Thomas Palley

Last Monday, Federal Reserve Vice-Chair Janet Yellen gave the keynote speech at an AFL-CIO economic policy conference on restoring shared prosperity.

Dr. Yellen began by noting that the Federal Reserve “is the only agency assigned the job of pursuing maximum employment.” She then went on to acknowledge “the gulf between maximum employment and the very difficult conditions workers face today.” That gulf is the reason behind the Federal Reserve’s on-going actions to strengthen the recovery and why there is continued need for “forceful action to increase the pace of economic growth and job creation”. (more…)

Several years ago (June 2006) I wrote an article advancing a new theory of why the dollar is the world’s dominant currency and why it is likely to remain so. The article was published in the midst of the last boom and sank like a stone. But now debate about the cause of the dollar’s hegemony has been revived in an interesting paper by Fields and Vernengo titled “Hegemonic currencies during the crisis: The dollar versus the euro in a Cartelist perspective” (also here). Their paper provides an opportunity to revive discussion, so I am posting the article again. Here it is (subject to a couple of word edits):

The U.S. dollar is much in the news these days and there is a sense that the world economy may have become excessively reliant on the dollar. This reliance smacks of dysfunctional co-dependence whereby the U.S. and the rest of the world both rely on the dollar’s strength, but neither is well served by it.

The U.S. dollar is the world’s premiere currency, with approximately two-thirds of world official foreign exchange holdings being dollars. Moreover, many countries appear willing to run sustained trade surpluses with the U.S., supplying everything from t-shirts to Porsches in return for additional dollar holdings. This willingness to exchange valuable resources for paper IOUs represents a form of dollar tribute. (more…)

The Federal Reserve has now openly adopted a two percent inflation target, with both Chairman Bernanke and the Federal Open Market Committee publicly committing to holding inflation at that level. Though not a problem today, this two percent target represents a policy trap that will undercut the possibility of future wage increases despite on-going productivity growth. That promises to aggravate existing problems of income inequality and demand shortage.

The Fed’s new policy is tactically and analytically flawed. Tactically, at this time of global economic weakness, the Federal Reserve should be advocating policies that promote rising wages rather than focusing on inflation targets. Analytically, its inflation target is too low and will inflict significant future economic harm. (more…)

ELR Comes to the UK

The following story, which appeared in The Guardian on Sunday 29 July, was forwarded to me by Malcolm Sawyer:

“Million jobless may face six months’ unpaid work or have unemployment benefits stopped”

In a sense, the UK, under Conservative Prime Minister Cameron, is looking to adopt a quasi-employer of last resort (ELR) scheme in which the ELR wage is set equal to existing unemployment benefits (Note: the Conservative scheme involves compulsory labor for benefits). (more…)

Randy Wray and Mat Forstater, two leading contributors to the MMT School, have replied to my recent blog on the MMT controversy. Their replies warrant a brief response.

I agree that it does not matter very much who first identified the euro’s potential for failure. Along with other Keynesians, MMT-ers were early to identify the euro’s structural flaw – namely, its conversion of the financial status of national government into provincial government status via removal of government’s power to access money creation through a government controlled central bank. In many ways Warren Mosler (1995) is the godfather of interest in this issue. (more…)

Led by Randy Wray (see this and this), supporters of so-called Modern Monetary Theory (MMT) are declaring that they were the first to identify the problems of the euro and that MMT has now proved itself to be the correct approach to monetary theory.

As regards these two claims, permit me to quote the following:

“5.3 Will capital still be able to veto policy?
…First, financial capital may still be able to discipline governments through the bond market. Thus, if financial capital dislikes the stance of national fiscal policy, there could be a sell-off of government bonds and a shift into bonds of other countries. This would drive up the cost of government borrowing, thereby putting a break on fiscal policy (Palley, 1997, p.155-156).” (more…)

Conducted by Philip Pilkington and posted on Naked Capitalism on April 18, 2012.

His latest book, From Financial Crisis to Stagnation, was recently published by Cambridge University Press, 2012.

A 20% discount is available when you purchase using this discount code.

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Philip Pilkington: At the beginning of your book From Financial Crisis to Stagnation you refer to the 2008 crisis as a ‘crisis of bad ideas’. Could you please briefly explain why you refer to the crisis in this way?

Thomas Palley: A central and critical element of my book is its emphasis on the role of economic ideas in generating the crisis. This feature fundamentally distinguishes it from mainstream explanations that tend to represent the crisis in terms of surprise events and economic shocks (e.g. black swans).

My book starts with the fundamental idea that economies are made, not found. The way economies are organized and function is significantly the product of social choices, not the product of nature. Over the past thirty years we (society) have embraced a set of economic ideas that shaped economic arrangements – including the pattern of income distribution, the power of corporations and finance relative to labor, and the way in which the economy generates demand.
(more…)

In his novel, The Jungle, the American muckraking author Upton Sinclair wrote about the horrendous work and sanitary conditions in the Chicago meat packing industry of the early 20th century. It is sometimes said Sinclair aimed for the heart but hit the stomach. That is because he aimed for progressive social and economic change but instead prompted the founding of the Food and Drug Administration. (more…)

The eurozone’s public finance crisis continues to fester, reflecting both political and intellectual failure. The intellectual failure is the crisis has been interpreted exclusively as a debt crisis when it is also a central bank design crisis resulting from the euro’s flawed architecture. The flaw is the inability of eurozone governments to harness the central bank’s power to assist government finances. This systemic weakness explains why U.S. and U.K. government bonds are weathering the storm, whereas Spain confronts default rumors despite having roughly similar debt and deficit profiles. (more…)

Published in the FT Economists’ Forum, July 18, 2011

The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages. (more…)