Archive for February, 2013

Europe’s Perilous Quest for Stability

Jörg Bibow | February 14, 2013

Europe’s currency union is built on two key principles. The first is that the central bank must be independent of political control and its policies squarely focused on maintaining price stability. The second is that fiscal policy must be disciplined and never threaten price stability. Price stability, in turn, is the foundation for economic stability and prosperity. These principles and ideas are of German origin. And they distill the gist of Germany’s post WW2 economic history, an economic success story featuring both stability and growth.

The German success story was meant to be replicated at the European level. The European Central Bank copycatted the Bundesbank. As Germany’s constitution featured a “golden rule” limiting public budget deficits to public investment, a fiscal pact was to safeguard the ECB by decreeing budget deficits in excess of three percent of GDP as excessive and prescribing their speedy reduction. That pact was named the “Stability and Growth Pact” reflecting the German belief – based on historical experience – that fiscal and monetary discipline go along with both stability and growth.

Things have not played out according to script for Europe. …

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Reverse Pivot?

Michael Stephens | February 13, 2013

Is the era of the “grand bargain” over?  That was the implication of a number of news stories that pre-framed last night’s speech.  “When President Obama delivers his State of the Union address Tuesday evening,” wrote the Washington Post‘s Lori Montgomery, “here’s one thing you won’t hear: an ambitious new plan to rein in the national debt. In recent weeks, the White House has pressed the message that, if policymakers can agree on a strategy for replacing across-the-board spending cuts set to hit next month, Obama will pretty much have achieved what he has called ‘our ultimate goal’ of halting the rapid rise in government borrowing.”

There was indeed a small change in emphasis in this year’s SOTU.  The president began by highlighting how much deficit reduction had already been achieved ($2.5 trillion, not including the ACA) and downplayed how much remains to be done to stabilize the debt.  He then spent the bulk of his address on job creation and other national priorities that have been languishing for years, including proposals to raise the minimum wage, invest in infrastructure repairs, create wider access to quality pre-kindergarten, reduce carbon emissions, and so on.  The key line, rhetorically, was this one:  “deficit reduction alone is not an economic plan.”

The deficit-reduction industry isn’t going to close up shop after this speech.  You’ll still get to hear from Alan Simpson and Erskine Bowles about how Washington’s budget cuts have been insufficiently “hard” or “painful.”  Morning cable news hosts, and everyone they know, will still be so convinced that spending is “out of control” that they will find the very idea of checking the data to be laughable.  But ever since the Obama administration announced their “pivot” to deficit reduction in 2010, they have been doing little to dissuade the public from believing that we are on the verge of a government debt crisis that demands our immediate attention, and the SOTU suggests that, going forward, the administration may be providing a little less aid and comfort to the deficit hawks.

Unfortunately, the substance of the president’s speech, the economic policy, was still hemmed in by a prioritization of the federal budget balance.  Obama pledged, for instance, that none of his proposals would add to the deficit (“nothing I’m proposing tonight should increase our deficit by a single dime”).  That’s an unfortunate (and arbitrary) limitation.  For policies such as investment in infrastructure repair that are meant to stimulate the economy and create jobs, deficit neutrality is going to be a significant hindrance.

In the Levy Institute’s last strategic analysis, Dimitri Papadimitriou, Greg Hannsgen, and Gennaro Zezza showed how you can do “deficit neutral” economic stimulus:  this is mainly due to the different “multipliers” associated with various budgetary changes.  However, their simulation of a deficit-neutral stimulus demonstrated that while such policies can boost economic activity (a $150 billion increase in government investment that is “paid for” could reduce the unemployment rate by almost 0.5 percentage points), a deficit-financed stimulus would be more effective.  (Their newest strategic analysis and projections for the US economy will be coming out in late February/early March.)

It remains to be seen how these SOTU proposals get fleshed out, but a true pivot away from prioritizing the deficit would mean, instead of promising not to add a dime to the deficit, pledging not pass a budget that removes even one-tenth of a percentage point from growth until the unemployment rate dips below some target level.


Master of Science in Economic Theory and Policy

Michael Stephens | February 11, 2013


Are your student advisees looking for an opportunity to advance their career goals with a graduate degree? The Levy Economics Institute Master of Science in Economic Theory and Policy can help them prepare themselves for responsible positions in government, business, education and research.

The M.S. in Economic Theory and Policy degree is designed to meet the preprofessional needs of undergraduates in economics and related fields. The terminal nature of the M.S. degree provides a strong signal that the graduate is pursuing career-stage posts and not simply transitional employment. All students participate in a graduate research assistantship at the Levy Economics Institute of Bard College—an economic policy think tank with more than 25 years of public policy research experience.

With the “deadline season” for graduate school applications approaching, please advise your students to consider our program. Click here to find out more. Application deadline: March 30, 2013


Office of the Director
Master of Science in Economic Theory and Policy
Levy Economics Institute of Bard College
[email protected]


Can the Deficit Warriors Be Appeased?

Michael Stephens | February 8, 2013

Over the last few years, there have been significant changes to the federal government’s finances—changes that have had barely any perceptible impact on the budget debate.  The federal deficit has been shrinking (from 2009 to 2012) at a faster rate than in any other period since 1937.  Most Americans have never lived through more rapid budget tightening.  A lot of this has to do with the fact that the budget deficit is automatically stabilizing as the economy recovers, just as it automatically grew due to the Great Recession, but it’s not all automatic changes.  You wouldn’t know it from the Sunday news shows, but policy changes over the last two years alone have resulted in roughly $2.4 trillion in scheduled deficit reduction—and that doesn’t even include the budget savings from the Affordable Care Act (“Obamacare”).

These facts have had a difficult time breaking through to the public consciousness.  Last week, the genuinely level-headed Michael Kinsley wrote an article in Bloomberg that proceeded on the basis of the (common) assumption that while we’ve had “plenty of stimulus,” the political system is incapable of delivering significant budget tightening:

We’ve all done a great job of barely cutting spending, barely raising taxes, not reforming entitlements, and all told spending about a trillion dollars a year more than we bring in. Plenty of stimulus… But is there a shred of evidence that the citizenry and our political leaders are ready for Step No. 2? That’s where everyone agrees to enough spending cuts and tax increases to close the budget gap. I’ll believe that when I see it.

Our problem, however, appears to be the opposite of the one Kinsley suggests.  Currently, the political system seems unable to resist shrinking the budget. continue reading…


A Progressive Agenda for Greece (Part 2 of an Evening with Syriza)

Michael Stephens | February 7, 2013

Part 2 of a special event on Greece and the eurozone crisis, featuring top leadership of the official opposition party in Greece, SYRIZA:

(1:30) Yiannis Milios, Economic Advisor, SYRIZA, Member of the Political Secretariat of Synaspismos and Professor of Political Economy, National Technical University of Athens
(10:15) Rania Antonopolous, Senior Scholar and Director, Gender Equality and the Economy Program, Levy Economics Institute of Bard College
(18:55) Helen Ginsburg, Professor Emeritus of Economics, Brooklyn College, City University of New York and Co-Founder, National Jobs for All Coalition
(29:00) Mark Weisbrot, Co-Director, Center for Economic and Policy Research
(37:15) Panelist Q&A

(101:30) Q&A with Alexis Tsipras, Leader of the Opposition in Greek Parliament, SYRIZA

For more background on some of the issues covered by Rania Antonopoulos’ discussion of direct social service job creation programs, see “Direct Job Creation for Turbulent Times in Greece” (Antonopoulos, Papadimitriou, and Toay).

The Levy Institute also released an interim report on the Greek economy that uses the Institute’s macroeconomic model (inspired by Wynne Godley) to identify the causes and consequences of the current Greek recession and to assess the likely results of the policy status quo: “Current Prospects for the Greek Economy” (Papadimitriou, Zezza, and Duwicquet). A final report will be issued shortly.


22nd Annual Minsky Conference: Building a Financial Structure for a More Stable and Equitable Economy

Michael Stephens | February 6, 2013

A conference organized by the Levy Economics Institute of Bard College with support from the Ford Foundation.

April 17–19, 2013

Ford Foundation
320 East 43 Street, New York City

In 2008–09, the world experienced its worst financial and economic crisis since the Great Depression. Global employment and output collapsed, and an estimated 84 million people fell into extreme poverty. Given the fragility and uneven progress of the economic recovery, social conditions are expected to improve only slowly. Meanwhile, austerity measures in response to high government debt in some of the advanced economies are making the recovery even more uncertain.

It’s time to put global finance back in its proper place as a tool to achieving sustainable development. This means substantial downsizing, careful reregulation, universal social protections, and an active, permanent employment-creation program. Therefore, the 2013 Minsky Conference will address both financial reform and poverty in the context of Minsky’s work on financial instability and his proposal for a public job guarantee. Panels will focus on the design of a new, more robust, and stable financial architecture; fiscal austerity and the sustainability of the US economic recovery; central bank independence and financial reform; the larger implications of the eurozone debt crisis for the global economic system; improving governance of the social safety net; the institutional shape of the future financial system; strategies for promoting poverty eradication and an inclusive economy; sustainable development and market transformation; time poverty and the gender pay gap; and policy and regulatory challenges for emerging-market economies.

To register, visit the conference website.

A list of conference participants is below the fold. continue reading…


An Unconventional Central Banker

Michael Stephens | February 5, 2013

Since the outbreak of the global financial crisis and recession, we’ve seen some renewed interest (and angst) regarding the role of the central bank and of treasury-central bank cooperation.  (The most recent example comes out of Japan, in which Japanese PM Shinzo Abe has been pushing for the Bank of Japan to accommodate his relatively ambitious fiscal stimulus program.)

In the US context, many of these issues bring us back to the 1951 Treasury-Federal Reserve Accord, establishing the parameters of the Fed’s independence.  In a new working paper and one-pager, Thorvald Grung Moe of Norges Bank (and a research associate at the Levy Institute) offers an alternative reading of the history and significance of the ’51 Accord—and of central bank independence in general—through an analysis of the career and views of Fed Chairman Marriner Eccles, and of his supporting role in the events leading up to the Accord in particular.

Moe stresses that Eccles’ support for the Accord has to be understood in the inflationary context of the time, and that a portrait of Eccles’ views that doesn’t also include his 1930s-era support for deficit financing and accommodative monetary policy is seriously incomplete.  “The history of the Accord,” Moe writes, “should teach central bankers that independence can be crucial for fighting inflation, but also encourage them to be more supportive of government efforts to fight deflation and mass unemployment.”

Moe also highlights Eccles’ positions on the sustainability of public debt, some of which would place him in stark opposition to most deficit hawks today (and some doves, for that matter).  Here is Eccles, speaking in 1934:

“If a man owed himself, he could not be bankrupt, and neither can a nation. We have got all of the wealth and resources we ever had, and we do not have the sense, the financial and political leadership, to know how to use them.”

Read Moe’s one-pager here and his working paper here.