Associated Programs
Federal Budget Policy
The demographic shift resulting from the aging of the baby boomer generation presents a number of potential dilemmas for policymakers. Whether a shrinking working-age population can support its own dependents, in addition to retirees, has led to debates about the increasing size of Social Security, Medicare, and Medicaid budgets—now and in the future. Questions have been raised about whether these government programs can continue to function in the same manner, and achieve the same goals, as they do today. Will structural reform be necessary? Do we wish to provide the same, or a higher, level of support equally throughout the aging population? Should some, or all, benefits be “income tested”? What can be done today to offset the problems of the future?
In aggregate terms, fiscal debates have turned from what to do about growing federal budget surpluses to what constitutes the necessary size and composition of a stimulus package. Some economists have argued that, by creating a wider pool of funds available for investment, “fiscal responsibility” resulted in greater access to investment funds by private sector firms, which, in turn, stimulated economic growth. Others contend that the unprecedented growth of the 1990s happened in spite of budget surpluses, and that if the composition of private versus public funding had been more in balance, growth and employment would have expanded even further. These debates are related to those that surround the current demand shortfall and to calls for fiscal stimulus: if budget surpluses were the cause of economic growth, an argument can be made that fiscal stimulus should focus on investment-targeted tax cuts. If, however, surpluses were the result of economic growth, then demand-led fiscal policies, such as spending programs and tax cuts aimed broadly over the income distribution, should be the focus.
In responding to the above-listed issues, Levy Institute scholars have concentrated recent research on evaluating proposals that would alter the structure of Social Security to deal with future funding shortfalls, privatize any or all of the Social Security program, and restructure Medicaid financing to widen the availability of funding for long-term care. Other recent analyses deal with specific budgetary issues, such as tax-cut proposals and evaluation of the causes and effects of federal budget surpluses.
Research Program
Economic Policy for the 21st Century
Program Publications
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Working Paper No. 1065 | December 2024Originally issued as EDI Working Paper No. 09, 2023
This paper explains the MMT approach for evaluating the affordability of spending programs, contrasting it with the mainstream approach. Using the examples of the Green New Deal, Medicare-for-All, and Build Back Better, it argues that rethinking spending and taxes as claims on, and releases of resources, respectively, leads to different conclusions about the affordability of these programs. Unlike the mainstream view, the MMT approach does not lead to the conclusion that taxes necessarily must go up to “pay for” more spending. Conversely, just because money is not a constraint does not mean that every government program is immediately “affordable”. The resource demands of certain programs might be beyond the economy’s potential, at least in the short-term. The MMT approach thus leads to different solutions for how to make a program “affordable”; to do so it focuses on creating the necessary resource space through the tools the government has at its disposal, such as public investment and taxation.Download:Associated Program:Author(s):Related Topic(s):
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Working Paper No. 1064 | December 2024Originally issued as EDI Working Paper No. 08, 2022
This paper evaluates the relationship between monetary and fiscal policy and the relative effectiveness of macroeconomic stabilization through the lens of Modern Money Theory (MMT). We articulate previously-neglected aspects of monetary sovereignty to offer a new interpretation of the Bernanke Doctrine that emerged in the wake of the 2008 Global Financial crisis. This Doctrine validated key MMT precepts and paved the way for fiscal policy activism in response to COVID19. The paper argues that fiscal and monetary policy coordination is not new or rare. It is an intrinsic feature of sovereign monetary regimes, allowing for more effective policy responses to financial crises or pandemics. To the extent that monetary policy is able to stabilize an unstable economy, it is largely due to its fiscal components. This recognition also calls for a rethinking of fiscal policy.Download:Associated Program(s):Author(s):Related Topic(s): -
Working Paper No. 1055 | September 2024This paper looks at the relationship between government budget deficits and the growth rate of GDP. While orthodox economic theory offers several reasons to believe that growing deficits might be associated with slower growth, and would ultimately be unsustainable, Keynesians assert that deficits could stimulate growth—at least in the short run—implying the relation between deficits and growth could be positive. Modern Money Theory, adopting Godley’s sectoral balance approach, Lerner’s functional finance approach, and Minsky’s theory of financial instability takes a more nuanced approach. Historical data for a number of countries is presented, showing that there is no obvious relation between the deficit ratio and economic growth over long time periods. However, there is a predictable path of the relationship over the course of the business cycle for all countries examined.
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One-Pager No. 72 | May 2024Recently, the neglected question of why the US government borrows, given that it can print money, has arisen in the context of discussions surrounding a new documentary, Finding the Money. As L. Randall Wray observes in this one-pager, Modern Money Theory has been providing answers to this question for some time; and, he argues, it is a topic that mainstream economists are ill-equipped to address, since very few concern themselves with the monetary operations that underlie the question of why a currency-issuing government issues debt.Download:Associated Program(s):Author(s):Related Topic(s):
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Working Paper No. 1032 | October 2023The policy evaluation is a crucial component in analyzing the efficacy of public spending in translating the money spent into desired outcomes. Using OECD evaluation criteria, we analyzed the child protection schemes of Odisha to understand whether legal commitments on child protection are translated into fiscal commitments. The intergovernmental fiscal transfers and state-targeted programs for children in need of care and protection (CNCP) and children in conflict of law (CCL) are evaluated using the OECD criteria of relevance, coherence, effectiveness, efficiency, and sustainability. Using the theory of change, various fiscal interventions for child protection are analyzed with activities, outputs, intended outcomes, and impacts. The analysis revealed that, in the post-pandemic fiscal strategy of Odisha, various programs have been designed by the government to tackle the capability deprivation, hardships, and vulnerabilities faced by children within the budgetary frameworks, and that these programs are made fiscally sustainable through public expenditure convergence within the classification of budgetary transactions. However, the low utilization ratios of the funds and the institutional constraints are identified as challenges in the effective implementation of child protection programs in Odisha.Download:Associated Program:Author(s):Related Topic(s):
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One-Pager | December 2022While the trigger for the Covid recession was unusual—a collapse of the supply side that produced a drop in demand—the inflation the US economy is now facing is not atypical, according to L. Randall Wray. In this one-pager, he explores the causes of the current inflationary environment, arguing that continuing inflation pressures come mostly from the supply side.
Wray warns that, given federal spending had already been declining substantially before the Fed started raising interest rates, rate hikes make a recession—and potentially stagflation—even more likely. A key part of our fiscal policy response should be focused on well-designed public investment addressing the substantial supply constraints still affecting the US economy—constraints that are not just due to the Covid crisis, but also decades of underinvestment in infrastructure. Such an approach, in Wray's view, would reduce inflationary pressures while supporting growth.
Download:Associated Program(s):The State of the US and World Economies Monetary Policy and Financial Structure Federal Budget PolicyAuthor(s):Related Topic(s):Region(s):United States -
One-Pager No. 69 | February 2022A recent article in the New York Times asks whether Modern Money Theory (MMT) can declare victory after its policies were (supposedly) implemented during the response to the COVID-19 pandemic. The article suggests yes, but for the high inflation it sparked. In the view of Yeva Nersisyan and Senior Scholar L. Randall Wray, the federal government’s response largely validated MMT’s claims regarding public debt and deficits and questions of sovereign government solvency—it did not, however, represent MMT policy.Download:Associated Program(s):Author(s):Region(s):United States
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One-Pager No. 68 | November 2021With the US Treasury cutting checks totaling approximately $5 trillion to deal with the COVID-19 crisis, Senior Scholar L. Randall Wray argues that when it comes to the federal government, concerns about affordability and solvency can both be laid to rest. According to Wray, the question is never whether the federal government can spend more, but whether it should. And while there are still strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, with two centuries of experience the evidence for these concerns is mixed at best.Download:Associated Program(s):Author(s):Related Topic(s):Federal budget policy Federal debt Federal deficit Inflation Modern Money Theory (MMT) Monetary policyRegion(s):United States
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Public Policy Brief No. 155 | June 2021
Yes, If He Abandons Fiscal “Pay Fors"
President Biden’s proposals for investing in social and physical infrastructure signal a return to a budget-neutral policymaking framework that has largely been set aside since the outbreak of the COVID-19 crisis. According Yeva Nersisyan and L. Randall Wray, this focus on ensuring revenues keep pace with spending increases can undermine the goals internal to both the public investment and tax components of the administration’s plans: the “pay for” approach limits our spending on progressive policy to what we can raise through taxes, and we will only tax the amount we need to spend.
Nersisyan and Wray propose an alternative approach to budgeting for large-scale public expenditure programs. In their view, policymakers should evaluate spending and tax proposals on their own terms, according to the goals each is intended to meet. If the purpose of taxing corporations and wealthy individuals is to reduce inequality, then the tax changes should be formulated to accomplish that—not to “raise funds” to finance proposed spending. And while it is possible that general tax hikes might be needed to prevent public investment programs from fueling inflation, they argue that the kinds of taxes proposed by the administration would do little to relieve inflationary pressures should they arise. Under current economic circumstances, however, the president’s proposed infrastructure spending should not require budgetary offsets or other measures to control inflation in their estimation.Download:Associated Program(s):Author(s):Region(s):United States -
Policy Note 2021/3 | June 2021Edward Lane and L. Randall Wray explain how federal taxes on corporate profits are not well suited to either containing inflationary pressures or reducing inequality. They are not only a poor complement to President Biden’s proposed infrastructure plans, but are inefficient and ineffective taxes more broadly, according to Lane and Wray. The authors follow Hyman Minsky in recommending the elimination of corporate taxes, and they outline a replacement centered on the taxation of unrealized capital gains.
Research Programs
