IN THIS ISSUE:

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The Political Economy of Monetary Policy and Fiscal Regulation: A Conference in Honor of Jane D'arista

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The Housing Bubble and Financial Deregulation

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A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States

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Alternatives to Inflation Targeting as Central Bank Policy

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New and Expanded Toxic 100 Index

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The Economic Costs of the War in Iraq

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Green Investments
and Job Creation

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PERI Working Papers & Other Publications

Robert Blecker
External Shocks, Structural Change, and Economic Growth in Mexico, 1979-2006
This paper estimates the effects of external constraints on growth and investment in the Mexican economy, and how those effects have changed since the economic liberalization of the 1980s and the formation of NAFTA in 1994. Shocks to financial inflows, world oil prices, the U.S. growth rate, and the value of the peso explain most of the fluctuations in Mexico’s growth since 1979. Analysis generally supports the view that growth drives investment but not the other way around. Inflows of foreign direct investment have positive effects on investment, but coefficients are small and their significance is marginal.

James Boyce
Post-Conflict Recovery: Resource Mobilization and Peacebuilding
Societies embarked on the fragile transition from war to peace face enormous economic, social, and political challenges. In attempting to support this transition, the international community often provides substantial amounts of external assistance. This paper reviews evidence on the impact of aid in post-conflict settings and offers suggestions for making aid more effective in supporting efforts to build a durable peace.

Graham Brown, Ales Cobham
& Frances Stewart
Promoting Group Justice: Fiscal Policies in Post-Conflict Countries
In the aftermath of violent conflict, governments have an opportunity to address fundamental inequalities between internal groups. As taxation and expenditure policies are developed to rebuild an economy and infrastructure, policies can be designed to lessen divisions and promote equity. The authors discuss the role of tax codes, expenditure planning, and donor aid in addressing distributional issues and increasing equitable access to public services, employment, health and education.

Lila Costabile
Current Global Imbalances and the Keynes Plan
This paper proposes an interpretation of current global imbalances based on the nature of the international currency, its main objective being to illustrate how alternative models of international financial organization may produce opposite results in the global economy. It argues that some of the provisions of the Keynes Plan may provide remedies for international disequilibria, by remedying the asymmetries of the international monetary system and curbing inflationary and deflationary pressures on the world economy.

Jane D'Arista
The Implications of Aging for the Structure and Stability of Financial Markets
Aging populations have altered saving and investment patterns in many developed and emerging market economies. The structural changes that have occurred have important implications for financial stability and for the conduct of monetary policy. This paper offers policy choices and proposals to address the adverse outcomes of these developments that are likely to intensify under the ongoing pressure of demographic change.

Kevin Gallagher &
Strom Thacker
Democracy, Income, and Environmental Quality
This paper considers the role of democracy in environmental quality and the Environmental Kuznets Curve. Some studies have examined the extent to which democratic nations are more or less apt to have improving environmental conditions, but they have drawn from static measures of a nation’s current regime. In this paper the authors examine panel data from 1960 to 2001 and analyze the extent to which both the current level and the stock of a country’s democracy have significant and independent effects on a nation’s sulfur and carbon dioxide emissions.

James Heintz & Robert Pollin
Targeting Employment Expansion, Economic Growth and Development in Sub-Saharan Africa
This paper for the United Nation’s Economic Commission for Africa questions the emphasis of current development policy on macroeconomic stability over human development variables, such as poverty, education, reduction in gender inequity, and health. The authors discuss an alternative economic framework for Africa, which targets ‘real’ outcomes, with emphasis on employment, given the fact that employment is one of the most significant channels through which growth translates into sustainable poverty reduction.

Philippe Le Billon
Resources for Peace? Managing Revenues from Extractive Industries in Post-Conflict Environments
Revenues from extractive sectors such as oil and gas, minerals, and logging play an important role in many post-conflict environments, often providing more than 30% of state fiscal receipts. Managed well, these revenues can help to finance reconstruction and other vital peace-related needs. Mismanaged, resource revenues can undermine economic performance and governance, thereby heightening the risk of renewed violence. This paper offers proposals for managing revenues from these industries to support peacebuilding.

Thomas Michl
Discounting Nordhaus
This paper evaluates Nordhaus’ neoclassical complaints about the Stern Review from the vantage point of classical growth theory. Nordhaus argues that the Stern Review exaggerates the effects of global warming because it uses a discount rate that is well below the market rate of return on capital. From the perspective of classical growth theory, Nordhaus’ choice of parameters for the social planner is equivalent to assigning the preferences of the capitalist agents to the social planner. This paper presents an alternative analysis of the Stern Review.

Peter Middlebrook
& Gordon Peake
Right-Financing Security Sector Reform
Security sector reform (SSR) in post-conflict environments encompasses a range of efforts to improve governance, performance, and sustainability. The fiscal implications of SSR decisions are often neglected, however. The consequences of this neglect include unsustainable reforms, squeezing out other vital sectors, and ultimately under-provision of security. This paper argues for a ‘right-financing’ approach to SSR that strikes an balance between current needs and the goal of building a fiscally sustainable security sector.

On May 2 and 3, 2008, PERI hosted a conference on "The Political Economy of Monetary Policy and Financial Regulation" in honor of Jane D'Arista. The conference brought together more than a dozen economists from around the world to discuss their work on financial regulation and monetary policy, much of which bears on the enormous financial problems the U.S. now faces. Sessions focused on the nature of liquidity provision in financial markets, the current financial crisis, and monetary policy and financial regulation from a contemporary and historical perspective.

Jane D'Arista is Director of Programs for the Financial Markets Center and the author of the masterful study of U.S. financial regulation, The Evolution of U.S. Finance. She was formerly a staff member of the House Banking Committee and the House Energy and Commerce Committee. For more than thirty years, Jane D'Arista has been one of the country's most insightful analysts of financial markets and regulation.

ONLINE RESOURCES
>> Read more about the conference and download preliminary papers here

In his most recent 'Economic Prospects' column for New Labor Forum, Robert Pollin argues that the collapse at the end of 2007 of the U.S. housing bubble and subprime mortgage market demonstrates yet again that unregulated financial markets are systematically destabilizing. Financial crises are a persistent feature of capitalist economies, but the regularity and severity of crises can be greatly diminished through forceful regulations. The U.S. economy did operate under a reasonably effective regulatory system in the four decades after the 1929 Wall Street collapse. But, as Pollin writes, since the early 1970s our increasingly unregulated financial markets have been allowed to operate “according to their own self-destructive logic." Pollin offers some ideas on creating a new regulatory system that could restore a degree of stability and fairness to our financial system. 

ONLINE RESOURCES
>> Download "The Housing Bubble and Financial Deregulation"
>> Go to the New Labor Forum home page

In A Measure of Fairness, Robert Pollin, Mark Brenner, Jeannette Wicks-Lim, and Stephanie Luce assess how well the range of living wage and minimum wage regulations throughout the United States serve the workers they are intended to help. The authors give an overview of wage policies in Louisiana, New Mexico, Arizona, California, Massachusetts, and Connecticut to show how they play out in the paychecks of workers, in the halls of legislatures, and in business ledgers. Based on a decade of research, this volume concludes that these laws have been effective policy interventions capable of bringing significant, if modest, benefits to the people they were intended to help.

Richard Freeman of Harvard University's Economics Department writes: "The study of living wages in the United States has moved from an odd peripheral topic to a major issue in economic policy analysis largely because of the research reported in A Measure of Fairness. This volume defines the issues and provides a glow of empirical sunlight on an economic topic traditionally shrouded with ideology instead of evidence."

ONLINE RESOURCES
>> In this related interview, Jen Kern, Director of the ACORN Living Wage Resource Center, offers her perspective on PERI's role in the living wage movement.
>> Order A Measure of Fairness from Cornell University Press

"Inflation targeting"--monetary policy focused almost exclusively on keeping inflation in the low single digits--has become the operational objective for many central banks around the world. Many economists, international organizations, and central bankers have promoted inflation targeting to the exclusion of other concerns, but the policy's record has been rather disappointing. After several decades of experience with the inflation-focused approach, problems of employment creation and poverty are mounting around the world.

Gerald Epstein, Co-Director of PERI, together with Erinc Yeldan of Bilkent University in Turkey, convened an international team of economists to develop more socially useful alternatives to inflation-targeted central bank policy: policies that promote employment, reduce poverty, and generate economic growth while keeping inflation moderate and stabilizing exchange rates. This research appears in a special edition of the International Review of Applied Economics, and will be published as a book in the fall of 2008. The conveners and contributors hope that this work can broaden the debate over the role of central banks, and make them part of the solution to global poverty and unemployment, rather than a part of the problem.

ONLINE RESOURCES
>> Go to the International Review of Applied Economics special issue
>> Read more about PERI's Alternatives to Inflation Targeting project

Industrial facilities in the United States release some 1.5 billion pounds of industrial toxics into the air each year. The latest version of PERI's Toxic 100 uses the most recent available data from the Risk Screening Environmental Indicators project of the Environmental Protection Agency to rank the largest corporations in the United States by the human health risk from their airborne toxic releases. The rankings take into account not only the quantity of releases, but also the relative toxicity of chemicals, the exposure of nearby populations, and transport factors such as prevailing winds and height of smokestacks. PERI's Toxic 100 builds on the achievements of the right-to-know movement. The goal is to engender public participation in environmental decision-making, and to help stakeholders translate the right to know into the right to clean air.

ONLINE RESOURCES
>> Go to the Toxic 100 Index

The war in Iraq is a strategic and moral disaster. But one issue relating to the war that hasn't been addressed in depth is its impact on the U.S. economy. In a series of research and popular press articles papers, Robert Pollin and Heidi Garrett-Peltier assess the impact of military spending versus spending on a series of peaceful priorities -- including health care, education, and energy conservation -- on job creation in the U.S. To date, three papers have explored various aspects of this issue, and more are to come.

ONLINE RESOURCES
>> Download "The U.S. Employment Effects of Military and Domestic Spending Priorities"
>> Download "The Employment Effects of Downsizing the U.S. Military"
>> Read "The Wages of Peace" in The Nation

On June 3, the Natural Resources Defense Council released Robert Pollin and Jeannette Wicks-Lim’s report, "Job Opportunities for the Green Economy: A State-by-State Picture of Occupations that Gain from Green Investments.” This is the first in a series of studies assessing the 'green economy.' Pollin and Wicks-Lim address the basic question of what jobs are required to build a clean energy economy. The NRDC report will soon be followed by a study, produced in partnership with the Center for American Progress, which goes quite a few steps further, asking how we can invest public funds to build a clean energy economy in such a way as to maximize the creation of high-quality, domestic employment. Watch for this report on the PERI website later this summer.

ONLINE RESOURCES
>> Download "Job Opportunities for the Green Economy: A State-by-State Picture of Occupations that Gain from Green Investments”

Leonce Ndikumana &
James Boyce
Estimates of Capital Flight from Sub-Saharan African Countries
Even as African countries became increasingly indebted from 1970 to 2004, they experienced large-scale capital flight. Some of this was legitimately acquired capital fleeing economic and political uncertainties; some was illegitimately acquired wealth spirited to safer havens abroad. This paper presents new estimates of the magnitude and timing of capital flight from forty sub-Saharan African countries and analyzes its determinants, including linkages to external borrowing.

Ozlem Onaran
Jobless Growth in the Central and Eastern European Countries
This paper estimates a labor demand equation based on panel data of manufacturing industries in Central and Eastern Europe , to test the effect of domestic and international factors on employment during the post-transition era. The findings indicate that employment does not respond to wages in more than half of the cases. While there are very few cases of positive effects, insignificant effects of trade and FDI dominate the findings with some evidence of negative effects.

Thomas Palley
The Backward Bending Phillips Curves
This paper develops a simple macroeconomic model of the backward bending Phillips curve that allows easy comparison with the neo-Keynesian and new classical models of the Phillips curve. The model incorporates two explanations of the backward bending Phillips curve: near-rational inflation expectations and aggregation of expectations across workers; and nominal wage setting behavior and aggregation of nominal wage behavior across sectors. The paper concludes with observations about the implications of the backward bending Phillips curve for monetary policy.

Thomas Palley
Financialization: What It Is and Why It Matters
Financialization is a process whereby financial markets, institutions and elites gain influence over economic policy and economic outcomes. This paper describes the principle impacts of financialization on economic systems at macro and micro levels. It explores an agenda for countering financialization in order to: restore policy control over markets; challenge the neoliberal economic policy paradigm; make corporations responsive to interests of stakeholders other than financial markets; and reform the political process so as to diminish the influence of corporations and wealthy elites.

Thomas Palley
Keynesian Models of Deflation and Depression Revisited
This paper extends Tobin’s Keynesian analysis of deflation to include a range of additional channels through which deflation exacerbates Keynesian unemployment, and provides theoretical reasons why downward price adjustment may not solve the Keynesian problem. These arguments challenge the received wisdom that Keynes’ General Theory is a special case resting on downwardly rigid prices and nominal wages. This idea has led many economists to recommend policies through which deflation is more likely, giving new relevance to Keynesian analysis of deflation.

Thomas Palley
The Relative Income Theory of Consumption
This paper presents a ‘relative permanent income’ model of consumption behavior that synthesizes the contributions of Keynes, Friedman, and Duesenberry. The key feature is that the share of permanent income devoted to consumption is a negative function of household relative permanent income. The model generates patterns of consumption spending consistent with long-run time series data and modern empirical findings that high-income households have a higher propensity to save. It also explains why consumption inequality is less than income inequality.

Englebert Stockhammer
Wage Flexibility or Wage Coordination?
Wage shares have fallen substantially in Europe since the early 1980s. To some extent this is due to a macroeconomic policy package that encourages wage flexibility and wage competition. This paper aims, first, at clarifying some conceptual issues in the design of a European system of productivity-oriented wage coordination and, second, discusses the economic policy implications of wage coordination.

Christian Weller
& Jeffrey Wenger
The Interplay between Labor and Financial Markets
The relationship between earnings, savings and retirement is well-known; however the linkage between labor market outcomes and financial market performance is generally unacknowledged. This paper examines the implications of the link between labor markets and financial markets for workers who save money in individual retirement accounts. The findings suggest that, for many people, the retirement savings losses associated with the timing of markets are similar to the costs of annuitizing savings upon retirement.