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]
Archive for the ‘Political Economy’ Category
Zero Lower Bound (ZLB) Economics: The Fallacy of New Keynesian Explanations of Stagnation
Thursday, March 3rd, 2016The Relevance of Keynes’s General Theory after 80 years
Tuesday, February 9th, 2016By Thomas Palley, Louis-Philippe Rochon and Matías Vernengo
This year marks two important anniversaries in macroeconomics: the 80th anniversary of the publication of Keynes’s The General Theory of Employment, Interest and Money, and the 70th anniversary of Keynes’s premature death, at the age of 63. To mark these anniversaries, the first issue of the fourth year of the Review of Keynesian Economics is dedicated to Keynes.
The issue contains a symposium of papers titled “The Relevance of Keynes’s General Theory after 80 years” and some previously unpublished archive material on Keynes. The unpublished material is notes from a 1936 University of Chicago course taught by Frank Knight in which The General Theory was discussed, and a memorandum written by Lauchlin Currie, who is considered the first and most combative Keynesian in the Roosevelt administration during the early phases of the New Deal.
The 80th anniversary of The General Theory takes place at a time when the global economy is struggling with economic stagnation that set in after the financial crisis of 2008. In some regards, these conditions have parallels with the 1930s when the Great Depression followed the financial crisis of 1929. However, this time economic depression was avoided by timely economic policy interventions that either bore the direct hallmarks of conventional Keynesian thinking or were inspired by Keynesian thinking about the economy’s limited self-stabilizing capacity. [READ MORE]
Website 10th Anniversary: 10 Things I Got Right
Sunday, September 27th, 2015Ten years ago (September 2005) I launched my website. To mark this anniversary, here are ten postings that I think got it right. Many of them are included in my book, The Economic Crisis: Notes From The Underground (2012).
1. Keynesianism: what it is and why it still matters (September 18, 2005). My first post. What was intellectually unfashionable back then is now in.
2. The Questionable Legacy of Alan Greenspan (October 16, 2005). Raining on the Maestro’s parade was not popular.
3. Winner’s curse: The Torment of Chairman-designate Bernanke (November 4, 2005). I suspect Mrs. Bernanke wishes Mr. Bernanke read this before accepting the job.
(more…)
Stop Fearing Full Employment
Friday, September 4th, 2015August’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…)
American capitalism, globalization & possibilities for reform
Wednesday, August 12th, 2015An interview with Andrew Mazzone, President of the Board of Trustees, Henry George School of Social Science [VIEW HERE].
The US Economy: Explaining Stagnation and Why It Will Persist
Friday, August 7th, 2015This paper examines the major competing interpretations of the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize and save the economy, but failed to change the underlying neoliberal economic policy model. That failure explains the emergence of stagnation, which is likely to endure. Current economic conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion. However, this time it is unlikely to be followed by financial crisis because of the balance sheet cleaning that took place during the last crisis. [READ MORE]
Inequality, the Financial Crisis and Stagnation: Competing Stories and Why They Matter
Monday, June 8th, 2015This 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 and Shared Prosperity: A Guide to the Policy Issues and Institutional Challenges
Tuesday, January 27th, 2015The 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]
Economists Without Borders (Economistes Sans Frontières)
Tuesday, November 25th, 2014Inspired by the work of Doctors Without Borders (Médecins Sans Frontières), I have recently started a project called Economists Without Borders (Economistes Sans Frontières). Its purpose is to inoculate the global economy against the virus of neoliberalism. Last week, I had two difficult “missions” to Vienna and Warsaw.
In Vienna, I confronted an outbreak of the neoliberal globalization – free trade strain of the virus. Without doubt, this is the most virulent and dangerous of all strains. People who get infected become blind to all evidence, deaf to all argument and prone to intellectual condescension. Massachusetts Avenue in Washington DC is a hot zone of infection. The bad news is that if you are over forty and infected it is doubtful you can be cured. However, younger patients have a chance of recovery. Here is the anti-viral I prescribed titled “The Theory of Global Imbalances: Mainstream Economics vs. Structural Keynesianism”.
In Warsaw, I confronted an outbreak of Milton Friedmanism which is one of the oldest strains of neoliberal virus. Friedmanism is a gateway virus that weakens defenses against other neoliberal strains and younger minds are particularly susceptible to it. The good news is that if diagnosed early there is a good chance of recovery. However, if treatment is delayed, intellectual ossification and closed-mindedness sets in. This ossification is almost always associated with inflation obsessive compulsive disorder and austerity fever. Here is the treatment I recommend titled “Milton Friedman’s Economics and Political Economy: An Old Keynesian Critique”.
Rethinking wage vs. profit-led growth theory with implications for policy analysis
Tuesday, November 11th, 2014The distinction between wage-led and profit-led growth is a major feature of Post-Keynesian economics and it has triggered an extensive econometric literature aimed at identifying whether economies are wage or profit-led. That literature treats the economy’s character as exogenously given. This paper questions that assumption and shows an economy’s character is endogenous and subject to policy influence. This generates a Post-Keynesian analogue of the Lucas critique whereby the econometrically identified character of the economy depends on policy rather than being a natural characteristic. Over the past twenty years, policy has made economies appear more profit-led by lowering workers’ share of the wage bill and tax rates on shareholder income. Increasing workers’ wage bill share increases growth and capacity utilization regardless of whether the economy is wage-led, profit-led or conflictive. That speaks to making it the primary focus of policy efforts. [READ MORE].