William H. Janeway
Institute for New Economic Thinking and Warburg Pincus Technology

Monday, March 4, 2013  4:45 p.m.
Bard College
Reem-Kayden Center for Science and Computation (RKC), Room 103

Excerpt from Doing Capitalism:

“The Innovation Economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error and error and error: upstream exercises in research and invention, and downstream experiments in exploiting the new economic space opened by innovation. Each of these activities necessarily generates much waste along the way: dead-end research programs, useless inventions and failed commercial ventures. In between, the innovations that have repeatedly transformed the architecture of the market economy, from canals to the internet, have required massive investments to construct networks whose value in use could not be imagined at the outset of deployment. And so at each stage the Innovation Economy depends on sources of funding that are decoupled from concern for economic return.”

About the Author: continue reading…

A forum organized by the Athens Development and Governance Institute and the Levy Economics Institute — “Exiting the Crisis: The Challenge of an Alternative Policy Roadmap” — will take place in Athens, Greece on March 8–9.  The Levy Institute’s Dimitri Papadimitriou, James Galbraith, Jan Kregel, and Rania Antonopoulos are among the academics, journalists, politicians, and organizers participating in the two-day forum at the Athinais Cultural Centre (Kastorias 34–36, Votanikos).  Simultaneous translation (Greek / English) will be provided.

Topics include:

• Major Challenges and Policy Choices

• European Union: Toward Which Way and for Whom?

• National Strategic and Security Challenges in S.E. Europe and the Eastern Mediterranean

• Empowering Democracy: Legitimization, Accountability, Effectiveness, and Social Oversight

• Productive Restructuring and Sustainable Development

• Social Cohesion

• Fairness and Democracy

• Toward a Social Front for Change: Prerequisites and Priorities

For more information and a full list of participants, see here.

Randall Wray joined Suzi Weissman on her “Beneath the Surface” radio show on Friday.  They began the interview with a discussion of the policy blunders that are creating headwinds for the US economy, including the expiration of the payroll tax cut, the decline of real per capita government spending, and, as Wray put it, “the government sucking jobs right out of the economy.”  He’s not referring here to the walking corpse of the theory that regulatory uncertainty is to blame for the slow recovery, but to the fact that government is holding back job growth far more directly: by laying off workers at an unprecedented rate.  For context, look at this chart put together by Floyd Norris (highlighted):

They also addressed this Marketplace segment on the “death of inflation,” ongoing threats from the financial system, and some ideas for financial reform that are currently being tossed around.  On the latter, Wray argued that the idea of a financial transactions tax (being considered by a number of EU countries) is a second-best or partial solution.  Instead of sin taxes and other such “economists’ solutions,” as he described them, Wray recommended coming at the problem more directly: by outlawing certain speculative activities and going after practices like high-frequency trading.  They closed with a discussion of the prospects of another financial crisis emerging.

Listen to the interview here.

Tomorrow at UCLA, Randall Wray, Frank Partnoy, and Robert Brenner will discuss “The Economic Crisis:  Causes, Consequences, and What’s Next” as part of the annual colloquium series of the Center for Social Theory and Comparative History.

The speakers will consider the origins and results of the ongoing global economic crisis. They will give special attention to the rise of finance and the role of financial markets and institutions in its onset, spread, and ultimate consequences. How has the meltdown of Wall Street, its bailout by government, and its apparent recovery affected the macroeconomy and the future of finance itself? Are the great banks and other leading financial institutions now more or less likely to experience new meltdowns in the foreseeable future? Will the real economy see a new surge of growth, continuing stagnation, or renewed crisis? These are only some of the issues that will be addressed at this colloquium.

Monday, 25 February 2013
2:00-5:00 pm
History Conference Room, 6275 Bunche

See the flyer for more information: 

The Congressional Budget Office’s latest report on the budget outlook revealed (perhaps unintentionally) that fixating on Congress and the President as the central players in the federal deficit drama is a mistake.  According to the CBO, the path the federal budget deficit will follow over the next 10 years is just as much (if not more so) a question of Federal Reserve policy.

Here’s CBO’s latest 10-year outlook for the federal budget:

As you can see, the fastest rising category of spending is not “Social Security,” or even “major healthcare programs,” but rather “net interest,” which CBO projects will grow from 1.4 percent of GDP to 3.3 percent of GDP by 2023 (“a percentage that has been exceeded only once in the past 50 years,” they note). continue reading…

Why has the world’s premiere deficit-reduction laboratory produced such a dismal failure? European leadership still expects the painful über austerity measures imposed on Greece to result in a dramatic improvement of its debt to GDP ratio. But the experiment in endurance is not succeeding for an important reason: Austerity programs have been rooted in myths about what caused the crisis in the first place.

The popular notion that government overspending is the basis of Greece’s deficit woes is simply wrong. Evidence doesn’t support what seems to be a never-ending scolding about profligate spending.

Greek national expenditures were at about 45 percent of GDP in 1990, long before the crisis. That share remained stable through 2006. Proportionally, its size was well below that of France, Italy, or even Germany. While Greece has a reputation for a nasty, historically oversized public sector, in the lead up to the crisis it behaved no differently than its neighbors, and its rate of spending didn’t prevent it from catching and surpassing affluent eurozone nations in growth. Rapid spending increases weren’t notable until the 2008 recession. The timeline reinforces the conviction that long-term government extravagance hasn’t been key to the Greek meltdown.

Its debt picture was also steady. For years, Greece ran a deficit of 3 to 5 percent of GDP, and roughly a 120 percent debt to GDP ratio without any market upheaval. In 2000, just before it joined the euro, its deficit was 3.8 percent, where it more or less remained through the early euro years. Government borrowing didn’t explode until the sovereign debt crisis surfaced in 2009, which indicates that its record of national debt wasn’t the primary cause of Greece’s deficit crunch, either.

Other trends were more worrisome than government spending and borrowing. Revenues, for one, had been a creeping problem. Even before Greece joined the euro, it lagged considerably behind other European economies in tax collection. A Levy Institute analysis shows that by 2005, revenues from income and wealth taxes in particular, were still well below other European countries. The notable increase in government revenue, from 9.8 percent of GDP in 1988 to 2005’s high of 13.5 percent (before stabilizing at a slightly lower level), was mainly from an increase in social contributions. Tax evasion was rampant in the robust shadow economy.

In the late 1990s another danger emerged. continue reading…

A couple of links worth sharing on the politics and policy of the budget debate.

First, the Wall Street Journal reports that Alan Simpson and Erskine Bowles are coming out with a new deficit reduction plan, worth $2.4 trillion.  If it’s anything like the last plan, every lawmaker will claim to love it, journalists will assume its goodness as a fact more established than the shape of the earth, no one will have a clue what’s in it, and it will go nowhere.

The details have not yet been released, but one initial question you might have is this:  where does that $2.4 trillion number come from?  Have they taken their original deficit reduction target from 2010 ($4 trillion) and subtracted the amount of budget savings already achieved ($2.5 trillion)?  Apparently not.  Has the deficit picture worsened since 2010?  Quite the contrary.  If you look at healthcare alone, the government is now set to spend almost $1 trillion less over the next decade than what was expected when Simpson and Bowles were coming up with their plan.  If their new plan takes these recent developments into account, it’s not clear how.  The question remains:  why this number?

We’ll  have to wait to hear what the justification is (if there is any).  Perhaps this is an issue of different budget windows, but it’s also possible we’re looking at another example of the asymmetry between deficit hawks and deficit doves (or owls) when it comes to budget targets.  For the dovish, the budget math is reasonably simple:  the right level for the deficit is whichever one will bring us back to full employment (likely a higher deficit than we have now).  For the hawks, it’s not quite as clear.  Stabilizing the public debt as a percentage of GDP (at 73 percent), the administration’s target, is apparently not sufficient.  If someone is consistently specific about means (in this case, cut spending on programs that benefit the elderly in such a way that benefits are reduced; shrinking healthcare providers’ profit margins doesn’t count) but a little vague about the ends, you should start to consider the possibility that their means really are their ends, and vice versa.

Second, Dan Kervick at New Economic Perspectives argues that the debate over healthcare costs is very poorly framed as an issue of budget deficits: continue reading…

Jörg Bibow was recently interviewed by CJ Polychroniou in Kyriakatiki Eleftherotypia (Κυριακάτικη Ελευθεροτυπία).*  An English transcript of the interview follows:

Since Mario Draghi’s announcement last fall that the ECB will intervene with the purchase of government bonds, the euro crisis is in a state of relative calm. Is it over? And if not, what developments could make the crisis resurface?

Yes, Mr. Draghi’s promise of ECB support for government bond markets seems to have calmed fears of an imminent euro breakup, at least for the time being. That does not mean the euro crisis is over though. Not at all, as the underlying problems remain largely unresolved. Liquidity can buy time but it cannot solve the imbalances inside the euro area and related debt overhangs that are the deeper cause behind the euro crisis. It is important in this context that the ECB promise is for conditional support. As liquidity support comes along with mindless austerity and asymmetric adjustment pressures imposed on debtor countries, debt problems are bound to get worse rather than better. Markets are currently in complacency mode about these prospects. The crisis may resurface at any time.

In several of your studies, you point to Germany as the main culprit behind the euro crisis.  Why is that?

Yes, Germany is the culprit. Being the largest economy in Europe, Germany’s performance and policies inevitably impact Europe. In the currency sphere Germany is also Europe’s traditional anchor of stability. As a result, the policy regime of Economic and Monetary Union agreed at Maastricht is largely of German design, based on the Bundesbank success story and deutschmark stability. It was not understood that the pre-EMU success of the German model of export-led growth required that other countries behaved different from Germany. Germany’s traditional two-percent price stability norm stimulated export-led growth as long as Germany’s trade partners had higher inflation, as such a differential would give rise to cumulative German competitiveness gains over time. Exporting the German model to Europe and requiring everyone to abide by the two-percent stability norm was therefore begging for trouble. Exports would no longer fulfill their traditional role as growth engine. Confronting high unemployment, Germany therefore departed from its own stability norm by prescribing itself flat wages. German wage repression—joined by mindless fiscal austerity—turned Germany into the “sick man of the euro,” suffering from protracted domestic demand stagnation. However, German competitiveness once again improved over time, this time inside the currency union. At the same time, given Germany’s size, the ECB’s monetary policies became too easy for countries with stronger domestic demand dynamics. Herein rests the source of the currency union’s internal imbalances and consequent crisis. German banks sponsored the boom in the so-called periphery serving as the vent for German trade surpluses.

You have argued that a euro country that runs up surpluses must lend or transfer its surpluses to the deficit-running euro countries. Germany and the other “northern” euro countries will never accept such a condition, so what are the implications of this for the future of the eurozone—a permanent fixture between a metropolis and satellite?

In pre-crisis times liberalized private capital flows permitted soaring intra-area trade imbalances. While Germany’s foreign asset position improved markedly, in the deficit countries, this meant a corresponding rise in external indebtedness. Internally, these debts were actually largely private debts, with Greek public debt developments as the outlier. At some point the markets woke up, and private capital flows dried up or even reversed. The irony is that since Germany cannot have perpetual export surpluses without bankrupting its partners, it is bound to end up paying for its über-competitiveness by means of fiscal transfers. The German authorities refuse to understand this accounting logic. They also decline to recognize that wrecking their debtors’ economies and driving them ever deeper into debt does not really improve the creditor’s position either. If Germany does not want Europe to be a transfer union it should end policies that make such a transfer union inevitable.

The IMF has admitted twice that it miscalculated the negative impact of the austerity measures on Greek growth because it misjudged the impact of the fiscal multiplier.  But isn’t it the case that the IMF never paid much attention to the multiplier, anyway, considering it to be a Keynesian obsession? continue reading…

Here’s yet another way of representing the fact that to the extent the United States has a “spending problem,” it is a problem of too little spending.  From a speech by Janet Yellen, Vice Chair of the Federal Reserve:

… discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as exhibit 3 [below] indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits.

On this issue, the conventional wisdom is so far from the truth that it’s difficult to figure out how one might begin persuading anyone who isn’t acquainted with the data (lest one appear insane).  It would be one thing if current fiscal policy were merely in line with past expansionary practices in the wake of recessions (even arguing that much will get you some raised eyebrows and uncomfortable coughs).  But the dismal truth is that, after 2009—when discretionary fiscal support was a hair above the postwar average but well below the expansionary stimuli under Ronald Reagan and George W. Bush—the combined federal/state/local government fiscal response broke dramatically with the postwar pattern, in a display of record-breaking stinginess.  To borrow loosely from H. L. Mencken: if you want government to rein in its spending, you’re getting it good and hard.

Salim B. “Sandy” Lewis in conversation with Matt Taibbi
Tuesday, February 19, 7 pm
Bard College, Annandale-on-Hudson, NY
Room 103, Reem-Kayden Science Building

Lewis will explore “Why Fixing Wall Street and the Economy Is Critical to the World” in a discussion with Matt Taibbi, the renowned political and financial columnist for Rolling Stone. The discussion will be moderated by Roger Berkowitz, academic director of the Hannah Arendt Center for Politics and Humanities at Bard. Following the talk, Lewis will take questions.

Some of Lewis’s criticisms of Wall Street appeared in an Op-Ed essay in the New York Times.  He has been featured as well in a Times profile in 2012.