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The ECB is to be congratulated on finally defying its German masters, who have long kept the euro’s guardian of stability in captivity. For a number of years, Germany’s unholy triangle of power over the land of the euro – Berlin, Frankfurt, Karlsruhe – has enforced a diktat that undermined both the euro economy and democracy, causing a deep socioeconomic crisis, the rise of nationalism, and anti-EU sentiments across the continent. At last, the ECB has liberated itself from the scourge of hyperinflation scaremongering that is the self-serving conviction – and declaration of intellectual bankruptcy – of the Germany political elite. It is fitting that the chance for a revival of democratic values and European solidarity is knocking on Athens’ door this weekend. In the markets’ perception, Mario Draghi over-delivered yesterday on his famous “whatever-it-takes” promise made at the height of the euro crisis in the summer of 2012. The euro and bond yields are down, stocks are up, party time is here. Things are going according to plan and everyone financial is in high spirits. The question is what Mario’s QE bazooka will really do beyond the markets – for the real economy, that is. The markets are not worried about that issue at this point. Or perhaps some are thinking ahead like this: if growth stays weak, there… Read More

In the context of last Tuesday’s State of the Union, Pavlina Tcherneva was interviewed by Wall Street Journal Live‘s Sara Murray on the issue of the effectiveness of policies to combat widening income inequality. [iframe width=”475″ height=”288″ src=”http://video-api.wsj.com/api-video/player/iframe.html?guid=84206A51-1034-4E5F-A37D-363CBF7499CD” autoplay=”0″ frameborder=”0″ allowfullscreen></iframe]   In the interview, Tcherneva comments that while some of the progressive taxation policies outlined by the President may be part of the solution, we ought to be focusing more on raising wages at the bottom and middle of the income distribution through the promotion of tight full employment — with direct job creation policies playing a key role. She notes that the President’s proposal to create more infrastructure jobs would help on that front, but that we are still well short of full employment.* Tcherneva memorably captured the increasing severity of the problem — economic expansions that have left the bottom 90 percent further and further behind — with the chart below. She lays out a brief summary of her alternative, “bottom-up” approach to fiscal policy in this one-pager: “Growth for Whom?” *(Note that Tcherneva’s concept of tight full employment would ultimately bring the unemployment rate below what is conventionally understood as “full employment.” With a maximal job guarantee policy, anyone ready and willing to work would have access to a paid job in the public, nonprofit, or… Read More

When French president François Hollande pre-announced the ECB Governing Council’s long-awaited adoption of “quantitative easing” at its meeting tomorrow, German chancellor Angela Merkel was quick to respond by pointing out that this was still the independent ECB’s decision alone. It was good of her to do so. For in recent times one could not help getting the impression that the German political elite had forgotten all about that precious centerpiece of German monetary orthodoxy: that the independence of the central bank was the most important safeguard of solidity in the world. Against the background of an ill-informed German public and an ideology-stricken German media landscape that excels in nothing more than keeping alive hyperinflation phobia even as the land of the euro is at acute risk of sinking ever deeper into the morass of deflation, Germany’s body politic got carried away with their self-righteous assumption that it was in everyone’s best interest to accept the reality of German hegemony over Euroland in all matters of economic policy, including monetary policy. Yesterday’s Financial Times quoted the former ECB governing council member Athanasios Orphanides on what would appear to be a rather intolerable (since illegal) state of affairs: “It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany, and for the ECB to constrain… Read More

Wolfgang Münchau is one of those rare sensible voices in the international media reporting on the euro crisis. He has been consistently right in his gloomy assessments of euro crisis management in recent years. He is also correct in pointing out that the observed deflationary trend in the eurozone is not primarily due to any recent oil price shock but mainly driven by the chosen deflationary intra-area “rebalancing” path: with German wage-price inflation well below the 2-percent stability norm, everybody else is forced into deflation to restore their competitiveness. (See here: “Beware what you wish for when it comes to ECB measures”) But Münchau got it pretty wrong in his FT column this week suggesting that so-called helicopter drops of money would constitute monetary policy. Milton Friedman famously used the helicopter analogy in pushing his monetarist mantra, but he forgot to mention that central banks are not in the business of running money-dropping helicopters. Friedman’s story went like this: “In our hypothetical world in which paper money is the only medium of circulation, consider first a stationary situation in which the quantity of money has been constant for a long time, and so have other conditions. Individual members of the community are subject to enough uncertainty that they find cash balances useful to cope with unanticipated discrepancies between receipts and… Read More

If you, too, are living in one of the sub-zero climes right now, you might want some stimulating reading: 1) Here’s one of the best and fairest summaries of MMT that I’ve seen, by Joe Guinan. As Joe says: “Few matters of economic importance are as woefully misunderstood as modern money. It can seem a fiendishly complicated subject, even to economists. Schumpeter confessed to never having understood money to his own satisfaction, while Keynes claimed to know of only three people who really grasped it: ‘A Professor at another university; one of my students; and a rather junior clerk at the Bank of England’.” Reminds me of the time Robert Heilbroner called me up after reading my draft 1998 book, Understanding Modern Money, apologizing because he could not write a blurb for the jacket. Money is, he said, the scariest topic there is, and your book is going to scare the hell out of everybody. And by Jove he was right. Anyway, Joe goes on to argue that MMT seems to have the theory, description of real world operations, and policy right, but needs some better political economy. I agree. Geoff Ingham has done some pretty spectacular work on that, but we need more. 2) As you probably know, something like 90 percent of Americans do not have passports. Presumably, few have… Read More

The Advocate General (AG) has spoken on the ECB’s OMT program today. Apparently the markets were more concerned about the latest U.S. retail sales numbers than delighted about the “okay in principle provided that” signal sent from Luxembourg to the German triangle of euro power (Frankfurt, Berlin, and Karlsruhe). First of all, in the AG’s view, OMT constitutes monetary policy but not economic policy. That was one of the critical issues. The German Constitutional Court (GCC) had preliminarily concluded that the ECB may be stepping outside the monetary policy domain, for which it enjoys exclusive competence. In its previous judgment on the Pringle case the ECJ found that the ESM constitutes economic policy, which remains primarily a national responsibility in Europe’s Economic and Monetary Union, and does not encroach on the ECB’s territory. On OMT the opposite verdict was reached, based on the following evaluation: “in order for a measure of the ECB actually to form part of monetary policy, it must specifically serve the primary objective of maintaining price stability and it must also take the form of one of the monetary policy instruments expressly provided for in the Treaties and not be contrary to the requirement for fiscal discipline and the principle that there is no shared financial liability. If there are isolated economic-policy aspects to the measure… Read More

by Scott Fullwiler Tim Worstall has a post decrying the dangers of MMT ever being used in the real world—even as he recognizes or at least suggests that it might be the correct description of how the monetary system works—and is particularly concerned about Stephanie Kelton’s new appointment as Chief Economist on the Senate Budget Committee. (Note: Randy Wray also posted a critique of Mr. Worstall’s post.) Mr. Worstall’s main issue is one we’ve heard hundreds of times before—because MMT explains that currency-issuing governments operating under flexible exchange rates and without debt in a foreign currency do not actually have budget constraints, this opens the door to all sorts of problems if put into practice. We can’t trust our government with this information, in other words—it must be required to match spending with revenues over some period (whether each year, over the business cycle, etc.) or at least plan over some period of time to not allow the debt ratio to rise beyond a modest level.** Mr. Worstall notes the frequently heard MMT argument that the point of taxes is to regulate the economy—and takes particular issue with the view that taxes can be increased/decreased in real time. Note, though, that this is simply a metaphorical or simplified explanation—it blends the Chartalist argument that “taxes drive money” with the functional… Read More

On Wednesday, January 14, 2015, the European Court of Justice (ECJ) Advocate General Pedro Cruz Villalon will publish his opinion on the European Central Bank’s (ECB) “Outright Monetary Transactions” (OMT) program. The Advocate General’s opinion will give us important clues and is likely going to shape the court’s later ruling on the matter. What is at issue? The OMT program played a critical role in calming the markets since the height of the euro panic in the summer of 2012. ECB president Mario Draghi kicked off the counterattack on the markets by dropping his by now famous “whatever it takes” hint in a speech in late July in London. A few days later, on August 2, 2012, the ECB announced that “the Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.” The technical details of the OMT were then published on September 6, 2012, when the bank also terminated its earlier Securities Markets Programme (SMP) under which it had purchased fairly small quantities of government debts issued by euro crisis countries. Moreover, any purchases were sterilized to preempt “monetary financing” accusations (see here). Rather predictably, like in the case of the earlier… Read More

Greece is back in the headlines as upcoming elections look likely to produce a workable majority for the anti-austerity Syriza party. Some suggest this would represent the first step toward the country’s inevitable exit from the eurozone. Not so fast, says Dimitri Papadimitriou in an interview with Bloomberg Radio’s Kathleen Hays and Vonnie Quinn (segment begins around 13:40). A Syriza victory would likely usher in significant changes — most notably the plan to write down Greece’s public debt and end austerity policies — but Papadimitriou emphasizes that pulling Greece from the eurozone is not part of Syriza’s platform. And he suggests that much of the “Grexit” talk being deployed by the current government in Greece and other European policymakers (particularly in the vicinity of Berlin) should be understood as a scare tactic directed at the Greek electorate. (In that vein, Peter Spiegel recently reported in the Financial Times that “privately, European officials acknowledge that 2015 is not 2012. Nobody really believes Grexit is imminent.” Spiegel’s article, which contains this particular gem, is worth reading in full: “At the core of Mr Tsipras’s economic platform is debt relief, an idea so unthinkable that nearly every mainstream economist has advocated it.”) Contrary to those who now confidently claim the eurozone would be just fine if Greece were to leave or be forced… Read More

Here’s an unintentionally hilarious piece by Tim Worstall at Forbes. Watch out, he warns, MMT has come to Washington! Our nation’s capital! No doubt ruin and wastage will follow. Why? Well. Nothing wrong with the theory of Modern Money Theory, he admits. “It’s not actually that I disagree very much with the economics that is being laid out in MMT: indeed, I’m terribly tempted to agree that they’re actually correct in much of what they say.” He admits that MMT is right on budgets: “It’s most certainly not obvious that MMT proponents are all barking mad or anything. Jamie Galbraith (who I’ve had one or two very limited interactions with) is certainly a reasonable guy. And his insistence that a budget surplus, despite the ribbing he gets about it, is in fact economically contractionary doesn’t seem to have anything wrong with it. Budget deficits are fiscally expansive, a surplus is fiscally contractionary, if there’s any one statement at the heart of Keynesianism that’s it.” And it is right on money: “And their basic outline about money creation is true as far as I can see. If you’re a country with your own central bank you can print as much money as you like.” And really nothing wrong with the policy, either. No, it is all politics. What he’s afraid of… Read More

With the January 25th elections in Greece approaching, Dimitri Papadimitriou writes about the future of Greek policy and the discussions that took place at a recent Levy Institute conference in Athens: At the Athens economics conference, Europe At The Crossroads, the participants were a diverse collection of policymakers, overflowing with disagreements on the very best route to growth. Nonetheless, with one notable exception (the leader of Ireland’s central bank, endorsing European Central Bank policy), the overwhelming majority united on a single principle: The bailout and its related austerity programs have failed miserably. […] The home base of some of the conference’s strongest austerity critics may come as a surprise. Peter Bofinger of Germany, the only Keynesian in Chancellor Angela Merkel’s council of economic advisers, described the risks the current approach poses for Greece, France, and Italy, and outlined why a continuation also threatens to destroy the rest of Europe. That includes Germany. Pointing to serious weaknesses in its economic foundations, Bofinger particularly singled out the FRG’s problematic physical infrastructure, an issue echoed by Elga Bartsch, Chief European economist at Morgan Stanley. And Bofinger raised the widely ignored fact that — despite endless German bellyaching about the so-called EU drain on its wealth — Germany’s contribution to other members of the European Union has been exactly zero euros. Read the rest: “Hello 2015. Goodbye… Read More

A New York Times article over the weekend delves into the history and rationale of the 2 percent inflation target, beloved of central bankers everywhere and a fairly recent innovation. Of course, the US Federal Reserve has a dual mandate, which includes both inflation and employment goals. The Fed said last week that it was most likely to start raising interest rates around the summer of 2015, but many countries’ central banks are moving in the opposite direction, solely because inflation is falling short of their targets. Private borrowers—who usually have higher propensities to spend than lenders—benefit from an easing of the burden of debt when wages and prices move broadly upward. Also, for governments with debts that they cannot service with their own currency, inflation eases the burden of making payments, as tax revenues tend to rise in step with nominal wages and prices. Of course, falling prices have the opposite effect. The resulting changes in spending reverberate through the rest of the economy. Recent data show that there exists a strong threat of deflation around the world in economies such as Japan and the Eurozone, where core inflation has recently turned negative. The effect of deflation on spending by indebted households was noted by Keynes in Chapter 19 of the General Theory (pp. 268-269). Michal Kalecki also argued… Read More