What should be the direction of economic policy in the US and more widely following the damage wrought by the Great Recession and its aftermath? Sluggish growth across many advanced countries continues to be a problem. Where jobs have been created, there has been wage stagnation. In the US, this stagnation, which has recently shown signs of abating, has afflicted the average worker for several decades. These economic trends have surely contributed to disaffection with the established elite and the rise of populism and a more radical politics.
Thomas Palley is an American post-Keynesian economist. Post-Keynesians are heterodox thinkers, outside the mainstream. They are on the left of the political spectrum, and make a case for being more faithful to the original ideas of Keynes himself. They support a reformed capitalism which is more equitable and can sustain full employment, rather than a revolutionary turn to socialism.
These sorts of reforms and why they are needed are set out in much of Palley’s work. I have recently read some of his books, one written in the late 90s, which warned of a serious recession or depression in the US, given the likely evolution of the economy. He was a little early, but obviously the recession did strike eventually. Two of his other works were published after the crisis, and continue his main arguments for restoring ‘shared prosperity’ through what he calls ‘structural Keynesianism’.
As Palley outlines, the rise of neoliberal ideology among economists and policymakers since the 1970s have led to rising inequality, generally sluggish growth in many economies, and higher unemployment. Prosperity has been extremely unevenly distributed, accruing mainly to those at the top of the income scale. This is in marked contrast to the ‘Golden Age of capitalism’ of the 1950s and 60s, which many Keynesians look back on very positively in terms of what was achieved by the major capitalist economies. There was more or less full employment in many countries, growth was faster than before or since, and wages for those in work rose consistently.
Palley blames the neoliberal turn in policy and the subsequent ‘financialization’ of the economy for the deterioration in performance. For him and many post-Keynesians, the decline of trade union influence and the deregulation of finance shifted the balance of power in society dramatically against labour and the state and towards business, especially finance. The balance of power between business, government and labour is therefore a key determinant of economic performance.
Neoliberal policies designed to weaken labour market institutions and liberalization of international trade and capital flows have according to this argument led to stagnant wages for the majority. This has in turn weakened the growth of consumption and aggregate demand, which Keynesians argue determines economic growth and employment. Consumption was only sustained thanks to the deregulation of credit and a huge expansion in private sector (household and business) debt. When the growth in debt became unsustainable, the underlying weakness of demand in the economy was asserted, leading to the current weak growth performance. The poor performance is thus structural, and requires institutional change to be overcome, rather than endless monetary and fiscal expansion which, if nothing else changes, will lead to further unsustainable increases in private and public sector debt.
For Palley and other post-Keynesians, this argument has become familiar in recent years. The solution is more radical than anything adopted by current policymakers: the strengthening of labour vis-a-vis business, which is needed to restore wage growth for the majority and become a sustainable source of growing demand. The latter will reduce unemployment, and tighter labour markets will also contribute to rising wages. Rising wages should fuel rising consumption, and this should encourage business to invest, raising productivity and creating incomes for further wage rises as well as increased profits to fund further growth in investment, in a virtuous circle of rising and more fairly shared prosperity.
There is more to Palley’s argument, involving the regulation of international capital flows and the requirement for labour standards to be included as part of new trade deals, to prevent a ‘race to the bottom’ by businesses choosing where to invest around the world. In this way, the positive effects of competition should not negated by competition which tends to reduce taxes and wages globally.
The major barrier to such radical change within capitalism is political, rather than technical. Keynes noted the power of ideas as the major influence on societal change, but Marx suggested that the ruling class determines the ruling ideas in society. If Marx is right as Palley proposes, then a political revolution of some form may be needed to counter neoliberal ideology and enact successful policies.
Palley makes a strong case for his structural Keynesianism, but much of his argument depends on the primacy of aggregate demand in determining long term growth. Keynesians do tend to emphasise demand, to the neglect of supply. They also rely on demand being ‘wage-led’, rather than ‘profit-led’.
Demand and growth are wage-led if a rising wage share across the economy boosts demand through rising consumption more than the fall in the profit share of business reduces investment. Conversely, demand and growth are profit-led if a falling wage share and the consequent rise in the profit share fuels higher investment. Which effect dominates is an empirical matter, and many post-Keynesians have tested these theories against the evidence. They argue that the world economy as a whole is wage-led, even if individual countries may be profit-led. If this is right, strengthening the power of labour across many economies would boost global growth and employment.
On the other hand, Marxists tend to argue that growth is profit-led, so that stagnating wages may have been needed following the 1970s economic crisis to restore profit rates and investment. Anwar Shaikh argues in his book Capitalism that growth might be wage-led over short periods, but if the consequent higher employment and tighter labour markets reduce profit rates, the profit-led effect will reassert itself, and investment will weaken, slowing growth over a longer period.
Personally I think that the jury is still out on the debate. I have read studies coming down on either side, many of them fairly persuasive. There are surely limits to how far wage shares can fall, if growth is to be sustained over a lengthy period. Rising consumption is needed to realise profits and stimulate investment in new capacity in the consumer goods industries. But if profits are tending to fall for whatever reason, investment will tend to weaken and economic growth will slow.
For the capitalist world economy as a whole, wage and profit shares may fluctuate, but this will be within limits. If wages rise slower than productivity growth, the profit share will rise, providing a potential source of funds for new investment, as Marxists would argue. But if Palley and the post-Keynesians are correct, sluggish consumption in the absence of rising household borrowing will weaken demand and reduce the stimulus for new investment. This may seem a little esoteric, but it has vital implications for policymakers and the potential for a more equitable and efficient capitalism.