This will be last lecture on Why Minsky Matters on Wednesday 24th April 2019
After this, lectures starting from Monday 6th May, students will present one chapter starting from Chapter 2 of Mian and Sufi.
I would like students to ADD and ENRICH the material they are studying by taking the theories they are studying in the book and finding applications elsewhere. ALSO, I would like them to relate the theories and events in the book to the MMT and Minsky theories we have been studying
The following documentary provides useful and interesting information related to the financial structure of the 20th Century:
https://www.youtube.com/watch?v=np_ylvc8Zj8
There are many other books related to the Global Financial Crisis, which would be of relevance and importance in expanding upon the material you are studying in Mian and Sufi.
1-Standard Keynesian theory says that in slumps we should apply expansionary monetary and fiscal policy, while in booms we should use contractionary policy. Explain the several problems with this approach
1. Stop-Go nature of monetary policy if fiscal policy is not used.
2. Standard Method is Restrictive Monetary Policy means to hike interest rates. It does not work well because it is NOT TARGETED. It chokes the entire economy, kills growth, and DOES bring inflation to a HALT but at GREAT COST. Suggested Alternative: Use TARGETED restrictions by directed lending. Put maximum limits to lending in sectors which are heating up. Force banks to lend to priority sectors.
Quantitative Easing did not lead to increased lending by banks
Rates near zero cannot be lowered further
Hard to find good borrowers in bad economic environment
In general pessimistic outlook, borrowers use internal funds, do not make risky borrowings, with uncertain returns.
7. Monetary Policy impotent. Need DIRECT stimulation via Fiscal Policy.
Timing problems in fiscal policy – lags in implementation due to political power struggles.
Preference for automatic stabilizers need to be handled. Most important automatic stabilizer is the Job Guarantee program.
Government should act as employer of the last resort.
2. Explain the Minskian alternative to Keynesian methods for taming the business cycles.
Answer 2 - Minsky rejected the Keynesian notion that a big government can restore the economy through pump priming (the action taken to stimulate an economy, usually during a recessionary period, through government spending and interest rate and tax reductions). He advocated targeted spending for e-g; job creation programs that would create jobs directly rather than by pump priming and hoping that jobs are created automatically. He also argued that pump priming would be unsustainable and inflationary because it pays people not to work which would increase demand for output without increasing supply.
Minsky favored employment programs suggesting that the government should act as an employer of last resort because only government can offer infinitely elastic demand for labor which is necessary for full employment. He argued that these job creation programs would be less inflationary because they would increase the productivity and would produce useful output in the economy. He also favored to reduce barriers to labor force participation by eliminating the pay-roll tax (taxes imposed on employers or employees) and by allowing retirees to work without losing Social Security benefits. Hence Minsky was reluctant to accept that full employment can be achieved without direct job creation by government.
3. Explain why Big Government and Big Bank are at the heart of the Minskian proposals for reform of the capitalist economic system, and how these are the opposite of conventional policy recommendations coming from IMF/WB as well as from graduate students of conventional macro courses.
Answer 3: One of the reforming agenda of Minsky was big government and big bank. Minsky advocates an active role of the “big Government in parallels with big bank” in order to stabilize the economy through counter cyclical movement of its budget. Basically private sector is subject to automatic cycles so; government is needed in big enough size to fill in gaps when size is calculated how big government is needed on the basis of stabilization consideration. It has to make up for short fall when private sector is in recession and it has to tax when private sector is going into boom. The Government is, for him, the more effective automatic stabilizer. Minsky argued that free market ideology of conventional economist is dangerous, particularly at this stage of capitalism. Minsky also rejected the mainstream Keynesian notion that a big government can fine tune the economy through pump-priming. Minsky advocated targeted spending job guarantee is an example; it create job directly rather than by pump priming and hoping that jobs are created. He argued that pump priming is unsustainable and if it achieves anything close to full employment, it would be inflationary.
Why Minsky Matters Ch 8 Conclusions: Financial Reforms - part 2 - Video Lecture on Last Chapter of L Randall Wray's Book: Why Minsky Matters.