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From Financial Crisis to Stagnation -- Thomas Palley


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From Financial Crisis to Stagnation:  The Destruction of Shared Prosperity and the Role of Economics is a 2012 book by Tom Palley, a labor-affiliated macroeconomist who has written many books and articles over the last 30 years.  [His website is here:  https://thomaspalley.com/]  Although he typically publishes in left-wing, heterodox friendly journals like the Journal of Post-Keynesian Economics and the Cambridge Journal of Economics, Palley’s work on stagnation has gotten shoutouts recently from people like Larry Summers (See https://www.theguardian.com/business/2019/aug/26/central-bankers-conventional-tools-no-longer-working ). 


In From Financial Crisis, Palley lays out his case that the Great Recession and ensuing slow recovery were the culmination of 30 years of flawed neoliberal economic policy.  Palley describes himself as a “structural Keynesian,” as opposed to the New Keynesianism of Mankiw, Krugman, et al., which Palley describes as a softer, kinder form of neoliberalism.  As a structural Keynesian, Palley believes that a well-functioning economy needs a stable “demand generating process.”  In the post-World War II, pre-neoliberal era (1945-80), Palley contends that the US had such a stable demand generating process in which productivity growth led to wage growth, which led to demand growth, which led to investment, which led to more productivity growth, which led to more wage growth, and so on. 


The neoliberal reforms – limited union bargaining power, offshoring of jobs, lowering marginal tax rates, etc. -- disrupted this cycle by limited real wage growth among the middle and lower income wage earners and shifting much more income to higher earners, who are more apt to save rather than spend.  The resulting fall in demand would have resulted in stagnation but for a massive increase in US public and private debt, which filled the gap in demand until the debt bubble burst in 2008.  Although government stimulus spending in 2008-2010 helped stabilize the situation, much deeper structural reform is necessary to prevent a relapse into stagnation or another round of debt-fueled instability. 


The book appears to be written for a lay audience, so it is a bit short on rigorous empirical support for many of its arguments, but it does contain extensive citations to the economic literature so the reader can delve further into areas of interest.  In addition, the book provides a useful popular introduction to demand-side theories of stagnation that focus on the macroeconomic effects – rather than just the perceived fairness or unfairness – of significant income inequality.  The Institute for New Economic Thinking publishes many papers along similar lines.  See, e.g., https://www.ineteconomics.org/research/research-papers/the-secular-stagnation-of-productivity-growth

Edited by KJP
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