Academic journal article Journal of Economic Issues

What Happened to Goldilocks? A Minskian Framework

Academic journal article Journal of Economic Issues

What Happened to Goldilocks? A Minskian Framework

Article excerpt

Three decades ago, both President Richard Nixon and Milton Friedman announced that "we're all Keynesians now." Since that time, Keynesian economic policy has remained out of favor both in the ivory towers of academia and in our nation's capital. Every president from Jimmy Carter forward reduced the presence of government in our society. Since the early 197Os, not only were "welfare" programs cut but federal government also reduced its support for state governments, slowed growth of defense spending as the Cold War wound down, and increased payroll taxes in a series of steps -- all of which simultaneously reduced the role of government while tightening the fiscal stance. In the international sphere, the United States pushed privatization, globalization, and free trade as the Washington Consensus reduced protection for workers, consumers, and the environment around the world.

And it all seemed to work -- at least for America -- as we enjoyed a cornucopia of Goldilocks growth in the second half of the last decade of the old millennium. The economy boomed. Wall Street bubbled with "irrational exuberance." Unemployment disappeared, at least from sight. Welfare moms got jobs and gained self-respect. Crime fell. Free from intrusive government, technology innovated and created a New Economy. And so long as government policy remained solely in the hands of an insular Board of Governors helmed by Chairman Alan Greenspan, even inflation would remain at bay. Recessions were banished to history, and without any Keynesian fine tuning. The Goldilocks economy glittered and we basked in her radiance -- until the eleventh of September of 2001.

It is now widely recognized that economists and policy makers alike had been living a thirty-year lie. The best government is not that which governs least. The best economy is not that which is abandoned to the invisible fist of the unconstrained market. Our national and individual security is not best left to the fate of private pursuit of maximum profit. The events of 9-11 forced all of us to face the reality that was already apparent: Big Government needs to play a Bigger role in our economy and in our society. We're all Keynesians again.

Unfortunately, at best only the bastardized version of Keynes is likely to be revived -- that is the stop-and-go, fine-tuning Keynesianism of shifting and slippery-sloped Phillips curves. Keynes' main insight -- that monetary production economies fail to generate adequate private domestic spending and hence fluctuate between boom and bust at an average level insufficient to fully utilize a nation's labor and capital resources -- remains beyond the comprehension of economists and policy makers. Nor do today's analysts understand Hyman Minsky's argument that Big Government and Big Bank must be permanent features of any capitalist economy that is going to achieve a "practical best."

A Minskian Analysis of Goldilocks Growth

As is well known, Minsky analyzed each economic unit as a "money-in, money-out" entity. As he wrote in 1963, "each liability emitter attempts to arrange his receipts and spending so as to be able to meet his commitments" (Minsky 1963, 412). Even from his earliest analyses, Minsky emphasized the important role played by margins of safety -- that is, the maintenance of a gap between money inflows and outflows, as well as a gap between assets and liabilities, and a reserve of liquid assets to be called upon should money inflows fall short of committed money outflows. In an expansion fueled by the private sector, these margins of safety would be (intentionally) reduced as an ever-increasing proportion of prospective income flows would be committed to servicing liabilities, and as the ratios of debt to net worth and of debt to liquid assets would increase. However, Minsky contrasted this with a government-spending-led expansion: "During a protracted expansion dominated by household and business deficits the ratio of household and business financial commitments to income rises, whereas in an expansion dominated by government deficits the ratio of private commitments to income decreases" (Minsky 1963, 412). …

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