A low-inflation world and what to do about it

The Economist magazine recently published a special report on the world economy, looking at the ‘problem’ of low inflation. More than ten years have passed since the beginning of the Global Financial Crisis and Great Recession, and inflation is now strikingly low in many rich economies. This is despite unemployment falling to historically low levels in countries such as the US, UK and Germany, although it remains much higher in a number of European countries that have yet to recover from the worst of the eurozone crisis.

Normally economists expect wages to rise faster as unemployment falls below some critical level and the labour market tightens, and at some point this has tended, at least in the past, to lead to higher inflation.

In the US and UK, wage growth has been picking up, but inflation has remained low, and has even undershot central banks’ inflation targets. Wage increases are relatively good news for workers after a decade of sluggish or stagnant earnings growth, but remain weak compared to those seen prior to the recession. Continue reading

Fighting Inequality Can Strengthen the US Economy

A one-pager free download from the Levy Institute on how higher taxes on the wealthiest Americans coupled with a comparable increase in public spending can not only redress political but also economic inequality while boosting consumption and aggregate demand in a sustainable fashion and reducing the dependence of these factors on rising debt levels. A brief summary below:

“Senators Elizabeth Warren and Bernie Sanders, along with Representative Alexandria Ocasio-Cortez, recently proposed to increase the rate of taxation on very high incomes and net worth. One of the primary justifications for such policies is that reducing inequality would help safeguard political equality. However, Dimitri B. Papadimitriou, Michalis Nikiforos, and Gennaro Zezza show how these tax policies, if matched by comparable increases in government spending, have the potential to boost aggregate demand while helping reform the unstable structure of the US economy.”

Latest prospects for the US economy: can redistribution help sustain growth?

Here is a link to the latest Strategic Analysis on the US economy from the Levy Economics Institute. They publish a short report like this every year around this time, and discuss the performance of and prospects for the US, as well as considering how things could be improved with a change in policy.

The Levy Institute is officially non-partisan, but tends to publish in the spirit of post-Keynesian thinking. The late Hyman Minksy and Wynne Godley spent the latter part of their lives working there and Godley helped build their macroeconomic model of the US economy.

This year, the 14-page report is titled Can Redistribution Help Build a More Stable Economy? In short, the authors examine what they see as the four key constraints on the US economy and which account for the historically lengthy but weak recovery: (1) weak net export demand; (2) fiscal conservatism; (3) increasing income inequality; and (4) financial fragility. These four constraints help to explain the weak performance, as well as some of the political developments of recent years. Continue reading

Richard Koo – The Other Half of Macroeconomics and the Fate of Globalization

Richard Koo The Other HalfRichard Koo’s big idea is the theory of balance sheet recessions (BSR), and he has written a number of books that explain and apply it to our current economic problems. His latest was published earlier this year: The Other Half of Macroeconomics and the Fate of Globalization.

I do enjoy his work, as it is somewhat iconoclastic, and despite some repetition, both within and between the individual works, he is well worth reading. I have summarized his previous ideas here, so in this review I will concentrate mainly on what is new in this book.

The not so new

For readers unfamiliar with his previous work, Koo outlines his theory of BSRs; his critique of Quantitative Easing and the risks involved as it is unwound by central banks; and the source of the Eurozone crisis and solutions to it which avoid the creation of a fiscal union, which still lacks political legitimacy and support across the EU.

All of this is already covered in his books The Holy Grail of Macroeconomics and The Escape from Balance Sheet Recession and the QE Trap.

The new

Koo’s latest book elaborates and extends his theory of BSRs (what he calls ‘the other half of macroeconomics’) to longer term questions of economic development. He also addresses the current backlash against aspects of globalisation embodied in support for Donald Trump, Brexit and the like. Continue reading

Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading

On Balance Sheet Recessions: the economics of Richard Koo

RichardKooRichard Koo is best known for his concept of a Balance Sheet Recession (BSR), which was defined briefly in yesterday’s post. Two of his books are highly recommended: The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession and The Escape from Balance Sheet Recession and the QE Trap.

They are not difficult reading. The basic idea of a BSR is outlined many times throughout, and his arguments are clear. He also employs plenty of empirical evidence mainly in the form of charts.

This post summarizes some of Koo’s main ideas from the two books, although it is by no means exhaustive. Continue reading

Minsky on stagflation and the limits to state intervention

MinskyCanItHappenAgainGovernment can be a major force for promoting progressive economic and social development. History tells us that this is rarely sustained indefinitely: the political pendulum swings back and forth, and development proceeds unevenly across space and time.

I was reminded of some of the potential limits to state intervention by the quote below from Hyman Minsky in his collection of essays Can “It” Happen Again? , published in 1982. “It” refers to the Great Depression of the 1930s. His Financial Instability Hypothesis argued that ‘stability is destabilising’: periods of successful economic performance tend to encourage an increasingly risky financial structure, leading eventually to a financial crisis. This outcome could take decades to occur, but it seems that he was proved right by the crisis and recession of 2008-9. Continue reading