Archive for December, 2013

How Reorienting China’s Fiscal Policy Can Reduce Financial Fragility

Michael Stephens | December 19, 2013

L. Randall Wray just published a one-pager on China’s policy options from the perspective of Modern Money Theory:

Since adopting a policy of gradually opening its economy more than three decades ago, China has enjoyed rapid economic growth and rising living standards for much of its population. While some argue that China might fall into the middle-income “trap,” they are underestimating the country’s ability to continue to grow at a rapid pace. It is likely that China’s growth will eventually slow, but the nation will continue on its path to join the developed high-income group—so long as the central government recognizes and uses the policy space available to it.

China doesn’t necessarily need an expansion of total government spending — what it needs, Wray argues, is to “shift spending away from local governments, which have limited fiscal capacity, and toward the sovereign central government, which has more fiscal policy space.” Local government budgets, which face solvency constraints (local governments actually need to raise revenue to pay debt service), are showing signs of being over-extended — and the reality is probably even worse than the data suggest, Wray points out, given that local governments have been relying on off-balance-sheet investment vehicles. By contrast, Wray observes that China’s central government, facing no risk of insolvency, has a relatively tight budget. The logic of the sovereign currency approach suggests that these stances should be reversed.

He also finds signs of financial fragility related to corporate sector debt — traces of what Minsky would have called “speculative finance” — and suggests that the transition to slower economic growth in China will likely create even more instability in this context (by making it more difficult to service private debt). According to Wray, using the central government’s ample fiscal policy space, enabling “a slow transition to relying less on corporate debt to finance economic growth,” should help reduce financial instability risks.

Read the one-pager here.


New Book on the Gender Impacts of the Global Economic Crisis

Michael Stephens | December 17, 2013

A new volume edited by the director of the Levy Institute’s Gender Equality and the Economy program, Rania Antonopoulos:

Gender Perspectives and Gender Impacts of the Global Economic Crisis

With the full effects of the Great Recession still unfolding, this collection of essays analyses the gendered economic impacts of the crisis. The volume, from an international set of contributors, argues that gender-differentiated economic roles and responsibilities within households and markets can potentially influence the ways in which men and women are affected in times of economic crisis.

Looking at the economy through a gender lens, the contributors investigate the antecedents and consequences of the ongoing crisis as well as the recovery policies adopted in selected countries. There are case studies devoted to Latin America, transition economies, China, India, South Africa, Turkey, and the USA. Topics examined include unemployment, the job-creation potential of fiscal expansion, the behavioral response of individuals whose households have experienced loss of income, social protection initiatives, food security and the environment, shedding of jobs in export-led sectors, and lessons learned thus far. From these timely contributions, students, scholars, and policymakers are certain to better understand the theoretical and empirical linkages between gender equality and macroeconomic policy in times of crisis.

From the table of contents: continue reading…


Why Returning to Glass-Steagall Isn’t the Answer

Michael Stephens | December 16, 2013

Dissatisfaction with the incomplete or timid nature of the 2010 Dodd-Frank financial reforms has generated interest in some alternative regulatory proposals. One alternative that’s fairly prominent in progressive circles revolves around the idea of returning to the structure of the 1933 Glass-Steagall Act.

In this video, Jan Kregel explains why we can’t go back. He argues that recent proposals to revive Glass-Steagall are based on a misunderstanding of what banks do and how they make their money.

You can find this video and others at the Levy Institute’s new YouTube page (videos of speeches and panel discussions from two recent Levy Institute Minsky conferences, in Rio and Athens, will be made available. More to come).


James Galbraith Makes It Simple

Michael Stephens | December 13, 2013

Q: “Now why do you believe the US government will never, ever have a problem funding its public expenditures and deficits?”

A: “Because the electricity supply to the computers that send those signals will never be cut off.”

Q: “It’s that simple?”

A: “Simple as that.”

If you want the more complicated version, Galbraith wrote a policy note a couple years back that explains why the long-term budget projections that elicit so much bipartisan anxiety are unjustifiably pessimistic with regard to the question of whether the US public debt is “sustainable” over the long term, which is to say, whether the public debt-to-GDP ratio will stabilize or continue to grow without limit.

On this question, as he explains, it’s all about the relationship between the rate of economic growth and the rate of interest on government debt. If the real growth rate is greater than the real interest rate on debt, then even a small primary deficit is consistent with a debt-to-GDP ratio that stabilizes over the long term.

(Paul Krugman also danced on the edge of this idea a few weeks back, as part of his meditations on “secular stagnation” and the possibility of real interest rates staying low (or negative) for the foreseeable future: “I don’t want to push this too hard, but I just want to make it clear that if we really believe in low or even negative normal real interest rates, conventional views of fiscal prudence make even less sense than people like me have been saying.”)


A Passing Storm or a Crisis of Capitalism?

Michael Stephens | December 12, 2013

C. J. Polychroniou:

A strong case can be made that what we have been witnessing since [2007-08] is not simply a severe financial crisis centered in the developed world but the fact that today’s capitalism is simply incapable of functioning in an economic way conducive to maintaining sustainable and balanced growth.

The so-called “financialization” of the economy, so prone to financial crises and meltdowns as the late Hyman Minsky has shown, cannot be understood independent of the production processes or developments in the real economy. Advanced capitalism had been facing severe structural stresses, strains and deformations — including overproduction, trade deficits, lack of job growth and elevated public and private debt levels — for quite a few decades prior to the eruption of the financial crisis of 2007-08.

Indeed, the “financialization” wave — which many have labeled “casino capitalism” or “stock market capitalism” but which amounts essentially to the deregulation of giant financial entities capable of shaping and controlling the fate of national economies — began as a result of the structural problems associated with the postwar regime of capital accumulation, whose collapse in the mid-1970s threatened the growing expansion of capitalism. Thus, “financialization” does not spring out of the blue but emerges as an alternative model to the decay of the postwar regime of accumulation.

Read the rest here.


Financial Governance for Innovation and Social Inclusion (Video)

Michael Stephens | December 10, 2013

The Levy Institute’s Jan Kregel and L. Randall Wray took part in a workshop at the UK House of Commons, November 25th, on “Financial Governance for Innovation and Social Inclusion,” organized by Mariana Mazzucato (SPRU) and Leonardo Burlamaqui (Ford Foundation) and hosted by Shadow Minister for the Cabinet Office, MP Chi Onwurah. Kregel and Wray’s presentations follow:



The rest of the speeches from day 1 can be found here.


When Robots Make Drones: The Brave New World of Secular Stagnation

L. Randall Wray |

Amazon’s Jeff Bezos is all over the news with his statement that drones will sooner or later be delivering packages to your home. Predictably, this has generated two types of buzz: what about the inevitable mishaps, and what about the poor displaced UPS workers?

For me, the first is a wee bit scary. Of course, you now have the prospect of being run over by a UPS driver whose workload has already been increased so much that he doesn’t have the time to drive carefully. With the coming of drones we’ll have to constantly scan the sky for incoming errant flights and packages falling to earth. I suppose the drones are scarier than the trucks.

However, it is the second worry that is getting most of the attention: What are we going to do as robots increasingly replace human workers? That sort of apocalypse has been featured in science fiction from time immemorial. Not only do we have the worry of rising unemployment of humans, but also the growing intelligence of robots as they realize they don’t need no damn humans any more. Ahhhnold Is Baaaack! Open the Bomb Bay Doors, Hal!

An interesting piece in Salon addresses these latter issues. Indeed, the title tells it all: “Amazon, Applebee’s and Google’s job-crushing drones and robot armies: They’re coming for your job next.”

Andrew Leonard lays out the issues nicely:

Nobody knows how it will play out, but one thing seems certain: We won’t have to wait too long to find out whether a robot apocalypse is going to ravage society. The sense of increasing momentum toward a more robot-infested future is undeniable. No matter what the regulators say, I find it impossible to imagine that there won’t be more drones in our skies, more tablet menus replacing human beings, more jobs accomplished by automation. Whether this transition is driven because it delivers true convenience for consumers, or whether it simply makes economic sense for the masters of capital, the logic of this technological evolution is inexorable….

Panglossians believe that robots will perform the world’s drudgery, ushering in an era of affluence and leaving humans free to nurture their creative instincts. Whether our creative instincts will be able to generate the capital necessary to purchase the products of robot labor is as yet unknown. I’ve noted before that the big difference between the current technological revolution and the Industrial Revolution is that the initial technological advances of the 18th century created jobs for unskilled workers, while today’s robot armies are increasingly replacing the jobs of unskilled workers…

When the warehouse and the delivery and the waitress and taxi driver jobs are gone, where do those workers go? Will our education system be robust enough to keep them ahead of the rising technological curve?

The typical economist’s take on this, however, is that by filling the lower-skilled jobs with robots, we will be able to move human workers into the higher-skilled work. Of course, as robots get smarter (or as we continually reduce complex processes to a series of simple steps—which has been the basis of automation since the days of Adam Smith), humans will be funneled into ever-higher-order tasks. Not to worry, say the economists, because we’ll need more and more robots, too. Hence, the final refuge for human workers will be to make the robots that do everything else.

Economist Joan Robinson (who should have been the first woman to win the Nobel for Economics—but was disqualified for taking the winning side of the “Capital Controversy” debate; note all the losers of that debate did get a Nobel, presumably as a consolation prize for losing to Robinson!) saw all this coming long ago when she wondered “But what do we do when robots make the robots?”

Back in 1991, I wrote about all this in a journal article: continue reading…


Is the Recession in Greece Ending?

Gennaro Zezza | December 9, 2013

The Hellenic Statistical Authority (ElStat) reports today that real GDP in the third quarter of 2013 has fallen by “only” 3 percent. More in detail, from their press release:

Total final consumption expenditure recorded a decrease of 6.6% in comparison with the 3rd quarter of 2012 (Table 4).
Gross fixed capital formation (GFCF) decreased by 12.6% in comparison with the 3rd quarter of 2012 (Table 4).
Exports increased by 5.7% in comparison with the 3rd quarter of 2012 (Table 4). Exports of goods increased by 2.4% and exports of services increased by 8.8%.
Imports increased by 2.3% in comparison with the 3rd quarter of 2012 (Table 4). Imports of goods increased by 2.6% and imports of services increased by 1.1%.

(Imports will be growing with exports also because, as we have argued, a large and growing portion of Greek exports are intra-industry trade connected to oil products.)

My personal guess is that these figures will be revised downwards.


In the chart above we show exports of services in euros, as published by ElStat, together with the Turnover Index in Accommodation and Food Service Activities, also published by ElStat. The definition of the index given by Eurostat is as follows: “The definition of turnover is rather straightforward. It comprises basically what is invoiced by the seller. Rebates and price deductions are taken into account as well as special charges that the customer might have to pay. Turnover does not include VAT or similar deductible taxes.”

The two figures in the chart seem to move with the same seasonal pattern (although they are not strongly correlated in growth terms). If we take the value of the index as a predictor of the value of exports for the third quarter of 2013, we should expect exports of services to grow at about 1.2 percent over the same quarter of the previous year — or less, since the chart suggests that exports are less volatile than the turnover index.

This is a much lower value than what ElStat expects for exports of services. Given that all other components of demand are in free fall, a decrease in real GDP of 3 percent YoY in the third quarter of 2013 seems to me to be on the optimistic side.


Three Links on the Eurozone Crisis

Michael Stephens |

1) In an interview with Roger Strassburg, James Galbraith discusses the “Modest Proposal,” a plan for resolving the eurozone’s multiple crises without creating any new institutions or amending any treaties. Galbraith is a co-author of the latest version of the proposal, joining Yanis Varoufakis and Stuart Holland (an earlier version was published as a Levy Institute policy note). The interview then turned to a discussion of next year’s potential US debt standoff in the context of Modern Money Theory.

Read Galbraith’s full interview here at Yanis Varoufakis’s site.

2)  Starting off from Wynne Godley’s 1997 observation that the fundamental problem with the EMU setup was the institutionalized divorce between fiscal policy and currency sovereignty, Rob Parenteau develops an alternative public financing instrument that attempts to get around this flaw:

… governments will henceforth issue revenue anticipation notes to government employees, government suppliers, and beneficiaries of government transfers. These tax anticipation notes, which are a well known instrument of public finance by many state governments across the US, will have the following characteristics: zero coupon (no interest payment), perpetual (meaning no repayment of principal, no redemption, and hence no increase in public debt outstanding), transferable (can be sold onto third parties in open markets), and denominated in euros. In addition, and most importantly, these revenue anticipation notes would be accepted at par value by the federal government in settlement of private sector tax liabilities.

Read the rest here at Naked Capitalism. Parenteau recently discussed the idea at the Levy Institute’s Athens conference. You can listen to his presentation here (Saturday, November 9, Session 4; slides available here).

Also, see Philip Pilkington and Warren Mosler’s related proposal for “tax-backed bonds,” recently updated.

3) Usually, when we think about the rising threat of authoritarianism accompanying Greece’s policy-induced economic disaster, we think about Golden Dawn, but C. J. Polychroniou argues that there’s more to the deterioration of Greece’s political culture than the growing popularity of the far-right party:

In today’s economically beleaguered Greece, where the repayment of foreign debt, the sale of public assets to private interests and the blocking of alternative routes to recovery define the official public policy agenda, the government has resurrected the many authoritarian practices of the past in an apparent effort to keep the game going for as long as possible.

Read the rest at Truthout.


Tax-Backed Bonds: Update and Response to Critics

Michael Stephens | December 6, 2013

Last year, Philip Pilkington and Warren Mosler argued that they had come up with a financial innovation that had the potential to help control the crippling borrowing costs faced by many member-states on the eurozone periphery. Their “tax-backed bond” proposal worked like this: if a member-state issuing these bonds defaulted on a payment, the bonds could, under such circumstances (and only under such circumstances), be used to make tax payments in the country in question (and would continue to earn interest).

This financial innovation attempts to address, obliquely, one of the critical design flaws of the eurozone setup: that member-states remain responsible for their own fiscal policy after having given up control over their own currency. (Dimitri Papadimitriou and Randall Wray explain here why separating fiscal policy from a sovereign currency was such a fatal mistake.)

Part of the idea behind the tax-backed bond proposal is that it would allow a member-state to enjoy borrowing costs that would be more comparable to those of a currency issuer (countries that issue their own currency have lower debt-servicing costs, even when their government debt-to-GDP ratios soar above some of the ratios seen on the eurozone periphery, because they can always make payments when due). Tax-backing is meant to assure investors that these bonds are always “money good.”

Since they first published their proposal, ECB President Mario Draghi had his “whatever it takes” moment, which contributed to a fall in sovereign debt yields on the periphery. Does this make the tax-backed bond moot?

Pilkington has just published an update on the proposal, and he explains why the idea is still relevant in a post-OMT eurozone. In addition to being able to further reduce borrowing costs, Pilkington argues that implementing this plan would enable troubled member-states to minimize or avoid the fiscal austerity imposed as a condition of the troika’s bailouts and backstops; it would “give eurozone member countries back their fiscal independence,” as he puts it.

Pilkington also responds to some objections that have been raised since the proposal was first published, including most notably those of Ireland’s Minister for Finance, Michael Noonan (the proposal was raised, and ultimately rejected, in the Irish parliament). Finally, Pilkington explains how the tax-backed bond could be used in non-eurozone context, referencing recent debates over Scottish independence.

Download Pilkington’s latest policy note: “The Continued Relevance of Tax-backed Bonds in a Post-OMT Eurozone

(The original tax-backed bond proposal, by Pilkington and Mosler, is here.)