Publications
James K. Galbraith
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Policy Note 2023/3 | July 2023In recalling John Maynard Keynes’s revolutionary theory of interest, reviewing the doctrines Keynes sought to overthrow, and analyzing the structural transformations of the US economy, James K. Galbraith maintains there is no alternative to a policy of low interest rates. However, such a policy cannot be effective, he argues, without a radical restructuring of the US economy as a whole.Download:Associated Program:Author(s):Related Topic(s):
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In the Media | February 2015
Interview with James K. Galbraith
The Real News Network, February 27, 2015. All Rights Reserved.
Initially, Germany stood firm in saying that Greece would have to sign the existing loan program in order to secure an extension, but this was always an untenable position, says Research Scholar James K. Galbraith.
For the complete interview: http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=13320
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In the Media | March 2013
"Exiting The Crisis: The Challenge of an Alternative Policy Road Map," a policy forum oganized by the Athens Development and Governance Institute and the Levy Economics Institute of Bard College, was held at the Athinais Cultural Centre in Athens, Greece, March 8–9.
Speaking at the Athens policy forum on March 9, Senior Scholar James K. Galbraith noted that Greece is effectively powerless in its present situation because what’s being done within the country—a program of austerity that has led to widespread poverty and the highest unemployment rate in the European Union—is dictated and constrained from without. Real change, said Galbraith, will come about only when the north of Europe realizes that things cannot continue. At that point, Germany in particular must decide whether to save the eurozone with a policy of solidarity and mutual support, or to follow what is an emerging political tendency, which is to effectively break the eurozone in two.
Click here for a video of his remarks. -
In the Media | November 2012
Interview with James K. Galbraith
The Real News Network, November 30, 2012. All Rights Reserved.
The first in a planned series of six interviews with Senior Scholar James K. Galbraith on the validity of the "fiscal cliff." Full audio and a transcript of the interview are available here.
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In the Media | September 2012
Don't Put Faith in the Fed: Quantitative Easing Isn't Magic. We Need a Dose of Realism about What Central Banks Can Achieve
View More View LessBy James K. Galbraith
The Guardian (London), September 21, 2012. All Rights Reserved.
What should we make of the latest moves to kickstart the US economy, and to save the euro? As the late, great Harvard chaplain Peter Gomes said to my graduating class many years ago, about our degrees: "There is less there than meets the eye."
Quantitative easing, the third tranche of which was announced in the US last week (QE3), is just a fancy phrase for buying bonds, notably mortgage-backed-securities, in which operation the Federal Reserve takes assets from the banks and gives them cash. This tends to boost stock prices—very nice for people who own stock—and it can spur mortgage refinancing, improving the cashflow of solvent homeowners.
And the effect on the economy? Mostly indirect and quite small. People don't generally spend capital gains as windfalls. People who are already underwater on their mortgages can't refinance anyway, and are not affected.
Meanwhile, the European Central Bank is buying the dregs of the European bond market, propping up their price. The operation is similar to QE but the help for the economy is even less. Mario Draghi, the bank chief, aims to save the euro, not the eurozone; his conditions actually prevent beneficiaries from using the money they save; in fact, to get the aid they must spend less. So long as this goes on, unemployment, budget deficits and debt will get worse. It's no surprise that sensible countries refuse the deal for as long as they can.
Some people in high places—Tim Geithner, the US treasury secretary, for example—profess that restarting bank lending is the key to economic recovery, and increasing bank reserves will spur them to lend. (What else are banks really good for?) But if anyone believes that reserves are key to lending, they deeply misunderstand what banks do.
As Hyman Minsky used to say: banks are not moneylenders! Banks don't lend reserves, and they don't need reserves in order to lend. Banks create money by lending. They need a client willing to borrow, a project worth lending to, and collateral to protect against risk. If these are lacking, no amount of reserves will turn the trick. And especially not when the government is willing to pay interest on their reserves: the truest form of welfare, income for doing nothing.
Among the deluded in this matter are Republican members of Congress who rushed to attack QE3 for overstimulating, and urge laws constraining the Federal Reserve to a single price stability objective, in the manner of the European Central Bank. Obviously if the policy won't work—and it won't—they have nothing to fear on inflation. But a "price stability only" mandate for the Fed would destroy the honest accountability of the central bank to Congress.
The Fed today operates under a "dual mandate"—full employment and price stability. The law, originally known as the Humphrey-Hawkins Act of 1978, is one for which I drafted the monetary sections. It states a range of economic objectives and was deliberately kept general; the purpose was not to dictate economic theory but to foster an honest dialogue between the Fed and Congress over what monetary policy is and does.
Changing to a price-stability objective would oblige Ben Bernanke, the Fed chairman, to claim, as ECB officials do, that he is motivated solely by his charter, even if obviously doing something else. And Congress, having imposed the price-stability straitjacket, would not be able to complain about unemployment, foreclosures or anything else. The Fed-Congress dialogue would be reduced to a tissue of ritual incantation and lies.
What we need is a candid review of what central banks cannot do. Yes, they can usually forestall panic. Yes, they can keep zombie banks alive. No, they cannot bring on economic recovery or solve any of our deeper economic problems, from unemployment and foreclosures in America to unemployment and economic collapse in Greece. The sooner we stop thinking of central bankers as wizards and magicians, the better.
James K. Galbraith teaches at the University of Texas at Austin. His new book is Inequality and Instability, a Study of the World Economy Just Before the Great Crisis.
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In the Media | April 2012
James K. Galbraith
The Real News Network, April 5, 2012. All original content copyright © The Real News Network.
In an interview with TRNN’s Paul Jay, Senior Scholar James K. Galbraith offers a solution to boosting demand: raise the minimum wage. Full video and a transcript of the interview are available here.
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In the Media | May 2011
China Will Not Demand Its Money Back: Why the Doomsday Predictions on the Debt Ceiling Are Wrong
View More View LessPema Levy Interviews James K. Galbraith
The American Prospect, May 5, 2011. © 2011 by The American Prospect, Inc.
A deal is taking shape between Congress and the administration on the debt-ceiling vote, and it will likely include some spending cuts in exchange for increasing the amount the government can borrow.
As these negotiations play out, we’re constantly warned that the debt-ceiling fight has high stakes. Refusing to raise the ceiling will prevent us from paying debts and will destroy the faith our bondholders—that is, China—have in us. Or will it? The Prospect talked with James K. Galbraith, the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas at Austin, about just how accurate the doomsday predictions really are.
Everyone says that if we don’t raise the debt ceiling soon, we’ll have a financial disaster on our hands. How accurate are these catastrophic predictions?
Failure to raise the debt limit would be, for sure, a bad idea. Whether it would produce a fiscal and bond market Armageddon, I think, is really doubtful.
This is a group of politicians saying, give me cuts or I will shoot the economy. So that’s the political problem that we face. And one way I think to handle that problem is to point out that what the hostage-takers have in their hands may well not be a nuclear grenade; it might be something much less cataclysmic.
A few weeks ago, the ratings agency Standard & Poor’s warned that the United States could lose its AAA rating on U.S. debt (securities, bonds, etc.), which could have serious repercussions for the economy. How do you gauge the chances of a downgrade?
One can’t judge what Standard & Poor’s or Moody’s will do, because they’ve gotten most everything else wrong in the last decade. These are firms that graded vast mounds of worthless mortgage-backed paper as AAA because of the crafty ways it was securitized. These are firms that never to my knowledge downgraded a major corporate fraud—Enron and so forth—more than a few days in advance of its collapse. And they routinely give cities lower ratings than they should based upon the default rates on those instruments. They have no particular competence in Europe, either. So, it’s a little bit unpredictable what a corporation with that track record is going to do.
Is there a danger we’ll default?
If you read the 14th Amendment, Section 4, it says that the [validity of the] debt of the United States authorized by law—including pensions, by the way, so including Social Security—shall not be questioned. So long as we are run by the Constitution, we’re going to pay the debt.
One fear is that not raising the ceiling will cause a global panic or at least a ripple effect if the U.S. fails to pay its foreign creditors. What will foreign creditors do if we default on our bonds?
Let’s suppose that the Treasury actually says to the People’s Bank of China, sorry, we can’t write a check to you right now. Well, in the case of the People’s Bank of China, the bond that they hold would become a defaulted bond, but it would still be there. And the Treasury would still recognize its obligation on that bond and would presumably be willing to pay accrued interest on it. The Treasury would probably say, it’s going to be a few days while we resolve this, and the People’s Bank of China would, in my view, probably do nothing.
If I were sitting in the position of a foreign holder of U.S. Treasury securities in that situation, the last thing I would want would be a panic. I would want this problem to go away.
And if there is a panic?
I think the right analogy to that would be the failure of Congress to pass the [Troubled Asset Relief Program] on the first round. The stock market went down by 800 points. That sent a very powerful political wake-up call, and suddenly people changed their positions. The most likely thing if we actually go to this stage where there is real turmoil would be that Congress—the hostage-takers—would drop their guns.
So the question I would have then is: Does it make sense to give the hostage-takers what they want? Which are massive cuts. And I think it does not make sense by any stretch of the imagination to agree that the debt ceiling shall be the point of leverage for coming to a decision, which is what the Republicans want and unfortunately what some Democrats like Kent Conrad want.
This would be an act of just gross negotiating folly to set the precedent that the debt-ceiling negotiations become the way in which the extremists get what they want.
This Q&A has been edited for length and clarity.
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Policy Note 2011/2 | May 2011
By general agreement, the federal budget is on an “unsustainable path.” Try typing the phrase into Google News: 19 of the first 20 hits refer to the federal debt. But what does this actually mean? One suspects that some who use the phrase are guided by vague fears, or even that they don’t quite know what to be afraid of. Some people fear that there may come a moment when the government’s bond markets would close, forcing a default or “bankruptcy.” But the government controls the legal-tender currency in which its bonds are issued and can always pay its bills with cash. A more plausible worry is inflation—notably, the threat of rising energy prices in an oil-short world—alongside depreciation of the dollar, either of which would reduce the real return on government bonds. But neither oil-price inflation nor dollar devaluation constitutes default, and neither would be intrinsically “unsustainable.”
After a brief discussion of the major worries, Senior Scholar James Galbraith focuses on one, and only one, critical issue: the actual behavior of the public-debt-to-GDP ratio under differing economic assumptions through time. His conclusion? The CBO’s assumption that the United States must offer a real interest rate on the public debt higher than the real growth rate by itself creates an unsustainability that is not otherwise there. Changing that one assumption completely alters the long-term dynamic of the public debt. By the terms of the CBO’s own model, a low interest rate erases the notion that the US debt-to-GDP ratio is on an “unsustainable path.” The prudent policy conclusion? Keep the projected interest rate down. Otherwise, stay cool: don’t change the expected primary deficit abruptly, and allow the economy to recover through time.
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Public Policy Brief Highlights No. 112A | August 2010
The global abatement of the inflationary climate of the past three decades, combined with continuing financial instability, helped to promote the worldwide holding of US dollar reserves as a cushion against financial instability outside the United States, with the result that, for the United States itself, this was a period of remarkable price stability and reasonably stable economic expansion.
For the most part, the economics profession viewed these events as a story of central bank credibility, fiscal probity, and accelerating technological change coupled with changing demands on the labor market, creating a model of self-stabilizing free markets and hands-off policy makers motivated by doing the right thing—what Senior Scholar James K. Galbraith calls “the grand illusion of the Great Moderation.” A dissenting line of criticism focused on the stagnation of real wages, the growth of deficits in trade and the current account, and the search for new markets. This view implied that a crisis would occur, but that it would result from a rejection of US financial hegemony and a crash of the dollar, with the euro and the European Union (EU) the ostensible beneficiaries.
A third line of argument was articulated by two figures with substantially different perspectives on the Keynesian tradition: Wynne Godley and Hyman P. Minsky. Galbraith discusses the approaches of these Levy distinguished scholars, including Godley’s correlation of government surpluses and private debt accumulation and Minsky’s financial stability hypothesis, as well as their influence on the responses of the larger economic community.
Galbraith himself argues the fundamental illusion of viewing the US economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization. The real sources of American economic power, he says, lie with those who manage and control the public-private sectors—especially the public institutions in those sectors—and who often have a political agenda in hand. Galbraith calls this the predator state: a state that is not intent upon restructuring the rules in any idealistic way but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with deregulation.
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Public Policy Brief No. 112 | June 2010Senior Scholar James K. Galbraith argues the fundamental illusion of viewing the US economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization—the prevailing view among economists over the past three decades. The real sources of American economic power, he says, lie with those who manage and control the public‑private sectors—especially the public institutions in those sectors—and who often have a political agenda in hand. Galbraith calls this the predator state: a government that is intent, not upon restructuring the rules in any idealistic way, but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with financial deregulation.Download:Associated Program(s):Author(s):
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In the Media | January 2010
By James K. Galbraith
By James K. Galbraith, Thought and Action, The NEA Higher Education Journal, Fall 2009.
This article is partly a response to Paul Krugman’s piece in the Sunday New York Times of September 6, 2009, on the failures of the economists in the face of the crisis. Here, Senior Scholar James K. Galbraith takes up the challenge of identifying some of those economists—the “nobodies” of the profession—who did see it coming, and who have not gotten the credit they deserve. He also points out the urgent need to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time—an imperative for university administrators, for funding agencies, for foundations, and for students.
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Public Policy Brief Highlights No. 103A | September 2009
A group of experts associated with Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.
Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.
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Public Policy Brief No. 103 | August 2009
A group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.
Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.Download:Associated Program:Author(s): -
Testimony | July 2009
Statement of Professor James K. Galbraith to the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, US House of Representatives
View More View LessOn July 9, 2009, Senior Scholar James K. Galbraith testified before the House Financial Services Committee regarding the functions of the Federal Reserve under the Obama administration’s proposals for financial regulation reform—specifically, the extent to which the newly proposed role of systemic risk regulator might conflict with the Fed’s traditional role as the independent authority on monetary policy. He also addressed questions of whether the Fed should relinquish its role in consumer protection, and whether the shadow banking system should be restored.
Galbraith pointed out that the Board’s primary mission is macroeconomic: “Rigorous enforcement of safety and soundness regulation is never going to be the first priority of the agency in the run-up to a financial crisis.” Systemic risk regulation needs to be deeply integrated into ongoing examination and supervision—a function best taken on by an agency “with no record of regulatory capture or institutional identification with the interests of the regulated sector.” That agency, said Galbraith, is the FDIC. If systemic risk is to be subject to consolidated prudential regulation, why not place that responsibility in the hands of an agency for which it is the first priority? Further, if large banks and other financial holding companies pose systemic risks, why not require them to divest and otherwise reduce the concentration of power that presently exists in the financial sector? In Galbraith’s view it would, over time, “bring the scale of financial activity into line with the capacity of supervisory authorities to regulate it, and the result would be a somewhat safer system.”
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Strategic Analysis | April 2009
A “People First” Strategy: Credit Cannot Flow When There Are No Creditworthy Borrowers or Profitable Projects
View More View LessIn 1930, John Maynard Keynes wrote: “The world has been slow to realise that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.” The same holds true today: we are in the shadow of a global catastrophe, and we need to come to grips with the crisis—fast. According to Senior Scholar James K. Galbraith, two ingrained habits are leading to our failure to do so. The first is the assumption that economies will eventually return to normal on their own—an overly hopeful view that doesn’t take into account the massive pay-down of household debt resulting from the collapse of the banks. The second bad habit is the belief that recovery runs through the banks rather than around them. But credit cannot flow when there are no creditworthy borrowers or profitable projects; banks have failed, and the failure to recognize this is a recipe for wild speculation and control fraud, compounding taxpayer losses.
Galbraith outlines a number of measures that are needed now, including realistic economic forecasts, more honest bank auditing, effective financial regulation, measures to forestall evictions and keep people in their homes, and increased public retirement benefits. We are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business as usual, says Galbraith. Rather, we are at the beginning of a long, painful, profound, and irreversible process of change—we need to start thinking and acting accordingly.
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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 | May 2008
What in monetarism, and what in the "new monetary consensus," led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? Absolutely nothing, says Senior Scholar James K. Galbraith.
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Policy Note 2008 | May 2008
�What in monetarism, and what in the �new monetary consensus,� led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? The answer is, of course, absolutely nothing.��James K. Galbraith
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Policy Note 2008/1 | May 2008
What in monetarism, and what in the "new monetary consensus," led to a correct or even remotely relevant anticipation of the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007 and that has continued to preoccupy central bankers ever since? Absolutely nothing, says Senior Scholar James K. Galbraith.
In this new Policy Note, Galbraith reevaluates monetary policy in light of the collateral damages inflicted by the subprime mortgage crisis. He provides a critique of monetarism—what Milton Friedman famously defined as the proposition that "inflation is everywhere and always a monetary phenomenon"—and of the "new monetary consensus" on which Federal Reserve Chairman Ben Bernanke's ostensible doctrine of inflation targeting rests. Given the current economic crisis, Galbraith says, the Fed would do well to embrace the intellectual victory of John Maynard Keynes, John Kenneth Galbraith, and Hyman P. Minsky—and act accordingly.
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Working Paper No. 511 | August 2007
Monetary Policy, Inflation, Unemployment, Inequality—and Presidential Politics
Using a VAR model of the American economy from 1984 to 2003, we find that, contrary to official claims, the Federal Reserve does not target inflation or react to “inflation signals.” Rather, the Fed reacts to the very “real” signal sent by unemployment, in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. Tests of variations in the workings of a Taylor Rule, using dummy variable regressions, on data going back to 1969 suggest that after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell “too low.” Further, we find that monetary policy (measured by the yield curve) has significant causal impact on pay inequality—a domain where the Fed refuses responsibility. Finally, we test whether Federal Reserve policy has exhibited a pattern of partisan bias in presidential election years, with results that suggest the presence of such bias, after controlling for the effects of inflation and unemployment.
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Public Policy Brief No. 87 | November 2006
Toward Convergence and Full Employment
Unemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in Europe—labor market rigidities—is wrong. According to Senior Scholar James K. Galbraith, the application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.
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Public Policy Brief Highlights No. 87A | November 2006
Toward Convergence and Full Employment
Unemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in Europe—labor market rigidities—is wrong. According to Senior Scholar James K. Galbraith, the application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.Download:Associated Program:Author(s): -
Policy Note 2006/2 | February 2006
Public and Private Debts and the Future of the American Economy
Today’s federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? Does our fiscal condition warrant radical surgery, as some now prescribe? Or, are we in such deep trouble that there is no plausible route of escape?
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Public Policy Brief No. 81 | June 2005
The Case Against the Fiscal Hawks
For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy.
Other scholars are also concerned, but for reasons that we do not share. They argue that the interest rate is determined by the supply and demand of saving. When the government reduces its saving, the total supply of saving falls, and the interest rate inevitably rises. The result, they say, is that interest-sensitive spending, and investment in particular, falls. Finally, these scholars say, less investment now necessarily implies less output in the future.
In this new brief, Senior Scholar James K. Galbraith evaluates a recent article by William G. Gale and Peter R. Orszag, two economists who regard this view of deficits as plausible. He forwards an alternative, Keynesian view. This alternative suggests that deficits can increase overall output, possibly enabling the government to spend more money without increasing the ratio of the debt to GDP. He casts doubt on the notion that the interest rate is determined by the supply and demand of saving, arguing that monetary policy plays a much larger role than Gale and Orszag allow for. Moreover, he writes, strong demand for goods and services is more important than the supply of capital in determining the pace of technological advance and the rate of growth of output per worker.
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Public Policy Brief Highlights No. 81A | June 2005
The Case Against the Fiscal Hawks
For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy.
Other scholars are also concerned, but for reasons that we do not share. They argue that the interest rate is determined by the supply and demand of saving. When the government reduces its saving, the total supply of saving falls, and the interest rate inevitably rises. The result, they say, is that interest-sensitive spending, and investment in particular, falls. Finally, these scholars say, less investment now necessarily implies less output in the future.
In this new brief, Senior Scholar James K. Galbraith evaluates a recent article by William G. Gale and Peter R. Orszag, two economists who regard this view of deficits as plausible. He forwards an alternative, Keynesian view. This alternative suggests that deficits can increase overall output, possibly enabling the government to spend more money without increasing the ratio of the debt to GDP. He casts doubt on the notion that the interest rate is determined by the supply and demand of saving, arguing that monetary policy plays a much larger role than Gale and Orszag allow for. Moreover, he writes, strong demand for goods and services is more important than the supply of capital in determining the pace of technological advance and the rate of growth of output per worker.
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Public Policy Brief Highlights No. 72A | August 2003
Soft Budgets and the Keynesian Devolution
The "American Model" serves as a point of reference in discussions of economic policy around the world, especially in Europe. Many claim that the American version of the free market represents an ideal type—it is the highest form of capitalism. Senior Scholar James K. Galbraith argues, however, that the United States has relied heavily on government intervention in housing, health care, pensions, and education. Not only have these programs been largely successful and popular, but they also provide a Keynesian stimulus to spending that helps account for the strength of the US economy. Now that the United States is in a weak, jobless recovery, the key to restoring growth may lie in the kinds of governmental programs that have helped to sustain and stabilize the US economy in the past.Download:Associated Program:Author(s): -
Public Policy Brief No. 72 | August 2003
Soft Budgets and the Keynesian Devolution
The “American Model” serves as a point of reference in discussions of economic policy around the world, especially in Europe. Many claim that the American version of the free market represents an ideal type—it is the highest form of capitalism. Senior Scholar James K. Galbraith argues, however, that the United States has relied heavily on government intervention in housing, health care, pensions, and education. Not only have these programs been largely successful and popular, but they also provide a Keynesian stimulus to spending that helps account for the strength of the US economy. Now that the United States is in a weak, jobless recovery, the key to restoring growth may lie in the kinds of governmental programs that have helped to sustain and stabilize the US economy in the past.
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Policy Note 2003/1 | January 2003
The Case for Public Spending
Keynesian economics is back. As John Maynard Keynes stressed, total spending matters—and not who does it or for what purpose. Tax cuts and deficit spending are, therefore, on the agenda; low interest rates seem here to stay. Stimulus is the watchword of the day. It remains only to fill in the details, or so it seems.
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Policy Note 2002/2 | February 2002
The International Monetary Fund has offered Brazil a $30 billion loan, most of it reserved for next year, on condition that the country continue to run a large primary surplus in the government budget. In this way the Fund maintains a strong arm over Brazil's next government. Any significant move toward fiscal expansion would trigger revocation of the promised loan, followed by capital market chaos. Or so one is led to suppose.
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Policy Note 2001/8 | August 2001
There is no chance that events will right themselves in a few weeks, or that we will be saved by such underlying factors as technology and productivity growth or by lower interest rates or the provisions of the recent tax act. Rather, we are in for a crisis; the sooner this is recognized and acted upon, the better.
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Policy Note 2001/4 | April 2001
According to Federal Reserve Chairman Alan Greenspan, we live in a time “profoundly different from the typical postwar business cycle.” Our experiences have “defied conventional wisdom” and mark ”veritable shifts in the tectonic plates of technology.” Evidently, the law of supply and demand has been repealed. This is the theme of “Put your chips on 35”—where 35 refers to the standard industrial classification code for machinery, of which 357, computers and office equipment, is the ground zero of the technological earthquake.
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Policy Note 2000/2 | February 2000
Full employment without inflation can continue—with the right leadership, prudent policy changes to manage the dangers, and cooperation from all branches of the government.
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Working Paper No. 259 | December 1998
Year-to-year economy-wide measures of income distribution, such as the Gini coefficient, are rarely available for long periods except in a few developed countries, and as a result few analyses of year-to-year changes in inequality exist. But wage and earnings data by industrial sectors are readily available for many countries over long time frames. This paper proposes the application of the between-group component of the Theil index to data on wages, earnings, and employment by industrial classification in order to measure the evolution of wage or earnings inequality through time. We provide formal criteria under which such a between-group Theil statistic can reasonably be assumed to give results that also track the (unobserved) evolution of inequality within industries. While the evolution of inequality in manufacturing earnings cannot be taken as per se indicating the larger movements of inequality in household incomes, including those outside the manufacturing sector, we argue on theoretical grounds that the two will rarely move in opposite directions. We conclude with an empirical application to the case of Brazil, an important developing country for which economy-wide Gini coefficients are scarce, but for which a between-industries Theil statistic may be computed on a monthly basis as far back as 1976.
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Working Paper No. 249 | August 1998
This paper uses industrial wage data and a systematic if unconventional selection of methods to examine changes in the inter-industry structure of wages between 1920 and 1947. We first sort among the available data on wage change by industry and occupation for blocs that exhibit common patterns of wage changes over time, reducing the 83 time series available to us into eight distinct groups. Following this, we present a systematic decomposition of the sources of wage variation across groups and through time. The fact that our cluster analysis relies on wage-change observations in percentage form implies that our discriminant analysis produces eigenvectors in time-series format; thus each eigenvector is itself an artificially constructed economic time series. We identify four such forces that together explain 97 percent of the variance in wage change across groups, and identify variables in the historical record that appear to correspond closely to these forces.
This raises a beguiling possibility. It may be that simple explanations account for most of the relative-wage changes during the years under study. In a reversal of the usual notions of micro-to-macro causality, it may be that a small number of macroeconomic variates account for a large proportion of distributional changes.
In a final section, we compute an estimate of the evolution of inequality in the wage structure over time. This estimate is independent of our clustering procedures and of our discriminant analysis, and is measure is well suited to regression analysis. Using it, we test a simple macroeconomic explanation of inequality in the wage structure. The results appear to support the argument that well-known macroeconomic and social developments, including changes in the unemployment rate, in strikes, and in the exchange rate, played the determining roles in the evolution of wage inequality during this time.
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Public Policy Brief No. 36 | October 1997
Unemployment, Inflation, and the Job Structure
The concept of a labor market, responding to familiar underpinnings of supply and demand, completely colors thought on the relationship between employment, wages, and inflation, according to James K. Galbraith. However, he asserts, wages are determined not by such market forces, but by what he calls the job structure—a complex set of status and pay relationships involving individual qualifications, job characteristics, and industry patterns. What is the meaning of the job structure for policy? Notions of natural rates of unemployment and inflationary barriers to full employment fade away. Supply-side measures can no longer been seen as adequate to deal with problems of unemployment and inequality. Questions of distribution of income and adjustment of the wage structure are returned to the political context. The active pursuit of full employment is returned to the list of respectable, and essential, policy goals.
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Public Policy Brief Highlights No. 36A | October 1997
Unemployment, Inflation, and the Job Structure
The concept of a labor market, responding to familiar underpinnings of supply and demand, completely colors thought on the relationship between employment, wages, and inflation, according to James K. Galbraith. However, he asserts, wages are determined not by such market forces, but by what he calls the job structure—a complex set of status and pay relationships involving individual qualifications, job characteristics, and industry patterns. What is the meaning of the job structure for policy? Notions of natural rates of unemployment and inflationary barriers to full employment fade away. Supply-side measures can no longer been seen as adequate to deal with problems of unemployment and inequality. Questions of distribution of income and adjustment of the wage structure are returned to the political context. The active pursuit of full employment is returned to the list of respectable, and essential, policy goals.Download:Associated Program:Author(s): -
Working Paper No. 154 | January 1996
In this working paper, James K. Galbraith rejects the analytical construct within which many economists currently operate—that is, the construct in which, in the extreme, macroeconomic behavior is identical to the behavior reflected in microeconomic demand and supply curves. He rejects it on the theoretical and practical grounds that microeconomic categories (supply, demand, price, and quantities) "have little bearing on important policy questions." The markets that have a bearing on policy either are asset markets (for which the rules are dramatically different from those for flow markets) or are not really markets at all, but rather a set of deeply structural social relations. According to such thinking, microeconomic issues become secondary in the policy arena and macroeconomic policy tools—spending, taxes, income policies, and interest rates—take the fore.
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