Reading 9 – The economic contributions of Hyman Minsky: varieties of capitalism and institutional
reform – Papadimitriou and Wray
Stabilizing the Unstable Economy
Minsky: “The policy problem is to devise institutional structures and measures that attenuate the
thrust to inflation, unemployment, and slower improvements in the standard of living without
increasing the likelihood of a deep depression”
4 things needed in policy making:
- Big Government
- Employment
- Financial Reform
- Market Power
(1) BIG GOVERNMENT government must be large enough so that: the swings of its budget are =
sufficient to offset swings of private investment.
government spending should be approximately “the same order of magnitude as or larger than
investment”:
- at full employment the budget should be balanced at about 20% of GDP
- below full employment spending would be somewhat more than this while tax revenues
would be somewhat less
- above full employment revenues would exceed 20% of GDP while spending would be
less.
Minsky concerned with = maintaining the appearance of credit-worthiness = “a tax and spending
regime in place that would yield a favorable cash flow (a surplus) under reasonable and attainable
circumstances” (he deemed the Reagan administration of being out of line = tax size ok, but
spending too high a deficit would occur SO spending cuts required)
Minsky wanted to reorder spending priorities towards employment programs + child allowances
+ public infrastructure investment (away from defence and non-Old Age, Survivors, Disability, and
Hospital Insurance transfers) employment program = would allow spending cuts (in non-defence
spending).
Minsky also wanted to dispense with automatic cost-of-living adjustments so that inflation would
move the government's budget toward balance (by increasing tax revenues through 'bracket creep'
while avoiding increases of social spending).
Minsky = transfers + taxes = inflationary (=push up prices) so he wanted to reduce transfers +
eliminate taxes aggregate demand determines aggregate costs of production (mainly wages paid
to workers)
- Transfers = stream of income for social spending (=consumption) generate income (=wages
paid to workers) so it adds to aggregate demand (=more consumption) but no increase in
the aggregate supply SO: prices go up MINSKY argues instead to shift government
spending from policies that raise aggregate demand but not aggregate supply to policies that
would increase both aggregate supply and aggregate supply (=production) so prices would
be lower (because you need to cover the now increased costs of production) to reduce
inflation = public infrastructure development + workfare (instead of welfare)
, - Taxes too = inflationary because it adds to costs passed along in prices going up (Social
Security Tax paid by employers + corporate income tax) + payroll tax = encouraged
substitution of capital for labor SO wanted to eliminate corporate income tax + the
employer portion of payroll tax + but wanted larger tax on petroleum
(2) EMPLOYMENT key component of Minsky's reform strategy = to remove barriers to labor force
participation + ensure that all who wanted a job would be able to obtain one (Job Guarantee vs UBI)
Policies advocated by Minsky:
- substitution of a universal children's allowance for AFDC (Aid to Families with Dependent
Children)
- elimination of wage income constraints for Social Security recipients, but with an extension
of the retirement age for collecting Social Security benefits
- true 'full employment' policy the government would act as the employer of last resort
(using a program modeled on the New Deal's Civilian Conservation Corps or Works Progress
Administration = WPA).
This would guarantee = a public sector job to anyone unable to find a private sector job,
at some established minimum wage.
this WPA system argued not to be inflationary (or anyway not more inflationary than
current system) because it would increase aggregate demand + aggregate supply at same
time (not just aggregate demand as the transfer payments = inflationary)
these jobs would pay less than private sector jobs + would generate at least some
additional output SO no pressure on prices/private sector wages.
- Need a minimum wage (current system = minimum wage = 0 $ because that is the wage if
one’s unemployed + employment in current system= subject to cyclical fluctuations) in
Minsky’s system: policy would set a minimum WPA- wage at which all could work +
fluctuations in private sector employment would be offset by variations in the proportion of
workers in government-sponsored WPA jobs.
- In current system employers compete with government which gives out benefits to non-
working people = compete in the sense they need to set wages high enough so that people
have an incentive to go working instead of just accepting the benefits given by the
government VS. Minsky’s system: the alternative to private employment = WPA
employment + wages if do not go up too often could decrease wage pressures on employers
even leading to less inflation
(3) FINANCIAL REFORM Fed = acting as lender of last resort = leads to changes of behaviors in the
financial market + Fed must take greater responsibility for regulating financial markets + Minsky
recommended:
- greater reliance on prudential supervision of banks
- greater use of the discount window (and correspondingly less use of open market
purchases) = as the method through which reserves would be provided
this would allow the Fed to reward prudent bank practices with more favorable terms at
the window.
- policies that would tie lending to specific assets (like a “real-bills” doctrine) so that: “the
payment commitments on the debts used can be closely related to the cash flows that these
assets are expected to yield. The financial flow relations are analogous to those that
characterize hedge financing.”
reform – Papadimitriou and Wray
Stabilizing the Unstable Economy
Minsky: “The policy problem is to devise institutional structures and measures that attenuate the
thrust to inflation, unemployment, and slower improvements in the standard of living without
increasing the likelihood of a deep depression”
4 things needed in policy making:
- Big Government
- Employment
- Financial Reform
- Market Power
(1) BIG GOVERNMENT government must be large enough so that: the swings of its budget are =
sufficient to offset swings of private investment.
government spending should be approximately “the same order of magnitude as or larger than
investment”:
- at full employment the budget should be balanced at about 20% of GDP
- below full employment spending would be somewhat more than this while tax revenues
would be somewhat less
- above full employment revenues would exceed 20% of GDP while spending would be
less.
Minsky concerned with = maintaining the appearance of credit-worthiness = “a tax and spending
regime in place that would yield a favorable cash flow (a surplus) under reasonable and attainable
circumstances” (he deemed the Reagan administration of being out of line = tax size ok, but
spending too high a deficit would occur SO spending cuts required)
Minsky wanted to reorder spending priorities towards employment programs + child allowances
+ public infrastructure investment (away from defence and non-Old Age, Survivors, Disability, and
Hospital Insurance transfers) employment program = would allow spending cuts (in non-defence
spending).
Minsky also wanted to dispense with automatic cost-of-living adjustments so that inflation would
move the government's budget toward balance (by increasing tax revenues through 'bracket creep'
while avoiding increases of social spending).
Minsky = transfers + taxes = inflationary (=push up prices) so he wanted to reduce transfers +
eliminate taxes aggregate demand determines aggregate costs of production (mainly wages paid
to workers)
- Transfers = stream of income for social spending (=consumption) generate income (=wages
paid to workers) so it adds to aggregate demand (=more consumption) but no increase in
the aggregate supply SO: prices go up MINSKY argues instead to shift government
spending from policies that raise aggregate demand but not aggregate supply to policies that
would increase both aggregate supply and aggregate supply (=production) so prices would
be lower (because you need to cover the now increased costs of production) to reduce
inflation = public infrastructure development + workfare (instead of welfare)
, - Taxes too = inflationary because it adds to costs passed along in prices going up (Social
Security Tax paid by employers + corporate income tax) + payroll tax = encouraged
substitution of capital for labor SO wanted to eliminate corporate income tax + the
employer portion of payroll tax + but wanted larger tax on petroleum
(2) EMPLOYMENT key component of Minsky's reform strategy = to remove barriers to labor force
participation + ensure that all who wanted a job would be able to obtain one (Job Guarantee vs UBI)
Policies advocated by Minsky:
- substitution of a universal children's allowance for AFDC (Aid to Families with Dependent
Children)
- elimination of wage income constraints for Social Security recipients, but with an extension
of the retirement age for collecting Social Security benefits
- true 'full employment' policy the government would act as the employer of last resort
(using a program modeled on the New Deal's Civilian Conservation Corps or Works Progress
Administration = WPA).
This would guarantee = a public sector job to anyone unable to find a private sector job,
at some established minimum wage.
this WPA system argued not to be inflationary (or anyway not more inflationary than
current system) because it would increase aggregate demand + aggregate supply at same
time (not just aggregate demand as the transfer payments = inflationary)
these jobs would pay less than private sector jobs + would generate at least some
additional output SO no pressure on prices/private sector wages.
- Need a minimum wage (current system = minimum wage = 0 $ because that is the wage if
one’s unemployed + employment in current system= subject to cyclical fluctuations) in
Minsky’s system: policy would set a minimum WPA- wage at which all could work +
fluctuations in private sector employment would be offset by variations in the proportion of
workers in government-sponsored WPA jobs.
- In current system employers compete with government which gives out benefits to non-
working people = compete in the sense they need to set wages high enough so that people
have an incentive to go working instead of just accepting the benefits given by the
government VS. Minsky’s system: the alternative to private employment = WPA
employment + wages if do not go up too often could decrease wage pressures on employers
even leading to less inflation
(3) FINANCIAL REFORM Fed = acting as lender of last resort = leads to changes of behaviors in the
financial market + Fed must take greater responsibility for regulating financial markets + Minsky
recommended:
- greater reliance on prudential supervision of banks
- greater use of the discount window (and correspondingly less use of open market
purchases) = as the method through which reserves would be provided
this would allow the Fed to reward prudent bank practices with more favorable terms at
the window.
- policies that would tie lending to specific assets (like a “real-bills” doctrine) so that: “the
payment commitments on the debts used can be closely related to the cash flows that these
assets are expected to yield. The financial flow relations are analogous to those that
characterize hedge financing.”
