Sunday, September 13, 2009

Why Capitalism Fails... and Minsky Punts!

by the Sandwichman

The Boston Globe today carries an op-ed by Stephen Mihm, a history professor at the University of Georgia, highlighting the aptness of Hyman Minsky's financial instability hypothesis:
Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. "Instability," he wrote, "is an inherent and inescapable flaw of capitalism."
"But does Minsky’s work offer us any practical help?" Mihm asks. Part of the solution, he continues, is to have the Federal Reserve act as a lender of last resort to distressed firms. Nothing new there. But the other part is more radical: to have the government act as employer of last resort, guaranteeing a job to anyone who wanted one.

The political objections to the latter policy would seem at first glance to be insurmountable. But hold on a minute. A few years ago, the "house-price bubble" only existed in the fevered rantings of a smattering of chronic doomsayers. Today, who has heard of the "youth jobs crisis"? No one. Crisis? What crisis? Here's the chart again. Read it and weep.

Employment-Population Ratio - 16-24 yrs. Seasonally Adjusted

Digging deeper into the data, it gets worse. Long story short: youth employment has been COLLAPSING since the bursting of the bubble in 2000. There was no recovery for youth employment during the last "boom" -- only a leveling off. In the context of the youth employment crisis -- which will not be solved by a traditional bastard Keynesian fiscal-spending stimulus -- a far-reaching government jobs program might become politically feasible. But would it be economically feasible? Sandwichman doubts it. (to be continued...)


BruceMcF said...

Yes, Minsky has nailed it, and as modern monetary theorists working with balanced stock/flow models have shown, a job guarantee at a standard living wage provides the price anchor in the face of volatile private demand for labor that bastard-Keynesian pump priming alone cannot.

Sandwichman said...


As I've indicated above, I'm going to be arguing against job guarantees (at least as the core employment program) in a subsequent post. I would certainly welcome your detailed defense of it!

Anonymous said...


In your forthcoming post, you might consider Randal Wray's defense of government Job Guarantee, posted in late Aug on Economic Perspectives from Kansas City.

Sandwichman said...

Thanks, anonymous, I was going to be addressing an earlier piece by Wray on job guarantees and some criticisms of it, but it's better to have a more recent one.