Three, Four… Many Secular Stagnations!

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

I. The Third Coming of John A. Hobson

In my view, the current debate about “secular stagnation” started by Larry Summers is best thought of as the third coming of John A. Hobson.

The first coming of John A Hobson was, of course, Hobson (1902): Imperialism: A Study. In Hobson’s schema, unequal income distribution combined with the limited physical capacity to consume of the rich meant that anything like full employment could be maintained only with a growing share of output devoted to government purchases and investment. But where were there vents for additional investment? Abroad, in the growing empire:

Investors who have put their money in foreign lands, upon terms which take full account of risks connected with the political conditions of the country, desire to use the resources of their Government to minimize these risks, and so to enhance the capital value and the interest of their private investments. The investing and speculative classes in general also desire that Great Britain should take other foreign areas under her flag in order to secure new areas for profitable investment and speculation…

Moreover, the military apparatus necessary to conquer and to defend what had been conquered soaked up productive capacity that would otherwise have been idle. As Winston Churchill put it with respect to Great Britain’s naval construction plans for the year 1909: “The Admiralty had demanded six [Dreadnought-class] battleships: the economists offered four: and we finally compromised at eight.” Thus governments that embarked on imperialism and armaments found their domestic economies in relatively good shape with respect to employment, capacity utilization, and profits; while governments that minded their knitting did not. And even though imperialism and militarism were humanitarian and cost-benefit disasters, governments that pursued them tended to remain in office. And this pushed Europe toward World War I.

It is conventional among economists to not understand Hobson’s “underconsumptionist” argument. As Ben Bernanke commented in 2013:

As I pointed out… [when] Larry first raised the secular stagnation argument… it’s hard to imagine that there would be a permanent dearth of profitable investment projects. As Larry’s uncle Paul Samuelson taught me in graduate school at MIT, if the real interest rate were expected to be negative indefinitely, almost any investment is profitable. For example, at a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades. It’s therefore questionable that the economy’s equilibrium real rate can really be negative for an extended period…

This, of course, misses the point that risk-bearing capacity is an essential factor of production needed for private-sector business investment, and risk bearing capacity must be mobilized and paid for—and paid for very handsomely given the adverse selection and moral hazard problems in financing private investment. A very healthy average risky rate of profit is perfectly consistent with a short-term safe real rate of interest less than the negative of the rate of inflation.

For Hobson, of course, the solution was progressive tax and transfer (and perhaps predistribution?) policies to end the Gilded Age and create a reasonable distribution of income, in which fortunes would not be in the hands of those whose stomachs were small and whose narrow eyes were not much bigger, and who would thus hoard rather than spend their incomes.

The second coming of John A. Hobson was, of course, Alvin Hansen (1939). Secular stagnation was “sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment…” We were “rapidly entering a world in which we must fall back upon a more rapid advance of technology than in the past if we are to find private investment opportunities adequate to maintain full employment…” For Hansen, the solution was either (a) more investment in research and development to speed technological progress, or (b) public investment “in human and natural resources and in consumers’ capital goods of a collective character…”

In some sense Hobson’s fears became true and more than true: World War I, and what followed. And when the world economy reoriented itself after World War II we were no longer in a Gilded Age but, rather, in an Age of Social Democracy with a much more equal income distribution—and so Hobson’s unequal income distribution and resulting underconsumptionist worries were no longer relevant.

Alvin Hansen’s worries were similarly obsolete as the post-World War II order formed itself. We got the greater public investment, both in research and development to spur more rapid technological progress—DARPA—and in the Cold War arms race.

The Wheel Has Turned Again

The Longer Depression: But now the wheel of history has turned once again. We have a Second Gilded Age. We have had what looks to have been either the second-largest or the largest adverse financial business-cycle shock in history. We have had an economic downturn followed by a very slow recovery that has produced and will produce a cumulative output gap vis-a-vis potential that will rival and may well exceed the Great Depression itself as a multiple of the economy’s productive potential.

But it is not just what people call “the Great Recession” and should call “the Longer Depression”. It is the long, steady decline in safe interest rates at all maturities since 1990: the decline in short-term safe real interest rates from 4% to -1.5%, and the decline in long-term safe real interest rates from 5% to 1%.

B. Larry’s Core Worry: And so now we have Larry Summers (2013), reacting to the collapse of the short-term safe nominal Wicksellian “neutral” rate of interest consistent with full employment and with central banks’ ability to hit their inflation targets.

We are handicapped because there is not one place in which Larry has developed his argument: it is evolving. But the debate Larry has started seems to me, as I wrote, “the most important policy-relevant debate in economics since John Maynard Keynes’s debate with himself in the 1930s.”

Summers’s core fear is that the global economy—or, at least, the North Atlantic chunk of it—will be stuck for a generation or more in a situation in which, if investors have realistically expectations, then even if central banks reduce interest rates to accommodate those expectations and even if governments follow sensible but not extravagant fiscal policies, private financial markets will still fail to support a level of investment demand compatible with full employment.

Thus economic policymakers will find themselves either hoping that investors form unrealistic expectations—prelude to a bubble—or coping with chronic ultralow interest rates and the associated risks of stubbornly elevated unemployment.

III. Causes of Secular Stagnation III

Such “badly behaved investment demand and savings supply functions,” as Martin Feldstein called them when he taught this stuff to me at Harvard back in 1980, could have seven underlying causes:

  1. High income inequality, which boosts savings too much because the rich can’t think of other things they’d rather do with their money. (Hobson)
  2. Technological and demographic stagnation that lowers the return on investment and pushes desired investment spending down too far. (Hansen)
  3. Non-market actors whose strong demand for safe, liquid assets is driven not by assessments of market risk and return but rather by political factors or by political risk. (Bernanke)
  4. A broken financial sector that fails to mobilize the risk-bearing capacity of society and thus drives too large a wedge between the returns on risky investments and the returns on safe government debt. (Rogoff)
  5. Very low actual and expected inflation, which means that even a zero safe nominal rate of interest is too high to balance desired investment and planned savings at full employment. (Krugman, Blanchard)
  6. Limits on the demand for investment goods coupled with rapid declines in the prices of those goods, which together put too much downward pressure on the potential profitability of the investment-goods sector.
  7. Technological inappropriateness, in which markets cannot figure out how to properly reward those who invest in new technologies even when the technologies have enormous social returns—which in turn lowers the private rate of return on investment and pushes desired investment spending down too far.

A. Other Economists’ Views as Partial: The first thing to note is that other economists who have been worrying at related issues have views all of which appear to be a subset of Summers-style secular stagnation concerns. Hobson saw income inequality as the root—that’s number 1 on the list. Hansen saw demographic and technological stagnation—that’s number 2, and today this point of view is echoed by Gordon. Bernanke, the former Federal Reserve chairman, says we have entered an age of a “global savings glut” because of mercantilism and political risk in emerging markets—that’s number 3 on the list. Kenneth Rogoff of Harvard points to the emergence of global “debt supercycles” that have broken the ability of financial markets to do the risk transformation on a large enough scale—that’s number 4. CUNY’s Paul Krugman warns of the return of “Depression economics” and seeks central banks that will “credibly promise to be irresponsible”, while Olivier Blanchard called for a 4%/year inflation target—that’s number 5. And numbers 6 and 7 have not yet made their appearance in the policy-macroeconomic debate. But they should.

Larry Summers is all of the above: all seven.

B. Against Partial Explanations: And his major concern is to argue against those who think that it is just one of the seven that is the problem—that there is a quick fix, which will either come of itself relatively soon or could be brought forward in time via a simple, clever policy move. Thus Summers on Bernanke:

Ben… suggest[s]… the savings glut is a relatively transitory phenomenon that will be repaired. Perhaps in the fullness of time… [but] it is very difficult to read market judgments about real interest rates as suggesting that that is likely…. For the relevant medium‐term policy horizon (as I have no useful views about 2040 or 2050) the challenge of absorbing savings in productive investment will be the overriding challenge for macroeconomic policy…

And Summers on Rogoff:

Ken Rogoff argues… that the current weakness is the temporary result of over‐indebtedness…. The debt super‐cycle view does not have a ready explanation for the low level of real interest rates, nor does it have a ready explanation for the fact that real interest rates have fallen steadily…. Ken suggests an alternative hypothesis for explaining the low level of real interest rates… a generalized increase in the level of risk…. [But] you would… expect [that] to lead to a decline, rather than an increase, in asset values, given that it was those assets that had become more risky. You would expect it to manifest itself in a measurable and clear increase in implied volatilities, as reflected in options markets. You would expect it to reflect itself in a dramatic increase in the pricing of out‐of‐the‐money puts. But the opposite has occurred…. The length of time that markets are forecasting low real interest rates makes the stagnation fairly secular or the debt super‐cycle very long, at which point the distinction blurs.

And what is the temporary debt‐overhand induced headwind that is thought to be present in a major way today but that will be gone in three years? Corporate balance sheets are flush. The spread between LIBOR and other yields are low. Debt service ratios are at abnormally low levels. Whatever your indicator of repair from the financial crisis, it has mostly happened. And yet with interest rates of zero, the United States is still likely to grow at only two percent this year. I do not see a good reason to be confident that that situation will be significantly better three years from now….

Any debt overhang would itself be endogenous. Why did we have a vast erosion of credit standards by 2005? Why were interest rates in a place that enabled such bubbles? Because that was what was necessary to keep the economy going with adequate aggregate demand through that period. So even if a debt overhanging were occurring it would in a sense be a mechanism through which secular stagnation or over‐saving produces damage. It is not an alternative to the idea of secular stagnation…

Summers’s rejection of the Krugman-Blanchard higher-inflation-is-the-solution position as a sufficient and quick fix seems to me more subtle. I do not think he has set it out clearly. But what Summers is thinking—or at least what the Larry Summers emulation module I have running on my own wetware is thinking—is this:

There are worthy private risky investment projects and unworthy ones. Worthy risky projects have a relatively low elasticity with respect to the required real yield—that is, lowering interest rates to rock-bottom levels would not induce much more spending. In contrast, unworthy risky investment projects have a high elasticity. Thus, when safe interest rates get too low, savers who should not be bearing risk nonetheless reach for yield—they stop checking whether investment projects are worthy or unworthy.

Put it another way: there are people who should be holding risky assets and there are people who should be holding safe assets. The problem with boosting inflation so that the central bank can make the real return on holding safe assets negative is that it induces people who really should not be holding risky assets to buy them.

I would speculate that, deep down, Summers still believes in one tenet of inflation economics: that effective price stability—the expectation of stable 2 percent inflation—is a very valuable asset in a market economy. It should not be thrown away.

C. Seeking Not a Cure But Palliatives: For Summers, secular stagnation does not have one simple cause but is the concatenation of a number of different structural shocks un- or only loosely-connected with each other in their origin that have reinforced each other in their effects pushing the short-term safe nominal Wicksellian “neutral” rate down below zero. But even though there is no one root cause, there are two effective palliatives to neutralize or moderate the effects.

Thus Summers calls for two major policy initiatives:

  1. Larger and much more aggressive progressive tax and transfer (and predistribution?) policies to end the Second Gilded Age.

  2. A major shift to an investment-centered expansionary fiscal policy as the major component of what somebody or other once called “a somewhat comprehensive socialisation of investment… [as] the only means of securing an approximation to full employment… not exclud[ing] all manner of compromises and of devices by which public authority will cooperate with private initiative…”

I think he has a very, very strong case here.

D. Achieving Potential: The standard diss of Larry was that even though his promise was immense—he was brilliant, provocative, creative, and so willing to think outside-the-box that you sometimes wondered whether he knew where the box was or even if there was a box—there was no great substantive contribution but only a bunch of footnotes to lines of inquiry that really “belonged” to others.

I think this is the contribution.

The “Short” vs. the “Long” Twentieth Century…

Ah. I see that Branko Milanovic has found the first draft of my opening lecture for Econ 115 next semester…

I think whether it is more useful to do the tell of 20th century economic history as the “short” 1914-1989 (as Hobsbswm does) or the “long” 1870-2012 (as I want to) rests on two analytical judgments:

The first judgment that leads you to the “short” century is the judgment that Kuznetsian modern economic growth was implicit in the steam engine, the spinning Jenny, and the iron horse. The belief is that, after that breakthrough, more than two centuries of 1.5%/year frontier-economy TFP growth plus the full demographic transition were largely baked in the cake.

By contrast, the judgment that leads to the “long” century is the judgment that there were three big game-changers. The first was the British Industrial Revolution jump from 0.07%/year to 0.35%/year global TFP growth. The second was the subsequent jump to 1.7%/year. The third was that the world became rich enough and literate enough and feminist enough for the demographic transition to take hold. A world with TFP growth ebbing or even continuing at 0.35%/year is still a semi-Malthusian world. It is a world in which the demographic transition would have had a hard time taking hold. And that world would be a very different world than ours.

That world is very close to ours in some multiverse-timelines sense. As of 1870 and even as of 1919 the Malthusian Devil was still very visible in the mind’s eye. Recall J.S. Mill writing in 1871 in his Principles of Political Economy about the British Industrial Revolution:

Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes. But they have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish. Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the intellect and energy of scientific discoverers become the common property of the species, and the means of improving and elevating the universal lot…

You can say that Mill wrote that in 1848 and–carelessly–did not revise it for even the 7th edition of 1870. But he did not revise it. And Mill’s Principles of Political Economy was still the Oxford textbook in 1919.

Recall John Maynard Keynes writing in 1919 in The Economic Consequences of the Peace:

After 1870 there was developed on a large scale an unprecedented situation, and the economic condition of Europe became during the next fifty years unstable and peculiar…. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up. That happy age [had] lost sight of a view of the world which filled with deep-seated melancholy the founders of our Political Economy. Before the eighteenth century mankind entertained no false hopes. To lay the illusions which grew popular at that age’s latter end, Malthus disclosed a Devil. For half a century all serious economical writings held that Devil in clear prospect. For the next half century he was chained up and out of sight. Now perhaps we have loosed him again…

The second judgment that leads you to the short century is the judgment that the big story is that of Leninism as the century’s tragic hero: confidently dreaming of utopia, confidently albeit brutally attempting to build utopia, exhausting itself saving the world from the monstrous dystopia of the Nazi abattoir, and then expiring in “a vast bureaucratic incompetence”. I agree that if you are going to do that tell, 1914-1989 is the 20th century that tells it. (And if you know ex ante that 1914-1989 is the 20th century, then that is the natural story that suggests itself.) But I believe that if you start thinking that the 20th century is 1900-2000, the natural story–the important story–is the more complex one that I want to tell. Then the natural thing to do is not to shorten the century but to extend it, and to extend it to 1870-2012.

Why did Hobsbawm write about the short century in his Age of Extremes? Three reasons:

  1. He was writing in the early 1990s.
  2. He had already written Age of Empire 1870-1914.
  3. There was no way in Heaven, in Hell, or here on God’s Green Earth that Eric Hobsbawm was going to write a triumphalist Fukuyamaesque “end of history” book about the triumph of liberal capitalist democracy. He has chosen his side in Germany in the 1920s. And a British gentleman did not turn his coat and change his side under any circumstances–even if it meant one had to spend a lifetime in bed with and making excuses for Josef Vissarionovich…


Eric Hobsbawm (1987): The Age of Empire
Eric Hobsbawm (1995): The Age of Extremes
John Maynard Keynes (1919): The Economic Consequences of the Peace
John Stuart Mill (1871): Principles of Political Economy

Inequality: Brown University Janus Forum

Brown University Janus Forum Lecture: Inequality: Is America Becoming a Two-Tiered Society?

N. Gregory Mankiw and J. Bradford DeLong

Faculty Club at Brown University :: 5:30 PM – 8:00 PM :: October 17, 2016

My Presentation:

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This presentation file:

Communism and Really Existing Socialism: A Reading List for Post-Millennials

Manchester 1844 Google Search

What should someone coming of age in 2020 or so–someone post-millennial, who has no memories of all of any part of the twentieth century–learn about communism, and really existing socialism?

It is, I think, very clear by now to everyone except the most demented of the herbal teabaggers, and should be clear to all, that communism was not one of the brightest lights on humanity’s tree of ideas. Nobody convinced by the writings of Marx and his peers that a “communist” society was in some sense an ideal who then achieved enough political power to try to make that vision a reality has built a society that turned out well. All, measured by the yardsticks of their time and geographical situation, were either moderately bad, worse, disastrous, or candidates for the worst-régime-every prize. None attained the status of:

a prayse and glory that men shall say of succeeding plantations, “the Lord make it like that of New England.” For wee must consider that wee shall be as a citty upon a hill…

Moreover, those who took Marx most seriously and fell under his intellectual spell either did first-class work only after they had liberated themselves and attached themselves to some other’s perspective (as Perry Anderson did to Weber via “modes of domination” and as Joan Robinson did to Keynes). Too close and uncritical a study of Marx is a mode of self-programming that introduces disastrous bugs into your wetware. The thinkers useful for the twenty-first century are much more likely to be along the lines of Tocqueville, Keynes, Polanyi, de Beauvoir, Lincoln, and (albeit in his intellectual rather than his political or personal practice) Jefferson than Marx. (And Foucault? Maybe Foucault–nah, that is too likely to introduce a different set of dangerous bugs to your wetware…)

Yet the ideas and the arguments for “communism” were (and are?) powerful. And they were very convincing to millions if not billions of people for fully a century and a half. How should post-millennials understand this? How much about this ought they to learn? And how best to present the subject so that they gain the fullest and most accurate understanding, in the short time that is all that they can afford to spend on it?

Here’s my first second take on readings, in the order in which I would put them a course:

More Scattered Things I Have Written: on and About the Subject:

What Was Herbert Hoover’s Fiscal Policy?: Hoisted from Five Years Ago

Herbert hoover as president Google Search

What Was Herbert Hoover’s Fiscal Policy?: In his Budget Message setting out his plans for taxes and spending for fiscal year 1932, Herbert Hoover begged Congress not to embark on any ‘new or large ventures of government’. He admonished congress that even though ‘the plea of unemployment will be advanced as reasons for many new ventures… no reasonable view of the outlook warrants such pleas’. And he boasted that he was proposing a balanced budget–even though revenues were mightily depressed by the Great Depression:

This is not a time when we can afford to embark upon any new or enlarged ventures of Government. It will tax our every resource to expand in directions providing employment during the next few months upon already authorized projects. I realize that, naturally, there will be before the Congress this session many legislative matters involving additions to our estimated expenditures for 1932, and the plea of unemployment will be advanced as reasons for many new ventures, but no reasonable view of the outlook warrants such pleas as apply to expenditures in the 1932 Budget.

I have full faith that in acting upon these matters the Congress will give due consideration to our financial outlook. I am satisfied that in the absence of further legislation imposing any considerable burden upon our 1932 finances we can close that year with a balanced Budget. When we stop to consider that we are progressively amortizing our public debt, and that a balanced Budget is being presented for 1932, even after drastic writing down of expected revenue, I believe it will be agreed that our Government finances are in a sound condition…

Over at the Atlantic Monthly, Megan McArcle claimed that ‘Hoover was no budget-cutter’:

Hoover Was No Budget-Cutter: Hoover did not tighten up on spending.  According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before. In 1930 it was $3.3 billion. In 1931, Hoover raised spending to $3.6 billion.  And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget)…

In his Budget Message for fiscal year 1933, Hoover wrote:

In framing this Budget, I have proceeded on the basis that the estimates for 1933 should ask for only the minimum amounts which are absolutely essential for the operation of the Government under existing law, after making due allowance for continuing appropriations. The appropriation estimates for 1933 reflect a drastic curtailment of the expenses of Federal activities in all directions where a consideration of the public welfare would permit it….

The welfare of the country demands that the financial integrity of the Federal Government be maintained…. [W]e are now in a period where Federal finances will not permit of the assumption of any obligations which will enlarge the expenditures to be met from the ordinary receipts of the Government….

To those individuals or groups who normally would importune the Congress to enact measures in which they are interested, I wish to say that the most patriotic duty which they can perform at this time is to themselves refrain and to discourage others from seeking any increase in the drain upon public finances…

That is not a man who wants to open up the taps. That is not a man who thinks that he is opening up the taps.

So what is going on here?

I think that Megan McArdle’s major problem is that she is looking at one table–Table 1.1 in OMB’s Historical Tables. She is not reading Hoover’s Budget Messages or any other documents from the Hoover administration, not reading histories of the Hoover administration, not identifying how what congress finally enacted and what Hoover signed differed from what Hoover had originally proposed–or indeed, at how as the Great Depression deepened Hoover decided at the very start of calendar year 1932–halfway through fiscal year 1932–to push for measures (Reconstruction Finance Corporation, Home Loan Bank, direct loans to fund state Depression relief programs) that increased spending–but did so alongside the Revenue Act of 1932 that increased taxes.

After he decided that he was President and that the Treasury Secretary Andrew Mellon whom he had inherited from Coolidge worked for him and that Mellon should go off to be Ambassador to the Court of St. James, Hoover did decide to do something to fight the Great Depression. Tax increases to try to balance the budget in order to call down the confidence fairy made up the biggest part of his plan. But Hoover also sought to fund state relief. And he sought to set up GSE’s (RTC, HLB) to restart broken capital markets.

But to say that ‘Hoover was no budget-cutter’ misses most of the story. Hoover would have been a budget-cutter in normal times. Hoover was a budget-balancer. Hoover held the line against powerful political forces that sought to increase government spending in the Great Depression for fully 2 1/2 years before endorsing what seem to us to be half-measures.

Can This Capitalism Be Saved?

Robert reich saving capitalism Google Search

Here is piece of mine left on the cutting room floor elsewhere. So I might as well throw it up here.

Reviewing: Robert Reich: Saving Capitalism: For the Many, Not the Few

Robert Reich’s Saving Capitalism: For the Many, Not the Few is an excellent book. It powerfully argues that America needs once again—as it truthfully reminds us that we did four times in the past—restructure its institutions to build both private and public countervailing power against the monopolists and their political servants in order to right the distribution of income and boost the pace of economic growth.

Reich wants to remind us Americans of our strong record of “expanding the circle of prosperity when capitalism gets off track.” We have in our past no fewer than four times built up countervailing power to curb the ability of those controlling last generation’s wealth and this generation’s politics to tune institutions, property rights, and policy to their station. This repeated, deliberate construction of countervailing power kept America a high-wage economy—the world’s highest-wage economy, in fact—for ordinary (white, male) guys.

Until now.

Thus Reich wants us here in America to fix our future by recalling our past.

The first piece of our past Reich wants us to remember is Andrew Jackson’s Age: the period starting in 1828 when America removed:

accrued unwarranted privileges… [keeping] average citizens… [from] gain[ing] ground…. The Jacksonians sought to abolish property requirements for voting and allow business firms to incorporate without specific acts of the legislature, and they opposed the Second Bank of the United States, which they believed would be controlled by financial elites. They did not reject capitalism; they rejected aristocracy. They sought a capitalism that would improve the lot of ordinary people rather than merely the elites…

In what may be the only favorable citation of Roger B. Taney I will see in this decade, Reich remembers not the Supreme Court Chief Justice of the late 1850s but the Attorney General of the early 1830s. He remembers the Taney of:

It is a fixed principle of our political institutions to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation…

Yes, Reich says, that Taney shared the same body with the Taney who wrote the opinion in Dred Scott vs. Sanford: Jacksonians believed that no laws that endowed the Cherokee or other native Americans with any property whatsoever should be enforced, and that no African American—slave or free—had any “rights which the white man was bound to respect” at all. But in Reich’s the Jacksonian Revolution prevented America’s drift toward a more English form of political-economic organization, in which restrictions on westward migration coupled with political grants of economic monopoly rights lead to a lower-wage economy.

Of course, that drift came after the Civil War, with the coming of the Gilded Age and then of the second piece of history that Reich wants us to remember: the 1901-1916 Progressive Era of Teddy Roosevelt and Woodrow Wilson as a response to Gilded Age inequality and political corruption of the system. The response to the Great Depression took the form of Franklin Delano Roosevelt’s 1933-1939 New Deal and the partial construction of the great arch of American social democracy, which was then extended with Lyndon Johnson’s 1964-1966 three-part legislative program of the 1964 Civil Rights Act, the 1965 Voting Rights Act, and the 1965 Medicare Act.

All of these, Reich argues, show that:

We need not be victims of impersonal “market forces” over which we have no control. The market is a human creation… based on rules that human beings devise. The central question is who shapes those rules and for what purpose…. The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about the size of government; it is about whom government is for. The central choice is not between the “free market” and government; it is between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top… how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact…

The key for Reich is the proper construction of institutions that provide, in a phrase he borrows from John Kenneth Galbraith, countervailing power to that power over political-economic arrangements provided by the oligarchic inheritance of last generation’s wealth and the oligarchic building up of political influence.

We today see a much gloomier future–at least a much gloomier economic future than the one 2006 seemed to offer us. Lower asset returns and lower profit opportunities. Greater “headwinds”. Slowed technological progress. Slower growth in living standards. More income and wealth inequality. A political economy chained by ideological propaganda in which making good win-win policies has gone out the window.

Reich sees this context, and so he writes to remind us that we have successfully dealt with the problems of creating institutions to support equitable and inclusive growth before. But his book seems more cheerleading than sober assessment. It feels to me like an optimism of the will. But when I look around me, the reality I see seems to weigh heavily on the side of a pessimism of the intellect–in economic affairs, at least.

A Brief History of (In)equality: Now Live at Project Syndicate

Digesting Income Inequality Mind the Post

Over at Project Syndicate: A Brief History of (In)equality: BERKELEY – The Berkeley economist Barry Eichengreen recently gave a talk in Lisbon about inequality that demonstrated one of the virtues of being a scholar of economic history. Eichengreen, like me, glories in the complexities of every situation, avoiding oversimplification in the pursuit of conceptual clarity. This disposition stays the impulse to try to explain more about the world than we can possibly know with one simple model. For his part, with respect to inequality, Eichengreen has identified six first-order processes at work over the past 250 years.

READ MOAR of A Brief History of (In)equality at Project Syndicate