1. John Quiggin offers a critique of what he calls a “misreading of MMT.”

2. Bill Mitchell, interviewed by the Harvard International Review, waxes functional (emphasis added):

Particular budget outcomes should never be a policy target. What the government should be targeting is real goals, by which I mean a sustainable growth rate buoyed by full employment. Why do we want governments? We want them because they can do things that improve our welfare that we can’t do individually. In that context, it becomes clear that public policy should be devoted wholly to making sure that there are enough jobs, that poverty is eliminated, that the public health and public education systems are first class, that people who are less well off are able to become better off, etc. From a macroeconomic point of view, the spending and tax decisions of government should be such that total spending in the economy is sufficient to produce the level of real output at which firms will employ the available labor force. This is the goal, and the particular budget outcomes must serve this goal.

None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation…. Deficits can be too large, just as they can be too small, and the aim of government is to make sure that they’re just right to employ all available productive capacity.

In his latest one-pager (“Dawn of a New Day for Europe?“) C. J. Polychroniou anticipates the outlines of a Merkel-Sarkozy agreement on policies designed to address the eurozone debt crisis, and comes away skeptical.  Polychroniou suggests that a massive infusion of emergency funding, somewhere on the order of 2 to 3 trillion euros, would be required, but that the self-imposed necessity of operating within the constraints of the ECB’s 2 percent inflation ceiling, as well as the political challenge of passing any far-reaching measures through the national parliaments, make a sufficient response unlikely.  Read it here.

Add central banker Mark Carney (governor of the Bank of Canada—and former vampire squidite) to the list of class traitors unlikely supporters of the Occupy Wall Street movement, calling it “entirely constructive“:

In a television interview, Mr. Carney acknowledged that the movement is an understandable product of the “increase in inequality” – particularly in the United States – that started with globalization and was thrust into sharp relief by the worst downturn since the Great Depression, which hit the less well-educated and blue-collar segments of the population hardest.

Carney, whom the Harper government is pushing as the next head of the Financial Stability Board, was also the proximate instigator of Jamie Dimon’s well-publicized tirade last month about “anti-American” financial regulation.

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.

The bowling alley cannot run out of points, and the US government cannot run out of keystrokes.  Research Associate Stephanie Kelton slaps down the folk wisdom that there is nothing the government can do about unemployment because it’s “broke.”  “We don’t understand our own monetary system.”

(hat tip to NEP)

“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.)

(cross posted from EconoMonitor)

Yet another rescue plan for the EMU is making its way through central Europe—raising the total funding available to the equivalent of $600 billion. Germany agreed to raise its contribution to the fund by more than $100 billion equivalent. However, Slovakia has vetoed the rescue and all eyes are now turned to a forthcoming October 23 summit.

In any event, some rescue package is assured because the center of Europe wants to save its banks—that hold billions of euros of troubled government debt.
No one is foolish enough to believe that will be enough. The latest casualty is Dexia Group, a Belgian-French behemoth that specializes in sovereign debt. It had already been bailed out once, and now needs another bail-out. Rest assured that Dexia is just today’s domino—the other big European banks will fail, too. This is not a Greek problem. It is not an Irish problem. It is not a Portuguese problem. It is not a Spanish problem. It is not an Italian problem.

It is an EMU problem and Band-Aids will never suffice.

The problem with the set-up of the EMU was the separation of nations from their currencies—as I have long argued, along with Charles Goodhart, Warren Mosler, and Wynne Godley. (Go here for a relatively recent piece.) And as I said a few weeks ago, it was a system designed to fail. With no central government that issues currency it has no way to use fiscal policy on a large enough scale to counter the business cycle, let alone to deal with a financial crisis on the scale we’ve seen since 2007.

And with the gathering storm, the individual members of the EMU will be swamped as their financial institutions are forced to realize losses.

Even if the member states were not busy pointing fingers and squabbling over profligate spending by neighbors, the current arrangements prohibit any effective response to crisis. When markets decide to attack one member, it quickly finds itself in a vicious debt trap, with interest rates rising that blow a hole in the budget. At most, other members can put together a debt package—lending at slightly more generous terms.

But what highly indebted members need is debt relief and economic growth, not more debt. With austerity demanded in order to get the proffered loans, growth turns negative, increasing budget deficits and leading to more desperate borrowing.

So either way, the indebted country gets into the debt trap: if it borrows from markets, interest rates rise; if it borrows from the EMU (or the IMF) its growth falls and tax revenue plummets.

Damned if you do, damned if you don’t. continue reading…

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).

Without wading into the debate too much, we report on some commentary from the web on yesterday’s announcement that Thomas Sargent and Christopher Sims had won the Nobel Memorial Prize in Economics:

“Free-market” supporters differed greatly in their assessments. One “New Monetarist” argues that the choice of Sargent and Sims represents a nod to the anti-Keynesian “New Classical” school of macroeconomic theory, which introduced rational expectations into macro in the 1970s.

On the other hand, while Edward Glaeser also seems to view the award as partly an anti-Keynesian decision, his comments on Sims and the New Classical School of macroeconomics emphasize Sims’s efforts to minimize the use of macroeconomic theory of any kind in his econometric work:

“Sims — like Sargent, Lucas and Edward Prescott (another great theorist of the post-Keynesian world) — saw that the Keynesian macroeconometric models were a thing of the past, but he understood the ongoing need for economic prediction. Perhaps one day, economic theory will make complete sense of the business cycle, but until that time, policy makers and ordinary investors will still want to have some idea of what lies ahead. Sims’s work addressed that need, free from the confining assumptions of Keynesianism.”

Similarly, at this link, Keynesian-leaning Mark Thoma endorses the argument that Sims’s vector autoregression (VAR) techniques help economists avoid making an inordinately large number of dubious assumptions.

Getting to deeper issues, an economist quoted in a Businessweek.com article notes wryly that the prize is partly about an issue as abstract and unworldly as cause and effect: continue reading…