Yesterday I received an invitation to read a paper on the financial
crisis written by Thomas Palley, a Schwartz Economic Growth Fellow at
the New America Foundation. Titled “America’s Exhausted Paradigm:
Macroeconomic Causes of the Financial Crisis and Great Recession,” it
makes a basic distinction between macro and micro explanations for the
current mess and adds that unless we see things in macro terms, we will
never be able to solve what is arguably the biggest crisis since the
Great Depression. He writes:
"The current financial crisis is widely recognized as being tied to the
bursting of the house price bubble and the debts accumulated in
financing that bubble. Most commentary has therefore focused on market
failure in the housing and credit markets. But what if the house price
bubble developed because the economy needed a bubble to ensure continued
growth? In that case the real cause of the crisis would be the economy’s
underlying macroeconomic structure. A focus on the housing and credit
markets would miss that.
"Despite the relevance of macroeconomic factors for explaining the
financial crisis, there is resistance to such an explanation. In part,
this is because such factors operate indirectly and gradually, while
microeconomic explanations that emphasize regulatory failure and flawed
incentives within financial markets operate directly. Regulatory and
incentive failures are specific, easy to understand, and offer a
concrete “fixit” agenda that appeals to politicians who want to show
they are doing something. They also tend to be associated with tales of
villainy that attract media interest (such as Bernie Madoff’s massive
Ponzi scheme or the bonus scandals at AIG and Merrill Lynch). Finally,
and perhaps most important, a microeconomic focus does not challenge the
larger structure of economic arrangements, while a macroeconomic focus
invites controversy by placing these matters squarely on the table."
The macroeconomic approach consists of an examination of policies that
were ushered in during the Reagan administration and have been continued
by Democrats and Republicans alike. They include:
Globalization: a policy characterized by free trade and capital mobility
that leaves American workers at a disadvantage
Small government: this includes privatization of public services such as
the school system, deregulation, and the erosion of working class and
poor people’s rights. Clinton’s attack on welfare is just one example.
Labor market flexibility: this involves attacking unions, the minimum
wage, unemployment benefits, employment protections, and employee rights.
Abandonment of full employment: this prioritizes low inflation even if
it means rising unemployment.
The article is worth reading if only for its most useful array of
statistics, all designed to prove how much of a one-sided class war has
taken place since Reagan first took office. For example, a chart showing
manufacturing employment from 1997 to 2007 reflects declining numbers.
In 1997, there were 17.42 million manufacturing jobs; 10 years later
there were only 13.88. If the table included figures up until the
current day, the loss would be even more dramatic.
For Palley, 1980 is a watershed year. That is when—for some reason—a new
economic policy was introduced, one that he characterizes as the
Neo-liberal Growth Model. Before 1980, there was a kind of Golden Age
that was ushered in by FDR. Like a wicked king in a fairy tale, Reagan
came along and destroyed a policy that benefited workers and businessmen
alike.
read full article:
http://louisproyect.wordpress.com/2009/08/20/keynesian-illusions/
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