New year brings new hope for economy
Over-influence of financial leaders prompts politicians to pick failed policies, Louis-Philippe Rochon writes
The beginning of a new year inevitably brings the temptation to make predictions and forecasts for the year ahead. What will happen to growth? Where will interest rates go? Will this be the year when the housing market finally collapses?
In the last two years, I have indulged in this tradition, but this year, instead of looking forward, I'll look back at the past decade, as 2017 marks a rather important milestone in the annals of economics.
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It is hard to believe it's been a decade since the world economy essentially imploded under the weight of increased fragility and casino-type economic policies that destabilized markets.
The financial crisis was the inevitable result of more than three decades of bad policies that amplified income and wealth inequality, which is at the root of the growing instability.
Our very own lost decade began on Aug. 9, 2007, with obvious problems in the subprime market. These cracks exploded into a full-blown banking crisis, which contributed to the collapse of Lehman Brothers on Sept. 15, 2008. From there, economies deteriorated quite rapidly.
Since then, we have not really recovered and there are few encouraging signs ahead. Yet the crisis and its lackluster recovery could have been avoided had governments followed the right policies, both before and after the crisis.
Austerity, inequality pose danger
Economies grow and fall as a result of specific policies, which themselves are the result of choices aligned with the overall economic and political philosophy of the governing party. In other words, it is a political decision not to pursue policies that would ensure full employment or to follow austerity policies.
And the verdict on the past three decades is now loud and clear. Even the International Monetary Fund and a growing cabal of economists are extolling the dangers of austerity and growing inequality. I also know of economists who have personally met with world leaders and have conveyed this message, along with the urgent need to adopt the right policies to restore hope, growth, prosperity and wealth. Governments are well aware of the problems and the policies that need to be adopted.
The rise and victories of populists should be the proof we need that the failed policies of the recent past need to be changed.
Workers and voters around the world are demanding changes and are now showing their displeasure with the abuses governments allow markets to perform. These have not gone unnoticed, with the Brexit victory and the election of Donald Trump: the rise and victories of populists should be the proof we need that the failed policies of the recent past need to be changed.
So why are our leaders not acting? What compels a political party to campaign in one way but govern in another? What makes political leaders abandon promises of change in favour of proven failed policies once they're elected to office?
What makes governments hesitate to pursue policies they have been told would benefit the economy and the working class?
Full employment possible
I am forced to conclude that these choices do not depend on economic factors, but rather on political ones, and in particular, the over-influence of finance and financial leaders in the political arena.
Full employment is possible, if governments chose to pursue it. Nothing stops government from adopting policies that would reduce the great inequalities in income by increasing marginal tax rates, adopting inheritance taxes and more.
Voters and workers are left more desperate, and gamble by electing fringe populist parties.
Inevitably, however, these policies would hurt the financial elites who have become way too tangled up with the political class. It would also inevitably shift social power toward the working class and away from finance.
In the end, voters and workers are left more desperate, and gamble by electing fringe populist parties.
In a little-known article entitled The Great Slump of 1930, John Maynard Keynes wrote at the time, "We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time."
These words are just as poignant today.
Louis-Philippe Rochon is a professor of economics at Laurentian University and a founding co-editor of the Review of Keynesian Economics. Follow him on Twitter @Lprochon.