This old post on the question of how to make sense of the claim that government debt places a net “burden” on future generations—the question of whether there’s an economic case to be made that supports the common claim that today’s public debt levels are an immoral burden on our children and grandchildren—generated a fair amount of discussion here.  The issue has been revived again in a recent back-and-forth that some of our readers might find interesting.  The latest round began with a post by Dean Baker, who said this:

A moment’s reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates’ grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution. …

As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment.

Nick Rowe took exception, kicking off the discussion here.  Brad DeLong responded to Rowe here; Mark Thoma responded here; and Baker responded here and here. Paul Krugman also weighed in, and then addressed the particular issue of foreign ownership of debt.

In a 90-minute debate, I’m not sure it’s possible to cover every single issue of pressing national importance and to do so in coherent detail.  So the following is a complaint one could make about a number of issues that were missing from last Thursday’s VP debate, but it was a little eyebrow-raising that financial reform was absent from the conversation.

Sure, the collapse of Lehman is ancient history as far as the political news cycle is concerned, and regulatory details can sometimes come off as unbearably technical to the average viewer.  However, we are still living through the real-world economic consequences of a massive global financial crash; the ink on the 2010 Dodd-Frank Act is not yet dry (key regulations are still being finalized); and recent scandals should have reminded us that the soundness of the financial system cannot be taken for granted.

Hopefully, tonight’s presidential debate will feature a little more recognition of the catastrophic regulatory failure we’re still living with.  We’ll see.  At this year’s Minsky conference, Gillian Tett of the Financial Times joined a panel discussion (with Louis Uchitelle, Jeff Madrick, and Yalman Onaran) on the role of the press in the financial crisis and financial reform efforts (audio here).  Tett commented on the failure of the press to focus on what was really going in finance in the run up to the crisis, and one of the challenges she identified here was what she labelled the “complexity problem”:  the key activities in advance of the crisis, in derivatives for example, were poorly understood, and now, after the crisis, we have a regulatory response in Dodd-Frank that’s even more complex and opaque.

This issue of complexity isn’t just a challenge for the press.  It’s also a public policy problem.  Jan Kregel argues that the more recent JPMorgan and LIBOR scandals demonstrate that the financial conglomerates involved are “too big to manage” and too big to regulate effectively.  This isn’t a fact of nature.  This is the financial system we have built.  Whether we’re able to make informed public choices about the future of financial regulation is also bound up with the question of whether we will have a financial system whose operations can be readily supervised and understood. continue reading…

We expect the unexpected at the Levy Institute. As followers of Keynes, most economists here, including this author, believe that one cannot assign exact probabilities to most important economic outcomes even, say, six months into the future.

On the other hand, thinking about the economic debate on job creation, and the recent release of new jobs data, I have not been very surprised at the gradual pace of progress in reducing the unemployment rate. In fact, we on the macro team have consistently called for more fiscal stimulus rather than less. The reason is that unemployment is a relatively slow-moving variable. As the chart at the top of this post shows, the unemployment rate (shown as a blue line) fell only rather gradually after each of the previous three recessions (shown as shaded areas in the figure). (Here, we count the double-dip recessions of 1980 and 1981–82 as one.) Hence, once the recovery began, we knew that with the unemployment rate at very high levels, it needed to fall unusually fast to be at reasonable levels by this point in the Obama administration.  Hence, since 2007, the team has advocated an easing of fiscal policy. Instead, especially after the 2009 ARRA, little action was taken by the government to stimulate the economy. Partly as a result of inaction on fiscal stimulus, government employment as a percentage of the civilian workforce (red line in the figure above) peters out after 2010.

At this point, we hope for legislation to moderate January’s expected “fiscal cliff”—which will lead to perhaps a $500 billion in reductions in the federal deficit in 2013 unless laws are changed, by CBO estimates.  (In its current form, the cliff would probably have a serious impact on all economic and demographic groups. Lately, I’ve been working on a model that incorporates the larger effects of an additional dollar of income on spending at lower income levels—not a simple task.)

In the figure, both lines are shown in the same units, namely percentages of the civilian labor force age 16 and above, though the two lines use different scales, one on each side of the figure.  For example, a one-unit change in the blue line represents the same number of workers as a move of one unit in the red line. A hypothetical jobs program or another spending measure that gradually increased government employment (red line) by, say, 1 percent of the total US workforce might easily have led to an unemployment rate (blue line) for last month of 1 to 3 percent less than the actual reported amount. But government does not seem to be expanding; in fact, the red line shows that government employment shrank at a time when more hiring from that sector would have been of great help to the economy. (The figures include employees of local and state governments, as well as those of the federal government. The smaller governmental units have seen the biggest cuts in payrolls.) continue reading…

On the surface, the data from Argentina look awfully good—among the top performers in the world over the past decade. And she’s apparently done it without a run-up of either private sector or government sector debt. In other words, Argentineans have bucked the trend among developed countries, that saw (mostly) tepid growth fueled almost entirely by debt.

And that seems to be at least in part due to a policy choice. Argentina had been the poster child for Neoliberal policies all through the 1990s—they adopted virtually the whole Neolib agenda lock-stock-and-barrel. They even adopted a currency board. And unlike Euroland (which also adopted something like a currency board as each member adopted a foreign currency—the euro), Argentina would have consistently met the tight Maastricht criteria on budget deficits and debts over that period. The main purpose of the austere budgets and currency board constraints was to kill high inflation. It worked. But, over that period unemployment grew and GDP growth was moderate. I won’t go further into the problems encountered at the turn of the new decade but the whole thing collapsed into a severe economic, financial, and political crisis. In a last desperation move, the government abandoned the currency board (or, you could say the currency board abandoned the government!), defaulted on its debt, and created a Jobs Guarantee program called Jefes.

(You can read more here and here; or if you want a first-hand account by Daniel Kostzer who played a major role in bringing Argentina out of crisis by helping to create and implement the Jefes program, read this.)

Starting from the depths of a horrible recession, then, Argentina climbed back to recovery—not only making up for ground lost in the downturn, but also in many ways by rectifying problems created by the Neoliberal experiment. continue reading…

Levy Institute scholars James Galbraith and Randall Wray presented at the annual conference held by the Central Bank of Argentina last week. Galbraith’s presentation began with the issue of the flexibility of central bank mandates and then turned to an account of the long-term evolution in the economy that prepared the groundwork for the recent global financial crisis. Randall Wray spoke on the theoretical and policy implications of a government’s ability to issue a sovereign currency.  Video and slides below the fold (full list of speakers here). continue reading…

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.

Kevin Drum has excised another section of the now-famous leaked fundraiser video, and this time the GOP challenger is holding forth on quantitative easing and other subjects. Drum picks on Romney’s specific claim that the government is buying three-quarters of US treasury debt, but there’s something in this quotation that’s more fundamentally off:

We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.

The problem here is that Romney’s “fantasy” world, in which the government “makes up” money, is just a roughly accurate description of fiat money.  And if you’re rooting around in the text of Obama’s American Recovery and Reinvestment Act for the dastardly provision that created this new “feeyat” money thing, don’t waste your time—it’s been around for a long, long time.  If you’re interested in the actual history of money, as opposed to the “we used to have real money before January 2009″ version, this working paper gives a nice rundown of the anthropological and historical material and lays out the economic policy upshot.

Whether it’s buying three-quarters of new treasury debt or a tiny fraction, the Fed is always using “made up money.”  And in theory (which is to say, aside from the various legal obstacles placed in its way), the Fed can buy as much US treasury debt as it wants, because it can never exhaust its ability to “make up” more money.  Don’t believe me?  Ask Alan Greenspan:

To the extent that there’s a real policy limit to this, it’s not that the Fed will somehow run out of money, but that at some point, when the economy is closer to running at full capacity, buying US debt to keep interest rates low could lead to inflation.  But inflation, for now and the near future, just isn’t a significant problem.  (On the contrary, the current challenge is to figure out how to get more of it.)

There are plenty of things to worry about in our current economic situation.  Unemployment would be pretty close to the top of the list.  Fiat money should not be.

We’re seeing a lot of “is the euro crisis over?” stories pop up in the press lately (or rather, again).  The sensible responses are “no” and “which euro crisis?”

Presumably, this burst of enthusiasm derives in part from Mario Draghi’s announcement to (sort of) commit to (sort of) unlimited bond purchases.  But even if you think, optimistic reader that you are, that this will (sort of) rein in the periphery’s galloping borrowing costs and forestall an immediate breakup of the eurozone (at least until next month), that would just leave us with a slightly smaller pile of crises—including a crippling growth crisis.

For Greece in particular, to declare its crisis “over” requires a serious dose of lowered expectations:

The unemployment rate currently stands at 23.5 percent, wages and salaries have shrunk by as much as 30 percent, a series of pension cuts has been implemented (the latest proposal is to cut up to 600 euros per month from individual pension checks!), hospital operating expenses have been reduced by half, and the education budget has been hit so hard that many schools throughout the country operated without heating oil last winter.

If you want to know what it looks like when a national crisis isn’t over, read more here.

For those who haven’t seen it already, US News and World Report did a brief piece a short while ago on Minsky’s approach to financial instability.  After running through a list of recent financial panics and crises, Chris Gay notes that from a certain theoretical perspective, this wasn’t supposed to happen.  “This sort of blood-curdling free-fall is supposed to be a once-in-a-lifetime event, like the transit of Venus or a federal budget surplus.  How is it,” he asks, “that someone who was in high school when Justin Bieber was in Pampers has already experienced half a dozen of them? Either we need to redefine ‘crash’ or someone owes you some lifetimes.”  Black swans were once thought by European ornithologists to be rare, until they discovered a number of the birds in Australia.  By contrast, the assumption that financial panics and crises are rare has stuck around, despite more than enough experience with the economic equivalent of black feathers.

In Minsky’s view, financial crises are a normal part of the functioning of this economic system; they are not some deus ex machina that arrives from without to push the system off-balance.  Digesting this way of looking at the stability of our economic system won’t just affect whether we’re surprised when the next panic or crisis comes crashing down on our heads, but also, as Jan Kregel and Dimitri Papadimitriou explain, how we approach financial regulation:

As Minsky emphasized, you cannot adequately design regulations that increase the stability of financial markets if you do not have a theory of financial instability. If the “normal” precludes instability, except as a random ad hoc event, regulation will always be dealing with ad hoc events that are unlikely to occur again. As a result, the regulations will be powerless to prevent future instability. What is required is a theory in which financial instability is a normal occurrence in the system.

For more, the Levy Institute ebook Beyond the Minsky Moment lays out the implications of Minsky’s approach for how we should understand the roots of the recent meltdown and why we can neither settle for Dodd-Frank nor go back to Glass-Steagall. (epub, pdf)

by Lekha Chakraborty

India has recently turned to a debate over the effect of the Prime Minister’s personal characteristics on the country’s growth and development outcomes. Do political leaders’ personal characteristics affect economic growth? It is an elusive empirical question.

One of the most robust findings of a recent treatment of this topic is that leaders do matter for economic growth and, in particular, more educated leaders generate higher growth. The paper, titled “Do Educated Leaders Matter?,” appeared in The Economic Journal in 2011, by Timothy Besley of the London School of Economics and co-authored by Jose G. Montalvo and Marta Reynal-Querol. They examined this issue in a new context of how the educational attainment of a political leader affects a country’s economic growth during the leader’s tenure in office. The study also finds a strong negative effect on growth of a random exit of the Prime Minister from his office.  “[I]ntelligence is central to the Platonic view of leadership,” they write, “so the idea that more educated citizens could be better leaders would come as no surprise.” This finding naturally leads us to the question of who should be appointed as Prime Minister. In India, we currently find a well-educated technocrat in that position.

With the recent controversial article by Simon Denyer, the New Delhi bureau chief of the Washington Post, the focus on the potential personal impact of the Prime Minister on reform policies or economic growth has reached its peak.   continue reading…