The Levy Institute’s annual Minsky conference will be held at the National Press Club in Washington, D.C. on April 9-10.

Day one features a speaker lineup that includes Sen. Sherrod Brown, Rep. Carolyn Maloney, head of the Chicago Fed Charles Evans, member of the Fed Board of Governors Daniel Tarullo, and many others. On day two, Jason Furman, Chair of President Obama’s Council of Economic Advisers (and recently featured in this Washington Post profile), asks “Is the Great Moderation Coming Back?”

The full conference program is online. Session titles include:

Financial Reregulation to Support Growth and Employment

Financial Regulation and Economic Stability: Was Dodd-Frank Enough, or Too Much?

The Global Growth and Employment Outlook: Cloudy with a Risk of … ?

The Euro and European Growth and Employment Prospects

What Are the Monetary Constraints to Sustainable Recovery of Employment?

Registration is open.

In a recent post, Daniel Gros asks why Greece has failed to get out of recession through an increase in exports, as he claims happened in Portugal, Spain and Ireland.
He is suggesting that the problem lies in the economy resisting structural reforms:

“In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground. On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated”

“So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.”

Gros is therefore endorsing the Troika vision: European peripheral countries with a large current account deficit, and large government deficits, should use austerity to improve the public sector balance, and wage and price deflation to improve export competitiveness.
These policies have been devastating for Greece. Our first chart reports the level of real output: real GDP in Greece has fallen by almost 25 percent, relative to 2007, the last year before the recession started. Indeed, as we have argued, the recession in Greece has been worse than the 1929 Depression in the United States. In the other GIIPS countries the recession has been severe, but the fall in output has been much smaller. When capacity is reduced by a shock comparable to that of a war, it is hardly suprising that the exporting capacity is compromised as well.

Yanis Varoufakis, on Twitter, rightly commented on Gros’ post that Greek firms have been experiencing a severe contraction in credit, which is an additional reason to prevent any expansion in production and sales on foreign markets.
In addition, Greek exports were a smaller fraction of GDP, compared to the other GIIPS countries. The pattern of the response of the exports to GDP ratio during the crisis has been similar in Greece, Portugal or Spain, but as the next chart shows, exports in Greece were only 23 percent in 2007, compared to about 32 percent in Portugal or 27 percent in Spain, not to mention Ireland.

Last, but not least, our estimates of price elasticities for Greek exports suggest that they are low, so that increasing exports only through wage and price deflation will take a long time, and may even generate a fall in export revenues as long as the volume of exports does not grow sufficiently to outweight the fall in export prices.
Since Greece cannot expect to recover from exports (besides, export-led growth requires that your trading partners are willing to increase demand fo your products!), recovery can only come from government intervention, in one of the forms we have discussed in our last report.

Central Bank Independence: Myth and Misunderstanding
L. Randall Wray
“This paper argues that the Fed is not, and should not be, independent, at least in the sense in which that term is normally used.
…
Our understanding of policy, of the policy space available to the sovereign, and of the operational realities of fiscal and monetary policy would be improved if we abandoned the myth of central bank independence.”

Changes in Global Trade Patterns and Women’s Employment in Manufacturing: An Analysis over the Period of Asianization and Deindustrialization
Burca Kizilirmak, Emel Memis, Şirin Saraçoğlu, and Ebru Voyvoda
“We provide estimates for total and women’s employment effects of world trade, evaluating the changes in trade flows in 30 countries (21 OECD and 9 non-OECD countries) for 23 manufacturing sectors by breaking up the sources of these changes between the trade with the North, the South, and China. …
Our results present a net negative impact of trade on total employment as well as on women’s employment in 30 countries over the period of analysis [1995-2006]. … Country level results show that the United States has by far the largest estimated employment losses from the change in structure of trade: 81 percent of the employment losses in the North originate in the US”

Full Employment: The Road Not Taken
Pavlina R. Tcherneva
“It is common knowledge that Keynesian stimuli are frequent policy tools to deal with recessions and unemployment; what is not commonly known is that modern ‘Keynesian policies’ bear little, if any, resemblance to the policy measures Keynes himself believed would guarantee true full employment over the long run.”

From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy
L. Randall Wray
“This paper explores the intellectual history of the state, or chartalist, approach to money, from the early developers (Georg Friedrich Knapp and A. Mitchell Innes) through Joseph Schumpeter, John Maynard Keynes, and Abba Lerner, and on to modern exponents Hyman Minsky, Charles Goodhart, and Geoffrey Ingham. This literature became the foundation for Modern Money Theory (MMT).”

Modern Money Theory and Interrelations between the Treasury and the Central Bank: The Case of the United States
Éric Tymoigne
“[T]here is nothing written in stone in terms of fiscal operations. If tomorrow nobody is willing to take treasuries, the Treasury, with or without the help of the Federal Reserve, has the means to bypass that problem if it chooses to use them; it becomes a political issue rather than an economic one. The theoretical implication that MMT draws from this is that one can simplify the economic analysis without a loss of generality by assuming that the Federal Reserve directly funds the Treasury.”

From Jörg Bibow’s recent letter in the Financial Times, reacting to an article by Wolfgang Münchau on deflation and ECB policy:

What is really new today is that wages are becoming unanchored and hence cease to provide the safety net that asymmetric central bankers habitually rely on. This is the consequence of the collective effort to restore competitiveness practised across the eurozone. Deflationary structural reforms of labour markets can only amplify this futile and hazardous process. But with the ECB applauding these efforts as the supposed panacea to the eurozone’s ills, what kind of miracle weapon can we expect the bank to deploy to halt the resulting plight?

Read the rest here.

Memo to Obama: Don’t tie progressive spending policy to progressive tax policy. Each can stand on its own.

Reported today in the Washington Post:

Obama proposes $600 billion in new spending to boost economy

President Obama on Tuesday unveiled an ambitious budget that promised more than $600 billion in fresh spending to boost economic growth over the next decade while also pledging to solve the nation’s borrowing problem by raising taxes on the wealthy, passing an overhaul of immigration laws and cutting health costs without compromising the quality of care. Obama seeks to raise more than $1 trillion – largely by limiting tax breaks that benefit the wealthy – to spend on building roads and bridges, early childhood education and tax credits for the poor.

Here’s the conceit: Uncle Sam is broke. He’s got a borrowing problem. He’s gone hat-in-hand to those who’s got, trying to borrow a few dimes off them. But they are ready to foreclose on his Whitehouse.

Obama knows his economy is tanking. Five and a half years after Wall Street’s crisis, we still have tens of millions of workers without jobs. Even the best-case scenarios don’t see those jobs coming back for years.

Obama will leave office with a legacy of economic failure.

Belt-tightening austerity isn’t working. He wants to spend more, but he doesn’t have more to spend. He’s run up his credit tab at the local saloon and the bar-keep won’t pour another whiskey.

So he’s got an idea: let’s take from the rich and give to the poor, homeless and jobless. Robin Hood rides to the rescue.

Look, we all love Robin Hood. continue reading…

After taking a short breather in late January-early February, the markets now seem to be back in “happy mode.” Whether the news on the economic recovery is good or bad doesn’t really matter. The current convention is that growth acceleration is under way.

That emerging markets had become key drivers of global growth was yesterday’s story, today they don’t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon – as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what.

Curiously, not even the long-awaited ruling by Germany’s constitutional court on the ECB’s “outright monetary transactions” (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB’s supposedly all-powerful weapon meant to bolster the earlier “whatever it takes” promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. “So what?”, Mr. Market shrugged his shoulders.

The Financial Times’ Ralph Atkins reports of a banker who was even making fun of those “crimson-roped weirdos in Karlsruhe.” For apparently Karlsruhe does not matter anymore to the fate of the euro, only Frankfurt does, especially now that they have sent the case off to the European Court of Justice. The ECB is seemingly safe now to deploy its miraculous weaponry, or do anything it likes, it might even seem. Wondering whether the markets may be either deluded or wise and prescient in ignoring the ruling, Mr. Atkins seems to come down with the verdict that “Karlsruhe fallout highlights power of ECB.”

But just how powerful is the ECB, really? continue reading…

I recently did an interview for the magazine “Synchrona Themata” (“Contemporary Issues”). The interview, which will appear in Greek, was conducted by Christos Pierros, doctoral student at the University of Athens Doctoral Program in Economics (UADPhilEcon). What follows is the English transcript:

What do you think went wrong in 2008? Why was standard macro theory unable to predict such an event?

This was a collapse of what Hyman Minsky called “Money Manager Capitalism.” In many ways it was similar to the 1929 collapse of “Finance Capitalism” that led to the Great Depression. MMC and FC share several common characteristics. First, the dominant approach of economists and policy makers in the 1920s and in the 2000s was one of “laissez faire”—that is, a worship of free markets. Importantly, that meant that finance was “freed” from regulation and supervision. Second, in both cases we lived in an era of globalization—with both goods and finance crossing borders fairly freely. That ensured that when crisis hit, it would spread around the world. Third, finance dominated over industry. Our economy in both cases was “financialized”—with finance sucking 40 percent of all corporate profits out of the economy. To say that “finance ran amuck” is an understatement. To say that our economies were completely taken over by “blood sucking vampire squids of Wall Street” is only a slight exaggeration.

Standard macro theory either thinks all these are “good” trends, or ignores them. That is why—as the Queen of England remarked—none of these economists saw the crisis coming.

Do you believe that by using other tools of analysis (another methodology) one could have seen it coming? If yes, which type of analysis would that be?

Certainly. Many of us saw the crisis coming. The three approaches that made it possible to understand what was going on were: a) Minsky’s financial instability approach; b) Wynne Godley’s sectoral balance approach; and c) Modern Money Theory—which actually builds upon the approaches of Minsky and Godley. All of those working in these approaches “saw it coming.”

Just very briefly, those following Minsky could see that financial institutions were engaged in highly risky practices that would eventually cause liquidity and solvency problems. Those following Godley knew that government budgets were too tight—including the governments of the USA, Spain, and Ireland. By the same token, private sector households and firms had taken on far too much debt. That was particularly true of homebuyers in the USA, in the UK, and in Spain. And those following MMT knew that Euroland was designed to fail; by disconnecting fiscal policy from currency sovereignty, the EMU ensured that the first serious downturn or financial crisis would threaten the very existence of the European Union.

Do you see any shift in the paradigm of economics taking place? If yes, towards which direction? continue reading…

(The following is an extended version of a piece that originally appeared in Greek in Kathimerini.)

The responses to unemployment by the last three governments in Greece have been characterized by sloppy proposals and an insignificant amount of funds in relation to the size of the problem. Regardless of whether there were political considerations behind it (or not), the recent announcement of the Prime Minister highlights, unfortunately, a relentless continuation of a lack of understanding of reality.

The Prime Minister recently (on January 29) told us that unemployment is a “sneaky enemy” and proceeded to announce measures to tackle the problem. He also indicated that “we do not promise things we cannot do, and we say no to populism and fine words.” The goal of the proposed measures, we heard, is to create 440,000 “work opportunities,” of which 240,000 will target the unemployed 15-24 years of age with no prior work experience. The announced measures totaling 1.4 billion euros will be financed by funds from the National Strategic Reference Framework (NSRF), social funds from the EU, and are classified into three pillars.

Specifically, the first pillar sets a target to recruit 114,000 unemployed for the private sector; an initiative that essentially subsidizes wages and social security contributions for businesses that hire unemployed who are up to 29 years old and some who are unemployed between the ages of 30 and 60. The second pillar concerns 240,000 young persons. This program will provide work experience and training for all unemployed up to 24 years old who have no prior work experience. These unemployed will also go to private companies for some time, or participate in vocational training centers (VTC) to improve their skills in order to find their first job, or both. The third pillar concentrates on hiring 90,000 unemployed from households that have no employed person, who will work in community service projects in the public sector and local government.

Assuming that strict rules are in place, with dedicated control mechanisms that will guarantee non-replacement of existing positions in the private and public sector (really, is there a sufficient number of public sector inspectors for this task?), prima facie, it all sounds positive and leads to the conclusion that at last the Prime Minister himself has publicly accepted his responsibility toward the citizens that have been left without a job. But appearances can be deceiving.

Let’s start with the obvious. continue reading…

From C. J. Polychroniou’s latest policy note:

[I]n 2001, a three-year, multi-country study by the Structural Adjustment Participatory Review International Network (SAPRIN), prepared in cooperation with the World Bank, national governments, and civil society organizations, offered a damning indictment of the policies of structural adjustment reform pursued by the IMF and the World Bank in third world countries. Here is a partial summary of the organization’s findings […]:

“The intransigence of international policymakers as they continue their prescription of structural adjustment policies is expanding poverty, inequality and insecurity around the world. These polarizing measures are in turn increasing tensions among different social strata, fueling extremist movements and delegitimizing democratic political systems. Their effects, particularly on the poor, are so profound and pervasive that no amount of targeted social investments can begin to address the social crises that they have engendered.” (SAPRIN 2001, 24) […]

The structural adjustment programs in Greece, combined with the policies of austerity, are producing results that fit the patterns outlined in the SAPRIN study like a glove. No doubt, this is part of the reason why the IMF was invited to participate in Europe’s rescue schemes: the Fund’s technical expertise in advancing the neoliberal agenda, which has been fully embraced by the EU at least since the Maastricht Treaty, carries more than three decades of experience.