Krugman shows the above graph (from Piketty and Saez) in a great post entitled "Boom for Whom."
As he points out, the true age of spectacular economic growth in the USA and around the world was the post WWII era. However, conservative economists and "Very Serious People" continue to maintain the opposite, and claim the deregulatory era has been the era of spectacular growth. Yes, indeed, spectacular growth in the incomes of the top 1%. Very Serious People continue to be considered Very Serious precisely because the economic elite likes them, and despited the continued disasters of deregulation, almost too numerous to mention, and so far culminated with the global depression we're in right now.
I don't even think this captures the essence of the failure of the Reagan Revolution. Much of the growth since 1979 in average family income occurred not under Reagan but under Clinton, and that was largely due to public investments that had been made in computer research during the 1960's and 1970's finally coming to fruition. Much of the other "growth" has really been losses deferred through bubble economics and chicanery which started catching up with us in 2008. Deregulation spoiled our true growth seeds, and it's unclear when if ever we will recover.
Deep background: the following is a post I made to Crooked Timber today. This thread concerns how recently bootlicking European politicians are calling in bootlicking European econonomists and bankers to dole out the deadly austerity medicine.
Krugman alternates between excellent posts on the growth of inequality in the era of market liberalism, like this one:
and questionable posts about how inequality doesn’t explain the downturn, like this one:
I was wondering about this today, and keeping #85 (see below) in mind, and it seems obvious to me that the savings glut (if you could call it that, since it’s largely gambling IOU’s) is global, so obviously it isn’t captured by looking at the low savings in the USA.
Big manufacturing countries like Germany and China are the savers. Unlucky countries like Greece and Ireland are flooded by the bursting bubbles that result. Here in Triffin DilemmaUSA we’re lucky that savers continue to throw their money at us. Well it’s a kind of luck, anyway, why complain about free money? The downside is we’ve let our domestic manufacturing atrophy (though Henwood argues it hasn’t nominally shrunk) to the extent it’s way out of balance with FIRE. This is not good for equality, the long run, and increasingly shorter medium runs as well.
The #85 I was referring to was this great post on the same thread.
11.11.11 at 10:59 p#85
11.11.11 at 10:59 p#85
That this crisis has provoked from the system a turn away from politicans and towards technocrats, is the clarifying final act of that system.
Even if you completely agreed with their diagnosis and treatment plan, you would think that these defenders of the system would see the wisdom of getting politicians in front to implement that treatment plan. It involves unpleasantness for the non-wealthy majority. You would think they would want specialists in getting away with foisting unpleasantness on the majority handling the day to day PR, and be satisfied to have the serious, adult, technocrats call the shots from advisory positions.
Obviously, these people feel that the time for such games is over. Politicians cannot be trusted to maintain the rigid exclusion of demand side considerations. Rigidity wasn’t necessary before we were in a crisis, but now that we are in the crisis created by ignoring the demand side for 40 years, such rigidity is a strict necessity. They feel that they need people in authority who can be trusted. Their diagnosis of the cause of the present difficulty is that demand side considerations weren’t excluded rigidly enough. They think we need people who will not flinch from enforcing the consequences of contraction.
Modern economies are enormously productive. They produce such vast wealth, that unless that wealth is very carefully managed so that too much excess is not allowed to go to people who will not recycle it into consumption and generate demand, a huge imbalance is created as too much unused money accumulates compared to the limited opportunities for actual capital investment. This excess money still imagines that it deserves a sizable RoI, these people who possess it still imagine that they are Galtian overlords and Captains of Industry, etc., so they create bubble markets, and the intrusion of their excess turns even once real and useful markets into bubbles.
The governments of the West messed up. They didn’t hoover up this excess money on the front end. They relented a generation ago on top tax rates in the 90s, and left way too much drone money out there that had no place to go but into economic weapons of mass destruction. The resulting bubbles will have to do this necessary work of destroying what was never real money, because it does not generate demand for goods and services. But leave it to the bubbles and it happens on the back end, after this funny money has gotten entangled with real money, such as the deferred consumption money of pensioners. There is no recourse now but to have those governments that failed to prevent this on the front end take the responsibility for sorting out on this back end the real money of investors who need to be kept whole to keep up demand, from all those trillions in drone money that not only can be allowed to go up in smoke without any real harm to anything but some outsized egos, but must be allowed to go up in smoke if we are ever to have an end to this cycle of bubble crises.
What started in 2008 will go on forever until and unless we stop trying to save all this fake drone money. It never existed. It was always paper profits, gimmicks and chicanery. Until we start to respect the difference between real money and this stuff, we will continue to put real money and our real economies at the mercy of inherently unstable markets in fake assets. We have to stop bailing out the fake money, and instead accept the truth that it never existed.
We actually do need ruthlessness right now. But that ruthlessness has to be directed at wealth that has accumulated in excess of any possible use in consumption, deferred consumption, or capitalization. Directing it at the capacity of workers to generate demand is exactly the wrong strategy. So of course it’s what the system is dong now by putting up these technocratic austerians.
This excess wealth has taken on a life of its own, but all it wants to do with that life is to destroy itself. We can’t let it just kill itself, because it will take us down with it. We have to manage the work of destruction if it is to be done discriminately.
Let Greece default, and Italy follow it if that market insists on offing itself in panic. Don’t bail out the banks, have governments instead take them over under resolution authority when the sovereign default pushes them into insolvency. These governments, and only these governments, have the right and duty to then distinguish between counterparties who must be made whole as the banks fail because they need to be made whole to sustain demand, and that other large set who need to take 100% haircuts because they were gambling with excess money at the dogtracks, and their losses will be no real loss to anyone.