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28461. The American Dual Economy: Race, Globalization, and the Politics of Exclusion

Author:
Peter Temin
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
I describe the American economy in the twenty-first century as a dual economy in the spirit of W. Arthur Lewis. Similar to the subsistence and capitalist economies characterized by Lewis, I distinguish a low-wage sector and a FTE (Finance, Technology, and Electronics) sector. The transition from the low-wage to the FTE sector is through education, which is becoming increasingly difficult for members of the low-wage sector because the FTE sector has largely abandoned the American tradition of quality public schools and universities. Policy debates about public education and other policies that serve the low-wage sector often characterize members of the low-wage sector as black even though the low-wage sector is largely white. This model of a modern dual economy explains difficulties in many current policy debates, including education, healthcare, criminal justice, infrastructure and household debts.
Topic:
Economics, Education, Globalization, Race, Capitalism, Exclusion, and Public Service
Political Geography:
North America and United States of America

28462. The Greek “Rescue”: Where Did the Money Go?

Author:
Pablo Gabriel Bortz
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyses the financial assistance provided to Greece in the first two rescue packages granted by the Troika (European Union, European Central Bank and IMF). It looks particularly carefully at claims by Sinn that a third of the public credit granted to Greece financed its current account deficit, while another third funded capital flight by Greek nationals, with only the remaining third used to pay creditors. The paper shows that Sinn inflates the assistance given to Greece by mixing several different concepts in the total. It also critically reviews the claim that the assistance was used to finance the current account deficit or capital flight by Greek citizens. Realistic accounting shows that 54% of the financial assistance provided to Greece was used to repay (foreign) debt, while another 21% was used to recapitalize Greek banks (some of which were owned by foreign institutions). Other claims about the rescue package are also analysed in relation to the treatment of Greek and foreign banking exposure to sovereign debt.
Topic:
Economics, Finance, Banking, and Development Assistance
Political Geography:
Europe and Greece

28463. Inequality, Debt Servicing, and the Sustainability of Steady State Growth

Author:
Mark Setterfield, Yun K. Kim, and Jeremy Rees
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We investigate the claim that the way in which debtor households service their debts matters for macroeconomic performance. A Kaleckian growth model is modified to incorporate working households who borrow to finance consumption that is determined, in part, by the desire to emulate the consumption patterns of more affluent households. The impact of this behavior on the sustainability of the growth process is then studied by means of a numerical analysis that captures various dimensions of income inequality. When compared to previous contributions to the literature, our results show that the way in which debtor households service their debt has both quantitative and qualitative effects on the economy’s macrodynamics.
Topic:
Debt, Inequality, Islamic State, Economic Theory, and Sustainability
Political Geography:
North America and United States of America

28464. Debt Servicing, Aggregate Consumption, and Growth

Author:
Mark Setterfield and Yun K. Kim
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
We develop a neo-Kaleckian growth model that emphasizes the importance of consumption behavior. In our model, workers first make consumption decisions based on their gross income, and then treat debt servicing commitments as a substitute for saving. Workers’ borrowing is induced by their desire to keep up with the consumption standard set by rentiers’ consumption, reflecting an aspect of the relative income hypothesis. As a result of this consumption and debt servicing behavior, consumer debt accumulation and income distribution have effects on aggregate demand, profitability, and economic growth that differ from those found in existing models. We also investigate the financial sustainability of the Golden Age and Neoliberal growth regimes within our framework. It is shown that distributional changes between the Golden Age and the Neoliberal regimes, together with corresponding changes in consumption emulation behavior via expenditure cascades, suffice to make the Neoliberal growth regime unsustainable.
Topic:
Debt, Economics, Economic Growth, Economic Theory, Profit, Sustainability, Models, and Consumption
Political Geography:
Global Focus

28465. Elasticity and Discipline in the Global Swap Network

Author:
Perry Mehrling
Publication Date:
11-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper sketches the outlines of the new international monetary system that has emerged in the aftermath of the global financial crisis. At the center of the system, a network of central bank swaps between the six major central banks serves as an elastic backstop for private foreign exchange operations. Farther out on the periphery, a further network of central bank swaps operates to economize on scarce reserves of the major currencies. Meanwhile, in the private foreign exchange market, basis swaps are emerging as the central location where liquidity is explicitly priced, inside the bounds set by central bank swaps.
Topic:
Markets, Finance, Global Financial Crisis, Central Bank, Banking, and Liquidity
Political Geography:
Global Focus

28466. Did Quantitative Easing Increase Income Inequality?

Author:
Juan Montecino and Gerald Epstein
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The impact of the post-meltdown Federal Reserve policy of ultra-low interest rates and Quantitative Easing (QE) on income and wealth inequality has become an important policy and political issue. Critics have argued that by raising asset prices, near-zero interest rates and QE have significantly contributed to increases in inequality, while practitioners of central banking, counter that the distributional impact have probably been either neutral or even egalitarian in nature due to its employment impacts. Yet there has been little academic research that addresses empirically this important question. We use data from the Federal Reserve’s Tri-Annual Survey of Consumer Finances (SCF) and look at the evolution of income by quintile between the “Pre- QE period” and the “QE period” analyzing three key impact channels of QE policy on income distribution: 1) the employment channel 2) the asset appreciation and return channel, and 3) the mortgage refinancing channel. Using recentered influence function (RIF) regressions pioneered by Firpo et. al (2007) in conjunction with the well-known Oaxaca-Blinder decomposition technique, we find that while employment changes and mortgage refinancing were equalizing, these impacts were nonetheless swamped by the large dis-equalizing effects of equity price appreciations. Reductions in returns to short term assets added further to dis-equalizing processes between the periods. Bond price appreciations, surprisingly, had little distributional impact. We cannot know precisely how much of these changes are due to QE as opposed to other influences, but to assess potential causal effects we utilize a counter-factual exercise to assess the quantitative range of impacts of QE on the main channels. We conclude that, most likely, QE was modestly dis-equalizing, despite having some positive impacts on employment and mortgage refinancing. The modestly dis-equalizing impacts were due to both policy choices and deep seated structural problems, such as the long-term deterioration in labor market opportunities for many workers due to globalization and legal and political reductions in labor bargaining power that have contributed to long term wage stagnation. Finally, there is no support in our analysis, for the proposition that raising interest rates would be an efficient mechanism for improving income distribution, because of the likely costs in terms of employment and debt refinancing opportunities.
Topic:
Federal Reserve, Inequality, Income Inequality, Fiscal Policy, and Wage Growth
Political Geography:
North America and United States of America

28467. Innovative Enterprise or Sweatshop Economics? In Search of Foundations of Economic Analysis

Author:
William Lazonick
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
By integrating the history of industrial development in Britain and the United States with the ideas of leading economic thinkers, this essay demonstrates the absurdity of perfect competition as the ideal of economic efficiency. In Capitalism, Socialism, and Democracy, Joseph Schumpeter asserts: “perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency.” For neoclassical economists, the large corporation is a “market imperfection” that, compared with “perfect competition,” should result in higher product prices and lower industry output. Yet business history reveals the capability of the most productive enterprises to generate massive quantities of output at low costs to attain large market shares with buyers benefiting from low prices even as employees receive higher pay and shareholders ample dividends. By integrating the history of industrial development in Britain and the United States with the ideas of leading economic thinkers, this essay demonstrates the absurdity of perfect competition as the ideal of economic efficiency. Indeed, I show that, in their desire to make the market rather than the firm the main arbiter of resource allocation, neoclassical economists have enshrined the sweatshop as the foundation of their analysis, with profoundly negative consequences for understanding how a modern economy actually operates and performs. In doing so, neoclassical economists ignore not only the economic history of capitalism but also the intellectual history of their own discipline. I conduct a journey through two hundred years of economic thought – from Adam Smith’s The Wealth of Nations (1776) to Alfred Chandler’s The Visible Hand (1977) – to derive analytical foundations for a theory of innovative enterprise that can explain and explore firm- level sources of productivity growth in the economy. What then do more sophisticated theories of the firm rooted in the neoclassical tradition have to offer? In a section of this essay that I call (borrowing a phrase from Adolf Berle and Gardiner Means) “Economic Theory for ‘an Era of Corporate Plundering’,” I outline the shortcomings of Williamsonian transaction-cost theory and Jensenian agency theory for analyzing the role of the business corporation in the operation and performance of the economy. From the perspective of the theory of innovative enterprise, I demonstrate how the methodology of constrained optimization trivializes the business enterprise while the ideology that companies should be run to maximize shareholder value legitimizes financial predators, many senior corporate executives among them, in the looting of the industrial corporation. The “era of corporate plundering” since the mid-1980s has contributed to extreme concentration of income among the richest households and the erosion of middle- class employment opportunities. Finally, I call for a transformation of economic thinking so that the innovative enterprise is at the center of economic analysis. The theory of innovative enterprise exposes as costly intellectual failures “perfect competition” as the ideal of economic efficiency, “constrained optimization” as the prime tool of economic analysis, and “maximizing shareholder value” as the ideology of superior corporate governance. The theory of innovative enterprise provides, moreover, a clear and compelling rationale for sharing the gains of business enterprise among stakeholders in the broader community, in conjunction with government policies that seek to support sustainable prosperity, characterized by stable and equitable economic growth.
Topic:
Economics, Business, Economic Growth, Innovation, and Industry
Political Geography:
North America and United States of America

28468. The Cyclically Adjusted Budget: History and Exegesis of a Fateful Estimate

Author:
Orsola Costantini
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper traces the evolution of the concept of the cyclically adjusted budget from the 1930s to the present. The idea of balancing the budget over the cycle was first conceived in Sweden in the 1930s by the economists of the Stockholm School and was soon reinterpreted and incorporated into the fiscal program of the American political coalition supporting the New Deal, especially by the Committee for Economic Development during and after World War II. In the 1960s, Keynesian economists associated with the Kennedy and Johnson administrations reformulated the notion. Despite their claims at the time, their version differed only in degree from the earlier CED approach, the transformation being largely conditioned by changing political circumstances. In the 1980s, however, the concept changed substantially. Methods for calculating it transformed dramatically, as the notion became a device to limit and direct governments’ fiscal policies in a wide sense, that is, including institutional (or “structural”) reforms. The final section of the paper considers the shifting uses of the notion in the European Growth and Stability Pact.
Topic:
Economics, Budget, Economic Growth, and Fiscal Policy
Political Geography:
Europe, North America, and United States of America

28469. When Credit Bites Back: Leverage, Business Cycles and Crises

Author:
Oscar Jorda, Moritz Schularick, and Alan Taylor
Publication Date:
10-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
Topic:
Economics, Business, Fiscal Policy, Private Sector, and Credit
Political Geography:
North America and United States of America

28470. Religious Riots and Electoral Politics in India

Author:
Sryia Iyer and Anand Shrivastava
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The effect of ethnic violence on electoral results provides useful insights into voter behaviour and the incentives for political parties in democratic societies. The effect of ethnic violence on electoral results provides useful insights into voter behaviour and the incentives for political parties in democratic societies. Religious riots have claimed more than 14,000 lives in India since 1950. We study the effect of Hindu-Muslim riots on election results in India. We combine data on riots with electoral data on state legislature elections and control variables on demographics and public goods provision to construct a unique panel data set for 16 large states in India over a 25 year period commencing in 1977. We use a new instrument that draws upon the random variation in the day of the week that important Hindu festivals fall on in each year to isolate the causal effect of riots on electoral results. We find that riots occurring in the year preceding an election increase the vote share of the Bharatiya Janata Party in the election. We find suggestive evidence that communal polarisation is the likely mechanism driving our results.
Topic:
Politics, Religion, Minorities, Responsibility to Protect (R2P), and Exclusion
Political Geography:
India and Asia