Democratic Perspective had the opportunity to interview Thomas Palley, PhD about his new book, From Financial Crisis to Stagnation, The Destruction of Shared Prosperity and the Role of Economics.
Palley received his Bachelor of Arts degree from Oxford University in 1976 prior to earning a Master’s degree in international relations and a PhD in economics from Yale University.
In speaking about his new book, he said, “What I have tried to do is make available different interpretations of what happened to cause our economic crisis,” he continued. “Once people have facts, they are perfectly capable of understanding what is going on. What I’ve tried to do is outline the different stories that are out there.”
“Story number one is the hard core free market story,” he said. “That story is that the crisis is due to government, and there are two ways the government forced the crisis. One way is that in the recession from 2001 to 2003, the Federal Reserve pushed interest rates too low and held them there for too long and that caused the housing price bubble. And the other is that Congress interfered in the housing market through Fannie Mae and Freddie Mac, and the Community Redevelopment Act. It basically pushed too many people into home ownership, and Congress helped people buy homes they couldn’t afford.”
Having explained this story, Palley tore it apart. “Let me point out to people that Fannie Mae was established in 1938,” he said. “It’s been around for a very long time. To say suddenly, in 2001, it’s the cause of the crisis really doesn’t make sense. Fannie Mae wasn’t leading subprime mortgages. That was being done by Wall Street. It’s a classic case of where you pick on the weakest group and blame them for what happened.”
When asked why this became the dominant story, Palley replied, “In the 1980s, we decided to reconfigure the American economy. We had 35 years of prosperity… we reconfigured it and a big part of the propaganda was government was the problem. That’s a story we have been telling over and over again for 30 years, and people still believe it. I call it the right wing conservative two-step.”
“One side claims to be for capitalism and says the other side is not,” Palley continued. “I wish people would see through that debate and stop politicians from giving false choices. That’s where we’re stuck right now.”
Palley then offered an alternative. “The second story is that the financial crisis was due to the lack of regulation of Wall Street, but everything else was okay,” he said. “If I have a criticism of the Obama administration it’s that what they’ve said is the financial crisis is the result of a lack of regulation on Wall Street, but everything else about the system was okay. We passed the Dodd-Frank bill, which is a very good piece of legislation and very needed. But that is not enough. That’s why we’re stuck in stagnation.”
“After World War II, we put in place a system with the New Deal and Keynesian economics that came out of the 1930s that wages would grow with productivity, and they did,” Palley stated. “In fact, there was a slight distribution towards the bottom of the income scale away from the top.”
“In the mid 1970s, we fought a political war that the right wing won,” he declared. “They then put in place new arrangements that broke the link between wages and productivity. Productivity kept rising, but wages flat-lined. People didn’t realize this immediately; there was a bit of inflation going on so they see a rising number and, for a while, they think their incomes are being eaten away by rising prices. That helped cover up the stagnation.”
“Another thing, in the old days you started with a low wage and as you got a little older, got more experience, you got a wage increase,” Palley continued. “So there was a bit of a rise in what we call a wage profile that camoflaged it to the younger people.”
“The final step, which started in the late 1990s and really accelerated in the 2000s, is that house prices jumped. It basically gave people access to an ATM…all of that help us cover the wage stagnation problem,” Palley said. “We had shell prosperity in a sense that it was hollow – based on credit. That made wage stagnation possible. Only by fixing that will we begin to get out of the hole we’re in.”
“Ask any business why they’re not producing more; why they’re not hiring more, it’s a shortage of demand,” he said. “The surest way to fix the demand problem is a better distribution of income and wealth.”
When asked about raising the minimum wage, Palley responded, “I’m definitely a supporter of raising the minimum wage in a series of steps. But here’s one of the problems we have: We have integrated our economy with the global economy, which was part of the corporate agenda. If you raise wages you’ve got to make sure that you also fix the way in which we’ve integrated into the global economy or we’re going to make ourselves uncompetitive. That’s where economics gets complicated. When you lose the policy debate, the other side puts in place ideas that are hard to undo.”