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Home Publications Blogs Beat the Press What's This "We " Jazz, White Man? Robert Samuelson Edition

What's This "We " Jazz, White Man? Robert Samuelson Edition

Monday, 19 March 2012 04:59

Robert Samuelson uses his column today to complain that:

"Four years after the onset of the financial crisis — in March 2008 Bear Stearns was rescued from failure — we still lack a clear understanding of the underlying causes."

Wow, it sure doesn't seem very hard to me. The Reagan-Volcker policies of the early 80s broke the link between productivity growth and wage growth for ordinary workers. This meant that demand growth did not necessarily keep pace with output potential as had been true earlier in the post-war period, since higher wages would quickly translate into higher consumption. 

That created an environment which opened a door to speculative bubbles. In the 90s it was the stock bubble which drove growth, primarily by pushing saving rates to then record lows. In the last decade it was the housing bubble which drove growth, both by creating a building boom and also by pushing saving rates even lower as bubble-generated home equity led to a consumption boom.

None of this story is new. I was writing about how the stock bubble was driving the economy in the 90s and how the housing bubble was driving the economy as early as 2002. And, I gave the historical picture in Plunder and Blunder: The Rise and Fall of the Bubble Economy.

But, folks like Robert Samuelson would rather pretend that the whole story is a great mystery rather than contemplate the possibility that the economic instability of the last decade had its roots in a pattern of growth that was built on redistributing income from ordinary workers to the most highly paid workers and corporate profits.

Comments (12)Add Comment
Broken links
written by David, March 19, 2012 6:50
Robert Samuelson has failed to distinguish his feelings from his thinking, in fact he's thinking with his feelings, which is like using a hammer as a screwdriver, or driving blindfolded. No wonder he can't see the simple reason lying in plain sight. Unfortunately, this basic mis-training of the human organism is a very, very widespread phenomenon. Feelings have their place, but not in analysis, economic or otherwise.
People who have consistently been right
written by David B. Schuster, March 19, 2012 7:01
While Samuelson chooses not to see reality, other writers speak with truth and clarity. Nice shout out to Dean Baker in this piece by Thomas Frank:

I think the bubble makers think
written by Rex, March 19, 2012 8:00
the world is coming to an end...and if they have lots and lots of money that won't be a problemm... la dee da, la dee da
written by PeonInChief, March 19, 2012 9:38
Robert Samuelson is egregious, but he's not alone in not understanding the role of neoliberal economics in bubbles and the like. I've been massively entertained here in California, where various pundits rattle on about the income taxes paid by poorer Californians (insufficient), while richer Californians pay more. Well, California has the most neoliberal distribution of income in the country--lots of people barely making it, while a few get most of the income--and taxing poor people in this economy is like squeezing blood from a turnip.
written by liberal, March 19, 2012 9:58
PeonInChief wrote,
Well, California has the most neoliberal distribution of income in the country...

California's main problem is that landowners get to keep even more money for doing absolutely nothing than they did before Prop 13.
Bubble economics
written by John Buell, March 19, 2012 10:21
The bubbles Dean describes have also been fueled by systematic imbalances in the world economy. Dean has described the role that the overvalued US dollar plays in the process. I would also recommend to readers of this blog a recent book by Greek economist Yanis Varoufakis, Modern Political Economics, about the role the breakdown in the Bretton Woods order has played in perpetuating disproportionate capital flows to US capital markets and the fuel this has provided for bubble creations.
worst column in human history
written by Peter K., March 19, 2012 11:12
especially the last two lines:

"But it does mean that one promise of modern economics — to extend economic expansions and shorten slumps — can create the conditions for its own failure. Although the conclusion is obvious, economists ignore it. The most likely reason is that it undermines their self-appointed role as agents of social progress."

The conditions were created by ideologues like Samuelson who say on a daily basis that government regulation of the financial industry is bad and that redistribution of wealth upwards is nothing to be worried about. It's as if he set out to write the worst column in the history of the planet.
What Recession?
written by Ellen1910, March 19, 2012 12:31
In 2008-9 companies took advantage of the cover the bankers' "panic" offered them and cut deadwood and wrote off large "one-time-expenses"; profits fell -- for a time. Today, those companies are doing fine, thank you very much. Yeah, I've heard that a bunch of people who want jobs can't find any but then, so it goes.

If we wanted full employment, we'd have full employment. There's always work to be done. Talk of the Recession -- Great or otherwise -- is a red herring, a smoke screen to obscure the path to full employment.

Economists who blame the so-called recession for the woes of the unemployed are the real culprits.

Samuelson even worse than Dean says
written by Barkley Rosser, March 19, 2012 2:29
The article by R. Samuelson is even worse than Dean says. At the end, after in fact talking about things dating back to the Reagan era he declares that "economists" do not know history and that he is alone in thinking deeply about the sources of the problem, quite aside from his not even getting it right. What can one say? Sure, there were plenty of economists who do not and did not think about history and were completely out to lunch, but there were plenty who were on top of all of this, and not all of them were named "Dean Baker."
written by skeptonomist, March 20, 2012 8:20
The crisis can also be traced with certainty to some specific deregulatory legislation, especially vitiation and repeal of the separation of commercial banking and investment in Glass-Steagall and the failure to regulate financial derivatives. Samuelson's spot blindness about these things is shared by many others in the media and the executive and legislative branches of government.
written by namaimo, March 20, 2012 7:54
The difference between YOU and Robert Samuelson is that YOU are an educated economist, and he is not ... Not many readers of the Washington Post know that.
written by S Bayer, March 21, 2012 3:06
"The Reagan-Volcker policies of the early 80s broke the link between productivity growth and wage growth for ordinary workers."

There is an important insight here: the underlying problem is the growth in productivity without a corresponding growth in wages. But we need to do more than simply attribute this to "Reagan-Volcker policies". What we need is an economic model that reflects the underlying mechanisms that lead to this disconnect. The neoclassical synthesis is of no help on this issue. It is not a phenomenon that Keynes (or Walras) ever considered.

Interestingly, in his memoirs, Alan Greenspan noted (with bewilderment) this phenomenon and stated that the only previous period where this had occurred was in the 1920's.

As a start, we can take a cue from Minsky consider the GDP to comprise wages and profits, with the 'heroic assumption' that wages are spent and profits are reinvested. If wages grow more rapidly than profits, we get inflation. If, on the other hand profits grow more rapidly than wages, we get asset bubbles. Note that the real estate bubble did not cause the current crisis. It was a sympton. The underlying cause was (and continues to be) the excessive growth in profits relative to wages. The issue economics must address is then: why have profits grown more rapidly than wages?

We can identify, I think, several contributing factors:

1. Patent monopolies.

As in the 1920's we have seen tremendous productivity growth resulting from technological innovation, and in consequence an explosive growth in profits accruing to monopolies granted by the U.S.Patent Office. But the problem is far more serious today than in the 20's, and not only because the Patent Office has taken such an expansive view of what is patentable (e.g. 'business methods'). We have today, in addition, software copyrights that produce staggering profits for their holders. The profit margins on Microsoft Office are reported to be around 60%, and aside from the ubiquitous programs we all use every day, virtually every industry relies on industry-specific software packages that have little or no competition and for which the labor cost of producing each copy is vanishingly small.

2. Government privatization.

Privatization replaces the wages of government employees with payments to vendors that are then allotted to wages and profits. The magnitude of this shift is suggested by the fact that the Federal workforce today is no larger than it was in the last year of the Carter Administration. And while it was plausible to argue that privatization would save governments money, the opposite turns out to have been the case. Whenever a governmental function was privatized, a vendor interest was created and, in turn, a trade association unconstrained by the Hatch Act and diligent in its efforts to ensure that its budget was ever-increasing.

3. Commercialization of Health Care

In the past 30 years we have seen the dramatic move of the Health Care Industry, from the non-profit sector to the for-profit sector. The pharmaceutical industry led the way, followed by hospitals and health insurance. (For the last of thes, one might note the importance of the rather obscure provision of the Technical Corrections Act of 1986 that taxed the reserves of non-profit health insurance providers, intended to "level the playing field" with their commercial competitors, i.e., to raise the price of premiums the non-profit Blue Cross units were required to charge their customers.)

Current economic theory cannot reflect the impact of such factors. Nor can we expect the problem to be corrected by fiscal and monetary policies. The solution will necessarily be structural and institutional.

There is widely promoted mythology that the New Deal was an example of Keynesian stimulus. This does not agree with the historical facts. The New Deal restored the balance between wages and profits through structural and institutional action: minimum wage and maximum hours legislation, the Wagner Act protecting unionization efforts, farm price supports to increase farm income, financing for public power projects (shifting power generation from the for-profit to the governmental sector), and others. This was largely the work of Marriner Eccles, who was greatly influence by the economic theories of William Trufant Foster and Waddill Catchings.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.