As deflation sets in in the economies of Europe and Japan, Robert Kuttner’s words in Debtor’s Prison: The Politics of Austerity versus Possibility—an interesting, readable new volume—complement those of many of the Levy Institute’s scholars. The book argues that during the financial crisis and its aftermath, policymakers continually relied on excessively optimistic projections of economic growth. Hence, stimulus plans adopted by Congress were not up to the task. Meanwhile, monetary policy could do little more than keep the crisis from worsening. As a result, the recovery remained exceedingly weak, and deficits overshot estimates to boot. Kuttner notes that in spite of the end of the recession, US growth rates on the order of 1.7 percent in 2011 and 2.2 percent in 2012 have not been high enough “to blast out of the deflationary trap.”

The more recently released annual growth rate of 2.4 percent for 2014, as well as the 2.2 percent final figure for the year before, indicate that he is right when he argues against the political “consensus” that “borrowing money is the last thing the government should do.” In fact, fiscal policy still needs to be made more stimulative, perhaps through increased infrastructure spending. Kuttner decries a situation in which an “austerity lobby” is set to bat down such efforts in Washington.

Also notably, Kuttner uses a detailed historical argument to challenge the notion that fiscal austerity is the answer to foreign debt problems in highly indebted economies such as Greece. In essence, keeping economies in a debtor’s prison is not in anyone’s interest.

Kuttner’s book, published just last year, addresses many other big policy issues, including health care, all in relation to deflationary fiscal austerity and the problems and non-problems posed by high levels of different types of debt. His lucid argument brings home the sometimes counterintuitive insight from John Maynard Keynes that an increase in government borrowing is actually desirable in a world facing a huge unemployment problem. This situation, faced by policymakers, in fact differs completely from that of a household that is heavily indebted and finding itself with inadequate disposable income. “Austerity economics,” Kuttner points out, “conflates several kinds of debt, each with its own causes, consequences, and remedies. The reality is that public debt, financial industry debt, consumer debt, and debt owed to foreign creditors are entirely different creatures.”

For our Spanish-speaking followers, my Modern Money Primer has just been released in Spanish and is available:

Here’s the description of the book:

El esfuerzo intelectual que se realizó en el campo de la física tras la aparición de la teoría de la relatividad o del modelo copernicano, no se llevó a cabo en la economía tras la aparición del dinero fíat. Teoría Monetaria Moderna es la plasmación de dicho esfuerzo intelectual. En este libro se expone claramente qué es el dinero en realidad y lo que es más importante se exponen las políticas económicas que deberían llevarse a cabo para llevar a la práctica un programa político coherente con dicha realidad. L. Randall Wray es doctor en economía y profesor en la Universidad de Missouri-Kansas City, así como director de investigaciones del Center for Full Employment and Price Stability. Además, pertenece al Levy Economics Institute of Bard College de Nueva York.

I’ll be in Madrid for the book launch. See you there. More details to follow.

“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.

The first collection of essays by Jan Kregel, focusing on the role of finance in development and growth, has just been made available through Anthem (edited by Rainer Kattel).

From the foreword by G. C. Harcourt:

As I wrote in my remarks when Jan and I were the co-recipients of the 2011 Veblen Commons Award, “I regard Jan as the best all-round general economist alive” (Journal of Economic Issues, XLV, June 2011, 261). I have been nagging him for years to bring out a volume (preferably volumes) of his essays for surely, in his case, the whole is greater than the sum of the parts, splendid though each part is. … Jan is steeped in the history of our subject. He has an intimate knowledge and understanding of the work of past greats and the relevance of their contributions to their times and ours. Jan has an especially deep understanding of the nature of money and finance, and of the institutions associated with them and of the indissoluble relationship between them and the real economy, whether in developed or developing economies. He couples this with a flair for designing humane, realistic policies, in the process bringing out clearly the shortcomings of existing institutions and policies in a wide variety of settings.

Opinions heard on the subject of money and the economy often seem uninformed or absurd. For a great book about money and monetary theory, I would strongly recommend Money: The Unauthorized Biography by Felix Martin, a 2014 book from Alfred A. Knopf. This book might just please students of history and finance and others who might already be familiar with one theory or another about the origins of money and ways of managing a monetary system. These and other readers might benefit from a readable account of these theories up to the current time and what they might have to say about the recent financial crisis and its roots in theory and practice.

Martin is critical of mainstream finance as well as orthodox macroeconomics, and friendly to points of view related to Hyman Minsky’s financial fragility hypothesis and other truly monetary forms of economics. The latter were introduced to the civilized world by John Maynard Keynes, Bagehot, Wynne Godley, James Tobin, our own Randy Wray, and others sometimes mentioned in this blog. But as the new book shows, their intellectual roots in monetary thought go deeper into the centuries. Martin’s accounts seems fair all around. I think it will be one of those books that offers almost everyone who reads it something surprising and of interest.  Nonetheless, the book is one of those many signs of widespread recognition that Keynes’s monetary production theory and related points of view offer a vantage point that the mainstream missed, helping to bring on the financial crisis. It is a fascinating and lucid read.

(By the way, the New York Times Book Review ran a favorable review earlier this year in an edition that covered many titles related to the theme of money–some not so good.)

As you may have guessed, I have been doing some reading of new books from a summer trip to my local bookstore and hope to get to more of them in posts in the near future.

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

Regarding spurious policy arguments about “excessive growth of the money stock”: Ed Dolan posts helpfully to Economonitor on the more realistic approach suggested by the theory of endogenous money. In particular, I took note of the following passage, which brings up a point that I wrote about recently:

 “Formally, a model that includes a minimum reserve ratio or target plus unlimited access to borrowed reserves would not violate the multiplier model, in the sense that at any given time, the money stock would be equal to the multiplier times the sum of borrowed and non-borrowed reserves. However, the multiplier would have no functional effect, since the availability of reserves would no longer act as a constraint on the money supply. Economists describe such a situation as one of endogenous money, by which they mean that the quantity of money is determined from the inside by the behavior of banks and their customers, not from the outside by the central bank.”

In this simplified setting, the constant known as the “money multiplier” becomes the “credit divisor,” a concept defined in a short article I wrote recently for the forthcoming Elgar volume Encyclopedia of Central Banking.

Using the divisor D, instead of

bank reserves ×  M = money,

one can write

credit/D = bank reserves.

The equation reflects a theory in which causality runs from left to right, reflecting the endogeneity of reserves.

Indeed, the divisor is far more realistic as a model of the money-creation process than the money multiplier. The collapsing money multiplier in the figure in Dolan’s post corresponds to a rapidly rising credit divisor.

The post also points out that after loan demand, “the second constraint is bank capital.” The post notes that when this constraint is binding, the idea of a “reserve constraint” is still more irrelevant. Also, a profitable and solvent bank that wishes to expand its lending can usually increase its capital by retaining earnings or by other moves, as Marc Lavoie and others have pointed out in the academic literature. Moreover, Lavoie observes that a commercial bank having difficulty raising capital might be able get the central bank to purchase its shares in some countries.  Lavoie’s account can be found in his fairly comprehensive essay, “A Primer on Endogenous Money,” in Modern Theories of Money, edited by Louis-Philippe Rochon and Sergio Rossi, Edward Elgar, 2003.

From a policy perspective, a fast-growing stock of money is not generally a “cause” of inflation, though it can be an effect of rising prices or economic activity. (Of course, interest rates that were low enough long enough could cause inflation in a situation in which there was a lack of unused productive capacity.) Central banks cannot fix the growth rate of money to achieve a desired inflation rate, by setting the growth rate of bank reserves. For, as the concept of the credit divisor illustrates, the latter are also endogenous in a modern banking system.

Paul Krugman warns against “caricaturing” Keynesian economics, and in particular the General Theory (GT), Keynes’s best known work. One caricature heard from time to time is that the book is not mathematically tractable. The caricature also claims that no one has succeeded in fitting such a contradictory and confusing bunch of arguments into a clear, mathematically coherent model. Okay, in the spirit of a concession to these macro skeptics, what follows is a schematic caricature of sorts that seems okay to me as a broad summary of the first 18 chapters or so of the book, from a classic book by Pasinetti. So for those who insist that (1) they need a preview in a very concise form or (2) that they will never have time for the lengthy and complicated GT, below is the aforementioned schema. It is only meant to show that one can in fact simplify this oft-misinterpreted work quite a bit using mathematical symbols and keep the gist of the first part of the story.

where the variables are defined as follows:

L = liquidity preference (psychological factors affecting long-term interest rates, especially expected future rate changes)

M-overbar = policy-determined money supply

I = nominal interest rate

E = expected profitability of investment projects, given economic conditions

C = consumption

I = investment

Y = total output

All arrows (→) show directions of causality, so that A→B means that knowing A allows us to determine B.

Finally, f(), ψ(), and φ() signify functions endowed with properties that allow one to use math to analyze the model.

(I have altered some of Pasinetti’s notation slightly.)

As Pasinetti points out, this causal schema is different from Krugman’s favored IS-LM model, and it does leave out much that is important, including changes in the numéraire (chapter 19) and long-run dynamics, which the formal argument left up in the air. In a footnote, Pasinetti says that the model is only a first approximation to Keynes’s theory, and that care should be taken with attempts to do exercises involving shifts in the curves. But while Pasinetti’s schema, and the simple model it represents, certainly succeeds in simplifying the GT, it is really not a caricature. The original version of the schema can be found in Growth and Distribution, by Luigi Pasinetti, chapter II, Cambridge University Press, a 1974 collection of generally lucid essays (publisher’s book site).

A new book by the Levy Institute’s Randall Wray and Éric Tymoigne (release date July 31):

I returned to the Levy Institute yesterday after the International Post Keynesian Conference in beautiful Kansas City. I will mention some of the news from the conference, for readers who are interested in the kinds of events that Levy Institute scholars attend.

At such conferences, ideas are taken very seriously, and many interesting debates were simmering at this one.  Theories and models abounded. Many of them went right to the heart of the causes of the financial crisis.

Speaking of interesting, students were among those attending and helped to organize the conference. Some were selling official conference t-shirts as well as used books in the vendors’ area. I haven’t had a chance to try my shirt on, having returned home only Sunday night on a delayed flight.

Many of the giants in the field were there.  A surprise event in honor of the Institute’s Jan Kregel took place last Thursday night, the first night of the conference.  Kregel recently joined Paul Davidson as an editor of the Journal of Post Keynesian Economics. A new Post Keynesian economic policy forum is online, and many from the Institute are editors. This new paperback from Eckhard Hein and Englebert Stockhammer, also on display at the conference, explains some of the ideas and history of this school of economists, including their conferences. Post Keynesian and Keynesian economics have of course been resurgent in recent years, and the topic of Hyman Minsky (whose archive is here) in particular frequently came up in the presentations and discussions among the economists.

An enjoyable keynote speech by noted author Robert Skidelsky came after the conference was officially adjourned. Skidelsky argued in favor of an “underconsumptionist” interpretation of the current world economic situation. In other words, a tilt in income distribution reduces spending by the masses. He noted that Keynes himself deployed such an argument in his later work, though his 1936 General Theory of Employment, Interest and Money emphasized that volatile investment, driven by changing expectations, largely accounted for fluctuations in total output and employment.  The speech also mentioned the views of Depression-era Fed Chair Marriner Eccles, which were featured in this recent post by Thorvald Grung Moe, another conference participant.  Skidelsky also discussed his new book, How Much Is Enough? (Amazon link), which is coauthored by Edward Skidelsky.

As for myself, I presented my most recent Levy Institute working paper and two example computable documents based on the model. The documents, which allow one to experiment with the model, along with links to the paper, appear in this May post.*  A somewhat skeptical Marc Lavoie, Fred Lee, and Sunanda Sen asked questions during the Q and A. After the session, Davidson was kind enough to bring up a few important issues that did not figure in my paper and presentation, including the key role of household credit, which has, however, been an important part of some previous work by me and other macroeconomists at the Institute (like this 2007 brief on the potential for a mortgage crisis, which I coauthored with Dimitri Papadimitriou and Gennaro Zezza).

*Note: The post is now slightly revised.- G.H., October 3.