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We ask why working hours in the rich world have not declined more sharply or even risen at times since the early 1980s, despite a steady increase in productivity, and why they vary so much across rich countries. We use an internationally comparable database on working hours (Bick et al., 2019) and conduct panel data estimations for a sample of 17 European countries and the USA over the period 1983–2019. We find that high or increasing top-end income inequality, decentralized labor relations, and limited government provision of education and other in-kind services contribute to long working hours. Our results are consistent with the hypothesis that upward-looking status comparisons in positional consumption (‘Veblen effects’) contribute to a ‘rat race’ of long working hours that is more or less pronounced in different varieties of capitalism.

In this paper, we analyze how corporate sector behavior has affected national current account balances in a sample of 25 countries for the period 1980-2015. A consistent finding is that an increase (decrease) in corporate net lending leads to an increase (decrease) in the current account, controlling for standard current account determinants. We disentangle the current account effects of corporate saving and investment and we explore a number of alternative explanations of our results, including incomplete piercing of the "corporate veil", by households, foreign direct investment activities, a temporary crisis phenomenon, and changes in income inequality. We conclude that corporate sector saving is an important driver of macroeconomic trends and that the rise of corporate net lending especially in a number of current account surplus countries has contributed considerably to global current account imbalances. In diesem Working Paper untersuchen wir für 25 Länder für den Zeitraum 1980-2015, wie sich das Verhalten des Unternehmenssektors auf nationale Leistungsbilanzsalden ausgewirkt hat. Ein robustes Ergebnis unserer Analyse ist, dass ein Anstieg (Rückgang) im Finanzierungssaldo des Unternehmenssektors mit einem Anstieg (Rückgang) im Leistungsbilanzsaldo einhergeht, wobei für Standarddeterminanten der Leistungsbilanz kontrolliert wird. Wir unterscheiden ferner die Leistungsbilanzeffekte von Veränderungen im Spar- und Investitionsverhalten des Unternehmenssektors und untersuchen verschiedene Erklärungen der Ergebnisse, wie etwa eine unvollständige Durchdringung des "Unternehmensschleiers" durch die privaten Haushalte, ausländische Direktinvestitionen, ein temporäres Krisenphänomen und Veränderungen der Einkommensungleichheit. Die Ergebnisse lassen darauf schließen, dass die Ersparnisbildung im Unternehmenssektor makroökonomische Trends wesentlich beeinflusst und der Anstieg des Finanzierungssaldos im Unternehmenssektor insbesondere bei einigen Leistungsbilanzüberschussländern erheblich zur Entstehung von globalen Leistungsbilanzungleichgewichten beigetragen hat.

Household surveys such as the German Socio-Economic Panel (SOEP) tend to underestimate income and wealth inequality. The research methodology developed by Thomas Piketty et al. therefore analyses o...

We present results from a survey of 1,399 first-year university students of economics and of courses designed for prospective teachers in Germany. We find strong self-selection effects in terms of students’ interests, their views about economics as a discipline and selected economic policy proposal: Students in political and social science education are systematically more sceptical of free-market policies. Regression analysis further suggests that economics and economics education students consistently place lesser emphasis on fairness in their acceptance judgments about policy proposals. Comparison with previous surveys suggest that indoctrination effects at university level may be stronger for economists than for teachers. JEL Codes: A13, A20, A21, F5, H0

We present results from a survey of 785 prospective social science teachers who were asked about their attitudes on the euro crisis during their first year at university in Germany. The students strongly believe that the crisis is mainly due to excessive public debt and lack of competitiveness in the crisis countries but do not consider Germany's persistent trade surplus as a major problem. A regression analysis suggests that students’ views about Germany's trade surplus are unrelated to their political orientation, their general support for the European idea or their perceptions of its efficiency and fairness. The implications for European integration and citizenship education are discussed.

In this paper, we investigate whether changes in income distribution can explain current account developments in a sample of 20 countries for the period 1972–2007. We analyze the relationship between the personal and the functional income distribution in our sample, before disentangling their effects on the current account. A consistent finding is that rising (top-end) personal inequality leads to a decrease of the current account, controlling for standard current account determinants. By contrast, a fall in the share of wages in national income leads to an increase in the current account. We further analyze how different measures of income distribution affect the financial balances of the household, corporate and government sectors and discuss potential theoretical explanations of our findings. We conclude that changes in personal and functional income distribution have contributed considerably to the widening of current account balances, and hence to the instability of the international economic system, prior to the global financial crisis starting in 2007.

We develop a three-country, stock-flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances. Each country has a household sector and a non-household (corporate) sector. The household sector is divided into income deciles, and consumer demand is characterized by upward-looking status comparisons following the relative income hypothesis of consumption. The strength of consumption emulation depends on country-specific institutions. The model is calibrated for the United States, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector.

Der Artikel zeichnet die Debatte über die Einführung eines separaten Schulfachs Wirtschaft nach und präsentiert ausgewählte Ergebnisse einer Befragung von Studierenden in den neuen Studiengängen mit Lehramtsoption Wirtschaft beziehungsweise Politik in Baden-Württemberg. Oft wird gefordert, dass die individuelle Finanzkompetenz der Schülerinnen und Schüler gefördert werden soll. Zudem werden in vielen Lehr-Lern-Materialien allgemeine wirtschaftswissenschaftliche und wirtschaftspolitische Fragestellungen anhand persönlicher Spar- und Anlageentscheidungen diskutiert, um zielgruppengerecht an die Lebenswelt von Jugendlichen anzuknüpfen. Dabei drohen jedoch gesamtwirtschaftliche Zusammenhänge,die einen wichtigen Bestandteil einer umfassenden ökonomischen Bildung darstellen, zu kurz zu kommen. Denn die Übertragbarkeit einzelwirtschaftlicher Prinzipien auf gesamtwirtschaftliche Themen ist umstritten und wird insbesondere von nachfrageorientierten Theorieansätzen verneint. Unsere Befragungen zeigen, dass Erstsemester mit Lehramtsoption Wirtschaft in Baden-Württemberg sich im Vergleich zu Studierenden mit Lehramtsoption Politik stärker für Unternehmensthemen und individuelle Spar- und Anlageentscheidungen interessieren und weniger stark für Arbeitnehmerthemen und politisch-ökonomische Themen. Zugleich befürworten die zuerst Genannten in geringerem Maße als die zuletzt Genannten konjunkturpolitische Maßnahmen des Staates oder staatliche Versuche, Spekulationen auf den Finanzmärkten einzudämmen. Allgemein zeigt sich, dass ein stärkeres Interesse für individuelle Spar- und Anlageentscheidungen mit einer schwächeren Befürwortung nachfrageorientierter Wirtschaftspolitik einhergeht. This article reflects upon the recent debate over the introduction of a separate subject matter "Economics" at the secondary school level in Germany and presents selected results of a survey of prospective teachers in "Politics" and "Economics" during their first university year in the German state of Baden-Württemberg. A common claim in the debate over a separate subject matter Economics is that students at the secondary school level should receive a better financial education to help them make better financial decisions as individuals. Moreover, in many teaching materials general principles of economics and economic policy are discussed with reference to individual saving and portfolio decisions. This approach to economics education may be seen as appropriate from a pedagogical viewpoint because it takes into account the real world experiences of teenagers. However, to the extent that economics education makes use of simple micro-macro analogies, it may run the risk of violating the so-called imperative of controversy, which traditionally has been an important cornerstone of citizenship education in Germany and says that scientifically controversial issues must be treated as such also in the classroom. In particular, demand-oriented approaches to macroeconomics and economic policy reject the notion that microeconomic principles can be aggregated to the aggregate level. Our survey shows that students enrolled in teacher training programmes in "Economics" are more interested in business topics and personal saving and portfolio decisions, and less interested in employee topics and political-economic topics, than students enrolled in teacher training programmes in "Politics". They are also more critical of countercyclical deficit-spending by the government and regulation of financial markets by the government. More generally, a stronger interest in individual saving and portfolio decisions goes hand in hand with a weaker support for a demand-oriented approach to economic policy.

Michael Hudson is President of the Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. ISLET engages in research regarding domestic and international finance, national income and balance-sheet accounting with regard to real estate, and the economic history of the ancient Near East. Michael Hudson acts as an economic advisor to governments worldwide including Iceland, Latvia, and China on finance and tax law. He has published extensively on International Trade, Finance, and Debt, and co-edited volumes on the archeology of the ancient Near East.

In his widely discussed book ‘Fault Lines’ (2010), Raghuram Rajan argues that many low and middle income consumers have reduced their saving and increased debt since income inequality started to soar in the United States in the early 1980s. This has temporarily kept private consumption and employment high, but it also contributed to the creation of a credit bubble. This surge in household indebtedness turned out to be unsustainable in the financial crisis starting in 2007. Although Rajan and others emphasize the role of government in promoting credit to those households with declining relative (permanent) incomes, other strands of the literature have focused more explicitly on the implications of rising inequality for aggregate demand and households’ demand for credit. These differences in emphasis may explain why the literature on the inequality-crisis nexus appears somewhat disparate, even though the various strands are far from mutually exclusive but rather complement each other. We therefore place the ‘Rajan hypothesis’ in the context of competing theories of consumption, and survey the empirical literature on the effects of inequality on household behaviour. We conclude that the empirical evidence calls for a renaissance of the relative income hypothesis of consumption.

In der Dezemberausgabe 2015 veröffentlichte der Wirtschaftsdienst einen Aufsatz zur Überprüfung des Stabilitäts- und Wachstumsgesetzes (StabG) von Henrike Michaelis, Steffen Elstner und Christoph M. Schmidt. Dazu erscheinen diese Replik und eine Erwiderung der Autoren. In their reply, Dullien and van Treeck criticise the argument of Michaelis, Elstner and Schmidt that the German Stability and Growth law (StabG) from the 1960s must not be reformed. They claim that Michaelis et al. neglect that the concept of sustainability has changed over the past 50 years and that nowadays issues such as social and ecological sustainability should be included. Moreover, the claim by Michaelis et al. that the StabG provides important tools for business cycle management is hardly convincing, given that these tools have not been used since the 1970s and stimulus packages have been passed on other legal grounds. / In their response Michaelis et al. stress that economic policy has to consider equally aspects of economic, social and ecological sustainability. The StabG, however, is a completely inappropriate basis for attempts to address aspects of social and ecological sustainability. The main use of the StabG consists in the possibility to quickly implement fiscal measures that could mitigate the consequences of severe economic downturns. Proposals of Dullien and van Treeck that various dimensions of sustainability are controllable by a predetermined set of instruments neglect the complexity of the social market economy.

Dieser Beitrag gibt einen Uberblick uber konkurrierende Ansatze der Stabilisierungspolitik. Dazu werden zunachst Grundlagen der wirtschaftswissenschaftlichen Konjunkturtheorie erlautert sowie Formen stabilitatspolitischer Eingriffe vorgestellt. Anschliesend wird auf die Schwierigkeiten eingegangen, in der wirtschaftspolitischen Praxis konjunkturelle Schwankungen des Bruttoinlandsprodukts von strukturellen Entwicklungen des Produktionspotenzials zu unterscheiden. Am Beispiel der wirtschaftlichen Entwicklung in der Folge der Finanz- und Eurokrise wird gezeigt, wie der Wettstreit um die „richtige“ makrookonomische Theorie haufig von politischen Interessen und Weltanschauungen uberlagert wird.

International audience; We revisit the old but still vibrant Post-Keynesian debate over ‘fully-adjusted positions’, defined by the long-run equality of actual and standard utilisation rates. The central proposition of this paper is that in a world where different groups inside and outside firms have different objectives, the equality of actual and standard utilisation should not be treated as the only possible long-run equilibrium condition. The argument is illustrated in a model of target return pricing with conflict inflation, building on the work of Marc Lavoie. A ‘common language’ for the conflicting claims by shareholders, managers and workers is developed in terms of target profit rates, and it is shown that these contradictory claims can be partly reconciled through variations in the utilisation rate. The analysis unifies history and equilibrium in the sense that the nature of final equilibrium position and the adjustment to it depend on the objectives of the dominant social groups. We distinguish a ‘Fordist regime’ and a ‘financialisation regime’ and produce simulation results within a simple stock-flow consistent model that are broadly consistent with the stylised facts of these distinct historical phases of capitalism.

We tackle the issue of the possible instability of the Kaleckian distribution and growth model and the consequences for the endogeneity of the equilibrium rate of capacity utilization and for the paradox of thrift and the paradox of costs. Distinguishing between Keynesian and Harrodian instability, we review various mechanisms that have been proposed to tame Harrodian instability while bringing back the rate of utilization to its normal rate. We find that the mechanisms that have been suggested are far from being convincing. We thus review some approaches arguing that the adjustment towards a predetermined normal rate should not be expected at all, either because the normal rate reacts to the actual rate, or because of other constraints on the behaviour of entrepreneurs. We conclude that Kaleckian models are more flexible than their Harrodian and Marxian critics suppose when attacking the simple textbook version.

Starting from potential Harrodian instability in the Kaleckian distribution and growth model we survey Kaleckian reactions put forward to avoid or to cope with this instability. We show that, contrary to the position taken by the critics of the Kaleckian model, this model is capable of maintaining an endogenous rate of capacity utilization, the paradox of thrift and the paradox of costs in the long run, even if the problem of Harrodian instability arises. We conclude that Kaleckian models are more flexible than their Harrodian and Marxian critics suppose when attacking the simple textbook version.

We establish the link between rising shareholder power on the firm level, increasing pressure on labour, and redistribution at the expense of wages, with the macroeconomic effects on capacity utilisation, profits and capital accumulation. Three channels of transmission of ‘financialisation’ and increasing shareholder power, the ‘preference channel’, the ‘finance channel’ and the ‘distribution channel’, are introduced into two different variants of the Kaleckian distribution and growth model, the Kaleckian model and the Post-Kaleckian model. Within these models, three potential regimes of accumulation are derived, the ‘contractive’ regime, the ‘profits without investment’ regime, and the ‘finance-led growth’ regime. Only the ‘profits without investment’ regime generates a strict micro-macro identity, whereas the other two regimes are characterised by fallacies of composition, a ‘paradox of accumulation’ in the ‘finance-led growth’ regime and a ‘paradox of profits’ in the ‘contractive’ regime.

Die in vielen Ländern gewachsene Einkommensungleichheit wird international zunehmend als eine wesentliche Ursache für die Weltwirtschaftskrise und die globalen Ungleichgewichte im Außenhandel hervorgehoben. Hingegen ist die Debatte in Deutschland teilweise noch immer durch die Forderung nach weiterer Lohnzurückhaltung und sozialpolitischen Einschnitten gekennzeichnet. Welche Rolle kann die Lohn- und Verteilungspolitik zur mittelfristigen Überwindung der deutschen Exportlastigkeit und zur Stabilisierung der deutschen und globalen Wirtschaft spielen?

Der Beitrag argumentiert, dass die in Deutschland erfolgte Arbeitsmarkderegulierung nicht die von den Deregulierungsbefurwortern angekundigten Effekte gezeigt hat. Die Beschaftigungsentwicklung blieb im europaischen Vergleich unterdurchschnittlich, hingegen nahm die Einkommensungleichheit ausergewohnlich stark zu. Auch trugen die Reformen zur weiteren Schwachung der Lohnverhandlungsmacht der Arbeitnehmerinnen und Arbeitnehmer bei. Die hierdurch beforderte Stagnation der Lohnstuckkosten, einhergehend mit einer einseitigen Exportorientierung der grosten Volkswirtschaft im Euroraum im letzten Jahrzehnt, ist auf Dauer nicht nachhaltig und wird zunehmend als Mitursache der Krise des Euroraums erkannt. Zuweilen wird argumentiert, die Reformen hatten die Stabilitat des deutschen Arbeitsmarkts seit Ausbruch der weltweiten Finanz- und Wirtschaftskrise mitbewirkt. Ursachlich hierfur waren de facto jedoch die Ausweitung der Kurzarbeit und die von den Tarifparteien ab Ende der 1990er Jahre verstarkt eingefuhrten Arbeitszeitkonten - und nicht die Flexibilisierung des Arbeitsmarktes.

In den USA ist "Finanzialisierung" wahrend der letzten zweieinhalb Jahrzehnte mit einer tendenziellen Abschwachung der Investitionstatigkeit bei gleichzeitig kraftiger Entwicklung des privaten Konsums u.a. auf der Grundlage von Vermogenspreissteigerungen einhergegangen. Im Ergebnis zeigte sich eine trotz schwacher Investitionstatigkeit positive Entwicklung der Unternehmensgewinne sowie eine relativ robuste gesamtwirtschaftliche Dynamik. Dieses Modell ist aber wegen der latenten Uberschuldung vieler privater Haushalte sowie der hohen Auslandsverschuldung mit erheblicher Fragilitat des nationalen und internationalen Finanzsystems verbunden. In Deutschland ist es nach dem Wiedervereinigungsboom ebenfalls zu einer tendenziellen Abschwachung der privaten Investitionstatigkeit gekommen - zusammen mit ersten Finanzialisierungstendenzen im Unternehmenssektor. Allerdings stand die unverandert hohe Sparquote der einkommensstarken und vermogenden Haushalte - zusammen mit einem deutlich restriktiverem makrookonomischen Politik-Mix und einer deutlicheren Umverteilung zulasten der Arbeitseinkommen - bisher einem nachhaltigen Anstieg der Konsumnachfrage im Wege. In Deutschland wird die Auseinanderentwicklung von Profiten und Investitionen vor allem durch hohe Leistungsbilanzuberschusse ermoglicht, bei allerdings deutlich geringerem Wachstum als in den USA. Hieraus ergibt sich zudem eine besondere Gefahrdung des realwirtschaftlichen Wachstums und der Finanzsystemstabilitat durch Finanzkrisen im Ausland.

The inequality of income and wealth is one of the defining issues of our time, in terms of both its social and macroeconomic implications. In this article, I focus on the macroeconomic implications of inequality. In particular, it is possible to identify four themes on which there seems to be growing consensus among many economists especially in the various heterodox traditions, but also increasingly in the mainstream of the economics profession

Germany entered the euro with a current account deficit but over the entire past decade has run large and persistent current account surpluses. Besides joining the common currency, the increase of Germany’s current account since the late 1990s has been accompanied by strong shifts in the personal and, in particular, the functional income distribution. In this paper, we argue that income inequality should always be analyzed with respect to both the personal and the functional distribution of income. We present a dynamic stochastic general equilibrium (DSGE) model in which a current account surplus arises as an endogenous result of a decrease in the share of household income in national income. On the one hand, this result complements existing literature where current account deficits result from rising personal income inequality. On the other hand, we find that current account imbalances will be more pronounced when accompanied by changes in the financial system. Accordingly, if we link Germany’s accession to the European monetary union to lower exchange rate costs for German bank lending, the current account surplus becomes larger.

In this second issue of the European Journal of Economics and Economic Policies: Intervention (EJEEP), the Papers and Proceedings of the Research Network Macroeconomics and Macroeconomic Policies (FMM), 1 we publish some invited papers which were presented at the 17th FMM conference on ‘The State of Economics after the Crisis’. The conference took place in Berlin, 25–27 October 2012.

Freiwillige Haushaltbefragungen wie das Sozioökonomische Panel (SOEP) unterschätzen tendenziell die Ungleichheit von Einkommen und Vermögen. Die von Thomas Piketty und anderen etablierte Forschungsrichtung wertet daher zur Bestimmung der Ungleichheit am oberen Ende der Verteilung amtliche Steuerstatistiken aus. Da in Deutschland seit 2009 Kapitaleinkommensteuern nicht mehr personenbezogen erfasst werden und es überdies keine Vermögenssteuer gibt, gestaltet sich die Erfassung hoher Einkommen und Vermögen jedoch als schwierig. Darüber hinaus führt die Piketty-Methode auch deswegen zu einer Unterschätzung des Anstiegs der Ungleichheit in Deutschland seit der Jahrtausendwende, weil ein großer Teil der steigenden Gewinne von den Unternehmen einbehalten und damit nicht als Haushaltseinkommen erfasst wurde. Trotz dieser Probleme können aussagekräftige Kennziffern der Ungleichheit in Deutschland unter Zuhilfenahme vorhandener Umfragedaten sowie Gesamtwirtschaftlicher Rechenwerke entwickelt werden. Im Report wird zudem argumentiert, dass eine Reduzierung der Ungleichheit in Deutschland könnte zum Abbau der hohen Exportüberschüsse und damit zu mehr makroökonomischer Stabilität beitragen würde.

Household surveys like the German Socio-Economic Panel (SOEP) notoriously underestimate the degree of income and wealth inequality at the upper end of the distribution. A new approach developed by Thomas Piketty and co-authors therefore analyses tax return data in an attempt at better measuring top incomes and wealth. In the case of Germany, however, this approach faces a number of difficulties. Since 2009, capital incomes are subject to a flat rate withholding tax, levied at source. Moreover, Germany abandoned the wealth tax in 1997. This makes it difficult to measure the distribution of wealth and capital incomes. Moreover, at the conceptual level, top household income shares underestimate the rise of inequality in Germany because much of the shift in income distribution since the early 2000s has taken the form of rising corporate profits, which in large part have been retained by firms and hence are not counted as household income. Despite these problems, measures of income and wealth inequality can be developed by combining information from household surveys and national accounts data. The article also argues that reducing inequality would contribute to reducing Germany's export surplus and thereby enhance macroeconomic stability.

First paragraphThe financial market crisis that transformed into a global recession is a challenge for both economic theory and policy. In retrospect, nearly three years after the first signs of the crisis, a few tentative conclusions concerning the appropriateness and effectiveness of the responses to the crisis might be possible. After an initial state of shock, the political system acted forcefully and issued programmes to stabilise both financial sector and the real economy all over the world. Moreover, governments started to talk about an encompassing regulation of the financial sector, which was supported by many economists. This is indeed remarkable compared to what used to be common sense in the years before within advisory bodies – among others the European Commission, the IMF and academic think tanks. Privatisation and liberalisation of markets were, then, thought to be key to increasing the capacity of the economy to absorb shocks and to guarantee high growth rates and economic well-being. Although in that respect politicians and economists obviously did learn from the crisis and began to take seriously alternative ideas which had for a long time been absent in the debates, a ›return to normality‹ is already imminent; the planned fiscal retrenchment programmes, particularly within the European Union, and the deferral of regulatory measures for financial markets are testament to this. The king is dead, long live the king? From today's view it is not clear whether or not, in the longer run, this crisis has really shaken the foundations of economic thinking and policy making.

We analyse the link between income distribution and the current account for the period 1972-2007. We find that rising (top-end) personal inequality leads to a decrease of the current account, ceteris paribus. This result is consistent with consumption externalities resulting from upward-looking comparisons. Moreover, an increase in the corporate financial balance or a decrease in the labour income share leads to an increase in the current account. This finding is consistent with the view that consumers do not fully ‘pierce the corporate veil’. Changes in personal and functional income distribution have contributed considerably to the widening of current account balances.

We discuss the link between rising income inequality, financialisation and macroeconomic imbalances during the period before the global financial and economic crisis starting in 2007. We present case studies for the United States and Germany as well as the results of model-based simulations and panel econometric estimations. A large part of the widening global current account imbalances prior to the crisis can be explained by country-specific trends in the personal and functional income distribution. Der Artikel diskutiert den Zusammenhang von zunehmender Einkommensungleichheit, Finanzialisierung und makroökonomischen Ungleichgewichten im Vorfeld der weltweiten Finanz- und Wirtschaftskrise ab 2007. Neben den Fallbeispielen USA und Deutschland werden Ergebnisse aus modellgestützten Simulationen und panelökonometrischen Schätzungen präsentiert. Ein signifikanter Teil der globalen außenwirtschaftlichen Ungleichgewichte im Vorfeld der Krise lässt sich durch länderspezifische Entwicklungen in der funktionalen und personellen Einkommensverteilung erklären.

We analyse the link between income distribution and the current account through a descriptive analysis for the G7 countries and a series of panel estimations for the G7 countries and a larger sample of 20 countries for the period 1972-2007. We find that, firstly, rising personal inequality leads to a decrease of household net lending and the current account, ceteris paribus. The effect is strong for top household income shares, but much weaker for the Gini coefficient of household income. This finding is consistent with consumption externalities resulting from upward-looking status comparisons. Secondly, an increase in the corporate financial balance leads to an increase in the current account, i.e., consumers do not fully 'pierce the corporate veil'. There is also tentative evidence that the corporate net lending and the current account increase as a result of a decline in the share of wages in value added. The joint effects of changes in personal and functional income distribution contribute to a significant degree to explaining the global current account imbalances prior to the Great Recession.

Is there a link between rising inequality and the ‘Great Recession’ of 2008? As noted by The Economist (22 January 2011, p. 11), ‘[s]everal prominent economists now reckon that inequality was a root cause of the financial crisis’. Similarly, IMF-ILO (2010, p. 8) conclude: ‘In the wake of the current crisis there is an emerging view about the importance of growing inequality as one of the causes of global crises past and present.’ Indeed, in recent years there has been a proliferation of analyses supporting this view (see, inter alia, UN Commission of Experts, 2009; Rajan, 2010; Reich, 2010; Kumhof and Ranciere, 2010; Galbraith, 2012; Palley, 2012). The explanation is straightforward: As the benefits of rising income over the past decades were confined to a relatively small group of households at the top of the income distribution, the consumption of the lower- and middleincome groups was largely financed through rising credit rather than rising incomes. This process was facilitated by government action, both directly through credit promotion policies and indirectly through the deregulation of the financial sector. But with the downturn in the housing market and the subprime mortgage crisis starting in 2007, the overindebtedness of the US personal sector finally became apparent and the debt-financed private demand expansion came to an end. We refer to this line of argument as the ‘Rajan hypothesis’, because of the impetus his book Fault Lines (2010) has given to the renewed interest in inequality as a macroeconomic risk.

In this chapter, we argue that the projections for achieving stability in the current Stability Programmes (SPs) of Euro zone member countries are very likely too optimistic.2 We aver that by ignoring the importance of external rebalancing and assuming an overly buoyant world economy, the SPs either forecast unrealistic growth rates or unrealistically successful fiscal consolidation. Towards this, we examine the interrelated- ness of public deficit reduction and external imbalances reduction. We derive our argument mainly from evaluating the SPs against the logic of simple accounting identities, which clarify the connections of financial balances and thereby of the two challenges. Thus we transcend the SPs’ narrow focus only on the government balance, and shed light instead on the SPs’ projections of the financial balances of all three sectors in the economy (foreign, private and public) and how they are intertwined with the overall macroeconomic development. Merely the final brief sketch of feasible alternative policy recommendations to address both challenges (sustainability of public deficits and current account positions) requires a greater sophistication of the economic argument and thus involves more judgment.

The global economy and the euro area, in particular, face serious challenges in the years ahead. Throughout the year 2010, politicians and financial investors were mainly concerned with the question of whether Greece and other ‘deficit countries’ should be ‘rescued’ by the other, seemingly more ‘financially responsible’ EMU countries in case of solvency problems.

Monetary theory typically assumes that the pass-through from policy-controlled interest rates to longer term rates and yields is complete, rapid and symmetric. We investigate these assumptions by applying the Nonlinear ARDL (NARDL) model advanced by Shin, Yu and Greenwood-Nimmo (2013) to the analysis of interest rate pass-through in the U.S. We fi nd five stylised fi ndings as follows: (i) rate cuts are passed through more completely than rate hikes in the long-run; (ii) rate hikes are passed through more rapidly than rate cuts in the short-run; (iii) pass-through has become less complete during the Great Moderation; (iv) the speed of adjustment has increased during the Great Moderation; and (v) the 2003-5 decoupling 'conundrum' identifi ed by Alan Greenspan is statistically indistinct from previous monetary contractions. Where pass-through exhibits such complexities, our findings suggest that demand management policies involving manipulation of the short-term interest rate may encounter signifi cant diffi culties in the absence of regulatory reform.

Ein integrativer Politikansatz zielt auf die Verbesserung der Lebensbedingungen in einer Vielzahl von Dimensionen bei Bewahrung der natürlichen Lebensgrundlagen ab, und diese Dimensionen müssen in eine sinnvolle moderne Wohlstandsdefinition einfließen. Ein moderner Wohlstandsbegriff ist viel breiter zu fassen als die traditionellen Maßzahlen zum Bruttoinlandsprodukt. Auch die Begrenzung der Staatsverschuldung, wie sie nun sowohl im Grundgesetz mit der Schuldenbremse als auch absehbar auf EU-Ebene mit dem Fiskalpakt festgeschrieben ist, kann keinen Wohlstandszuwachs garantieren. Wohlstand muss aber nicht nur anders definiert werden, sondern diese Definition muss auch in die praktische Regierungsarbeit einfließen. Zudem muss für einen politischen Erfolg die neue Wohlstandsdefinition effektiv medial vermittelt werden, um die Überlegenheit einer sozialökologisch ausgerichteten Wirtschaftspolitik gegenüber traditioneller Wirtschaftspolitik aufzuzeigen, die auf Steigerung des BIP ohne Rücksicht auf Verteilungsfragen und ökologische Fragen setzt. Wir schlagen als Lösung für diese Herausforderung eine Reform des Stabilitäts- und Wachstumsgesetzes von 1967 vor, mit einem neuen magischen Viereck mit den Oberzielen materieller Wohlstand, ökologische Nachhaltigkeit, soziale Nachhaltigkeit und Zukunftsfähigkeit der Staatstätigkeit und der Staatsfinanzen. Diese Oberziele sollten in Einzelzielen konkretisiert werden und in konkrete, überprüfbare, quantitative Zielquoten für Regierungshandeln einfließen, für deren Einhaltung sich die Regierung in einem neuen „Jahreswohlstandsbericht“ rechtfertigen muss. Wir glauben, dass über einen solchen Rahmen Wirtschaftspolitik in Deutschland besser strategisch ausrichtbar wird und leichter normative Wertungen und Ziele diskutiert werden können.

The financial and economic crisis in the euro area has revealed a number of important flaws in the economic policy framework in Europe. On the one hand, the imbalances, which have dominated European development since the introduction of the euro, are not sustainable; and this is more serious in a period of crisis in particular. On the other hand, it has become clear that the euro area suffers from a serious lack of institutions and policy concepts, which will not allow coping with deep financial and economic crises unless a deep restructuring takes place. The policy reactions of European governments, the European Commission and the European Central Bank in cooperation with the IMF will, therefore, hardly be able to initiate recovery. On the one hand, some important steps towards financial stabilization have been made. On the other hand, however, these are combined with restrictive fiscal and wage policies, which will impose deflationary pressure on major parts of the euro area and thus prevent stabilization (or reduction) of public debt–GDP ratios. In the paper we will first analyse the imbalances, which have been built up in the euro area, before we briefly review the policy responses towards the crisis. Since the prescribed fiscal and wage policies are still dominated by the New Consensus Macroeconomics theoretical framework, we will then develop an alternative macroeconomic policy model based on Keynesian and Post-Keynesian principles. It will be shown that stabilizing wage and active fiscal policies will have major roles to play in order to cope with the imbalances and to initiate recovery for the EU as a whole. Furthermore, current account targets will have to be included into intra-euro area policy coordination.

This paper evaluates whether the 2011 national stability programs (SPs) of the euro area countries are instrumental in achieving economic stability in the European Monetary Union (EMU). In particular, we analyze how the SPs address the double challenge of public deficits and external imbalances. Our analysis rests, first, on the accounting identities of the public, private, and foreign financial balances; and second, on the consideration of all SPs at once rather than separately. We find that conclusions are optimistic regarding GDP growth and fiscal consolidation, while current account rebalancing is neglected. The current SPs reach these conclusions by assuming strong global export markets, entrenched current account imbalances within the EMU as well as the deterioration of private financial balances in the current account deficit countries. By means of our simulations we conclude, on the one hand, that the failure of favorable global macroeconomic developments to materialize may lead to the opposite of the desired stability by exacerbating imbalances in the euro area. On the other hand, given symmetric efforts at rebalancing, the simulation suggests that for surplus countries that reduce their current account, a more expansionary fiscal policy will likely be required to maintain growth rates.

The financial and economic crisis in the Euro area has revealed a number of important flaws in the economic policy framework in Europe. On the one hand, the imbalances, which have dominated European development since the introduction of the euro, are not sustainable; and this is more serious in a period of crisis in particular. On the other hand, it has become clear that the Euro area suffers from a serious lack of institutions and policy concepts, which will not allow coping with deep financial and economic crises unless a deep restructuring takes place. The policy reactions of European governments, the European Commission and the European Central Bank in cooperation with the IMF will, therefore, hardly be able to initiate recovery. On the one hand, some important steps towards financial stabilisation have been made. On the other hand, however, these are combined with restrictive fiscal and wage policies, which will impose deflationary pressure on major parts of the Euro area and thus prevent stabilisation (or reduction) of public debt-GDP ratios. In the paper we will first analyse the imbalances, which have been built up in the Euro area, before we briefly review the policy responses towards the crisis. Since the prescribed fiscal and wage policies are still dominated by the New Consensus Macroeconomics theoretical framework, we will then develop an alternative macroeconomic policy model based on Keynesian and Post-Keynesian principles. It will be shown that stabilising wage and active fiscal policies will have major roles to play in order to cope with the imbalances and to initiate recovery for the EU as a whole. Furthermore, current account targets will have to be included into intra-Euro area policy coordination.

We analyse the newly updated Stability Programmes of the Euro area governments by applying the simple accounting identity by which the financial balances of the government, the private sector and the foreign sector always sum to zero. While the focus of the old Stability and Growth Pact was solely on the government balance, the current euro crisis has shown that this narrow focus was wrong and that macroeconomic stability within the monetary union requires reducing imbalances between all three sectors of individual member states. While the need for overcoming these imbalances is now increasingly recognised by economists and policymakers, we argue that the projections for achieving stability in the current Stability Programmes are very likely too optimistic. We show that, individually, the Stability Programmes rely on optimistic assumptions about GDP growth; collectively, they require an improvement of the Euro area's current account with the rest of the world, the continuation of significant current account imbalances within the Euro area, and a steep drop of private balances in some countries. Based on some simple counterfactual simulations, we conclude that a symmetric effort at rebalancing current accounts would most likely require a slowdown of fiscal consolidation (in the current account surplus countries) but would be required to successfully address the euro area's macroeconomic challenges and thereby not only allow for consolidation in the medium term but also lead to the desired stability.

We analyse the bank interest rate pass-through in the euro area for the period 1999:1–2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999) , allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run pass-through. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the period since the founding of the European Monetary Union.

The recession of 2009 following the financial market crisis of 2008 was severe, especially in Europe. World GDP decreased by 0.6 per cent, the GDP of the USA by 2.6 per cent, and in the European Monetary Union (EMU) it declined by 4.1 per cent (IMK/OFCE/WIFO 2011). The export-oriented German economy had to face a relatively strong negative growth of 4.7 per cent of GDP. By mid-2010, however, it seemed that the disastrous effects of the financial market crisis were successfully countered by stabilisation measures in countries all around the world: rescue programmes for banks were established in most of the European countries; some countries like Ireland and Spain tried to compensate for the effects of busted housing bubbles; and fiscal stimuli were initiated to dampen the downturn of the economy, e.g. by the introduction of a scrapping premium for cars in Germany, France and other countries. But for Europe, the crisis was not over. This transformation of private debt of banks, house owners and consumers into public debt raised the state’s debt-to-GDP ratio for the euro area as a whole from 66.3 per cent in 2007 before the crisis to 85.3 per cent in 2010

We review recent attempts to integrate 'financialisation' processes into Post-Keynesian distribution and growth models and distinguish three principal channels of influence: 1. objectives and finance restrictions of firms, 2. new opportunities for households' wealth-based and debt-financed consumption, and 3. distribution between capital and labour, on the one hand, and between management and workers on the other hand. Starting from a re-interpretation of the Post-Keynesian theory of the firm we bridge the gap between micro- and macro-analysis of 'financialisation' and we trace the main characteristics and effects of 'financialisation' from the micro to the macro level taking into account stock-flow interactions. Our review of the theoretical literature on 'financialisation' shows that expansive effects may arise under certain conditions, in particular when there are strong wealth effects in firms' investment decisions (via Tobin's q) and in households' consumption decisions. However, our review also suggests that even an expansive finance-led economy may build up major financial imbalances, i.e. increasing debt-capital or debt-income ratios, which make such economies prone to financial instability.