Can Tighter Financial Regulation and a Smaller Financial Sector Increase Economic Growth?

Jul 9, 2012Ugo Panizza

Economists are increasingly using statistics to debunk the age-old belief that economic growth goes hand in hand with a large financial sector. 

Economists are increasingly using statistics to debunk the age-old belief that economic growth goes hand in hand with a large financial sector. 

For a long time it was simply taken for granted that a large financial sector was beneficial to economic growth. This assumption supported the long period of financial deregulation and weak enforcement that began in the 1970s. Increasingly, economists are using statistical techniques to challenge this view. In the piece below, Ugo Panizza, the international economist who works for UNCTAD, summarizes the analysis he has done to show that a large financial sector is associated with slower economic growth. Links to the detailed papers he and colleagues have done are included at the end of this post. -Jeff Madrick, Director, Rediscovering Government Initiative

---

The financial system acts like the central nervous system of modern market economies. Without a functioning banking and payment system, it would be impossible to manage the complex web of economic relationships that are necessary for a modern decentralized economy. Finance facilitates the exchange of goods and services, allows diversifying and managing risk, and improves capital allocation through the production of information about investment opportunities.

However, there is also a dark side of finance. Hyman Minsky and Charles Kindleberger emphasized the relationship between finance and macroeconomic volatility and wrote extensively about financial instability and financial manias. James Tobin suggested that large financial sector can lead to a misallocation of resources and that "we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity."

A large financial sector could also capture the political process and push for policies that may bring benefits to the sector but not to society at large. This process of political capture is partly driven by campaign contributions but also by the sector's ability to promote a worldview in which what is good for finance is also good for the country. In an influential article on the lobbying power of the U.S. financial industry, former IMF chief economist Simon Johnson suggested that:

The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

The objective of financial regulation is to strike the optimal balance between the risks and opportunities of financial deepening. After the collapse of Lehman Brothers, many observers and policymakers concluded that the process of financial deregulation that started in the 1980s went too far. It is in fact striking that, after 50 years of relative stability, deregulation was accompanied by a wave of banking, stock market, and financial crises. Calls for tighter financial regulation were eventually followed by the Dodd-Frank Wall Street Reform and Consumer Protection Act and by tighter capital standards in the Basel III international regulatory framework for banks.

Not surprisingly, the financial industry was not happy about this rather mild tightening in financial regulation. The Institute of International Finance argued that that tighter capital regulation will have a negative effect on bank profits and lead to a contraction of lending with negative consequences on future GDP growth. Along similar lines, the former chairman of the Federal Reserve, Alan Greenspan, wrote an op-ed in the Financial Times titled “Regulators must risk more, and intervene less,” stating that tighter regulation will lead to the accumulation of "idle resources that are not otherwise engaged in the production of goods and services" and are instead devoted "to fending off once-in-50 or 100-year crises," resulting in an "excess of buffers at the expense of our standards of living"

Greenspan's op-ed was followed by a debate on whether capital buffers are indeed idle resources or, as postulated by the Modigliani-Miller theorem, they have no effect on firms' valuation. To the best of my knowledge, there was no discussion on Greenspan's implicit assumption that larger financial sectors are always good for economic growth and that a reduction in total lending may have a negative effect on future standards of living.

In a new Working Paper titled “Too Much Finance?” and published by the International Monetary Fund, Jean Louis Arcand, Enrico Berkes, and I use various econometric techniques to test whether it is true that limiting the size of the financial sector has a negative effect on economic growth. We reproduce one standard result: at intermediate levels of financial depth, there is a positive relationship between the size of the financial system and economic growth. However, we also show that, at high levels of financial depth, a larger financial sector is associated with less growth. Our findings show that there can be "too much" finance. While Greenspan argued that less credit may hurt our future standard of living, our results indicate that, in countries with very large financial sectors, regulatory policies that reduce the size of the financial sector may have a positive effect on economic growth.

Countries with large financial sectors (the data are for the year 2006):

Source: Arcand, Berkes, and Panizza.

Ugo Panizza is a chief economist with UNCTAD, the United Nations agency dealing with trade, investment, and development, and is a visiting professor at the Geneva Institute.

 

References

Arcand, J.L., Berkes, E., and Panizza U. (2012) “Too Much Finance” IMF Working Paper WP/12/161 http://www.imf.org/external/pubs/ft/wp/2012/wp12161.pdf

Greenspan, A. (2011) "Regulators must risk more, and intervene less," Financial Times, July 26, 2011.

Johnson, S. (2009), "The quiet coup," The Atlantic (May 2009).

Kindleberger, C. P. (1978), Manias, Panics, and Crashes: A History of Financial Crises, Basic Books, New York.

Minsky, H. P., (1974), "The modeling of financial instability: An introduction," in Modelling and Simulation, Vol. 5, Proceedings of the Fifth Annual Pittsburgh Conference, Instruments Society of America, pp. 267—72.

Tobin, J. (1984), "On the efficiency of the financial system," Lloyds Bank Review 153, 1—15. 


This piece draws from a longer article titled “Finance and Economic Development” and published in International Development Policy (http://poldev.revues.org/?lang=en).

Wall Street image via Shutterstock.com.

Share This

Why That Great Interview Didn't Land You a Job: Recruitment Intensity Rates and Mass Unemployment

Jul 9, 2012Mike Konczal

The problem with the labor market isn't that the unemployed aren't looking for work -- it's that employers aren't looking very hard for workers.

The problem with the labor market isn't that the unemployed aren't looking for work -- it's that employers aren't looking very hard for workers.

Have you, or someone you know, had a great job interview and wound up wondering why, months and months later, there's been no offer and the job remains open? The job opening is on the firm's web page, you are perfect for the spot, but you aren't getting any responses, either for an interview or for post-interview interest. I know many people this has happened to -- so many that I've been wondering if it is quantifiable and generalizable.

We have a lot of ways to observe how the unemployed behave. We have detailed information on the duration of unemployment, lots of economists fretting over whether unemployment insurance keeps people from taking jobs, sophisticated models trying to understand their search behaviors, etc. But none of that mental framework exists for employers and job openings. (A cynic might note that economics, as practiced, is a machine for observing and disciplining labor.)

Luckily, a group of economists has put something together that adds significantly to the debates over structural unemployment. Jason Faberman and Bhash Mazumder at the Federal Reserve Bank of Chicago put out a report last month asking "Is There a Skills Mismatch in the Labor Market?" Their answer: "we find limited evidence of skills mismatch." In other words, not really.

They reference work that looks fascinating by Steven Davis of the University of Chicago, R. Jason Faberman of the Federal Reserve Bank of Chicago, and John Haltiwanger of the University of Maryland. Those researchers "find that employers were able to fill jobs relatively easily during the recession, but that their measure of recruiting intensity per vacancy, which captures a variety of efforts employers put into recruiting, remained low well after the end of the recession. One can interpret this as employers imposing relatively high hiring standards despite the abundance of available workers."

This comes out of two previous papers they've put out, "Establishment-Level Behavior of Vacancies and Hiring" and "Recruiting Intensity during and after the Great Recession: National and Industry Evidence." These papers go into micro data from JOLTS and other soruces to create an elasticity measure of how much firms fill job vacancies in respect to the hiring rate.

Recruitment intensity hovers around the 1.0 index through the 2000s, until the recession starts in 2007. In the Great Recession, the recruitment intensity collapses and never recovers going into the end of 2011. What does it mean for recruitment intensity to fall? This recruitment intensity, according to the research, "is shorthand for the other instruments employers use to influence the pace of new hires – e.g., advertising expenditures, screening methods, hiring standards, and the attractiveness of compensation packages. These instruments affect the number and quality of applicants per vacancy, the speed of applicant processing, and the acceptance rate of job offers." This margin for trying to fill jobs is ignored, or assumed away, in most of the major economic models of unemployment and hiring.

The collapse of recruitment intensity helps us understand several things. First, the issue of how job openings are increasing while wages aren't. The research notes that "[i]ncorporating a role for the recruiting intensity index also improves the stability of the Beveridge Curve and yields a better fit to data on the job-finding rate for unemployed workers." This helps us understand some small movements in job openings in the Beveridge Curve while other measures of supply-constraints in the labor market aren't going off.

The second issue it helps us understand is a common media story we see -- the story of the boss who complains about the workforce but doesn't want to raise wages. Dean Baker likes to point out these stories as lacking economic sense. This shows that employers not trying very hard to fill empty jobs, even on non-wage margins, is a general phenomenon.

Finally, it explains why you or your friends and loved ones are having such a hard time finding a job even when you see advertisements for a perfect job that never seems to be filled. It is probably not much comfort to understand that this is a national phenomenon, one we have the tools to fix but that Republicans in Congress, bank regulators, and the FOMC are not willing to address.

Mike Konczal is a Fellow at the Roosevelt Institute.

Follow or contact the Rortybomb blog:
  

Share This

The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy

Jul 3, 2012Mike Konczal

The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt.

The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt. This IMF report is well to the Keynesian side of almost all major US debate, and its recommedations and observations are incredibly sensible. You should read it all, but I want to point out five few high-level arguments they make:

1. A run-up in household debt and leverage explains the economic collapse across countries.

Here's a graph they include, comparing increases in household debt-to-income ratios from 2002-2006 against consumption collapses in 2010.

Implicit here is that the problems aren't labor "inflexiblity" or whatever the latest faddish argument is. It's household leverage.

You see the same exact relationship across the states in the United States, where the biggest increases in household leverage ratios (i.e. the places with the biggest housing collapses) have the worst unemployment and consumption collapses. In the United States monetary policy and transfers help mitigate this. We send checks to Arizona and Florida, where housing is a disaster. As Paul Krugman and others have pointed out, there are no equivalent transfers across these countries, especially in the Euro.

2. Financial crises are not a driver of prolongued recessions. If anything they are a symptom.

There's a common wisdom among many elites that prolongued recessions are just what happens in the aftermath of a financial crisis. Most people who argue this derive it from Kenneth Rogoff and Carmen Reinhart's This Time It's Different. These arguments have always been a bit difficult to justify. Usually people who invoke them call for inaction, as if there isn't anything to be done but let the recession run its course.

The IMF report looks at OECD data on housing busts over the past 30 years and compares housing busts with large household leverage ratios with those with low ratios. Busts with large household leverage ratios have much bigger drops in consumptions years out, just like what we see in our recession. What is important is that this holds with or without financial crises:

They don't discuss it, but this implies that the causation runs the other way; countries that have giant drops in housing values and/or increases in debt-to-income ratios probably create financial crises. But this means that having a financial crisis, like we did, doesn't change the game; it just amplifies the case for normal demand-side stimulus.

III. HAMP is a failed program.

I remember when saying that HAMP was a failed program that was making the situation worse was a controversial opinion. At the recent Netroots Nation I was chatting with David Dayen and we talked about his portrait of HAMP series from fall 2010, which included the title that HAMP "makes your financial situation worse." That was an argument that had to be built, one data dump and one blog post at a time, over Treasury trying hard to convince people otherwise.

We bloggers ringing the bell about HAMP also argued two additional points: that Treasury wasn't actually spending the money Congress told it to spend on homeowners. This was at a point where trying to find additional funding for stimulating the economy was the highest priority. And it was also well after the second round of TARP funding went out based on promises by Larry Summers of spending that allocated money on homeowners. And, secondly, that these problems weren't going away, because they were fundamental to how HAMP was designed.

Here's the IMF: "HAMP had significant ambitions but has thus far achieved far fewer modifications than envisaged....By the same token, the amount disbursed under MHA as of December 2011 was only $2.3 billion, well below the allocation of $30 billion (0.2 percent of GDP). Issues with HAMP’s design help explain this disappointing performance." All three points, taken for granted in the report.

IV. Foreclosures are a problem.

It's never been clear whether Treasury views mass foreclosures as a macroeconomic problem. Well, the IMF does:
A further negative effect on economic activity of high household debt in the presence of a shock, postulated by numerous models, comes from the forced sale of durable goods (Shleifer and Vishny, 1992; Mayer, 1995; Krishnamurthy, 2010; Lorenzoni, 2008)...The associated negative price effects in turn reduce economic activity through a number of self-reinforcing contractionary spirals.
 
The IMF staff notes that “distress sales are the main driving force behind the recent declines in house prices—in fact, excluding distress sales, house prices had stopped falling” and that “there is a risk of house price undershooting” (IMF, 2011b, p. 20)...Overall, debt overhang and the deadweight losses of foreclosures can further depress the recovery of housing prices and economic activity. These problems make a case for government involvement to lower the cost of restructuring debt, facilitate the writing down of household debt, and help prevent foreclosures (Philippon, 2009).
Couldn't put it better myself. Ironically I had first heard the theoretical financial-macroeconomic arguments about preventing the fireselling of assets into a depressed market from Shleifer/Vishny's 1992 paper that the IMF cites. Shleifer is a protégé of Larry Summers, so I assumed Summers might have gone a bit harder about preventing the mass fireselling of the largest consumer asset, an asset which just has a gigantic collapse in value, into the largest economic downturn since the Great Depression. Alas.
 
V. Demand demand-side stimulus. Across the board. Now.
 
One has good reason to dread hearing the policies the IMF recommends for a country in a crisis. Maximal labor "flexiblity"? Cat food for old people? Picking government functions out of a hat to privatize? What does the IMF recommend here? Ok, brace yourself:

Temporary macroeconomic policy stimulus...simulations of policy models developed at six policy institutions suggest that, in the current environment, a temporary (two-year) transfer of 1 percent of GDP to financially constrained households would raise GDP by 1.3 percent and 1.1 percent in the United States and the European Union, respectively...Monetary stimulus can also provide relief to indebted households by easing the debt service burden...A social safety net can automatically provide targeted transfers to households with distressed balance sheets and a high marginal propensity to consume, without the need for additional policy deliberation...

Support for household debt restructuring: Finally, the government may choose to tackle the problem of household debt directly by setting up frameworks for voluntary out-of-court household debt restructuring—including write-downs—or by initiating government-sponsored debt restructuring programs. Such programs can help restore the ability of borrowers to service their debt, thus preventing the contractionary effects of unnecessary foreclosures and excessive asset price declines.

There's then a major discussion about what went right in the United State's Great Depression and Iceland's recent collapse on comphrensive housing policy.

Huh. That's actually an amazing set of polices. When can we start? And can we get the IMF advising US economic policy if this is what they are suggesting?

Follow or contact the Rortybomb blog:
  

Share This

New Report: A Literature Summary on New Balance-Sheet Recession Research

Jul 3, 2012Mike Konczal

In the last 8 months there's been a ton of research validating the theory and arguments of the "balance-sheet recession." I wrote up a literature summary of this research as a Roosevelt Institute white paper: "How Mortgage Debt is Holding Back the Recover

In the last 8 months there's been a ton of research validating the theory and arguments of the "balance-sheet recession." I wrote up a literature summary of this research as a Roosevelt Institute white paper: "How Mortgage Debt is Holding Back the Recovery." You can download a PowerPoint presentation on the paper as well.

This paper was designed to give some background for those interested in understanding this powerful theory, backed by the latest empirical research, and needed to be caught up. I noticed that the latest Economic Report of the President and the latest IMF World Economic report were backing this theory and these researchers. It is important for activists to understand that elite opinion is moving on the conneciton of the housing bubble collapse and slow growth and mass unemployment, and this will have implications for those arguing against foreclosures and for debtor relief.

The key of the report is the following graph, which summarizes the four papers I dig into:

I'll be discussing the individual reports in the future. I had previously interviewed Amir Sufi on the first two papers last fall.

Follow or contact the Rortybomb blog:
  

Share This

Government and Economic Growth: Correcting Common Mythology

Jul 2, 2012Jeff Madrick

The claim that the size of government is inversely related to growth is misguided and detrimental. 

The claim that the size of government is inversely related to growth is misguided and detrimental. 

A major purpose of the Rediscovering Government initiative is to counter unfounded and damaging claims about the effects of government on an economy’s growth. The Financial Times published a letter on June 27th, which asserted that all economists agree the size of government is inversely related to growth and that high levels of debt tamper growth. I wrote a brief letter challenging such all-too-common mythology, which was published on June 28th.

See the letter below, followed by links to first-rate scholars’ work that can be found on our web site. This in turn is followed by a link to a well-documented rebuttal to the widespread claim that debt of 90 percent affects growth negatively. Is there really a demarcation point beyond which debt as a percent of GDP slows growth? Many observers have simplistically adopted the Reinhardt-Rogoff analysis that debt of 90 percent of GDP is a threshold, but it is not considered valid by many economists because the analysis is so dependent on a few atypical post World War II years in the U.S. This criticism of Reinhardt-Rogoff can be found below. Finally, the UNCTAD economist, Ugo Panizza, wrote us and sent his own fine work on the subject. We link to that here as well.

On issues involving the uses and purposes of government, we at Rediscovering Government will respond to mythologies and deliberately misleading arguments as quickly and responsibly as possible. Our aim is to correct and nourish the public discourse.

 

FINANCIAL TIMES, June 29, 2012

Bold statements – but few will agree

From Mr Jeff Madrick.

Sir, Andrew Sussman (Letters, June 28) makes two bold assertions that require correction.

He says there is an inverse relationship between the size of government and growth. This is untrue. Serious economists agree there is no such statistical relationship. Many big government states have grown faster than the US.

Even more boldly, he states that “one thing all economists agree on” is that if debt reaches 90 per cent of gross domestic product, growth will slow markedly. This is based on a paper by Carmen Reinhardt and Kenneth Rogoff that has been widely criticised. Few economists agree with this simple conclusion.

Jeff Madrick, The Roosevelt Institute, New York, NY, US

 

1. Peter Lindert Bio

Full Presentation

Presentation Handout

2. Jon Bakija Bio

Full Presentation

Presentation Handout

3. Lane Kenworthy Bio

Full Presentation

Presentation Paper

4. A criticism of Reinhardt-Rogoff

5. Is High Public Debt Harmful for Economic Growth?  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Share This

The French Economic Experiment

Jun 27, 2012Jeff Madrick

Francois Hollande's novel economic policies in France should be monitored closely, to see if they are successful. 

The new president of France, Francois Hollande, has announced unusual new economic measures that everyone should pay attention to. They represent a decided turn away from the destructive policies of the eurozone so far, and even violate basic neoclassical economic principles. We all ought to watch closely to see if they succeed.

Francois Hollande's novel economic policies in France should be monitored closely, to see if they are successful. 

The new president of France, Francois Hollande, has announced unusual new economic measures that everyone should pay attention to. They represent a decided turn away from the destructive policies of the eurozone so far, and even violate basic neoclassical economic principles. We all ought to watch closely to see if they succeed.

While almost everyone in Europe is calling for lower wages, Hollande is raising his country’s minimum wage faster than inflation. He thus has favored a view of the economy called demand-led growth, which suggests higher wages will increase demand sufficiently to promote more growth. It is a version of Keynesianism, long since dropped by most American Keynesians. I discuss this at some length in a piece for New America Foundation, called "A Case for Wage-Led Growth."

He is also proposing a 75 percent income tax on those who make more than 1 million euros a year, and higher taxes on dividends. Many think raising taxes in a recession is anathema, but raising taxes on the rich will not hurt the nation. It will not affect their spending very much.

Thus, he stokes demand with higher wages for lower income people and satisfies the budget crisis with higher taxes on the wealthy. Not bad. There are hints he will also propose budget cuts, which would mistakenly play into the hands of the austerity advocates. We shall see.

The problem of course is that the wage increase is skimpy, to say the least. Another problem—and a bigger one—is that a higher-wage policy has to be taken broadly across Europe and led by the Germans. This is what I advocate in the New America piece. While German ministers have talked about higher wages there, they are not taking aggressive action.

Still, let’s keep an eye on the French experiment. It is a bit of fresh air in a compression chamber of stifling, self-centered economic policy-making.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

Share This

Debunking the Myths About Government

Jun 25, 2012

Rediscovering Government presented four mainstream, empirically based analyses of major government-related questions in the Myths About Government panel in Washington DC on June 21st. The panelists from the roundtable discussion addressed four common misconceptions about government and the economy. Read their summary responses below, and click through to view their bios and full presentations.

Rediscovering Government presented four mainstream, empirically based analyses of major government-related questions in the Myths About Government panel in Washington DC on June 21st. The panelists from the roundtable discussion addressed four common misconceptions about government and the economy. Read their summary responses below, and click through to view their bios and full presentations.

Does big government impede growth?

Government Social Programs and Economic Growth: Verdicts from History

Peter Lindert, University of California, Davis

Economic history does not find any net cost in GDP from democratic large-budget welfare states. The “free lunch puzzle” of welfare states is this: They avoided any net GDP cost while achieving many social goals: reducing poverty and inequality, extending life spans, and having cleaner government. In addition, their government budget deficits are no greater, and people are no less happy in these large-budget welfare states.

Peter Lindert Bio

Full Presentation

Presentation Handout

Do high taxes create disincentives?

Evidence on the Economic Effects of Taxes

Jon Bakija, Williams College

There have been many econometric studies of cross-country data that have attempted to estimate the effects of the overall level of taxes on economic growth, and many other econometric studies (using a variety of types of data) that have attempted to estimate the causal effect of changes in marginal income tax rates on peoples' efforts to earn income. This presentation displays the basic facts on these issues, discusses why neither approach has provided convincing evidence of a strong negative effect of taxes on long-run real economic activity, and explains why healthy skepticism of any claims to the contrary is in order.

Jon Bakija Bio

Full Presentation

Presentation Handout

Do markets distribute income fairly and equitably?

America’s Struggling Lower Half

Lane Kenworthy, University of Arizona

When the country prospers, everyone should prosper. In the period between World War II and the mid-to-late 1970s, economic growth was good for Americans in the middle and below. Since then, however, relatively little of our economy's growth has reached households in the lower half. Wages for this group have barely budged. Rising employment helped in the 1980s and 1990s, but that wasn't enough to ensure that incomes kept pace with economic growth, and employment stopped increasing after 2000. Government transfers are another key source of income for many households in the lower half, but they too have lagged behind growth of the economy. What are the prospects going forward? Will we see a return to rising wages or employment for Americans in the lower half, or are the trends of the past few decades likely to continue? What, if anything, could our government do to help?

Lane Kenworthy Bio

Full Presentation

Presentation Paper

Do Americans want smaller government?

Better, Not Smaller: What Americans Want from Federal Government

Ruy Teixeira, Century Foundation, Center for American Progress

Americans lack confidence in the federal government's ability to solve problems.  A wide range of other indicators show that people think the government wastes a lot of the money it spends, is inefficient, not accountable for its actions, unresponsive and more a hindrance than a help to getting ahead in life. Not a pretty picture.  However, that doesn't mean the public necessarily wants the government to be smaller.  They would prefer instead that it worked better and solved problems.  Therefore, reforming the way government works could potentially contribute to building public support for government programs both old and new.  This is particularly true among members of the Millennial generation.  The other important factor is better macroeconomic performance, which would go a long way toward making people more receptive to an active role for government, especially a government that seemed to be performing more efficiently and effectively.

Ruy Teixeira Bio

Full Presentation

 

Rediscovering Government is an initiative of the Roosevelt Institute dedicated to exploring the purpose and value of government. Led by Roosevelt Institute Senior Fellow Jeff Madrick, the program aims to reinvigorate conversation surrounding government and what it can and should be doing for its citizens, through the website, blog, roadshows, and conferences.

Share This

Paul Krugman: Europe has Made a Terrible Mistake and Republicans are Completely Mad

Jun 22, 2012

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times op-ed columnist.

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times op-ed columnist. Krugman discusses how and why the “two great centers of world economic activity, of democracy, and of everything else are both in deep trouble.” He says, "Europe made the terrible mistake of having a single currency without a single government, and the United States has one of its two major political parties that has gone completely mad.”Watch Krugman explain these two major structural problems causing global economic crisis:   

Interview : Paul Krugman from Roosevelt Institute on Vimeo.

According to Krugman, we are in a “classic depression” for the first time in 80 years, and it is high time for increased government spending to help our economy while our private sector builds itself back up. But “instead, because of the way our politics have worked, we’ve actually had unprecedented fiscal austerity.” He argues that this dangerous paralysis is “exactly what 80 years of economic analysis tells us we should not be doing.” Krugman sighs at the continual Republican assertion that we can’t spend because of our deficit and we instead need to focus on long-run fiscal responsibility. Meanwhile, 8.2 percent of Americans are unemployed, and as Keynes said, “in the long run we are all dead.”

At the same time, Europe is sliding further and further into economic catastrophe. “It’s unthinkable that anybody should leave the Euro, and yet it’s becoming increasingly unthinkable that policymakers will take the steps needed to prevent that from happening.” Europe is basically demanding that Spain slash wages as well as spending, “which is a recipe for depression.”

European will to properly solve this problem is just not there, since “Europe is a currency but not a country.” In contrast, he discusses the fiscal bailouts of Florida and Texas that worked because in America, “we are a nation.” As Cutter notes, “it would be good if we stayed so.”

For more, watch Krugman’s full presentation:

Paul Krugman :: Lecture from Roosevelt Institute on Vimeo.

 

Share This

Paul Krugman: Europe has Made a Terrible Mistake and Republicans are Completely Mad

Jun 22, 2012

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times o

In the latest Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter interviews Paul Krugman, Nobel-prize winning economist and New York Times op-ed columnist. Krugman discusses how and why the “two great centers of world economic activity, of democracy, and of everything else are both in deep trouble.” He says, "Europe made the terrible mistake of having a single currency without a single government, and the United States has one of its two major political parties that has gone completely mad.”Watch Krugman explain these two major structural problems causing global economic crisis:   

Interview : Paul Krugman from Roosevelt Institute on Vimeo.

According to Krugman, we are in a “classic depression” for the first time in 80 years, and it is high time for increased government spending to help our economy while our private sector builds itself back up. But “instead, because of the way our politics have worked, we’ve actually had unprecedented fiscal austerity.” He argues that this dangerous paralysis is “exactly what 80 years of economic analysis tells us we should not be doing.” Krugman sighs at the continual Republican assertion that we can’t spend because of our deficit and we instead need to focus on long-run fiscal responsibility. Meanwhile, 8.2 percent of Americans are unemployed, and as Keynes said, “in the long run we are all dead.”

At the same time, Europe is sliding further and further into economic catastrophe. “It’s unthinkable that anybody should leave the Euro, and yet it’s becoming increasingly unthinkable that policymakers will take the steps needed to prevent that from happening.” Europe is basically demanding that Spain slash wages as well as spending, “which is a recipe for depression.”

European will to properly solve this problem is just not there, since “Europe is a currency but not a country.” In contrast, he discusses the fiscal bailouts of Florida and Texas that worked because in America, “we are a nation.” As Cutter notes, “it would be good if we stayed so.”

For more, watch Krugman’s full presentation:

Paul Krugman :: Lecture from Roosevelt Institute on Vimeo.

 

Broken Euro image via Shutterstock.com.

 

Share This

Myths About Government

Jun 20, 2012Jeff Madrick

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

The Rediscovering Government roundtable discussion in DC tomorrow sets out to debunk misconceptions about government spending and the economy and reinvigorate a dialogue about the importance and positive potential of government. 

Perhaps it isn’t odd that the American people are so skeptical of the uses and purposes of government. As a nation built on a revolution against a monarchy, such skepticism is likely built into our national character.

But it doesn’t accord with our history, and that is why it remains surprising. Government was inseparable from American economic and social development. It did not reduce freedom, but protected it.

I am always disturbed when economists in particular talk about the “role of government.” It is like talking about the role of parents in their children’s lives, or the role of the basketball in a basketball game. There is no economy without government, even in America. The government does not merely correct market failures; its purpose is far more profound. It is about true freedom, true opportunity, and necessary change.

We have organized an important panel discussion on June 21st in Washington, D.C., to put to rest some of the prevailing myths about government. Peter Lindert of the University of California at Davis will tell us about his empirical work on whether large government impedes growth; his extensive research shows it has not. Jon Bakija of Williams College will similarly tell us about how little hard evidence there is that high taxes impede growth. Lane Kenworthy of the University of Arizona will show how much of the income of the lower half of the distribution depends on social policies. Nancy Altman of Social Security Works will put straight the true finances of Social Security. And finally Ruy Teixeira of the Center for American Progress will tell us how extensive the American antagonism towards government is despite these facts, and whether these views can be changed.  

Our goal is to present a counter-narrative to the prevailing anti-government ideology. We will not argue that government is all good, requires no radical reforms, or cannot be made to work better. After all, why should we expect politicians to act in the interests of others, rather than their own sometimes contradictory interests?  

But there is reason to expect this, because it has happened time and again in American history. Moreover, acting in the interests of others is often acting in one’s self interest. Thomas Jefferson championed regulations of land sales in early America to make sure many people got a chance at ownership. The result was a strengthened democracy of secure and satisfied citizens.

His party built the canals through public financing in the states, led by New York. Many, and probably most, prospered when New York City became the giant hub of trade and commerce with the opening of the Erie Canal. American government created free and mandatory schools, subsidized the railroads, started technical colleges, and sanitized the cities, which in turn became sources of growth. In the 1800s, these activities were typically led by the state and local governments.

Markets don’t work when monopolies gather power, and the federal government in the next century set out to limit that from happening. It protected workers in all kinds of ways. In the 1930s, it recognized that financial markets were different from others and required special regulations. It built highways, invested in medical and technical research, subsidized college, and established necessary product, safety, and environmental regulations.   

As Lane Kenworthy points out in his fine summary piece on our site, if big government were a problem, why did the U.S. economy keep growing fast even as government got bigger?  

And let me point out one other factor that is neglected. As I emphasized in my book, The Case for Big Government, government is the key agent of change. No one anticipated we’d need high schools and colleges when the Constitution was written, but government was the instrument to create these critical institutions. No one knew of germ theory, but government led the way in sanitizing water and making large cities habitable. Who knew about the computer chip?

Perhaps I am biased because I live in New York. The New York City government eventually took over and aggressively expanded the subways. It built the dramatic walls of Riverside Drive, so often neglected. Miracle of miracles, it collects the garbage in this densest of cities.

But consider the great water works of the west. This was the work of state and federal government. And the highways, of course.  And the university system of California, among others.

If one needs further historical examples, consider the first great European city, Rome. Its aqueducts and enormous road network were the work of the government. Its devotion to law is a model to this day. It was highly productive and conducive to commerce because of these advances.  

American attitudes towards government have always shifted; sometimes pro-government and public investment and social programs, sometimes against them. We were usually at our best when we favored government, but government was far from always efficient. America was not immune to substantial corruption. Government always needed a good wringing out. But when it was widely vilified and weakened, America often failed. Political instability, widespread sacrifice, and jeopardized democracy were results.  

As for contemporary times, the Great Depression was an important catalyst. It turned an already partly progressive nation (since Teddy Roosevelt and Woodrow Wilson) far more so. It gave us a minimum wage, unemployment insurance, Social Security, labor organizing protections, securities regulations, and great public works to create jobs. The New Deal was followed by Johnson’s remarkable Great Society in the 1960s -- Medicare, Medicaid, historic civil rights legislation, and on. The American social sphere was brought into modern time along with its economy, which required those social investments.

But these attitudes shifted strongly beginning in the 1970s. Attitudes towards government had already become somewhat more skeptical in the 1960s, with new poverty programs and racial demands. The Vietnam War was a further blow to confidence in government, as was the Watergate scandal.  

In my view, however, the economic devastation of the 1970s was the major blow. Inflation of 12 percent, unemployment soaring, mortgage rates at 18 percent. In 1972, Governor Ronald Reagan of California supported a referendum to demand a sharp and permanent cut in state income taxes. Californians voted against it; they said they would pay their state taxes. By 1978, only six years later, Proposition 13 passed overwhelmingly, sharply cutting property taxes and with it undermining the state’s great education system.  Nationally, the Kemp-Roth tax proposal to cut federal income taxes up to 30 percent was rapidly gaining support in Congress. Economic pain caused Americans to seek quick and sometimes vindictive solutions, even personally self-destructive ones.  

In my view, the lost faith in and mismanagement of government is the key cause of the crisis of the future the nation now faces. This lost faith resulted in deregulation, unaffordable tax cuts, and the failure of government to develop new programs and act as the agent of change it should be.  

We can argue about these issues philosophically. But Rediscovering Government will stay as close to the demonstrable facts as possible. We will present the evidence about government, the economy, and growth. Then we can discuss how to restore a true sense of our own history, rebalance our sense of the purpose of government, and move on constructively.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

 

Capitol image via Shutterstock.com.

Share This

Pages