2020 and Beyond

This Strategic Analysis examines the US economy’s prospects for 2020–23 and the risks that lie ahead. The baseline projection generated by the Levy Institute’s stock-flow consistent macroeconomic model shows that, given current fiscal arrangements and the slowdown in the global economy, the pace of the US recovery will slacken somewhat, with a growth rate that will average 1.5 percent over the next several years.

The authors then point to three factors that can derail this already weak baseline trajectory: (1) an overvalued stock market; (2) evidence that the corporate sector’s balance sheets are more fragile than they have ever been in the postwar period; and (3) risks in the foreign sector stemming from the slowdown of the global economy, an overvalued dollar, and the current administration’s erratic trade policy.

2019 marked the third year of the continuing economic recovery in Greece, with real GDP and employment rising, albeit at modest rates. In this Strategic Analysis we note that the expansion has mainly been driven by net exports, with tourism playing a dominant role. However, household consumption and investment are still too far below their precrisis levels, and a stronger and sustainable recovery should target these components of domestic demand as well.

Fiscal austerity imposed on the Greek government has achieved its target in terms of public finances, such that some fiscal space is now available to stimulate the economy. Our simulations for the 2019–21 period show that under current conditions the economy is likely to continue on a path of modest growth, and that the amount of private investment needed for a stronger recovery is unlikely to materialize.

Reexamining the Economic Costs of Debt

On November 20, 2019, Senior Scholar L. Randall Wray testified before the House Committee on the Budget on the topic of reexamining the economic costs of debt:

"In recent months a new approach to national government budgets, deficits, and debts—Modern Money Theory (MMT)—has been the subject of discussion and controversy. [. . .]

In this testimony I do not want to rehash the theoretical foundations of MMT. Instead I will highlight empirical facts with the goal of explaining the causes and consequences of the intransigent federal budget deficits and the growing national government debt. I hope that developing an understanding of the dynamics involved will make the topic of deficits and debt less daunting. I will conclude by summarizing the MMT views on this topic, hoping to set the record straight."

Update 1/7/2020: In an appendix, L. Randall Wray responds to a Question for the Record submitted by Rep. Ilhan Omar

A Path to Full Employment

Despite reports of a healthy US labor market, millions of Americans remain unemployed and underemployed, or have simply given up looking for work. It is a problem that plagues our economy in good times and in bad—there are never enough jobs available for all who want to work. L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton examine the impact of a new “job guarantee” proposal that would seek to eliminate involuntary unemployment by directly creating jobs in the communities where they are needed.
 
The authors propose the creation of a Public Service Employment (PSE) program that would offer a job at a living wage to all who are ready and willing to work. Federally funded but with a decentralized administration, the PSE program would pay $15 per hour and offer a basic package of benefits. This report simulates the economic impact over a ten-year period of implementing the PSE program beginning in 2018Q1.
 
Unemployment, hidden and official, with all of its attendant social harms, is a policy choice. The results in this report lend more weight to the argument that it is a policy choice we need no longer tolerate. True full employment is both achievable and sustainable.

In this policy brief, Yeva Nersisyan and Senior Scholar L. Randall Wray argue that assessing the “affordability” of the Green New Deal is a question of whether there are suitable and sufficient real resources than can be mobilized to implement this ambitious approach to climate policy. Only after a careful resource accounting can we address the question of whether taxes and other means might be needed to reduce private spending to avoid inflation as the Green New Deal is phased in.
 
Nersisyan and Wray provide a first attempt at resource budgeting for the Green New Deal, weighing available resources—including potential excess capacity and resources that can be shifted away from existing production—against what will be needed to implement the major elements of this plan to fight climate change and ensure a just transition to a more sustainable economic model.

As global market integration collides with growing demands for national political sovereignty, Senior Scholar Jan Kregel contrasts two diametrically opposed approaches to managing the tensions between international financial coordination and national autonomy. The first, a road not taken, is John Maynard Keynes’s proposal to reform the postwar international financial system. The second is the approach taken in the establishment of the eurozone and the development of its settlement and payment system. Analysis of Keynes’s clearing union proposal and its underlying theoretical approach highlights the flaws of the current eurozone setup.

A Macro-Micro Policy Model for Ghana and Tanzania
 

Feminist economics has long emphasized the role of physical and social infrastructure as determinants of the time women spend on household production (the provision of unpaid domestic services and care). Surprisingly, there is a lack of studies that directly investigate how infrastructure improvements affect the time spent on household production and commuting to work, which is another important unpaid activity for most employed individuals. We attempt to fill the lacunae in the research by studying this issue in the context of Ghana and Tanzania utilizing the framework of the Levy Institute Measure of Time and Income Poverty. Separately, while there are several studies (including those done previously at the Levy Institute) on the macroeconomic impacts of government expenditures on care, these assessments tend to be based primarily on employment multipliers along with simple macroeconomic assumptions. We develop a disaggregated and fully articulated macroeconomic model based on the social accounting matrices for the two countries to take account of the intersectoral linkages and external constraints, such as balance of payments, that are particularly important for many developing nations, including Ghana and Tanzania. The macro- and microeconomic aspects are integrated in a unified analytical framework via a top-down disaggregated macroeconomic model with microsimulation that is novel in that it enables the investigation of the gendered economic processes and outcomes at the macroeconomic and microeconomic levels.

Among the more ambitious policies that have been proposed to address the problem of escalating student loan debt are various forms of debt cancellation. In this report, Scott Fullwiler, Research Associate Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum examine the likely macroeconomic impacts of a one-time, federally funded cancellation of all outstanding student debt.

The report analyzes households’ mounting reliance on debt to finance higher education, including the distributive implications of student debt and debt cancellation; describes the financial mechanics required to carry out the cancellation of debt held by the Department of Education (which makes up the vast majority of student loans outstanding) as well as privately owned student debt; and uses two macroeconometric models to provide a plausible range for the likely impacts of student debt cancellation on key economic variables over a 10-year horizon.

The authors find that cancellation would have a meaningful stimulus effect, characterized by greater economic activity as measured by GDP and employment, with only moderate effects on the federal budget deficit, interest rates, and inflation (while state budgets improve). These results suggest that policies like student debt cancellation can be a viable part of a needed reorientation of US higher education policy.
 

Against the background of an ongoing trade dispute between the United States and China, Senior Scholar Jan Kregel analyzes the potential for achieving international adjustment without producing a negative impact on national and global growth. Once the structure of trade in the current international system is understood (with its global production chains and large imbalances financed by international borrowing and lending), it is clear that national strategies focused on tariff adjustment to reduce bilateral imbalances will not succeed. This understanding of the evolution of the structure of trade and international finance should also inform our view of how to design a new international financial system capable of dealing with increasingly large international trade imbalances.

While a consensus has formed that the eurozone’s economic governance mechanisms must be reformed, and some progress has been made on this front, what has been agreed to so far falls short of what is needed to address the central imbalances caused by the eurozone setup, according to Paolo Savona.

The key elements that are missing from the current package of reforms are interrelated: a common insurance scheme for bank deposits, the possible regulation of banks’ sovereign exposure, and the existence of a common safe asset. Savona outlines a proposal to increase the supply of safe assets provided by a common European issuer (the European Stability Mechanism) and explains how the plan could be made economically and politically satisfactory to all member states while facilitating progress on the deposit insurance and sovereign exposure issues.

Senators Elizabeth Warren and Bernie Sanders, along with Representative Alexandria Ocasio-Cortez, recently proposed to increase the rate of taxation on very high incomes and net worth. One of the primary justifications for such policies is that reducing inequality would help safeguard political equality. However, Dimitri B. Papadimitriou, Michalis Nikiforos, and Gennaro Zezza show how these tax policies, if matched by comparable increases in government spending, have the potential to boost aggregate demand while helping reform the unstable structure of the US economy.

What's New?

The Trump administration is facing a legal challenge to its efforts to add a citizenship question to the 2020 decennial census—a question that was first included in 1890, but has not been asked of the entire population since 1950. If the citizenship question was asked in the past, why not reinstate it? Senior Scholar Joel Perlmann explains how the characteristics of both immigration and the census itself have changed radically since 1890 and, as a result, how the inclusion of this question on the once-a-decade census would not only be redundant, but would threaten the integrity of the census count.

This paper extends the empirical stock-flow consistent (SFC) literature through the introduction of distributional features and labor market institutions in a Godley-type empirical SFC model. In particular, labor market institutions, such as the minimum wage and the collective bargaining coverage rate, are considered as determinants of the wage share and, in turn, of the distribution of national income. Thereby, the model is able to examine both the medium-term stability conditions of the economy via the evolution of the sectoral financial balances and the implications of functional income distribution on the growth prospects of the economy at hand. The model is then applied to the Greek economy. The empirical results indicate that the Greek economy has a significant structural competitiveness deficit, while the institutional regime is likely debt-led. The policies implemented in the context of the economic adjustment programs were highly inappropriate, triggering private sector insolvency. A minimum wage increase is projected to have a positive impact on output growth and employment. However, policies that would enhance the productive sector’s structural competitiveness are required in order to ensure the growth prospects of the Greek economy.

This paper analyzes recent macroeconomic developments in the eurozone, particularly in Germany. Several economic indicators are sending signals of a looming German recession. Geopolitical tensions caused by trade disputes between the United States and China, plus the risk of a disorderly Brexit, began disrupting the global supply chain in manufacturing. German output contraction has been centered on manufacturing, particularly the automobile sector. Despite circumstances that call for fiscal intervention to rescue the economy, Chancellor Angela Merkel’s government was overdue with corrective measures. This paper explains Germany’s hesitancy to protect its economy, which has been based on a political and historical ideology that that rejects issuing new public debt to increase public spending, thus leaving the economy exposed to the doldrums. The paper also considers serious shortcomings in the European Union’s (EU) foreign and defense policies that recently surfaced during the Syrian refugee crisis. The eurocrisis revealed near-fatal weaknesses of the European Monetary Union (EMU), which is still incomplete without a common fiscal policy, a common budget, and a banking union. Unless corrected, such deficiencies will cause both the EU and the EMU to dissolve if another asymmetric shock occurs. This paper also analyzes recent geopolitical developments that are crucial to the EU/eurozone’s existential crisis.

Edited by Marcella Corsi, Jan Kregel, and Carlo D'Ippoliti

Edited by Marcella Corsi, Sapienza University of Rome, Levy Institute Director of Research Jan Kregel, and Carlo D’Ippoliti, Sapienza University of Rome, this new collection of 16 essays is dedicated to Alessandro Roncaglia and deals with the themes that “have characterized his work or represent expressions of his personality, his interests and method," particularly his contributions to the interpretation of classical political economists as a means for informing present-day policy.

Published by: Anthem Press

This issue of the Summary features L. Randall Wray’s written testimony submitted for a November 20, 2019 hearing before the US House of Representatives’ Budget Committee, where he urged a reexamination of the economic impact of public debt and deficits; prepared by Wray and Yeva Nersisyan, the testimony explains why federal deficits have become the norm in the context of the US economy, argues that they are not only necessary but useful, and advocates strengthening automatic fiscal stabilizers. A working paper, also by Wray, examines state and local government debt through the lens of Modern Money Theory and proposes a new understanding of how the fiscal space available at the federal level can be used to revitalize local economies.

In a related vein, this issue includes two working papers that are part of a series of empirical investigations uncovering evidence for the Keynesian view that the chief determinants of government bond yields are the decisions of monetary policymakers. Tanweer Akram and Huiqing Li inquire into the impact of Japan’s monetary policy on its government bond yields; Akram and Anupam Das extend their earlier work on the short-term interest rate’s influence over the long-term interest rate, this time employing daily data on changes in US Treasury security yields.

In a Research Project Report under the Levy Institute Measure of Time and Income Poverty (LIMTIP) program, Senior Scholar Ajit Zacharias, Research Scholars Thomas Masterson, Fernando Rios-Avila, Michalis Nikiforos, and Kijong Kim, and Research Associate Tamar Khitarishvili present the findings of their study on consumption and time poverty in Ghana and Tanzania, undertaken with the support of the William and Flora Hewlett Foundation.

A working paper under the Gender Equality and the Economy program by Srinivas Raghavendra, Research Scholar Kijong Kim, Sinead Ashe, Mrinal Chadha, Felix Asante, Petri T. Piiroinen, and Nata Duvvury puts forth the results of their study on the macroeconomic impacts of violence against women and girls in Ghana.

Also in this issue, Research Associate Jörg Bibow reviews the evolution of the international monetary and financial architecture against the background of John Maynard Keynes’s original Bretton Woods plan; Lorenzo Esposito and Giuseppe Mastromatteo argue that the faulty assumptions of a particular strand of mainstream theory played a key role in rendering economic systems more fragile; Research Associate Lekha Chakraborty reflects on the future of fiscal federalism in India; and Zengping He and Genliang Jia examine local government debt growth in China—tying it to increased concerns of a Chinese Minsky moment—and argue that the central government should play a more active role in relieving these local burdens.
 
 
INSTITUTE RESEARCH
Program: The State of the US and World Economies

• TANWEER AKRAM and ANUPAM DAS, An Analysis of the Daily Changes in US Treasury Security Yields

 
Program: Monetary Policy and Financial Structure

• L. RANDALL WRAY, Congressional Testimony
• TANWEER AKRAM and HUIQING LI, The Impact of the Bank of Japan’s Monetary Policy on Japanese Government Bonds’ Low Nominal Yields
• LEKHA S. CHAKRABORTY, Indian Fiscal Federalism at the Crossroads: Some Reflections
• L. RANDALL WRAY, Fiscal Reform to Benefit State and Local Governments: The Modern Money Theory Approach
• JÖRG BIBOW, Evolving International Monetary and Financial Architecture and the Development Challenge: A Liquidity Preference Theoretical Perspective
• LORENZO ESPOSITO and GIUSEPPE MASTROMATTEO, Defaultnomics: Making Sense of the Barro-Ricardo Equivalence in a Financialized World
• ZENGPING HE and GENLIANG JIA, Rethinking China’s Local Government Debt in the Frame of Modern Money Theory

 
Program: The Levy Institute Measure of Time and Income Poverty

• AJIT ZACHARIAS, THOMAS MASTERSON, FERNANDO RIOS-AVILA, MICHALIS NIKIFOROS, KIJONG KIM, and TAMAR KHITARISHVILI, Macroeconomic and Microeconomic Impacts of Improving Physical and Social Infrastructure: A Macro-Micro Policy Model for Ghana and Tanzania

 
Program: Gender Equality and the Economy

• SRINIVAS RAGHAVENDRA, KIJONG KIM, SINEAD ASHE, MRINAL CHADHA, FELIX ASANTE, PETRI T. PIIROINEN, and NATA DUVVURY, The Macroeconomic Loss Due to Violence against Women and Girls: The Case of Ghana

 
INSTITUTE NEWS

• 29th Annual Hyman P. Minsky Conference
• The Hyman P. Minsky Summer Seminar
• Intensive Course in Gender-Sensitive Macroeconomic Modeling for Policy Analysis
• New Research Fellow