Galbraith the end of normal; the great crisis and the future of growth (2014)

Thank you for downloading this Simon & Schuster eBook Join our mailing list and get updates on new releases, deals, bonus content and other great books from Simon & Schuster CLICK HERE TO SIGN UP or visit us online to sign up at eBookNews.SimonandSchuster.com Contents Epigraph Prologue: A Contest of One-Note Narratives Part One: The Optimists’ Garden 1. Growth Now and Forever 2. A Decade of Disruption 3. The Great Delusion 4. Tweedledum and Tweedledee 5. The Backwater Prophets Part Two: The Four Horsemen of the End of Growth 6. The Choke-Chain Effect 7. The Futility of Force 8. The Digital Storm 9. The Fallout of Financial Fraud Part Three: No Return to Normal 10. Broken Baselines and Failed Forecasts 11. The Crackpot Counterrevolution 12. The Pivot, the Cliff, and the Brink of Default 13. Is There a European Crisis? 14. Beyond Pangloss and Cassandra Epilogue: When Homer Returns Acknowledgments About James K Galbraith Bibliography Index For Bruce Bartlett A brave and honored friend Politics is not the art of the possible It consists in choosing between the disastrous and the unpalatable —John Kenneth Galbraith Prologue A Contest of One-Note Narratives In 1930 John Maynard Keynes wrote, “The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.” No such hesitation attended the tumult of September 2008, as the financial world collapsed into the arms of the US government Nor were scribblers and analysts slow to react Because of the Depression, the New Deal, and World War II, no history of the Great Crash emerged until a slim volume, written over a summer by my father, appeared in 1954 But today, barely a half decade since the Great Crisis, we have the benefit of many books by journalists and economists, a growing number of political memoirs, and a shelf of official reports The problem is what to make of them A first round, including David Wessel’s In Fed We Trust and Andrew Ross Sorkin’s Too Big to Fail, focused on the top bankers and on the George W Bush administration; later Ron Suskind’s Confidence Men and Noam Scheiber’s The Escape Artists did similar service for the Obama team Political memoirs (so far) by former treasury secretary Henry Paulson, by former special inspector general for the Troubled Asset Relief Program (TARP) Neil Barofsky, and by former chair of the Federal Deposit Insurance Corporation Sheila Bair tell the story of the crisis mainly in human and political terms—of the strengths and failings of the men and women who were caught in the storm The political and personal accounts usually not describe the practices that produced the debacle This is the domain of business reporters, a few law professors, and official investigations For these, the essence of crisis lies in the behavior of the entities that provided housing finance in America in that time Major efforts include All the Devils Are Here by Bethany McLean and Joseph Nocera, Griftopia by Matt Taibbi, The Subprime Virus by Kathleen Engel and Patricia McCoy, and Anatomy of a Financial Crisis by Marc Jarsulic The Big Short, by Michael Lewis, stands a bit apart as an account of speculators who bet profitably against a doomed system Official investigations have been led by the Financial Crisis Inquiry Commission (chaired by Phil Angelides), the Congressional Oversight Panel (chaired by Elizabeth Warren), the Senate Permanent Subcommittee on Investigations (chaired by Carl Levin), and by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) These investigations have between them marshalled evidence Some of their accounts are mesmerizing, like a good horror movie But they are narratives of fact and not, generally, of explanation To take an example, the majority report of the Financial Crisis Inquiry Commission presents a detailed, well-documented history of misfeasance both in government and in the banking sector (For a government document, it is also very well written.) It establishes that what happened did so in plain view But to what end? What’s the theory that comports with the facts? Even a powerful story line does not by itself explain why the circumstances were such Nor can it lead effectively toward a safer, more stable economic and financial world The facts are vital for establishing whether individual and business conduct met standards of ethics and law But even if these matters are fully disclosed, and even if they were fully acted upon by competent authority (which has not been the case), by themselves they not guide us to what we should to repair the damage and to prevent such things from happening again Then we come to the stage when writers turn from what happened to why This is the economist’s task The economist in these matters is an interpretive artist, placing facts within a framework that can convey understanding and (where necessary) motivate action It is an important role; without it, the personal and business histories remain barren Economists take this role seriously, guarding with some jealousy their professional hold over this niche in the discourse And so a small shelf of interpretations, by authors ranging from Nassim Taleb (The Black Swan), to Nouriel Roubini (Crisis Economics), to Raghuram Rajan (Fault Lines), to Joseph Stiglitz (Freefall), to Paul Krugman (End This Depression Now!), has appeared But so far no common understanding has emerged On the contrary, each economist brings to the job a distinctive vision, set apart from that of anyone else, reflecting that economist’s place in the larger constellation of the profession These visions then compete in a marketplace of ideas and a contest of marketing What it takes to win acceptance is not entirely settled, but passion, political allies, and a prominent platform for promoting book sales all play their roles And so does simplicity: the power of what is easy to grasp It is far easier to sell a simple idea, even if that means that the conflicts with other ideas must go unresolved For the most part, what the economists have delivered so far are efforts to interpret the crisis as the instance of a theme The themes vary Black Swans Fat Tails Bubbles Big Government Inequality The Liquidity Trap Some are simple metaphors; others more developed Some are conservative; others liberal Some comport with the dominant views in academic economics; others dissent A few are mainly misinformation, political, opportunistic, even arguably corrupt; others contain large elements of truth Yet all are incomplete There has been not much effort to weigh these arguments against one another, and no common framework seems to exist to set the rules for doing so The situation brings to mind what child psychologists call “parallel play.” A brief survey can help bring this situation into focus Black Swans The “Black Swan” view is perhaps the simplest possible explanation of the Great Crisis; it holds that there is nothing, necessarily, to be explained Like black swans, crises are rare The failure to predict an event that happens rarely is unfortunate, but it is not a sign of scientific failing A model can be a good one, even if rare events that it did not expect sometimes occur The Black Swan view calls our attention to the predictive limits of even the best theoretical apparatus It can be used to defend the contention that “no one could have foreseen” the oncoming disaster of 2008—even though some people did foresee it It may even be that the best available forecast beforehand was “no crisis,” and that those who claimed otherwise were alarmists who on this occasion merely happened, like the proverbial stopped clock, to have been right One problem with applying this particular point of view to financial crises, though, is that, viewed globally, they are not especially rare To ordinary citizens of the United States and Germany, a fullscale financial meltdown may be a novelty But they are a stock-in-trade of international investors and currency speculators, and the citizens of less stable lands deal with them as a matter of course Just since the mid-1990s, we have seen financial crises in Latin America, Africa, Mexico, Russia, Iceland, most of Asia, Japan, the United States, and the Eurozone I The notion that financial crises are scarce is a mirage, reflecting the fact that they don’t generally happen at short intervals to precisely the same people, and less in the richest countries than in poorer ones Fat Tails The “Fat Tails” view deflates the notion of Black Swans It admits that extreme events are not rare As a matter of habit and mathematical convenience, modelers typically assume that this distribution of errors is “normal” (or Gaussian), so that the relative frequency of extreme events is known It is a feature of normality, in this statistical meaning, that extreme events happen rarely Generally speaking for events measured on human timescales, the eponymous “Six Sigma” deviation from the average outcome should not happen but once in thousands of years But crises may happen much more often than, from the statistical point of view, they “should.” In the real world, the distribution of events about the mean expectation may not be Gaussian In that case, extreme events will happen much more frequently than assumed It is not even possible, under this view, to say just how frequently to expect a disaster The essence of Fat Tails is that you cannot measure this; you know only that disasters happen, and that the risk cannot safely be assessed by calculating the area under a normal curve And yet, even in a world of Fat Tails, the model that doesn‘t predict a crisis need not be wrong The average view, which is also a model’s “best” expectation at any time, may still be that things will go on as before The message is that in this unpleasant and difficult world, one should be prepared in general terms for ugly surprises, in the certainty that they will occur but with no hope of predicting them in real time One cannot even anticipate the direction the deviations-from-normal will take—there may be a boom, and there may be a bust Fat-tailed distributions are mathematical monstrosities just as much as they are harsh features of the real world They are hard on forecasters, rough on speculators, and hell on people who have to live with the disasters that they imply will occur Bubbles The word bubble conveys something that seems to be a bit more specific A bubble is a quasimechanical process—a physical phenomenon with certain properties It inflates slowly It pops quickly These traits impart an apparent completeness to the concept of bubbles that, together with repetition, has made it a very popular term for describing financial dynamics The concept almost seems to be a theory, in the sense of providing explanation and guidance Many people, including many economists, use the term as though it were founded in a well-understood economics, so that one need only identify a bubble in progress in order to know that disaster awaits This is not the case “Bubble” is simply a compelling image, a metaphor, made familiar by long usage in the history of disasters The bubble metaphor conveys inevitability Bubbles always pop Once one is in a bubble, there is no way out One can speak, with forlorn hope, of lancing the bubble so that it deflates gently, or of a “soft landing”—but these are mixed metaphors: the obvious artifacts of wishful thought Bubbles are not boils, and they are not spacecraft Deffeyes, Kenneth S., 40n deficits, 36, 83–84, 85–87, 209–10 budget, 186, 212, 213–14, 221, 230–31 trade, 41, 44, 56, 84–85, 105, 211–12 deflation, 62 de Gaulle, Charles, 36, 37 demand, 241 dependency ratio, 247 deposit insurance, 9, 172, 182, 246–47 Depression, Great, 1, 11, 12, 23–24, 30, 35, 71, 136, 143, 187, 190–94, 246 unemployment in, 192–93 deregulation, 61–62, 63, 166, 167, 199 “deterministic chaos,” 89 Detroit, MI, 231 Deutsche Bank, 182 devaluation, 44 Dien Bien Phu, 119 digital age, 131, 166, 240 see also information revolution distress borrowing, 165 distributed production, 133 Dodd-Frank Wall Street Reform and Consumer Protection Act, 184, 198 dollar, real value of, 54 domestic peak oil, 39–41 Dow 36,000 (Glassman and Hassett), 82n Duesenberry, James, 12 dynamic stochastic general equilibrium approach, 68 early retirement, 248 Earned Income Tax Credit, 249 e-commerce, 134 Economic Consequences of the Peace, The (Keynes), 22 economic output, technical change and, 132–33 Economic Policy Institute, 142 economists, 21–22, 27, 47, 50, 63–66 backwater, 79–92 as confusing beauty and truth, 66–70 crackpot counterrevolution in, 189–205, 207 “flaws and frictions,” 70–74 forecasting failures by, 172–78, 180–81 fraud ignored by, 154–55 freshwater vs saltwater, 70, 72–73, 77, 79 oil shock and, 43 peak oil and, 40 Edison, Thomas, 26 education, 25 efficiency, 98–100, 257 efficient markets, doctrine of, 70 Egypt, 102 Eisenhower, Dwight, 35 electric power, 136–37 empires, 113–19, 120, 122 second wave of, 116 employment, 35, 36, 39, 130 and digital revolution, 141–42 full, 73–74, 84 World War II and, 143–44 Employment Act of 1946, 35 Endless Crisis, The (Foster and McChesney), 77, 156 End This Depression Now! (Krugman), 154–55, 192 energy, 108, 136, 247, 260 costs of, 100, 105–9 markets in, 239–40 prices of, 214 supplies of, 99 energy return on investment (EROI), 100n Engel, Kathleen, 149, 150–52 entitlement reform, 222 entropy, 98 Entropy Law and the Economic Process, The (Georgescu-Roegen), 97 Environmental economists, 50 envy, 12, 16 Escape Artists, The (Scheiber), 1, 220 estate tax, 251, 252 Estonia, 202 Eurodollar, 43 Europe, 43, 45, 95, 108, 172, 225–35, 243 budget deficits in, 231 public debt in, 232 European Central Bank, 232, 233 European Investment Bank, 228 European Investment Fund, 228 Eurozone, 227, 228–29, 231, 233–34, 235, 240 trade imbalance in, 227, 229–30 exchange rates, floating, 44 Exchange Stabilization Fund, 172 executive pay, 161 expansionary austerity, 202–3 Fabulous Decade, The (Blinder and Yellen), 58 “factors of production,” 28 Fallujah, 123 Fama, Eugene, 210 Fannie Mae, 9, 10, 81, 171 farming, 99–100, 135–36 fat tails, 5–6, 71 Fault Lines (Rajan), 12, 154 Federal Deposit Insurance Corporation, 2, 163 Federal Express, 134n federal funds rate, 220 Federal Open Market Committee (FOMC), 33 Federal Reserve, 33, 42, 46, 48, 53, 57, 59, 60, 74, 154, 163, 167, 181, 182, 183, 184, 185, 212, 217, 220, 221 Federal Reserve Bank of Dallas, 10 fencing, 150 Ferguson, Niall, 114–15, 118–19 fertility rates, 145 fertilizer, 135, 136 finance, 76–78, 83, 88–89, 96, 105–6, 166, 241 fraud in, see financial fraud regulation of, 90–91 finance capitalism, 75 financial crises, history of, 4–5 Financial Crisis Inquiry Commission, 2, 10, 110n, 149, 208 Financial Crisis Inquiry Report, The, financial fraud, 149–68 economists in ignoring of, 154–55 government and, 163–64 financialization, 66, 105 Financial Times, “fiscal cliff,” 222–23 fiscal Keynesians, 157–58 fiscal policy, 199, 200 Fisher, Richard, 9–10 Fitch Ratings, 153 fixed costs, 98–99, 101–2, 260–61 of Soviet system, 257–58 taxes on, 103 floating exchange rates, 44 food stamps, 249 Ford, Gerald, 45, 46, 59 forecasting failures, 172–78, 180–81 Foster, John Bellamy, 77, 156 France, 36, 108, 120, 231, 248 Frank, Jerome, 11 Frank, Robert, 12 Freddie Mac, 9, 10, 81, 171 Freefall (Stiglitz), 73, 155–56 French Empire, 113 freshwater economists, 70, 72–73, 77, 79 Friedman, Milton, 25, 28, 47, 60, 65, 247 full employment, 73–74, 84 futures markets, 106–7 Galbraith, John Kenneth, 11, 159n, 237 Gallaway, Lowell, 195, 197 Gates, Bill, 26, 139n GDP gap, 173 Geithner, Timothy, 183, 184 General Theory of Employment, Interest, and Money, The (Keynes), 29 Georgescu-Roegen, Nicholas, 97–98 Germany, 44, 108, 113, 117, 118, 226, 227–28, 229, 230, 231, 258 Giap, Vo Nguyen, 126 gift tax, 251, 252 Gilleran, James T., 167 Gintis, Herbert, 74 Glassman, James K., 82n Glass-Steagall Act, 91 globalization, 55, 66 global war on terror, 114, 125, 128 Godley, Wynne, 83–87, 89, 97 Goldman Sachs, 105, 150, 182 Goodwin, Doris Kearns, 193 Gorbachev, Mikhail Sergeyevich, 255 Gorbachev Foundation, 255 Gordon, Robert J., 131–32, 140 government, 22, 32, 35, 73, 245 business cycle management by, 39 economic forecasting by, 173–74 financial fraud and, 163–64 and growth, 194–95, 203 1990s budget surplus of, 85 role in Great Crisis, 8–10 role of, 90–91 spending by, 186, 195–96 theory of growth and, 29 government bonds, 86–87 “Government Size and Economic Growth” (Vedder and Gallaway), 195 Gramm, Phil, 195n Great Britain, 36, 117 Great Crash of 1929, 13 Great Depression, see Depression, Great Great Financial Crisis, 21, 51, 63, 72–73, 128, 171–72, 204 Black Swan view of, 4–5 bubble view of, 6–8 economists failure to foresee, 63–64, 66 fat tails view of, 5–6 as financial crisis, 76–78 financial fraud and, 149–68 government role in, 8–10 inequality and, 11–17 investigations of, Marxian view of, 74–78 narratives of, 1–17 resource costs and, 110–11 resource scarcity and, 164–68 Great Inflation and Its Aftermath, The (Samuelson), 59n “Great Moderation,” 59–60 Great Society, 37, 196 Greece, 215–16, 225, 226–27, 228, 232, 233 debt-to-GDP ratio in, 216 Greenspan, Alan, 6–7, 56, 57, 58, 59, 82, 91, 154, 196–98, 199 Grenada, 121 Gresham’s Law, 157n, 162 Grove, Andrew, 139n growth, economic, 21–37, 39, 44, 48, 50, 59, 62, 74, 75, 165, 190, 241–42 government and, 194–95, 203 technical change and, 129–31, 132n, 133 “Growth in a Time of Debt” (Reinhart and Rogoff), 204 Grunwald, Michael, 179 guaranteed personal income, 247–48, 249 Gulf of Mexico, 40 Gulf War (1991), 45, 113, 121 Haditha massacre, 123 Hansen, Alvin, 8n Hartz reforms, 228 Harvard University, 74 Hassett, Kevin, 82n Hayek, Friedrich von, 24 health, 25 hedge positions, 88 Herndon, Thomas, 204 Hitler, Adolf, 116, 258 Hobson, J A., 11 Ho Chi Minh, 120 Holland, 108, 227 Home Affordable Modification Program (HAMP), 182–83 home ownership rates, 160 home values, 172 House Appropriations Committee, 179 household debt, 12–13, 56, 77, 172 household spending, declines in, 172 housing, 25, 160 bubble in, 80–81 price/rental ratio in, 82 housing policy, 8–9, 10 “How Did Economists Get It So Wrong?,” 65–66 Hubbert, M King, 40, 40n Hubbert’s peak, 40n Hubbert’s Peak: The Impending World Oil Shortage (Deffeyes), 40n Hume, David, 207–8 Hussein, Saddam, 45, 57, 122 hydroelectric dams, 102–3 hydrofracking, 103, 109 imbalances, concept of, 207–8 Impact of Poor Underwriting Practices and Fraud in Subprime RMBS Performance, The, 153–54 imperialism, 97 income inequality, see inequality, income income taxes, 187 index arbitrage, 105 India, 54, 116, 117–18, 123, 240 industrial age, 131 industrial organization, 30–31 industrial policy, 45n industrial revolution, 113 inequality, income, 11–17, 30, 66, 77 effects of technology on, 130 information revolution and, 140–41 In Fed We Trust (Wessel), inflation, 36, 39, 41, 42, 44, 46, 47, 57, 59, 61, 62, 111, 127, 176, 213–14 and budget deficits, 213–14 collapse of, 55–56 monetarist explanation for, 47 information revolution, 137–47 inequality and, 140–41 information-technology boom, 85 Inside Job, 149 interbank lending markets, 171, 220 interest rates, 32–33, 33n, 41, 46, 59, 103, 178, 181, 208 determinants of, 220–21 recession of 1970 and, 42 regulation of, 34 world, 54 intergenerational accounting, 209–10, 246 Intergovernmental Panel on Climate Change, 174 International Monetary Fund (IMF), 34, 36 international monetary system, 34 internet, 138 investment, 27 Iran, 102, 125 Iran, Shah of, 42 Iranian revolution, 45 Iran-Iraq War, 54 Iraq, 45, 57, 78, 96, 121, 124, 240 Iraq War, 122–23, 125, 126–27, 243 total cost of, 126–27 Ireland, 225, 226, 232 Irrational Exuberance (Shiller), 79n Israel, 43, 102, 124 “Is US Economic Growth Over?” (Gordon), 131 Italy, 225, 228, 233 Japan, 43, 44, 95, 113, 117, 118, 221, 243, 258 Jobs, Steve, 27 Johnson, Lyndon, 37 Joint Economic Committee, 53 JPMorgan Chase, 150 Justice Department, U.S., 154, 163, 167 Kaldor, Nicholas, 30 Kennedy, John F., 35–36 Kenya, 117 Keynes, John Maynard, 1, 22, 23, 29, 30, 83, 135, 238 Keynesianism, 35, 39, 44, 46, 47, 97, 146 fiscal, 157–58 Kissinger, Henry, 45 Klein, Lawrence, 71 “Knightian” uncertainty, 71 Koopmans, Tjalling, 204–5 Korea, 118, 258 Kosovo, 121 Krugman, Paul, 44–45, 65–66, 67, 69, 70, 71, 72, 79–80, 154–55, 156, 157–58, 192, 238 Kurds, 121n Kuwait, 57, 121 Kuznets, Simon, 30, 83 labor, 28, 29–30, 75, 103, 130, 176 in Germany, 228 taxes on, 251 technical change and, 133–34, 141–42 laissez-faire, land reform, 29 Laos, 119 “Large Changes in Fiscal Policy: Taxes Versus Spending” (Alesina and Ardagna), 199 Latin America, 54, 111 Latvia, 202 laundering, 150 Lehman Brothers, 150, 171, 198, 234 Leijonhufvud, Axel, 262 Lenin, Vladimir, 11 Leno, Mark, 250n Leontief paradox, 33n Leuchtenburg, William, 193 Levin, Carl, Levy Economics Institute, 84 Lewis, Michael, 2, 63, 150 liar’s loans, 149, 150 Libya, 123, 125 Limits to Growth, 49–50, 96 Lincean Academy, 49–50 living standards, 22–23, 127, 130, 131–32, 133, 134, 247 in U.S., 58, 96 Lomborg, Bjørn, 50n London Interbank Offered Rate (Libor), 33n looting, 161–62 “Looting: The Economic Underworld of Bankruptcy for Profit” (Akerlof and Romer), 160n Lucas, Robert, 60, 203n Luxemburg, Rosa, 11 Luxury Fever (Frank), 12 Luzhkov, Yury, 257 McAfee, Andrew, 141 McChesney, Robert W., 77, 156 McCoy, Patricia, 149, 151–52 MacEwan, Arthur, 74 McGovern, George, 247–48 McLean, Bethany, 149, 152–53 Madoff, Bernard, 163 Magnitogorsk, 256 Malaya, 117 Malpass, David, 196 Malthus, Thomas Robert, 26 Malthusian trap, 22–23 manufacturing, 15, 55 maquiladora program, 55 marginal-productive theory, 33n market discipline, 91 market fundamentalists, 157 marks, 150 Marshall, Alfred, 261 Marx, Karl, 11, 22, 23, 74, 96–97, 133 Marxian analysis, 74–78 Massachusetts, University of, 74 Massachusetts Institute of Technology (MIT), 25 media, 123 median wage, 14–15 Medicaid, 187, 222, 223, 246 Medicare, 186, 187, 195, 196, 209, 222, 223, 246 mercantilism, 44–45, 208 Merrill Lynch, 171 Mexico, 41 light manufacturing in, 55 middle class, 145 Middle East, 41, 111 military power, 113–28, 240, 243–44 effectiveness of, 115–16 scales of permissible violence, 123–24 Mill, John Stuart, 133 Miller, G William, 59 Milosevic, Slobodan, 121 minimum wage, 31, 249–50, 251 Minsky, Hyman, 83, 87–92, 97, 158, 161 Minskyans, 158 Mirowski, Philip, 98n Mishel, Lawrence, 142 “MIT school,” 65–66 monetary policy, 47, 55–56 monetary system, 31–32 international, 34 money market mutual funds, 171–72 monopolies, 10, 29 monopoly capitalism, 75 monopoly power, 30–31 technical change and, 30 Monthly Review, 156 moral hazard, More Heat Than Light (Mirowski), 98n Morgan Stanley, 105, 150, 182 Morgenson, Gretchen, mortgage-backed securities, 182n mortgage capital, 241 mortgages, 150–55 Moscow School of Economics, 255 My Early Life (Churchill), 116 Naked Capitalism (blog), 80 Naked Keynesianism (blog), 80 Napoleon Bonaparte, 116 National Bureau of Economic Research, 199 National Guard, U.S., 243 National Income and Product Accounts, 83 national income identities, 83–87 national independence, 117–18 National Industrial Recovery Act (NIRA), 106n, 191, 198 nationalization, 182 natural gas, 103, 109, 136, 239 neutron loans, 149 New Classicals, 59–60, 203n New Deal, 1, 11, 35, 106n, 143, 143n, 180n, 181, 187, 190–94, 197, 198, 238, 246 New Economics, 35, 42, 47 New Industrial State, The (Galbraith), 159n New New Deal, The (Grunwald), 179 New Zealand, 204 ninja loans, 149 Nixon, Richard, 45, 46, 59 recession of 1970 and, 42–43 Nocera, Joe, 149, 152–53 nonaccelerating inflation rate of unemployment (NAIRU), 176–77 nonlinear financial dynamics, 87–92 North American Free Trade Agreement (NAFTA), 55 North Korea, 125 Norway, 108 nuclear power, 136 Obama, Barack, 1–2, 153, 175, 177, 179, 198 Obey, David, 179 Office of Management and Budget (OMB), 174, 175 Office of the Comptroller of the Currency, 167 Office of the Special Inspector General for the Truobled Asset Relief Program (SIGTARP), Office of Thrift Supervision, 167 Ohanian, Lee, 189–92, 194, 195, 197, 198 oil, 43–44, 45–46, 49, 95–96, 100, 109, 110, 135–36, 138, 143, 239, 260 prices of, 31, 40, 41, 43–44, 54–55, 61 oil industry, 39–40 domestic peak oil in, 39–41 oil shocks, 43, 49, 108 Operation Desert Storm, 121 Organisation for Economic Co-operation and Development (OECD), 199, 201–2 organizational economics, 158–60, 237–38 Organization of Petroleum Exporting Countries (OPEC), 43, 47, 106 Ottomans, 113 output, 28, 30 outsourcing, 133 overcollateralization, 154 overnight banking loans, 33 Pakistan, 125 Palley, Thomas, 13 Panama, 121 Papaconstantinou, George, 226n Paraguay, 102 Parker, Ed, 152 patents, 105, 130, 251 Patrick, Deval, 153 Paulsen, James W., 174–75 Paulson, Henry, 2, 172 Pax Americana, 101–2, 113 payroll tax, 251 peak oil, 39–41, 109n People’s Liberation Army, 120 Perotti, Roberto, 199 Persian Gulf, 95, 113 phase transitions, 89–90 philanthropy, 252 Phillips curve, 36, 42 PIGS, 226 pivots, 221–22 planned obsolescence, 138 planning, 24 Poland, 227 policy, economic, 60–61 errors in, 62–63 Pollin, Robert, 204 poll taxes, 48 pollution, 28–29 Ponzi phase, 88, 91, 158, 161 population growth, 26–27 Portugal, 118, 225, 232 Portuguese, 116 potential GDP, 176, 190 potential output, 22 poverty, 21, 58 Prestowitz, Clyde, 45 price controls, 31, 42 price/earnings ratio, 81–82, 85 price-fixing, 34 price/rental ratio, 82 prices: oil, 31, 40, 41, 43–44, 54–55, 61 and peak oil, 40 volatility of, 239, 241 Principles of Economics (Marshall), 261 privatization, 259 productivity, 23 productivity growth, 58 Project for a New American Century, 121–22 propaganda, 25 property rights, 32 proxy wars, 120 public debt, 209–11, 213 average real returns on, 217–18 in Europe, 232 GDP ratio of, 214–20 public goods, 29 Public-Private Investment Fund (PPIP), 182 quantitative easing, 184, 197 Race Against the Machine (Brynjolfsson and McAfee), 141 racism, 226 railroads, 117 Rajan, Raghuram, 12, 13, 16, 17, 154, 156 RAND Corporation, 25 ratings agencies, 150 Reagan, Ronald, 35, 53, 56, 57, 59, 120, 167 tax cuts of, 180n “real business cycle” theory, 48, 69–70, 146 recessions, 22, 35, 46, 173 of early 1980s, 56 of 1970, 41–43 Reckless Endangerment (Morgenson and Rosner), regulation, 29, 34, 90–91, 162, 198 Reinhart, Carmen, 4n, 203–4 Reinhart-Rogoff threshold, 204 Reis, Ricardo, 59 renminbi, 214 rental income, 41 rents, 29, 96, 251 representative agents, 68–69 Republicans, 35 resource costs, 110–11, 113, 237, 238, 261 resources, 28–29, 40, 48, 51, 54, 95–101, 102, 106, 110–11, 164–68, 242–43, 257 depletion of, 49 efficiency in, 98–100 futures markets in, 106–7 innovations and, 96 investment spending and, 108 price volatility in, 239, 241 scarcity of, 103–4, 106, 108, 164–68 retirement, early, 248 risk taking, 9–10, 88, 165, 208 Roberts, Bennie, 151 Robinson, Joan, 30 Rogers, Ruby, 151–52 Rogoff, Kenneth, 4n, 203–4 Romer, Christina, 175, 177, 178, 220 Romer, Paul, 160n Romney, Mitt, 196 Roosevelt, Franklin D., 136, 181, 189, 191, 192, 193, 246 Rosner, Joshua, Rosser, Barkley, Jr., 89 Rostow, Walt W., 27 Roubini, Nouriel, 174 Russia, 113, 117, 168, 240 Russian Academy of Sciences, 255 sales tax, 251 saltwater economists, 70, 72–73, 77, 79 Samuelson, Paul, 36, 65, 71 Samuelson, Robert, 59n Santa Fe Institute, 50 Save America First (Frank), 11 savings, 26, 48, 50, 62, 83–84, 172 optimal rate of, 27 savings and loan industry, 91, 160, 166, 167 savings glut, 208 scarcity, 103–4, 106, 108, 164–68 Scheiber, Noam, 1, 220 Schmitt, John, 142 Schumpeter, Joseph, 30, 134–35, 137 Seante Permanent Subcommittee on Investigations, second law of thermodynamics, 97–98 “secular stagnation,” 8n Securities and Exchange Commission, 163 Senate Permanent Investigations Subcommittee, 149 September 11, 2001, terrorist attacks of, 121–22 sequestration, 245 service economy, 28 service jobs, 247 shale gas, 103, 109, 239–40 Shierholz, Heidi, 142 Shiller, Robert, 79n Shlaes, Amity, 189 shocks, 47, 63, 64, 190 oil, 43, 49, 108 “shovel-ready” projects, 179 Siberia, 116 Silverado Savings and Loan, 167 Skidelsky, Robert, 157 Slovenia, 234n slow growth, 242, 252–53 smartphones, 131–32, 134n Smith, Adam, 207, 257 social insurance programs, 246–47, 249, 251 Social Security, 11, 42, 186, 187, 195, 196, 200, 209, 211, 222, 223, 245, 246, 248 software, 139 Solow, Robert, 26, 28n, 36, 130, 132n Solow residual, 130 Sorkin, Andrew Ross, South Carolina, 234n Soviet Union, 55, 56, 75, 95, 101, 118, 121, 168, 234n, 255–56 collapse of, 259–60, 262 economy of, 256–59 Spain, 116, 202, 225, 227, 228, 233 “specie-flow,” 207–8 speculative bets, 88 speculative mortgages, 91–92 spending cuts, 222–23 Spoils of War (Tirman), 121 Stages of Economic Growth (Rostow), 27 stagflation, 44 steady-state equilibrium, 75 steady-state expansion path, 27 steamship, 117 Stiglitz, Joseph, 71, 72, 73, 126n, 155–56, 238 stimulus, 72, 171, 175, 177, 178, 186, 187, 210, 220, 238 stimulus program, 178, 186, 187 stress tests, 183 structural changes, 60–62 subprime lending industry, 150–54 Subprime Virus, The (Engel and McCoy), 151–52 Summers, Lawrence, 7–8, 175, 178, 220, 238 superexploitation, 77 Supplemental Nutritional Assistance Program, 246 supply-side economics, 48 suppressed inflation, 259 Suskind, Ron, Sweezy, Paul, 25, 74, 77, 156 Syria, 125 Taliban, 122 tariffs, 105 tax cuts, 35, 179, 180n, 200, 201 taxes, 91, 116, 199, 245, 251, 252 on fixed costs, 103 income, 187 post-war, 25 supply-side economics and, 48 technological change, 26–27, 48, 50, 69–70, 103, 129–47, 240–41, 247, 261 economic output and, 132–33 growth and, 129–31, 132n, 133 labor and, 133–34, 141–42 and monopoly power, 30 technology, 76, 103 telegraph, 117 television, 120, 138 Term Asset-Backed Securities Lending Facility (TALF), 182, 183 Texas, 106, 135 Texas Railroad Commission, 31, 43, 106 This Time Is Different (Reinhart and Rogoff), 4n, 203–4 Three Mile Island, 46 “Time for a New New Deal” (Auerback), 143n Tirman, John, 121 Tobin, James, 247 Tobin tax, 91 “too big to fail,” 9–10, 198 Too Big to Fail (Sorkin), Tooze, Adam, 256 torture, 124 toxic waste, 149, 155, 155n tractors, 135 trade deficits, 41, 44, 56, 84–85, 105, 211–12 trade imbalances, 207–8, 227–28, 229–30 trade unions, 10 transfer payments, 195–96 transfer programs, 222 transfers, 245–46 Treasury bonds, 56–57, 102, 127, 211, 213 Treasury Department, U.S., 163, 172, 182–83, 185 Troubled Asset Relief Program (TARP), 2, 163, 181–82 trucks, 135–36 UBS Financial Services, 183n underconsumption, 12 crisis of, 11 unemployment, 11, 22, 42, 44, 47, 57 in Great Depression, 192–93 monetarist explanation for, 47 natural rate of, 173, 176 unemployment insurance, 186, 187, 246 unequal exchange, 97 Union of Soviet Socialist Republics (USSR) see Soviet Union unions, 25, 31, 250 United Kingdom, 108, 231 United Nations, 34, 117, 118–19 United States, 34, 36–37, 44, 113, 117 asymmetry in, 211 budget deficits in, 212, 221, 230–31 case of empire of, 114–15, 118–19 debt-to-GDP ratio in, 216–20 as empire, 118–19 financialization of, 105 fixed costs in, 260–61 global war on terror and, 114, 125, 128 government downsizing in, 245 hydro development in, 102–3 imperial overreach of, 127–28 invasion of Iraq by, 122–23 living standards in, 58, 96, 127 military power of, 113–28, 240, 243–44 military spending of, 126 oil policy of, 45–46 post-Vietnam, 120–21 post-war, 24–25, 101–2 public debt, 209–11 resource use of, 96–97 total federal government spending in, 186 trade deficit in, 211–12 Unz, Ron, 250n urbanization, 123 value-added tax (VAT), 251 variable costs, 98–99, 103 Varoufakis, Yanis, 57n, 211 Veblen, Thorstein, 12, 136 Vedder, Richard, 195, 197 Venezuela, 41 venture capital, 241 Vietnam War, 36, 40, 41, 57, 102, 113, 117, 118–20, 123, 196, 243 Volcker, Paul A., 53, 54, 56, 59 wage controls, 42, 44 “wage rigidity,” 176n wages, 22–23, 176 fixing of, 31 minimum, 31, 249–50, 251 post-war, 25 stagnation in, 12–13, 14 stickiness of, 71 Wallison, Peter, 9, 10 war on terror, 114, 125, 128 Warren, Elizabeth, Watergate scandal, 45 Watt, James, 26 weaponry, 123 Wells Capital Management, 174–75 Wells Fargo, 150 Wessel, David, Wilson, Harold, 36, 37 women, 25, 144, 145, 249 World Bank, 34, 262 World War I, 117, 136 World War II, 1, 35, 117, 118, 143–44, 147, 192 Yangtze River, 103 Yellen, Janet, 58 Yergin, Daniel, 40n Yom Kippur War, 43 Yugoslavia, 234n, 259 Simon & Schuster 1230 Avenue of the Americas New York, NY 10020 www.SimonandSchuster.com Copyright © 2014 by James K Galbraith All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever For information address Simon & Schuster Subsidiary Rights Department, 1230 Avenue of the Americas, New York, NY 10020 First Simon & Schuster hardcover edition September 2014 SIMON & SCHUSTER and colophon are registered trademarks of Simon & Schuster, Inc The Simon & Schuster Speakers Bureau can bring authors to your live event For more information or to book an event contact the Simon & Schuster Speakers Bureau at 1-866-248-3049 or visit our website at www.simonspeakers.com Interior design by Aline Pace Author photograph by Xingquan Zhang Library of Congress Cataloging-in-Publication Data Galbraith, James K The end of normal : the great crisis and the future of growth / James K Galbraith pages cm Global Financial Crisis, 2008–2009 Europe—Economic conditions—20th century Europe—Economic policy—20th century United States—Economic conditions—20th century United States Economic policy—20th century I Title HB37172008.G337 2014 330.9'0511—dc23 2014012308 ISBN 978-1-4516-4492-0 ISBN 978-1-4516-4494-4 (ebook) ... starting in the mid-1920s in the United Kingdom and after 1929 in the United States, appeared to signal the collapse of the Victorian accumulation regime and with it, the end of the uneasy truce and. .. placed the managers in charge and declared that the performance of the economy—defined as the achievement of economic growth was a permanent function of the state Even though the theory of growth, ... by former chair of the Federal Deposit Insurance Corporation Sheila Bair tell the story of the crisis mainly in human and political terms of the strengths and failings of the men and women who