A brief history of political dysfunction and economic stagnation that's 40 years in the making
The Atlantic has offered me the opportunity to write a column in this space every few weeks on the intersection of economics and political debate. In the wake of the debt-ceiling showdown that both seriously threatened our economy and revealed deep dysfunction in our system, I'm going to use this opportunity to explore how we got here and how we can get out.
It will help to start out with a brief, truncated-if-not-reductionist history of the ideas and policy decisions that led up to this moment--what we call around here a "baseline," you should excuse the expression.
In the 1970s, the collision of high unemployment and high inflation put the dominant Keynesian economics on the ropes and gave rise to a new model that had, at its core, self-correcting markets and distrust of government intervention or oversight.
In the 1980s, Reaganomics enshrined this model in public policy, with large supply-side tax cuts and deregulation. The cuts failed to "pay for themselves" and deficits grew. Middle-class incomes and wages stagnated and income inequality, which had begun to rise in the mid-70s, accelerated.
In the 1990s, Clintonomics generally stuck with the deregulatory regime. Alan Greenspan et al continued the intellectual tradition of self-correcting markets. We also raised taxes at the high end. Growth accelerated, generating lots of jobs and a budget surplus. But a key source of growth, the dot.com bubble, burst at the end of the decade, causing a recession.
In the 2000s, we got a hard shift to trickle-down, supply-side economics, and large tax cuts. Financial engineering, goosed by deregulation and the ever-deepening belief in self-regulating markets led to cheap credit, underpriced risk, and over-leverage. After the dot.com bubble popped, the real estate industry inflated.
You know the rest.
The housing bubble burst in 2007, leading to widespread defaults that brought down banks large and small, froze credit markets, left millions of families stuck in homes with collapsing values, and ultimately drove our economy into the Great Recession.
We now pick the story up live, dateline 2011, Washington, D.C.
The Obama administration, of which I was a member, fought back hard against the recession, as did the Federal Reserve. Those actions arrested the decline in GDP and helped pull forward a technical recovery--i.e., a recovery in GDP terms but one that has never achieved escape velocity (families can be forgiven for not being able to distinguish "recovery" from "recession").
The fact that our actions only made things less bad gave our political opponents the opportunity to say that none of it worked. Many voters believed them, and Republicans took over the House in 2011. With the political realignment of the midterms, cutting spending replaced creating jobs as Washington's dominant policy goal.
All these dynamics collided in the terrible debt ceiling debate of 2011.
At one level, it's really quite fascinating to think about this remarkable chain of ideas and events--from the rise of hyper-rational economics in the 1970s, through middle-class stagnation, two bubbles-and-busts, global financial innovations and explosions, Keynesian stimulus, to the Tea-Party-led attack on government spending.
At another level, it's downright scary. I'm obviously leaving out a lot of nuances, some of which were quite positive, like the acceleration in productivity growth in recent decades, or the fact that for a New York minute in the latter 1990s, we hit full employment and the middle class and poor actually made some real progress.
But mostly, it's a story of destructive ideas (self-regulation, supply-side economics) amplified by powerful political forces to claim an ever-growing share of national output, such that by the end of this period, the share of income held by the top one percent--over 20%--was more than double its level before this brief history began. And this is, of course, a zero-sum calculation. Their gains in share were the bottom 99%'s losses.
It is also a story that leaves us in a very tough spot. Our president is a Democrat with a strong investment, education, and innovation agenda, but to say he has no running room is an understatement. Yes, there's a case to be made that he hasn't fought hard enough of behalf of Democratic policy goals, but if my historical account is accurate, I think the problem is less with the president and more with the history of bad ideas that have brought us to this moment.
Over the next few months, I'd like to devote this column to thinking about how we as a nation get out of this very difficult situation. Given the diagnosis I've laid out, what will it take to get the political economy--meaning the policy debates, the policies themselves, and ultimately, the economy--back on track?
I'm not sure I have the answers. But I can't imagine a more important question.