Every Month a CPEG member will be posting a selected economics article for discussion and comments. This month, CPEG member Mel Rothenberg has chosen the 2009 article “America’s Exhausted Paradigm” by Thomas Palley, available for reading here.
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.
Mel Rothenberg: Palley’s 2009 report raises in a clear way the crucial issues of the 2007-8 financial collapse and the economic recession which followed. Although his alternative growth model itself has significant issues and problems it digs much more deeply into fundamental causes then mainstream neo-liberal or Keynesian analysis. If his analysis has validity it requires a new and much more radical politics to drive the necessary changes.
Ron Baiman: I found this to be an excellent summary of the 30 year NL takeover of U.S. macro policy. I found the historical sequencing of trade deals and lack of real growth leading to easy money and “asset bubble” financialization to be most interesting. In general I think Paley’s diagnoses is pretty much what we and many others on the left are saying. Less developed (as you note) are the policies going forward. We emphasize a large scale living wage job program and an FTT, along with trade and industrial policy. Palley is bit more vague about this in this paper, though his other papers offer more detailed policy proposals. As I recall they emphasize exchange rate rebalancing, labor reform, asset requirements for financial institutions, and policies to narrow “labor” earnings inequalities – but there are probably many more. The one area where we might have our greatest difference with Tom Palley is that he (like Keynes) does not want to dismantle capitalism – so even though his diagnosis is right on, his policy recommendations will be oriented toward recreating a working capitalism – not toward democratic socialism. In less categorical language, I think he would focus on “macro” and sometimes micro solutions (like changes in corporate governance regulations) that create more of a labor capital “balance” rather than on de-throwning private capital as the primary mover of the economy. But politically its hard to see how we can get out of this mess without substantailly de-throwning capital, if only just to get it sufficiently out of the way, so that necessary reforms can be made – so public finance, public job creation, emergency trade legislation, and massive public sector expansion!
We invite comments and responses to the Paley piece as a way of stimulating discussion on these important issues. Please add your comment below.