Publications
Steven M. Fazzari
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Working Paper No. 752 | February 2013
One might expect that rising US income inequality would reduce demand growth and create a drag on the economy because higher-income groups spend a smaller share of income. But during a quarter century of rising inequality, US growth and employment were reasonably strong, by historical standards, until the Great Recession. This paper analyzes this paradox by disaggregating household spending, income, saving, and debt between the bottom 95 percent and top 5 percent of the income distribution. We find that the top 5 percent did indeed spend a smaller share of income, but demand drag did not occur because the spending share of the bottom 95 percent rose, accompanied by a historic increase in borrowing. The unsustainable rise in household leverage concentrated in the bottom 95 percent ultimately spawned the Great Recession. The demand drag of rising inequality could be one explanation for the stagnant recovery in the recession’s aftermath.
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Working Paper No. 278 | August 1999
Has Recent Research Rediscovered Financial Keynesianism
Hyman Minsky's research emphasized the central role of finance in modern economics at a time when finance was not important in most mainstream macroeconomic research. But in the 1980s, mainstream research began to explore the role of finance in firm and consumer behavior. This paper examines the extent to which this recent mainstream research captures Minsky's insights and whether it extends his work. I argue that recent work on micro foundations-the link between economic behavior and finance—complements Minsky's contributions and corresponding empirical research provides strong support for his argument that financial conditions affect expenditures. But large differences remain between Minsky and the mainstream paradigm, especially in the role played by the financial system in macroeconomic fluctuations. Furthermore, there is much in Minsky's Big Government—Big Bank policy framework that does not appear in recent mainstream work.
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Policy Note 1999/7 | July 1999
Tax reform that reduces tax rates on capital income, no matter how successful it is in reducing the user cost of capital, will have at best minimal effects on capital formation and output and therefore on the growth of the United States' economy.
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Working Paper No. 175 | November 1996
New Evidence on the Responsiveness of Business Capital Formation
The responsiveness of business investment to user costs (interest rates, taxes, and depreciation rates) is important in determining the effect of fiscal policy and aggregate stabilization policy on the economy and for assessing the transmission mechanism of monetary policy to real economic variables. Although this responsiveness is central to the theoretical underpinnings of most economic models, empirical support for substantial responsiveness is lacking. In this working paper, Robert S. Chirinko of Emory University, Research Associate Steven M. Fazzari, of Washington University in St. Louis, and Andrew P. Meyer of the Federal Reserve Bank of St. Louis use micro data to evaluate the user cost elasticity of capital.
The authors employ data obtained from the Compustat database on investment, cash flow, and sales for 4,112 firms for 1981 to 1991. They merge this with industry-level data obtained from Data Resources, Inc., on the user costs of 26 different capital assets variables. Unlike other studies in which user cost variables vary only over time and not across firms, Chirinko, Fazzari, and Meyer's user cost variables vary in both time-series and cross-sectional dimensions. The large number of firm-level observations in the Compustat data increase the precision of the estimates and allow a given parameter to be estimated over a relatively short time frame. The data also help to address questions of biases not easily dealt with when using aggregate time-series data.
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Public Policy Brief No. 25 | April 1996
Effects of a Capital Gains Tax Cut on the Investment Behavior of Firms
This brief assesses the effect of a capital gains tax cut on firms’ decisions to undertake new investment projects and the possible effect of such projects on economic growth and employment. The authors' analysis takes into account such factors as projects’ degree of uncertainty, investors’ degree of risk aversion, whether capital gains losses are deductible against capital gains income, whether the market value of an investment project is affected by the imposition of capital gains taxes, and whether the project is financed by internal or external means. They find that there is little theoretical or empirical basis for the view that lowering the capital gains tax rate would have a substantial effect on economic growth or level of economic activity. They estimate that the current proposal to lower the highest capital gains tax rate from 28.0 percent to 19.8 percent would have a long-term effect on the level of output no greater than the impact of roughly two months of normal economic growth, and it would take years to realize even this small benefit. Indexing the rate to inflation would have a somewhat larger, but still small, effect. The authors conclude that capital gains taxes have a negligible influence on investment decisions and dispute the claim that a lower capital gains tax rate would have large beneficial effects on output, growth, or entrepreneurial activity in the US economy.
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Working Paper No. 147 | October 1995
No further information available.
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Working Paper No. 134 | January 1995
A New Perspective on Keynesian Macroeconomics
No further information available.
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Public Policy Brief No. 9 | October 1993
Investment and U.S. Fiscal Policy in the 1990s
The author of this brief offers evidence that policies aimed at stimulating private sector investment through interest rate reductions are, at best, misguided. He concludes that, while there may be benefits from policies aimed at increasing saving or lowering the budget deficit, a higher level of business investment is not one of them. Rather, because of the sizable effects of the business cycle and financial channels on investment, such a program will weaken the economy in the short run and curtail investment, with lower interest rates having little counteracting effect. A similar argument can be made about programs that attempt to reduce interest rates by promoting a rise in saving. If policymakers aspire to raise investment, they should look to actions that affect firms’ access to internal finance directly, such as an investment tax credit.
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Working Paper No. 98 | September 1993
In this working paper, Steven Fazzari presents new empirical research that attempts to measure the relative strength of fiscal policy on investment through the cost of capital, firms' financial circumstances, and sales growth. Fazzari argues against the crowding-out effect and claims that even if the connection between the national budget deficit and interest rates is valid, the linkage between interest rates and private sector investment is at best, misguided. While neoclassical empirical studies have found a statistically significant relationship between investment and the cost of capital, Fazzari contends that high degree of explanatory power yielded by many of these investigations is due to the fact that they fail to separate the effects of sales or output growth from the cost of capital in determining investment, which renders the source of their significance unclear. The focus of fiscal policy is therefore difficult to determine./p>
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Book Series | November 1992
Essays in Honor of Hyman P. Minsky. Edited by Steven Fazzari and Dimitri B. Papadimitriou
This collection of papers on financial instability and its impact on macroeconomic performance honors Hyman P. Minsky and his lifelong work. The papers consider the clear and disturbing sequence of events described in Minsky’s definitive analysis: boom, government intervention to prevent debt contraction, new boom that causes progressive buildup of new debt and eventually leaves the economy more fragile financially. The collection is based on a 1990 conference at Washington University and contains papers by Benjamin M. Friedman, Charles P. Kindleberger, Jan A. Kregel, Steven M. Fazzari, and others.
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Working Paper No. 52 | April 1991
In conventional macroeconomic thought, price flexibility stabilizes thc economy. The more quickly prices fall (or inflation decreases) in a demand-induced recession, the faster output returns to its full-employment level. An alternative tradition, however, suggests that price flexibility can be destabilizing. If a recession reduces expectations of Jitlzre prices, this can raise current real interest rates and dampen aggregate demand. In addition, as actual current prices fall in a recession, real debt burdens rise which can reduce aggregate demand due to financial distress or the response of capital markets. This paper presents simulations from a dynamic macroeconomic model designed to examine the empirical effects of price flexibility. Our results show that, for credible specifications and parameter values7 the destabilizing effects of greater price flexibility can be larger than the conventional stabilizing channels. Therefore, it is possible that greater price flexibility magnifies the severity of economic contractions initiated by negative demand shocks.
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