Following up on a previous item, Macroeconomic Advisers have updated their analysis in response to the most recent debt ceiling deal.  The results:  no good news, and some serious uncertainty in the probable effects on growth (though not the sort of “uncertainty” the conventional wisdom is persistently telling us we should care about).

In 2012, they estimate that the fiscal drag resulting from budget cuts is likely to hover around 0.1 percentage points.  If that strikes you as a minor blip, note that they have not included multiplier effects in their estimates.  The Economic Policy Institute, using standard multipliers, estimate that the ultimate damage in 2012 would amount to a reduction of 0.3 percentage points in GDP, or, if that still doesn’t get your attention, around 323,000 fewer jobs.

When adding in the effects of the expiration of the unemployment insurance extensions (528,000 fewer jobs) and the payroll tax cuts (972,000 jobs), EPI suggest that we should expect the economy to shed somewhere on the order of 1.8 million jobs as a result of these policy choices.

While the administration, via Tim Geithner op-ed, signaled today that it would like to extend both the unemployment insurance and payroll tax cut measures, as well as to initiate new infrastructure investments, it takes a certain amount of imagination to see how any of these measures—even the extension of tax cuts—could get through Congress in the current climate.

If that still doesn’t faze you, consider that in 2013, as a result of the debt ceiling deal, things really start to get dicey. continue reading…

The economy grew at an unflattering 1.3% annual rate in the second quarter, while first quarter GDP growth has been revised downwards to a wretched 0.4%.

Against the backdrop of these abysmal numbers, the US government appears poised to do its best to make matters worse.  Even if the debt limit negotiations generate an agreement, this is likely to entail a rather substantial anti-stimulus over the next couple of years.  When combined with the expiration of the unemployment insurance extensions and of last year’s payroll tax cut, one can expect the US government to shortly be withdrawing somewhere on the order of a quarter of a trillion dollars from the economy.

The forecasting group Macroeconomic Advisers estimates that, as a result of the possible debt limit deals alone, GDP will be roughly 0.1 percentage points lower next year, and up to almost 0.5 points lower in 2013.

Again, it is useful to remind ourselves that this is purely self-inflicted.  There is no requirement that budget savings be produced equal to the value of the rise in the debt ceiling—this is entirely a result of political strategy and political demands.  And aside from the debt limit negotiations themselves, there is not much of a case to be made that reducing deficits in the near term in any way solves an emergent economic problem.  Interest rates are low by historical standards and inflation remains in check.  What’s more, key indicators show little evidence of expectations of increasing inflation down the road (for more on this, see the Levy Institute’s Public Policy Brief on the health of the recovery, containing useful numbers on measures of inflationary expectations).

Debt and deficits are not some moral stain on the nation; they are simply a matter of economic accounting.  And as such, with regard to the idea of reducing debt and deficit levels we must always ask:  what problem is this supposed to solve? In a recent working paper, Levy Institute Research Associate Mathew Forstater provides a helpful primer (pp. 6-13) on three different ways of understanding the potential economic issues surrounding government debt and deficits:  from a “deficit hawk,” “deficit dove,” and “functional finance” approach.

MS

Many Levy Institute scholars and staff members are in New York City for this year’s conference on the late Institute scholar and author. Breakfast should be ending now, with the conference about to begin. The conference’s theme is “financial reform and the real economy.” More information about the conference, including the program, are available at the conference page on the Institute’s website.

Update, approximately 3 pm, April 13: The first audio from the conference has now been posted to this page on the Institute website. Now available there is audio from the conference’s formal opening and from the first session. You can choose among recordings of Leonardo Burlamaqui, Dimitri B. Papadimitriou, Jan Kregel, L. Randall Wray, and Eric Tymoigne. The conference ends this Friday, April 15.

Hyman P. Minsky, the renowned financial economist, macroeconomist, and Levy Institute distinguished scholar, was born 91 years ago today. A short bio of Minsky, along with links to many of his publications, can be found here. Minsky’s papers are collected at the Minsky Archive, which is housed at the institute. In April, we will be holding our 20th Annual Hyman P. Minsky Conference in New York City. I hope you enjoy these links to information about an economist who was and is very important to this institute.

Are we a nation of property owners? Michael Barone, of the American Enterprise Institute, says we are:

The fact is that we are once again, as in the days of the early republic and not in the heyday of the Progressives and the New Dealers, a republic of property owners. Most Americans have accumulated — or will, during the course of their working years, accumulate — significant amounts of wealth. And that is why, I believe, American voters seem to be rejecting the policies of the Obama Democrats.

But Uwe Reinhardt in Are We a Nation of Property Owners?, uses research by Arthur Kennickell at the Federal Reserve and my colleague Ed Wolff of the Levy Insitute (and NYU) to argue that Barone is wrong.

Reinhardt contends that most Americans own very little property, since almost half of families have a net worth of $10,000 or less–including their homes. So Barone is just wrong to claim that most Americans have or will accumulate “significant” amounts of wealth. Of course, if you believe that significant in this context should mean more than zero, I can’t help you.

I think that Barone is onto something, though as is so frequently the case, it’s not what he intended. The definition of republic is:

a state in which the supreme power rests in the body of citizens entitled to vote and is exercised by representatives chosen directly or indirectly by them.

Barone is talking about a republic in the Jeffersonian sense, a republic of small property owners (or for Jefferson, yeoman farmers). What we have is a republic more in the Roman mold, where the property owners are the citizens entitled to vote.

But, you say, there are no property restrictions on voting in the U.S.! Right you are, but there are certainly property restrictions on who you get to choose from when you go to vote. More accurately there are property restrictions on who gets to decide who you get to choose from. In this unintended sense, Barone is right. Reinhardt is also right to say that we are not a nation of property owners. For we are not in fact a nation, but rather a Roman republic, of property owners.

With apologies to Isaiah Berlin, here is the link.

Writing for the New York Times Economix blog, Nancy Folbre of the University of Massachusetts cites the work of Levy Institute economists in suggesting that Uncle Sam fund more home-care jobs:

Four economists at the Levy Economics Institute of Bard College – Rania Antonopoulos, Kijong Kim, Thomas Masterson and Ajit Zacharias – have published a policy brief, “Why President Obama Should Care About ‘Care’: An Effective and Equitable Investment Strategy for Job Creation.”

There are many reasons this is a great way to battle unemployment. Check out the policy brief for the full story.

The Economist’s obituary for the late Wynne Godley generated a couple of worthwhile letters. A key passage:

Your obituary of Wynne Godley (May 29th) did an injustice to his considerable intellectual achievements in macroeconomics and his courage in going against the orthodoxy that has ruled the economics profession for the past three decades.

You can read the rest here.

In a sobering column in the Financial Times, Edward Chancellor reminds us that the late Wynne Godley was right in predicting that large private deficits in the U.S. would lead to trouble–and that the Eurozone, when it was formed, might become a tragic disinflationary trap. The end of the column is particularly noteworthy:

He went on to caution that without a common European budget, there was a danger that “the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression that it is powerless to lift”.

Rob Parenteau, a fellow Levy Institute scholar, has recently applied Prof Godley’s analysis to the eurozone periphery. Germany wants countries, such as Spain, to get their public finances in order. Yet if Spain is to reduce its fiscal deficit without too much pain, two conditions are necessary. First, the country’s trade position must shift into surplus. This is problematic since labour costs are high relative to Germany and Spain cannot devalue its currency. Second, the private sector must move back into deficit. Yet it is difficult to see Spanish households and companies wanting to borrow more given the ongoing problems caused by the collapse of the property bubble.

There is a danger the proposed fiscal tightening in the eurozone will lead to further deflation and economic collapse. The Spanish government faces what Mr Parenteau calls “the paradox of public thrift”: the less it borrows, the more it will end up owing. It is unfortunate that it has taken a severe global recession to vindicate Prof Godley’s macroeconomic analysis. If economic policymakers start to pay more attention to financial balances, they might forestall the next crisis. European politicians might also understand the potentially dreadful consequences of their new-found frugality.

You can read some of Rob’s analysis for yourself here. Chancellor, by the way, is the author of a good book called Devil Take the Hindmost: a History of Financial Speculation.

The Economist has published this obituary of the late economist, whose career included a lengthy stint as head of the Levy Institute’s Macro-Modeling Team. In the small world dept.:

After a spell in business and a few years at the Treasury, he was enticed to King’s College, Cambridge, which 61 years earlier another economist-aesthete, John Maynard Keynes, had joined as a lecturer, writing (with his mother’s help) a letter of resignation from the civil service to his boss, a Sir Arthur Godley. This man was to become the first Lord Kilbracken and eventually grandfather of Wynne.