New Thinking in Economics in Light of the Great Recession (Inequality is a Choice)


Photo Credit: Gage Skidmore/ Flickr

Hillary Clinton’s laudable moves to put fighting poverty back onto the agenda can be understood in the context of some economic re-thinking that has been taking place since the “Great Recession” of the last decade.  I came across a beautiful survey of that re-thinking at Vox, by the Roosevelt Institute’s brilliant Mike Konczal.  The piece starts this way:

The “new liberal economics” is the key to understanding Hillary Clinton’s policies

The Great Recession and its aftermath shattered the policy consensus on economics. What would come next? It’s taken a while, but we’re witnessing the emergence of an important new vision.

Before the crash, complacent Democrats, whatever their disagreements with their Republican peers, tended to agree with them that the economy was largely self-correcting. …

But there’s been a quiet revolution in thinking about economic issues — at least on the left. Call the developing consensus the “new liberal economics.” Emerging from a wide range of academic research, popular writing, and activist energy, it reflects an economic liberalism that is both more comprehensive and self-confident than what was produced during the era of conservative dominance…

The new liberal economics makes several claims:

  1. Inequality is not a regrettable but inevitable byproduct of an efficient economy, nor a temporary, self-correcting trend. It’s driven by policy choices, and new choices can make a difference.

  2. The economy will not simply bounce back from any weaknesses, as was assumed under Alan Greenspan’s Great Moderation. Rather, there are deep structural problems that include a global savings glut and unwillingness by US companies to make investments.

  3. “Nudging” the private market is not always the best way to deliver core goods and economic security. Deploying government services directly can be more effective.

Inequality is a choice

The clearest indication that something has changed is the new conception of inequality. An older consensus saw the rise of the top 1 percent of income earners as driven by market forces and technology. Inequality wasn’t anything to worry about, and might even have been helpful (by encouraging people to work harder, to climb the ladder). To the extent that a rise in inequality was sustained, it would gradually decline as new markets matured. Efforts to push back against these trends would punish workers by dragging down the overall economy.

Now inequality research is all the rage, and a new culprit is becoming clear: The rules of the economy, meaning the regulatory, legal, and institutional frameworks that underpin our markets, are a major driver of inequality. Since the 1980s, there have been a series of changes to these rules, and the result has been greater inequality with no extra growth as recompense.

We tamed inequality in the 1950s and into the 70s and then it raised its head again as the rules were eroded.  We need not tolerate it now; we can fix the rules to tame it again.

There’s lots more in Konczal’s piece.  Worth your time.