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.
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. Read the rest of this entry »
This book explores the process of financialization whereby economies are increasingly dominated by finance capital. This process is characterized by rising income inequality, wage stagnation, increased indebtedness, a rising financial sector share of profits, and tendencies to generate asset price bubbles. The financial crisis of 2008 and the subsequent recession and stagnation represent the latest phase. The book provides a comprehensive treatment of these developments, beginning with a presentation of the empirical evidence. That is followed by economic theory chapters dealing with the macroeconomics of financialization; business cycle effects; microeconomic developments; tendencies toward Minsky-style economic instability; and economic growth effects. The final section of the book focuses on the political economy of financialization and policies to stabilize financial markets.
EUROPE, AFRICA, LATIN AMERICA:
A 50% discount is available at www.palgrave.com with discount code WPALLEY2013a.
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. Read the rest of this entry »
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. Read the rest of this entry »
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”. Read the rest of this entry »
This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT’s construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT’s polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT’s oversimplifications of macroeconomic theory and policy (Read full paper here).
The Economic Crisis: Notes from the Underground
by Thomas I. Palley, Createspace, 2012
This book provides a collection of short essays detailing the causes of the economic crisis and the failure of the economics profession to foresee and explain it. An old adage is “The winners get to write history” and that is proving true in the current moment. Open any major newspaper and the op-ed page contains articles by the same economists and policymakers as before the financial crash of 2008. One myth the winners are looking to promulgate is the crisis was not predicted and not predictable. This claim has a purpose as it excuses the economics profession from its catastrophic intellectual failure. The book challenges this “winners’ version of history” by showing the crisis was predictable and foreseen. The articles provide easy access to both theoretical and policy controversies that continue to be important, and they also show little has been done to fix the root problems. The academy is a club and it resists change because club members benefit from their intellectual monopoly. This monopoly means politicians are all fed roughly the same policy diet. Politicians are also subject to the pull of money and money likes the existing mainstream economic paradigm. Together, this constitutes a powerful sociological system that is hard to crack. Part of cracking it is exposing the failure of economists by showing the crisis was foretold and predicted.
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. Read the rest of this entry »
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. Read the rest of this entry »