Thomas Palley

The Democratic Party establishment has recently found itself discomforted by Senator Bernie Sanders’ campaign to return the party to its modern roots of New Deal social democracy. The establishment’s response has included a complex coupling of elite media and elite economics opinion aimed at promoting an image of Sanders as an unelectable extremist with unrealistic economic policies.

The response provides a case study showing how the Party suffocates progressive change. Every progressive knows about the opposition and tactics of the Republican Party. Less understood are the opposition and tactics of the Democratic Party establishment. Speaking metaphorically, that establishment is a far lesser evil, but it may also be a far greater obstacle to progressive change. (more…)

This paper explores zero lower bound (ZLB) economics. The ZLB is widely invoked to explain stagnation and it fits with the long tradition that argues Keynesian economics is a special case based on nominal rigidities. The ZLB represents the newest rigidity. Contrary to ZLB economics, not only does a laissez-faire monetary economy lack a mechanism for delivering the natural rate of interest, it may also lack such an interest rate. Moreover, the ZLB can be a stabilizing rigidity that prevents negative nominal interest rates exacerbating excess supply conditions. [READ MORE]

August’s Employment Report showed the unemployment rate fell to 5.1 percent and creation of 173,000 new jobs. Predictably, the decline in the unemployment rate has triggered calls for higher interest rates from Wall Street Hawks on grounds that higher core inflation is just around the corner. That is the same call we heard when the unemployment rate was much higher, and it is the same call we heard in the past two business cycles.

Federal Reserve policymakers should ignore the Hawks and stop being afraid of tight labor markets. In a market economy, that is the way workers get a raise. There is no reason for the Fed to rock the boat and risk confiscating the raise working families have waited for so long. That is the message this Labor Day weekend. (more…)

This paper examines several mainstream explanations of the financial crisis and stagnation and the role they attribute to income inequality. Those explanations are contrasted with a structural Keynesian explanation. The role of income inequality differs substantially, giving rise to different policy recommendations. That highlights the critical importance of economic theory. Theory shapes the way we understand the world, thereby shaping how we respond to it. The theoretical narrative we adopt therefore implicitly shapes policy. That observation applies forcefully to the issue of income inequality, the financial crisis and stagnation, making it critical we get the story right. [READ MORE]

The Federal Reserve is a hugely powerful institution whose policies ramify with enormous effect throughout the economy. In the wake of the Great Recession, monetary policy focused on quantitative easing. Now, there is talk of normalizing monetary policy and interest rates. That conversation is important, but it is also too narrow and keeps policy locked into a failed status quo. There is need for a larger conversation regarding the entire framework for monetary policy and how central banks can contribute to shared prosperity. It is doubtful the US can achieve shared prosperity without the policy cooperation of the Fed. That makes understanding the Federal Reserve, the policy issues and institutional challenges, of critical importance. [READ MORE]