nep-pke New Economics Papers
on Post Keynesian Economics
Issue of 2013‒03‒02
eight papers chosen by
Karl Petrick
Western New England University

  1. How the Great Moderation Became a (Contained) Depression and What to Do About It By Barry Cynamon; Steven Fazzari; Mark Setterfield
  2. Design Failures in the Eurozone: Can they be fixed? By Paul de Grauwe
  3. Why Does the Minimum Wage Have No Discernible Effect on Employment? By John Schmitt
  4. Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study By Mark Weisbrot; Helene Jorgensen
  5. Reducing Waste With an Efficient Medicare Prescription Drug Benefit By Dean Baker
  6. "The Economics of Inclusion: Building an Argument for a Shared Society" By Michael A. Valenti; Olivier G. Giovannoni
  7. The Solow Growth Model with Keynesian Involuntary Unemployment By Riccardo Magnani
  8. Leaving Theory Behind: Why Hypothesis Testing Has Become Bad for IR By Mearsheimer, John J.; Walt, Stephen M.

  1. By: Barry Cynamon (Weidenbaum Center on the Economy, Government, and Public Policy, Washington University in St. Louis); Steven Fazzari (Department of Economics, Washington University in St. Louis); Mark Setterfield (Department of Economics, Trinity College)
    Abstract: The Great Recession was deep and the subsequent recovery has been slower than most economists predicted. This article summarizes the message of a recent book that presents perspectives from a group of Keynesian economists who warned prior to 2007 of dangerous trends that could lead to these unfavorable outcomes. We discuss how the debt-fueled consumer boom leading up to the Great Recession was unsustainable and how rising inequality has compromised demand generation during the feeble recovery. We conclude the article by considering how public policy must respond in coming years.
    Keywords: Great Recession, Great Moderation, economic recovery, Keynesian macroeconomics
    JEL: E21 E25 E61
    Date: 2013–02
  2. By: Paul de Grauwe
    Abstract: I analyse the nature of the design failures of the Eurozone. I argue first that the endogenous dynamics of booms and busts that are endemic in capitalism continued to work at the national level in the Eurozone and that the monetary union in no way disciplined these into a union-wide dynamics. On the contrary the monetary union probably exacerbated these national booms and busts. Second, the existing stabilizers that existed at the national level prior to the start of the union were stripped away from the member-states without being transposed at the monetary union level. This left the member states “naked” and fragile, unable to deal with the coming national disturbances. I study the way these failures can be overcome. This leads me to stress the role of the ECB as a lender of last resort and the need to make macroeconomic policies more symmetric so as to avoid a deflationary bias in the Eurozone. I conclude with some thoughts on political unification.
    Date: 2013–02
  3. By: John Schmitt
    Abstract: The employment effect of the minimum wage is one of the most studied topics in all of economics. This report examines the most recent wave of this research – roughly since 2000 – to determine the best current estimates of the impact of increases in the minimum wage on the employment prospects of low-wage workers. The weight of that evidence points to little or no employment response to modest increases in the minimum wage.
    Keywords: minimum wage, labor, employment, inequality, poverty
    JEL: J J2 J3 J31 J38 J6 J8 D
    Date: 2013–02
  4. By: Mark Weisbrot; Helene Jorgensen
    Abstract: The IMF makes policy recommendations to European countries through its Article IV consultations and resulting papers. This paper examines IMF policy recommendations to see whether they have contributed to the ongoing crisis in Europe, and also how they might affect other European Union goals such as those of Europe 2020, which seeks to reduce social exclusion, promote public investment in research and development, and promote employment and education. The paper examines the policy advice given by the IMF to European Union countries in 67 Article IV agreements for the four years 2008-2011 (IMF 2012c).
    Keywords: ILO, IMF, article Iv,
    JEL: E F E5 E6 J
    Date: 2013–01
  5. By: Dean Baker
    Abstract: When Congress was debating the Medicare drug benefit in 2003, there were many who advocated that Medicare provide the benefit as part of the traditional hospital insurance program. This was expected to save money both due to lower administrative costs and also as result of Medicare’s ability to use its market power to directly negotiate lower prices with the pharmaceutical industry. The plan that was passed instead required beneficiaries to purchase insurance from private insurers who would be subsidized by the government. It has been widely noted that the drug benefit has cost considerably less than expected. In 2011, the benefit cost $67.4 billion, just 51.3 percent of the originally projected cost. While advocates of using private insurers have claimed that lower-than-projected costs vindicate their design for the benefit, in fact the main reason that costs have been less than projected is that drug costs in general have risen much less rapidly than had been projected. This issue brief looks at the main factor behind slower-than-projected costs and how the United States can lower spending by negotiating drug prices.
    Keywords: Medicare, medicare drug benefit, prescription drug, Dean Baker, hospital insurance, pharmaceutical industry, private insurers
    JEL: I I1 I14 I18 I3 I38 H
    Date: 2013–02
  6. By: Michael A. Valenti; Olivier G. Giovannoni
    Abstract: This paper presents a review of the literature on the economics of shared societies. As defined by the Club de Madrid, shared societies are societies in which people hold an equal capacity to participate in and benefit from economic, political, and social opportunities regardless of race, ethnicity, religion, language, gender, or other attributes, and where, as a consequence, relationships between the groups are peaceful. Our review centers on four themes around which economic research addresses concepts outlined by the Club de Madrid: the effects of trust and social cohesion on growth and output, the effect of institutions on development, the costs of fractionalization, and research on the policies of social inclusion around the world.
    Keywords: Shared Societies; Economic Inclusion; Institutions; Economic Growth; Income Distribution
    JEL: D31 O11 O43
    Date: 2013–02
  7. By: Riccardo Magnani
    Abstract: The aim of this paper is to extend the Solow model in a way that permits to endogenize unemployment. Starting from a Neoclassical growth model, as the Solow model, we introduce a mechanism that allows us to determine the Keynesian unemployment, i.e. unemployment that is caused by the weakness of the aggregate demand. Using our base model, that works as a Keynesian demand-driven model, we find that an increase in the aggregate demand (due to a reduction in the saving rate or to an increase in public expenditures) reduces unemployment and stimulates the GDP. Then, we modify the investment function in order to take into account for the crowding-in/crowding-out effect on investments. This allows us to build a model which is between Neoclassical supply-driven models and Keynesian demand-driven models.
    Keywords: Growth models;Neoclassical models;Keynesian models;Involuntary unemployment
    JEL: O40 E13 E12 J60
    Date: 2013–01
  8. By: Mearsheimer, John J. (University of Chicago); Walt, Stephen M. (Harvard University)
    Abstract: Theory creating and hypothesis testing are both important elements of social science. Unfortunately, in recent years the balance between theory creation/refinement and the testing of empirical hypotheses has shifted sharply toward the latter. This trend is unfortunate, because insufficient attention to theory can lead to misspecified models and overreliance on misleading measures of key concepts. In addition, the poor quality of much of the data in IR makes it less likely that these efforts will produce useful cumulative knowledge. The shift away from theory and towards hypothesis testing is due mostly to the professionalization of academia, and this trend is likely to continue unless there is a collective decision to alter prevailing academic incentives.
    Date: 2013–01

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