Can deceased economic ideas live? Yes, writes John Quiggin, a progressive economist in Australia. To this end, his Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, October 2010), surveys economic history and policies of the 20th and 21st centuries. His preface, introduction, five chapters and conclusion, uncovers the life cycles of zombie ideas: from birth to reanimation and beyond.
He opens with the Great Moderation. GMs zenith was the consumption-led boom of the 1990s. Backers of GM boasted and bragged. According to them, the business cycle had ended. Their proof? They cited the decline of volatility in employment and growth. Ben Bernanke, head of the US Federal Reserve Bank, popularized GM. In brief, the approach privileged two policies: central banks shifts of short-term interest rates, and government deregulation of financial markets.
Together, according to GM practice and theory, such policies stabilized the business cycle of expansions and contractions. Think that the 2007 recession, begun in the US and spread globally, has buried that notion? Think again. Quiggin urges a rethinking of Keynes ideas on fiscal solutions to imbalances between demand and supply. He backed government spending to revive economic activity during downturns, a backbone of postwar prosperity, until inflation and stagnation arrived, screaming, as US armed forces left Vietnam.
Then there is the efficient markets hypothesis. According to EMH, financial markets price the value of risk for investments accurately. As Quiggin shows, the evidence of EMHs performance is underwhelming, to say the least. Cases in point are three financial bubbles last decade. Each bubble from dot.com to stock market and residential housing blew larger then the previous one, with losses from the risk falling hardest on those least responsible. To wit, the financial meltdown of 2007-2008 has paved the way to the current budget-deficit crises of US states and municipalities, and nations such as Greece, Iceland and Ireland. Alas, the reports of EMHs death are greatly overstated. Why? Quiggin offers intriguing answers on the failings of such zombie ideas that live instead of dying when reality intrudes.
Quiggins longest chapter covers Dynamic Stochastic General Equilibrium. DSGE analyzes the over-all economy minus debt loads and trade balances, while privileging the behaviors of self-maximizing businesses and consumers. As inflation and stagnation surged in the early 1970s, DSGE supplanted Keynesian policies of the postwar era, the so-called golden age of 20th-century capitalism.
DSGEs strong focus on interest-rates as an economy-wide policy was a comprehensive failure in the lead-up to, during and after the Great Recession/Financial Crisis, Quiggin writes. Nevertheless, DSGE chugs on. Quiggin explains why, and suggests alternative approaches. He favors and fleshes out cooperative policies that address the current financializing of the economy.
The final two chapters dig into trickle-down economics and privatization. Quiggin strolls through the building blocks of TDE, or supply-side economics. That is the idea which emerged under President Reagan and British Prime Minister Thatcher. In brief, TDE claims that when the well-heeled get more capital, it will flow down to create good times for wage earners. Exactly the opposite unfolded.
TDE and privatization are both anti-New Deal era redistributive policies, as Quiggin documents. Each is a right-wing idea that wont die. Case in point is President Obamas tax-cut package that Congress approved recently. It showers one-quarter of tax benefits on the top 1% of the US populace. This walking-dead policy helps capital and harms labor. All that after the latter bailed out big banks and Wall St. in the recent financial crisis.
Defend yourself from the ideas of zombie economics. Read Quiggins book. Its a timely counter-narrative. He blogs at johnquiggin.com and crookedtimber.org/author/john-quiggin/.
Seth Sandronsky lives and writes in Sacramento, Calif. Email email@example.com.
From The Progressive Populist, March 15, 2011
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