporters from the media wrongly interpreted our results as a measure of the Fed’s exposure to risk. Chairman Bernanke’s memo emphasized that the Fed’s total exposure never exceeded more than $1.5 trillion—and since there is no way that it ever would have realized anything close to 100% loss on its loans, the real risk of loss was only a tiny fraction of that. Further, he (rightly) asserted that most of the loans were repaid, indeed, most of the special lending facilities have been closed.

To be sure, the total amount of loans still outstanding as of November 2011 was just under $1 trillion. In recent weeks the Fed has renewed its lending to foreign central banks (in “swaps”), so outstanding loans have climbed a bit. But the Fed and its defenders are correct: Fed maximum exposure to losses would likely be measured in tens of billions of dollars—maybe hundreds of billions, but most certainly not trillions.

So, should anyone care? Yes. continue reading…


MMT as Public Policy

Michael Stephens |

First The Economist, now CNBC.  CNBC’s Senior Editor John Carney has put together a series of posts on Modern Monetary Theory at his blog.  One of Carney’s objections to MMT is this:

…my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending.

I’m not sure this is a problem for MMT in particular, but you might put the point a little differently.  Fully MMT-inspired public policy would require a particular set of political and policy-making institutions.  If inflation is going to be fought through raising taxes, for example, we will need a policy-making process that is able to pull this off, and with the right timing.

But having said that, after observing the process since the outbreak of the Great Recession it’s pretty clear that we don’t even have the right policy apparatus for carrying out conventional aggregate demand management.  Having a robust set of automatic stabilizers in place during the crisis would have been far more preferable to forming fiscal policy according to the whims of Susan Collins and Olympia Snowe (or catering to Congress’ anxiety about a thirteenth digit).

Carney’s latest entries:

Monetary Theory, Crony Capitalism and the Tea Party

Modern Monetary Theory and Austrian Economics

Can the Government Guarantee Everyone a Job?

MMT Monetary Theory vs. Austrian Monetary Theory

The Trouble with a Job Guarantee

The Wall Street Firm That Uses Modern Monetary Theory


Heterodoxy and the Mainstream(s)

Michael Stephens | January 11, 2012

Over the break an article appeared in The Economist spotlighting three “schools of macroeconomic thought”:  Scott Sumner’s market monetarism, Austrian free banking, and neo-chartalism (MMT).  In addition to noting the role of the blogosphere in refining and promoting these heterodoxies, the article elects to use Paul Krugman as a stand-in for the “mainstream” opponent.

If you step back, what’s slightly unsatisfactory about this choice is that Krugman is, right now, more in tune with the policy preferences of two-thirds of these “doctrines on the edge of economics” than he is with the reigning fiscal or monetary policy stance of the US government.  Krugman has written extensively about the fact that our current debt and deficit levels present no serious current economic problem.  (The dispute between Krugman and MMTers stems from disagreements about the long-term debt.)  And as The Economist points out, Krugman is fine with nominal GDP targeting.

Figuring out where to draw the boundaries of “the mainstream” in the economics profession is one thing, but when it comes to the range of politically acceptable policy options (a different kind of mainstream, admittedly) Krugman stands shivering in the cold side-by-side with a lot of heterodox thinkers.  With respect to both policy outcomes and policy rhetoric, our institutions seem to pay a great deal more attention to deficits, debt, and inflation than they do to unemployment and the threat of deflation (though one might argue that, at least with respect to fiscal stimulus, this has more to do with the fact that in the US political system the “opposition” party has the ability to see the government fail.  Resistance to fiscal stimulus may all but disappear from Congress in the event of a Romney presidency.  Explaining the preferences of the FOMC is a more complicated affair.)  The mainstream policy space since 2010 excludes neo-chartalism, market monetarism, and Paul Krugman.

A handful of the Levy Institute’s working papers and policy briefs related to the neo-chartalist approach can be read here:  “Money,” “Deficit Hysteria Redux?“, “Money and Taxes,” “Modern Money.”


A Third Way on Fiscal Policy

Michael Stephens | January 10, 2012

Courtesy of INET, here is Pavlina Tcherneva explaining her “bottom up” approach to fiscal policy.

Notice the way she uses the term “trickle down” to apply also to conventional pump-priming fiscal policy (targeting growth and hoping for the right employment side-effects).  We need to move beyond the conventional options on fiscal policy, says Tcherneva; beyond a fiscal policy space marked out by aggregate demand management on one end and austerity on the other.  There’s a third approach that’s more in tune with the “original Keynesian spirit,” as she puts it:  directly employing the unemployed.  We should be targeting employment and the unemployed directly rather than trying to achieve this through the kind of bank-shot maneuver represented by conventional pump priming.

You can read some of Tcherneva’s work on this issue here and here.  One-pager here.


Galbraith in Brazil

Michael Stephens | January 5, 2012

Via Matías Vernengo, here is the audio of James Galbraith’s keynote address at the ANPEC (Associação Nacional dos Centros de Pós-Graduação em Economia) conference in Brazil.  Galbraith addresses the global financial crisis and the intellectual reactions (or non-reactions) to it, dealing both with those who attempted to explain away the crisis and those with a “rage to return” who scrambled for past insights.  Here Galbraith has in mind what he regards as the superficial return to Keynes in the early portion of the Great Recession:  “Half-remembered insights were framed into half-measures advocated by Keynesians of convenience. … [T]he authority that continues to be associated with Keynes was invoked to deflect and bury his spirit.”

Galbraith also talks about the Marxian, Godleyan, Minskyan, and “Galbraithian” (John Kenneth) schools of thought (which he likens to “Millenarian sects”), joined by their acceptance of the possibility and likelihood of crises, and runs through the differences in their approaches to thinking about financial crises.


Papadimitriou: To Solve Unemployment, Employ People

Michael Stephens |

In an op-ed in today’s LA Times Dimitri Papadimitriou makes the case for a direct job creation program:

It’s unreasonable to expect private enterprises to solve these problems. Full employment isn’t an objective of businesses. … There simply isn’t any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work. …

At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate — in this case, a wage — is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.

Papadimitriou goes on to describe successful examples of direct public service job creation programs around the world, and finishes with a discussion of the need for decent monitoring and evaluation systems for these programs (a set of topics highlighted in the recent Levy Institute report on the framework of a direct job creation program for Greece).

We’ve now seen a long string of employment reports in the US in which modest private sector job gains have been paired with continuing job losses in the public sector.  Sometimes (sometimes) the most straightforward-sounding policy solutions really are the best.  When a government faces an unemployment crisis like the one we’re in now it should, after ensuring that lower levels of government (states and municipalities) have the means to stop firing so many people, go ahead and start paying more people to do useful things.

This country is filled with sick, neglected, disabled, and vulnerable children and adults who need care, and plenty of roads, bridges, and school buildings in various states of disrepair or obsolescence.  Now would be a good time to pay some people to do something about it.

Read Papadimitriou’s op-ed here.

The Levy Institute research he references indicating the dramatic employment creation effects of investing in care services versus physical infrastructure (double the jobs created per dollar invested) can be read here, here, and here.  If you only have time for the one page version, see here.


Some pertinent ideas about growth paths, long and short

Greg Hannsgen | January 4, 2012

In my last post, I reviewed an enjoyable book about some post-Keynesian economic economic thought and thinkers. To round things out a bit more, I thought I might offer a list of a few more often-overlooked but classical themes from economists who may be obscure to some blog readers or perhaps simply forgotten. Many of the points made in this post involve ways that economies change and develop, a topic that often brings “historical time” into the picture. (This list is by no means exhaustive or even carefully chosen.)

virtuous circles in economic growth: it’s often thought that the economy reverts to a steady and mediocre long-term growth trend following an especially good or bad economic year. Unfortunately, this may not be happening now (see Figure 1 in this Levy Institute one-pager). One theme of the Smithian growth theories pioneered for our era by Nicholas Kaldor and other economists profiled in A. P. Thirlwall’s excellent book The Nature of Economic Growth (2002; paperback 2003) is that a year or two of strong economic growth won’t necessarily increase the chances of a lean year in the future. continue reading…


Outside the Bubble, Public Investment Is Disappearing

Michael Stephens | January 3, 2012

These two stories need to get together in a room and talk:

1) Demand for US debt is really high.

2) Government (net) investment is at a 40-year low.

Notice that neither of these facts plays any noticeable role in the policy debates that dominate the US political scene.  There we’re offered a choice of competing visions between radicals who claim that current levels of government spending and investment represent the collapse of free civilization, and conservatives (only, we don’t call them that) who seem to think that we have the share of public investment more or less right (give or take a few dollars for green energy).