Rx: a new economic model that would value work and workers

Stripped down to its basics, the economic model to which we are addicted undervalues work and workers, a failing that is largely responsible for our sick economy. Thank God, some bright minds are working to free us from that addiction. They are shaping the outlines of a model – a paradigm -- that seriously values work and workers.

One of the few economists addressing that enormous challenge is Thomas Palley, with a Yale PhD and varied experience that now includes an assignment at the New America Foundation, a Washington-based think tank. In that role, he has written a policy paper released July 22 under the title “America’s Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession.”

“Macroeconomics” is jargon for the big economic picture, and as Palley emphasizes in an email: “It’s critical that we get the big picture right. Without that, we will be pushed toward small picture reforms that do not solve the fundamental problems.”

Tracing Origins of Today's Flawed System

The big picture is very big indeed, and Palley’s report is itself only an overview. Here I present my highlights of only one part of that overview. I focus on his critique of the neo-liberal economic policies adopted after 1980 under Ronald Reagan as a “flawed growth model” that has continued to infect policies of subsequent administrations, Republican and Democratic alike, including the present one.

Palley, with well documented backup, contrasts the new model to the one that the United States followed in the four decades after World War II. Prior to 1980, the United States benefited from policies that led to what Palley calls a “virtuous circle of growth,” in which wages grew with productivity. “Rising wages meant robust aggregate demand, which contributed to full employment, [which] in turn provided an incentive to invest, which raised productivity, thereby supporting higher wages.”

The rejection of that model after 1980 – and to this very day -- put workers figuratively and literally in a box, a box with anti-worker policy pressures coming from four sides, which Palley designates as small government, labor market flexibility, retreat from full employment, and globalization.

Small government policies, advocated under the cover of liberating people from government interference, fundamentally undermine the legitimacy of government. The policies include deregulation, light-touch regulation, privatization, and outsourcing public services, all to the advantage of corporations and the disadvantage of workers.

Labor market flexibility is the name of a program enabling employers to fight unions, minimum wages, unemployment benefits, and other worker rights. In neo-liberal economic theory, flexibility generates more employment, but in the real world has led to wage stagnation and widening inequality.

Abandonment of full employment means the Federal Reserve’s actions that put a higher priority on low inflation than on the goal of full employment. The switch was facilitated by the economic profession’s embracing the theory of a “natural” rate of unemployment, thus providing political cover for higher actual unemployment, a condition that undermines the bargaining power of workers on wages.

Globalization, with a combination of free trade and the unfettered cross-border movement of capital, puts American workers into competition with a huge foreign labor force, in which workers have markedly lower wages and working conditions. At the same time, intergovernmental agencies, especially the World Bank and the International Monetary Fund, promote global policies that put foreign workers into the same neo-liberal box as American workers. Thereby, the neo-liberal policies not only undermine demand in advanced countries. They also fail to compensate for this by creating adequate demand in developing countries. A prime example is China, with its rising income inequality.

Palley’s critique covers not only the flawed economic growth model but also the United States’ “flawed engagement with the global economy.” That and the concluding sections of his paper deal with critical issues such as the following:

-- Why concentrating on micro tales of villainy (Madoff’s massive Ponzi project, huge banker bonuses paid by taxpayers) can distract from addressing the fundamental economic problems.

-- How NAFTA established the global template that U.S. corporations wanted, to the detriment of the U.S. economy, most visibly to its manufacturing sector and its workers.

-- How the U.S. policy of encouraging and facilitating new investment abroad decreases U.S. jobs while withholding from foreign workers their rightful share of gains in increased productivity.

-- Why the significance of granting Permanent Normal Trade Relations (PNTR) to the People’s Republic of China in 2000 is not about trade.

-- Why economic stagnation is the logical next stage of the prevailing paradigm.

For reasons of space and time, this posting does not deal with those and other issues that Palley analyzes. I intend to do so in coming weeks. There is no way I can avoid them, since they are so intricately woven into current events affecting work and workers.

For a fuller understanding of Palley’s position, read the text of his paper on the New America Foundation Website. Click here.

And watch a You Tube video of Palley’s oral presentation of his critique, also available on New America Foundation Website.

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