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Randall Wray joined Suzi Weissman on her “Beneath the Surface” radio show on Friday.  They began the interview with a discussion of the policy blunders that are creating headwinds for the US economy, including the expiration of the payroll tax cut, the decline of real per capita government spending, and, as Wray put it, “the government sucking jobs right out of the economy.”  He’s not referring here to the walking corpse of the theory that regulatory uncertainty is to blame for the slow recovery, but to the fact that government is holding back job growth far more directly: by laying off workers at an unprecedented rate.  For context, look at this chart put together by Floyd Norris (highlighted): They also addressed this Marketplace segment on the “death of inflation,” ongoing threats from the financial system, and some ideas for financial reform that are currently being tossed around.  On the latter, Wray argued that the idea of a financial transactions tax (being considered by a number of EU countries) is a second-best or partial solution.  Instead of sin taxes and other such “economists’ solutions,” as he described them, Wray recommended coming at the problem more directly: by outlawing certain speculative activities and going after practices like high-frequency trading.  They closed with a discussion of the prospects of another financial crisis emerging…. Read More

Tomorrow at UCLA, Randall Wray, Frank Partnoy, and Robert Brenner will discuss “The Economic Crisis:  Causes, Consequences, and What’s Next” as part of the annual colloquium series of the Center for Social Theory and Comparative History. The speakers will consider the origins and results of the ongoing global economic crisis. They will give special attention to the rise of finance and the role of financial markets and institutions in its onset, spread, and ultimate consequences. How has the meltdown of Wall Street, its bailout by government, and its apparent recovery affected the macroeconomy and the future of finance itself? Are the great banks and other leading financial institutions now more or less likely to experience new meltdowns in the foreseeable future? Will the real economy see a new surge of growth, continuing stagnation, or renewed crisis? These are only some of the issues that will be addressed at this colloquium. Monday, 25 February 2013 2:00-5:00 pm History Conference Room, 6275 Bunche See the flyer for more information: 

The Congressional Budget Office’s latest report on the budget outlook revealed (perhaps unintentionally) that fixating on Congress and the President as the central players in the federal deficit drama is a mistake.  According to the CBO, the path the federal budget deficit will follow over the next 10 years is just as much (if not more so) a question of Federal Reserve policy. Here’s CBO’s latest 10-year outlook for the federal budget: As you can see, the fastest rising category of spending is not “Social Security,” or even “major healthcare programs,” but rather “net interest,” which CBO projects will grow from 1.4 percent of GDP to 3.3 percent of GDP by 2023 (“a percentage that has been exceeded only once in the past 50 years,” they note).

Why has the world’s premiere deficit-reduction laboratory produced such a dismal failure? European leadership still expects the painful über austerity measures imposed on Greece to result in a dramatic improvement of its debt to GDP ratio. But the experiment in endurance is not succeeding for an important reason: Austerity programs have been rooted in myths about what caused the crisis in the first place. The popular notion that government overspending is the basis of Greece’s deficit woes is simply wrong. Evidence doesn’t support what seems to be a never-ending scolding about profligate spending. Greek national expenditures were at about 45 percent of GDP in 1990, long before the crisis. That share remained stable through 2006. Proportionally, its size was well below that of France, Italy, or even Germany. While Greece has a reputation for a nasty, historically oversized public sector, in the lead up to the crisis it behaved no differently than its neighbors, and its rate of spending didn’t prevent it from catching and surpassing affluent eurozone nations in growth. Rapid spending increases weren’t notable until the 2008 recession. The timeline reinforces the conviction that long-term government extravagance hasn’t been key to the Greek meltdown. Its debt picture was also steady. For years, Greece ran a deficit of 3 to 5 percent of GDP, and roughly a 120 percent… Read More

A couple of links worth sharing on the politics and policy of the budget debate. First, the Wall Street Journal reports that Alan Simpson and Erskine Bowles are coming out with a new deficit reduction plan, worth $2.4 trillion.  If it’s anything like the last plan, every lawmaker will claim to love it, journalists will assume its goodness as a fact more established than the shape of the earth, no one will have a clue what’s in it, and it will go nowhere. The details have not yet been released, but one initial question you might have is this:  where does that $2.4 trillion number come from?  Have they taken their original deficit reduction target from 2010 ($4 trillion) and subtracted the amount of budget savings already achieved ($2.5 trillion)?  Apparently not.  Has the deficit picture worsened since 2010?  Quite the contrary.  If you look at healthcare alone, the government is now set to spend almost $1 trillion less over the next decade than what was expected when Simpson and Bowles were coming up with their plan.  If their new plan takes these recent developments into account, it’s not clear how.  The question remains:  why this number? We’ll  have to wait to hear what the justification is (if there is any).  Perhaps this is an issue of different budget windows,… Read More

Jörg Bibow was recently interviewed by CJ Polychroniou in Kyriakatiki Eleftherotypia (Κυριακάτικη Ελευθεροτυπία).*  An English transcript of the interview follows: Since Mario Draghi’s announcement last fall that the ECB will intervene with the purchase of government bonds, the euro crisis is in a state of relative calm. Is it over? And if not, what developments could make the crisis resurface? Yes, Mr. Draghi’s promise of ECB support for government bond markets seems to have calmed fears of an imminent euro breakup, at least for the time being. That does not mean the euro crisis is over though. Not at all, as the underlying problems remain largely unresolved. Liquidity can buy time but it cannot solve the imbalances inside the euro area and related debt overhangs that are the deeper cause behind the euro crisis. It is important in this context that the ECB promise is for conditional support. As liquidity support comes along with mindless austerity and asymmetric adjustment pressures imposed on debtor countries, debt problems are bound to get worse rather than better. Markets are currently in complacency mode about these prospects. The crisis may resurface at any time. In several of your studies, you point to Germany as the main culprit behind the euro crisis.  Why is that? Yes, Germany is the culprit. Being the largest economy in… Read More

Here’s yet another way of representing the fact that to the extent the United States has a “spending problem,” it is a problem of too little spending.  From a speech by Janet Yellen, Vice Chair of the Federal Reserve: … discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as exhibit 3 [below] indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits. On this issue, the conventional wisdom is so far from the truth that it’s difficult to figure out how one might begin persuading anyone who isn’t acquainted with the data (lest one appear insane).  It would be one thing if current fiscal policy were merely in line with past expansionary practices in the wake of recessions (even arguing that much will get you some… Read More

Salim B. “Sandy” Lewis in conversation with Matt Taibbi Tuesday, February 19, 7 pm Bard College, Annandale-on-Hudson, NY Room 103, Reem-Kayden Science Building Lewis will explore “Why Fixing Wall Street and the Economy Is Critical to the World” in a discussion with Matt Taibbi, the renowned political and financial columnist for Rolling Stone. The discussion will be moderated by Roger Berkowitz, academic director of the Hannah Arendt Center for Politics and Humanities at Bard. Following the talk, Lewis will take questions. Some of Lewis’s criticisms of Wall Street appeared in an Op-Ed essay in the New York Times.  He has been featured as well in a Times profile in 2012.

Europe’s currency union is built on two key principles. The first is that the central bank must be independent of political control and its policies squarely focused on maintaining price stability. The second is that fiscal policy must be disciplined and never threaten price stability. Price stability, in turn, is the foundation for economic stability and prosperity. These principles and ideas are of German origin. And they distill the gist of Germany’s post WW2 economic history, an economic success story featuring both stability and growth. The German success story was meant to be replicated at the European level. The European Central Bank copycatted the Bundesbank. As Germany’s constitution featured a “golden rule” limiting public budget deficits to public investment, a fiscal pact was to safeguard the ECB by decreeing budget deficits in excess of three percent of GDP as excessive and prescribing their speedy reduction. That pact was named the “Stability and Growth Pact” reflecting the German belief – based on historical experience – that fiscal and monetary discipline go along with both stability and growth. Things have not played out according to script for Europe. … Continue reading at http://www.social-europe.eu/2013/02/europes-perilous-quest-for-stability/ In Spanish: http://elpais.com/elpais/2013/02/07/opinion/1360258562_755195.html

Is the era of the “grand bargain” over?  That was the implication of a number of news stories that pre-framed last night’s speech.  “When President Obama delivers his State of the Union address Tuesday evening,” wrote the Washington Post‘s Lori Montgomery, “here’s one thing you won’t hear: an ambitious new plan to rein in the national debt. In recent weeks, the White House has pressed the message that, if policymakers can agree on a strategy for replacing across-the-board spending cuts set to hit next month, Obama will pretty much have achieved what he has called ‘our ultimate goal’ of halting the rapid rise in government borrowing.” There was indeed a small change in emphasis in this year’s SOTU.  The president began by highlighting how much deficit reduction had already been achieved ($2.5 trillion, not including the ACA) and downplayed how much remains to be done to stabilize the debt.  He then spent the bulk of his address on job creation and other national priorities that have been languishing for years, including proposals to raise the minimum wage, invest in infrastructure repairs, create wider access to quality pre-kindergarten, reduce carbon emissions, and so on.  The key line, rhetorically, was this one:  “deficit reduction alone is not an economic plan.” The deficit-reduction industry isn’t going to close up shop after this speech.  You’ll… Read More

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Over the last few years, there have been significant changes to the federal government’s finances—changes that have had barely any perceptible impact on the budget debate.  The federal deficit has been shrinking (from 2009 to 2012) at a faster rate than in any other period since 1937.  Most Americans have never lived through more rapid budget tightening.  A lot of this has to do with the fact that the budget deficit is automatically stabilizing as the economy recovers, just as it automatically grew due to the Great Recession, but it’s not all automatic changes.  You wouldn’t know it from the Sunday news shows, but policy changes over the last two years alone have resulted in roughly $2.4 trillion in scheduled deficit reduction—and that doesn’t even include the budget savings from the Affordable Care Act (“Obamacare”). These facts have had a difficult time breaking through to the public consciousness.  Last week, the genuinely level-headed Michael Kinsley wrote an article in Bloomberg that proceeded on the basis of the (common) assumption that while we’ve had “plenty of stimulus,” the political system is incapable of delivering significant budget tightening: We’ve all done a great job of barely cutting spending, barely raising taxes, not reforming entitlements, and all told spending about a trillion dollars a year more than we bring in. Plenty of stimulus…… Read More