A New York Times article over the weekend delves into the history and rationale of the 2 percent inflation target, beloved of central bankers everywhere and a fairly recent innovation. Of course, the US Federal Reserve has a dual mandate, which includes both inflation and employment goals. The Fed said last week that it was most likely to start raising interest rates around the summer of 2015, but many countries’ central banks are moving in the opposite direction, solely because inflation is falling short of their targets.

Private borrowers—who usually have higher propensities to spend than lenders—benefit from an easing of the burden of debt when wages and prices move broadly upward. Also, for governments with debts that they cannot service with their own currency, inflation eases the burden of making payments, as tax revenues tend to rise in step with nominal wages and prices. Of course, falling prices have the opposite effect. The resulting changes in spending reverberate through the rest of the economy. Recent data show that there exists a strong threat of deflation around the world in economies such as Japan and the Eurozone, where core inflation has recently turned negative.

The effect of deflation on spending by indebted households was noted by Keynes in Chapter 19 of the General Theory (pp. 268-269). Michal Kalecki also argued to this effect in a critique of the so-called Pigou effect (falling prices would supposedly restore full employment by raising the inflation-adjusted wealth of households). The New York Times emphasizes instead the point that lower inflation makes it easier for some inflation-adjusted wages to fall, given that wages do not move downward as easily as upward. It also mentions that modest inflation permits central banks to lower real short-term interest rates below zero. Thoughts that deflation might be coming in much of the world are very sobering.

I highly recommend a movie to be released next year (that is, the year that begins next week). Terry Jones, of Monty Python fame, is one of the key developers of the film. It is on the Global Financial Crisis, but also provides a quick history of bubbles and crashes. It is highly entertaining and as good as any that I’ve seen on the crisis.

The movie features Hyman P. Minsky as well as J. K. Galbraith, who appear as life-sized puppets. One of Terry’s crew told me they brought Minsky over from England on a plane as a fare-paying customer. I would have loved to have seen the look on the faces of the flight attendants. I hope they bought him a beer.

Originally they were to film Minsky in his office at the Levy Institute, but when they saw pictures of it they said that there’s no way such a big and important economist could have had such an inauspicious office (albeit in beautiful Blithewood overlooking the Hudson). So they used a nice library down in Manhattan.

As Terry puts it, ”I wanted to be part of this project as soon as I discovered economics students are taught crashes just don’t happen.”

Here’s the blurb on the purpose of the project:

In revealing the truth about our unstable economic system, the film acts as the starting point for global project BoomBustClick.com – to get the world talking about change through education. A central hub for information, news and ideas, BoomBustClick is an online resource for everyone – can we change an unstable economic system? Can we adapt economics to human nature?

Terry interviewed me for the film. He’s as funny as you’d expect, but also deeply engaged and knowledgeable. Most of my interview ended up on the cutting room floor, but some bits survived.

You’ll also enjoy interviews with Steve Keen and Jamie Galbraith. Minsky’s son, Alan, is a natural before the camera. The actor John Cusack makes some memorable comments. Steve Kinsella and John Cassidy are good. My friend Zvi Bodie (best name in economics) is featured, as is Paul Krugman. The UK’s Andy Haldane–one of the regulators–does a bit of mea culpa for the profession’s failure to “see it coming.”

As an added bonus, the film has some catchy tunes that you won’t be able to get out of your head

Go to the project’s website for more info; I presume they’ll be posting up the film’s release date soon. There are some clips on the making of the film that you can enjoy now.

(cross-posted from EconoMonitor)

“This collection brings together distinguished scholars who have been influenced by Jan Kregel‘s prodigious contributions to the fields of economic theory and policy. The chapters cover and extend many topics analyzed in Kregel’s published work, including monetary economic theory and policy; aspects of the Cambridge (UK and US) controversies; Sraffa’s critique on neoclassical value and distribution theory; Post-Keynesianism; employment policy; obstacles in financing development; trade and development theories; causes and lessons from the financial crises in East Asia, Latin America, and Europe; Minskyan-Kregel theories of financial instability; and global governance. Combining rigorous scholarly assessment of the issues, the contributors seek to offer solutions to the debates on economic theory and the problem of continuing high unemployment, to identify the factors that determine economic expansion, and to analyze the impact of financial crises on systemic stability, markets, institutions, and international regulations on domestic and global economic performance.

The scope and comprehensive analyses found in this volume will be of interest to economists and scholars of economics, finance, and development.”

From the table of contents:

1. Jan Kregel’s Economics; Dimitri B. Papadimitriou
2. The Reconstruction of Political Economy: Alternative, Parallel Paths to Rediscovering the Distinctively Classical Surplus Approach; Mathew Forstater
3. Post-Keynesian, Post-Sraffian Economics: An Outline; Alessandro Roncaglia and Mario Tonveronachi
4. Money in The General Theory: The Contributions of Jan Kregel; L. Randall Wray
5. A Financial Analysis of Monetary Systems; Eric Tymoigne
6. Full Employment, Inflation and Income Distribution: Evaluating the Impact of Alternative Fiscal Policies; Pavlina R. Tcherneva
7. Can Employment Schemes Work? The Case of the Rural Employment Guarantee in India; Jayati Ghosh
8. Development Theory: Convergence, Catch-up or Leapfrogging? A Schumpeter-Minsky-Kregel Approach; Leonardo Burlamaqui and Rainer Kattel
9. The Access to Demand; Luiz Carlos Bresser-Pereira
10. Development Finance in the Era of Financial Liberalization; C.P. Chandrasekhar
11. From Miracle to Stagnation: The Last Two Stages of Mexico’s Economic Development; Julio López-Gallardo
12. The New Millennium Argentine Saga: From Crisis to Success and from Success to Failure; Mario Damill, Roberto Frenkel and Martín Rapetti
13. Global Governance for Financial Stability; Stephany Griffith-Jones and José Antonio Ocampo
14. What Did We Learn from the 1997-98 East Asian Crises?; Jomo Kwame Sundaram
15. Financial Crises and Countermovements: Comparing the Times and Attitudes of Marriner Eccles (1930s) and Mario Draghi (2010s); Erik S. Reinert
16. Can Basel III Work When Basel II Didn’t?; Fernando J. Cardim de Carvalho

You can download a sample chapter (pdf) from Palgrave.

Outside Money: The Advantages of Owning the Magic Porridge Pot
L. Randall Wray
“Money is always introduced into economic models through very simple ways—whether by ‘helicopter drops,’ ‘inheritance from the past,’ or ‘deposit multipliers.’ Once introduced, money is largely irrelevant—neutral in the long run and non-neutral in the short run only because of ad hoc assumptions. This casual and misleading treatment of money contributed to the two greatest economic disasters since the Great Depression: the Global Financial Crisis and the Euro Crisis. In both cases, economists ‘could not see it coming’ because their understanding of money was deeply flawed. In the first instance, they misunderstood ‘inside’ money and led the rush toward the financial excesses that inevitably led to the 2008 crash. In the second, they designed a currency system based on a fundamentally flawed understanding of sovereign currency, creating a union that would inevitably fail. The alternative framework offered by the state money tradition—broadly defined—provides the understanding that would have prevented both disasters.”

Minsky, Monetary Policy, and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies
Srinivas Yanamandra
“This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003–04 to 2013–14). The paper uses Hyman P. Minsky’s financial instability hypothesis as the conceptual framework for evaluating the endogenous nature of financial instability and its potential impact on monetary policymaking, and addresses the need to pursue regulatory policy as a tool that is complementary to monetary policy in light of the agenda of reforms put forward by Minsky.”

An Outline of a Progressive Resolution to the Euro-area Sovereign Debt Overhang: How a Five-year Suspension of the Debt Burden Could Overthrow Austerity
Dimitris P. Sotiropoulos, John Milios, and Spyros Lapatsioras
“This paper sketches a political proposal to the problem at the level of the euro area (EA) from a progressive viewpoint. Dealing with the debt overhang in an increasing number of EA economies is primarily a political issue. The related technical details are not politically neutral: they are integral parts of political strategies attempting to influence the outcome of the ongoing social and political struggles all over Europe.”

“Our main strategy is for the European Central Bank (ECB) to acquire a significant part of the outstanding sovereign debt (at market prices) of the countries in the EA and convert it to zero-coupon bonds. No transfers will take place between individual states; taxpayers in any EA country will not be involved in the debt restructuring of any foreign eurozone country. Debt will not be forgiven: individual states will agree to buy it back from the ECB in the future when the ratio of sovereign debt to GDP has fallen to 20 percent. The sterilization costs for the ECB are manageable. This model of an unconventional monetary intervention would give progressive governments in the EA the necessary basis for developing social and welfare policies to the benefit of the working classes. It would reverse present-day policy priorities and replace the neoliberal agenda with a program of social and economic reconstruction, with the elites paying for the crisis.”

The Determinants of Long-Term Japanese Government Bonds’ Low Nominal Yields
Tanweer Akram and Anupam Das
“Japanese government bonds’ (JGBs) nominal yields have stayed exceptionally low since the mid 1990s, even though the country experienced chronic fiscal deficits, the government’s net and gross debt ratios rose sharply and remained elevated, and international credit rating agencies have downgraded its yen-denominated sovereign debt several times. This is contrary to the conventional wisdom, which holds that higher government deficits and indebtedness lead to upward pressures on government bonds’ nominal yield.”

“The theoretical reasons for long-term JGBs’ low nominal yields are simple: (1) The government of Japan exercises monetary sovereignty and Japan’s government debt is issued in its own currency, (2) the BOJ largely controls short-term interest rates by setting the policy rate, and it also influences JGBs’ nominal yields though asset purchases, forward guidance, and communication tools, (3) low inflation and deflationary pressures have also contributed to keeping JGBs’ nominal yields low in Japan, and (4) the demand for government debt remains strong, as the country’s domestic financial institutions hold the bulk of it.”

The Levy Economics Institute of Bard College co-organized an international conference on November 21-22 in Athens, Greece, on the continuing crisis in the eurozone.

Among the speakers were:

• Elga Bartsch, Morgan Stanley’s chief European economist;

• Peter Bofinger, a German academic economist and a member of the German Chancellor’s Council of Economic Advisers;

• Marek Belka, governor of Poland’s central bank;

• Giannis Dragasakis, a Greek politician and member of the Greek parliament for the Coalition of the Radical Left (SYRIZA);

• Heiner Flassbeck, a former director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD) and former vice minister of the German Federal Ministry of Finance;

• Patrick Honohan, governor of Ireland’s central bank;

• Stuart Holland, a British academic economist teaching in Portugal and a former member of the British parliament;

• Stephen Kinsella, an Irish academic economist;

• numerous Greek economists, including Panagiotis Liargovas, the head of Parliamentary Budget Office at Greek Parliament; and, last but not least,

• scholars from the Levy Institute, including its president (Dimitri B. Papadimitriou), who heads the Institute’s macro-modeling team projects.

Adding to this rather illustrious list of speakers were panel moderators from The New York Times, Wall Street Journal, Bloomberg News, National Public Radio (USA), and various daily newspapers in Greece.

While there were some disagreements on policy matters among the panelists, it seems that most speakers reached the following conclusions: continue reading…

The Levy Economics Institute Master of Science in Economic Theory and Policy is an innovative degree program focusing on empirical and policy analysis, with extensive research opportunities. To learn more about the program and receive an application fee waiver, attend one of our upcoming webinars:

Saturday, December 6, at noon (EST): Co-hosted by Program Director Jan Kregel. Research focus: Monetary Policy and Financial Structure

Wednesday, January 7, at 5pm (EST): Co-hosted by Research Scholar Michalis Nikiforos. Research focus: Macroeconomic Theory and Modeling

To join a webinar, simply click here at the time listed above.

Please visit our website for more information about the program: www.bard.edu/levyms/

Regular Decision deadline: January 15. Scholarships available.

Dean Baker, everyone’s favorite progressive economist (mine, too), has an interesting take on our unemployment problem: Give more paid vacations.

The idea is that if all the employed work less, employers will need to hire the unemployed to produce what the already employed won’t be producing while sunning themselves on Florida’s beaches.

Look, I’m all for shorter workweeks. It is ridiculous that labor’s push somehow got stuck a century ago at the 40-hour workweek in the USA. Employed Americans work more hours per year than just about any other workforce on the planet.

But, as Joan Robinson once declared, the only thing worse than working as a wage slave is to be unemployed. Just ask the Italians, who now have the highest unemployment rate since they started keeping records. Thanks to the EMU and German fiscal rectitude!

I see shorter work days and more paid vacations as a progressive goal to humanize the work place. More time to enjoy one’s family, recreation, and the arts. More time for self-improvement and community involvement. More time for our wage slaves to enjoy the life of leisure long pursued by the leisure classes.

However, last on my list of arguments for a shorter workweek would be the claim that it will create more jobs for the unemployed. continue reading…