nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2011‒03‒19
five papers chosen by
Karl Petrick
University of the West Indies

  1. Understanding the Great Recession By Palley, Thomas; SHAIKH, ANWAR M; Madrick, Jeff
  2. The Potential Savings to Social Security from Means Testing By Dean Baker; Hye Jin Rho
  3. Economists as Worldly Philosophers By Robert J. Shiller; Virginia M. Shiller
  4. Does a Rising Tide Lift All Boats? Welfare Consequences of Asymmetric Growth By Murphy, Daniel P
  5. Fragile States and Development Policy By Besley, Timothy J.; Persson, Torsten

  1. By: Palley, Thomas; SHAIKH, ANWAR M; Madrick, Jeff
    Abstract: Thomas Palley argues that the causes of the “Great Recession†are not primarily to be found in the asset bubble that was allowed to inflate in the housing market and in the financial sector. The bubbles actually reflect the longer-term basis for stagnation that originate in the macro-economic structure of the US. He presents two major dimensions of these structural problems. The first problem is the entrenchment of a “neoliberal†growth model that is hegemonic in the minds of politicians and the economics establishment that became orthodoxy in the 1980s. He then considers the second obstacle to creating a virtuous circle of demand and full employment. Secondly, Palley finds that the US model of economic engagement with the world’s other economies is flawed. He ends his presentation with an alternative policy recommendation that inverts the power of corporations in favor of workers. Crisis is an inherent, inevitable, feature of capitalism in the findings of Anwar Shaikh. He demonstrates this historically by outlining its recurrence from at least two centuries of experience. Moreover, the crises are not limited to just one nation but are system-wide events. The current recession rises out of the generalized leveling off of the profit rate in the early 1980s that was achieved by driving down wages but increasing productivity. Moreover, the cost of capital has been historically low and, thus, particularly important for fueling financial bubbles. He concludes that there is little reason to believe that wages might be able to return to a greater balance with productivity growth given the power of capitalists and the growing army of reserve labor. Jeff Marick trains his lens on the corruption of Wall Street and the lack of governmental regulation of the financial sector as the two most important causes of the Great Recession. The incentives for Wall Street were at odds with a self-sustaining economy. Short-term gains, huge bonuses and gaming the sector were given priority over fiducially prudent decisions for the long-term health of financial institutions and the economy as a whole. These incentives grew out of deregulation beginning with the Reagan administration, a lack of micro-economic analysis stemming from a Grenspanian ideology of banker probity, and mass delusion that economy would continue to churn along. Madrick points to recurrent market failures from the fall of junk bond kings, to the Savings and Loans collapses, to recurrent crisis in the 1990s and the blowout of the high-tech bubble at the century’s turn. Despite these warnings, the government refused to be diligent and allowed for ever-greater financial chicanery to be built with the goal of enriching corporate executives at the expense of the rest of the economy.
    Date: 2011–01–31
  2. By: Dean Baker; Hye Jin Rho
    Abstract: Many people in policy debates have argued that means testing, or reducing Social Security payments to affluent beneficiaries, can be an effective way to save money for the program and to reduce the federal budget deficit. This paper examines the feasibility of saving money through various types of means tests and suggests that is likely to be very limited unless the means test is applied to individuals who are very much middle class by any reasonable definition. The percentage of benefits that go to affluent seniors is too small to make very much difference to the program’s finances.
    Keywords: social security, retirement, means testing
    JEL: H H5 H55
    Date: 2011–03
  3. By: Robert J. Shiller (Cowles Foundation, Yale University); Virginia M. Shiller (Child Study Center, Yale University)
    Abstract: While leading figures in the early history of economics conceived of it as inseparable from philosophy and other humanities, there has been movement, especially in recent decades, towards its becoming an essentially technical field with narrowly specialized areas of inquiry. Certainly, specialization has allowed for great progress in economic science. However, recent events surrounding the financial crisis support the arguments of some that economics needs to develop forums for interdisciplinary interaction and to aspire to broader vision.
    Keywords: Economic methodology, Specialization, Behavioral economics, Psychology, Rational expectations, Economics as a moral science, Pareto criterion, Interdisciplinary, Journal of Economic Perspectives
    JEL: B4 B41
    Date: 2011–03
  4. By: Murphy, Daniel P
    Abstract: A common presumption is that increased growth in the aggregate enhances the welfare of both the rich and the poor. I show that instead, as the rich get richer, the welfare of the poor may decline if the underlying growth is asymmetric. There are two distinct and complementary explanations: First, sector-biased, skill-biased technological change, and second, efficiency improvements in the government sector. In the first case, skill-biased technological change in sectors consumed by the skilled rich increases their income beyond the increase in economic wealth, causing a decline in the consumption and welfare of the low-skilled poor. This result stands in contrast to the standard model of skill-biased technological change. In the second case, growth takes the form of improved efficiency in a government sector that is financed by rich taxpayers. The welfare of the low-skilled poor will decline whenever the consumption bundle of the skilled rich embodies more skill intensity than does the production of government services. This analysis demonstrates that a rising tide need not lift all boats and that the exact nature of consumption patterns is important not only for growth and inequality, as has been emphasized in earlier literature, but also for welfare.
    Keywords: economic growth; inequality; skill-biased technological change; public economics
    JEL: O11 H50 I31 O39 J24 J30
    Date: 2011–01
  5. By: Besley, Timothy J.; Persson, Torsten
    Abstract: It is widely recognized that fragile states are key symptoms of under-development in many parts of the world. Such states are incapable of delivering basic services to their citizens and political violence is commonplace. As of yet, mainstream development economics has not dealt in any systematic way with such concerns and the implications for development assistance. This paper puts forward a framework for analyzing fragile states and applies it to a variety of development policies in different types of states.
    Keywords: development; state fragility
    JEL: O10 O19 P45
    Date: 2011–03

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