IEA's Conceptual Framework for Macroeconomic Analysis and Policy

IEA uses a comprehensive conceptual framework that makes it possible to "complete the Keynesian Revolution" by conceptually, analytically and empirically bridging the Keynesian/NIPA financial gap between financial saving and credit-financed GDP spending -- and by providing a more precise conceptual framework for describing economic fluctuations -- so that macroeconomic analysis and policy can become a more credible science to meet the challenges of the 21st century.

This framework has three main aspects:

which provide the basis for a conceptually and empirically integrated Policy Package.

A. The IDMF Conceptual framework

• The basic analytical questions for each transaction:  Where does the money come from? Where does it go? What role does it play in the operation of the economy?

• Non-Credit Money.  A single precise "pseudo-commodity" inventory concept of money stocks and money-creation replaces the Federal Reserve's present anomalous collection of "money and credit aggregates." This also opens up the monetarists' traditional "black box" between money growth and economic growth and makes possible incisive empirical analysis of this powerful "multiplier" relationship.

• "Primary" Credit.  "Primary" Saving and "Primary" Borrowing concepts net out excessive intermediate ("pass-through") credit flows in the Flow of Funds Accounts (FOFA), much as the "value added" concept nets out intermediate flows in the National Income and Product Accounts (NIPA). This makes it possible to functionally integrate the FOFA and NIPA, fill the "financial gap" in the Keynesian/NIPA conceptual framework, and empirically track the flow of financial saving through the credit market into the Primary Borrowing used to finance each type of GDP investment.

• The Integrated Macro Equation.  Keynesian NIPA-based macroeconomic equations (which exclude money and credit) are replaced by a dynamic money-flow equation which expresses the functional integration of FOFA and NIPA data -- on both macro and micro levels.

B. The Full-Employment Growth-Trend Standard of Reference

• The (NBER) absolute-based business-cycle framework is replaced by growth-trend-based operating rates and structural analysis, as presented in a conceptual diagram and IEA Pocket Charts.

C. Structural Equilibrium Analysis

• This focuses mainly on the structural balance of a full-employment economy, and on the dynamic equilibrium between "elastic stimulants" (such as consumer credit expansion and stock market booms) and "institutional depressants" (such as gross inequalities of market power, income and wealth).

1. Government Macroeconomic Responsibility is to maintain an economic environment of structurally-balanced, environmentally-sustainable, full-employment growth, with low inflation and low interest rates -- as required by the long-ignored Humphrey/Hawkins "Full Employment and Balanced Growth Act of 1978". Such an environment best facilitates the long run planning of families, local governments and responsible private enterprise.

2. Monetary Policy.  Since the Federal Reserve largely controls the unemployment rate and GDP growth rate, its ad-hoc, judgment-based monetary policy decisions are replaced by the precise, easily understandable, empirical-based Money-Growth Formula that the IEA conceptual framework makes possible.

3. Budget Policy.  Genuine fiscal and economic responsibility requires use of dual operating budgets, in both of which the Social Security Trust Fund is excluded (as private pension funds are excluded from business operating budgets). The primary basis for budget projections, debate and legislation is the Standardized-Employment Budget based on the 4% unemployment rate mandated by the Humphrey/Hawkins Act.

4. Fiscal (Stabilization) Policy  (effect of the federal deficit/surplus on the economy). The traditional economy-dependent "automatic stabilizer effect" and budget deficits caused by Federal Reserve anti-inflation policy, are replaced by a pro-active, Formula-Automatic Stabilization Adjustment (FASTA) which causes changes in federal borrowing (deficit or surplus) to maintain a stable balance between the economy's total supply and demand for credit, at stable low interest rates.

5. Anti-inflation Policy.  Use of high unemployment as the primary anti-inflation policy tool is replaced by a more comprehensive focus on the "cyclical," structural, institutional and excessive-market-power relationships which directly affect prices and wages.

6. Income Distribution Policy.  Emphasis on "after-market" redistributive taxes and subsidies is replaced by emphasis on "pre-final-market" institutional relationships -- educational opportunities, economic concentration and market power, credit-availability, low interest rates -- and other policies to achieve greater equality of economic opportunity and market bargaining power, for both individuals and businesses -- and particularly by maintaining a stable, full-employment economic environment.