Richard Koo explains balance sheet recessions

Economist Richard Koo is well known for his concept of  a ‘balance sheet recession’. In this short video he explains how the recent Great Recession, the Great Depression of the 1930s, and Japan’s economic stagnation since the 1990s are all examples of this, and what can be done about it.

A number of somewhat iconoclastic economists have explored the nature and consequences of asset-price bubbles, fueled by the accumulation of private sector debt, and their subsequent collapse, followed by private sector deleveraging (paying down debt). They include Koo, Michael Pettis, Steve Keen and Michael Hudson, the latter three being influenced by the late Hyman Minsky and his Financial Instability Hypothesis. The four of them proffer somewhat different solutions to the long stagnation that can follow the collapse of a debt-fueled asset-price bubble, which we are arguably still living through.

Koo favours a fiscal stimulus in which government spending exceeds revenue at a rate sufficient to prevent the economy collapsing as a large number of firms use their cash flow to pay down debt, rather than invest. This is what has been done intermittently in Japan. Koo argues that without the stimulus the Japanese economy would have experienced its own Great Depression, rather than simply years of stagnation.

Keen and Hudson favour a Modern Debt Jubilee in which much private debt is simply forgiven and wiped out, allowing households and firms to raise their spending on consumption and investment and drive economic recovery.

Pettis focuses his analysis on the current account imbalances across the global economy which in his view caused the build-up of debt. The unwinding of these imbalances is required to secure a more sustainable global recovery.

There is something to be said for the ideas of all of the above. I am keen to compare them and integrate the most important aspects, as their thinking overlaps to a significant extent. That will be the subject of a future post! In the meantime, I can definitely recommend watching the video as an introduction to Koo’s thinking.

The Trump effect: is this time different?

LevyInstituteAn interesting recent paper here from the Levy Economics Institute of Bard College on the prospects for the US economy in the coming years. The authors use their model, which was developed with the late post-Keynesian economist Wynne Godley (one of the few to have predicted the Great Recession), to take stock of the current situation and to discuss alternative future scenarios.

Nikiforos and Zezza argue that the US economy has performed relatively poorly since the Great Recession, and growth outcomes continue to disappoint. Although headline unemployment is relatively low, there remains substantial labour underutilization in the form of ‘marginally attached workers’ and involuntary part-time workers, which when added to the headline rate is known as the U6 measure. The latter is nearly double the headline rate, and helps to explain the continued weakness in wage growth.

The US economy faces three headwinds which continue to constrain growth: income inequality, fiscal conservatism, and the weak performance of net exports (exports minus imports). Continue reading

Michael Pettis on the global economic outlook, negative interest rates and Charles Dickens

A short interview with Michael Pettis, an economist I greatly admire for his insights on the evolution of the world economy, economic history and especially China. He predicted that the Chinese economy, having boomed for most of the 30 years since Deng began reform in the late 1970s, would slow dramatically, and may even experience a ‘lost decade’ of slow growth due to its structural imbalances: excessive and poorly allocated investment, and now increasing financial fragility due to rising private sector debt. His work covers a broad range of issues, while his blog is mainly on China, and can be found here.

The euro disaster — Wynne Godley was spot on already back in 1992! — LARS P. SYLL

If there were an economic and monetary union, in which the power to act independently had actually been abolished, ‘co-ordinated’ reflation of the kind which is so urgently needed now could only be undertaken by a federal European government. Without such an institution, EMU would prevent effective action by individual countries and put nothing in […]

via The euro disaster — Wynne Godley was spot on already back in 1992! — LARS P. SYLL

Socialism no longer ‘whispered’ for Labour

“You no longer have to whisper it, it’s called socialism.” With these words, UK shadow finance minister John McDonnell reconfirmed the Labour Party’s commitment to transforming British society, should they win the next election. On current polling evidence, this seems unlikely.

For those of us more inclined towards the social democratic wing of Labour, this rhetoric is a little dismaying. I am not convinced that the hard left has widespread appeal beyond the party’s core membership. An appeal to ‘middle England’, alongside the working class and those nearer the top of society who see the importance of progressive politics, is vital should they actually want to win the next election and obtain the power required to put policies into action. Continue reading

Japan, Abenomics and moving beyond Keynesianism forever


Japanese PM Shinzo Abe, instigator of ‘Abenomics’

The Japanese government yesterday announced a fiscal stimulus for the economy of 28 trillion yen, or $275bn. Although much of this money is not new, it has been hailed as leading the way against austerity and towards expanding demand. This is part of the three-pronged package of policies known as Abenomics, named after the Prime Minister Shinzo Abe. This includes monetary stimulus in the form of quantitative easing, fiscal stimulus (tax cuts and public spending increases) and structural reforms to labour and product markets.

The Economist magazine claimed recently that Abenomics has been a partial success. In a country with an ageing and shrinking population, labour force participation is slowly growing as more women find work. Inflation is now positive as the price level slowly rises, although this may be largely due to the yen’s depreciation. The yen has strengthened recently and price rises have for the moment stalled.

But stimuli to demand, whether monetary or fiscal, have their limits if the productive side of the economy does not expand its output and productivity. The real structural problem is the huge accumulation of savings by firms. Corporate savings exceed investment by a substantial margin. This imposes a deflationary impulse to the economy. Arguably, these savings need to fall, and the funds flow to households for them to spend on consumption. It could also redistribute the funds available for investment towards more efficient firms looking to invest in profitable new areas, so raising the productivity of capital spending. As Michael Pettis has argued, the key structural policy change is for corporate savings to be redistributed to households, and it is this process which will ensure the more rapid growth of private demand necessary for a reasonable growth rate. Continue reading

The continued failure of the government’s ‘long term economic plan’


The ex-chancellor George Osborne in his hard hat

Some evidence here that the outcomes of the oft-mentioned ‘long term economic plan’ of the UK government have fallen far short of predictions and claims. First of all: austerity. Geoff Tily, Senior Economist at the TUC, shows that public sector net borrowing for the first quarter of this financial year was £26.6bn, more than the November 2011 official forecast for the whole of the 2015/16, which was £24bn.

The cuts to public spending and tax increases have reduced the deficit much more slowly than hoped, since growth has been much weaker than forecast since 2010.

The government has claimed many times that it has turned the economy around and saved it from ruin. What it doesn’t mention is that recovery was underway when it came into office in 2010. The combination of austerity and the Eurozone crisis slowed growth significantly until 2013, when it picked up and the chancellor George Osborne in fact relaxed austerity to some extent.

The UK’s recovery since the recession has been the weakest since records began. Continue reading