Archive for March, 2014

Modern Money In Six Short Videos

L. Randall Wray | March 31, 2014

I recently did an interview for Euro Truffa on six topics related to MMT. The website is here. They are transcribing my interview to Italian (I think that only two are up so far) and putting up the videos. They have also posted all of the videos to YouTube.

As you can tell, I did not realize they were recording the video—I might have tried to sit still if I had known. Also, the coffee had not quite kicked in so I was not entirely awake. Here are the links with just a brief indication of the topic for each.

The first two videos have already been embedded here. (1) The first one addresses all the (silly) (non)-controversy about “consolidating” the Government’s central bank and treasury for the purposes of analysis of fiscal and monetary policy operations. I provide three responses to the critics. (2) The second video tackles the belief that the Euroland crisis is due to current account “imbalances.” As I explain, the real problem is the abandonment of sovereign currency. No one describes the USA financial crisis as a problem of current account imbalances between, say, Alabama and New York. Why? We unified our currency—the dollar—but under Uncle Sam in Washington. The EMU only partially unified, without a central fiscal authority that issues the euro.

(3) In this one, I argue that a floating currency provides more domestic policy space. A country that floats does not need to accumulate reserves of foreign currency. Still, I do not argue that a floating exchange rate is always and everywhere the best strategy.

(4) This one addresses the Job Guarantee (or ELR) and questions about inflation and labor discipline. I argue that the JG provides a job to anyone who wants to work, but without sparking inflation or eliminating discipline. Note that Minsky, like Heinz, argues there are 57 varieties (I think I said 52—again, too early in the morning for me to be doing interviews) of capitalism and pickles.

(5) This segment continues discussion of the JG, arguing that it is morally reprehensible to keep people unemployed, poor, and hungry on the argument that this is necessary to avoid a trade deficit. I do not agree with Tom Palley, who objects to the JG on the argument that “the poor will want meals.” Give them jobs, let them eat. If you do not like trade deficits, then reduce imports of luxury goods bought by the wealthy.

(6) How to save the EMU? Some suggest a unified central bank system—like the Fed. I argue that the problem is fiscal policy, not monetary policy.

Here are the original questions, in English and Italian: continue reading…


Galbraith on Piketty’s “Capital”

Michael Stephens | March 27, 2014

From Senior Scholar James Galbraith’s review of Thomas Piketty’s much-discussed Capital in the Twenty-First Century:

Although Thomas Piketty, a professor at the Paris School of Economics, has written a massive book entitled Capital in the Twenty-First Century, he explicitly (and rather caustically) rejects the Marxist view. He is in some respects a skeptic of modern mainstream economics, but he sees capital (in principle) as an agglomeration of physical objects, in line with the neoclassical theory. And so he must face the question of how to count up capital-as-a-quantity.

His approach is in two parts. First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.

This, I fear, is a source of terrible confusion. […]

Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.

The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.

Read the rest at Dissent magazine.


Can a Parallel Financial System Solve the Greek Crisis?

Michael Stephens | March 26, 2014

In a new article, Dimitri Papadimitriou looks at the possibility of creating a parallel financial system — dubbed the “geuro” (following Thomas Mayer) — to help rescue the Greek economy:

Geuros would essentially be small denomination zero-coupon bonds: transferable instruments with no interest payment, no repayment of principal, and no redemption, that would be acceptable at par for tax payments. This kind of arrangement is well-known in public finance.

The government would use the alternative currency to pay domestic debts, unemployment benefits, and a portion of wages for public employees. And it would demand that a share of taxes and social benefits be paid in geuros.

Foreign trade would still require euros, which would remain in circulation, and Greece’s private sector would still do business in euros. The currency would be convertible only in one direction, from euro to geuro.

There’s a certain view that, if Greece weren’t in the eurozone, the ideal solution would be to devalue its currency and grow its way out of depression through exports. But since Greece doesn’t have its own currency, we’re left with “internal devaluation” — trying to boost exports through reducing unit labor costs. As Papadimitriou and some other members of the Levy Institute’s macromodeling team (Michalis Nikiforos and Gennaro Zezza) have pointed out, that internal devaluation strategy isn’t working — even though Greece “succeeded” in reducing its relative labor costs.

But what if it were possible for Greece, while remaining firmly in the eurozone, to create a financial instrument (the geuro) that would effectively operate as a parallel currency? Would export-led growth through devaluation of the new currency then become a viable possibility? The answer, according to Papadimitriou, is no, not really:

Why not stress exports? Price elasticity in Greece’s trade sector is low, our analysis shows, which explains why there hasn’t been much evidence of success in export growth. Of course exports are important, but even China, with its gigantic export-guided economy, has recognized the need to increase and stabilize domestic demand.

The value of creating an alternative currency like the geuro is not that it would enable devaluation, but that it would allow Greece to regain a measure of control over its fiscal policy: it could be used to fund the sort of stimulative policies that aren’t forthcoming under the reigning austerity regime. Papadimitriou explains in the article that a geuro-funded direct job creation program targeting 550,000 jobs (not counting the indirect employment creation) could boost GDP in Greece by 7 percent at a net cost of around 3.5 billion geuros per year. And as he points out, “there would still be a sizable euro surplus.” Read the whole thing here.

The article is based on the recent strategic analysis for Greece by Papadimitriou, Nikiforos, and Zezza, which uses the Levy Institute’s stock-flow consistent modeling approach.


MMT, the Consolidation Hypothesis, and Why Louisiana Won’t Leave Its Currency Union

Michael Stephens | March 18, 2014

In this interview with Euro Truffa, L. Randall Wray responds to some recent critiques of Modern Money Theory (MMT).

In the first segment, Wray defends the idea that we can, for the purposes of simplifying the analysis of affordability constraints faced by modern governments, safely disregard many of the self-imposed constraints on Treasury-Central Bank cooperation (this is sometimes referred to as the “consolidation hypothesis.” For more on this topic, see “Modern Money Theory 101: A Reply to Critics,” by Randall Wray and Éric Tymoigne, as well as Tymoigne’s recent working paper on Fed-Treasury operations in the United States).

In this next segment (sorry, video quality is bad, but audio is fine), Wray challenges the idea that the eurozone crisis is chiefly a balance of payments crisis.


Inflation, Deflation, and ECB Asymmetry

Jörg Bibow | March 13, 2014

It is quite interesting to see how popular myths can live on in the public’s mind and continue to cause harm and irritation even when the facts speak to totally different language. How can education fail so badly?

The particular example I have in mind here is Germans’ supposed exceptionalism in matters of inflation hyper-sensitivity. Whether or not Germans really are special in this regard, even internationally many observers seem to feel that Germans would be truly justified to be that way. Hence Germans are readily excused for doing stupid things because they seem to be justified that way. There is a highly relevant context to this today: the ECB’s asymmetry in mindset and approach.

I recently argued in a Letter to the Editors, “Beware what you wish for when it comes to ECB measures,” published by The Financial Times on February 26 2014, that there was actually nothing really new about the ECB’s revealed asymmetry regarding inflation versus deflation risks. At issue is a genetic defect inherited from the Bundesbank. In fact, there can be absolutely no doubt anymore about the ECB being asymmetric in mindset and approach, and more and more observers have come to realize that in more recent times. But there is also a long track record of asymmetric “stability-oriented” monetary policy that includes and precedes the ECB’s own life.

My letter prompted a response from a Mr Han de Jong, the Chief Economist of ABN AMRO Bank in Amsterdam, arguing that there would be a solid basis in history for Americans to fear deflation over inflation while the opposite is true for Germans, pointing to the Great Depression as the biggest trauma in US economic history of the last 100 years and contrasting it with Germany’s hyperinflation of 1922-23 (“Economic trauma scarred both the US and Europe,” Letters, March 3 2014).

This is surely right about America. While some US economists speak of the “Great Inflation” of the 1970s, which was followed by the Volcker shock and a double-dip recession in the early 1980s, this episode truly pales in comparison to the calamitous Great Depression experience of the 1930s. The memory of the Great Depression lives on in modern America. US policymakers are haunted by the ghosts of that historical episode. And that is a good thing!

When it comes to Germany, however, the story is less straightforward than is popularly held. continue reading…


Minsky Conference, D.C.: Stabilizing Financial Systems for Growth and Full Employment

Michael Stephens |

The Levy Institute’s annual Minsky conference will be held at the National Press Club in Washington, D.C. on April 9-10.

Day one features a speaker lineup that includes Sen. Sherrod Brown, Rep. Carolyn Maloney, head of the Chicago Fed Charles Evans, member of the Fed Board of Governors Daniel Tarullo, and many others. On day two, Jason Furman, Chair of President Obama’s Council of Economic Advisers (and recently featured in this Washington Post profile), asks “Is the Great Moderation Coming Back?”

The full conference program is online. Session titles include:

Financial Reregulation to Support Growth and Employment

Financial Regulation and Economic Stability: Was Dodd-Frank Enough, or Too Much?

The Global Growth and Employment Outlook: Cloudy with a Risk of … ?

The Euro and European Growth and Employment Prospects

What Are the Monetary Constraints to Sustainable Recovery of Employment?

Registration is open.


Call for Papers: 12th International Post-Keynesian Conference

Michael Stephens | March 10, 2014

Call for Papers_12th Internatl PostKeynesian


Export-led Growth for Greece?

Gennaro Zezza | March 8, 2014

In a recent post, Daniel Gros asks why Greece has failed to get out of recession through an increase in exports, as he claims happened in Portugal, Spain and Ireland.
He is suggesting that the problem lies in the economy resisting structural reforms:

“In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated”

“So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.”

Gros is therefore endorsing the Troika vision: European peripheral countries with a large current account deficit, and large government deficits, should use austerity to improve the public sector balance, and wage and price deflation to improve export competitiveness.
These policies have been devastating for Greece. Our first chart reports the level of real output: real GDP in Greece has fallen by almost 25 percent, relative to 2007, the last year before the recession started. Indeed, as we have argued, the recession in Greece has been worse than the 1929 Depression in the United States. In the other GIIPS countries the recession has been severe, but the fall in output has been much smaller. When capacity is reduced by a shock comparable to that of a war, it is hardly suprising that the exporting capacity is compromised as well.
Real GDP in GIIPS countries
Yanis Varoufakis, on Twitter, rightly commented on Gros’ post that Greek firms have been experiencing a severe contraction in credit, which is an additional reason to prevent any expansion in production and sales on foreign markets.
In addition, Greek exports were a smaller fraction of GDP, compared to the other GIIPS countries. The pattern of the response of the exports to GDP ratio during the crisis has been similar in Greece, Portugal or Spain, but as the next chart shows, exports in Greece were only 23 percent in 2007, compared to about 32 percent in Portugal or 27 percent in Spain, not to mention Ireland.
GIIPS share of exports on GDP
Last, but not least, our estimates of price elasticities for Greek exports suggest that they are low, so that increasing exports only through wage and price deflation will take a long time, and may even generate a fall in export revenues as long as the volume of exports does not grow sufficiently to outweight the fall in export prices.
Since Greece cannot expect to recover from exports (besides, export-led growth requires that your trading partners are willing to increase demand fo your products!), recovery can only come from government intervention, in one of the forms we have discussed in our last report.


Working Paper Roundup 3/7/2014

Michael Stephens | March 7, 2014

Central Bank Independence: Myth and Misunderstanding
L. Randall Wray
“This paper argues that the Fed is not, and should not be, independent, at least in the sense in which that term is normally used.

Our understanding of policy, of the policy space available to the sovereign, and of the operational realities of fiscal and monetary policy would be improved if we abandoned the myth of central bank independence.”

Changes in Global Trade Patterns and Women’s Employment in Manufacturing: An Analysis over the Period of Asianization and Deindustrialization
Burca Kizilirmak, Emel Memis, Şirin Saraçoğlu, and Ebru Voyvoda
“We provide estimates for total and women’s employment effects of world trade, evaluating the changes in trade flows in 30 countries (21 OECD and 9 non-OECD countries) for 23 manufacturing sectors by breaking up the sources of these changes between the trade with the North, the South, and China. …
Our results present a net negative impact of trade on total employment as well as on women’s employment in 30 countries over the period of analysis [1995-2006]. … Country level results show that the United States has by far the largest estimated employment losses from the change in structure of trade: 81 percent of the employment losses in the North originate in the US”

Full Employment: The Road Not Taken
Pavlina R. Tcherneva
“It is common knowledge that Keynesian stimuli are frequent policy tools to deal with recessions and unemployment; what is not commonly known is that modern ‘Keynesian policies’ bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run.”

From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy
L. Randall Wray
“This paper explores the intellectual history of the state, or chartalist, approach to money, from the early developers (Georg Friedrich Knapp and A. Mitchell Innes) through Joseph Schumpeter, John Maynard Keynes, and Abba Lerner, and on to modern exponents Hyman Minsky, Charles Goodhart, and Geoffrey Ingham. This literature became the foundation for Modern Money Theory (MMT).”

Modern Money Theory and Interrelations between the Treasury and the Central Bank: The Case of the United States
Éric Tymoigne
“[T]here is nothing written in stone in terms of fiscal operations. If tomorrow nobody is willing to take treasuries, the Treasury, with or without the help of the Federal Reserve, has the means to bypass that problem if it chooses to use them; it becomes a political issue rather than an economic one. The theoretical implication that MMT draws from this is that one can simplify the economic analysis without a loss of generality by assuming that the Federal Reserve directly funds the Treasury.”


Bibow on Deflation and ECB Measures: “Beware What You Wish For”

Michael Stephens | March 6, 2014

From Jörg Bibow’s recent letter in the Financial Times, reacting to an article by Wolfgang Münchau on deflation and ECB policy:

What is really new today is that wages are becoming unanchored and hence cease to provide the safety net that asymmetric central bankers habitually rely on. This is the consequence of the collective effort to restore competitiveness practised across the eurozone. Deflationary structural reforms of labour markets can only amplify this futile and hazardous process. But with the ECB applauding these efforts as the supposed panacea to the eurozone’s ills, what kind of miracle weapon can we expect the bank to deploy to halt the resulting plight?

Read the rest here.