The alleged "success" of financial deregulation and other right-wing fantasies examined (Paul Krugman)

Some people, including not just Republican politicians but prominent right-wing economists, have been claiming for a while that policy changes originating in the so-called Reagan Revolution, including the dismantling of financial regulation, set in motion a sustained and unprecedented economic boom. For example, in 2009 Eugene Fama, the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, put it as follows:

Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth.

And many others, ranging from journalists and pundits to ordinary citizens, have come to accept this picture as accurate.

But the fact that anyone believes this is actually puzzling. Paul Krugman points out the obvious:

The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable.

(For a handy graph, see here.) The truth of that historical comparison is simply incontestable. One might try to find ways to explain it away, but the facts themselves are quite clear. So why do people who pretend otherwise ever get taken seriously?

Krugman ventures into a sociological analysis of hegemonic ideologies.

And the answer, once you think about it, is obvious: growth for whom? There’s only one way in which the post-deregulation boom was exceptional, and that’s in terms of the growth in incomes at the top of the scale.

That's quite shrewd, and I think Krugman is on to something here. In this case, it really does appear that the dominant economic ideas have been those that fit not only the interests but the distinctive experience of the top 1%. At all events, this is an insightful and illuminating discussion. See below.

--Jeff Weintraub
==============================
New York Times (On-Line)
November 8, 2011, 11:33 a.m.
Boom for Whom?
By Paul Krugman

While I’m talking about inequality and the crisis, I realized recently that there’s another channel not usually talked about, via the misperception of success.

Let me start with a puzzle: why did faith in the wonders of financial deregulation persist so long?

After all, if you step back from the record, deregulation began producing disasters from early on. Early deregulatory moves helped bring on the Latin American debt crisis of the early 1980s; Garn-St. Germain produced the savings and loan debacle; freed-up capital flows produced the Asian crisis and LTCM; and now we have the great bust. So why were Very Serious People so convinced that it was a good thing?

Well, the answer from the usual suspects has always been that the era of deregulation was also an era of unprecedented economic growth. A while back I noted how Peter Wallison — one of the prime movers behind the Big Lie on the causes of the crisis — claimed that

Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations.

Similarly, Eugene Fama asserted that

Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth.

The point is that these are pure fantasies on the part of the right. The true age of spectacular growth in the United States and other advanced economies was the generation after World War II, with post-Reagan growth nowhere near comparable. So why do these people imagine otherwise?

And the answer, once you think about it, is obvious: growth for whom? There’s only one way in which the post-deregulation boom was exceptional, and that’s in terms of the growth in incomes at the top of the scale.

Here’s a comparison of the postwar boom with the deregulation alleged boom, using real average family income from the Census and real average income for the top 1 percent from Piketty and Saez:

If you’re looking at the average, the last generation is a poor shadow of the postwar boom. But if you’re talking about the 1 percent, wonderful things have happened.

No wonder then, that Very Serious People — who, after all, get to be considered Very Serious because the elite likes them — have retained faith in deregulation despite repeated disasters.