Wednesday, May 9, 2012

Thomas Palley — From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics

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.
Read the rest at Thomas Palley
From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics
by Thomas I. Palley

Brilliant heterodox summation of the historical background and economic ideology that resulted in the GFC. Palley captures the essence in a few well-chosen words.

Palley concludes:
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.
Stand by for action. The situation in Europe is now beginning to unwind politically as a result of recent elections repudiating austerity, and the periphery is becoming politically unstable. The global economy is hitting stall speed owing to lack of demand, and the US, still the world leader, is tied up in hopeless political gridlock, hence incapable of responding to looming crisis both domestically and externally. The public in many countries has lost trust in the establishment and its leaders, and extremism is on the rise as people look elsewhere for solutions. The river of time beginning to flow more quickly, stirring the waters.


3 comments:

Ken said...

I like it ... only one small nit to pick .... "coordinated exchange rates". MMT based policy wouldn't agree with that, right? Exchange rates should freely float?

Tom Hickey said...

Exchange rated don't freely float now. Central banks regularly defend their currencies.

There is no "free," i.e., absence of government intervention in markets, trade, capital flow, etc. Sovereign government always act in their perceived national interest when they feel they need to, including pre-emptive military action and undertaking black ops.

Calgacus said...

Sovereign government always act in their perceived national interest when they feel they need to, including pre-emptive military action and undertaking black ops. Problem is the religion against "intervening" in their domestic economy, which works only to weaken the nation as a whole, while relatively, but not absolutely enriching the elite.

And even more so with exchange rates & military action, where "intervention" is constant, and almost always flagrantly opposed to the national interest, generally even to elite interests, defending exchange rates temporarily by wrecking the domestic economy, so strong is the grip of the distorted perception of "mainstream" anti-economics.

Very old-fashioned Henry Clay "American System" type intervention might be better than non-intervention floating. Just as Washingtons avoidance of entangling alliances is better than today's aggressor of last & first resort USA, though perhaps worse than FDR's UN as it should be. But non-intervention is much better than the usual suicidal, destructive intervention that Ramanan & some other PKers trend of thought might lead to.

Domestically, and hence externally, the US gridlock is far better than "responding to the looming crisis" by making things much worse, as is the fashion in Europe.