This paper uses hysteresis to develop the concept of policy lock-in and lock-out. Policy changes may near-irrevocably change the economy’s structure, thereby changing the distribution of wealth, income and power. That may lock-in policy by changing the political equilibrium. Exit costs that block policy reversals also cause lock-in. Conventional thinking treats policy as a dial which is adjusted according to the economy’s state. Policy lock-in questions the dial formulation and raises new issues for optimal policy design. It also offers insights into economic and political crisis theory. Policy lock-in is illustrated with examples that include tax policy, government spending, the euro, globalization, and the neoliberal policy experiment. READ MORE
Archive for the ‘Economics’ Category
A Theory of Economic Policy Lock-in and Lock-out via Hysteresis: Rethinking Economists’ Approach to Economic Policy
Tuesday, July 4th, 2017Trump and the Neocons: Doing the Unilateralist Waltz
Monday, May 29th, 2017The neocon factor dramatically changes the interpretation of the Trump administration’s unilateralist international economic policy chatter.
Donald Trump’s first one hundred days have revealed his inclination for unilateralism in international relations. That inclination reflects his opportunistic and bullying disposition, and it also fits well with his anti-globalization pose.
Trump’s unilateralism has also spawned a dangerous waltz with Washington’s neocon establishment. The opportunistic Trump looks to gain establishment support, while the neocon establishment looks to the opportunist-in-chief to implement its own unilateralist view of the world.
The waltz is clearly visible in recent military actions, but it also extends to international economic policy which is an area of budding neocon concern. A further twist is that neocon unilateralism can be exercised against both rivals and allies. Power is at the core of the neocon project, and power can be used to block rivals or bend allies. READ MORE.
The Real Reasons for Trump’s Anti-Globalization Circus
Wednesday, May 24th, 2017Trumponomics: How Trump skillfully used anti-globalization as bait to cover up his extremely neoliberal switch.
A key element of Trump’s political success has been his masquerade of being pro-worker, which includes posturing as being anti-globalization.
However, his true economic interests are the exact opposite. That creates conflict between Trump’s political and economic interests.
For political leaders around the world, understanding the calculus of that conflict is critical for understanding and predicting Trump’s economic policy, especially his international economic policy. [READ MORE]
Monetary Policy and the Punch Bowl: The Case for Quantitative Policy and Wage Growth Targeting
Friday, May 5th, 2017Federal Reserve Chairman William McChesney Martin famously declared that the Federal Reserve “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” This paper uses the punch bowl metaphor to analyze how the Federal Reserve can improve monetary policy so as to deliver shared prosperity with greater financial stability. The problem is the party starts earlier on Wall Street than Main Street, so the Fed may remove the punchbowl before the party reaches Main Street. Ensuring Main Street attends the party requires a new recipe for the punch, new serving rules, and a new punch master. Additionally, there is a deeper problem that the current neoliberal growth model has the economy addicted to monetary punch. Resolving that requires a cure that goes beyond the punch bowl.
READ MORE: Simple version here.
READ MORE: Technical version here.
Trumponomics:NeoconNeoliberalism Camouflaged with Anti-Globalization Circus
Thursday, April 20th, 2017A key element of Trump’s political success has been his masquerade of being pro-worker, which includes posturing as anti-globalization. However, his true economic interest is the exact opposite. That creates conflict between Trump’s political and economic interests. Understanding the calculus of that conflict is critical for understanding and predicting Trump’s economic policy, especially his international economic policy.
As part of maintaining his pro-worker masquerade, Trump will engage in an anti-globalization circus, but the bark will be worse than the bite because neoliberal globalization has increased corporate profits, in line with his economic interests.
Trump also expresses neocon unilateralist tendencies that play well with much of the US electorate. His neocon unilateralism is not a one-off temporary political aberration. Instead, it reflects intrinsic and enduring features of the current US polity. That has profound implications for the international relations order, and is something many Western European governments may not yet have digested.
Fixing the Euro’s Original Sins: The Monetary – Fiscal Architecture and Monetary Policy Conduct
Wednesday, April 5th, 2017The euro zone (EZ) was created in January 1999. Its weak economic performance is significantly due to the euro’s neoliberal monetary architecture and the design of monetary policy. Those features undermine national political sovereignty and consign the EZ to severe economic under-performance, which in turn fosters political demands for exit from the euro. Escaping this dynamic requires restoring fiscal space to EZ countries, and also changing the design of EZ monetary policy. The paper shows how this can be done. It decomposes the challenge of reform into generic problems related to the neoliberal construction of monetary policy, and specific problems concerning the euro as a currency union. The currency union problems are further decomposed into “money – fiscal policy” architecture problems and specific monetary policy conduct problems. [READ MORE]
Are Negative Interest Rates Dangerous?
Wednesday, January 18th, 2017A debate on negative interest rates.
YES, Thomas Palley: “One can have too much of a good thing”.
NO, Adam Posen: “Negative interest rates have proved useful”.
The Federal Reserve Raising Interest Rates is Unwelcome and Unnecessary
Friday, December 16th, 2016Wednesday’s decision by the Federal Reserve to raise interest rates is unwelcome and unnecessary. As admitted in its statement, investment remains soft, growth is only moderate, and inflation expectations are little changed. Moreover, the economy confronts financial headwinds from the recent jump in long term interest rates and an even stronger dollar.
The Federal Reserve seems to be relying on old economic thinking that should have been discarded after the financial crisis. That poses a danger the economy will be slowed before full employment is reached, putting a stop to workers reclaiming their fair share.
If the Federal Reserve is worried about financial market exuberance, it should use its regulatory tools and not the blunderbuss of higher interest rates. Financial markets must not be allowed to stampede the Fed into raising rates.
James Tobin
Sunday, October 30th, 2016James Tobin was a leading – perhaps the leading – American neo-Keynesian macroeconomist in the era of Keynesian dominance after World War II that extended through to the early 1970s. Along with growth theorist Robert Solow and micro and trade theorist Paul Samuelson, the three substantially shaped what became known as the neoclassical synthesis which fused neoclassical microeconomic theory, Keynesian macro theory, and neoclassical growth theory. The macroeconomic component of the neoclassical synthesis is termed neo-Keynesianism. All three received the Royal Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel, with Tobin winning his prize in 1981. Tobin died in 2002, aged 84. (more…)
An Undergraduate’s Question about Economic Policy
Wednesday, October 5th, 2016I received an e-mail from an undergraduate economics student who was curious about economic policy in Washington, DC. His question says a lot about the current state of affairs. Here it is with my reply.
From: Xxxxxxx Xxxxxxx [mailto:xxxxxxxxxxxxxx@xxxx.com]
Sent: Saturday, October 1, 2016 10:56 AM
To: mail
Dear Dr. Palley,
I am a first-year undergraduate in economics and political theory, and a longtime admirer of your work.
What are your thoughts on how Keynesian/Post-Keynesian ideas are treated in current political discourse?
I was in Washington D.C. recently and I had conversation with a Brookings fellow who told me that he thought Joseph Stiglitz was an “extremist who isn’t taken seriously by anyone who knows their way around the Beltway.”
Does it worry you that ideas which used to be considered “mainstream” (like social democracy) are now increasingly considered “extreme”?
Deeply grateful for your time and attention
Sincerely
Xxxxxxx Xxxxxxx (more…)