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This paper examines the issue of the Greek public debt from different perspectives. We provide a historical discussion of the accumulation of Greece’s public debt since the 1960s and the role of public debt in the recent crisis. We show that the austerity imposed since 2010 has been unsuccessful in stabilizing the debt while at the same time taking a heavy toll on the Greek economy and society. The experience of the last six years shows that the country’s public debt is clearly unsustainable, and therefore a bold restructuring is needed. An insistence on the current policies is not justifiable either on pragmatic or on moral or any other grounds. The experience of Germany in the early post–World War II period provides some useful hints for the way forward. A solution to the Greek public debt problem is a necessary but not sufficient condition for the solution of the Greek and wider European crisis. A broader agenda that deals with the malaises of the Greek economy and the structural imbalances of the eurozone is of vital importance.

First paragraphThe prospects for world trade, the motor of growth for many countries for almost a decade, are discouraging especially during a time the global economy is enduring a recession. Since the summer of 2007, trade declined and was exacerbated when trade finance became difficult to obtain for importers, and consumer confidence dropped to unprecedented lows. In December 2008, exports were down in Brazil, China, South Korea and Taiwan by 2, 2.8, 17.4 and 42 percent respectively while in November 2008 exports from the US, Germany, Japan and India were correspondingly lower by 4, 22, 12 and 10 percent respectively – all significant declines (Patel/Trivedi 2009, Norris 2009). Expectations and consensus forecasts for the first quarter of 2009 suggest a decrease in overall trade value around 15 percent in both the advanced and emerging economies and a three percent contraction for the entire year, in real terms. These conditions demonstrate the synchronized slowdown of global demand and the implausibility of any economy to »export its way out of trouble« (Norris 2009). Furthermore, history is full of events illustrating protectionism attempts in many countries intended at improving their trade position with detrimental effects on others. This paper argues that the US and the rest of the world will not be able to achieve balanced growth and full employment unless they are able to agree and implement an entirely new way of running the global economy. In what follows, we outline the nature and magnitude of the emerging crisis, and suggest some of the things that must happen, even if our suggestions for achieving these things might be considered weak.

The present paper examines the issue of the Greek public debt. After providing a historical discussion, we show that the austerity of the last six years has been unsuccessful in stabilizing the debt while,at the same time,ithas takena heavy toll on the economy and society. The recent experience shows that the public debt is unsustainable and therefore a restructuring is needed. An insistence on the current policies is not justifiable either on pragmatic or on moral or any other grounds.The experience of Germany in the early post-WWII period provides some useful hints for the way forward. A solution to the public debt problem is a necessary but not sufficient condition for the solution of the Greek and European crisis. A wider agenda that deals with the malaises of the Greek economy and the structural imbalances of the Eurozone is of vital importance. Resumo: O presente artigo examina a questão da dívida pública grega. Após oferecer um panorama histórico, mostramos que a austeridade dos últimos seis anos fracassou em sua tentativa de estabilizar a dívida, ao mesmo tempo em que produziu intensos efeitos negativos sobre a economia e a sociedade. A experiência recente mostra que a dívida pública é insustentável, e que uma reestruturação é necessária. Uma insistência nas políticas correntes não se justifica seja em termos pragmáticos, morais, ou de qualquer outra natureza. A experiência da Alemanha no imediato pós-Segunda Guerra Mundial oferece indicações valiosas acerca do caminho a ser seguido. Encontrar uma solução para o problema da dívida pública é uma condição necessária, porém não suficiente para equacionar as crises grega e europeia. Uma agenda mais ampla, direcionada para as deficiências da economia grega e para os desequilíbrios estruturais da Zona do Euro, será de importância vital.

The Greek economy has the potential to recover, and in this report we argue that access to alternative financing sources such as zero-coupon bonds ("Geuros") and fiscal credit certificates could provide the impetus and liquidity needed to grow the economy and create jobs. But there are preconditions: the existing government debt must be rolled over and austerity policies put aside, restoring trust in the country's economic future and setting the stage for sustainable income growth, which will eventually enable Greece to repay its debt.

In this latest Strategic Analysis, the Institute's Macro Modeling Team examines the current, anemic recovery of the US economy. The authors identify three structural obstacles--the weak performance of net exports, a prevailing fiscal conservatism, and high income inequality--that, in combination with continued household sector deleveraging, explain the recovery's slow pace. Their baseline macro scenario shows that the Congressional Budget Office's latest GDP growth projections require a rise in private sector spending in excess of income--the same unsustainable path that preceded both the 2001 recession and the Great Recession of 2007-9. To better understand the risks to the US economy, the authors also examine three alternative scenarios for the period 2015-18: a 1 percent reduction in the real GDP growth rate of US trading partners, a 25 percent appreciation of the dollar over the next four years, and the combined impact of both changes. All three scenarios show that further dollar appreciation and/or a growth slowdown in the trading partner economies will lead to an increase in the foreign deficit and a decrease in the projected growth rate, while heightening the need for private (and government) borrowing and adding to the economy’s fragility.

To mobilize Greece's severely underemployed labor potential and confront the social and economic dangers of persistent unemployment, we propose the immediate implementation of a direct public benefit job creation program--a Greek "New Deal." The Job Guarantee (JG) program would offer the unemployed jobs, at a minimum wage, on work projects providing public goods and services. This policy would have substantial positive economic impacts in terms of output and employment, and when newly accrued tax revenue is taken into account, which substantially reduces the net cost of the program, it makes for a comparatively modest fiscal stimulus. At a net cost of roughly 1 percent to 1.2 percent of GDP (depending on the wage level offered), a midrange JG program featuring the direct creation of 300,000 jobs has the potential to reduce the unemployed population by a third or more, once indirect employment effects are taken into account. And our research indicates that the policy would do all this while reducing Greece’s debt-to-GDP ratio--which leaves little room for excuses.

In this report, we discuss alternative scenarios for restoring growth and increasing employment in the Greek economy, evaluating alternative policy options through our specially constructed macroeconometric model (LIMG). After reviewing recent events in 2013 that confirm our previous projections for an increase in the unemployment rate, we examine the likely impact of four policy options: (1) external help through Marshall Plan–type capital transfers to the government; (2) suspension of interest payments on public debt, instead using these resources for increasing demand and employment; (3) introduction of a parallel financial system that uses new government bonds; and (4) adoption of an employer-of-last-resort (ELR) program financed through the parallel financial system. We argue that the effectiveness of the different plans crucially depends on the price elasticity of the Greek trade sector. Since our analysis shows that such elasticity is low, our ELR policy option seems to provide the best strategy for a recovery, having immediate effects on the Greek population's standard of living while containing the effects on foreign debt.

U.S. economy has performed well over the past several years compared to what we have come to expect in recent decades, but it is far from the best it can be. The unemployment rate of 4.2 percent is the lowest since the 1960s, but in the midst of the longest peacetime expansion in the nation's history, it is nearly double rates that were common in the 1950s. In addition to the number of unemployed, millions are underemployed and millions more are officially out of the labor force but would work if a job were available. Of those who have full-time jobs, many earn wages below the poverty line. In good economic times, people forget about business cycles, but this expansion will eventually turn to recession. Poverty, joblessness, and underemployment will again increase. Although no

The work of Hyman Minsky represents an important link between Post Keynesians and Institutionalists. This essay begins with a brief summary of Minsky's early work, including his well-known financial instability hypothesis and his policy proposals designed to reform the financial system. It then moves on to discuss other proposals that are less well known, and developed after the publication of his Stabilizing an Unstable Economy (1986) book. One of them in all the work of Minsky is his demand that theory be institution-specific. Because there are a variety of possible types of economies, theory must be appropriate to the specific economy under analysis. His analysis concerned an evolving, developed, big-government capitalist economy with complex and long-lived financial arrangements. His policy recommendations were designed to promote a successful, democratic form of capitalism given these financial arrangements. These policies would have to ‘constrain’ instability through creation of institutional ‘ceili...

(1997). The Institutional Prerequisites for Successful Capitalism. Journal of Economic Issues: Vol. 31, No. 2, pp. 493-500.

If the Congressional Budget Office's recent projections of government revenues and outlays come to pass, the United States will not grow fast enough to bring down the unemployment rate between now and 2016. The public sector deficit will decline from present levels, endangering the sustainability of the recovery. But as this new Strategic Analysis shows, a public sector stimulus of a little over 1 percent of GDP per year focused on export-oriented R and D investment would increase US competitiveness through export-price effects, resulting in a rise of net exports, and slowly lower unemployment to less than 5 percent by 2016. The improvement in net export demand would allow the US economy to enter a period of aggregate-demand rehabilitation—with very encouraging consequences at home.

Greece's unemployment rate just hit 27.6 percent. That wasn’t supposed to happen. Why has the troika--the European Commission, International Monetary Fund (IMF), and European Central Bank--been so consistently wrong about the effects of its handpicked policies? The strategy being imposed on Greece depends in large part on the idea of "internal devaluation": that reducing wages will make its products more attractive, thus spurring a return to economic growth powered by rising exports. Our research, based on a macroeconomic model specifically constructed for Greece, indicates that this strategy is not working. Achieving significant growth in net exports through internal devaluation would, at best, take a very long time--and a great deal of immiseration and social disintegration would take place while we waited for this theory to bear fruit. Despite some recent admissions of error along these lines by the IMF, the troika still relies on a theory of how the economy works that badly underestimates the negative effects of austerity.

Employment in Greece is in free fall, with more than one million jobs lost since October 2008--a drop of more than 28 percent. In March, the "official" unemployment rate was 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years. In this report, Levy Institute President Dimitri B. Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza analyze the economic crisis in Greece and offer policy recommendations to restore growth and increase employment. This analysis relies on the Levy Institute's macroeconomic model of the Greek economy (LIMG), a stock-flow consistent model similar to the Institute’s model of the US economy. Based on the LIMG simulations, the authors find that a continuation of austerity policies would decrease GDP and increase unemployment. They find recent International Monetary Fund and European Commission projections for the Greek economy overly optimistic, and recommend a recovery strategy, similar to the Marshall Plan, to increase public consumption and investment—a strategy centered on an expanded direct public-service job creation program.

As this report goes to press, the official unemployment rate remains tragically elevated, compared even to rates at similar points in previous recoveries. The US economy seems once again to be in a "jobless recovery," though the unemployment rate has been steadily declining for years. At the same time, fiscal austerity has arrived, with the implementation of the sequester cuts, following tax increases and the ending of emergency extended unemployment benefits just two months ago. Our new report provides medium-term projections of employment and economic growth under four different scenarios. The baseline scenario starts by assuming the same growth rates and government deficits as the Congressional Budget Office's (CBO) baseline projection from earlier this year. The result is a new surge of the unemployment rate to nearly 8 percent in the third quarter of this year, followed by a very gradual new recovery. Scenarios 1 and 2 seek to reach unemployment-rate goals of 6.5 percent and 5.5 percent, respectively, by the end of next year, using new fiscal stimulus. We find in these simulations that reaching the goals requires large amounts of fiscal stimulus, compared to the CBO baseline. For example, in order to reach 5.5 percent unemployment in 2014, scenario 2 assumes 11 percent growth in inflation-adjusted government spending and transfers, along with lower taxes. As an alternative, scenario 3 adds an extra increase to growth abroad and to private borrowing, along with the same amount of fiscal stimulus as in scenario 1. In this last scenario of the report, the unemployment rate finally pierces the 5.5 percent threshold from the previous scenario in the third quarter of 2015. We conclude with some thoughts about how such an increase in demand from all three sectors—government, private, and external—might be realistically obtained.

The United States must make a fundamental choice in its economic policy in the next few months, a choice that will shape the US economy for years to come. Pundits and policymakers are divided over how to address what is widely referred to as the "fiscal cliff," a combination of tax increases and spending cuts that will further weaken the domestic economy. Will the United States continue its current, misguided, policy of implementing European-style austerity measures, and the economic contraction that is the inevitable consequence of such policies? Or will it turn aside from the fiscal cliff, using a combination of its sovereign currency system and Keynesian fiscal policy to strengthen aggregate demand? Our analysis presents a model of what we call the "fiscal trap"—a self-imposed spiral of economic contraction resulting from a fundamental misunderstanding of the role and function of fiscal policy in times of economic weakness. Within this framework, we begin our analysis with the disastrous results of austerity policies in the European Union (EU) and the UK. Our account of these policies and their results is meant as a cautionary tale for the United States, not as a model.

From the very start, the European Monetary Union (EMU) was set up to fail. The host of problems we are now witnessing, from the solvency crises on the periphery to the bank runs in Spain, Greece, and Italy, were built into the very structure of the EMU and its banking system. Policymakers have admittedly responded to these various emergencies with an uninspiring mix of delaying tactics and self-destructive policy blunders, but the most fundamental mistake of all occurred well before the buildup to the current crisis. What we are witnessing today are the results of a design flaw. When individual nations like Greece or Italy joined the EMU, they essentially adopted a foreign currency—the euro—but retained responsibility for their nation's fiscal policy. This attempted separation of fiscal policy from a sovereign currency is the fatal defect that is tearing the eurozone apart.

Hyman Minsky had particular views about how the regulatory system and financial architecture should be reformulated, and one of the many lessons we can learn from his work is that there is an intimate connection between how we think about the prospect of financial market instability and how we approach financial regulation. Regulation cannot be effective if it is simply based on "piecemeal" measures produced in response to the current "moment," Minsky wrote. It needs to reformulate the structure of the financial system itself.

It's a mistake to interpret the unfolding disaster in Europe as primarily a "sovereign debt crisis." The underlying problem is not periphery profligacy, but rather the very setup of the European Monetary Union (EMU)—a setup that even now prevents a satisfactory resolution to this crisis. The central weakness of the EMU is that it separates nations from their currencies without providing them with adequate overarching fiscal or monetary policy structures—it's like a United States without a Treasury or a fully functioning Federal Reserve. Without addressing this basic structural weakness, Euroland will continue to stumble toward the cliff—and threaten to pull a tottering US financial system over the edge with it.

President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a "sovereign debt crisis" ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster. The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.

Though the economy appears to be gradually gaining momentum, broad measures indicate that 14.5 percent of the US labor force is unemployed or underemployed, not much below the 16.2 percent rate reached a full year ago. In this new report in our Strategic Analysis series, we first discuss several slow-moving factors that make it difficult to achieve a full and sustainable economic recovery: the gradual redistribution of income toward the wealthiest 1 percent of households; a failure to fully stabilize and reregulate finance; serious fiscal troubles for state and local governments; and detritus from the financial crisis that remains on household and corporate balance sheets. These factors contribute to a situation in which employment has not risen fast enough since the (supposed) end of the recession to significantly increase the employment-population ratio. Meanwhile, public investment at all levels of government fell from roughly 3.7 percent of GDP in 2008 to 3.2 percent in the fourth quarter of 2011, helping to explain the weak economic picture. For this report, we use the Levy Institute macro model to simulate the economy under the following three scenarios: (1) a private borrowing scenario, in which we find the appropriate amount of private sector net borrowing/lending to achieve the path of employment growth projected under current policies by the Congressional Budget Office (CBO), in a report characterized by excessive optimism and a bias toward deficit reduction; (2) a more plausible scenario, in which we assume that the federal government extends certain key tax cuts and that household borrowing increases at a more reasonable rate than in the previous scenario; and (3) a fiscal stimulus scenario, in which we simulate the effects of a fully "paid for" 1 percent increase in government investment. The results show the importance of debt accumulation as a consideration in macro policymaking. The first scenario reproduces the CBO's relatively optimistic employment projections, but our results indicate that this private-sector-led growth scenario quickly brings household and business debt to new all-time highs as percentages of GDP. We note that the CBO makes its projections using an orthodox model with several common, but fundamental, flaws. This makes possible the agency's result that current policies will reduce the unemployment rate without a run-up in the private sector’s debt—"business as usual," in the words of our report's title. The policies weighed in the second scenario do not perform much better, despite a looser fiscal stance. Finally, our third scenario illustrates that a small, tax-financed increase in government investment could lower the unemployment rate significantly—by about one-half of 1 percent. A stimulus package of this size might be within the realm of political possibility at this juncture. However, our results lead us to surmise that it would take a much more substantial fiscal stimulus to reduce unemployment to a level that most policymakers would regard as acceptable.

Fiscal austerity is now a worldwide phenomenon, and the global growth slowdown is highly unfavorable for policymakers at the national level. According to our Macro Modeling Team's baseline forecast, fears of prolonged stagnation and a moribund employment market are well justified. Assuming no change in the value of the dollar or interest rates, and deficit levels consistent with the Congressional Budget Office's most recent "no-change" scenario, growth will remain very weak through 2016 and unemployment will exceed 9 percent. In an alternate scenario, the authors simulate the effect of new austerity measures that are commensurate with the implementation of large federal budget cuts. Here, growth falls to 0.06 percent in the second quarter of 2014 before leveling off at approximately 1 percent and unemployment rises to 10.7 percent by the end of 2016. In their fiscal stimulus scenario, real GDP growth increases very quickly, unemployment declines to 7.2 percent, and the US current account balance reaches 1.9 percent by the end of 2016—with a debt-to-GDP ratio that, at 97.4 percent, is only slightly higher than in the baseline scenario. An export-led growth strategy may accomplish little more than drawing a small number of scarce customers away from other exporting nations, and the authors expect no net contribution to aggregate demand growth from the financial sector. A further fiscal stimulus is clearly in order, they say, but an ill-timed round of fiscal austerity could result in a perilous situation for Washington.

As the crisis in Europe spreads, policymakers trot out one inadequate proposal after another, all failing to address the core problem. The possibility of dissolution, whether complete or partial, is looking less and less farfetched. Alongside political obstacles to reform, there is a widespread failure to understand the nature of this crisis. And without seeing clearly, policymakers will continue to focus on the wrong solutions.

Research Scholar Greg Hannsgen and President Dimitri B. Papadimitriou disprove claims made by Social Security skeptics that the program is nothing more than a "Ponzi scheme."

President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen make the case that the recession has turned into a prolonged and very unusual slump in growth, preventing a labor-market recovery—and the government lags far behind in creating the new jobs needed to deal with this disaster.

With quantitative easing winding down and the latest payroll tax-cut measures set to expire at the end of this year, pressing questions loom about the current state of the US economic recovery and its ability to sustain itself in the absence of support from monetary and fiscal policy.

This public policy brief analyzes the current economic climate in light of recent data and commentary. The authors’ approach rests upon a Keynesian framework in which departures from full employment can persist even in the long run. Moreover, monetary policy matters in our view, but fiscal policy and finance are more central to the problem of stabilizing a modern economy. In keeping with Wynne Godley’s stock-flow consistent approach to macroeconomics, levels of debt and financial imbalances play a central role in our analysis through good times and bad. Problems with private-sector debt are a subtle and important matter, which we interpret through the lens of Hyman P. Minsky’s financial fragility hypothesis. In this public policy brief, we find that as of early spring 2011, the economic recovery is still alive, but numerous dangers lie both ahead and behind: ill-conceived calls for fiscal austerity in Washington and other capitals; concerns about monetary laxity that unfortunately persist in the face of low long-term interest rates and inflation in almost every major economy; undercapitalized banks that have yet to deal with the many low-quality assets that remain on their books; a dysfunctional public-finance system in the European Union; commodity prices that are in many cases rising at double-digit annual rates; and high rates of short- and long-term unemployment. Fortunately, in spite of these nagging issues, consumer spending and the export sector have been showing some signs of improved health. Nevertheless, our analysis suggests that the current situation requires increased fiscal deficits and additional long-maturity asset purchases by the Federal Reserve.

The US economy grew reasonably fast during the last quarter of 2010, and the general expectation is that satisfactory growth will continue in 2011-12. The expansion may, indeed, continue into 2013. But with large deficits in both the government and foreign sectors, satisfactory growth in the medium term cannot be achieved without a major, sustained increase in net export demand. This, of course, cannot happen without either a cut in the domestic absorption of US goods and services or a revaluation of the currencies of the major US trading partners. Our policy message is fairly simple, and one that events over the years have tended to vindicate. Most observers have argued for reductions in government borrowing, but few have pointed out the potential instabilities that could arise from a growth strategy based largely on private borrowing-as the recent financial crisis has shown. With the economy operating at far less than full employment, we think Americans will ultimately have to grit their teeth for some hair-raising deficit figures, but they should take heart in recent data showing record-low "core" CPI inflation—and the potential for export-led growth to begin reducing unemployment.

The long economic expansion was fueled by an unprecedented rise in private expenditure relative to income, financed by a growing flow of net credit to the private. On the surface, it seemed that the growing burden of the household sector's debt was counterbalanced by a spectacular rise in the relative value of its financial assets, but this was never a match among equals, and the great meltdown in the financial markets has proved this imbalance to be true. The private sector has dramatically cut back its acquisition of new credit and reversed the path of its financial balance, but this adjustment has been uneven within the sector: the business sector suffered a huge drop in investment while the household sector has continued to borrow.

Yet another rescue plan for the European Monetary Union (EMU) is making its way through central Europe, but no one is foolish enough to believe that it will be enough. Greece’s finance minister reportedly said that his nation cannot continue to service its debt, and hinted that a 50 percent write-down is likely. That would be just the beginning, however, as other highly indebted periphery nations will follow suit. All the major European banks will be hit—and so will the $3 trillion US market for money market mutual funds, which have about half their funds invested in European banks. Add in other US bank exposure to Europe and you are up to a potential $3 trillion hit to US finance. Another global financial crisis is looking increasingly likely. We first summarize the situation in Euroland. Our main argument will be that the problem is not due to profligate spending by some nations but rather the setup of the EMU itself. We then turn to US problems, assessing the probability of a return to financial crisis and recession. We conclude that difficult times lie ahead, with a high probability that another collapse will be triggered by events in Euroland or in the United States. We conclude with an assessment of possible ways out. It is not hard to formulate economically and technically simple policy solutions for both the United States and Euroland. The real barrier in each case is political—and, unfortunately, the situation is worsening quickly in Europe. It may be too late already.

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.

The trillion-dollar rescue package European leaders aimed at the continent's growing debt crisis in May might well have been code-named Panacea. Stocks rose throughout the region, but the reprieve was short-lived: markets fell on the realization that the bailout would not improve government finances going forward. The entire rescue plan rests on the assumption that the eurozone's "problem children" can eventually get their fiscal houses in order. But no rescue plan can address the central problem: that countries with very different economies are yoked to the same currency.

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. 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.

This Companion provides a timely and engaging treatment of Hyman Minsky’s approach to economics, which is enjoying a renewed appreciation because of its prescient analysis of the slow but sure transformation of the capitalist economy in the post-war period. Many have called the global financial crisis that began in the United States in 2007 a ‘Minsky crisis’, and these original contributions demonstrate precisely why both academic economists as well as policymakers have turned to Minsky for guidance. The book brings together the foremost Minsky scholars to provide a comprehensive overview of his approach, with extensions to bring the analysis up to date.

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.

Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing. No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.

Now that America's financial institutions have been brought back from the brink, the greatest threat to global economic stability is the gigantic trade imbalance between the United States, China, and other trading partners. A second big threat to economic stability, in the longer run, is global warming. Both problems are related to America's addiction to cheap imports and foreign oil—bad habits that a clever cap-and-trade system could help us kick at last.

Though recent market activity and housing reports give some warrant for optimism, United States economic growth was only 2.8 percent in the third quarter, and the unemployment rate is still very high. In their new Strategic Analysis, the Levy Institute's Macro-Modeling Team project that high unemployment will continue to be a problem if fiscal stimulus policies expire and deficit reduction efforts become the policy focus. The authors--President Dimitri B. Papadimitriou and Research Scholars Greg Hannsgen and Gennaro Zezza--argue that continued fiscal stimulus is necessary to reduce unemployment. The resulting federal deficits would be sustainable, they say, as long as they were accompanied by a coordinated and gradual devaluation of the dollar, especially against undervalued Asian currencies--a step necessary to prevent an increase in the current account deficit and ward off the risk of a currency crash.

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.

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.)

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.

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.

As shown in recent Federal Reserve flow-of-funds data, federal government 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. Below we focus 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.