Why Economic Stagnation Will Persist In Western Economies

Thomas Palley is a labor economist.  He argues that a neo-liberal economic consensus in the US (and also in most of Europe) consists of policies that are responsible for wage stagnation in developed countries.  Wage stagnation created a demand stagnation crisis that substituted debt and asset price inflation for demand creation.  The financial industry was able to restore growth in the 1990's but new regulations following the financial crisis, along with household debt overhang and wage stagnation will limit its ability to sustain consumer demand.  Consequently, the advanced economies will not be able to support economic growth as it did in the 1990's.

Palley claims that there are two versions of the neo-liberal agenda which shape policies and political debate in the advanced economies.  The conservative wing takes the position that the financial crisis and slow economic growth are the result of government failure.  The soft neo-liberal position is that the financial crisis was due to market failures.  The US response to the financial crisis was designed to deal with the market failures that led to the crisis, and to prevent the collapse of the international banking system and another Great Depression.  The financial industry plays a critical role in the neo-liberal economy.  It controls corporate behavior through the imposition of the shareholder value dictum, which links  executive compensation to the stock price; it also manages to global flow of capital in the world economy that supports globalization.  The neo-liberal model is dependent upon a heavily financialized economy. 

Palley concludes by offering an alternative to the neo-liberal model which manages globalization and restores the relationship between productivity and wage growth that prevailed prior to the imposition of the neo-liberal agenda.  His arguments will fall on deaf ears, but he has done a lot of homework, and the models that he describes are not an unreasonable account of the interconnections between the real economy and our heavily financialized economies which place the financial industry in the cat bird seat.