Thomas Palley

Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity.

Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation”. (more…)

The Economic Crisis: Notes from the Underground
by Thomas I. Palley, Createspace, 2012

This book provides a collection of short essays detailing the causes of the economic crisis and the failure of the economics profession to foresee and explain it. An old adage is “The winners get to write history” and that is proving true in the current moment. Open any major newspaper and the op-ed page contains articles by the same economists and policymakers as before the financial crash of 2008. One myth the winners are looking to promulgate is the crisis was not predicted and not predictable. This claim has a purpose as it excuses the economics profession from its catastrophic intellectual failure. The book challenges this “winners’ version of history” by showing the crisis was predictable and foreseen. The articles provide easy access to both theoretical and policy controversies that continue to be important, and they also show little has been done to fix the root problems. The academy is a club and it resists change because club members benefit from their intellectual monopoly. This monopoly means politicians are all fed roughly the same policy diet. Politicians are also subject to the pull of money and money likes the existing mainstream economic paradigm. Together, this constitutes a powerful sociological system that is hard to crack. Part of cracking it is exposing the failure of economists by showing the crisis was foretold and predicted.

Buy this book. List price $9.99

Several years ago (June 2006) I wrote an article advancing a new theory of why the dollar is the world’s dominant currency and why it is likely to remain so. The article was published in the midst of the last boom and sank like a stone. But now debate about the cause of the dollar’s hegemony has been revived in an interesting paper by Fields and Vernengo titled “Hegemonic currencies during the crisis: The dollar versus the euro in a Cartelist perspective” (also here). Their paper provides an opportunity to revive discussion, so I am posting the article again. Here it is (subject to a couple of word edits):

The U.S. dollar is much in the news these days and there is a sense that the world economy may have become excessively reliant on the dollar. This reliance smacks of dysfunctional co-dependence whereby the U.S. and the rest of the world both rely on the dollar’s strength, but neither is well served by it.

The U.S. dollar is the world’s premiere currency, with approximately two-thirds of world official foreign exchange holdings being dollars. Moreover, many countries appear willing to run sustained trade surpluses with the U.S., supplying everything from t-shirts to Porsches in return for additional dollar holdings. This willingness to exchange valuable resources for paper IOUs represents a form of dollar tribute. (more…)

The Federal Reserve has now openly adopted a two percent inflation target, with both Chairman Bernanke and the Federal Open Market Committee publicly committing to holding inflation at that level. Though not a problem today, this two percent target represents a policy trap that will undercut the possibility of future wage increases despite on-going productivity growth. That promises to aggravate existing problems of income inequality and demand shortage.

The Fed’s new policy is tactically and analytically flawed. Tactically, at this time of global economic weakness, the Federal Reserve should be advocating policies that promote rising wages rather than focusing on inflation targets. Analytically, its inflation target is too low and will inflict significant future economic harm. (more…)

There is much debate over whether the Federal Reserve should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others. (more…)

There is widespread recognition that the financial crisis which triggered the Great Recession was significantly due to financial excess, particularly regarding real estate lending. Now, policymakers are looking to reform the financial system in hope of avoiding future crises. But like the drunk who looks for his lost keys under the lamp post because that is where the light is, policymakers remain fixated on capital standards because that is what is already in place. (more…)