Archive for September, 2013

Galbraith on Lehman’s Lessons, Five Years On

Michael Stephens | September 13, 2013

From a panel discussion yesterday at the George Washington University Law School on what we have(n’t) learned since the 2008 financial collapse (via Matias Vernengo). Galbraith begins by cautioning that these “lessons learned” frameworks often leave unchallenged the premise that the crisis is over and done with, when, as he argues, the events of 2008 were merely an “acute phase” of a broader crisis we are still living through.

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Waiting for Export-led Growth in Greece

Michael Stephens | September 12, 2013

The policy strategy being imposed on Greece by its international lenders depends on the success of something called “internal devaluation”: in the absence of being able to devalue its own currency, Greek wages have been cut in the hopes that this generates an export-led economic recovery. So, how is this going? As Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza explain in a new One-Pager, not very well.

The authors observe that Greece has succeeded in increasing the sort of “competitiveness” required by this strategy: it has lowered its relative labor costs more than any other country in the eurozone except for Germany. Furthermore, Greece’s net exports have expanded since 2009.

Mission accomplished? Not quite. One problem, the authors point out, is that 71 percent of Greek export growth since 2009 has come in the form of an increase in the value of trade related to its oil refineries — which is to say, in an area that has little to do with internal devaluation (and depends on volatile factors like changes in oil prices). Most of the increase in net exports came from a decline in imports (a result of the neverending recession).

But most important of all, the gains from net exports have not come close to offsetting the dramatic plunge in domestic demand, as you can see here (this figure comes from their July strategic analysis):

Fig8_Greece GDP Components_Strategic Analysis

Now, perhaps we just need to give the troika’s (EC/IMF/ECB) strategy more time. Perhaps exports will eventually pick up across the board (beyond refined petroleum products) and on such a scale as to generate a recovery. As this recent headline from Ekathimerini indicates, we shouldn’t be holding our breath: “Greek exports post worst performance in three years.” And the model developed by Papadimitriou, Zezza, and Nikiforos — based on the stock-flow approach of Wynne Godley recently featured in the New York Times, and tailored specifically to the Greek economy — suggests that it would take a very long time just to discover whether there’s anything to this theory of internal devaluation.

Meanwhile, the costs of sticking with the troika’s program look (socially and politically) unsustainable: the authors project that if Greece continues with current policies, it may be looking at an unemployment rate around 34 percent by 2016. (By comparison, the EC/IMF predict that if everything goes according to plan — and it is notable that, year after year, the Greek economy has consistently performed worse than their projections — unemployment will be “only” 20 percent in that year.)

Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza’s new One-Pager: “Waiting for Export-led Growth: Why the Troika’s Greek Strategy Is Failing” (pdf).

See also “The Greek Economic Crisis and the Experience of Austerity,” a Strategic Analysis.

For more details on their model, see this technical paper: “A Levy Institute Model for Greece.”


The Federal Government Is Not a Large Household or Business

Michael Stephens | September 11, 2013

The Heritage Foundation presents what one hopes it doesn’t believe is a clever critique of US public finances:


Brad Plumer has the inevitable takedown here. This pretty much sums up the inanity of these government-as-household analogies:

“Anyway, it’s a good analogy. The U.S. federal government really does resemble your typical money-printing family that owns lots of tanks, operates a giant insurance conglomerate, can borrow money at extremely low rates, and is assumed to be immortal.”


The Global Crisis, a Recovery (?), and the Road Ahead

L. Randall Wray |

I hope that all of you saw the very nice feature on Wynne Godley in the NYTimes. It is about time he’s getting the notice he deserved. I just came across a juicy quote from Wynne: “I want to say of neoclassical macroeconomics what I have sometimes said of certain kinds of fiction; I know that the world is not like that and I have no need to imagine that it is.”

Here’s an interview I recently gave to a Brazilian reporter.

Q: The crisis, which began with the collapse of Lehman Brothers on September 15, 2008, will complete five years. What has changed in the world economy during this period?

LRW: Unfortunately, the global financial system was restored to its 2006 status through massive bail-outs by the public sector. It was not reformed. It was not investigated and prosecuted for fraud. Essentially, it was allowed to go back to doing what it did in the years preceding the crisis. Our real economies are still “financialized” with too much debt and with the financial sector taking far too big a share of profits. As a result, in most developed economies around the world, the real sector is very weak.

Of course, the success story was the BRICs—which largely avoided the worst of the crisis and even made gains in their real sectors. China’s development of its economy is unprecedented.

Q: The crisis is over? Is near the end? Still going to get worse?

LRW: No it is not over—especially in Euroland. While it might appear that the USA, UK, and some other developed non-European countries have recovered, as I said their real sectors are weak and their financial institutions have resumed risky practices. The global economic system is fragile and a full-blown crisis could return.

Q: U.S., Europe and emerging countries, such as Brazil, faced the crisis in different ways. How to describe these differences and which country or region got more successful in dealing with the crisis? continue reading…


Work and Income as Economic Rights

Michael Stephens | September 10, 2013

In this video, Pavlina Tcherneva and Philip Harvey look at the job guarantee and basic income grant proposals in the context of a discussion of economic rights.

Tcherneva begins with the theory behind the job guarantee — a federally-funded (and in Tcherneva’s version, locally-administered) program that would offer a paid job to anyone willing and able to work — and then (16:10) turns to a real-world example that, while not quite a job guarantee, was in the family of direct job creation programs: Argentina’s Plan Jefes. (Tcherneva has a related working paper that analyzes the socially transformative potential of direct job creation, over and above its macroeconomic stabilization benefits, in the context of the alteration of Plan Jefes into a pure cash transfer program, Plan Familias.)

Philip Harvey (31:45) looks at the legal bases of the rights to work and income (beginning with US statutes) before moving on to a comparison of basic income guarantees with job guarantees:

This talk was delivered as part of Columbia’s “Modern Money” series; you can find links to background reading for this seminar here.


Barbera on the Case Against Mainstream Economics

Michael Stephens | September 6, 2013

Robert Barbera, a regular contributor to the Levy Institute’s Minsky conferences, has a great post at Johns Hopkins’ Center for Financial Economics on the cycle of amnesia and remembrance that seems to plague mainstream economic theorists. Here’s a key passage:

Perhaps the most indictable offense that mainstream economists committed, from 1988 through 2008, was to retrace, step by step, Keynes’s path of discovery from 1924 through 1936. Wholesale deregulation of finance and categorical confidence in a reductionist role for central banks came into being as the conventional wisdom embraced the 1924 view that free markets and stable prices alone gave us the best chance for economic stability. To add insult to injury, the conventional wisdom before the crisis was embedded in models called “new Keynesian” which were gutted of the insights of Keynes. This conventional wisdom gave license to a succession of asset market boom/bust cycles that defied the inflation/deflation model but were, nonetheless, ignored by central bankers and regulators alike. Quite predictably, in the aftermath of the grand asset market boom/bust cycle of 2008-2009, we are jettisoning Keynes, circa 1924, for the Keynes of 1936.

It’s worth reading the whole thing: “Exit Keynes, the Friedmanite, Enter Minsky’s Keynes.”


The Low Rates that Saved Wall Street

Michael Stephens | September 5, 2013

In a new One-Pager, Nicola Matthews sums up some of the findings from her analysis of the activities of the Federal Reserve’s special lending facilities set up during the last financial crisis. She contends that the Fed departed from a classical understanding of what central banks should do in liquidity crises but focuses in particular on the lending rates.

“[E]xamination of the data shows that most of the Fed’s emergency facilities lent at rates that were, on average, at or below (sometimes well below) market rates, with the big banks the primary beneficiaries,” she writes. Matthews notes that the top eight individual borrowers paid a combined weighted mean interest rate of 1.49 percent. The lowest rates went to Morgan Stanley and Goldman Sachs in December 2008, at 0.01 percent (on $50 million and $200 million, respectively).

These emergency facilities were also engaged in lending for sustained periods of time: excluding ST OMO and the support given to Bear Stearns and AIG, the average length of the lending facilities was 22 months. Matthews notes that these extended durations suggest that many of the banks receiving support may have been insolvent, rather than merely illiquid.

“So what?” you might ask. This was an extraordinary crisis, and it demanded an extraordinary response. Matthews argues that while Fed intervention was needed, the particular approach it took to its lender-of-last-resort function — “without penalty rates, without good collateral, or for sustained periods of time” — has perpetuated dangerous dynamics within the financial system: “Lending at or below market rates, allowing banks to negotiate these rates through auctions, and rescuing insolvent banks has not only validated unstable banking instruments and practices but also possibly set the stage for an even greater crisis.”

Read it here (pdf). This One-Pager draws from a working paper (pdf) that contains a detailed breakdown of the rates, durations, and recipients of each emergency facility’s loans.


The Long Battle for a Living Wage Goes On

Pavlina Tcherneva | September 2, 2013

(cross-posted from

This week workers in fast food restaurants across the country gathered to protest the minimum wage in the United States, which currently is a paltry $7.25, and to fight for a better standard of living. The battle for a living wage for the nation’s poorest workers is set against the backdrop of mass unemployment and the highest level of economic inequality in the U.S. in almost a century.

The first minimum wage laws in the U.S. were the result of a state-by-state effort in the Progressive era to secure a floor to a decent life to employed women and youth. The first of these was enacted in Massachusetts in 1912 and eventually led to the 1938 Fair Labor Standards Act, which instituted a minimum wage at the federal level.

The objective was fairness, economics opportunity, stability, and social cohesion. The problem was the unequal power between labor and capital—a rationale that even early neoclassical economists embraced on the grounds that it constrained labor’s bargaining power and reduced morale, productivity, and wellbeing.

The solution was to set the “rules of the game” so that working women could support their families and young workers would not fall prey to discriminatory practices of their employers. In the absence of such rules, economists thought, the market mechanism wouldn’t work. Firms simply could not be counted on to self-regulate or reinforce these rules. The minimum wage movement required legislation.

The Supreme Court initially resisted and ruled that the state laws were unconstitutional, but states and organized labor prevailed, and by the time the New Deal rolled around, the Supreme Court had changed its mind. It had begun to work with a much broader definition of “the public interest” and supported various state legislations to protect the “welfare of its citizens.” It was understood that the wellbeing of workers served an important public purpose.

American economists – neoclassical and institutionalists alike – all supported the movement, the legislation, and the rationale. This wonderful excursion in the history of the minimum wage movement and the history of economic thought by Robert Prasch (1999) shows that economists in the U.S. were virtually unanimous in their support. The objections largely came from the British, notably from Professor Pigou, until another British economist, John Maynard Keynes, disproved his argument. Not only were the assumptions behind the labor market mechanism unfounded in Pigou’s analysis, but the notion that the minimum wage caused unemployment was also theoretically and empirically flawed. As Keynes explained, reducing wages as a macroeconomic policy was a “method socially disastrous in the process and socially unjust in the result.”

A federally mandated minimum wage was not enough to secure fairness, economic opportunity, stability, and social cohesion. The missing piece was a policy for full employment – one that guaranteed jobs for all who wished to work. That came later with the work of John Maynard Keynes, John Pierson, William Beveridge, and others. All advanced specific policies for full employment that aimed to secure decent work at decent pay to anyone who was ready, willing, and able, regardless of whether the economy was reeling from a Great Depression or enjoying relative prosperity. The right to work was codified by the international community in the 1948 Universal Declaration of Human Rights and found a special place in Martin Luther King, Jr.’s “I Have a Dream” speech during the 1963 March on Washington for Jobs and Freedom.

The New Deal put full employment front and center on the policy agenda. Though it did not deliver a long-term job guarantee program, it boldly and successfully experimented with direct employment policies. The war mobilization delivered true full employment, but Keynes insisted that public policy could and ought to achieve the same in peacetime.

In 1949, the minimum wage nearly doubled at a time when the economy was as close to true full employment as it has ever been, and when direct job creation was the policy of choice to deal with unemployment. Full employment and high wages ushered in the Golden Age of the American economy.

Today we have neither. Mainstream economists have successfully convinced themselves and policy makers that true full employment is impossible and that the minimum wage is the root of all evil.

Jobs for all (via a Full Employment Program through Social Entrepreneurship, a Green Jobs Corp, or a Job Guarantee) and a doubling of the minimum wage is what the economy needs today. Keynes made the case, Martin Luther King, Jr. made the case, and the international community made the case.

Sometimes the good old ideas are the best new ideas.

Follow me on Twitter at @ptcherneva