From Financial Crisis to Stagnation

By Thomas Palley

Marshall McLuhan, the famed philosopher of media, wrote: “we shape our tools and they in turn shape us”. His insight also applies to the economy which is shaped by economic policy derived from economic ideas, and it is the theme of my recent book which argues the global economic crisis is the product of flawed policies derived from flawed ideas.

Broadly speaking, there exist three different perspectives on the crisis. Perspective 1 is the hard-core neoliberal position, which can be labelled 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 soft-core neoliberal position, which can be labelled 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 labelled the “destruction of shared prosperity hypothesis”. It is identified with the other half of the Democratic Party and the labour movement, but it has no standing within major economics departments owing to their suppression of alternatives to orthodox theory.

Read the rest here.

Palley on the crisis and more

Philip Pilkington interviews Tom Palley on his new book at Naked Capitalism.

Palley on the destruction of shared prosperity and the role of economics



Tom Palley's new book is out. From the blurb:

"The U.S. economy today is confronted with the prospect of extended stagnation. This book explores why. Thomas I. Palley argues that the Great Recession and the destruction of shared prosperity is due to flawed economic policy over the past thirty years. One flaw was the growth model adopted after 1980 that relied on debt and asset price inflation to fuel growth instead of wages. The second flaw was the model of globalization that created an economic gash. Financial deregulation and the house price bubble kept the economy going by making ever more credit available. As the economy cannibalized itself by undercutting income distribution and accumulating debt, it needed larger speculative bubbles to grow. That process ended when the housing bubble burst. The earlier post–World War II economic model based on rising middle-class incomes has been dismantled, while the new neoliberal model has imploded. Absent a change of policy paradigm, the logical next step is stagnation. The political challenge we face now is how to achieve paradigm change."

You can read a larger excerpt here. Tom correctly puts the roots of the crisis on policy decisions, that led to debt-driven fragile consumption bubbles, with weakening labor institutions and stagnating income, and suggests that solutions must go beyond expansionary macroeconomic policies (even if those help). This is Keynesian economics at its best, and it emphasizes that economic ideas did play an important role in getting us into this crisis, and will need to play one if we do get out. As noted by Jamie Galbraith:

"In the depths of the Great Depression, John Maynard Keynes wrote that 'nothing is required, and nothing will avail, except a little clear thinking.' Thomas Palley here renews that message for our time."

It's a must read.

Arestis and Sawyer on the EU fiscal compact

Philip Arestis and Malcolm Sawyer are guest blogging at TripleCrisis on the so-called fiscal compact. They say:

The European Leaders agreed in principle at their meeting in Brussels on the 8th/9th of December 2011 to adopt tougher sanctions on the euro area countries that break the ‘new’ rules of what used to be the Stability and Growth Pact (SGP), what is now called the ‘fiscal compact’ (FC). The FC requires that tax and spending plans be checked by European officials before national governments intervene. There will be automatic actions against those countries that are deemed to have budget deficits that are too large. In effect the new agreement tightens the rules of the old SGP, but with no apparent improvement, as the FC retains the principles of the previous SGP but with the one addition that breaking the deficit rules may actually be punished in some way.

Read the rest here. Also read Tom Palley's take on the role of the ECB in the crisis here.

Tom Palley on a global wage policy

Tom Palley suggests that wages should be higher in surplus (current account) countries, to help re-balance the global economy.  In the case of Europe, it seems really unlikely that Germany will expand the economy, and promote nominal wage increases to help the European periphery.  With respect to the rest of the world it seems that Tom still believes that export-led growth is the engine of growth.  In China it seems clear that domestic demand has taken over and that real wages (including minimum wages) have been increasing at a fast pace (see ILO's Global Wage Report).  The world economy needs more growth in the US and Germany, China and other developing countries are actually doing their job to help in a global recovery.  Tom believes that competition from low wage countries has had a negative impact in labor conditions in the North.  I tend to believe that the problems have more to do with political economy problems in the North, in particular the ascendancy of conservatism since the 1980s. But nothing against high minimum wages, which is Tom's main point!