In an op-ed in today’s LA Times Dimitri Papadimitriou makes the case for a direct job creation program:

It’s unreasonable to expect private enterprises to solve these problems. Full employment isn’t an objective of businesses. … There simply isn’t any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work. …

At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate — in this case, a wage — is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.

Papadimitriou goes on to describe successful examples of direct public service job creation programs around the world, and finishes with a discussion of the need for decent monitoring and evaluation systems for these programs (a set of topics highlighted in the recent Levy Institute report on the framework of a direct job creation program for Greece).

We’ve now seen a long string of employment reports in the US in which modest private sector job gains have been paired with continuing job losses in the public sector.  Sometimes (sometimes) the most straightforward-sounding policy solutions really are the best.  When a government faces an unemployment crisis like the one we’re in now it should, after ensuring that lower levels of government (states and municipalities) have the means to stop firing so many people, go ahead and start paying more people to do useful things.

This country is filled with sick, neglected, disabled, and vulnerable children and adults who need care, and plenty of roads, bridges, and school buildings in various states of disrepair or obsolescence.  Now would be a good time to pay some people to do something about it.

Read Papadimitriou’s op-ed here.

The Levy Institute research he references indicating the dramatic employment creation effects of investing in care services versus physical infrastructure (double the jobs created per dollar invested) can be read here, here, and here.  If you only have time for the one page version, see here.

These two stories need to get together in a room and talk:

1) Demand for US debt is really high.

2) Government (net) investment is at a 40-year low.

Notice that neither of these facts plays any noticeable role in the policy debates that dominate the US political scene.  There we’re offered a choice of competing visions between radicals who claim that current levels of government spending and investment represent the collapse of free civilization, and conservatives (only, we don’t call them that) who seem to think that we have the share of public investment more or less right (give or take a few dollars for green energy).

The Levy Institute, with underwriting from the Labour Institute of the Greek General Confederation of Workers, has helped design and implement a program of direct job creation throughout Greece. Two-year projects, financed using European Structural Funds, have already begun.

This report by Senior Scholar Rania Antonopoulos, President Dimitri B. Papadimitriou, and Research Analyst Taun Toay traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. Overall, the report aims to aid policymakers and planners in channeling program resources to the most deserving regions, households, and persons; and in devising data collection methodologies that will facilitate accurate and useful monitoring and evaluation systems for a targeted employment creation program.

On its own, the report provides an excellent in-depth portrayal of the evolution of the Greek economy since joining the euro and traces some of the harrowing challenges ahead—particularly in youth employment (the youth labor force participation rate is 20 percent below the OECD average—what’s happening in Greece will truly mark an entire generation).

For those interested in the policy side, the report also provides a solid introduction to the conceptual justification behind a direct job creation program along the lines of Hyman Minsky’s “employer of last resort” idea (beginning on p.33 of the report), while also detailing some of the nuts-and-bolts monitoring and evaluation aspects of making this kind of policy work.

It’s difficult to know where to begin with this post from Casey Mulligan (the comments are definitely worth reading). He starts off by implying that those who might want to characterize the recession as involving “a lack of hiring” are simply misled by the nature of aggregate data on hiring and separations. He goes on to say this is due to the fact that turnover rates (and therefore hiring and separations) for younger people are higher throughout the business cycle than for older workers. He links to this 2010 Brookings paper by Michael Elsby, Bart Hobijn and Aysegul Sahin. Unfortunately for Mulligan’s point, the authors have this to say:

Measures of unemployment flows for different labor force groups yield an important message on the sources of the disparate trends in unemployment across those groups: higher levels and greater cyclical sensitivity of joblessness among young, low-skilled, and minority workers, both in this and in previous downturns, are driven predominantly by differences in rates of entry into unemployment between these groups and others. In sharp contrast, a striking feature of unemployment exit rates is a remarkable uniformity in their cyclical behavior across labor force groups—the declines in outflow rates during this and prior recessions are truly an aggregate phenomenon.[p.3]

While Mulligan states, correctly, that “[e]stimated job separations among employees ages 25-54 were 33 percent greater in 2009 than they were in 2007,” he stumbles into trouble by asserting that “the low employment rates for young people since 2007 are almost entirely explained by low hiring rates.” While the latter statement is true, it is also true, and conspicuously absent from Mulligan’s piece, that hiring rates fell as much for older workers as for younger workers. Figure 8 of the Elsby, Hobijn and Sahin paper clearly shows this dynamic: hiring has dropped precipitously for all age groups since 2007, while separations increased by much more for older workers and remains higher than the 2007 level.

Given the plunge in hiring detailed in the paper Mulligan refers to, what is one to make of this argument:

Before the recession began, quits were by far the most common type of separation; now the number of quits about equals the number of layoffs.

Perhaps the decline in quits is a signal of what’s ailing the economy, although I view it largely as a consequence of the unemployment insurance system. A person who quits his or her job is not eligible for unemployment insurance. As a result, calling a job separation a “quit” rather than a “layoff” results in the loss of unemployment benefits.

For some strange reason, Mulligan chooses to focus on separations, rather than unemployment inflows, and then blames unemployment insurance for this trend (Casey-watchers will have seen this coming a mile away). Of course, separations includes people who leave one job to go to another job. Separation trends from quits and layoffs are reported in Figure 11 in the Elsby, Hobijn and Sahin paper (see below), which I guess is where Mulligan got that trend. Interestingly, that same figure also shows inflows into unemployment from layoffs and quits, which paint a somewhat different picture than the one Mulligan wants us to see: continue reading…

Michael Hudson has an article appearing in the Frankfurter Allgemeine Zeitung on the history of debt and democracy.  For those who can’t read German, Hudson has produced an abbreviated English version.  An excerpt:

The idea of an independent central bank being “the hallmark of democracy” is a euphemism for relinquishing the most important policy decision – the ability to create money and credit – to the financial sector. Rather than leaving the policy choice to popular referendums, the rescue of banks organized by the EU and ECB now represents the largest category of rising national debt. The private bank debts taken onto government balance sheets in Ireland and Greece have been turned into taxpayer obligations.

Read the English version here.

In a new one-pager, Dimitri Papadimitriou and Randall Wray team up to offer their take on the confusion that seems to afflict many approaches to the eurozone crisis. Government spending did not cause this crisis, they argue, and austerity will not solve it.  Wray and Papadimitriou include this chart showing both government and private debt ratios for key EMU nations.  They note that prior to the crisis only Italy and Greece were substantially beyond the 60 percent Maastricht limit for government debt.  But if you look at private sector debt, every one of these countries had debt ratios above (well above, for most) 100 percent of GDP.  (click to enlarge)

The problem, in other words, goes well beyond Mediterranean profligacy.  “There was something else going on here;” they write, “something that has been in the works for the past 40 years: a general trend in the West of rising debt-to-GDP ratios. While government debt is part of this trend, it is dwarfed by the rise in private debt. Taking the West as a whole, government debt grew from 40 percent of GDP in 1980 to 90 percent today, while private debt grew from over 100 percent to roughly 230 percent of GDP.”

Moreover, tackling the crisis through austerity is bound to fail as long as policymakers continue to be oblivious to balance sheets.  The only way that austerity in the periphery will not cripple economic growth (and therefore worsen the private debt problem) is if there is a substantial reduction in current account deficits in the periphery.  But this is only possible if Germany reduces its current account surplus—and there is no evidence that key policymakers will make this happen.  That leaves us, say Wray and Papadimitriou, with deflation as the only mechanism for restoring competitive balance.  In other words, it leaves us with an approach that makes default, and the collapse of the EMU, more likely.

Read the one-pager here.

Dan Monaco, writing for The Straddler, attended this year’s Minsky Summer Seminar at the Levy Institute and put together an engrossing (and accessible) article that looks at the work of Hyman Minsky, paying particular attention to Minsky’s interpretation of Keynes (including his views about the misinterpretation of Keynes by mainstream economics).  The article is sprinkled with excerpts from Monaco’s interview of Dimitri Papadimitriou:

“Economists have lost their credibility because they do not actually deal with the real world,” Dimitri Papadimitriou, President of the Levy Institute, told me in my conversation with him. …

“Minsky was in some ways a pioneer. He saw that economic theory assumed that everything is known and that there is some tendency of the system to reach for equilibrium and, at times, to reach periods of ‘tranquility,’ as he preferred to call them. Of course, he never believed that stability was possible. He didn’t believe in the invisible hand. There’s a reason why it’s invisible—because it’s not there.”

Read the entire thing here.

If you missed last week’s Reuters-sponsored Keynes vs. Hayek debate at the Asia Society, video of the event is attached below, beginning with James Galbraith’s contribution.

The debate, predictably, ended up being more about the last two-and-a-half years of economic policy.  Note also the way in which this turns into a Democratic Keynesianism vs Republican Keynesianism debate; due in no small part to the Wall Street Journal‘s Steve Moore, who argues that instead of Obama’s wretched ARRA, a mixture of tax cuts and spending increases, what we really need is … a mixture of tax cuts and spending increases.  The key to being a Moore-style Schmeynesian, as near as I can tell, is that when describing Obama’s policies one ignores the tax cuts, and when describing Reagan-era fiscal policy one mumbles something about “defense” rather than spending increases.

(Note also Galbraith’s list of Hayek’s later policy preferences, which would place Hayek somewhere in the progressive wing of today’s Democratic Party).

There’s an interesting (and unsettling) section of Martin Mayer’s presentation at the Minsky Conference that I’ll quote at length in which he talks about the reception of Hyman Minsky’s work.  Add this to the growing “what’s wrong with the economics profession?” folder:

I have found my own explanation, rather a disturbing one, for Hy’s relative obscurity despite the importance and intrinsic interest of his work. Several people, some of whom consider themselves followers of Hy, have noted to me that there isn’t much published work, which is nonsense: there is a lot of published work. But relatively little of it is in the economic journals. It’s in the peer-review journals.

The most important person in Minsky’s career was Bernard Shull, who has also been at a lot of these meetings, and I talked to him the other day. . . . He was a young member of the research staff at the Philadelphia Fed when he read Hy’s original article on central banks and the money market in 1957. Shull moved onto the Board of Governors to conduct a study on how the discount window actually operated and how it should operate. It was through working on that study that Hy developed the financial instability hypothesis, which was published originally in detail as a Federal Reserve document. Hy’s important work for the Ford Foundation-sponsored Commission on Money and Credit was published as part of the report of the Commission on Money and Credit. His late and long and important article on finance and profits was published by the Joint Economic Committee of Congress. Other major papers appeared in Festschriften and textbooks.

In the world of the economics profession, these things don’t count. Efforts to explain problems to people who might be able to do something about them are hobbies for the professor. The real work, and what he is expected to turn out, is this goddamn gelatinous stuff with its borders of mathematics that gets published in the professional journals. It may be that Hy’s increasing salience will do something about that. There was only one Hy Minsky. Natura il fece, e poi ruppe la stampa. But other lone wolves may get more attention in the future because the economics world finally awakened to the importance of Hyman Minsky, and thus the importance of publications that are not right down the standard track. We hope so.

[The following is the text of Senior Scholar Randall Wray’s presentation, delivered October 28, 2011, at the annual conference of the Research Network Macroeconomics and Macroeconomic Policies (IMK) in Berlin. This year’s conference was titled “From crisis to growth? The challenge of imbalances, debt, and limited resources.”]

It is commonplace to link Neoclassical economics to 18th or 19th century physics with its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic CDOs. Guided by invisible hands, supplies balance demands and all markets clear.

Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies, themselves. Certainly there is a price, somewhere, someplace, somehow, that will balance supply and demand—for the stuff we can drop on our feet to break a toe, and on to the mental and physical efforts of our brethren, and finally to notional derivatives that occupy neither time nor space. It all must balance, and if it does not, invisible but powerful forces will accomplish the inevitable.

The orthodox economist is sure that if we just get the government out of the way, the market will do the dirty work. Balance. The market will restore it and all will be right with the world. The heterodox economist? Well, she is less sure. The market might not work. It needs a bit of coaxing. Imbalances can persist. Market forces can be rather impotent. The visible hand of government can hasten the move to balance. continue reading…