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The American Role-of-Government Debate and the Trashing of ‘Europe’

by David Howell

The presidential election and the ‘fiscal cliff’ negotiations dramatically illustrated the growing political polarization of America, which is ultimately about one big question: what role for government in America’s future?

But it should also be recognized that the ideological fulcrum of this debate has shifted far to the right in recent decades, and dramatically so in recent years. This is nicely illustrated by the similarity of the long-term budget plans that were proposed last month by President Obama and House Speaker Boehner, which would have shrink the Federal government’s civilian discretionary budget to levels not seen since the Eisenhower era (see “Goodbye, Government, Under Either Fiscal Plan,” The New York Times, December 18, 2012). The outcome of the ‘fiscal cliff’ negotiations was widely seen as an Obama victory – certainly by the House Republicans – but as the Times put it on the front page the day after the agreement, “Just a few years ago, the tax deal pushed through Congress on Tuesday would have been a Republican fiscal fantasy” (“Lines of Resistance on Fiscal Deal,” January 2, 2013).

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How Financial Structure Undermines Job Creation

by Jane DArista

After averaging annual increases of $30 billion in bank loans in the years 1998-2000, small businesses saw their access to direct bank loans wither when the dot.com crisis took hold. But as a result of financial innovation, a new credit channel opened for these non-corporate enterprises and their credit market debt grew rapidly in the period from 2001 to 2008. The primary source of funding for this sector became fast-growing mortgage securitization programs that required company owners to pledge their private residences as collateral for mortgage loans to finance their small businesses.

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Between a Rock and a Hard Place, or Up Against the Wall?

by Michael Ash

A friend who teaches in the social sciences–but not economics–wrote:

“Did you read this Marty Feldstein piece in the WSJ yesterday?  I know bupkes about Fed policy, but it seems to me the Fed is between a rock and a hard place.  It continues to buy U.S. securities (in part, by printing money) to keep the economy afloat.  But Feldstein suggests this is all going to come crashing down.  Do you agree? Who should I turn to for an alternative perspective?”

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The Real Debt Trap

by James Heintz

Democrats and Republicans both saw the fight over the fiscal cliff to be about the best way to reduce the government debt. This obsession with the public debt is dangerous and misplaced. The real threat to a robust recovery isn’t public borrowing – it’s the mountain of debt households are buried under, thanks to the financial crisis.

In 2007, before the worst of the crisis unfolded, the debt owed by U.S. households amounted to 111% of what American’s got from their jobs each year, according to the Federal Reserve’s Flow of Funds Accounts. This is up from 51% back in 1981. This level of debt dragged down spending in the economy, fueling the on-going crisis and insuring persistently high unemployment. One explanation for the burgeoning debt is that growing inequalities prompted unsustainable levels of consumption as households struggled to “keep up with the Joneses.”  But the story looks more complicated when we take into account trends in household wealth.

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‘Internal Devaluation’ and the Crisis in Europe

by Engelbert Stockhammer

The euro area is entering recession again. It’s tempting to call this a double-dip recession, but that is misleading. The first recession never ended: the EU’s output is still below the pre-crisis peak. But still, things are getting worse. It is the Southern European countries and Ireland that are dragging down European growth; but the recession in Europe’s South is now also beginning pull down Germany. Europe’s answer to the crisis has been an orthodox one: sound public finance and ‘internal devalution.’ Internal devaluation is the modern way of saying ‘cut wages.’ And so the Southern European countries have done. In Greece real wages have fallen by no less than 17% since 2008. In Portugal by 4.5%. In Spain and Italy they fell by about half a percentage point and in Cyprus by 1.4%. Among the Western European countries in recession only in Ireland are real wages higher than they were in 2008 (there they increased until 2009 and declined thereafter).

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