"The Role of Institutions and Policies in Creating High European Unemployment: The Evidence"

The conventional wisdom is that high European unemployment is the result of job markets that are rigid and inflexible. This paper presents new empirical evidence that challenges this received wisdom. A major contribution of the paper is that it fully accounts for both micro- and macroeconomic factors, as well as taking account of cross-country economic spillovers. The evidence shows that macroeconomic factors dominate in explaining unemployment. These factors are robust to changes in empirical specification. Labor market institutions do matter for unemployment, but not in the way conventionally spoken about. Unemployment benefits and union density have no effect. The level of wage bargaining coordination and the extent of union wage coverage both matter, but if properly paired they can actually reduce unemployment. Lower tax burdens can also reduce unemployment, but a far more cost-effective fiscal approach is to increase spending on active labor market policies. The bottom line is that high unemployment in western Europe has been the result of self-inflicted dysfunctional macroeconomic real interest rates, and slower growth that raised unemployment. Moreover, they all did so at the same time, thereby generating a wave of trade-based spillovers that generated a continentwide macroeconomic funk and further raised unemployment.

Soros on International Capital Markets and Developing Economies: Multiple Equilibria and the Role of Policy

George Soros' views on financial markets are complex and at odds with most of the economics profession, marking him as an intellectual iconoclast. This paper explores Soros' thinking about financial markets, with special emphasis on his views regarding the shortcomings of the current international financial system and its treatment of developing countries. His thinking on developing countries and the international financial system is represented in terms of a model of multiple equilibria. The model is then applied to analyze Brazil's current financial problems, and policies for escaping the current "bad" high interest rate equilibrium are explored. Soros' analysis of financial markets and Brazil's financial predicament are suggestive of how Brazil might escape its current high interest rate trap. More broadly, Soros' analysis of financial markets suggests a need for policy makers to reconsider how these markets operate, which may in turn result in rethinking the role and relevance of capital controls.

The Simple Macroeconomics of Fiscal Austerity, Public Sector Debt and Deflation

This paper explores the macroeconomics of fiscal austerity and deflation in an economy with public debt. A binding budget deficit cap destabilizes the economy by turning the government budget into an automatic destabilizer. Public debt helps maintain AD in the presence of deflation because deflation increases the real value of public interest payments. That makes public debt significantly different from private debt. If the economy is subject to a binding deficit cap, deflation no longer stabilizes output. This is because increased real interest payments must be matched by spending cuts, giving rise to a negative balanced budget multiplier.fiscal austerity, budget deficit cap, public debt, deflation growth theory

Contradictions Coming Home to Roost? Income Distribution and the Return of the Aggregate Demand Problem

It is widely believed that the current economic slowdown will be mild and temporary in nature, the result of a momentary wobble in the stock market. This paper argues that the slowdown stands to be more deep- seated, owing to contradictions in the existing process of aggregate demand generation. These contradictions are the result of deterioration in income distribution. They have been held at bay for almost two decades by a range of different demand compensation mechanisms: steadily rising consumer debt, a stock market boom, and rising profit rates. However, these mechanisms are now exhausted, confronting the U.S. economy with a serious aggregate demand generation problem. Fiscal policy adjustments may be the only way out of this impasse, but such adjustments should be accompanied by measures to rectify the structural imbalances at the root of the current impasse. Absent this, the problem of deficient demand will reassert itself, and the next time around public sector finances may not be in such a favorable position to deal with it.

"The Contradictions of Export-led Growth"

The export-led growth paradigm is a development strategy aimed at growing productive capacity by focusing on foreign markets. It rose to prominence in the late 1970s and became part of a new consensus among economists about the benefits of economic openness. According to Thomas I. Palley, this paradigm is no longer relevant because of changed conditions in both emerging-market (EM) and developed economies. He outlines the stages of the export-led growth paradigm leading to its adoption worldwide, as well as the various critiques of this agenda that have become increasingly prescient. He concludes that we should reduce reliance on strategies aimed at attracting export-oriented foreign direct investment and institute a new paradigm based on a domestic demand–led growth model. Otherwise, the global economy is likely to experience asymmetric stagnation and increased economic tensions between EM and industrialized economies.

Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility

This paper extends Tobin’s (1975) Keynesian analysis of deflation to include a range of additional channels through which deflation exacerbates Keynesian unemployment. The paper provides further theoretical reasons why downward price level adjustment may not solve the Keynesian problem. These arguments challenge the received wisdom that Keynes’ General Theory is a special case resting on downwardly rigid prices and nominal wages. This conventional wisdom has led many economists to recommend policies promoting downward flexibility. These policies have created an environment in which deflation is more likely, giving new relevance to Keynesian analysis of deflation.deflation, liquidity trap, Fisher debt effect, price flexibility

The Aggregate Demand, Aggregate Supply, and Endogenous Growth: A Synthetic neo-Kaleckian Model

This paper develops a neo-Kaleckian endogenous growth model that incorporates aggregate supply - demand balance and balance between labor force and employment growth. The paper explicitly models income distribution which is a critical channel whereby unemployment affects investment and growth. The model generates a growth unemployment rate trade-off. A reduced propensity to save raises growth but it also raises the unemployment rate because of induced technological progress. This resonates with Alvin Hansen's hypothesis. The paper contains several theoretical innovations including a new mechanism whereby unemployment affects income distribution; introduction of a Phillips curve and inflation effects; and introduction of demand growth expectation effects.aggregate demand, supply, unemployment, neo-Kaleckian endogenous growth theory

Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations

This paper examines the theory of the Phillips curve, focusing on the distinction between "formation" of inflation expectations and "incorporation" of inflation expectations. Phillips curve theory has largely focused on the former. Explaining the Phillips curve by reference to expectation formation keeps Phillips curve theory in the policy orbit of natural rate thinking where there is no welfare justification for higher inflation even if there is a permanent inflation - unemployment trade-off. Explaining the Phillips curve by reference to incorporation of inflation expectations breaks that orbit and provides a welfare economics rationale for Keynesian activist policies that reduce unemployment at the cost of higher inflation.Phillips curve, formation of inflation expectations, incorporation of inflation expectations, backward bending Phillips curve.

The Role of Institutions and Policies in Creating High European

The conventional wisdom is that high European unemployment is the result of job markets that are rigid and inflexible. This paper presents new empirical evidence that challenges this received wisdom. A major contribution of the paper is that it fully accounts for both micro- and macroeconomic factors, as well as taking account of cross-country economic spillovers. The evidence shows that macroeconomic factors dominate in explaining unemployment. These factors are robust to changes in empirical specification. Labor market institutions do matter for unemployment, but not in the way conventionally spoken about. Unemployment benefits and union density have no effect. The level of wage bargaining coordination and the extent of union wage coverage both matter, but if properly paired they can actually reduce unemployment. Lower tax burdens can also reduce unemployment, but a far more cost- effective fiscal approach is to increase spending on active labor market policies. The bottom line is that high unemployment in western Europe has been the result of self-inflicted dysfunctional macroeconomic policy. European policymakers adopted a course of disinflation, high real interest rates, and slower growth that raised unemployment. Moreover, they all did so at the same time, thereby generating a wave of trade-based spillovers that generated a continentwide macroeconomic funk and further raised unemployment.unemployment, macroeconomic shocks, labor market institutions

"The Fallacy of the Revised Bretton Woods Hypothesis: Why TodayÕs International Financial System Is Unsustainable"

The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the U.S. trade deficit and has failed to understand the microeconomics of transactions within the system. According to this brief by Thomas I. Palley, the international financial system is unsustainable for reasons of demand, not supply. He recommends a global system of managed exchange rates to replace the current system before it crashes, along with the U.S. economy. East Asian economies are pursuing export-led growth and running huge trade surpluses with the United States by actively pursuing policies aimed at maintaining undervalued exchange rates. Their governments continue to accumulate U.S. financial assets in order to support and stabilize the international financial system.While East Asian policymakers are correct in their belief that they can improve economic outcomes through exchange rate intervention, the system is undermining the structure of income and aggregate demand and eroding U.S. manufacturing capacity.