James K. Galbraith: How to Stop the Path of Economic and Social Destruction
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Economist James K. Galbraith recently addressed an audience in Greece to examine why members of his profession have done such a poor job of diagnosing economic problems and recommending appropriate policy solutions. As he explains, economists dedicated to an outdated model of how the economy functions have promoted national policies focused on austerity, deregulation and privatization, which have failed miserably to address the widespread pain of a global financial crisis. In contrast, economists critical of this view have strongly opposed austerity and have recommend policies that can create a robust economy and society through stabilizing institutions, addressing the burden of debt, restructuring banks, and promoting investment and jobs. Which side has been proven right? The answer, Galbraith argues, is obvious, and it is time for a sea change in economic thinking.
In the wake of a brutal crisis that has now lasted five years, even economists ought to reconsider their ideas. Most other people would do so much more quickly, but we are a very patient and stubborn profession.
The view that was propagated at the time of the crisis was that there was a series of national problems: in the U.S., the subprime mortgage disaster; in Greece, overspending, undertaxing; in Ireland, commercial real estate; in Spain, a residential housing bubble. And somehow, all of these things seemed to come to a head and break out in a crisis at the same time. What a coincidence!
In this view, the crisis was to be corrected by national policies at national scale by the actions of national governments. What policies? Well, the policies were to be the policies they were told to adopt, which in every case were approximately the same: Cut your public sector, raise your taxes, deregulate your markets, privatize, privatize, privatize — that is the new Moses, as is profits.
But while the policy was interpreted by authority, the judgment would be rendered by markets. Good behavior, effective action, would bring back confidence. You must have heard this a thousand times: Confidence would mean interest rates would fall and the credit markets would open. That was the sequence of events. And when that didn’t happen, well there was always an explanation, which was “an inadequate degree of zeal.”
The failure of the policy could always be remedied by making the policy even more harsh. This is the attitude of the gambler who loses every hand he plays and comes back and doubles his bet. This is what we’re seeing. You can keep that game going for quite some time. You may perhaps be familiar with a phrase attributed to Albert Einstein, which is that insanity consists in always doing the same thing and expecting a different result.
Now, from the beginning, there was a different view. It wasn’t very widely held, but it existed. This view held that the central fact of the crisis was the worldwide collapse of a model of growth fueled by private credit markets. It seemed obvious that this was the case. How could it not be? Everything happened at once. Yes, the collapse originated with the debacle of the U.S. mortgage markets, whose losses had been spread all through Europe by the sale of toxic securities to pension funds and townships and private investors and banks. And Europe and the U.S. are the same investment community. They react the same way when they see a disaster, which is they run for safety. So of course they sold all the weak assets – the sovereign credits of the small countries, and bought the sovereign debts of the big countries. And the interest rates go up on one and down on the other. It’s as obvious as anything in front of you eyes. Did the interest rates on U.S. debt go up because the U.S. had a mortgage crisis? No, they went down. It was a massive, worldwide flight to safety.