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Wednesday, May 09, 2012

"From Financial Crisis to Stagnation"

The heterodox view:

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 on Wednesday, May 9, 2012 at 05:33 PM in Economics, Methodology | Permalink  Comments (121)


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