Friday, March 9, 2012

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.

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