Weaker than Expected Job Growth Should be a Yellow Flag to the Federal Reserve

July 2nd, 2015

June’s Employment Report showed the economy continued to edge forward, driven by momentum. But the numbers were softer than expected. That should provide a clear yellow flag to those Federal Reserve policymakers who have expressed impatience to raise interest rates.

Though the headline unemployment rate fell to 5.3 percent, that decline masks underlying weakening of conditions. The fall in the unemployment rate is fully explained by a fall in labor force participation, and job creation was on the weaker side.

The economy created 223,000 jobs, which is below the twelve month average of 250,000. Furthermore, April and May job creation numbers were revised down by 60,000.

This relative weakness is also reflected in average hourly wages which were unchanged. A strong labor market should produce sustained wage gains significantly above inflation, but we have not yet seen that.

There are solid reasons for these mixed conditions. The strong dollar is encouraging imports and discouraging manufacturing job creation. Budget austerity continues to strangle public sector investment and public sector job creation. The strong dollar and budget austerity are policy failures we can, should and must fix.

Inequality, the Financial Crisis and Stagnation: Competing Stories and Why They Matter

June 8th, 2015

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]

Fraternity of Failure – The Alternative Version

May 20th, 2015

Hillary Clinton does not want to talk about past economic controversies. And it is easy to understand why. There is much that is troubling. But let’s not go along with her wishes. You can learn a lot by studying recent history and even more by watching how politicians react to that history. Read the rest of this entry »

More Jobs, Flat Wages: Trade and the Trade Deficit Continue to Hurt Us

May 12th, 2015

April’s Employment Report showed a gain of 223,000 jobs and a further one-tenth percent decline in the unemployment rate to 5.4 percent. The good news is the report shows the economy continues to nudge forward and create jobs for newcomers into the labor force. The bad news is the economy is not growing fast enough to raise wages. Read the rest of this entry »

More Jobs, Still Weak Wage Growth: The Federal Reserve Must Wait

March 11th, 2015

February’s employment report showed a gain of 295,00 jobs and a decline in the unemployment rate to 5.5 percent. The report is another in a string of strong employment reports, but it also contains depressingly familiar news about weak wage growth and millions of workers still short of work.
Read the rest of this entry »

The Federal Reserve and Shared Prosperity: A Guide to the Policy Issues and Institutional Challenges

January 27th, 2015

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]

Economists Without Borders (Economistes Sans Frontières)

November 25th, 2014

Inspired 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

November 11th, 2014

The 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].

The theory of global imbalances: mainstream economics vs. structural Keynesianism

August 7th, 2014

Prior to the 2008 financial crisis there was much debate about global trade imbalances. Prima facie, the imbalances seem a significant problem. However, acknowledging that would question mainstream economics’ celebratory stance toward globalization. That tension prompted an array of explanations which explained the imbalances while retaining the claim that globalization is economically beneficial. This paper surveys those new theories. It contrasts them with the structural Keynesian explanation that views the imbalances as an inevitable consequence of neoliberal globalization. The paper also describes how globalization created a political economy that supported the system despite its proclivity to generate trade imbalances. [READ MORE]

New Keynesianism as a Club

July 27th, 2014

Club, noun. 1. An association or organization dedicated to a particular interest or activity. 2. A heavy stick with a thick end, especially one used as a weapon.

Paul Krugman’s economic analysis is always stimulating and insightful, but there is one issue on which I think he persistently falls short. That issue is his account of New Keynesianism’s theoretical originality and intellectual impact. This is illustrated in his recent reply to a note of mine on the theory of the Phillips curve in which he writes: “I do believe that Palley is on the right track here, because it’s pretty much the same track a number of us have been following for the past few years.” Read the rest of this entry »