Prakash Loungani — Links

From a new paper by Antonio Fatas:

“This paper studies the negative loop created by the interaction between pessimistic estimates of potential output and the effects of fiscal policy during the 2008-2014 period in Europe. The crisis of 2008 created an overly pessimistic view on potential output among policy makers that led to a large adjustment in fiscal policy during the years that followed. Contractionary fiscal policy, via hysteresis effects, caused a reduction in potential output that not only validated the original pessimistic forecasts, but also led to a second round of fiscal consolidation. This succession of contractionary fiscal policies was likely self-defeating for many European countries. The negative effects on GDP caused more damage to the sustainability of debt than the benefits of the budgetary adjustments. The paper concludes by discussing alternative frameworks for fiscal policy that could potentially avoid this negative loop in future crises.”

The Unassuming Economist
Fiscal Policy and the Shifting Goalposts

Prakash Loungani | Advisor and Senior Personnel & Budget Manager in the IMF’s Independent Evaluation Office

See also

From a new IMF working paper:

“This paper contributes to the open economy local fiscal multiplier literature by estimating regional output and employment responses to federal expenditure shocks in the European Union. In particular, similarly to the literature on foreign aid and growth, I use shocks to the supply of federal transfers (European Commission commitments) of structural fund spending by subnational region as instruments for annual realized expenditure in a panel from 2000-2013. I find a large, contemporaneous multiplier of 1.7 which translates into a cumulative multiplier of 4 three years after the shock. Furthermore, using a novel dataset on bilateral trade between EU regions, I find evidence of demand-driven spillovers up to three years after a shock.”

Fiscal Stimulus in a Monetary Union: Evidence from Eurozone Regions

Also

From a new IMF policy paper:

“This paper reviews the experience with the fiscal space assessment framework that was piloted during 2017–18. In 2016, staff proposed an operational definition of fiscal space and a new four-stage framework for its assessment. These were discussed informally by the Board in June, and a Board paper “Assessing Fiscal Space: An Initial Consistent Set of Considerations”incorporating Directors’ views was published in December. Fiscal space was narrowly defined as the room for undertaking discretionary fiscal policy relative to existing plans without endangering market access and debt sustainability. The framework was developed in response to the need to provide a more systematic approach to assessing fiscal space in the Fund’s surveillance. It was designed as a tool to inform the availability of fiscal space over a 3 to 4 year horizon for discretionary action, as opposed to the optimality of its use. Indeed, it was stressed that the availability of space does not necessarily mean that it should be used or should not be further expanded. The framework was piloted in the Article IV consultations of 34 advanced economies and emerging markets, comprising almost 80 percent of global GDP in PPP terms.”

Assessing Fiscal Space: An Update and Stocktaking

Pedro Nicolaci da Costa — Inequality is getting so bad it's threatening the very foundation of economic growth

Income inequality has been rising so rapidly in the United States and around the world that it threatens to make economic growth less durable, according to research from the International Monetary Fund.

"While strong economic growth is necessary for economic development, it is not always sufficient," four IMF economists write in a new blog.

"Inequality has risen in several advanced economies and remains stubbornly high in many that are still developing," they added.

"This worries policymakers everywhere for good reason. Research at the IMF and elsewhere makes it clear that persistent lack of inclusion—defined as broadly shared benefits and opportunities for economic growth—can fray social cohesion and undermine the sustainability of growth itself."

That's because growth that excludes large portions of the population reinforces inequality in a variety of ways, like access to education, technology, resources and even social connections that help individuals land jobs and remain relevant in the labor market....

Business Insider
Inequality is getting so bad it's threatening the very foundation of economic growth
Pedro Nicolaci da Costa

Ramanan — Robots, Globalization, Unemployment, Etc

Economists have played down the notion of technological unemployment. If production is constant and productivity rises, there’s a fall in employment because less labour is required to produce the same output. So output has to rise to keep employment from falling because of “automation”. In Post-Keynesian economics, the principle of effective demand matters both in the short run and the long run. So technological unemployment is a real possibility. New Consensus economists concede that John Maynard Keynes rules in the short run but assume that Jean-Baptiste Say rules in the long run. The irony hence is that New Consensus economists seem to show worry about automation these days.

In my opinion, this is because the sacred tenet of free trade must be defended by economists at all costs. So they make a concession about loss of employment to robots. Unfortunately that’s not right either. Globalization—both because of competition by international producers and offshoring of jobs via global supply chains—has led to the loss of livelihood for many in the Western world....

Tradeoffs.

Automation and robotization increase productivity, reducing the need for labor, which reduces worker incomes in developed countries. Globalization increases the available work force in open economies, increasing competition among workers in the global labor pool and reducing worker incomes in developed countries. Reduction in worker incomes undeveloped countries reduces effective demand, leading to excess capacity and potential oversupply, unless lagging demand is addressed by government fiscal policy.

Both globalization, which benefits emerging world workers, and automation and robotics, which increases productivity across the board, should be welcomed as an emergent opportunity and addressed simultaneously as an emergent challenge. Government that are currency sovereigns have tool for this, and global economy policy aimed at win-win can be achieved through concerted action rather than harmful competition and a beggar-thy-neighbor approach.

The developing world can be lifted up without necessarily dragging down the developed world.

The Case for Concerted Action
Robots, Globalization, Unemployment, Etc
V. Ramanan

Peter Cooper — The Confidence Fairy and Formation of Demand Expectations Under Uncertainty

From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty....

heteconomist
The Confidence Fairy and Formation of Demand Expectations Under Uncertainty
Peter Cooper

Edward Harrison — You should be concerned about falling car prices and Ally’s profit warning

Yesterday, Ally Financial warned that profits would underperform expectations. Now, they dd not say that profits would fall or that they were taking credit writedowns. Neverthless, the warning is an important marker and should be of grave concern. Here’s why....

Credit Writedowns
You should be concerned about falling car prices and Ally’s profit warningEdward Harrison

Josh Bivens — A ‘high-pressure economy’ can help boost productivity and provide even more ‘room to run’ for the recovery

A “high-pressure economy” that eliminates the remaining demand shortfall in the U.S. economy and leads to low rates of unemployment and rapid wage growth would likely induce faster productivity growth. This faster productivity growth would in turn blunt much of the potentially inflationary pressure stemming from tighter labor markets that generated faster wage-growth....

Productivity is defined as the average income or output generated in an hour of work in the economy. This makes it the ceiling to how much average living standards can rise over the long run in an economy. It is important to note that inflation-adjusted (or real) wages and incomes for the large majority of American workers and families have risen significantly slower than economy-wide productivity growth in recent decades. This divergence between a typical worker’s pay and economy-wide productivity is the root cause of the rise in income and wage inequality over that period.

The unequal distribution of the benefits of productivity growth is an extremely important issue. But even apart from the distribution issue, the rate of productivity growth remains a crucially important macroeconomic variable to track, not least because it provides an upper bound on how fast wages (both nominal and real) can rise....

Further, one does not have to search that hard for reasons why the last 5 years might be particularly uninformative for projecting future productivity growth. The fingerprints of demand-side slack holding back productivity growth are all over the data, so, as this slack relents, there is every reason to think that longer-term trends will reassert themselves....

Labor quality upgrading measures the contribution of a smarter, more experienced, and more educated labor force to productivity growth over time. Capital deepening measures the contribution of investments in plant and equipment that give workers better tools to perform their jobs. Total factor productivity growth measures how much output rises holding all other inputs (labor and capital) constant. Its long-run change is frequently interpreted as a sign of technological advance.…

Bears out MMT and Post Keynesian analysis that "it's the demand, stupid." Austerity was the wrong fiscal policy, and monetary policy based on ZIRP and QE was not able to counteract it, and may have contributed to it by reducing interest income.

EPI
A ‘high-pressure economy’ can help boost productivity and provide even more ‘room to run’ for the recovery
Josh Bivens | Director of Research at the Economic Policy Institute

Zero Hedge — Goldman Stunned By Collapse In Gasoline Demand: "This Would Require A US Recession"

All time high in US economic confidence is belied by apparently plunging demand for gasoline.

Zero Hedge
Goldman Stunned By Collapse In Gasoline Demand: "This Would Require A US Recession"
Tyler Durden

Bill Mitchell — Rising inequality and underconsumptionRising inequality and underconsumption

John Atkinson Hobson was an English economist in the second-half of the C19th and worked well into the C20th, dying at the age of 81 in 1940. I have been reflecting on his work in the context of wage and other labour market developments in recent years. Hobson, individually and with co-authors, provided some excellent insights into how rising income inequality, mass unemployment and increased poverty destabilises the economic system through its impacts on consumption spending. He argued that government should engender what he called a ‘high-wage economy’ which would provide the best basis for prosperity. He was writing as an antagonist to the trends of the day, which considered wage suppression to be good for business and society. In this blog, we consider some of those issues. This is a further instalment to the manuscript I am currently finalising with co-author, Italian journalist Thomas Fazi. The book, which will hopefully be out soon, traces the way the Left fell prey to what we call the globalisation myth and formed the view that the state has become powerless (or severely constrained) in the face of the transnational movements of goods and services and capital flows. This segment fits into Part 3 which focuses on ‘what is to be done’.

Bill Mitchell – billy blog
Rising inequality and underconsumption
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brad DeLong — Nick Bunker: How concerned should we be about business investment and productivity growth?

WCEG
Must-Read: Nick Bunker: How concerned should we be about business investment and productivity growth?

Brad DeLong

Matias Vernengo — Crazy as Adam Smith: the Media Discovers the Kaldor-Verdoorn Effect

… this is in part why a Bernie type policy would actually lead to significant changes in employment and productivity.

Naked Keynesianism
Crazy as Adam Smith: the Media Discovers the Kaldor-Verdoorn Effect
Matias Vernengo | Associate Professor of University Economics, Bucknell

Also

The guy that used the graph above said: "The middle-class society I grew up in didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and the New Deal. As the chart shows, income inequality declined drastically from the late 1930s to the mid 1940s, with the rich losing ground while working Americans saw unprecedented gains." Unprecedented, as in never done before, or implausible. Who said that? Bernie Sanders? Gerald Friedman? No, it was Paul Krugman of course.

Getting history right: Krugman continues his disinformation campaign

David F. Ruccio — Capitalism’s growth problem

Anyone who understands MMT or has been following MMT blogs including this one knows what the "top" economists are apparently at a loss for.

The slow down of growth is a demand problem. Investment is demand led. Lagging demand can be fixed either by increasing labor share, or (inclusive disjunction) increasing government contribution.

Increasing exports cannot do this in an open global economy in which lagging demand is a global issue, since one country's net exports are other countries net imports. Unfortunately, this has not sunk into the thinking of policymakers that are trying to export their way out their countries' doldrums, using currency devaluation, for example.

So-called secular stagnation is a fancy way of saying that economies are settling into equilibrium at under optimal potential and full employment (without defining down "full"). Keynes understood this and showed how to escape this trap eighty years ago. The General Theory was published in 1936. Abba Lerner elaborated on how to manage government contribution through functional finance. In "Political Aspects of Full Employment," Michal Kalecki explained how capitalism is about disciplining labor and controlling labor share to the advantage of capital share.

There is no mystery here. What is wrong with these people?

The issue to threefold.

1. Capital is increasingly dominant over labor and the capital share to labor share reflects this.

2. The paradox of thrift is making itself felt through the popularity of fiscal austerity in government among elites.

3. The rise of mercantilism and beggar-thy-neighbor policy, where trade surpluses are preferred by elites even though they are a cost in real terms to net exporters' economies.

Occasional Links & Commentary
Capitalism’s growth problem
David F. Ruccio | Professor of Economics, University of Notre Dame

Brad DeLong — Future Economists Will Probably Call This Decade the 'Longest Depression'

Economist Joe Stiglitz warned back in 2010 that the world risked sliding into a "Great Malaise." This week, he followed up on that grim prediction, saying, "We didn't do what was needed, and we have ended up precisely where I feared we would."
The problems we face now, Stiglitz points out, include "a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity."

He says the only cure is an increase in aggregate demand, far-reaching redistribution of income and deep reform of our financial system. The obstacles to this cure, he writes, "are not rooted in economics, but in politics and ideology."

Indeed. Joe Stiglitz is right.…

World Post
Future Economists Will Probably Call This Decade the 'Longest Depression'
Brad DeLong

Completely ignores Post Keynesians and MMT economists who were right in advance of the crisis and warning about it and who prescribed addressing the demand issue when the crisis hit. Imputes Hyman Minsky's financial instability theory based on the three stage financial cycle to Martin Wolf.

The disturbing thing is that Brad knows better.

David F. Ruccio — Capitalism and technology [Stephen Hawking]

Stephen Hawking quote. 

See also Albert Einstein, Why Socialism?

I doesn't take a brilliant physicist to figure this out. 

Occasional Links & Commentary

Capitalism and technology

David F. Ruccio | Professor of Economics, University of Notre Dame

IMF Direct — Growth’s Secret Weapon: The Poor and the Middle Class

It's the demand, stupid.

Earlier IMF work has shown that income inequality is bad for growth and its sustainability. Our new research shows that income distribution itself—not just the level of income inequality—matters for growth.

Specifically, we find that making the rich richer by one percentage point lowers GDP growth in a country over the next five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points (Chart 2). Put simply, boosting the incomes of the poor and the middle class can help raise growth prospects for all.

One possible explanation is that the poor and the middle class tend to consume a higher fraction of their income than the rich. If more money flows to these segments of society, they will consume rather than save, raising demand and spurring aggregate growth in the short run. What this means is that the poor and the middle class are key engines of growth. But with inequality on the rise, those engines are stalling.

Over the longer run, persistent inequality means that the the poor and the middle class have fewer opportunities to get educated, enhance their skills, and pursue their entrepreneurial dreams. As a result, labor productivity and growth suffer.

Ya think?

IMF Direct
Growth’s Secret Weapon: The Poor and the Middle Class

Era Dabla-Norris, Kalpana Kochhar, and Evridiki Tsounta

ht Mark Thoma at Economist's View

William H. David — The Internet Has Been a Colossal Economic Disappointment

This gets it backwards. The purpose of technological innovation is not to create jobs but to increase productivity, which generally means replacing jobs and making space for increased leisure. 

Technological innovation increase makes work obsolete. This has been the historical result of technological innovation. 

If there is a problem, it's with distribution of increasing surplus in order to increase shared prosperity.

Harvard Business Review — HBR Blog Network

The Internet Has Been a Colossal Economic Disappointment
William H. Davidow | Mohr Davidow Ventures

Dirk Ehnts — The euro zone’s most urgent economic problem: stagnating investment

If we wish the euro zone to have less unemployment, there most be more goods produced. Goods are only produced if people demand them, so the question comes down to who is going to finance the purchase of additional goods. There are three potential sources: the private sector can spend more than it earns by running up debt. It does this by borrowing from banks. However, in most of the euro zone private sector firms and households are not in the mood to move into debt further. The second possibility to increase growth is for the public sector to spend more than it earns (taxes). This seems like a possible way to go, since the German “black zero” is not strictly necessary. Last but not least the rest of the world can buy more of the euro zone’s goods. For this a depreciation of the currency would be helpful, and the ECB has just engineered this by quantitative easing, which means an increase in central bank money held by banks. However, if pushing the exchange rate down leads to more exports for Europe (and that is a big if), then at some point Europe will grow stronger and investors will come back to invest. This would drive the euro up again, which would lead to weakness of demand once again.... 

Well, the euro’s exchange rate is not fixed, and other countries will retaliate against “gains in competitiveness” that come via depreciation of the euro by depreciating their own currencies. Hence the solution to Europe’s economic woes – low investment – cannot lie with the rest of the world. It must lie in Europe.

econoblog 101
The euro zone’s most urgent economic problem: stagnating investment
Dirk Ehnts | Berlin School for Economics and Law

Joseph E. Stiglitz — The Politics of Economic Stupidity

In 1992, Bill Clinton based his successful campaign for the US presidency on a simple slogan: “It’s the economy, stupid.” From today’s perspective, things then do not seem so bad; the typical American household’s income is now lower. But we can take inspiration from Clinton’s effort. The malaise afflicting today’s global economy might be best reflected in two simple slogans: “It’s the politics, stupid” and “Demand, demand, demand.” 

The near-global stagnation witnessed in 2014 is man-made. It is the result of politics and policies in several major economies – politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize. It is that simple.…

The big problem facing the world in 2015 is not economic. We know how to escape our current malaise. The problem is our stupid politics.

Hits the high points.

Project Syndicate
The Politics of Economic Stupidity
Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank

NY brit expat — Anti-Capitalist Meetup: The Word is Crisis, Not Recession!

Yes, comrades, we need to talk about crises again, the term recession simply does not explain what is really going on! Just in case you might not have noticed or perhaps the mainstream media where you live ignored it, the obvious has happened and the end of the so-called recession has disappeared into the fantasy novel. Once again there is a slowdown in growth and the financial markets are not particularly happy. This time, Germany and China are showing signs of slowdown. Globalisation has not ended the potential towards crises in the capitalist economic system; in fact, the greater interconnectedness of the world economy has exacerbated the situation and ensured that the contagion spreads.

For those who believe the fantasies of neoliberal economics, the shock of these latest failures of neoliberalism must come as a surprise. But for those of us that have been warning of the stupidity of squeezing wages and destroying work conditions, rising inequality in income and wealth, the dangers of export-led growth when wage incomes are being squeezed meaning that unless governments become the sole purchasers of goods and services that are being produced (and they are not) that obviously there comes a point when working people cannot purchase goods and services as their incomes are too low, wiping out of savings has happened and personal indebtedness leads to default and bankruptcy. Neither of these things helps to maintain capitalist growth, accumulation and profitability in the long run; forget that, it hasn’t even lasted in the short run.

I will be giving a run through on what is going on and why our lives feel as though we are living through the Shock Doctrine (which we are) and then address the proposals of dealing with persistent unemployment under capitalism from the Left on which there is significant disagreement.…

This analysis would make Michael Hudson proud.

Daily Kos
Anti-Capitalist Meetup: The Word is Crisis, Not Recession!
NY brit expat

No Wonder Fed Bankers Wear Dark Suits ....

(Commentary posted by Roger Erickson)

So no one will bother looking for the splatters .... while Fed guys claim that they're valiantly pissing into the wind? (On demand? Following whose demand? Not aggregate, that's for sure.)

A top regulator threatens to hold his breath until the evil culture on Wall Street changes.

:(

They doth protest too much?

While getting rich in the process?

(What do we pay Fed "regulators" for anyway? To just LOOK like regulators?)

Alan Pyke — Companies Warn That Income Inequality Is Hurting Their Business

After decades as the dominant economic theory in American politics, trickle-down economics is starting to lose its grip on the debate. For evidence of that slippage, look no further than the business community’s own communications with investors. 

Two thirds of the largest retail companies in the country say falling incomes for their customers threaten their business, according to an analysis of corporate filings by economists at the Center for American Progress (CAP). That is double the proportion that cited slack earnings for the masses among their business risks in 2006. And seven out of every eight major American retail companies “cite weak consumer spending as a risk factor to their stock price,” the authors write.…

These observations are not groundbreaking as a matter of economic theory. The importance of consumer spending and demand to broad economic growth is a well-understood basic fact of how the world works. Previous CAP research has found that the median American family saw an 8 percent drop in income from 2000 to 2012 while the cost of living rose, leaving them with $5,500 less to spend on essentials like groceries and clothing each year. The lingering stagnation of the broader economy owes in large part to this long-running squeeze on the middle class, which has persisted despite decades of the trickle-down tax and spending policies that conservatives have argued for for decades.

But in political terms, the fact that the largest companies in the business of selling stuff to Americans are saying publicly that their shoppers earn too little money is a significant development. It represents a shift in the narrative within the traditional base of support for right-wing economic policy, as the CAP authors note. “If the Heritage Foundation, the U.S. Chamber [of Commerce], and other proponents of trickle-down economics refuse to believe the overwhelming academic evidence that clearly shows low consumer spending and income growth are holding the economy back, they should listen to corporate America and Wall Street,” the report says.

The formerly indefatigable American consumer throws in the towel. Exit trickle down.

Think Progress

Companies Warn That Income Inequality Is Hurting Their Business
Alan Pyke