James Galbraith, interviewed by Henry Blodget, suggests that more “stimulus,” if this means a program that will run out in a couple of years, is not sufficient.  What we need, he insists, is something more like a “strategic plan” for the next 10-15 years, investing in growth and dealing with problems like energy, climate change, and infrastructure (and that laying this groundwork would ultimately shore up private sector confidence).  Galbraith is also careful to distinguish between concerns about private and public debt:  while private, household debt has been a problem for the US, he argues, the public debt is sustainable and should not be a concern.  His closing line is worth repeating:  “We’re a big country.  We can finance our own reconstruction if we choose to do so.”

Here’s one fairly standard reading of our economic policy challenge:  the economy needs more pump priming, the federal government has more than enough fiscal space to provide it, but for political reasons it won’t be forthcoming.  (If you needed further evidence of that last proposition, take a look at the latest House Republican job creation offering:  repealing a law designed to prevent tax evasion by federal contractors, paid for by kicking some seniors off of Medicaid.  Take a moment to gape at the boundary-probing cynicism.  This is the legislative equivalent of planting a giant foam middle finger on the White House lawn.)  So as far as aggregate demand goes, in other words, there’s little reason to think that the federal government will step into the breach (and as things stand, we expect the government to be withdrawing demand from this economy).  But a new one-pager by Pavlina Tcherneva (“Beyond Pump Priming“) suggests that the above reading of the situation is … too optimistic.

Even if the AJA, or some other form of aggregate demand injection is passed, there are serious limitations to relying too heavily on an approach that boils down to boosting growth and hoping for the right employment side effects.  Featuring a rather stark graph portraying the ratcheting up of long-term unemployment over the last several decades, the piece argues that there are shortcomings to relying too exclusively on pump priming (which is largely what the AJA is, aside from a small amount of infrastructure).

The alternative is to take dead aim at the employment outcomes we need—to directly target the unemployed.  Tcherneva explains why, instead of just trying to fill the demand gap for output, we ought to focus on closing the demand gap for labor, through public works and job guarantee programs that directly employ the unemployed.  Among the benefits of the latter approach are an ability to focus on particularly distressed regions of the country.

Read the one-pager here.

Pavlina Tcherneva was interviewed recently on Wisconsin Public Radio’s “At Issue” with Ben Merens and took questions from listeners.  She argues that while there are plenty of good job creation ideas available, it is ultimately the toxic political environment that is holding us back.  Beginning at the 33:54 mark, responding to a question about payroll taxes, Tcherneva pounces on the idea that the federal deficit should be a policy priority:  “in and of itself, the deficit should not be a policy objective.”

Download the interview here (begins at the 2:20 mark).

Rob Parenteau has a post at Naked Capitalism commenting on Wolfgang Münchau’s article in the Financial Times.  Münchau argues that policy makers in Europe largely ignored the spillover effects of simultaneous fiscal contraction across the entire eurozone.  Parenteau insists that, at least at the level of ideas, the problem occurs at a much more basic level:

…while this pursuit of simultaneous, multi-year fiscal consolidation can only thwart itself by dragging down growth and dampening tax revenues, thereby leading perversely to still higher public debt outstanding, the problem does not lie so much in failure of policy makers to recognize and take into account the interactive effects of fiscal consolidation across countries. Rather, the truth of the matter is that most of the eurozone policy makers and their erstwhile economic advisors are practicing a faith based economics. They believe in the moral purity of balanced fiscal budgets. They also believe private sector activity will pick up to more than compensate for public sector cutbacks. That is the essence of the Ricardian Equivalence Theory, which is a central theoretical proposition that mainstream economists believe in and teach every graduate student to parrot.

Paul Krugman had a similar reaction:

That said, I think Munchau is being too kind here. European leaders and institutions by and large didn’t even get to the point of devising policies that might have worked in a small open economy. Instead, they went in for fantasy economics, believing that the confidence fairy would make fiscal contraction expansionary.

Parenteau points to presentations he delivered at the Levy Institute’s Minsky Conference in which he assailed this idea of “expansionary contraction” (the idea that deficit-cutting can boost growth) from the standpoint of the financial balances approach.  In his 2010 presentation, Parenteau regrets that the sectoral balances approach, typified by the work of Wynne Godley, hasn’t caught on more in the mainstream—though in journalism he notes the occasional exception from Martin Wolf in the Financial Times (see Wolf’s latest column for just such a flirtation with the financial balance approach.  The heterodox flavor of Martin Wolf’s writing is quite striking, as noted previously.)

You can hear the audio for Parentau’s 2010 presentation here (see Thursday, Session 4); the slides for the presentation are here.

Nouriel Roubini argues at Project Syndicate that widening inequality lends itself to both economic and political instability.  In his latest policy brief, “Waiting for the Next Crash,” Randall Wray connects some of these same dots, tying the rise of “financialization” and soaring household debt levels to stagnating median incomes in the US:

…as finance metastasized, the “real” economy was withering—with the latter phenomenon feeding into the former. High inequality and stagnant wage growth tends to promote “living beyond one’s means,” as consumers try to keep up with the lifestyles of the rich and famous. Combine this with lax regulation and supervision of banking, and you have a debt-fueled consumption boom. Add a fraud-fueled real estate boom, and you have the fragile financial environment that made the [global financial crisis] possible.

Partly inspired by the work of Hyman Minsky (the Minsky Archives here at the Levy Institute, incidentally, are in the process of being digitized), Wray recommends a set of policy changes that are aimed at righting this imbalance between finance and the “real” economy.  These include restructuring (shrinking) and re-regulating (with strict limits on securitization) the financial sector, and an “employer of last resort” policy that would offer a guaranteed job to everyone willing and able to work (federally funded, with decentralized administration).  The ELR would not just be aimed at addressing the catastrophic unemployment problems associated with a cyclical downturn like the one we’re in now, but at creating a force pushing toward full employment at all phases of the business cycle.  (You can read the brief here.)

Update:  Read the IMF’s recent contribution to the inequality debate here and here.

“Crises are an inherent feature of capitalism. Marx knew this only too well; so did Keynes and Minsky. Neoliberals, on the other hand, tend to believe that it is government action that causes market turbulence and economic instability.”  This is the opening salvo from a new one-pager by C. J. Polychroniou that takes on neoliberal doctrine in light of the global financial crisis (Read it here.)

Polychroniou also has a recent working paper that looks at the potential dissolution of the Eurozone as a failure of neoliberalism:

…the fact that EU’s leaders are having a difficult time getting a handle on the Greek problem and providing a comprehensive solution for the eurozone debt crisis is due to the very constraints of the neoliberal economic regime in which policymakers operate, and helped to create, and much less a question of political incompetence. The architecture of eurozone governance, combined with the asymmetries of European integration, severely limit quick, far-reaching political decisions for addressing the debt crisis, including Europe’s banking system that remains vastly undercapitalized.

The paper includes a detailed and compelling narrative of how Greece got to where it is today.  (Read the working paper here.)

The National Journal asks whether we can learn something about addressing unemployment by studying elements of the unemployment insurance systems of other OECD nations, many of which make re-training a key part of transitioning from UI back to employment.  The American Jobs Act (dead man walking) contains a “bridge to work” provision that would include similar job training and apprenticeship programs (already in place in Georgia and North Carolina) as a means of aiding the long-term unemployed.  The Journal interviewed Dimitri Papadimitriou for their piece, who suggests that while a “bridge to work”-type program would be beneficial, this sort of thing would amount to (at best) nibbling around the edges of the unemployment problem:  “Papadimitriou cautioned that without a more general economic recovery, simply training unemployed workers doesn’t guarantee jobs.”  (read it here)

“Bridge to work” might be a positive addition to the social insurance system, but we shouldn’t mistake it for a “solution” to our unemployment problem.  As Papadimitriou illustrates in this Strategic Analysis, we should not expect unemployment to come down without a massive influx of demand, whether foreign (exports) or domestic (higher government deficits).

James Galbraith talks about the mechanisms by which obstacles are placed in the way of dissenting and original voices in economics, as well as the failure of most in the forefront of the profession to see the global financial crisis coming (via INET):

Galbraith has written about this before; surveying the work of those who got it right, as well as the narrow parameters of prevailing doctrine:  “This is the extraordinary thing. Economics was not riven by a feud between Pangloss and Cassandra. It was all a chummy conversation between Tweedledum and Tweedledee. And if you didn’t think either Tweedle was worth much—well then, you weren’t really an economist, were you?” (read it here).

“We’ve put this off for too long.  We need debt relief and jobs and until we get these two things, I think recovery is impossible”—Randall Wray, quoted in a Reuters article examining the possibility of negotiating massive consumer debt relief.

Although household borrowing has been declining, debt burdens remain sky high:

(from the latest Levy Institute Strategic Analysis)

Rania Antonopoulos, director of the Gender Equality and the Economy program at the Levy Institute, has a blog post up at Direct Care Alliance making the case for adding social care investments to the American Jobs Act, citing the large employment effects of direct job creation programs in early childhood education and long-term care for the elderly and chronically ill.

A version of this idea showed up on the DC legislative radar recently, in the form of a jobs bill that includes a “Health Corps” and “Child Care Corps” among its provisions for direct job creation (see items 5 and 7).