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October 14, 2011

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Paul Krugman: Rabbit-Hole Economics

Posted: 14 Oct 2011 12:24 AM PDT

The GOP is "becoming a caricature of itself":

Rabbit-Hole Economics, by Paul Krugman, Commentary, NY Times: Reading the transcript of Tuesday's Republican debate on the economy is, for anyone who has actually been following economic events these past few years, like falling down a rabbit hole. Suddenly, you find yourself in a fantasy world where nothing looks or behaves the way it does in real life.
And since economic policy has to deal with the world we live in, not the fantasy world of the G.O.P.'s imagination, the prospect that one of these people may well be our next president is, frankly, terrifying.
In the real world, recent events were a devastating refutation of the free-market orthodoxy that has ruled American politics these past three decades. Above all, the long crusade against financial regulation...
But down the rabbit hole, none of that happened. We didn't find ourselves in a crisis because of runaway private lenders like Countrywide Financial. We didn't find ourselves in a crisis because Wall Street pretended that slicing, dicing and rearranging bad loans could somehow create AAA assets — and private rating agencies played along. We didn't find ourselves in a crisis because "shadow banks" like Lehman Brothers exploited gaps in financial regulation to create bank-type threats to the financial system without being subject to bank-type limits on risk-taking.
No, in the universe of the Republican Party we found ourselves in a crisis because Representative Barney Frank forced helpless bankers to lend money to the undeserving poor. ..., government caused the whole problem. So what you need to know is that this orthodoxy has hardened even as the supposed evidence for government as a major villain in the crisis has been discredited. ...
The Great Recession should have been a huge wake-up call. Nothing like this was supposed to be possible in the modern world. Everyone, and I mean everyone, should be engaged in serious soul-searching, asking how much of what he or she thought was true actually isn't.
But the G.O.P. has responded to the crisis not by rethinking its dogma but by adopting an even cruder version of that dogma, becoming a caricature of itself. During the debate, the hosts played a clip of Ronald Reagan calling for increased revenue; today, no politician hoping to get anywhere in Reagan's party would dare say such a thing.
It's a terrible thing when an individual loses his or her grip on reality. But it's much worse when the same thing happens to a whole political party, one that already has the power to block anything the president proposes — and which may soon control the whole government.

links for 2011-10-14

Posted: 14 Oct 2011 12:06 AM PDT

Roubini: The Instability of Inequality

Posted: 13 Oct 2011 10:44 AM PDT

Nouriel Roubini says inequality is a destructive force:

The Instability of Inequality, by Nouriel Roubini, Commentary, Project Syndicate: This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets... While these protests have no unified theme, they express in different ways the serious concerns of the world's working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. ...
The problem is not new. Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. ...
Even before the Great Depression, Europe's enlightened "bourgeois" classes recognized that, to avoid revolution, workers' rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression... by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.
Thus, the rise of the social-welfare state was a response ... to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940's until the mid-1970's, a period when inequality fell sharply and median incomes grew rapidly.
Some of the lessons ... were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe's social-welfare model. Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone's sovereign-debt crisis now.
But the laissez-faire Anglo-Saxon model has also now failed miserably. To stabilize market-oriented economies requires a return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of unregulated markets and the continental European model of deficit-driven welfare states. Even an alternative "Asian" growth model – if there really is one – has not prevented a rise in inequality in China, India, and elsewhere.
Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.

I made similar points here: Why a Working-Class Revolt Might Not Be Unthinkable (and to some extent, more recently here: Why America Should Spread the Wealth, and a bit further back here: Redistribute Income to Grow Economy). And Jeff Sachs weighs in with Occupy Wall Street and the Demand for Economic Justice.

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