How about trying some unconventional wisdom for a change?
COMMENTARY | October 20, 2009
Renegade economist Thomas Palley supports long-term deficit spending, warns that the stimulus won't work, says it's time to rethink globalization – and argues that journalists aren't asking the really tough questions.
(Part of our series on "Reporting the Economic Collapse.")
By Dan Froomkin
Conventional wisdom about the economy has demonstrably been all wrong lately. So why are we still listening to it?
Mainstream, “neo-liberal” economics brought us to our currently sorry state of affairs, yet its devotees continue to run government and academe – and its views remain utterly dominant in the media.
Maybe what we need is an insurgent view. And for that, Thomas Palley is your man.
Trained at Oxford and Yale, but squeezed out of the economic mainstream by the intellectual contraction of the ‘80s and ‘90s, Palley, who has worked for the AFL-CIO and the Open Society Institute, is now a consultant with the New America Foundation. And it was there that he recently published two eye-catching policy papers: America’s Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession and The Fiscal Austerity Trap: How Budget Deficit Alarmism Risks Sabotaging Growth and Creating Self-fulfilling Budget Difficulties.
Just how much of a renegade is he? Well, in a town where ceaselessly worrying about the deficit is considered the foremost sign of intellectual seriousness, Palley embraces deficit spending – not just in recession, but pretty much through eternity. When most everyone in town is talking about how the stimulus is priming the pump for a sustained economic recovery, Palley is warning that priming the pump doesn’t work if the well is dry. As the talking heads on television feverishly anticipate a roaring recovery, Palley warns that the post-Reagan economic model that depended on debt and the increase of asset prices for growth has imploded, once and for all -- and that it’s time to reconsider a pre-Reagan era model based on rising middle-class incomes, where wages grow with productivity. And Palley thinks maybe it’s time to rethink the benefits of globalization, to boot.
In his essay on the “Fiscal Austerity Trap,” Palley starts off not entirely heretical. After all, more and more of even mainstream economists acknowledge that short-term deficit spending is called for at this point in the recession. “The case for fiscal austerity is based on flawed economic analysis and it is not supported by thoughtful budget analysis,” Palley writes. “It was the wrong agenda before the crisis and it is even more wrong now.” But where Palley goes off the reservation is in embracing rather than rejecting longer-term deficit spending. He writes:
Though there is understanding of the need for budget deficits to provide short-term Keynesian fiscal stimulus, there is little understanding of the medium-term need for budget deficits to facilitate the process of private sector deleveraging and to restore growth.
The U.S. economy needs a new engine of growth and deficit-financed public investment has an important role to play. Deficit financed investment can create a “virtuous” circle whereby public investment spurs growth, in turn improving the budget outlook. The fiscal austerity agenda risks creating a “vicious” circle in which austerity slows growth, necessitating further austerity.
The budget numbers show the U.S. has a health care cost problem rather than a budget deficit problem. Fiscal austerity does not solve the health care cost problem and it also risks undermining growth. That makes fiscal austerity economic malpractice.
A long-term deficit – within reason – won’t overburden taxpayers with debt, won’t crash the dollar, but will help our economy, Palley tells NiemanWatchdog. “For me, I would say a permanent deficit somewhere around 2 percent of GDP (Gross Domestic Product) would be totally fine.” More in bad times, he says, and less during the booms.
While not alone in calling for more public spending, Palley is a particularly fervent apostle. He writes:
The combination of thirty years of neglect of the public capital stock and collapse of the neo-liberal growth model make the current moment the right time to increase public investment. This will create jobs in a time of recession and install public capital that will increase income in future when the nation will face the increased obligations that go with an older population.
Palley is even unafraid of advocating on behalf of government jobs (as well as government spending that would increase private-sector jobs). “We’ve had 40 years of an attack on government,” he says. "When you frame the debate in that way, people naturally develop anti-government patterns of thinking. You say ‘government jobs’ and they think it’s a bad idea.” But it’s not.
Indeed, Palley thinks one factor that is too frequently overlooked in modern political and economic discourse is that “as a society gets richer, the kinds of things it wants, and the kinds of things that add to well-being, may well be public goods” – like fast trains, good schools and quality healthcare.
Despite his enthusiasm for deficit spending, Palley believes that is only one part of the “matrix” of steps that must be taken to right the economy. “That alone will not do it, I promise you,” Palley says. “It is an ingredient.” Growing the economy from his point forward will require a whole slew of adjustments in the areas of labor, globalization, manufacturing, and of course financial regulation.
Palley argues that deregulation “fueled the engine of debt and asset price inflation,” and that new systemic financial regulation will therefore serve as a important inhibitor of the kind of wild speculative bubbles that ultimately did us so much damage. But he warns against the press getting overly focused on that one issue.
Journalists are much too prone to hyping simple solutions to complex, interdependent problems, Palley says. What’s missing in most mainstream journalism are serious discussions of policy, “and how to think of policy as a matrix rather than looking for silver bullets.”
A key question the press should ask is: “Where does growth come from next?” Palley says. “That question of the sources of future growth is not being raised. The economic profession is in denial.”
Next in this series: Needed: a new industrial policy that responds to things as they are now, not as they used to be.
01/26/2010, 04:59 AM
It would seem Palley wants to swap excess in the private sector into eternal excess in the public sector. Not sure his model could work even at the 2% of GDP he mentions. Like most things in life the answer will lie in the middle somewhere....