Tag Archives: A Minskian New Deal

Bill Gross advocates for a Job Guarantee Program

Bill Gross, co-founder of Pacific Investment Management, recently advocated for an employer of last
resort program:

In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.

Click here for the full post.

When All Else Has Failed, Why Not Try Job Creation?

By L. Randall Wray

The US continues to hemorrhage jobs even as some purport to see “green shoots”. All plausible projections show that unemployment will rise even if our economy begins to grow. Personally, I think those green shoots will die this winter because the stimulus package is far too small and because the financial system is going to crash again. The longer we wait to actually address the unemployment problem, the worse are the prospects for a real recovery.

In his recent piece, Paul Krugman writes:

Just to be clear, I believe that a large enough conventional stimulus would do the trick. But since that doesn’t seem to be in the cards, we need to talk about cheaper alternatives that address the job problem directly. Should we introduce an employment tax credit, like the one proposed by the Economic Policy Institute? Should we introduce the German- style job-sharing subsidy proposed by the Center for Economic Policy Research? Both are worthy of consideration.

The point is that we need to start doing something more than, and different from, what we’re already doing. And the experience of other countries suggests that it’s time for a policy that explicitly and directly targets job creation.

As Krugman reports, Germany has avoided massive job losses by subsidizing firms that retain workers but reduce hours worked. The EPI’s proposal follows a similar strategy. This is fine so far as it goes—in a sense it allows workers, firms, and government to share the burden of reduced output and thus reduced work hours required. That is more equitable but in my view it is not a path toward recovery. While I do agree with Krugman that greater aggregate demand stimulus is required, there is no reason to believe that would provide a sufficient supply of jobs for all who want to work.

The final sentence in the Krugman post makes far more sense: let’s create MORE jobs, MORE work hours, and MORE payroll. A new, New Deal program with a permanent and universal job guarantee that will supply as many jobs as there are job seekers. Not only will this provide jobs in the New Deal style program, but it will also save jobs and increase work hours in the rest of the economy. Why go for second or third best when the best option is available?

Winston Churchill remarked “The Americans will always do the right thing………. after they`ve exhausted all the alternatives”. Direct job creation is the right way to put the economy onto a sustainable path to recovery.

For discussion and ideas on direct job creation and full employment, go here; here; here; and here.

Time For the Third Stimulus Package

by L. Randall Wray

According to Paul Krugman “voices calling for stronger stimulus are, may I say, sorta kinda respectable — several Nobelists in the bunch, plus a large fraction of the prominent economists who predicted the housing crash before it happened.”

Professor Krugman provides a link to those who argued that the second stimulus was too small, as well as to those who are already calling for a third stimulus. Three UMKC-affiliated professors are listed, including yours truly. With some immodesty, I’d like to point out that Wynne Godley and I were already calling for a stimulus package in 1999. We were worried that a tightening fiscal stance forced our economy to rely on unsustainable private sector deficits. We said:

“Growing government budget surpluses combined with growing trade deficits have generated record private sector deficits. Unless households continue to reduce their saving—creating an increasingly unsustainable debt burden—the impetus that has driven the expansion will evaporate.”

Of course the economy did quickly collapse into recession, but emerged due to restoration of a budget deficit plus a growing domestic private sector deficit. Over the years, many of us continued to warn that the budget remained too tight while private sector deficits were unsustainable. It all went on far longer than we expected, which does not prove us wrong but rather means that the slump will be immensely worse than it would have been had it come to an end earlier. That is why many of us believe the stimulus is orders of magnitude too small. The private sector is left with a monumental debt overhang and things will not get better until private balance sheets recover.

The best thing that the government can do now is to stop the job losses and to start creating jobs. We are not talking about a couple of million new jobs at this point—we need 6.5 million to replace those already lost, plus another 1-2 million to provide jobs for those who would have entered the labor force (high school and college graduates, for example) if the economy had not collapsed. Reports this morning show that President Obama’s approval rating is falling—below 50% in the swing state of Ohio—and job loss is a big part of the reason. Pessimism is setting in and it will be hard to overcome because it is well-founded. Job losses are devastating for communities—retailers are hit, real estate prices continue to fall, and state and local governments are forced to cut spending.

Many are looking back to 1937, when fiscal policy inappropriately tightened and threw the economy back into depression; indeed the collapse in 1937 was faster than the original crash that started the Great Depression off. To some extent that is not the correct analogy because most of the second stimulus package has yet to be spent, and recent data reported by Mike Norman shows that the federal deficit has actually increased in recent days. But it is still not enough, as evidenced by the growing economic stress around the country.

I realize that it is important for Congress to settle on some dollar figures for a third stimulus because that is the way that budgeting works. But in truth it is impossible to say beforehand how much we will need to stop the carnage. As James Galbraith has been warning, it is better to err on the upside. So far we have done the opposite—with the predictable result that the economy continues on a path toward another great depression.

The Carnage Continues: Time To Ramp Up the Stimulus

By L. Randall Wray

Some like to see green shoots everywhere, but that is becoming an increasingly audacious hope. Here are four related stories from the July 5th edition of the New York Times:

Tax Bill Appeals Take Rising Toll on Governments By JACK HEALY

Homeowners across the country are challenging their property tax bills in droves as the value of their homes drop, threatening local governments with another big drain on their budgets…. The tax appeals and reassessments present a new budget nightmare for governments. In a survey conducted by the National Association of Counties, 76 percent of large counties said that falling property tax revenue was significantly affecting their budgets…. Officials in some states say their property tax revenue is falling for the first time since World War II.

Safety Net Is Fraying for the Very Poor By ERIK ECKHOLM

Government “safety net” programs like Social Security and food stamps have pulled growing numbers of Americans out of poverty since the mid-1990s. But even before the current recession, these programs were providing less help to the most desperately poor, mainly nonworking families with children… The recession is expected to raise poverty rates, economists agree, although the impact is being softened by the federal stimulus package adopted this year…. “It’s a good thing we have the stimulus package,” Mr. {Arloc} Sherman said. “But what happens to the most vulnerable families in two years, when most of the provisions expire?”

Employment Report Sours the Market By JEFF SOMMER

A grim report on unemployment on Thursday let the air out of the stock market…. In a monthly report, the Labor Department said that 467,000 jobs were lost in June. In surveys, most economists expected 100,000 fewer jobs lost. The unemployment rate edged up to 9.5 percent from 9.4 percent the previous month, to its highest level in 26 years, and virtually all analysts expect joblessness to mount in the coming months.

So Many Foreclosures, So Little Logic By GRETCHEN MORGENSON

LAST week, the stock market tumbled on news that housing foreclosures and delinquencies rose again in the first quarter. The Office of the Comptroller of the Currency said that among the 34 million loans it tracks, foreclosures in progress rose 22 percent, to 844,389. That figure was 73 percent higher than in the same period last year…. But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.

What do these reports have in common? They provide powerful evidence that the federal government is not doing enough to help the “real” economy. As Sam Gompers famously responded when asked what workers wanted–“More!”—our nation’s state and local governments, households, workers, and poor need more help, now. We have tried the Reagan/Paulson/Rubin/Geithner “trickle down” approach of targeting relief to Wall Street, but the only thing trickling down is misery. The only way to stop the downward spiral is to substitute trickle-up policy—and even if nothing trickles-up, at least we will have helped those most in need.

I have already outlined a comprehensive recovery package so will here simply summarize four policies that would bring immediate relief.

1. Payroll tax holiday: This provides nearly $2500 of tax relief per year for each worker, with the same amount of relief going to that worker’s employer. The total stimulus to the economy would be somewhere around $650 billion per year. The relief is well-targeted (to workers and employers), immediate (take home pay rises as soon as the holiday takes effect), simple to administrate, and can be phased out (if desired) after the economy recovers.

2. State and local government assistance: The current stimulus package provided some relief to state and local governments, but was so little that it is forcing them to make Hobson’s choices: cut poor children from Medicaid roles or decimate universities? Furloughs for firefighters or postpone bridge repairs? Increase real estate taxes or raise fees for services? Only the federal government can resolve revenue shortfalls by providing funding to keep state and local governments running. Perhaps $400 billion, allocated by population (a bit over $1200 per capita) across state and local governments would be sufficient. If President Obama really could reform healthcare, that would generate tremendous savings for state governments that are saddled with exploding Medicaid costs to cover low income and elderly patients. Until then, direct grants are required. As I have argued, for the long-term we need a permanent program of federal transfers to states, with some of that attached to a requirement that they reduce reliance on regressive taxes.

3. Jobs to reduce poverty: Last week Pavlina Tcherneva provided an excellent argument for direct job creation by the federal government. We have already lost 6 million jobs, and Tcherneva notes that unemployed plus discouraged workers total about twice that number. However, a plausible case can be made that we are short more than 20 million jobs—as Marc Andre Pigeon and I demonstrated a decade ago. Further, as Stephanie Kelton and I showed, a substantial amount of America’s poverty problem is really a jobless problem. We found that in 2002 the poverty rate of families with no member working reached nearly 26%; on the other hand, if the family had at least one member working full-time, the poverty rate fell to just 3.5%. Our conclusions were similar to those offered by Hyman Minsky: “The achievement and sustaining of tight full employment could do almost all of the job of eliminating poverty” (1968, p. 329); “a large portion of those living in poverty and an even larger portion of those living close to poverty do so because of the meager income they receive from work” (p. 328). Minsky believed that “a suggestion of real merit is that the government become an employer of last resort” (1968, p. 338). Thus, not only will direct job creation reverse the trend toward ever-higher unemployment rates, but it will also go a long way toward filling the growing holes in the social safety net.

4. Homeowner relief: The plan offered by Warren Mosler provides an alternative to the current painful foreclosure process. When banks begin to foreclose, the government would step in to purchase the property at the lower of market price or outstanding mortgage balance. Of course, establishing market price in a glut is not simple and I will leave it to real estate market experts to compose a plan. What is more important is to keep people in their homes. Mosler proposes that the federal government would rent homes back to the dispossessed owners (Dean Baker has a similar plan) for a specified period (perhaps two years) at fair market rent. At the end of that period, the government would sell the home, with the occupant having the right of first refusal to buy it. By itself, this proposal would do little to stop spiraling delinquencies and foreclosures, and home prices will probably continue to decline for many months (or even years). However, as the other parts of this stimulus package begin to spur recovery, the real estate sector freefall will (eventually) be halted. I am somewhat ambivalent about continued falling house prices—on one hand, this will make housing more affordable; on the other it is devastating for families. Still, reducing evictions by offering a rental alternative will help reduce the pain of foreclosure. It might also allow the process to speed up (with smaller losses for banks) since many families would choose to stay-on as renters, with the possibility that they could later buy their homes at more reasonable prices.

I will not address here the preposterous argument that failure of the economy to swiftly recover is evidence against the Keynesian belief that government spending is the answer. Leaving to the side the Wall Street bail-outs (that do little to stimulate production and jobs), only a small portion of the stimulus package has been spent to date. There is evidence, however, that the automatic stabilizers (falling federal tax revenue and rising federal spending) are doing some good already—and would eventually pull the economy out of this depression. However, there is no reason to wait for our ship to hit bottom before it slowly resurfaces. Active, discretionary, targeted policy can reduce suffering and generate the forces that will be required to overcome substantial headwinds created by the private sector as well as by our state and local governments. Only the federal government has the fiscal wherewithal to lead us out.

Coherently Confronting US Macro Challenges

Many investors, policy makers, and economists find themselves unnerved by current economic conditions, and reasonably so. Depression or recovery, deflation or run away inflation, private or public insolvency – debates rage on all fronts. The disarray reflects in part the uncharted waters the global economy has sailed into over the past year, but it also reflects the inadequacy of contemporary macro frameworks. The financial balance approach is a simple yet powerful lens that can help clarify relationships that otherwise remain elusive at the macroeconomic level. Without this lens, it is hard to think coherently about the options available and their possible consequences.

We first encountered the financial balance approach[1] in the work of Wynne Godley at the Levy Institute for Economics over a decade ago, but this framework also informed the contributions of Hy Minsky and Dr. Kurt Richebacher in anticipating the conditions that give rise to financial instability at the level of the economy as a whole. It is not a difficult approach to follow, but it has proven very useful in thinking through the implications of recent credit bubbles and episodes of financial instability.

We can enter this approach from the standard macro observation that in any accounting period, total income in an economy must equal total outlays, and total saving out of income flows must equal total investment expenditures on tangible assets. The financial balance of any sector in the economy is simply income minus outlays, or its equivalent, saving minus investment. A sector may net save or run a financial surplus by spending less than it earns, or it may net deficit spend as it runs a financing deficit by earning less than it spends.

Furthermore, a net saving sector can cover its own outlays and accumulate financial liabilities issued by other sectors, while a deficit spending sector requires external financing to complete its spending plans. At the end of any accounting period, the sum of the sectoral financial balances must net to zero. Sectors in the economy that are net issuing new financial liabilities are matched by sectors willingly owning new financial assets. In macro, fortunately, it all has to add up. This is not only true of the income and expenditure sides of the equation, but also the financing side, which is rarely well integrated into macro analysis.

We can next divide the economy into three major sectors: the domestic private sector (including households and businesses), the government sector, and the foreign sector and ask a simple question relevant to current developments. What happens if the domestic private sector tries to net save, with no attending change in the government or foreign sector financial balances?

If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies – that is, unless creditors are generously willing to renegotiate existing debt contracts en masse.

In other words, such a configuration is an invitation to Irving Fisher’s cumulative debt deflation spiral which has been discussed on this website and in prior Richebacher letters. So unless some other sector is willing to reduce its net saving (as with the foreign sector recently, via a reduction in the US current account deficit as US imports have fallen faster than US exports) or increase its deficit spending (as with the federal budget balance of late) then the mere attempt by the domestic private sector to net save out of income flows, given the existing private debt overhang, can prove very disruptive.

In fact, the US economy has dipped into a mild version of Fisher’s debt deflation process as nominal GDP has fallen, wage and salary income flows have fallen, the CPI and other inflation measures have dropped into deflation, and private debt delinquencies and defaults are still spreading. Following the shocks to tangible and financial asset prices, credit availability, and the labor market, the US private sector, by our calculations, has swung from a 4.5% of GDP deficit spending position three and a half years ago to a 4% net saving position as of Q1 2009. This exceeds the 8% of GDP swing in the private sector financial balance witnessed as the tail end of the 1973-5 recession – it is an enormous adjustment, to put it mildly.

Had the current account deficit (which, remember, is the trade balance plus net income flows related to asset holdings, equals foreign net saving) not shrunk from 6% to 2% of GDP over the same period, while the combined government fiscal deficit increased from 1.5% to 6% of GDP, then the attempt by the private sector to complete such a dramatic swing in its financial balance position would have ended in a very sharp and severe debt deflation.

From an Austrian School perspective, nothing less than that is required to wipe the slate clean of excess private debt and to free up productive resources misallocated during the credit boom years. However, the political appetite for an Austrian solution appears to have all but disappeared following the global repercussions of the Lehman derailment. Investors and policy makers looked into the abyss, and they could not stomach what they saw. Even Germany Chancellor Merkel, who appears to have the most Austrian orientation among G7 policymakers, has chosen to introduce some degree of fiscal stimulus and financial sector intervention in the German economy.

To further illustrate the current situation, we can use the 1973-5 recession as a rough guide – after all, as mentioned above, that is when domestic private net saving jumped to its highest share of GDP in the post WWII period. Currently, we appear to have an even deeper recession, and we know the drop in the ratio of household net worth to disposable income is over four times that experienced in the 1973-5 episode. What happens if private net saving preferences run all the way up to 10% of GDP, with say an additional 4% of GDP increase from the household side, and another 2% from the business side?

If the swing evident from 2006 is any indication, the hypothetical 4% increase in the household financial balance as a share of GDP will take the current account back to balance (for the first time in nearly two decades) from its recent 2% of GDP deficit position. To further contain debt deflation dynamics, given a domestic private sector attempting to save 10% of GDP, the combined fiscal balance will need to expand out to 10% of GDP, or else private income will fall further. The reduction in foreign net saving and the increase in fiscal deficit spending will then match the increase in private net saving from Q1 2009 values assumed above.

If the combined government deficit aims for 12-13% of GDP while the domestic private sector is shooting for 10% and net foreign saving is zero, then the odds improve that an economic recovery can take root alongside a larger private sector deleveraging than we witnessed in Q1 2009. Household and business incomes will be buttressed by tax cuts and government spending, which will allow higher private spending for any given private saving target. In other words, in a worst case scenario, it does appear debt deflation dynamics can be contained and reversed, but at the price of a rather large fiscal deficit that in essence validates higher domestic private sector net saving. The linkages between rising private sector net saving and deflation, and between fiscal deficits and private net saving, are currently poorly understood, but the financial balance approach helps bring some clarity to these questions.

Normally, the business sector tends toward a deficit spending position as profitable investment opportunities exceed retained earnings. This makes a certain amount of sense: debt imposes future cash flow commitments on borrowers, and using debt to expand productive capacity allows the borrower to have a decent shot at generating sufficient cash flow to service debt. Notice this is not usually the case with consumer debt, except perhaps with the case of mortgages used to purchase rental properties, or credit cards used to finance new small businesses. Households do not directly increase their income earning capacity, and hence their debt servicing capacity, by purchasing a flat screen TV or a larger house on credit. Of course, businesses that use credit to buy back shares or complete a merger or acquisition similarly are not directly enhancing their ability to service debt with new productive capacity, so the intended use of new debt is relevant in either sector.

Richard Koo makes the related point in his book, “The Holy Grail of Macroeconomics”, that following the bursting of an asset bubble, businesses often move into a debt reduction mode that takes over their usual search for profitable opportunities. For the current post bubble period, reeling fiscal deficit spending back in before the business sector is headed back toward its more “natural” deficit spending position, or before the rest of the world has found its way to a faster pace of recovery than the US (thereby aiding US export growth), could prove disruptive.

Ideally then, fiscal deficit spending would be designed to encourage businesses to reinvest in more efficient technology or in new product innovation, both of which could help improve US export competitiveness. Alternatively, public/private cooperation in R&D projects like Sematech could be explored with various emerging energy technologies, for example, in order to reduce US energy dependence. Such moves would speed the transition away from deep fiscal deficit spending which began riling investors in longer dated Treasury debt back in March. Nevertheless, such a shift in the fiscal deficit was required for the domestic private sector to return to a net saving position and begin reducing its debt load without setting off a full blown debt deflation.

At best, favorable effects on business investment will arise be secondary or peripheral results of some of the infrastructure and green tech investments in the current fiscal stimulus package, generally due to ramp up in 2010 and 2011. Unfortunately, since few economists work with the financial balance approach we shared with you above, policy makers are not yet emphasizing this type of policy design. Nevertheless, the financial balance approach does offer a more coherent way of thinking about the macroeconomic dynamics currently underway, and the plausible paths ahead. From this framework, we can see the situation is indeed difficult, but not insurmountable, as some of the necessary adjustments in US sector financial imbalances are already in motion. Deflation in the US does look like it can be contained and reversed, but the quest for a new growth model – one that does not rely on serial asset bubbles, household deficit spending and debt accumulation, and imported consumer goods leading to a perpetually rising current account deficit – remains ahead. No doubt it will test the ingenuity and adaptability of an entire generation – a generation that through the abundance of credit, may have forgotten that in order to consume, one must first produce.

[1] Very simply, if income (Y) equals expenditures (E) at the level of the whole economy, and we split the economy into three sectors, domestic private (dp), government (g), and foreign (f) then the following holds true:

Y = E
Ydp + Yg + Yf = Edp + Eg + Ef
(Ydp-Edp) + (Yg-Eg) + (Yf – Ef) = 0

The first term in parentheses is the domestic private financial balance, the second is the combined government financial balance, and the third term is the inverse of the current account balance, since US imports are income to foreign producers, and US exports are expenditures of foreign economic agents. The sum of the domestic private financial balance and the combined government financial balance minus the current account balance must net to zero.

This is an ex post accounting identity that must hold true. It could equally be derived using the saving equals investment identity for the economy as a whole. Values for these concepts can be derived from the Fed’s Flow of Funds quarterly report. In general, nominal income adjusts to reconcile divergences in planned investment relative to intended saving.

Bring the Stubborn Unemployment Numbers Down Now

by Pavlina R. Tcherneva

Every month this year (perhaps with the exception of May) economic forecasters were stunned by the unexpectedly high unemployment numbers. Today the Bureau of Labor Statistics reported that in June employers shed 467,000 jobs, pushing the unemployment rate to 9.5%, a 25-year high. With an ever gloomier jobs picture, President Obama’s economic team has started to change its tune with respect to the promised job creation. The first economic report on the job impact of his recovery plan carefully phrased the objectives to include “creating or saving” at least 3 million jobs by the end of 2010. Those early projections called for peak unemployment of 8% in the third quarter of this year, far less than today’s actual unemployment rate of 9.5%

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A Message to President Obama: Stop Priming the Pump, Hire the Unemployed

by Pavlina R. TchernevaMany have called President Obama’s stimulus plan a return to Keynesian policy. Some of us who like reading Keynes professionally or for leisure have already been scratching our heads. I have wondered in particular whether the plan isn’t set up to work in a manner completely backwards from what Keynes himself had in mind when he advocated economic stabilization by government.

There are two things to remember about Keynes’s fiscal policy proposals: 1) government spending was always linked to the goal of full employment (the absence of both cyclical and structural unemployment) and 2) to achieve macro-stability and full employment, the government had to employ the unemployed directly into public works.

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James K. Galbraith on the Global Financial Crisis

See below James K. Galbraith’s lecture in Dublin, June 5 2009, at the Institute for International and European Affairs, on the current economic crisis. With Q&A and a small postscript.

A ‘people first’ strategy

Click here to read James K. Galbraith’s piece on the Guardian.

Alternative Stimulus and Bailout Proposals

Click here to listen to the audio of session 6 of the 18th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies. The order of the session is as follows:

Click here to see “No Return to Normal”, by James K. Galbraith, The Levy Economics Institute and University of Texas at Austin

Click here to see“Alternative Proposals for a U.S. Nonconvertible Currency Regime”, Warren Mosler, Valance Company, Inc.

Click here to see“Riding the Debt Deflation Guardrails”, Robert W. Parenteau, The Levy Economics Institute and MacroStrategy Edge

Click here to see“The Return of Big Government: A Minskyan New Deal”, L. Randall Wray, The Levy Economics Institute and University of Missouri–Kansas City