Europe is now stuck in a fiscal trap, brought about by the failure of orthodox economics to provide an effective strategy for economic growth

The United States has yet to resolve its “fiscal cliff”, its own version of austerity. Dimitri B. Papadimitriou and Greg Hannsgen of the Levy Economics Institute offer an analysis of what they term the “fiscal trap.” They argue many economists and policymakers continue to misunderstand the role of fiscal policy, especially in times of economic turmoil, and have, as a result, failed to offer effective policies to repair the economies of the US and eurozone

"Recent Rise in Federal Government and Federal Reserve Liabilities--Antidote to a Speculative Hangover"

Federal government and Federal Reserve (Fed) liabilities rose sharply in 2008. Who holds these new liabilities, and what effects will they have on the economy? Some economists and politicians warn of impending inflation. In this new Strategic Analysis, the Levy Institute's Macro-Modeling Team focuses on one positive effect--a badly needed improvement of private sector balance sheets--and suggest some of the reasons why it is unlikely that the surge in Fed and federal government liabilities will cause excessive inflation.

"The New New Deal Fracas: Did Roosevelt's 'Anti-Competitive' Legislation Slow the Recovery from the Great Depression?"

A wave of revisionist work claims that "anti-competitive" New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.

"Debts, Deficits, Economic Recovery, and the U.S. Government"

In this new policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes by any amount will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.

"Fiscal Stimulus, Job Creation, and the Economy: What Are the Lessons of the New Deal?"

As the nation watches the impact of the recent stimulus bill on job creation and economic growth, a group of academics continues to dispute the notion that the fiscal and job creation programs of the New Deal helped end the Depression. The work of these revisionist scholars has led to a public discourse that has obvious implications for the controversy surrounding fiscal stimulus bills. Since we support a new stimulus package—one that emphasizes jobs for the 9.8 percent of the workforce currently unemployed—we have been concerned about this debate. With Congress, the White House, pundits, and the press riveted on the all-important health care debate, we worry that they are also distracted by skirmishes over economic theory and history, while millions wait for a new chance to do meaningful work and effective, if imperfect, policy tools are readily at hand. (See also, Public Policy Brief No. 104.)

"Lessons from the New Deal--Did the New Deal Prolong or Worsen the Great Depression?"

Since the current recession began in December 2007, New Deal legislation and its effectiveness have been at the center of a lively debate in Washington. This paper emphasizes some key facts about two kinds of policy that were important during the Great Depression and have since become the focus of criticism by new New Deal critics: (1) regulatory and labor relations legislation, and (2) government spending and taxation. We argue that initiatives in these policy areas probably did not slow economic growth or worsen the unemployment problem from 1933 to 1939, as claimed by a number of economists in academic papers, in the popular press, and elsewhere. To substantiate our case, we cite some important economic benefits of New Deal–era laws in the two controversial policy areas noted above. In fact, we suggest that the New Deal provided effective medicine for the Depression, though fiscal policy was not sufficiently countercyclical to conquer mass unemployment and prevent the recession of 1937–38; 1933's National Industrial Recovery Act was badly flawed and poorly administered, and the help provided by the National Labor Relations Act of 1935 came too late to have a big effect on the recovery.New Deal; Public Works Projects; NIRA; NLRA; Cartelization; Unions; Labor Relations Policy; Fiscal Policy; Fiscal Stimulus; Unemployment; Great Depression

"The Central Bank 'Printing Press': Boon or Bane? Remedies for High Unemployment and Fears of Fiscal Crisis"

In recent years, the US public debt has grown rapidly, with last fiscal year's deficit reaching nearly $1.3 trillion. Meanwhile, many of the euro nations with large amounts of public debt have come close to bankruptcy and loss of capital market access. The same may soon be true of many US states and localities, with the governor of California, for example, publicly regretting that he has been forced to cut bone, and not just fat, from the state's budget. Chartalist economists have long attributed the seemingly limitless borrowing ability of the US government to a particular kind of monetary system, one in which money is a "creature of the state" and the government can create as much currency and bank reserves as it needs to pay its bills (this is not to say that it lacks the power to impose taxes). In this paper, we examine this situation in light of recent discussions of possible limits to the federal government's use of debt and the Federal Reserve's "printing press." We examine and compare the fiscal situations in the United States and the eurozone, and suggest that the US system works well, but that some changes must be made to macro policy if the United States and the world as a whole are to avoid another deep recession.Budget Deficit; Federal Debt; Debt Tolerances