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1. Zombies at Large? Corporate Debt Overhang and the Macroeconomy

Author:
Òscar Jordà, Martin Kornejew, Moritz Schularick, and Alan M. Taylor
Publication Date:
10-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on non-financial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.
Topic:
Debt, Economics, International Political Economy, Global Recession, Macroeconomics, Credit, and Corporations
Political Geography:
Global Focus

2. Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy

Author:
Jakob Vestergaard and Daniela Gabor
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Despite much attention to unconventional monetary policies after the financial crisis, the collateral policies of central banks are rarely discussed. And when they are, the haircuts applied to assets pledged to access central bank liquidity tend not to be analyzed. An exception to these trends is the recent work by Nyborg (2017), who argues that the collateral policies adopted by the European Central Bank (ECB) aggravated the sovereign debt crisis and put the survival of the euro at risk. Taking our point of departure in the money view literature (Mehrling 2011), we argue however that Nyborg’s critique of the ECB’s crisis response is misguided and that his proposal to deepen and reinforce the ECB’s role in the fiscal disciplining of member states would be procyclical and destabilizing. Through our analysis of Nyborg’s work and the ECBs crisis response, we identify core principles for countercyclical collateral policies suitable for market-based financial systems.
Topic:
International Political Economy, Global Markets, Central Bank, Macroeconomics, Money, Fiscal Policy, European Central Bank, and Banking
Political Geography:
Europe

3. Europe 1957 to 1979: From the Common Market to the European Monetary System

Author:
Joseph Halevi
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This essay deals with the contradictory dynamics that engulfed Europe from 1959 to 1979, the year of the launching of the European Monetary System. It focuses on how the macroeconomic frame- work of stop-go policies in the 1960s ended up privileging external – intra-European - exports at the expense of domestic demand. The paper offers a very tentative explanation as to why stop-go policies, by weakening domestic demand, did not put an end to the to the ‘long boom’ earlier as they should have. The French crisis of 1968-69 leading to the demise of De Gaulle is discussed at length, as is the renewal of the German export drive in the wake of a nominal revaluation of the D-Mark in 1969. Finally, the revival of labor struggles in Italy in the same year is put in the context of the structural weaknesses of the Italian economy as analyzed by the late Marcello de Cecco. The conclusion is that European countries had neither the political culture nor the institutional mechanisms to coordinate mutually advantageous policies. Their so-called cooperation was an exercise in establishing hegemony while defending the interests specific to the dominant economic groups of each country. The essay then deals with the formation of the EMS as an expression of efforts to establish and enforce economic dominance.
Topic:
Economics, Markets, History, Monetary Policy, Capitalism, Common Market, and Macroeconomics
Political Geography:
Europe

4. From the EMS to the EMU and...to China

Author:
Joseph Halevi
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The paper highlights the position of German authorities, showing that they were quite lucid about the fundamental weaknesses inherent in a process that separated monetary from fiscal policies by giving priority to the centralization of the former. Instead of repeating the well known critiques levelled against the EMU – for which readers are referred to the unsurpassed treatment by Stiglitz, the essay highlights the splintering of Europe in the way in which it has unfolded during the 1990s and in the first decade of the present millennium. In particular the early economic and political origins of the terminal crisis of Italy are located between the late 1980s and the 1990s. France is shown to belong increasingly to the so-called European periphery by virtue of a weakening industrial structure and persistent balance of payments deficits. The paper argues that France regains its central role by political means and through its weight as an active nuclear military power centered on maintaining its imperial interests and posture especially in Africa. The first decade of the present millennium is portrayed as the period in which a distinct German economic area had been formed in the midst of Europe with a strong drive to the east with an increasingly powerful gravitational pull towards the People’s Republic of China.
Topic:
Economics, International Political Economy, Political Economy, History, and Macroeconomics
Political Geography:
Africa, China, Europe, Asia, Germany, and Global Focus

5. Synthetic MMT: Old Line Keynesianism with an Expansionary Twist

Author:
Lance Taylor
Publication Date:
10-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Expansionary macroeconomic policy with a strong redistributive component is an attractive proposition, most recently launched on the basis of Modern Monetary Theory or MMT. The Theory is a synthesis of familiar ideas, newly relevant but scarcely path-breaking. Its basics – Chartalist or fiat money, functional finance, and models based on consistent national accounting – come straight from Maynard Keynes, Abba Lerner, and Wynne Godley. Functional finance is the heart of fiscalist Keynesianism built upon automatic stabilizers for the business cycle. MMT’s job guarantee proposal is one more stabilizer which could be a modest helpful supplement to the system which exists. National accounting comparisons of a possible MMT package with the 2008 crash and the Trump tax cut are presented with emphasis on autonomous shifts in demand. The package could have problems with debt sustainability and external balance. Inflation is unlikely if wage repression in the USA is not reversed. But strong wage increases are presumably a goal of MMT.
Topic:
Economics, Monetary Policy, Finance, Economic Theory, Macroeconomics, and Money
Political Geography:
United States

6. Big Tech Acquisitions and the Potential Competition Doctrine: The Case of Facebook

Author:
Catherine Ruetschli and Mark Glick
Publication Date:
10-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Big Tech companies, including Google, Facebook, Amazon, Microsoft and Apple, have individually and collectively engaged in an unprecedented number of acquisitions.When a dominant firm purchases a start-up that could be a future entrant and thereby increase competitive rivalry, it raises a potential competition issue. Unfortunately, the antitrust law of potential competition mergers is ill-equipped to address tech mergers. We contend that the Chicago School’s assumptions and policy prescriptions hobbled antitrust law and policy on potential competition mergers. We illustrate this problem with the example of Facebook. Facebook has engaged in 90 completed acquisitions in its short history (documented in the Appendix to this paper). Many antitrust commentators have focused on the Instagram and WhatsApp acquisitions as cases of mergers that have reduced potential competition. We show the impotence of the potential competition doctrine applied to these two acquisitions. We suggest that the remedy for Chicago School damage to the potential competition doctrine is a return to an empirically tractable structural approach to potential competition mergers.
Topic:
Economics, Science and Technology, Communications, Law, Digital Economy, Macroeconomics, Monopoly, and Antitrust Law
Political Geography:
United States

7. American Gothic: How Chicago Economics Distorts “Consumer Welfare” in Antitrust

Author:
Mark Glick
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Since the publication of Robert Bork’s The Antitrust Paradox, lawyers, judges, and many economists have defended “Consumer welfare” (CW) as a standard for decisions about antitrust goals and enforcement priorities. This paper argues that the CW is actually an empty concept and is an inappropriate goal for antitrust. Welfare economists concede that there is no credible measurable link between price and output and human well-being. This means that the concept of CW does not legitimate limited antitrust enforcement, nor does it justify the exclusion of other antitrust goals that require more active enforcement practices. This paper contends that antitrust policy is not welfare based at all, and that if it were, antitrust policy and enforcement would differ significantly from the Chicago School vision. Without the fiction that economists can establish that in the short run lower price and higher output measurably increases welfare more than other goals, recent defenses of the CW standard resolve down to arguments based on unsupported assumptions.
Topic:
Economics, Law, Legal Theory, Economic Theory, Macroeconomics, Antitrust Law, and Microeconomics
Political Geography:
United States

8. Expansionary Austerity and Reverse Causality: A Critique of the Conventional Approach

Author:
Christian Breuer
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
In this paper we methodologically review and criticize a broad literature of empirical work on the effects of fiscal policy (the ‘conventional approach’). Beyond previous critiques of this approach, we show that the cyclical adjustment strategy as used in this literature entails erroneous assumptions that necessarily produce flawed results in support of expansionary austerity. Specifically, the cyclically-adjusted primary balance (CAPB) strategy this literature employs fails to correct for cyclical effects in the expenditure- GDP-ratio, so that the estimates of the results of expansionary fiscal consolidation are affected by reverse causality, i.e. increasing GDP causally decreases expenditure-GDP- ratios, rather than vice versa. We provide suggestions on how to fix this incomplete cyclical adjustment problem with a new approach. After replicating two famous articles of the conventional literature and controlling for this bias, the expansionary effects of fiscal adjustments disappear or turn into their opposite
Topic:
Economics, Macroeconomics, and Fiscal Policy
Political Geography:
United States

9. Macroeconomic Management Meets the New Economy

Author:
Commission on Global Economic Transformation
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Finance and the macroeconomy, both policy and industry practices as well as academic research, have evolved substantially in recent years. While the old questions of business cycles, macroeconomic management, financial regulation, and social protection are still being debated, we are now confronted with new developments in the economy, characterized by digital technology, new modes of production and business models, and changing employment relations. Macroeconomics and finance need urgent rethinking as the global economy transforms. Our gathering on March 5, 2019 brought together economists, policymakers, financial regulators, and industry practitioners from around the world. We heard diverse perspectives on multilateralism, pension and labor market reform, international trade, and risks in the world economy, and we grappled with issues on stagnant wages, public debt, fiscal and monetary policy, and banking reforms. Our discussion was by no means exhaustive or conclusive, but we attempted to harness the group’s collective wisdom to address some of the most prominent questions of our day. This document is intended to inform our commissioners as they develop CGET’s final report and to share our timely conversation with policymakers and the general public. Fomenting multidisciplinary, critical discourse is one of the most important responsibilities of this initiative, and we sincerely thank the staff at the Institute for New Economic Thinking (INET), our dedicated Commissioners, and our outside experts for helping us to promote this dialogue.
Topic:
Economics, Industrial Policy, Regulation, Digital Economy, Economic Theory, and Macroeconomics
Political Geography:
United States and Global Focus

10. Demand-determined potential output: a revision and update of Okun’s original method

Author:
Claudia Fontanari, Antonella Palumbo, and Chiara Salvatori
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper challenges the mainstream view of potential output, and enquires into the supposed effects of Great Recession on potential growth. We identify in the demand-led growth perspective a more promising theoretical framework both to define the notion and to gauge the long-term effects of a demand slow down. Based on the poor reliability of standard estimates of potential output, we also propose an alternative calculation. This is based on an update of Arthur M. Okun’s original method for estimating potential output, which, differently from the estimation methods currently in use, does not rely on the notion of NAIRU, thus being immune to its theoretical and empirical shortcomings. Our calculation, based on a re-estimation of Okun’s Law on US quarterly data, shows both how far an economy generally operates from its production possibilities, and how much potential growth is affected by the actual growth of demand over time. These wide margins for expansion of actual and potential output growth imply that a determined policy of demand expansion would create, given time, the very capacity that justifies it.
Topic:
Economics, Global Recession, Economic growth, Macroeconomics, and Demand
Political Geography:
United States and Global Focus