Archive for January, 2014

Demand Management in the Age of Global Finance

Michael Stephens | January 31, 2014

From the preface to a new policy brief by Amit Bhaduri:

In our era of global finance, the theory of aggregate demand management is alive and unwell. In this policy brief, Bhaduri describes what he regards as a prevalent contemporary approach to demand management. Detached from its Keynesian roots, this “vulgar” version of demand management theory is being used to justify policies that stand in stark contrast to those prescribed by the original Keynesian model. Rising asset prices and private-debt-fueled consumption play the starring roles, while fiscal policy retreats into the background. …

While some might insist that the age of global finance leaves little room for the idea of demand management, Bhaduri contends that the theory survives, but that it does so in a form that is nearly unrecognizable from the original. This contemporary model of demand management receives its inspiration from the presuppositions of neoclassical economics, and its policy emphasis is often the very opposite of the old Keynesian model. … To support demand, the “vulgar,” or “Great Moderation,” model hinges on the interplay between expectations of ever-rising asset prices and a consumption boom driven by private debt.

Bhaduri cautions, however, that a model centered on private credit creation is prone to instability. More and more financial investment is needed to produce greater returns and boost asset prices, continually shifting the composition of investment from the real to the financial and creating the conditions for a delinking of finance from output and employment. When the paths of the financial and real sectors of the economy diverge, when incomes stagnate while debt and asset prices continue to rise, this creates the conditions for a financial crisis.

Read the brief here.


European Commission Kicks Off Fresh Round in its Never-ending Love Affair with Structural Reform

Jörg Bibow | January 24, 2014

The Commission’s latest “Quarterly Report on the Euro Area” makes an interesting read; at least to those who simply can’t get enough of the “structural reform” gospel that has been running high in the Commission’s corridors for the past 30 years or so. So be warned: For any more enlightened minds the report is mainly of interest for what it does not talk about.

One might perhaps start by congratulating the Commission for noticing that the euro area is falling behind internationally. In case you had not known, the euro area’s GDP is still about 3 percent below its pre-crisis peak level, domestic demand about 5 percent. Few other policymakers on this planet have such a stellar record to show for themselves. And the Commission is surely part of that gang.

The Commission does not wish to talk about the crisis too much though. It is more concerned with long-run trends that started some time before the crisis. In particular, the Commission points out that after catching up quite successfully with the US in terms of productivity levels and living standards from the mid-1960s up until the mid-1990s, something seems to have happened in the mid-1990s that enabled the US to persistently outperform the euro area ever since. What happened around that time that allowed the US to achieve respectable growth but prevented the euro area from fulfilling its promise? Well, it comes as little surprise that the Commission is quick to blame the euro area’s sluggish productivity performance on nothing but a supposed lack of growth-boosting “structural reforms.” Europe talked about its “Lisbon Agenda,” but never got round to implementing it, the Commission observes regretfully.

Needless to say, the Commission is even more convinced that now is the time to really go for it. continue reading…


Euro Delusion and Denial Keep Authorities Entranced

Jörg Bibow | January 22, 2014

Could it be that Mario Draghi is alone among the key euro authorities in recognizing that the euro crisis may not be quite over yet? Given that Mr. Draghi is also widely credited as the euro’s foremost savior, this seems more than just a little odd.

Recall that, almost magically, Mr. Draghi managed to pull the euro currency union back from that yawning abyss of acute breakup scares prevailing until the summer of 2012 – and with nothing but words: the simple promise “to do whatever it takes” to keep the euro whole.

As the markets have stayed calm ever since, the euro body politic has indulged in complacency. All the more so since the release of the first non-negative quarter-on-quarter GDP growth number for the spring of last year that saw the euro authorities engage in self-congratulatory shoulder-slapping, bravely declaring that the war on the euro crisis was won as their sound policies were finally starting to bear fruit.

European Commission president José Manuel Barroso just added another refrain to the chorus, predicting that 2014 would bring definite change for the better to the euro community. Interestingly, as delusion and denial seems to fully absorb other euro authorities, the ECB’s president alone is taking a more clear-headed view on the actual state of affairs and prospects for the euro currency union. I dare to venture that this may be because he is also all too aware of the fact that his monetary powers are actually quite limited.

It may be time for a sober stocktaking of where the eurozone stands regarding the successful resolution of its internal crisis. Is the economy truly on the mend? Has the euro policy regime been put on a sound and sustainable footing? continue reading…


Minsky on the War on Poverty

Michael Stephens | January 10, 2014

Roughly a year after President Johnson used the occasion of his first State of the Union address to declare war on poverty, Hyman Minsky presented a paper on the subject at a conference in Berkeley. Here’s what he wrote:

The war against poverty is a conservative rebuttal to an ancient challenge of the radicals, that capitalism necessarily generates “poverty in the midst of plenty.” This war intends to eliminate poverty by changing people, rather than the economy. Thus the emphasis, even in the Job Corps, is upon training or indoctrination to work rather than on the job and the task to be performed. However, this approach, standing by itself, cannot end poverty. All it can do is give the present poor a better chance at the jobs that exist: it can spread poverty more fairly. A necessary ingredient of any war against poverty is a program of job creation; and it has never been shown that a thorough program of job creation, taking people as they are, will not, by itself, eliminate a large part of the poverty that exists.

The war against poverty cannot be taken seriously as long as the Administration and the Congress tolerate a 5 percent unemployment rate and frame monetary and fiscal policy with a target of eventually achieving a 4 percent unemployment rate. Only if there are more jobs than available workers over a broad spectrum of occupations and locations can we hope to make a dent on poverty by way of income from employment. To achieve and sustain tight labor markets in the United States requires bolder, more imaginative, and more consistent use of expansionary monetary and fiscal policy to create jobs than we have witnessed to date. …

The single most important step toward ending poverty in America would be the achieving and sustaining of tight full employment. Tight full employment exists when over a broad cross-section of occupations, industries, and locations, employers, at going wages and salaries, would prefer to employ more workers than they in fact do. Tight full employment is vital for an anti-poverty campaign. It not only will eliminate that poverty which is solely due to unemployment, but, by setting off market processes which tend to raise low wages faster than high wages, it will in time greatly diminish the poverty due to low incomes from jobs.

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The Social Enterprise Sector Model for a Job Guarantee in the U.S.

Pavlina Tcherneva |

Jesse Myerson created a firestorm over mainstream media with his Rolling Stone piece “Five Economic Reforms Millennials Should Be Fighting For.” I’d like to address the very first of these reforms, the Job Guarantee (JG), as Myerson references my proposal for running the program through the non-profit sector and discussed it in several interviews on Tuesday.

Last month, I did a podcast with him about this program. Let me focus on some questions that keep popping up about the proposal, e.g., Josh Barro’s Business Insider piece.

What is the problem?

It is fundamental. It’s not just a problem of today’s deeply ailing economy. It’s permanent. There are always people willing to work, whom profit-driven firms do not wish to hire.  Even when economies are growing rapidly, there are never enough job openings for all who want to work. That number is 24.4 million people today: 10.9 million officially unemployed and 13.5 million in hidden unemployment (

The mark of unemployment is itself an obstacle to getting a job. The average employer equates 9 months of unemployment to 4 years of lost work experience. (Eriksson and Rooth AER, 2014). And so unemployment breeds unemployability, feeding the decades-long uptrend in long-term unemployment, while the economic, political and social costs are mounting.

Whenever I write about unemployment, I always stress the long run. The point is to solve the problem in recessions and expansions. Virtually no economist or pundit outside MMT makes this point. I predict that, while it is fashionable to entertain various solutions for the unemployed today, as soon as the economy recovers sufficiently, they will be forgotten.

It’s time to change the conversation from creating jobs for the jobless now, to creating jobs for the jobless always. The Job Guarantee provides the solution. I have explained elsewhere why neither the private sector nor the flawed bastard Keynesian pump-priming policies can get us there (here and here).

So let’s move right to the design and implementation of a JG through the non-profit sector.* continue reading…


Push for Job Guarantee Gains Momentum

L. Randall Wray | January 6, 2014

I just returned from the big annual meeting of economists (this time in Philly), at which we had a panel on the Job Guarantee. One of the papers on our panel was by William (Sandy) Darity and Darrick Hamilton, which demonstrated how imperative it is to implement the JG to reduce hiring discrimination in the labor market. Darrick (who presented the paper) pointed out that official unemployment rates for black Americans is chronically twice as high as that for whites; by conventional views of what constitutes Great Depression levels of unemployment, black Americans are in a Great Depression and are always suffering from at least recession levels of unemployment.

Darrick pointed out that even in good times, blacks with some college education have unemployment rates higher than white high school drop-outs, and even as high as whites who’ve been incarcerated. Sandy has supported the Job Guarantee since the earliest days—he was on the first panel we ever organized on the JG (back when we were calling it Public Service Employment). While the JG will not eliminate racial discrimination in the USA, it will go a long way in helping to provide a real opportunity.

The highest unemployment rates are among the young. As Sandy says, black teen high school dropouts have a 95 percent joblessness rate. You read that right. The JG would give them an alternative path to gainful employment.

Some years ago, Marc-André Pigeon and I did a study of joblessness. We found that during the Clinton boom years (when the overall unemployment rate finally reached the lows that were last achieved in the Johnson years), of the 12 million jobs created only 700,000 of them went to workers who had not attended college. We found that even with the relatively robust labor markets of the Clinton boom, “Well over half of noninstitutionalized high school dropouts remain out of the labor force, compared with only a quarter of those who attended college. If the current expansion raises the employment rate for high school dropouts by only about 3 percentage points over a period of 6 years, by simple extrapolation, the expansion would have to continue for another 78 years before the gap could be closed.” YEP. If we could maintain an economic boom for 78 more years, we could get the unemployment rate down across all the groups. That’s how boomy our economy needs to be to generate jobs for workers at the bottom of the queue.

(It won’t happen. We’d get very high inflation and asset bubbles before we boomed for even a decade. See our other article that looks in depth at those who are officially “out of the labor force” but who could be brought in if jobs were available. We estimated there were probably around 26 million potentially employable people left behind. In other work we looked at incarceration rates and compared the probabilities of employment rates and incarceration rates among prime age males across race and level of educational attainment. The results were horrific; I’ll report on that some time.)

Here are three recent, interesting, pieces on the JG proposal, two by Sandy Darity and one by Jesse Myerson at Rolling Stone: continue reading…