Publications
L. Randall Wray
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Policy Note 2024/1 | October 2024In a New York Times editorial, David Leonhardt recounts Aesop’s apocryphal story about the boy and the wolf, warning that while deficit hawks have so far been wrong, the growing government debt will eventually bite. He reports the economic plans of both presidential candidates would add to the debt that will soon exceed GDP and grow to 130 percent of annual output under a President Harris, or 140 percent with a Trump presidency.
The story of the boy and the wolf was a fable, although it was within the realm of possibility. The fable of the debt wolf is not. While there are real world wolves—Leonhardt mentions climate catastrophe and autocratic leaders, and the authors would add rising inequality and the concentration of economic and political power in the hands of billionaires—authors Yeva Nersisyan and L. Randall Wray assert, federal debt is not one of them.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 1055 | September 2024This paper looks at the relationship between government budget deficits and the growth rate of GDP. While orthodox economic theory offers several reasons to believe that growing deficits might be associated with slower growth, and would ultimately be unsustainable, Keynesians assert that deficits could stimulate growth—at least in the short run—implying the relation between deficits and growth could be positive. Modern Money Theory, adopting Godley’s sectoral balance approach, Lerner’s functional finance approach, and Minsky’s theory of financial instability takes a more nuanced approach. Historical data for a number of countries is presented, showing that there is no obvious relation between the deficit ratio and economic growth over long time periods. However, there is a predictable path of the relationship over the course of the business cycle for all countries examined.
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One-Pager No. 72 | May 2024Recently, the neglected question of why the US government borrows, given that it can print money, has arisen in the context of discussions surrounding a new documentary, Finding the Money. As L. Randall Wray observes in this one-pager, Modern Money Theory has been providing answers to this question for some time; and, he argues, it is a topic that mainstream economists are ill-equipped to address, since very few concern themselves with the monetary operations that underlie the question of why a currency-issuing government issues debt.Download:Associated Program(s):Author(s):Related Topic(s):
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Working Paper No. 1018 | April 2023
How to Deal with the “Demographic Time Bomb”
The aging of the global population is in the headlines following a report that China’s population fell as deaths surpassed births. Pundits worry that a declining Chinese workforce means trouble for other economies that have come to rely on China’s exports. France is pushing through an increase of the retirement age in the face of what is called a demographic “time bomb” facing rich nations, created by rising longevity and low birthrates. As we approach the debt limit in the US, while President Biden has promised to protect Social Security, many have returned to the argument that the program is financially unsustainable. This paper argues that most of the discussion and policy solutions proposed surrounding aging of populations are misfocused on supposed financial challenges when they should be directed toward the challenges facing resource provision. From the resource perspective, the burden of caring for tomorrow’s seniors seems far less challenging. Indeed, falling fertility rates and an end to global population growth should be welcomed. With fewer children and longer lives, investment in the workers of the future will ensure growth of productivity that will provide the resources necessary to support a higher ratio of retirees to those of working age. Global population growth will peak and turn negative, reducing demands on earth’s biosphere and making it easier to transition to environmental sustainability. Rather than facing a demographic “time bomb,” we can welcome the transition to a mature-aged profile.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager | December 2022While the trigger for the Covid recession was unusual—a collapse of the supply side that produced a drop in demand—the inflation the US economy is now facing is not atypical, according to L. Randall Wray. In this one-pager, he explores the causes of the current inflationary environment, arguing that continuing inflation pressures come mostly from the supply side.
Wray warns that, given federal spending had already been declining substantially before the Fed started raising interest rates, rate hikes make a recession—and potentially stagflation—even more likely. A key part of our fiscal policy response should be focused on well-designed public investment addressing the substantial supply constraints still affecting the US economy—constraints that are not just due to the Covid crisis, but also decades of underinvestment in infrastructure. Such an approach, in Wray's view, would reduce inflationary pressures while supporting growth.
Download:Associated Program(s):The State of the US and World Economies Monetary Policy and Financial Structure Federal Budget PolicyAuthor(s):Related Topic(s): -
Public Policy Brief No. 157 | April 2022
The Fed Cannot Engineer a Soft Landing but Risks Stagflation by Trying
Roughly two years into the economic recovery from the COVID-19 crisis, the topic of elevated inflation dominates the economic policy discourse in the United States. And the aggressive use of fiscal policy to support demand and incomes has commonly been singled out as the culprit. Equally as prevalent is the clamor for the Federal Reserve to raise interest rates to relieve inflationary pressures. According to Research Scholar Yeva Nersisyan and Senior Scholar L. Randall Wray, this narrative is flawed in a number of ways. The problem with the US economy is not one of excess of demand in their view, and the Federal Reserve will not be able to engineer a “soft landing” in the way many seem to be expecting. The authors also deliver a warning: excessive tightening, combined with headwinds in 2022, could lead to stagflation. Moreover, while this recovery looks robust in comparison to the jobless recoveries and secular stagnation that have typified the last few decades, in Nersisyan and Wray’s estimation there are few signs of an overheating economy to be found in the macro data. In their view, this inflation is not centrally demand driven; rather dynamics at the micro-level are playing a much more central role in driving the price increases in question, while significant supply chain problems have curtailed productive capacity by disrupting the availability of critical inputs.
The authors suggest there is a better way to conduct policy—one oriented around targeted investments that would increase our real resource space. This will serve not only to address inflationary pressures, according to Nersisyan and Wray, but also the far more pressing climate emergency.Download:Associated Program:Author(s): -
Working Paper No. 1003 | March 2022
Pandemic or Policy Response?
This paper examines the recent increase of the measured inflation rate to assess the degree to which the acceleration is due to problems created (largely on the supply side) by the pandemic versus pressures created on the demand side by pandemic relief. Some have attributed the inflation to excess demand, most notably Larry Summers, who had warned that the pandemic relief spending was too great. As evidence, one could point to the quick recovery of GDP and to reportedly tight labor markets. Others have variously blamed supply chain disruptions, shortages of certain inputs, OPEC’s oil price increases, labor market disruptions because of COVID, and rising profit margins obtained through exercise of pricing power. We conclude that there is little evidence that excess demand is the problem, although we agree that in the absence of the relief checks, recovery would have been sufficiently slow to minimize inflation pressure. We closely examine the main contributors to rising overall prices and conclude that tighter monetary policy would not be an effective way to reduce price pressures. We also cast doubt on the expectations theory of inflation control. We present evidence that suggests there is currently little danger that higher inflation will become entrenched. If anything, rate hikes now will make it harder for the economy to adjust to current realities. The potential for lots of pain with little gain is great. The best course of action is to tackle problems on the supply side.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager No. 69 | February 2022A recent article in the New York Times asks whether Modern Money Theory (MMT) can declare victory after its policies were (supposedly) implemented during the response to the COVID-19 pandemic. The article suggests yes, but for the high inflation it sparked. In the view of Yeva Nersisyan and Senior Scholar L. Randall Wray, the federal government’s response largely validated MMT’s claims regarding public debt and deficits and questions of sovereign government solvency—it did not, however, represent MMT policy.Download:Associated Program(s):Author(s):
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Public Policy Brief No. 156 | December 2021
The Federal Reserve’s Continuing Experiments with Unobservables
Institute President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray contend that the prevailing approach to monetary policy and inflation is influenced by a set of concepts that are a poor guide to action. In this policy brief, they examine two previous cases in which the Federal Reserve misread the data and raised rates too soon, as well as the evolution of the Fed’s thought and practice over the past three decades—a period in which the central bank has increasingly turned to unobservable indicators that are supposed to predict inflation. Noting that their criticisms have now been raised by the Fed’s own members and research staff, the authors highlight the ways in which we need to rethink our overall framework for monetary and fiscal policy. The Fed has far less control over inflation than is presumed, they argue, and, at worst, might have the whole inflation-fighting strategy backwards. Managing inflation, they conclude, should not be left entirely in the hands of central banks.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager No. 68 | November 2021With the US Treasury cutting checks totaling approximately $5 trillion to deal with the COVID-19 crisis, Senior Scholar L. Randall Wray argues that when it comes to the federal government, concerns about affordability and solvency can both be laid to rest. According to Wray, the question is never whether the federal government can spend more, but whether it should. And while there are still strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, with two centuries of experience the evidence for these concerns is mixed at best.Download:Associated Program(s):Author(s):Related Topic(s):
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e-pamphlets | August 2021Modern Money Theory (MMT) has been frequently mentioned in recent media—first as “crazy talk” that if followed would bankrupt the nation and then, after the COVID-19 pandemic hit, as a way to finance an emergency response. In recent months, however, Washington seems to have returned to the old view that government spending must be “paid for” with new taxes. This raises the question: Has MMT really made headway with policymakers? This e-pamphlet examines the extraordinary interview given recently by Representative John Yarmuth’s (D, KY-03), Chair of the House Budget Committee, in which he explicitly adopts an MMT approach to budgeting. Chairman Yarmuth also lays out a path for realizing the major elements of President Biden’s proposals. Finally, Wray summarizes a recent presentation he gave to the Congressional Budget Office’s Macroeconomic Analysis section that urged reconsideration of the way that fiscal policy impacts are assessed.Download:Associated Program(s):Monetary Policy and Financial Structure Economic Policy for the 21st Century The State of the US and World EconomiesAuthor(s):Related Topic(s):
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Public Policy Brief No. 155 | June 2021
Yes, If He Abandons Fiscal “Pay Fors"
President Biden’s proposals for investing in social and physical infrastructure signal a return to a budget-neutral policymaking framework that has largely been set aside since the outbreak of the COVID-19 crisis. According Yeva Nersisyan and L. Randall Wray, this focus on ensuring revenues keep pace with spending increases can undermine the goals internal to both the public investment and tax components of the administration’s plans: the “pay for” approach limits our spending on progressive policy to what we can raise through taxes, and we will only tax the amount we need to spend.
Nersisyan and Wray propose an alternative approach to budgeting for large-scale public expenditure programs. In their view, policymakers should evaluate spending and tax proposals on their own terms, according to the goals each is intended to meet. If the purpose of taxing corporations and wealthy individuals is to reduce inequality, then the tax changes should be formulated to accomplish that—not to “raise funds” to finance proposed spending. And while it is possible that general tax hikes might be needed to prevent public investment programs from fueling inflation, they argue that the kinds of taxes proposed by the administration would do little to relieve inflationary pressures should they arise. Under current economic circumstances, however, the president’s proposed infrastructure spending should not require budgetary offsets or other measures to control inflation in their estimation.Download:Associated Program(s):Author(s): -
Policy Note 2021/3 | June 2021Edward Lane and L. Randall Wray explain how federal taxes on corporate profits are not well suited to either containing inflationary pressures or reducing inequality. They are not only a poor complement to President Biden’s proposed infrastructure plans, but are inefficient and ineffective taxes more broadly, according to Lane and Wray. The authors follow Hyman Minsky in recommending the elimination of corporate taxes, and they outline a replacement centered on the taxation of unrealized capital gains.
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One-Pager No. 67 | June 2021President Biden has proposed pairing his American Jobs Plan with an increase in federal corporate income taxes. Leaving aside the issue of whether any tax increases are needed to “pay for” the plan, Edward Lane and L. Randall Wray assess the proposed corporate profits tax hike in terms of its ability to meet two objectives: (1) fighting potential inflation that might result from the new Jobs Plan (and all the other relief and stimulus plans enacted), and (2) taxing the rich to reduce inequality. They argue the federal corporate income tax is far less effective at combating inflation and inequality than what many might think, and propose replacing corporate taxation with taxes on individuals that would ensure the burden is mostly imposed on high earners.
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One-Pager No. 65 | February 2021With the unveiling of President Biden’s nearly $2 trillion proposal for addressing the COVID-19 crisis, Democrats appear keen to avoid repeating the mistakes of the Great Recession—most notably the inadequate fiscal response.
Yeva Nersisyan and L. Randall Wray observe that while Democrats are not falling for the “deficit bogeyman” this time, critics have pushed the idea that the increase in government spending will cause inflation. Nersisyan and Wray argue that the current fiscal package should be evaluated as a set of relief measures, not stimulus, and that the objections of the inflation worriers should not stand in the way of taking needed action.Download:Associated Program:Author(s):Related Topic(s): -
Working Paper No. 985 | February 2021
No! And Yes.
Modern Money Theory (MMT) economists have used Japan as an example of a country that demonstrates that high deficits and debt do not lead to insolvency, high interest rates, or inflation. MMT insists that governments that issue their own sovereign currency cannot be forced into insolvency, that they can make all payments as they come due, and that they do not really spend tax revenue or borrow in their own currency—with Japan serving as an example of a country that does not face financial budget constraints as normally defined. In this paper we evaluate whether Japan is the poster child of MMT and argue that policy-wise Japan is not following MMT recommendations; in fact, it is generally adopting policies that are precisely the opposite of those proposed by MMT, consistently adopting the path of stop-go fiscal measures and engaging in inadequate and temporary fiscal stimuli in the face of recessions, followed by austerity whenever the economy has seemed to recover.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 979 | November 2020As the nation is experiencing the need for ever-increasing government expenditures to address COVID-19 disruptions, rebuild the nation’s infrastructure, and many other worthy causes, conventional thinking calls for restoring at least a portion corporate taxes eliminated by the 2017 Tax Cuts and Jobs Act, especially from progressive circles. In this working paper, Edward Lane and L. Randall Wray examine who really pays the corporate income tax and argue that it does not serve the purposes most people believe.
The authors provide an overview of the true purposes and incidence of corporate taxation and argue that it is inefficient and largely borne by consumers and employees, not shareholders. While the authors would prefer the elimination of the corporate profits tax, they understand the conventional thinking that taxes are necessary to help finance government expenditures—even if they disagree. Accordingly, the authors present alternatives to the corporate tax that shift the burden from consumers and employees to those who benefit the most from corporate success. -
Working Paper No. 961 | July 2020Modern money theory (MMT) synthesizes several traditions from heterodox economics. Its focus is on describing monetary and fiscal operations in nations that issue a sovereign currency. As such, it applies Georg Friedrich Knapp’s state money approach (chartalism), also adopted by John Maynard Keynes in his Treatise on Money. MMT emphasizes the difference between a sovereign currency issuer and a sovereign currency user with respect to issues such as fiscal and monetary policy space, ability to make all payments as they come due, credit worthiness, and insolvency. Following A. Mitchell Innes, however, MMT acknowledges some similarities between sovereign and nonsovereign issues of liabilities, and hence integrates a credit theory of money (or, “endogenous money theory,” as it is usually termed by post-Keynesians) with state money theory. MMT uses this integration in policy analysis to address issues such as exchange rate regimes, full employment policy, financial and economic stability, and the current challenges facing modern economies: rising inequality, climate change, aging of the population, tendency toward secular stagnation, and uneven development. This paper will focus on the development of the “Kansas City” approach to MMT at the University of Missouri–Kansas City (UMKC) and the Levy Economics Institute of Bard College.Download:Associated Program(s):Author(s):Related Topic(s):
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One-Pager No. 63 | April 2020As governments around the world explore ambitious approaches to fiscal and monetary policy in their responses to the COVID-19 crisis, Modern Money Theory (MMT) has been thrust into the spotlight once again. Unfortunately, many of those invoking the theory have misrepresented its central tenets, according Yeva Nersisyan and L. Randall Wray.
MMT provides an analysis of fiscal and monetary policy applicable to national governments with sovereign, nonconvertible currencies. In the context of articulating the elements of that analysis, Nersisyan and Wray draw out one of the lessons to be learned from the pandemic and its policy responses: that the government’s ability to run deficits is not limited to times of crisis; that we must build up our supplies, infrastructure, and institutions in normal times, and not wait for the next crisis to live up to our means.Download:Associated Program(s):Author(s):Related Topic(s): -
One-Pager No. 62 | March 2020As the coronavirus (COVID-19) spreads across the United States, it has become clear that, in addition to the public health response (which has been far less than adequate), an economic response is needed. Yeva Nersisyan and Senior Scholar L. Randall Wray identify four steps that require immediate attention: (1) full coverage of medical costs associated with testing and treatment of COVID-19; (2) mandated paid sick leave and full coverage of associated costs; (3) debt relief for families; and (4) swift deployment of testing and treatment facilities to underserved communities.Download:Associated Program:Author(s):Related Topic(s):
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Public Policy Brief No. 148 | January 2020In this policy brief, Yeva Nersisyan and Senior Scholar L. Randall Wray argue that assessing the “affordability” of the Green New Deal is a question of whether there are suitable and sufficient real resources than can be mobilized to implement this ambitious approach to climate policy. Only after a careful resource accounting can we address the question of whether taxes and other means might be needed to reduce private spending to avoid inflation as the Green New Deal is phased in.
Nersisyan and Wray provide a first attempt at resource budgeting for the Green New Deal, weighing available resources—including potential excess capacity and resources that can be shifted away from existing production—against what will be needed to implement the major elements of this plan to fight climate change and ensure a just transition to a more sustainable economic model.Download:Associated Program(s):The State of the US and World Economies Economic Policy for the 21st Century Climate Change and Economic PolicyAuthor(s):Related Topic(s): -
Book Series | January 2020
Heterodox Economic Policy for the 21st Century
A Great Leap Forward: Heterodox Economic Policy for the 21st Century investigates economic policy from a heterodox and progressive perspective. Author Randall Wray uses relatively short chapters arranged around several macroeconomic policy themes to present an integrated survey of progressive policy on topics of interest today that are likely to remain topics of interest for many years.
Published by: Elsevier PressAssociated Program:Author(s):Related Topic(s): -
Testimony | November 2019
Statement of Senior Scholar L. Randall Wray to the House Budget Committee, US House of Representatives
View More View LessReexamining the Economic Costs of Debt
On November 20, 2019, Senior Scholar L. Randall Wray testified before the House Committee on the Budget on the topic of reexamining the economic costs of debt:
"In recent months a new approach to national government budgets, deficits, and debts—Modern Money Theory (MMT)—has been the subject of discussion and controversy. [. . .]
In this testimony I do not want to rehash the theoretical foundations of MMT. Instead I will highlight empirical facts with the goal of explaining the causes and consequences of the intransigent federal budget deficits and the growing national government debt. I hope that developing an understanding of the dynamics involved will make the topic of deficits and debt less daunting. I will conclude by summarizing the MMT views on this topic, hoping to set the record straight."
Update 1/7/2020: In an appendix, L. Randall Wray responds to a Question for the Record submitted by Rep. Ilhan OmarDownload:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 936 | September 2019
The Modern Money Theory Approach
This paper will present the Modern Money Theory approach to government finance. In short, a national government that chooses its own money of account, imposes a tax in that money of account, and issues currency in that money of account cannot face a financial constraint. It can make all payments as they come due. It cannot be forced into insolvency. While this was well understood in the early postwar period, it was gradually “forgotten” as the neoclassical theory of the household budget constraint was applied to government finance. Matters were made worse by the development of “generational accounting” that calculated hundreds of trillions of dollars of government red ink through eternity due to “entitlements.” As austerity measures were increasingly adopted at the national level, fiscal responsibility was shifted to state and local governments through “devolution.” A “stakeholder” approach to government finance helped fuel white flight to suburbs and produced “doughnut holes” in the cities. To reverse these trends, we need to redevelop our understanding of the fiscal space open to the currency issuer—expanding its responsibility not only for national social spending but also for helping to fund state and local government spending. This is no longer just an academic debate, given the challenges posed by climate change, growing inequality, secular stagnation, and the rise of Trumpism.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 931 | May 2019This paper follows the methodology developed by J. M. Keynes in his How to Pay for the War pamphlet to estimate the “costs” of the Green New Deal (GND) in terms of resource requirements. Instead of simply adding up estimates of the government spending that would be required, we assess resource availability that can be devoted to implementing GND projects. This includes mobilizing unutilized and underutilized resources, as well as shifting resources from current destructive and inefficient uses to GND projects. We argue that financial affordability cannot be an issue for the sovereign US government. Rather, the problem will be inflation if sufficient resources cannot be diverted to the GND. And if inflation is likely, we need to put in place anti-inflationary measures, such as well-targeted taxes, wage and price controls, rationing, and voluntary saving. Following Keynes, we recommend deferred consumption as our first choice should inflation pressures arise. We conclude that it is likely that the GND can be phased in without inflation, but if price pressures do appear, deferring a small amount of consumption will be sufficient to attenuate them.Download:Associated Program(s):The State of the US and World Economies Economic Policy for the 21st Century Climate Change and Economic PolicyAuthor(s):Related Topic(s):
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Book Series | February 2019This groundbreaking new core textbook encourages students to take a more critical approach to the prevalent assumptions around the subject of macroeconomics, by comparing and contrasting heterodox and orthodox approaches to theory and policy. The first such textbook to develop a heterodox model from the ground up, it is based on the principles of Modern Monetary Theory (MMT) as derived from the theories of Keynes, Kalecki, Veblen, Marx, and Minsky, amongst others. The internationally-respected author team offer appropriate fiscal and monetary policy recommendations, explaining how the poor economic performance of most of the wealthy capitalist countries over recent decades could have been avoided, and delivering a well-reasoned practical and philosophical argument for the heterodox MMT approach being advocated.
Published by: Red Globe PressAssociated Program:Author(s):Related Topic(s): -
Policy Note 2018/3 | May 2018The idea of a universal job guarantee (JG) policy for the United States has become the subject of renewed public debate due to a number of high-profile political endorsements. L. Randall Wray recently coauthored a report that presented a JG proposal—the Public Service Employment program—along with estimates of the economic impact of the plan. However, several other variants have been proposed and/or endorsed. In this policy note, Wray seeks to establish common ground among the major JG plans and provides an initial response to critics.Download:Associated Program:Author(s):Related Topic(s):
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Research Project Reports | April 2018
A Path to Full Employment
Despite reports of a healthy US labor market, millions of Americans remain unemployed and underemployed, or have simply given up looking for work. It is a problem that plagues our economy in good times and in bad—there are never enough jobs available for all who want to work. L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton examine the impact of a new “job guarantee” proposal that would seek to eliminate involuntary unemployment by directly creating jobs in the communities where they are needed.
The authors propose the creation of a Public Service Employment (PSE) program that would offer a job at a living wage to all who are ready and willing to work. Federally funded but with a decentralized administration, the PSE program would pay $15 per hour and offer a basic package of benefits. This report simulates the economic impact over a ten-year period of implementing the PSE program beginning in 2018Q1.
Unemployment, hidden and official, with all of its attendant social harms, is a policy choice. The results in this report lend more weight to the argument that it is a policy choice we need no longer tolerate. True full employment is both achievable and sustainable.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2018/2 | March 2018Amid a recent upsurge in support for a national job guarantee program, L. Randall Wray, Stephanie A. Kelton, Pavlina R. Tcherneva, Scott Fullwiler, and Flavia Dantas outline a new proposal for a federally funded program with decentralized administration. Their Public Service Employment (PSE) program would offer a job—paying a uniform living wage with a basic benefits package—to all who are ready and willing to work. In advance of an upcoming report detailing the economic impact of the PSE, this policy note presents an overview of the goals and structure of the program in the context of current labor market trends and the prospects of poverty reduction.Download:Associated Program:Author(s):Related Topic(s):
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One-Pager No. 54 | February 2018The outgoing governor of the People’s Bank of China recently warned of a possible Chinese “Minsky moment”—Paul McCulley’s term, most recently applied to the 2007 US real estate crash that reverberated around the world as a global financial crisis. Although Western commentators have weighed in on both sides of the debate about the likelihood of China’s debt bubble bursting, Senior Scholar L. Randall Wray argues that too little attention is being paid to the far more probable repeat of a US Minsky moment. US prospects for growth, as well as for successfully handling the next financial meltdown, are dismal, he concludes.
Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2018/1 | February 2018It is beginning to look a lot like déjà vu in the United States. According to Senior Scholar L. Randall Wray, the combination of overvalued stocks, overleveraged banks, an undersupervised financial system, high indebtedness across sectors, and growing inequality together should remind one of the conditions of 1929 and 2007. Comparing the situations of the United States and China, where the outgoing central bank governor recently warned of the fragility of China’s financial sector, Wray makes the case that the United State is far more likely to “win” the race to the next “Minsky moment.” Instead of sustainable growth, we have “bubble-ized” our economy on the back of an overgrown financial sector—and to make matters worse, he concludes, US policymakers are ill-prepared to deal with the coming crisis.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 900 | January 2018
A Comparison of the Evolution of the Positions of Hyman Minsky and Abba Lerner
This paper examines the views of Hyman Minsky and Abba Lerner on the functional finance approach to fiscal policy. It argues that the main principles of functional finance were relatively widely held in the immediate postwar period. However, with the rise of the Phillips curve, the return of the Quantity Theory, the development of the notion of a government budget constraint, and accelerating inflation at the end of the 1960s, functional finance fell out of favor. The paper compares and contrasts the evolution of the views of Minsky and Lerner over the postwar period, arguing that Lerner’s transition went further, as he embraced a version of Monetarism that emphasized the use of monetary policy over fiscal policy. Minsky’s views of functional finance became more nuanced, in line with his Institutionalist approach to the economy. However, Minsky never rejected his early beliefs that countercyclical government budgets must play a significant role in stabilizing the economy. Thus, in spite of some claims that Minsky should not be counted as one of the “forefathers” of Modern Money Theory (MMT), this paper argues that it is Minsky, not Lerner, whose work remains essential for the further development of MMT.Download:Associated Program:Author(s):Related Topic(s): -
Policy Note 2017/3 | July 2017
Because Healthcare Is Not Insurable
The growing political momentum for a universal single-payer healthcare program in the United States is due in part to Republican attempts to repeal and replace the Affordable Care Act (Obamacare). However, according to Senior Scholar L. Randall Wray, it is Obamacare’s successes and its failures that have boosted support for a single-payer system. Even after Obamacare, the US healthcare system still has significant gaps in coverage—all while facing the highest healthcare bill in the world. In this policy note, Wray argues that the underlying challenge for a system based on private, for-profit insurance is that basic healthcare is not an insurable expense. It is time to abandon the current, overly complex and expensive payments system and reconsider single payer for all. Social Security and Medicare provide a model for reform.Download:Associated Program:Author(s):Related Topic(s): -
One-Pager No. 53 | February 2017
Demographics or Lack of Jobs?
Aging demographics, “social shifts,” and other supply-side and institutional factors have commonly been blamed for the fall in the US labor force participation rate. However, depressed labor force participation for prime-age workers is likely due to a combination of insufficient aggregate demand, weak job creation, and stagnant wages—all of which have been persistent problems over the past three or four decades. Although insufficient aggregate demand is the main problem, general “Keynesian” pump priming is not the answer. Stimulus needs to take the form of targeted job creation to tighten labor markets for less-skilled workers.
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Public Policy Brief No. 142 | February 2017
Flavia Dantas and L. Randall Wray argue that the emerging conventional wisdom—that the US economy has reached full employment—is flawed. The unemployment rate is not providing an accurate picture of the health of the labor market, and the common narrative attributing shrinking labor force engagement to aging demographics is overstated. Instead, falling prime-age participation rates are the symptom of a structural inadequacy of aggregate demand—a problem of insufficient job creation and stagnant incomes that conventional public policy remedies have been unable to address. The solution to our long-running secular stagnation requires targeted, direct job creation for those at the bottom of the income scale.
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In the Media | August 2016Manhattan Neighborhood Network, August 25, 2016. All Rights Reserved.
"Radical Imagination" host Jim Vrettos talks to Senior Scholar L. Randall Wray about what the US economy might look like under a Stein, Clinton, Trump, or Johnson administration.
Full video of the interview is available here. -
In the Media | May 2016Bloomberg, May 12, 2015. All Rights Reserved.
Senior Scholar L. Randall Wray discusses the US national debt and inflation with Bloomberg’s Joe Weisenthal on “What’d You Miss?”
Full video of the interview is available here. -
Book Series | November 2015
By L. Randall Wray
Perhaps no economist was more vindicated by the global financial crisis than Hyman P. Minsky (1919–1996). Although a handful of economists raised alarms as early as 2000, Minsky’s warnings began a half century earlier, with writings that set out a compelling theory of financial instability. Yet even today he remains largely outside mainstream economics; few people have a good grasp of his writings, and fewer still understand their full importance. Why Minsky Matters makes the maverick economist’s critically valuable insights accessible to general readers for the first time. Author L. Randall Wray shows that by understanding Minsky we will not only see the next crisis coming but we might be able to act quickly enough to prevent it.
As Wray explains, Minsky’s most important idea is that “stability is destabilizing”: to the degree that the economy achieves what looks to be robust and stable growth, it is setting up the conditions in which a crash becomes ever more likely. Before the financial crisis, mainstream economists pointed to much evidence that the economy was more stable, but their predictions were completely wrong because they disregarded Minsky’s insight. Wray also introduces Minsky’s significant work on money and banking, poverty and unemployment, and the evolution of capitalism, as well as his proposals for reforming the financial system and promoting economic stability.
A much-needed introduction to an economist whose ideas are more relevant than ever, Why Minsky Matters is essential reading for anyone who wants to understand why economic crises are becoming more frequent and severe—and what we can do about it.
Published by: Princeton
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Book Series | September 2015
Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Second Edition
View More View LessBy L. Randall Wray
In a completely revised second edition, Senior Scholar L. Randall Wray presents the key principles of Modern Money Theory, exploring macro accounting, monetary and fiscal policy, currency regimes, and exchange rates in developed and developing nations. Wray examines how misunderstandings about the nature of money caused the recent global financial meltdown, and provides fresh ideas about how leaders should approach economic policy. This updated edition also includes new chapters on tax policies and inflation.
Published by: Palgrave Macmillan
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Working Paper No. 837 | May 2015
A Keynes-Schumpeter-Minsky Synthesis
This paper discusses the role that finance plays in promoting the capital development of the economy, with particular emphasis on the current situation of the United States and the United Kingdom. We define both “finance” and “capital development” very broadly. We begin with the observation that the financial system evolved over the postwar period, from one in which closely regulated and chartered commercial banks were dominant to one in which financial markets dominate the system. Over this period, the financial system grew rapidly relative to the nonfinancial sector, rising from about 10 percent of value added and a 10 percent share of corporate profits to 20 percent of value added and 40 percent of corporate profits in the United States. To a large degree, this was because finance, instead of financing the capital development of the economy, was financing itself. At the same time, the capital development of the economy suffered perceptibly. If we apply a broad definition—to include technological advances, rising labor productivity, public and private infrastructure, innovations, and the advance of human knowledge—the rate of growth of capacity has slowed.
The past quarter century witnessed the greatest explosion of financial innovation the world had ever seen. Financial fragility grew until the economy collapsed into the global financial crisis. At the same time, we saw that much (or even most) of the financial innovation was directed outside the sphere of production—to complex financial instruments related to securitized mortgages, to commodities futures, and to a range of other financial derivatives. Unlike J. A. Schumpeter, Hyman Minsky did not see the banker merely as the ephor of capitalism, but as its key source of instability. Furthermore, due to “financialisation of the real economy,” the picture is not simply one of runaway finance and an investment-starved real economy, but one where the real economy itself has retreated from funding investment opportunities and is instead either hoarding cash or using corporate profits for speculative investments such as share buybacks. As we will argue, financialization is rooted in predation; in Matt Taibbi’s famous phrase, Wall Street behaves like a giant, blood-sucking “vampire squid.”
In this paper we will investigate financial reforms as well as other government policy that is necessary to promote the capital development of the economy, paying particular attention to increasing funding of the innovation process. For that reason, we will look not only to Minsky’s ideas on the financial system, but also to Schumpeter’s views on financing innovation.
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Working Paper No. 832 | February 2015
The Contributions of John F. Henry
This paper explores the rise of money and class society in ancient Greece, drawing historical and theoretical parallels to the case of ancient Egypt. In doing so, the paper examines the historical applicability of the chartalist and metallist theories of money. It will be shown that the origins and the evolution of money were closely intertwined with the rise and consolidation of class society and inequality. Money, class society, and inequality came into being simultaneously, so it seems, mutually reinforcing the development of one another. Rather than a medium of exchange in commerce, money emerged as an “egalitarian token” at the time when the substance of social relations was undergoing a fundamental transformation from egalitarian to class societies. In this context, money served to preserve the façade of social and economic harmony and equality, while inequality was growing and solidifying. Rather than “invented” by private traders, money was first issued by ancient Greek states and proto-states as they aimed to establish and consolidate their political and economic power. Rather than a medium of exchange in commerce, money first served as a “means of recompense” administered by the Greek city-states as they strived to implement the civic conception of social justice. While the origins of money are to be found in the origins of inequality, a well-functioning democratic society has the power to subvert the inequality-inducing characteristic of money via the use of money for public purpose, following the principles of Modern Money Theory (MMT). When used according to the principles of MMT, the inequality-inducing characteristic of money could be undermined, while the current trends in rising income and wealth disparities could be contained and reversed. -
Working Paper No. 827 | January 2015
Early Work on Endogenous Money and the Prudent Banker
In this paper, I examine whether Hyman P. Minsky adopted an endogenous money approach in his early work—at the time that he was first developing his financial instability approach. In an earlier piece (Wray 1992), I closely examined Minsky’s published writings to support the argument that, from his earliest articles in 1957 to his 1986 book (as well as a handout he wrote in 1987 on “securitization”), he consistently held an endogenous money view. I’ll refer briefly to that published work. However, I will devote most of the discussion here to unpublished early manuscripts in the Minsky archive (Minsky 1959, 1960, 1970). These manuscripts demonstrate that in his early career Minsky had already developed a deep understanding of the nature of banking. In some respects, these unpublished pieces are better than his published work from that period (or even later periods) because he had stripped away some institutional details to focus more directly on the fundamentals. It will be clear from what follows that Minsky’s approach deviated substantially from the postwar “Keynesian” and “monetarist” viewpoints that started from a “deposit multiplier.” The 1970 paper, in particular, delineates how Minsky’s approach differs from the “Keynesian” view as presented in mainstream textbooks. Further, Minsky’s understanding of banking in those years appears to be much deeper than that displayed three or four decades later by much of the post-Keynesian endogenous-money literature.
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Working Paper No. 821 | December 2014
The Advantages of Owning the Magic Porridge Pot
Over the past two decades there has been a revival of Georg Friedrich Knapp’s “state money” approach, also known as chartalism. The modern version has come to be called Modern Money Theory. Much of the recent research has delved into three main areas: mining previous work, applying the theory to analysis of current sovereign monetary operations, and exploring the policy space open to sovereign currency issuers. This paper focuses on “outside” money—the currency issued by the sovereign—and the advantages that accrue to nations that make full use of the policy space provided by outside money.
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Research Project Reports | April 2014This monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.
This is the third in a series of reports examining the Federal Reserve Bank’s response to the global financial crisis, with particular emphasis on questions of accountability, democratic governance and transparency, and mission consistency. In this year’s report, we focus on issues of central bank independence and governance, with particular attention paid to challenges raised during periods of crisis. We trace the principal changes in governance of the Fed over its history—changes that accelerate during times of economic stress. We pay special attention to the famous 1951 “Accord” and to the growing consensus in recent years for substantial independence of the central bank from the treasury. In some respects, we deviate from conventional wisdom, arguing that the concept of independence is not usually well defined. While the Fed is substantially independent of day-to-day politics, it is not operationally independent of the Treasury. We examine in some detail an alternative view of monetary and fiscal operations. We conclude that the inexorable expansion of the Fed’s power and influence raises important questions concerning democratic governance that need to be resolved.Download:Associated Program:Author(s): -
Working Paper No. 792 | March 2014
An Alternative to Economic Orthodoxy
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). In the MMT approach, the state (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social, legal unit of account—a money—used for measuring the obligation. This approach does not require the preexistence of markets; indeed, it almost certainly predates them. Once the authorities can levy such obligations, they can name what fulfills any obligation by denominating those things that can be delivered; in other words, by pricing them. MMT thus links obligatory payments like taxes to the money of account as well as the currency. This leads to a revised view of money and sovereign finance. The paper concludes with an analysis of the policy options available to a modern government that issues its own currency.
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Working Paper No. 791 | March 2014
Myth and Misunderstanding
It is commonplace to speak of central bank “independence” as if it were both a reality and a necessity. While the Federal Reserve is subject to the “dual mandate,” it has substantial discretion in its interpretation of the vague call for high employment and low inflation. Most important, the Fed’s independence is supposed to insulate it from political pressures coming from Congress and the US Treasury to “print money” to finance budget deficits. As in many developed nations, this prohibition was written into US law from the founding of the Fed in 1913. In practice, the prohibition is easy to evade, as we found during World War II, when budget deficits ran up to a quarter of US GDP. If a central bank stands ready to buy government bonds in the secondary market to peg an interest rate, then private banks will buy bonds in the new-issue market and sell them to the central bank at a virtually guaranteed price. Since central bank purchases of securities supply the reserves needed by banks to buy government debt, a virtuous circle is created, so that the treasury faces no financing constraint. That is what the 1951 Accord was supposedly all about: ending the cheap source of US Treasury finance. Since the global financial crisis hit in 2007, these matters have come to the fore in both the United States and the European Monetary Union, with those worried about inflation warning that the central banks are essentially “printing money” to keep sovereign-government borrowing costs low.
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. The Fed is a “creature of Congress,” created by public law that has evolved since 1913 in a way that not only increased the Fed’s assigned responsibilities but also strengthened congressional oversight. The paper addresses governance issues, which, a century after the founding of the Fed, remain somewhat unsettled. While the Fed should be, and appears to be, insulated from day-to-day political pressures, it is subject to the will of Congress. Further, the Fed cannot really be independent from the Treasury, because the Fed is the federal government’s bank, with almost all payments made by and to the government running through the Fed. As such, there is no “operational independence” that would allow the Fed to refuse to allow the Treasury to spend appropriated funds. Finally, the paper addresses troubling issues raised by the Fed’s response to the global financial crisis; namely, questions about transparency, accountability, and democratic governance.
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Working Paper No. 783 | January 2014
A Sovereign Currency Approach
This paper examines the fiscal and monetary policy options available to China as a sovereign currency-issuing nation operating in a dollar standard world. We first summarize a number of issues facing China, including the possibility of slower growth, global imbalances, and a number of domestic imbalances. We then analyze current monetary and fiscal policy formation and examine some policy recommendations that have been advanced to deal with current areas of concern. We next outline the sovereign currency approach and use it to analyze those concerns. We conclude with policy recommendations consistent with the policy space open to China.Download:Associated Program(s):Author(s):Related Topic(s): -
One-Pager No. 44 | December 2013
Reorienting Fiscal Policy to Reduce Financial Fragility
Since adopting a policy of gradually opening its economy more than three decades ago, China has enjoyed rapid economic growth and rising living standards for much of its population. While some argue that China might fall into the middle-income “trap,” they are underestimating the country’s ability to continue to grow at a rapid pace. It is likely that China’s growth will eventually slow, but the nation will continue on its path to join the developed high-income group—so long as the central government recognizes and uses the policy space available to it.Download:Associated Program:Author(s):Related Topic(s): -
Working Paper No. 778 | November 2013
A Reply to Critics
One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.
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Research Project Reports | April 2013
The Lender of Last Resort: A Critical Analysis of the Federal Reserve’s Unprecedented Intervention after 2007
View More View LessThis monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.
“Never waste a crisis.” Those words were often invoked by reformers who wanted to tighten regulations and financial supervision in the aftermath of the global financial crisis that began in late 2007. Many of them have been disappointed, since the relatively weak reforms adopted (for example, in Dodd-Frank) appear to have fallen far short of what is needed. But the same words can be invoked in reference to the policy response to the crisis—that is, to the rescue of the financial system. To date, the crisis was wasted in that area, too. If anything, the crisis response largely restored the deeply flawed system that existed on the eve of the crisis.But it may not be too late to use the crisis, and the crisis response, to formulate a different approach to dealing with the next financial crisis—and another crisis is inevitable—by learning from the policy mistakes made in reaction to the last crisis, and by looking to successful policy responses around the globe.Download:Associated Program:Author(s): -
In the Media | January 2013
Pacifica Radio, January 4, 2013. All Rights Reserved.
Senior Scholar L. Randall Wray talks to KPFK’s Suzi Weissman about the economic prospects waiting on the far side of the fiscal cliff. Full audio of the interview is available here.
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Working Paper No. 736 | November 2012
This paper argues that the usual framing of discussions of money, monetary policy, and fiscal policy plays into the hands of conservatives.That framing is also largely consistent with the conventional view of the economy and of society more generally. To put it the way that economists usually do, money “lubricates” the market mechanism—a good thing, because the conventional view of the market itself is overwhelmingly positive. Acknowledging the work of George Lakoff, this paper takes the position that we need an alternative meme, one that provides a frame that is consistent with a progressive social view if we are to be more successful in policy debates. In most cases, the progressives adopt the conservative framing and so have no chance. The paper advances an alternative framing for money and shows how it can be used to reshape discussion. The paper shows that the Modern Money Theory approach is particularly useful as a starting point for framing that emphasizes use of the monetary system as a tool to accomplish the public purpose.
It is not so much the accuracy of the conventional view of money that we need to question, but rather the framing. We need a new meme for money, one that would emphasize the social, not the individual. It would focus on the positive role played by the state, not only in the creation and evolution of money, but also in ensuring social control over money. It would explain how money helps to promote a positive relation between citizens and the state, simultaneously promoting shared values such as liberty, democracy, and responsibility. It would explain why social control over money can promote nurturing activities over the destructive impulses of our “undertakers” (Smith’s evocative term for capitalists).
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Policy Note 2012/8 | July 2012From the very start, the European Monetary Union (EMU) was set up to fail. The host of problems we are now witnessing, from the solvency crises on the periphery to the bank runs in Spain, Greece, and Italy, were built into the very structure of the EMU and its banking system. Policymakers have admittedly responded to these various emergencies with an uninspiring mix of delaying tactics and self-destructive policy blunders, but the most fundamental mistake of all occurred well before the buildup to the current crisis. What we are witnessing today are the results of a design flaw. When individual nations like Greece or Italy joined the EMU, they essentially adopted a foreign currency—the euro—but retained responsibility for their nation’s fiscal policy. This attempted separation of fiscal policy from a sovereign currency is the fatal defect that is tearing the eurozone apart.
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Working Paper No. 717 | May 2012
This paper integrates the various strands of an alternative, heterodox view on the origins of money and the development of the modern financial system in a manner that is consistent with the findings of historians and anthropologists. As is well known, the orthodox story of money’s origins and evolution begins with the creation of a medium of exchange to reduce the costs of barter. To be sure, the history of money is “lost in the mists of time,” as money’s invention probably predates writing. Further, the history of money is contentious. And, finally, even orthodox economists would reject the Robinson Crusoe story and the evolution from a commodity money through to modern fiat money as historically accurate. Rather, the story told about the origins and evolution of money is designed to shed light on the “nature” of money. The orthodox story draws attention to money as a transactions-cost-minimizing medium of exchange.
Heterodox economists reject the formalist methodology adopted by orthodox economists in favor of a substantivist methodology. In the formalist methodology, the economist begins with the “rational” economic agent facing scarce resources and unlimited wants. Since the formalist methodology abstracts from historical and institutional detail, it must be applicable to all human societies. Heterodoxy argues that economics has to do with a study of the institutionalized interactions among humans and between humans and nature. The economy is a component of culture; or, more specifically, of the material life process of society. As such, substantivist economics cannot abstract from the institutions that help to shape economic processes; and the substantivistproblem is not the formal one of choice, but a problem concerning production and distribution.
A powerful critique of the orthodox story regarding money can be developed using the findings of comparative anthropology, comparative history, and comparative economics. Given the embedded nature of economic phenomenon in prior societies, an understanding of what money is and what it does in capitalist societies is essential to this approach. This can then be contrasted with the functioning of precapitalist societies in order to allow identification of which types of precapitalist societies would use money and what money would be used for in these societies. This understanding is essential for informed speculation on the origins of money. The comparative approach used by heterodox economists begins with an understanding of the role money plays in capitalist economies, which shares essential features with analyses developed by a wide range of Institutionalist, Keynesian, Post Keynesian, and Marxist macroeconomists. This paper uses the understanding developed by comparative anthropology and comparative history of precapitalist societies in order to logically reconstruct the origins of money.
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Research Project Reports | April 2012This monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.
In the current financial crisis, the United States has relied on two primary methods of extending the government safety net: a stimulus package approved and budgeted by Congress, and a massive and unprecedented response by the Federal Reserve in the fulfillment of its lender-of-last-resort function. This monograph examines the benefits and drawbacks of each method, focusing on questions of accountability, democratic governance and transparency, and mission consistency. The aim is to explore the possibility of reform that would place more responsibility for provision of a safety net on Congress, with a smaller role to be played by the Fed, not only enhancing accountability but also allowing the Fed to focus more closely on its proper mission.
Download:Associated Program:Author(s):Related Topic(s):Commercial banking Deregulation Dodd-Frank Federal Reserve Financial governance Financial instability Financial Stability Oversight Council (FSOC) Glass-Steagall Act Global financial crisis Hyman Minsky Investment banking Lender of last resort (LOLR) Monetary policy Securitization Self-supervision Social safety net Subprime mortgage crisis Too big to fail (TBTF) -
Working Paper No. 711 | March 2012
A Minskyan Interpretation of the Causes, the Fed’s Bailout, and the Future
This paper provides a quick review of the causes of the Global Financial Crisis that began in 2007. There were many contributing factors, but among the most important were rising inequality and stagnant incomes for most American workers, growing private sector debt in the United States and many other countries, financialization of the global economy (itself a very complex process), deregulation and desupervision of financial institutions, and overly tight fiscal policy in many nations. The analysis adopts the “stages” approach developed by Hyman P. Minsky, according to which a gradual transformation of the economy over the postwar period has in many ways reproduced the conditions that led to the Great Depression. The paper then moves on to an examination of the US government’s bailout of the global financial system. While other governments played a role, the US Treasury and the Federal Reserve assumed much of the responsibility for the bailout. A detailed examination of the Fed’s response shows how unprecedented—and possibly illegal—was its extension of the government’s “safety net” to the biggest financial institutions. The paper closes with an assessment of the problems the bailout itself poses for the future.
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Public Policy Brief No. 122 | February 2012President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a “sovereign debt crisis” ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster.
The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.Download:Associated Program:Author(s):Related Topic(s): -
Working Paper No. 707 | February 2012
A Proposal for Ireland
Euroland is in a crisis that is slowly but surely spreading from one periphery country to another; it will eventually reach the center. The blame is mostly heaped upon supposedly profligate consumption by Mediterraneans. But that surely cannot apply to Ireland and Iceland. In both cases, these nations adopted the neoliberal attitude toward banks that was pushed by policymakers in Europe and America, with disastrous results. The banks blew up in a speculative fever and then expected their governments to absorb all the losses. The situation was similar in the United States, but in our case the debts were in dollars and our sovereign currency issuer simply spent, lent, and guaranteed 29 trillion dollars’ worth of bad bank decisions. Even in our case it was a huge mistake—but it was “affordable.” Ireland and Iceland were not so lucky, as their bank debts were in “foreign” currencies. By this I mean that even though Irish bank debt was in euros, the Government of Ireland had given up its own currency in favor of what is essentially a foreign currency—the euro, which is issued by the European Central Bank (ECB). Every euro issued in Ireland is ultimately convertible, one to one, to an ECB euro. There is neither the possibility of depreciating the Irish euro nor the possibility of creating ECB euros as necessary to meet demands for clearing. Ireland is in a situation similar to that of Argentina a decade ago, when it adopted a currency board based on the US dollar. And yet the authorities demand more austerity, to further reduce growth rates. As both Ireland and Greece have found out, austerity does not mean reduced budget deficits, because tax revenues fall faster than spending can be cut. Indeed, as I write this, Athens has exploded in riots. Is there an alternative path?
In this piece I argue that there is. First, I quickly summarize the financial foibles of Iceland and Ireland. I will then—also quickly—summarize the case for debt relief or default. Then I will present a program of direct job creation that could put Ireland on the path to recovery. Understanding the financial problems and solutions puts the jobs program proposal in the proper perspective: a full implementation of a job guarantee cannot occur within the current financial arrangements. Still, something can be done.
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One-Pager No. 24 | February 2012
It’s a mistake to interpret the unfolding disaster in Europe as primarily a “sovereign debt crisis.” The underlying problem is not periphery profligacy, but rather the very setup of the European Monetary Union (EMU)—a setup that even now prevents a satisfactory resolution to this crisis. The central weakness of the EMU is that it separates nations from their currencies without providing them with adequate overarching fiscal or monetary policy structures—it’s like a United States without a Treasury or a fully functioning Federal Reserve. Without addressing this basic structural weakness, Euroland will continue to stumble toward the cliff—and threaten to pull a tottering US financial system over the edge with it.
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Working Paper No. 704 | January 2012
A Dissenting View
It is commonplace to link neoclassical economics to 18th- or 19th-century physics and its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic collateralized debt obligations—CDOs. Guided by invisible hands, supplies balance demands and markets clear. Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies themselves. Certainly there is a price, somewhere, somehow, that will balance supply and demand. The orthodox economist is sure that if we just get the government out of the way, the market will do the dirty work. The heterodox economist? Well, she is less sure. The market might not work. It needs a bit of coaxing. Imbalances can persist. Market forces can be rather impotent. The visible hand of government can hasten the move toward balance.
Orthodox economists as well as most heterodox economists see the Global Financial Crisis as a consequence of domestic and global imbalances. The most common story blames the US Federal Reserve for excessive monetary ease that spurred borrowing, and the US fiscal and trade imbalances for a surplus of liquidity sloshing around global financial markets. Looking to the specific problems in Euroland, the imbalances are attributed to profligate Mediterraneans. The solution is to restore global balance, which requires some combination of higher exchange rates for the Chinese, reduction of US trade deficits, and Teutonic fiscal discipline in the United States, the UK, and Japan, as well as on the periphery of Europe.
This paper takes an alternative view, following the sectoral balances approach of Wynne Godley, combined with the modern money theory (MMT) approach derived from the work of Innes, Knapp, Keynes, Lerner, and Minsky. The problem is not one of financial imbalance, but rather one of an imbalance of power. There is too much power in the hands of the financial sector, money managers, the predator state, and Europe’s center. There is too much privatization and pursuit of the private purpose, and too little use of government to serve the public interest. In short, there is too much neoliberalism and too little democracy, transparency, and accountability of government.
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Working Paper No. 700 | December 2011
This paper takes off from Jan Kregel’s paper “Shylock and Hamlet, or Are There Bulls and Bears in the Circuit?” (1986), which aimed to remedy shortcomings in most expositions of the “circuit approach.” While some “circuitistes” have rejected John Maynard Keynes’s liquidity preference theory, Kregel argued that such rejection leaves the relation between money and capital asset prices, and thus investment theory, hanging. This paper extends Kregel’s analysis to an examination of the role that banks play in the circuit, and argues that banks should be modeled as active rather than passive players. This also requires an extension of the circuit theory of money, along the lines of the credit and state money approaches of modern Chartalists who follow A. Mitchell Innes. Further, we need to take Charles Goodhart’s argument about default seriously: agents in the circuit are heterogeneous credit risks. The paper concludes with links to the work of French circuitist Alain Parguez.
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One-Pager No. 23 | December 2011
$29,000,000,000,000: A Detailed Look at the Fed’s Bailout of the Financial System
View More View LessThe extraordinary scope and magnitude of the financial crisis of 2007–09 induced an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort function. Estimates of the total amount of bailout funding provided by the Fed have ranged from its own lowball claim of $1.2 trillion to Bloomberg’s estimate of $7.7 trillion (just for the biggest banks) to the GAO tally of $16 trillion. But new research conducted as part of a Ford Foundation project directed by Senior Scholar L. Randall Wray finds that the Fed’s commitments—in the form of loans and asset purchases to prop up the global financial system—far exceeded even the highest estimates.
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One-Pager No. 20 | November 2011As the crisis in Europe spreads, policymakers trot out one inadequate proposal after another, all failing to address the core problem. The possibility of dissolution, whether complete or partial, is looking less and less farfetched. Alongside political obstacles to reform, there is a widespread failure to understand the nature of this crisis. And without seeing clearly, policymakers will continue to focus on the wrong solutions.
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Working Paper No. 693 | October 2011Yet another rescue plan for the European Monetary Union (EMU) is making its way through central Europe, but no one is foolish enough to believe that it will be enough. Greece’s finance minister reportedly said that his nation cannot continue to service its debt, and hinted that a 50 percent write-down is likely. That would be just the beginning, however, as other highly indebted periphery nations will follow suit. All the major European banks will be hit—and so will the $3 trillion US market for money market mutual funds, which have about half their funds invested in European banks. Add in other US bank exposure to Europe and you are up to a potential $3 trillion hit to US finance. Another global financial crisis is looking increasingly likely.
We first summarize the situation in Euroland. Our main argument will be that the problem is not due to profligate spending by some nations but rather the setup of the EMU itself. We then turn to US problems, assessing the probability of a return to financial crisis and recession. We conclude that difficult times lie ahead, with a high probability that another collapse will be triggered by events in Euroland or in the United States. We conclude with an assessment of possible ways out. It is not hard to formulate economically and technically simple policy solutions for both the United States and Euroland. The real barrier in each case is political—and, unfortunately, the situation is worsening quickly in Europe. It may be too late already.Download:Associated Program:Author(s):Related Topic(s): -
Public Policy Brief No. 120 | October 2011
The Minskyan Lessons We Failed to Learn
Senior Scholar L. Randall Wray lays out the numerous and critical ways in which we have failed to learn from the latest global financial crisis, and identifies the underlying trends and structural vulnerabilities that make it likely a new crisis is right around the corner. Wray also suggests some policy changes that would shore up the financial system while reinvigorating the real economy, including the clear separation of commercial and investment banking, and a universal job guarantee.
Download:Associated Program:Author(s):Related Topic(s):Commercial banking Control fraud Employer of Last Resort (ELR) policy Employment guarantee Financial instability Financialization Full employment policy Global financial crisis Hyman Minsky Investment banking Monetary policy Money manager capitalism Securitization Shadow banking Subprime mortgage crisis -
In the Media | August 2011
New Economic Perspectives, August 13, 2011. Copyright © 2010 KPFK. All Rights Reserved.
Senior Scholar Wray joins Masters for a macroeconomic analysis of adverse economic trends at home and abroad amid dire predictions of a double-dip recession in the United States and defaults in Europe, connecting the dots to see if we are indeed at a Smoot-Hawley moment where the Congress, instead of reversing economic decline, has accelerated it. Full audio of the interview is available here.
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Working Paper No. 681 | August 2011
This paper begins by recounting the causes and consequences of the global financial crisis (GFC). The triggering event, of course, was the unfolding of the subprime crisis; however, the paper argues that the financial system was already so fragile that just about anything could have caused the collapse. It then moves on to an assessment of the lessons we should have learned. Briefly, these include: (a) the GFC was not a liquidity crisis, (b) underwriting matters, (c) unregulated and unsupervised financial institutions naturally evolve into control frauds, and (d) the worst part is the cover-up of the crimes. The paper argues that we cannot resolve the crisis until we begin going after the fraud, and concludes by outlining an agenda for reform, along the lines suggested by the work of Hyman P. Minsky.
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Public Policy Brief No. 117 | April 2011
Scott Fullwiler and Senior Scholar L. Randall Wray review the roles of the Federal Reserve and the Treasury in the context of quantitative easing, and find that the financial crisis has highlighted the limited oversight of Congress and the limited transparency of the Fed. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is whether the Fed should be able to commit the public purse in times of national crisis.
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Working Paper No. 662 | March 2011
This paper examines the causes and consequences of the current global financial crisis. It largely relies on the work of Hyman Minsky, although analyses by John Kenneth Galbraith and Thorstein Veblen of the causes of the 1930s collapse are used to show similarities between the two crises. K.W. Kapp’s “social costs” theory is contrasted with the recently dominant “efficient markets” hypothesis to provide the context for analyzing the functioning of financial institutions. The paper argues that, rather than operating “efficiently,” the financial sector has been imposing huge costs on the economy—costs that no one can deny in the aftermath of the economy’s collapse. While orthodox approaches lead to the conclusion that money and finance should not matter much, the alternative tradition—from Veblen and Keynes to Galbraith and Minsky—provides the basis for developing an approach that puts money and finance front and center. Including the theory of social costs also generates policy recommendations more appropriate to an economy in which finance matters.
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Working Paper No. 661 | March 2011
The world’s worst economic crisis since the 1930s is now well into its third year. All sorts of explanations have been proffered for the causes of the crisis, from lax regulation and oversight to excessive global liquidity. Unfortunately, these narratives do not take into account the systemic nature of the global crisis. This is why so many observers are misled into pronouncing that recovery is on the way—or even under way already. I believe they are incorrect. We are, perhaps, in round three of a nine-round bout. It is still conceivable that Minsky’s “it”—a full-fledged debt deflation with failure of most of the largest financial institutions—could happen again.
Indeed, Minsky’s work has enjoyed unprecedented interest, with many calling this a “Minsky moment” or “Minsky crisis.” However, most of those who channel Minsky locate the beginnings of the crisis in the 2000s. I argue that we should not view this as a “moment” that can be traced to recent developments. Rather, as Minsky argued for nearly 50 years, we have seen a slow realignment of the global financial system toward “money manager capitalism.” Minsky’s analysis correctly links postwar developments with the prewar “finance capitalism” analyzed by Rudolf Hilferding, Thorstein Veblen, and John Maynard Keynes—and later by John Kenneth Galbraith. In an important sense, over the past quarter century we created conditions similar to those that existed in the run-up to the Great Depression, with a similar outcome. Getting out of this mess will require radical policy changes no less significant than those adopted in the New Deal.
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Working Paper No. 659 | March 2011
Stability is destabilizing. These three words concisely capture the insight that underlies Hyman Minsky’s analysis of the economy’s transformation over the entire postwar period. The basic thesis is that the dynamic forces of a capitalist economy are explosive and must be contained by institutional ceilings and floors. However, to the extent that these constraints achieve some semblance of stability, they will change behavior in such a way that the ceiling will be breached in an unsustainable speculative boom. If the inevitable crash is “cushioned” by the institutional floors, the risky behavior that caused the boom will be rewarded. Another boom will build, and the crash that follows will again test the safety net. Over time, the crises become increasingly frequent and severe, until finally “it” (a great depression with a debt deflation) becomes possible.
Policy must adapt as the economy is transformed. The problem with the stabilizing institutions that were put in place in the early postwar period is that they no longer served the economy well by the 1980s. Further, they had been purposely degraded and even in some cases dismantled, often in the erroneous belief that “free” markets are self-regulating. Hence, the economy evolved over the postwar period in a manner that made it much more fragile. Minsky continually formulated and advocated policy to deal with these new developments. Unfortunately, his warnings were largely ignored by the profession and by policymakers—until it was too late.
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Working Paper No. 658 | March 2011
Rethinking Money as a Public Monopoly
In this paper I first provide an overview of alternative approaches to money, contrasting the orthodox approach, in which money is neutral, at least in the long run; and the Marx-Veblen-Keynes approach, or the monetary theory of production. I then focus in more detail on two main categories: the orthodox approach that views money as an efficiency-enhancing innovation of markets, and the Chartalist approach that defines money as a creature of the state. As the state’s “creature,” money should be seen as a public monopoly. I then move on to the implications of viewing money as a public monopoly and link that view back to Keynes, arguing that extending Keynes along these lines would bring his theory up to date.
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Working Paper No. 656 | March 2011
This paper begins by defining, and distinguishing between, money and finance, and addresses alternative ways of financing spending. We next examine the role played by financial institutions (e.g., banks) in the provision of finance. The role of government as both regulator of private institutions and provider of finance is also discussed, and related topics such as liquidity and saving are explored. We conclude with a look at some of the new innovations in finance, and at the global financial crisis, which could be blamed on excessive financialization of the economy.
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Working Paper No. 655 | March 2011
In the aftermath of the global financial collapse that began in 2007, governments around the world have responded with reform. The outlines of Basel III have been announced, although some have already dismissed its reform agenda as being too little (and too late!). Like the proposed reforms in the United States, it is argued, Basel III would not have prevented the financial crisis even if it had been in place. The problem is that the architects of reform are working around the edges, taking current bank activities as somehow appropriate and trying to eliminate only the worst excesses of the 2000s.
Hyman Minsky would not be impressed.
Before we can reform the financial system, we need to understand what the financial system does—or, better, what it should do. To put it as simply as possible, Minsky always insisted that the proper role of the financial system is to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined.
In this paper, we first examine Minsky’s general proposals for reform of the economy—how to restore stable growth that promotes job creation and rising living standards. We then turn to his proposals for financial reform. We will focus on his writing in the early 1990s, when he was engaged in a project at the Levy Economics Institute on reconstituting the financial system (Minsky 1992a, 1992b, 1993, 1996). As part of that project, he offered his insights on the fundamental functions of a financial system. These thoughts lead quite naturally to a critique of the financial practices that precipitated the global financial crisis, and offer a path toward thorough-going reform.
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Working Paper No. 653 | March 2011
In this paper I will follow Hyman Minsky in arguing that the postwar period has seen a slow transformation of the economy from a structure that could be characterized as “robust” to one that is “fragile.” While many economists and policymakers have argued that “no one saw it coming,” Minsky and his followers certainly did! While some of the details might have surprised Minsky, certainly the general contours of this crisis were foreseen by him a half century ago. I will focus on two main points: first, the past four decades have seen the return of “finance capitalism”; and second, the collapse that began two years ago is a classic “Fisher-Minsky” debt deflation. The appropriate way to analyze this transformation and collapse is from the perspective of what Minsky called “financial Keynesianism”—a label he preferred over Post Keynesian because it emphasized the financial nature of the capitalist economy he analyzed.
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Working Paper No. 652 | March 2011
The Queen of England famously asked her economic advisers why none of them had seen “it” (the global financial crisis) coming. Obviously, the answer is complex, but it must include reference to the evolution of macroeconomic theory over the postwar period—from the “Age of Keynes,” through the Friedmanian era and the return of Neoclassical economics in a particularly extreme form, and, finally, on to the New Monetary Consensus, with a new version of fine-tuning. The story cannot leave out the parallel developments in finance theory—with its efficient markets hypothesis—and in approaches to regulation and supervision of financial institutions.
This paper critically examines these developments and returns to the earlier Keynesian tradition to see what was left out of postwar macro. For example, the synthesis version of Keynes never incorporated true uncertainty or “unknowledge,” and thus deviated substantially from Keynes’s treatment of expectations in chapters 12 and 17 of the General Theory. It essentially reduced Keynes to sticky wages and prices, with nonneutral money only in the case of fooling. The stagflation of the 1970s ended the great debate between “Keynesians” and “Monetarists” in favor of Milton Friedman’s rules, and set the stage for the rise of a succession of increasingly silly theories rooted in pre-Keynesian thought. As Lord Robert Skidelsky (Keynes’s biographer) argues, “Rarely in history can such powerful minds have devoted themselves to such strange ideas.” By returning to Keynes, this paper attempts to provide a new direction forward.
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One-Pager No. 8 | February 2011
The economic crisis that has gripped the US economy since 2007 has highlighted Congress’s limited oversight of the Federal Reserve, and the limited transparency of the Fed’s actions. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is, Should the Fed be able to commit the public purse in times of national crisis?
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Working Paper No. 647 | December 2010
This paper advances three fundamental propositions regarding money:
(1) As R. W. Clower (1965) famously put it, money buys goods and goods buy money, but goods do not buy goods.
(2) Money is always debt; it cannot be a commodity from the first proposition because, if it were, that would mean that a particular good is buying goods.
(3) Default on debt is possible.
These three propositions are used to build a theory of money that is linked to common themes in the heterodox literature on money. The approach taken here is integrated with Hyman Minsky’s (1986) work (which relies heavily on the work of his dissertation adviser, Joseph Schumpeter [1934]); the endogenous money approach of Basil Moore; the French-Italian circuit approach; Paul Davidson’s (1978) interpretation of John Maynard Keynes, which relies on uncertainty; Wynne Godley’s approach, which relies on accounting identities; the “K” distribution theory of Keynes, Michal Kalecki, Nicholas Kaldor, and Kenneth Boulding; the sociological approach of Ingham; and the chartalist, or state money, approach (A. M. Innes, G. F. Knapp, and Charles Goodhart). Hence, this paper takes a somewhat different route to develop the more typical heterodox conclusions about money.
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Working Paper No. 645 | December 2010
Beyond its original mission to “furnish an elastic currency” as lender of last resort and manager of the payments system, the Federal Reserve has always been responsible (along with the Treasury) for regulating and supervising member banks. After World War II, Congress directed the Fed to pursue a dual mandate, long interpreted to mean full employment with reasonable price stability. The Fed has been left to decide how to achieve these objectives, and it has over time come to view price stability as the more important of the two. In our view, the Fed’s focus on inflation fighting diverted its attention from its responsibility to regulate and supervise the financial sector, and its mandate to keep unemployment low. Its shift of priorities contributed to creation of the conditions that led to this crisis. Now in its third phase of responding to the crisis and the accompanying deep recession—so-called “quantitative easing 2,” or “QE2”—the Fed is currently in the process of purchasing $600 billion in Treasuries. Like its predecessor, QE1, QE2 is unlikely to seriously impact either of the Fed’s dual objectives, however, for the following reasons: (1) additional bank reserves do not enable greater bank lending; (2) the interest rate effects are likely to be small at best given the Fed’s tactical approach to QE2, while the private sector is attempting to deleverage at any rate, not borrow more; (3) purchases of Treasuries are simply an asset swap that reduce the maturity and liquidity of private sector assets but do not raise incomes of the private sector; and (4) given the reduced maturity of private sector Treasury portfolios, reduced net interest income could actually be mildly deflationary.
The most fundamental shortcoming of QE—or, in fact, of using monetary policy in general to combat the recession—is that it only “works” if it somehow induces the private sector to spend more out of current income. A much more direct approach, particularly given much-needed deleveraging by the private sector, is to target growth in after tax incomes and job creation through appropriate and sufficiently large fiscal actions. Unfortunately, stimulus efforts to date have not met these criteria, and so have mostly kept the recession from being far worse rather than enabling a significant economic recovery. Finally, while there is identical risk to the federal government whether a bailout, a loan, or an asset purchase is undertaken by the Fed or the Treasury, there have been enormous, fundamental differences in democratic accountability for the two institutions when such actions have been taken since the crisis began. Public debates surrounding the wisdom of bailouts for the auto industry, or even continuing to provide benefits to the unemployed, never took place when it came to the Fed committing trillions of dollars to the financial system—even though, again, the federal government is “on the hook” in every instance.
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One-Pager No. 6 | November 2010
Before we can reform the financial system, we need to understand what banks do—or, better yet, what banks should do. Senior Scholar L. Randall Wray examines Hyman Minsky’s views on banking and the proper role of the financial system—not simply to finance investment in physical capital but to promote the “capital development” of the economy as a whole and the improvement of living standards, broadly defined.
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One-Pager No. 4 | November 2010
The Rescue Plan Cannot Address the Central Problem
The trillion-dollar rescue package European leaders aimed at the continent’s growing debt crisis in May might well have been code-named Panacea. Stocks rose throughout the region, but the reprieve was short-lived: markets fell on the realization that the bailout would not improve government finances going forward. The entire rescue plan rests on the assumption that the eurozone’s “problem children” can eventually get their fiscal houses in order. But no rescue plan can address the central problem: that countries with very different economies are yoked to the same currency.
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Book Series | September 2010
Edited by Dimitri B. Papadimitriou and L. Randall Wray
Hyman Minsky’s analysis, in the early 1990s, of the capitalist economy’s transformation in the postwar period accurately predicted the global financial meltdown that began in late 2007. With the republication in 2008 of his seminal books John Maynard Keynes (1975) and Stabilizing an Unstable Economy (1986), his ideas have seen an unprecedented resurgence, and the essays collected in this companion volume demonstrate why both economists and policymakers have turned to Minsky’s works for guidance in understanding and addressing the current crisis. The volume brings together the world’s foremost Minsky scholars to provide a comprehensive overview of his approach, and includes chapters that extend his analysis to the present. Beginning with Minsky’s ideas on money, banking, and finance—including his influential financial instability hypothesis—subjects range from the psychology of financial markets to financial innovation and disequilibrium, to the role of Big Government in constraining endogenous instability, to a Minskyan approach to international relations theory.
Published By: Edward Elgar
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Public Policy Brief No. 115 | September 2010
A Minskyan Analysis
In this new brief, Senior Scholar L. Randall Wray examines the later works of Hyman P. Minsky, with a focus on Minsky’s general approach to financial institutions and policy.
The New Deal reforms of the 1930s strengthened the financial system by separating investment banks from commercial banks and putting in place government guarantees such as deposit insurance. But the system’s relative stability, and relatively high rate of economic growth, encouraged innovations that subverted those constraints over time. Financial wealth (and private debt) grew on trend, producing immense sums of money under professional management: we had entered what Minsky, in the early 1990s, labeled the “money manager” phase of capitalism. With help from the government, power was consolidated in a handful of huge firms that provided the four main financial services: commercial banking, payments services, investment banking, and mortgages. Brokers didn’t have a fiduciary responsibility to act in their clients’ best interests, while financial institutions bet against households, firms, and governments. By the early 2000s, says Wray, banking had strayed far from the (Minskyan) notion that it should promote the capital development of the economy.
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Public Policy Brief Highlights No. 113A | September 2010
Without Major Restructuring, the Eurozone is Doomed
Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing.
No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.
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Working Paper No. 612 | August 2010
Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled “Reconstituting the United States’ Financial Structure.” This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper).
Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.
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Public Policy Brief Highlights No. 111A | August 2010
Why We Should Stop Worrying About U.S. Government Deficits
This brief by Yeva Nersisyan and Senior Scholar L. Randall Wray argues that deficits do not burden future generations with debt, nor do they crowd out private spending. The authors base their conclusions on the premise that a sovereign nation with its own currency cannot become insolvent, and that government financing is unlike that of a household or firm. Moreover, they observe that automatic stabilizers, not government bailouts and the stimulus package, have prevented the US economic contraction from devolving into another Great Depression. The authors dispense with unsubstantiated concerns about deficits and debts, noting that they mask the real issue: the unwillingness of deficit hawks to allow government to work for the good of the people.Download:Associated Program:Author(s): -
Public Policy Brief No. 113 | July 2010
Without Major Restructuring, the Eurozone Is Doomed
Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing.
No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.
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Working Paper No. 603 | June 2010
A Critique of This Time Is Different, by Reinhart and Rogoff
The worst global downturn since the Great Depression has caused ballooning budget deficits in most nations, as tax revenues collapse and governments bail out financial institutions and attempt countercyclical fiscal policy. With notable exceptions, most economists accept the desirability of expansion of deficits over the short term but fear possible long-term effects. There are a number of theoretical arguments that lead to the conclusion that higher government debt ratios might depress growth. There are other arguments related to more immediate effects of debt on inflation and national solvency. Research conducted by Carmen Reinhart and Kenneth Rogoff is frequently cited to demonstrate the negative impacts of public debt on economic growth and financial stability. In this paper we critically examine their work. We distinguish between a nation that operates with its own floating exchange rate and nonconvertible (sovereign) currency, and a nation that does not. We argue that Reinhart and Rogoff’s results are not relevant to the case of the United States.
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Public Policy Brief No. 111 | May 2010
Why We Should Stop Worrying About U.S. Government Deficits
This brief by Yeva Nersisyan and Senior Scholar L. Randall Wray argues that deficits do not burden future generations with debt, nor do they crowd out private spending. The authors base their conclusions on the premise that a sovereign nation with its own currency cannot become insolvent, and that government financing is unlike that of a household or firm. Moreover, they observe that automatic stabilizers, not government bailouts and the stimulus package, have prevented the US economic contraction from devolving into another Great Depression. The authors dispense with unsubstantiated concerns about deficits and debts, noting that they mask the real issue: the unwillingness of deficit hawks to allow government to work for the good of the people.Download:Associated Program(s):Author(s): -
Public Policy Brief Highlights No. 110A | April 2010
More Care Less Insurance
The United States has the most expensive health care system in the world, yet its system produces inferior outcomes relative to those in other countries. This brief examines the health care reform debate and argues that the basic structure of the health care system is unlikely to change, because “reform” measures actually promote the status quo. The authors believe that the fundamental problem facing the US health care system is the unhealthy lifestyle of many Americans. They prefer to see a reduced role for private insurers and an increased role for government funding, along with greater public discussion of environmental and lifestyle factors. A Medicare buy-in (“public option”) for people under 65 would provide more cost control (by competing with private insurance), help to solve the problem of treatment denial based on preexisting conditions, expand the risk pool of patients, and enhance the global competitiveness of US corporations—thus bringing the US health care system closer to the “ideal” low-cost, universal (single-payer) insurance plan.Download:Associated Program:Author(s): -
Public Policy Brief Highlights No. 109A | April 2010
Toward an Alternative Public Policy to Support Retirement
Pension funds have taken a big hit during the current financial crisis, with losses in the trillions of dollars. In addition, both private and public pensions are experiencing significant funding shortfalls, as is the government-run Pension Benefit Guaranty Corporation, which insures the defined-benefit pension plans of private American companies. Yeva Nersisyan and Senior Scholar L. Randall Wray argue that the employment-based pension system is highly problematic, since the strategy for managing pension funds leads to excessive cost and risk in an effort to achieve above-average returns. The average fund manager, however, will only achieve the risk-free return. The authors therefore advocate expanding Social Security and encouraging private and public pensions to invest only in safe (risk-free) Treasury bonds—which, on average, will beat the net returns on risky assets.
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Public Policy Brief No. 110 | March 2010
The United States has the most expensive health care system in the world, yet its system produces inferior outcomes relative to those in other countries. This brief examines the health care reform debate and argues that the basic structure of the health care system is unlikely to change, because “reform” measures actually promote the status quo. The authors believe that the fundamental problem facing the US health care system is the unhealthy lifestyle of many Americans. They prefer to see a reduced role for private insurers and an increased role for government funding, along with greater public discussion of environmental and lifestyle factors. A Medicare buy-in (“public option”) for people under 65 would provide more cost control (by competing with private insurance), help to solve the problem of treatment denial based on preexisting conditions, expand the risk pool of patients, and enhance the global competitiveness of US corporations—thus bringing the US health care system closer to the “ideal” low-cost, universal (single-payer) insurance plan.
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Public Policy Brief No. 109 | March 2010
Toward an Alternative Public Policy to Support Retirement
Pension funds have taken a big hit during the current financial crisis, with losses in the trillions of dollars. In addition, both private and public pensions are experiencing significant funding shortfalls, as is the government-run Pension Benefit Guaranty Corporation, which insures the defined-benefit pension plans of private American companies. Yeva Nersisyan and Senior Scholar L. Randall Wray argue that the employment-based pension system is highly problematic, since the strategy for managing pension funds leads to excessive cost and risk in an effort to achieve above-average returns. The average fund manager, however, will only achieve the risk-free return. The authors therefore advocate expanding Social Security and encouraging private and public pensions to invest only in safe (risk-free) Treasury bonds—which, on average, will beat the net returns on risky assets.
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Working Paper No. 587 | February 2010
While most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the “shadow banking system” and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income—what is sometimes called “financialization”—as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme.
The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail—and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications.
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Public Policy Brief Highlights No. 106A | December 2009
Social unrest across Europe is growing as Euroland’s economy collapses faster than the United States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.
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Public Policy Brief No. 106 | November 2009
Social unrest across Europe is growing as Euroland’s economy collapses faster than the United States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.
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Public Policy Brief No. 105 | October 2009
The Obama administration has implemented several policies to “jump-start” the American economy—efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style “lost decade.” They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.
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Working Paper No. 580 | October 2009
This paper contrasts the orthodox approach with an alternative view on finance, saving, deficits, and liquidity. The conventional view on the cause of the current global financial crisis points first to excessive United States trade deficits that are supposed to have “soaked up” global savings. Worse, this policy was ultimately unsustainable because it was inevitable that lenders would stop the flow of dollars. Problems were compounded by the Federal Reserve’s pursuit of a low-interest-rate policy, which involved pumping liquidity into the markets and thereby fueling a real estate boom. Finally, with the world awash in dollars, a run on the dollar caused it to collapse. The Fed (and then the Treasury) had to come to the rescue of US banks, firms, and households. When asset prices plummeted, the financial crisis spread to much of the rest of the world. According to the conventional view, China, as the residual supplier of dollars, now holds the fate of the United States, and possibly the entire world, in its hands. Thus, it’s necessary for the United States to begin living within its means, by balancing its current account and (eventually) eliminating its budget deficit.
I challenge every aspect of this interpretation. Our nation operates with a sovereign currency, one that is issued by a sovereign government that operates with a flexible exchange rate. As such, the government does not really borrow, nor can foreigners be the source of dollars. Rather, it is the US current account deficit that supplies the net dollar saving to the rest of the world, and the federal government budget deficit that supplies the net dollar saving to the nongovernment sector. Further, saving is never a source of finance; rather, private lending creates bank deposits to finance spending that generates income. Some of this income can be saved, so the second part of the saving decision concerns the form in which savings might be held—as liquid or illiquid assets. US current account deficits and federal budget deficits are sustainable, so the United States does not need to adopt austerity, nor does it need to look to the rest of the world for salvation. Rather, it needs to look to domestic fiscal stimulus strategies to resolve the crisis, and to a larger future role for government in helping to stabilize the economy.
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Policy Note 2009/9 | October 2009
Banks Running Wild: The Subversion of Insurance by “Life Settlements” and Credit Default Swaps
View More View LessOblivious to any lessons that might have been learned from the global financial mess it has created, Wall Street is looking for the next asset bubble. Perhaps in the market for death it has found a replacement for the collapsed markets in subprime mortgage–backed securities and credit default swaps (CDSs). Instead of making bets on the “death” of securities, this new product will allow investors to gamble on the death of human beings by purchasing “life settlements”—life insurance policies that the ill and elderly sell for cash. These policies will then be packaged together as bonds—securitized—and resold to investors, who will receive payouts when the people with the insurance die. In effect, just as the sale of a CDS creates a vested interest in financial calamity, here the act of securitizing life insurance policies creates huge financial incentives in favor of personal calamity. The authors of this Policy Note argue that this is a subversion—or an inversion—of insurance, and it raises important public policy issues: Should we allow the marketing of an instrument in which holders have a financial stake in death? More generally, should we allow the “innovation” of products that condone speculation under the guise of providing insurance?
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Public Policy Brief Highlights No. 105A | October 2009<p>The Obama administration has implemented several policies to “jump-start” the American economy—efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses—and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style “lost decade.” They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.</p>
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Working Paper No. 578 | September 2009
This paper applies Hyman Minsky’s approach to provide an analysis of the causes of the global financial crisis. Rather than finding the origins in recent developments, this paper links the crisis to the long-term transformation of the economy from a robust financial structure in the 1950s to the fragile one that existed at the beginning of this crisis in 2007. As Minsky said, “Stability is destabilizing”: the relative stability of the economy in the early postwar period encouraged this transformation of the economy. Today’s crisis is rooted in what he called “money manager capitalism,” the current stage of capitalism dominated by highly leveraged funds seeking maximum returns in an environment that systematically under-prices risk. With little regulation or supervision of financial institutions, money managers have concocted increasingly esoteric instruments that quickly spread around the world. Those playing along are rewarded with high returns because highly leveraged funding drives up prices for the underlying assets. Since each subsequent bust wipes out only a portion of the managed money, a new boom inevitably rises. Perhaps this will prove to be the end of this stage of capitalism–the money manager phase. Of course, it is too early even to speculate on the form capitalism will take. I will only briefly outline some policy implications.
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Working Paper No. 560 | April 2009
Unemployment was singled out by John Maynard Keynes as one of the principle faults of capitalism; the other is excessive inequality. Obviously, there is some link between these two faults: since most people living in capitalist economies must work for wages as a major source of their incomes, the inability to obtain a job means a lower income. If jobs can be provided to the unemployed, inequality and poverty will be reduced—although such policy will not directly address the problem of excessive income at the top of the distribution. Most importantly, Keynes wanted to put unemployed labor to work—not digging holes, but in socially productive ways. This would help to ensure that the additional effective demand created by government spending would not be exhausted in higher prices as it ran up against bottlenecks or other supply constraints. Further, it would help maintain public support for the government’s programs by providing useful output. And it would generate respect for, and feelings of self-worth in, the workers employed in these projects (no worker would want to spend her days digging holes that serve no useful purpose). President Roosevelt’s New Deal jobs programs (such as the Works Progress Administration and the Civilian Conservation Corps) are good examples of such targeted job-creating programs. These provided income and employment for workers, actually helped increase the nation’s productivity, and left us with public buildings, dams, trails, and even music that we still enjoy today. As our nation (and the world) collapses into deep recession, or even depression, it is worthwhile to examine Hyman P. Minsky’s comprehensive approach to resolving the unemployment problem.
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Public Policy Brief Highlights No. 99A | April 2009
Policy Advice for President Obama
In the current global financial crisis, economists and policymakers have reembraced Big Government as a means of preventing the reoccurrence of a debt-deflation depression. The danger, however, is that policy may not downsize finance and replace money manager capitalism. According to Senior Scholar L. Randall Wray, we need a permanently larger fiscal presence, with more public services. His advice to President Obama is to discard all of former Treasury Secretary Paulson’s actions. Wray believes that we can afford any necessary spending and bailouts, and that these actions will not burden our grandchildren.
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Public Policy Brief No. 99 | March 2009
In the current global financial crisis, economists and policymakers have reembraced Big Government as a means of preventing the reoccurrence of a debt-deflation depression. The danger, however, is that policy may not downsize finance and replace money manager capitalism. According to Senior Scholar L. Randall Wray, we need a permanently larger fiscal presence, with more public services. His advice to President Obama is to discard all of former Treasury Secretary Paulson’s actions. Wray believes that we can afford any necessary spending and bailouts, and that these actions will not burden our grandchildren.
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Public Policy Brief Highlights No. 98A | February 2009
The Accounting Campaign Against Social Security and Medicare
The Federal Accounting Standards Advisory Board (FASAB) has proposed subjecting the entire federal budget to “intergenerational accounting”—which purports to calculate the debt burden our generation will leave for future generations—and is soliciting comments on the recommendations of its two “exposure drafts.” The authors of this brief find that intergenerational accounting is a deeply flawed and unsound concept that should play no role in federal government budgeting, and that arguments based on this concept do not support a case for cutting Social Security or Medicare.
The FASAB exposure drafts have not made a persuasive argument about basic matters of accounting, say the authors. Federal budget accounting should not follow the same procedures adopted by households or business firms because the government operates in the public interest, with the power to tax and issue money. There is no evidence, nor any economic theory, behind the proposition that government spending needs to match receipts. Social Security and Medicare spending need not be politically constrained by tax receipts—there cannot be any “underfunding.” What matters is the overall fiscal stance of the government, not the stance attributed to one part of the budget.
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Public Policy Brief No. 98 | February 2009
The Case Against Intergenerational Accounting: The Accounting Campaign Against Social Security and Medicare
View More View LessThe Federal Accounting Standards Advisory Board (FASAB) has proposed subjecting the entire federal budget to “intergenerational accounting”—which purports to calculate the debt burden our generation will leave for future generations—and is soliciting comments on the recommendations of its two “exposure drafts.” The authors of this brief find that intergenerational accounting is a deeply flawed and unsound concept that should play no role in federal government budgeting, and that arguments based on this concept do not support a case for cutting Social Security or Medicare.
The FASAB exposure drafts have not made a persuasive argument about basic matters of accounting, say the authors. Federal budget accounting should not follow the same procedures adopted by households or business firms because the government operates in the public interest, with the power to tax and issue money. There is no evidence, nor any economic theory, behind the proposition that government spending needs to match receipts. Social Security and Medicare spending need not be politically constrained by tax receipts—there cannot be any “underfunding.” What matters is the overall fiscal stance of the government, not the stance attributed to one part of the budget.
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Policy Note 2008/6 | November 2008
While serving as chairman of the Federal Reserve Board, Alan Greenspan advocated unsupervised securitization, subprime lending, option ARMs, credit-default swaps, and all manner of financial alchemy in the belief that markets “work” to reduce and spread risk, and to allocate it to those best able to assess and bear it—in his view, markets would stabilize in the absence of nasty government intervention. But as Greenspan now admits, he could never have imagined the outcome: a financial and economic crisis of biblical proportions.
The problem is, market forces are not stabilizing. Left to their own devices, Wall Street wizards gleefully ran right off the cliff, and took the rest of us with them for good measure. The natural instability of market processes was recognized long ago by John Maynard Keynes, and convincingly updated by Hyman P. Minsky throughout his career. Minsky’s theory explained the transformation of the economy over the postwar period from robust to fragile. He pointed his finger at managed money—huge pools of pension funds, hedge funds, sovereign wealth funds, university endowments, money market funds—that are outside traditional banking and therefore largely underregulated and undersupervised. With a large appetite for risk, managed money sought high returns promised by Wall Street’s financial engineers, who innovated highly complex instruments that few people understood.
In this new Policy Note, President Dimitri B. Papadimitriou and Research Scholar L. Randall Wray take a look back at Wall Street’s path to Armageddon, and propose some alternatives to the Bush-Paulson plan to “bail out” both the Street and the American homeowner. Under the existing plan, Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.
But it is highly unlikely that relieving banks of some of their bad assets, or injecting some equity into them, will increase their willingness to lend. Resolving the liquidity crisis is the best strategy, the authors say, and keeping small-to-medium-size banks open is the best way to ensure access to credit once the economy recovers. A temporary suspension of the collection of payroll taxes would put more income into the hands of households while lowering the employment costs for firms, fueling spending and employment. The government should assume a more active role in helping homeowners saddled with mortgage debt they cannot afford, providing low-cost 30-year loans directly to all comers; in the meantime, a moratorium on foreclosures is necessary. And federal grants to support local spending on needed projects would go a long way toward rectifying our $1.6 trillion public infrastructure deficit.
Can the Treasury afford all these measures? The answer, the authors say, is yes—and it is a bargain if one considers the cost of not doing it. It is obvious that there exist unused resources today, as unemployment rises and factories are idled due to lack of demand. Markets are also voting with their dollars for more Treasury debt. This does not mean the Treasury should spend without restraint—whatever rescue plan is adopted should be well planned and targeted, and of the proper size. The point is that setting arbitrary budget constraints is neither necessary nor desired—especially in the worst financial and economic crisis since the Great Depression.
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Public Policy Brief Highlights No. 96A | October 2008
Money Manager Capitalism and the Financialization of Commodities
In a new public policy brief, Senior Scholar L. Randall Wray shows how money manager capitalism—characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk—has destabilized one asset class after another, with commodities being simply the latest. Policymakers must fundamentally change the structure of our economic system and reduce the influence of managed money, Wray argues, in order to break the speculative boom-and-bust cycle.
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Public Policy Brief No. 96 | October 2008
Money Manager Capitalism and the Financialization of Commodities
Money manager capitalism—characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk—has resulted in a series of boom-and-bust cycles in equities, real estate, and commodities. Because subsequent cycles have been increasingly damaging to the broader economy, we are now at the point where we are experiencing the most severe financial crisis since the Great Depression. Hasty interventions (bailouts) by Congress, the Treasury, and the Federal Reserve are attempting to keep the financial industry solvent, in the belief that government inaction would result in a prolonged recession.
In this new public policy brief, Senior Scholar L. Randall Wray shows how money manager capitalism (financialization) has destabilized one asset class after another. He concludes that policymakers must fundamentally change the structure of our economic system, break the cycle of booms and busts, and reduce the influence of managed money—as well as prevent the next speculative boom in yet another asset class.
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Working Paper No. 543 | September 2008
The Financial Theory of Investment
Expanding on an approach developed by financial economist Hyman Minsky, the authors present an alternative to the standard “efficient markets hypothesis”—the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike.
Coauthors L. Randall Wray and �ric Tymoigne argue that the current financial crisis, which began with the collapse of the US subprime mortgage market in 2007, provides a compelling reason to show how Minsky’s approach offers us a solid grounding in the workings of financial capitalism. They examine Minsky’s extension to Keynes’s investment theory of the business cycle, which allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility—what is well known as his financial instability hypothesis. They then update Minsky’s approach to finance with a more detailed examination of asset pricing and the evolution of the banking sector, and conclude with a brief review of the insights that such an approach can provide for analysis of the current global financial crisis.
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Policy Note 2008 | August 2008
Policy Response to the Current Crisis
As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking, and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. Labor markets continue to weaken as firms shed jobs, and state tax revenues have plummeted. In March, the dollar fell to new record lows against the euro and other currencies. Commodities prices have boomed, fueling inflation and adding to consumer distress. What's a central bank to do? So far, the Federal Reserve has met or exceeded the market�s anticipations for rate cuts. It has allowed banks to offer securitized mortgages as collateral against borrowed reserves, and opened its discount window to a broad range of financial institutions to guard against future liquidity problems (remember Bear Stearns?). It helped to formulate a rescue plan for Freddie Mac and Fannie Mae, and Chairman Ben Bernanke even supported the fiscal stimulus package that will increase the federal budget deficit�something that is normally anathema to central bankers. Most importantly, Fed officials have consistently argued that, while they are carefully monitoring inflation pressures, they will not reverse monetary ease until the fallout from the subprime crisis is past. Unfortunately, the policy isn�t working�the economy continues to weaken, the financial crisis is spreading, and inflation is accelerating. The problem is that policymakers do not recognize the underlying forces driving the crisis, in part because they operate with an incorrect model of how our economy works. This Policy Note summarizes that model, offers an alternative view based on Hyman Minsky�s approach, and outlines an alternative framework for policy formation.Published By:Download:Associated Program:Author(s): -
Policy Note 2008/3 | August 2008
Policy Response to the Current Crisis
As homeowner equity continues to disappear, there is a growing consensus that losses on all mortgages will exceed $1 trillion, with financial losses spreading far beyond real estate. Mortgage rates are spiking and, more generally, interest rate spreads remain wide, as financial players shun private debt in the rush to safe Treasury securities. Labor markets continue to weaken as firms shed jobs, and state tax revenues have plummeted. In March, the dollar fell to new record lows against the euro and other currencies. Commodities prices have boomed, fueling inflation and adding to consumer distress.
What's a central bank to do? So far, the Federal Reserve has met or exceeded the market’s anticipations for rate cuts. It has allowed banks to offer securitized mortgages as collateral against borrowed reserves, and opened its discount window to a broad range of financial institutions to guard against future liquidity problems (remember Bear Stearns?). It helped to formulate a rescue plan for Freddie Mac and Fannie Mae, and Chairman Ben Bernanke even supported the fiscal stimulus package that will increase the federal budget deficit—something that is normally anathema to central bankers. Most importantly, Fed officials have consistently argued that, while they are carefully monitoring inflation pressures, they will not reverse monetary easing until the fallout from the subprime crisis is past.
Unfortunately, the policy isn’t working—the economy continues to weaken, the financial crisis is spreading, and inflation is accelerating. The problem is that policymakers do not recognize the underlying forces driving the crisis, in part because they operate with an incorrect model of how our economy works. This Policy Note summarizes that model, offers an alternative view based on Hyman Minsky’s approach, and outlines an alternative framework for policy formation.
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Policy Note 2008/2 | June 2008
“At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was ‘that which can be securitized, will be securitized.’” So notes Hyman Minsky in a prescient memo on the nature, and the implications, of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. This memo, which served as the basis for a lecture in Minsky’s monetary theory class at Washington University, has not been widely circulated. It is published here in its entirety, with a preface and an afterword by Senior Scholar L. Randall Wray that places Minsky’s work in context.
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Public Policy Brief Highlights | April 2008
What Can We Learn from Minsky?
According to Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the “originate and distribute” model), leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand.
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Public Policy Brief Highlights No. 94A | April 2008
According to Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the “originate and distribute” model), leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand.
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Public Policy Brief No. 94 | April 2008
What Can We Learn from Minsky?
In this new Public Policy Brief, Senior Scholar L. Randall Wray explains today’s complex and fragile financial system, and how the seeds of crisis were sown by lax oversight, deregulation, and risky innovations such as securitization. He estimates that the combined losses throughout the entire financial sector could amount to several trillion dollars, and that the United States will feel the effects of the crisis for some time—perhaps a decade or more.
Wray recommends enhanced oversight of financial institutions, much larger stimulus packages, and creation of a new institution in line with President Franklin D. Roosevelt’s Home Owners’ Loan Corporation.
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Working Paper No. 522 | December 2007
This paper uses Hyman P. Minsky’s approach to analyze the current international financial crisis, which was initiated by problems in the American real estate market. In a 1987 manuscript, Minsky had already recognized the importance of the trend toward securitization of home mortgages. This paper identifies the causes and consequences of the financial innovations that created the real estate boom and bust. It examines the role played by each of the key players—including brokers, appraisers, borrowers, securitizers, insurers, and regulators—in creating the crisis. Finally, it proposes short-run solutions to the current crisis, as well as longer-run policy to prevent “it” (a debt deflation) from happening again.
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Working Paper No. 519 | November 2007
The Impact of Argentina’s Jefes Program on Female Heads of Poor Households
In 2002, Argentina implemented a large-scale public employment program to deal with the latest economic crisis and the ensuing massive unemployment and poverty. The program, known as Plan Jefes, offered part-time work for unemployed heads of households, and yet more than 70 percent of the people who turned up for work were women. The present paper evaluates the operation of this program, its macroeconomic effects, and its impact on program participants. We report findings from our 2005 meetings with policymakers and visits to different project sites. We find that Jefes addresses many important community problems, is well received by participants, and serves the needs of women particularly well. Some of the benefits women report are working in mother-friendly jobs, getting needed training and education, helping the community, and finding dignity and empowerment through work.
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Working Paper No. 515 | September 2007
Employer of Last Resort and the War on Poverty
While Hyman P. Minsky is best known for his work on financial instability, he was also intimately involved in the postwar debates about fiscal policy and what would become the War on Poverty. Indeed, at the University of California, Berkeley, he was a vehement critic of the policies of the Kennedy and Johnson administrations, and played a major role in developing an alternative. Minsky insisted that the high investment path chosen by postwar fine-tuners would generate macroeconomic instability, and that the War on Poverty would never lower poverty rates significantly. In retrospect, he was correct on both accounts. Further, he proposed high consumption and an employer of last resort policy as essential ingredients of any coherent strategy for achieving macro stability and poverty elimination. This paper summarizes Minsky’s work in this area, focusing on his writings from the early 1960s through the early 1970s in order to explore the path not taken.
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Working Paper No. 514 | September 2007
This working paper examines the legacy of Keynes’s General Theory of Employment, Interest, and Money (1936) on the occasion of the 70th anniversary of its publication and the 60th anniversary of Keynes’s death. The paper incorporates some of the latest research by prominent followers of Keynes, presented at the 9th International Post Keynesian Conference in September 2006.
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Working Paper No. 512 | September 2007
Structuralist and Horizontalist
While the mainstream long argued that the central bank could use quantitative constraints as a means to controlling the private creation of money, most economists now recognize that the central bank can only set the overnight interest rate—which has only an indirect impact on the quantity of reserves and the quantity of privately created money. Indeed, in order to hit the overnight rate target, the central bank must accommodate the demand for reserves, draining the excess or supplying reserves when the system is short. Thus, the supply of reserves is best characterized as horizontal, at the central bank’s target rate. Because reserves pay relatively low rates, or even zero rates (as in the United States), banks try to minimize their holdings. Over time, they continually innovate, as they seek to minimize costs and increase profits. This includes innovations that reduce the quantity of reserves they need to hold (either to satisfy legal requirements, or to meet the needs of check cashing and clearing), and also innovations that allow them to increase the rate of return on equity within regulatory constraints, such as those associated with Basle agreements. Such behavior has been a central concern of the structuralist approach—which argued that it is too simplistic to hypothesize simple horizontal loan-and-deposit supply curves.
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Working Paper No. 510 | August 2007
A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate
View More View LessThis paper addresses three issues surrounding monetary policy formation: policy independence, choice of operating targets, and rules versus discretion. According to the New Monetary Consensus, the central bank needs policy independence to build credibility; the operating target is the overnight interbank lending rate, and the ultimate goal is price stability. This paper provides an alternative view, arguing that an effective central bank cannot be independent as conventionally defined, where effectiveness is indicated by ability to hit an overnight nominal interest rate target. Discretionary policy is rejected, as are conventional views of the central bank’s ability to achieve traditional goals such as robust growth, low inflation, and high employment. Thus, the paper returns to Keynes’s call for low interest rates and euthanasia of the rentier.
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Working Paper No. 489 | January 2007
This paper provides an analysis of Keynes's original "Bancor" proposal as well as more recent proposals for fixed exchange rates. We argue that these schemes fail to pay due attention to the importance of capital movements in today's economy, and that they implicitly adopt an unsatisfactory notion of money as a mere medium of exchange. We develop an alternative approach to money based on the notion of currency sovereignty. As currency sovereignty implies the ability of a country to implement monetary and fiscal policies independently, we argue that it is necessarily contingent on a country's adoption of floating exchange rates. As illustrations of the problems created for domestic policy by the adoption of fixed exchange rates, we briefly look at the recent Argentinean and European experiences. We take these as telling examples of the high costs of giving up sovereignty (Argentina and the European countries of the EMU) and the benefits of regaining it (Argentina). A regime of more flexible exchange rates would have likely produced a more viable and dynamic European economic system, one in which each individual country could have adopted and implemented a mix of fiscal and monetary policies more suitable to its specific economic, social, and political context. Alternatively, the euro area will have to create a fiscal authority on par with that of the US Treasury, which means surrendering national authority to a central government—an unlikely possibility in today's political climate. We conclude by pointing out some of the advantages of floating exchange rates, but also stress that such a regime should not be regarded as a sort of panacea. It is a necessary condition if a country is to retain its sovereignty and the power to implement autonomous economic policies, but it is not a sufficient condition for guaranteeing that such policies actually be aimed at providing higher levels of employment and welfare.
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Working Paper No. 488 | January 2007
In a series of articles and books, Harold Vatter and John Walker attempted to make the case that the American economy suffers from chronically insufficient demand that leads to growth below capacity. Of particular interest are a 1989 Journal of Post Keynesian Economics article that extends Domar's work on the supply side effects of investment spending and a 1997 book that provides a comprehensive analysis of the evolution of the US "mixed" economy. Their analysis of secular growth complements the well-known writings of Hyman Minsky, who also emphasized the role of the "big government" and the "big bank" in stabilizing an unstable economy over the cycle. This article will summarize, provide support for, and extend the Vatter and Walker approach, concluding with an examination of some of the dangers facing the US economy today. As appropriate, the ideas of Minsky will be used to supplement the argument.
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Policy Note 2007/1 | January 2007
Tax Reform Advice for the New Majority
Anyone who reads a newspaper knows that most Americans have accumulated excessive levels of debt, and realizes that as interest rates climb, it becomes more difficult to service financial liabilities. To add insult to injury, wage growth has been slow, while prices—especially for energy—have risen sharply. What is not clear, however, is the fact that taxes have also been rising rapidly, relative to both income and government spending. In this Policy Note, we concentrate on the last issue, and argue that many middle-income earners will find themselves unprepared for the coming surprise in April.
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Working Paper No. 468 | August 2006
The world's population is aging. Virtually no nation is immune to this demographic trend and the challenges it brings for future generations. Relative growth of the elderly population is fueling debate about reform of social security programs in the United States and other developed nations. In the United States, the total discounted shortfall of Social Security revenues has been estimated at about $11 trillion, nearly two-thirds of that comes after 2050. However, this paper argues that those calling for reform have overstated the demographic challenges ahead. Reformers conclude that aging poses such a serious challenge because they focus on financial shortfalls. If we focus on demographics and on the ability to produce real goods and services today and in the future, the likelihood of a real crisis in social security in the United States and developed nations is highly improbable. Demographic changes are too small relative to the growth of output that will be achieved even with low productivity increases. This paper concludes with policy recommendations that will enhance our ability to care for an aging population in a progressive manner that will not put undue burdens on future workers. Policy formation must distinguish between financial provisioning and real provisioning for the future; only the latter can prepare society as a whole for coming challenges. While individuals can, and should, save financial assets for their individual retirements, society cannot prepare for waves of future retirees by accumulating financial trust funds. Rather, society prepares for aging by investing to increase future real productivity.
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Working Paper No. 459 | July 2006
A Socioeconomics Approach
This paper briefly summarizes the orthodox approach to banking, finance, and money, and then points the way toward an alternative based on socioeconomics. It argues that the alternative approach is better fitted to not only the historical record, but also sheds more light on the nature of money in modern economies. In orthodoxy, money is something that reduces transaction costs, simplifying "economic life" by lubricating the market mechanism. Indeed, this is the unifying theme in virtually all orthodox approaches to banking, finance, and money: banks, financial instruments, and even money itself originate to improve market efficiency. However, the orthodox story of money's origins is rejected by most serious scholars outside the field of economics as historically inaccurate. Further, the orthodox sequence of "commodity (gold) money" to credit and fiat money does not square with the historical record. Finally, historians and anthropologists have long disputed the notion that markets originated spontaneously from some primeval propensity, rather emphasizing the important role played by authorities in creating and organizing markets.
By contrast, this paper locates the origin of money in credit and debt relations, with the money of account emphasized as the numeraire in which credits and debts are measured. Importantly, the money of account is chosen by the state, and is enforced through denominating tax liabilities in the state’s own currency. What is the significance of this? It means that the state can take advantage of its role in the monetary system to mobilize resources in the public interest, without worrying about "availability of finance." The alternative view of money leads to quite different conclusions regarding monetary and fiscal policy, and it rejects even long-run neutrality of money. It also generates interesting insights on exchange rate regimes and international payments systems.
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Policy Note 2006/5 | July 2006
Much Ado about Nothing, or Little to Do about Something?
Demographers and economists agree that we are aging—individually and collectively, nationally and globally. An aging population results from the twin demographic forces of fewer children per family and longer lives. Most experts recognize the burden that aging causes as the number of retirees supported by each worker rises. This trend is reinforced by the graying of the baby-boom generation, but burdens will continue to rise even after the boomers are buried—albeit at a slower pace.Download:Associated Program:Author(s): -
Working Paper No. 450 | May 2006
Extending Minsky's Classifications of Fragility to Government and the Open Economy
View More View LessMinsky's classification of fragility according to hedge, speculative, and Ponzi positions is well-known. He wrote about fragile positions of individual firms and of the economy as a whole, with the economy transitioning naturally from a robust financial structure (dominated by hedge units) to a fragile structure (dominated by speculative units). In most of Minsky's writing, he introduced government through its impact on the private sector with its spending and balance sheet operations as stabilizing forces (although he insisted that stability is ultimately destabilizing). On a few occasions he also analyzed the government's own balance sheet position. More rarely, Minsky extended his analysis to the open economy, examining the fragility of external debt positions. In these works, he analyzed the United States as the "world's bank" and discussed the impact of various US balance sheet positions on the rest of the world. This paper will carefully examine Minsky's position on these topics, and will offer an extension of Minsky's work. It will also examine the "sustainability" of the current "twin US deficits."Download:Associated Program:Author(s): -
Public Policy Brief No. 84 | May 2006
A Pessimistic View
Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. Credit derivatives allow banks to share risks with holders of the derivatives, which are often mutual funds and other nonbank financial institutions.The Basel II Accord, now being implemented in many countries, is hailed as a good form of protection against the risk of a series of bank failures of the type that might cause problems in the derivatives markets. Basel II represents a more sophisticated and complex version of the original Basel Accord of 1992, which set minimum capital ratios for various types of bank assets.Download:Associated Program:Author(s): -
Public Policy Brief Highlights No. 84A | May 2006
A Pessimistic View
Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. Credit derivatives allow banks to share risks with holders of the derivatives, which are often mutual funds and other nonbank financial institutions.The Basel II Accord, now being implemented in many countries, is hailed as a good form of protection against the risk of a series of bank failures of the type that might cause problems in the derivatives markets. Basel II represents a more sophisticated and complex version of the original Basel Accord of 1992, which set minimum capital ratios for various types of bank assets.Download:Associated Program:Author(s): -
Policy Note 2006/3 | April 2006In the mid-to-late 1980s, the American economy simultaneously produced—for the first time in the postwar period—huge federal budget deficits as well as large current account deficits, together known as the “twin deficits”. This generated much debate and hand-wringing, most of which focused on supposed “crowding-out” effects. Many claimed that the budgetdeficit was soaking up private saving, leaving too little for domestic investment, and that the “twin” current account deficit was soaking up foreign saving. The result would be higher interest rates and thus lower economic growth, as domestic spending—especially on business investment and real estate construction—was depressed. Further, the government debt and foreign debt would burden future generations of Americans, who would have to make interest payments and eventually retire the debt. The promulgated solution was to promote domestic saving by cutting federal government spending, and private consumption. Many pointed to Japan’s high personal saving rates as a model of the proper way to run an economy.Download:Associated Program(s):Author(s):
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In the Media | February 2006
Copyright 2005 The Financial Times Limited (London, England)
Wednesday, February 15, 2006; Financial Times; USA Edition; Letters to the EditorSir, Balance of payments deficits often cause concern because they may result in financing difficulties and, possibly, a disorderly depreciation of the currency.
The U.K. payments deficit would seem to be too small, at present, to worry about. But it is the balance of trade, not payments, that measures the direct effect of a deficit on the demand for domestically produced goods and services.
The trade deficit of the US is now about 6.5 per cent of gross domestic product while that of the U.K. is about 4.5 per cent. In both countries domestic demand in total has so far been held up by budget deficits as well as by personal expenditure (on consumption and investment combined) far in excess of disposable income, and this has perforce been financed by unusually high borrowing leading to rapidly rising personal indebtedness.
In other words, the growing subtractions from demand caused by trade deficits, which now seem to be structural, have so far been made good by injections of demand which are essentially temporary.
The unusual size of the deficits, both in the US and in the U.K., has introduced a novel element into economic prospects viewed strategically because if (or when) personal borrowing and expenditure slows down, neither government has any obvious politically feasible policy instrument to avert a prolonged deficiency in total demand.
Cuts in interest rates might conceivably reignite the housing booms for a time but could not provide permanent motors for growth.
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Working Paper No. 438 | January 2006
An Assessment after 70 Years
This paper first examines two approaches to money adopted by John Maynard Keynes in his General Theory (GT). The first is the more familiar “supply and demand” equilibrium approach of Chapter 13 incorporated within conventional macroeconomics textbooks. Indeed, even post-Keynesians utilizing Keynes’s “finance motive” or the “horizontal” money supply curve adopt similar methodology. The second approach of the GT is presented in Chapter 17, where Keynes drops “money supply and demand” in favor of a liquidity preference approach to asset prices that offers a more satisfactory treatment of money’s role in constraining effective demand. In the penultimate section, I return to Keynes’s earlier work in his Treatise on Money (TOM), as well as the early drafts of the GT, to obtain a better understanding of the nature of money. I conclude with policy implications.
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Working Paper No. 431 | November 2005
Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the US
View More View LessIn the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the former’s flexibility and capacity to adjust rigidity, and the latter’s extreme caution and its obsession with low inflation. In looking at the foundations of the two banks’ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the United States and in Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long period, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, etc., but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and US The two economic areas’ differences must be explained by considering other factors among which the most important is fiscal policy.
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Policy Note 2005/6 | September 2005
Surviving 20 Years of Reform
Social Security turned 70 on August 14, although no national celebration marked the occasion. Rather, our top policymakers in Washington continue to suggest that the system is “unsustainable.” While our nation's most successful social program, and among its longest lived, has allowed generations of Americans to live with dignity in retirement, many think it is time to retire Social Security itself. They claim it is necessary to shift more responsibility to individuals and to scale back the promises made to the coming waves of retiring baby boomers. -
In the Media | September 2005
Copyright 2005 The Financial Times Limited (London, England)
Wednesday, September 21, 2005; Financial Times; USA Edition; Letters to the EditorSir, In his article, “Only leadership can defuse America's fiscal time-bomb” (September 15), Jagadeesh Gokhale claims that US fiscal deficits will force the Fed to face a “surfeit of Treasuries,” leading it to put too many dollars in circulation as it buys excess bonds; and that the fiscal deficits will lead to slow productivity growth and high unemployment by “eroding the capital stock.”
With respect to the first claim, Mr. Gokhale misunderstands reserve accounting. Budget deficits lead ceteris paribus to net credits to banking system reserves that are drained through bond sales—either open market sales by the central bank or new issues by the Treasury.The central bank would only buy Treasuries if banks were short of reserves—an unlikely event in the current situation with annual budget deficits of at least $330bn.
In any case, central bank interventions are automatic, triggered by excess or deficient reserve positions of banks that cause the overnight interest rate to move away from target.
There is no plausible circumstance in which the Fed would not be able to provide or withdraw reserves to keep rates on target.
Mr. Gokhale's second claim appears to be based on the “crowding-out” argument—that a budget deficit absorbs private sector saving, leaving less to finance private investment. He is ignoring the fact that the current account deficit, now 6.3 per cent of gross domestic product, makes the large budget deficit necessary if aggregate demand is to be sustained. If the government were now to cut its deficit without increasing net export demand, it would only succeed in reducing output, thereby reducing saving and investment as well.
Whether or not the current fiscal stance is the correct one, it is not creating any operational difficulties for the central bank, nor is it reducing the private capital stock by absorbing saving.
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Public Policy Brief No. 82 | August 2005
Social Security Is Only the Beginning . . .
As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the “ownership society,” a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. L. Randall Wray, who has written for the Levy Institute on many topics, evaluates the premises and logic of this program in this new public policy brief.
Wray points out that much of the history of the Western world since the advent of liberalism has been marked by a gradual rise in the power of those who lack property. Some of the milestones in this progression include universal suffrage, regulation of business, and progressive taxation. Bush’s ownership society proposals, according to Wray, would result in a partial reversal of the progress of the last 250 years. The reason is that, while Bush’s plans would undoubtedly increase the choices and power of those who have property, they would fail to democratize ownership. Many gains to the wealthy would come at the expense of the poor, the sick, and the elderly.
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Public Policy Brief Highlights No. 82A | August 2005
Social Security Is Only the Beginning . . .
As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the "ownership society," a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children. L. Randall Wray, who has written for the Levy Institute on many topics, evaluates the premises and logic of this program. Wray points out that much of the history of the Western world since the advent of liberalism has been marked by a gradual rise in the power of those who lack property. Some of the milestones in this progression include universal suffrage, regulation of business, and progressive taxation. Bush's ownership society proposals, according to Wray, would result in a partial reversal of the progress of the last 250 years. The reason is that, while Bush's plans would undoubtedly increase the choices and power of those who have property, they would fail to democratize ownership. Many gains to the wealthy would come at the expense of the poor, the sick, and the elderly.Download:Associated Program:Author(s): -
Policy Note 2005/2 | February 2005
The Neocon Attack on Social Security
For seven decades, the far right has never veered from its avowed mission to gut America’s most comprehensive, successful, and popular safety net: Social Security. While it had won a few small battles (most notably, the Greenspan Commission’s huge 1983 payroll tax hikes and two-year increase in the normal retirement age), its efforts never gained much political traction before 2000. Ironically, the Clinton administration provided some much-needed support to the conservative think tanks’ preposterous claim that Social Security faces financial Armageddon. And candidate Al Gore’s only significant campaign issue involved maintaining “lockboxes” to protect the trust fund by dedicating a portion of projected 15-year budget surpluses to the program. -
Public Policy Brief No. 80 | December 2004
The Case for Rate Hikes, Part Two
The most charitable interpretation of the Federal Reserve’s recent interest rate hikes is that they appear to have been premature. A convincing array of data on payrolls, employment-to-population ratios, and other labor market indicators show that the current recovery has not yet attained the degree of labor market tightness that was common in previous recoveries, and therefore that the threat of inflation is minimal. Hence, the Fed, in raising rates, was unnecessarily jeopardizing the economy’s weak recovery.
In this new brief, we learn about the flaws in the Fed’s thinking that have led to its frequent policy mistakes. Author L. Randall Wray traces several strands of current central bank thinking back to their roots in the Fed’s internal discussions in the mid-1990s. Transcripts of these discussions have recently been released, a development that has yielded some disturbing and telling insights about the way in which monetary policy is formed.
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Public Policy Brief Highlights No. 80A | December 2004
The Case for Rate Hikes, Part Two
The most charitable interpretation of the Federal Reserve’s recent interest rate hikes is that they appear to have been premature. A convincing array of data on payrolls, employment-to-population ratios, and other labor market indicators show that the current recovery has not yet attained the degree of labor market tightness that was common in previous recoveries, and therefore that the threat of inflation is minimal. Hence, the Fed, in raising rates, was unnecessarily jeopardizing the economy’s weak recovery.
In this new brief, we learn about the flaws in the Fed’s thinking that have led to its frequent policy mistakes. Author L. Randall Wray traces several strands of current central bank thinking back to their roots in the Fed’s internal discussions in the mid-1990s. Transcripts of these discussions have recently been released, a development that has yielded some disturbing and telling insights about the way in which monetary policy is formed.
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Public Policy Brief No. 79 | August 2004
Did the Fed Prematurely Raise Rates?
For a time, the Federal Open Market Committee (FOMC) seemed to have learned from the mistakes of the past. Instead of taking good economic performance as a sign of incipient inflation, Chairman Alan Greenspan kept interest rates relatively low in the late 1990s, even as unemployment plummeted. Many commentators worried that the FOMC’s unusually easy stance would usher in a period of runaway inflation, but inflation stayed in the 2 to 3 percent range.
Now, with scant evidence of an inflationary threat, Greenspan and his committee seem intent on raising interest rates. Greenspan argues that the current anemic expansion is “self-sustaining” and no longer needs the support of low interest rates.
In this new brief, Levy Institute Senior Scholar L. Randall Wray evaluates the Fed’s concern about a coming inflation and its decision to begin raising interest rates. He begins with an examination of key market developments that might signal inflation. Most economists worry about inflation when labor markets begin to tighten and employees gain the bargaining power necessary to demand pay raises. Wray marshals an array of evidence demonstrating that workers can only wish for such conditions. The economy has created no net new jobs since the beginning of the current presidential term. To match the 64.4 percent proportion of adults who held jobs during the Clinton era, the economy would have to generate four million new positions. It is clear that the job market will not be a source of inflation any more than it was during the Clinton boom.
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Public Policy Brief Highlights No. 79A | August 2004
Did the Fed Prematurely Raise Rates?
For a time, the Federal Open Market Committee (FOMC) seemed to have learned from the mistakes of the past. Instead of taking good economic performance as a sign of incipient inflation, Chairman Alan Greenspan kept interest rates relatively low in the late 1990s, even as unemployment plummeted. Many commentators worried that the FOMC's unusually easy stance would usher in a period of runaway inflation, but inflation stayed in the 2 to 3 percent range.
Now, with scant evidence of an inflationary threat, Greenspan and his committee seem intent on raising interest rates. Greenspan argues that the current anemic expansion is "self-sustaining" and no longer needs the support of low interest rates.
Senior Scholar L. Randall Wray evaluates the Fed's concern about a coming inflation and its decision to begin raising interest rates. He begins with an examination of key market developments that might signal inflation. Most economists worry about inflation when labor markets begin to tighten and employees gain the bargaining power necessary to demand pay raises. Wray marshals an array of evidence demonstrating that workers can only wish for such conditions. The economy has created no net new jobs since the beginning of the current presidential term. To match the 64.4 percent proportion of adults who held jobs during the Clinton era, the economy would have to generate four million new positions. It is clear that the job market will not be a source of inflation any more than it was during the Clinton boom.
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Public Policy Brief No. 78 | June 2004
A Minskyan Assessment
Twenty to 25 years ago, a debate was under way in academe and in the popular press over the War on Poverty. One group of scholars argued that the war, initiated by Presidents Kennedy and Johnson, had been lost, owing to the inherent ineffectiveness of government welfare programs. Charles Murray and other scholars argued that welfare programs only encouraged shiftlessness and burdened federal and state budgets.
In recent years, despite the fact that the extent of poverty has not significantly diminished since the early 1970s, the debate over poverty has seemingly ended. In a country in which middle-class citizens struggle to afford health insurance and other necessities, the problems of the worst-off Americans seem to many remote and less than pressing. Moreover, the welfare reform bill of 1996 has deflected much of the criticism of the welfare state by ending the individual-level entitlement to Aid to Families with Dependent Children benefits (now known as Temporary Assistance to Needy Families) and putting time limits on welfare recipiency, among other measures.
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Public Policy Brief Highlights No. 78A | June 2004
A Minskyan Assessment
Twenty to 25 years ago, a debate was under way in academe and in the popular press over the War on Poverty. One group of scholars argued that the war, initiated by Presidents Kennedy and Johnson, had been lost, owing to the inherent ineffectiveness of government welfare programs. Charles Murray and other scholars argued that welfare programs only encouraged shiftlessness and burdened federal and state budgets.
In recent years, despite the fact that the extent of poverty has not significantly diminished since the early 1970s, the debate over poverty has seemingly ended. In a country in which middle-class citizens struggle to afford health insurance and other necessities, the problems of the worst-off Americans seem to many remote and less than pressing. Moreover, the welfare reform bill of 1996 has deflected much of the criticism of the welfare state by ending the individual-level entitlement to Aid to Families with Dependent Children benefits (now known as Temporary Assistance to Needy Families) and putting time limits on welfare recipiency, among other measures.
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Policy Note 2004/2 | May 2004
Deficits, Debt, Deflation, and Depreciation
Recent economic commentary has been filled with “D” words: deficits, debt, deflation, depreciation. Deficits—budget and trade—are of the greatest concern and may be on an unsustainable course, as federal and national debt grow without limit. The United States is already the world’s largest debtor nation, and unconstrained trade deficits are said to raise the specter of a “tequila crisis” if foreigners run from the dollar. Federal budget red ink is expected to imperil the nation’s ability to care for tomorrow’s retirees. While public concern with deflationary pressures has subsided, concern continues regarding America’s ability to compete in a global economy in which wages and prices are falling. In fact, the current situation is far more “sustainable” than that at the peak of the Clinton boom, which had federal budget surpluses but record-breaking private sector deficits. Nevertheless, it is time to take stock of the dangers faced by the US economy.
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Working Paper No. 404 | April 2004
A Minskyan Assessment
Hyman Minsky is best known for his work in the area of financial economics, and especially for his financial instability hypothesis. In recent years, some authors have also recognized his advocacy of the “employer of last resort” as part of his “big government” intervention to help maintain stability. However, very little research has been undertaken regarding Minsky's early involvement in the “War on Poverty.” This paper will trace the development of Minsky's thinking on antipoverty policies to his support for welfare reform and federal job creation programs.
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Public Policy Brief Highlights No. 74A | November 2003
Treating the Disease, Not the Symptoms
Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.Download:Associated Program:Author(s): -
Public Policy Brief No. 74 | November 2003
Treating the Disease, Not the Symptoms
Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.
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Working Paper No. 392 | October 2003
Treating the Disease, Not the Symptoms
Deflation can be defined as a falling general price level utilizing one of the common price indices.the consumer price index; the GDP deflator or other, narrower indices as the wholesale price index; or an index of manufactured goods prices. Falling indices of output prices can be the result of several mechanisms: productivity increases, quality increases and hedonic imputations of prices, competition from low-cost producers, government policy influences, or depressed aggregate demand. Falling output prices, in turn, can have strong effects, especially on the ability to service debts fixed in nominal terms; depending on the level of indebtedness of households and firms, they can set off a classic Minsky-Fisher debt deflation spiral. In this paper, we argue that deflation can and usually does generate large economic and social costs, but it is more important to understand that deflation itself is a symptom of severe and chronic economic problems. This distinction becomes important for the design and implementation of economic policy.
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Policy Note 2003/5 | September 2003
For the first time since the 1930s, many worry that the world's economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. Given the singleminded pursuit of deflationary policies over the past decade, this does come as something of a surprise. But policymakers—especially central bankers—in Europe and the United States seem to have little inkling of how to stave off deflation, with the result that prices are already falling in much of the world. Contrary to widespread beliefs, the worst outcome will not be avoided if the only response is to balance budgets and introduce new monetary policy gimmicks. To the contrary, policymakers should increase deficits to at least 7 percent of GDP.
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Policy Note 2001/10 | October 2001
It is now widely recognized that economists and policymakers alike had been living a 30-year fantasy. The best government is not that which governs least. The best economy is not that which is abandoned to the invisible fist of the unconstrained market. Our national and individual security is not best left to the fate of the private pursuit of maximum profit. The events of September 11 underscored what was already apparent: Big Government needs to play a bigger role in our economy. Our late Levy Institute colleague Hyman P. Minsky has been vindicated once more.
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Policy Note 2001/6 | June 2001
The President’s commission claims that the Social Security program is “unsustainable” and requires a complete “overhaul.” It also claims that the program is a bad deal for women and minorities. However, any honest accounting of all Social Security benefits finds that the program is a good deal for disadvantaged groups. Social Security will become a worse deal only if tomorrow's politicians slash benefits—as the commission presumes they will—or increase the taxation of the disadvantaged. A suspicious person might conclude that the reason the report uses such scare tactics is because its authors fear that future Congresses will indeed keep their promises to maintain Social Security. Hence, the urgent need to privatize today.
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Policy Note 2001/5 | May 2001
This policy note examines the case for large tax cuts, focusing on the issues surrounding the purpose and overall size of the needed cut. Although Congress has passed a significant package of tax relief, many have worried that the budget surplus on which it was based will never appear. Thus, some have advocated “triggers” to reduce the size of the tax cuts should tax revenues begin to decline. This note argues that such a proposal represents “backward thinking.”
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Policy Note 2001/2 | February 2001
Large Tax Cuts Are Needed to Prevent a Hard Landing
Growing government surpluses, a ballooning trade deficit, and the resulting growth in private sector debt have placed the United States' economy in a precarious position. Papadimitriou and Wray agree with President Bush that fiscal stimulus is necessary to reinvigorate the economy; in the current economic environment, monetary policy will not work. However, a tax cut that would adequately stave off a downturn needs to be substantially larger than that proposed by the president. Therefore, in addition to the president's proposal to cut marginal income tax rates, the authors include among their recommends a payroll tax reduction and an expansion of the EITC.
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Policy Note 2000/7 | July 2000
The Fed has raised interest rates six times in the past year to slow the economy, in the belief that unemployment is too low. There is scant evidence, however, that low unemployment leads to inflation, that the economy is in danger of overheating, or that higher interest rates will reduce inflation. Instead, the Fed is merely hastening a downturn that will impose huge costs on society's most disadvantaged.
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Policy Note 2000/5 | May 2000
A Minskyan View
Hyman P. Minsky’s insights into the relationship between profits, economic growth, and the public and private financial balances are particularly relevant to today’s conditions. How can a Minskyan view be applied to explain the processes that brought the economy to its current state and to recommend a policy stance for the future?
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Policy Note 1999/8 | August 1999
Breaux Plan Slashes Social Security Benefits Unnecessarily
Neither the Breaux plan nor President Clinton’s proposal for “saving” Social Security promises much gain, but the Breaux plan, unlike the president's proposal, would inflict real pain in the form of reduced benefits.
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Public Policy Brief Highlights No. 55A | August 1999
Providing for Retirees throughout the Twenty-first Century
Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a "crisis" and could be eliminated with relatively simple adjustments when it occurs. The real issue regarding our ability to provide for retirees throughout the coming century is not the size of Social Security Trust Funds, but the size and distribution of the whole economic pie. When the issue is viewed in this light, it becomes clear that most proposals to "save" the system—locking away budget surpluses, investing the Trust Funds in the stock market, privatization, reduction of benefits—do not address the real problem of caring for future retirees. Solutions consistent with the true nature and scope of the problem lie not within the Social Security system itself but in the realm of a general fiscal policy aimed at ensuring the growth of the economy.Download:Associated Program:Author(s): -
Public Policy Brief No. 55 | August 1999
Providing for Retirees throughout the Twenty-first Century
Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a “crisis” and could be eliminated with relatively simple adjustments when it occurs. The real issue regarding our ability to provide for retirees throughout the coming century is not the size of Social Security Trust Funds, but the size and distribution of the whole economic pie. When the issue is viewed in this light, it becomes clear that most proposals to “save” the system—locking away budget surpluses, investing the Trust Funds in the stock market, privatization, reduction of benefits—do not address the real problem of caring for future retirees. Solutions consistent with the true nature and scope of the problem lie not within the Social Security system itself but in the realm of a general fiscal policy aimed at ensuring the growth of the economy.
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Public Policy Brief Highlights No. 54A | July 1999
An Inside Look at the Out of the Labor Force Population
Despite a long period of strong economic growth, more than 28 million working-age persons were categorized by the Bureau of Labor Statistics as out of the labor force in 1998. A small portion of this population will move into the labor force, but the majority will remain without work. This brief examines the demographics of the out-of-the-labor-force population, their reasons for not working, the likelihood that they will move into the labor force, and the adverse effects on them of prolonged joblessness. Current labor market policies, and especially welfare reform measures, have proved ineffective for the "hard-core" jobless because the policies are predicated on the mistaken notion that the private labor market is dynamic and flexible enough to accommodate anyone who wants to work. A public employment program would complement the operation of the private market, providing those who are able and willing with income, a sense of worth, the opportunity to make a social and economic contribution, and preparation for entry into the labor force.Download:Associated Program:Author(s): -
Working Paper No. 275 | July 1999
In this paper, the authors discuss Minsky's analysis of the evolution of one variety of capitalism—financial capitalism—which developed at the end of the nineteenth century and was the dominant form of capitalism in the developed countries after World War II. Minsky's approach, like those of Schumpeter and Veblen, emphasized the importance of market power in this stage of capitalism. According to Minsky, modern capitalism requires expensive and long-lived capital assets, which, in turn, necessitate financing of positions in these assets as well as market power in order to gain access to financial markets. It is the relation between finance and investment that creates instability in the modern capitalist economy. Financial capitalism emerged from World War II with an array of new institutions that made it stronger than ever before. As the economy evolved, it moved from this more successful form of financial capitalism to the fragile form of capitalism that exists today.
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Public Policy Brief No. 54 | July 1999
An Inside Look at the Out of the Labor Force Population
Despite a long period of strong economic growth, more than 28 million working-age persons were categorized by the Bureau of Labor Statistics as out of the labor force in 1998. A small portion of this population will move into the labor force, but the majority will remain without work. This brief examines the demographics of the out-of-the-labor-force population, their reasons for not working, the likelihood that they will move into the labor force, and the adverse effects on them of prolonged joblessness. Current labor market policies, and especially welfare reform measures, have proved ineffective for the “hard-core” jobless because the policies are predicated on the mistaken notion that the private labor market is dynamic and flexible enough to accommodate anyone who wants to work. A public employment program would complement the operation of the private market, providing those who are able and willing with income, a sense of worth, the opportunity to make a social and economic contribution, and preparation for entry into the labor force.
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Working Paper No. 270 | May 1999
The first part of this paper is an overview of projections of Social Security's future and an explanation of why the projections have led many to believe there is a looming financial crisis. We argue that any problems to be faced are far down the road and not severe enough to justify the use of the word "crisis." Something will have to be done to resolve the real and financial problems that are likely to crop up in two or three decades. However, this does not in itself mean that something has to be done today specifically to save Social Security
The second part of the paper discusses the real and financial nature of Social Security's problems. Almost all commentators have focused on the financing of Social Security and thus have proposed financial solutions. We argue that the questions about the future of Social Security concern the size and distribution of the real economic pie. Once this is recognized, it becomes obvious that none of the popular reforms, such as privatization, reduction of current benefits, and President Clinton's proposal to "set aside" budget surpluses, can really help. We conclude with alternative policy recommendations that are consistent with the true nature of the future problem.
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Working Paper No. 269 | May 1999
In recent years the United States has seemed to achieve the best of all possible worlds: robust economic growth, very low unemployment, and low inflation. Many attribute this performance to fewer supply-side constraints, as the country has moved away from stifling regulations and other impediments to trade. When compared with the very high unemployment rates suffered in European countries, our lower unemployment rates appear to be due to freer labor markets and to a less generous social safety net that saps private initiative.
In this paper we show that although it is true the United States has enjoyed a higher employment rate than all of our major competitors, we lag behind all other major countries in per capita GDP growth since 1970. The reason is our dismal rate of productivity growth. We show that when one decomposes per capita GDP growth into its component parts—growth of employment rates and growth of output per employee—the US experience is quite different from that of the other countries. In some sense, countries "choose" high employment paths or low employment paths, but regardless of that choice, economic growth does not appear to be much affected. We argue that this is because countries have not faced significant supply constraints; rather, per capita GDP growth has been largely demand constrained. For this reason policies aimed at removing supply constraints do not lead to more rapid economic growth. The conclusion is that, if one is to trying to increase growth rates, Keynesian "demand side" policies are preferable to "supply side" policies.
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Policy Note 1999/5 | May 1999
The search for the solution to the problems faced by the Social Security system should focus not on how to amend OASDI but on how best to achieve faster long-term economic growth. Achieving such growth is better left to the purview of fiscal and monetary policy, not the OASDI system.
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Policy Note 1999/4 | April 1999
Growing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate.
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Policy Note 1999/3 | March 1999
A Reality Check
A federal government surplus has finally been achieved, and it has been met with pronouncements that it is a great gift for the future and with arguments about what to do with it. However, the surplus will be short-lived, it will depress economic growth, and, in any case, surpluses cannot be “used” for anything.
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Policy Note 1999/2 | February 1999
President Clinton’s Proposed Social Security Reform
If you were to write yourself IOUs to provide for your retirement and put them in a safety deposit box, would you rest comfortably, assured that you would be able to purchase all the necessities of life in 2020? Well, President Clinton’s proposal is even worse.
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Working Paper No. 262 | January 1999
A Case of Minskian Instability?
The so-called credit crunch of 1966 has long been recognized as the first significant postwar financial crisis and one that required the first important intervention by the Federal Reserve Bank. In the midst of the robust postwar expansion, the Fed began to fear inflation and tightened monetary policy to the point at which profitability of financial institutions was threatened. As Minsky argued, "By the end of August, the disorganization in the municipals market, rumors about the solvency and liquidity of savings institutions, and the frantic position-making efforts by money-market banks generated what can be characterized as a controlled panic. The situation clearly called for Federal Reserve action." The Fed was forced to enter as a lender of last resort to save the muni bond market, which in effect validated practices that were stretching liquidity. As a result of Fed intervention, the economy continued to expand, new financial practices emerged and were validated, leverage ratios increased, memories of the Great Depression faded, and markets came to expect that big government and the Fed would come to the rescue as needed. That 1966 crisis was only a minor speed bump on the road to Minskian fragility. To some extent, 1966 proved to be the first verification of the "financial instability hypothesis" that Minsky had been developing since the late 1950s, and the events of that year would stimulate further development of his analysis of the early postwar transition from a "robust" financial system toward a "fragile" financial system.
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Working Paper No. 261 | January 1999
This paper extends earlier work that argued that liquidity preference theory should be interpreted as a theory of value. Here I will argue that two theories of value are needed for analysis of a monetary production economy: the labor theory of value and the liquidity preference theory of value. Both Keynes and Marx were trying to develop a monetary theory of production; Marx, of course, adopted a labor theory of value in his analysis, and it was previously argued that Keynes adopted a liquidity preference theory in his. A monetary theory of production should adopt both, however, and I will argue that Keynes seems to have recognized this. Further, Keynes did adopt labor hours as the measure of value and said he agreed that labor produces all value. I admit it is still a leap to claim that Keynes accepted both theories of value. Instead, I argue he should have adopted both and will show that this is consistent with the purposes of the General Theory.
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Working Paper No. 257 | November 1998
An Irreverent Overview of the History of Money from the Beginning of the Beginning to the Present
This paper poses that the one commonality between institutionalist thought and Keynesianism (as presented in his General Theory) was money. Tracing the origins and uses of money, the myth of the development of money as a medium of exchange is dispelled and replaced with money used as evidence of debt, specifically, government debt. This paper was presented as the Presidential Address to the 1998 Association for Institutionalist Thought conference. As such, the paper should be taken in the same spirit as the [in]famous neoclassical Robinson Crusoe story, or Paul Samuelson's story of the evolution of money. The only significant change that has been made is to add several endnotes that will make some of the references more clear; this might make the piece more accessible for students.
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Public Policy Brief No. 45 | October 1998
Job Opportunity for the Less Skilled
During the recent robust expansion only 700,000 of the almost 12 million jobs created went to the half of the population that does not have at least some college education. Even though the number of officially unemployed fell to less than 4 million in the 25-and-over age group, there remain in that group over 26 million potentially employable workers—the combined number of those who are actively seeking work (and are counted as officially unemployed) and those who are currently out of the labor force but would be willing to participate. Since expansion has not proven sufficient to remedy this intolerably high level of wasted human resources, well-targeted, active labor market policies are required. One such policy is a job opportunity program that “hires off the bottom,” providing minimum-wage jobs for all those who are ready, willing, and able to work. The program would create a buffer stock of labor from which employers could hire during upturns instead of bidding up the wages of the already employed, and thus would offer both full employment and price stability.
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Public Policy Brief Highlights No. 45A | October 1998
Job Opportunity for the Less Skilled
During the recent robust expansion only 700,000 of the almost 12 million jobs created went to the half of the population that does not have at least some college education. Even though the number of officially unemployed fell to less than 4 million in the 25-and-over age group, there remain in that group over 26 million potentially employable workers—the combined number of those who are actively seeking work (and are counted as officially unemployed) and those who are currently out of the labor force but would be willing to participate. Since expansion has not proven sufficient to remedy this intolerably high level of wasted human resources, well-targeted, active labor market policies are required. One such policy is a job opportunity program that "hires off the bottom," providing minimum-wage jobs for all those who are ready, willing, and able to work. The program would create a buffer stock of labor from which employers could hire during upturns instead of bidding up the wages of the already employed, and thus would offer both full employment and price stability.Download:Associated Program:Author(s): -
Working Paper No. 255 | October 1998
This paper argues that economists require a particular concept of time to develop theory with greater explanatory power in describing and analyzing the sort of economy in which we are primarily interested--the monetary economy usually termed capitalism. Economists of various persuasions have recognized the importance of a concept of time, but we argue that a very specific concept is required. We propose a concept of time that is consistent with the perception and experience of time in a monetary or capitalist economy. This concept of time is determined by the debt cycle, and the length of this cycle is determined by the interest rate. Thus, while our proposed time measure is certainly historical and sequential in nature (months, years), it is not simply clock time: the length of economic time is fluid and is regulated by the interest rate, a variable of significance in dictating a host of socially important effects.
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Working Paper No. 251 | September 1998
Paul Davidson is one of the best known and most influential post-Keynesian economists. He has insisted throughout his career that economists should focus on real-world problems and that the purpose of economic policy is to help society become more humane and civilized. He is also known for his insistence on adhering to the words and ideas of John Maynard Keynes. This article reviews his contributions to monetary theory, international economics, aggregate supply theory, and environmental economics.
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Working Paper No. 252 | September 1998
All modern economies have a "chartalist" or "state" money, as acknowledged by Friedrich Knapp and John Maynard Keynes. In this paper, I examine the "history" of money to shed light on its origins. I also examine in detail the views of those who accepted the chartalist, or state, approach to money, from Adam Smith to Knapp and Keynes, with some discussion of the views of Hyman Minsky and Abba Lerner. This is then linked to Lerner's "functional finance" approach to money and government spending. I next explore the implications of "modern money" for government policy and show that much economic analysis reaches erroneous conclusions because it fails to recognize the nature of modern money. The state "defines" money when it chooses that in which taxes must be paid. Government spending is the most important determinant of the supply of base money; government deficits are the most important source of net money holdings. This stands in stark contrast to traditional analysis, for fiscal policy is the primary determinant of the money supply and monetary policy determines the short-term interest rate. Because government deficits increase bank reserves, monetary policy is required to offer an interest-earning alternative to excess reserves; essentially, monetary policy consists of sales of government bonds (by the Treasury and central bank) to "drain" excess reserves in order to hit the interest rate target established for monetary policy. Thus, bond sales are not a part of fiscal policy nor are they needed to "finance" government deficits. This analysis leads to several interesting policy conclusions regarding the importance of government deficits and debts and regarding proposals to promote full employment.
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Policy Note 1998/7 | July 1998
Unlike the Papa, Mama, and Baby Bears faced by the storybook Goldilocks, our Goldilocks faced three ferocious grizzlies: a cascading, global financial crisis, global deflation and excess capacity (or insufficient demand), and a domestic fiscal surplus in conjunction with record private deficits.
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Policy Note 1998/6 | June 1998
Fiscal Policy and the Coming Recession
Neither Congress nor the president is on the right track. Rather than protecting the surplus, we should be increasing spending and cutting taxes to contain the looming world recession.
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Policy Note 1998/5 | May 1998
Some analysts have argued against monetary ease, fearing that it might fuel a speculative boom. Alas, given the recent substantial “market correction,” this objection may safely be put away.
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Working Paper No. 222 | January 1998
The Chartalist Approach
Senior Scholar L. Randall Wray traces the development of the chartalist approach to money from Adam Smith, Georg Friedrich Knapp, and John Maynard Keynes to the later theorists, including Hyman Minsky, Abba Lerner, and Kenneth Boulding, who follow the endogenous money approach.
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Working Paper No. 225 | January 1998
The international financial system might be said to be in crisis. It requires frequent intervention by central banks and other national and international bodies to reduce fluctuations of currencies. It does not tend to eliminate current account deficits or surpluses; exchange rate fluctuations do not lead to movements toward balanced trade, nor do they appear to follow from flows of international reserves: some countries run persistent surpluses while others run persistent deficits.
This paper first examines the functioning of the modern international financial system in order to design a reformed system that will make it easier to deal with some of the problems that face the international financial system today. The paper advocates reformation of the international financial system along the lines of Keynes's famous bancor proposal. Most importantly, the reform would eliminate the current bias toward "austerity" that results from the way in which existing international financial institutions operate.
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Working Paper No. 213 | November 1997
Full Employment without Inflation
Since the Employment Act of 1946 a stated policy of the United States government has been to pursue simultaneously high employment and stable prices. However, because many economists and policymakers do not believe that it is possible to have both high employment and stable prices, monetary policy has generally been geared, at least for the past two decades, toward increasing unemployment as a means to achieving stable prices. Senior Scholar L. Randall Wray demonstrates that stable prices and "truly full employment" are in fact compatible with each other if a properly targeted employment program is used.
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Public Policy Brief No. 27 | September 1996
The Effects of Monetary Policy on the CPI and Its Housing Component
The targets for monetary policy adopted by the Fed in recent years have not proven to be closely correlated with inflation, leading some theorists and policymakers to advocate the use of a price index, such as the consumer price index (CPI), as both the target and the goal of monetary policy. The authors of this brief show that such a choice is not wise because the CPI does not accurately reflect market-caused price increases and is not under the control of monetary policy. Their analysis extends beyond that of recent reports to show how and why the transmission mechanisms through which monetary policy is thought to affect the CPI are tenuous at best. The authors focus on the housing component of the CPI to illustrate their point. They conclude that those components of the CPI that monetary policy is likely to affect have been declining in importance, meaning that to produce a given reduction in the overall rate of inflation will require that monetary policy have an increasingly larger impact on an ever-diminishing portion of the consumer basket. Therefore, careful reconsideration of an alternative ultimate target, such as the rate of economic growth or the unemployment rate, is warranted.
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Working Paper No. 164 | May 1996
A consensus is emerging among economists and policymakers that the consumer price index (CPI) as a measure of cost of living has an upward bias. As a result, downward revisions of cost-of- living adjustments are frequently recommended, especially in discussions about deficit reduction. Such revisions would lower the rate of increase of some entitlements and raise the rate of increase of federal government revenue by reducing future adjustments to tax brackets. In this new working paper, Dimitri B. Papadimitriou, executive director of the Levy Institute, and L. Randall Wray, research associate of the Levy Institute and associate professor of economics at the University of Denver, express their surprise that this discussion has not been broadened to include the use of the CPI as a measure of inflation and a target of monetary policy. The Federal Reserve has increasingly pursued the single goal of price stability, or zero inflation, although according to Papadimitriou and Wray, it has been unable to find a target that it can hit and to demonstrate a consistent link between any of its targets and inflation. The authors argue that if the CPI overstates inflation and the Federal Reserve uses it as a target, the Fed is basing its policy on a measurement error. Given recent findings of measurement bias in the CPI, they contend that it is inappropriate at this time to identify zero inflation with a constant CPI. In a detailed analysis of the components of the CPI they conclude that the CPI is not a reliable guide for policy purposes. They question whether tight money can reduce inflation as measured by the CPI, and they note that the impact of such a policy could be perverse.
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Public Policy Brief No. 15 | September 1994
Flying Blind: The Federal Reserve’s Experiment with Unobservables
Experience with a variety of targets has cast doubt on the likelihood that a single variable can be found to be closely and reliably linked to future inflation; it is even less likely that such a variable, should it be found, would somehow be under the control and manipulation of the Federal Reserve. This brief provides a review of the experiments with various targets undertaken by former Fed Chairman Paul Volcker and current Chairman Alan Greenspan. The authors contend that there is no reason to suppose that the Fed will discover a target variable whose control will yield stable prices. Finally, they conclude that economists lack sufficient information to calculate the costs of achieving stable prices in terms of unemployment and lost output.
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Working Paper No. 124 | September 1994
The Federal Reserve's Experiment with Unobservables
No further information available.
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Public Policy Brief No. 12 | May 1994
Community-based Factoring Companies and Small Business Lending
At a time when small businesses are suffering from a credit crunch, “niche” financial institutions are filling the void left by more traditional sources of financing, such as commercial banks. The authors argue that the most important of these niche players are community-based factor companies, which are rapidly expanding from their client base in apparel and textiles to finance a range of firms in everything from electronics to health care. The purchase of accounts receivable by factors enhances the balance sheets of their clients, making it easier for the clients to obtain bank financing. Also, because factors are more interested in the creditworthiness of a client’s customers than of the client itself, they are willing to extend loans in excess of collateral to rapidly growing businesses. Because factors are becoming an increasingly important source of financing for small and start-up businesses, the authors propose that factors be encouraged to play a broader role in financing firms in distressed communities by (1) making some factors eligible for funding and assistance under legislation regulating community development financial institutions and (2) by allowing investments by banks in factors to count toward compliance under the Community Reinvestment Act.
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Working Paper No. 108 | April 1994
No further information available.
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Working Paper No. 99 | October 1993
Wray asserts that rigorous analyses of the role played by innovation in economic development must acknowledge the contribution of Joseph Schumpeter. However, the author suggests that the current stagnation confronting most developed, capitalist economies "cannot be understood without synthesizing Schumpeter's insights with those of Kalecki and Keynes." Hence, Schumpeter's work alone is inadequate in explaining the links between government deficits in ensuring aggregate demand and corporate profits.
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Working Paper No. 95 | May 1993
The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks
View More View LessThe Community Development Banks (CDBs) should not be seen as a substitute for the Community Reinvestment Act (CRA) or for other programs designed to revitalize lower income areas. Rather, they should be seen as a complement for existing programs and for other programs that will be proposed by the Clinton administration. As discussed above, the CRA process ensures that a dialogue takes place among regulators, financial institutions, and served communities: it ensures that banks identify their communities and that they satisfy some of the needs of these communities. Moreover, it helps to expand the awareness of bankers such that their expectations about presently undeserved areas are revised. It is unrealistic to expect that any financial institution can meet all the needs of any community; this, there is a role for a CDB to play in some communities that supplements the role played by traditional financial institutions. Similarly, while we believe that CDBs have an important role to play in revitalizing low income communities, we certainly do not see these as a substitute for the wide range of programs (both public and private) that will be needed to reverse long trends of deterioration experienced by some distressed communities.
Finally, the CDBs are not intended to be welfare programs but to provide services to the community's residents, and consequently, they must meet the long-run market tests of profitability. Aside from the service aspect, community development banks will: (i)improve the well-being of our citizens not now served because of unresponsive, yet traditional loan qualification norms, and (ii) directly increase the opportunities for potential entrepreneurs and potential employees. The basic assumption underlying the community development bank is that all areas of the country need banks that are clearly oriented toward the small customer: households that have a small net worth, a small IRA account, and a small transactions account, and businesses that need financing measured in thousands rather then millions or billions of dollars.
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Public Policy Brief No. 6 | May 1993
The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks
The establishment of a system of federally regulated, for-profit community development banks (CDBs) would help to fill the financial gap in areas inadequately served by traditional banks, requirements of the Community Reinvestment Act (CRA) notwithstanding. These organizations would be charged with delivering credit, payment, and savings opportunities and providing basic financing to households and small businesses in underserved areas. Such a system would not substitute for the CRA, but rather act as a supplement to current regulation. Proposed exemptions from CRA compliance for depository institutions that invest in the equity of a CDB would weaken the existing law by diluting the investment of the depository institution in its own particular community. Such proposals (under which “investment” has been defined to be as little as one-quarter of one percent of total assets) are not consistent with the spirit of the CRA and would negate the beneficial dialogue that takes place between the institution and the community in which it operates.
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Working Paper No. 86 | March 1993
The origins of money and banking are explained in nearly every introduction money and banking course, but Wray proposes an alternative approach that emerges from a comparative analysis of economic institutions. Orthodox theory suggests that barter replaced self-sufficiency and increased efficiency by fostering specialization- subsequently, establishing some object as a medium of exchange permits greater efficiency. In essence, the orthodox economist espouses the view that we operate in a free market economy in which "neutral money is used primarily to facilitate exchange of real goods, undertaken by self-interested maximizers for personal gain."
Institutionalists reject this argument because it emerges from the perspective of a rational economic agent facing scarce resources and unlimited wants-thus, the focus is on choice. Wray states that economic analyses must incorporate interactions between humans and nature, and that the economy is a "component of the material life process of society." Hence, the conventionalists' focus on choice should instead be directed at production and distribution.
The Wray thesis suggests that money is necessarily endogenously determined: Monetary economies have not, and cannot, operate with exogenous money supply can function with a commodity reserve system, such a system is subject to periodic debt deflations. In sum, the monetarist policy prescription would be counterproductive to systemic stability and would not yield greater control of the money supply.
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Public Policy Brief No. 3 | January 1993
A Proposal to Establish a Nationwide System of Community Development Banks
This brief proposes that the establishment of a nationwide system of community development banks (CDBs) would advance the capital development of the economy. The proposal is based on the notion that a critical function of the financial system is not being adequately performed by existing institutions for low-income citizens, inner-city minorities, and entrepreneurs who seek modest financing for small businesses. The primary goals of the CDBs are to deliver credit, payment, and savings opportunities to communities not well served by banks, and to provide financing throughout a designated area for businesses too small to attract the interest of the investment banking and normal commercial banking communities.
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Working Paper No. 83 | December 1992
The Clinton/Gore proposal for the creation of a network of 100 community development banks (CDBs) to revitalize communities is bold, and will contribute to the success of the U.S. economy. Banks are essential institutions in any community, and the establishment of a bank is often a prerequisite for the investment process. For this reason, the creation of banks in communities lacking such institutions is important to the welfare of these communities.
The vitality of the American economy depends on the continual creation of new and initially small firms. Because it is in the public interest to foster the creation of new entrants into industry, trade, and finance, it is also in the public interest to have a set of strong, independent, profit-seeking banking institutions that specialize in financing smaller businesses.
When market forces fail to provide a service that is needed and potentially profitable, it is appropriate for government to help create the market. Community development banks fall into such a category. They do not require a government subsidy, and after start-up costs, the banks are expected to be profitable.
The primary perspective of this concept paper is that the main function of the financial structure is to advance the capital development of the economy-to increase the real productive capacity and wealth-producing ability of the economy. The second assumption is that capital development is encouraged by the provision of a broad range of financial services to various segments of the U.S. economy, including consumers, small and large businesses, retailers, developers, and all levels of government. The third is that the existing financial structure is particularly weak in servicing small and start-up businesses, and in servicing certain consumer groups. The fourth is that this problem has become more acute because of a decrease in the number of independent financing alternatives and a rise in the size distribution of financing sources, which have increased the financial system's bias toward larger transactions. These are assumptions that appear to be supported by the evidence: they are also incorporated in other proposals that advance programs to develop community development banking.
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