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If you believe the US political system is incapable of handling counter-cyclical policy and that we need to rely on automatic stabilizers, this CBPP graph is depressing: In other words, Temporary Assistance for Needy Families (the result of the 1996 “welfare reform”), for whatever its other merits might be, has not been particularly sensitive to increases in poverty.  As the number of needy families grew during the recession, the TANF rolls barely budged.  More here.

(via EconoMonitor) In last week’s post, I responded to Paul Krugman’s critique of Modern Money Theory (MMT), which argues that a sovereign government that issues its own floating exchange rate currency cannot face an affordability constraint—which means it cannot be forced into involuntary default on its own currency debt. His criticisms really boiled down to a misunderstanding over operational details—how banks work, how the Federal Government really spends, and the role played by the Fed in making all these operations work smoothly. I won’t rehash any of that here. But what we were left with is the argument that if a government operates along MMT lines, then we are on the path to ruinous hyperinflation. Of course Austrians have long argued that all fiat money regimes are subject to these dangers—even ones that don’t follow MMT’s recommendations. MMTers are commonly accused of promoting policy that would recreate the experiences of Zimbabwe or Weimar Republic hyperinflations. These were supposedly caused by governments that resorted to “money printing” to finance burgeoning deficits—increasing the money supply at such a rapid pace that inflation accelerated to truly monumental rates. It is very easy to titillate audiences with graphs such as the following, which displays rapid depreciation of the Weimar Republic’s paper money in terms of gold: Or with a picture of a Zimbabwe note—which… Read More

The author is a Professor at the National Institute of Public Finance and Policy, New Delhi. His views are his own. An anti-corruption movement in India, run by a set of elites primarily from Delhi, has put poor Anna Hazare out in front and called itself a national movement. Their key demand is an anti-corruption citizen ombudsman bill, the Jan Lokpal Bill (JLPB), which would create an independent body investigating corruption cases, completing the investigation, and holding a trial within a specific time frame. Is the Jan Lokpal Bill (JLPB) the path toward a corruption-free India? Presumably, if the answer were a straight forward “yes,” we would probably have had a JLPB by now. The founding fathers of this nation have gifted us a Constitution which laid the foundation for a vibrant democracy, a secular republic, and a federal structure. This strong foundation has not only kept this country together despite its adversities, but it has also been able to accommodate the needs and aspirations of people of diverse cultures, ethos, and religion with a fair degree of success. If the JLPB or a law of such nature were so important, certainly our founding fathers would not have deprived us of that perceived magic wand to keep India corruption-free.  In the existing system itself there are sufficient institutional safeguards against… Read More

Levy Institute President Dimitri Papadimitriou, as quoted in the Huffington Post in reference to revelations of the Fed’s $1.2 trillion in “secret loans” to banks and other companies. Papadimitriou told The Huffington Post that the Fed issued many of its biggest loans during the Bush administration, and that “they didn’t appear to have any difficulty supporting the financial sector, but very much difficulty supporting the real sector, households.” … “One would assume banks are too interconnected, you have to help all of them,” Papadimitriou said. “But if you take households in total, they are also all interconnected. They are also too big to fail.”

The early phases of the 2012 presidential election season have already brought us a great deal of debate on fundamental economic policy issues. Greg Ip, in the Washington Post‘s PostOpinions, writes about the views of a number of Republican candidates (pointer via Economist’s View). Are they believers in the “voodoo economics” that many recall from past elections–tax cuts for the wealthy that supposedly spur growth and reduce deficits and at the same time? Not according to Ip. He describes a risky, and somewhat novel, approach to economic policy emerging in this year’s political rhetoric. This approach rejects policies that have reduced the severity of the business cycle since the Great Depression.  Ip skewers the politicians’ critique of these Keynesian policies, which blames the country’s economic problems on excessive government action: Many Republicans consider the tepid economic recovery an indictment of Keynesianism, and use the word as an epithet, as in “Keynesian Utopia” (Sarah Palin) or “Keynesian bubble” (Ron Paul). They argue that aggressive fiscal and monetary stimulus have made things worse by generating uncertainty among firms and investors, and that austerity would put things right. They almost surely have it wrong. Uncertainty about fiscal and monetary policy was also rampant in the early 1980s: Taxes were cut and raised repeatedly and the Fed tried, then abandoned, efforts to target growth… Read More

Rick Perry’s recent reflections/threats regarding quantitative easing have occasioned some speculation about whether his raising the political profile of the issue might actually affect Fed behavior; making the Fed less willing to engage in a third round of easing.  The question of political bias at the Fed has been raised before, here in this Levy Institute working paper (free of any implicit promises of lynching) authored by Galbraith, Giovannoni, and Russo.  The authors reveal that there is in fact an argument to be made for the existence of partisan bias, at least for the period 1984- 2003: …we find that in the year before presidential elections, the term structure [of interest rates] deviates sharply from otherwise-normal values. When a Republican administration is in office, the term structure in the preelection year tends to be steeper, by values estimated at up to 150 basis points, and monetary policy is accordingly more permissive. When a Democratic administration is in office, the term structure tends to be flatter, by values also estimated at up to 150 basis points, and monetary policy is more restrictive. These findings are robust across model specifications and across time, though the anti-Democrat effect is smaller after 1983. Taken together, they suggest the presence of a serious partisan bias, at the heart of the Federal Reserve’s policymaking process. Now,… Read More

You might wonder if this question is a misguided satire of Keynesian proposals like the ones in this Institute one-pager for boosting employment in a time of weak economic growth. The question is not meant as a satire, though. In a time of increasing recession fears, policies specifically aimed at reducing the value of the dollar have gained some supporters. Many scholars see a deliberate weakening of the U.S. dollar and/or a moderate increase in the U.S. inflation rate as something to be sought after in itself, not just as an unfortunate side effect of monetary or fiscal stimulus. Kenneth Rogoff, for example, recently reprised the classic argument that the burden of debt falls when prices rise across all industries. (Rogoff’s Financial Times article is here. The New York Times discusses his views here.)  To wit, moderately higher prices obviously allow firms that have debt in dollars to more easily meet their debt-service obligations. Furthermore, increases in prices often bring higher wages, albeit with a time lag, making it easier for consumers to pay off their debts on time. In the United States, this is a very salient point, in light of high debt levels in nonfinancial business and the household sector, which we documented in this recent post. Meanwhile, on the other hand, John Plender skeptically reminds Financial Times… Read More

mul·li·gan noun /ˈməligən/ mulligans, plural A stew made from odds and ends of food (in informal golf) An extra stroke allowed after a poor shot, not counted on the scorecard Casey Mulligan responds to a Paul Krugman post deliciously entitled “The General Theory of Anti-Mulliganism.” Never mind for the moment that Mulligan’s claim that Krugman admits to there being “exceptions to Keynesian theory” is, to put it most charitably, a self-serving reading of Krugman’s post. The use of the word “exceptions” sounds like Krugman is saying that in such-and-such a case Keynesian theory doesn’t apply. Of course, if you read Krugman’s piece, that isn’t the story he tells. This is merely intellectual dishonesty, though. More atrocious is Mulligan’s insistence that unemployment is caused by unemployment insurance. Why? It’s the incentives, stupid! unemployment insurance reduces employment, rather than increasing it, because it penalizes beneficiaries for starting a new job. Fascinating! No wonder those unemployed don’t go out and get new jobs. Because people love being on unemployment so much (they’re the envy of their friends), taking a job would certainly be a step down. See, they’d have to give up all that free time. For more money, maybe, sure, but so what? Of course a new job might also help to alleviate the stress on personal relationships, depression, anxiety, lack of sleep,… Read More

Joe Nocera’s musings about Kurzarbeit aside, it is not the case that what we need right now are more and newer ideas for increasing growth and jobs.  We do not have a scarcity of such policy ideas.  What we are lacking are the political institutions that would allow us to carry any of them out.  Our policy problem is a political problem. It is remarkable how much of our lingering economic malaise can be attributed, not to the inherent thorniness of the problems we face, but to the misaligned incentives of our political system.  As Greg Hannsgen pointed out in a recent post, there is no reason to believe that the United States government has suddenly been rendered unable to pay its debts as they come due.  Rather, the danger appears to be that the political system (or at least an empowered minority of it) will simply refuse to do so. This is a recurring pattern.  Take the case of growth and employment.  The real resources necessary for a higher level of economic activity and employment are there, sitting idle.  Unfortunately, most of the textbook policy solutions lay equally idle; discarded and now beyond the realm of political possibility.  We have the productive capacity, but through political choice or obstruction we are simply refusing to use it. Under these circumstances,… Read More

Research Associate Pavlina Tcherneva was interviewed by Ian Masters for his “Background Briefing” about S&P’s downgrade, the distressing new State of America’s Children report, and our misguided focus on debt rather than growth and jobs. “If you take care of the economy, the debt and the deficits take care of themselves.”

L. Randall Wray has responded in the Huffington Post to Paul Krugman’s latest criticism of Modern Money Theory.  In addition to taking issue with the usefulness of Krugman’s historical example (France after WWI), Wray discusses the evolution of MMT and the manner in which it has benefited from the rise of social media. Update:  Krugman’s newest post on MMT, from today. Update II:  Wray’s point by point rejoinder.

Senior Scholar James Galbraith’s recent article in The New Republic (“Stop Panicking About Our Long-Term Deficit Problem. We Don’t Have One”) has sparked some reactions from Paul Krugman and Arnold Kling (JG responds briefly to the latter in comments). Galbraith, jumping off from his Levy Institute policy note, argues that there is a certain marked evasiveness in attempts to describe the dangers of the long-term deficit: Exactly what that threat is remains elusive. Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion. The concept of “sustainability” is often invoked, rarely defined, never criticized; things are deemed unsustainable by political consensus, backed by a chorus of repetition from the IMF, headline-seeking academics, think-tankers, and, of course, the ratings agencies. He takes issue in particular (in passing in TNR and in detail in the policy note) with the Congressional Budget Office’s estimates of the trajectory of long-term debt; estimates that depend upon assuming rising interest rates.  Galbraith argues that this assumption is hard to square with CBO’s concurrent assumptions of moderate growth and low unemployment and inflation.  At a bare minimum, his point here is:  whatever story you might tell about the long-term deficit and debt, CBO’s particular version (which has inspired a great deal of the public commentary about future budget peril) appears… Read More