The Macro Roots of the Crisis

My friend and former union (AFL-CIO) economist colleague Tom Palley has produced a characteristically lucid piece on the macro economic roots of the US and global crisis for the New America Foundation. He interprets our predicament as a crisis of the neo liberal growth model and not as a failure of financial regulation or, for that matter,  conventional macro economic management. Given the neo liberal paradigm and the lack of private investment or productivity enhanced wage growth,  US expansion came to depend upon the inflation of asset bubbles. This growth path has collapsed, and cannot be re-constituted.

“This report traces the roots of the current financial crisis to a faulty U.S. macroeconomic paradigm. One flaw in this paradigm was the neo-liberal growth model adopted after 1980 that relied on debt and asset price inflation to drive demand. A second flaw was the model of U.S. engagement with the global economy that created a triple economic hemorrhage of spending on imports, manufacturing job losses, and off-shoring of investment. Deregulation and financial excess are important parts of the story, but they are not the ultimate cause of the crisis. Instead, they facilitated the housing bubble and are actually part of the neo-liberal model, their function being to fuel demand growth based on debt and asset price inflation. The old post-World War II growth model based on rising middle-class incomes has been dismantled, while the new neo-liberal growth model has imploded. The United States needs a new economic paradigm and a new growth model, but as yet this challenge has received little attention from policymakers or economists.”

I agree with the analysis, and the need to develop a new paradigm. Indeed I am struck by the extent to which the emerging debate in the US over the need for further “stimulus” obscures the real issues. Certainly I agree with Krugman et al who call for more stimulus to avert a likely otherwise very prolonged downturn, but conventional Keynesian fiscal measures hardly seem up to the task.  On top of fiscal stimulus (with a heavy focus to public investment) we – as Tom stresses – also need fundamental changes to the neo liberal trade and investment regime to rebalance global supply and demand, and much closer regulation of the labour market to raise the bargaining power of labour. Likely we also need to regulate and plan private investment, which has been very weak in the US (and most OECD countries) as investment and production have shifted to Asia.

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