:: Levy Economics Institute of Bard College ::

The State of the U.S. and World Economies

The central focus in this program area is the use of Levy Institute macroeconomic models in generating strategic analyses of the U.S. and world economies. The outcomes of alternative scenarios are projected and analyzed, with the results—published as Strategic Analysis reports—serving to help policymakers understand the implications of various policy options.

The Levy Institute macroeconomic models, created by Distinguished Scholar Wynne Godley, are accounting based. The U.S. model employs a complete and consistent system (in that all sectors “sum up,” with no unaccounted leakages) of stocks and flows (such as income, production, and wealth). The world model is a “closed” system, in which 11 trading blocs—of which the United States, China, Japan, and Western Europe are four—are represented. This model is based on a matrix in which each bloc’s imports are described in terms of exports from the other 10 blocs. From this information, and using alternative assumptions (e.g., growth rates, trade shares, and energy demands and supplies), trends are identified and patterns of trade and production analyzed.

The projections derived from the models are not presented as short-term forecasts. The aim is to display, based on careful analysis of the recent past, what it seems reasonable to expect if current trends, policies, and relationships continue. To inform policy, it is not necessary to establish that a particular projection will come to pass, but only that it is something that must be given serious consideration as a possibility. The usefulness of such analyses is strategic: they can serve to warn policymakers of potential dangers and serve as a guide to policy instruments that are available, or should be made available, to deal with those dangers, should they arise.

Research Group: Wynne Godley, Dimitri B. Papadimitriou, James K. Galbraith, Greg Hannsgen, Kijong Kim, Gennaro Zezza, Claudio H. Dos Santos, Robert W. Parenteau

Program Publications
Working Papers \| April 2008 Old Wine in a New Bottle: Subprime Mortgage Crisis—Causes and Consequences This paper seeks to explain the causes and consequences of the United States subprime mortgage crisis, and how this crisis has led to a generalized credit crunch in other financial sectors that ultimately affects the real economy. It postulates that, despite the recent financial innovations, the financial strategies—leveraging and financial risk mismatching—that led to the present crisis are similar to those found in the United States savings-and-loan debacle of the late 1980s and in the Asian financial crisis of the late 1990s. [more] Working Paper No. 532
Press Releases \| April 2008 Larger Fiscal Stimulus Needed to Limit Impact of Downturn, New Levy Economics Institute Analysis Says [more] Press Release, April 15, 2008
Working Papers \| April 2008 Changes in the U.S. Financial System and the Subprime Crisis This paper traces the evolution of housing finance in the United States from the deregulation of the financial system in the 1970s to the breakdown of the savings and loan industry and the development of GSE (government-sponsored enterprise) securitization and the private financial system. The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system. [more] Working Paper No. 530
Public Policy Brief Highlights \| April 2008 Financial Markets Meltdown According to Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the “originate and distribute” model), leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand. [more] Public Policy Brief Highlights No. 94A, 2008
Strategic Analysis \| April 2008 Fiscal Stimulus—Is More Needed? In its November 2007 Strategic Analysis, the Levy Institute’s Macro-Modeling Team called for an immediate, sustained fiscal stimulus of 2 percent of GDP, as well as a plan for a much larger additional fiscal stimulus should the economic slowdown continue over the next two to three years. Since then, conditions have significantly worsened. [more] Strategic Analysis, April 2008
Public Policy Briefs \| April 2008 Financial Markets Meltdown In this new Public Policy Brief, Senior Scholar L. Randall Wray explains today’s complex and fragile financial system, and how the seeds of crisis were sown by lax oversight, deregulation, and risky innovations such as securitization. [more] Public Policy Brief No. 94, 2008
Strategic Analysis \| November 2007 The U.S. Economy: Is There a Way Out of the Woods? In their latest Strategic Analysis, Distinguished Scholar Wynne Godley, President Dimitri B. Papadimitriou, and Research Scholars Greg Hannsgen and Gennaro Zezza review recent events in the housing and financial markets to obtain a likely scenario for the evolution of household spending in the United States. [more] Strategic Analysis, November 2007
Public Policy Briefs \| October 2007 Globalization and the Changing Trade Debate The failure of the Doha Development Round of World Trade Organization (WTO) negotiations in July 2006 was the first major collapse of a multilateral trade round since World War II. Research Associate Thomas Palley sees the failure as an event that could mark the close of a 60-year era of trade policy largely centered on increasing market access and reducing tariffs, quotas, and subsidies. [more] Public Policy Brief No. 91, 2007
Working Papers \| July 2007 The Effects of a Declining Housing Market on the U.S. Economy Longstanding speculation about the likelihood of a housing market collapse has given way in the past few months to consideration of just how far the housing market will fall, and how much damage the debacle will inflict on the economy. This paper assesses the magnitude of the impact of housing price decreases on real private expenditure, examines the role of new types of mortgages and mortgage-related securities, and analyzes possible policy responses. [more] Working Paper No. 506
Public Policy Briefs \| July 2007 Cracks in the Foundations of Growth With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden. [more] Public Policy Brief No. 90, 2007
Public Policy Brief Highlights \| July 2007 Cracks in the Foundations of Growth With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden. [more] Public Policy Brief Highlights No. 90A, 2007
Working Papers \| June 2007 A Simplified “Benchmark” Stock-flow Consistent (SFC) Post-Keynesian Growth Model Despite being arguably one of the most active areas of research in heterodox macroeconomics, the study of the dynamic properties of stock-flow consistent (SFC) growth models of financially sophisticated economies is still in its early stages. This paper attempts to offer a contribution to this line of research by presenting a simplified Post-Keynesian SFC growth model with well-defined dynamic properties, and using it to shed light on the merits and limitations of the current heterodox SFC literature. [more] Working Paper No. 503
Strategic Analysis \| April 2007 The U.S. Economy The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment. Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. [more] Strategic Analysis, April 2007
Working Papers \| April 2007 Fiscal Policy in a Stock-flow Consistent (SFC) Model This paper deploys a simple stock-flow consistent (SFC) model in order to examine various contentions regarding fiscal and monetary policy. It follows from the model that if the fiscal stance is not set in the appropriate fashion—that is, at a well-defined level and growth rate—then full employment and low inflation will not be achieved in a sustainable way. [more] Working Paper No. 494
Conference Proceedings \| April 2007 16th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies The 2007 Hyman P. Minsky Conference focused on monetary and fiscal policies for continued growth and employment; currency markets fluctuations and the consequent exchange-rate misalignments, as well as possible cures; and the United States' households and trade deficits, their implications for growth and employment, and their effect on the conduct of monetary and fiscal policy. [more] Conference Proceedings, April 19–20, 2007
Working Papers \| January 2007 Demand Constraints and Big Government In a series of articles and books, Harold Vatter and John Walker attempted to make the case that the American economy suffers from chronically insufficient demand that leads to growth below capacity. Of particular interest are a 1989 Journal of Post Keynesian Economics article that extends Domar’s work on the supply side effects of investment spending and a 1997 book that provides a comprehensive analysis of the evolution of the U. [more] Working Paper No. 488
Policy Notes \| January 2007 The April AMT Shock Anyone who reads a newspaper knows that most Americans have accumulated excessive levels of debt, and realizes that as interest rates climb, it becomes more difficult to service financial liabilities. To add insult to injury, wage growth has been slow, while prices—especially for energy—have risen sharply. [more] Policy Note 2007/1
Working Papers \| December 2006 Global Imbalances, Bretton Woods II, and Euroland's Role in All This Approaching the issue of mounting global imbalances from the perspective of the “Bretton Woods II hypothesis,” this paper argues that the popular preoccupation with China’s supposed export-led development strategy is misplaced. It also suggests, similar to Japan’s depression, subdued growth in Euroland for most of the time since the Maastricht Treaty has been of first-order importance in these developments. [more] Working Paper No. 486
Public Policy Briefs \| November 2006 U.S. Household Deficit Spending Over the past decade, deficit spending by consumers has supported the United States economy. Research Associate Robert Parenteau analyzes the financial balance of American households and finds that the pace of deficit spending is likely to stall and, possibly, reverse course. [more] Public Policy Brief No. 88, 2006
Strategic Analysis \| November 2006 Can Global Imbalances Continue? In this new Strategic Analysis, we review what we believe is the most important economic policy issue facing policymakers in the United States and abroad: the prospect of a growth recession in the United States. The possibility of recession is linked to the imbalances in the current account, government, and private sector deficits. [more] Strategic Analysis, November 2006
Public Policy Brief Highlights \| November 2006 U.S. Household Deficit Spending Over the past decade, deficit spending by consumers has supported the United States economy. Research Associate Robert Parenteau analyzes the financial balance of American households and finds that the pace of deficit spending is likely to stall and, possibly, reverse course. [more] Public Policy Brief Highlights No. 88A, 2006
Public Policy Briefs \| October 2006 Rethinking Trade and Trade Policy The theory of comparative advantage says that there are gains from trade for the global economy as a whole. In this second brief of a three-part study of the international economy, Research Associate Thomas Palley observes that comparative advantage is driven by technology, which can be influenced by human action and policy. [more] Public Policy Brief No. 86, 2006
Public Policy Brief Highlights \| October 2006 Rethinking Trade and Trade Policy The theory of comparative advantage says that there are gains from trade for the global economy as a whole. In this second brief of a three-part study of the international economy, Research Associate Thomas Palley observes that comparative advantage is driven by technology, which can be influenced by human action and policy. [more] Public Policy Brief Highlights No. 86A, 2006
Strategic Analysis \| May 2006 Can the Growth in the U.S. Current Account Deficit Be Sustained? Can the growth in the current account deficit be sustained? How does the flow of deficits feed the stock of debt? How will the burden of servicing this debt affect future deficits and economic growth? President Dimitri B. Papadimitriou and Research Scholars Edward Chilcote and Gennaro Zezza address these and other questions in a new Strategic Analysis. [more] Strategic Analysis, May 2006
Policy Notes \| April 2006 Debt and Lending Many papers published by the Levy Institute during the last few years have emphasized that the American economy has relied too much on the growth of lending to the private sector, most particularly to the personal sector, to offset the negative effect on aggregate demand of the growing current account deficit. Moreover, this growth in lending cannot continue indefinitely. [more] Policy Note 2006/4
Policy Notes \| April 2006 Twin Deficits and Sustainability In the mid-to-late 1980s, the American economy simultaneously produced—for the first time in the postwar period—huge federal budget deficits as well as large current account deficits, together known as the “twin deficits”. This generated much debate and hand-wringing, most of which focused on supposed “crowding-out” effects. [more] Policy Note 2006/3
Working Papers \| April 2006 A Random Walk Down Maple Lane? The development of the permanent income/life cycle consumption hypothesis was a key blow to Keynesian and Kaleckian economics. According to George Akerlof, it “set the agenda” for modern neoclassical macroeconomics. [more] Working Paper No. 445
Policy Notes \| February 2006 The Fiscal Facts Today’s federal budget deficits are a preoccupation of many American citizens and more than a few political leaders. Is the American government going bankrupt? [more] Policy Note 2006/2
Working Papers \| February 2006 Prolegomena to Realistic Monetary Macroeconomics This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, markup pricing, et cetera) with a model of the financial system (comprising banks, loans, credit money, equities, and so on), together with a model of inflation. Central contentions of the paper are that there are virtually no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome. [more] Working Paper No. 441
Strategic Analysis \| January 2006 Are Housing Prices, Household Debt, and Growth Sustainable? Rising home prices and low interest rates have fueled the recent surge in mortgage borrowing and enabled consumers to spend at high rates relative to their income. Low interest rates have counterbalanced the growth in debt and acted to dampen the growth in household debt-service burdens. [more] Strategic Analysis, January 2006
Strategic Analysis \| September 2005 The United States and Her Creditors The main arguments in this paper can be simply stated: 1) If output in the United States grows fast enough to keep unemployment constant between now and 2010, and if there is no further depreciation in the dollar, the deficit in the balance of trade is likely to get worse, perhaps reaching 7.5 per cent by the end of the decade. [more] Strategic Analysis, September 2005
Policy Notes \| June 2005 Some Unpleasant American Arithmetic Is it sufficiently realized how intractable those account imbalances—and how dangerous their potential consequences at home and abroad—have now [more] Policy Note 2005/5
Policy Notes \| April 2005 Imbalances Looking for a Policy The latest batch of numbers from the United States makes for a disturbing read. The GDP growth rate of GDP has been adequate. [more] Policy Note 2005/4
Working Papers \| April 2005 The Disutility of International Debt In dealing with the problematic relationship of morality to rational choice theory, neoclassical economists since Lionel Robbins have often argued that they can incorporate moral values into consumer theory by putting those values into the utility function. This paper tests the viability of such an approach in the context of international finance. [more] Working Paper No. 422
Working Papers \| April 2005 A Simplified Stock-flow Consistent Post-Keynesian Growth Model Despite being arguably the most rigorous form of structuralist/post-Keynesian macroeconomics, stock-flow consistent models are quite often complex and difficult to deal with. This paper presents a model that, despite retaining the methodological advantages of the stock-flow consistent method, is intuitive enough to be taught at an undergraduate level. [more] Working Paper No. 421
Strategic Analysis \| March 2005 How Fragile Is the U.S. Economy? As we projected in a previous Strategic Analysis, the United States' economy experienced growth rates higher than 4 percent in 2004. The question we want to raise in this Strategic Analysis is whether these rates will persist or come back down. [more] Strategic Analysis, March 2005
Working Papers \| November 2004 Measuring Capacity Utilization in OECD Countries This paper derives measures of potential output and capacity utilization for a number of OECD countries, using a method based on the cointegration relation between output and the capital stock. The intuitive idea is that economic capacity (potential output) is the aspect of output that co-varies with the capital stock over the long run. [more] Working Paper No. 415
Strategic Analysis \| August 2004 Prospects and Policies for the U.S. Economy The American economy has grown reasonably fast since the second half of 2003, and the general expectation seems to be that satisfactory growth will continue more or less indefinitely. This paper argues that the expansion may indeed continue through 2004 and for some time beyond. [more] Strategic Analysis, August 2004
Book Series \| August 2004 Induced Investment and Business Cycles This unique volume presents, for the first time in publication, the original doctoral thesis of Hyman P. Minsky, one of the most innovative thinkers on financial markets. [more] Book Series, August 2004
Working Papers \| May 2004 Keynesian Theorizing during Hard Times This paper argues that the Stock-Flow Consistent Approach to macroeconomic modeling can be seen as a natural outcome of the path taken by Keynesian macroeconomic thought in the 1960s and 1970s, a theoretical frontier that remained largely unexplored with the end of Keynesian academic hegemony. The representative views of Davidson, Godley, Minsky, and Tobin as different closures of the same SFC accounting framework are presented, and similarities and problems discussed. [more] Working Paper No. 408
Policy Notes \| May 2004 Those “D” Words Recent economic commentary has been filled with “D” words: deficits, debt, deflation, depreciation. Deficits—budget and trade—are of the greatest concern and may be on an unsustainable course, as federal and national debt grow without limit. [more] Policy Note 2004/2
Strategic Analysis \| April 2004 Is Deficit-financed Growth Limited? Wynne Godley, our Levy Institute colleague, has warned since 1999 that the falling personal saving and rising borrowing trends that had powered the U.S. [more] Strategic Analysis, April 2004
Working Papers \| February 2004 A Stock-flow Consistent General Framework for Formal Minskyan Analyses of Closed Economies This paper reviews the general tenets of "stock-flow consistent" and the "formal Minskyan" literatures and argues that the advantages and weaknesses of the latter become clearer when analyzed with the tools of the former. It also analyzes a small but representative and influential sample of seminal "formal Minskyan" models, particularly the Taylor-O'Connel model, in light of a fully consistent "Minskyan artificial economy. [more] Working Paper No. 403
Working Papers \| February 2004 A Post-Keynesian Stock-flow Consistent Macroeconomic Growth Model Stock-flow consistent models may be considered the rallying point for heterodox authors interested in modeling macroeconomic relations, since these models incorporate real and financial relations in an entirely consistent way, therefore providing macroeconomic constraints to individual behavior. The present model expands on the Godley-Lavoie model of growth, which was based on a two-asset world, with only bank deposits and the shares issued by private corporations. [more] Working Paper No. 402
Working Papers \| January 2004 Borrowing Alone Over the past 20 years, finance has become commodified. Firms increasingly obtain finance from securities markets, instead of borrowing from commercial banks with which they have long-term relationships, while Fannie Mae and Freddie Mac package a growing number of mortgages into bonds. [more] Working Paper No. 401
Strategic Analysis \| October 2003 Deficits, Debts, and Growth These are fast-moving times. Two years ago, the Congressional Budget Office (CBO, 2001) projected a federal budget surplus of $172 billion for fiscal year 2003. [more] Strategic Analysis, October 2003
Policy Notes \| September 2003 Is International Growth the Way Out of U.S. Current Account Deficits? The current account deficit of the United States has been growing steadily as a share of GDP for more than a decade. It is now at an all-time high, over 5 percent of GDP. [more] Policy Note 2003/6
Policy Notes \| September 2003 Deflation Worries For the first time since the 1930s, many worry that the world's economy faces the prospect of deflation—accompanied by massive job losses—on a global scale. In a rather hopeful sign, policymakers from Euroland to Japan to America all seem to recognize the threat that falling prices pose to markets. [more] Policy Note 2003/5
Working Papers \| September 2003 Measures of the Real GDP of U.S. Trading Partners This paper provides the details of the construction of new quarterly measures of the real GDPs of the 36 trading partners that are taken into consideration by the Federal Reserve in its "broad exchange rate" indexes. These new measures have some important advantages. [more] Working Paper No. 387
Working Papers \| May 2003 How Long Can the U.S. Consumers Carry the Economy on Their Shoulders? The consumer has been on a tightrope since the bursting of the "new economy" bubble, as losses in equity markets have been partly offset by gains in real estate and fiscal support and mortgage refinancing have partly offset increased consumer cautiousness. The consumer will remain on a tightrope in the near future, but if the economy were to stumble, the fragile consumer might contribute to turning the downturn into a deep and protracted recession. [more] Working Paper No. 380
Working Papers \| May 2003 The Conditions for Sustainable U.S. Recovery The anemic U.S. [more] Working Paper No. 378
Strategic Analysis \| March 2003 The U.S. Economy Right through the boom years prior to 2001, the American economy faced a strategic predicament in that the main engine of growth (credit-financed private spending) was unsustainable, from which it followed that the whole stance of the government's fiscal policy would have to be radically changed if the New Economy were not to become stagnant. The boom was indeed broken, because private expenditure fell relative to income. [more] Strategic Analysis, March 2003
Strategic Analysis \| November 2002 Is Personal Debt Sustainable? 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. [more]