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The Levy Institute’s Macro-Modeling Team — The Pandemic, The Stimulus, And The Future Prospects For The US Economy

Dimitri B. Papadimitriou, Michalis Nikiforos and Gennaro Zezza have a new report on prospects for the US economy.

They argue that while the US economy would enjoy a boom in the near term because of the large fiscal stimulus, the danger is that because of the large trade imbalance because of the different growth rates of the US and its trading partners implies that the continuation would require a large fiscal deficit or the private sector becoming a net borrower.

In my opinion, soon enough when the US economy starts approaching full employment, there will be shouts to cut the fiscal stance because as Michal Kalecki argued captains of industry don’t like full employment. And/or: continuous growth would require high fiscal deficits but as the public debt will continue to rise relative to gdp, politicians will get nervous.

The US government could try to improve net exports by increasing competitiveness of US firms but such things take time. A combination of trying to improve net exports by industrial policy, tariffs and eventually removing the system of free trade is the way forward. It won’t be easy as economists are attached to dogmas.

JPKE Special Issue: The Legacy Of Wynne Godley

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There was a conference on the 10th death anniversary of Wynne Godley last year. If you haven’t seen it, the video recordings/presentation/remarks are in that link.

Now, there’s a special issue by the JPKE about the conference with papers as in the cover:

Happy reading!

Conference Recordings Of The Legacy Of Wynne Godley

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Yesterday, March 13th had a special event, a virtual conference in honour of the great Wynne Godley.

If you hadn’t joined it, you can still view the recordings which have now been made available, thanks to Gennaro Zezza, who organised the event.

Here’s another poster, prior to the event. You can find the picture here.

Picture credit: Levy Institute on Twitter.

All videos now seem available. Check again with the conference page for the presentation or write-ups.

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Gennaro Zezza And Alan Shipman — Wynne Godley

There’s a nice recent six-page biography of Wynne Godley in The New Palgrave Dictionary Of Economics by Gennaro Zezza and Alan Shipman. Shipman had recently written a full biography on Wynne Godley’s life.

Abstract:

The chapter provides a brief biography of Wynne Godley (1926–2010), a British economist who informed the discussion of economic policy in the United Kingdom and later the United States. Godley was the main contributor to the development of the stock-flow-consistent approach to macroeconomics, setting out models based on rigorous accounting which allowed him to anticipate (ahead of more orthodox forecasters) adverse developments in the UK economy in the 1970s and 1980s, as well as the global recessions of 2001 and 2007–2009.

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Dimitri B. Papadimitriou, Michalis Nikiforos And Gennaro Zezza — Can Redistribution Help Build A More Stable Economy?

The latest Strategic Analysis report from Levy Institute.

Interesting chart and explanation:

The main reason for the relative stability of the trade and current account balances is presented in Figure 4d. Since the beginning of the recovery, the trade deficit in goods except for petroleum products has been following its precrisis trend.3 At the end of 2018 it reached its precrisis peak—and for that matter its historical peak—of around 4.4 percent. However, at the same time this increase has been counteracted by the improvement in the trade balance of petroleum goods, related to shale gas extraction. The trade deficit of petroleum goods is now close to zero, compared to 2.2 percent of GDP when shale gas extraction started in 2011 and 3 percent before the crisis. It is not then hard to calculate that, had it not been for this improvement in the petroleum products trade balance, the overall trade deficit of the US economy would be close to 7 percent, or more.

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Notes

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  1. To be more precise, the trade balance of non-petroleum goods started slowly improving in 2006, more than a year before the economy officially entered the recession. This improvement had to do with two main factors: (1) the slowdown of the US economy that had started already in 2006, and (2) the significant depreciation of the dollar that started in 2002 and continued up until 2008.
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“America First,” Fiscal Policy, And Financial Stability

The Levy Institute Of Bard College was far ahead of anyone with its prescience on the fate of the U.S. economy (and also the world) before the crisis. So everyone should read them. Michalis Nikiforos and Gennaro Zezza have a new Strategic Analysis report.

Abstract:

The US economy has been expanding continuously for almost nine years, making the current recovery the second longest in postwar history. However, the current recovery is also the slowest recovery of the postwar period.

This Strategic Analysis presents the medium-run prospects, challenges, and contradictions for the US economy using the Levy Institute’s stock-flow consistent macroeconometric model. By comparing a baseline projection for 2018–21 in which no budget or tax changes take place to three additional scenarios, the authors isolate the likely macroeconomic impacts of: (1) the recently passed tax bill; (2) a large-scale public infrastructure plan of the same “fiscal size” as the tax cuts; and (3) the spending increases entailed by the Bipartisan Budget Act and omnibus bill. Finally, Nikiforos and Zezza update their estimates of the likely outcome of a scenario in which there is a sharp drop in the stock market that induces another round of private-sector deleveraging.

Although in the near term the US economy could see an acceleration of its GDP growth rate due to the recently approved increase in federal spending and the new tax law, it is increasingly likely that the recovery will be derailed by a crisis that will originate in the financial sector.

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Gennaro Zezza — Modeling The Macroeconomic Effects Of A Universal Basic Income

In August, Gennaro Zezza and his co-authors Michalis Nikiforos and Marshall Steinbaum had a paper for the Roosevelt Institute, studying the effects of a Universal Basic Income. The model uses the Levy Institute‘s model.

The idea is simple. If a basic income is provided for everyone, it raises domestic demand because of higher consumption and hence leads to higher output. This is easy to see if there’s no rise in tax rates. If tax rates are increased so that the income provided matches the taxes raised, it’s still a stimulus to the economy, since the propensity to consume for people with lower incomes (or no income otherwise) is higher.

From the introduction;

We examine three versions of unconditional cash transfers: $1,000 a month to all adults, $500 a month to all adults, and a $250 a month child allowance. For each of the three versions, we model the macroeconomic effects of these transfers using two different financing plans – increasing the federal debt, or fully funding the increased spending with increased taxes on households – and compare the effects to the Levy model’s baseline growth rate forecast. Our findings include the following:

  • For all three designs, enacting a UBI and paying for it by increasing the federal debt would grow the economy. Under the smallest spending scenario, $250 per month for each child, GDP is 0.79% larger than under the baseline forecast after eight years. According to the Levy Model, the largest cash program – $1,000 for all adults annually – expands the economy by 12.56% over the baseline after eight years. After eight years of enactment, the stimulative effects of the program dissipate and GDP growth returns to the baseline forecast, but the level of output remains permanently higher.
  • When paying for the policy by increasing taxes on households, the Levy model forecasts no effect on the economy. In effect, it gives to households with one hand what it is takes away with the other.
  • However, when the model is adapted to include distributional effects, the economy grows, even in the tax-financed scenarios. This occurs because the distributional model incorporates the idea that an extra dollar in the hands of lower income households leads to higher spending. In other words, the households that pay more in taxes than they receive in cash assistance have a low propensity to consume, and those that receive more in assistance than they pay in taxes have a high propensity to consume. Thus, even when the policy is tax- rather than debt-financed, there is an increase in output, employment, prices, and wages.

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What Is Equilibrium?

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The new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute, surveying the literature on stock-flow consistent models has a discussion on the concept of equilibrium:

In the short run, “equilibrium” is reached through price adjustments in financial markets, while output adjustments guarantee that overall saving is equal to investment. However, such “equilibrium” is not a state of rest, since the expectations that drive expenditure and portfolio decisions may not be fulfilled, and/or the end-of-period level for at least one stock in the economy is not at its target level, so that such discrepancies influence decisions in the next period.

In theoretical SFC models, the long-run equilibrium is defined as the state where the stock-flow ratios are stable. In other words, the stocks and the flows grow at the same rate. The system converges towards that equilibrium with a sequence of short-run equilibria, and thus follows the Kaleckian dictum that “the long-run trend is but a slowly changing component of a chain of short-run situations; it has no independent entity” (Kalecki 1971: 165). The adjustment takes place because stocks and stock-flow ratios are relevant for the decisions of the agents of the economy. If stocks did not feed back into flows, the model may generate ever-increasing (or decreasing) stock-flow ratios: a result that might be stock-flow consistent, but at the same time unendurable. The convergence towards the long-run equilibrium also depends on more conventional hypotheses regarding the parameters of the model.

So equilibrium is a state where stock-flow ratios are stable.

Of course equilibrium just means that and doesn’t automatically translate to full employment, for example. One can imagine stock-flow ratios such as public debt/gdp, private debt/gdp may converge to some level such as 80%, 50% respectively but with unemployment at, say, 5%.

Also, it’s worth mentioning—especially in open economies—there is in general no automatic/market mechanism which guarantees that stock-flow norms are converging to some stable ratios.

Let me offer an alternative viewpoint for the short run.

In the short run, there’s really no concept of equilibrium because there is no heavenly Walrasian auctioneer in most markets. As pointed out by Nicholas Kaldor, there are dealers who are both buyers and sellers simultaneously. Dealers quote bid/ask prices and the quantities they are willing to buy or sell. Since there is a mismatch in demand and supply of “outside buyers” and “outside sellers”, dealers accumulate inventories or stocks. Dealers make a business out of the bid-ask spread. In non-financial markets, the terminology is slightly different. You won’t find a board with bid/ask prices at a car dealer, but the concept is similar. Here even the producer has inventories in the goods market. In the services market, whatever is demanded is supplied (or put in queue or refused if capacity is reached).

So there’s no equilibrium to be reached in the short-run. It’s always in disequilibrium. Sometimes neoclassical authors make it look like accounting identities are violated in disequilibrium and satisfied in equilibrium arranged by the Walrasian auctioneer. But in SFC models, it’s illogical to have such a thing. Accounting identities must always be respected. At all times, between all time periods, even infinitesimally small.

In real life, especially because of complications of the open economy, there is no such thing as an equilibrium or a tendency to move toward any equilibrium via market forces.

Still, the concept of equilibrium is useful even in SFC models. One can start with a state with a stable stock-flow ratios and then study what happens if some parameter or some exogenous variable is changed or a set of them are changed simultaneously. The dynamics may or may not reach equilibrium in the long run but we can study what happens in the traverse.

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Stock-Flow Consistent Models: A Survey

There’s a new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute.

Abstract:

The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

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