Levy Institute Publications

From a macroeconomic point of view, 2016 was an ordinary year in the post–Great Recession period. As in prior years, the conventional forecasts predicted that this would be the year the economy would finally escape from the “new normal” of secular stagnation. But just as in every previous year, the forecasts were confounded by the actual result: lower-than-expected growth—just 1.6 percent.
 
The radical policy changes promoted by the new Trump administration dominated economic conditions in the closing quarter of the year and the first quarter of 2017. Markets have responded with exuberance since the November elections, on the expectation that the proposed policy measures would increase profitability by boosting growth and cutting personal and corporate taxes. However, an evaluation of the US economy’s structural characteristics reveals three key impediments to a robust, sustainable recovery: income inequality, fiscal conservatism, and weak net export demand. The new administration’s often conflicting policy proposals are unlikely to solve any of these fundamental problems—if anything, the situation will worsen.
 
Our latest Strategic Analysis provides two medium-term scenarios for the US economy. The “business as usual” baseline scenario (built on CBO estimates) shows household debt and GDP growth roughly maintaining their moribund postcrisis trends. The second scenario assumes a sharp correction in the stock market beginning in 2017Q3, combined with another round of private sector deleveraging. The results: negative growth and a government deficit of 8.3 percent by 2020—essentially a repeat of the crisis of 2007–9. 

The Greek government has agreed to a new round of fiscal austerity measures consisting of a sharp increase in taxes on income and property and further reductions in pension and other welfare-related expenditures. Based on our model of the Greek economy, policies aimed at reducing the government deficit will cause a recession, unless other components of aggregate demand increase enough to more than offset the negative impact of fiscal austerity on output and employment.

In this report we argue that the troika strategy of increasing net exports to restart the economy has failed, partly because of the low impact of falling wages on prices, partly because of the low trade elasticities with respect to prices, and partly because of other events that caused a sharp reduction in transport services, which used to be Greece’s largest export sector.

A policy initiative to boost aggregate demand is urgently needed, now more than ever. We propose a fiscal policy alternative based on innovative financing mechanisms, which could trigger a boost in confidence that would encourage renewed private investment.

Our latest strategic analysis reveals that the US economy remains fragile because of three persistent structural issues: weak demand for US exports, fiscal conservatism, and a four-decade trend in rising income inequality. It also faces risks from stagnation in the economies of the United States’ trading partners, appreciation of the dollar, and a contraction in asset prices. The authors provide a baseline and three alternative medium-term scenarios using the Levy Institute’s stock-flow consistent macro model: a dollar appreciation and reduced growth in US trading partners scenario; a stock market correction scenario; and a third scenario combining scenarios 1 and 2. The baseline scenario shows that future growth will depend on an increase in private sector indebtedness, while the remaining scenarios underscore the linkages between a fragile US recovery and instability in the global economy. 

American Prosperity in Historical Perspective

Jordan Brennan, of Unifor and the Canadian Centre for Policy Alternatives, examines the rise of income inequality and the deceleration of economic growth in the United States in this two-part analysis. The first section explores the consolidation of corporate power, through mergers and acquisitions, between 1895 and 2013, and finds that reduced competition, declines in fixed asset investment, and the rise of practices such as stock buybacks have shifted investment away from the real economy, leading to weak economic growth and rising income inequality. The second section of Brennan’s analysis examines the interplay of labor unions, inflation, and income inequality. The author observes that the decline of unions as a countervailing force to corporate power and anti-inflationary monetary policy have shifted income away from middle- and lower-income groups. Similarly, he observes that over the past century inflation has tended to redistribute income from capital to labor—from the upper to the lower income strata. In this context, he observes that anti-inflation policy is a use of state power to effect a regressive redistribution of income.  

Since inheriting the Brazilian presidency five months ago, the new Temer administration has successfully ratified a constitutional amendment imposing a radical, two-decades-long public spending freeze, purportedly aimed at sparking an increase in business confidence and investment. In this policy brief, Fernando Cardim de Carvalho explains why this fiscal strategy is based not only on a flawed conception of the drivers of private-sector confidence and investment but also on a mistaken view of the roots of the current Brazilian economic crisis. The hoped-for “expansionary fiscal consolidation” is not likely to be achieved.

Flavia Dantas and L. Randall Wray argue that the emerging conventional wisdom—that the US economy has reached full employment—is flawed. The unemployment rate is not providing an accurate picture of the health of the labor market, and the common narrative attributing shrinking labor force engagement to aging demographics is overstated. Instead, falling prime-age participation rates are the symptom of a structural inadequacy of aggregate demand—a problem of insufficient job creation and stagnant incomes that conventional public policy remedies have been unable to address. The solution to our long-running secular stagnation requires targeted, direct job creation for those at the bottom of the income scale.

Since the 1980s, economic recoveries in the United States have been delivering the vast majority of income growth to the wealthiest households. This policy note updates the analysis in One-Pager No. 47 and Policy Note 2015/4 with the latest data through 2015, looking at the distribution of average income growth (with and without capital gains) between the bottom 90 percent and top 10 percent of households, and between the bottom 99 percent and top 1 percent of households.

Little has changed when considering the distribution of average income growth in the current recovery (up to 2015) between the bottom 90 percent and top 10 percent of families, with or without capital gains. Although average real income for the bottom 90 percent of households is no longer shrinking, these families still capture a historically small proportion of that growth—only between 18 percent and 22 percent. The growing economy continues to deliver the most benefits to the wealthiest families.

In this policy note, Research Scholar Fernando Rios-Avila and Gustavo Canavire-Bacarreza, Universidad EAFIT, observe that immigration in the United States has a small but statistically significant impact on the labor market behavior of native-born unemployed workers. Their chances of transitioning from unemployment to employment are not affected by the share of immigrants in their job markets, but the native-born unemployed are more likely to leave the labor force when living in areas with a higher relative concentration of immigrants. Three additional results of the study shed light on what might be contributing to this higher rate of labor market exit, with each pointing to the potential role of expectations in creating a discouraged worker effect among the native-born unemployed in high-immigration states. 

Demographics or Lack of Jobs?

Aging demographics, “social shifts,” and other supply-side and institutional factors have commonly been blamed for the fall in the US labor force participation rate. However, depressed labor force participation for prime-age workers is likely due to a combination of insufficient aggregate demand, weak job creation, and stagnant wages—all of which have been persistent problems over the past three or four decades. Although insufficient aggregate demand is the main problem, general “Keynesian” pump priming is not the answer. Stimulus needs to take the form of targeted job creation to tighten labor markets for less-skilled workers.

Even under optimistic assumptions, the policy status quo being enforced in Greece cannot be relied upon to help recover lost incomes and employment within any reasonable time frame. And while a widely discussed public investment program funded by European institutions would help, a more innovative, better-targeted solution is required to address Greece’s protracted unemployment crisis: an “employer of last resort” (ELR) plan offering paid work in public projects, financed by issuing a nonconvertible “fiscal currency”—the Geuro.

Standing on the Shoulders of Minsky

Since the death of Hyman Minsky in 1996, much has been written about financialization. This paper explores the issues that Minsky examined in the last decade of his life and considers their relationship to that financialization literature. Part I addresses Minsky’s penetrating observations regarding what he called money manager capitalism. Part II outlines the powerful analytical framework that Minsky used to organize his thinking and that we can use to extend his work. Part III shows how Minsky’s observations and framework represent a major contribution to the study of financialization. Part IV highlights two keys to Minsky’s success: his treatment of economics as a grand adventure and his willingness to step beyond the world of theory. Part V concludes by providing a short recap, acknowledging formidable challenges facing scholars with a Minsky perspective, and calling attention to the glimmer of hope that offers a way forward.

A Survey

The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

Edited by Rainer Kattel, Jan Kregel, and Mario Tonveronachi

Have past and more recent regulatory changes contributed to increased financial stability in the European Union (EU), or have they improved the efficiency of individual banks and national financial systems within the EU? Edited by Rainer Kattel, Tallinn University of Technology, Director of Research Jan Kregel, and Mario Tonveronachi, University of Siena, this volume offers a comparative overview of how financial regulations have evolved in various European countries since the introduction of the single European market in 1986. The collection includes a number of country studies (France, Germany, Italy, Spain, Estonia, Hungary, Slovenia) that analyze the domestic financial regulatory structure at the beginning of the period, how the EU directives have been introduced into domestic legislation, and their impact on the financial structure of the economy. Other contributions examine regulatory changes in the UK and Nordic countries, and in postcrisis America.

Published by: Routledge

By L. Randall Wray

Perhaps no economist was more vindicated by the global financial crisis than Hyman P. Minsky (1919–1996). Although a handful of economists raised alarms as early as 2000, Minsky’s warnings began a half century earlier, with writings that set out a compelling theory of financial instability. Yet even today he remains largely outside mainstream economics; few people have a good grasp of his writings, and fewer still understand their full importance. Why Minsky Matters makes the maverick economist’s critically valuable insights accessible to general readers for the first time. Author L. Randall Wray shows that by understanding Minsky we will not only see the next crisis coming but we might be able to act quickly enough to prevent it.

As Wray explains, Minsky’s most important idea is that “stability is destabilizing”: to the degree that the economy achieves what looks to be robust and stable growth, it is setting up the conditions in which a crash becomes ever more likely. Before the financial crisis, mainstream economists pointed to much evidence that the economy was more stable, but their predictions were completely wrong because they disregarded Minsky’s insight. Wray also introduces Minsky’s significant work on money and banking, poverty and unemployment, and the evolution of capitalism, as well as his proposals for reforming the financial system and promoting economic stability.

A much-needed introduction to an economist whose ideas are more relevant than ever, Why Minsky Matters is essential reading for anyone who wants to understand why economic crises are becoming more frequent and severe—and what we can do about it.

Published by: Princeton

This issue of the Summary opens with a policy brief that examines the move by Brazil’s Temer administration to impose a radical, two-decades-long public spending freeze aimed at boosting business confidence and investment, and explains why this fiscal strategy is flawed.

Working papers included in this issue investigate the long-run determinants of government bond yields in India; expansionary austerity theory; the Federal Reserve’s announced policy of “normalization”; money’s role in the modern economy; the effects of the Great Recession on the well-being of different racial groups in the United States; why abstractions are necessary for understanding complex economic and social realities; and the economic impacts of expanding the social care sector in Turkey. The issue closes with a policy brief that argues that the current unemployment rate provides an inaccurate picture of the health of the labor market, and that the common narrative attributing shrinking labor force engagement to aging demographics is overstated.

INSTITUTE RESEARCH

Program: The State of the US and World Economies

• FERNANDO J. CARDIM DE CARVALHO, Brazil Still in Troubled Waters

Program: Monetary Policy and Financial Structure

• TANWEER AKRAM and ANUPAM DAS, The Long-run Determinants of Indian Government Bond Yields
• ALBERTO BOTTA, The Short- and Long-run Inconsistency of the Expansionary Austerity Theory: A Post-Keynesian/Evolutionist Critique
• JAN KREGEL, Financial Stability and Secure Currency in a Modern Context
• FLAVIA DANTAS, Normalizing the Fed Funds Rate: The Fed’s Unjustified Rationale

Program: Distribution of Income and Wealth

• THOMAS MASTERSON, AJIT ZACHARIAS, FERNANDO RIOS-AVILA, and EDWARD N. WOLFF, The Great Recession and Racial Inequality: Evidence from Measures of Economic Well-Being
• MICHALIS NIKIFOROS, Distribution-led Growth through Methodological Lenses

Program: Gender Equality and the Economy

• KIJONG KIM, İPEK İLKKARACAN, and TOLGA KAYA, Investing in Social Care Infrastructure and Employment Generation: A Distributional Analysis of the Care Economy in Turkey

Program: Employment Policy and Labor Markets

• FLAVIA DANTAS and L. RANDALL WRAY, Full Employment: Are We There Yet?

INSTITUTE NEWS

Upcoming Events

• 26th Annual Hyman P. Minsky Conference
• The Hyman P. Minsky Summer Seminar

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