Thomas Palley

This paper critiques the Federal Reserve’s quantitative easing (QE) exit strategy which aims to deactivate excess liquidity via higher interest rates on reserves. That is equivalent to giving banks a tax cut at the public’s expense. It also risks domestic and international financial market turmoil. The paper proposes an alternative exit strategy based on ABRR which avoids the adverse fiscal and financial market impacts of higher interest rates. ABRR also increase the number of monetary policy instruments which can permanently improve policy. This is especially beneficial for euro zone countries. Furthermore, ABRR yield fiscal benefits via increased seignorage and can shrink a financial sector that is too large.

[READ MORE HERE]
Keywords: Quantitative easing, asset based reserve requirements, exit strategy.

This paper presents a Keynesian critique of Steve Keen’s treatment of the endogenous money – credit – aggregate demand (AD) nexus. It argues his analytic intuition is correct but is developed in the wrong direction. Keen’s fundamental relation describing determination of AD in an endogenous credit money economy suffers from two flaws. First, it neglects the core Keynesian problematic of leakages from and injections into the circular flow of income. Second, it falls into the theoretical morass regarding the black box of velocity of money via its adoption of a form of Fisher equation to determine AD. The paper contrasts Keen’s treatment with a Keynesian structural framework. [READ MORE HERE]

Larry Summers (HERE) and Paul Krugman (HERE) have recently identified the phenomenon of stagnation. Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.

Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles. (more…)

Eric Tymoigne and Randall Wray’s (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT’s policy claims are based on unsubstantiated economics (The full paper is HERE).

This paper presents a three class growth model with labor market conflict. The classes are workers, a middle management middle class, and a “top” management capitalist class. The model introduces personal income distribution that supplements conventional concerns with functional income distribution. Endogenously generated changes in personal income distribution can generate endogenous shifts from profit-led to wage-led regimes and vice-versa. A three class economy generates richer patterns of class conflict because the middle class has shared interests and conflicts with both capitalists and workers. Changes that benefit the middle class do not necessarily increase growth or employment or benefit workers (The full paper is available HERE).

Edited by Thomas I. Palley and Gustav A. Horn. The economic recovery in the US since the Great Recession has remained sub-par and beset by persistent fear it might weaken again. Even if that is avoided, the most likely outcome is continued weak growth, accompanied by high unemployment and historically high levels of income inequality. In Europe, the recovery from the Great Recession has been even worse, with the euro zone beset by an unresolved euro crisis that has already contributed to a double-dip recession in the region. This book offers an alternative agenda for shared prosperity to that on offer from mainstream economists. The thinking is rooted in the Keynesian analytic tradition, which has been substantially vindicated by events. However, pure Keynesian macroeconomic analysis is supplemented by a focus on the institutions and policy interventions needed for an economy to generate productive full employment with contained income inequality. Such a perspective can be termed “structural Keynesianism”. These are critical times and the public deserves an open debate that does not arbitrarily or ideologically lock out alternative perspectives and policy ideas. The book contains a collection of essays that offer a credible policy program for shared prosperity, rooted in a clear narrative that cuts through the economic confusions that currently bedevil debate.

Contributions by Richard L Trumka, Thomas I Palley, Gustav A. Horn, Andreas Botsch, Josh Bivens, Achim Truger, Jared Bernstein, Robert Pollin, Dean Baker, Gerald Epstein, Damon Silvers, Jennifer Taub, Silke Tober, Jan Priewe, John Schmidt, Heidi Shierholz, William E Spriggs, Eckhard Hein, Heiner Flassbeck, Gerhard Bosch, Michael Dauderstädt

The book is available for $7.52 at AMAZON.COM

A free PDF is available HERE.

The last thirty years have witnessed the creation of an integrated global economy. However, what began as a project for globalization has gradually been transformed into a project of “China-centric globalization.” This phenomenon has grave economic and geo-political implications for the US. China-centric globalization has been allowed to develop with great rapidity and little public discussion of its implications and consequences. There is a conceit that there are no security dangers inherent in it because economic links will turn China into a democracy and democracies do not go to war with each other. History shows that conceit to be very dangerous.

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Some months ago it became known that Federal Reserve Chairman Ben Bernanke was likely to step down as the end of his second term of appointment drew near. Initially, Federal Reserve Vice-Chair Janet Yellen appeared the favorite to succeed Bernanke, but now it seems as though Larry Summers has become the Obama administration’s preferred candidate. Summers’ candidacy raises grave political and policy concerns. (more…)

The global economy needs exchange rate coordination now. Absent that, the world is likely to be increasingly afflicted by exchange rate fluctuations and policy acrimony. These are bound to undermine the economic recovery and increase the likelihood of stagnation.

In 2010, Brazilian Finance Minister Guido Mantega warned of the possibility of “currency wars”, as countries sought to devalue their exchange rates to gain competitive advantage. (more…)

Financial sector reform has been at the center of the post-crisis policy debate but, so far, discussion and legislative action has been almost exclusively about issues of “stability” and preventing a repeat of the crisis.

However, just as important, if not more so, is the effect of financial markets on “equity” and economic “efficiency”. Yet here, the reform debate has been almost totally silent. By restricting the debate to stability, the economic winners have been able to shut down the case for deeper systemic reform. (more…)