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Open Access Publications from the University of California

Understanding the Great Recession

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Thomas Palley argues that the causes of the “Great Recession” are not primarily to be found in the asset bubble that was allowed to inflate in the housing market and in the financial sector. The bubbles actually reflect the longer-term basis for stagnation that originate in the macro-economic structure of the US. He presents two major dimensions of these structural problems. The first problem is the entrenchment of a “neoliberal” growth model that is hegemonic in the minds of politicians and the economics establishment that became orthodoxy in the 1980s. He then considers the second obstacle to creating a virtuous circle of demand and full employment. Secondly, Palley finds that the US model of economic engagement with the world’s other economies is flawed. He ends his presentation with an alternative policy recommendation that inverts the power of corporations in favor of workers.

Crisis is an inherent, inevitable, feature of capitalism in the findings of Anwar Shaikh. He demonstrates this historically by outlining its recurrence from at least two centuries of experience. Moreover, the crises are not limited to just one nation but are system-wide events. The current recession rises out of the generalized leveling off of the profit rate in the early 1980s that was achieved by driving down wages but increasing productivity. Moreover, the cost of capital has been historically low and, thus, particularly important for fueling financial bubbles. He concludes that there is little reason to believe that wages might be able to return to a greater balance with productivity growth given the power of capitalists and the growing army of reserve labor.

Jeff Marick trains his lens on the corruption of Wall Street and the lack of governmental regulation of the financial sector as the two most important causes of the Great Recession. The incentives for Wall Street were at odds with a self-sustaining economy. Short-term gains, huge bonuses and gaming the sector were given priority over fiducially prudent decisions for the long-term health of financial institutions and the economy as a whole. These incentives grew out of deregulation beginning with the Reagan administration, a lack of micro-economic analysis stemming from a Grenspanian ideology of banker probity, and mass delusion that economy would continue to churn along. Madrick points to recurrent market failures from the fall of junk bond kings, to the Savings and Loans collapses, to recurrent crisis in the 1990s and the blowout of the high-tech bubble at the century’s turn. Despite these warnings, the government refused to be diligent and allowed for ever-greater financial chicanery to be built with the goal of enriching corporate executives at the expense of the rest of the economy.

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Jeff Madrick's presentation


Thomas Palley's presentation


Anwar Shaikh's presentation