In 2010, the first year of the economic recovery, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez.  There are a whole host of reasons for the stubborn persistence of corrosive levels of inequality, but one of the surprising contributing factors may be found in the way we approach fiscal stimulus policy.

In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them.  The status quo, at best, offers us two choices in fiscal policy flavors:  austerity and stimulus through aggregate demand management.  While stimulus is preferable, says Tcherneva, there are still flaws in a fiscal strategy that aims at boosting investment and growth without explicitly targeting unemployment.  The problem with pump priming is that it is rarely aggressive enough to adequately reduce unemployment—and when it is sufficiently aggressive, it has inflationary tendencies.

Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution.  She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct employer of workers and finds that the first two policies are more inflationary and more inequitable than direct job creation:  “pro-investment policies in particular add upward pressure to prices and skew the income distribution toward the capital share of income.”

Jumping off from these results, Tcherneva offers a third way on fiscal policy, beyond austerity and pump priming.  continue reading…

It says something about how badly the battle for public opinion on budget matters has been lost when a headline about a “fiscal cliff” the US is about to fall over in 2013 leaves you grimly expecting a pile of words dedicated to the poorly articulated threat of near-term public debt and deficits.  But in this case, hold off on letting your eyes glaze over.  The author is Alan Blinder and the fiscal emergency he’s talking about is a large scheduled swing toward further budget austerity: a combination of expiring tax cuts and automatic spending cuts (from the debt ceiling deal) that are all set to occur in January 2013.  Combined, says Blinder, the fiscal contraction amounts to a drag of 3.5% of GDP—a serious blow to aggregate demand.

And if the macro-level view of things doesn’t grip you, the view from the ground offers enough frustrating examples of the self-inflicted wounds to come.  As Nancy Folbre points out today, Head Start, the early childhood education (ECE) funding program, is destined for cuts.  This isn’t just a “think of the poor children!” moment (though, seriously, think of the poor children.  For whatever reason, only budget hawks are allowed to chastise us for short-changing the next generation).  The economic case for borrowing right now (at negative real interest rates) to make public investments in projects that would yield even modest benefits down the road is compelling.  Making the case for decreasing investment over the next few years in a program that yields substantial benefits, like early childhood education, is a feat to be attempted by only the most clever of sophists.  This is one of those situations where the macro level might not be the most favorable terrain for an argument; where “cutting government spending” doesn’t register quite like “cutting early childhood education.”

And this isn’t just a rhetorical point—the payoffs from ECE are considerable.  Rania Antonopoulos and Kijong Kim’s working paper on the economic benefits of ECE surveys the research showing the direct welfare improvements and positive spillover effects that come from these investments in human capital (enhanced cognitive and noncognitive development for children leading to improved labor market outcomes and asset ownership in the future, improved labor market participation for mothers, higher GDP, etc.).  Antonopoulos and Kim also share the results of their research (along with a team of other Levy Institute scholars) on the job creation potential of a 50 percent increase in Head Start/Early Head Start funding (which, it should be noted, still wouldn’t be enough to offer universal ECE).  In terms of the number of jobs created per dollar spent, they found that investing in social care service delivery packs a serious punch (more than twice the jobs per dollar, when compared with more capital-intensive infrastructure projects).  And if that isn’t enough, Head Start, because it’s targeted at poor children, enhances the sort of equality to which both sides of the political spectrum feel compelled to pay lip service:  equality of opportunity.

Head Start, as Folbre observes, “has never served more than 60 percent of eligible children in extreme poverty.”  That’s a lot of wasted potential.  We’re planning on wasting even more, and in exchange for what exactly?

The Nation notes that austerity policies in Europe have proved to be very damaging to economic growth in the region, and points out that after adhering to IMF and EU austerity programs since last May, Portugal is “even deeper in the hole. The austerity has only increased its debt, as it has spread more suffering.”

The editorial goes on to point out that the euro countries have also been hindered by their unified currency system. This system currently makes it difficult for member governments to see to it that there is a market for their bonds and other securities—namely, their central banks. Taking exception to Republican fears of a “Greek-type collapse,” the Nation emphasizes that the “sovereign currency” possessed by the American government has always allowed it to avoid difficulties making payments on its debt. (A web version of the editorial is here. A similar Washington Post opinion piece is posted here.) Compare this with the current financial problems experienced by many state and local governments, as documented by recent articles in the New York Times (“Deficits Push New York Cities and Counties to Desperation”) and the Wall Street Journal (“States Keep Axes Sharpened”).

Many things can go wrong in an economy, even one with a smoothly running monetary system.  But the Nation’s argument remains crucial for the U.S.—first, that deficit-financed stimulus programs have helped keep our economy going; and second, that a government with its own currency is almost unable to default.

Quick note: In an interesting op-ed piece, Martin Wolf of the Financial Times notes that U.S. budget deficits have allowed the  private sector to deleverage a bit: “If the public sector does not sustain spending as the private sector  cuts back, the latter will go too far, causing unnecessarily deep damage to the economy.” He contrasts the U.S. situation with the crisis in the United Kingdom and Spain, where deleveraging has not gone as far. He points out that Spain’s lack of a sovereign currency has prevented its government from helping along the private-sector deleveraging process.

C J Polychroniou explains how the latest pair of efforts aimed at addressing the Greek crisis, the newest bailout package and the bond swap, create tremendous complications down the road even if they may offer a temporary respite.  As you know, the bailout money was shackled to a series of grim austerity measures that will push the already struggling nation further under water.  But his analysis of the bond swap is even more intriguing.

One way of getting at the political challenge in the eurozone is to note that many powerful economic solutions involve, not to put too fine a point on it, reinvesting resources from countries like Germany into countries like Greece.  This is something that happens all the time within units that understand themselves as nations (or aspire to such an understanding.  As Dimitri Papadimitriou and Randall Wray point out, after reunification Germany invested resources in the former East Germany in much the same way).  But the question of whether revenues from New York are being shoveled into Mississippi rarely becomes a live issue.  Within the eurozone, however, these distributional questions are fraught with political peril; dooming a whole host of solid policy solutions.  And Polychroniou suggests that the restructuring of roughly 200 billion euros in private debt that just took place may have actually made these political dynamics worse (while also making life more difficult for Greece if forced out of the eurozone):

the bond swap was a deal forced on private investors, … yet the new bonds have been issued under foreign law. This doesn’t mean that the Parthenon is at risk of one day falling into the hands of foreign creditors, but it does mean that the Greek government has lost whatever strategic advantage it may have had in the ruthless game of sovereign debt restructuring. For one, all of Greece’s debt is now wholly owned by public institutions (with European taxpayers bearing much of the cost), so the next debt restructuring phase could entail political, not merely economic, consequences. Simply put, it could pave the way for Greece’s forced exit from the eurozone. Indeed, given the prevailing sentiments toward Greece across Europe, it is most unlikely that European taxpayers will accept kindly the idea of getting stuck with Greece’s bill while allowing a pariah state to remain in the Union. However, in the event of an exit from the eurozone, Greece will no longer be able to pass legislation to convert euro-dominated debt into new drachmas.

Read the whole thing here.

Although recent employment numbers seem to have set off a fresh round of complacency, the December Strategic Analysis from the Levy Institute makes it pretty clear that more fiscal stimulus is necessary if the economy is going to reach decent levels of growth and employment anytime soon.

However, there’s very little reason to think that anything substantial is forthcoming on the stimulus front, as the US slides slowly into austerity.  And the biggest obstacle is congressional opposition.  Short of an historic wave election, substantial new stimulus just isn’t likely (although when it comes to increasing government spending to counteract a recession, Congress appears to be much more accommodating when there’s a Republican in the Oval Office).  But short of these once-in-generation electoral outcomes, there’s another possibility:  business groups could come around to the realization that they might benefit from an increase in aggregate demand and start seriously pushing their clients in Congress to pass something.

An article in Bloomberg points out that just such a push occurred in the 1940s, as a coalition of business interests, concerned about what would happen to demand as war spending wound down, pushed for fiscal stimulus (interesting side note:  Fed Chairman Marriner Eccles is featured in the article as someone whose Depression-era experience in the private sector led him to conclude that government stimulus was necessary):

Dennison joined forces with Paul Hoffman of Studebaker, advertising executive William Benton, and top managers from Eastman Kodak, General Foods, Sears and General Motors in the Committee for Economic Development in 1942. Fearful that the economy would slip back into a depression once World War II ended, they advocated an activist state that spent money to promote consumption and high employment. Their position was hardly radical, and they aimed their appeal at “all who are interested in keeping the system of private enterprise and larger personal freedom.” But they understood that capitalism could survive only if there was a way to “counter the tendencies toward boom and depression.” Capitalism required growth, by whatever means necessary.

… soon even the Chamber of Commerce took the plunge and joined the growth coalition. Under the dynamic leadership of Eric Johnston, it supported the Full Employment Act of 1946, a Keynesian, albeit conservative, embrace of government spending to reduce the boom-and-bust cycle that Hoffman feared.

It’s notable that such a coalition, as far as I can tell, has not emerged in the contemporary United States.  One can’t help but think that it might have something to do with the decoupling of median and average incomes; with the fact that the top 1 percent seem to be able to enjoy quite robust income growth without needing to pull the average worker along with them.

Philip Pilkington shares a discussion he had with Dean Baker about, among other things, the Post-Keynesian take on the limitations of some conventional economic models (of the “LM” part of IS-LM, in particular.  And if that just looks like an arbitrary string of letters to you, Pilkington has an accessible explanation at the beginning of his post).  His description of the “self-justifying” dynamics of the IS-LM view of money and central banking is worth quoting:

By assuming an upward-sloping LM-curve – that is, a fixed supply of funds – there is an implicit assumption that actions on the part of the central bank are somehow neutral. ISLM enthusiasts implicitly assume that the central bank is simply responding to some otherwise ‘equilibrating’ market conditions and adjusting its rates in line with this. …

… [The standard ISLM model] buries the fact that the central bank is actually taking a specific stance on policy and then tries to pass off this stance as a sort of quasi-market response (i.e. as if there were a market for a fixed supply of funds). But the central bank’s policy stance is nothing of the sort. Instead it is a sort of a simulation of what a market response is thought to be. Thought to be by whom? By economists that adhere to models similar to the ISLM, of course!

In a related vein, Greg Hannsgen points me to the latest volume of essays published in honor of Wynne Godley, “Contributions to Stock-Flow Modeling,” in which Marc Lavoie highlights this Godley quotation on the fixed stock of funds assumption in IS-LM:

Godley was always puzzled by the standard neoclassical assumption, found in both the IS/LM model and among monetarists, of an exogenous or fixed stock of money, the worse example of which is Friedman’s money helicopter drop. As Godley says, ‘governments can no more control stocks of either bank money or cash than a gardener can control the direction of a hosepipe by grabbing at the water jet’.

Medicare cost growth has been slowing down, and according to research published in the New England Journal of Medicine there may be more going on here than just a temporary reaction to the recession.  This is just one analysis of course, but if it pans out, if it marks the beginning of a sustained trend, the implications for the budget debates would be huge.

If Medicare cost growth tapers off, this would address the most pressing issue for those who are concerned (in good faith at least) about the long-term US budget picture.  “Deficit doves,” who are careful to state that we need to increase deficits in the short-term to deal with the recession’s aftermath, will tell you that in the long run the problem is not spending in general, or entitlements (the long-term gap in Social Security funding is estimated to be about 0.6 percent of GDP), or even demographics (the aging of the population will inevitably mean more spending on programs for the elderly, but this trend levels off after a certain period; it’s predictable and manageable).  The very core of their case for long-term debt anxiety is the belief that healthcare costs (and by extension Medicare costs) will rise much faster than GDP for the foreseeable future.

But this means that a large part of the debate has been driven by what we think will happen to healthcare costs decades and decades into the future.  That’s not to say that we should simply wave away problems if they’re based on long-term projections, but we do need to keep it all in perspective.  In this vein, Karl Smith picks up the story on Medicare costs and delivers a bracing inoculation against the “think of the children!” disease that afflicts so many policymakers: continue reading…

The title of C. J. Polychroniou’s latest policy note, “Neo-Hooverian Policies Threaten to Turn Europe into an Economic Wasteland,” gives you a pretty good idea of where he’s coming from:

There can be no denying that, despite the experiences provided by the Great Depression and the numerous financial crises that have taken place since 1973, policymakers have been dismally wrong in their assessment of the 2007–08 global crisis and governments dreadfully incompetent in developing a clear strategy for addressing it appropriately. The reason for this lies with an economic ideology, a conceptual framework with which government officials and bankers deal with economic reality, that is fundamentally flawed.

As a way of addressing some of the flaws of the eurozone policy architecture, and of counteracting the ideology of austerity that is embedded in that architecture (the “fiscal compact” currently being debated, which would place more automatic penalties on governments that deviate from severe limits on budget deficits, goes even further in embedding this ideology in the setup of the European Monetary Union), Polychroniou is looking to a “United States of Europe” model, with an expansion of EU-level fiscal policy powers.

As he observes, however, the European project is moving in the opposite direction:

Indeed, in an indication of where Europe may be headed politically, the EU’s budget was slashed by four billion euros in 2010, with some governments arguing that the EU budget, in the words of British Prime Minister David Cameron, should be progressively “reduced rather than increased”—and this appears to be the definite trend in Euroland.

What manner of union is this?

Read the policy note here.

Randall Wray has been engaged in a back-and-forth with John Carney of CNBC.  Their latest exchange touched on the question of the “real” economic burdens of Social Security (distinct from issues of affordability).  Wray responds:

“John Carney agrees with me that supporting our elderly is not an ‘affordability’ problem, but he claims that I fail to see the ‘real’ burden—the dependency ratios and all that. Actually I’ve been writing about that since the early 1990s. The ‘real’ burden is the only thing that matters.

Here’s just a short list of easily accessible things I’ve written at www.levy.org:

The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare [2009]

Global Demographic Trends and Provisioning for the Future [2006]

The Burden of Aging [2006]

Social Security’s 70th Anniversary [2005]

Killing Social Security Softly with Faux Kindness [2001]

More Pain, No Gain [1999]

Does Social Security Need Saving? [1999]

… There are two important issues here. continue reading…

It won’t be quite as satisfying as having Marshall McLuhan stashed in a corner to back up your argument, but for the next time you find yourself in a real-time wonkfight, FRED (the go-to database of the St. Louis Fed) is now available as a mobile app.