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nonsense economics
April 18, 2012 9:48 AM   Subscribe

"I call it the destruction of shared prosperity hypothesis. ... [A]round 1980 the U.S. adopted a fundamentally flawed economic paradigm ... that abandoned full employment and severed the link between wages and productivity growth. ... Financial deregulation, regulatory forbearance, financial innovation, financial mania, and plain vanilla financial fraud kept the economy going by making ever more credit available, However, as the economy cannibalized itself by undercutting income distribution and accumulating debt, it needed ever larger speculative bubbles to grow. The house price bubble was simply the last and biggest bubble and was effectively the only way around the stagnation that would otherwise have developed in 2001." - an interview with Thomas Palley on the origins and prognosis for the crisis
posted by crayz (31 comments total) 29 users marked this as a favorite

 
I read the quote at the beginning of the post and thought it would be attributed to Robert Reich, who has said essentially the same thing.
posted by KokuRyu at 9:52 AM on April 18, 2012 [1 favorite]


Easy credit coupled with lack of government regulation and oversight leads to speculative bubbles? Well, shit, that lesson's been taught since the days of Andrew Jackson.

Pity it has to be relearned anew every generation or so.
posted by absalom at 10:23 AM on April 18, 2012 [1 favorite]


mainstream economists are starting to admit income distribution has played a role in fermenting the crisis (you have to be willfully blind not too see it).

Finally the establishment is seeing its role in creating The Mess. Hopefully this message is transmitted far and fast, for pity a country already struggling with wealth inequity and social collapse that considers electing a Golden Calf of Private Equity as the man responsible for enforcing its laws.
posted by nickrussell at 10:25 AM on April 18, 2012 [1 favorite]


Pity it has to be relearned anew every generation or so.

And only acted on every 3rd or 4th generation.
posted by DU at 10:29 AM on April 18, 2012 [2 favorites]


When you get into the interview you'll see that Palley has little in common with Reich. His is a hypothesis that cuts to the heart (or cuts OUT the heart) of current Economic Theory.

All in all, this is probably the best job I've seen of describing what I have personally seen and experienced (I had a job with a front row seat for the Junk Bond Bubble). The sad fact that this isn't so totally obvious to everyone suggests two things: Economics is not a Science, it's a Religion, and the consequences of going down this road for three decades is so dire, we'd all prefer to deny them. Even Palley does to some extent in his 'optimism of the will' conclusion.

Recognizing the problem is one thing, fixing it is quite another, especially the effects of the 'economic leakage' caused to the U.S. by Globalization that the string of bubbles has camouflaged more than anything else. And if you think the '70s were crappy, guess what: that's exactly what we get if we really give up the Voodoo Econ of the last 30 years.

And DU said it as well as I could... far beyond an "every generation" thing...
posted by oneswellfoop at 10:34 AM on April 18, 2012 [2 favorites]


A deadly spiral of self-cannabilizing 'growth' spurts... and very little in terms of physical goods produced.

Something in this links back, in my brain, to the two ways sustainability is presented: as a way of sustaining the current levels of overconsumption and underproduction and as a means for nature conservation.
posted by Slackermagee at 10:49 AM on April 18, 2012


There's a lot here I don't understand. Which makes me afraid I'm being snowed here.

One thing that stood out was the section on speculation -- I could buy that (ha!), but at one point he says oil prices aren't following inventories -- and yet when I look it up (mainly because I was wondering how inventories could still be up given all the malthusian peak oil stuff floating around) and yes they are, and yes, prices are dropping. So?

Also, what does he even mean by "demand gap" and "growth"?

Basically, would someone with a better background try and explain this -- because it isn't clear at all to me whether any of this makes any sense...
posted by smidgen at 10:50 AM on April 18, 2012


[A]round 1980 the U.S. adopted a fundamentally flawed economic paradigm ...

Around? I'll give the exact moment: 12 noon, 20 January, 1981.
 
posted by Herodios at 10:50 AM on April 18, 2012 [15 favorites]


Around? I'll give the exact moment: 12 noon, 20 January, 1981.

It started with a trickle...
posted by AElfwine Evenstar at 10:58 AM on April 18, 2012


It started with a trickle.

And then it went down.
posted by Xurando at 11:03 AM on April 18, 2012


Around? I'll give the exact moment: 12 noon, 20 January, 1981.

It started with a trickle...

And spread incontinent.
posted by hal9k at 11:04 AM on April 18, 2012 [1 favorite]


Who actually takes establishment economists seriously anymore? What Mr. Palley is saying has been abundantly clear since at least the S&L clusterfuck.
posted by AElfwine Evenstar at 11:09 AM on April 18, 2012 [4 favorites]


He talks about a "shared prosperity" paradigm that prospered from 1945 to the "mid-1970s" and then condemns the new paradigm that went into effect in 1981. He conveniently fails to discuss the mid and late 1970s, which (in fact) saw a near-complete collapse of the post-war economic arrangements. Reagan and Thatcher weren't acting in a vacuum, and something was going to change. One thing I have heard a lot in the past few years is that those years in the 1970s were far worse for many than anything we've recently experienced except for the six month existential distress of 2008-2009.
posted by MattD at 11:26 AM on April 18, 2012 [1 favorite]


I'm not an economist, and if my thoughts are way off I'd like to know why, but I can't help thinking that he admits a flaw in his analysis of economics as a social force here:

There are many mainstream (orthodox) economists who have progressive values but they miss the big picture because their theory cannot accommodate it. Moreover, they can’t abandon their theory for a host of psychological and sociological reasons. At the psychological level it would involve a devastating admission that they have been wrong; that they’ve been teaching their students a lot of nonsense for thirty years. At the sociological level it would mean giving up the trappings of power and pay that go with their current intellectual monopoly because the paymasters of the system would quickly replace them with others.

Economists don't tell businesses and corporate-governmental elites how they ought to behave, they mostly seem to justify or explain ex post facto the market conditions that attain. In almost every case, the insights of contemporary economists can be reduced to facts like "the rich do not care about most Americans or about America's long-term financial health and viability".

What Palley refers to as sociological forces I would describe as simply political. The powerful and wealthy want cheerleaders to help confuse people of lower socioeconomic classes about what's happening. Popular economics is either propaganda or mere reportage, nothing more or less. So I find it hard to believe that economists are directing or guiding the actions of real economic actors to any significant degree.

So when he discusses the two mainstream explanations of the crisis, of course they're both going to be extremely limited and fail to account for structural factors. To do anything else would be to court the displeasure of the paymasters he refers to.

There must be a way to account for the behavior of the financial and governmental elites under the Reagan-era paradigm that doesn't conflate the legitimating processes of the new order with the causes of it.
posted by clockzero at 11:29 AM on April 18, 2012


One thing I have heard a lot in the past few years is that those years in the 1970s were far worse for many than anything we've recently experienced except for the six month existential distress of 2008-2009.

Yes, some boomers do indeed tell tales of hardship
posted by crayz at 11:33 AM on April 18, 2012 [14 favorites]


> I'll give the exact moment: 12 noon, 20 January, 1981

No future, no future,
No future for you
No future, no future,
No future for me

No future, no future,
No future for you
No future, no future
For you


Sex Pistols, "God Save the Queen", released 27 May 1977
posted by jfuller at 12:25 PM on April 18, 2012


Around? I'll give the exact moment: 12 noon, 20 January, 1981.

I'm pretty sure the CRA became law before that.
posted by ZenMasterThis at 12:26 PM on April 18, 2012


I like to think of economists as sportscasters.
posted by srboisvert at 12:26 PM on April 18, 2012 [1 favorite]


I'm pretty sure the CRA became law before that.

Yep, that's the conservatives' story and you're sticking to it.
posted by Mental Wimp at 12:33 PM on April 18, 2012 [1 favorite]


arguably began with the deregulation of wall street commissions. Certainly the period of stagnant real wage growth began in the 70's. Much of the regulation post that was part of a tacit arrangement between politicians and capitalists "If you let people lever up so their standard of living increases even when wages aren't so that we can keep getting re-elected, we'll make sure you have soft-touch regulation"
posted by JPD at 1:03 PM on April 18, 2012


Yep, that's the conservatives' story and you're sticking to it.

I'm pretty sure every president after Carter, conservative and liberal, used the CRA as an opportunity to shamelessly pander to both "banking" and "community" interests. Most of them expanded CRA's scope while reducing regulatory oversight.
posted by ZenMasterThis at 1:08 PM on April 18, 2012


The data has pretty much shown CRA was not one an underlying cause of the leverage bubble built up in the US over the last 35 years. It was really a middle-class and wealthier phenomenon.
posted by JPD at 1:24 PM on April 18, 2012 [2 favorites]


The data has pretty much shown CRA was not one an underlying cause of the leverage bubble built up in the US over the last 35 years. It was really a middle-class and wealthier phenomenon.

cite?
posted by AElfwine Evenstar at 3:58 PM on April 18, 2012


cite? Speech from a fed governor.

CRA was FNM and FRE. They lost share of origination during the bubble.
posted by JPD at 4:42 PM on April 18, 2012


Oh here is a pull quote - because I loathe this talking point so so so so so much

Putting together these facts provides a striking result: Only 6 percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.

and troll through my posting record if want to see where I stand ideologically compare to most of the people who post regularly here.
posted by JPD at 4:44 PM on April 18, 2012


Around? I'll give the exact moment: 12 noon, 20 January, 1981.

If we have to pick just one exact date to get all the blame, I'd prefer to put my money on whatever day it was in August 1971. It's not like there's an immediate disaster when someone cuts the anchor line, there can be some considerable drifting around before the wind shifts direction and you end up on the rocks.
posted by sfenders at 5:37 PM on April 18, 2012


I'd prefer to put my money on whatever day it was in August 1971.

Reverting to the gold standard would break the economy in various ways, and wouldn't actually fix anything that is a real problem.
posted by one more dead town's last parade at 6:00 PM on April 18, 2012 [1 favorite]


I was not suggesting that anyone should return to a gold standard. It would by now be a bit impractical. But before abandoning it, they should've thought more carefully about what was going to replace it.
posted by sfenders at 6:15 PM on April 18, 2012 [1 favorite]


We should definitely return the gold standard now that we have private enterprise talking about mining asteroids. What could be better for humanity than to peg the value of the dollar to gold only to have an asteroid captured in a few decades that makes gold as valuable and common as iron?
posted by feloniousmonk at 6:26 PM on April 18, 2012 [3 favorites]


What could be better for humanity than to peg the value of the dollar to gold only to have an asteroid captured in a few decades that makes gold as valuable and common as iron?
. . . and since we have decided to adopt the leaf as legal tender, we have all become immensely rich. But we have run into a small inflation problem owing to high leaf availability. In order to obviate this problem and revalue the leaf, we've decided on an extensive campaign of defoliation and -- eh -- burn down all the forests.

I think that's a sensible move, don't you?
posted by Herodios at 7:06 PM on April 18, 2012


If the analog to burning down the forests is to bombard the earth with asteroids until either it gives out or the asteroids do, then yes, this seems like the course of action reasonable societies would follow.
posted by feloniousmonk at 7:31 PM on April 18, 2012


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