nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2009‒03‒14
six papers chosen by
Karl Petrick
University of the West Indies

  1. The Financial Crisis and the Systemic Failure of Academic Economics By David Colander; Hans Föllmer; Armin Haas; Michael Goldberg; Katarina Juselius; Alan Kirman; Thomas Lux; Brigitte Sloth
  2. "Obama's Job Creation Promise A Modest Proposal to Guarantee That He Meets and Exceeds Expectations" By Pavlina R. Tcherneva
  3. The finance-dominated growth regime, distribution, and aggregate demand in the US By Özlem Onaran; Engelbert Stockhammer; Lukas Grafl
  4. "Time to Bail Out-- Alternatives to the Bush-Paulson Plan" By Dimitri B. Papadimitriou; L. Randall Wray
  5. Economists in the PITS? By Bruno S. Frey
  6. Better to be rough and relevant than to be precise and irrelevant. Reddaway's Legacy to Economics By Ajit Singh

  1. By: David Colander; Hans Föllmer; Armin Haas; Michael Goldberg; Katarina Juselius; Alan Kirman; Thomas Lux; Brigitte Sloth
    Abstract: The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models
    Keywords: financial crisis, academic moral hazard, ethic responsibility of researchers
    JEL: A11 B40 G1
    Date: 2009–02
  2. By: Pavlina R. Tcherneva
    Abstract: Job creation is once again at the forefront of policy action, and for advocates of pro-employment policies, President Obama's Keynesian bent is a most welcome change. However, there are concerns that Obama's plan simply does not go far enough, and that a large-scale public investment program may face shortages of skilled labor, put upward pressure on wages, and leave women and minorities behind. Both concerns can be addressed by a simple amendment to the Obama plan that will bring important additional benefits. The amendment proposed here is for the government to offer a job guarantee to all unemployed individuals who are ready, willing, and able to participate in the economic recovery--that is, to target the unemployed directly.
    Date: 2009–01
  3. By: Özlem Onaran (Department of Economics, Vienna University of Economics & B.A.); Engelbert Stockhammer (Department of Economics, Vienna University of Economics & B.A.); Lukas Grafl (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: The finance-dominated growth regime has affected key macroeconomic variables in several contradictory ways. This paper investigates some of these effects: an increase of rentiers income, housing wealth and net financial wealth on private consumption expenditures and the effects of changes in payments to the rentier by the business on private investment expenditures. A Post-Kaleckian macro model is used as a starting point for this investigation. The paper thus contributes to two debates. First, it aims at clarifying some important macroeconomic effects of financialization. Second, it extends the analysis of distribution-led demand regimes by controlling for financialization variables.
    JEL: E12 E20 E22 E25 E61
    Date: 2009–02
  4. By: Dimitri B. Papadimitriou; L. Randall Wray
    Abstract: While serving as chairman of the Federal Reserve Board, Alan Greenspan advocated unsupervised securitization, subprime lending, option ARMs, credit-default swaps, and all manner of financial alchemy in the belief that markets "work" to reduce and spread risk, and to allocate it to those best able to assess and bear it--in his view, markets would stabilize in the absence of nasty government intervention. But as Greenspan now admits, he could never have imagined the outcome: a financial and economic crisis of biblical proportions. The problem is, market forces are not stabilizing. Left to their own devices, Wall Street wizards gleefully ran right off the cliff, and took the rest of us with them for good measure. The natural instability of market processes was recognized long ago by John Maynard Keynes, and convincingly updated by Hyman P. Minsky throughout his career. Minsky's theory explained the transformation of the economy over the postwar period from robust to fragile. He pointed his finger at managed money--huge pools of pension funds, hedge funds, sovereign wealth funds, university endowments, money market funds--that are outside traditional banking and therefore largely underregulated and undersupervised. With a large appetite for risk, managed money sought high returns promised by Wall Street's financial engineers, who innovated highly complex instruments that few people understood. In this new Policy Note, President Dimitri B. Papadimitriou and Research Scholar L. Randall Wray take a look back at Wall Street's path to Armageddon, and propose some alternatives to the Bush-Paulson plan to "bail out" both the Street and the American homeowner. Under the existing plan, Treasury would become an owner of troubled financial institutions in exchange for a capital injection--but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation's financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by "healthy" ones. But it is highly unlikely that relieving banks of some of their bad assets, or injecting some equity into them, will increase their willingness to lend. Resolving the liquidity crisis is the best strategy, the authors say, and keeping small-to-medium-size banks open is the best way to ensure access to credit once the economy recovers. A temporary suspension of the collection of payroll taxes would put more income into the hands of households while lowering the employment costs for firms, fueling spending and employment. The government should assume a more active role in helping homeowners saddled with mortgage debt they cannot afford, providing low-cost 30-year loans directly to all comers; in the meantime, a moratorium on foreclosures is necessary. And federal grants to support local spending on needed projects would go a long way toward rectifying our $1.6 trillion public infrastructure deficit. Can the Treasury afford all these measures? The answer, the authors say, is yes--and it is a bargain if one considers the cost of not doing it. It is obvious that there exist unused resources today, as unemployment rises and factories are idled due to lack of demand. Markets are also voting with their dollars for more Treasury debt. This does not mean the Treasury should spend without restraint--whatever rescue plan is adopted should be well planned and targeted, and of the proper size. The point is that setting arbitrary budget constraints is neither necessary nor desired--especially in the worst financial and economic crisis since the Great Depression.
    Date: 2008–11
  5. By: Bruno S. Frey
    Abstract: Academic economists today are caught in a “Publication Impossibility Theorem System” or PITS. To further their careers, they are required to publish in A-journals, but this is impossible for the vast majority because there are few slots open in such journals. Such academic competition is held to provide the right incentives for hard work, but there may be serious negative consequences: the wrong output may be produced in an inefficient way, the wrong people may be selected, and the losers may react in a harmful way. The paper suggests several ways for improvement.
    Keywords: Academia, economists, publication, journals, incentives, economic methodology
    JEL: A1 D02 I23
    Date: 2009–03
  6. By: Ajit Singh
    Abstract: W.B. Reddaway has been a highly influential figure in Cambridge economics during the second half of the 20th Century. His method and style of doing economics - called the Reddaway-type economics - were quite distinct. The present paper explains Reddaway's methodology by examining his most important research contributions. The title of this essay conveys his distance from mainstream economists. His essential substantive difference with the latter concerned inferential econometrics. He subscribed to Keynes' critique of Timburgen's methodology. In summary, Reddaway regarded economics as an empirical, evidence-based subject which, through economic policy, should help improve the world. In his view mathematics could sometimes help, but, more often than not, it obfuscated economic reality. Currently the academic economics profession is dominated by a priori theorising and deductive modelling. Greater attention to Reddaway's legacy to economics, to its research methods and to teaching, would very much help to rebalance the subject.
    Keywords: Method and style of doing economics, Reddaway-type economics, inferential econometrics
    JEL: A1 A2 C1 B5
    Date: 2008–12

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