From Financial Crisis to Stagnation

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As the economy cannibalized itself by undercutting income distribution and accumulating debt, it needed larger speculative bubbles to grow. That process ended when the housing bubble burst.

The earlier post World War II economic model based on rising middle-class incomes has been dismantled, while the new neoliberal model has imploded. Absent a change of policy paradigm, the logical next step is stagnation. The political challenge we face now is how to achieve paradigm change. Get A Copy. Hardcover , pages. More Details Other Editions 6.

From Financial Crisis to Stagnation

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Sort order. Jun 10, ! May 31, Robert C rated it it was amazing. Contains a rare combination of detail, insight, and that all important readability. Strongly recomended.

Anthony rated it liked it Jun 29, Ecofriend rated it it was amazing Oct 05, Sasha rated it really liked it Feb 17, Thomas rated it really liked it Apr 25, George Atuan rated it it was ok Jul 14, LPenting rated it really liked it Aug 06, Reid Perkins rated it it was amazing Apr 07, Boma rated it really liked it Feb 14, Ruth Feathers rated it it was amazing Jan 20, John rated it liked it Feb 14, Warren rated it it was amazing Feb 25, Ryan marked it as to-read Apr 18, George marked it as to-read Apr 18, Steve Ring marked it as to-read May 12, Drake marked it as to-read May 13, Jesse Rhines added it May 13, Andy marked it as to-read Jun 09, Stuart Elliott marked it as to-read Feb 24, Bonnie added it Jan 07, Keith marked it as to-read Jun 09, Gabriel S marked it as to-read Jul 11, Palley argues that mainstream or orthodox economics can be usefully divided into two camps: a hardcore neoclassical camp emphasizing government failure and most closely associated with the Department of Economics at the University of Chicago, and a softcore neoclassical camp that gives greater recognition to market failure and is most closely associated with the Department of Economics at the Massachusetts Institute of Technology MIT.

Palley stresses that differences between hardcore and softcore neoclassical economists are of degree rather than kind, as both camps share an analytical framework that is incompatible with structural Keynesianism.

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Both camps have provided intellectual support for the neoliberal model, both exhibited blindness of macroeconomic reality in the run-up to the financial crisis, and both support a neoclassical monopoly in academic economics and economic policy advice. They so limit that range of expert economic opinion in the United States that the country risks falling into a closed-society trap, unable to come up with solutions to changed economic circumstances and destined to economic stagnation.

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Palley argues that in explaining the crisis it is a mistake to focus only on microeconomic causes such as regulatory behaviour and flawed incentives in financial markets. A satisfactory explanation cannot ignore the deeper macroeconomic causes in terms of the flawed US economic growth model and its forms of engagement with the global economy.

In sum, the new growth paradigm put in place after involved squeezing worker incomes, squeezing household savings rates, raising debt levels, persistent asset price inflation in excess of CPI inflation, and reliance on ever lower nominal interest rates. This logic made it economically unsustainable. Chapter 5 provides a succinct discussion of the role of finance in the crisis. It concludes with a ten-point plan to increase financial stability in the United States, but emphasizes that implementation of the plan would not be sufficient to overcome economic stagnation.


Extending the metaphor of the neoliberal policy box of chapter 4 that pressures workers from all sides, he argues that workers must be taken out of the box and corporations and financial markets must be put into a structural Keynesian policy box. The four sides of the structural Keynesian policy box are full employment, balanced government, solidarity labour markets, and managed globalization. He argues p. It discusses reforms such as core labour standards, a global minimum wage system, managed exchange rates, capital controls, and new trade rules.

Having challenged the economic theory and evidence used to support neoliberalism, Palley wraps up with a critical evaluation of the political philosophy behind neoliberalism. He particularly emphasizes insights from Adam Smith's Theory of Moral Sentiments about how a properly functioning capitalist society requires a sense of justice among its citizens that will induce them to behave according to a code of ethics.

Neoliberalism, Palley argues, undermines ethics and thereby produces major efficiency losses. Given the huge subject it tackles, this is a slim book at pages including front matter, references and index. Many issues it touches upon warrant additional discussion. Most significantly, the structural Keynesian perspective is not applied to explaining developments in capitalist economies other than the United States.

The only country mentioned in the index of the book is China, which is mentioned regarding the hollowing-out of US manufacturing. Other countries are mentioned, but only in passing or to explain the role of the United States in the global economy see, for example, pp.


Yet surely the persuasiveness of any broad economic or political economy theory can only be strengthened through supporting case studies of different economies or cross-national statistical analysis. Another important issue is the relationship between structural Keynesianism and other forms of heterodox economics on the one hand, and what Palley p. Palley shows relatively little appreciation of the values such economists share with many heterodox economists, and expresses great concern that attention to such economists creates the false impression of pluralism within the mainstream of economics and thereby contributes to neoclassical domination of the discipline.

Although Palley pp. This review will conclude by returning to an assertion with which it began: Thomas Palley's From Financial Crisis to Stagnation provides a vehicle for bringing together different schools of economic thought. One reason it has this potential is that it offers a broad framework for investigating how growth of income inequality since the s may be a key source of macroeconomic instability, a topic that has come to attract the interest of economists of various theoretical persuasions. But, more specifically, it offers a framework for bringing post-Keynesian economics and radical political economy, two key schools of heterodox economics, into a closer alliance.

Structural Keynesianism is compatible with much of post-Keynesian economics, but aims for greater attention to traditional social democratic concerns than is displayed by strands of post-Keynesian economics heavily focused on money and finance. On the other hand, structural Keynesianism shares with the social structure of accumulation approach pioneered by Gordon, Edwards, Reich, and others of radical political economy a concern with the real economy, class conflict, and income distribution.

As radical political economy has evolved to incorporate a greater role for the financial system, it has come closer to structural Keynesianism. Indeed, structural Keynesianism as advanced by Palley might benefit from incorporating some of radical political economy's attention to productivity growth and corporate profitability, and its materialist explanation for the rise of neoliberalism.

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From Financial Crisis to Stagnation

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