Archive for March, 2012

Change in the Age of Parasitic Capitalism

Michael Stephens | March 29, 2012

In his latest policy note, C. J. Polychroniou argues that the political and economic dominance of finance is pushing advanced liberal societies to a breaking point:

The main problem is the power that finance capitalism exerts over domestic society and the abuses that it inflicts. Finance capitalism is economically unproductive (it does not create true wealth), socially parasitic (it lives off the revenues produced by other sectors of the economy), and politically antidemocratic (it restricts the distribution of wealth, creates unparalleled inequality, and fights for exclusive privileges). At the turn of the 20th century, finance capitalism … was still seeking to bring industry under its control and exercised its brutal power largely on undemocratic societies overseas. By the late 1970s, it can safely be said that finance capitalism had subjugated industry at home and took control of government power in the same manner that the great industrialists of the 19th and 20th centuries were able to influence public policy. The difference is that finance capitalism has no vested interest in seeing the living standards of ordinary people improve, and regards any public intervention as an attack on its freedom to exploit society’s economic and financial resources as it sees fit. Industrial capitalism was a progressive stage of economic development relative to agrarian capitalism and feudalism. …. But the dominance of finance capitalism represents a setback for society as a whole.

Read the rest here.


Can Tax-Backed Bonds Save the Eurozone?

Michael Stephens | March 28, 2012

Philip Pilkington and Warren Mosler have teamed up to present a financial innovation that they believe could settle the eurozone’s sovereign debt crisis:  a special type of “tax-backed bond” that contains a clause stating that if (and only if) the country issuing the bond defaults, the bond can be used to make tax payments in that country.  “If an investor holds an Irish government bond, for example, worth 1,000 euros,” they write, “and the Irish government misses a payment of interest or principal, the investor can simply use the bond to make tax payments to the Irish government in the amount of 1,000 euros.”

Pilkington and Mosler call attention to the fact that countries like Japan that issue their own currency are not facing unbearably heavy interest costs on their debt; with the reason being that such countries can always make payments when due.  Investors know that Japan can always create enough yen to meet its obligations.  Eurozone member-states, however, are users, not issuers of the euro, and as a result, while many countries in the periphery have debt-to-GDP ratios that are smaller than Japan’s, they nevertheless face higher and higher debt servicing costs.

The idea behind the tax-backed bond, which draws inspiration from Modern Monetary Theory, is to provide a way of securing investor confidence in peripheral debt (the bonds are guaranteed to be “money good,” since they’re acceptable for the payment of taxes in the event of default) and thereby keep interest payments under control, without requiring a eurozone exit; to provide a way of endowing peripheral debt with an aura of safety comparable to that of the debt of a currency-issuing nation—but without requiring a country like Greece to actually leave the euro and revert to the drachma.

And as Pilkington and Mosler argue, if this plan works, the bonds would never actually be used for tax payments:  “since this tax backing would set an absolute floor below which the value of the asset could not fall, and because the bonds pay a fair rate of interest, there would be no risk of actual loss and no reason to part with them—and, hence, the bonds might never be used to repay taxes.”

You can read their proposal here.


Why Minsky Matters (Part One)

L. Randall Wray | March 27, 2012

My friend Steve Keen recently presented a “primer” on Hyman Minsky; you can read it here.

In his piece, Steve criticized the methodology used by Paul Krugman and argued that Krugman could learn a lot from Minsky. In particular, Krugman’s equilibrium approach and primitive dynamics were contrasted to Minsky’s rich analysis. Finally, Krugman’s model of debt deflation dynamics left out banks—while banks always played an important role in Minsky’s approach. Krugman responded here.

I found two things of interest in this exchange.

First, Krugman argued: “So, first of all, my basic reaction to discussions about What Minsky Really Meant — and, similarly, to discussions about What Keynes Really Meant — is, I Don’t Care.” This is not the first time Krugman has mentioned Minsky—see, for example, here, which previewed a talk he was to give titled “The night they reread Minsky.”

Amazingly, Minsky only appears in the title of the talk. It is pretty clear that Krugman has not cared enough to try to find out what Minsky wrote, much less “what Minsky really meant.” Minsky always argued that he stood “on the shoulders of giants”—and he took the time to find out what they had said. So while Minsky probably would have agreed with Krugman that arguing about what the “master” really meant was less interesting, he did believe it was worthwhile to try to understand the writings of those whose shoulders you stand on.

Second, at the end of his most recent blog it is pretty clear that Krugman leaves banks out of his model because he doesn’t understand “what banks do.” He starts by saying ”If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else…” Well, if he had actually read Minsky, he would understand that this is the description of a loan shark, not a bank.

So what I want to do today is to quickly summarize Minsky’s main areas of research. Then next week I will post more on Minsky’s view of “money and banking.” For those who want to read ahead, you can see the more “wonkish” piece at the Levy Institute, where I summarize Minsky’s later (mostly unknown) work on banks.

So, who was this Minsky guy and what was he all about? continue reading…


The Levy Institute Measure of Time and Income Poverty

Thomas Masterson | March 23, 2012

I’d like to take a moment to give a brief report on some research that my colleagues Ajit Zacharias, Rania Antonopoulous, and I have been working on as a result of collaboration between the Levy Economics Institute and United Nations Development Programme (UNDP) Regional Service Centre for Latin America and the Caribbean (RSCLAC), particularly the Gender Practice, Poverty, and Millennium Development Goals (MDG) Areas. It addresses an identified need to expand our understanding of the links between income poverty and the time allocation of households, and between paid and unpaid work. Policies to combat poverty and promote equality require a deeper and more detailed understanding of the linkages between conditions of employment, unpaid household production, and existing arrangements of social provisioning—including social care provisioning.

Income poverty is customarily judged by the ability of individuals and households to gain access to some level of minimum income based on the premise that such access ensures the fulfilment of basic material needs.  However, this approach neglects to take into account the necessary (unpaid) household production requirements, without which basic needs cannot be fulfilled. Households differ in terms of their household production requirements and also in terms of the time their members have available to meet the requirements, so it should not be assumed that all households can meet these requirements. In order to promote gender equality, it is imperative to understand how labor force participation and earnings interact with household production responsibilities, as it is already well established that women contribute their time disproportionately to unpaid work.

We provide an analytical and empirical framework that includes unpaid household production work in the concept and measurement of poverty. Our approach shows that awareness of gender differences (especially in unpaid work) can bring to the forefront a ‘missing’ but key analytical category that allows for an improved measurement of poverty, and a deeper and more precise poverty classification of households and individuals. Future posts will delve more into policy ramifications of this work. In this post, I want to report on two of the headline results of our research.

Our alternative measure is a two-dimensional measure of income and time poverty, which we refer to as the Levy Institute Measure of Time and Income Poverty (LIMTIP). Time poverty, especially when coupled with income poverty, imposes hardships on the adults who are time-poor as well as their dependents, particularly the children, elderly, and sick. Income poverty alone does not convey enough useful information about their deprivation. Our measure can shed light on this phenomenon. My colleague Ajit Zacharias has published a working paper that lays out the theoretical underpinnings of the measure, and I have a working paper that outlines the methods used to construct the data sets we used to create the measure for Argentina, Chile, and Mexico.

The first important result of our project is that the size of the hidden poor, namely those with incomes above the official threshold but below the LIMTIP poverty line, is considerable in all three countries (Table 1). The LIMTIP income poverty rate for Argentina is 11.1 percent, compared to 6.2 percent for the official poverty line. For Chile, adjusting for time deficits increases the poverty rate to 17.8 percent from 10.9 percent for the official line. And in Mexico, the poverty rate increases to 50 percent from an already-high 41 percent. This implies that the households in hidden poverty in Argentina, Chile, and Mexico comprise, respectively, 5, 7, and 9 percent of all households.

The second important result of taking time deficits into account is that it dramatically alters our understanding of the depth of income poverty. The average LIMTIP income deficit (the time-adjusted poverty line minus household income) for poor households was 1.5 times higher than the official income deficit in Argentina and Chile and 1.3 times higher in Mexico. Thus, official poverty measures grossly understate the unmet income needs of the poor population. From a practical standpoint, this suggests that taking time deficits into account while formulating poverty alleviation programs will significantly shift both the coverage (including the ‘hidden poor’ in the target population) and the benefit levels (including the time-adjusted income deficits where appropriate).

Table 1 Official, LIMTIP, and ‘Hidden’ Poverty Rates and Number of Poor (thousands)

Official income poverty

LIMTIP income poverty

‘Hidden poor’






























Redistribution of Wealth, Foreclosure Style

Michael Stephens | March 21, 2012

Matthew Goldstein and Jennifer Ablan report on the latest US investment craze:  buying up large bundles of foreclosed homes from Fannie Mae and renting them out to take advantage of the hot rental market.  Randall Wray is among the critics quoted in the article who contend that, as Goldstein and Ablan put it, “the federal government is fostering a transfer of wealth of sorts by selling big pools of foreclosed homes to big fund investors and high-net-worth individuals. There’s also concern that some of the players who helped create the housing crisis will now benefit by buying foreclosed homes at a steep discount.”

Wall Street benefited from the ballooning indebtedness of American households on the way up, and now on the way down they’re taking advantage of the flipside of that indebtedness, as families’ assets are seized, transferred, and rented out … likely to some of the same people who just lost their homes.  That feedback loop is galling enough.  But as Wray has pointed out, it’s also a cycle that’s been greased by foreclosure fraud.

Felix Salmon is surprised at the continued success of the financial industry in pushing legislation (in this case, he’s talking about the proposed “JOBS Act,” a key provision of which involves a nice dose of financial deregulation):  “a bill which was essentially drafted by a small group of bankers and financiers has managed to get itself widespread bipartisan support, even as it rolls back decades of investor protections.”

At this point, it’s very difficult to imagine what could possibly change these dynamics.  Clearly, triggering a global economic collapse hasn’t made a dent in the sway the industry holds.  There was a lot of enthusiasm surrounding the Occupy movements, but it’s hard to see it amounting to a countervailing political force (even if it intended to be one, which isn’t clear).  Dodd-Frank, for all its faults (and they are legion:  see this new Levy Institute working paper by Bernard Shull, and Chapter 1 of this analysis) appears to be the only game in town.  If it’s able to shrink the sector a little that may change the political economy—but only at the margins.  And that’s likely the best case scenario.


To Help Address Inequality, Reinvent Fiscal Stimulus

Michael Stephens | March 20, 2012

In 2010, the first year of the economic recovery, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez.  There are a whole host of reasons for the stubborn persistence of corrosive levels of inequality, but one of the surprising contributing factors may be found in the way we approach fiscal stimulus policy.

In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them.  The status quo, at best, offers us two choices in fiscal policy flavors:  austerity and stimulus through aggregate demand management.  While stimulus is preferable, says Tcherneva, there are still flaws in a fiscal strategy that aims at boosting investment and growth without explicitly targeting unemployment.  The problem with pump priming is that it is rarely aggressive enough to adequately reduce unemployment—and when it is sufficiently aggressive, it has inflationary tendencies.

Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution.  She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct employer of workers and finds that the first two policies are more inflationary and more inequitable than direct job creation:  “pro-investment policies in particular add upward pressure to prices and skew the income distribution toward the capital share of income.”

Jumping off from these results, Tcherneva offers a third way on fiscal policy, beyond austerity and pump priming.  continue reading…


What a Real Fiscal Crisis Looks Like

Michael Stephens | March 19, 2012

It says something about how badly the battle for public opinion on budget matters has been lost when a headline about a “fiscal cliff” the US is about to fall over in 2013 leaves you grimly expecting a pile of words dedicated to the poorly articulated threat of near-term public debt and deficits.  But in this case, hold off on letting your eyes glaze over.  The author is Alan Blinder and the fiscal emergency he’s talking about is a large scheduled swing toward further budget austerity: a combination of expiring tax cuts and automatic spending cuts (from the debt ceiling deal) that are all set to occur in January 2013.  Combined, says Blinder, the fiscal contraction amounts to a drag of 3.5% of GDP—a serious blow to aggregate demand.

And if the macro-level view of things doesn’t grip you, the view from the ground offers enough frustrating examples of the self-inflicted wounds to come.  As Nancy Folbre points out today, Head Start, the early childhood education (ECE) funding program, is destined for cuts.  This isn’t just a “think of the poor children!” moment (though, seriously, think of the poor children.  For whatever reason, only budget hawks are allowed to chastise us for short-changing the next generation).  The economic case for borrowing right now (at negative real interest rates) to make public investments in projects that would yield even modest benefits down the road is compelling.  Making the case for decreasing investment over the next few years in a program that yields substantial benefits, like early childhood education, is a feat to be attempted by only the most clever of sophists.  This is one of those situations where the macro level might not be the most favorable terrain for an argument; where “cutting government spending” doesn’t register quite like “cutting early childhood education.”

And this isn’t just a rhetorical point—the payoffs from ECE are considerable.  Rania Antonopoulos and Kijong Kim’s working paper on the economic benefits of ECE surveys the research showing the direct welfare improvements and positive spillover effects that come from these investments in human capital (enhanced cognitive and noncognitive development for children leading to improved labor market outcomes and asset ownership in the future, improved labor market participation for mothers, higher GDP, etc.).  Antonopoulos and Kim also share the results of their research (along with a team of other Levy Institute scholars) on the job creation potential of a 50 percent increase in Head Start/Early Head Start funding (which, it should be noted, still wouldn’t be enough to offer universal ECE).  In terms of the number of jobs created per dollar spent, they found that investing in social care service delivery packs a serious punch (more than twice the jobs per dollar, when compared with more capital-intensive infrastructure projects).  And if that isn’t enough, Head Start, because it’s targeted at poor children, enhances the sort of equality to which both sides of the political spectrum feel compelled to pay lip service:  equality of opportunity.

Head Start, as Folbre observes, “has never served more than 60 percent of eligible children in extreme poverty.”  That’s a lot of wasted potential.  We’re planning on wasting even more, and in exchange for what exactly?


Opinions on Modern Monetary Systems Not Sharply at Odds

Greg Hannsgen | March 15, 2012

The Nation notes that austerity policies in Europe have proved to be very damaging to economic growth in the region, and points out that after adhering to IMF and EU austerity programs since last May, Portugal is “even deeper in the hole. The austerity has only increased its debt, as it has spread more suffering.”

The editorial goes on to point out that the euro countries have also been hindered by their unified currency system. This system currently makes it difficult for member governments to see to it that there is a market for their bonds and other securities—namely, their central banks. Taking exception to Republican fears of a “Greek-type collapse,” the Nation emphasizes that the “sovereign currency” possessed by the American government has always allowed it to avoid difficulties making payments on its debt. (A web version of the editorial is here. A similar Washington Post opinion piece is posted here.) Compare this with the current financial problems experienced by many state and local governments, as documented by recent articles in the New York Times (“Deficits Push New York Cities and Counties to Desperation”) and the Wall Street Journal (“States Keep Axes Sharpened”).

Many things can go wrong in an economy, even one with a smoothly running monetary system.  But the Nation’s argument remains crucial for the U.S.—first, that deficit-financed stimulus programs have helped keep our economy going; and second, that a government with its own currency is almost unable to default.

Quick note: In an interesting op-ed piece, Martin Wolf of the Financial Times notes that U.S. budget deficits have allowed the  private sector to deleverage a bit: “If the public sector does not sustain spending as the private sector  cuts back, the latter will go too far, causing unnecessarily deep damage to the economy.” He contrasts the U.S. situation with the crisis in the United Kingdom and Spain, where deleveraging has not gone as far. He points out that Spain’s lack of a sovereign currency has prevented its government from helping along the private-sector deleveraging process.


Greece’s Pyrrhic Victories

Michael Stephens | March 14, 2012

C J Polychroniou explains how the latest pair of efforts aimed at addressing the Greek crisis, the newest bailout package and the bond swap, create tremendous complications down the road even if they may offer a temporary respite.  As you know, the bailout money was shackled to a series of grim austerity measures that will push the already struggling nation further under water.  But his analysis of the bond swap is even more intriguing.

One way of getting at the political challenge in the eurozone is to note that many powerful economic solutions involve, not to put too fine a point on it, reinvesting resources from countries like Germany into countries like Greece.  This is something that happens all the time within units that understand themselves as nations (or aspire to such an understanding.  As Dimitri Papadimitriou and Randall Wray point out, after reunification Germany invested resources in the former East Germany in much the same way).  But the question of whether revenues from New York are being shoveled into Mississippi rarely becomes a live issue.  Within the eurozone, however, these distributional questions are fraught with political peril; dooming a whole host of solid policy solutions.  And Polychroniou suggests that the restructuring of roughly 200 billion euros in private debt that just took place may have actually made these political dynamics worse (while also making life more difficult for Greece if forced out of the eurozone):

the bond swap was a deal forced on private investors, … yet the new bonds have been issued under foreign law. This doesn’t mean that the Parthenon is at risk of one day falling into the hands of foreign creditors, but it does mean that the Greek government has lost whatever strategic advantage it may have had in the ruthless game of sovereign debt restructuring. For one, all of Greece’s debt is now wholly owned by public institutions (with European taxpayers bearing much of the cost), so the next debt restructuring phase could entail political, not merely economic, consequences. Simply put, it could pave the way for Greece’s forced exit from the eurozone. Indeed, given the prevailing sentiments toward Greece across Europe, it is most unlikely that European taxpayers will accept kindly the idea of getting stuck with Greece’s bill while allowing a pariah state to remain in the Union. However, in the event of an exit from the eurozone, Greece will no longer be able to pass legislation to convert euro-dominated debt into new drachmas.

Read the whole thing here.


Why Haven’t Business Groups Pushed Harder for Stimulus?

Michael Stephens | March 13, 2012

Although recent employment numbers seem to have set off a fresh round of complacency, the December Strategic Analysis from the Levy Institute makes it pretty clear that more fiscal stimulus is necessary if the economy is going to reach decent levels of growth and employment anytime soon.

However, there’s very little reason to think that anything substantial is forthcoming on the stimulus front, as the US slides slowly into austerity.  And the biggest obstacle is congressional opposition.  Short of an historic wave election, substantial new stimulus just isn’t likely (although when it comes to increasing government spending to counteract a recession, Congress appears to be much more accommodating when there’s a Republican in the Oval Office).  But short of these once-in-generation electoral outcomes, there’s another possibility:  business groups could come around to the realization that they might benefit from an increase in aggregate demand and start seriously pushing their clients in Congress to pass something.

An article in Bloomberg points out that just such a push occurred in the 1940s, as a coalition of business interests, concerned about what would happen to demand as war spending wound down, pushed for fiscal stimulus (interesting side note:  Fed Chairman Marriner Eccles is featured in the article as someone whose Depression-era experience in the private sector led him to conclude that government stimulus was necessary):

Dennison joined forces with Paul Hoffman of Studebaker, advertising executive William Benton, and top managers from Eastman Kodak, General Foods, Sears and General Motors in the Committee for Economic Development in 1942. Fearful that the economy would slip back into a depression once World War II ended, they advocated an activist state that spent money to promote consumption and high employment. Their position was hardly radical, and they aimed their appeal at “all who are interested in keeping the system of private enterprise and larger personal freedom.” But they understood that capitalism could survive only if there was a way to “counter the tendencies toward boom and depression.” Capitalism required growth, by whatever means necessary.

… soon even the Chamber of Commerce took the plunge and joined the growth coalition. Under the dynamic leadership of Eric Johnston, it supported the Full Employment Act of 1946, a Keynesian, albeit conservative, embrace of government spending to reduce the boom-and-bust cycle that Hoffman feared.

It’s notable that such a coalition, as far as I can tell, has not emerged in the contemporary United States.  One can’t help but think that it might have something to do with the decoupling of median and average incomes; with the fact that the top 1 percent seem to be able to enjoy quite robust income growth without needing to pull the average worker along with them.