Good-bye Milton Friedman, Hello Joseph Stiglitz! Progressive Economists Can Help Save Working America
For more than four decades the debate on economic policy has been dominated by an ideologically driven theory originating in economics departments of several major universities, most notably the University of Chicago. This simplistic neoliberal economic philosophy relentlessly taught that there was no problem that could not be solved by a reliance on market forces. All that was needed was for the government to get out of the way. President Reagan summed it up with the mantra: "government is not the solution; government is the problem."
This neoliberal economic philosophy has dominated the debate on economic policy. It has limited the very language in which our political debates have been conducted. The simplistic model of the perfectly competitive market has been the standard against which all public policies have been measured. (Remember the case made for the deregulation of financial markets in the period before 2008.)
In the current highly polarized political world political pundits talk endlessly about "centerist" politics. Centerist virtually always means a position that respects the core values of the free market ideology and is, therefore, not "extreme." This value judgment is so ingrained in our political discourse that it passes unnoticed. Of course there can be an acceptable level of debate around its edges, but deviation from the core values of this ideology puts one in a position outside the main stream of political discourse -- where it is impossible to be taken seriously.
The last several years have witnessed an utter collapse of this fundamentalist free market ideology, or at least its intellectual underpinnings, in the precise place where it all began -- academia. Since at least 2008, it has become impossible to subscribe to the "efficient market hypothesis," which is central to the free market ideology. Those economists who had some credibility left in the aftermath of the Great Recession were in agreement that the economy was not going to get out of its downward spiral on its own. A Keynesian solution was required: an aggressive monetary policy and an expansive fiscal policy. And now they see the slow recovery and persistent unemployment as a matter of too little "aggregate demand." This is a wonkish way of saying that the middle class is not spending enough to keep everyone employed. The obvious reason why they are not spending enough is that they don't have the money to spend.
This problem is not just a matter of middle-class wages not recovering from the Great Recession.
For decades after WWII, wages tracked the growth in worker productivity. Sometime around 1980 this stopped. Productivity continued to grow but wages flatlined. One can get into a grand argument over why wages have stagnated. But one thing that has consistently accompanied the stagnation of wages has been the decline of the labor movement. There is a huge amount of evidence showing that in its heyday labor was, in effect, bargaining for the wages of the whole middle class. As labor unions pushed up their members' wages, there was a positive effect on wages throughout the economy. Correspondingly, as union membership and bargaining power declined, middle class wages in general suffered.
The inescapable conclusion, reached by almost all of the economists left standing after 2008, is that a revival of the union movement is vital to the survival of the middle class and a revival of the economy. If the middle class is to stop losing ground it needs the support of a strong labor movement.
Unfortunately, the middle class is not predisposed to look to the labor movement for help. Indeed, if they think about unions at all, they most likely have a rather unfavorable impression. Words such as "corruption," "bosses," and "extortion" are far more likely to be associated with unions than any benefit to the middle class. The glory days of the '50s and '60s are in a far distant past. The union contribution to the middle class has been forgotten. The incessant drumbeat of anti-labor rhetoric used to promote right-to-work legislation drowned out most middle class sympathy for the labor movement.
To summarize all this in somewhat simplistic terms, the American middle class (especially the lower part of the middle class -- what not long ago we called the "working class") finds itself being joined, at least intellectually, by the most conservative element in the academic world. The fact that a very large, not to mention very influential, part of the economics profession strongly supports the revitalization of the labor movement has largely gone unnoticed (at least outside the upper echelon of the AFL-CIO). The question is whether the labor movement, as well as liberals generally, can use this as effectively as conservatives used the economics of the hard core free market ideologues. The work of Milton Friedman, George Stigler and their minions were very important not only in giving credibility to the conservative economic agenda but in defining the terms of economic policy debates for several decades. Now, will the work of Joseph Stiglitz, Dean Baker, Jared Bernstein, Christina Romer, Paul Krugman, and even (God forgive us) Larry Summers change the current terms of debate?
Much depends on the ability of organized labor to seize this opportunity. At this point it asks much of the labor leadership to put a lot of faith in the world of academic economists. One can hardly blame them for showing little appreciation of the relevance of current economics. Many economics departments have been citadels of conservative thinking. The world dominated by an extreme free-market ideology is not where a labor leader would look for shelter and comfort -- much less help. The notion that events have turned this world upside-down does not seem to yet have had an impact on labor's thinking. The exception to this is the leadership coming from Richard Trumka, president of the AFL-CIO. Mr. Trumka clearly understands the role labor must play in the broader economy. His efforts to reach out to other kinds of organizations that share labor's economic values has tremendous potential.
If the middle class is to pull out of its nose dive, it needs to understand the essential role that labor must play. It must provide the political support that labor needs. Equally important, it is essential that the leadership of organized labor step beyond its rear-guard actions and reach out to the broader middle class. None of this will be easy. It requires a lot of people from very different backgrounds to talk to each other. But unless the intellectual opinion-makers of the middle class can join forces with a revitalized labor movement, all of us are in a lot of trouble.