Saturday, January 23, 2016

dsquared 11.30.15 at 8:21 am

I can’t tell if you are arguing with John or agreeing with him. Is this agreement with his d) [the political capture explanation]?

Well, it is and it isn’t. I think we’re in violent agreement about what actually happened, but my view would be that it’s a real misreading of history to tell a story about the financial sector having all the class consciousness and political agency and everyone else being bent to their whims.

Margaret Thatcher wasn’t a banker. Nor was Ronald Reagan. The Clinton White House did have a lot of people in it who had come through the financial sector revolving door, but it also had Brad DeLong, and it really wasn’t because of bankers that NAFTA got passed. In general, the debt bubble had two component causes – a) stagnant real wages and b) borrowing to maintain consumption. My argument would be that a) was a general policy goal of more or less the whole political system, including a lot of nominally social-democratic parties, and b) is just the logical consequence of a) in a world in which fiscal policy isn’t used and the balanced budget multiplier isn’t a tool of policy – the demonisation of state spending and taxation also having been a consensus policy during the period.

So it was a consequence of the ideology of the times – if you have policies of reduced government investment, combined with low real wage growth, then you have, de facto, a policy either of falling living standards or one of increasing debt levels and therefore a growing financial sector. But it’s a real stretch (albeit one that some people on this thread, in my opinion unconvincingly, are prepared to make) to claim that the whole growth of “neoliberalism”, “economic rationalism”, “Thatcherism” and all the other names for this policy mix, was foisted on the population even by the industrial sector as a whole, let alone by a particular industry with in it. This revolution was brought to you by ideologues and economists.
dsquared 11.30.15 at 8:24 am

(and further to 43, these policies won elections. If the median of public opinion wanted to have a set of policies which didn’t result in financial sector growth, they could have voted for Michael Foot or Walter Mondale. After about 1990 I agree it became more difficult to find candidates who didn’t support this consensus, but that’s because it was a consensus. Again, you can tell stories about Clinton and Blair being corrupted by finance capital but IMO it’s a lot more plausible to believe what they themselves kept saying – that they were tired of losing elections and were compromising with public opinion on this low wage, low tax, high debt policy mix in order to get some of their other agenda through.)
dsquared 11.30.15 at 2:22 pm

I am not sure I really agree – if you look at someone like Blair, Cameron or indeed Turnbull, then their actual career has been “lifelong political influence peddler”. This sometimes takes them through banks, but only because at various points, banks have been better payers than other professional services firms – when you see a politician like Hillary Clinton who spent her Arkansas career as a lawyer and a consigliere to the Walton family, you don’t conclude that this shows the outsized influence of either the legal profession or big box retail over the government.

In fact, Blair at least was not particularly close to the financial sector in the 1990s when it might have made a difference. Notoriously, New Labour was very heavily staffed up and co-opted by consultancies (particularly PA Associates) and Big Four accountancy firms (particularly PWC). These guys got their payback in very large amounts. Later towards the end of the boom, everyone wanted to be friends with the financial sector, but why wouldn’t they? The sector looked like it was a massive success story, and its continued growth was essential to the policy model.

I think you’re hugely underestimating the extent to which the Washington Consensus was a consensus. It really was. And it was a consensus around a set of policies which (as nobody except Wynne Godley seemed to realise) implied a structurally growing financing sector and structurally increasing leverage. The banks were obviously very keen on this, because it was good for them, and so they assuredly invested money and influence in promoting it. But this is like a theory of why we have so many wars which blames them on arms manufacturers – they’re part of the story but if that’s your whole explanation you’re missing the big picture.
dsquared 11.30.15 at 4:44 pm

Dsqaured assumes the only alternative to debt-fueled growth and a metastasizing financial sector is secular stagnation. That’s what they would have you believe.

No that’s not true. Every single time I explained this I was very careful to point out that debt-financed demand management was made necessary by the lack of willingness to carry out government investment. It kind of irritates me when people ignore important points like this.

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