From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics, by Thomas Palley: Many countries are now debating the causes of the global economic crisis and what should be done. That debate is critical for how we explain the crisis will influence what we do.
Broadly speaking, there exist three different perspectives. Perspective # 1 is the hardcore neoliberal position, which can be labeled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics. Perspective # 2 is the softcore neoliberal position, which can be labeled the “market failure hypothesis”. It is identified with the Obama administration, half of the Democratic Party, and the MIT economics departments. In Europe it is identified with Third Way politics. Perspective # 3 is the progressive position which can be labeled the “destruction of shared prosperity hypothesis”. It is identified with the other half of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to orthodox theory.
The government failure argument holds the crisis is rooted in the U.S. housing bubble and bust which was due to failure of monetary policy and government intervention in the housing market. With regard to monetary policy, the Federal Reserve pushed interest rates too low for too long in the prior recession. With regard to the housing market, government intervention drove up house prices by encouraging homeownership beyond peoples’ means. The hardcore perspective therefore characterizes the crisis as essentially a U.S. phenomenon.
The softcore neoliberal market failure argument holds the crisis is due to inadequate financial regulation. First, regulators allowed excessive risk-taking by banks. Second, regulators allowed perverse incentive pay structures within banks that encouraged management to engage in “loan pushing” rather than “good lending.” Third, regulators pushed both deregulation and self-regulation too far. Together, these failures contributed to financial misallocation, including misallocation of foreign saving provided through the trade deficit. The softcore perspective is therefore more global but it views the crisis as essentially a financial phenomenon.
The progressive “destruction of shared prosperity” argument holds the crisis is rooted in the neoliberal economic paradigm that has guided economic policy for the past thirty years. Though the U.S. is the epicenter of the crisis, all countries are implicated as they all adopted the paradigm. That paradigm infected finance via inadequate regulation and via faulty incentive pay arrangements, but financial market regulatory failure was just one element. ...
The neoliberal economic paradigm was adopted in the late 1970s and early 1980s. For the period 1945 - 1975 the U.S. economy was characterized by a “virtuous circle” Keynesian model built on full employment and wage growth tied to productivity growth. ...
After 1980 the virtuous circle Keynesian model was replaced by a neoliberal growth model that severed the link between wages and productivity growth and created a new economic dynamic. Before 1980, wages were the engine of U.S. demand growth. After 1980, debt and asset price inflation became the engine. ...
For proponents of the destruction of shared prosperity hypothesis the policy response is ... to overthrow the neoliberal paradigm and replace it with a “structural Keynesian” paradigm that ... restores the link between wage and productivity growth. ... That requires replacing corporate globalization with managed globalization; restoring commitment to full employment; replacing the neoliberal anti-government agenda with a social democratic government agenda; and replacing the neoliberal labor market flexibility with a solidarity based labor market agenda.
Managed globalization means a world with labor standards, coordinated exchange rates, and managed capital flows. A social democratic agenda means government ensuring adequate provision of social safety nets, fundamental needs such as healthcare and education, and secure retirement incomes. A solidarity based labor market means balanced bargaining power between workers and corporations which involves union representation, adequate minimum wages and unemployment insurance, and appropriate employee rights and protections. ...
Posted by Mark Thoma on Wednesday, May 9, 2012 at 05:33 PM in Economics, Methodology | Permalink Comments (109)
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“market failure hypothesis”. . . .
“destruction of shared prosperity hypothesis”.
These three hypotheses are not mutually exclusive. :)
Any attempt to concentrate political power on a global level in a democratic manner is a red carpet invitation to corporate and wealthy interest to capture politicians. It is naive to believe otherwise. Heck, our own government is proof of this and we cannot even implement these sorts of policies on a national level as "progressives" elect and defend a president who is to the right of Nixon.
We need more decentralization, not more centralization. Some groups of people will get it right and some will get it wrong and there will be various shades of in between. However, when we try to centrally plan a global economy that is an invitation to political capture that will be masked behind democracy....like we have now.
Restoring AD , whether by monetary or fiscal means or a combination , will not solve the underlying problem , and we'll be back in the ditch as soon as the juice is pulled back. It'll be just like the tech bubble , which gave us full employment but had to be replaced by a debt-fueled housing bubble when it popped.
Krugman falls squarely in the soft-porn neoliberal camp. Today he's railing against the "structuralists" , insisting that AD is the problem and that restoring it should be the primary goal. He's just setting himself up for ridicule - and all the Dems that go along with him - when the economy fails to respond in a sustainable fashion to his fix , if adopted , because the underlying "structural" problems in income distribution and crony capitalism haven't been addressed.
He loves to point to the full employment that resulted from the WWII stimulus as support for his thesis , ignoring all the pro-labor , anti-finance , and income-compressing "structural" changes that were essential to the development of the Golden Era in capitalism post-WWII.
Restoring AD by some means is a necessary but not a sufficient step on the road to recovery. Palley gets that while the soft-core crowd doesn't.
If Krugman wants to dissociate himself from the economic pornographers , hardcore or soft , he needs to start by advancing a more comprehensive plan and by warning that if an incomplete plan is implemented , it will fail.
Klein believes that neo-liberalism belongs among "the closed, fundamentalist doctrines that cannot co-exist with other belief-systems ... The world as it is must be erased to make way for their purist invention. As Klein sees it, the social breakdowns that have accompanied neo-liberal economic policies are not the result of incompetence or mismanagement. They are integral to the free-market project, which can only advance against a background of disasters. Klein seems to suggest that these disasters are manufactured as part of a deliberate policy framed by corporations with hidden influence in government. Her more considered view, which is also more plausible, is that disaster is part of the normal functioning of the type of capitalism we have today: "An economic system that requires constant growth, while bucking almost all serious attempts at environmental regulation, generates a steady stream of disasters all on its own, whether military, ecological or financial. The appetite for easy, short-term profits offered by purely speculative investment has turned the stock, currency and real estate markets into crisis-creation machines, as the Asian financial crisis, the Mexican peso crisis and the dotcom collapse all demonstrate.
http://www.guardian.co.uk/books/2007/sep/15/politics?INTCMP=SRCH
The only reason for a person like me to make an argument about this issue:
"The critical insight is that each perspective carries its own policy prescriptions. Consequently, the explanation which prevails will strongly impact the course of economic policy. That places economics at the center of the political struggle as it influences which explanation prevails."
"As of now, the economics profession is split between the hardcore and softcore neoliberal positions. However, that can change under the pressure of an ugly reality that produces mass political demand for change, as happened in the Great Depression of the 1930s which provided an opening for Keynesian economics. The only certainty is change will be politically opposed as powerful elites and orthodox economists have an interest in preserving the dominance of the existing paradigm by ensuring their explanation of events prevails."
There is a central bank printing money: China. The Chinese central bank has a "revealed preference" for growth, according to the Hong Kong Monetary Authority.
I guess the mainland Chinese don't know that they "suffering" through three percent and four percent inflation, when they could copy Japan or Europe and get much lower inflation rates.
There is alternative #4:
The Ben Bernanke Easy forever, ignore bubbles policy that everyone here is loathe to even consider. Letting central banks off the hook entirely for repeated bubbles (and they are still being fostered by easy policy) is like letting the wolf go when he was found prowling around the chicken pen.
It had the effect of putting working class and poor men in a position of status. It put them in a position to be admired. They were universal heroes for life.
That all changed in Vietnam. The heroism demanded of those who fought was just as great, but they were regarded cooly by wealthy chicken-hearts and sometimes berated by some who opposed the war. Even WWII veterans were known to show disdain for those who went to Vietnam, regarding it as something other than a "real war".
This is not the whole story, but it is integral to the present dynamic, IMHO. Capitalism is inherently unstable in that today's debt is alsways to be paid for via tomorrow's growth. However, it doesn't matter too much what sectors see growth and which workers or rentiers see their income and wealth increase. So long as there is growth, capitalism survives.
For me, the dynamics of increasing inequality, periodic financial crises coupled with public bailouts of corporate executives, and the rise of apathetic trade can only be understood in the light of primate status dynamics. A person making $1 million+ per year may consciously think he or she wants more money. What the earner really desires is more power, more status, more reproductive opportunities for one's self or offspring.
It's easy to justify a drive for money and wealth. Most people can understand it because they don't have enough to meet the real needs of their present and future. It's impossible to justify a constant grab for eternal power for oneself and progeny. But it is exactly what we are witnessing. Economists and everyone else should call it what it is.
This is why it is not a contradiction to say that the 30s unemployment was structural, and at the same time say that the government was able to improve the unemployment picture. To the extent that 30s unemployment was structural, it was the central planning which upended the structure and created a better fit between workers and the economy.
While these two parts of the economic intervention during the War, the planning and the spending, certainly both contributed to the economic recovery, it is only the spending which has really been talked about in public, according to the orthodoxies. The central planning of the WPB certainly is not. As mentioned in the post, polite economists don't talk about central planning at all.
It's hard to put 4-8 percent of your imputed GDP into an utterly unproductive endeavor and not produce first order economic distortions.
Jes sayin'.
"... 1945 - 1975 the U.S. economy was characterized by a “virtuous circle” Keynesian model built on full employment and wage growth tied to productivity growth"
I guess being the world's super power, no competition for industrial stuff from japan and china, low oil etc had nothing to do with it.
if all you have is a hammer..
I'm always amazed at how little effort economist put into getting something other then a hammer (tools from phd time) to study problems
Of course, if things like military might creating low oil were responsible for some of the growth, then people might question the high status afforded to the math driven economist