The History Of Our Economy And How To Fix It.

Democratic Perspective was again fortunate to host Thomas Palley, economist, author and Schwartz Economic Growth Fellow at the New America Foundation.

Asked to comment on the issues confronting the US economy, Palley responded, “The argument that I’m making in my book is that around 1980, we put in place a new economic model – call it trickle down, call it Reaganomics, call it supply side, call it corporate globalization. What that did was that it hollowed out the economy. That’s when we start to see the emergence of wage stagnation. That’s when we start to see the explosion in income inequality. That’s when we start to hear about outsourcing and the downsizing and disappearance of manufacturing. That eroded the American middle class. And it created a problem – we’re short demand.”

“But the demand shortage was then covered up by this process of finance,” he continued. “So we had bubble after bubble after bubble. Using finance in this way was a sort of Ponzi scheme. And that’s the problem why we’re not having a recovery despite all of the stimulus and low interest rates. Until we get our hands on this basic problem and bring back the middle class, we’re going to have ongoing stagnation.”

We then asked why he is opposed to tax cuts for the wealthy as a means of job creation. “I’m fundamentally opposed to them on two levels,” he responded. “We’ve really pushed tax rates to the lowest they’ve been in the era since the Second World War. And we’ve had, during this whole time, a continuing worsening of economic performance. We saw a widening of income inequality, which again is part of this structural problem. And then the worst piece about it is that it has produced year after year of deficits.”

“The idea that lowering taxes solves deficits is absolutely amazing,” Palley continued. “It just can’t possibly work and we see it in the numbers. Of course Romney and Ryan say that they are for balanced budgets, and then immediately propose to cut taxes at an enormous, fantastic rate, it fails the arithmatic test.”

“If you really want to understand these guys,” he offered. “When they say they’re for balanced budgets, they exploit peoples’ good will. But the reality is they’re never for balanced budgets. When you cut taxes, you create a deficit. You then use the deficit as an excuse to cut every single program that government does. You go after Medicaid. You go after Social Security. You go after education. You go after health. You go after all the things that government does to make us a rich and happy society to contribute to our well-being. They never really want balanced budgets. All they want to do is cut taxes and actually destroy government.”

When asked why we can’t strengthen Social Security, instead of cutting it, Palley said, “Well that was the history of the program until the early 1980s – 1983, the Greenspan Commission when Reaganomics took hold of people’s imaginations and we started to use economics to hurt ourselves. But if you go back and look at how much of the national pie was taxed to provide for Social Security, back in the late 1970s it peaked. But since the 1970s we’ve been running down the taxes that we pay into Social Security as a share of the pie.”

We then asked for his thoughts on the job creators. “Well, I think we’ve heard enough of that,” said Palley. “Yes, no jobs were created without business, but on the other hand you have to have the right type of business. There is a lot of business in this country that is about job destroying and making profits off the job destruction. So I’m completely with people who say we can only do this working with business and we have to put in the right rules for business so that business interest is aligned with the country’s interests and is aligned with the middle class.”

As for the auto bailout, Palley said, “It is an amazing, amazing accomplishment. What he (President Obama) did is that he kept together one of the major manufacturing centers in the US. All of those manufacturing jobs that go into making the parts the assemblers use. Without that bailout, it’s scary to think what places like Ohio, Indiana, Illinois, and Detroit, Michigan would all look like. It’s not just about GM, Chrysler and Ford. All of the other car companies here use those same parts suppliers. It would have been a domino effect with one company pushing down another.”

“It’s one of the amazing successes of that time,” he continued. “I think there was a tremendous amount of misunderstanding about what happened. And I think the Republicans purposely fueled that misunderstanding because its success was political poison for them. I think they were out to sabotage this president and they don’t give a damn about the American people. As long as they eventually got back into power so they could begin again this regimen of tax cuts for the richest.”

Asked for his thoughts on strengthening our economy, Palley offered three keys. “First, we’ve got to get wages connected to productivity,” he said. “That was the secret of the period from 1945 to 1975 when we had shared prosperity. That means we’re going to have to raise the minimum wage to bring up the floor of the economy and we’re going to have to make it possible for workers to share in their productivity growth by building unions again. Number two, we have to deal with our trade deficit and our problem of our overvalued dollar. And then we’re going to have to do something with our public investment. We need to put some juice in the economy while we wait for these other measures to take effect. Now’s the time, when interest rates are low, to invest in the infrastructure we need.”

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